Business Model of Airports

Business Model of Airports - Image

The business model of airports across the world is quite unique. 

Airports in itself is a hugely capital intensive investment.

Both in terms of CAPEX and Operating costs, airports demand huge cash flows. 

Airport Authority of India (AAI) design, develops, controls and manages 126 nos airports in India.

The breakup of these 126 nos airports are as below:

  • International: 21 nos.
  • Domestic: 78 nos
  • Custom: 08 nos.
  • Civil Enclaves at Defence Airfields: 19 nos

In FY 2015-16 and FY 2016-17, the financial results of AAI has been as below:

Revenue: FY 2015-16: Rs.10.824 Billion. FY 2016-17: Rs.12.542 Billion.

Net Profit: FY 2015-16: Rs.2.537 Billion. FY 2016-17: Rs.3.116 Billion.

#1. How much does it cost to run an airport?

By passenger traffic, India’s Delhi and Mumbai airports are the biggest and busiest.

Annual traffic of these airports are as below (FY 2017-18):

  • Delhi: 6.569 crore number passengers handled. 
  • Mumbai: 4.85 crore number passengers handled. 

It cost a whopping Rs.3.129 Billion to run Delhi airport in FY 2015-16.

Delhi International Airport Limited (DIAL) is being operated in joint venture between AAI and GMR Infrastructure. 

Hence a major chunk of the total expense of DIAL is allocated to the annual fees paid by GMR to AAI.

Extracts from Annual Report published by GMR.

Annual Fee paid to AAI in FY 2015-16 was Rs.2.635 Billion (84.2% of total expense).

Salaries & other benefits paid to the employee of DIAL was Rs.129.47 Crore.

Cost of Repair and Maintenance of DIAL was Rs.163.42 Crore

The cost of utility bill (water, electricity, internet etc) was Rs.106.54 Crore

We all have seen CISF officials deployed in Indian airports. They do all the frisking etc. This cost goes out as “Airport Operator Fee”.

For DIAL, “Airport Operator Fee” is Rs.151.05 Crore.

These are the major costs that goes to operate a airport in India. 

For Delhi Airport, the total annual cost of operation is Rs.2.635 Billion (Rs.2,635 Crore).

How high is this cost?

Just to give you an idea of what it means by an expense of Rs.2,635 Crore.

The whole GDP of a union territory of India (Dadar and Nagar Haveli) is Rs.2,440 Crore.

Business Model of Airports -GDPVsDIALExp
GDP of a Union Territory is less than Total Expense of DIAL

So the question comes, how airports manage to pay these huge costs?

How they generate revenue to bear these exorbitant costs?

The costs are exorbitant, no doubt.

But a well managed airport can not only cover its cost but also make a decent profit. 

How? The income will come from two main sources:

(1) Airlines & (2) Service Providers.

#2. How Much Airports Earn Money from “Service Providers”?

First, who are these service providers?

Imagine airport like a big shopping mall.

Every restaurant, retail outlet, movie theatre etc pays a rent to the mall.

Similarly, airports also make money using the same business model. 

Total number of passengers using Delhi Airport in FY 2017-18 was 6.57 Crore.

Restaurants, retail outlets etc would like to sell their goods and services to these 6.57 Crore travellers.

How big is the number 6.57 Crore per year?

Even the biggest of shopping malls in India will not have average foot fall of 1.0 Lakhs per day. 

Suppose we have one mall like this. 1.0 lakhs footfall per day means, 3.65 Crore footfalls per year. 

Delhi Airport had 6.57 crore traveller in FY 17-18.

The more will be the number of passengers using the airport, higher rent the services providers will be willing to pay to the airport. Why?

Because more passengers means more sale. So this is like a win-win scenario.

Service providers earn money by means of “sale”. Airports earn money in form of rent.

Few typical service providers who operate in Airports are as below:

(1) Restaurants & Retail: They pay a fixed amount of rent to airport to operate within the airport premises.

(2) Parking: Every time a car or a motor bike is parked in the airport’s parking lot, it generates an income for the airport. 

(3) Paid Taxi/Bus Service: The taxi service provider who operate from the airport premise also pays a fixed charge to the airport. 

(4) Passenger Lounges: They also pay a rent to use the space in the airport terminals.

Generally speaking, the revenue generated by the airports from the service providers are termed as “Non-Aeronautical Income“. 

Delhi Airport generates 36% of its total income from non-aeronautical source.

Bigger the airport, higher will be this share.

#3. How Much Airports Earn Money from “Airlines”?

Airlines pay to the Airport for the “Aeronautical Service” provided by the airport to them.

What means by Aeronautical Services?

  • Fuel Supply (to all Aircrafts).
  • Air traffic management (Using navigation, surveillance & communication).
  • Ground Service including safety (Landing, parking etc). 
  • Baggage Handling (Passengers, Cargo etc).
  • Cargo Facility (Store management etc). 

Generally speaking, the revenue generated by the airports from the Airlines are termed as “Aeronautical Income“.

Delhi Airport generates 64% of its total revenue as Aeronautical income.

Final Words…

So what we can conclude from the above presentation?

Business model of airports are profitable or not? Unfortunately it is not the case.

As per a report published in Indian Express in Jan’2018, over 90% of all airports in India runs at a loss.  

Airports directly managed by AAI which also made profit were only:

  • Kolkata, Bhubaneswar, Guwahati.
  • Leh, Lucknow, Patna.
  • Mangalore, Tiruchirappalli.

Airports of Delhi, Mumbai, Bangalore and Hyderabad are managed by Private Players (like GMR Infra etc) in JV with AAI. 

These airports are modern and has been designed for profitability. 

But having said that, running airports profitably across the world, has been a big challenge. 

This is one reason why, most of the airports of the world are managed by National Governments at subsidised rates. Why?

Because operation of airports is key in the development of a nation. 

India is a growing economy. By year 2025 its GDP will touch $5 Trillion.

But this will not happen in thin air. India will need more airports.

Government can develop all airports on its own? It is not possible in such a big country like India.

Private player must also participate in development, and operation of airports. 

In India, Delhi’s Airport can be used as a reference business model for the future airports development. 

But one important question to ponder at the end, if AAI is making Rs.2,537 Billion in profit, why airline providers are running in losses?

6 thoughts on “Business Model of Airports

  1. Ramakrishnan Reply

    Hi Mani,

    Mr.Dhiraj asked my question. Please do not loss your focus and keep focus on your area like personal finance and stock suggestions.

    Trust me. Article like this will ruin your reputation. We love you for what you have did so far with this blog, but now it seems you are deviating.

    It is my personal suggestion. Take it or leave it. The choice is yours. Thank you so much.

    • Mani Post authorReply

      Thanks for sharing your point of view. I will take care.
      But kindly allow me to ask, why you think that article like this will ruin the reputation?

  2. Gokul Reply

    very detailed information. I liked the way you described 🙂 really got to know the details of AAI and stuffs

  3. dhiraj Reply

    How this article is relevant to your blog I didn’t understand and also what benefit a reader will get from this information.

    • Mani Post authorReply

      Hello Dhiraj, Thanks for posting a comment. Nice question. Becoming aware about business models helps is deeper understanding of the business, which eventually leads to better analysis of its financial position.

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