Regulatory environment is the key risk for the country’s airport sector as it is creating “significant uncertainty” on the timing of fall in tariffs, global rating agency S&P has said.
Standard & Poor’s Ratings Services observation comes at a time when the government is working on ways to boost the domestic aviation sector, which has substantial growth potential, and is in the process of finalising the new civil aviation policy.
The rating agency last month said Delhi International Airport Ltd (DIAL) would maintain its competitive position but uncertainty continues to surround its cash flows on account of pending tariff decision.
“We believe the key risk for the airport sector in India and particularly Delhi International Airport is the regulatory environment… This is because it results in significant uncertainty on the extent and timing of fall in tariffs,” S&P’s credit analyst Mehul Sukkawala told PTI.
Airports in countries like Australia, benefit from a regulatory regime which is well-established and light-handed, he noted.
In its report on DIAL last month, S&P had mentioned that regulatory risk for airport operators in India to be higher than that for other rated airports elsewhere in Asia-Pacific.
“This is highlighted by Airports Economic Regulatory Authority’s (AERA) delay in passing regulatory orders and pending decisions on tariff disputes. The delay is now because of the pending decision from an appellate tribunal on DIAL’s appeal,” it had said.
DIAL operates the Delhi international airport.
Sukkawala said India’s airport regulatory system has had a short history compared to other countries.
“During this period, we have seen delay in appointment of the regulator as well as the appellate tribunal members. We have also seen delay by the regulator in declaring revised tariffs as well as the appellate tribunal in passing order on company’s appeal of the first regulatory period,” he added.
Noting that the regulator has also made sudden changes like development fees that can be charged by the airport, Sukkawala said these factors have resulted in tariffs being very low in first three years of the first regulatory period (April 2009-March 2014) then very high in the last two to cover up for the under-recovery in the first three years.
“Subsequently, the delay in passing the order for the 2nd regulatory period (April 2014-March 2019) results in high tariffs continuing and making the likely fall in tariffs for the remaining period of the 2nd regulatory period more steep. All of these factors result in significant volatility and uncertainty in tariffs for DIAL whereas airports in other countries generally register very stable cash flows,” he said.
However, DIAL benefits from a transparent tariff- determination mechanism, with principles outlined in an agreement with Indian government, he added.
According to S&P, airports in countries like Australia, benefit from a regulatory regime which is well-established and light-handed.
According to Sukkawala, tariffs would have a significant bearing on the agency’s projection of DIAL’s cash flow generation.
The agency assigns 75-100 per cent weights to its financial ratio projections for the next three years.
“In the case of DIAL, we expect funds from operations (FFO) to debt (an important financial ratio that we look at for airports) to fall from ’30 per cent’ in fiscal year ended March 31, 2016 to a wide range of ‘3 to 14 per cent’ in fiscal 2017 as compared to SCACH where we expect the ratio to remain in a range of ‘6.9-7.2 per cent’ for next two years,” he said.
Southern Cross Airports Corp. Holdings Ltd (SCACH) operates the Sydney airport in Australia.
“The regulatory risk not only affects the financial ratios but also our view on the business risk profile of DIAL. We assess DIAL’s business risk profile as ‘satisfactory’ compared to ‘excellent’ for SCACH, Narita International Airport and Airport Authority Hong Kong and ‘strong’ for Aeroporti di Roma SpA primarily on account of the higher regulatory risk in India,” he noted.