Opinion October 2009

Sections

Executive summary A-1

1.0 Passenger and cargo traffic: Review and outlook A-3
- Review A-3
- Outlook A-5
2.0 State of Indian airports A-9
- Metro and greenfield airports to dominate investments going forward A-9
3.0 Retail development at airports A13
4.0 Real estate development at Indian airports A-15
5.0 Maintenance, repair and overhaul (MRO) A-17
- Definition A-17
6.0 Low cost airports A-23
- Global examples A-25
- Indian scenario A-27

Boxes

1.0 Passenger and cargo traffic: Review and outlook

01 Methodology A-6

Figures

1.0 Passenger and cargo traffic: Review and outlook

01 International and domestic passengers and growth rate A-3
02 Total passenger movement and growth rate A-4
03 Total traffic movement across major cities (q-o-q) A-4
04 International and domestic freight and growth rate A-5
05 Projected passenger numbers and growth rate A-6
06 Projected freight numbers and growth rate A-6

3.0 Retail development at airports

01 Non-aero revenue per passenger at Indian airports on the rise A-13

6.0 Low cost airports

01 Break-up of Glasgow Prestwick revenue A-24

Continued

CRISIL RESEARCH AIRPORT INFRASTRUCTURE ANNUAL REVIEW A-i

continued

Tables

1.0 Passenger and cargo traffic: Review and outlook

01 Quarter on quarter growth A-5

2.0 State of Indian airports

01 Investments at Indian airports (2009-10 to 2013-14) A-9
02 Commissioning schedule of various airports A-10
03 Sources of funding-DIAL A-11
04 Sources of funding-MIAL A-11
05 UDF and ADF charges levied at airports A-11

4.0 Real estate development at Indian airports

01 Upcoming real estate development at Indias major airports A-15

5.0 Maintenance, repair and overhaul (MRO)

01 Fleet size of airline companies in India A-20

A-ii CRISIL RESEARCH AIRPORT INFRASTRUCTURE ANNUAL REVIEW

 Executive summary

Passenger and cargo growth to moderate but remain healthy

CRISIL Research expects a moderation in the growth of both passenger traffic and cargo tonnage due to relatively
slower economic growth as compared to the past and the high base effect because of structural shifts in the
industry with the arrival of LCCs. Overall passenger traffic is still expected to grow at a healthy CAGR of 11.4
per cent from 108.7 million in 2008-09 to 187 million by 2013-14, on the back of benign ticket prices and the
improved economic environment, which is expected to lead to an increase in business and leisure travel. The
cargo tonnage is likely to grow at a CAGR of 7.9 per cent from 1.7 million tonnes in 2008-09 to 2.5 million
tonnes by 2013-14. Also, with steady traffic growth and increasing revenues from development fees and non-
aeronautical activities, the operating margins of players are expected to remain healthy.

Indian airports witnessing significant escalation in capex; development fees and fresh debt
to bridge funding gap
The capex plans lined up by the AAI and private operators for the modernisation of various metro and non-metro
airports in India have increased substantially as compared to previous estimates. The development fees currently
levied by the major airports and fresh debt is expected to bridge the funding gap for carrying out the planned
upgradation in infrastructure. Mumbai and Delhi airports have hiked their cost estimates considerably by 18 per
cent and 29 per cent, respectively.

Non-aeronautical revenues under focus at Indian airports; food & beverages to lead growth
in retail
Non-aeronautical revenue per passenger at Indias airports have increased over the past 3 years, as the space
additions have led to an increasing number of retail outlets, car parking slots, advertising, etc. The food and
beverages segment, which accounts for a significant portion of an airports retail revenues, is expected to register
relatively faster growth due to the increasing number of low cost carriers, whose ticket prices do not include meals
aboard the aircraft. Regular retail will remain under pressure due to the continuing reluctance of passengers to buy
big ticket items from airports, while revenues from duty free retail will remain subdued due to competition from
other global airports.

Real estate development at airports to remain slow

The real estate development planned at Indian airports will remain slow owing to the current adverse business
environment. Lease rentals will continue to be under pressure due to the downturn in the real estate market and
excess supply planned for hotels, IT parks, SEZs etc in the country. Also, the decrease in the number of business
travellers will result in reduced revenues from convention and exhibition centres. Consequently, developers are
likely to delay or downsize their real estate plans at Indian airports.

Large captive market for MROs in India

Indias aviation market has witnessed strong growth in the past few years, with the fleet size of airline companies
increasing from 184 aircrafts in 2004-05 to 381 aircrafts in 2007-08. This has heightened the demand for MRO
facilities in India. Also, airline companies in India would gain considerable cost advantage by servicing an aircraft
in the country as compared to going abroad for the same. Therefore, there is ample untapped potential for MRO

CRISIL RESEARCH AIRPORT INFRASTRUCTURE ANNUAL REVIEW A-1

services in India, provided the players can achieve the necessary technology tie-ups. However, currently, the
domestic market only holds enough potential for a few players, as the number of aircrafts owned by airline
companies is not large enough at the moment to accommodate many players.

Low cost airports not viable in India

Low cost airports are normally set up in remote locations and are operated by low cost carriers. In India, the
possibility of attracting traffic to such far-flung areas is very low due to inadequate connectivity. In addition,
revenue streams from a low cost airport in India would be strained, as aeronautical revenues would be very
limited due to low airport charges to attract low cost carriers. Moreover, the potential to attract non-aeronautical
revenues by setting up malls and hotels in remote areas would also be very limited. Hence, setting up low cost
airports is not likely to be a lucrative venture in India over the medium term.

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 1.0 Passenger and cargo traffic: Review and outlook

Review
Overall passenger traffic and aircraft movement grew rapidly from 2002-03 to 2007-08, driven largely by the
advent of low cost carriers (LCCs), open skies policy and private airlines flying on international routes. Healthy
economic growth due to rising portfolio and capital investments in the country and increasing demand also
contributed to the passenger traffic growth and cargo movement during the period. Further, the arrival of LCCs
led to a sharp reduction in ticket prices, which in turn, spurred a new breed of customers for whom air travel
became affordable. The spurt in demand on account of reduction in prices led to purchase and lease of new
aircrafts, which led to an increase in capacities and passenger traffic.

However, with the economy witnessing considerable slowdown in 2008-09, both leisure and business travel
dipped significantly. Also, with lower consumption and a decrease in exports, cargo tonnage decreased
substantially as well. The CAGR of overall passenger and cargo movement from 2003-04 to 2008-09 has,
therefore, moderated to 17.6 per cent as compared to 21.6 per cent between 2002-03 and 2007-08.

Domestic passenger traffic declines in 2008-09; but 5-year growth remains healthy
Domestic passenger traffic, which increased at a CAGR of 24.5 per cent from 2002-03 to 2007-08, declined
substantially by 11.2 per cent y-o-y in 2008-09, owing to the economic slowdown and the resultant reduction in
spending on air travel. During 2002-03 to 2007-08, domestic passenger traffic clocked rapid growth on account of
the entry of many new airlines, and as most of these were low cost, the price point for air travel decreased. As a
result, both domestic aircraft movements and passenger traffic recorded a rise during the period. However, in
2008-09, the economic meltdown brought about a significant reduction in both leisure and business travellers, and
hence, resulted in a decline in passenger traffic.

