The Hindu Business Line : Airports can be a high-flying business

AFTER much debate, the Ministry of Civil Aviation has floated tenders for 49 per cent stake in the Mumbai and Delhi airports, and given the green signal for the Rs 1,300-crore Bangalore airport project.

Privatisation of airports and airlines is a global trend. However, unlike in the case of airlines, where privatisation has not always meant gains for the promoters, , airports remain the most profitable links in the aviation value chain.

A profitable business: The top 50 airport groups recorded operating profits of $5,024 million, with an average operating margin of 19.2 per cent in 2002-03, compared with the over $10-billion in losses and a negative operating margin of the top 150 airlines (Table).

The most profitable among the airport groups is BAA p1c, UK, which owns the three airports in London — Heathrow, Gatwick, and Stansted. The other profitable airports belong to Spain, the US (New York's JFK and Newark airports), and ADP, France (Figure 1).

It is no coincidence that all highly profitable airports are located at tourist hubs. The profitability of airports stems as much as from auxiliary income such as the lease of airport space to airlines for check-in counters, lounges, and revenue from advertisements and duty-free shops as from the primary source — the landing, navigation and parking fees charged to airlines.

Heathrow airport's duty-free area has been successfully turned into a massive shopping mall! Airports are ideal for repositioning as shopping malls, marketing retail goods and advertising premium products.

Mountains of capital: Airport projects require massive capital, most of it in foreign exchange, for building runways, navigation, landing systems, terminal buildings, conveyor belts, airport check-in counters, cargo warehouses, IT systems, computer hardware and air-conditioning equipment. An international airport of 5 million annual capacity is estimated to cost $300 million. Mumbai and Delhi airports have world rankings of 82nd and 98th respectively: India is the second largest country in the world but our two metro city airports have a long way to go before they catch up with the developed world (Figure 2).

India does not even figure in the five biggest airports in Asia. Excluding Japan, these are Bangkok (18 in world ranking), followed by Hong Kong (24), Singapore (31), Beijing (32 ), Seoul (43) and Dubai (54) — (Figure 3).

Why is India far behind South-East Asian countries in tourism? Several Asian minnows are far ahead, including Taiwan, China, and the UAE.

All these Asian countries, which were behind us a few years ago, have stolen a march over India in their rapid growth.

China's rapid strides: China's blitzkrieg in civil aviation is as spectacular as its Olympic medal tally and industrial progress. From 1996 to 2000, China invested $7.9 billion in airport construction.

In 2000 alone, airport investment totalled $2.3 billion, as key airport development projects were completed in Shanghai and accelerated in Guangzhou and Beijing. China has seven airports among the top 150 airports of the world against India's two — Mumbai and Delhi.

The size of China's international tourist arrival is estimated at 35 million per year, (much bigger than India's 2.8 million), thanks to the creation of better infrastructure in airports.

As a rule, the national airline contributes significantly to growth of a nation's airports. The success of tourism in Thailand has made Bangkok, the biggest among the Asian airports, and Thai Airways a much bigger airline, with a world ranking of 26, against Air India's 51 in terms of revenues.

What is amazing is the fact that the population base of countries such as Thailand, Singapore, Hong Kong and the UAE, is but a small fraction of annual number of tourists arrivals.

The growth of the Emirates in the last decade was founded on the central strategy of making the desert city of Dubai a West Asian hub. Today, Dubai has expanded to become a tourism and business hub of the region, and even in South Asia.

Just 30 years ago, Dubai had nothing but a creek, and a sheikh's palace. Today, Dubai boasts of 272 hotels with 30,000 rooms, 30 shopping malls, and attracts over 5 million foreign visitors, twice the number India does!

Passengers from India, Pakistan, Egypt, Kuwait, Saudi Arabia, and all the neighbouring countries, prefer to take a break in Dubai, and change planes to onward destinations.

Emirates Airlines played a stellar role in Dubai's development. As a result of the open-skies policy with most countries, Dubai is now linked with 145 destinations by 100 airlines.

China created infrastructure such as airports well before the demand. In the 1990s, it built more than 35 airports all over the country, driving huge growth in tourism.

From Figure 4, one can see that Singapore Airlines, Cathay Pacific, Thai Airways, Emirates and Air China have emerged as top five Asian airlines, contributing handsomely to their nation's GDP.

Landing fees in Indian airports are low: The landing fee charged by an airport depends on the weight of the aircraft, called MTOW (Maximum Take off Weight).

Asian airports such as Mumbai, New Delhi, Kuala Lumpur and Singapore charge much lower than airports in the US and Europe. The landing charges are surcharged for peak time of landing, and noise of aircraft (the louder noise, the higher the surcharge).

A key question is whether after privatisation of Indian airports, the landing fees will be revised upwards?

Who owns the passengers? Airlines or airports? In developed Western countries, there are quite a few privately-owned, secondary airports that offer competitive landing and handling rates compared with main airports.

Ryanair's COO, Michael Cawley, says that airports are like a commodity product. It is the airlines which own the passengers and not the airports.

Ryanair operates flights from little known secondary airports, boosting regional economies by this strategy.

Relations between airlines and the leading airports of Europe have soured as airlines are nursing losses on their balance-sheets, in contrast to the profitability of major airports.

The airlines, led by IATA, are complaining that post-privatisation the airports are charging higher landing charges. In the absence of price controls, the airports tend to charge what they like (Figure 5).

The airline community has won $630 million worth of savings last year in airport landing fees and ATS (air traffic service) charges.

Ryanair is the airline responsible for changing the fortunes of Stansted airport in London, as it has made this airfield its base.

Airports such as in Singapore and Geneva are planning separate terminals for use by Low Cost Carriers. CIDCO, sponsors of the airport in Navi Mumbai , can look for a partnership with a domestic or international airline to kickstart the airport project.

India has a natural leadership position in SAARC countries. India is strategically located between the industrially developed Europe, oil-rich West Asia and the high-growth regions of China, and South-East Asia. Thus, investing in Indian airports will be profitable for private sector players.

Can Mumbai do a Dubai? Can Air India transform India's tourism the way Emirates did for Dubai? Can India set up a string of 35 world-class airports, as China has?

The Minister for Civil Aviation, Mr Praful Patel, has started off well by floating a tender for 49 per cent stake in the Mumbai and Delhi airports. Fraport Airport of Germany, Changi Airport of Singapore and Vancouver Airport, are expected to submit bids with their Indian partners.

The Ministry of Civil Aviation has given the green signal for the Rs 1,300-crore Bangalore airport project, with 76 per cent investment coming from the private sector, Siemens AG, Larsen and Toubro, and Unique Zurich of Switzerland.

India's tourism industry will see spectacular growth if similar investments are made in at least a dozen more regional airports across India.

(The author is a senior consultant, Infosys Technologies, Bangalore, and can be reached at Pankaj-Pandit@infosys.com. The views expressed are personal.)