An investment of more than Rs 35,000 crores is expected to be made in the sector from 2008 to 2012. In order to ramp up airport infrastructure, the Ministry of Civil Aviation has unveiled reforms to facilitate investment in this segment. The Airport Authority of India (AAI) was formed in 1995 to accelerate integrated development, expand and modernize the passenger terminal, air traffic services, and operation areas. The AAI Act was amended in 2004, to enable private participation.
New analysis from Frost & Sullivan (financialservices.frost.com), Financing Airport Infrastructure in India, reveals that liberalization initiatives and the entry of low-cost carriers will provide the market with a shot of adrenalin.
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"In 2006, 100 percent FDI was permitted into Greenfield airports and the development of the new airports by the private participants was allowed," says Frost & Sullivan Financial Analyst R. Madusudanan. "It is expected that the entry of private participants will infuse the capital necessary to enhance infrastructure and streamline airport management."
Establishment of Airport Economic Regulatory Authority (AERA) as regulator will ensure sustained growth in the sector.
Airports in India are highly congested, and they have limited ground and cargo handling capacity; this offers huge opportunities for airport developers in the country. Besides, there are some non-functional airports in non-metros. Problems surrounding land acquisition have also created roadblocks for the market.
Another challenge faced by participants in this sector is the high cost of funds. Because of the capital-intensive nature of the airports, the initial years are characterized by high levels of depreciation and interest payouts, which reduce profitability. However, the concessions given by the state governments play an important role in making the project financially viable. Further, as the airports become more established, the interest expenses and levels of deprecation are very low.
"The public private partnership (PPP) model for development for airports came into existence due to the huge requirement of capital investment and a need for better management of the existing facilities," notes Madusudanan. "The huge capital requirement also limits the number of participants in this developing market, giving early entrants the first mover advantage."
Other highlights of the PPP agreements include responsibility for new investment, revenue sharing, legal ownership, and duration of holding period. Additionally, airports have very little competition because of a fairly large catchment area.
Observations reveal that there is tremendous scope to rake in non-aeronautical revenues from real estate development, retail space, and parking activities. The generation of non-aeronautical revenues is likely to make airport operation more viable and reduce volatility in earnings.
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