Until the coronavirus pandemic hit and disrupted the ways of the world, the Indian aviation market was witnessing phenomenal growth. This was driven by an emerging middle class, increased propensity to spend and very low air-travel penetration. Rising household incomes and a middle-class expected to double in the next decade were key to this growth. Put simply, people had more money and they were spending it and taking to the skies.
And, the evidence was in the numbers. The number of flyers grew from 36 million passengers in 1996 to 73 million in 2006 to 341 million in 2019. And despite rapid growth in aviation, the market was far from saturated. Concurrently, there were scenes of airports bursting at the seams with aircraft lined up as far as the eye could see. Airport capacity was the need of the hour.
Fast forward to today, and it is estimated that $40 billion will be required for airport development alone over the next decade. The projects will be both greenfield—airports that are developed from ground-up—and brownfield, where existing airports are used and developed further. Interestingly, while the last two decades saw a dominance of greenfield projects, the upcoming projects are likely to be in the brownfield category.
Deviating from PPP Model
At the time of writing this, 12 airports, all brownfield, are lined up for potential privatisation while two major greenfield airport projects at Jewar and Navi Mumbai are underway. The list of airports that the government intends to privatise includes those at Amritsar, Bhubaneswar, Tiruchirappalli, Raipur, Indore and Varanasi, with consideration that they may be clubbed with airports at Barmer, Jharsuguda, Salem, Jagdalpur, Jabalpur and Kushinagar. Because these are smaller cities, each with a distinct characteristic and unique travelling traits and spending profiles, this next round of airport privatisation promises to be very different from the previous ones. What worked in the past will not work in the future.
This current wave of privatisation will deviate from the public-private partnership (PPP) model and firms will instead be given management contract. This means, the ownership will still rest with the government while a private company will manage the operations. Arguably, this will help mitigate mindless construction coupled with cost-overruns, and address concerns that consumers have paid for much of the infrastructure by way of fees and charges. Whether or not this translates into reality remains to be seen.
The question of lending
At the same time, there is another storm brewing—banks are reluctant to lend to airport projects and are negative on aviation as a whole. The risk of not realizing adequate returns, and limited cash-flow risk mitigation measures have led to this situation. And, in spite of a growth market, private capital has been reluctant to enter due to the challenges with contract enforcement and the overall atmosphere or perception thereof.
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Interestingly, when it comes to lending to airports, there is a unique contradiction on the question of collateralization. While at first glance, the airports have significant collateral—but it is collateral that isn’t really liquid. For instance, land in most cases is owned by the government and thus it cannot be leveraged. The terminal buildings and other hard assets don’t carry with them liquidity—even if a bank is to repossess these assets, disposing them becomes a challenge. Same is the case with runways, airside infrastructure, like parking bays and hangars for aircraft, and landside assets such as access roads and parking. Intangible assets again have limited liquidity. Thus, financiers for the most part are left giving loans that are secured against cash-flows from airports. These cash-flows can only accrue if there are strong passenger volumes and cargo flows. But the coronavirus pandemic has had a unique impact. While the number of travellers is slowly moving up, their appetite to spend is drastically lower. And, the situation is likely to get worse before it gets better.
The challenges ahead
Finally, due to the pandemic, people are eager to reach their destinations directly. Indeed, several passengers are now opting for buses—not because they are an easier solution—because it does away with the hassle of long security lines, random interactions, last-mile connectivity and the prospect of last-minute flight cancellations.
As far as India’s airports go, they have a challenge ahead. Airports have to be upgraded and developed so that the demand can be leveraged to its full potential. At the same time, they will need to look all around because the traveller has a multitude of options and is increasingly impatient with her time and money. The next round of airport privatisation is sure to bring challenges and opportunities alike.
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