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Strategic Flexible Planning and Real Options for Airport Development in India

With market liberalisation, established airports have regularly faced greater uncertainties regarding their planned investments. However, airport authorities as well as private stakeholders (through international consortia) continue to invest in ever larger and more capital-intensive infrastructures. Major uncertainties arise regarding these long-term investments since traffic forecasts have a legacy of being grossly inaccurate. In contrast to such practice, both literature and empirical evidence suggest that airport development should be undertaken in incremental steps, avoiding over-commitment of funds and being able to adapt to a changed environment, including altered patterns of competition. This paper highlights scenarios that characterise paths of airport development in India. A decision-tree analysis provides a helpful tool to identify those paths for airport development that will minimise uncertainty and prove more effective in fostering robust and efficient growth for the Indian air traffic system as a whole.


Strategic Flexible Planning and Real Options for Airport Development in India

Hans Huber

With market liberalisation, established airports have regularly faced greater uncertainties regarding their planned investments. However, airport authorities as well as private stakeholders (through international consortia) continue to invest in ever larger and more capital-intensive infrastructures. Major uncertainties arise regarding these long-term investments since traffic forecasts have a legacy of being grossly inaccurate. In contrast to such practice, both literature and empirical evidence suggest that airport development should be undertaken in incremental steps, avoiding overcommitment of funds and being able to adapt to a changed environment, including altered patterns of competition. This paper highlights scenarios that characterise paths of airport development in India. A decision-tree analysis provides a helpful tool to identify those paths for airport development that will minimise uncertainty and prove more effective in fostering robust and efficient growth for the Indian air traffic system as a whole.

Hans Huber ( is with the Shailesh J Mehta School of Management, Indian Institute of Technology, Bombay.

orecasting traffic for given airports has notoriously been an inaccurate exercise (de Neufville 2008). Flexibility in strategic planning (FSP) as well as scenario forecasts have been important tools for planners of such projects as they are intended to reduce the risk of exposure for investors in airports. One type of uncertainty is commonly associated with unforeseen changes in the rate of traffic. Another kind of uncertainty can arise from the type of traffic. While forecasts usually distinguish between national and international routes, the distinction between full-service-carriers (FSCs) and low-cost carriers (LCCs) is often made in a superficial or inadequate way. This problem is particularly relevant in emerging economies where LCC business models as such are often claimed by operators but seldom implemented in reality. Demand for such self-proclaimed LCCs can prove much less robust compared to real LCCs that operate in more developed countries. Also, the recent and very rapid growth in many emerging economies such as India provides for little reliability when extrapolating traffic figures into the future.

1 Introduction

The author takes issue with the effectiveness of FSP and scenariobased forecasts, at least in the context of developing countries. Instead, we suggest addressing the “real options” that exist with regard to investing in specific infrastructure for different types of traffic. Rather than taking investment choices as given and finding financially-driven rationales for undertaking them, our approach to these real options would look at alternative investment paths in terms of cost, location and traffic that would also encourage competition from a structural perspective. Not only would such an approach result in globally lower cost and (spatially) more balanced growth for Indian air traffic, but also in a reduction of the systemic risk or “uncertainty” within the air t raffic system itself.

2 The Situation in India

An analysis of some examples among Indian airports (Annex 1, p 49 shows an overview of some pending projects) reveals some striking patterns of airport development as far as the biggest metro airports of the country are concerned:


choking infrastructure, no investments have been undertaken for LC airports. It is known that the costs for such airports would only be a fraction of those for terminals that cater to mixed operators (both FSCs and LCCs).


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cities are being undertaken through private concession models, i e, public-private partnerships (PPPs). The exceptions to that rule are Mumbai and Delhi airports, which are centrally located and where PPPs are used to modernise both airports, and also to expand capacity through additional terminals, etc. t 5IFQVCMJDBJSQPSUPQFSBUPSJSQPSUTVUIPSJUZPG*OEJB AAI) is modernising metro airports that remain relatively centrally located in cities such as Chennai and Kolkata. In total, 35 such modernisation projects are being planned across Indian metros. They are operated as mixed terminals. In the cases of Hyderabad and Bangalore, AAI opted to terminate their operations after the commencement of operations by the private operator at the new airports that are remote from the city centre. t OBEEJUJPOBMPQUJPOJTUPNPEFSOJTFIVOESFETPGGPSNFSNJMJtary air strips on the outskirts of many cities, either by the AAI or by private parties. This option has not been exercised so far.

3 ‘Real Option’ in Airport Planning?

