So why is the Indian government keen to cede control of its profit-making airports? Over the years, airport lease has become the single largest revenue source for AAI. In 2016-17, it earned Rs 38 billion as airport lease revenue from the Delhi and Mumbai airports. That’s almost 31 per cent of AAI’s streams during the year. AAI counts only these two airports while calculating its airport lease revenue. The revenue from Delhi and Mumbai airports dwarfs those from ‘airport services’ at all other airports AAI operates across India. Since 2007-08, a year after the Operation, Management and Development Agreement (OMDA) was signed between AAI and GMR-led Delhi International Airport Limited (DIAL) and GVK group-led Mumbai International Airport Limited (MIAL), these two private airports have become the most impressive cash cows for the government with revenue earned from them outstripping all other sources. From 2007-08 to 2016-17, the money earned by AAI from Delhi and Mumbai airports increased five times. Meanwhile, its total revenues and profits just about increased three times during the same period. During this period, the GMR-led DIAL and GVK-led MIAL together paid almost Rs 200 billion to AAI. GMR-led DIAL said it has paid almost Rs 150 billion till date to AAI. These are impressive returns for the AAI, which had invested Rs 9.5 billion to pick up stakes in the joint ventures named DIAL and MIAL which run the Delhi and Mumbai airports respectively back in 2006. AAI has a 26 per cent stake in DIAL and MIAL having invested Rs 6.4 billion and Rs 3.1 billion in them respectively.
Almost 31% of AAI’s streams in 2016-17 came from airport lease revenues at Delhi and Mumbai alone
The difference between Mumbai and Delhi revenue collections are primarily on account of different revenue sharing agreements in place for both airports. Under the terms of separate agreements signed by AAI with DIAL and MIAL it gets 45.99 per cent of DIAL’s revenues and 38.7 per cent of MIAL’s revenues. A GMR spokesperson said, “Though it puts a substantial burden on DIAL’s profit and loss, it is an obligation that we have to fulfil. We are proud that this revenue share from DIAL has contributed towards the development of other AAI airports.”
Unbeatable business proposition
The subtle concerns of the GMR spokesperson on the “substantial burden” of this revenue sharing arrangement are partly explained by DIAL’s financial performance over the years. GMR-led DIAL has clocked impressive profits in running the Indira Gandhi International Airport in Delhi after spending billions of dollars transforming it. Delhi airport, one of the busiest airports in the world with a footfall of over 60 million passengers a year, has also yielded good money for GMR. DIAL clocked revenues of Rs 56 billion in 2016-17, up 16 per cent over the previous year. Since 2013-14, DIAL’s revenues have risen 43 per cent with non-aeronautical revenue (earned from retail, food, real estate and other services inside the airport) growing at a faster pace than aeronautical revenues. In many ways, the better DIAL does every year, the merrier it is for AAI which gets a larger share of Delhi airport’s revenue pie. By the look of it, DIAL has been beating all predictions when it comes to making money.
The National Council of Applied Economic Research (NCAER) had quite accurately predicted in 2012 that more than 60 million passengers would start using the Delhi airport by 2017-18. By 2020, the NCAER study had estimated 77 million passengers using the Delhi airport every year. The same study had estimated DIAL’s operational revenue to be Rs 420 billion in 2016-17. But GMR-led DIAL breached that revenue figure in 2014-15, two years earlier than it was predicted to. The NCAER study estimated that by 2020, DIAL’s operational revenue would touch Rs 67 billion. That means AAI’s own share would have roughly touched Rs 31 billion by 2020. But if DIAL were to continue performing the way it has been over the last four years, it will end up earning operational revenues in excess of Rs 80 billion by 2020-21 which is significantly higher than what NCAER had predicted. And that means AAI could revise its own earnings upward, with almost Rs 37 billion flowing to it as rental income from Delhi airport alone by 2020-21.
Why worry when we got property?
