Low-Cost Airports

The arrival of Air Deccan on the Indian civil aviation scene was portentous. The low fares offered by the airline caught the imagination of a nation brought up on the idea that air travel was a luxury that was affordable only by the outrageously affluent. The ‘Rupee One Fare’ on offer appeared to be a dream come true and attracted a fervent mass following. Air Deccan’s visible onslaught also fired the entrepreneurial spirit in the scheduled operator space with the no-frills model inviting the maximum attention, largely due to the appeal of the Air Deccan archetype. The ‘low-cost carrier’ tag was used to allude to all such aspirants.

However, the discerning observer soon learnt that the term was being used erroneously. Although the fares were alluringly low, the cost of running the airline was not lower than those of legacy carriers. This was in stark contrast to the US and Europe where low-cost airlines are differentiated by their lower cost of operations. The single major factor contributing to the reduction in cost of operation of airlines outside of India is the availability of low-cost airports. Some airports which are not exclusively lowcost, have low-cost terminals to cater for low-cost airlines, thus assisting them in achieving low running costs through features such as self check-in counters, Spartan facilities, reduced shopping opportunities, austere amenities, limited food outlets and so on. However, in India, no low-cost airport or terminal has been developed so far and it is only in recent months that the term lowcost airport is being used in officialese for the first time.

THE NEED

India currently offers a depressing environment for the growth of civil aviation due to an apathetic disposition of the establishment and an apparent lack of veritable comprehension of the contribution of civil aviation to national economic growth. However, despite unfavourable government policies, there is an inexorable growth dictated by the demand for air travel, domestic and international. Indeed, according to International Air Transport Association (IATA), India is poised to become the third largest aviation market by 2031.

Today, the total number of aircraft held by airlines in India is around 400 but according to Dinesh Keskar, Vice President, Sales, Boeing, India needs 1,600 new aircraft over the next 20 years. Indi-Go’s orders for aircraft add up to 530 Airbus A320 (100 in 2005, 180 in 2011 and 250 in 2014, with option for an additional 100). AirAsia India also has plans to induct another ten aircraft next year, taking its total fleet strength to 15. Indeed, all the existing airlines have plans to bring more aircraft into the Indian skies. At the same time, new airlines are waiting in the wings for the environment to become conducive enough for them to enter the market.

Of all the scheduled operations in India, around 70 per cent are low fare in nature. What the foregoing points to is two notable elements; firstly, that the number of airliners in India is going to increase significantly in the years ahead and secondly, that majority of their operations are going to be low fare in nature. Juxtaposed, these two indicate a need for an increasing number of low-cost airports so that low-cost operations can be facilitated for the major proportion of ‘low-cost’ operators to make their operations tenable and profitable.

LOW COST AIRPORTS

Addressing a conference during the India Aviation Air Show in Hyderabad in March this year, the Civil Aviation Secretary Ashok Lavasa said, “There has been a phenomenal growth of the Indian aviation sector in the last decade to reach out to the consumer at the bottom of the pyramid. We are working towards a framework where the states, the Centre and the airlines make collaborative efforts to develop low-cost airports.” He went on to state that the government had identified 50 airports for low-cost development and modernisation to boost regional air connectivity.

In July 2014, the Minister of State for Civil Aviation G.M. Siddeshwara said that his Ministry had finalised a list of 50 airports across the country that have the potential to be converted into low-cost airports. This iteration is part of the bigger picture of government plans to develop 200 airports over the next two decades in Tier-II/Tier-III cities. However, therein lies the quandary. The government lacks the financial prowess to invest in development of the large number of airports needed to support future operations and to accommodate the projected numbers of airliners slated to enter the scene.

On the other hand, the private and public-private partnership (PPP) models have not proved to be a low-cost affair at all. Indeed, aircraft operators have continually complained about the high handed and arbitrary charges levied by private airport operators.

Unfortunately, the Airports Economic Regulatory Authority (AERA) Act has not proved to be effective in this regard. The Act does not contain provision for any special concessions for lowcost or low fare airlines. In a meeting between AERA officials and aircraft operators, low-cost airlines vehemently opposed the airport operators’ initiatives to introduce facilities like Common User Terminal Equipment (CUTE), inline baggage screening, commercial outlets and so on with resultant, hefty hikes in fees and charges being levied upon them.

