New civil aviation policy a shot in the arm for airports: India Ratings

Proposed policy measures aims to eliminate regulatory uncertainty and pave the way for fresh capital from foreign investors in the upcoming PPP modelled airport bidding

The Ministry of Civil Aviation’s (MoCA) proposed policy measures is a shot in the arm for airports as it aims at eliminating regulatory uncertainty and paving the way for fresh capital from foreign investors in the upcoming public-private partnership (PPP) modelled bidding, says India Ratings and Research.

The draft policy suggests that all future airports under the PPP framework will determine tariffs on a 30 per cent ‘hybrid till’ model (30 per cent non-aeronautical revenue will be cross-subsidised with aeronautical revenue) to arrive at the user development fee.

This is a change from the earlier ‘single-till’ approach by the airport economic regulatory authority. Hence, the ratings agency said, “New tariff model is a win-win for both, the airport developers and passengers.”

While addressing tariffs, the policy indicates that in the event of excessively high tariff for a particular year, the airport may be advised to spread out the collections over the ensuing years. India Ratings believes that the operator and regulator need to ensure that there are adequate reserves or cash flows to meet the debt service requirements, given the CAPEX intensive nature of the business. “Nevertheless, timely revision of tariffs by the airport authority is vital for all airports, which currently seem to be lacking,” it said.

Notwithstanding this policy direction, the government’s intention to repeal the unwanted approvals and clearances is gradually shaping up. One such step is removal of environmental clearance for the expansion projects and brownfield airports.

The draft policy reiterated the government’s commitment to press ahead with existing dispersal guidelines, which mandates airlines to fly to remote areas and create new no-frills airports, which cost less than ` 50 crore.

“These measures have the potential to galvanise the passengers from the places where the connectivity is currently dismal,” India Ratings said.

MoCA plans to cap the tariff including taxes at ` 2,500 per passenger, for a one hour flight on regional connectivity scheme routes and levy 2 per cent on domestic and international routes, barring certain category and routes.

“With the renewed interest of new airlines on regional flights and expected low operational costs due to no-frill airports the passenger traffic could improve drastically,” the agency observed.

While the payment record of airlines to airports improved since the second half of 2014-15, any stress on the financials of airlines due to a cap on the ticket pricing may strain their payment profile, it cautioned.

The increased focus on cargo services and maintenance repair and overhaul (MRO) – according infrastructure status and section 80IA benefits, provided the facility is located along with the airport, augur well for the sector. This assumes greater significance given the growing share of freight cargo income for the private airports. The historical pattern suggests that freight is an important forward indicator of passenger traffic. Since the business potential for the Indian airports from MRO is large, the government proposes to exempt service tax for MRO.

The government also suggests building new airports and enhancing capacity through Airports Authority of India (AAI) even with a reduced IRR. India Ratings believes, while this may strengthen the passenger traffic, it could also lead to idle capacity. In the backdrop of a few airports like Jaisalmer, Puducherry and Akola are being non-operational, despite the rule which mandates flying to remote places. “Thus creation of new airports without adequate passenger traffic could drain the public funds, not with standing a reasonably strong balance sheet of AAI,” India Ratings, which is part of the Fitch Group, further cautioned.

The current policy framework aims to overcome the challenges and risks faced by the sector in the past and are a harbinger of renewed optimism for the sector.

“The total passenger volumes would cross 21 crore in 2015-16 and in another 7-8 years India to be the third largest aviation market after US and China,” the agency estimated.

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