DEMAND ANALYSIS FOR NON METRO AIRPORTS: ISSUES

AVIATION SECTOR IN INDIA

Global perspective
Aviation industry in any country cannot be viewed in isolation and needs to be seen from global
perspective. Post 2008-09, the Global aviation industry has been on an uptrend post as depicted
below. 1

Graph: Passengers handled by the global airline industry (in millions)

Total number of unique city-pair connections exceeded 16,600 in 2015 almost double of the
connectivity by air 20 years back. There has been a fall in air fare after adjusting for inflation.
Compared with 20 years ago, real transport costs have more than halved. The passengers handled
by airlines worldwide grew by 5.4% CAGR2 during 2013-18. Asian markets like India and China
led this growth. Apart from demographic factors and higher economic growth, the industry in these
geographies benefitted from the dip in oil prices that began in 2014. Total passenger handled by
airlines globally stood at around 4.1 billion during 2016-17. Major countries accounting for this
passenger traffic are USA, UK, Germany, China, India and Japan. Region-wise, Asia Pacific led
with 1/3rd the total global passenger share followed by Europe (26.5%) and North America (23%).
Capacity across these regions grew faster than the previous year with Asia and Latin America
reporting a growth of around 9.25% followed by Europe at 8.2% and African region at 7.5%.

1
Source: IATA
2
Compound Annual Growth Rate
 Table: Major economies and aviation industry statistics

Aviation Industry in India

The Airline Industry is among the sunrise sectors in India post 2014. India is the fastest growing
airline market as per International Air Transport Association (IATA) for the past three years. The
Indian Airline Industry also witnessed addition of new service providers in the last few years as
well as multinational airline companies investing into domestic service providers.
Three factors contributing to the growth of this industry in India are-
 Lowering cost of air travel
 Growing middle-income population
 Public transport services over medium/long distances like Railways being unable to deliver
efficient alternatives or enough capacity to cater to demand.

This sudden growth in Airline industry provides opportunities and poses a challenge at the same
time since the evolution of airlines into public transport requires comparable investment into
development and expansion of new & existing airports and other aviation facilities.

Regional Connectivity
The Government implemented the “UDAN” (Regional Connectivity Scheme) scheme which aims
at connecting tier-3 and 4 cities to larger metro cities and other cities providing an affordable travel
medium to a much large population. In the initial two rounds of bidding for the scheme, the
Government announced operationalising of 56 new airports and 31 new helipads. The scheme is
expected to add 1.3 million new passenger seats across new networks. The major benefit is in terms
of strengthening the airline network across the country.
 PERFORMANCE OF AIRPORTS IN INDIA

Airport Authority of India (AAI) was incorporated as a statutory body responsible for creating,
upgrading, maintaining and managing civil aviation infrastructure both on the ground and air space
in the country. Currently there are 129 airports3 operating in the country which are governed by
Airport Authority of India. These airports are categorized as:
 International airport: Designated for scheduled international operations by Indian and foreign
carriers. Currently there are 23 international airports which include 17 airports managed by AAI
and 6 airports which are Joint-ventures between AAI and private companies.
 Custom Airports: These airports have custom and immigration facilities for limited
international operations by national carriers and for foreign tourist and cargo charter flights.
 Domestic Airports: All other airports are covered in this category.
 Civil Enclaves in Defence Airport: There are 20 civil enclaves in Defence airfields. These are
civilian aircraft operations at designated defence airports.

Shares of Passengers across Airports Categories between 2016-2018 is shown below. Notably, over
87% of the traffic is handled by International / Joint Venture Airports.

Graph: Shares of Passengers across Airports Categories between 2016-2018

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Passenger Handled at Major Airports 4
The 6 largest airports in the country handled over 175 million passengers in 2016-17. The six metro
city airports handle 2/3rd of the total air-passengers in the country. Out of these, 4 airports viz.
Delhi, Mumbai, Bengaluru and Hyderabad are handling passengers more than their maximum
indicative handling capacity. These 4 airports are among the early JV airports developed under PPP
model infrastructure projects, where a Private Developer/Company, Central (AAI) and State
Government constitute for the majority shareholders.

