Airport operators oppose cap on revenue share of ISPs

Airport operators have opposed a proposal by Airports Economic Regulatory Authority of India (Aera) to cap royalty paid to them by independent service providers (ISP) to 30% of latter's gross turnover.

ISP includes companies dealing in ground handling, cargo handling and fuel services.

At present, airport operators charge as high as 40-42% from some of the ISPs, which leads to losses for the company and increases the cost to the end consumers, sources said.

Airport operators, which include privately-run airports in Mumbai, Delhi, Hyderabad, Bengaluru and Cochin, have asked Aera to keep off the issue as it will increase the airport costs and raise airfares.

On the other hand, air passengers association and cargo companies say high charges of airport operators are against the rules of United Nations-backed ICAO and European Union and limit the aviation sector growth in the country.

The proposal came after Aera noticed that some airport operators, due to lack of any regulation, were charging unreasonably high royalty/ revenue share from the ISP.

Aera in its consultation paper on the subject last month, said, "The rates charged for services do not seem to be commensurate with the cost, or quality of service provided," and are, therefore, inconsistent with the policies of International Civil Aviation Organization (ICAO) relating to tariff determination.

GVK-backed Mumbai International Airport Ltd (MIAL) in its response to Aera, said the concession to ISPs differ on a case-to-case basis. In their case, which involves international cargo concession at Mumbai, the entire investment in cargo facility is made by the airport operator (hundreds of crores of rupees) and not ISP, and lease rentals for land are also not charged separately. The royalty/revenue percentage are bound to be higher for them vis-a-vis other cases where investments are made by ISPs, or where land rentals are charged separately.

"Limiting the royalty/concession fee at a specified percentage would limit the availability of cross subsidy and lead to increased aeronautical charges which shall be detrimental to the interest of airlines and passengers and will benefit users of these services at cost of passengers," said MIAL during their presentation report which has been undersigned by Sanjiv Bhargava, vice president (regulatory), MIAL.

GMR-run Delhi International Airport's (DIAL) Sidharath Kapur, president (finance and business development), said, any change in regulatory regime post signing of concession agreement creates a lot of uncertainty and discourages further investments in the sector. "Also, revenue from these sources have been forecast by airports on existing concession terms. Any change in terms with ISP will lead to actual revenue being lower than revenue forecasted in airport's tariff model. This will lead to worsening of financial position of airport operators," Kapur said.

The Association of Private Airport Operators (APAO), a lobby body for privately-held airports, said, the proposal to cap if implemented will also lead to a fall in revenue share to the Airport Authority of India (AAI) by the PPP airports. AAI has 45.99% revenue sharing with DIAL and 38.7% with MIAL.

However, airlines and ISP operators have taken an opposing view to it.

According to Iata, the lobbying body for airlines, it is aware of at least one case where an airport operator has attempted to unilaterally impose a hike in the royalty (more than double) without any due justification given.

"We believe Aera should aim to not allow any royalty fees. However, if Aera intends to continue to allow them (with a cap), a more appropriate level that we believe is sustainable for the industry, is a cap of 5%," an Iata official said.

Kamal Kikani, vice-president (airports) at GoAir, said, besides a fair margin charged by the service provider huge amount of royalty is being charged by airport operators' ranking from 13% to 40% plus at various airports. "It is such kind of multiple layering that is raising the cost of air travel taking the masses away from flying," Kikani said.

Blue Dart Aviation said that the maximum cap if any should be at 5% to promote aviation growth. The airport fueling arms of oil companies run by Bharat Petroleum, Hindustan Petroleum and Indian Oil, have however opposed Aera's move, sighting that since they pay around 5-6% of revenue sharing, a cap of 30% would induce the airport operators to increase it and therefore they want the status quo to be maintained.

Air Passengers Association of India (APAI), said royalty is a legacy of Britishers and in accounting terms is defined as "payment made to someone for whose invention, idea or property is used".

The Indian aviation market is among the fastest-growing in the world. As per an Iata report released on Tuesday, India was a big mover in this year's rankings by jumping up two places to the No.4 ranking with 131 million departures in 2016, and with a stellar growth of 20% year on year it continues to close in fast on Japan. Just three years ago, India was at the No.8 position. Similarly, the total air cargo at all Indian airports during 2016-17 (April 2016-February 2017) witnessed a growth of 9.3%, according to the AAI statistics. The cargo too grew at 9.3% at Indian airports between April 2016 and February 2017.