33 highlights
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The glee in Gautam Adani’s statement was palpable. His Adani Airport Holdings Ltd had just taken management control of the Chhatrapati Shivaji Maharaj International Airport in Mumbai on 13 July.
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No other business in the $15 billion Adani Group had seen such a meteoric rise. It took Adani a little over two years to lord over a quarter of the Indian aviation market, which was among the fastest growing in the world before COVID-19 struck.
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It doesn’t take an economist to tell you that the Mumbai airport (which also brings with it the to-be-developed Navi Mumbai airport) is critical to Adani’s overall ambition in this space. He had already won rights to operate six airports that were managed by Airports Authority of India, the government agency that supervises the industry segment. The six are Ahmedabad, Jaipur, Lucknow, Thiruvananthapuram, Mangaluru and Guwahati.
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By shaving off much of the traffic from airports and making recovery slow and uncertain, it has struck at the heart of Adani’s airports business. As much as an airport is about creating a facility for airlines to land their aircraft, park them and take off, modern airport businesses equally focus on creating an infrastructure that can be a destination even for non-travellers.
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“Airports as a business is a safe bet. The model is such that it ensures you an assured return over the lease tenure. But if you have bid aggressively, then a disruption like COVID-19 can create stress,” says a former senior executive from the industry
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Adani was aggressive with the bids for the six airports. He had quoted the rates hoping that the Indian aviation sector will keep growing at the 11%-a-year pace seen in 2019. That is no longer the case.
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The airport arm is at present being incubated under the group flagship, Adani Enterprises Ltd. The takeover of Mumbai International Airport Ltd, which runs the Mumbai airport, comes at a time when cash flows are down to a trickle, making debt-servicing painful.
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Meanwhile, an attempt to raise charges by one of the partner firms specializing in ground handling at Lucknow airport ended in failure, in the face of stiff opposition from airlines.
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Both actions—asking for more time and raising charges—evoked sharp responses. A senior industry official contended that the Airports Authority of India didn’t have to be benevolent. “Who compensates AAI for the loss of revenue?” he asked.
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While a measure of relief did come Adani’s way, the two instances reveal the liquidity crunch in the business.
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With a net worth of $55 billion, Adani may not look short of cash. But like this story had earlier pointed out, the Adani Group’s debt already stands at about Rs 1,37,000 crore.
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The pandemic, experts say, may have reset Adani’s targets for the airport business by at least three years.
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Adani winning bids for the six airports was a watershed moment for the Indian airports business. Many rules of the game changed, making the business a sweeter proposition
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No, we are not talking about allegations that the terms of auction benefited Adani. Several reports have pointed out how unlike the earlier times (when GMR took over Delhi airport and GVK Mumbai), a prospective investor could bid and win more than one airport, the lease period had been increased from 30 to 50 years, and no prior experience in airport management was needed.
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At present, an airport operator gets an assured 16% return on his investments. Further, it makes money mainly from two buckets—aero and non-aero. Under aero, the airport charges airlines different kinds of fees for letting them use the space for landing, take-off and parking of aircraft. Passengers pay a user development fee as part of their fare. Non-aero is the whole retail side of an airport, betting on travellers spending even as they wait for their flights. Outside the terminal too, visitors spend while waiting or seeing off friends and relatives. Even the parking fees are part of this bucket.
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But the airport operator can’t decide on how much to charge the airlines or passengers. The tariff is decided by airports in consultation with the Airports Economic Regulatory Authority, or AERA, the government agency that regulates airport tariffs.
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For the current set of privatized airports, a hybrid till system is followed to determine the rates. It takes into account the airport’s expenses over a “control period” (usually five years) and the tariff is fixed so as to just cover these costs. “To ensure that the charges are not too high, especially for a passenger, it is decided that 30% of non-aero revenues will be used to cross-subsidize the aero business,”
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Now, airports also need to share their revenue with the Airports Authority of India. While Mumbai airport has to share 38.7% of its revenues, Delhi airport has to part with 45.99% of its income.
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“In the case of airports in Bengaluru and Hyderabad, as these were greenfield projects and risks were higher, the revenue share was kept at just 4%,”
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Little wonder then that both Mumbai and Delhi airports approached courts to stop the Airports Authority of India from taking its revenue share amid COVID-19.
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Now to the new system that came into effect with the six airports that Adani took over. While the assured rate of return on investment remained (it’s not clear if this will stay at 16% or go higher/lower), the hybrid till system was taken off the table. It was replaced by a “base maximum blended aeronautical yield” that was capped at Rs 400 per passenger.
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In other words, instead of getting a share of the annual revenues, Airports Authority of India will get a fee for every passenger that sets foot inside the airport. And here is the clincher: the whole of non-aero revenue is now left to the airport operator. No cross-subsidization
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“There is no doubt that compared to the previous system, the new one gives more reason for the airport operator to maximize non-aero revenues,”
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“In the earlier system, there was a doubt that the AAI was not getting its fair share of the revenue as some companies were under-reporting. With the per-passenger fee formula, the system could be more transparent as the traffic data is shared by airlines and collated by aviation regulator DGCA,”
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The biggest upside in the business comes from the real estate development around an airport. This is akin to the Aerocity in Delhi that is spread around the airport and includes hotels and Metro stations. Adani has similar, but grander, plans for the airports in his portfolio.
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Ideally, a major chunk of an airport’s revenue should be coming from the non-aero bucket. That would mean the operator’s business is in good shape, and doesn’t need to charge high user fees from customers and airlines (the aero bucket we mentioned earlier).
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No other airport operator in India has ever had the scale that Adani now has with seven airports under his wing. The Navi Mumbai airport will add to this list and the entrepreneur is sure to bid for more when the government puts more airports on the auction table.
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The data from the Mumbai airport could turn out to be the most lucrative. That is because once the Navi Mumbai airport is operational (Adani aims to complete the first phase in three years), the present airport may focus more, or just, on international traffic. That will be highly profitable because international passengers tend to spend more time in an airport and also tend to spend higher.
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In Lucknow alone, Adani Airport Holdings could get access to 217 acres that was earlier earmarked by the Airports Authority of India for “city side development”. MIAL in Mumbai has nearly 200 acres and in Jaipur, the land parcel consists of 35 acres.
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So, has Adani struck gold? Yes, until the pandemic played spoilsport.
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Unfortunately, this could impact passengers and airlines who may be forced to fork out higher user charges when the next control period of five years sets in. That is because tariffs are reset based on the performance of the previous five years. Basically, an under-recovery in the earlier control period may lead to higher charges in the next.
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Sentiments are similarly subdued when it comes to the real estate side of the business. In June, Hyatt Regency hotel near Mumbai airport closed down due to a funds crunch. Overall, hotel occupancy levels remain low in the country. Malls remain mostly shut or, in some cases, open for a few hours a day. And when it comes to commercial real estate, a recent ICICI Securities report said office vacancies may touch 20% this year.
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Some of these issues haven’t been resolved in years and Adani will need all the help it can get from local authorities. What definitely didn’t help his case was the decision to shift the headquarters of Mumbai airport to Ahmedabad, the hub of the Adani empire.