For most airport systems development plans, several “real options” may be found. The most obvious is the possibility for expansion. At a given point in time, decision-makers may choose to increase capacity either through new construction or modernisation of existing facilities. These alternatives may be understood as a real option. Another real option would be the type of airport to be built. We know that airlines have distinct needs depending on their targeted passenger types, i e, LCCS require faster turnaround times and are more receptive to lower airport user fees. When building or expanding any airport, the infrastructure requirement of such carriers would be different compared to FSCS. A third level of “real option” would concern the location aspect of the airport. An airport may be centrally located or, for example, be situated at the outer periphery of a city, which would normally imply one hour or more of travel time before getting to the city centre. The planner/investor will have to choose a combination among all of these three dimensions of “real options”. Other options come to mind, for example, the decision to operate multiple airports in a given city. We shall briefly discuss these options for the sake of highlighting the current policy decisions made in India.

It becomes evident that some combinations among “real options” may seem less viable than others. For example, positioning a dedicated LC terminal more centrally in a city by modernising existing or even setting up new infrastructure may seem suboptimal, as it cannot be found in India. However, this is what happened at Singapore’s Changi and at Kuala Lumpur airports: terminals that are dedicated to budget carriers started operations there in 2006. Plans for further expanding their capacity are well in progress. Another unlikely option may be to modernise the existing airports rather than construct new terminals that are remote from any city centre. However, hundreds of former air force landing strips are waiting to be converted in India. LCCS, regional aircraft as well as charter aircraft could benefit by m odernising these airstrips. Thus, many combinations are feasible and can open a much wider scope of “real options” compared to airport development as it is currently being planned and i mplemented in India.


“Flexible Strategic Planning” does not address this wide scope of options. For example, modernisation of an existing airport could be considered, by analogy, as a form of flexible planning as it provides for effective gains in capacity through less investment costs as compared to new construction. The risk of the present day application of “FSP” is that it commonly focuses on options regarding mostly greenfield investments, in particular those that do not offer dedicated terminals/infrastructure for LCCs.

4 Analysis

A real options approach may help to reduce systemic risk, especially in a volatile environment. Taking into account all options for investment may influence the nature of competition among airlines and improve demand in terms of its robustness. Irreversible investment can be more vulnerable to volatility in demand (Huber 2006), while smaller and spatially more distributed investment may provide for more usage flexibility (Ghemawat and de Sol 1998) and, in the end, adapt better to price-elastic demand. Both supply and demand side aspects must be considered in order to assess the potential of “real options” to yield robust growth in a competitive setting.

4.1 Irreversibility of Investment

One major issue that arises from the investment is due to its “irreversibility”. As Dixit and Pindyk (1994: 176) point out:

…most major investment expenditures are at least partly irreversible: the firm cannot disinvest, so the expenditures are sunk costs. Irreversibility usually arises because the capital is industry or firm-specific, that is, it cannot be used in a different industry or by a different firm.

Figure 1: Decision-Tree Identifying Paths for Airport Development

New construction Modernise, including extension FSC terminal FSC terminal LC terminal LC terminal Outskirts Outskirts Outskirts Central Central Central Navi Mumbai (PPP) Bangalore (PPP) Hyderabad (GMR) Old airport (AAI) Close Open New Delhi (GMR) Mumbai (GVK) Chennai (AAI) Kolkata (AAI)

Irreversible investments represented through bold lines, reversible through dashed lines.

Figure 1 indicates different options with distinct degrees of flexibility or (ir)reversibility. These options are not to be confused with FSP that regularly accepts the paths of a decision-tree as given and focuses on their modular (gradual) expansion afterwards, without leaving the decision path. From a conceptual point of view, the extent of irreversibility of a given path does not matter for FSP.

The different options of investment show some dominant paths that could have been taken:

A highly reversible, i e, usage flexible path could have been taken in the form of centrally located airports that dedicate their

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new terminals to budget airlines (as in Changi or Kuala Lumpur). Such new terminals in fact represent extensions of existing i nfrastructure. Their scale of investment cost is very low when compared to greenfield projects that require new runways, c ontrol towers, gates, etc. In the event of an economic slump, the investment could be converted into even simpler operations (cargo), be upgraded (for FSCs) or easily be used for other c ommercial activities due to its central location. Such an option, however, is not being exercised by the actual modernisation of the centrally located Delhi and Mumbai airports: here expensive terminal extensions and modernisation are being undertaken in a modular fashion without creating specific terminals for LCCs. It is noteworthy that both Indian airports are following FSP-principles by upgrading facilities in a modular fashion.

The least reversible option (highest degree of commitment) would have been new airport construction (greenfield) on the outskirts of cities to serve both FSC and LCcs (through shared terminals, operations, etc). This was actually the case in Bangalore and Hyderabad, and at a time was also planned for Chennai and Kolkata through PPPs. There are intrinsic risks to the investor and, in case of failure, the investment may be lost due to its high asset specificity. Rather than a modular expansion after reaching a bottleneck threshold at 10 to 12 million passengers, it is the continuation of existing operations at the city centre and the creation of less expensive (and thus less risky) LC terminals on the outskirts that could provide for a flexible alternative to this dominant model of costly greenfield projects. The successful airport project of Cochin could also be considered part of the same category of options. However, much lower investment costs were incurred there while addressing a specific international customer segment. This intelligent focus and a much lower initial capacity requirement set the case of Cochin apart from Bangalore and Hyderabad.

