With COVID’s debilitating impact appearing to be on the wane, S Vasudevan, Partner and Head-Aviation in India & Global Sector Lead-Airports, KPMG, appears gung ho for the future of the country’s airports and aviation sector. In an exclusive interview from Bangalore, the globally renowned Airports business specialist who has advised governments, airport owners, operators and aviation stakeholders on policy, strategy, finance, operations and transaction related solutions, offered Shrikant Rao a view of the emerging national plane port landscape.
Briefly give us an understanding how the Airports sector has performed in 2021, both globally and in India, in the wake of the dramatic shift in the manner in which they now operate post-COVID? From a KPMG perspective, what are the principal changes seen in ground conditions – mainly through introduction of new best practices, and in terms of Indian government policy changes – and how that will impact sectoral growth?
The buzz is back! That’s the best way I can express what I see today, almost 20 months after the aviation world was grounded because of the pandemic. Just looking back at this year, countries with strong domestic or regional markets, like India, China or the European Union, have recovered well on traffic. Other countries like UAE or Singapore or Australia have struggled on regrowth because of continued restrictions on international traffic, while the numbers are increasing. Multiple waves of COVID in some of these countries have inevitably impacted traveler sentiment and growth.
The US, China and India have always been markets of interest as the top three aviation economies in the world today. India will continue to be of interest for aviation entrepreneurs and investors for known reasons. It is a high-growth economy with a young, growing, globally mobile middle-class and importantly a country where still 95 per cent of the population does not have access to flying making it one of the least penetrated aviation markets globally, an irony for a nation that is the third largest economy in PPP terms. The good news is that governments both at the State and Centre have acknowledged the critical and strategic importance of this sector for India. Many important policy changes have been made in the last 36 months. These will help put more wheels on our journey to become potentially the second largest aviation economy in the next two decades. VAT on aviation turbine fuel has been brought down to less than 5 per cent in many airports across the country, with Kerala and Andhra Pradesh levying as low as 1 per cent. Many others like tax reliefs for the MRO business, Air India’s privatization, the new drone rules, changes in the land lease policy for MROs, AAI’s proposal to redevelop more airports under PPP frameworks and the proposed divestment of government’s stake in existing PPP airports are unprecedented and augur well for the future.
Can you give us an understanding of the key lessons derived by airport minders post-pandemic?
The pandemic has also triggered a significant shift in how airport owners and operators are redefining operating models and reimagining the frontiers of customer experience in the aviation world to deal with some of the potential challenges that COVID like events could throw up in future. This has provoked thinking on many issues like – how do you prepare or insure for unpredictable “force majeure” situations; is traffic risk the way we understand it today really manageable? Can we de-risk the aviation business by relying less on “passengers” and focusing more on “consumers”. Can technology and innovations in service delivery provide some reliable answers?
Please dilate on the technological emphasis that has emerged as a part of our new airport experience, and the impact on operations and business.
One thing we have seen is the role that technology has played in changing the way services are delivered and the potential it holds in transforming businesses in the future. Contactless journeys are now becoming the norm in most airports and digital technologies and innovations in infrastructure are facilitating them. There is a lot more to look forward to for airport and airline users. AI, IoT, block-chain and machine learning tools will help unlock the power of data analytics that will allow many service providers to customize and enhance user experience. WI-FI could become a standard feature on domestic flights and customized content could also become a reality because of costs, competition and the value it can bring to carriers through in-flight and off-aircraft services. Digital passports could come in sooner than we think and the integration with hospitality and tourism services could happen in ways that we may have never imagined before, making long journeys seamless, cost-efficient, enjoyable and rewarding. We can also hope to see more collaboration between airlines and airports globally to augment the bouquet of services to flyers and enhance commercial value for businesses.
There now appears to be a discernible trend towards creating sustainable airports?
Yes, the impetus on green and sustainable infrastructure is also a big ideological shift we are seeing. The aviation world is going to be watched closely by governments and regulators on how they
deliver on COP26 aspirations and target KRAs. Many airports have invested big on the greening agenda and have also set new benchmarks on carbon neutrality including leading airports in India. What will be interesting to see is how some of these pioneers and project developers in the pipeline are able to effectively monetise and unlock value through “green” initiatives by tapping into the fast evolving capital market for financing sustainability linked infrastructure projects. All these trends make the next two years very exciting and industry enthusiasts are certainly looking at the futurewith renewed optimism.
Tell us of the status of various ongoing planeport projects across India which KPMG is monitoring and how you see these planned developments unfolding as demand for air travel rises, both worldwide and across the country?
There are many large airport development and expansion projects underway. Bangalore, which has been one of the fastest growing airports in the country is building a brand new terminal at an estimated cost of $ 1.7 billion that would double its passenger capacity. Construction for the first phase of the Noida International Airport at Jewar is expected to commence early next year and work at the new international airport at Mopa, Goa is also showing brisk progress. With changes in travel preferences and continuing transformation of the air travel business, India now has the opportunity to become a regional aviation hub with large airports adding more capacity and many new airport projects in the pipeline.Leading international carriers are exploring more direct connections to airports in Delhi, Bangalore. Mumbai and Chennai. They have also expressed interest in connecting Tier-2 cities directly in the past because of demand. The government may need to make some important decisions on our hub strategy, capacity additions at regional airports and new points of call for foreign carriers as international traffic opens up.
What are the key challenges before the government as it seeks to further build the airports sector in the metros and in Tier II and III cities? What are the development gaps that will have to be bridged to add strength to airport construction?
