GMR Hyderabad International Airport Limited (GHIAL) Course Instructor: Prof. Padmalatha Suresh Submitted By: Presented By: Group 8, Section-B Abhishek Singh Shashi Bhushan Dwivedi Vivek Sinha Chaitanya Kini Isha Agarwal Kshitij Varshney (2010062) (2010167) (2010176) (2010192) (2010201) (2010206) 1 INTRODUCTION Mr A. Subba Rao, CFO of GMR Infrastructure was wondering about the success of building international airports. On a fine summer morning in 2007, sitting in his office he is analysing the sustainability of a very important project and its impact on the future cash flow of the company.

While thinking about aeronautical & non aeronautical revenues generated from Hyderabad International Airport in future Mr A. Subba Rao is thinking about risks involved in this project that have direct impact on company’s revenue, accordingly he has to negotiate about the UDF (User Development Fee) with the government. UDF is to be considered only in cases and years where the target revenue of a major airport is projected to fall short of the admissible expenditure. He knows that UDF is a huge source of revenue but only for initial years of operations, after that revenues generated through non aeronautical operations becomes crucial.

So his major concern is the impact of non-aeronautical revenue on GHIAL’s balance sheet in later period. Also the main parameter which he was thinking is of air traffic forecast which is subject to degree of risks and uncertainties in the dynamic changing business environment. Mr A. Subba Rao knows that it is not possible to determine events like timing of recessions, fuel shortages, etc. The cyclical nature of tourism and economic growth would be difficult to capture by any existing model.

The aviation sector in Hyderabad was not in a good position and the coming years were neither good. Mr A. Subba Rao was in the final phase of completing the international airport at Hyderabad and all these concerns were hovering in his mind. The world aviation sector in 2007 is experiencing decline in the global passenger traffic. The main reason was the global economic crisis and inflation in the consumer commodities. He is worried about its impact on airline industry and specially the domestic airlines. This would result in approximations in the forecast instead of accuracy.

The company started the construction in September 2005 and the project is about to complete in few months so before the full-fledged operation of HIAL these issues needs to be addressed. Page |2 2 Sector Background The civil aviation traffic has seen an unprecedented traffic in the past few years on account of booming Indian economy, growing tourism industry & entry of low cost carriers in the private sector, liberalization of international bi-lateral agreements and liberalization of civil aviation policy. In future also the civil aviation traffic is expected to grow at the same pace despite current slowdown due to global recession.

But airport infrastructure has not kept pace with the growth of the civil aviation traffic. This has resulted in congestion and inefficient services in major airports, limited landing slots, inadequate parking bays and congestion during peak hours for airlines. Development of quality infrastructure will have an impact on international competitiveness and economic growth. This requires faster development of civil aviation infrastructure on public private partnership mode. In tune with the requirement many initiatives have already been started in the 10th five year plan and they are expected to continue in the 11th plan also.

Of a total number of 454 airports and airstrips in India, 16 are designated as international airports. The Airports Authority of India (AAI) owns and operates 97 airports. A recent report by Centre for Asia Pacific Aviation (CAPA) states that over the next 12 years, India’s Civil Aviation Ministry aims at 500 operational airports. The Government aims to attract private investment in aviation infrastructure. India has been witnessing a very strong phase of development in the past few years. Many domestic as well as international players are showing interest in the growth and development of the aviation sector with mmense focus on the development of the airports. With the opening up of the domestic skies to private carrier in the second half of the Tenth Plan, air services have become affordable and are now competing with other modes of transport. Propelled by economic growth and liberalization, the sector experienced an unprecedented growth during the Tenth Plan, especially during the last three years. Indian private airlines – Kingfisher, Jet, IndiGo, Spice jet, Go Air, Paramount – account for around 84% of the domestic passenger traffic. Some have now started

Page |3 international flights. For the next years to come India is poised with strong focus on the development of its airports to meet the international standards. The government is planning modernization of the airports to establish a standard. The newly developed airports will help releasing pressure on the existing airport in the country. The passenger traffic has grown tremendously during the last five years (Exhibit 1). It has grown from 5. 92 crores in 2004-05 to 11. 68 crores in 2007-08 showing an overall growth (CAGR) of 25%.