Domestic aircraft movements (the number of take-offs and landings) increased at a CAGR of 15 per cent from
0.50 million in 2003-04 to 1.3 million in 2008-09. Meanwhile, domestic passenger traffic increased at a CAGR of
19 per cent from 32.1 million in 2003-04 to 77 million in 2008-09.

Figure 1: International and domestic passengers and growth rate

(million) (per cent)
100 50
90
40
80
70 30

60
20
50
10
40
30 0
20
-10
10
0 -20
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

International Passengers Domestic Passengers

Growth in International Passengers Growth in Domestic Passengers

Source: Airports Authority of India (AAI)

CRISIL RESEARCH AIRPORT INFRASTRUCTURE ANNUAL REVIEW A-3

Slow growth in international passenger traffic in 2008-09, though 5-year growth is robust
International aircraft movements have increased at a CAGR of 14 per cent from 0.14 million in 2003-04 to 0.27
million in 2008-09. International passenger traffic grew by a CAGR of 15 per cent between 2002-03 and 2007-08,
triggered by the open sky policy of the government and healthy economic growth during the period. However, in
2008-09, growth in international passenger traffic slowed down significantly as a result of the overall slump in the
global economy. Consequently, growth in international passenger traffic moderated to a CAGR of 13.7 per cent
from 16.6 million in 2003-04 to 31.6 million in 2008-09.

Figure 2: Total passenger movement and growth rate

(in millions) (per cent)

160 40

32

120
24

16
80
8

0
40

-8

0 -16
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Total Passengers Growth

Source: AAI

Healthy growth in overall aircraft and passenger traffic from 2003-04 to 2008-09
Aircraft movements increased from 0.64 million in 2003-04 to 1.3 million in 2008-09 at a CAGR of 15 per cent.
Passenger traffic registered a CAGR of 17.4 per cent during the same period.

Figure 3: Total traffic movement across major cities (q-o-q)

(in millions)
35

30

25

20

15

10

0
Q1 2006

Q2 2006

Q3 2006

Q4 2006

Q1 2007

Q2 2007

Q3 2007

Q4 2007

Q1 2008

Q2 2008

Q3 2008

Q4 2008

Q1 2009

Q2 2009

Q3 2009

Q4 2009

Mumbai Delhi Chennai Bangalore Kolkata Hyderabad Others

Source: AAI

A-4 CRISIL RESEARCH AIRPORT INFRASTRUCTURE ANNUAL REVIEW

Table 1: Quarter on quarter growth
Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009
Mumbai 27% 23% 18% 17% 16% 22% 18% 10% 4% -2% -27% -23%
Delhi 31% 26% 24% 23% 23% 21% 16% 11% 7% -9% -10% -27%
Chennai 39% 32% 34% 26% 27% 23% 16% 9% 0% -9% -8% -20%
Bangalore 59% 33% 29% 43% 42% 32% 22% 8% 1% -15% -23% -38%
Kolkata 47% 42% 31% 28% 30% 28% 27% 14% 6% -15% -8% -34%
Hyderabad 61% 51% 39% 31% 30% 26% 19% 13% 4% -12% -16% -34%
Others 43% 37% 38% 38% 37% 38% 27% 13% 12% -14% 6% -1%
Source:AAI

Cargo
International cargo traffic increased at a CAGR of 10 per cent from 0.69 million tonnes in 2003-04 to 1.1 million
tonnes in 2008-09. During the same period, domestic cargo tonnage expanded at a CAGR of 8 per cent from 0.37
million tonnes to 0.54 million tonnes. Owing to the economic slowdown, cargo movements declined by 1 per cent
y-o-y in 2008-09. As a result, overall cargo movements at Indian airports moderated to a CAGR of 9.7 per cent
from 1.06 million tonnes in 2003-04 to 1.7 million tonnes in 2008-09, as compared to the CAGR of 11.8 per cent
from 2002-03 to 2007-08.

Figure 4: International and domestic freight and growth rate

('000 tonnes) (per cent)

1400 25

1200 20

1000
15
800
10
600
5
400

200 0

0 -5
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

International Freight Domestic Freight

Growth in International Freight Growth in Domestic Freight

Source: AAI

Outlook
Passenger and cargo traffic growth rates to moderate, but remain impressive
From 2002-03 to 2007-08, overall passenger traffic and cargo tonnage witnessed strong growth, stimulated by
structural shifts with the arrival of LCCs and the open skies policy. Further, the extremely buoyant economic
conditions during the period led to increased business travel and freight movement.

CRISIL RESEARCH AIRPORT INFRASTRUCTURE ANNUAL REVIEW A-5

Figure 5: Projected passenger numbers and growth rate
(million) (per cent)

200 20
180
160 16
140
120 12
100
80 8
60
40 4
20
0 0
2009-10 2010-11 2011-12 2012-13 2013-14

Total Passenger Movement Growth rate

Source: CRISIL Research

Figure 6: Projected freight numbers and growth rate

('000 tonnes) (per cent)

3000

2500
12

2000

8
1500

1000
4
500

0 0
2009-10 2010-11 2011-12 2012-13 2013-14

Total freight movement Growth rate

Source: CRISIL Research

Box 1: Methodology
Pax-km
GDP and ticket prices are key determinants of domestic passenger traffic. CRISIL Research has carried out
regression with real GDP and ticket prices (inflation adjusted) to arrive at the projected pax-km till 2013-14.

Domestic passenger traffic

CRISIL Research has forecast the domestic passenger traffic by dividing pax-km with the average expected stage
length till 2013-14.

International passenger traffic

For projecting international passenger traffic, CRISIL Research has regressed the real GDP (Indian and world)
and ticket prices with international traffic numbers.

A-6 CRISIL RESEARCH AIRPORT INFRASTRUCTURE ANNUAL REVIEW

Going forward, CRISIL Research expects a moderation in the growth rates of both passenger traffic and cargo
tonnage due to relatively slower economic growth as compared to the past as well as the high base effect on
account of structural shifts in the aviation industry with the arrival of LCCs. Overall passenger traffic is expected
to increase at a healthy CAGR of 11.4 per cent from 108.7 million in 2008-09 to 187 million by 2013-14. Cargo
tonnage is expected to grow at a CAGR of 7.9 per cent from 1.7 million tonnes in 2008-09 to 2.5 million tonnes
by 2013-14, driven by steady growth in trade.

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 2.0 State of Indian airports

Metro and green-field airports to dominate investments going forward

CRISIL Research expects investments worth Rs 261 billion at Indian airports from 2009-10 to 2013-14. Of this,
more than 80 per cent of the investments would be towards upgradation of infrastructure at metro airports and
constructing greenfield airports.

