indian airport privatization

8/6/2019 Indian Airport Privatization

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Brief on Airport Privatization in India

1 2 T H S E P T E M B E R 2 0 0 8 S H E K H A R P P H A D N I S

A P P R O A C H

B US I NE S S P E R S P E C T I V E

Need for Airport Privatization in India2

Overview on Airport Revenue and Cost Structure..4

Public Private Participation Initiative..5

F I NA NC I A L P E R S P E C T I V E

Detailed Revenue Break-up and Its Drivers.8

Charge Structure of Bengaluru International Airport (BIAL)..9

Financial Comparison of BAA Vs AAI.11

Our Observations12

Annotations

AAI Airport Authority of India

PSU Public Sector Undertaking

BAA Consortium led by Grupo Ferrovial (Spanish Infrastructure Company)

AOCC Airports Operations Control Centre


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B US I NE S S P E R S P E C T I V E

Need for Airport Privatization in India - Recent global phenomenal in Airport

Ownership and Airport Management Control is witnessing a Structural (not

Cyclical) Change and Indian Airports are no exception to it.

Reduction in Capital Allocation - Intense pressure on Airports

profitability caused by cost cutting measures and an increased effort to

improve load factors are forcing incumbent airport authorities to reduce

capital allocation towards airports operating infrastructure.

Policy Shift - Till recently, Indian Government treated Airport

infrastructure as a mode of transportation for an elite group but now with a

change in perception and greater emphasis on development of trade and

tourism, government wants air travel to be made available to general

masses.

Congestion at the Existing Airports Liberalization in Air Travel Policy

has triggered a significant increase in air traffic and early estimates

suggest that air traffic will grow at more than 10% pa for next few years.

This situation has led to a traffic congestion in some international airports

at Mumbai, Delhi, Chennai, Thiruvananthapuram and also at some

domestic airports like Delhi, Chennai, Bangalore, Goa, Ahmedabad,

Cochin and Mangalore. Increased air traffic puts enormous pressure on

the existing infrastructure by stretching the apron capacity to its limits.

In Present World Airport Development is Treated as Ongoing

Process- Traffic growth is a function of type and size of the air crafts

handled by the Airport. Era of inexpensive oil has vanished and ATF

(Aviation Turbine Fuel) prices have escalated to the roofs. Effective

solution to this problem has instigated the demand for newer passenger


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planes with different capacities and varied ranges in order to meet the

requirements of complex route structure. All the airlines across the globe

have announced fleet expansion plans with a sole objective of bringing

down the cost per seat/kilometer while catering to increased demand. This

development has a direct implication on the current state of the airport

infrastructure and its ability to handle incremental capacity. Initial reports

indicates that Indian Aviation sector requires approximately INR260,000

million of capital investments by way of purchasing new aircrafts,

replacement of old fleet, modernization of airports and up-gradation of

navigation/communication infrastructure. Now, modernization and up-

gradation of airport infrastructure in India is a headache for AAI (Airport

Authority of India), as it owns and manages 126 airports and 26 civil

enclaves at defense airfields. AAI also, provides air traffic services over

the entire Indian airspace and adjoining oceanic areas. Such a mammoth

of investment is unviable business proposition for Government and to

make this as a lucrative business opportunity for private investors

Government needs to change its style of running an airport from

Traditional to Commercial.

Transition form Traditional Airport Model To Commercial Model

Under the Traditional Airport Structure ownership

and management largely stayed with the

Government and management was controlled by

Governmental authorities like Ministry of Transport,

Civil Aviation authorities etc. Airport's revenue

generation capability was linked only to its

Aeronautical OR Non-Commercial Operations and

Airport's mission included providing services to its

direct customers like Airlines, Passengers, and

Freighters. Most of the Airport's from Canada wererunning on this model before 2000. Even today, few

Airports can be found in China and Papua New

Guinea which are running on traditional model style.

Under Commercial Model two prime sources of

revenues are identified; Aeronautical OR Non-

Commercial and Non-Aeronautical OR Commercial.

