Supreme Court to rule on AERA’s powers, may lead to costlier airport services

The court will decide whether the AERA can regulate tariffs for services such as ground-handling and cargo operations at airports including New Delhi and Mumbai, the busiest in India.

A three-judge bench of the Supreme Court comprising Chief Justice of India DY Chandrachud, Justice JB Pardiwala and Justice Manoj Mishra reserved its judgment on September 24. The bench will deliver separate judgments on the issue of maintainability before addressing the main questions of law raised.

The AERA had appealed against a January 2023 judgment by the Telecom Disputes Settlement and Appellate Tribunal (TDSAT), which ruled that non-aeronautical services fall outside the AERA’s jurisdiction, regardless of whether they are provided by the airport operator or a contractor. The ruling came in response to a plea by airport operators, including Delhi International Airport Ltd (DIAL) and Mumbai International Airport Ltd (MIAL).

The AERA told the Supreme Court that under the Airports Economic Regulatory Authority of India Act, 2008, its role is critical to ensure fair competition and protect public interest, particularly regarding passenger tariffs.

During the proceedings, AERA argued, “At least the people who created us certainly call us regulators. Creating a level playing field, fostering healthy competition, encouraging investments, and regulating tariffs… for whom? For each one of the passengers—a section representing the public—are we going to say they are not ‘public interest?’"

If the ruling goes against AERA

Experts said if the judgment goes against the AERA, it may lose its powers to regulate ground-handling and cargo services at airports. Without regulatory oversight, operators could raise prices, likely passing these increases on to passengers and making services more expensive.

“AERA was enacted by Parliament to foster healthy competition by regulating tariffs and other charges for aeronautical services at airports and monitoring performance standards post-Act," said Mumtaz Bhalla, a partner at Economic Laws Practice. “Any curtailment in its powers could make services more expensive, ultimately burdening passengers. If ground- and cargo-handling services are declared ‘non-aeronautical’ under both the pre- and post-2008 regimes, AERA would lose its right to regulate tariffs for these services."

According to Surya Sreenivasan, a partner at Cyril Amarchand Mangaldas, ground-handling and cargo services are freely priced in mature markets, relying on market competition to regulate prices.

“If the Supreme Court upholds the TDSAT order, it will mark a paradigm shift in how the aviation industry is viewed," said Sreenivasan. "At the time of privatization in India, the government sought to regulate pricing for airports and essential aviation services due to the market's nascent nature. Today, with rapid growth and privatization in the sector, the industry has moved towards a more competitive market space, akin to other mature markets."

Mark Martin, chief executive of aviation consultancy firm Martin Consulting, said operators cannot function effectively without regulation. AERA must be empowered to oversee pricing for services within the airport environment, including ground-handling and airside services associated with DIAL and MIAL.

“It is crucial for AERA to enhance its enforcement and surveillance capabilities. Allowing private airport companies to set prices without oversight risks exorbitant and monopolistic charges that harm consumers," said Martin. "Handling services should not be deemed non-aeronautical as this undermines AERA’s authority. AERA must ensure fair pricing across all airport services to foster competition that ultimately benefits passengers and the entire aviation sector."

In October 2023, the AERA issued a notice cautioning airport operators against imposing unapproved tariffs on passengers. This order followed the AERA’s observation that operators at major airports had levied charges for aeronautical services without obtaining the necessary regulatory consent.

If ruling is pro-AERA

Experts said a ruling in favour of AERA could significantly expand its scope of regulation and potentially set a legal precedent for other sectoral regulators.

“A pro-AERA ruling would broaden its regulatory scope, allowing it to oversee non-aeronautical services, setting a legal precedent for other sectoral regulators to extend their powers," noted Aslam Ahmed, a partner at Singhania & Co.

However, according to Jayesh H, co-founder of Juris Corp, a pro-AERA ruling could make private companies feel insecure about investing in the sector.

“The underlying legislative intent of the AERA Act is to meet the high investment needs of the airport sector by bringing in private capital. It aims to create an atmosphere where private players can safely invest in airports," he said.

Jayesh H. compared the issue to the debate over whether the fees paid by telecom companies should be based on their telecom revenue alone or encompass all revenue streams.

“The core question is whether the regulator should oversee fees for aeronautical and related services such as ground handling, or if it should extend to all services offered at an airport, including luxury shopping and experiences. This isn't merely about the government securing its share of revenues - it's fundamentally about the scope of regulation. A pro-AERA judgment could empower other sectoral regulators as well," he said.

Impact on DIAL and MIAL

Both MIAL and DIAL asserted that they entered into agreements with the government and raised the issue of contractual obligations predating the AERA Act of 2008. They argued that the AERA cannot file an appeal in "public interest" and is not a regulator entitled to determine tariffs for ground-handling and cargo-handling services.

Experts said an order favouring the AERA could significantly impact existing contracts between private airport operators and their service providers.

“A pro-AERA ruling would likely necessitate adjustments to tariff structures in existing contracts," said Aslam Ahmed of Singhania & Co.

He said operators and service providers may need to renegotiate their agreements to comply with the new regulatory framework. This could lead to stricter pricing regulations, altering the financial terms and flexibility of the current contracts.

“Service providers may face reduced pricing autonomy and operators might have to adjust their business models to align with AERA’s tariffs," he said.

Bhalla of Economic Laws Practice emphasized that if the ruling is pro-AERA, contracts executed in the pre-2008 regime would need to be revised afresh based on AERA-regulated tariffs.

TDSAT's order

Under the DIAL's agreement with the government, the New Delhi airport operator DIAL and its concessionaires can set charges for non-aeronautical services - activities and operations at airports that are not directly related to aircraft or flight operations.

These include passenger and cargo handling, retail and dining options such as shops, restaurants and lounges, advertising and marketing services, real estate development, parking facilities, and rental services.

However, in 2021, AERA issued orders stating that if ground-handling and cargo-handling services are performed by DIAL, they would be non-aeronautical services. However, if the services were provided through contractors, they would be considered aeronautical services.

DIAL challenged these orders in the TDSAT, which ruled on 13 January 2023 that both cargo and ground-handling service are non-aeronautical, regardless of who provides them.

The TDSAT found that the AERA lacked jurisdiction over these tariffs and affirmed that MIAL could set its own charges. The AERA argued that its authority under the AERA Act of 2008 allowed it to regulate ground-handling and cargo-handling services as aeronautical services.

However, the TDSAT upheld that the AERA Act respects existing agreements, and both services remain non-aeronautical.

The Airports Economic Regulatory Authority Appellate Tribunal was merged with the TDSAT in 2017.