Federation of India Airlines (FIA) - AERA
Federation of India Airlines (FIA) - AERA
Federation of India Airlines (FIA) - AERA
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
Preliminary Comments & Submissions on behalf <strong>of</strong> the <strong>Federation</strong> <strong>of</strong> <strong>India</strong>n <strong>Airlines</strong> (<strong>FIA</strong>) in response to<br />
White Paper No.01/2009‐10 titled “Regulatory Objectives & Philosophy in Economic Regulation <strong>of</strong><br />
Airports & Air Navigation Services :<br />
‐ 1 ‐<br />
PRELIMINARY COMMENTS & SUBMISSIONS<br />
1. These issue - wise preliminary comments and submissions are being placed on record for the<br />
consideration <strong>of</strong> the Authority, while seeking the liberty to add to and supplement these<br />
comments and submissions with more detailed submissions and evidentiary material and<br />
precedents 1 within the next 8 weeks or so. These submissions are organized under the<br />
following heads:-<br />
A. Submissions with respect to the issues identified in paragraph 5.1 (a) to (h) <strong>of</strong> the White<br />
Paper.<br />
B. Submissions with respect to some additional related issues.<br />
A. SUBMISSIONS re. ISSUES IN PARAGRAPH 5.1<br />
Re. Form <strong>of</strong> Regulation: Price Cap vs. Rate <strong>of</strong> Return vs. Light Touch<br />
2. It is submitted that ‘Price Cap mechanism’ should be adopted for airport charges, inter alia,<br />
for the following reasons:-<br />
(a) The advantages succinctly captured in the comparative table in paragraph 4.18 <strong>of</strong> the<br />
White Paper.<br />
(b) The expectation that in case the earnings <strong>of</strong> the airport operator are capped and its<br />
performance is monitored by the service level agreements, the resultant regime will be the<br />
suitable performance based regulation desirable to incentivize them to strive to achieve<br />
and maintain quality <strong>of</strong> services at the airports. This also ties in with the service quality<br />
standards monitoring.<br />
(c) It is submitted that all Aeronautical activities that are covered under Section 2(a) <strong>of</strong> <strong>AERA</strong><br />
Act i.e. including Ground Handling, Cargo Facility, and Fuel supply infrastructure at the<br />
airport, should form part <strong>of</strong> Aeronautical revenue for the purpose <strong>of</strong> determination <strong>of</strong><br />
Aeronautical tariff. Consequently, the regulatory asset base must also include investments<br />
made in these activities. Presently, Revenues arising from Ground Handling, Cargo and<br />
Fuel Supply are treated as Non-Aeronautical revenue, though they are integral part <strong>of</strong><br />
1 As envisaged in paragraph 5.2 <strong>of</strong> the White Paper
Preliminary Comments & Submissions on behalf <strong>of</strong> the <strong>Federation</strong> <strong>of</strong> <strong>India</strong>n <strong>Airlines</strong> (<strong>FIA</strong>) in response to<br />
White Paper No.01/2009‐10 titled “Regulatory Objectives & Philosophy in Economic Regulation <strong>of</strong><br />
Airports & Air Navigation Services :<br />
‐ 2 ‐<br />
Aeronautical services. This is clearly enunciated in the concession agreement signed by<br />
MIAL and DIAL and hence would require modification going forward.<br />
(d) The belief that while determining the regulatory price-cap, the Authority would take into<br />
account, on a year to year basis the relevant factors including:<br />
(i) inflation,<br />
(ii) change in traffic volume (increase / decrease in number <strong>of</strong> passengers),<br />
(iii) additional major capital expenditure, and<br />
(iv) such other items which have a bearing on absorption <strong>of</strong> charges.<br />
Such a mechanism shall also take into account:<br />
(a) suitable flexibility in the <strong>India</strong>n context,<br />
(b) suitable flexibility to adapt to the changing times, depending upon the growth <strong>of</strong><br />
Aviation sector and the progress <strong>of</strong> Airport modernization and development at<br />
various locations, over a period <strong>of</strong> time; and<br />
(c) induce a more transparent and accountable system <strong>of</strong> charges being levied upon<br />
the users (directly or through the airlines), rather than a mechanism where all<br />
‘residual’ charges (costs which are not absorbed / paid by other stakeholders) are<br />
passed on through the airlines.<br />
(d) The Price Cap approach seems to provide incentives to reduce unit costs compared with<br />
the original forecast.<br />
(e) It is noteworthy that a multi-year price-cap regulation has been successfully implemented<br />
in UK and Australia, and has been strongly recommended by the Naresh Chandra<br />
Committee Report setting out the Road-map for <strong>India</strong>’s Civil Aviation Sector. 2<br />
Re. Treatment <strong>of</strong> non-aeronautical revenue; Adoption <strong>of</strong> Single vs Dual vs Hybrid till<br />
3. It is submitted that the Single Till concept may be adopted both for revenues and for<br />
