Logistics

Experts counsel caution in airport privatisaton

Our Bureau New Delhi | Updated on May 17, 2020

The government needs to be cautious as it moves ahead with involving the private sector in the operation, management and development of six more airports. This is the view of some analysts BusinessLine contacted after Finance Minister Nirmala Sitharaman outlined the proposal to put up another six airports for bidding.

The Finance Minister said India would become a global hub for aircraft maintenance, repair and overhaul (MRO) and also spoke of easing of restrictions on use of air space for a reduction of flying costs by about ₹1,000 crore.

Call for caution

Peeyush Naidu, Partner, Deloitte India is clear that airports continue to remain an attractive investment class, but he cautions that given the impact Covid-19 is having on the aviation sector, the government needs to be cautious in its timing and choice of airports to be handed over to the private sector.

“The difference in scale and nature of business at these airports will be an important factor from the private sector’s perspective,” he said.

Industry watchers also point out that globally established investors and funds with deep pockets look at airports that cater to 30 lakh or more passengers annually. Many such airports have already been given away through the public-private partnership mode in India.

Bidders’ preferences

Now, with Covid-19 affecting travel patterns and its effects likely to last a few years, it is very likely that initially air passenger traffic flows will be between the metros before gradually shifting to tier-II cities. This is likely to make the government’s task of attracting global bidders to the third round for six more airports more difficult.

Terming Saturday’s announcements as “good initial steps,” Kuljit Singh, Transactions Partner, EY India, feels that these may be followed by a phase-2 reforms package.

“One challenge for private airlines in India is that these airlines have nearly all borrowings in foreign exchange (by way of foreign aircraft leases or foreign exim-backed loans) and have little collateral to offer for new loans (as they own a low percentage of aircraft, which are anyway mortgaged, and typically have negative working capital) and hence they may have difficulty in raising unsecured debt from the Indian banking system to tide over the Covid-induced problems,” he said.

Areas for reforms

Singh is of the view that the second phase of reforms in the sector may need to have more reforms in taxes on fuel, subvention of airport charges and government guarantees for additional unsecured borrowings of private airlines.

“In addition to the Indian government, foreign aircraft lessors and foreign exim banks may need to play a major role as well. Lastly, some of the private airlines may need to arrange external equity capital, even at current depressed valuations, to tide over these unusual circumstances,” Singh said.

The Finance Minister also announced that the government was planning to make India a global hub for aircraft MRO and establishing conversion between the defence sector and civil sector for creating economies of scale.

MRO advantage

Commenting on these proposals, Anand Bhaskar, Managing Director and CEO, Air Works, says making India an MRO hub will go a long way in making the aviation sector, both civil and defence, self-reliant and cost-effective.

“The sector has huge employment generation capacity, which is the need of the hour,” he said. Air Works has been working in the MRO space for over seven decades.

Published on May 17, 2020

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