Airport fee abolition will end a scam, not lower airfares

By R Jagannathan

The headlines tell us that airfares may come down due to the proposed abolition of the airport development fee (ADF) at Delhi and Mumbai from 1 January 2013.

Take that with a pinch of salt. Currently, passengers using Delhi airport pay Rs 200 as ADF for domestic flights and Rs 1,300 for international; in Mumbai, the rates are Rs 100 and Rs 600.

The abolition of the ADF will, however, not lead automatically to a drop in fares since the money currently being raised for airport modernisation through this fee will have to be raised through some other means-equity or debt. Neither equity nor debt is free money. The two airports-Delhi, run by GMR, and Mumbai, run by GVK-will thus have to find ways to finance this gap-which will ultimately come back to the passenger as higher airport charges/fees in some form or the other.

This money, if it comes as equity, is recoverable by the airport operator from airlines, who will ultimately pass the charge on to users through higher fares. Reuters

While allowing the Delhi International Airport Ltd (DIAL) to raise airport charges by 345 percent, the Airport Economic Regulatory Authority (AERA), the airport regulator, had assumed that DIAL will have a funding gap of Rs 1,175 crore and Mumbai airport Rs 4,200 crore, reportsBusiness Standard.

This money, if it comes as equity, is recoverable by the airport operator from airlines, who will ultimately pass the charge on to users through higher fares.

The newspaper quotes Amber Dubey of KPMG on how this works: "... removing ADF may make the cost of air travel higher for the passenger... Let's assume Rs 1,000 crore of ADF is disallowed. In that case the airport operator has to bring in the same in the form of debt and equity. According to the project agreements, the operator is allowed to recover the entire Rs 1,000 crore plus returns on the same, plus the additional taxes, if any, from the passengers.That's what will make airport tariffs higher for the passenger."

So goodbye, cheaper fares from 1 January.

Moreover, Civil Aviation Minister Ajit Singh's directive on ADF to the Mumbai and Delhi airports is partly a response to the Comptroller and Auditor General's (CAG's) trenchant observations in its report on Delhi Airport last August.

CAG was particularly critical of the fact that there was no provision for an Airport Development Fee in the Operation, Management and Development Agreement (OMDA) of 2006, when Delhi airport was put out for competitive bidding for public-private partnership.

Said the CAG report: "Article 13.1 of OMDA specifically provides that the JVC (joint venture company) shall arrange the financing and/or meet all financing requirements through suitable debt and equity contributions in order to comply with its obligations, including development of airport pursuant to the master plan and the major development plans'".

However, the Civil Aviation ministry under Praful Patel allowed GMR, though an order dated 9 February 2009, to levy an ADF in Delhi, which was "clearly in contravention of the provisions of Article 13.1 ofOMDA, provisions in the AAI Act and in AERA Act as later confirmed by the Delhi High Court."

CAG (read the full report here) was scathing is its verdict: "This decision to levy DF after the effective date has vitiated the sanctity of the bidding process, as the draft OMDA, which was part of the bid documents, does not mention about funding of the project cost of the airport through levy ofdevelopment fees. In case the JV was to have been permitted to levy DF to finance the project after signing of the OMDA, this important condition should have been known upfront to all the bidders at the time of bidding. Approval of ministry and later of AERA for levy of DF by DIAL (to bridge the funding gap) was a post-contractual benefit provided to DIAL...".

It concluded that the DF (i.e. ADF) gave GMR an unintended benefit of Rs 3,415.34 crore at the "cost of passengers."

What Ajit Singh is doing is trying to correct a wrong pointed out by CAG. But it is not particularly going to benefit passengers.