Long-Term Demand and Regulated Business Model Keep Risks for Private Airports in Control: Report
Moneylife Digital Team 31 August 2021
Confident of air traffic growth in the long term, private airport operators will spend around Rs42,000 crore on capacity expansion over the next five years through fiscal 2026. According to a research note, that is more than double the capital expenditure (capex) they incurred in the previous five fiscals. 
In the report, ratings agency CRISIL says, "The confidence on capex stems from the strong long-term fundamentals and regulated tariff structure, which allows pass-through of capex costs and thereby keeping the risks low." 
Before the onset of COVID-19 in India towards the end of fiscal 2020, private airports were bursting at their seams, operating at over 115% of their design capacity or operating at about 175 million passengers on a design capacity of around 150 million passengers. 
The high operating rate was due to strong annual growth of over 8% in air traffic between fiscals 2016 and 2020. The operational rates took a massive hit in fiscal 2021 as the pandemic and the subsequent economic slowdown led to traffic nose diving by about 65%.
Though the current fiscal also started with a more virulent second wave, the ratings agency says, prospects of economic recovery look brighter with the infection rate easing, vaccinations gathering pace, and the government continuing its thrust on infrastructure development. 
The economic growth outlook remains strong and GDP is expected to grow at around 7.4% compounded annual growth rate (CAGR) over the next four years of fiscal 2022 to fiscal 2025, in real terms, it added.
According to Ankit Hakhu, director of CRISIL Ratings, economic growth will boost air traffic volumes given the impact of an increase in per capita consumption and a shift in preference towards an efficient commute mode. 
"Given that air traffic in India tends to grow faster than the GDP growth and government’s push to connect lower-tier cities with metros under its regional connectivity scheme (RCS), we expect a robust 8.5% annual air traffic growth at Indian airports till fiscal 2026 compared with fiscal 2020 levels,” he added.
This would mean an additional about 190 million passengers will fly pan-India by fiscal 2026 over the pre-pandemic base of fiscal 2020 of 340 million passengers taking the overall traffic to about 530 million passengers by fiscal 2026. 
CRISIL says that 70% or about 375 million passengers are expected to be handled by private airports in fiscal 2026, up from around 50% in fiscal 2020, primarily driven by overall traffic growth and new airports getting privatised during this period.
"This expected demand growth is driving private airport operators to enhance the design capacity to 340 million passengers per annum from the pre-pandemic level of about 150 million," it added. 
Despite this significant capacity expansion, the ratings agency feels a strong increase in demand to keep utilisation rates of these airports around 100% by fiscal 2026.
Varun Marwaha, associate director of CRISIL Ratings, says, “While the high utilisation rate justifies the large capex, credit profiles of these airports will also be supported by their regulatory business model. Tariffs for these airports are based on a fixed regulated return (weighted average of around 16% on the equity investment and the market cost of debt) on capex in the next five years, which provides certainty regarding cash-flow return on the capex.”
Airports also earn from non-aero activities, including passenger spending within the airport ecosystem, such as food and beverages, lounge and retail. 
"By fiscal 2024, increase in passenger traffic and economic revival should help this revenue stream rebound by 50% in absolute terms over fiscal 2020 and contribute over 40% to the overall revenue of private airports," the ratings agency added.
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