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Airport Business Models

This paper deals with the most pertinent thought in the minds of aviation experts , world over – The Best Business model of airports. There exists various business models in the planning, construction and operation of an airport in the world. The study analyses the various business models and try to ascertain the importance of a business model over the others with example of a new generation airport which is immensely profitable to the stakeholders.

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The major differences of that airport over the other airports in the country in terms of model of construction. Funding,operation and revenue sharing is mentioned in detail. Airport ,as being fully privately owned enterprise is a very important problem . There were a lot of discussions , dedicated to this problem ,which tried to examine and study experience of world practice of privatizing and shareholding of airports as one of means to increase effectiveness of work in conditions of market relations .

Some countries cannot make airports being fully privately owned enterprises because they don ‘t have legal securing in governmental property of usage airports . Absences of legalized documents which give right of management by governmental property don ‘t give opportunity to attract foreign investors , limit development of non-aviation activity , and create a lot of other problems .

In these conditions coordination of efforts in the country , forming of legal regulations and regulation of activity of aircraft companies ,airports and other organizations of this field , directed at guaranteeing of safety flights and protection of customers ‘ interests is very important . A new business model of Airport , PPI – Public –Private Investor model ( Peoples Airport Model ) which has proven to be the most effective and profitable model of business in Cochin ( Kerala – India ) is subjected to detailed analysis in this paper. Aviation Industry and India The history of civil aviation in India began in December 1912.

This was with the opening of the first domestic air route between Karachi and Delhi by the Indian state Air services in collaboration with the imperial Airways, UK. Three years later, the first Indian airline, Tata Sons Ltd. , started a regular airmail service between Karachi and Madras . In early 1948, a joint sector company, Air India International Ltd. , was established by the Government of India and Air India (earlier Tata Airline) with a capital of Rs 2 crore and a fleet of three Lockheed constellation aircraft. Its first flight took off on June 8, 1948 on the Mumbai (Bombay)-London air route.

At the time of its nationalization in 1953, it was operating four weekly services between Mumbai-London and two weekly services between Mumbai and Nairobi. The joint venture was headed by J. R. D. Tata, a visionary who had founded the first India airline in 1932 and had himself piloted its inaugural flight The Civil Aviation Sector in India is undergoing a huge transformation over the last few years and is poised to take another quantum leap in the years to come . This is mainly due to the changed travel mindset of the people . Air travel become more affordable to the masses with the growth of the disposable income with the middle class.

Indian Middle class is comprising of youth in the age group 25- 40 and hence there is a promising future for the Indian Aviation Industry in the years to come. A very sharp increase in the airtraffic is predicted as flying is no more the privilege of the elite class and due to the liberalization of air travel services. The Indian Airports are not prepared to handle the huge increase in the number of passengers and hence upgradation of the airports and construction of new airports are the only alternatives left with the Controlling Authorities in India.

Indian aviation industry and airports in India As Air transport is the most modern, the quickest and the latest addition to the modes of transport, travel by air is becoming increasingly popular. The Open-sky policy came in April 1990. The policy allowed air taxi- operators to operate flights from any airport, both on a charter and a non charter basis and to decide their own flight schedules, 3 cargo and passenger fares. The operators were, however, required to use aircraft with a minimum of 15 seats and conform to the prescribed rules.

Rapid economic growth in India has made air travel more affordable Several other foreign airlines connect Indian cities with other major cities across the globe. Kingfisher Airlines, Air India and Jet Airways are the most popular brands in domestic air travel in order of their market share. These airlines connect more than 80 cities across India and also operate overseas routes after the liberalisation of Indian aviation. However, a large section of country’s air transport system remains untapped India’s vast un utilised air transport network has attracted several investments in the Indian air industry in the past few years.

