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Delhi Airport’s Plan to Charge Higher Fees for Grounded Planes

In a first for India, Delhi Airport gets a fourth runway…an elevated  taxiway - BusinessToday

Introduction:

The Delhi airport operator DIAL plans to charge airlines higher fees for grounded planes that occupy parking spaces for extended periods, impacting airport operations. This could affect various stakeholders across aviation and related sectors.

Analysis of this news for a layman:

DIAL refers to Delhi International Airport Limited, the operator of Delhi airport. Grounded planes are aircraft that are parked at the airport but not in operation, often due to technical or financial issues. These unused planes take up parking spaces, which are in limited supply at airports. By charging higher fees after a certain grounding period, DIAL aims to incentivize airlines to minimize grounded planes at Delhi airport so active flight operations are not negatively impacted.

This would improve overall airport efficiency. Aviation consultancy CAPA India estimates 161-201 planes across Indian carriers could be grounded by March 2024. A320s and Boeing 737s comprise over 75% of grounded planes. T1, T2, T3 refer to the three passenger terminals at Delhi airport. T1 expansion should finish by February 2023 to handle more traffic. DIAL may convert T2 for international flights in the interim term.

Original Analysis:

DIAL’s plan to charge higher fees for grounded planes is a prudent commercial move to ensure India’s busiest airport can operate efficiently amid rapid air traffic growth. With Indian carriers expected to nearly triple their fleet with 1,500 new aircraft on order, maximizing infrastructure utilization is critical. Delhi airport already handles 1,300-1,500 flights daily across its 295 aircraft parking stands. Dedicating scarce parking resources to non-operational planes would severely constrain current and future capacity. Imposing financial disincentives nudges airlines to limit grounded planes and return them to service quicker by addressing maintenance, staffing, financial issues or exploring sales/leasebacks if needed. This prevents Delhi airport’s available parking stands being misused for long-term plane storage instead of active flight operations.

The charges should be set appropriately – high enough to change airline behaviors without being unrealistic. The fees cannot be so exorbitant that they negatively impact airlines’ viability. An equitable solution boosting total airport productivity is ideal. DIAL also needs to collaborate proactively with distressed carriers like SpiceJet to understand their challenges. While financially prudent for DIAL, airlines may pass on higher airport costs to customers via fuel surcharges or base fare hikes if unable to absorb these themselves. This could dampen air passenger growth and government’s lofty vision of making India an affordable aviation hub.

Impact on Retail Investors:

As publicly listed corporations, Indian carriers’ financial health directly affects retail investors owning their shares. SpiceJet, IndiGo and Air India shares underperformed the benchmark Sensex in 2022 amid widening losses, with SpiceJet now seeking to restructure debt. Higher airport charges for grounded planes will negatively impact their bottom lines further. However, this move may catalyze management actions to fix systemic issues plaguing them – older fuel-guzzling planes, high costs, inadequate crew – rather than defer problems. In the long run, becoming sustainably profitable again will boost carrier share prices and retail investor returns.

But near-term share volatility is likely given precarious balance sheets across airlines and risks of crew shortages or maintenance issues triggering fresh groundings. Savvy retail investors should wait for clarity on carriers’ turnaround plans to emerge before investing significant capital. Alternatively, they can opt for leading airline servicing companies like Air Works or logistics providers like Blue Dart which support sector growth without direct airline ownership risks. Airport operators like DIAL itself are also a sound option given strong traffic and non-aero revenue tailwinds. Their retail/duty-free and real estate monetization potential make them an attractive, defensive aviation play.

Impact on Industries:

The wider aviation industry will benefit significantly if India’s airline market, set to be world’s 3rd largest by 2030, rationalizes grounded planes faster and channels capital into network/fleet expansion instead. More punctual flight operations build passenger confidence while well-maintained young fleets with adequate staff improve onboard experience and safety track records. This stimulates air traffic demand both domestically and internationally.

