India invests in airport development

Earlier this decade, India experienced a massive – and unsustainable – surge in air travel demand. Now, however, more stable growth has returned and the country’s plans to develop its airport infrastructure are more important than ever

17th Apr 2010


Civil aviation in India is entering a new phase of development after experiencing both stagnation and explosive growth over the past 20 years. Even after the huge boom in demand earlier this decade and with its expanding middle class, fewer than 2 percent of Indians travel by air in any given year – an indication of just how much growth potential there is left in the market.

To accommodate that growth, India has been pursuing an ambitious plan to develop and upgrade its airport infrastructure, maintaining its effort through the global slump of the past year with an eye on the industry’s future.

The period from 2003 to 2006 marked an unprecedented change for India’s aviation industry. A new domestic open skies policy opened the door for an influx of start-up airlines, some of which adopted the low-cost carrier business model that had proved successful in the United States and Europe.

Among these were companies such as Air Deccan, SpiceJet, IndiGo and Go Air, all making air travel available to people who had previously been unable to afford it. At the same time, national carriers Air India and Indian Airlines placed long-awaited orders for 111 new aircraft in a modernisation and expansion of their fleets.

At the same time, there was liberalisation of the international air transport sector, allowing some private carriers to start operating overseas, allowing greater access to foreign airlines and opening up international routes for non-metro airports. As a result of all this, domestic and international traffic started to grow at double-digit rates, demonstrating how much pent-up demand there was for air travel in the market.

As growth of the airline industry accelerated, India announced its airport modernisation plan, which included the privatisation of Delhi and Mumbai airports, upgrades to 35 smaller facilities and active encouragement of green-field developments.

Unsustainable expansion

But by 2007, when traffic growth approached an amazing 40 percent, many were realizing that this expansion could not be sustained. Overcapacity was hurting yields while the poor state of the airport infrastructure and a shortage of pilots and engineers was pushing costs ever higher. At this point, capacity was increasing about twice as fast as demand was rising – and this at a time when the country’s airport infrastructure programme was yet to deliver real results.

With congested airports and inadequate surface access to the facilities, airlines found they were unable to compete successfully with other modes of transport.

Soaring fuel prices in 2008, which had a severe effect on airline costs around the world, were exacerbated in India a taxes that increase fuel costs by as much as 60 percent. Carriers were forced to raise fares, just as the Indian economy slowed. As a result, traffic fell by 10-12 percent.

Now, according to the Centre for Asia Pacific Aviation (CAPA) in its report ‘Indian Aviation: A Review of 2009 and Outlook for 2010’, a more favourable environment is starting to emerge. As the global economic crisis took hold, growth of India’s gross domestic product slowed from 9 percent in 2007-2008 to 6.1 percent in 2008-2009. Still, given the worldwide recession, CAPA points out, this was not a bad result.

Now the economy is recovering faster than anticipated and the World Bank predicts it will return to 8 percent annual growth from 2011 to 2014.

Traffic growth is returning too. After 12 straight months of year-on-year declines, the figure returned to positive territory in July last year and has stayed positive since then, although yields remain low.

“The operating environment is improving, with airports and airspace gradually being upgraded and ground access being developed, which will not only enhance the passenger experience, but should allow airlines to achieve faster turnarounds and higher aircraft utilisation,” CAPA says.

National embarrassment

Prior to the country’s air transport boom, India’s airports had suffered decades of neglect and underinvestment. In the Naresh Chandra Committee’s 2003 report to the Ministry of Civil Aviation, the authors wrote that the country’s “passenger airports are for the most part an embarrassment”.

When traffic growth took hold in earnest, several major airports were quickly pushed way past their design capacity, causing congestion in terminals, on runways and in the air. As a result, passengers suffered and the airlines found their operating environment becoming increasingly inefficient and costly.

As a result, in 2005, the government announced a five-year plan for upgrading and modernising airports, requiring investment of about US$10 billion. From 2010 to 2020, about another US$20 billion investment is expected. The government recognised that it lacked the expertise and capital required to complete the upgrade, so it invited private sector participation.

