CRISIL Ratings estimates that India’s top four airports – New Delhi, Mumbai, Hyderabad and Bengaluru – which cater to nearly 55% of India’s air traffic and are operating at almost full capacity, will need to spend heavily on expansion through 2021. Yet, their credit quality will remain healthy because of strong business models backed by robust traffic growth and predictable cash flows under a regulated tariff structure.
Gurpreet Chhatwal, President, Crisil Ratings said, “Because of surging footfalls and high capacity utilisation of over 90%, we estimate the four airports would need to invest Rs 27,000 crore for expansion. Yet their credit quality will not suffer because of low implementation risk – such expansions are brownfield and modular in nature – and conducive tariff regulation.”
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Air traffic in India grew 20% in fiscal 2017, compared to the weak average annual growth of 9% seen since 2011. Bengaluru and Hyderabad airports grew even faster at over 24%. Rising private consumption and healthy economic growth will continue to aid traffic growth at airports.
Charges such as user development fee levied by airports is calculated in blocks of five years (called ‘control periods’) based on a fixed return on capital expenditure and base traffic growth assumption. This mechanism not only compensates for the risks taken but also provides for adjustments in user fee on account of large variations in traffic, and/or capital expenditure plan in a control period.For example, the ‘Hybrid-Till’ mechanism encourages airport developers to increase their non-aeronautical revenues through retail, advertising and parking, as upto 70% of non-aeronautical revenue is allowed to be utilized by the operator for development of Airport Infrastructure. This benefits the passengers as well as the user development fee is subsidized by a portion of non-aeronautical revenue.
Manish Gupta, Director, Crisil Ratings said, “While aeronautical revenues may moderate in the next control period due to adjustment in passenger user fee, increasing footfalls can offset this through higher non-aeronautical revenue so it’s unlikely to curb the earnings’ momentum of these airports. The contribution from non-aeronautical revenue is expected to increase to ~50% over the next four years from ~35% now.”