Higher aircraft utilization creates positive spillovers across the aviation supply chain too. More flight hours directly raise MRO revenue potential for maintenance firms like Air Works, increasing hiring and sub-contractor income. Additional passenger traffic and freight capacity boost airport retail, hospitality and logistics arms. Ground handling and catering vendors like TajSATS and Bird Travels prosper with more flights to service. Crucially, reducing grounded planes nurtures a healthier, sustainable airline sector. This unlocks network connectivity and growth opportunities for allied sectors – tourism, manufacturing exports, services – reliant on air connectivity. However, external risks remain. If crude prices spike, carriers’ cost base could be inflated further making viability challenges resurface. Any global recession in 2023 may temper travel demand and undermine turnaround efforts too.

Long Term Benefits:

In the long run to 2030, ensuring high airport slot utilizations by disincentivizing grounded planes will be invaluable for India’s aviation growth trajectory. As rising incomes, demographics and government stimulus programs boost air travel penetration beyond 10-15% presently, both passenger and air cargo traffic are expected to grow over 10% CAGR this decade. Enabling leading metro airports like Delhi to handle 500-600 daily movements and 100 mn+ annual passengers smoothly will thus be critical. DIAL’s planned scale up to ~300 parking stands from 295 today indicates long term infrastructure will keep pace.

Concurrently nurturing financially stable airlines with right-sized, well-maintained fleets via punitive grounded plane charges will optimize industry capacity additions. This sustainable capacity creation is essential to serve expected traffic growth while benefiting from economies of scale to achieve 15-20% sector profitability and attract foreign capital. Overall Delhi airport’s greater productivity and operational excellence will bolster India’s global aviation hub ambitions.

Attracting foreign carriers to launch India services, international transit visitors and accelerating air freight connecting India to key export markets will be long term gains. With healthy passenger growth and ancillary revenues, DIAL itself stands to gain higher ROI on infrastructure investments like upcoming T1 expansion, potential T4 in future. Carriers optimizing fleet use stand to gain too – capturing domestic and international traffic upside as middle class expands. Mature low cost carrier models dependent on fast aircraft turns and operational excellence are well positioned to reap benefits.

Short Term Benefits:

In the near term horizon to mid-2024, DIAL’s grounded aircraft charges will positively impact slot availability at Delhi airport to match surging post-COVID demand. After touching 400 daily movements last December, slot faith adherence remains low at ~50% indicating substantial traffic being left on table by 20 overbooked major airports. Boosting Delhi airport’s slot efficiency by 5-10% points through temporary reductions in grounded planes can allow accommodating 30-60 more daily flights. This will be invaluable in the peak winter schedule as lean travel season gives way to summer schedule surge from March 2023.

Debottlenecking slots will enable airlines launch and announce new domestic routes connecting key Tier 2 cities, benefitting MSME business travel and price sensitive students/leisure travellers. Easing slot capacity near term also allows foreign carriers eyeing India services launch Delhi flights by March 2024 instead of delays to Winter 2024. More long haul services connecting India’s capital to Europe, Americas and East Asian hubs support traffic rebound. In the interim before T1 expansion completes, converting T2 for international flights also handles near term growth ahead of long term infrastructure boost. Carriers will benefit from higher aircraft utilization metrics owing to reduced groundings. This can drive 5-7% efficiency gains on unit costs as fixed plane lease/labor costs are spread over more flying hours annually. Healthier operations in turn aid in securing favorable aircraft/engine leasing rates and maintenance reserves easing negative cash flows.

Companies to Gain :

Five key aviation companies likely to gain from Delhi airport’s plans to reduce grounded planes by charging higher fees after elapsed duration are:

