Despite the dent created by COVID-19 on Indian aviation, the long-term story of the domestic industry seems to be intact. That is one reason why the Indian government is firmly progressing on its plan to develop the airport infrastructure in the country. This includes developing 100 new airports, privatising those in Tier 2-3 cities and selling its remaining stake in some of the most profitable ones.
While everyone agrees the need for a sound airport infrastructure, many doubt if there is money to be made from smaller airports. Also, will investors like the idea of clubbing together non-profitable and profitable airports to privatise them?
For aviation consulting firm Caladrius Aero's Managing Partners Rohit Tomar and Ram Shankar, the key lies in operational efficiency and managing debt. The two industry veterans share their views on airport development in an emailed interview. Excerpts:
Let’s start with a basic question. Given the experience of the last decade or so, is airports privatisation a good move?
Ram: Yes, it certainly is. Air traffic demand in India is characterised by the growing middle-class population, which makes the case for developing Tier II and III city airports. Such growing traffic demand calls for faster development of airport infrastructure, in line with global standards. Delivering such complex projects at a faster pace demands huge investments and deployment of large amount of resources.
Privatisation turns out to be the best answer for such challenges. With this option, the government leverages the strong expertise of in-house private players, gives them an opportunity to expand, opens up FDI in the sector and brings in foreign investments, and create more jobs.
Given the present circumstances, what is the outlook for the airports business in India? Most current players seem to be struggling.
Rohit: If airports, as an infrastructure business in India, are finding it difficult to attract significant support from the global equity and debt markets, it is largely due to the misalignment of infrastructure and efficiency by some private players.
The aviation sector, over the next 10-15 years, is going to be driven by Tier II and III airports. That’s where the focus of next round of airport privatisation is. This does not take metro airports out of the picture as they act like reservoirs in the domestic traffic flow, generating and moderating traffic from Tier II and III cities. Hence, it would be important for metro airports to continuously invest and improve their airport infrastructure to keep pace with the growth in Tier II and III airports.
Do you think there is money to be made in non-metro airports?
Rohit: The growth in air traffic in India, over the next 10-15 years, is going to be driven by Tier II and III airports. As such, there is significant value potential in them.
Meeting the expectations of the Airports Authority of India (AAI) will be a challenge since the ability to generate higher non-aero revenue per square metre would be muted across Tier II and III airports. As such, investors will have to carefully evaluate the revenue-generation capability of airports. It is also important for investors to manage their leverage, and, most importantly, focus on revenue augmentation, based on efficiency and not on scale.
The government wants to completely exit from airports such as Delhi and Mumbai. What does it mean for its present majority shareholders?
Rohit: In my view, this is a stake sale transaction which would not have any effect on ground. The airports are still on long-term lease, and have to pay royalties to AAI as part of the OMDA (Operation, Management and Development Agreement).
A bird’s-eye view of this transaction will reveal that it is very much in line with what VCs and PE firms engage in, when they end up having stake in companies. The issue will be timing and the valuation for their stake that AAI will be able to achieve. It would also be an interesting situation to see how AAI would manage this stake sale while ensuring that it’s getting the maximum value for its investment without infringing on other covenants of the shareholders agreement.
One proposal is to club loss-making airports with profitable ones, and to privatise them. Is this a sound idea?
Ram: Offering a profit-and-loss making airport as a bundle to the bidder sounds ideally correct. However, it will be prudent for such schemes to demonstrate its financial viability. Taking over a loss-making and profit-making airport together is tricky as infrastructure is a capex-intensive industry.
Given the government's initiative in promoting RCS (regional connectivity scheme), there, potentially, can be traffic built in those loss-making airports over time (subject to many factors). However, the payback period of such investments infused during the lead time will be hard to predict.
From a customer’s point of view, does privatisation mean better services?
Ram: Every private player sets up its own standards of service quality and customer service. A healthy competition in an industry certainly results in better services.
The pandemic has set the industry back by a few years. How long do you think it will take for the airports to get back to the pre-COVID-19 levels?
Rohit: The redistribution of traffic, post COVID-19, in the domestic sector has already been a boon for Tier II airports, and to a large extent, Tier 1 airports, too, as passenger throughput is close to the pre-COVID levels at many airports, and, in some airports, it exceeds pre-COVID levels.
With international traffic expected to return only by the last quarter of 2021 to anywhere close to the pre-COVID levels, I believe 2021 would be good for Tier II airports.
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