Amidst gradual recovery, private airports to double capex to ~Rs 42,000 Cr
Private airport operators, confident in the long term growth of aviation traffic, will invest around Rs 42,000 crore in capacity expansion over the next five years, until fiscal 2026. This is more than double the amount spent on capital expenditures (capex) in the previous five fiscal years.
The confidence in capex is based on the company's strong long-term fundamentals and regulated tariff structure, which allows for cost pass-through and hence keeps risks low.
Prior to the beginning of Covid-19 in India near the end of fiscal 2020, private airports were running at more than 115% of their design capacity (i.e., 175 million passengers on a design capacity of 150 million passengers). The high operating rate was a result of the airline industry's significant annual growth of more than 8% between fiscal years 2016 and 2020. The operating rates suffered a significant hit in fiscal 2021, as the pandemic and ensuing economic recession resulted in a 65% decline in traffic.
Though the current fiscal year began with a more severe second wave, economic prospects appear to be improving as infection rates decline, vaccination rates increase, and the government maintains its focus on infrastructure development. The economic growth forecast remains favourable, with GDP expected to expand at a 7.4% compound annual growth rate1 during the following four fiscal years, from fiscal 2022 to fiscal 2025, in real terms.
As CRISIL Ratings' Director Ankit Hakhu puts it, "Economic growth would increase air traffic volumes as a result of increased per capita spending and a trend toward more efficient modes of transportation. Given that air traffic in India typically grows faster than GDP and the government's push to connect lower-tier cities to metros through the Regional Connectivity Scheme (RCS), we anticipate a robust 8.5% annual growth rate in air traffic at Indian airports until fiscal 2026 (compared to fiscal 2020) "'levels').
This would result in an additional 190 million passengers flying across India by fiscal 2026, compared to the pre-pandemic base of 340 million passengers in fiscal 2020, bringing total traffic to 530 million passengers by fiscal 2026. 70%, or 375 million passengers, of this is estimated to be handled by private airports in fiscal 2026, up from 50% in fiscal 2020, owing largely to overall traffic increase and the privatisation of new airports during this period.
This anticipated demand surge is motivating private airport operators to increase design capacity to 340 million4 passengers per year, up from 150 million pre-pandemic. Despite this major capacity addition, robust demand growth could keep these airports' utilisation rates at 100% by fiscal 2026.
Varun Marwaha, Associate Director at CRISIL Ratings, explains, "While the strong utilisation rate justifies the substantial capital expenditure, these airports' credit ratings will also be bolstered by their regulatory business model. Tariffs for these airports are based on a fixed regulated return (weighted average of 16% on equity and market cost of debt) on capital expenditures over the following five years, which gives certainty regarding the cash-flow return on the investment "capital expenditure."
Airports also gain revenue from non-aeronautical operations, such as passenger spending on food and beverages, lounges, and retail. By fiscal 2024, increased passenger traffic and economic recovery should enable this revenue stream rebound by 50% (in absolute terms over fiscal 2020) and contribute more than 40% to private airports' total revenue.