investments, with the Capex to be netted-<strong>of</strong> against the deposits garnered by the Airport<br />
Operators), inter alia, for the following reasons:-<br />
2 Please refer to paragraph 4.3.1 <strong>of</strong> the Naresh Chandra Committee Report
Preliminary Comments & Submissions on behalf <strong>of</strong> the <strong>Federation</strong> <strong>of</strong> <strong>India</strong>n <strong>Airlines</strong> (<strong>FIA</strong>) in response to<br />
White Paper No.01/2009‐10 titled “Regulatory Objectives & Philosophy in Economic Regulation <strong>of</strong><br />
Airports & Air Navigation Services :<br />
‐ 3 ‐<br />
(a) The Single Till model perhaps lends itself to ensuring that the legislative objectives<br />
underlying the Airports Economic Regulatory Authority <strong>of</strong> <strong>India</strong> Act, 2008 (“the Act”)<br />
comprehensively, in particular the principles enshrined in Section 13.<br />
(b) The Single Till model would comprehensively factor in the revenues arising out <strong>of</strong><br />
diverse activities that goes on at the airport and the facilities available there,<br />
yielding revenue for the Airport Operators, including the third party groundhandling,<br />
charges on fuel throughput, earnings arising from diverse retail spaces,<br />
hospitality sectors and all other forms <strong>of</strong> commercial exploitation <strong>of</strong> the real estate<br />
opportunity at the airports. Such multifarious non-aeronautical income-streams need to<br />
be recognized and factored before aeronautical charges payable by the airlines /<br />
passengers are determined.<br />
(c) The Single Till model incentivizes the airlines and the airport operators to optimize the<br />
footfalls at the airports. These passengers in turn avail <strong>of</strong> the non-aeronautical services at<br />
the airports which generates significant non-aeronautical revenue.<br />
(d) Since Price Cap mechanism considers the capex incurred / to be incurred, adoption <strong>of</strong> the<br />
Dual or Shared Till models would create significant implementation difficulties where some<br />
non-aeronautical revenues are preserved for expansions. To illustrate the point, -<br />
(i) Whilst Delhi and Mumbai airports pay certain percentages to the AAI as part <strong>of</strong><br />
their concession agreements, it is not clear how AAI allocates this earning to<br />
airports under its management. This creates an anomaly where certain income is<br />
earned by the respective airport operators but it is not reflected while calculating<br />
the charges at other airports.<br />
(ii) If it turns out that this income is supporting loss-making airports, then the airlines<br />
should have a say in the matter <strong>of</strong> determining whether any one or more such<br />
airports are required or not. If such airports need to operate as an element <strong>of</strong><br />
“essential air services” 3 , funding <strong>of</strong> such airports should come from the<br />
Government and not air passengers using other airports.<br />
As suggested vide pages 31 <strong>of</strong> 89 <strong>of</strong> the White Paper, adoption <strong>of</strong> dual or hybrid approach may<br />
lead to higher airport charges, as large capital outlays are associated with development <strong>of</strong><br />
Aeronautical assets, while larger income is realizable from Non-Aeronautical services with least<br />
capital investment.<br />
3 As discussed at paragraph 2.22 <strong>of</strong> the White Paper and in the Naresh Chandra Committee Report
Preliminary Comments & Submissions on behalf <strong>of</strong> the <strong>Federation</strong> <strong>of</strong> <strong>India</strong>n <strong>Airlines</strong> (<strong>FIA</strong>) in response to<br />
White Paper No.01/2009‐10 titled “Regulatory Objectives & Philosophy in Economic Regulation <strong>of</strong><br />
Airports & Air Navigation Services :<br />
‐ 4 ‐<br />
Further from a reading <strong>of</strong> OMDA and the White Paper, the Aeronautical costs are subsidized only<br />
to the tune <strong>of</strong> 30% <strong>of</strong> Non-aeronautical income in dual approach methodology and hence single till<br />
approach appears to be best suited for both Airports and <strong>Airlines</strong>.<br />
As such, it is suggested that the <strong>AERA</strong> should in effect take precedence over any contractual<br />
arrangements (such as concession agreements etc.) between the airport operator and the AAI.<br />
THE <strong>FIA</strong> IS OF THE CONSIDERED VIEW THAT THE CONCESSIONS OFFERED BY THE<br />
CENTRAL GOVERNMENT VIDE ANY AGREEMENT OR MOU CAN, AT BEST, BE TAKEN<br />
INTO CONSIDERATION BY THE <strong>AERA</strong> WHILE DETERMINING THE TARIFF, BUT THOSE<br />
CONCESSIONS CANNOT BE THE GUIDING FORCE/PRINCIPLE BEHIND DETERMINING THE<br />
TARIFF AT THE AIRPORTS BY THE <strong>AERA</strong>.<br />
Re. Capital Investment: Need for user consultation and degree <strong>of</strong> regulatory oversight; and<br />
Operating Expenditure: incentives for efficiency improvement & cost pass-through<br />