Table 1: Investments at Indian airports (2009-10 to 2013-14)

Investment
Revised estimates during
project cost 2009-14 (Rs Expected
Airport (Rs billion) billion) completion date
DIAL 105 43 2010-11
MIAL 98 78 2013-14
Kolkata & Chennai Airport 46 46 2011-12
Greenfield airports (Goa, Pune, Navi 50 50 2013-14
Mumbai, Nagpur)
35 Non-metro airports 64 44 2011-12
Total 363 261
Source: CRISIL Research

Private airports
The construction of greenfield airports at Bangalore and Hyderabad has been completed in 2008. Modernisation
of the metro airports at Delhi (DIAL) and Mumbai (MIAL), which the government has handed over to private
operators under the public private partnership (PPP) model, is on track. The AAI has retained an ownership of 26
per cent in the airports, and the rest is held by private players. The private players (GMR and GVK) have to share
45.9 per cent of their revenues at the Delhi airport and 37.8 per cent at the Mumbai airport.

Significant capex incurred at DIAL; MIAL to lead investment plans, going forward
DIALs modernisation has been divided into two phases I and II. Of the total capex of Rs 105 billion attributed
towards Phase 1, Rs 62 billion has so far been spent. Phase 1 is expected to be complete by March 2010 and Phase
2 in 2035.

As for the Mumbai airport, out of the total capex of Rs 98 billion, only Rs 23 billion has been spent so far. The
interim phase of Mumbai airport was completed in 2008, while Phase-1 is currently underway.

Commissioning schedule of DIAL more stringent as compared to other major airports

DIAL is carrying out its modernisation program at an accelerated rate to meet the deadline of March 2010, in line
with the upcoming Commonwealth Games. The timelines fixed by DIAL are very stringent as compared to those
fixed by other international airports like Changi, Heathrow and Beijing, which are also undergoing modernisation.

CRISIL RESEARCH AIRPORT INFRASTRUCTURE ANNUAL REVIEW A-9

Table 2: Commissioning schedule of various airports
Airport Capacity (in million) Time (in months)
Changi 22 76
Heathrow T5 25 60
Beijing Airport T3 45 60
IGI Airport T3 34 37
Source: CRISIL Research

AAI managed airports

As per the Eleventh Plan, the Airport Authority of India (AAI) has earmarked a sum of Rs 124 billion towards
modernisation and construction of airports in India. The execution of expansion plans is taking longer than
expected.

AAI plans to raise about Rs 50 billion through infrastructure bonds (Rs 40 billion from institutions, and Rs 10
billion from the public) and the remaining through internal accruals. Capex for 2009-10 has been pegged at about
Rs 32 billion; of this, around Rs 20 billion will be raised through fresh borrowings, and the rest through internal
accruals. Of the total outlay for the current year, around Rs 15 billion is being spent for the modernisation of the
Kolkata and Chennai airports and the balance is being spent on non-metro airports.

Chennai and Kolkata airports accounting for lions share of investment plans
The modernisation of Chennai and Kolkata airports are being undertaken by the Airport Authority of India (AAI)
and will entail a capex of Rs 23 billion each. The development work will include construction of new terminals,
additional runways and taxiways in both the airports. Modernisation of Chennai airport envisages the
development of a new integrated modern terminal building with an annual handling capacity of 10 million
passengers. It also has provisions to integrate the existing terminals along with the new terminal building over a
period of time. This will result in an overall handling capacity of 22 million domestic passengers and 8 million
international passengers by 2015-16.

At the Kolkata airport, AAI is building an integrated passenger terminal capable of handling 20 million
passengers per annum; this will be sufficient to meet demand till 2015-16.

Both Kolkata and Chennai airport projects were awarded in October 2008 and their construction work is
underway.

Non-metro airports
AAI has identified 35 non-metro airports for modernisation, and has completed air-side development for nearly
eight of these. Air-side work has been completed for the airports at: Vizag (Andhra Pradesh), Surat (Gujarat),
Aurangabad (Maharashtra), Nagpur (Maharashtra), Jaipur (Rajasthan), Udaipur (Rajasthan) Trichy (Tamil Nadu),
Dehradun (Uttarakhand).

The city-side development, which includes commercial development of property, car park and cargo operation, is
yet to begin. The city-side development for 24 airports would be done by the private players under the PPP model.
The 24 airports include Ahmedabad, Amritsar, Guwahati, Jaipur, Udaipur, Thiruvananathapuram, Lucknow,

A-10 CRISIL RESEARCH AIRPORT INFRASTRUCTURE ANNUAL REVIEW

Madurai, Mangalore, Aurangabad, Khajuraho, Rajkot, Vadodara, Bhopal, Indore, Raipur, Vizag, Trichy,
Bhubaneshwar, Varanasi, Agatti, Dehradun, Ranchi and Dimapur. Request for Qualification (RFQ) for Amritsar
and Udaipur has already been issued. Development works at additional 13 non-metro airports are being
undertaken for completion in a similar timeframe.

Significant cost escalation in capex plans of metro airports

Table 3: Sources of funding-DIAL Table 4: Sources of funding-MIAL

Current status
Current of amount
status of Contribution spent
Contribution amount spent Source (in Rs billion) (in Rs billion)
Source (in Rs billion) (in Rs billion) Equity 12 4
Equity (including internal accruals) 13 12 Debt 42 18
Development fees 18 - Internal accruals 18 -
Advance against lease deposits 9 13 Development fees 15
Debt 65 37 Advance against lease deposits 11 -
Total 105 62 Total 98 22
Source: GMR website Source: GVK

There has been significant cost escalation in the capex plans of DIAL, MIAL, Kolkata and Chennai airports. The
overall project costs for DIAL and MIAL, which had been initially planned at Rs 89 billion and Rs 76 billion,
have increased to Rs 105 billion and Rs 98 billion, respectively. On the other hand, the project costs for Chennai
and Kolkata airports has increased from an estimated Rs 37 billion to Rs 46 billion. This revision has been
attributed to an increase in overall construction costs. We expect the additional capex for DIAL to come from
debt.

Levy of UDF and ADF to bridge financing gap

Table 5: UDF and ADF charges levied at airports

Domestic (in International (in
Airport Rs) Rs) Commencement
GHIAL 375 1000 Dom-Aug'08, Intl-Mar'08
DIAL 200 1300 Feb'09
MIAL 100 600 Dom-Aug'08, Intl-Apr'08
BIAL 260 1070 Dom-Jan'09, Intl-July'08
Note: Dom-Domestic, Intl-International

MIAL and DIAL levy ADF charges while other airports charge UDF
Source: Airport websites

Development fee is an aeronautical source of revenue for the airport. The Airport Development Fee (ADF) is
levied to part fund future expansion plans, while the User Development Fee (UDF) is charged after a new airport
is ready to recover the capital costs incurred and for the maintenance and management of the airport.

The Mumbai and Delhi airports have been levying ADF on passengers, as both are currently undergoing
significant expansion, and the amount received as ADF will aid in bridging the funding gap. On the other hand,
GHIAL and BIAL have been levying development fees for the existing facilities at the airports. The amount
received as UDF will help in recovering the capital costs incurred in setting up these facilities.

