India’s Air Passenger Volumes To Reach 310 Million By FY18

Pick-up in passenger volumes aided by economic growth and policy impetus.

Passengers wait in the departure lounge of the Mumbai International Airport. (Photographer: Abhijit Bhatlekar/Bloomberg News)
Passengers wait in the departure lounge of the Mumbai International Airport. (Photographer: Abhijit Bhatlekar/Bloomberg News)

Domestic air passenger volumes (pax) have been consistently increasing and are likely to reach 310 million by financial year 2017-18, says India Ratings and Research (Ind-Ra).

This will be driven by the aspirations of the middle class to travel in flights and a reduction in price differential between air travel and rail journey, including the recently increased cancellation fees for train tickets.

The slowdown in economic growth during the first half of the current decade had minimal impact on pax growth.

However, the 2008 global economic crisis and fuel and currency crises in fiscal 2012-13 had a pronounced impact on air traffic growth. The gradual increase in private final consumption expenditure has been buttressing India’s pax growth since early fiscal 2013-14.

Ind-Ra’s sensitivity on economic growth also underlines the strong underlying fundamentals and continued growth in pax volumes.

Airports are an integral part of the aviation sector; hence, any impairment of airport functions exerts stress on the stake holders such as airlines, fuel suppliers and travellers.

Large gateways such as Mumbai and Delhi airports and mid-market airport hubs such as Bangalore and Hyderabad airports have displayed strong volume resilience, despite unfavourable macroeconomic trends.

The new civil aviation policy has given clarity on the methods to determine aero revenue.

Seventy percent non-aero revenue that is outside the purview of the tariff setting mechanism will prove to be a significant contributor to EBITDA margin improvement. Commercial revenues (such as retail, car parking, rental cars and ground transportation) have collectively evolved to become the leading components of revenues to cover airports’ expenses and debt service.

The ability of airports to stabilise these diversified revenue streams (aeronautical charges) or generate excess cash from them for asset preservation or increase operating margins could enhance their debt service coverage ratios or reduce leverage ratios.

Airport Economic and Regulatory Authority indicated a normative capital expenditure cost for the construction of new terminals and runways in June 2016. Previous construction costs for Ind-Ra rated airports were higher than the indicative costs and could bring in a disparity in the structural design and quality of construction.

While greenfield airports (Bangalore and Hyderabad) were running at their full capacities, the order introduces an ambiguity among developers.

Although some airports are facing refinancing risks, Ind-Ra rated airports have refinanced their loans comfortably either through capital market instruments or through bank loans. Given the robust performance in the past, investors have shown interest in airport assets.

However, Ind-Ra expects domestic airports to raise bonds in the domestic capital market as against international issuances earlier.

Brownfield expansions by airports are not on the cards till fiscal 2018; therefore, their debt/EBITDA is likely to reduce. However with the rapid growth in pax, utilisation is likely to reach the created capacity ahead of the original projected timelines.

Hence, airports will be compelled to take up expansion plans ahead of time.

To make air travel affordable for the masses, the government has introduced Regional Air Connectivity Scheme (RCS) with concessions on aviation turbine fuel, reduced air ticket prices, and exemption from airport charges.

Ind-Ra expects the government in the fiscal 2018 budget to announce some contributions for RCS viability gap funding. However, slot non-availability for new aircraft in major hubs will be a constraint in operationalising RCS.

(India Ratings and Research a wholly-owned subsidiary of Fitch Group is a SEBI and RBI accredited credit rating agency operating in the Indian credit market.)