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Airport Development Fee at Mumbai and Delhi: Heads we win, tails you lose

The airport operators at Delhi and Mumbai airports have a mantra as far us passengers go. “Heads I win, tails you lose”

After a messy process, in May 2006, the Delhi Indira Gandhi International Airport (IGIA) was handed over to the Delhi International Airport Ltd. (DIAL) consortium led by the GMR group, for modernising, handling and management. GMR won the bid for by promising to share 46% of the airport’s top-line revenue with the current owner Airports Authority of India (AAI).

DIAL estimates for their master plan was Rs 8,975 crore ($1.8 billion). Funds were to be raised by a combination of equity, borrowings and Rs. 2,739 crore ($476 million) refundable security deposits on commercial property development of what was called a “hospitality district”.

Through the middle of 2006 till the latter half of 2007, DIAL tried, what can only be charitably described as a very devious method, to reduce the revenue paid to AAI as part of their 46% revenue share. In short, DIAL demanded astronomical deposits upfront from bidders for the real estate project, in return for a reduction in long term rent, and then contended these deposits were not income, and therefore need not be shared with AAI. For full and gory details I refer you to Sunil Jain’s article “Mr. 20 per cent” in the Business Standard. Since this scheme would have cut AAI’s revenue share by almost half, it confronted DIAL and forced the consortium to put its plans on hold.

This delay cost DIAL dearly. By the time all disputes were settled in late 2007, the property market collapsed, and along with it the grandiose plans of raising the required Rs. 2,739 crore from security deposits, without which the bankers would not lend any more money.

Hanging the upcoming 2010 Commonwealth Games as a Damocles sword, DIAL quickly ran to their friends in the Indian Civil Aviation ministry for help, and help they did.

On February 10, the government approved a levy of an “Airport Development Fee” (ADF) by DIAL. From March 1, we passengers are forced to pay ADF at the rate of Rs 200 per domestic passenger and Rs 1,300 per passenger travelling abroad, totalling a whopping Rs. 1827 crores ($366 million) over three years. This, keep in mind, is on top of a recent 10% increase in fees the airport charges airlines, which is ultimately passed on to us passengers.

In a “me-too” move, fellow brown-field airport operator, GVK led Mumbai International Airport Ltd. (MIAL), seized the opportunity to gain a bonanza, and has obtained approval for levy of an ADF, again, on top of a recent hike of airport charges levied on airlines, which, by the way, was used by DIAL as justification for demanding a hike.

In a totally unjustified move, the government today approved levying an ADF at Mumbai Chhatrapati Shivaji International Airport (CSIA). Rs. 100 will be charged from every outbound domestic passenger and Rs. 600 from each international passenger, effective April 1, 2009, totalling Rs. 1,543 crores ($309 million) over the next four years.

Forget the fact that MIAL is facing no “commonwealth games” type deadline, or that they have till date, spent less than one-third of what DIAL has already spent on developing the airport.

Unfortunately, this is a slippery slope the Government put itself and us passengers on, when they approved ADF for DIAL. They have no grounds for refusing MIAL’s demands.

The justification offered by DIAL, MIAL, and their friends in the ministry, is the ADF will be used to develop aeronautical assets which will be transferred back to AAI upon completion of the lease. Never mind that the lease is for 58 years, and passengers are being asked to pay for future assets that they may not use, and this asset creation is precisely what the property development concession rights were meant to cover ???

When both these airport operators bid for the respective airports, there was no condition or plan for the levy of ADF. It was never part of the initial bidding conditions, process or bid documents.

Had the property market not collapsed, DIAL and MIAL would have made a killing on the property development. In such a scenario would DIAL and MIAL have paid an amount equal to the ADF back to passengers as they share of gain? If the economic tide has turned, it a business risk and ultimately DIAL’s and MIAL’s problem.

It all boils down to DIAL and MIAL raising the collateral money insisted by the banks who have agreed to lend the remaining amount. Unfortunately the shareholders of DIAL and MIAL do not have the financial strength to do.

They have a means to raise the funds, like any other company in the world. They can sell their shares and raise equity. So DIAL and MIAL can sell shares to us passengers against the ADF.

If airport operators want us passengers to bear their share of the risks, it is only fair that we be given our share in the rewards.

About Devesh Agarwal

A electronics and automotive product management, marketing and branding expert, he was awarded a silver medal at the Lockheed Martin innovation competition 2010. He is ranked 6th on Mashable's list of aviation pros on Twitter and in addition to Bangalore Aviation, he has contributed to leading publications like Aviation Week, Conde Nast Traveller India, The Economic Times, and The Mint (a Wall Street Journal content partner). He remains a frequent flier and shares the good, the bad, and the ugly about the Indian aviation industry without fear or favour.

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