The Authority while determining (and levying) tariff should adopt a transparent and consultative<br />
approach whereby all stakeholders using the airport and availing its service <strong>of</strong>ferings are given a<br />
fair and effective opportunity to intervene and be heard 4 .<br />
To ensure that the regulatory model results in the desired outcomes consistent with the legislative<br />
objectives underlying the Act, it is desirable that:–<br />
(a) The projected capex and opex should be proposed by the airport operators to the<br />
Authority in context <strong>of</strong> the ensuing tariff period. It is desirable that some industry<br />
standards, norms and benchmarks 5 are established by the Authority after a public hearing<br />
process to guide the airport-specific projections. So for instance, in the case <strong>of</strong> some <strong>of</strong><br />
the major airports, the concession agreement provides very clear incidences for<br />
commercial exploitation <strong>of</strong> airports. However, the airport operators do not exploit the real<br />
estate to the optimum level for whatever reasons. This has a huge bearing on the<br />
aeronautical charges; given that the revenue from the non-aeronautical charges is meant<br />
4 Please refer to the submissions under the head “Guiding Principles For Regulatory Processes” below.<br />
5 Like norms and principles guiding the determination <strong>of</strong> tariff, debt-equity ratio, reasonable return,<br />
depreciation, working capital, foreign exchange rate variation, etc. It will be instructive to examine the<br />
tariff principles governing power sector utilities as was enshrined in (a) the 6 th Schedule to the Electricity<br />
(Supply) Act, 1948 read with the depreciation notifications issued by the Ministry <strong>of</strong> Power, or (b) the<br />
Electricity Supply (Annual Accounts) Rules, 1985, or (c) the Tariff Regulations notified by the Central<br />
Electricity Regulatory Commission from time to time.
Preliminary Comments & Submissions on behalf <strong>of</strong> the <strong>Federation</strong> <strong>of</strong> <strong>India</strong>n <strong>Airlines</strong> (<strong>FIA</strong>) in response to<br />
White Paper No.01/2009‐10 titled “Regulatory Objectives & Philosophy in Economic Regulation <strong>of</strong><br />
Airports & Air Navigation Services :<br />
‐ 5 ‐<br />
to cross subsidize the tariff payable for the aeronautical charges. This gross mismatch<br />
between projections for non aeronautical revenue (i.e. what the airport operators are<br />
supposed to do under the concession agreements) and the actual level <strong>of</strong> commercial<br />
exploitation (and the realizations made therefrom) tends to have considerable impact on<br />
the aeronautical charges for airlines.<br />
As such, AIRLINES CANNOT BE BURDENED WITH AND EXPECTED TO ABSORB,<br />
THE HUGE COSTS (IN THE FORM OF EXCESSIVELY HIGH AERONAUTICAL<br />
CHARGES) INCURRED BY THE AIRPORT OPERATORS ON ACCOUNT OF THE<br />
INEFFICIENCIES ON THEIR PART IN EXPLOITING THE NON - AERONAUTICAL<br />
POTENTIAL (ESPECIALLY, REAL ESTATE) AT THE AIRPORTS TO ITS OPTIMUM<br />
LEVEL.<br />
(b) Each airport operator then should propose a long term plan for each airport<br />
showing trends <strong>of</strong> Capex and Opex which should be shared with the stakeholders.<br />
(c) Against such projections, the actual expenditure should be reported periodically to<br />
bring transparency in charges and duration there<strong>of</strong>. The audited data for actual<br />
performance so submitted must be evaluated – both for capex and opex.<br />
(d) The actual expenditure claimed must pass muster <strong>of</strong> the standard <strong>of</strong> “regulatory<br />
prudency check 6 ” before it is passed onto any user.<br />
(e) At relevant points in time the stakeholders must be empowered to assist the Authority to<br />
secure efficiency and affordability without compromising the viability <strong>of</strong> the operations.<br />
This would be necessary in particular in context <strong>of</strong> any significant time and cost overruns<br />
or windfall gains and savings, in respect <strong>of</strong> which suitable regulatory mechanism and<br />
processes would need to be evolved to rebalance the consequential impacts.<br />
As huge investments are contemplated across various airports in the country including<br />
those privatized for modernization and the Green field airports, there is a greater need to<br />
evolve a mechanism whereby investments are justified either for capacity expansion or for<br />
technological obsolescence or replacement capital expenditure due to efflux <strong>of</strong> time. Just<br />
by way <strong>of</strong> example, while the Capital outlay for Mumbai Modernization project is about Rs.<br />
10,000 Crores, the Capacity expansion is a mere 20% i.e. from 700 Aircraft movements to<br />
840 Aircraft movements. For a similar spend at Delhi, with a marginal increase in<br />
6<br />
In this context, it would be instructive to examine the regulatory jurisprudence evolved in the electricity<br />
regulatory regime.
