By Prittle Prattle News
AAI plans to invest Rs 25,000 crore in the next five years
In the Aviation sector, two major stakeholders are the Airport Operators & Airlines. In India, significant airports are privatized while other airports are managed by the Airport Authority of India (AAI). Airport Operators include GVK (Mumbai Airport), GMR (Delhi & Hyderabad Airports), Fairfax (Bengaluru Airport) & AAI for other Airports. Major Airlines include Indigo, Spicejet, Vistara, Go Air, Air India & Air Asia.
AIRPORT OPERATORS
AAI has leased out four major airports to private players for its development, management & operations. It includes all infrastructural development, maintenance & expansion of the airports. AAI plans to invest Rs 25,000 crore (US$ 3.58 billion) in the next five years to augment facilities and infrastructure at the airports. The Indian Government is planning to invest US$ 1.83 billion for the development of airport infrastructure along with aviation navigation services by 2026.
The primary source of funding for AAI shall come from:
1. Revenue share from 4 major privatized airports – Mumbai, Delhi, Hyderabad & Bengaluru
2. Privatization of Airports
3. External Borrowings
Let us evaluate each of the options in detail:
1. AAI gets revenue share from the four major airports, facilitating the development & maintenance of other airports managed by AAI. Such airports are not much revenue generators to cover the expenses & event. AAI, in return, gets revenue share from such airports.
“At the beginning of the FY 2019-20, Airport Operators’ revenue decreased due to closure of Jet Airways. As they were recovering from this loss, COVID 19 pandemic led to the Airports’ closure by the end of FY 2019-20. This lead to a decrease in major sources of income for the major airports, including the sale of duty-free goods, retail concessionaires & food & beverage concessionaires by a considerable proportion. Thus, revenue share to AAI has decreased to a great extent. Lockdown has to lead to no source of revenue for Airports.” – says CA Sushant Agarwal in an interview with Prittle Prattle News
The Airport Operators are considering two options, such as invoking the force majeure clause to suspend the payment to AAI or proposing an increase in tariff to cover the losses incurred. The impact of the first option shall lead to a decrease in AAI’s revenue, which will result in substantial external borrowing for the development of other airports. For information, AAI is a profitable public sector only because of the revenue share from major airports. The second option’s impact shall lead to an increase in charges paid by the Airlines to the Airport Operators, which shall recover from passengers through increased airfares. Thus, both shall harm the aviation sector.
2. Also, the major airports privatized funded through a more substantial portion of the debt. From the Airport Operators’ perspective, infrastructure development & maintenance at major airports is very capital intensive. The payback period is relatively long since the Authorities regulate the revenue/tariff model. Thus, recovering the principal & the return on has become difficult due to this pandemic. As they incur fixed maintenance expenditure and employee expenditure with no cash flow, their plans for expansion & development are now uncertain and shall postpone. Thus, in the current volatile market & the banking sector into crisis, the option of raising funds through public or borrowing from banks has become difficult considering the tenure of such projects & risk involved therein.
3. Looking at India’s economic growth & fiscal deficit, external borrowing shall be the last resort & further impacting the economy & government budget.
AIRLINES
The Indian Airline industry is going through a fair amount of turmoil, with airline shutdowns including Jet Airways in 2019 & Kingfisher Airlines in 2012, and the disinvestment of Air India by the Indian Government. Besides, Indian carriers face inherent structural issues, including thin margins, regulatory pressures, high taxes & unsteady fuel prices. For Indian Airlines, fuel accounts for 34% of total costs compared to 24% for foreign airlines.
UDAN scheme, where the price of half the seats on flights less than 500 km or 1 hour, is capped at about $30. Concessions partly offset this by no landing & parking charges but difficult for airlines to be profitable on those routes.
Thus, easing of regulations and an increase in FDI & more partnerships with international airlines shall improve the scenario for Indian Airlines. With the closure of two major airlines & the Air India disinvestment plan, the general public has lost confidence and reluctant to invest in this sector and prefers to stay away. The Government has to take bold steps to make the airlines stable in the long run & gain the public’s confidence to encourage investment in it.
