World airports body urges India to reject proposal of restrictions on duty-free sales

On January 19, news agency PTI reported that union commerce ministry had proposed to restrict the purchase of tax-free alcohol to one litre from two-litre and prohibit the purchase of one carton of cigarettes comprising 100 sticks at duty-free shops.

"Notably, the amendment in question is inconsistent with the latest attempts by the government to incentivise private capital to invest in the airport sector. The aggressive and successful bids of the latest airport privatisation processes and the investors’ risk to cover significant capital expenditure plans require them to diversify and increase non-aeronautical revenue streams to ensure the viability of a project," ACI wrote in a letter dated January 21 to Puri.

The industry body has argued that as duty-free sales are a major component of non-aeronautical revenue, this will impact the new players who have submitted aggressive bids keeping in mind that they will "enjoy full freedom to generate commercial revenues at the airport."

While fragrances and cosmetics account for the majority of duty-free sales in several aviation markets overseas, wine and spirits are the top duty-free segment in India, contributing to over 75-80 percent of overall duty-free sales.

At most Indian airports duty-free revenues make up 15-20 percent of the total non-aeronautical revenues and sales of liquor and cigarettes together account for over 75-80 percent of overall duty-free sales, data from domestic airports shows.

As passenger charges alone are not enough to fund the cost of developing and operating airports, operators depend on non-aeronautical revenue to subsidise these costs.

As per an ACI report published in March 2019, global airport revenues grew 6.2 percent to reach $172.2 billion in 2017, out of which 55.8 percent was aeronautical revenue, 39.9 percent was non-aeronautical revenue and 4.3 percent non-operating revenue.

While the global passenger traffic grew 7.5 percent in 2017, the total cost per passenger for airports ($13.69) exceeded global aeronautical revenues per passenger ($9.95). Hence, airports consider non-aeronautical revenue significant for financial sustainability.

Zurich airport, which is set to develop and build Jewar airport in India, has also supported the statement from ACI. Association of private airport operators in India has already estimated a loss of Rs 650 crore per annum, loss of 8,000-10,000 jobs and hike in airfares if the proposed restrictions are approved.

ACI also said the proposed move will hurt India’s potential to grow in duty-free and travel retail as estimates from an October 2019 study commissioned by the Duty-Free World Council shows that despite the high pace of growth of this segment in India over the 2007-2017 period (+ 21 percent /year), India’s current duty-free and travel retail market is relatively nascent. In 2017, only 17 of India’s 42 international airports had duty-free zones.

In terms of absolute spending as well, India was at $ 0.9 billion in duty-free retail in 2017. This was ten times lower than the spending reported in South Korea and below the volume of spending reported in mainland China, Hong Kong, Thailand, Singapore, and Japan, ACI has pointed out.

"It (duty-free segment) has significant potential to grow, given the 8 percent growth rate of passengers in the country over the 2017-2027 period, as estimated by ACI, and the potential growth of international traffic. Within an unconstrained scenario, it is forecasted that the spending in duty-free and travel retail will grow 20 percent to $2.1 billion in 2022," ACI Asia-Pacific Director-General Stefano Baronci said in the letter.