AIRPORT INDUSTRY OUTLOOK

INTRODUCTION

The primary responsibility for the development and management of Indian airports has been with the Government of India (GoI) through the Ministry of Civil Aviation (MoCA)-controlled Airports Authority of India (AAI). During the last decade, the Indian aviation industry reported healthy growth following liberalisation of the airlines industry, advent of low-cost carriers, competition-induced decline in travel costs etc¹.

MARKET SIZE

The international and domestic aircraft movements have witnessed an increase of 9.5 per cent and 13.9 per cent respectively resulting into 13.0 per cent increase in total aircraft movements during (April- February) 2017-18 as compared to (April- February) 2016-17; whereas the international and domestic passengers traffic have shown an increase of 10.1 per cent and 17.4 per cent respectively resulting into overall increase of 15.8 per cent in total passenger traffic during the period (April- February) 2017-18 as compared to (April- February) 2016-17. Further, the international and domestic freight traffic have shown growth of 17.2 per cent and 8.0 per cent respectively resulting into overall increase of 13.7 per cent in total freight traffic during the period (April- February) 2017-18 as compared to (April- February) 2016-17².

CAPITAL EXPENDITURE (Capex) PLANS

Airports Authority of India (AAI) has chalked out a programme for upgradation of airports with an expenditure of Rs 18,000 crore in the next four years³. The capital expenditure is projected to be around Rs 4,100 crore for 2018-19.4

REGIONAL CONNECTIVITY SCHEME

Last Year, Regional connectivity scheme of UDAN (Ude Desh ka Aam Nagrik) initiated by the Government of India (GoI) shall connect 56 unserved airports and 31 unserved helipads across the country.5 UDAN is the Government’s initiative to make air travel to India’s tier II and tier III cities affordable to the common people by placing/connecting smaller cities and remote regions on the aviation map. Under the scheme, the Government offers incen- tives to airlines to flag off new flights to neglected smaller cities and towns by providing Viability Gap Funding (VGF) to make these operations profit- able. Airlines are required to bid for exclusive rights to fly on the regional routes opened up under the scheme. Heritage Aviation, Maritime Energy Heli Air Services, Turbo Aviation, Zoom Air and Pinnacle are some of the new private players.6

The Union Budget 2018 stated that the Airport Authority of India (AAI) has 124 airports and proposed to expand airport capacity more than five times to handle a billion trips a year under a new initiative- NABH Nirman; this expansion will be funded by leveraging the balance sheet of Airport Authority 7 of India (AAI). The AAI is likely to invest INR 15,000 Crore in FY2018-19 to expand existing terminal buildings as well as construct new buildings.

¹Privatisation of airports became visible with the award of build-operate-transfer (BOT) concessions to private players for greenfield airports at Bengaluru and Hyderabad in 2004, followed by the privatisation of the existing airports at Delhi and Mumbai in 2006. Furthermore, attempts to revive defunct airports and developing greenfield airports was also underway. Gradually, airport development projects are increasingly being implemented through project-specific special purpose vehicles (SPVs) in which the debt is raised to fund part of the project cost. An independent regulator, Airports Economic Regulatory Authority (AERA),has been formed for overhauling regulatory affairs. ²According to latest February 2018 data from Airport Authority of India (AAI), URL: https://www.aai.aero/sites/default/files/traf- fic-news/TR%20of%20%20Feb%202018.pdf ³https://economictimes.indiatimes.com/industry/transporta- tion/airlines-/-aviation/aai-chalks-out-rs-18000-crore-capex-plan-for-next-four-years/articleshow/63219471.cms; accessed on 4 July 2018. 4 http://www.newindianexpress.com/business/2018/jan/21/aai-to-raise-funds-to-meet-capital-expenditure-requirements-1760139.html; accessed on 4 July 2018. 5 https://indianexpress.com/article/business/budget/udan-to-connect-56-unserved-airports-says-arun-jaitley-5047594/ RECENT DEVELOPMENTS 8

