‘Public’ excluded from the PPP model of airports

News of frustrated air passengers flooded social media over the past week as many complained of chaos and queues, particularly Delhi airport. A shameful situation especially as the country is hosting the G20 summit and there are repeated calls for metros to develop hub airports.

The management of Delhi airport was so poor that the minister personally had to get involved, the government promised to initiate several measures, and a parliamentary panel summoned the senior leadership of the airport administration. Even so, these are interim measures at best and once the hue and cry dies down, there is unlikely to be any significant change brought about. Because as far as airports go, the focus is 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 passengers. And while the airport charges continue to rise, the passenger experience has been worsening. The much-advertised public-private partnership (PPP) model for developing airports continues to chug along even as the “public” continues to be excluded from the partnership.

A flawed economic regulatory model
Much of the challenge has its roots in the current economic regulatory model of Indian airports. Currently the 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) on 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).

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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 a public utility. This model overlooks market realities. A reality wherein a population of 1.3 billion, approximately 84%, survive on a per-capita income of less than USD 1,200. And within the remaining segment that flies, more than 90% constitutes extremely price-sensitive demand. Of passengers that simply will not fly beyond a price point. They also require efficient airports that are low-cost but high quality, which enable them to fly in and out while minimising time spent. But walk through an airport and you’ll see high-end fashion stores, the proverbial 150-rupee cup of “tea” and the monetisation of every touchpoint but never airport development being aligned with the nature of the demands.

A focus on building vs operating with costs borne by passengers
When the airport privatisation drive was initiated, private capital was called in to build, operate and transfer various airports. Yet while the building part is taken seriously, the operation — as is evident from passenger experience — is not. Project costs leave much to be desired and are borne by passengers as increased airport charges. And those charges have only translated into an experience where every touch point is monetised, 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.

Moreover, project costs almost always exceed their estimates. In the case of Delhi airport, 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 passengers. 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.

While investment in excess of USD5.5 billion has gone into airports, 55-70 per cent of total project costs for airport development expenses have been on the construction of 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.

The operations challenge: by the numbers
Taking the Delhi airport as an example, where 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 slower) the ability to process at best is 2,000 passengers per hour. 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 flyer.

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Operations challenges for airports also extend to other areas. For instance car parks. Airports often advertise the amount of spaces at the car park. But exit lanes from the car park are few, and some tend to be closed, creating long 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. Given that airports were once owned by the public, the “public” should be the core of the PPP model. This aligns with the stated policy goals as well. This is important, especially as the country is well on its way to becoming the 3rd largest aviation market in the world.

(Satyendra Pandey is the Managing Partner at the aviation advisory firm AT-TV)