Preliminary Comments & Submissions on behalf <strong>of</strong> the <strong>Federation</strong> <strong>of</strong> <strong>India</strong>n <strong>Airlines</strong> (<strong>FIA</strong>) in response to<br />
White Paper No.01/2009‐10 titled “Regulatory Objectives & Philosophy in Economic Regulation <strong>of</strong><br />
Airports & Air Navigation Services :<br />
‐ 6 ‐<br />
expenditure in the subsequent years, there is a scope to triple the capacity. Under these<br />
circumstances, the cost <strong>of</strong> Airport operations at Mumbai will be disproportionately high<br />
compared to Delhi, which in itself requires justification for incurrence <strong>of</strong> such high costs.<br />
It is pertinent to note that during the current phase <strong>of</strong> modernization <strong>of</strong> Delhi and Mumbai<br />
Airports, the operating costs <strong>of</strong> all the airlines have increased manifold, due to<br />
taxiing/holding time both on the ground and in the air, as a result <strong>of</strong> Airport congestion,<br />
since the entry <strong>of</strong> new <strong>Airlines</strong> and the expansion <strong>of</strong> air services has preceded the<br />
enhancement <strong>of</strong> airport facilities. The cost increase has been considerable in the area <strong>of</strong><br />
fuel burn, aircraft and engine maintenance, besides cost <strong>of</strong> flight cancellation due to<br />
delayed arrivals. Further, statistically speaking, the additional annual costs incurred by the<br />
<strong>Airlines</strong>, as a result <strong>of</strong> the above, is estimated to be in the region <strong>of</strong> Rs. 1000 Crores for<br />
the entire industry and against the backdrop <strong>of</strong> the above, the Airport charges that the<br />
<strong>Airlines</strong> are required to pay, during these times need to be lower, as <strong>Airlines</strong>, in any case,<br />
are saddled with huge infrastructural bottleneck costs. Furthermore, as Capital outlay for<br />
development is substantial, there must be transparency in cost incurrence mechanism,<br />
whereby information pertaining to costs can be made available at any time to the<br />
users/<strong>Airlines</strong> through <strong>AERA</strong> to ensure its justification, as is the case with Telecom and<br />
Energy sectors.<br />
As regards the operating expenses – the incentives for efficiency improvement and cost<br />
pass through, the users i.e. <strong>Airlines</strong> and Passengers must be provided with an opportunity<br />
to assess the cost increase, as it will have a multiplier effect on the entire sector leading to<br />
inflationary conditions, thereby impacting growth.<br />
Re. Form <strong>of</strong> Price Control and Tariff Structure<br />
It is submitted that the Authority should set individual / item-wise tariff rather than<br />
‘aggregate’ to obviate the cross-subsidization/price gouging problems that are likely to arise<br />
otherwise. This is also pertinent given the fact that various services are provided at an<br />
airport by various agencies such as the BSF, CISF, AAI, ATC along with the airport<br />
operator. Given the diverse component involved, while determining the tariff structure, the<br />
costs should ideally be segregated to the extent possible. As such, it is proposed that -<br />
(a) Each <strong>of</strong> the aeronautical and non aeronautical services, broken into each<br />
discernible sub-head, should be individually spelt out for the purposes <strong>of</strong><br />
determining the tariff applicable to them. For instance, -<br />
(i) Under aeronautical services, the tariff should be itemized for communication,
Preliminary Comments & Submissions on behalf <strong>of</strong> the <strong>Federation</strong> <strong>of</strong> <strong>India</strong>n <strong>Airlines</strong> (<strong>FIA</strong>) in response to<br />
White Paper No.01/2009‐10 titled “Regulatory Objectives & Philosophy in Economic Regulation <strong>of</strong><br />
Airports & Air Navigation Services :<br />
‐ 7 ‐<br />
navigation and surveillance services (CNS), supportive communication landing,<br />
housing and parking <strong>of</strong> aircraft, meteorological services for air navigation, search<br />
and rescue services, aeronautical information services and so on and so forth.<br />
(ii) Under the non-aeronautical services, the tariff should be itemized for retail, hotel,<br />
car parking and so on.<br />
(b) The non-aeronautical revenue arising from the passenger should be used to <strong>of</strong>fset/subsidize<br />
the passenger charges for the aeronautical services paid for by the<br />
passengers for the use <strong>of</strong> the airports.<br />
(c) The revenues derived from non-aeronautical charges imposed on airlines should be used<br />
to <strong>of</strong>f-set the aeronautical charges payable by airlines at the airports.<br />
Currently, too many nomenclatures used to recover cost by the Airport operator. It neither justifies<br />
its incurrence nor its pass through mechanism. It is therefore prudent to seek bifurcation <strong>of</strong> the<br />
tariff structure levied on airlines by the airport operators to the largest extent possible.<br />
Also, for instance, there is a compelling need for transparency with respect to utilization <strong>of</strong> funds<br />
drawn towards Passenger Service Fee (PSF). Considerable charges are recovered from the<br />