CRISIL RESEARCH AIRPORT INFRASTRUCTURE ANNUAL REVIEW A-11

Income received as ADF cannot exceed a particular limit, and also, airport developers cannot levy development
fees beyond the set threshold. The ceiling for ADF is Rs 15 billion in the case of MIAL, and Rs 18 billion for
DIAL.

UDF to be levied at other metro and non-metro airports

AAI has proposed to charge UDF (approval awaited) at Jaipur, Udaipur, Amritsar, Cochin, Vizag, Mangalore,
Trivandrum, Kolkata, Chennai, Lucknow, Varanasi, and Ahmedabad airports as well. AAI has proposed a charge
of around Rs 300 per airport for domestic passengers and $20 per airport for international passengers.

Additional infrastructure, good connectivity to boost economic activity at airports

With more space and additional facilities at Indian airports owing to the construction of green-field airports and
upgradation of existing ones, overall economic activity at the airport and in surrounding areas is likely to expand
significantly.

Congestion at airports to reduce

Indias top six airports, which handle about 70 per cent of the traffic, are heavily congested and are operating way
above their handling capabilities. However, with the upswing in investments in airport infrastructure, most of
these airports are getting modernised, resulting in additional seating capacity, lower time at check-in counters and
security check. Therefore, with additional space and improved quality standards, the congestion at these airports is
expected to reduce in the short to medium term.

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 3.0 Retail development at airports

Mirroring the trend in other major international airports, Indian airports are also increasingly focusing on non-
aeronautical revenues to maximise the return on capital invested. Retail revenues, which form a dominant chunk
of the overall non-aero revenues of an airport, have been rising steadily at airports in India. Increase in income
from retail space is directly proportional to the growth in passenger traffic. The limited choice for food and
beverages on low cost airlines has triggered an increase in the number of passengers spending on food items at
airports. Also, with passengers arriving at airports earlier than before due to stringent security measures, the time
available for shopping at airports has increased.

Figure 1: Non-aero revenue per passenger at Indian airports on the rise

(in Rs.)
250

202
200
171 167

150
123
107
100
78

50

0
DIAL* MIAL

FY07 FY08 FY09

Source: DIAL, MIAL

Non-aero revenues consist of income from retail, real estate, advertising, car parking, etc. With airport
modernisation taking place at both MIAL and DIAL under the PPP route, available space for retail and other
activities at the airports have gone up significantly and many retail outlets have come up at the two airports,
thereby presenting passengers with a wide array of products and inducing them to spend more. Also, the space for
facilities like car parking, etc has gone up. With improved facilities at airports, private players have increased the
charges at airports. Consequently, the non-aeronautical revenue per passenger at both DIAL and MIAL has gone
up over the past 3 years at a CAGR of 37 per cent and 47 per cent, respectively. Hyderabad and Bangalore
airports have also been witnessing a similar trend of increasing spending on retail.

Retail segment to remain under pressure; Food & Beverages to perform well domestically

Retail development at airports can be divided into three broad segments:

Regular retail
Duty-free shopping
Food and beverages (F&B)

CRISIL RESEARCH AIRPORT INFRASTRUCTURE ANNUAL REVIEW A-13

Regular retail
Regular retail comprises shops selling apparels, watches, sunglasses, book stores, shops selling gift items, etc.
Gold and diamond jewellery also forms a part of these shops at Indian airports. Regular retail shops at various
Indian airports have been facing difficult times, as most people prefer to buy products from malls and branded
showrooms. However, low value items such as books, toys, gift items, etc will continue to do well as these are
impulse purchase items.

Duty-free shopping
Duty-free shopping in India is still in its nascent stages and has been registering subdued growth on the whole,
owing to the economic downturn and decreased spending pattern of passengers. For instance, revenues from duty-
free shopping at MIAL fell by 12 per cent y-o-y during the first quarter of 2009-10. However, Cochin
International Airport (CIAL), which has one of the largest spaces for duty-free shopping with about 14,000 sq ft,
has been an exception, with duty-free shops acting as a major source of revenue for the airport. .

Overall duty-free shopping in India has been struggling primarily due to competition from other airports. For
example, the Dubai airport gives bulk discounts that are significantly higher than those offered by Indian airports.
Revenue from departures has been particularly strained as a result of restrictions placed in other (arriving) airports
for wines, spirits and other liquid items.

Airport developers are planning to adopt various promotional strategies such as offering discounts and introducing
local specialty products to their shops. For instance, at GHIAL, shops selling local speciality products such as
Hyderabad bangles and Bombay stores (for gift items) and Landmark outlets with special shops for kids have
been set up to attract more shoppers. Despite promotional strategies being undertaken by airports, they will
continue to face stiff competition from airports at Frankfurt, Dubai, Singapore, etc, which have the ability to offer
large volume discounts as they are transit hubs and attract larger traffic.

Food and beverages

The food and beverages segment at airports has been performing well domestically, owing to factors such as wide
spread of delicacies to suit the preferences of passengers from various geographical destinations, hygiene factor
and the increasing number of low cost carriers, wherein food and beverages are not part of the ticket price.
However, in the international segment, this sector is struggling due to lower presence of low cost carriers and
availability of quality food aboard airlines. Consequently, airports are presently altering and upgrading their
offerings to meet the needs and spending patterns of international passengers.

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 4.0 Real estate development at Indian airports

Business models for real estate development

Real estate development at airports could adhere to any of the following business models:

Joint venture- Here, the airport developer leases the land and the other party bears the construction cost. The
revenue earned is shared between the two parties equally.

Self development- In this case, airport developer carries out all the activities such as undertaking construction of
the building on the available land and using it for commercial activities. Consequently, the revenue need not be
shared with any other party.

Leased land- In this case, the airport developer leases out the land and receives lease rentals and advance
deposits irrespective of the performance of the business.

Table 1: Upcoming real estate development at Indias major airports

Land available for
Airport development Real estate development plans
GHIAL 1000 acres Commercial development (service apartments,
budget & luxury hotels)
250 acres Multi-product SEZ (IT & IT enabled services, Bio-
technology, Textile (Garment & apparels) and
electronics industries in processing zone.)

250 acres Aviation sector-specific SEZ-Aircraft Maintenance

and Manufacturing, Assembling or Repairing of
Avionics Components.

DIAL 250 acres Phase-1: Hospitality district spread over 45 acres

and will house hotels from luxury to budget
categories.

MIAL 198 acres Planning to develop the entire land over the next
10-15 years starting from March 2010. Focus on
luxury and budget hotels.

BIAL 215 acres Office parks, retail and entertainment and

hospitality.

CIAL 450 acres Aircraft Maintenance, Repair and Overhaul facility,

Aviation Academy, Star/Budget Hotels, 18 Hole
Golf Course, Convention / Exhibition Centre,
Logistics Centre, IT park, Amusement Park,
Cultural Village, etc.