One private airport director reproached them for wanting to pay dhaba food costs for five-star facilities. A low-cost airline representative retorted that the low-cost airlines were quite content with paying for dhaba food and had not asked for the five-star fare in the first place. This polarisation of views summarises the whole predicament. Airport operators want to expand the extent of the services provided to aircraft operators so that they can provide better quality of flying experience to the passenger and enhance their revenues. On the other hand, low-cost airlines and passengers would rather do away with the airport frills just as they are ready to forego airline frills in return for low fares.

TARIFF BASED AIRPORT OPERATIONS

Having realised that privatisation and revenue sharing models have led to sharp increases in airport charges and with the intent to shield airlines and passengers from the resultant high cost of air travel, the Ministry of Civil Aviation is said to be considering tariff-based bids from prospective airport operators. The model would work on the basis of lowest tariff quotes submitted by entities bidding for airports. Privatisation of the six airports at Chennai, Kolkata, Lucknow, Guwahati, Jaipur and Ahmedabad, initiated last year by the UPA Government, is on hold. The new government has declared that it will privatise only Ahmedabad and Jaipur airports of the six originally planned. Meanwhile, a new draft aviation policy includes proposals for management contracts for Kolkata and Chennai airports, leaving a question mark over the privatisation of Guwahati and Lucknow airports.

The government’s proposal is to get tariff-based bids for 30-year periods so as to keep airport charges at manageable levels. However, according to Amber Dubey, Partner and India Head of Aerospace and Defence at global consultancy KPMG, “In a volatile world of aviation wherein passenger traffic, fuel prices, dollar exchange rate, interest rate, price of airport equipment and construction material cannot be predicted even for the next 12 months, expecting bidders to bid at a fixed tariff for a period of 30-long years sounds impractical.” It remains to be seen whether the tariff-based model of privatisation is implemented but, as the motivation of the bidders would be to maximise return on investment, for obvious reasons, the Ministry’s plans for new low-cost airports are unlikely to draw enthusiastic response from bidders who would rather go for the more lucrative regular airports.

REGIONAL AND REMOTE AREA AIR CONNECTIVITY

At the 7th International Conference on Indian Civil Aviation held in New Delhi during October this year, Yes Bank, in association with ASSOCHAM, India’s apex industry body, released a report entitled “Civil Aviation—Developing Remote & Regional Connectivity”. At the conference, Rana Kapoor, President, ASSOCHAM said, “The Indian aviation sector is set for a quantum leap in the coming years and has the potential to become the world’s third largest aviation market by 2020. The industry has steered in a new beacon of expansion driven by low-cost carriers, modern airports, cutting edge information technology and a growing emphasis on regional connectivity. With an estimated investment of $98 billion by 2030-31, I believe, the next phase of growth in India’s aviation sector is expected to be fuelled by connectivity to Tier-II and Tier-III cities. Hence, low-cost approach for developing airport infrastructure is the need of the hour.” The implication is that a key concept for enhancing regional and remote area connectivity needs to be predicated on low-cost airports. This is so not only because of the high cost of creating airport infrastructure which would lead to delays in initiating projects, but also the need to keep cost of airport operations low so that airline operations can prosper.

CONCLUDING REMARKS

The new government has demonstrated an urge to be pragmatic and progressive in its approach to existing problems. Civil aviation is one sector which is in dire need of some life-saving nourishment by way of reforms. One of the areas which have the crying need is for keeping the cost of operating from airports low so that air travel can accomplish its theorised, promising potential over the next two decades. Major airports have already reached a point of no return for low-cost models but future ones can look at that possibility. The desirability of having world-class, high-cost airports cannot be denied but including a low-cost terminal in future projects can be considered at the planning stages itself. Unquestionably, the fact that almost three-fourths of airline seats on offer in India are low-cost ordains that low-cost airports and terminals be an important policy consideration in the years to come.