• An airport at international level, that will be located at Jewar in the northern state of Uttar Pradesh and 72km from the Delhi Indira Gandhi International airport, to "decongest" Delhi airport,9 got approval recently to be built under the Public Private Partnership model (PPP); estimat- ed to spread over 3,000 hectares of land. The Uttar Pradesh government is likely to spend Rs. 4000 crore for land acquisition for the Noida international Greenfield airport near Jewar. Out of this amount, Rs.1500 will be spent by the State Civil Aviation Department, while another Rs. 1500 crore will be provided by the Noida Development Authority. An amount of Rs. 500 crore each, shall be shared by Greater Noida Authority and Yamuna Expressway Industrial Development Authority (YEIDA) respectively.10 Around 1441 hectares have been identified in the first phase of the project. The airport is expected to start operation in 2022-23, with an initial capacity of 60 lakh passengers. The airport is expected to have 4 runways (2 in 1st phase; 2 in 2nd phase) to cater over 300 million passengers. Site clearance for the project was granted by the Ministry of Civil Aviation (MoCA) on July 6, 2017, and the Uttar Pradesh Government appointed Yamuna Expressway Industrial Development Authority 11 (YEIDA) as the implementing agency on its behalf in October 2017. Jewar used to be a part of the Bulandshahr district but now is a Nagar Panchayat in the Gautam Buddha Nagar district. The area with a population of 32,000. YEIDA has identified nine villages which have to be acquired for the airport; however, land acquisition issue is likely to be less prominent provided farmers receive adequate compensation.12 • On 26 February 2018, -Bhatinda flight service began from under Ude Desh ka Aam Nagrik(UDAN) regional connectivi- ty scheme.13 in western has been completed at INR 200 crore. Foundation stone of Navi Mumbai airport is underway; where the City and Industrial Development Corporation of Maharashtra (CIDCO) is facing an arduous task of relocating project affected persons and flattening the Ulwe hill and diverting Ulwe river; hill operation and rehabilitation of local habitants also got delayed due to monsoon 14 challenges. MAJOR PLAYERS GMR Infrastructure Ltd GMR Airports Ltd, a subsidiary of GMR Infrastructure Ltd and part of GMR Group, has entered into an agreement with Malaysia Airports Holdings Berhard (MAHB) to acquire the 11 per cent stake that the latter holds in GMR Hyderabad International Airport for Rs.484 crore (about $ 76 million). In a regulatory filing made to exchange, GMR had informed it will acquire 4.15 crore shares of ₹10 each from MAHB, equivalent to 11 per cent equity in the airport, subject to regulatory approvals. Thus far, GMR held 63 per cent equity stake through its airports arm and with the acquisition of 11 per cent stake from MAHB it goes up to 74 per cent. Of the remaining stake, while the Airports Authority of India holds 13 per cent, the balance stake of 13 per cent is with the Telangana government. As per the transaction arrangement, the price is based on the assumption that the transaction takes 15 place on or before December 1, 2018. GMR Hyderabad International Airport Limited (GHAIL) has a concession period of 60 years starting March 2008. The infrastructure company is in the process of taking up expansion of the Hyderabad airport with an outlay of over Rs.2,500 crore. It has recently raised $350 million by offer of bonds for expansion and repayment of older debt. However, possibility of further financial leverage due to expansion might pose a challenge.16 GVK Power & Infrastructure Ltd Mumbai International Airport (MIAL) operator GVK Power and Infrastructure is building Mumbai's second airport and will raise up to $1b by issuing dollar bonds to fund the Greenfield project and refinance existing debt. The proposed overseas securities would be of "144A" nature, where institu- tional buyers across Asia, Europe and the US can invest. The bonds may have five-ten year maturities. Going by the latest market trend, the bonds may offer coupons in the range of 5-10% as the company is rated below investment grade.17 The company has to seek a fresh re-rating for its proposed offshore bond-sale, which could be marked as high-yield by any global rating company. Since GVK is burdened with debt, GVK will raise money either to refinance or fund new projects. In October last year, the Maharashtra government approved GVK's bid for the Rs 16,000-crore Navi Mumbai airport project. A special purpose vehicle (subsidiary), Navi Mumbai International Airport Pvt Ltd, is building the airport. GVK holds about three-fourths ownership in the company while City and Industrial Development Corporation (CIDCO), the nodal authority of the government of Maharashtra, owns the rest. GVK's total debt was about Rs 15,811 crore as on March 31, 2017, which was 5% less a year earlier, show data from Bloomberg. Total debt was Rs 22,464 crore three years ago. During the July-September quarter, GVK reported a net loss of Rs 77 crore. Recently GVK also expressed interest in running the Airport Authority of India’s Ahmedabad and Jaipur airports; GVK has submitted bids for taking over maintenance and operations of the two profit-making airports belonging to the Airport Authority of India (AAI). While Ahmedabad handles 8.42 million passengers annually, Jaipur currently caters to 4.34 million tourists each year.18 FUTURE OUTLOOK

• In December 2017, the International Air Transport Association (IATA) increased its estimates for 2018 industry net profit to $38.4 billion. Passenger numbers are expected to increase to 4.3 billion in 2018.

• India is poised to become the third largest civil aviation market by 2020 and the largest by 2030. Freight traffic on airports in India is expect- ed to cross 11.4 million tonnes by 2032. Growth in import and export in India will be the key driver for growth in freight traffic as 30 per cent of total trade is undertaken via airways.

• Government of India (GoI) is also encouraging private participation and PPP route. Domestic passenger traffic is also likely to increase in near future. Passengers carried by domestic airlines during Jan-Mar 2018 were 337.90 lakhs as against 272.79 lakhs during the corresponding period of previous year thereby registering a growth of 23.87 % (see Annexure, Chart 1). A growing middle class, under penetration of the sector, fleet augmentation plans, exploring new routes under UDAN scheme are supposed to increase passenger traffic.