Source: Airport websites

Capex and development plans delayed due to slowdown in commercial real estate
Real estate development at airports has slowed down due to the deceleration in commercial real estate activity. To
meet the real estate development planned at the major airports in India, various capex plans have been laid out.
GHIAL has planned a capex of Rs 5-6 billion for the next 3-4 years, which includes investments for multi-product
SEZ, Aviation-specific SEZ (MRO facility) and the entire commercial development planned at the airport. Of
this, about Rs 1-1.5 billion would be directed towards the development of each SEZ. The entire stretch of land is
expected to be developed over a period of 15 years. MIAL has also earmarked about 20 million sq ft of land for

CRISIL RESEARCH AIRPORT INFRASTRUCTURE ANNUAL REVIEW A-15

real estate development; of this, a significant portion would be set aside for hospitality development. Around 2-3
million sq ft will be developed over the next 3 years and about 0.5 million sq ft by March 2010. Similarly, out of
its total land bank of 5,100 acres, DIAL plans to utilise around 250 acres for commercial development; the
hospitality district will account for a large portion of this development.

Sources of revenue from real estate

Some sources of revenue from real estate development planned at Indian airports have been listed below:

Multiproduct SEZs- Multiproduct SEZs at Indian airports include IT and IT enabled services, bio-
technology, textile (garment and apparels) and electronics industries. SEZs also include aviation-specific SEZs,
comprising MRO facilities. These face stiff competition from other SEZs.

Hospitality district- The hospitality industry is directly correlated with the travel sector in India. Therefore, the
expected surge in passenger traffic has encouraged the setting up of hospitality districts in Indian airports, wherein
a number of luxury hotels would be built. For instance, the Delhi airport (DIAL) has planned an Aerocity, which
would be spread across an area of over 45 acres and wherein hotels belonging to all categories, ranging from
luxury to budget, would be built. 22 acres have already been bid out to Hyatt, Accor, Lemon tree, Dusit. However,
the occupancy rates at these hotels would depend on both passenger traffic and the extent of economic activity
around the airports. Increase in economic activity, that is, more number of commercial buildings around the
airports, would prompt business travelers to choose hotels in proximity to the airports for their stay. The
oversupply of hotel rooms across cities is likely to pressurise returns for the airports.

Cargo centre- Revenues of cargo facilities at airports are dependent on the economic activity in surrounding
areas. Airports give volume discounts to freighters and airlines to boost cargo volumes. Also, adequate runway
length without any restriction on payload capacity, good connectivity and marketing aid in increasing cargo
volumes. This segment is likely to witness higher growth at certain well-located airports.

Logistics park- Logistics parks are also part of the real estate development planned at airports. They include
pharma (bulk drug formulations), assembly packaging unit, apparels (sampling units), cold chain distribution
centre, international blood bank, etc. These are likely to see huge competition from other logistics parks and
SEZs.

Revenues from real estate to remain strained

The existing business environment has lead to an overall slowdown in expansion of real estate business during the
short term. With many IT Parks/SEZs already operating in major cities in India, the supply coming up at the
airports is likely to face tough competition, thereby exerting pressure on the lease rentals. Secondary benefits of
additional traffic on the back of overall economic activity are also expected to be limited. The hospitality district
will face competition from existing hotels around the airports. The occupancy rate will depend on the economic
activity around the airport and the ability to attract business travellers. With economic activity currently at very
low levels, revenues from the hospitality district would be low in the short term.

Further, revenues from convention/exhibition centre will depend on the ability of the airport to attract business
travellers. In the current economic environment, revenues from this business would be strained given the spending
pattern of the corporates.

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 5.0 Maintenance, repair and overhaul (MRO)

Definition
Maintenance, repair and overhaul (MRO) refers to activities associated with the effective maintenance of an
aircraft. MRO-related costs constitute a major portion of the total costs incurred by an airline.

Need for MRO

MRO is imperative for an aircraft primarily because of safety reasons. Besides this, timely maintenance checks
also aids in lowering the costs incurred on repair and improving the overall efficiency of the aircraft. The intervals
at which maintenance of aircrafts must be carried out depend on various factors such as the age of the aircraft,
number of take-offs and landings, total hours flown by the aircraft, etc. Due to its labour intensive nature, MRO
activities have been outsourced by several airline companies.

Classification
The MRO segment may be classified into:

Airframe heavy and modification

The term airframe refers to the mechanical structure of an aircraft. Airframe maintenance comprises structural
modifications, landing gear repair, engine changes and regular calendar checks. Labour cost is a major cost
component (around 65 per cent) of this segment.

Engine maintenance
Engine maintenance is the largest MRO segment and includes dismantling, inspecting, assembling and testing
aircraft engines. About 35 per cent of the total maintenance expenditure of an aircraft is attributed to this segment.
Material cost and labour cost are the major cost components of this segment, accounting for around 60 per cent
and 22 per cent, respectively.

Line maintenance
Line maintenance of an aircraft includes both minor as well as major aircraft checks and repairs. This segment is
highly labour intensive. At present, only 15 per cent of line maintenance is outsourced, thereby presenting
considerable potential for growth.

Component maintenance
An aircraft has several components and each component performs a unique function. These components have to
be maintained effectively for ensuring smooth performance of an aircraft. About 70 per cent of this segment is
currently outsourced.

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Business model of an MRO facility at an airport

An airport would consider setting up an MRO facility in two ways:

a. As a land lord The airport leases land to an MRO company. Here, income would be in the form of lease
rentals. Upside potential in margins would be limited as the airport developer does not participate in the business.

b. As a JV partner- The airport provides land and infrastructure and the JV partner would bring in technical
expertise as well as a share in revenues of the facility.

Capex, land requirement and break-even period

The minimum investment required for an MRO facility at an airport is about US$60-100 million. The minimum
land area required is about 15-20 acres. Further, the break-even period for the facility depends on the number of
aircrafts serviced and the type of service rendered. On an average, the MRO facility takes around 3-5 years to
break even.

Key success factors

Price- Pricing is main determinant of success for an MRO facility at an airport. The price at which the
aircraft is serviced should be competitive enough to attract aircrafts from India as well as abroad.

Quality- The quality of service is the next essential factor determining the success of an airport MRO
facility.

Turnaround time- The turnaround time, that is, the time taken to service the aircraft, also plays a key role
in the success of a MRO facility.

Technological tie-ups- Adequate technological expertise is necessary to carry on MRO services at an

airport. For this, the MRO company must have suitable technological tie-ups.

Availability of skilled labour Every division of a MRO facility demands specialised and certified skill-
sets. Hence, the presence of a highly skilled workforce is essential.

Infrastructure for an MRO facility

An MRO facility at an airport would require the following infrastructure:

Hangar
A hangar is an enclosed structure designed to hold aircraft in protective storage. Most modern hangars are built of
metal, but wood and concrete are also commonly used. Hangars protect aircraft from weather and ultraviolet light.

An MRO facility at an airport requires several hangars to accommodate the wide-bodied and small aircrafts that
are to be serviced.

Taxiway
A taxiway is a path on an airport connecting runways with ramps, hangars, terminals and other facilities. They
mostly have hard surface such as asphalt or concrete, although smaller airports sometimes use gravel or grass.