The main factors contributing to this growth include the growth of the economy, falling fares, and increasing capacities of domestic private airlines. Notwithstanding the slowdown in the year 2008, the passenger traffic over the next 12 yrs is expected to grow from 11. 97 crores in 2010-11 to reach 31. 66 crores by 2022-23 with a growth (CAGR) rate of 8. 44%. Keeping with the growth of the Air Passenger Traffic the fleet size also grown (CAGR) at 28. 74% during the period 2004-05 to 2006-07 from 184 aircrafts to 305 aircrafts (Exhibit 2). Private sector is planning to add another 258 aircrafts in the near future.

According to projections made by Boeing, over the next 20 years (2029-30), the Indian market would require 1,000 commercial jets valued at approximately $100 billion. Air Cargo Traffic grew (CAGR) by 10. 27% in the last three years period of 2004-05 to 2007-08 (Exhibit 3). The Air Cargo Traffic expected to grow (CAGR) by 8. 14% in the next 12 year period of 2010-11 to 2022-23. This requires creation of additional cargo capacity. As on date there are only seven cargo aircrafts in India compared to 100 in China. The private sector is now playing a crucial role in the development of both airline and airport sector.

Page |4 3 Overview of GMR GMR Group is one of the fastest growing infrastructure organisations in the country with interests in Airports, Energy, Highways and Urban Infrastructure. Employing the Public Private Partnership model, the Group has successfully implemented several infrastructure projects in India. GMR Infrastructure Limited is the infrastructure holding company formed to fund the capital requirements of various infrastructure projects in the Group’s Energy, Highways and Airport business. It undertakes the development of the infrastructure projects through its various subsidiaries.

In what is the largest greenfield project for the low-profile, Bangalore-based GMR Group so far, Rao decided to invest Rs 1,500 crore (Rs 15 billion) to build the new airport in Hyderabad with a capacity for handling 5 million passengers in the first phase (early 2008). By the end of the second phase (2018), the airport will have been expanded to handle over 20 million passengers. By that time the group would have sunk over Rs 5,000 crore into the project. The group has also won the mandate for modernisation of New Delhi International Airport, which is expected to be ready by 2010.

The GMR projects are two of the four Indian airport contracts awarded under the government’s Public-Private-Partnership Initiative – the other two projects being at Bangalore (Greenfield) and Mumbai (modernisation). The GMR Group plans to set up an airport based SEZ near the new Hyderabad International Airport, which it has the mandate to develop. Planned on the lines of free trade zones in Hamburg and Dubai, the SEZ will house aircraft component manufacturing industries and also see high end aircraft engineering support activities.

Besides, the SEZ will house high end electrical and auto component manufacturing facilities and software units. The group also has plans to set up high precision pharmaceutical equipment manufacturing to cash in on international air connectivity. If allowed, the GMR group has plans to develop aereotropolis-new ‘cities’ springing up around airports a new concept which is seeded in an urban hubs. An aerotropolis offers operational convenience for companies and organizations to maximize benefits, while cutting down on expenditure significantly.

Page |5 4 Airport crunch in India India’s airports will not be able to cope with the massive projected increase in demand for air travel unless the country drastically steps up its program of airport building and refurbishment, the chairman of the Airport Authority of India said at a recent conference in Delhi. Passenger demand is expected to rise from 124 million in 2010 to between 300 and 450 million in 2020. As recently as 2005, Indian airports processed only 84 million passengers per year.

The Indian Government has a programme underway to invest around US$10bn over ten years to upgrade India’s main airports and to modernise air traffic services. The two principal international airports, Mumbai and Delhi, have been partially privatised and are being modernised. Seven new Greenfield airports are to be built under ‘BOOT’ (build, own, operate and transfer) contracts – the first two, in Bangalore and Hyderabad (to be opened in 2008). Until recently, only five airports – Mumbai, Delhi, Chennai, Kolkata and Trivandrum – were considered as international gateways.