At the other extreme, highly flexible and inexpensive investments could be undertaken on the outskirts of cities by converting already existing airstrips into basic, low to medium density airports. These airports could be upgraded to serve LCCs, similar to the secondary airports that are being used by Ryanair in Europe for public service obligation (PSO) or for charter service. The required investments would be low, while maintaining all options for gradual expansion and upgrades later on: a clearer market focus and lower cost structure would definitely be more competitive as compared to costly greenfield projects. These converted airstrips could exist in accordance with concession agreements that stipulate exclusivity rights to PPPs in many metros.1

4.2 Cost Structure

Costa et al (2008: 5) review economies of scale in airport a ctivity thus:

Doganis and Thompson (1973) concluded that average costs decrease up to 3m passengers and to 5m in other studies (Doganis 1995). Results from Salazar de la Cruz (1999), analysing 16 airports in Spain, show that there are decreasing average costs up to 3.5m and increasing from 12.5m passengers. More recently, Jeong and Vogel (2005) showed that the economies of scale disappeared for traffic volumes

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between 2.5m and 5m passengers. Empirically it is possible to conclude that there are economies of scale from the air side until volumes of 20m to 25m passengers. Evidence from airports show (sic) that with one single runway it is possible to achieve up to 30m passengers. In what concerns (sic) terminal area, it is not possible to identify any evidence of economies of scale. Based on this information, it was developed (sic) a theoretical model for the airport capacity expansions and cost per unit.

Annexes 2A (p 49) and B (p 50) show project (summary) costs for some Indian airports. Except for the Multi-modal International Hub Airport at Nagpur (MIHAN) extension, we find that (planned) thresholds for extension of the named Indian airports are in accordance with the economies of scale (for terminal and gate side, etc) stated above. A modular approach respecting these thresholds may provide for some flexibility when expanding capacity. A second type of threshold may be reached at around 20 or 25 million passengers (subject to the number of aircraft movements and other external factors) when constructing an additional runway. The “old” airports at Chennai and Kolkata have two runways already, but only one of each pair is sufficiently long to serve long haul, greater capacity aircraft. Again, the MIHAN project stands out as very low in actual capacity, very optimistic in forecasted demand while planning for a disproportionate number of runways. Modular expansion and FSP have not prevented such risky projects from getting executed.

4.3 Demand and Revenue Side

Airport charges in India are considered the highest among the airports in Asia or the Gulf region. Experts claimed the charges in India were higher than even in Europe or the US. In 2006, Kuala Lumpur airport charged about $203 for a small Airbus A320 aircraft with a three-hour turnaround time while Indian airports charged four times more at $1,060. In India, airlines paid $2,331 for handling a long haul flight of a Boeing B777, while Kuala Lumpur airport charged only a third of this at $753 (ATRS 2008). Also, international flights had to pay 33% more in airport charges compared to domestic flights. Such discrimination stood in stark contrast to international practice. Although charges were fixed in 2008, airlines feared that greenfield airports would hike these charges once they became operational. An airline official said, “Charges for space rental, including back-up and ticketing offices, to be levied by the greenfield airport authorities in Hyderabad and Bangalore are going to be double of what we pay the AAI”.

Total passenger fees, airport taxes and fuel surcharges on top of a one-way ticket price typically ranged from Rs 2,800 to Rs 3,450 (for September 2008). This translated into between $70 and $87. However, the actual passenger usage fee at the airport often did not exceed Rs 225 ($5). There had been early signs that regular airport charges or user fees would not suffice to finance investment and operation at many airports under PPP. For example, the new Bangalore airport announced that it would charge a “user development fee” (UDF) of $22 per (outbound) international passenger. There was a proposal to levy a similar charge on domestic passengers, but this was unlikely to happen as the budget airlines, which were opposed to adding the fee to their ticket prices, had threatened to walk out. By comparison Cochin airport, which had stopped charging UDF, considered reintroducing it from 2008. Other requests came from GMR Infra and GVK Group to hike user development charges for Delhi and Mumbai airports by 10% each.

Another source for financing airport development costs came from commercial revenues. Changi airport had planned its budget terminal to be mostly financed through non-aeronautical revenues over a 10-year period. Over 60% of the profits that were made in this new terminal were to come from non-aeronautical activities. Investing in a completely new terminal that may be expanded in a modular fashion could be reckoned to increase revenue streams not only from aeronautical but from nonaeronautical activities as well. In contrast, keeping old terminals in operation and investing in LC terminals which may also be expanded would bring the benefit of lower investment costs. However, one may question the impact of such investment on non-aeronautical revenues.

