Domestic Airport Sector Likely To Incur Net Loss Of Rs 5,400 Cr This Fiscal: ICRA

The domestic airport sector is expected to incur a net loss of Rs 5,400 crore, and cash loss of Rs 3,500 crore in FY21, impacted by a 66 per cent year-on-year slip in passenger traffic amid COVID-19 induced travel restrictions, rating agency Icra said in a note on Monday.

It also said that given the significant delays in tariff orders in the past, timely tariff orders of regulator Airports Economic Regulatory Authority, which adequately compensates for the ongoing Capex and revenue loss due to COVID remains critical from the credit perspective.

According to the agency, domestic passenger traffic may drop by 61 per cent, while the international passenger traffic will nose dive by 85 per cent in 2020-21.

The industry, however, could see its profitability improving to Rs 190 crore backed by an expected massive 130 per cent year-on-year recovery in traffic in the next fiscal, the note stated.

The major growth drivers for the sectors in the near-term will be the success of mass vaccination, resumption of business travel, improvement in leisure travel, a ramp-up in non-aero revenue streams and monetisation of real-estate land parcels, it said.

"With the subdued international traffic, which has a higher yield per passenger when compared to domestic traffic, the revenues and profitability are adversely impacted in FY2021.

"The sector is expected to witness a decline in operating income by 61 per cent to Rs 8,400 crore while reporting an operating loss of around Rs 1,700 crore (-20 per cent margin) and a net loss of Rs 5,400 crore (-64 per cent margin) in FY2021," said Shubham Jain, Senior Vice President and Group Head at Icra.

The overall cash loss for the sector is estimated at around Rs 3,500 crore in FY2021, he said, adding with such significant losses, the debt coverage metrics have deteriorated sharply.

However, the liquidity of airport operators is robust with opening cash balances of Rs 8,100 crore as of March 31, 2020, which has supported in meeting the operational expenses, debt obligations and equity requirements for Capex, Jain said.

The liquidity is likely to deplete to around Rs 5,700 crore by March 31, 2021. The depletion of liquid reserves along with poor internal accrual generation could result in higher dependence on debt for the airports which are in the midst of large Capex, he added.

While the vaccination has started across major countries, the recovery in air travel in the international segment could be dampened by the recent rise in COVID-19 infections across nations, which could also result in longer restrictions on international traffic, the note said.

The passenger traffic levels are likely to reach almost 80 per cent of pre-COVID levels in FY 2022 translating to the overall traffic growth of around 130 per cent year-on-year, as per the agency.

According to the note, the sector is expected to witness improvement in operating income by 73 per cent to Rs 14,500 crore, while the operating profit is expected to improve to Rs 4,240 crore (29 per cent margin) and net profit to Rs 190 crore (1 per cent margin).

The ratings of airport operators continue to derive strength from the regulatory framework, which allows efficient cost-recovery from user tariff; the variation in passenger traffic due to economic cycles that often lead to temporary traffic decline are offset by truing-up the shortfall in the next regulatory period, albeit, with a lag, the note said.

Therefore, the loss of revenues on account of COVID-19 is expected to get largely recouped over the next control period for the airports developed on a PPP basis. Hence, the ratings in the sector have remained more resilient, Icra said in the note.

Slow ramp up in traffic would affect the cash flows available for debt servicing for airport operators adversely. This, along with large bullet repayments, is expected to result in a modest debt service coverage ratio (DSCR) cover in FY2022, it added.

However, the on-balance sheet liquidity for the airports is strong to meet the debt obligations. In FY2022, the interest coverage and DSCR are expected to improve to 2.4x and 1.5x, respectively. But, they will remain lower than interest cover and DSCR of 3.1x and 4.6x, respectively, in FY2020, Icra noted.

"The path to recovery in case of airports is longer; domestic air travel is expected to recover back to pre-COVID levels by FY2023 and the international sector by FY2024.

"Given the significant delays in tariff orders in the past, timely tariff orders from the regulator, which adequately compensates for the ongoing Capex and revenue loss due to COVID remains critical from the credit perspective," Jain said.