High Potential: Rising investor participation in the airport industry

The airport sector in India has traditionally been defined by a limited number of prominent players, who continue to maintain their dominance in the space. Conse­qu­ently, airport developers face the pressing need of securing funding to facilitate their expansion efforts. In this context, the National Investment and Infrastructure Fund has expressed strong interest in actively participating in the sector. It has already executed agreements with the GMR Group for three airports, including greenfield airports in Mopa and Andhra Pradesh.

Despite Covid-19, Indian airports have been of significant interest to lenders, primarily due to the favourable regulatory landscape of the sector. Investors look forward to an assured return on their investment, be it a greenfield or a brownfield project. As per Re­surgent India’s experience in the sector, the usual return on the invested capital stands at approximately 7-8 per cent. Due to return guarantees, financial closures posed no significant threat even during the pandemic. In 2021-22, SBI Capital Markets played a significant role in achieving the financial closure of the greenfield Jewar airport, and reported active participation from the other lenders.

Considering that there are no non-performing assets in the sector, India Infrastructure Finance Company Limited has had a constructive experience as well. The lender has an ex­posure of approximately Rs 7 billion. Addi­tio­nally, it has obtained government app­roval for engaging in direct lending. However, as of now, for airports, the lender has parti­cipa­ted only in consortiums.

Moreover, infrastructure projects across sectors such as power face a discernible level of risk, whereas airports collect a significant portion of their charges upfront. In some cases, bank guarantees are provided to secure the potential revenue owed by an airline for the utilisation of allocated slots. Furthermore, each passenger makes the payment for flight tickets in advance, prior to commencing their journey. Therefore, the level of risk associated with airports is comparatively lower.

Cost structuring

The cost structure of airport projects has multiple components. Typically, land acquisition accounts for 20 per cent to 25 per cent of the total cost; construction of terminal buildings constitutes about 25 per cent to 30 per cent; the development of runways, taxiways and aprons make-up 25 per cent; navigation aids and other infrastructure constitute 5 to 10 per cent; and consulting, pre-operations, etc., make up around 5 to 10 per cent.

Land acquisition costs vary for brownfield and greenfield projects. On an average, the estimated cost of acquiring land for a greenfield airport is approximately Rs 10 billion to Rs 15 billion per 1,000 acres, whereas for a bro­wnfield airport, it ranges from Rs 0.5 billion to Rs 1 billion per 1,000 acres.

In the case of public-private partnership airport projects, the land is given on lease at a concessional rate. Currently, for such projects, land is not being leased – only right of way is being granted. Therefore, the land acquisition cost component is negligible. However, land de­velopment costs may arise, as seen in the case of Navi Mumbai airport, where the cutting and levelling of the Ulwe hill was de­emed ne­ce­ssary for the development of parallel runways. These costs hold regulatory assurances and are subsequently reimbursed via the regulatory tariff mechanism.

Revenue streams

Airlines contribute around 25-30 per cent of the total revenue generated. Passenger and other tariffs contribute approximately 30 per cent of the revenue, while non-aeronautical revenue accounts for the remaining 40 per cent. Non-aeronautical revenue includes income generated from rental or retail activities.

A recent trend is that of the rental income (40 per cent of the total income) being hived off to a separate company, with the intention of implementing the lease rental discounting scheme. This scheme enables the new company to obtain an additional loan tenor of 20 years, which simultaneously enables the parent company to also extend the loan duration without having to restructure.

The introduction of infrastructure investment trusts (InvITs) has led to a significant transformation in the overall lending framework for infrastructure projects. Traditiona­lly, airports have prioritised the special purpose vehicle financing model. Even now, for InvITs to be deployed in the sector, consistent effort is required to sensitise the board to adopt the model. The road sector has experienced significant traction in the implementation of InvITs due to the assurance of fixed annuity income. Similarly, for airports, it is necessary to establish a predetermined benchmark for tariff ra­tes. Moreover, with the Adani Group holding a few airport assets, the scope of the InvIT model as a funding strategy has increased.

Taking into consideration the returns earned by prominent players such as Sie­me­ns, Bidvest and Groupe ADP, airports represent one of the most lucrative asset classes within the infrastructure sector. In the ne­ar fu­ture, with the monetisation of more airpor­ts, Tier II and Tier III cities are expected to be the driving force behind the expansion of airport traffic.

For 2023-24, the Centre has identified six major and seven minor airports for monetisation. For these airports, funds may be raised via disinvestment of existing stakes, as was done for the Bengaluru, Hyderabad, Delhi and Mumbai airports.

Key recommendations

There has been a substantial increase in the amount of global capital being invested in Indian infrastructure, countering the traditional pattern of domestic and private equity investments. In­vestors are now inclined to engage even at the asset level. Regulators and stakeholders are both in a favourable position to streamline and ad­vance this positive direction towards a more simplified regulatory framework.

Prior to 2015, if a project got terminat­ed du­ring the construction phase, all investments made were rendered null and void. This led to considerable uncertainty among investors, as numerous projects encountered last-mile financing issues. Despite substantial investments, the projects were still prematurely terminated. This led to arbitration, which took a long time. The government had previously issued a circular pertaining to “stuck projects” in the road sector, which led to an increase in investor confidence. It would be beneficial to extend this initiative to airports as well.

As per media reports, an investment of around Rs 1 trillion is required in the airport sector. Of this, around Rs 500 billion is expected to come from the lending community. However, len­ders are concerned about the concentration risk, as only two or three entities operate airports. Due to this, bankers also keep a cap on group exposure. The government must take ste­ps to attract new players to the sector, preferably mature players from other sectors.

Once an airport has been operationalised, its revenue sources could be monetised in an even more effective manner. In addition, financial engineering is required to improve the functionality of each revenue stream, as they may have different horizons, risks, money payment plans and underlying contracts.

Promising outlook

The airport sector is set to experience significant growth in the next five to ten years. Cur­rently, being the third largest domestic aviation market globally, India exhibits substantial po­tential for growth in air traffic. This growth can be further facilitated through governmental ef­forts aimed at privatising airports, thereby en­abling the development of robust infrastructure to accommodate the increasing traffic deman­ds. Financially sound airline businesses are also critical for pushing progress. w

Based on a panel discussion between Jyoti Prakash Gadia, Managing Director, Resurgent India; T. Harikrishnan, General Manager, India Infrastructure Finance Company Limited; Karthikeyan M., Partner, National Investment and Infrastructure Fund; and Aarani Subhanathan, VP (PASF), SBI Capital Markets, at a recent India Infrastructure conference