Since no information is available on LC airports in India, some insights may be gathered by comparing London-Luton with London-Stansted. The first predominantly caters to LCcs, while Stansted does so to a lesser extent. In both cases, the ratio of aeronautical revenues is approximately equal to non-aeronautical revenues (50/50 at Luton, 52/47 at Stansted) (Annual Reports 2006, 2007). Private Indian airports will seek 60% or more of their future revenues from commercial activities. At Luton (Stansted), the average passenger spent £3.92 on aeronautical charges as compared to his £3.87 contribution through commercial/retail income (in 2006). A similar pattern can be found in Singapore: Changi airport charges a traveller fee of S$13 (S$7 for passenger service and S$6 for passenger security) at its LC terminal as compared to the regular fee of S$21. There, LC passengers spent more than those of FSCs on purchases of alcoholic drinks and liquor. The situation at the LC terminal in Kuala Lumpur is consistent with these findings (see Annexes 3A (p 49) and B (p 50)).

5 From ‘Real Options’ to Robust Air Traffic Systems

Real options valuation normally uses a discounted cash flow analysis to assess the well-founding of an investment choice. Coming up with specific numbers for the Indian context may not only be somewhat difficult (regarding cost structure, etc), but it is the revenue side that causes even greater concerns: reliable estimates must be made for both aeronautical and non-aeronautical revenues over a 15 to 20 year time-period or longer. Based on such forecasts and by increasing the ratio of non-aeronautical to aeronautical revenues, almost any investment could be rationalised into becoming economically viable. Problems with such an approach have been outlined above. Not only is the customer base for such forecasts relatively small in India at present (causing unreliable extrapolations into the future), but aeronautical and commercial revenues are highly interdependent as well. Less traffic would also drive down commercial results. Moreover, it is obvious that non-metro cities with poorer demographics will not be able emulate such high investments, which is an important factor to be taken into account in the context of the vast Indian subcontinent. Recent demands for hikes in UDFs at many Indian

46 airports show this discrepancy between budgetary planning and reality.

Also, a high percentage of air travellers are known for being very price sensitive. Hiking fees at airports is likely to impact on demand. Although, on paper, net present values may favour one investment choice over another, the impact on the entire air traffic system as such will not be taken into account. More specifically, concession agreements may ask for closing the “old” Bangalore and Hyderabad airports, which would encourage hiking fees and fares at the new airports – but the development and growth of the air traffic system as such would be seriously stifled due to less demand.

We therefore suggest comparing all options that are a priori viable and to determine their potential to induce growth at minimum risk for the Indian air traffic system altogether. Rather than applying a finance-dominated analysis, our approach will contrast three levels of demand (strong, average, weak) for the real options of investment paths that have been proposed before. The idea is to attribute a specific risk/growth combination to each option. In that sense, demand and potential for growth are no longer considered as exogenous, but as partly driven by the investment path itself.

Centrally Located Budget Terminals at Existing Airports:

This investment choice would be highly flexible and easily reversible (through upgrades, etc). The risk/growth profile would clearly be improved. The budget terminal would act as a hedging strategy to the airport in case of less demand: rather than losing the market due to high prices, the residual demand could still be satisfied due to lower costs. During high demand, expansion of FSC terminals would not be hindered, but expansion at the budget terminal would possibly be even stronger. With low demand, overall capacity would be maintained more easily. From a revenue perspective, this path seems near optimal: aeronautical r evenues would grow due to higher demand for LCCs (overall utilisation of most airport facilities would be less volatile) and fixed costs (runway, ground handling, etc) could be shared by different terminals. Aeronautical revenues would become significantly less risky during periods of less demand. In that sense, there would be less dependence on cross-subsidies from non-aeronautical r evenue as well. It is noteworthy that commercial revenues could be maximised as well due to the natural segmentation of customers in different terminal buildings, i e, products/services and prices at the budget terminal could be effectively differentiated to maximise revenues.

Centrally Located ‘Mixed’ Terminals at Existing Airports:

The Indian (private) examples of Mumbai and Delhi show no dedicated terminals for LCCs. This may be partly because the number of routes of “true” LCCs from these airports is very low, and market entry for “real” LCCs seems somewhat discouraged in India. The disadvantage of such a scenario is that there is no incentive for cost discipline during modernisation/expansion works. Shocks in factor costs, i e, fuel, are not absorbed, but f urther accentuated through the highly irreversible investment path taken. During periods of medium to lower demand, entire

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s egments of passengers turn away from flying, even during periods of economic growth. It is true that limited capacity at these airports enhances such an oligopoly situation which will do little to discipline pricing decisions made by airports and airlines. Instead, airlines will cut down on less profitable routes, which in turn will be a cause for less traffic growth (and not be the effect from exogenous price shocks)! Despite high prices, revenues will not be enough to finance infrastructure investments, with the operator asking for UDF without having completed their planned phase of modular expansion in the first place. The only passengers who are willing and able to pay will be business and international travellers. Non-aeronautical revenues will be exposed to the same systemic risk. During weaker economic times, consumers will spend less on the high-priced products, an effect that will be compounded by less traffic. Aeronautical fees in Mumbai and Delhi are already among the highest in Asia, while the quality of service (navigation, ground handling, landing and take-off assistance, security, etc) is among the weakest. In that sense, there is a systemic risk that other airports will take over more high-net-value passengers from these airports in the future. This risk is inherent in the investment path that had been taken. Any decision to expand capacity on such a basis would incur significantly high risk for all the long-term stakeholders involved. It is true that during strong economic growth, maximum returns can be drawn due to local market power and c onstrained capacity in an auction-like logic.