As a result, joint venture operators are now in place in Delhi, Mumbai, Bangalore, Hyderabad and Cochin, while all other airports – numbering 124 in total – remain under the control of the state-owned Airports Authority of India (AAI).

Up to the late 1990s, the AAI had controlled all of the country’s airports, but with the transfer of five of the nation’s biggest airports – Delhi, Mumbai, Bangalore, Hyderabad and Cochin – to public-private partnership models led by private consortia, the authority saw its revenues shrink substantially. Those five airports together handle more than 60 percent of India’s air traffic.

The AAI was left with 89 airports under its control, just seven of which are profitable. Given that the government has now committed itself to upgrading non-metro airports across the country, committing 124 billion rupees (US$2.8 billion) to that programme in its 11th Five-Year Plan, this opens a substantial shortfall between the AAI’s revenue and expenditure.

Turning to debt

With the Ministry of Finance turning down an AAI proposal to raise capital through the issue of tax-free bonds, the authority is expected to turn to take out bank loans of about 6 billion rupees over the next few months.

“As the AAI is a AAA-rated entity with cash reserves of around 50 billion rupees, this should be achievable,” CAPA says.

However, the Sydney-based consultancy says, the AAI still “needs to look more closely at developing a strategy to re-invent itself” in the light of the changes in the industry. The authority needs to restructure at a corporate level to develop a more commercial approach to its work, helping it compete for traffic with private airports.

This, CAPA points out, would be consistent with the national strategy of distributing traffic to smaller cities, reducing the concentration on major hubs.

“The AAI should also focus on developing other commercial opportunities,” CAPA says. “For example, there is huge upside in the potential for growing non-aeronautical revenue, such as duty free, domestic retail and food and beverage.”

Each individual airport also needs to prepare and follow its own business plan, the consultancy adds.

Corporatisation of the AAI has been discussed, but progress has been slow to date. In the short-term, it is more likely to spin off its air traffic management (ATM) responsibilities into a separate, corporatized unit. As a first step, the airport operator has appointed a new Board Member for Air Traffic Control.

In its five-year airport plan, the Indian Government identified 35 secondary airports for upgrade and modernisation, initially setting the goal that all work should be completed by 2009. However, fundraising problems and the slump in demand over the past year have delayed the plan.

Upgrades to the first eight to nine airports were finished by the first quarter of this year, with four to five more facilities set to be upgraded by the end of 2010. All 35 are to be finished by 2012.

According to AAI Chairman V P Agrawal, the upgrade projects completed to date cover the airports at Amritsar, Aurangabad, Dehradun, Jaipur, Lucknow, Nagpur, Trichy, Udaipur and Visakhapatnam. That leaves 26 still in progress.

Private partners

Previously, it had been intended that private partners would be brought in to help manage airport terminals and landside commercial development. However, it has now been decided that terminal and cargo operations will be retained by the AAI and only landside development will be open to external parties. Tenders for 10 of the non-metro airports are expected to be issued soon.

Among green-field development plans, those most likely to progress to the tender stage in the immediate future are Navi Mumbai and Mopa in Goa. Requests for Proposals were expected to be issued for these projects early this year.

Navi Mumbai would become Mumbai’s second airport after Chhatrapati Shivaji International Airport, which is expected to reach its capacity limits within the next five to seven years, with no scope for further expansion because of physical restraints. Mumbai is India’s commercial and financial capital, so the new airport is essential to the city.

The new facility is scheduled to open by 2014-2015, although the City and Industrial Corporation responsible for the airport’s development is pushing for operations a year earlier. With an initial annual capacity of 10 million passengers, the airport is expected to be able to handle as many as 65 million by 2030.

As of now, about 57 percent of the required land has been acquired, with the rest in the process of being transferred – involving the resettlement of 3,000 families. Environmental factors have proved to be an obstacle to the new airport’s development, since the proposed site is in a coastal protection zone. The Indian Institute of Technology Bombay is now preparing an Environmental Impact Assessment on the project.