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Adequate number of taxiways are essential for an airport MRO facility as the aircrafts have to be towed via
taxiways to their hangars.

Skilled labor
The facility requires the services of skilled engineers to carry out maintenance and repair operations.

Dedicated electricity, water supply and sewerage system

Dedicated electricity, water supply and sewerage system are essential to cater to the needs of the MRO facility.

Global MRO market

Major international MRO hubs include North America, Western Europe, South America, Middle East and Africa.
North America commands the highest market share of about 30 per cent, followed by Western Europe with a
market share of about 20-25 per cent. The largest airline MRO in North America is Delta TechOps, which
generated more than $500 million in revenues in 2008.

Going forward, the market share of the Asia Pacific region is likely to increase significantly, as over the next few
years, a dominant portion of overall air traffic would be to, from or within this region.

Global examples
Lufthansa Technik
Lufthansa Technik is the worlds leading provider of maintenance, repair and overhaul services (MRO) for
commercial aircrafts. The Lufthansa Technik Group is subdivided into six product divisions: maintenance, aircraft
overhaul, engines, components, landing gear and VIP aircraft completion and maintenance. As a full provider, it
offers variously structured products and product combinations, from individual repair of a component to the fully
integrated support for entire fleets.

Hamburg is its most important facility for maintenance operations, which include aircraft overhaul, engine and
component overhaul as well as for logistics and for design and production. The largest maintenance stations are at
Frankfurt, Munich and Berlin. Other stations exist at all large German airports and at 50 other locations
worldwide.

Lufthansa Technik has opened a new company for aircraft overhaul in Bulgaria as well. Lufthansa Technik Sofia,
a joint venture between Lufthansa Technik (80 per cent) and the Bulgarian Aviation Group (20 per cent), is
situated at the airport of the Bulgarian capital. Over 350 highly qualified staffers are overhauling short- and
medium-haul Airbus and Boeing aircraft.

In 2008, the companys revenues increased by 4.1 per cent y-o-y to 3.7 billion euros, and its pre-tax profit rose by
2.6 per cent y-o-y to 295 million euros, with a PBT margin of 7.9 per cent. Income generated through MRO
services offered to Lufthansa Group Carriers accounted for 41 per cent of the companys revenues.

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Indian opportunity
With the Indian aviation industry posting strong growth in the past few years, there is ample growth potential for
support industries like MRO. India is a potential MRO hub due to the following reasons:

Location

Establishing an MRO hub in India will reduce the costs of domestic airline companies considerably, as they would
be able to save on the cost of sending their aircrafts to Dubai, China and Malaysia for maintenance. On the other
hand, international carriers plying on Indian routes would be able to have their aircraft serviced in India at lower
costs.

Location is advantageous to aircrafts in India in the following ways:

Savings in time
An MRO facility in India would save a lot of flying time for aircrafts in the country. An aircraft has to fly for
about 4-5 hours to be get serviced in Malaysia, and only 1.5-2 hours to reach an MRO facility in an Indian city.

Savings in fuel
The distance between India and Malaysia is about 3,250 km, whereas an airline only needs to travel 1,200 km to
reach an MRO facility in India. The additional fuel spent on flying the extra distance would be saved if the
servicing is done in the country.

Avoids loss of revenue

To get the aircraft serviced in Malaysia, the airline must travel to and back from Malaysia without passengers,
resulting in significant loss of revenue for the airline.

Avoids cumbersome registration process

To get an aircraft serviced abroad, the airline must get itself registered with the DGCA and the customs officials.
Also, once the aircraft returns to India after getting serviced, it has to re-register itself with the DGCA and
customs officials. This results in additional cost and delays for the airline.

Large captive market

Table 1: Fleet size of airline companies in India

Airlines 2004-05 2005-06 2006-07 2007-08
Indian 67 70 74 92
Jet Airways 42 53 63 81
Air India 37 42 48 54
Kingfisher Red 16 29 39 41
Kingfisher - 11 25 41
Jetlite 22 29 27 25
SpiceJet - 5 11 19
Indigo - - 8 17
GoAir - 3 5 6
Paramount - 1 5 5
Total 184 243 305 381
Source: DGCA

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Indias aviation market has been witnessing strong growth over the past few years. The fleet size of airline
companies increased at a CAGR of 27 per cent from 2004-05 to 2007-08, thereby heightening the need for MRO
facilities in India.

High entry barrier

Setting up an MRO facility requires technical expertise and technological tie-ups. Due to the resultant high
entry barrier, the possibility of competition is very low.

Not capital intensive

The MRO business is not capital intensive, and only requires investments worth around US$60-100 million.
Hence, the funding requirements are low.

Increasing competition
The advent of low-cost carriers has increased competition in the industry, thereby increasing the need to
service aircrafts locally and keep costs low.

Upcoming MRO facilities at Indian airports

MRO facility at GHIAL

The GMR Groups GMR Hyderabad International Airport Ltd (GHIAL) and MAS Engineering &
Maintenance have recently entered into a joint venture to set up an MRO facility at the airport, involving an
outlay of US$50-70 million. The facility will comprise training and maintenance services for both narrow and
wide body aircrafts.

MRO facility at Nagpur

Aircraft manufacturer Boeing is planning to invest $100 million in the Nagpur SEZ to set up a MRO facility.
In this regard, Boeing has signed a lease agreement with Maharashtra Airport Development Company
(MADC), the developer of the SEZ for allotment of 50 acres of land.

In addition to providing the land, MADC is likely to construct a taxiway from the existing runway at the
international airport to allow Boeing to tow aircraft to its hangars. Air India is partnering with Boeing in the
venture and would be providing technical expertise and support in running the MRO. Aircraft maintenance is
a new business area for Boeing, while Air India is well experienced in the field.

Boeings investment in the MRO base is part of its deal with Air India, which has given the aircraft major a
huge order for 68 aircrafts. 23 of these aircrafts have already been delivered.

The MRO facility would focus on heavy maintenance work for wide-bodies, such as Boeing 777s and 787s. It
would not seek to serve narrow-bodies as Air India already has a MRO to take care of such aircrafts.

CRISIL RESEARCH AIRPORT INFRASTRUCTURE ANNUAL REVIEW A-21

Bottlenecks

Cumbersome procedure for acquiring land

The MRO facility must be ideally located near the airport. However, the procedure for acquiring land is
cumbersome and time-consuming, thus discouraging many potential MRO players.

Unfavourable tax regime

The current tax regime is not conducive for growth of MRO facilities in India. MRO business in India attracts
10.3 per cent service tax. Also, it attracts customs duty on parts imported for maintenance, repair and
overhaul. This takes a toll on the margins of the business.

Growing global competition

The Dubai MRO hub that is presently being developed would prove to be a strong competitor due to the low
tax regime and its proximity to the Middle-East market. Also, competition from players in China and
Malaysia, where the cost of servicing is very low, will influence margins.

Skilled manpower is scarce

Manpower for every segment in MRO is specialised and the availability for the same in India is low.

