MIAL 660% tariff hike pitch raises several eyebrows

By ZRG | Updated: Oct 12, 2012, 12:56 PM IST

Rohit Joshi & Siddharth Tak/Zee Research Group

Given the wide spread criticism of the Mumbai International Airport Limited (MIAL) latest proposal seeking a 660 percent hike in aeronautical tariffs, the need for airports administered by private operators to be made viable by identifying new non traffic revenues has become imperative.

Following the footsteps of Delhi International Airport Limited (DIAL), MIAL earlier this month urged the airport regulator Airports Economic Regulatory Authority (AERA) to hike aeronautical tariffs by as high as 660 percent, which if gets implemented would be a much steeper hike when compared to the already granted 346 percent hike to DIAL.

The move to hike aeronautical tariff by these two privately managed prime airports has hit genuine opposition given that privatization was widely perceived to reduce these tariffs. The move by MIAL has shocked many since the new manifold increased tariff may come even before the airport is fully modernized. However, in case of New Delhi, increased tariffs were granted, only after the modernization was completed in 2010.

This explains the vehement opposition to the tariff plea by MIAL. D Sudhakara Reddy, President, Air Passengers Association of India, asserted, “They (MIAL and DIAL) are doing illegal work by demanding a whopping hike of 660 percent in airport charges. The monopolistic pricing shouldn’t be followed in this type of environment.” Even Competition Commission of India (CCI) is said to be concerned over the tariff hikes in tandem by DIAL and MIAL being “outwardly monopolistic.”

Although in terms of highest aircraft movements handled at Indian international airports for the year 2011-12, DIAL and MIAL top the chart with a 24 and 20 percent respectively yet Delhi and Mumbai Airports lag behind other airports across the world in the terms of revenue earned per passenger.

The city side development of metro airports has been undertaken for increasing the non-aeronautical revenues of the airports. While aeronautical revenues from avenues such as landing and parking fees etc form the major part of revenues earned by the operators, non-aeronautical revenues mainly consist of travel retail, food, restaurants, beverages, shop floors rentals.

A major portion of Delhi airport’s revenue comes from non-aeronautical services (44.8 percent) followed by aeronautical services (36.4 percent) and the remaining portions of revenue comes from services like cargo etc.

Interestingly, Delhi airport’s share in non-aero revenue is far behind that in Asia Pacific, which is led by Hong Kong and Beijing airports. For instance, Asia Pacific and North America share the highest revenue in this component with an average of 51 percent each. It appears that DIAL has not yet exploited the land opportunity to the fullest. As per AERA report, DIAL was allotted 245 acres of land at a mere lease rent of Rs. 100 per acre per annum for 60 years, but has so far leased out only 45 acres.

It still has an opportunity to commercially exploit and monetize the remaining 200 acres of land, worth approximately Rs. 20,000 crore. Recently, the official auditor (CAG) has criticized the government for giving post-contractual benefits to Delhi airport, which the operator denies.

Since 15th May 2012, AERA allowed DIAL to charge a User Development Fee (UDF) both from departing and arriving passengers. UDF will be over and above the Airport Development Fee (ADF) charges of Rs. 200 per domestic and Rs. 1300 per international passenger. According to International Civil Aviation Organisation (ICAO) data, IGI Airport, New Delhi stands at 7th for long haul international flights, 6th for medium haul international and 19th for short haul international from the top.

This move of DIAL was highly criticized by the International Air Transport Association (IATA) and in press reports it had termed the move as “extremely disappointing”, as it violated the ICAO’s policy of cost-based charging.

"It will also have a larger impact on India and its economy, with an expected five to eight percent decrease in demand at Delhi as a result of higher costs, a fall in tourist arrivals and further damage to local and international airline connectivity. This is a big step backwards for Delhi`s ambition to be an aviation hub," IATA added when AERA had approved the hike.

However, DIAL has a different viewpoint and asserted that 346 percent increase allowed translates into return of equity (ROE) of 16 percent, far lower than 24 percent it needs to be profitable. As of March 2012, the accumulated losses of DIAL stood at Rs. 1300 crore.

The steep hike might prove as a dampener to the India’s overall aviation growth story. According to the aviation ministry, the passengers traffic from 2001-2002 to 2011-2012 (last 10 years) has grown at the rate of 15 percent as against the GDP growth rate of 7 to 9 percent. To cope up with the higher growth of air traffic, the investment in airports was made in keeping with the growth in the traffic.

Overall, there is a need for airports to earn their main income by non-traffic revenues as it reduces their risk of depending only on traffic revenues. This will help in optimal exploitation of the full commercial potential of airports and make airport projects viable.