Table: Largest airports in India (in terms of passengers handled per annum)

Important indicators and parameters for evaluating airports

The operational indicators help in analysing the infrastructure available and the efficiency at which
an airport is operating the entire facility. Financial indicators for airport highlight per passenger
revenue ratios. The ratios are broking down expenses to passenger handled by the airport.

4
AAI Report Apr-Jan 2018
Financial performance of Joint Venture and Private Airports
Fee and taxes charged by Indian airports continue to be higher compared to other South Asian
countries but lower than countries like Russia. The revenue collected by JV airports grew by 12.7%
CAGR during FY14-17. The airports reported improvement in operating margin by almost 10.5%
during the same period. The same can be attributed to higher passenger traffic handling and
optimum utilization of resources available. These airports are already operating above their
maximum capacity.
During the year 2017, Bangalore International Airport was acquired by Fairfax Group. The
company acquired 38% stake from its Private Promoters and some strategic investors. The Airport
was valued at around $ 1 billion for this transaction. This was one of the first and marquee
transaction in this space.

Table: Financial Performance of PPP Airports

Evidently, airports listed above, operated under PPP model have shown steady profit during
succesive preceeding years.
 NON-METRO AIRPORTS

As the aviation sector boomed in India, a need was felt to expand connectivity to remote and far
flung destinations i.e. non-metro airports as we will refer in this paper. Non-Metro airports are
identified based upon potential for traffic growth, tourism, business potential and
importance of airports located at State capitals etc 5.

Like economic development, airports are not evenly distributed across the country. In addition, air
traffic is not evenly spread out among the airports. There are huge congestion and flight delays
among some airports caused mainly due to unexpected growth of demand. For many regional
airports, the growth of business is slower than expected, resulting in significant excess capacity. It
can be safely put that airport development is positively related with economic growth, industrial
structure, population density, and openness, but negatively related with ground transportation. The
growth of airport transportation in certain region is slower than others, hinting at lack of viability of
air transport vis-a-vis available means of ground transport in such areas.

Project UDAAN
Government initiated the plan to connect remote airports under Project UDAAN which is mainly a
regional airport development and connectivity scheme. What underlines this scheme is the
government’s pursuit to make air travel affordable especially for travellers in tier-2, 3 and 4 cities.
The scheme aims at two broad themes:
 Developing and expanding footprint of aviation infrastructure in the country. This includes
development of both existing airports, regional airports and new airports at underserved and
unserved locations.
 To add several hundred financially-viable capped-airfare new regional flight routes to connect
more than 100 underserved and unserved airports in smaller towns with each other as well as
with well served airports in bigger cities by using "Viability Gap Funding" (VGF) where
needed.

Expenditure

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https://www.aai.aero/en/content/what-criterion-identifying-nonmetro-airports-development
AAI planned to spend US$ 1.3 billion on non-metro projects during 2013–18; mainly focusing on
the modernisation and upgradation of airports. Upfront subsidy was proposed through which non-
metro airports would be funded by imposing 2 per cent levy on both domestic and international
airfares. It was decided that while AAI would develop the air-side of these airports, public private
partnership would be required for city side development. To free up AAI to undertake this task, the
joint venture route was taken for Delhi and Mumbai and other existing metro airports.

Impact of Regional Connectivity

Airport development plays an important role in stimulating regional and national economic growth
through job creation and attracting the inflows of capital and new businesses to the regions close to
airports. Construction and expansion of airports can also change the structure of local investment
and employment. This may at times induce governments to implement more ambitious airport
development plans, investing vast amount of capital into new airport expansion and reconstruction.
If a nation’s transportation system is maturing and competition among different transportation
modes is intensifying, the effects of airport development on the economy can become ambiguous.

Performance of Non-Metro Airports

The proportion of domestic to international passengers is expected to widen further during the
coming years as airlines offer tickets priced at par with train tickets between selective destinations.
Domestic traffic growth is expected to emanate from the smaller and UDAN cities which were
untapped and unserved till now. Domestic Passenger share of Airports other than 6 Metros has
increased by more than 3% points between FY14 and FY 196

Graph: Share of Passengers at Non-Metro Airports

Demand Analysis: Non-Metro Airports

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Demand Analysis7 is a process whereby the policy makers take decisions with respect to the
production, cost allocation, advertising, inventory holding, pricing, etc. Although, how much a firm
produces depends on its production capacity but how much it must endeavour to produce depends
on the potential demand for its product. In terms of airports, this would essentially be based on
traffic flow at any given airport and the variables which govern their rise /fluctuations.