New ‘Mixed’ Airport Constructions (Greenfield) on the Outskirts of Cities, with Old Airports being Closed: It is very difficult to reverse this investment due to its high technological and locational specificity. Compared to Delhi and Mumbai, there are less constraints for capacity expansion. Also, the relative proximity between Hyderabad, Bangalore, Chennai and Cochin may induce competition for high-net-value passengers, in particular for transit flights. With high demand, all airports should grow and aeronautical revenues plus commercial revenues may be sufficient to finance investment and modular growth. However, this growth will remain dependent on domestic demand which is largely determined by LC tickets (including airport taxes and fuel surcharge). The extent to which these airports will be able to cater to LCCs will be critical for their growth in uncertain demand. Basically, the construction costs do matter and have been very high compared to dedicated LC terminals. This d ifferential is currently burdened on outbound international p assengers. This may be a viable strategy as long as there is no competition from the old airports that could remain in operation. Non-aeronautical revenues may cross-subsidise operations, although a dedicated terminal could probably have captured more budget travellers for commercial revenue. The risk lies in the reopening of old central airports that could provide better value to the time-pressed high-net-value individual. Weak demand (economic slowdown) would significantly handicap modular expansion and the competitiveness of such greenfield airports in the long run.

As mentioned before, the success story of Cochin airport could be regarded as an exception to this rule: One, its capacity amounts

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to 2.5 million passengers in 2007 which puts it at the lower end of the scale of investments discussed. Second, a strict cost discipline had been exercised throughout the project. Thus, the airport is likely at least to defend its competitive edge as it grows in a very balanced way (as compared to other, bigger airports in the same category), while being able to cover operational costs to a large extent through aeronautical revenues. Non-aeronautical revenues can be considered more of a supplement and would render Cochin even more profitable. This successful combination seems very robust to withstand economic slowdowns due to its greater cost-effectiveness and conservative approach to expansion for a very specific customer segment (international, no-transit).

New ‘Low-Cost’ Airport Constructions (Greenfield) on the Outskirts of Cities, with Old Airports Remaining Open: This solution could provide the best of both worlds: easy access and great connectivity from the city centre for high-net-value individuals. Selected transfer flights for long-distance would also be conceivable from that central location, as seen at other airports. The old airport could easily be modernised to cater to the specific needs of this segment of customers. The LC terminal on the outskirts could be constructed at a fraction of the usual costs and would offer significant cost advantages to carriers and passengers alike. Such satellite solutions may cater to the specific needs of budget travellers. Due to the different target segments, there would be little competition, while commercial revenues would be maximised. A strict focus on LC flights that would exclude longdistance or the use of very large aircraft could keep investment costs down and provide LCCs with a competitive advantage. These facilities could be expanded in a modular fashion and would be more likely to grow during economic slowdowns as compared to mixed facilities – even when central airport operations may suffer. There are, however, few examples of such airports. One reason may be the costs for separate runways and additional facilities that come with it, although LCCs do not require gates. As long as aeronautical revenues can cover these investment costs, in particular the greenfield case, the project would be feasible. With non-aeronautical revenues aimed at contributing more than 60% to airport profits, effective customer segmentation through different locations may be very effective. This option could apply to airports in Chennai or Kolkata, where PPPs had been discussed at a point in time, while AAI would c ontinue to operate from central airports in the same city.

Conversion of Existing Airstrips on the Outskirts of Cities: In t heory, the above option (4) could also be extended to the m odernisation of former military airstrips in India. This is what happened at airports in Europe, where Ryanair privileges s econdary airports and continues to increase both new routes and demand for them, despite higher fuel prices and economic slowdown. This choice has been shown to be totally insensitive to whether central airports are (or are not) in operation. Smaller aircraft, charter service as well as regional feeders could also serve such airports. Low fees to the airline and to the customer as well as shuttle services to the city centre would enable such smaller capacity airports to grow, although their overall volume would not in all cases reach that of (4). The advantage of this solution is the potential to develop a spatially balanced and comprehensive network of routes that are economically viable with very low investment costs. There would be little dependence on commercial revenues to cross-subsidise aeronautical operations. Instead, LCCs and other carriers may seize such opportunities to generate incremental revenue on board.

6 Results

It was our intention to show alternative paths for airport development in India. These alternatives feature distinct properties in terms of competition and resilience to shocks in demand as well as (in)dependence on commercial revenues to finance aeronautical operations and their growth. By comparing alternative “real options” and their plausible impact on market structure and competitive dynamics, a hierarchy of optimal versus sub-optimal solutions emerges.

