A real estate game

The progress of Indian airports from aero- to non-aero-heavy revenue model may happen sooner than we thought.

On the one hand Indian airports that are finally looking world-class even lavish and opulent, some say while airlines are cutting themselves down to size and not thinking beyond low-cost. It is ironic that both industries are losing money.

Lately, there has been a debate about how relevant and acceptable it would be for airlines to accept a steep increase in airport tariffs. Delhi International Airport Ltd (DIAL) had approached the Airports Economic Regulatory Authority (AERA) for permission to raise tariffs by 774 percent. AERA, on the other hand, has recommended a hike of 334 percent, and DIAL has promptly gone on record to state that it would still incur huge losses even after increasing the tariff by 334 percent. This would mean airlines would need to gulp and bear that much extra or pass it on to consumers.

Airline associations including International Air Transport Association (IATA), Board of Airline Representatives in India (BARI) and Federation of Indian Airlines (FIA), have understandably opposed any hike. Airlines have warned DIAL that it is likely that some airlines won’t patronise Delhi airport any longer. It is unrealistic that larger airlines would prefer to skip Delhi.The story with smaller airlines such as the Malaysian low-cost carrier AirAsia X Sdn Bhd may be different. Nevertheless, this kind of pressure injects uncertainty into DIAL’s balance sheet next year.

The modernisation of GMR-owned DIAL cost a whopping Rs 12,700 crore, but GVK’s Mumbai airport modernisation is expected to exceed that amount. So the problem and inevitability of tariff hikes has only started.

The increase in airport charges may be debatable, but this would be the first major increase in more than 10 years (the last time was a 10 percent increase). Yet as DIAL is set to lose Rs 900 crore from its airport this year alone, the question is why would charges in Indian airports be higher than those in Singapore, Hong Kong and other major airports of the world?

A new suggestion (from the aviation sector, understandably) is to de-link airport tariffs from user fees. Pooling them together would mean that airlines pay for the fancy non-aero infrastructure such as airport malls and high-end stores thus subsidising it in some way for the user of those facilities.

The airports sector offers a huge opportunity in real estate. This means that there is immense potential not only for airport developers, but could mean that real estate industry would be eyeing the airport sector carefully as airports gradually reach the smaller cities. De-linking the activities creates separate profit centres and businesses and emphasis on non-aeronautical activities will boost that side of revenues.

This would be a welcome move. Larger players whose portfolio cuts across sectors may be particularly interested in this activity. As airports are being built in smaller cities across India, private sector’s interest hinges on economic development of those cities. Such development often presents a chicken-and-egg story, the infrastructure typically following development initiated by real estate or, less frequently, industry. But with airports in smaller cities, wide-spectrum infrastructure players may like seize the opportunity to undertake real estate development simultaneously with development of airports.