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Will new tariff bring cheer to travellers?

Just two years ago, AirAsia’s Tony Fernandes had come down on Delhi International Airport, or DIAL, the GMR group company that operates the Indira Gandhi airport in Delhi, for charging exorbitant tariffs. The outspoken businessman swore his airline would not fly from the capital.

He had the silent support of millions of discontented passengers who complained that they were being forced to fork out very steep fees for using the airport. Airlines, as they moved from one fare war to another, too grumbled. Airport charges (user development fee, airport development fee and airport service charges) account for over 10 per cent of the average gross fare of Rs 5,000 between Delhi and Mumbai.

Now, however, there could be some good news for Fernandes, who has after all decided to fly from Delhi by the end of March, and the 40 million people who travel in and out of the airport. The Airports Economic Regulatory Authority of India, or AERA, has proposed a reduction of over 78 per cent in fees for a five-year period retrospectively from March 2014.

Airport charges in Delhi have always been under close scrutiny because as much as 20-25 per cent of the country’s air traffic flows through the airport. So any change in airport charges has an immediate impact on a large chunk of the population on whom the burden of the fees falls. At the same time, DIAL is also overly dependent on user development fees. They contributed 74 per cent to its revenue of Rs 1,700 crore last year.

Why the slide
So why has the regulator suggested this sharp cut? As things stand today, the regulator has to fix a target for the airport’s revenue for five years based on various complex parameters, including operating costs, depreciation, non-aero revenues and taxes. The regulator then adds a return on investment of 16 per cent, including the actual cost of debt. DIAL is then given a choice to raise this revenue through user development fees, parking and landing charges and a share of the fuel price, among others.

The first five-year block (called the control period) for this revenue target was 2009-2014. However, since the regulator was set up only later, the revenue target could only be fixed by July 2012. For the first three years, DIAL was getting the same airport charges that the Airports Authority of India (which controlled the airport before it was privatised) had charged in the past, which was substantially lower. In 2012, AERA gave DIAL permission to increase its airport charges by 346 per cent. The high charges were required to help DIAL recover the revenue that it was to get in five years but had only two years to collect because of the delay in passing the tariff order. The next round of price fixation for the airport is for the period between 2014 and 2019. As the airport now has the flexibility to recover the revenue of Rs 7,000 crore in five years, there is enough headroom to lower the tariff.

But how deep would the relief be for customers and airlines? In truth, the final drop will depend on many things, most important of which will be DIAL’s views on the tariff. Already, DIAL has sought a 42.6 per cent hike in airport charges for this five-year block. Sources say the company has pointed out that the delay in implementation led to a significant difference between the revenue for 2011-13 projected by AERA (Rs 6,597 crore) and the actual revenue earned by the airport (Rs 5,725 crore). This was largely because, according to DIAL, the non-aeronautical revenue was calculated using unrealistic growth rates. This gap has to be made good in the next five years.

Not only this gap, but the fate of the actual increase will also crucially depend on the various cases filed by DIAL in the AERA Appellate Tribunal, challenging what it considers an inadequate increase in 2012. DIAL in 2012 had demanded an increase of 775 per cent in tariff but got only half of that. As a result, DIAL went to the Delhi High Court which directed the ministry of civil aviation to appoint a chairman and members of the Appellate Tribunal so that it could challenge its tariff order of the first five years on various counts. The court has ordered that the tariff order of April 2012 will continue until final adjudication of the company’s appeal.

DIAL has argued that the regulator did not take into consideration many key issues that are now before the tribunal. For instance, it has not accepted the SBI Capital report, appointed by the ministry of civil aviation, which had recommended that return on capital should be upped from 18.5 per cent to 20.5 per cent (regulator allowed 16 per cent). Also, it has not taken into consideration the fact that delay in security clearances has impacted its real estate development. Because of these factors, DIAL’s return on equity was -8 per cent instead of 16 per cent.

As a result of these problems, DIAL had accumulated losses of over Rs 969 crore in 2013-14, despite eight years of operations. Fortunatelt, the rise in airport charges has helped the company reduce its accumulated losses ,which were Rs 1,453 crore in 2011-12.

Cheaper tickets?
If the regulator’s suggestion holds good it would mean a big relief for passengers and airlines. For example, domestic passengers travelling on IndiGo (the rates differ based on the aircraft weight) fork out Rs 551 as user development fees on departure and Rs 466 on arrival – the only instance of a private airport charging both ways. International passengers are charged Rs 1,006 on departure and Rs 840 on arrival. To put it in perspective, a passenger travelling from Mumbai to Delhi has to shell out nearly 15 per cent of the gross fare of Rs 5,000-Rs 308 in Mumbai and Rs 466 in Delhi -as airport fee.

But if the sharp reductions as suggested by AERA are introduced, things could change and Delhi could suddenly look very attractive. With a 78 per cent decline, domestic departure charge will fall from Rs 551 to Rs 121 and international departure, from Rs 1,006 to Rs 221. In comparison, Mumbai charges Rs 308 for domestic departure and Rs 616 for international departure. Bengaluru will charge Rs 306 on domestic departure and Rs 1,226 on international departure in 2015-16.

As far as airlines are concerned, their costs should also come down. Airlines say that parking and landing constitute around 6 per cent of their operating cost. So if they were also to fall by 78 per cent, airlines would shave off almost 4.7 per cent of their costs.

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