  1. InterGlobe Aviation (IndiGo): India and Asia’s largest low cost carrier is best positioned to capitalize on slot opening with its strong balance sheet, young operational fleet and route network reach. It can deploy freed up slots to bolster domestic connectivity between metro and Tier 2 cities along with entering new international destinations to reinforce market dominance. IndiGo allowing crew sabbaticals recently also enables tackling pilot fatigue issues and resultant groundings over long term.
  2. Air India: Now backed by deep pocketed Tata Group, the national carrier has ambitious growth plans to rebuild a world class fleet and global network leveraging India’s international traffic upside. Freeing up slots at the capital can aid launching direct flights to Europe, Americas sooner complementing Western hubs like Heathrow global connectivity.
  3. SpiceJet: The budget airline continues facing financial and operational struggles with 24 planes grounded currently at Delhi. Reducing this count drastically in short term will ease severe capacity constraints SpiceJet faces amid slot crunch at metro airports, letting it service key routes again. Long term having lean operations again is vital for profitability.
  4. Bird Travels: India’s leading airport service provider gives airlines, airports and passengers services including check in, ground handling, cargo/baggage. More Delhi flights will directly raise business, especially if T2 converts to an international terminal. New airline customers aid gains too.
  5. Air Works Group: India’s largest independent MRO stood to gain higher Line/Base maintenance business as more planes take to skies given under serviced fleet issues currently. Ensuring planes meet airworthiness standards is vital.

Companies to Lose Out:

Five aviation companies likely negatively impacted from potential fallout of Delhi airport’s higher grounded plane charges are:

  1. SpiceJet: The budget carrier with Rs1,500 crore debt and negative net worth faces imminent cash crunch risk. Being forced to suddenly bear steep charges to unground planes faster may drain its liquidity dangerously low. This heightens risk of fresh defaults on statutory payments like fuel charges, airport levies potentially grounding more planes.
  2. Alliance Air: Air India’s subsidiary serving Tier 2/3 cities has 1 plane grounded at Delhi presently. But its fragile financials can worsen if Made in India ATR fleet suffers maintenance issues leading to more planes being immobilized. Higher airport penalty charges may necessitate fare hikes dampening demand.
  3. Pratt & Whitney: The aircraft engine maker already faces backlash over grounded A320neo planes in India owing to engine issues disrupting LCC operations and hurting its market share against rival CFM. Under pressure to unground planes faster, P&W may face claims over product reliability and after sales support.
  4. Vistara: While India’s only full service carrier has no grounded planes currently, any minor fleet maintenance or pilot staffing issues can mean paying heavy charges. This may inflame losses at the Tata SIA JV carrier in a price sensitive market.
  5. Airbus India: Despite a strong A320neo order book from Indian LCCs, recurring issues like Pratt engine concerns or recent China Eastern 737 crash dent confidence in workhorse narrowbodies. If the grounded planes issue escalates, it risks reputational damage, delivery delays and after sales headaches for Airbus.

Additional Insights :

In summation, Delhi airport levying punitive charges on airlines to disincentivize grounded planes beyond permissible duration serves the larger purpose of reforming a distorted aviation market. India’s airline surge ambition cannot materialize if capacity addition is hampered by suboptimal aircraft utilization and shoddy fleet planning. Allowing the capital city’s airport – the fulcrum of international and domestic connectivity – to be consumed as carrier parking lots sets a terrible precedent nationally too. DIAL’s move is a wake up call to airlines that business viability, not just market share, is vital for the industry’s growth.

However, this intervention alone cannot resolve the mess. Structural reforms tackling high tax rates on aviation fuel, unrealistic airport development fees, outdated MRO policies also remain key to prevent airlines’ precarious finances from nosediving further. The real test lies in balancing Delhi airport’s commercial considerations as a profit-making entity without worsening the crisis in this strategic transport sector. A collaborative approach between DIAL, aviation authorities and airlines to fix system level issues is ideal for collective gain.

Conclusion:

In conclusion, Delhi airport’s planned move to charge higher fees on prolonged aircraft groundings aims to improve slot availability and operational efficiency amid surging traffic. However it remains to be seen whether financially struggling airlines can absorb these additional costs without negatively impacting customer fares, staff and maintenance capabilities. A fine balance between airport profitability goals and sectorial stability is needed so India’s lofty vision for aviation growth takes flight.

Citation: Prashanta Nanda, “Delhi airport plans levying higher charges for grounded aircraft”, The Economic Times, 03 December 2023,

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