Passengers through the <strong>Airlines</strong> and paid into a fund called PSF. From the reading <strong>of</strong> OMDA,<br />
there appear to be two components <strong>of</strong> PSF - Security Component and Facilitation Component.<br />
Security component (65% <strong>of</strong> PSF) is retained by the Airport Operator for and on behalf <strong>of</strong><br />
Government <strong>of</strong> <strong>India</strong> to meet the CISF related expenses and excess, if any, is transferred to AAI.<br />
With <strong>Airlines</strong> continuing to face turbulent times, there is a need for greater transparency with<br />
respect to the utilization <strong>of</strong> funds both on Revenue and Capital Account. Further Vide 3.3.5 <strong>of</strong> the<br />
State Support Agreement, the respective airport operator has been made responsible for procuring<br />
and maintaining all security systems and equipments at their cost (Except arms and ammunitions<br />
which will be spent out <strong>of</strong> Security Component) as required by Government <strong>of</strong> <strong>India</strong>, Bureau <strong>of</strong><br />
Civil Aviation Security or its designated nominees from time to time. With surging traffic flow into<br />
<strong>India</strong>, not to speak <strong>of</strong> domestic passenger growth now growing rapidly, there is a scope for review<br />
<strong>of</strong> PSF. In today’s time, there is a strong merit to reduce the incidence <strong>of</strong> “Security Component” <strong>of</strong><br />
PSF by atleast 50% to help enable <strong>Airlines</strong> to tide over the difficult times.<br />
Another glaring example in this regard is the Airport Development Fee (ADF). The Ministry in the<br />
recent past has been approving development fee being levied on the passengers for development<br />
<strong>of</strong> Airports. Since it is a capital receipt in the hands <strong>of</strong> the Airport operator, it is free <strong>of</strong> revenue<br />
share to AAI and no income tax also applicable on such fee. The reasons cited for such a levy was
Preliminary Comments & Submissions on behalf <strong>of</strong> the <strong>Federation</strong> <strong>of</strong> <strong>India</strong>n <strong>Airlines</strong> (<strong>FIA</strong>) in response to<br />
White Paper No.01/2009‐10 titled “Regulatory Objectives & Philosophy in Economic Regulation <strong>of</strong><br />
Airports & Air Navigation Services :<br />
‐ 8 ‐<br />
to fund the Airport modernization program, at a time when there was a worldwide recession<br />
impacting Air Traffic, falling passenger loads, not to speak <strong>of</strong> investors shying away from real<br />
estate development. The Government did intervene to bail out Airports at a crucial time and now<br />
as better times are returning, with all round improvement in Air traffic, surging loads and recovery<br />
seen in all sectors <strong>of</strong> the economy, there is a need to revisit the continuance <strong>of</strong> development fee<br />
being levied on the passengers.<br />
As PSF and ADF being a cost pass through mechanism, the ability <strong>of</strong> the <strong>Airlines</strong> to raise fares<br />
becomes limited, as the end user is already burdened with such levy. If, for good reasons, such a<br />
levy is required to be continued till the end <strong>of</strong> its term, the <strong>AERA</strong> must direct the Airport operator to<br />
give space to the <strong>Airlines</strong> for the entire concession period at nominal cost to enable the airlines to<br />
reduce its administrative cost.<br />
The concession agreement and the State Support Agreement entered into between AAI,<br />
Government <strong>of</strong> <strong>India</strong> and the airport operator emphasizes the following, while determining tariff<br />
and its structure:<br />
Clause 3.1.2 <strong>of</strong> the State Support Agreement (SSA) – The aeronautical charges for any year<br />
during the term shall be calculated in accordance with Schedule 6 appended to the SSA. For<br />
abundant caution, it is expressly clarified that the Aeronautical charges as set forth in Schedule 6<br />
will not be negotiated post bid after the selection <strong>of</strong> successful bidder and will not be altered by the<br />
airport operator (i.e. MIAL and DIAL) under any circumstances.<br />
Clause 10 Schedule 1 – Principles <strong>of</strong> Tariff fixation – Within the overall price Cap, the airport<br />
operator will be able to impose charges subject to those charges being consistent with these<br />
pricing principles and IATA pricing principles as revised from time to time including the following –<br />
• Cost Reflectivity – Any charges imposed by the airport operator must be allocated<br />
across users in a manner that is fully cost reflective and relates to facilities and<br />
services that are used by Airport users.<br />
• Non Discriminatory – Charges imposed by the airport operator are to be nondiscriminatory<br />
as within the same class <strong>of</strong> users.<br />
• Safety – Charges should not be imposed in a way to discourage the use <strong>of</strong> facilities<br />
and services necessary for safety.<br />
• Usage – In General Aircraft operators, Passengers and other users should not be<br />
charged for facilities and services that they do not use.
