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AAI Bidding For Bhogapuram Airport From Authority To Bidder Case Solution

Solution Id Length Case Author Case Publisher
1750 3362 Words (10 Pages) Ganesan Raghuram, Gopi S Gopikuttan Indian Institute of Management-Bangalore : IMB723
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Airports Authority of India, or AAI, is an aviation service provider that is bidding for the Bhogapuram International Airport project. AAI was previously an authority with numerous airports coming under them, but with time, it lost its authority due to public-private partnerships entering into this industry. AAI currently lost a bid of Mopa Airport, which was another setback for them. However, this new bid is what AAI is looking forward to, and based on its expertise and position in the industry; it should win this one. The strategies that AAI needs to adopt to win the bid and move forward towards its aim are explained below.

Following questions are answered in this case study solution

  1. Introduction

  2. Development of an international Greenfield airport by AAI 

  3. AAI’s expertise in airport operations and development

  4. Working towards a viable and winning revenue share

  5. Risks associated with the tender for the Greenfield Bhogapuram International Project

  6. Capital structure and financing strategy for the BIACL project

  7. AAI’s projected total passenger traffic at Bhogapuram Airport

  8. Changes to be introduced in response to the proposals 

  9. Conclusion

Case Analysis for AAI Bidding For Bhogapuram Airport From Authority To Bidder

2. Development of an international Greenfield airport by AAI 

Airports Authority of India would first start by designing the airport in detail. As the contract says, the selected bidder would design, build, finance, operate, and transfer the project, AAI would have to focus on each of these areas separately and in order. The first step here would be to design the airport. Designing will include choosing a location. The land would have to be big enough to accommodate AAI’s fleet of airplanes and the runways. Also, the area chosen will have to be plain and not hilly or mountainous for the ease of operations (Blackwell, et al., 2009). Once the location has been a selected, a design will have to be made which would require the work of expert architects and engineers. AAI would bear the costs of the engineers and other consultants, as that is usually the part of the bidders. The approved design will be sent to the contractor, which in this case, is BIACL. 

Coming on to the building part of the process, the RFP says that by May 2015, the airport will be built by BIACL. This implies that the airport has to be constructed by the contracting authority. So, the design will go over to BIACL, and they would complete the construction of the airport. From airport offices to runways and terminals, everything would be under the relevant authority and would be built by them. The plan and design provided by AAI would be strictly followed. The finances of the construction would come from BIACL’s pocket. They would fund the construction of the airport as the construction is their responsibility in the RFP. After the construction of the airport is complete, BIACL would inform AAI by the given deadline, and AAI’s approval for the built airport will be required. This approval will be based on technical assessment of the airport at a very extensive level, and all the technical assessment costs will be borne by AAI and once satisfied by the assessment, AAI would accept the airport and would move ahead with the project. 

AAI would have to obtain finances for the new airport. Since this is a big project and requires a high level of financing, AAI would have to develop detailed proposals for obtaining financing in forms of debt. AAI could finance the major portion of the project from its equity, but this would make it very risky for AAI. The whole project will become riskier if it has funds backing from just one source only (Wibowo, 2006). Moreover, it would become riskier for AAI to put all its equity in one project. Hence, obtaining financing from other sources would be necessary. For that, detailed proposals, including complex models, would be required so that the potential investors could be convinced to put in money into the project. A feasible option for AAI would be syndicated financing, where more than one financial institutions would pool in money and invest in the project. After the terms and structure of debt or equity financing is decided, AAI would have to move to the other steps.

AAI would have to analyse the traffic expected in the new airport so that plans can be made accordingly. The airline company’s flying plans would be required (Pita, et al., 2012). For setting the timings of the flights and other important maintenance and operation jobs, AAI will have to hire a workforce, which would be paid from AAI's funds. All costs incurred by the airport after construction will be paid by AAI and will have no links with BIACL. AAI would also have to develop airport offices and buy all the required equipment to operate the airport successfully. In short, all maintenance and operations of the airport would be AAI's responsibility for the next forty years.

