Liquidity buffers will cushion airports against COVID-19 scare in the short term, says India Ratings

Our Bureau Hyderabad | Updated on March 23, 2020

Indian airports have adequate liquidity buffers to weather short-term passenger volume (pax) disruptions stemming from the COVID-19 pandemic, says India Ratings and Research.

The coronavirus outbreak has transformed the way the airline business operates and has reshaped travel plans. A significant dip in pax has been visible in international flights during February and March 2020, due to visa cancellations, rerouting/flight cancellations and a complete embargo on international flights from March 22.

In addition, the domestic travel business could see a decline due to the spread of the virus in India and various State governments imposing restrictions on non-essential travel.

Ind-Ra plans to re-evaluate its base case assumptions to reflect the passenger traffic constraints the outbreak brings to the airports. Further ratings actions will depend on the scale and duration of the crisis and any material changes to ‘through-the-cycle’ credit profiles.

While three airports -- BIAL (Bengaluru), GHIAL (Hyderabad) and DIAL (Delhi) -- have some leeway to absorb a temporary drop in demand, the liquidity and credit metrics are commensurate with the current rating levels. Ind-Ra has placed the ratings on Watch Negative to assess the near-term risks in this evolving situation. ,

In the event of a prolonged disruption, beyond three months, air traffic will be hit and the ratings could be impacted.

However, the multi-notch rating downgrade on MIAL (Mumbai) stemmed majorly from inordinate delays in real estate monetisation compounded by the drain on liquidity due to the impact of COVID-19.

Air traffic revival halted

After the downfall of Jet Airways in 2019, both domestic and international traffic had started showing signs of revival from October 2019. However, the outbreak of the coronavirus has affected traffic since February wherein the international and domestic passenger load factor dropped 570 basis points year on year and 100 bps yoy, respectively.

Due to the continued disruption in travel both on the domestic and international side, traffic contraction beyond two months cannot be completely ruled out. Ongoing travel restrictions are likely to affect not only immediate travel plans but also summer travel plans, which is generally a peak period.

Impact of international travel disruption

Given the severe impact on international traffic, which constitutes not only 43 per cent of the aero revenues but also 20 per cent of the non-aero revenues directly, a protracted coronavirus scenario would pose a material risk. Therefore, non-aero revenue (duty-free revenues and forex) is not totally decoupled from passenger traffic growth. Nevertheless, the major gateway airports’ liquidity buffers should aid in riding over the difficult period. Aeronautical revenues contribute nearly 50 per cent to the revenues of the airports, with the least contribution to DIAL as it is under the base airport charge regime.

The overall contribution of international passengers to the total traffic at the four metro airports is around 22 per cent. Around 30 per cent of the non-aero revenues come from lease rentals and advertisements, which may not be completely dependent on traffic. Most airports provide these services through third-party service providers, where the revenues earned are in the form of revenue share and in many cases with a certain minimum guarantee. While the minimum guarantee provides some respite to the airport operators, the significant dip in traffic could impact the ability of the third-party service providers to honour their minimum guarantee commitments in a timely manner and they may seek relief under the force majeure clause under their contracts.

Asymmetric risks due to ongoing capex and liquidity

In the backdrop of the multi-billion-dollar planned capital expenditure, DIAL, BIAL and GHIAL shored up liquidity over FY18-FY20, leading to an adequate cushion to service debt. While the liquidity in BIAL is the least among the three airports, this is on account of 90 per cent of the equity requirement of the ongoing capex already being infused. Whereas DIAL and GHIAL need to tie up for additional debt of more than ₹20 billion.

GHIAL and DIAL have a bullet repayment profile; hence, they only have interest servicing obligations, whereas BIAL and MIAL have an amortising debt profile. However, the repayment profile of BIAL is limited against the backdrop of capex plans. All airports except MIAL have adequate liquidity to overcome the disruptions for three months. However, in case there is a prolonged disruption, the ratings could be impacted.

The revenue shortfall due to the dip in air traffic could affect all airports on account of the regulatory nature of the sector. With a tariff order yet to be released for all airports, the impact of the same can be factored in and adjusted in the tariff for the subsequent control period. The impact on MIAL could be negative if the tariff were revised to the base airport charges and any loss in revenue due to the coronavirus outbreak would not be fully adjusted.

Published on March 23, 2020

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