Probably the biggest challenge in developing Tier-II and Tier-III airports is the problem of scale. We have seen significant growth in many unserved and underserved airports under the UDAN scheme – on a low base – but at some point some of these airports will saturate on growth given differences in socio-economic profiles, limitations on per capita trip rates, fares and possibly competition from other competing modes in the future with better road and rail infrastructure. Places of business, religious or tourism interest may generate more consistent demand and have growth potential but can be seasonal and volatile as well, making consistent profitable operations a challenge. Today many of these routes are profitable or imminently sustainable for carriers because of exclusivity and the subsidy given under the UDAN scheme.
With international traffic muted and the current state of the industry, the ability of MoCA to raise adequate funds for providing subsidies forservices on other routes will also be a challenge. However, these routes are important because of the traffic they feed on a consolidated traffic to major hubs and aligns well with the hub strategy. In fact, one of the interesting trends observed in the last three quarters phase was that many of these regional routes recovered faster on traffic than trunk routes.
With changing traveller preferences and likely changes in bilateral air services agreements that could promote direct international connections from major hubs in India, the choice of fleet and allocation of capacity to domestic regional routes is going to be an interesting challenge to contend with, especially with more competition.
Can you tell us of the new strategies that will have to be adopted to further add value to air travel – not to mention profitability in construction business – and the kind of collaboration that will be increasingly required from various allied actors?
Airport service fees or terminal charges have not been a big bone of contention for airlines with respect to regional airports. Many of these airports also provide significant incentives for small aircraft operations including waiver of landing charges and lower VAT on ATF.What will make sense is to find ways to use satellite based augmentation systems such as GAGAN to reduce investment in ground basednavigation infrastructure like an ILS, which can bring down costs for AAI and also reduce charges for airlines. GAGAN offers that possibility and with all newer aircraft expected to be pre-fitted with equipage for satellite based navigation, it is an opportune moment for the Ministry to roll out a plan which can levelise navigation charges across regional airports in the country. The other area of interest could be to find ways to reduce real estate and terminal footprint of newer airports with more efficient designs and planning of land-side infrastructure, in a digital enabled eco-system.
How do you assess the increasing role of private sector operators like Adani in airport development across India and the impact it will have on the overall construction sector business?
The Vision 2040 report released by MoCA in 2019 provides a comprehensive perspective on the realm of the possible. Many of the growth targets and aspirations mentioned in the report are eminently achievable notwithstanding the setback caused by COVID for reasons mentioned earlier. In fact, the lessons learnt from the pandemic can actually help in reprioritizing our approach and hasten our journey to becoming the second largest aviation market in the world. The report envisages more than 1.1 billion air passenger trips served by close to 200 airports by 2040. That’s 5 times the pre-COVID traffic volume and twice the number of operating airports currently. It would also entail quadrupling of our aircraft fleet and by default significant additional capacity at many airports including possibly second airports in two or three more metros. The advent of drones and new drone rules have added a new dimension to this growth story.
Building all this capacity requires substantial investments. MOCA’s own estimate is about $40-50 billion to redevelop and build new airport infrastructure over the next 10 years, excluding what we now call drone-ports. Much of this investment will need to come from the private sector. Though airports are a regulated business – for aeronautical assets – with assured returns, the expansion of the airport business into other commercial and non-aeronautical services globally given strong synergies with such businesses will also make these assets riskier from a revenue standpoint, but with the promise of better profitability and by consequence lower passenger tariffs, if non-aero assets are monetized well.
What does that mean for private investors? Three things – Asset efficiency, cheaper long-term capital and market expansion. Large companies with established market leadership in asset construction, market penetration and global presence will be well placed in extracting more value from the airports business and across a portfolio of assets. Many businesses are becoming digital and that offers a great opportunity for seamless integration of markets and consumers on a single platform with more efficient ways of monetizing them. Airports and airlines will also become niche digital businesses eventually and the role that global tech companies are playing in transforming airport and airline businesses is quite evident. It is also bringing in new tools and solutions for making airport assets lean, agile and operationally efficient. A combination of smart entrepreneurs, tech-savvy service providers and market makers supported by a forward looking policy and regulatory environment can help unlock this market in a big way. If done well, it could also spawn a strong regional MRO business for small aircraft and multi-modal integration with substantial spin-off benefits for the travel, tourism and hospitality industries.
How has the dramatically altered scenario affected the dynamics of airport construction? What is your view of the future of Indian airports?
Being agile and lean are the two big mantras of most large businesses today. The growth of in-house and off-site commercial businesses which are now becoming natural extensions of the airport eco-system is also forcing developers to make assets nimble and scalable to meet recurrent market needs. Quality of hard infrastructure was always a fundamental need and influencer of choice but today the quality of soft/digital infrastructure and other value-added services carry equal or more premium for users to become tenants of the airport.
Sustainability has also become a key theme for many businesses with policy and regulations compelling better compliance and governance and provide the impetus to develop cleaner and greener infrastructure. Renewable energy projects, electric equipment – this includes TAXIBOTS, GPUS, APUS, buses and other service vehicles – and carbon efficient buildings could be some of the key assets that Indian airports, airlines and ground handlers will invest on in the near future. Real-time data sharing between multiple service providers in an airport will become sine qua non for a consistent seamless user experience. Skilling and training will become an essential part of the agile transformation process. Airport apps and super-apps could open up new avenues for market access and revenue maximization.
Cargo and logistics businesses are now drawing more attention in airport environments as they are expected to contribute significantly to the topline and profits. Our air cargo business is still not the best on operating metrics despite investments in infrastructure and technology, but with more automation, digitalization and better oversight, turnarounds of EXIM cargo and quality of services at airports can be substantially improved, providing a much better user experience. The next five years will see major changes in the way airports and allied infrastructure are designed, built and operated.