More than half a dozen low-cost carriers entered the Indian market in 2004-05. To meet India’s rapidly increasing demand for air travel, most of the carriers in India have placed order for new aircrafts This rapid growth of the airlines in the country demands quality airports across the country other than the major airports. Regional Airports are gaining importance in the present scenario Airport Authority of India Government of India formed the AAI on 1st April 1995 with the aim of carrying out the following Functions • • • • • • • • Control and management f the Indian airspace extending beyond the territorial limits of the country, as accepted by ICAO Design, Development, Operation and Maintenance of International and Domestic Airports and Civil Enclaves. Construction, Modification and Management of Passenger Terminals Development and Management of Cargo Terminals at International and Domestic airports. Provision of Passenger Facilities and Information System at the Passenger Terminals at airports. Expansion and strengthening of operation area viz. Runways, Aprons, Taxiway, etc. Provision of visual aids. Provision of Communication and Navigational aids .

Revenue Most of AAI’s revenue is generated from landing/parking fees and fees collected by providing Air Traffic Control services to aircraft over the Indian airspace. Evolution of Private Airports in India The development of infrastructure of Airports is not an easy task which could be accomplished soon. The issue is further worsened by the lack of resources with the Government. There is a recent thrust to the Airport Privatisation so as to provide the passengers with world class facilities and ease in travel, based on the changing passenger behavior and segmentation.

The introduction of Low Cost Carriers in the country by Air Deccan induced a sea change in the travel pattern of the middle class where people started relying more on Air travel compared to Rail which is time consuming and tedious. The initiative of the Government to attract more private participation and to make the non aeronautical revenue more important than the aeronautical revenue is attracting more investors and the airport projects feasible. On the financing front, airports in India range from 100% government funded to airports that have limited state government stakes.

The control structure depends on the equity bought in by various partners and hence varies with the financing. 4 The two catalysts of India’s economic growth have been telecom and civil aviation. They have both speeded up the pace of doing business. Air transportation side, while liberalization has brought in private carriers and capacities are being added by the day, the need for more physical infrastructure is very high. Building airports requires a lot of money, and the government does not have it. The total project cost of the Hyderabad airport is $600 million. At Bangalore, the budget is $300 million.

A GMR Group-led consortium, which has won the modernization project for the Indira Gandhi International Airport in Delhi, has recently increased its project estimate to $2. 2 billion. A similar upgrade for the Mumbai airport by a GVK-led consortium has a budget of $1. 3 billion. A new airport is also being planned at Panvel, about 35 kilometers from the existing Mumbai airport, at a projected cost of $2. 5 billion. Moreover, these figures tend to be revised — always upwards. PPPs are the best way forward. In this century, in the context of globalization, airports are the gateways to a country and will act as catalysts for growth.

Privatization provides a means of developing the airport infrastructure space rapidly by spreading the effort over several players. A PPP model allows efficient development of infrastructure by combining the strengths of the public organization with the entrepreneurial skills and business acumen of private enterprise. A public sector monopoly is a relatively known devil and it is a devil with whom the industry and consumers can negotiate. In a public sector monopoly, there is some sense of public propriety. The private monopolies, on the other hand, are there only for profit.

That is their guiding principle. On the one hand, there has to be an incentive for private players to come in and there has to be a sustainable business model”At the same time, it cannot be monopolistic pricing. One has to be careful about who is doing the pricing and how it is being done and what kind of regulations are in place to make it an even playing field. ” . A great wave of privatization has swept the world in the past two decades, embracing the industrial economies, the transition economies of East Europe and large parts of the less developed world, and it continues to roll on.

It is interesting, however, that its basis in theory was somewhat shaky to start with. Moreover, a sizable enough body of empirical evidence, on which hypotheses about its impact could be tested, became available only several years down the road. So much of the initial impetus to privatization entailed a leap in faith, and, as happens all too often in the development of knowledge, attempts to explain its impact have followed on the heels of widespread existing practice.

These objectives include one or more of the following: 1. to promote increased efficiency. 2. to raise revenues for the state (and thereby to bridge fiscal deficits). 3. to reduce government interference in the economy and promote greater private initiative. 4. to promote wider share ownership and the development of the capital market. Of these, the first objective, the need to promote efficiency in running commercial organizations, has arugably been the dominant motivation.