AAI can encash a performance bond in case a private airport operator falters on service
The government’s move to privatise airports also guarantees AAI a steady and substantial source of income irrespective of how the privatised airport performs financially. The Mumbai airport is a case in point. Unlike the GMR-led DIAL which has performed impressively, the GVK-led MIAL has lately hit turbulence. According to its financials, GVK-led MIAL last made a profit in 2013-14 when the revamped Terminal-2 of the Mumbai airport was thrown open to passengers. Since 2014-15, MIAL has accumulated losses to the tune of almost Rs 5 billion. But that makes little difference to AAI’s rental income from Mumbai. That’s because its share is tied to MIAL’s revenues which have been increasing steadily despite recent losses. The NCAER prepared a report, similar to the one it had prepared for Delhi airport, for Mumbai airport as well. While the Delhi airport report was prepared in 2012, NCAER’s Mumbai airport report was prepared a couple of years later. Like its passenger footfall predictions for Delhi, NCAER hit the bulls’ eye with its revenue predictions for Mumbai. It estimated that MIAL’s total revenue – including from aeronautical, non-aeronautical and cargo – would touch Rs 30 billion in 2016-17. MIAL reported revenue of Rs 30.26 billion that year. It paid almost Rs 12 billion to AAI. The NCAER report predicts that MIAL will earn Rs 41 billion by 2022-23 with 49 million passengers flying out of or through the Mumbai airport every year. If MIAL performs according to predictions, this could well translate into Rs 16 billion as rental income for AAI in 2022-23. GVK’s spokesperson did not respond to specific queries sent by Business Standard till the time of publication. AAI has concession agreements in place for Hyderabad and Bengaluru airports as well where it gets 4 per cent of the revenue as concession fee. These agreements were signed in 2004. While GMR holds a stake in Hyderabad Airport, GVK recently sold off its entire stake in Bengaluru airport.
More money means more trouble
This intertwining of the fortunes of AAI and private airport operators like GMR and GVK has led to bitterness with accusations of opacity in revealing revenue figures flying thick and fast. AAI in its latest annual report presented to Parliament clearly stated that it could not vouch for the authenticity of the revenue figures being given by the operators of Delhi and Mumbai airports. The report noted, “The independent auditors had highlighted in their audit reports for the year 2015-16 that they were not provided total access to books of accounts of the joint venture companies (DIAL& MIAL). However, the reports of the independent auditors for the year 2016-17 were silent on the issue. The management too did not respond to the clarification sought by government auditor on whether access to books of accounts of joint venture companies was allowed in 2016-17. In the absence of relevant records, the veracity of airport lease revenue of Rs 38.26 billion pertaining to DIAL and MIAL as reflected in the books of accounts cannot not be vouchsafed.” GMR’s spokesperson said, “GMR Group has never refused audit by AAI. We are committed to fulfil directives of Ministry of Civil Aviation in accordance to Operation, Maintenance and Development Agreement (OMDA). We are subjected to three types of audit – statutory audit & internal audit under the Companies Act; and revenue audit carried out by the independent auditor appointed as per the provisions of OMDA. Revenue Audits have been conducted from inception by independent auditors appointed by AAI.”
AAI's income is guaranteed irrespective of how a privatised airport performs financially
While the tussle over revenue sharing could have major business and political repercussions in the near future, there is little doubt that privatisation of airports has done more good than harm for the country’s civil aviation ecosystem. AAI’s agreement with both DIAL and MIAL have specific performance parameters whose achievement could be unfathomable at AAI operated airports across the country. The punishment for not meeting these performance parameters is also severe enough to keep the private operators on the tenterhooks.
Tightening the screws on service compliance
Take the case of Delhi airport. According to the agreement between AAI and DIAL, some performance parameters that GMR led DIAL has to fulfil are clubbed under a category called ‘objective service quality requirements.’ These include things like not making business class passengers queue up for more than five minutes and economy class passengers for 20 minutes while checking in. DIAL has partly solved this problem by introducing self-check-in kiosks at the Delhi airport. Then it involves other aspects like security check where DIAL has to ensure than no more than 5 per cent of the passengers wait for more than 10 minutes while being frisked by the Central Industrial Security Force (CISF). DIAL has to ensure that the first checked in bag rolls out on the baggage conveyor belts within 10 minutes of an aircraft’s arrival. Then there are other aspects like hauling a taxi where it has to ensure that 95 per cent of the passengers do not have to wait for more than three minutes to hop on a taxi on their way out of the Delhi airport. All of these performance parameters and a host of other subjective indicators are constantly monitored. Poor performance on DIAL’s part would mean that AAI could encash a performance bond worth Rs 5 billion given by DIAL. Quarterly reports are generated to evaluate DIAL’s performance and if any of the parameters are found to have been unfulfilled, DIAL would have to pay 0.5 per cent of the its monthly revenue to AAI till it is able to rectify its performance and meet the targets again. In the extreme event of ‘continued breach’ of these obligations, AAI can serve a notice of termination of the contract for the Delhi airport. A similar arrangement is in place for the Mumbai airport as well.
GMR's spokesperson said, "Post privatisation, the airport operations at Delhi, Mumbai, Hyderabad and Bangalore airports have substantially improved. It is evident from the very fact that Delhi and Mumbai airports are ranked as world’s best airports across all categories. It is interesting to note that in terms of on time performance (OTP) also, Delhi Airport today is India’s number one airport."
With such intense scrutiny and big money involved, the privatisation of Indian airports has turned into a high stakes game for both the government and the private operators. The Modi government’s decision to privatise some of India’s airports could not just make more Indians pay more and feel good while flying, it could also help AAI rake in the big bucks without breaking a sweat.