Changing Hands: Potential of airport privatisation in India

India has a very strong and robust history of airport privatisation. Private participation in airport infrastructure development has been extensive, and has helped in holistic and efficient development of the sector.

The passenger throughput at Indian airports has more than doubled between 2010 and 2020. The share of public-private partnership (PPP) and joint venture airports has grown from 50 per cent in 2017-18 to 60 per cent in 2021-22. The remaining 40 per cent traffic is handled by Airports Authority of India (AAI) airports. AAI still stands as the single largest airport operator, with a large number of airports being managed by it. Air traffic is expected to reach 93 per cent of pre-Covid-19 levels in 2022-23. It is expected to fully recover and reach 112 per cent of pre-pandemic levels in 2023-24.

Journey so far

The journey of airport privatisation in India started in 2004, with Hyderabad and Benga­lu­ru airports being the first PPP airports. In 2006, agreements for the operation, management and development of two major brownfield airports in Delhi and Mumbai were signed with the GMR Group and the GVK Group respectively.

In 2013-14, the Government of India, AAI and the Ministry of Civil Aviation attempted to privatise important airports such as Kolkata, Chennai, Ahmedabad, Jaipur, Lucknow and Gu­wa­hati. Plans to privatise these airports did not materialise owing to a mismatch of expectations with bidders, stringent clauses, a limitation on the number of airports that could be won, resistance from employee unions, tight timelines, etc. The operations and maintenan­ce transactions at the Ahmedabad and Jaipur airports were unsuccessful due to the AAI dema­nding excessive control.

Airport privatisation in the country witnessed an important turn of events in 2016, when the economic regulatory philosophy changed from single till to hybrid till. With the change in regulation, Indian airports witnessed a wave of PPP projects, with the Mopa and Navi Mumbai airports being awarded under this mode. In 2018, there was a change in bidding parameters from the “revenue share” model to the “per passenger fee” basis. After this, other AAI airports, including Ahmedabad, Lucknow, Mangaluru, Guwahati, Jaipur and Trivandrum, were successfully privatised in a deal with the Adani Group. Another big-ticket PPP project is the Jewar greenfield international airport, whi­ch is being executed in partnership with Zurich Airport International.

Impact of changes in regulatory regime

Changes in the regulatory regime in 2016 str­on­g­ly enhanced the attractiveness of assets for investors. The single till system dealt with complete airports as single systems, with no differentiation between aeronautical and non-aeronautical revenue. The single till regulation me­chanism limited the upside potential for the investor to a maximum return (cost of equity) of 16 per cent on capital investments. This also implied that there was no reward for efficiency in the non-aeronautical segment, and hence no major incentive for privatisation.

The changes in key airport concession ter­ms in 2018 instilled greater confidence am­ong private sector players, as evidenced in 2019, when 32 bids were received for six airports (Ahmeda­bad, Jaipur, Mangaluru, Trivandrum, Lucknow and Guwahati). The concession terms were improved in terms of clarity regarding revenue sharing, which was changed to a per passenger fee model. Another important change concerned termination payment. For example, the privatisation of Ahmedabad airport in 2021 entailed a clause whereby, in case passenger traffic dec­reases by 20 per cent for two or mo­re years, the concessionaire is allowed to re­ce­ive up to 70 per cent of the termination payment. Such downside risk protection was not available in earlier concession agreements. Previously, the concession period was 30 plus 30 years, which has now been increased to 50 years. This allows longer op­eration periods for investment recovery and returns. The new concession terms allow for a better approximation of the actual value of the assets, with AAI getting a fair value for handed-over assets. For the privatisation of the Mopa and Navi Mumbai airports, the state government actively supported the projects by developing road and metro connectivity, which also witnessed a lot of interest from private players.

Future of airport privatisation

Domestic air traffic has been increasing at a compound annual growth rate (CAGR) of nearly 15 per cent for the past five years. Overall, In­dia’s air traffic has been increasing at a CAGR of 10 per cent, and the share of smaller airports has been increasing in correspondence. Rising economic growth, a surging middle cla­ss, growing disposable income and the grea­ter regional connectivity envisaged throu­gh the UdeDesh ka AamNaagrik scheme are expected to enable Tier 2 and Tier 3 cities to drive air traffic in the future. As per estimates, the contribution of Tier 2 and Tier 3 cities to the total throughput could rise to 45-50 per cent by 2030. With the majority of large airports alrea­dy privatised or in the process of privatisation, there is scope for privatising Tier 2/3 brownfield airports in the future.

Under the National Monetisation Pipeline, 25 AAI airports have been selected for monetisation till 2025-26. They represent 18 per cent of AAI’s airport assets, with a cumulative investment of around Rs 208 billion. Airport monetisation has a 4 per cent share in the overall planned monetisation. The majority of the airports identified handle 1 million-3 million passengers per annum. Further, some greenfield airports are currently under development. These include Ayodhya, Rajkot, Puri, Purandar (near Pune) and Parandur (near Chennai).

Factors influencing privatisation

Apart from profitability, the monetisability of an airport is influenced by a host of risk factors. The key factors influencing privatisation are the diversity of stakeholders, overall regulatory en­vironment, and enforceability of contractual and legal protections. Another risk factor is ch­ange in scope during the development and operations period. The expected degree of airline concentration at the airport, competitiveness of city-side and airport access infrastructure such as rail and road corridors, and penetrability of the airport’s catchment areas (so that the envisaged traffic growth is realised) are other factors that impact private sector interest. The resilience of the airport to unexpected disturbances such as a pandemic is also a key risk factor.

When evaluating aeronautical revenue, factors such as future capacity creation/addition, potential for route development, accommodation of wider-body aircraft and the scope of developing the airport as a hub should be considered. Meanwhile, for non-aeronautical re­­venue, utilisation of customer stay time in ter­minals, potential for setting up duty-free shops, the share of corporate travellers in overall passenger footfalls and the potential de­mand for premium goods/discretionary items at airport terminals are important factors in de­termining returns. An airport should also consider technology-driven changes for improving passenger experience, which would al­so result in the enhancement of non-aeronautical revenue streams.

Key recommendations

One of the key measures that needs to be adopted to enhance the privatising ability of airports is a moratorium of about 10 years on the payment of concession fees for smaller airports. This would improve the cash flows of these airports in their initial years of operations. There is also a need for flexibility regarding capital investments. Additionally, defining the base tariff rates even when the actual tariffs could be lower would allow the concessionaire to reap benefits in the long term. In order to attract more privatisation, there should be better communication of tariff-setting mechanisms to prospective investors. Further, it is essential to ensure that there is improvement in the overall operating efficiency, in line with investments.

The key to enabling the success of airport operations, especially for smaller airports, is ke­e­ping the tariffs in check. It is essential to manage the private sector’s profit motivations while welcoming the development that it has to offer. In this context, the bundling or packaging of airports into single concessions can help in rationalising the yields for smaller airports.

 

Based on a presentation by Sonal Mishra, managing director and lead,
aviation, PwC, at a recent
India Infrastructure conference