Preliminary Comments & Submissions on behalf <strong>of</strong> the <strong>Federation</strong> <strong>of</strong> <strong>India</strong>n <strong>Airlines</strong> (<strong>FIA</strong>) in response to<br />
White Paper No.01/2009‐10 titled “Regulatory Objectives & Philosophy in Economic Regulation <strong>of</strong><br />
Airports & Air Navigation Services :<br />
‐ 9 ‐<br />
Clause 12.2 <strong>of</strong> Chapter XII <strong>of</strong> OMDA relating to Tariff and Regulation with respect to Nonaeronautical<br />
Services – Subject to Applicable law, the airport operator shall be free to fix the<br />
charges for Non-Aeronautical services subject to the provisions <strong>of</strong> the existing contracts and other<br />
agreements.<br />
Clause 12.3 <strong>of</strong> Chapter XII <strong>of</strong> OMDA relating to Tariff and Regulation with respect charges for<br />
Essential Services – Notwithstanding the foregoing, those Aeronautical and non- Aeronautical<br />
Services that are essential services shall be provided free <strong>of</strong> charge to the passengers<br />
While the White Paper documents a large part <strong>of</strong> the above, it is pertinent to note that there have<br />
been anomalies in the way the charges are being levied today either in the Pass through<br />
Mechanism or through direct increase in Aero / Non aero charges. Somewhere, the philosophy<br />
cited above is not being adhered to, prior to enacting any new levy or modifying the existing tariff<br />
structure.<br />
Clause 1 Page 13 <strong>of</strong> OMDA - The definition <strong>of</strong> Non-aeronautical Assets seems to have excluded<br />
real estate development and as a result, revenue from such activities may not be available for<br />
subsidizing the Aeronautical charges. WITH HUGE COMMERCIAL DEVELOPMENT<br />
ANTICIPATED OVER A PERIOD OF TIME AT THE AIRPORTS, THE PERCENTAGE OF<br />
REVENUE DERIVED FROM COMMERCIAL DEVELOPMENT AND EXPLOITATION OF REAL<br />
ESTATE AT THE AIRPORTS MUST BE CONSIDERED AN INTEGRAL PART OF NON-<br />
AERONAUTICAL REVENUE ALONG WITH THE OTHER NON-AERONAUTICAL SOURCES OF<br />
REVENUE IN ORDER TO REDUCE THE AERONAUTICAL COST FOR THE PURPOSE OF<br />
DETERMINATION OF AERONAUTICAL TARIFF.<br />
Please note that the above stated provisions from the OMDA and SSA are merely<br />
illustrative/indicative in nature, and not exhaustive.<br />
IT IS THEREFORE SUGGESTED THAT THE TARIFF STRUCTURE SHOULD BE DEVISED<br />
SUCH THAT AIRPORTS ARE ENCOURAGED TO DEVELOP THE INFRASTRUCTURE AND<br />
CHARGE AIRLINES, AFTER TAKING INTO ACCOUNT THE BUSINESS MODEL AND<br />
REQUIREMENTS OF THE VARIOUS AIRLINES. THIS WOULD WARRANT CONSTANT<br />
CONSULTATIONS BETWEEN THE AIRLINES AND OPERATORS.<br />
Re. Passenger Charges V. Airline Charges<br />
It is submitted that in keeping with the underlying principles <strong>of</strong> transparency and<br />
accountability, passenger charges and airline charges should be duly segregated by the
Preliminary Comments & Submissions on behalf <strong>of</strong> the <strong>Federation</strong> <strong>of</strong> <strong>India</strong>n <strong>Airlines</strong> (<strong>FIA</strong>) in response to<br />
White Paper No.01/2009‐10 titled “Regulatory Objectives & Philosophy in Economic Regulation <strong>of</strong><br />
Airports & Air Navigation Services :<br />
‐ 10 ‐<br />
Authority. This would be salutary to achieve the objectives <strong>of</strong> economic regulation <strong>of</strong> civil aviation<br />
in <strong>India</strong> which is inherently monopolistic in various segments, inter alia, since this would facilitate:-<br />
(a) Effective regulation <strong>of</strong> tariff and performance standards for each aspect.<br />
(b) Benchmarking <strong>of</strong> both tariff and service quality for various facilities amongst similarly<br />
placed operators.<br />
(c) Ensure that airports charge the passengers directly for the passenger facilities <strong>of</strong>fered at<br />
the airport, rather than recover it indirectly through the airlines.<br />
It is important to note that any increase in Airport charges, whether recovered from the Passengers<br />
or from the <strong>Airlines</strong>, impairs the <strong>Airlines</strong>’ ability to pass on its own cost onto the passengers,<br />
leading to unsustainable operations both in the short and in the long run.<br />
Re. Service Quality Monitoring<br />
It is submitted that the performance monitoring <strong>of</strong> the airports should be conducted by the<br />
Authority through a credible third party agency <strong>of</strong> international repute selected jointly by the<br />
airports and airlines.<br />
There should be objective performance-based service level agreements which set out<br />
(a) the performance standards and service levels expected <strong>of</strong> airports,<br />
(b) cure mechanism for significant defaults, and<br />
(c) penalties for non-adherence to any <strong>of</strong> those standards with a suitable mechanism to<br />
enforce the penalties.<br />
The monitoring <strong>of</strong> service quality assumes considerable significance, as good quality and service<br />
standards at optimum cost will bring more passengers, thereby increasing the return to all the<br />
stake holders. This will also enable the passengers to distinguish the quality and service standards<br />
<strong>of</strong> the <strong>Airlines</strong>/Airports; thereby giving them the option <strong>of</strong> choosing the best from the standpoint <strong>of</strong><br />
reliability, safety and service standards at the Airport.