Figure 2: Optimal Paths for Planning and Investing in Airport Development in India

LC terminal Outskirts

Navi Mumbai (PPP) Other airport


in Mumbai

FSC terminal?

New construction

Modernise, including extension

New Delhi (GMR) Mumbai (GVK) FSC Central Chennai (AAI) terminal?

Kolkata (AAI)

Figure 2 shows that modernisation of existing facilities can provide for cost-effective and flexible solutions when compared to new greenfield projects. Rather than committing to highly irreversible investments at (centrally located) metro airports, dedicated LC terminals would offer more robust and resilient solutions in the face of market competition and uncertain demand. In the case of airstrips that are close to existing metros, it may be a highly flexible and very competitive complement to have them upgraded for low-cost, charter flights or regional connections. Such low-intensity satellite solutions could decongest the existing airports and help them focus instead on high-value added business or international travellers. Upgrades there could be more focused and capacity expansion would become less urgent.

Our analysis shows that the approach of constructing completely new infrastructure (greenfield) aimed at full-service and LC carriers alike to be seriously flawed and sub-optimal when compared with other “real options”. The lower branch of Figure 2 (modernisation/upgradation of existing facilities) presents clearly superior cost/benefits, including risks/rewards in an uncertain environment. Experience has shown in the case of the new B angalore airport that stakeholders do not hesitate to commission new, i e, more optimistic, forecasts if original ones prove too conservative for justifying planned expenditures. Also, clauses in these concession agreements for greenfield projects clearly inhibit market competition and thus the possibility for more costeffective and flexible infrastructure to emerge in the same catchment area. During times of uncertain demand, these types of investments will be less adaptive to change and will be a major source of inefficiency in the market. Exceptionally successful projects such as Cochin airport demonstrate that growth from a small scale, with relatively modest investments at the beginning, but with a clear customer focus and market segmentation are the way to do greenfield projects.

Our analysis also suggests modifications in strategic planning for larger scale greenfield projects that are under way in central locations such as Navi Mumbai. The current plan there is to go for mixed terminals that would cater to LCCS and FSCs alike, possibly admitting even international traffic. There is no doubt about the commitment and irreversibility of investment that is to be undertaken there. However, continuing operations from the existing domestic and international terminals may deter some private parties from bidding for Navi Mumbai, in particular during periods of economic uncertainty. Thus there are significant risks in such a project, in spite of its central location and the state of the art technology that will be implemented there. As a clear alternative to typical PPPs for greenfield projects in India, we would therefore recommend flexibility in the case of Navi Mumbai. The new airport could be conceived as a dedicated LC terminal, while its budget could be reduced to a fraction of the initially planned investment. Customer segmentation with the remaining two Mumbai airports would fall in place, while Navi Mumbai should aim to finance its aeronautical activities without having to depend on cross-subsidies from commercial activities. This change in investment path from irreversible to lower costs will ensure greater flexibility in the usage of airport capacity and its expansion will show a better reward/risk trade-off in the long run. It would contribute to help air traffic in India to grow in a more balanced and robust way. Issues of FSP can be instrumental for implementing such growth from an operational perspective at the airport level.

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Jeong, J (2005): An Investigation of Operation Costs of Park, C S and H S B Herath (2000): “Exploiting Uncer-Salazar de la Cruz (1999): “A DEA Approach to Airport: Focus on the Effects of Output Scale. MSc tainty – Investment Opportunities as Real Options: the Airport Production Function”, Inter - thesis, Sauder School of Business, University of A New Way of Thinking Engineering Economics”, national Journal of Transport Economics 26(2), British Columbia, Vancouver, Canada. The Engineering Economist 45(1), 1-36. 255-70.

Annex 1: Scope and Scale of Major Airport Projects in India

Project Value Passengers (Year) Cargo (Year) A/C Movement (2007) Total Land No Runways (Length) Terminal (Floor Area)

Delhi (IGI) Rs 8,500 crore (includes new 23m in 2007, 37m 400,000t (’07) 75 flights/hr 5,000 acres 2 (3,810m + 2,813m); 1 domestic, terminal for Rs 2,900 crore) (planned for 2010) 3rd runway (4,400m) 1 internat’l (190,000m2) in construction + 1 new terminal (480,000m2)

Mumbai (CIS) Rs 5,500 crore (until 2010), 22m in 2007, 40m 5,33,593t (’07) 50 flights/hr; 1,450 acres 2 (3,445m + 2,925m) 1 domestic, essentially for new (planned for 2010) 650 flights/day (operational); 1 internat’l (146,000m2) terminals 2,000 acres + 1 pax terminal, total 1 cargo (planned)

Navi Mumbai Rs 3,200 – 4,000 crore 50-55m (final state) NA NA About 3,000 2 (each 4,500m) Pax: 250,000m2 (planned) acres Cargo 100,000m2

