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BW Businessworld

A Runaway Success

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That most airlines in India are losing money hand over fist is well known. The Centre for Asia Pacific Aviation (Capa) estimates that the airline industry in India has notched up losses of more than $2 billion in FY12.

What is more surprising is that private airports — which make money all over the world — have also been losing money for the last few years in India. The Delhi International Airport (DIAL), which runs the operations of New Delhi's airport, made a loss of Rs 1,085 crore FY12. It handled a little over 35 million passengers. The Hyderabad airport, which too has the GMR group as the private partner like in the case of Delhi airport, has also been making losses since inception. It had accumulated losses of Rs 770 crore by the end of 2010.

The only private airport that seems to be doing rather well is the Bangalore International Airport (BIAL), which was initially considered the ugly duckling among private airports.

When the two new airports in Hyderabad and Bangalore opened their doors, the one in Bangalore with its "box-like" structure and lack of "curves" was considered far less glamorous than its Hyderabad counterpart.  Later, when the Delhi airport was built, its sheer size made the Bangalore airport look even smaller and cramped. 

But even as both the Delhi and the Hyderabad airports try hard to break even, the Bangalore airport is enjoying profits. BIAL broke even in its second year of operations. It is now using its internal accruals to part-fund the next phase of expansion. Last year, BIAL registered net profits of Rs 170 crore, and this year's after-tax profit is expected to be around Rs 156 crore.

BIAL's success has been helped by the fact that air traffic at Bangalore is growing despite the dramatic scaling down of Kingfisher Airlines' operations. In its heyday, Kingfisher Airlines, which is headquartered in Bangalore, accounted for almost 30 per cent of Bangalore airport's revenues. That has come down to single digits as Kingfisher has cancelled flights and trimmed its operations. "We have lost 22 per cent of business due to the troubles that Kingfisher is witnessing," says BIAL president Hari Marar. Kingfisher flights are down from over 45 a day to less than 20 a day. And even flight loads have declined sharply.

Despite this, BIAL expects at least an increase of 10 per cent in its revenues this year. "Bangalore is growing both in terms of the state of the economy and the disposable income with residents. This reflects in both increased business and leisure travel," says Marar.

This year, BIAL has handled around 13 million passengers. Delhi handles two and a half times more. For the next five years, the compounded annual traffic growth through Bangalore airport is expected to be 8 per cent.

As things stand, BIAL's capacity is just enough to meet current traffic demands, a fact many critics find quite unusual for a greenfield facility, since one would expect it to be built to cater to future demand. But BIAL officials say that, in 2005, when traffic projections were made, it was expected that traffic would grow at 17 per cent every year for the next five years and that when the new facility opened, it would handle around 6.5 million passengers a year.

But Bangalore's traffic actually grew at a jaw-dropping 40 per cent per annum between 2005 and 2008. Much of that came from the low-cost airlines that started from Bangalore. Net result: when the facility opened, it had a traffic volume of 10.2 million instead of the projected 6.5 million. "That was what caused the problem. We were already at peak in a sense," says Marar. "It was a good problem to have because it increased revenues and helped us break even early."

The second thing that helped BIAL was its very "plain Jane" status. The facility was relatively simple and the operations focused on efficiency to keep costs low. At the time of its construction, the authorities did not want to "overbuild" capacity. "When you overbuild for the future, users of the airport have to start paying for infrastructure that will be used later. It is unfair on users, especially in the Indian context where you need to make the cost of air travel as low as possible," says Marar. He adds that the airport recognised that what India was missing was efficiency. "We focused less on building a glitzy building and  kept costs low."

BIAL, built primarily by a foreign consortium, with former CEO Albert Brunner, remained conservative and sober in both its spending and its projections whereas some of the Indian-led consortia, some feel, went "overboard in a bid to impress".
This conservative approach has helped BIAL in the long run since many of the other private airports — Delhi and Hyderabad included — are asking passengers to pay today for what will only be used in the future. The Airports Authority of India (AAI) chairman V.K. Aggarwal told BW that he was of the view that "Hyderabad was a bit premature" and that the traffic at the time the airport was built did not justify the kind of investment made by the GMR-led consortium. Delhi airport too has come in for similar criticism.

Also, unlike the other two private airports (Delhi and Mumbai), BIAL gives  only 4 per cent of its topline to AAI whereas Mumbai and Delhi give a substantial part of their revenues. This is due to the Bangalore airport being a greenfield facility where all the initial investment was done by the promoters. At Delhi and Mumbai, the assets have been given on lease to private developers.

There are other reasons why facilities such as Hyderabad have lagged behind. The Telangana issue has taken a toll on business and business travel to Andhra Pradesh, harming the airport's interests. Then again, Hyderabad sees a much larger volume of one-time fliers whereas Bangalore, being an information technolgy hub, has many more frequent fliers.

The traffic profile at the two cities also varies with the average flier in Bangalore willing to spend a lot more at the airport than the one at Hyderabad. The passenger volume in the two cities is also quite at variance with that at Bangalore at around 13 million last year while Hyderabad's traffic stood at somewhere between 7.5-8 million.

Marar says that the attitude of passengers has  seen a sea change. Travellers have become far more demanding and what was luxury some years ago is now par for the course.  Also, passengers today have both the capacity and the willingness to spend. "It is not just that Indian airports have grown. So has the economy. And this reflects in passenger behaviour and their spending patterns".

Marar also feels that BIAL has done well because it was born in the middle of a crisis. "Even before we learned to stand on our feet, we were dealing with the 2008 financial crisis. Things could only get better from there," he says.

Passenger volumes crashed from 10.2 million  to 8.7 million as soon as the airport opened its doors. The government took many months to approve an ad hoc user development fee (UDF) (the airport opened on 24 May 2008 but the UDF kicked in only in 2009). "We tightened our belts at that point in time which made our financial system very strong. Things were tough and we learnt to live with that," adds Marar.

It also taught the airport administration to operate like one of the low-cost airlines that they were serving. Bhaskar Bodapati, director of finance at BIAL, says the airport spends money "if and only if" one of four objectives is furthered: better customer experience, higher efficiency, increased safety or a long-term reduction in the cost structure. "If one of these four objectives is not met, we simply don't spend on whatever proposal comes up." It is something similar to the approach followed by low-cost airline IndiGo. "Just like IndiGo is low on cost, but by no means low on experience, the same holds for Bangalore airport," adds Marar.

Now, the Bangalore airport is entering its next phase of growth. The expansion — which is already under way — will take the handling capacity up to 17 million passengers, which will suffice till 2016-17. The increase in terminal capacity will cost the airport around Rs 1,500 crore, 30 per cent of which will come from accruals. The existing terminal will also be given a new look and feel.
The airport is also constructing a second runway which will be ready by the end of 2014. In addition to a second terminal — advertisements for designing the second terminal have recently been issued. "The idea is that every 3-4 years, we add capacity and at no point do we overbuild capacity", says Marar

Eventually, the Hyderabad airport is expected see its handling capacity go up to 50 million passengers — all in good time.


(This story was published in Businessworld Issue Dated 11-06-2012)