The government is reportedly lining up another set of airports to offer to private players. Indian airports present opportunities to unlock value, but the creamy top is largely out of bounds and the action is in the bulging, less-lucrative middle
When it comes to offering public assets to private players, the airport sector in India has already taken a lead. In early-2019, the government granted 50-year rights to private players to run six airports. The Adani Group outbid rivals for all six. Two years on, the government is reportedly preparing the runway for the next round.
The largest Indian airport assets have a private touch that predates the 2020 sale. Over the last three decades, through various mechanisms, the government involved the private sector in six airports, existing and new. These handled 52% of passenger traffic in 2019-20. The six airports bagged by Adani in 2019 handled another 10%.
Thus, the current government push is for a play on the remaining 38% of passenger traffic. Although not prime assets, the potential of this bulging middle—many airports handling small volumes of traffic—lies in their long-term growth potential, and the opportunity for monetization in private hands.
Unlike the volatile and attrition-filled airline business, the business of airports is a lot more stable. It offers a natural competitive advantage: the large land and capital requirements, and logistics, means a city is likely to have only one airport. Even when it has more, the existing operator tends to have a right of refusal on the second, as is the case with new airports coming in the vicinity of the existing ones in Delhi and Mumbai.
To sweeten the deal further, under the public-private partnership structure, the government guarantees private players a 16% return on equity, which gives them significant flexibility and support for expansion. Airport operators submit traffic projections, along with operating and capital expenditure, and financing options. A target revenue figure is calculated, and the gap between the target revenue and actual revenue is sought to be bridged by the user development fee levied on passengers.
Airport revenues can be broadly broken into two parts. The first is aeronautical revenues, or what airports earn from airlines for using various facilities like air traffic systems and aircraft parking slots. Several of these components are governed by tariffs, which places limits on revenues and profits. So, airport operators look to non-aeronautical revenues for the kicker. The potential of non-aero revenues in large markets can be gauged from the revenue mix of Delhi International Airport Limited (DIAL), the company that runs Delhi airport and in which the government owns 26%.
In 2018-19, ₹2,205 crore of DIAL’s revenues of ₹3,909 crore, or 56%, came from non-aeronautical streams. In 2015-16, this was ₹1,360 crore, or 28% of overall revenues. The non-aero side includes revenues from leasing space, sales in duty-free shops, advertisements and vehicle parking, among others. Another 19% came from commercial property development. In other words, only 24% of DIAL’s revenues came from aeronautical revenues.
The revenue split of DIAL is a contrast to that of the Airports Authority of India (AAI), the government operator that owns most airports. In 2018-19, the share of non-aero in AAI’s revenues was just 13%. The ₹1,842 crore non-aero revenues AAI earned from 140-odd airports was less than what DIAL earned from the country’s largest airport.
Framed in that contrast is the opportunity—and limits—for private players. Since aero revenues are regulated, growth will be organic in nature, a function of more flights and passengers. Hence, they are eyeing the non-aero side to monetize more than what the AAI is doing.
But there are limits to such monetization. Delhi is India’s largest airport. The maximum revenues that DIAL has achieved is ₹5,264 crore in 2016-17. This is when it was implementing a higher tariff --- which regulatory authorities subsequently reset lower --- and after monetizing a sizeable land bank. The tariff revision pushed DIAL to a lower revenue trajectory and led to losses in 2018-19.
In 2019-20, Delhi handled 20% of India’s air passenger traffic. Ahmedabad, the largest of the six airports handed out in 2019, did one-sixth of that. Among the airports that AAI still controls, Chennai and Kolkata are the big ones, handling one-third the traffic of Delhi. But after them, the drop is steep.
In the domestic segment, India is ranked third in the world in terms of passenger kilometers flown, according to the International Air Transport Association, but there is a wide gap between India and the top two countries. For December 2019, the US domestic segment accounted for 14% of all passenger kilometers (domestic and international). It was followed by China (9.8%) and India (1.6%).
The difference is also reflected in the number and mix of airports, and the top-heavy concentration that Indian airports currently face. According to ourairports.com, which catalogues data on airports the world over, India had 11 large airports, against 34 for China and 136 for the US. In medium airports, the differential is lower but still sizeable.
Such differentials underscore the concentration at the top in Indian airports. Unlocking value in smaller airports will require both business acumen and patience.