However, with the rapid development of direct flights from other airports to foreign destinations, the government conferred international status on Ahmedabad, Amritsar, Bangalore, Calicut, Cochin, Goa, Guwahati, Hyderabad, Indore, Nagpur, Pune and Srinagar. Even though India is the world’s second most populous nation, travel to both Europe and elsewhere is being held back by the airport infrastructure of the country. Indian customers make up an important group of overseas visitors for retailers, but are still way behind

Chinese, Russian, and even American, Brazilian and Nigerian customers in terms of retail spend in Europe. This will not be rectified until India’s airports are updated. Page |6 5 Overview of the Project GMR Hyderabad International Airport Limited (GHIAL) is a joint venture company promoted by the GMR Group (63%) in partnership with government of India (13%), government of Andhra Pradesh (13%) and Malaysia Airports Holdings Berhad (11%). The Company is incorporated to design, finance, build, operate and maintain a world class greenfield airport at Shamshabad, Hyderabad.

The project is based on the Public Private Partnership (PPP) model and is structured on a Build, Own, Operate and Transfer (BOOT) basis. The airport which is expected to commission in about 30 months will have an initial capacity of 12 million passengers per annum (MPPA) and 100,000 tons of cargo handling capacity per annum. The Project has the flexibility to increase capacity to accommodate over 40 MPPA and shall be developed in a phased manner. The airport will provide world-class facilities and infrastructure, in accordance with ICAO standards and practices to handle large aircraft and international traffic.

It will have integrated domestic and international terminals equipped with 12 contact boarding bridges, 30 remote stands, Common User Terminal Equipment (CUTE), self-check-in kiosks (Common User Self Service- CUSS) and 46 immigration counters. It will also incorporate modern IT systems including Flight Information Display Screens, Baggage Handling System (BHS), and Airport Operational Database (AODB) technology for the first time in India. RGIA will be the first Indian airport to have the Airport Operations Control Centre which acts as the nerve centre for all coordination within the airport.

Located strategically at the geographical centre of India within a two hour flying time to all the major cities in India, Hyderabad is well positioned and within a four hour radius from all major cities in the Middle East and South East Asia. Thus, it will have the potential to not only become one of the main air travel hubs in India, but also an important centre for destinationcum-transit location for travel between the East and the West. Currently, there are 11 international and 9 domestic airlines operating from Hyderabad flying to over 35 destinations. Lufthansa Cargo also operates a weekly freighter service from Frankfurt via Mumbai.

Page |7 This flight returns to Frankfurt via Sharjah. The modular integrated Cargo facility will be spread over14,330 sq. mts with a capacity to handle 100000 MT annually. Adjoining that will be an exclusive apron to accommodate Code-F aircraft. The airport provides two Animal Quarantine Stations. The first Quarantine Station is located at the International arrivals and the second, in the Cargo Satellite Building. On the east of the airport 250 acre Aerospace SEZ will be constructed, that will house, amongst others, the Maintenance Repair and Overhaul (MRO) facility, being developed by the GHIAL-MAS Joint Venture.

CFM International, a 50-50 joint venture between Snecma (SAFRAN Group) of France and General Electric Company (GE) of the United States will also be setting up its aircraft engine Maintenance Training Centre. A detailed list of facts has been mentioned in the Exhibit 5. The Rajiv Gandhi International Airport at Hyderabad will set to establish the city prominently on the global aviation map, thereby contributing to the prosperity, growth and all round economic development of the region. Bidding Parameter The project is bided out on Built Own Operate and Transfer (BOOT) model.

