The news continues to be flooded by feedback from frustrated passengers with regards to airport queues and chaos across airports, most notably Delhi airport. The challenge came to a point where the minister personally had to intervene, where the government had to initiate several measures and a parliamentary panel summoned senior leadership at the airport. Evenso, these are interim measures at best and once the hue and cry dies down, there is unlikely to be any significant change from the airports. Because as far as airports go, the focus has been on returns which are secured. And it does not help that the economic regulatory model has incentives where the airport lends towards building rather than operating. The costs– both financial and operational – are borne by the passengers. And while airport charges continue their upwards trajectory, for these charges the passenger is getting an experience that leaves much to be desired. The much advertised public-private partnership model to develop airports continues to chug along – but the “public” continues to be short-changed.
Also read
A flawed economic regulatory model Much of the challenge traces to the current economic regulatory model of Indian airports. Currently PPP airports are guaranteed a return on equity of 16%. The process involves the airports submitting traffic projections along with operating expenses, taxes, the cost of capital, any subsidies received and Capex plans to the regulator. A target revenue figure is calculated and the gap between the target revenue and actual revenue is recovered via the levy of User Development Fees (UDF) to the passengers. That’s not all, in cases where the airport is unable to secure adequate financing for Capex, the funding gap between the financing secured and financing required is again borne by the passengers via airport development fees (ADF).
Take this economic regulatory model and couple it with misaligned incentives and one is left with a market environment where passengers are forced to pay for airport largesse. The market reality is one where of a population of 1.3 billion, eighty four percent survive on a per-capita income of less than $1200. And within the remaining segment that flies, more than ninety percent constitute extremely price-sensitive demand. Demand that simply will not fly beyond a price point. Demand that demands efficient airports that are low-cost but high quality and enable folks to fly in and out while minimising time. Airport development has to be aligned to this nature of demand. But this has simply not been the case.
A focus on building vs operating with costs borne by passengers
The airport privatisation drive had two elements to it which include building and operating. But while the first is taken very seriously the latter – as seen via the passenger experience- are not. Project costs leave much to be desired and are borne by passengers via increased airport charges. And those charges have only translated into an experience where every touch point is monetized, a captive passenger is made to snake through multiple lines, and once in the airport retail establishments are forced to charge prices that many multiples of main street – best evidenced by the Rs 150 cup of tea.
Where project costs are concerned, the numbers have been repeated without much recourse. But it is still worth repeating once more. Consider the case of Delhi airport where the final project cost was 3.8 times the initial estimate and in the case of Mumbai it was 1.7 times the initial estimate. The cost of these overruns were covered by the flying public. Both airports were allowed to levy development fees to the tune of nearly Rs 3,400 crore. The contribution via fees levied on passengers being 1.2X–1.4X the equity contribution in the case of Delhi and 3.0X–3.2X in the case of Mumbai. Given the recent expansion at other airports, a similar outcome is all but certain.
The misaligned incentive structure also provides avenues for airports towards spending more. Airports are increasingly an excuse to construct and it is no wonder that while investment in excess of $5.5 billion has gone into airports, 55-70 percent of total project costs for airport development spends have gone to terminal buildings. Not because it is required. But because it provides for immediate returns. The design and utility of these buildings clearly demonstrate that they are geared towards driving Capex rather than driving aviation growth. Where focus should have been on security areas and passenger convenience, the design plans have gone towards building retail outlets and lounges. Throw in pliant stakeholders and you have a passenger experience that has gone from bad to worse.
The operations challenge: by the numbers
Taking the Delhi airport as an example, the much touted number for handling capacity is 70mn per annum. However, this number is meaningless and what actually should be advertised is the handling capacity per hour. Yet this is a number airports are very secretive about and is hardly published. Based on Airports Authority of India data, the airport handled 4.12 million domestic and 1.3 million international passengers in October. The domestic passengers are split between 3 terminals and double counted for departures or arrivals. Adjusting for that, during peak hours
this translates to 5000 – 7000 passengers per hour. The total X-Ray machines available were 14 and even assuming 30 seconds per passenger which is a very high estimate (actual times are much lower) the ability to process at best is 2000 passengers per hour. The gap between what is required and what is available is fairly large. Throw in additional bottlenecks like document checks, priority queues and special queues and delays are all but certain. The focus of the operator should be on additional security infrastructure but this has been found wanting. And in the end the only one who is suffering is the flying public.
Operations challenges for airports also extend to other areas. For instance the car-parks which are another challenge. Airports often advertise the amount of spaces at the car park. But exit lanes from the car park are few and many times some lanes are closed making for exorbitant delays to exit parking. Restrooms are often closed, elevators shut and for folks who want to take public transport from the airport – especially buses or rickshaws – these are put on the periphery yet again highlighting the disconnect between market reality and market aspirations.
The list goes on…
As far as airports go, a refocus is definitely required. The “public” should be the core of the PPP model. This aligns with the stated policy goals as well. If there is any silver lining to the current airport situation that has forced ministerial intervention, capacity reduction and a parliamentary panel to summon senior airport leadership, it is that at least the challenge is front and centre. It could not have come at a worse time as India is hosting the G20 and as the aspirations to develop hub airports finally were gaining traction with the strength of Air India and Indigo. The “public” has been short-changed at PPP airports. This should not continue to be the case – especially as the country is well on its way to becoming the 3 rd largest aviation market in the world.
—Satyendra Pandey is Managing Partner at the aviation advisory firm AT-TV. The views are personal.
Read his previous articles
here (Edited by : CH Unnikrishnan)
First Published: Dec 16, 2022 8:30 AM IST
