Regional Aviation - Untapped Potential

Reports indicate that a majority of flights operate either between state capitals or to metros. Quite evident from these statistics is the opportunity that lies slumbering in the form of airports or airstrips that can be commissioned in the future.

The last five years have been turbulent for Indian civil aviation. Airline and aircraft operators have had wobbly trajectories, although statistically speaking the domestic aviation market has grown in a wholesome manner, displaying an 85 per cent upward leap since end 2006. However, this impressive growth has not translated into profits for the major stakeholders in civil aviation. The Centre for Asia Pacific Aviation estimates that the total losses incurred by all the Indian carriers combined for the financial year 2011-12, will be Rs. 12,500 crore. In the domestic market, every time a passenger boards an aircraft, India’s airlines lose around Rs. 1,200-1,500 owing to high cost of aviation fuel, steep tax rates, inadequate infrastructure and highly competitive domestic market characterised by aggressive and at times, predatory pricing. The result has been an unfavourable yield-cost ratio leading to losses. A major role has been played by the stunted development of regional aviation whose potential represents lucrative options for investment.

Inadequate Connectivity

End December 2011, D.S. Rawat, Secretary-General, Associated Chambers of Commerce and Industry of India (ASSOCHAM), formulated an eight-point strategy for the Indian aviation sector. The document included upgradation of airport infrastructure and the development of an infrastructure fund to construct airports in Tier-II/Tier-III cities. According to a commentary in Mid Day, a recent report prepared by the Ministry of Civil Aviation has made some startling revelations about the regional aviation pattern in India. The report indicates that a mere 14 per cent of scheduled flights which operate in the country cater to a massive 55 per cent of the total population and that the states of Haryana, Sikkim, Puducherry, Dadra and Nagar Haveli have almost zero connectivity. Also, 11 states including Uttar Pradesh, Uttarakhand, Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Rajasthan, Meghalaya and Odisha are catered to by only 14 per cent of total 12,000 weekly domestic flights. The report also reveals that a majority of flights operate either between state capitals or to metros. Quite evident from these statistics is the opportunity that lies slumbering in the form of airports or airstrips that can be commissioned in the future.

Modernising Airports

Till 2006, India’s airports were dreary, shabby and archaic lacking in proper passenger facilities. Fortunately, the government realised that as long as the Airports Authority of India (AAI) had the responsibility to develop and maintain airports, their standard would remain mediocre. Even today, only a small fraction of AAI’s operations are profitable with many airports incurring heavy losses because of high operating costs. The government embarked on a multi-billion dollar airport modernisation programme based on the public-private partnership (PPP) model to upgrade and develop the country’s two main airports—Mumbai and Delhi—as well as construct Greenfield airports at Bangalore and Hyderabad. Kochi, the first private airport in India, was developed privately. The government has plans for a further investment of Rs. 42,500 crore for the development of other airports. Nearly half has been committed for upgrading metro airports at Kolkata, Chennai and Trivandrum. The rest will be invested in other non-metro airports and in the modernisation of existing facilities. The remaining 121 airports and 329 airstrips are still run by the AAI but most are in dire need of investment in infrastructure.

ASSOCHAM has been calling for creating an environment for attracting investments for infrastructure development. It projects that airports will require an investment of Rs. 67,500 crore during the 12th Five Year Plan (2012-17), of which Rs. 50,000 crore will be the share of the private sector. In a step towards that direction, the state-run IDBI Bank is launching the country’s first Infrastructure Debt Fund (IDF) to raise Rs. 25,000 crore for building airports. Such debt funds can be floated through non-banking finance companies (NBFC) or as trusts. IDBI Bank has sought the Reserve Bank of India’s approval for an NBFC, which will have a capital base of Rs. 1,000 crore. The bank will hold 30 per cent stake in the NBFC and the rest will be held by some state-run banks and the Life Insurance Corporation (LIC) of India. The new entity under the relaxed norms can provide long-term debt of over Rs. 25,000 crore in the infrastructure sector. As IDF-NBFC, it can invest in PPP projects.

Meanwhile, the AAI has drawn up an ambitious plan for expansion and improvement of airports. Some of the current projects are the major airports of Assam including the Lokapriya Gopinath Bordoloi International Airport at Guwahati. As per reports, the Assam Chief Minister Tarun Gogoi has met the AAI Chairman V.P. Agrawal and discussed the development of airports in the state. The AAI chief is known to have updated him about the recent developments and steps by the AAI for the construction of a new integrated terminal building and taxi track at the airport in Guwahati and the expansion of the Rowriah Airport in Jorhat as it has tremendous scope for growth. In addition, expansion of the Lilabari Airportat North Lakhimpur and revival of the Rupshi Airport at Dhubri are also under consideration. Night landing facilities are also being planned for airports at Guwahati, Mohanbari and Dibrugarh. Elsewhere, the holy city of Deogarh in Jharkhand will soon figure on the country’s air map as the AAI has decided to set up an airport there and a memorandum of understanding (MoU) has recently been signed between the AAI and the Jharkhand Government. Several other projects are also under active consideration.

Non-Aeronautical Revenue

Associated with the development of airports is the significant upside potential in nonaeronautical revenue. In the year 2006, the last year in which all metro airports were operated by the AAI, non-aeronautical activities generated just 15.1 per cent of total revenue, compared with around 50 per cent or more being achieved by commercially driven airports in other parts of the world. The results since then indicate that optimism about the revenue growth potential was wellplaced. In the last five years, total non-aeronautical revenue generated across all airports in the country has grown by more than 340 per cent from Rs. 490 crore to Rs. 2,160 crore. Admittedly, 91 per cent of this growth has been driven by the four PPP metro airports at Delhi, Mumbai, Bengaluru and Hyderabad. However, the difference in the commercial approach of the AAI and the four PPP airports is starkly visible from an analysis of the non-aeronautical share of total revenue. All of the PPP airports have increased their nonaeronautical revenues to at least 35 per cent of the total revenue. In the case of Delhi and Hyderabad airports, it is more than 45 per cent. However, in the case of AAI airports, it has risen by less than a couple of percentage points over the last five years to reach just 17 per cent. Thus, there exists huge but unrealised potential for nonaeronautical revenue growth at the AAI airports.