Take off issues

Regional airports face peculiar problems and require solutions tailored to enhance their economics. There is a need for a multipronged approach to address issues affecting the economies of these airports, writes Rohit Chaturvedi.

The Indian aviation sector has witnessed significant changes in the last few years and the total traffic has been growing at a fast pace. The passenger traffic for the domestic and international sectors has seen a growth rate of 13 per cent and 15 per cent respectively, between 2008 and 2013. In 2013-14, although the traffic declined by 0.8 per cent as compared to 2012-13, the outlook remains robust in the medium term. The trend is expected to continue in the foreseeable future with passenger traffic increasing by 7-9 per cent till 2017-18. Freight traffic has also increased, albeit at a lower growth rate of just under 7 per cent, between 2008 and 2013. The key factors catalysing the growth in traffic include:

• Burgeoning middle class
• Increase in business and leisure travel
• Introduction of low-fare carriers
• Steady development of airport infrastructure

Need for regional airports

It may be noted that the development of airport infrastructure is both a key driver and an enabler for the growth of the aviation industry. At present, the total capacity utilisation of all airports stands at 70 per cent. The capacity utilisation of major and non-major airports (small regional airports) is 68 per cent and 75 per cent, respectively.

If the capacity utilisation of non-major airports is juxtaposed with the underlying pattern of traffic growth, the message is clear that the development of regional airports ought to be immediately implemented. To provide a perspective on the traffic trend at a smaller regional airport, it is important to understand the trends of share of these airports in the overall traffic which has been showing steady increase over the past many years. The proportion of traffic at non-major airports is expected to reach one-third of the total aviation traffic by 2017-18.

The need for developing regional airports in India has also been identified by policymakers. The target is to develop a number of regional airports during the 12th Plan as per the Planning Commission. These airports include Mopa in Goa; Gulbarga, Bijapur, Hassan, and Shimoga in Karnataka; Aranmula (Pathanamthitta) and Kannur in Kerala; Sindhudurg, Navi Mumbai and Shirdi in Maharashtra; Darba in Madhya Pradesh; Karaikal in Pudducherry; Kushinagar in Uttar Pradesh; Andal-Faridpur in West Bengal; Itanagar in Arunachal Pradesh; Kishangarh (Ajmer) in Rajasthan; and Deoghar in Jharkhand.

Moreover, there are plans to develop 100 new airports by 2020. The planned airports are envisaged to improve the air connectivity of smaller destinations.

Underlying problems

However, the plans may fail to fulfill the desired objectives if due consideration is not provided to the economics of the non-major airports which tend to be smaller. These airports face additional issues on top of general risks affecting all the airports. Thus, there is a need to address these issues in order to successfully develop the regional airports.

It is important to understand the cost structure and revenue build-up of the smaller airports to appreciate the impact on economics of these airports.

The cost structure of an airport may be understood by analysing the value chain of airport development. Airport development encompasses provisions for infrastructure-based and service-based activities. The first category includes investment in construction works and procurement of technology and equipment. In the second category, development includes investment in airline-based services, retail-based services, and parking facilities.

The overall break-up of costs catering to the above-mentioned is given in Figure 1. It may be seen from the Figure that the major share of capital costs has to be incurred even before an airport is operational.

In addition, most of the operating costs tend to be sticky as well. The upfront commitment and sticky operational cost translate to higher risks if revenue visibility is not ascertained adequately.

Table 1: Share of non-aero revenues for key major airports

The factors impacting revenues at the small airports are complex. First, in the case of smaller airports, the revenue streams are restricted by the fact that non-aeronautical revenues form a very small share of the total revenues of these airports. The non-aero revenues in medium-sized airports in India averages to less than 5 per cent of the overall revenues. To give an idea of how non-aeronautical revenue may affect an airport's economy, the share of non-aero revenues for the key major airports is given in Table 1.

The second issue impacting economics of the non-major airports, especially in Tier II and III cities, is limited scope of ancillary development such as real estate. This could be attributed, principally, to low land values and real estate absorption levels, the case in point being five regional airports in Maharashtra. The airports' concessions were awarded along with land adjoining these airports. However, the concessionaires have not been able to monetise the real estate potential.

• The third issue affecting economic flows from the higher sensitivity of traffic, owing to the following two factors:
• High cost of service for airlines makes traffic too sensitive to tariffs which are market-determined. The higher costs are due to low capacity of the aircraft and high fixed costs which result in high per passenger cost.
• Competition between short-haul flights and surface transport is intense (the high proportion of traffic at small airports mainly consists of connecting flights to the nearest large airports acting as hubs).

Lastly, non-major airports face indirect consequences arising from price volatility of aviation fuel and cost of complying with regulations by the airlines. The traffic at the regional airport is principally driven by smaller aircraft. The volatility of fuel prices and costs of complying regulations affect small aircraft, compared with large ones, disproportionately due to diseconomies. The higher volatility of these costs impinges on the traffic handled at small regional airports.

Solutions

Despite the complex and industry-specific nature of the issues, solutions may be conceived to reduce their impact on the non-major airports. A few key steps that could be adopted to make investment in regional airports more attractive are:

• Develop project structure inducing competition to reduce the costs of development. This may include developing suitable public-private partnership (PPP) frameworks or tweaking existing ones.
• Leverage private sector capital through viability gap funding.
• Advance planning and consultations with Ministry of Civil Aviation (MoCA) on approvals relating to additional revenue from user development fees (UDF) and airport development fees (ADF).
• Adopt modular approach to airport planning/development to ensure minimum stress on viability from front-ended capital expenditure.
• Facilitate framework to maximise monetisation of available land for real estate development and combine it with project development.
• Enable long-term and concessional funding.

Given the high growth of air traffic in India and its changing characteristics, it is imperative to focus on regional airports. However, these airports face peculiar problems and require solutions tailored to enhance their economics. There is a need for a multipronged approach to address issues affecting the economies of these airports. With the right focus and appropriate strategy, these airports could become their regions' growth engines.

The author is Director – Transport, CRISIL Infrastructure Advisory.