With airlines in the midst of a crisis — stemming from Jet shutting down operations and technical glitches in 737 affecting the frequency of flights at major airports, the travellers encounter a piquant situation (scramble to book tickets at high prices). At the same time, there is a question lurking in the minds of many — is the ebullient airport sector likely to see a melt-down?
The current airport model offers adequate cushion given the return-driven regulatory model therefore, there is a possibility of cash-flow mismatches but not a material or immediate threat to the credit quality of these assets.
However, the nervousness gripping the sector will impact the passenger (pax) volumes and thus decelerate pax growth in FY20. The growth in Q1 CY20 has remained almost flattish at about 5 per cent and March 2019 pax was just a mirror image of March 2018.
That being said, there are areas that could inflict pain for airports such as decelerating pax leading to subdued non-aero revenues — revenues from reduced sales at the shops in airport.
Although a major source of income (ranging between 35 and 55 per cent in airports) the impact assessment on this would be premature given the possibility of quick ramp-up by other airlines.
Undoubtedly, this could be either a mediocre or muted growth phase for airports for the current decade. However, this could aid airports in managing loads as there are ongoing expansions, capacity constraints (Mumbai) and lack of new slots. At the same time, the pax growth could dampen during the season of travel (April and May).
Also, the grounding of 737 Max owned by SpiceJet adds the pressure on air traffic. However, the impact could be moderate as the number of flights is only 18. If airlines decide to scale back fleet expansion plans, pax volumes could be further negatively impacted.
Globally, an individual airline’s bankruptcy has limited impact on traffic performance. In the US, nearly every major domestic carrier has filed for bankruptcy at some point in the past. These events could lead to only short-term disruptions, given that large airports have large catchment areas and other operating airlines can absorb traffic to an extent. A similar episode of Kingfisher Airlines highlights the ability of other airlines to adopt to the difficult times and grow their market share.
PPP model
Indian public-private partnership-based airports are insulated from the vagaries of airlines because the payments are usually upfront and airlines submit a bank guarantee entailing a reasonable sum of payments.
The airports could also exercise the ‘cash and carry’ option to address the weakened financial profile risks of airlines, as part of their receivable management strategy.
The market share lost by Jet has to an extent been a gain for other airlines such as Interglobe Aviation Limited (IndiGo), GoAir and Vistara Airlines. SpiceJet could not gain market share in March 2019 due to grounding of the Boeing 737 Max. Given the vacation season, troubles in the airlines space are likely to keep the ticket prices high and thereby dent the propensity to fly.
Oil impact
To an extent, uptick in oil prices may be offset by the high airfares and allow the airlines to retain their margins.
With increased airport pairing, underpinned by the regional connectivity scheme, traffic volumes soared in FY18 and FY19. Although air traffic also increased in 11MFY19 by 12.94 per cent yoy, we can expect a decline in 1HFY20.
Leisure travel propelled air traffic in December and May during FY09-FY18. About 19 per cent of the pax volumes originate in May and December averagely during a year.
Both domestic and international pax growth for January-February 2019 combined dipped to 6.7 per cent and 5.7 per cent, respectively, from 20.6 per cent and 10 per cent for January-February 2018.
In the event of a prolonged delay in the resolution of airlines issues, the impact would be more pronounced on pax volumes in FY20. According to India Ratings & Research, if the issue resolves within 1H19, pax growth would be about 13 per cent while the growth deceleration would be higher in the event of troubles spilling over to 3Q19.
How has the Indian airport sector fared post such downfall in an airline? Historically, the all India airport traffic from FY 2007 to FY 2019 has grown at a CAGR of 11.2 per cent; however, the sector has seen its best growth phase in the last five years when the traffic grew by 15.3 per cent.
Part of the growth may also be attributed to schemes launched by the government such as UDAN. Also the growth in the sector is inevitable given the low penetration of air travel in the country which would ensure the traffic at the airports grow after a temporary glitch.
Privatisation thrust
We believe privatisation of airports leads to efficiency, improvement in service quality (standard mentioned in their concessions), better consumer experience in addition to easing of financial obligation of the government for building additional capacities.
Better service quality and experiences can be reflected in the fact that these airports are ranked at the top globally in their respective categories.
The four metro airports being operated on a PPP model are recognised for their world class infrastructure. The four major metro airports are undergoing a cumulative capex of more than INR 400 billion (including Navi Mumbai Airport) for increasing the capacity which otherwise would have to be funded by the government.
In essence, two factors would drive the strength of airport credits — how quick the existing airlines scale up their route frequency resulting in slots getting filled up for large airports like Mumbai and Delhi and the continued aspiration of the Indian middle class to fly.
Until then, the airports can reasonably sail given the backdrop of liquidity available at hand but the game has just only begun for airlines.
Kotecha is Associate Director and Subramanian is Director, India Ratings and Research