The Ministry of Civil Aviation's (MoCA) proposed policy measures aims to eliminate regulatory uncertainty and pave the way for fresh capital from foreign investors in the upcoming public-private partnership modelled airport bidding, says India Ratings and Research (Ind-Ra).
Concurrently, the policy dwells on addressing issues related to all stakeholders including airports, airlines, maintenance repair and overhaul (MRO) services.
Ind-Ra notes that the current proposal is line with MoCA's recent policy guidance for the GMR Hyderabad International Airport’s (IND A-/Positive). The proposed policy is not applicable to the existing private airport developers that Ind-Ra has outstanding ratings on, namely (GMR Hyderabad International Airport: IND A-/Positive, Mumbai International Airport : IND A+/Stable and Delhi International Airport Private: IND A+/Stable). Nonetheless, the clarity of thought in the aviation policy is crucial for the upcoming airports.
The draft policy suggests that all future airports under the public-private partnership framework will determine tariffs on a 30% ‘hybrid till’ model (30% non-aeronautical revenue will be cross-subsidised with aeronautical revenue) to arrive at the user development fee. This is a change from the earlier 'single-till' approach by the airport economic regulatory authority. Hence, the new tariff model is a win-win for both, the airport developers and passengers.
While addressing tariffs, the policy indicates that in the event of excessively high tariff for a particular year, the airport may be advised to spread out the collections over the ensuing years. Ind-Ra believes that the operator and regulator need to ensure that there are adequate reserves/cash flows to meet the debt service requirements, given the capex intensive nature of the business. Nevertheless, timely revision of tariffs by the airport authority is vital for all airports, which currently seem to be lacking.
Notwithstanding this policy direction, the government's intention to repeal the unwanted approvals and clearances is gradually shaping up. One such step is removal of environmental clearance for the expansion projects and brownfield airports.
The draft policy also reiterated the government’s commitment to press ahead with existing dispersal guidelines, which mandates airlines to fly to remote areas and create new no-frills airports, which cost less than Rs 500 million. These measures have the potential to galvanise the passengers (pax) from the places where the connectivity is currently dismal. MoCA plans to cap the tariff including taxes at Rs 2500 per pax, for a one hour flight on regional connectivity scheme routes and levy 2% on domestic and international routes, barring certain category and routes.
With the renewed interest of new airlines on regional flights and expected low operational costs due to no-frill airports the pax traffic could improve drastically. That said, the airlines payment record to airports had improved since 2HFY15 against the previous years. Therefore, any stress on the financials of airlines, due to a cap on the ticket pricing, may strain their payment profile.
The increased focus on cargo services and MRO- according infrastructure status and section 80IA benefits, provided the facility is located along with the airport, augurs well for the sector. This assumes greater significance given the growing share of freight cargo income for the private airports. The historical pattern suggests that freight is an important forward indicator of passenger traffic. Since the business potential for the Indian airports from MRO is large, the government proposes to exempt service tax for MRO.
Government also suggests building new airports and enhancing capacity through AAI even with a reduced IRR. Ind-Ra believes, while this may strengthen the pax traffic, it could also lead to idle capacity. In the backdrop of a few airports (Jaisalmer, Puducherry, Akola etc) being non-operational, despite the rule which mandates flying to remote places. Thus creation of new airports without adequate pax traffic could drain the public funds, notwithstanding a reasonably strong balance sheet of AAI.
The current policy framework aims to overcome the challenges and risks faced by the sector in the past and are a harbinger of renewed optimism for the sector. Ind-Ra expects the total pax volumes to cross 210 million pax in FY16 and in another seven to eight years India to be the third largest aviation market after US and China.