Main mission statement of this type of Airport is

nothing but profit maximization by all possible

means. This type of Airport Model requires great

shift in Ownership and Management Control from

hands of Government to Private investors. In all

modes of airport privatization in India retention of air

traffic control is with the Government of India as airtraffic is an important function of National Security.

Commercial Model of Airport caters to wider

spectrum of customers including employees,

visitors, local communities, local businesses and

local industries.

Traditional Model Commercial Model


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Overview on Airport Revenue & Costs StrucOverview on Airport Revenue & Costs StrucOverview on Airport Revenue & Costs StrucOverview on Airport Revenue & Costs Structureturetureture

3 Point Revenue AND 3 Point Cost Structure

We believe it is important to understand the Revenue and Cost structure of an

Airport, irrespective of the Airport Model (Traditional OR Commercial). Pay User

Concept is an important, simplified and contemporary function which identifies

three end users who consume almost all services provided by the airport.

3 Point Revenue Structure - Pay User Concept

Identification of users and how much they are willing to pay is the key

determinant of Airports funding process. Pay User Concept covers all possible

revenue generating opportunities that an Airport should earn. These three broad

categories are as follows:

Non-Aeronautical (Commercial)

Revenue

Airlines Passengers Ground Tenants

Runway

landing &

take-off charges

Aircraft parking

charges

Airbridge

charges

Cargo

Passenger service

charge

Airport security

charge

Retail revenue (from shops, catering,

foreign exchange vendors etc.)

Car parking & car rental

Advertising

Concession

Other non-aeronautical (consultancy,

visitor & business services, propertydevelopment etc.)

Recharges (for gas, water, electricity

etc.)

Aeronautical (Non Commerical)

Revenue

3 Point Cost Structure

Distinct from the revenue reporting standards (segregating Aeronautical

revenues versus Non-aeronautical revenues) there is no specific guide line for

reporting operating costs. We believe that its simple to identify all operating

costs under three broad categories as follows:

Labour Capital

Broad Classification of Operating Costs

Other Operating Costs


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PublicPublicPublicPublic----Private Partnership (PPP)Private Partnership (PPP)Private Partnership (PPP)Private Partnership (PPP) IniIniIniInitiativetiativetiativetiative

Need for privatization throws light on Indian Governments inefficiencies to raise

the standard of existing airport infrastructure at par with international levels. PPP

is a correct initiative to bridge the resource gap between the huge capitalinvestments required to meet the growing demand and also, to improve upon the

managerial and operational efficiencies across entire Air Service Spectrum. The

existing legislative framework (The Aircraft Rules, 1937) is very conducive for

privatization process and allows Central Government, Public Sector Undertaking

(PSUs), State Governments, Urban Local Bodies, private companies, individuals

and joint ventures involving one OR more of the above to own and manage

airports in India. In some high cost projects like developing a Aerotropolises

(covered later in detail under financial perspective non-aeronautical revenues)

Government has recognized a need of bilateral cooperation with other countries

in order to bring in requisite expertise and financial muscle to complete such

projects. Foreign participation in such case is allowed upto 74% with an

automatic approval and 100% under special circumstances.

Bengaluru International Airport Limited (BIAL) Shareholding Aug08

Unique(Flughafen

Zrich AG) -

Zurich Airport,

Switzerland

Larsen & Toubro,

India

17%

Airport Authority

of India (AAI)

13%

KSIIDC (Agencyowned by

Karnataka Sate

Govt.

13%

Siemens Project

Ventures,

Germany

40%

Government has kept an option open with respect to which type of PPP model

should be adopted with respect to the privatization process that too on case by


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case basis. So far Government has signed four agreements; two under

Greenfield development process (Bengaluru and Hyderabad) and remaining two

under Brownfield process (Delhi and Mumbai). De-risking of airport business

requires huge plots of land to built sustainable flows of revenues from Non-

aeronautical (Commercial) operations. At Bengaluru the concessionaire got

about 300 acres of land and at Delhi 250 acres were allotted for commercial

development.