Bidders were selected through International Competitive Bidding (ICB). The bid parameter is the percentage of share of revenue. The concession period is 30 years. The concession period may be extended to another 30 years at the option of the HIAL. It is the only airport under PPP which has used cash grant of Rs 107 crs from the government. As Concession fee in lieu of the concession granted, HIAL will pay GOI a fee amounting to four per cent of Gross Revenue annually. Recent GHIAL contracts awarded April 2007: GHIAL awards the concession to operate retail at both the international and domestic terminals to a partnership between The Nuance Group and Shoppers’ Stop. The international retail will be managed by Nuance Group (India) Private Limited, the joint venture company of The Nuance Group and Shoppers’ Stop, whereas Shoppers’ Stop’s Airport Division will handle retail in the domestic part. Page |8 30 November 2006: GHIAL ties up with Accor Hotels and Resorts, Singapore, to operate its first Business Hotel at Rajiv Gandhi International Airport in Shamshabad.

The construction of the hotel will commence shortly and become operational by the time the new international airport opens in March, 2008. Accor operates in nearly 100 countries with 160,000 employees and is expanding rapidly in India with up to 100 hotels planned for the next decade. 18 October 2006: Responding to the phenomenal growth of over +40% in air traffic in Hyderabad in the last few years, GHIAL decides to create additional facilities to cater for 12 million passengers at the time of commencement of its first phase operations in March, 2008.

These include increasing aircraft parking stands to 42 bays from the current 30, two rapid exit taxiways, and full length parallel taxiways for enabling quick turnaround for aircraft. Also included in the new facilities are additional office space for airlines, extra cargo terminal space, and additional car parking. To ensure effective service standards, enhanced seating facilities, extra immigration desks, self-check-in kiosks, bus gate lounges, trolleys etc are also being added to cater to the growing passenger demand. 11 September 2006: GHIAL enters into an inflight catering concession with LSG Sky Chef and Sky Gourmet.

The contracts are awarded for setting up world-class inflight catering units in the upcoming international airport. The concessions will be extensively involved in financing, constructing, operating and maintaining inflight kitchen facilities at GHIAL. Both the inflight catering units will offer 7,500 meals per day capacity in the initial phase. LSG Sky Chef is a 100% subsidiary of Lufthansa. It is the world’s largest provider of airline catering and inflight solution and caters for 270 airlines from 190 customer service centers in 49 countries. It produces around 369 million airline meals per year.

In India it is currently operating in Hyderabad and Bangalore. Sky Gourmet Catering Pvt. Ltd. operates under the trade name of Skygourmet and is one of the leading airline catering companies in India, with operations spread across Mumbai, Delhi, Bangalore and Pune. Page |9 6 Key Issues in Project Implementation Connecting Road – 11. 5 km long flyover: This flyover connects the main city to the new airport is not ready by the time the airport gets opened to the traffic in March 2008. The work is still going on even one and half year after opening of the airport.

Due to this lot of inconvenience is caused to the airport user public and also to the general public Connecting Road – Outer Ring Road (ORR): Around 160 km length 8 lane access controlled ambitious road comparable to the best in the world is being executed around the city. Around 30 radial roads, connecting the centre of the city to the ORR are at various stages of execution. Some of the stretches like the ORR connecting the Hi-tech City and the New Airport supposed to be ready by the time of opening of the airport. This is expected to be ready by 2010. 000 acres of Land: Voices were raised at various stages about allotment of 5000 acres of land for the airport in the initial stages. Though it may look justified with various plan to develop Cargo Hubs, SEZs and turning the new airport into aerotropolis,that contains Malls, Hotels, Woking places, Residing places in addition to SEZs etc. Resistance to shift the Airport: Initially there was lot of resistance and widespread criticism from the employees and the general public to shift the airport from Begumpet to Shamshabad. There was pressure to operate both the airports simultaneously.

With great persuasion and as per the conditions of the concession agreement the airport was finally shifted to Shamshabad Resistance for increasing the user charges: There was lot of opposition and criticism for levying the user charges. With great amount of persuasion and convincing user charges are now being levied. P a g e | 10 Subsidies and Concessions: As the aviation industry was going through recession, there was a steep fall in the air passenger traffic. Private developers were now asking for various subsidies and concessions in the form of increasing User Development Fee (UDF).

