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BL Research Bureau

The Union Ministry of Civil Aviation’s approval for the levy of user development fee (UDF) for domestic passengers at the Hyderabad airport comes as a relief to GMR Infrastructure – a majority holder in the joint venture that runs the new airport.

GMR may now see improvement in profits arising from the Hyderabad airport.

The Rajiv Gandhi International Airport at Hyderabad will now be allowed to charge a fee of Rs 375 for each passenger from all domestic outbound passengers with effect from August 22.

This amount is, however, lower than the Rs 650 for each passenger originally planned by GMR.

While the airport has already started levying UDF of Rs 1,000 for each international passenger from April 2008, levy of the same on domestic passengers was severely criticised.

Airlines feared that the UDF would make travel on short-haul routes unviable what with airfares already trending up sharply on mounting fuel costs.

Non-levy of domestic UDF could have hurt the profitability of the GMR joint venture over the long run.

For one, levy of UDF was part of the concession agreement; therefore the projection for internal rate of return on the project would have taken into account cash flows from UDF.

Two, debt contracted for these projects would have been based on this revenue stream. Hence profitability as well as debt servicing of the joint venture could have been impaired if UDF were not collected.

For the quarter ended June 2008, the Hyderabad airport had incurred operating losses of Rs 25.5 crore and the GMR management had attributed this to the non-levy of UDF on domestic passengers.

While the approval of domestic UDF comes as a relief, there are bigger concerns for GMR in the form of slowing growth in traffic. For the quarter-ended June 2008, Hyderabad Airport recorded a passenger growth of merely 1.22 per cent to 1.74 million on a y-o-y basis.

The airport, historically among the fastest growing airports in the country, may have witnessed a slowdown due to rising air travel costs. The location of the airport, away from the city, also requires passengers to shell out more for the airport shuttle service.

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