Ownership Clause Government has kept 26% stake in all the PPP projects

either through Airport Authority of India (AAI) OR through State Government of

India. By retaining 26% stake Government can veto certain major fundamental

resolutions like increasing equity capital, change in directors etc. As per theCompanies Act 75% stake holder can have complete control over companys

decision making powers but here in Airport Privatization case Government has

not sold its 25% stake Or lesser than that to private consortium.

Main Characteristic in Concession Agreement To facilitate the larger chunk

of revenues from Non-aeronautical OR Commercial operations Government has

leased out land for the period of 30 years to a concessionaire at a nominal rent. It

allows construction, development, operations and maintenance of the airports by

the concessionaire and with his sole discretion lease can be extended for

another 30 years (60 years in total).

Unique Feature in Airport Privatization Government of India will not carry out

any action in contradiction with Concessionaire Agreement which would deprive

Concessionaries from their economics interest. All the Governmental bodies to

the agreement including State Government are obliged to ensure all the requisitestatutory compliance and grant all the permissions to the Concessionaire. This

obligation on Government makes Airport Privatization a unique process different

from Road and Port Privatization.


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Stringent Construction Timelines for Brownfield Projects In Greenfield

projects Concessionaire can carry out construction work with a relaxed timeline

approved in the specific Master Plan. Where as in Brownfield projects

development of a Master Plan itself has a stringent timeline (maximum six

months after signing of an agreement). Delay in submission of the Master Plan

would force Concessionaire to bear a monetary penalty of US$65000 per day.

Secondly, with regard to the construction work of parallel runway at Delhi airport

has an estimated timeline of 24 months after signing the agreement; any failure

in completion of work within the stipulated timeline would cause a

Concessionaire hefty US$ 25 million fine or even in excess of that.


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F I NA NC I A L P E R S P E C T I V E

After understating the 3 point revenue and cost structure, now lets discuss these

three broad categories of revenues and cost in detail. This is possible by taking a

close financial perspective on revenues and costs drivers of an Airport. For

analyzing purpose we have taken all data from AAI and BAA 2006-07 annual

reports. Currently, AAI manages 11 international and 89 domestic airports.

Revenue Break-up and Drivers

A] Aeronautical Revenue is further divided into following three types

1) Traffic Revenue

2) Non Traffic Revenue

3) Cargo Revenue

Traffic Revenue Drivers

Route Navigation Facilities Charges No. of aircrafts handled

Landing Fees per *MTOW

Parking & Housing Fees Per hour per **MT

Terminal Navigational Landing Charges No. of aircrafts handled

Passenger Service Fee per embarking passenger

Non-Traffic Revenue Drivers

Public Admission Fees Percentage of No. of passengers handled

Trading Concessions Royalty payments decided by Government

Rent Services Avg rate per m2

Cargo Revenue Drivers

Freight per MT* MTOW maximum take-off weight

**1 MT = 1000 kgs

Aeronautical Revenue is sensitive to following three major activities:

Activity Units

Aircraft Movements Nos. International Domestic

Passengers Nos. International Domestic

Freight Tonnes International Domestic

Type


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Charge Structure of Bangalore International Airport Limited (BIAL) May-Aus08

(A minimum fee of INR5000 shall be charged per single landing of international flights and INR3000 shall be charged persingle landing of other than international flight. (Minimum charge of INR1000 per single landing applied from 24 May 2008to 26 May 2008)

The BIAL spread over 4000 acres, is located 40 kilometers north of the citys

central business district. Its commercial (Non-Aeronautical) revenue comes fromhotel, shopping mall, food courts and other convenience amenities which will be

completed in upcoming phases.