Begumpet Terminated service in ‘08 20,000 pax/day NA 300 flights/day NA 1 (3,231m) NA (HYD)

Hyderabad Total: Rs 2,500 crore 1st stage: 10m, 43,000t (’08) NA 5,495 acres 1 (4,260m) Single terminal final: 40m (planned) (1st phase) (105,300m2)

Bangalore Terminated service in ‘08 7.5m (’06) 100,000t (’07) 550 flights/day NA 1 (3,307m) NA (HAL)

Bangalore Rs 2,470 crore 1st stage: 12m 350,000t 30 flights/hr, 4,300 acres 1 (4,120m) Single terminal (’09, planned) 440/day (71,000m2)

Cochin Rs 285-315 crore 1.01m (int), 1.50m 26,000t (’07) About 130/day 1,300 acres 1 (3,400m) 1 domestic (10,000m2) (dom) in ’06-‘07 + 440 acres for + 1 internat’l + 1 cargo comm dvlpmt (6,000m2)

MIHAN Rs 2,581 crore (’02-’35) 0.6m (’06), 14m (’30) 910t (’06), NA 2,935 Ha 1 (4,000m)+ Pax: 300,000m2 870,000t (’30) (planned) 1 (4,000m, Cargo: Separate for planned) dom/internt’l

Chennai Rs 1,100 crore * + 12m (2007) 270,608t (’07) 25 flights/hr 1,070 acres 2 (3,658m + 1 domestic pax, (modern-Rs 1,250 crore** (extension) 2,045m) 1 internt’l pax, 1 cargo isation) terminal

Chennai (greenfield) NA NA NA NA 4,821 acre s 4 (planned) NA
Kolkata NA 6m (’07) NA 350 flights/day NA 2 (3,627m + 2,400m) 1 domestic,
1 internat’l 1 Cargo
4th pax termin (planned)
35 others
* Cost of construction of the runway, taxiway and apron.
** Cost of construction of terminal building, car park and face uplift.
Source: AAI (2006).
Annex 2A: Project Costs Indian Airport Infrastructure (Navi Mumbai, Rs Crore) Annex 3A: Low-Cost Terminals in Asia/
Capacity (Mpax) Lumps 10 Basic Cost Pre-Dvlpm’t Phase 1 20 Phase 2 30 Phase 3 40 Phase 4 Total Singapore
Land development Land reclamation cost 688 River training and diversion 128 Budget Terminal In response to the emerging trend of low cost carriers (LCCs) in Asia, the Civil Aviation
Retaining walls 25 Authority of Singapore (CAAS) decided to
Off-site infrastructure cost 282 build a customised terminal, which is now
EHT electrical 101 called ‘Budget Terminal’, for LCCs after it
EMP and RR 248 received firm commitment from Tiger Airways
Land cost 524 to use such a terminal. The terminal is

Air side works 317 413 205 231 located along Airport Boulevard, near Changi

Terminal and other buildings Land side works and other Total Total project cost Particulars Construction cost Preliminary and pre-op exp Interest during construction Debt service reserve Total project cost Economic Political Weekly 384 353 90 76 2,787 841 4,200 Pre-Dvlpm’t Phase 1 Phase 2 0 3,157 1,628 513 174 59 39 672 153 0 194 94 552 4,197 1,934 February 21, 2009 vol xliv No 8 333 5 543 Phase 3 1,434 27 0 0 1,461 351 11 594 Phase 4 2,082 37 0 0 2,119 4,765 9,970 8,301 810 864 288 10,263

Airport. CAAS had earlier announced that the

o perating costs at the Budget Terminal would be kept low to meet the needs and operating m odels of LCCs. In line with this objective, the compact layout of the single-storey terminal has no need for travelators, escalators and aerobridges. The Budget Terminal will offer other services such as a free shuttle bus service to link passengers from the Budget Terminal to Changi Airport’s existing

Annex 2B: Other Project Costs Indian Airport Infrastructure (MIHAN, Rs Crore) yet to be finalised. It is expected that the per-
Capacity (Mpax) lumps 0.2 2 14 manent LCCT will have a design capacity of 30
2002-’06 2007-’15 2016-’25 2026-’35 to 35 million passengers per annum.
Movement area (runways) 769 787 484 452 2,492
Terminal complex 3,208 2,210 3,443 2,743 11,604 Low Cost Carrier Terminal
Flight control 562 60 60 60 742 The LCCT was specifically built at KL Interna-
Utilities 275 125 135 144 679 tional Airport to cater to the growing passen
Pre-ops, temp works and test 590 590
Contingencies 303 385 432 348 1,468 passengers of Malaysia’s first “no-frills” airline,
Design and proj supervision 146 92 92 84 414 Air Asia. It is located 20km away from the KLIA Main Terminal Building (MTB). Construction
MIHAN roads and infrastructure 800 735 400 64 1,999 of the LCCT was on a fast track basis beginning
MIHAN costs (rail, cargo, etc) 788 2 222 1,012 June 2005 at an approximate cost of RM108
Contribution off-site infrastructure 1,200 1,200 million.
Reconstruction IAF building 150 150 The 35,290 square metres terminal is
Contribution to MRTS 1,000 1,000 designed and built to suit the LCC business
Land acquisition and resettlement 2,460 2,460 model that requires basic terminal facilities
Total project cost 11,251 5,396 5,268 3,895 25,810 and amenities. With this in mind, the terminal
COCHIN BLR HYD is designed to facilitate the movement of pas-
Capacity (Mpax) Lumps 2 11 12 sengers of international and domestic depar
2000-’05 Phase 1 Phase 1 tures/arrivals within a single floor operation
Land acquisition and rehab 70 area. Thus travelators, escalators and aero-
Runway, terminal and other construction cost 160 bridges are not required to be provided at the
Interest capitalised 53 terminal.
Total 283 2,500 2,470 The operation of the LCCT is supported by