Forecasting is at the heart of the planning and design process at airports. Airport terminals,
runways, freight storage facilities, parking lots, and even the roadway network to and from an
airport are all based on the forecasts for the airport. Forecasts of passenger volumes are translated to
space requirements for the terminal building facilities, while forecasts of aircraft movements are
translated to the runway, taxiway, and apron needs, as well as to the need for air traffic control
systems.

Airport Development
A careful analysis on the interaction between airport development and economic activities is
warranted to lay down appropriate planning, particularly, in the context of the national and regional
space-economy. If the demand analysis for airports is not done with due considerations keeping in
mind the controlling factors, it may lead to mismatch of airport construction, economic
development and demand for air traffic. Such factors include: -
 population density
 openness of the local regions
 ground-transport
 economic growth.

While planning and designing airport terminal there is a significant number of traffic characteristics
that must be forecasted8:
 total number of passengers for the design period
 domestic, commuter and international passenger ratios at peak hours
 seasonal variations in demand

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https://businessjargons.com/demand-analysis.html
8
https://pdfs.semanticscholar.org/91cb/690e8f485a28479055d4674a0ca44db189c7.pdf
 volumes of transfer and/or transit passengers for each type of traffic, number of passengers,
bags and well-wishers
 distribution of dwelling times of passengers
 origin and destination of flights for immigration, customs, and health control purposes

GDP vs Passenger Traffic9

The Graph below shows the air traffic pattern between 2007-1017 and how it correlates with the
GDP growth of the country. As the GDP slowed in the year 2012-13, the domestic passenger
growth fell by almost 5%. Recovery in GDP post 2013-14 led to sustained growth in domestic
passengers. The share of domestic passengers has been greater than 55% over the last decade. In
2007-08, the share of domestic passengers was 62%, which dropped to 58% in 2013-14. In 2016-
17, the share of domestic passengers to total passengers stood at 65.5% indicating a recovery in
domestic passenger numbers in line with the GDP growth.

Graph: Passengers handled and GDP (%) growth

Implementation Experiences
Even though the government is pushing for regional connectivity through UDAN scheme, private
investments have not been made beyond airports at Tier-1 and 2 cities. UDAN even though aims at
making air travel affordable and reaching unserved and underserved cities, the footfalls generated
are limited which further limits the possibility for airport operators. AAI has been instrumental at
operating these airports, but the scope to scale up these smaller airports now is limited given the
limited capital which could be invested by AAI on new airports.

9
Source: Directorate General of Civil Aviation (DGCA)
Connecting airports with regional city centres with airports continues to be a challenge. New Delhi
is a prime example of connecting users to airports from across the city. The Delhi Metro has
finalised and is implementing a plan which aims at connecting all metro lines with the Delhi airport,
which makes it easy and time saving for commuters to reach the airport from any part of the city.
For tier 3 and 4 cities, the onus would be on airline and airport operators to provide public transport.

Vision 2040

In its Vision 2040 document, AAI has recently come up with plans of developing 200 new airports
by 2040 to handle country’s growing air traffic. Salient forecasts as per the document are: -

 As estimated, that India will need 200 airports and an investment of $40-50 billion to handle
at least 1.1 billion passengers flying to, from and within the country.

 Passenger traffic (to, from and within India) for FY 2040 would be 1.1 billion, which is six
times the 187 million traffic recorded in FY 2018.

 Most of the airports’ passenger capacity will saturate in the next 15 years and India must
nearly double the count from 99 to 200.

 Even the second airports in regions like Delhi and Mumbai would be saturated by 2040 and
will require a third airport.

 To cater to this huge passenger traffic, India must holistically develop airports having all
stakeholders on board. This must be coupled with providing quality service to flyers.

 The scheduled airline fleet will rise from 622, at the end of March 2018, to 2,360 till March
2040.

 Even though India is a “price sensitive” market, gradual rise in per capita incomes, increased
(perceived) value of ‘time’, propensity for leisure and tourism will lead to more and more
Indians using airways as a medium to travel.