Preliminary Comments & Submissions on behalf <strong>of</strong> the <strong>Federation</strong> <strong>of</strong> <strong>India</strong>n <strong>Airlines</strong> (<strong>FIA</strong>) in response to<br />
White Paper No.01/2009‐10 titled “Regulatory Objectives & Philosophy in Economic Regulation <strong>of</strong><br />
Airports & Air Navigation Services :<br />
‐ 11 ‐<br />
B. SUBMISSIONS re. SOME ADDITIONAL RELATED ISSUES<br />
1. Re. Definition <strong>of</strong> ‘major airport’<br />
There is an emergent need for clarity regarding the applicability <strong>of</strong> the definition <strong>of</strong> ‘major airport’<br />
under Section 2(i) <strong>of</strong> the Act with respect to the meaning <strong>of</strong> the term “designated to have annual<br />
passenger through-put in excess <strong>of</strong> one and a half million”.<br />
The following aspects <strong>of</strong> the Act are noteworthy :-<br />
(a) The Act does not prescribe the process or the basis for this designation.<br />
(b) The phrase “designation” is not a defined term.<br />
(c) The tariff determination under section 13(2) <strong>of</strong> the Act is for a period <strong>of</strong> 5 years.<br />
(d) The Authority is solely vested with the statutory functions <strong>of</strong> economic regulation <strong>of</strong> major<br />
airports.<br />
In this context, it is submitted that the Authority may clarify the following aspects:-<br />
(a) The process and basis for such designation <strong>of</strong> an airport, including the period for which the<br />
annual passenger through-put should be assessed;<br />
(b) Any airport whose annual passenger through-put and the annual growth trajectory, in<br />
context <strong>of</strong> the economic development <strong>of</strong> the regional economy that drives this growth, is<br />
such that that airport is expected to exceed 1.5 million annual throughput mark within the<br />
ensuing 5 year tariff period, that airport shall be brought under the purview <strong>of</strong> the Authority<br />
suo moto.<br />
(c) Define the process applicable to any AAI-managed airport or non-AAI airport coming<br />
under the purview <strong>of</strong> the Authority, whereby -<br />
(i) the performance standards relating to quality, continuity and reliability <strong>of</strong> service,<br />
and<br />
(ii) the tariff applicable will be aligned with those applicable to ‘major airports’.<br />
Further, once an airport qualifies as a “major airport” and comes under the purview <strong>of</strong> the
Preliminary Comments & Submissions on behalf <strong>of</strong> the <strong>Federation</strong> <strong>of</strong> <strong>India</strong>n <strong>Airlines</strong> (<strong>FIA</strong>) in response to<br />
White Paper No.01/2009‐10 titled “Regulatory Objectives & Philosophy in Economic Regulation <strong>of</strong><br />
Airports & Air Navigation Services :<br />
‐ 12 ‐<br />
<strong>AERA</strong>, the <strong>AERA</strong> needs to decide on the fate <strong>of</strong> the aeronautical and non aeronautical<br />
charges at such airport. In this regard a comfortable transition time should be given to ensure<br />
seamless transition for airlines from an ‘AAI governed airport’ to become an ‘<strong>AERA</strong> governed<br />
airport’ and the consequent changes in the tariff structure. So, for instance, the AAI, effective<br />
January 1, 2010, has imposed a User Development Fee in Jaipur Airport. Jaipur Airport is currently<br />
not under the purview <strong>of</strong> the <strong>AERA</strong>, but is strongly headed towards achieving the annual<br />
throughput as prescribed under the Act. (Statistically, as per AAI figures, during April-September<br />
2009 6.88 lakh passengers have travelled through Jaipur airport registering an increase <strong>of</strong> more<br />
than 24% over last years figure. Since the growth rate during the second half <strong>of</strong> the year is even<br />
higher the 1.5 million passenger mark will easily be crossed. In fact in 2007-08 Jaipur airport pax<br />
no. was 1.33 million and in 2008-09 it had declined to 1.20 million during the slow down period).<br />
2. Re. Major Airports to be made comparable to other global regional hubs<br />
It is submitted that given the quantum leap in passenger growth and the future <strong>of</strong> civil aviation in<br />
the country, it is imperative that ‘Major Airports’ be made efficient and competitive, so that the<br />
charges recovered by the operators for use <strong>of</strong> the airports make economic sense to the travelling<br />
public at large. In this behalf, it is submitted that the Authority must bear in mind that these airports<br />
must keep pace with other regional hubs such as Dubai and Singapore.<br />
It is submitted that the passengers (directly or through the charges levied through the airlines)<br />
should be made to pay for only those services that they actually avail at the airports. In this<br />
context, the successful regulatory development in broadcasting sector where the Telecom<br />
Regulatory Authority <strong>of</strong> <strong>India</strong> enforced regulations for carriers to provide unbundled television<br />
channels rather than bundled bouquets only to secure transparency, competition and value for<br />
money for customers. A similar development in the <strong>India</strong>n civil aviation is the successful<br />
