Cheaper air travel in India could be illusory

While Civil Aviation Minister Ajit Singh and some experts say abolition of the airport development fee (ADF) at the Delhi and Mumbai airports from January 2013 would lead to lower cost of travel, it might actually do the opposite.

Experts say the expected financing gap in the case of Mumbai International Airport Ltd (MIAL) will be Rs 4,200 crore (Rs 42 billion) and in the case of Delhi International Airport Ltd (DIAL) Rs 1,500 crore (Rs 15 billion).

Domestic passengers pay Rs 200 and Rs 100 as ADF at Delhi and Mumbai airports, respectively, and international passengers pay Rs 1,300 and Rs 600 a trip, respectively.

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Delhi also levies a user development fee (UDF) of between Rs 190 and Rs 450 on domestic passengers and Rs 400-1,000 on international travellers.

Sector experts say in the absence of ADF, the UDF charges are likely to go up. The amount will be fixed by the Airports Economic Regulatory Authority.

A GMR Group (it runs DIAL) spokesperson earlier told Business Standard that raising funds in the next two to three months to compensate for the loss of ADF (that is, raising debt and debt/equity to fill the gap) would be difficult.

Adding, the government's move will pose challenges for private investors in the project, too. 

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Amber Dubey, partner and head-aviation at global consultancy KPMG, feels the low passenger traffic and profitability could make it difficult for airport operators to raise fresh debt or equity.

Add an increased cost of funding in the present business environment, making debt and equity more expensive.

In the project agreements, experts say an airport operator is allowed to recover the entire funding gap plus returns on the debt or equity brought in, plus the additional taxes, if any, from passengers. That's what will make airport rates higher for passengers in the long run.

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Plus, UDF can always be revised if traffic falls, say experts. If the project cost increases, UDF will be used to provide more returns.

Another analyst feels even if we assume UDF will not be raised, with most airlines not seeing a good business environment, they can't afford to pass on the benefit of no ADF.

And, passengers are only given a fixed figure they need to pay for travel, not a breakdown of costs.

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Therefore, nothing stops airlines from not retaining the cost they charge today. Especially on the Delhi-Mumbai route, the competition will not let airlines/airports allow a lower charge structure.

ADF is charged to bridge the project funding gap. That is, it is a 'capital receipt', not taxable. Assume the airport company needs Rs 1,000 crore and manages to get Rs 800 crore. For the remaining Rs 200 crore, the government allows it to raise this by way of ADF.

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This Rs 200 crore can be put to use entirely for infrastructure costs like building terminals, runways and so on. For calculation of fare, only Rs 800 crore will be factored in and not the Rs 200 crore.

UDF makes up for a revenue shortfall if an airport is not able to get enough returns on its investment and is not economically viable. It is a 'revenue receipt'; that is, taxable.

Taking the earlier example, the airport company is supposed to pay taxes to the Airports Authority of India and other taxes from the Rs 200 crore raised. Hence, it retains very little for its own usage. For calculation of fare, only Rs 1,000 crore will be factored.