gers of the Low Cost Airlines, especially the

t erminals, and vice versa. Other services and facilities such as money changers, internet t erminals, duty-free shopping, and food and beverage outlets will also be available at the Budget Terminal.

The construction and other related costs of the Budget Terminal are about S$45 million. The 25,000 square metres terminal comprises two adjacent single-storey buildings for departure and arrival and is about the size of three football fields, or about a tenth of the size of Changi Airport’s Terminal 1. The terminal will initially be able to handle about 2.7 million passengers per annum and there is scope for further expansion should more airlines decide to use it. The Budget Terminal was completed in December 2005 and has opened for operations on 26 March 2006.

Total Passenger Service Charge

Travellers can look forward to enjoying greater cost savings as the CAAS has introduced a total passenger charge of S$13 for t ravellers departing from the new terminal. This is much lower than the S$21 total charge at Changi Airport’s Terminals 1 and 2 and is also the lowest passenger charge for international flights in the region.

The total passenger charge at the new terminal covers two components, namely:

  • (a) S$7 passenger service charge (PSC). This is less than 50% of the S$15 PSC at Terminals 1 and 2; and
  • (b) S$6 passenger security service charge (PSSC) as levied at both Terminals 1 and 2. The PSSC is consistent as the same level of airport security will be provided at the new t erminal.
  • For more information, please visit www.

    Annex 3B: Low-Cost Terminals in Asia/ Kuala Lumpur

    LCCT Extension and New LCCT

    With an increasing number of passengers using the Low Cost Carrier Terminal (LCCT), Malaysia Airports Holding Berhad (MAHB), the company managing KLIA had approved the expansion of the LCCT beginning early 2007 to accommodate more passengers as the current LCCT is nearly at full capacity. The expansion of LCCT also shows the support for the launch of Malaysia’s first long haul low cost carrier, AirAsia X by enabling the terminal to accommodate wide-bodied aircraft that are used by AirAsia X. However, as the LCCT is a temporary solution for budget travellers, MAHB has submitted a proposal to the Transport Ministry to build a new, permanent LCC hub in-between the main terminal building and satellite building A to replace the present LCCT.

    The airport operator has announced that the construction works for the extension of LCCT will begin in March 2008 and are expected to be completed by December 2008. The capacity of the LCCT will increase from 10 to 15 million passengers a year. A proposal for a more p ermanent building to house a new LCCT has been submitted and is expected to have a capacity of 30 million passengers a year. It is also expected that the new LCCT will be completed by 2011 to 2012. It is expected that the current LCCT will be converted into a cargo hub once the new terminal is completed. The RM124 million LCCT expansion project tender was won by Fajarbaru Builder Group Bhd and construction work is expected to begin immediately.

    The airport operator has announced that the construction of a permanent LCCT will commence sometime in 2008 although the site is the existing parking apron and additional infrastructure such as car parks, surface access, kerb side road and other utilities. This terminal is capable of handling 10 million passengers a year and there is scope for further expansion up to 15 million passengers, if required in the future.

    LCCT-KLIA was opened in 23 March 2006. It is an extension of the existing facilities of the KLIA. In November 2006, LCCT-KLIA was voted CAPA Low Cost Airport of the year in the CAPA Aviation Awards for Excellence.

    LCC Terminal – Dimensions (Sq metres)

    Size of the terminal 35,290
    a Check in area 2,650
    b International departure hall 3,240
    c International arrival hall 4,340
    d Domestic departure hall 4,430
    e Domestic arrival hall 1,900
    f Public concourse main area 4,355
    g Public concourse international
    arrival area 325
    Common, Ramp and circulation 6,760

    1US$ = 3.45 Malaysian Ringgit and 1.5 SD.

    available at

    Nagaraja Enterprises

    18(94), Mahakavi Kuvempu Road, 5th Cross, Malleswaram, Bangalore - 560 003, Karnataka. Ph: 23368551

    February 21, 2009 vol xliv No 8

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