Pre-Covid, India recorded 200 million passengers (domestic and international) per annum. However, the airport industry was severely disrupted during the Covid-19 outbreak and has not been able to recover fully since then. India’s performance in the cargo business has also been lagging. That said,
there is scope to revive its operations with improved administration and a technology-driven revolution of the cargo industry.
For the past two decades, the government and the industry have been focusing on enhancing passenger experience in terms of airport infrastructure and services. India’s ambition to become a global hub is one of its key priorities. In order to keep up with the rapid expansion in the sector globally, there is a need for additional investment in new airports in the country as well as development of airport infrastructure.
Some of the recent developments in the sector are the shift to a predetermined per passenger concession fee that is believed to be a better alternative to revenue sharing, 100 per cent Foreign Direct Investment (FDI) allowance to attract more foreign investors, and changes in the nature of control and governance. The concept of a golden share (the right to veto any proposal regarding the company’s charter) has been introduced, as seen in Visakhapatnam airport. Going forward, this could help in reassuring investors.
Investor and operator interest in the Indian airport sector has been fading. Over a period of 15 years, bidding activity has reduced significantly.
The estimated investment in Phase II (2002-09) of bidding was Rs 29.2 billion for Hyderabad airport, Rs 40 billion for Bengaluru airport, Rs 125.8 billion for Delhi airport and Rs 130 billion for Mumbai airport.
During Phase III of bidding (2009-18), post the formation of the Airports Economic Regulatory Authority (AERA), the GMR Group, the Airports Authority of India (AAI) and Essel-Incheon submitted bids for the Mopa International Airport for an estimated investment of Rs 25 billion. For the Navi Mumbai International Airport, an investment of Rs 160 billion was envisaged and bids were submitted by Mumbai International Airport Limited (Adani) and the GMR Group. The key imperatives for Phase IV of bidding include rapid capacity augmentation, incentives for global investors and low costs.
Over fiscal years 2022-25, 25 major AAI airports will be examined for monetisation. The primary purpose is to maximise the value of these 25 airports. The clustering of small airports with major airports to lease them out as a package has been considered as a way to optimise non-profitable airports with the assistance of private sector investment and participation. This will be a win-win for all parties as it will reduce the debt of the exchequer while handing over brownfield airports to private players on long-term concessions.
In what appears to be the final opportunity for private investors to enter the Indian airport sector, AAI has approved the privatisation process for 13 airports. AAI plans to bundle Jharsuguda airport with Bhubaneswar airport, Kushinagar and Gaya airports with Varanasi airport, Kangra airport with Amritsar airport, Jalgaon airport with Raipur airport, Jabalpur airport with Indore airport, and Salem airport with Trichy airport.
The AAI’s remaining stake in four airport joint ventures has also been examined for sale as part of the monetisation pipeline. These include airports operated by the private sector in Mumbai (26 per cent stake), Delhi (26 per cent), Hyderabad (13 per cent) and Bengaluru (13 per cent). The process of divestment of stakes in Bengaluru and Hyderabad airports has been initiated.
The policy and regulatory factors impacting the monetisation plans are time taken for the bidding process, risk of regulatory uncertainty, probability and risk of legal disputes, transaction cost, degree of capital control, ease of doing business and provisions for the participation of airline and cargo operators. In terms of financing and funding, the factors taken into consideration include ease of investment, return on investment, cost of financing, access to competitive and innovative financing and taxation. A few contract-related considerations include the level of autonomy over decision-making, incentives for sustainable measures, a well-defined quality and service monitoring mechanism, traffic risks, incentives for value adding innovation and selection of operators.
Although there has been some private investment in airports in India, it is believed that it has been primarily driven by Indian investors and developers over the past 15 years. Zurich airport is a prime example of an overseas investor holding a 100 per cent share. While contracts and concession agreements have evolved over time, regulatory uncertainty persists. It has been observed that assets in India have generated great returns, but due to the cash flow uncertainty, it concerns many investors.
For instance, the completion of the Navi Mumbai airport took over six and a half years due to several obstacles. While this has changed with regard to more recent assets, such as brownfield concessions, there must be consistency in how these processes are conducted and the timelines within which they are developed. In terms of modifying regulations, there is a need to reduce disputes, especially those involving tariff determination. Further, a few operational and governance concerns continue to impair customer experience.
Vision 2040 and outlook
The Ministry of Civil Aviation’s (MoCA) 2040 vision for Indian airports, which was released in 2019, is extremely ambitious, yet attainable. The vision aims for 1.1 billion passenger trips, 20 million tonnes of freight, and an investment of $50 billion by 2040. India has a robust asset base in terms of airport infrastructure, serving major centres and making the goal of 200 airports by 2040 realistic. It is currently the third largest aviation market, behind China and the US. MoCA’s vision 2040 seeks to elevate India to the top spot.
Over the previous two decades, high-growth markets such as India have developed the capacity necessary to satisfy the constant growth in demand for air travel. In certain airports, capacity has been built in advance or has been added after large costs have been incurred.
While the long-term outlook for growth in underserved aviation markets such as India remains favourable, the next three to four years will pose substantial challenges for airport owners and investors in terms of monetising assets and repurposing them to generate shareholder value. Competition from newer asset-light airports may impose additional constraints on asset rebalancing and profitability in some circumstances.
With inputs from Vasudevan S., Partner, KPMG India, at a recent India Infrastructure conference