Airports are no longer attractive assets

Published: April 3, 2020 4:15:02 AM

With air travel having come to a halt due to the corona pandemic, airports find themselves in the eye of a thunderstorm.

Over the last 20 years, investor interest in airports has only grown stronger.

By Satyendra Pandey

Investor interest in Indian airports has seen peaks and valleys. From heightened interest, and several privatisations between 1997 and 2006, there was a lull from 2007 through 2014. The sector once again attracted interest from 2015 onwards, including from airport operators, sovereign wealth funds, and pension funds keen to gain a foothold in the sector. This interest was driven by a host of factors, including market returns, liquidity, market potential, market access, and privatisation parameters.

Most investors in India’s airports have come via equity positions in the country’s two large airport operators, namely GMR, and GVK. Overall, these investors have fared well, the returns have been great. Consider these statistics: Malaysia Airports sold its 10% stake in Delhi Airport for a 2x multiple; Bidvest sold its 23.5% stake in Mumbai airport for a 7.7x multiple; Zurich Airport sold its 12% stake in Bengaluru airport for a 10.5x multiple; and Siemens sold its 6% stake in Bengaluru airport for a 19.1x multiple.

Over the last 20 years, investor interest in airports has only grown stronger. Fairfax group paid around $466 mn to gradually increase its stake to 54% ownership of Bengaluru International Airport Limited. Earlier in the year, Zurich Airports (Flughafen Zürich AG) won the bid to build and develop the greenfield airport at Jewar (the project’s estimated value is north of $3.1 bn); and, very recently, Groupe ADP (a French conglomerate) bought a 49% stake in GMR airports for $1.5 bn.

Until recently, airports, as an asset class, were on a stable ascent path. One might ask why this was so.
Airports’ success as an asset class is linked to several factors, the primary being the explosive traffic growth. This, when coupled with the monopoly status often enshrined in the master agreements, long-term concession periods, low competition risk, favourable till-structures, stable cash-flows, commercial property development rights, a captive consumer base, and guaranteed return on large portions of the asset base (currently PPP airports are guaranteed a return on the regulated asset base of up to 16%), is the perfect recipe for strong and growing cash-flows. Thus, while gestation periods are long, for investors looking at long-term assets, the elements align and make for a compelling case for investment. Consequently, airports carry immense market power. Coupled with the Indian market’s growth in double digits, the profit potential, until very recently, was immense.

Cochin airport was the first PPP airport without a defined concession period, and where the revenue share was in the form of a dividend to the government. Hyderabad and Bengaluru terms stipulated a 60-year concession, with a 4% annual concession fee. For Delhi and Mumbai, the revenue share was 46.99% and 38.7%, respectively, and the concession terms 30 + 30 years and 30 + 10 years, respectively. Later airports such as Goa had a 40 + 20 year concession period, with a revenue share of 36.99 %, but a five-year revenue share holiday. Most recently, the six airports won by Adani Airports have 50-year concession periods, and per passenger payments to the government, instead of the earlier revenue share agreement.

Recent policy measures also attempted to create a friendlier investment environment. Whether it was the revenue share (which is now taken on a per passenger basis rather than a top-line of the revenue basis) or the hybrid till-model (which is beneficial for airport operators, but not so much for other stakeholders, including the flying public), or the fast-tracking of various projects, the government was clear in its intent to privatise.

Needless to say, after a stunning takeoff, airports were on a steady climb. The elements were aligned and investors had already tasted success. With over `35,000 crore invested in India’s airports (approximately $5.5 bn, adjusted for exchange rates), this amount was to double over the next decade. This, toward capturing market potential because with a 300 million-strong middle class, low air travel penetration, and an increasing propensity to spend, India was targeting 500 million passenger trips in the next 20 years.

Airports would be key to facilitating this movement. But, then the novel coronavirus hit—a global pandemic, the likes of which have not been seen in a century. With major cities in lockdown globally and airlines grounded, airports have flown right into the eye of a thunderstorm.

The impact—decimation of demand and a change in the way we think about travel. Together, these make for paradigm shifts, and traffic volumes may take years to rebound. With public health emerging as a key concern post the pandemic, the airport experience may include an element of health risk, in addition to that of security risk.
The airline industry will emerge with fewer airlines, smaller fleets, and lower traffic volumes. And, the future
traveller will pay more in airport charges, further impacting demand. For travellers, there will be increased hassles and costs, and for demand, this will act as a natural suppressant.

That is not all, new risks are also emerging. Chief amongst these is the increase in aircraft ranges and a rush to smaller aircraft types, which may make the hub-concept obsolete. Similarly, revenue streams will be strained by the push for opening new low-cost airports, increased airport competition via dual airport systems (as will be seen in Goa, Delhi, and Mumbai in a few years), the talent crunch, new geopolitical risks and changing sentiment towards air-travel.
Airports are well aware of this fact, and on March 31, the industry body Airports Council International sent a letter to the prime minister asking for a range of measures. Ironically, in these the passenger was overlooked. Examined closely, the proposal indicates that airport revenues should not be impacted in any way, while there should be maximum relaxation on costs and funding. Much of these revenues stem from passenger flows. Yet, it seems that the “passenger” is the element missing from the private-public partnership model.

The beginning of the year saw approximately 48 % of domestic capacity under PPP airports. This number is now 60%, after the successful bids by Adani Airports for six airports. Another six airports were to be bid out, bringing the total airport capacity under PPP models to 65%. But, with airports no longer being as attractive to investors, the future remains uncertain.

(The author is Former head of strategy, GoAir. Views are personal)

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