There is a sense that public ownership somehow leads to lower levels of efficiency than are possible under private ownership; and inefficient enterprises, in turn, are seen as creating other problems such as pre-emption of government revenues (badly needed for investment in social sectors in the less developed countries ) through subsidies or recapitalization and uncompetitive industries in the economy In many ways, India provides an excellent testing ground for hypotheses about privatization and its impact, except that so far privatization has not been attempted on a scale that researchers would like to see.

The country has a large, well- diversified public sector. Unlike many of the transition economies, it also has a long tradition of private 5 enterprise, including big companies in the private sector, although there are certain sectors in which private sector participation is quite new, these sectors having been reserved until recently for the public sector. Privatization in India generally goes by the name of ‘disinvestment’ or ‘divestment’ of equity. This is because privatization has thus far not meant transfer of control or even of controlling interest from government to anybody else.

The government has sold stakes ranging from one per cent to 40% in 40 PSUs, but in no company has its stake fallen below the magic figure of 51% which is seen as conferring controlling interest. The privatization program is itself relatively new to the country. It is part of an ambitious process of economic reforms covering industry, trade, the financial sector and agriculture and also involving a program of macroeconomic stabilization focused on the federal budget, which commenced in 1991.

Privatization is seen as a necessary concomitant of deregulation of industry, necessary in order to enable firms in the public sector to compete and survive in the new environment. The importance of public–private partnerships Over the past two decades more than 1400 PPP deals were signed in the European Union, which represent an estimated capital value of approximately €260 billion. Since the onset of the financial crisis last year, best estimates suggest that the number of PPP deals closed has fallen 30 percent.

These difficulties have placed significant strains on governments that have come to rely on PPPs as an important means for the delivery of long-term infrastructure assets and related services. Moreover, this has occurred precisely at a time when investments in public-sector infrastructure are seen as an important means of maintaining economic activity during the crisis, as was highlighted in a European Commission communication on PPPs.

As a result of the importance of PPPs to economic activity, in addition to the complexity of such transactions, the European PPP Expertise Centre (EPEC) was established to support public-sector capacity to implement PPPs and share timely solutions to problems common across Europe in PPPs. Public–private partnership (PPP) describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies. These schemes are sometimes referred to as PPP, P3 or P3.

PPP involves a contract between a public-sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project. Typically, a private-sector consortium forms a special company called a “special purpose vehicle” (SPV) to develop, build, maintain and operate the asset for the contracted period. In cases where the government has invested in the project, it is typically allotted an equity share in the SPV..

It is the SPV that signs the contract with the government and with subcontractors to build the facility and then maintain it. In the infrastructure sector, complex arrangements and contracts that guarantee and secure the cash flows and make PPP projects prime candidates for project financing. A typical PPP example would be a hospital building financed and constructed by a private developer and then leased to the hospital authority. The private developer then acts as landlord, providing housekeeping and other non-medical services while the hospital itself provides medical services. Economic Benefits of Airport Privatization

The airport industry is going through an exceptional transformation that has driven the market towards increasing levels of competition. Additionally, major investment programs are required to meet the expected growth in air travel demand (particularly in some emerging regions, such as Asia). Nevertheless, governments and city airport authorities are becoming more reluctant to support airport projects, since they have major budgetary constraints. Airports and airlines have historically been considered as essential components of the national aviation system, and hence both were regarded as public utilities.

Due to this approach, operational and handling activities were contemplated as being fundamental for the development of the airport business, and commercial activities had a less important role to play. For that reason, airport assets and property have always been publicly managed and commercial activities have occasionally been contracted or outsourced to private companies. Within such a framework, economic regulation was seen as superfluous. The traditional airport management model becomes 6 isibly unsustainable when most governments begin to be concerned about the burden of airport financing and its lack of efficiency. However, for many years, a majority of airports around the world have continued to operate under this model and some still remain attached to it. Since the 1980s, the industry started to evolve with changes being brought about in the traditional airport management model. Currently, governments are progressively regarding airports as potential profit-making enterprises rather than merely considering them as part of the infrastructure suppliers.