MRO business in India holds ample potential

Setting up an MRO facility in India can be a profitable venture given the growing fleet size of airline companies
in India and the necessity to service aircrafts regularly. The first few players entering the market will have the first
mover advantage and will be able to garner significant market share in the field, as the Indian market would only
be able to accommodate 2-3 large players. The presence of an MRO facility in India saves considerable cost for
airline companies and will, therefore, prove beneficial to the airline services industry in India.

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 6.0 Low cost airports

Low cost airports or no-frills airports provide only essential facilities required by passengers to board and get
off an aircraft.

Differentiating characteristics vis--vis traditional airports

Some factors that differentiate a low cost airport from traditional ones have been enumerated below:

Only low cost carriers allowed to take-off and land

Low airport charges
Less space provided for food, beverages, retail shops, entertainment as these activities are of secondary
importance in a low cost airport given that passengers commuting via a low cost airport are less likely to
spend on these items.
Aerobridges and conveyor belts not provided
Only economy lounges would be provided
Minimal catering and cleaning facilities present (staff and equipment)
Minimal expenditure in terms of offices and check in desks

Low cost airport model - Is it feasible globally?

Low cost airports have been operating across the world for a while now. The concept was triggered by the need
for secondary airports to reduce the congestion at the main airports. Majority of these airports have been built out
of vacant military bases with minimum infrastructure and levy low airport charges. Most of them have been built
close to a major city, and in some cases, on the border of two countries, as in the case of the Buffalo Niagara
International Airport, which is located on the border of the US and Canada. Proximity to major cities ensures the
presence of dense population around the airport, which in turn, translates into high passenger traffic. In the case of
Buffalo Niagara International Airport, it has been successful in attracting a major portion of Canadian passengers
by offering lower ticket fares as compared to Canadian airports.

Low cost airports abroad have been successful in cases where the dependence on passenger-related activities has
been kept low, incentives have been offered to airlines and connectivity to the airport is well established.

Key factors driving the success of low cost airports

Location
Location is of primary importance for the success of a low cost airport. It must be situated close to densely
populated cities which have congested primary airports. This will aid in attracting sufficient passenger traffic to
the airport.

Pricing and efficiency

Airport charges at low cost airports should be significantly lesser than those at major airports, so as to encourage
low cost carriers to operate from remote towns. Also, given that most passengers to these airports would be highly

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time-sensitive and do not prefer boarding flights from congested airports, the turnaround time at the airport is a
vital factor.

Limited dependence on revenues from passenger-related activities

Low cost airports which have lower dependence on revenues from passenger-related activities and have diverse
sources of revenue find it easier to clock profits. For instance, the Glasgow Prestwick airport (Southern Scotland)
derives only 30 per cent of its revenues from landing fees and retail income, which are dependent on the extent of
passenger traffic at the airport. The remaining comes from freight (34 per cent), property related income (20 per
cent) and military, training and other aviation services (16 per cent). Therefore, the impact of a dip in passenger
traffic is relatively less in an airport that has varied sources of income.

Figure 1: Break-up of Glasgow Prestwick revenue

(Per cent)

Income from
Property related
passenger related
income
activity (landing fees
20
& retail income)
30

Military, training and

other aviation
services
16

Freight
34

Source: Airport Website

Incentives to airlines
Attracting airlines to operate from the airport and retaining them is a key success factor for low cost airports.
Consequently, airlines are paid certain incentives to land at the airport. For example, Ryan Air is offered payment
for landing at the Glasgow Prestwick airport due to the belief that the airline would bring in economic benefits to
the region. Also, at the Charleroi Brussels airport, Ryan air is given incentives such as reduction in airport fares
and ground handling charges, one-shot flat rate incentives for starting up new routes, such as contribution to
recruitment costs, hotels etc.

Established connectivity and discount on fares

Another important factor contributing to the success of low cost airports globally is their overall connectivity.
Established accessibility to the airport by road and rail ensures higher passenger and cargo traffic. In addition to
this, passengers are also given discounts on rail fares for traveling to the airport. For instance, passengers traveling
to the Glasgow Prestwick airport from Glasgow town are given a discount of 50 per cent on their rail fare.

Bottlenecks faced by low cost airports globally

The low cost model has not proved successful for some airports abroad, causing them to record losses. The key
reasons for the same are:

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Inability to levy ADF
Low cost airports cannot levy airport development fee to recover the capital costs incurred by them, as this would
prompt low cost airlines to pull out. This eventually takes a toll on the financials of the airport.

Low revenue streams

As the airport charges are kept at reduced rates so as to attract low cost carriers, these airports earn low
aeronautical revenues. Their non-aeronautical revenues are dependent on ancillary activities undertaken by the
airport, which compete with other real estate avenues in surrounding areas. As a result, the revenue streams of
these airports are low and involve lot of risk.

Global examples
Germanys Frankfurt Hahn
Frankfurt-Hahn, which is one of the smaller airports in Germany, is situated 120 km from Frankfurt city. It has
developed from a small provincial airport into a competitive centre for low-cost aviation in Germany. As the
airport charges are less due to its remote location, it is popular with many low cost carriers. Ryan Air uses the
airport as its main base. Other low cost airlines using this airport are Iceland Express and Wizz Air. Since 1993, in
just 15 years of operations, the airport has become the 11th-largest passenger airport and the fourth-largest cargo
airport in Germany.

Shareholders
Federal states of Rheinland and Hesse are the major shareholders of the airport, with a stake of 82.5 per cent and
17.5 per cent, respectively.

Infrastructure at the airport

Frankfurt-Hahn has a long runway of 3,800 meters (12,467 feet). This combined with a large apron allows it to
handle larger aircraft such as the Antonov An-124 or Boeing 747. Similar to a normal airport, it has check-in
counters and information desks, catering, shops, newspapers, seating, security checks, toilets for the disabled,
visitors' terrace, parking spaces, rental cars, a large bus station, a hotel and even a lounge. The main difference is
the unavailability of any passenger boarding bridges. In Hahn, the passengers walk directly over the apron to the
waiting aircraft through fenced off alley-ways.

Connectivity
Frankfurt-Hahn airport is well-connected by road and rail, which offsets the disadvantages of its remote location.
Hahn is fairly well accessible by road, with the nearest (highway) connections at a distance of approximately 40
km from the airport. Frankfurt-Hahn is served by a number of private bus operators that run regular services to
Frankfurt (1 hour 45 minutes, via Frankfurt International Airport), Cologne (2 hours 15 minutes), Luxembourg (1
hour 45 minutes) and a number of other cities in western Germany.

The airport has no railway station (it has a freight-railway connection only). The nearest local railway station is 15
km from the airport. Frequency of bus services to major railway stations of nearby cities, the closest being Mainz
(1 hour 10 minutes), is good.

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Cargo services
Frankfurt-Hahn also handles cargo traffic, which is its second important business. The airport is the fourth-largest
freight airport in Germany after Frankfurt, Cologne and Munich.