• In spite of a strong order book of aircraft by Indian airlines, demand is likely to outpace capacity growth due to slot constraints at certain airports coupled with other infrastructure bottlenecks as well as slow deliveries of aircraft. Novel technologies that will take challenges of fuel efficiency by cutting operating and maintenance costs is a key for improving margins for industry players.

• Potential risks, like rising oil prices, operational costs, increasing competition might impact airlines yields.

• Regarding regional outlook, challenges and areas of stress do vary by region. It seems that optimism levels highest for China and Asia in general, although pockets of stress in South East Asia are a concern for some.

• New entrants to the leasing space and the desire for scale to heighten efficiencies and cut costs is driving consolidation in the leasing market; nevertheless, it seems there will be more smaller scale deals than larger scale mergers although there remains the potential for some larger scale transactions, particularly if the market changes.

• Private companies like GVK, GMR are saddled with debt and future expansion through further financial leverage can pose a challenge for such companies. For instance, about 90% of GMR Enterprises shareholding in listed GMR infra was pledged to lenders. The promoter group of GMR Holding Company is also exploring to restructure a portion of its Rs. 4000 crore debt liability. GMR has planned a Rs 5,000-crore IPO of its airports division, that might be delayed due to ongoing dispute with a group of private equity (PE) investors led by Macquaire Group. 19

6 http://www.thehindubusinessline.com/opinion/columns/slate/all-you-want-to-know-about-indias--scheme/article22563182.ece; accessed on 12February2018. 7 https://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/aai-to-invest-rs-15000-crore-on-airport-terminals-in-fy19/articleshow/62947624.cms 8 “AAI to invest Rs 15,000 crore on airport terminals in FY19” (16 February 2018), Economic Times, URL: https://economictimes.indiatimes.com/industry/transporta- tion/airlines-/-aviation/aai-to-invest-rs-15000-crore-on-airport-terminals-in-fy19/articleshow/62947624.cms. 9 Techno-Economic Feasibility Study for this project is done by PWC that states-Capacity constraint at Delhi airport along with the horizontal expansion of the city has necessitated requirement of a new airport. 10 https://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/jewar-airport-rs-4000-crore-to-be-spent-on-land-acquisition/articleshow/64483350.cms; accessed on 4 July 2018. 11 The airport was a big political promise by Prime Minister during the 2014 Lok Sabha and 2017 UP Assembly polls. The NDA is pushing for a December start of the project, barely a couple of months before the campaign for 2019 make or break Lok Sabha polls. 12 ‘Centre clears Noida Airport project in Jewar (24 April 2018); URL: https://www.indiatoday.in/india/story/centre-clears-noida-airport-project-in-jewar-1218711-2018-04-24; accessed on 24 April 2018. 13 Airport Authority of India (AAI) Quarterly Newsletter, April-June 2018. 14 https://timesofindia.indiatimes.com/city/navi-mumbai/cidco-plans-to-go-full-blast-to-meet-navi-mumbai-airports-2019-deadline/articleshow/63902552.cms; accessed on 25 April 2018. 15 “GMR Airports to acquire MAHB's stake in GMR Hyderabad airport” (3 February 2018); URL: https://www.thehindubusinessline.com/companies/gmr-air- ports-to-acquire-mahbs-stake-in-gmr-hyderabad-airport/article22641876.ece ANNEXURE

Chart 1: Passenger Growth (Passengers carried by domestic airlines during Jan-Mar 2018 were 337.90 lakhs as against 272.79 lakhs during the corresponding period of previous year thereby registering a growth of 23.87 %)

Source: Director General of Civil Aviation (DGCA)

16 Moody’s Investor Service, in a credit rating statement in October 2017, states that- The ratings could be downgraded if there is a deterioration in financial leverage that is beyond base case expectation, and which could be due to a larger expansion program, or missteps in implementing the expansion project, or a reduction in aeronautical and/or non-aero- nautical revenues relative to Moody’s base case expectation. See, https://www.moodys.com/research/Moodys-as- signs-first-time-Ba1-rating-to-GMR-Hyderabad-International--PR_373511; accessed on 25 April 2018. 17 “GVK to raise up to $1 billion to fund Navi Mumbai airport “ (12 Feb 2018); URL: https://economictimes.indiatimes.com/mar- kets/stocks/news/gvk-to-raise-up-to-1-billion-to-fund-navi-mumbai-airport/articleshow/62880182.cms; accessed on 12 February 2018. https://www.financialexpress.com/industry/gvk-wants-to-run-ahmedabad-jaipur-airports/1143219/ 19 “GMR seeks to restructure portion of its Rs. 4,000 crore debt liability” (20 April 2018), The Economic Times, URL: https://economictimes.indiatimes.com/industry/banking/fi- nance/gmr-seeks-to-restructure-portion-of-its-rs-4000-crore-debt-liability/articleshow/63838898.cms Infomerics Valuation And Rating Pvt. Ltd. SEBI REGISTERED / RBI ACCREDITED / NSIC EMPANELLED CREDIT RATING AGENCY

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