Sustainability of Plans
There are apprehensions in the minds of Aviation Experts as to sustainability of plans envisaged in
Vison 2040.10 Speaking at a roundtable at the summit held in Mumbai in Jan 2019, experts hinted
that Indian airports may not be able to meet the surge in demand as envisaged. This is mainly due to

10
https://www.airport-technology.com/features/future-airports-in-india/
India’s mixed track record to consider when it comes to previous aviation promises. Back in 2017,
the Regional Connectivity Scheme was unveiled, aimed at connecting smaller towns in the country
to its aviation network through subsided new routes. The ambitious plans set out for the aviation
sector have not been delivered upon. Despite having won a combined 84 of the 128 contracts
offered in the initial phase of regional connectivity scheme, local carriers Air Deccan and Air
Odisha were forced to cancel half of their flights back in September, per the Directorate General of
Civil Aviation (DGCA). Various problems have also beset the country’s existing airports, with
Mumbai Airport – the country’s biggest – reporting delays for one in four of domestic flights in
September due a to shortage of landing slots. Such incidents do little to clear the long-hanging air of
scepticism around India’s ambitions as an aviation behemoth. But the enormous size of its air
passenger traffic is indisputable, meaning the country needs to deliver on its promise to not only
build more airports – but make sure they are operationally efficient.

Key Focus Areas

The decision on and planning of airport development is not to simply decide which airport needs to
be expanded or where to build a new airport. It is more a question of how the expansion of an
existing airport or the construction of a new one can impact upon the local economy in the most
efficient way, considering of the existing economic structure, topography, population density, and
the substitutability/complementarities of other modes of transport. In a fundamental cost-benefit
framework, airport is not only an important impetus of economic growth but also a cost to the
economy because it requires large investments. Consequently, it is important to take a holistic and
comprehensive approach to minimize the costs of wrong decisions on airport planning and to
maximize the efficiency of airport development and operation.

In the Indian context, the following points need to be kept in mind: -

 Accurate analysis of mounting passenger demands and anticipate readiness to handle the
demand with requisite capacity augmentation.
 The financial viability of the entire airline sector. Airline financials over the recent years are
vulnerable to changing fuel prices. On an average, ATF prices fell 25-30% between 2014 and
2015 and about 10% between 2015 and 2016. Profits may be under pressure as airlines may be
forced to give away the benefits of lower fuel to passengers in terms of discounts due to stiff
competition.
 The economic regulation of airports related to airport charges.
 Airlines pursuing their own growth and fleet expansion plans independently with insufficient
knowledge of potential constraints across the system.
 Excessive taxation on ATF is another big challenge being faced by the aviation industry.
 Land acquisition has been a major issue for airports which may delay expansion plans.
 CONCLUSION AND RECOMMENDATIONS

Conclusion
India has been experiencing the fastest growth of air traffic in the world during the recent years.
Need to expand the existing airport infrastructure has been realised by the policy makers based on
the traffic forecast for the next 20 years. Accordingly, Vision Document 2040 has been rolled out
paving the road map for implementation.

However, aviation sector has its own peculiarities and closely relates with certain other key drivers
of a nation’s economy especially when it comes to promoting regional connectivity. All factors
need to be carefully examined and balanced to prioritise airport developments without undue
financial stress given that we still are a developing nation. Despite being the world’s fastest growing
economy, India has long sought to boost infrastructure development, which is laggard compared to
that of its rival and neighbour China.

Recommendations
Notwithstanding our fast-growing air traffic volume and having a plan in place to match
infrastructure with anticipated demand, it is imperative that we view and analyse the roadblocks
experienced during a decade plus journey of modernising and connecting remote airports to the
national air network. The following points need to be addressed at the highest leadership and policy
makers level: -

 Amendments to Land Acquisition, Rehabilitation and Restructuring Act, 2013 and adopting
“land-pooling” techniques to develop newer airports.

 Lower Goods and Services Tax (GST) since taxes add pressure on the airline’s bottom line.

 Aviation turbine fuel (ATF) to be brought under GST.

 Putting in place a strong and effective pool of Aviation Experts specializing in Project
Management to handle the road map over the next 20 years.