This was against the originally agreed terms and conditions. This may raise lot of litigations later. There may be a provision in the concession agreement in extending or removing the subsidies and concessions if the traffic numbers falls outside the expected or predefined range. So the entire risk of traffic was not born by the private developer. Conclusion GMR has a huge task in hand. Though there is a temporary lull in the traffic due to global recession, but in the long run, growth in both the air passenger traffic and air cargo traffic is expected to leave a huge gap in desired airport infrastructure.

This challenge can be addressed through formulation of a comprehensive airport infrastructure plan, formulation of policies and guidelines, changes in the existing policies and guidelines, formulation of comprehensive financing plan, Spelling out the range of incentives and concessions, coming out with standard documents, creation of shelf of Bankable Projects, empanelment of sector specific transaction advisors, continuous publication of replicable models, continuous updating of skills through capacity building.

All these initiatives will enable the development of Hyderabad International airport infrastructure on PPP to meet the growing demand of airport traffic and offer the globally comparable service standards at competitive rates. P a g e | 11 7 Exhibits Exhibit 1 (Source: Review of Traffic at Indian Airports 2007-08 by AAI & Jan-Mar 2009 Quarterly Review of Traffic, AAI) Exhibit 2 (Source: India Air Transport Statistics 2006-07 by DGCA) P a g e | 12 Exhibit 3 (Source: Review of Traffic at Indian Airports 2007-08 by AAI & Jan-Mar 2009 Quarterly Review of Traffic, AAI)

Exhibit 4: P a g e | 13 Exhibit 5: Revenue Calculation P a g e | 14 Exhibit 6: Cash Flow Projection P a g e | 15 Exhibit 7 – Fact Sheet • • • • • • • • • • • • • • • • • • • • • Airport Location: 25 km from Begumpet 12 foreign and 10 domestic airlines will operate from Hyderabad flying to 35 destinations Total Area for Airport project: 5495 acres Initial Passenger capacity: 12 MPPA; Ultimate capacity: 40 MPPA Initial Cargo Capacity: 100,000 MT / annum; Ultimate over 1. 3 million MT Exclusive cargo apron for four Code C freighter aircraft Facility or Express/Courier cargo One of the longest runways in India – 4260 meters India’s longest taxiway (4395m) : can be used as emergency runway 10 runway entry/exit points (Including 4 Rapid exit taxiways) Code-F Facility: A-380 compatible Quick turnaround: Full length taxiway and rapid exit taxiways Aviation Fuel Hydrant System in an Open Access Model Airport Operations Control Centre (AOCC), first of its kind in Indian airports Parking area for over 3000 cars in front of Passenger Terminal Building Easy Transit from Domestic to International and vice-versa 130 Check-in counters (CUTE) and 16 self-check-in kiosks (CUSS) Immigration counters (46) Two Animal Quarantine Stations for the benefit of pet owners and pharma industry 42 aircraft parking stands including 12 passenger boarding bridges International brands like KFC, McDonalds, Hard Rock Cafe, Coffee Cafe Day, Pizza Hut, Coffee Club, Cookie Man, Grab & Fly, Coffee Bean Tea Leaf, Gelato, IIFA bar etc. • Duty Free Shops at both Departures (1223 sq mt) and Arrivals (1297 Sq mt) maintained by Nuance-Shoppers stop. • • • • Novotel Hyderabad Airport – Business Hotel with 305 rooms, just 2 kms away. 13 business class lounges maintained by Hong Kong based Plaza Premium 28 bed Nap & Shower facility operated by Plaza Premium for passengers as well as visitors Seven Automated Teller Machines (ATMS) of various banks available at both domestic and international arrivals/departures. • Revenues from Hotels/Shops will be realised from 2009-10. Taken as 310 crore in first year that is industry Benchmark. P a g e | 16