emergence <strong>of</strong> “low cost carriers”. Based on these models it is submitted that the Authority may<br />
ensure that all users <strong>of</strong> the airport facilities are <strong>of</strong>fered a ‘menu’ <strong>of</strong> services and charged only for<br />
those services that they actually avail at the airports.<br />
3. Re. Tariff Determination for a period <strong>of</strong> 5 years<br />
It is submitted that there is a need to strike a balance between a light-handed 5 year multi-year<br />
price-cap tariff and the need to evolve a base-line <strong>of</strong> data, norms and standards to effectively<br />
regulate monopoly segments <strong>of</strong> civil aviation sector during the initial years. It is noteworthy that a<br />
classic light-handed 5 year multi-year price-cap regulatory regime would suit a stable regulatory<br />
environment where various transition developments have occurred, including but not limited to<br />
elements like :-
Preliminary Comments & Submissions on behalf <strong>of</strong> the <strong>Federation</strong> <strong>of</strong> <strong>India</strong>n <strong>Airlines</strong> (<strong>FIA</strong>) in response to<br />
White Paper No.01/2009‐10 titled “Regulatory Objectives & Philosophy in Economic Regulation <strong>of</strong><br />
Airports & Air Navigation Services :<br />
‐ 13 ‐<br />
(a) unbundling <strong>of</strong> various elements <strong>of</strong> aeronautical and non- aeronautical revenue;<br />
(b) information asymmetry;<br />
(c) establishing and enforcing verifiable and objective performance benchmarks for quality,<br />
continuity and reliability <strong>of</strong> services;<br />
(d) stable and uniform application <strong>of</strong> a regulatory regime to all airports without any special<br />
dispensations, other than those warranted or found reasonable in the economic context <strong>of</strong><br />
an airport.<br />
Since Section 13(2) <strong>of</strong> the Act prescribes a 5-year tariff, the balance has to be struck under the<br />
“public interest” gateway provided in section 13(2) to establish in the first tariff regime:-<br />
(a) A baseline with very limited aspects treated as controllable, such that various aspects are<br />
under frequent true-ups and pass-through/re-adjustment for changes beyond a defined<br />
tolerance zone on both the positive and the negative side;<br />
(b) Focus on incentives for data discovery, such that the regulatory baseline for each airport<br />
can be revalidated in the first 3 years and robust industry standards evolved; and<br />
(c) The Authority retains flexibility to review the tariff and the regulatory baseline each time<br />
there is<br />
(i) a change in throughput and other key identified parameters beyond the defined<br />
thresholds, or<br />
(ii) specific defined milestone/landmarks are reached.<br />
This dispensation can be justified in light <strong>of</strong> the divergent tariff structures inherited by the 12 major<br />
airports under their respective regimes, which will need to be harmonized and brought into a<br />
reasonable range <strong>of</strong> the baseline regime.<br />
4. Re. Navigation Charges<br />
It is submitted that the determination <strong>of</strong> the navigation charges across all airports are the sole<br />
prerogative <strong>of</strong> the AAI, which must be kept at a level that:-<br />
(a) recovers the investments made with a reasonable but not usurious return or windfall,
Preliminary Comments & Submissions on behalf <strong>of</strong> the <strong>Federation</strong> <strong>of</strong> <strong>India</strong>n <strong>Airlines</strong> (<strong>FIA</strong>) in response to<br />
White Paper No.01/2009‐10 titled “Regulatory Objectives & Philosophy in Economic Regulation <strong>of</strong><br />
Airports & Air Navigation Services :<br />
‐ 14 ‐<br />
(b) while ensuring that the pass-through impact on the aeronautical charges is reasonable<br />
limits.<br />
Further, no cross subsidization should be permitted for such heads.<br />
5. Re. Transparency & accountability<br />
To secure transparency and accountability in the emerging regime, it is noteworthy that Section<br />
13(4) <strong>of</strong> the Act mandates this as the underlying principle for exercise <strong>of</strong> powers and discharge <strong>of</strong><br />
functions by the Authority. In this context, the following principles are required by the regulatory<br />
and administrative jurisprudence to be ensured :–<br />
(a) Share with the concerned parties any analysis/document/material/directive under<br />
consideration <strong>of</strong> the regulator in regulatory processes/decision-making except for specific<br />
confidential information;<br />
(b) Provide an opportunity to object to/ comment on, in writing, during stipulated timeframe;<br />
(c) Consolidated issue-wise comments received from stakeholders to be shared with all<br />
concerned parties;<br />
(d) Secure a fair opportunity to explain, respond and participate at a public hearing;<br />
(e) Oblige the sector regulator to give reasoned decisions based on relevant material and<br />
consideration.<br />
(f) All regulatory instruments, processes and decisions, as also the principles guiding them<br />
should be a matter <strong>of</strong> public record. This record must be accessible to all market<br />
participants, not just service providers, to inform long-term business plans.<br />
_______________________________