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Sparks Fly

twitter-logoManu Kaushik | Print Edition: Sep 2, 2012

The stand off between the Delhi airport operator and the airports' regulator continues, despite the steep hike in the Delhi airport charges the regulator allowed in April. The operator, the Delhi International Airport (P) Ltd (DIAL) still wants the much bigger hike it had initially sought.

The airlines, meanwhile, remain furious that tariffs have been raised at all.

Airlines have been protesting ever since DIAL first announced its intention to raise charges by a whopping 774 per cent. At least one foreign carrier, AirAsia, stopped using Delhi and Mumbai's airports from end-March, soon after DIAL made its proposals, citing the high costs at both airports. (See www.businesstoday.in/airport-costs.)

With the Airports Economic Regulatory Authority of India (AERA) agreeing to a smaller, but still substantial hike of 346 per cent, a number of carriers under the banner of the Federation of Indian Airlines (FIA) have challenged the decision in the Delhi High Court.

The International Air Transport Association (IATA) has said the hike was "unacceptable", with CEO Tony Tyler predicting the move would reduce passenger traffic by five to seven per cent and add more than $400 million to airlines' operating costs.

The tariffs airport operators charge can be divided into two broad categories: landing, parking and housing fees, and 'user development' charges. While the former have to be borne by the airlines, the latter can be passed on to passengers.

Operators also earn from the non-aeronautical opportunities airports offer, such as by leasing space to shops. While earlier about half of DIAL's income came from non-aeronautical sources, the share is likely to fall to 30 per cent now.

AERA Chairman Yashwant Bhave justifies the increase he allowed, noting that since 2001 aeronautical charges have been increased only once - in 2009, by 10 per cent.

FROM THE MAGAZINE:Is Delhi's IGI Airport the world's costliest?

"If we take into account the inflation rate, the costs of running the operations and the rate of return expectations, the amount we have permitted DIAL is reasonable," he says.

Mumbai's airport operator has also made a similar request, seeking to raise charges by 500 per cent, but AERA has yet to decide on that.

Similarly, DIAL's promoter, the Bangalore-based GMR Group, defends the hike by pointing out that the quality of services at Delhi airport has improved significantly since the new T3 terminal came up.

"Airlines have saved some Rs 500 crore on account of faster turnaround time and reduced hovering in the skies while waiting for landing permission," says Sidharath Kapur, Chief Financial Officer (Airports), GMR Group. He accuses the airlines of mixed up priorities.

"Aeronautical costs account for around two per cent of the total cost for airlines whereas aviation turbine fuel expenses constitute over 40 per cent of an airline's operating costs," he adds.

The price of jet fuel in Delhi jumped from Rs 61,169.08 per kilolitre in mid-July to Rs 65,005.59 per kilolitre by early August.

"Our estimates show that the impact of the hike in aeronautical charges on airlines is around Rs 40 per passenger on domestic routes and Rs 300 per passenger on international routes. Given that airfares have shot up almost 80 per cent in the past six to eight months, I don't think the increase in our charges is steep," says Kapur.

Analysts tracking the sector agree that DIAL cannot be blamed for the airfare hike, which came into effect only on May 15. "The rupee's depreciation and the jet fuel price hike have contributed to the rise in airfares," says Amber Dubey, Head (Aviation) at consultancy KPMG.

DIAL, however, is not satisfied with the tariff revision AERA has permitted. It intends to approach AERA's Appellate Tribunal against the decision, and is only held back by the fact that the existing tribunal's term expired some time back and the new one is yet to be constituted.

DIAL says the 346 per cent increase allowed translates into a return on equity (ROE) of 16 per cent, far lower than the 24 per cent it needs to be profitable. So far, the company has been incurring huge losses.

Experts say that returns on infrastructure projects in India vary from 12 to 25 per cent. For instance, the post-tax ROE for thermal power plants allowed by the Central Electricity Regulatory Commission is 15.5 per cent. According to a 2010 research paper by Goldman Sachs, the return on equity in India's infrastructure sector is higher than in the United States, Europe and elsewhere in Asia.

DIAL spent a total of Rs 12,857 crore on modernising Delhi airport, of which the equity contribution put in by all members of the GMRpromoted consortium and the Airports Authority of India was Rs 2,450 crore. "As of March 2012, we have accumulated losses of Rs 1,300 crore. The ROE calculation made by AERA is inadequate to recover the losses," says Kapur.

AERA disagrees. It says DIAL could increase its revenue from other sources. It was allotted 245 acres of land at a paltry lease rent of Rs 100 per acre per year for 60 years, but has so far leased out only around 45 acres. It also received Rs 1,471.52 crore as interest-free security deposit to be repaid after 57 years, and earns rental income of nearly Rs 90 crore per annum. "It still has around 200 acres, with a market value of some Rs 20,000 crore, which can be monetised," says AERA Chairman Bhave.

AERA also notes that the government has taken a number of measures to mitigate the risk for DIAL. "We are flexible when it comes to decision-making. Our job is not to make anyone lose," says Bhave.

Indeed, the land allotment has been questioned. In May this year, the Comptroller and Auditor General of India said DIAL received undue benefits in the form of cheap land that has the potential to earn Rs 1,63,557 crore over 60 years. DIAL's Kapur sees it differently. He points out that there are restrictions on the utilisation of the land.

"We already have 10 hotels coming up with a capacity of 5,000 rooms. Assuming we give most of the land to hotels, there is a limit to which the market can absorb the supply. It will take time to develop the land and returns will come only over a period of time," he says.

DIAL has also invested the security deposits it received in the project. "We could have used that money for anything, but we decided to invest it back. And now, we are denied any kind of return on that investment by AERA," says Kapur.

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