Privatisation of airports has transformed airport experience

Paramprit Bakshi, Associate General Manager, CAPA, opines that for the aviation industry to gain momentum, a transition from ad-hoc decision making to a rule-based operating environment is a pre-requisite.

What kind of growth has the aviation sector registered during last two years?
Largely on the back of improved financial performance of airlines, the sector saw a fortune reversal in FY2015. This was primarily aided by lower fuel prices and stable currency.

In FY2014, domestic traffic in India increased by 5.2 per cent y-o-y, while international traffic growth was at 8.3 per cent compared to FY2013.

In FY2015, traffic increased and losses declined largely due to lower fuel prices. There was little else which happened that contributed to improved performance. In FY2015, domestic traffic was up 13.9 per cent and international traffic increased by nine per cent y-o-y. A steep decline in oil prices allowed airlines to reduce fares, triggering incremental growth. For FY2015, combined losses of Indian carriers were about $1.21-1.27 billion, 25 per cent less then the previous year´s losses.

What kind of reform is necessary for the growth of the sector?
For a genuine transformation and to achieve potential growth opportunities, there has to be a clear vision and roadmap the onus of which is on government. For the vision to translate to action on the ground and to the benefits expected for the sector and for the economy, a comprehensive, long – term, forward-looking and enabling policy and regulatory framework is a must. Such framework should address legacy structural issues and imbalances which have plagued the aviation sector for several years.

The policy should prioritise short, medium and long-term objectives and actions in the context of the vision for the sector and a plan which is realistic and measurable. For the sector to thrive, we must migrate from the current ad-hoc decision making to a rule-based operating environment, backed by a robust policy and regulatory framework.

The government needs to hold exhaustive consultations with various industry stake¡holders, including recognised consumer forums. Further, the Ministry of Civil Aviation needs to recognise that many issues affecting aviation are beyond its purview, and interaction with Ministries of Finance, Commerce, Tourism, state agencies such as immigration, customs and excise is critical. Even state governments must be brought into the fold of discussion and consultation while drafting a national aviation policy.

There are a multitude of factors collectively impeding sustainable growth. These include a high fiscal regime, regulatory reforms (DGCA, BCAS), market access (bilaterals, 5/20 rule, RDGs, domestic airline licensing), economic regulation (especially for airports), infra¡structure (airports, MRO, multi-model conne¡ctivity for passenger and cargo movement), future of Air India and AAI, absence of a customised policy for the general aviation segment, financing alternatives for the sector, et al. Some low hanging fruits such as removal of the 5/20 rule and relief on fiscal front will provide an impetus to the industry till the time the policy and regulatory environment are addressed.

What are the benefits of privatisation of Chennai, Kolkata, Jaipur and Ahmedabad Airports?
CAPA believes privatisation of airports has transformed airport experience. As a result, India now has world class airports in Delhi, Mumbai, Hyderabad, Bangalore and Cochin. However, there are some outstanding issues to be addressed, especially relating to economic regulation.

We await the government´s policy on privatisation, and the model adopted for other airports, including Chennai, Kolkata, Jaipur, and Ahmedabad.

What are the infrastructure requirements for the sector?
CAPA believes India has the potential to be the third largest market in next 10 years as currently less than 0.2 per cent of the population travels through air. Once a robust and holistic policy and regulatory framework is in place, world class infra¡structure spanning airports, MRO, ground handling, ANS, training, etc., will become critical to support the growth envisaged. The infrastructural requirements of the entire aviation value chain and associated capital requirement are enormous. For instance, India needs massive additional airport capacity over the next two-three decades to ably support the passenger and cargo growth envisaged. Likewise, the ability of air navigation services to keep pace with the expected growth will be critical. The infrastructure requirement is not limited to only physical infrastructure. Equally important will be skilled manpower availability. The current training capacity within the system is also poor and inadequate to support the scale of growth envisaged.

What opportunities are the plans for no-frills airports likely to generate?
The UPA Government had asked the AAI to prepare a plan to develop 50,100 low cost airports across India to encourage regional connectivity. This is in principle a good idea, but the reality is more complex and needs caution against rushing to commit capital to such an exercise. With 50 idle airports and a further 60 loss-making operational airports in AAI´s portfolio, it is not clear that constructing additional infrastructure should be the priority, especially as we have seen investment in high profile airport rehabilitation in recent years at locations such as Mysore, Pondicherry and Kanpur which have failed to attract airline services. Likewise, the greenfield airport at Durgapur has struggled to secure the interest of airlines.

Robust regional connectivity is critical for overall long term growth of the aviation sector, and no-frills airports could help propel this agenda. However, this requires a well-developed ecosystem, where both the airlines and airports work cohesively. We hope the new policy will lay special emphasis on providing an enabling regional aviation framework, which includes establishing an essential services fund (ESF) to propel regional connectivity as well as for viability gap funding of otherwise sustainable projects.

How will the withdrawal of service tax exemption impact the sector?
Till now there was an exemption on paying service tax in construction of greenfield airports. With the exemption withdrawn, developers would have to pay tax on consul¡tancy, technical services or hiring of labour from contractors. As a result, construction cost of greenfield airports is likely to increase.

The move will however impact only greenfield and not brownfield projects. Given our need for new airports and associated private capital, this action may be sentiment negative for a sector which is already operating in a high cost environment.

What are the reasons for project delays?
Construction of an airport is a complex activity which involves several stakeholders. A host of key activities such as land acquisition, availability of mandatory clearances, financial closure, etc., need to fall in place in a synchronised manner to achieve on time project commissioning. An inordinate delay in any key activity has the potential to throw a project off course.

How can the government make the PPP model viable in the sector?
For viable airports, aspects like sufficiently robust catchment areas, adequate airspace, and potential for airlines to operate are critical. Approval of business plans of proposed airports should not be based only on clearance of technical thresholds, but should consider the overall viability of the project. An institutionalised framework which professionally vets projects on merit, including level of capex required, will help in objective assessment of viability.

In order to attract investors, there must be a predictable economic environment with respect to potential revenue streams, including land use for commercial development. It is also critical that the framework considers the impact on all stakeholders, including the consumer, and ensures competitiveness within the sector.