There are three main potential economic gains obtained from privatization, namely improvements in operating efficiency (the private for-profit business model more often leads to a further exploration for means to cut costs and boost revenues than public management), the introduction of new management styles and marketing skills directed to serve users with a more consumer-oriented approach, and better investment decisions. However, in many cases, these investment decisions might also imply under investment or capacity reductions, which mandates the presence of a regulatory environment.

Regardless of all its potential benefits, privatisation also involves risks and requires prudent management from the public authorities. Several policy issues have to be contemplated by the governments if the public interest needs to be safeguarded. Specifically, the eventual externality, negative or positive effect imposed by airport users over nonusers or other users, generated by the provision of airport services or strengthened market position gained by the airport operator after privatization should be carefully considered.

In this respect, a regulatory regime (in terms of charges, safety, quality, and noise intensity or spatial planning) should be designed before privatization takes place and the regulatory role ought to be delegated to an independent body. Airports: An Increasingly Attractive Industry Currently, only two per cent of the worlds commercial airports are managed or owned by the private sector. However, the success achieved by private investors so far is encouraging others to enter the market.

Various factors that make the industry attractive for investors are listed below in their order of relevance: – Strong growth trend observed in air traffic during the last several years together with the optimistic forecasts provided – Growth in passenger traffic leading to improved profit margins resulting from economies of scale (the upward traffic trend is also expected to have a positive impact) – Strong commercial opportunities that still remain to be exploited in this business – Significant barriers of entry for newer companies that allows existing participants to improve their earnings – Reduced risk related to exchange rate fluctuations due to the fact that airports generate substantial revenues in hard currencies and both travel and tourism industries are dominated either by the dollar or the euro Towards Multinational Airports Operators The airport industry is under strong influence of multinational airport operators, especially the specialized airport management firms that acquire and manage multiple airport networks. These firms can be segmented into several categories. Some of these groups are: – Global airport operators, such as the BAA, that take the responsibility for managing the whole airport. The BAA is based in the United Kingdom, where it runs seven airports (particularly the three major London airports). It also operates the Indianapolis airport under a ten-year contract, several airports in Australia (including Melbourne), the Naples

Airport (Italy), and besides it manages a group of other properties. – Airport development groups that offer project financing services and the ability to manage and provide facilities for major airport developments, which single airports do not typically have. A good example is Hochtief. This German construction firm has been a major partner in several German airports, as well as, involved in the construction and operation of the major new airport at Athens. – Investment groups specialised in airports, such as Macquarie Airports. Macquarie is a private equity investment fund that makes equity investments in airports and associated infrastructure.

Its portfolio comprises interests in five airports, namely Sydney, Rome, Birmingham, Bristol, Copenhagen, and Brussels. – Specialist operators, such as Standard Parking that focus on specific activities. It operates approximately 1,900 parking facilities in 280 cities throughout the United States and Canada. Standard Parking operates 60 airport locations across the United States, notably the OHare International Airport in Chicago. 7 Privatisation Process Worldwide After 1987, when the United Kingdom privatised the BAA, the interest for privatization has been increasing across the world. In fact, more than 20 countries have completed the sale or lease of airport facilities so far.

Some of them are: Argentina, Australia, Austria, Bahamas, Bolivia, Cambodia, Canada, Chile, China, Colombia, Denmark, Dominican Republic, Germany, Hungary, Italy, Japan, Malaysia, Mexico, New Zealand, Singapore, South Africa and Switzerland. In the United States, commercial airports have traditionally been independent of the national control, operated locally by local or regional authorities and highly influenced by private interests, specifically the airlines (with enough power to decide major facets of airport management and development).

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