3. AAI’s expertise in airport operations and development

AAI has no match in terms of experience. It has expertise in developing and operating airports. As of 2016, AAI managed around 125 airports, and 21 of them were international. None of them failed or faced any difficulty. It has operated around 69 airports from the 125. In terms of experience, AAI outperforms all other competitors bidding for the project. This unmatched competition is proof of AAI's expertise in operating and maintaining airports. Moving on, it has humungous levels of experience when it comes to management. AAI also provided Air Traffic Management Services (ATMS) to ensure the safety of aircraft operations (Bell, et al., 2004). 

The company was developed in 1995, and from then, it has been growing in the same industry. It was the authority some time ago and was the one contracting projects to other small firms. It's the business plan of 2017 says that it aims to be the principal aviation service provider in the country. AAI has been controlling and managing Indian air space (excluding special user air space) extending beyond the territorial limits of the country as accepted by International Civil Aviation Organization (ICAO), which gives it an edge over other in the bidding process for Bhogapuram airport. It also has experience in the Provision of communication, navigational, and surveillance aids. AAI has also been involved in the Expansion and strengthening of operational areas such as Runways, Aprons, Taxiways, etc. and has expertise in the provision of ground-based landing and movement control aids for aircraft and vehicular traffic in the operational area. AAI has tremendous experience in the designing, development, operation, and maintenance of passenger terminals, as well as the development and management of cargo terminals at international and domestic airports. Since a long time, it has also been providing passenger facilities and information systems in the passenger terminals, which gives it an experience of even the minor operation areas. All this experience will enable AAI to develop a request for proposal that is unmatched. 

AAI had received bids before when it was an authority and used to contract projects to other players in the market. It has seen many bids and hence knows what a perfect bid looks like. AAI also knows what the winning bid should consist of, as it has seen a lot of such bids in the past. Moreover, it has experience of losing a bid with the same government as well and hence got to know the strategies of other bidders too. AAI also knows what the government expects. The government's final criteria for selection of bidder is the share of revenue that they are offering (Hooper, 2002). Hence, AAI can offer revenue to it from the project, but which is of the category that AAI generates the most revenue in. AAI has revenue coming in from airport navigational services, airport services, non-aeronautical airport services, cargo revenue, airport lease revenue, and revenue from other sources. The major revenue generating category is airport services, and AAI can give a share from that category, as it can depend on it the most. As AAI’s ultimate goal is to become the principal aviation provider in the country, and not profit generation, it can offer a high share to the government and achieve its goal of handling the most airports and become the greatest aviation service provider in the country. This is a strategy that AAI can adopt, and it would help it to win the bid as well because the major criteria of the RFP is the greatest share of profit offered.  

4. Working towards a viable and winning revenue share

For coming up with a viable and winning share of revenue, AAI should first start with developing a detailed model for the project. The model would include revenues which would come in from airport services and aeronautics (Frank, 2011). For this, it will have to analyse the expected traffic and demand. By arriving at the expected revenue for the project, and that too at minimum expectations, AAI will move on to assess the costs of the project. The costs would include the pay of workforce, maintenance costs of managing the airport and the fleet of airplanes, and other various costs (Wu & Caves, 2000). This would give them the income figure expected to be generated from the project. Based on the profitability of the project, it will have to be decided that what share of profits should go to the contractor. For this, the profit margin of the business will have to be calculated. If the business has 50% profit margin, it will be able to spare that amount of money from the revenues of the business. Based on that, the revenue share will have to be decided.

Moreover, the bids of the previous airports are now known to everybody, and the previous players bidding for this airport will offer revenue shares above that. In any case, they will try to exceed the previous winning revenue share, so that they win this time. Hence, AAI will also have to come up with a share that is higher than the previous one. Apart from this, the third strategy would be to look at their historic revenues (Zhang, et al., 2010). If AAI has a history of generating the most revenues from one category, then shares from that category will have to be offered. AAI has revenue coming in from airport navigational services, airport services, non-aeronautical airport services, cargo revenue, airport lease revenue, and revenue from other sources. The major revenue generating category is airport services, and AAI can give a share from that category, as it can depend on it the most, and would end up generating the most revenues in that category. If AAI follows this strategy, it would be able to offer a revenue share to the government that looks the most appealing to them, while not being very risky for AAI as well. In any case, it will have to be over and above the share offered in the last bid. 

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