Upgrades to Kolkata and Chennai airports are on-going, although both projects have run over their initial budgets. According to CAPA, a green-field project may be announced for Chennai in the next financial year, raising doubts about the investment now being pumped into the existing facility.

“Chennai and Kolkata airport modernization projects are underway and we envisage no serious impediments to their completion,” says AAI chief Agrawal.

On top of the 35 airports already marked for upgrade, the AAI has identified 13 more that it wants to modernize and 32 unused airports that it wants to bring into operation.

Private operators

The private operators of Delhi and Mumbai airports are now focusing on achieving their goals for the first phase of their upgrade projects. However, they are being hurt by the high proportions of their revenue that they agreed to hand over to the government – 46 percent for Delhi and 37 percent for Mumbai. This has been exacerbated by the slump in travel demand at a time of high capital expenditure.

“The structural shift in the industry towards low-cost airlines will also have significant implications for the business models and infrastructure requirements for the airport operators,” CAPA says.

Delhi’s Indira Ghandi International Airport (IGIA) – South Asia’s busiest airport by traffic movements, was handed over to the management of the Delhi International Airport Ltd (DIAL) joint venture in May 2006. The venture is led by Bangalore-based GMR Group, which is also responsible for the airport’s ongoing expansion and modernisation.

Before the economic crisis hurt traffic growth, the airport in 2007 handled 23 million passengers. Expansion is expected to increase the hub’s capacity to 100 million by 2030.

The new Terminal 3 is now under construction at a cost of about US$2.6 billion and is expected to add capacity for an additional 33 million passengers per annum when it opens in July, in time for the October 2010 opening of the Commonwealth Games. It will be the third-largest terminal in the world after facilities at Dubai International Airport and Beijing Capital International Airport.

The new, two-tier terminal, designed by HOK in consultation with Mott MacDonald, will also make IGIA the world’s sixth-largest airport by capacity. The terminal will offer 168 check-in counter, 74 aero-bridges, 30 parking bays, 72 immigration counters, 15 X-ray screening areas and other features. More than 90 percent of IGIA’s passengers will use the terminal once it opens, since it will accommodate all international airlines and Indian full-service carriers including Air India, Jet Airways and Kingfisher.

Mumbai’s Chhatrapati Shivaji International Airport is the country’s busiest airport by passenger traffic. The airport operates four terminals and covers an area of 5.9 square kilometres, handling more than 25 million passengers a year and 533,593 tonnes of cargo. Together with Delhi’s IGIA, the two airports handle more than half of all traffic in South Asia.

Mumbai master plan

Since February 2006, the airport has been managed by Mumbai International Airport Ltd (MIAL), a consortium of GVK Industries and Airports Company South Africa (ACSA). In October 2006, MIAL unveiled its master plan for the airport, aimed at expanding and upgrading it to cater for up to 40 million passengers and 1 million tonnes of cargo per year by 2010. The separate international and domestic terminals were to be merged into one terminal building and the former domestic terminal converted to a dedicated cargo facility.

The plan has been undertaken in two stages. The first was completed in 2008 and included: refurbishment and construction at Terminal 2; upgrades and expansion to Terminal 1A; the addition of temporary cargo facilities; upgrades to runway facilities such as the addition of rapid-exit taxiways to increase capacity; and the addition of land-side facilities such as multi-storey car parks.

Additional goals scheduled for completion this year include: a new terminal at Sahar, for both domestic and international flights; a dedicated link from the Western Express Highway to the new terminal; the enhancement of airside facilities by transferring the control tower and construction of a parallel taxiway; development of land-side infrastructure; and the addition of new cargo facilities.

In its report, CAPA predicts that by 2020 Indian domestic air traffic will have grown to 160-180 million passengers a year from 40.77 million in 2008, while international traffic will exceed 80 million. This kind of growth cannot take place unless the infrastructure is in place to support it, guaranteeing that India’s airport development and upgrade plans will remain a high priority.

Asian Aviation at a glance