Other Highlights of Airport Charges at BIAL

Parking time is calculated based on ON BLOCK and OFF BLOCK time as

recorded at Airport Operations Control Centre (AOCC Parking time will be

calculated based on ON BLOCK and OFF BLOCK time as recorded at

Airport Operations Control Centre (AOCC)

For calculating chargeable parking time part of an hour is rounded of to

the next hour

In aerobridge stands normal rates are applicable for 2 hours after allotted

free parking period. After the 4 hour period parking charges would be

doubled that of normal charges

INR200 per embarking passengers are charged (out this INR70 towards

facilitation and INR130 towards security)

Infrastructure Charge from Passengers - INR952.30 per international

embarking passenger as User Development Fees (USF). UDF is a charge

for enhancing current facilities to match with international standards. Till

Weight of Aircraft International Flight Other than International

Flight

Up to 100 MT INR227.70 per MT INR170.80 per MT

Above 100 MT INR22,770 + INR306

per MT in excess of

100 MT

INR17,080 + INR229.5

per MT in excess of 100

MT

Landing Charges

Weight of Aircraft Housing charges Parking Charges

Up to 100 MT -NA - INR3.70 per hour per

MT

Above 100 MT -NA- INR370/- + Rs. 4.90

per MT per hour in

excess of 100 MT

Parking Charges


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both the companies is similar. EBITDA margins for both the companies are very

high.

BAA 2007 Revenue Break-up AAI 2007 Revenue Break-up

Aeronautical

(Non-

commercial),

51%

Non-

Aeronautical

(Commercial)

49%

Non-Aeronautical

(Commercial)

, 36%

Aeronautical

(Non-

commercial),

64%

BAA 2007 Operating Cost Break-up AAI 2007 Operating Cost Break-up

D&A, 22%

Staff Costs36%Other

Operating

Expenses

42%

Staff Costs38%

Other

Operating

Expenses

41%

D&A 21%

Revenues, EBITDA and EBITDA margins Comparison

INR 181,074

INR 37,262

INR 19,962

INR 86,468

54%

48%

INR 0

INR 20,000

INR 40,000

INR 60,000

INR 80,000

INR 100,000

INR 120,000

INR 140,000

INR 160,000

INR 180,000

INR 200,000

2007 BAA 2007 AAI

millions

44%

45%

46%

47%

48%

49%

50%

51%

52%

53%

54%

55%

EBITDAmargins

Revenue EBITDA EBITDA margins

Notes: We have converted BAA groups consolidated 2007 revenues & EBITDA @ 1 = INR80.585. In 2007

BAAs Aeronautical revenues stood at 1093 million and Non-aeronautical revenues were at 1154 million.

Operating costs (excluding exceptional items) after adjustment of capitalized costs was at 1174 million.


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Observations

Inconsistency in Punitive Damages of Brownfield and Greenfield

Projects - Under the Greenfield environment Concessionaire is liable for

financial damage only after six months of date on which airport is

supposed to be operational. Under such delay Concessionaire is liable to

pay at the rate of US$2500 per day. (Greenfield punitive damage is

US$65000 per day). There is a huge gap of US$62500 per day between

punitive damages for Greenfield and Brownfield.

Basis on which Punitive Damages are Calculated are also

Inconsistent in Nature Concessionaire in Greenfield project is liable forfinancial damage under only one circumstance i.e. delay in opening of an

airport. Contrary to this Concessionaire in Brownfield project will bear

financial consequence under 20 different parameters like security delay,

check in delay etc.

Delay in forming a Regulatory Authority is inexplicable We feel that

the performance of the major infrastructural projects like Airport

Privatization should be gauged by an independent Regulatory Authority

(like TRAI for Telecom) which will look after regulatory standards, approval

charges, imposing penalties, settlement of dispute between Government

and Concessionaire etc. Indian Government was obliged to form such a

Regulatory Authority for Airport Privatization but as of now even after

signing first Concession Agreement back in July 2004 Regulatory

Authority has not become a reality. Once such authority is formed power

to resolve any dispute between Government and Concessionairebecomes a tricky issue as few experts are of the opinion that arbitrator

should ideally possess such power and it might dampen the spirit of

foreign partners.


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Acquisition of large pieces of lands for Greenfield projects could be

a politically sensitive issue

Concession Fees an issue to ponder upon Although through

privatization initiative Government is diluting its stake in all major airports

across India still it collects Concession Fees, Royalties and rents from the

airports. Few experts states that under such scenario airlines and

passengers ends up paying 150% of the infrastructural costs.

indian airport privatization

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