Viable Airports, Need of the Hour

The Expenditure Finance Committee has recommended the proposal for revival of 50 unserved and underserved airports/airstrips of the state governments, the Airports Authority of India (AAI) and civil enclaves at an estimated cost of Rs. 4,500 crore in three financial years starting from 2017-18

Issue: 5 / 2017By R. ChandrakanthPhoto(s): By Wikimedia
Air India Regional Bombardier CRJ700 at Dehradun Jolly Grant Airport

The first flight of UDAN (Ude Desh ka Aam Naagrik — enabling the common man to fly) took off from Delhi to Shimla on April 27, 2017, with fares starting at Rs. 2,036. And with that it is hoped that the Regional Connectivity Scheme (RCS) or UDAN will transform airport connectivity in India, provided all the stakeholders — airlines, airports, regulatory agencies, etc – get their act right. One of the key components of RCS is going to be airports commensurate with the nature of regional airlines.

The government is creating an enabling environment in this regard and airports are on the priority list. The Expenditure Finance Committee has recommended the proposal for revival of 50 unserved and underserved airports/airstrips of the state governments, the Airports Authority of India (AAI) and civil enclaves at an estimated cost of Rs. 4,500 crore, in three financial years starting from 2017-18. However, the revival of airstrips and airports will be ‘demand driven’, depending upon firm commitment from airline operators as well as from the state governments for providing various concessions.

The AAI which is the implementing agency of UDAN had received 43 initial proposals from 11 bidders covering 92 airports (30 currently served airports, 12 currently under served airports and 50 currently unserved airports). In March this year, it approved five airlines, including Air India subsidiary and SpiceJet to operate on 128 routes connecting 70 airports, of which 31 are unserved.

Greenfield airports

The Ministry already has granted ‘in principle’ approval for setting up of the 18 greenfield airports in the country. The list of these airports along with the estimated cost is as under: MOPA in Goa at Rs. 3,100 crore, Navi Mumbai Rs. 16,704 crore, Shirdi Rs. 320.54 crore and Sindhudurg Rs. 520 crore in Maharashtra; Bijapur Rs. 150 crore, Gulbarga Rs. 13.78 crore in initial phase, Hassan Rs. 592 crore and Shimoga 38.91 crore in Karnataka; Kannur in Kerala Rs. 1,892 crore; Durgapur in West Bengal Rs. 670 crore; Dabra in Madhya Pradesh Rs. 200 crore; Pakyong in Sikkim Rs. 553.53 crore; Karaikal in Puducherry Rs. 170 crore; Kushinagar in Uttar Pradesh Rs. 448 crore; Dholera in Gujarat Rs. 1712 crore and Dagadarthi mandal, Nellore district Rs. 293 crore), Bhogapuram in Vizianagaram district Rs. 2,260 crore and Oravakallu in Kurnool district Rs. 200 crore in Andhra Pradesh. In Addition AAI has begun the public-private partnership (PPP) bidding process for O&M contracts for Jaipur and Ahmedabad airports.

As regards construction of new greenfield airports, execution of project including finalisation of project cost and financing arrangement is the sole responsibility of the respective airport promoters. However, as per the information provided by the respective airport developer, the total estimated cost for setting up of above mentioned 18 greenfield airports in the country is about Rs. 30,000 crore.

These are ambitious plans but the government is determined. However, what kind of airports is the AAI planning to develop is what we need to look into. For RCS to become effective the airports certainly have to be no-frills airports where the runways are good enough for turboprop or smaller jets and even going up to single-aisle aircraft. Not only can these airports be used by regional airlines, it can have the flexibility to accommodate low cost airlines for the airports to become viable. For LCCs, it makes sense to fly from cheaper, secondary airports to serve major markets. Many developed markets have taken the route of having terminals adjacent to one another, one serving international and other major airlines and the other serving budget/low cost or regional airlines. Tokyo Narita –T3 terminal is a classic example or for that matter London-Stansted. The Narita Terminal 3 serves five low-cost carriers — Jetstar, Japan; Jetstar Airways; Vanilla Air; SpringJapan and Jeju Air. The airport has been designed under the concept of ‘casual, functional and exciting.’ The regional airports while catering to the needs of small aircraft have to a vision of becoming big as traffic increases.

Peculiar challenges

In a report on ‘Challenges and opportunities for small and emerging airports in the 21st century’, Surabhi Rana of Mumbai International Airport of the GVK Group has analysed how there are many challenges, peculiar to India and what steps are required to have sustainable operations.

The report cites that small airports have a peculiar challenge of higher costs with less reliability on revenues derived from passengers. Airports are asset intensive businesses with high sunk costs, disproportionate to the revenues generated. As regards expenses, though small airports handle lower throughput, however their operating expenses per passenger are higher compared to the global average. The reason for it is though the airport is small, fixed costs have to be borne for operating the airport.

Average operating expense

As per ACI Airport Economic Report, 2015, airports with less than one million passengers have average operating expense of $13 per passenger whereas the global average is $11 per passenger. Airports handing 1-5 million passengers have average operating expense of $9 per passenger. Personnel expenses, administration expenses are some of the costs that need to be carefully looked into. Number of employees on airport site per one million passengers is very high at airports with less than 1 million passengers, i.e. 1,223 employees. However, the number is 1,065 for airports with 1-5 million annual passengers while global average is 924 employees.

On revenue generation, it cites that the global share of non-aeronautical revenue (excluding non-operating revenue) is 40.4 per cent. However, airports with less than one million and 1-5 million passengers have non-aeronautical revenue as 26.7 per cent and 32.9 per cent respectively. In terms of per passenger value, global per passenger non-aeronautical revenue is almost twice the airports handling less than one million passengers.

Negative margins

The ACI Airport Economic Report of 2015 has stated that profitability of smaller airports with less than one million annual passengers tend to have negative margins, thus giving less investor confidence. Majority of small and regional airports depend on subsidies to finance their operations. This may severely dampen the airports plans, requiring investments and aggressive marketing. Even if there are investments made in an airport there is guarantee that it will become viable and there are examples of how these airports have not attracted flights, one classic example being of Jaisalmer airport where for three years it was lying idle, after Rs. 100 crore was sunk in the project.

The report also mentions the challenge of a small and emerging airport being near a hub airport. An example to support this statement is Chandigarh airport which is a small airport handling approx.1.5 million passengers per annum. Chandigarh airport operated as a civil enclave since its inception, however, a new terminal building was constructed in 2011 and the airport was declared as a customs airport, making it eligible to handle international flights. However, no international flights operated from the new terminal, despite having a significant large catchment of Chandigarh, Haryana and Punjab, with the population of approximately 54 million as per 2011 census. In 2015, a new international airport was developed with the joint collaboration between the Government of Punjab, Government of Haryana and Airports Authority of India.

The report cites that small, regional and remote airports cater to smaller market size with very less or almost negligible catchment area. This poses a challenge in terms of attracting airlines to operate to such airports as the route may have to be operated with certain specific type of aircraft (e.g. aircraft with 80 or less seats) and which may not be available with all the airlines. Thankfully now with UDAN, aircraft with less than 20 seats also can be operated as a regional flight. The issue of smaller market size can be addressed by the deployment of the right aircraft. Linked to it, is the competition from other modes of transport, e.g. rail and road, where it may be convenient for the passengers to connect to other nearby destinations with multiple options to travel by rail or road, thereby further impacting the future development of the air transport in and around that region. It boils down to the attractiveness of the airfare. Now with UDAN taking off, it needs to be seen how this will play out.