Bangalore airport was valued at about `4,300 crore in 2011. The tariff determination, a process that allows the airport to charge passengers, airlines and other vendors for the next five years, is currently underway and the airports regulator Airports Economic Regulatory Authority, or AERA, has proposed a model known as single-till. Photo: Bloomberg
Bangalore airport was valued at about `4,300 crore in 2011. The tariff determination, a process that allows the airport to charge passengers, airlines and other vendors for the next five years, is currently underway and the airports regulator Airports Economic Regulatory Authority, or AERA, has proposed a model known as single-till. Photo: Bloomberg

Ministry tariff plan may increase Bangalore airport valuation

The civil aviation ministry recommends tariff plan that's more airport- than passenger-friendly

New Delhi: In a move that could help GVK Power and Infrastructure Ltd get better valuation for its Bangalore airport, the civil aviation ministry has recommended a tariff plan that’s more airport- than passenger-friendly.

The tariff plan will also help GMR Infrastructure Ltd consortium that runs Hyderabad airport, said an analyst, as both Bangalore and Hyderabad airports have largely been built on similar rules. GVK has been looking to sell its stake in the airport business.

Bangalore airport was valued at about 4,300 crore in 2011. The tariff determination, a process that allows the airport to charge passengers, airlines and other vendors for the next five years, is currently underway and the airports regulator Airports Economic Regulatory Authority, or AERA, has proposed a model known as single-till.

Airport charges are calculated under three models—single, double and hybrid till. Passengers and airlines the world over prefer the single-till model as airport charges are lower under it.

In this model, followed by Heathrow and Gatwick airports in the UK, all main airport activity, including aeronautical and retail, are taken into account to determine the airport charges, so airlines are charged less.

Under the dual-till principle, in contrast, only aeronautical or flying-related activities (fees for landing, navigation and parking) are considered. Private airport operators and their investors are keen on dual-till as it will help them increase revenue.

The hybrid model is a combination of the two, proving cheaper for airlines than the dual-till model but slightly more expensive than single-till.

“The ministry of civil aviation feels that the requirement of capital for the expansion during the current control period would be difficult to be met under a single till approach. A shared revenue till of 40% would strike an appropriate balance between the needs of expansion of the airport as well as passenger interest, in terms of keeping the user charges at reasonable level," the civil aviation ministry said in a 24 September letter to AERA chairman Yashwant Bhave reviewed by Mint.

The letter has been issued “with the approval" of the aviation minister, it notes.

AERA is in the process of taking a final view on the issue.

While the airport regulator is not bound by the suggestions of the aviation ministry, given that the views have been given in writing, it cannot exactly dismiss them, said a government official who asked not to be identified.

Interestingly, the ministry’s view—approved by civil aviation minister Ajit Singh—comes nearly a year after the ministry had asked Mumbai and Delhi airports to scrap airport development fees from 1 January last year to allow a reduction in airfares, as Mint reported on 17 October last year.

This was seen as a passenger-friendly move. Eventually, however, the fee was not scrapped but reduced marginally, with its duration expanded over a longer period of time.

If accepted, the aviation ministry’s views on Bangalore airport will help GVK, which has been looking to sell a stake in the airport business, get better valuation for Bangalore International Airport Ltd (BIAL) as this tariff model makes it more attractive for investors.

“The move will definitely increase valuation of BIAL," said Debayan Sen, India practice head for US-based consulting firm Landrum and Brown Worldwide Services.

“The hybrid model proposed by the ministry would enhance the valuation of BIAL and make the business more attractive for private investors. The non-aero revenue at Bangalore airport grew 8.6% in the last fiscal year, taking the non-aeronautical share of total revenue to about 36%. Such growth, if it can be sustained, coupled with higher tariffs that BIAL would obtain in a hybrid system, would be very attractive for private investors."

A second government official who also asked not to be identified said the aviation ministry had to keep the views of both the airports and passengers in mind.

“There is a need to play a balancing role—otherwise what is the incentive for private airport operators to invest," this official said.

This is not the first time the ministry has taken a view different from AERA’s.

India’s civil aviation ministry had approved a method of accounting for cargo revenue at GVK’s Mumbai airport that drove up airfare, countering the airport regulator’s view and contradicting its own push for lower ticket prices, Mint reported on 18 October 2012.

Yet the ministry’s views may hit passenger demand as higher airfares or levies on airfares would impact demand.

“Any increase in airport charges could impact the passenger demand side of the equation, something that airlines would be wary of," Sen said.

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