Growth in passenger and cargo traffic

During its first year of commercial operations, merely 7,000 passengers per year travelled from and to Hahn;
today, the figure stands at more than 10,000 per day. To attract more passengers, the airport offers price cuts to
destinations such as France, Great Britain, Ireland, Italy, Spain, Scandinavia, Island, Poland and Hungary. In the
holiday season, large tour operators such as FlyCar organise charter flights to popular summer and holiday areas
like the Swedish Lappland.
Cargo traffic has also grown significantly over the years, recording 1,79,375 tonnes in 2008.

Airport not profitable despite higher passenger traffic

In spite of the rise in passenger traffic over the years, the airport has not been able to make profits. To boost its
profitability, expansion of commercial services (retail, food & beverage and other services) and better utilisation
of the land around the airport is being planned. Also, to increase the efficiency of the airport, expansion of its
terminal is being planned from the current 800 sq m to 4,500 sq m. The move is part of a 120 million
modernisation of the airport, which began last year and will continue till 2011. The planned expansion will take
the capacity to about 8 million passengers per annum.

To recover the capex spent on modernisation and to enhance profitability, the airport had proposed to impose
Airport Development Fee (ADF). However, as its main airline, Ryan Air strongly opposed the same and
threatened to withdraw from the airport, the proposal was cancelled.

Brussels Charleroi airport

Airport Brussels Charleroi, which is an airport of moderate size in Belgium, is located 60 km from the centre of
Brussels. The airport is popular for short trips to the city, and is used by low cost airlines for domestic,
international and transcontinental flights. Airlines that have hubs at Brussels Charleroi include Jetairfly and
Ryanair. Other airlines operating at the airport are Air Arabia, Jet4you and Wizz Air.

Location and connectivity - The airports main assets

The airport is located 60 km from the centre of Brussels, and hourly coach shuttles link it to the city. This easy
and quick access to Brussels helps the airport attract tremendous passenger traffic.

Key success factors

The Charleroi airport thrives on the following:
A large and densely populated catchment area
Easy access
Proximity to Brussels
Strong growth, on the back of its main customer, Ryanair
Highly competitive charges

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Shareholding
The main shareholders of the airport are Societe Wallonne des aroports (SOWAER) and R.W Loco SOGEPA,
with a stake of 49 per cent and 28 per cent, respectively. Both companies are owned by the Belgian state
government.

Passenger growth
Brussels Charleroi Airport has been witnessing steady growth in passenger traffic; the traffic increased by 20 per
cent y-o-y in 2008 to 2,957,026.

Non-aeronautical revenues drive profitability of airport

The Brussels Charleroi airport had anticipated losses until 2005 when it had signed a 10-year deal in 2001 with
Ryan Air. The airport recorded profits in April 2004, and has been consistently profitable since then. The profits
were the result of the 76 per cent jump in non-aeronautical revenues, driven by duty-free sales.

However, globally, low cost airports have found it difficult to operate successfully, and have been heavily
dependent on non-aeronautical revenues to survive.

Indian scenario
A low cost airport in India will offer enhanced connectivity across the country and help in rationalising the costs
incurred by the airlines due to high fuel prices and airport charges. Moreover, it will help low cost carriers to land
and take-off faster, and also, will help in decongesting traffic at major airports.

Passengers will benefit through shorter distance between terminals, less waiting time for baggage retrieval and
cheaper car parking.

Low capital costs - A plus

A low-cost airport requires significantly lower capital outlay as compared to a primary airport, and therefore helps
in attracting potential investors. A typical low cost airport in India can be set up with a capital investment of about
Rs 400-500 million.

Upcoming low cost airports in India

Plans to set up low cost airports in India have been initiated and the following locations are being considered for
the purpose :

Maharashtra Kolhapur, Latur, Yavatmal, Ratnagiri, Nanded, Osmanabad, Sholapur, Karad, Sangli, Amravati,
Gondia, Baramati, Shirdi, Jalgaon, Solapur, Akola

Karnataka - Shimoga, Gulbarga, Hassan, Bijapur, Bellary, Karwar

Andhra Pradesh - Nellore, Kadapa/Ongole, Ramagundam, Tadepalligudem, Nizamabad

Tamil Nadu - Tuticorin, Sriperumbudur

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Kerala Kannur

Rajasthan - Ajmer, Mount Abu

West Bengal - Kanchrapara, Barrackpore, Durgapur

Orissa Jharsuguda

Punjab-Ludhiana, Patiala

The smaller towns were chosen on the back of estimates that air passenger traffic in smaller towns will grow by at
least 20 per cent a year until 2012. Of the above list, Shimoga, Gulbarga, Hassan and Bijapur airports have been
awarded to private players for development on PPP basis. The Bijapur airport was awarded to Marg Ltd, while
Shimoga and Gulbarga airports were awarded to a consortium of Maytas Infra, NCC Infrastructure (part of
Nagarjuna Construction Group) and Austria-based Vienna International Airport (through VIE India Project
Development & Holding LLC) and Hassan airport was awarded to Jupiter Aviation & Logistics Pvt. Ltd.

These low cost airports are expected to encourage economic activity in small districts and towns, help in
decongesting the metro airports, and also give an impetus to regional airlines.

Additional incentives offered to developers insufficient to attract bids

To attract bids for low cost airports, the Andhra Pradesh Government has offered additional incentives such as
exemption from value-added taxes and waiver of lease rentals for the first 7 years of operations. The government
expects the incentives to translate into a benefit of some Rs 250 million for each airport. The incentives have been
offered to attract bids for airports at Ramagundam, Kurnool, Tadepalligudem and Nizamabad in Andhra Pradesh.

However, these incentives would not be sufficient to attract bidders for these airports given the subdued traffic
potential in these towns and low potential for attracting non-aeronautical revenues owing to their remote locations.

Low cost airports are not a viable proposition in India

Low cost airports are not likely to be successful in India due to the following reasons:

Inability to attract sufficient passenger traffic

In big cities such as Mumbai and Delhi, connectivity would be a major issue for low cost airports, as these airports
would be located at a considerable distance from the main city. This would deter growth in passenger traffic, as
most people would find it difficult to reach the airport on time due to inadequate infrastructure.

Inability to attract airlines due to concentration of travellers in major cities

A low cost airport needs to attract at least one or two major low cost carriers to carry on its operations
successfully. However, in India, it would be difficult to encourage airlines to operate from remote locations, as
travellers with paying abilities are concentrated in large cities.

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Inability to attract non-aeronautical revenues
In India, a low cost airport which caters to low cost carriers is not likely to attract passengers who have the ability
and willingness to spend significantly on duty free and retail shops. Various successful low cost airports across the
globe are profitable on the back of strong non-aero revenues; but the same trend may not hold true in India due to
ample availability of alternate real estate avenues, which limits the potential of non-aeronautical revenues at low
cost airports. Also, low cost airports located in smaller cities may not be able to garner enough traffic to generate
significant non-aeronautical revenues.

Moreover, an airports viability largely depends on its ability to attract economic activity around it. This is another
roadblock to the success of low cost airports, as their remote locations would not be conducive to business
activities owing to issues in connectivity.

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