By Sidharath Kapur (Delhi, India)
The Corona Virus pandemic is an unprecedented black swan event of the kind that has not been seen in our lifetimes. The impact on global human health is a serious issue and is forcing governments to take severe and drastic measures to contain the aggressive spread of this pandemic. Shutdowns and lockdowns, cutting travel, social distancing, work from home and many such measures are having a serious deleterious economic impact. The measures apart, the fear factor is changing the economic behavior of populations. Various medical treatments are being tried and accelerated research in developing vaccines is on. Sustained and continuation of lockdowns and fear mindset may continue unless it is demonstrated that the pandemic can be contained and a medical treatment can be shown to be efficacious. However, on an optimistic note, the crisis will bring the best of medical research to fore and the severe measures will reverse and economic activity will kickstart again hopefully in a few months.
The aviation business is one sector that is bearing the most severe brunt of this crisis. Aircraft are grounded, travel restrictions are being imposed and airports which were once bursting at the seams are looking like ghost towns. Airports are public utilities and losses in Government run airports will ultimately be managed by the Government as an owner. However, the challenges of private airports which need to run on a commercial basis are concerning. In this situation what can private airports do, to ensure long term viability of operations. Further what can governments do to support private airports.
Typically, airport revenues can be bucketed into three segments – aeronautical, non-aeronautical and real estate.
The crisis is having a profound impact on aeronautical revenues which are usually linked to passenger throughput and aircraft movements. At the same time, this impact is accentuated due to steep fall in international traffic as countries shut borders since the international aeronautical revenues on per passenger and aircraft movement basis is higher than domestic. The long-term impact on a private airport will depend on the concession terms and regulatory framework. If the aeronautical tariffs are fixed in the concession agreements and are linked to traffic with no true-ups, this revenue shortfall is permanent.
As we all know most of the costs, up to 75% for an airport, are fixed/semi-variable. The impact will thus be a short-term liquidity crisis as well as a long-term viability impact. If on the other hand the aeronautical tariffs are fixed by the regulator for a control period on a cost-plus mechanism (like it is in India), the aeronautical revenue shortfall would be recouped once traffic picks up. It’s only a cash flow mismatch and short-term liquidity crisis which needs to be handled.
The impact on non-aeronautical revenues is the more concerning. While non-aero revenues can contribute 40-60% or even more in some cases of an airport’s revenues, the margins from these revenues are very high and they may contribute almost 70-80% of the EBITDA. A drop-in passenger and aircraft traffic will drop non-aeronautical revenues drastically, even up to 90%. The question is whether the brunt of this drop will be faced by concessionaires to airports or airports themselves. Most airports take percentage revenue shares from concessionaires but have inbuilt clauses for minimum guaranteed revenues. In many cases there may be fixed rentals too. Hence a drop in non-aero revenues will certainly drop revenues for airports but may not be a precipitous drop. However, this can drive the concessionaires out of business. Hence in interest of partnerships and long-term sustainability, airports would be called upon to defer and/or waive payments by concessionaires.
Real estate revenues of airports from office spaces and airport cities are usually fixed lease revenues and may not generally impact airport revenues except for malls, if any, operating on airport land which pay on revenue share basis.
It is estimated that the combination of drop in aeronautical and non-aeronautical revenues on a sustained basis over months could cut annual airport revenues by more than 50% and create a liquidity and cash flow crisis for private airports. Most airports are funded by debt and the interest meter is running apart from fixed costs.
What should airports do? This situation is a force majeure event which is beyond the control of contracting parties. However, force majeure events are always litigative and contentious. Moreover, long term partnerships with concessionaires may necessitate airports needing to take a sympathetic view on concessionaires and provide them financial support and in turn expect financial support from the other side.
On the premium payments to the Government, if the payments are on percentage revenue share basis which all current operating private airports in India are on, it’s a saving grace as this mitigates the impact. However, despite lower revenue share payments on percentage basis, airports would make losses since their operating costs are largely fixed. If the payments to governments have been one time upfront financed by debt or fixed lump-sum payments the impact would be very severe. In all cases, waiver and/or deferment of such payments is called for the magnitude of which can vary case by case. Airports need to build a case for this and governments need to take a sympathetic view. ACI and airport associations need to drum up country wise support on this matter.
Given the severe situation, lenders will need to take a sympathetic view and defer payments of interest and principal payments. Of course, lenders would receive such requests from various sectors. Large scale delay in payments can put pressure on the banking system. The Central Bank and the Government would need to provide liquidity to the banking system to support most impacted sectors like airports, airlines, hospitality, etc. Airports may also be funded through bonds. In such cases it’s difficult to have deferments from bond investors. Each airport would need to build a case from its government to have liquidity support directly for such cases.
Airports also need to look at their business models and cut all discretionary expenditure and focus on minimizing all non-discretionary costs. For e.g. close sections and conserve cleaning and power costs. Defer non-essential maintenance. Pay cuts or pay deferments may be extreme steps to be looked at. Airports that are on verge of expansion would be in a dilemma. While cash conservation would mean deferring capital expenditure, this may actually be a good time to accelerate capex in operating airports that were congested just before the crisis especially if funding is tied up. Traffic at such airports can bounce back quickly if the crisis passes in a few months and this period of vacant operating airports is ideal to implement capex spends.
In conclusion, these are testing times for airports and adept operational and financial management based on each private airport’s business dynamics is the key to survive this unprecedented crisis. Sovereign support is the need of the hour and should be expected and sought for.