India might change how it sells its airports

**SPEAKER_1** (0:04)
In today's episode, we'll break down two important stories. In the first one, we look at how Ministry of Civil Aviation is thinking of changing the rules of privatizing airports in India. And in the second one, we talk about the sensitive issue of stubble burning and what can be done to address it. Hello and welcome to The Daily Brief show by Zerota, where our aim is to cut through the noise and bring you the biggest news in the financial markets in a way that's one level deeper as compared to other news channels. Today is Thursday, 25th June.
For the third time, a new batch of Indian airports is about to go up for sale. This is the largest of all three rounds. After all, the third time is a charm, they say. But this round is charming in more ways than one, because unlike the other times, the government seems to be changing its mind about how to sell them. The last time India handed airports to private operators back in 2019, it went out of its way to make the bidding process easy. You didn't need to have ever run an airport before, there was no limit on how many you could win. And instead of haggling over a slice of revenue, bidders simply quoted a flat fee per passenger. The whole point was to pull in as many bidders as possible. It worked arguably too well. Adani Group walked away with all six airports on offer. In some cases, bidding nearly doubled its nearest driver. This time though, the rule book looks like it's moving the other way. On The Daily Brief, we've already walked through how India's airport business works. Do check it out for nitty gritties, but here we'll summarize it to set some context. See, for years, the big airports like Delhi and Mumbai ran on a revenue share model. The private operator handed the government a cut of everything the airport earned. That gave the state a share of the upside, but it squeezed operators hard. When the government is skimming a large chunk of your gross revenue, a debt-heavy business like an airport can struggle to breathe. One former Mumbai operator, GVK Group, eventually had to sell out under the weight of its loans.
So the 2019 round switched tack. Bidders competed on a per passenger fee, a fixed amount paid to the Airport Authority of India for every flyer who walks through the doors. It was cleaner to evaluate and more predictable for the government, but it also shifted the risk onto the operator who now had to bring enough money out of each passenger to justify the fee that they had promised to the Airport Authority. That's the model that has defined the last few years, and that's the context the third round operates in.
One caveat runs through this entire story, so it's worth saying plainly upfront. None of this is settled. The proposal for all these changes by the Ministry of Aviation is still working its way through the system. So everything I'll talk about is still subject to change.
Now comes the next wave. Under the second National Monetization Pipeline, Civil Aviation has been handed a target of 27,500 crores to raise by FY 30
A big chunk of that is meant to come from leasing out more airport authority airports. A lease is not a sale though. AAI stays the owner, and the airport eventually returns to it. What changes hands is the right to run and develop the airport for a fixed stretch in exchange for a fee to the airport authority. In return, the operator gets to earn from the airport however way it can, be it landing charges, retail, parking, advertising, or even real estate. The first tranche is 11 airports. Unlike the last two rounds, these airports aren't being auctioned one by one. They're being grouped into five bundles, each pairing a busier airport with one or two smaller ones nearby. Varanasi, for instance, is reportedly being clubbed with Kushinagar and Gaya. The logic behind bundling is simple enough. Auction airports individually and every bidder chases the same handful of profitable ones. Nobody really queues up for those sleepy regional airports that barely breaks even. It's not just a theoretical worry. The first time airport authority tried to lease out Ahmedabad and Jaipur, the auctions attracted too few takers and had to rerun on gentler terms. And those are still reasonably busy airports. Smaller ones are much harder to sell.
The fear is that handing over just the profitable airports to the private sector would leave the airport authority stuck running the unviable ones.
Bundling fixes that by force. We've seen the same logic playing out inside airports already. The fees you pay to fly are capped by the regulator, kept deliberately low partly because the airport earns so handsomely from everything around the runway. The flip side is that an operator boxed in on those flying charges leans very hard on the rest of the revenue opportunities. It squeezes its shops and restaurants for every rupee, which is why coffee at airports costs a small fortune. The profitable bits, in other words, are made to carry the unprofitable ones. Bundling is the same idea moved up a level. That may sound neat as a policy, but its financing is a lot messier. A bidder is no longer pricing one airport's future. They're pricing a small portfolio of very different airports in a single bit, each with its own traffic and its own commercial potential. The bundle also somewhat inflates the size of the check, which tends to favor bigger players. This might narrow the field to a few large infrastructure funds and established operators who often bid as one big consortium.