FDI Alone Won’t Help - Major Restructuring Needed For AAI Take-Off

The latest foreign direct investment (FDI) reforms in the civil aviation sector should ideally bring the focus back on airport infrastructure in many brownfield ventures which have failed to improve, thanks to the triad of slothful Airports Authority of India (AAI), labour unions and opposition-ruled states blocking such moves.

The true test of the benefits of raising FDI in brownfield airports to 100 percent without prior approval (earlier, FDI beyond 74 percent was subject to approval) may actually come when Chennai airport’s ceiling doesn’t crumble every other day.

India is one of the fastest growing aviation markets in the world and boasts of some world-class airports in Delhi, Bengaluru, Hyderabad and Mumbai on the one hand, and hundreds of ghost airports with not a single flight on the other.

Now that back-to-back reforms for airlines have been unleashed, by diluting the 5/20 restriction for overseas flights and removing caps on foreign investment, it is time the country got its airport infrastructure up and running too. If the airport infrastructure fails to keep pace, the liberalisation in airline ownership and operational conditions would be rather meaningless.

Monday’s announcement is a welcome move. Amber Dubey, partner and India head of aerospace and defence at global consultancy KPMG, notes: “There was no rhyme or reason behind the artificial distinction between greenfield and brownfield airports in terms of foreign ownership. It makes competitive bidding for revival of brownfield airports – owned by AAI, state governments or other entities – far more attractive to global bidders.” However, this alone is not nearly enough for airport proliferation in India.

Most of the brownfield airports in India are owned by the AAI, which means its restructuring is critical for the FDI reform to make any impact. But AAI reforms are stuck – plans to get it listed on the stock exchanges were dropped while drafting the Civil Aviation Policy, as it was felt that AAI should not become a commercial entity.  Then, plans to get private developers to operate and manage key AAI brownfield airports like Chennai and Kolkata were also dropped, as the government feared opposition from labour unions and respective state governments. This, when AAI earns much of its topline from the Delhi and Mumbai airports, which were privatised almost a decade ago; under this public-private-partnership (PPP) model, the private consortia of each airport has to share a pre-determined percentage of revenue with AAI.

The bulk of flyers in India are at Delhi and Mumbai.  According to sources, the AAI is all set to report Rs 10,317 crore in revenues for 2015-16 against Rs 9,284 crore in the previous fiscal. Profit after tax should increase to Rs 2,025 crore from Rs 1,959 crore in 2014-15. Close to half of AAI’s bottomline comes from its revenues from Delhi and Mumbai airports.  With a successful PPP model in operation at showpiece airports of Delhi and Mumbai, the reluctance to offer other large airports for operations and management to private parties is baffling.

If not the same model, at least an operations and management contract without leasing out airports to private parties should be developed. It is clear that AAI itself is not adept at either the commercial or the managerial side of airport operations. Revenue generation of Delhi and Mumbai airports jumped exponentially over the years after they were handed over to private consortia.

In the case of Chennai and Kolkata airports, lax management is clearly evident in falling glass panels and sometimes, even entire ceilings. The AAI has now decided to invest more on upgrading these two airports from its own pocket but it would do well to also take the help of experts in managing them eventually. With or without following the Delhi and Mumbai PPP model.

Last year, the government came up with something called ‘government to government’ pact between India and Singapore for operation and management of smaller brownfield airports. But since the usual process of farming out contracts for airport management through competitive bidding was bypassed in this process, a lot of hue and cry emerged from opposition parties.  After months of deliberations, this plan was dropped too.

Apart from privatisation woes at AAI’s brownfield airports, impending saturation of some of these airports also needs to be addressed. Aviation consultancy Centre for Asia Pacific Aviation points out that the government must recognise that most of the top 45 AAI airports will saturate in the next three to five years, necessitating second airports within most of the existing airports. “We need clarity on what happens when a second airport is planned. Will the investors come on board now, till such crucial clarity is given? Most of these airports cannot have two airport operations simultaneously due to traffic size. Does the current policy of closing existing airports when new greenfield airports become operational continue when new investors come on board?”

In fact, India has enough airports, just not enough which are functional. Of the 125 airports under AAI, 55 are not servicing a single scheduled flight. And yet, close to Rs 600 crore was spent in two years on 25 airports which were operational but did not handle a single scheduled flight, according to a written reply in Parliament during the monsoon session.

Airlines simply do not find it viable to operate scheduled flights to many such airports. But the staff has to be paid and depreciation accounted for. Then there are 30 other airports which are classified as non-operational. On these too, the government spent more than Rs 11 crore and Rs 10 crore each in 2014-15 and 2013-14. It seems vested interests, not commercial sense, dictated this expenditure.

With the new Civil Aviation Policy released last week laying emphasis on regional connectivity, perhaps some of the ghost airports will come to life with the help of state governments and other stakeholders. But for any meaningful change in India’s airport infrastructure, a thorough restructuring of AAI is important. Also, getting private parties with proven expertise in airport operations to manage brownfield projects would help matters further.