The Omicron-led third wave of the pandemic could pose fresh turbulence for air traffic, pushing full recovery¹ into fiscal 2024 from our earlier expectation of it happening in fiscal 2023.

A material impact on the credit quality of airport operators, however, is unlikely as the dip in revenue is expected to be limited by a likely strong rebound and operators have adequate debt servicing cushions, liquidity buffers and financial flexibility to absorb the blip in traffic.

An analysis of the top four private airports ― Delhi, Mumbai, Bengaluru and Hyderabad ― which accounted for ~90% of air passenger traffic handled by private airports and ~50% of all passenger traffic last fiscal, indicates as much.

Says Manish Gupta, Senior Director, Crisil Ratings, “The high infection rate of Omicron has resulted in several state governments and local authorities, such as Delhi and Mumbai, announcing restrictions on movement. In fact, domestic traffic is down by 25% from the highs of December 2021 in the first week of January 2022 itself. Both personal and business travel will take a hit in January and February, leading to air traffic plunging an estimated 30% sequentially in the fourth quarter of this fiscal².”

This spill-over impact is likely to delay recovery of air traffic from our earlier expectation of it happening in fiscal 2023. However, recovery is expected to be achieved within early part of fiscal 2024. This is because air traffic is likely to rebound faster this time around, compared with the second wave, when it took from May to November 2021 to recover from ~16% to 85% of the fiscal 2020 traffic.

The rebound confidence is underpinned by higher proportion of vaccinated populace ― over 71% now vis-à-vis only ~5%³ as of end May 2021 ― as well as learnings of governments and authorities from the past waves in implementing Covid-19 protocols for safe travel. The caseload, too, is expected to peak in February and return to the December 2021 level by the end of March 2022.

As a result revenues for fiscal 2023 and 2024 are likely to remain stable. What will further aid revenues is the expected uptick in tariffs. As per the recently released tariff orders for the Bengaluru and Hyderabad airports, the tariffs will more than double from April 2022.

Consequently, debt servicing cushions should remain adequate at over 1.2 times for these airports in fiscals 2023 and 2024.

Says Ankit Hakhu, Director, Crisil Ratings, “The credit quality of the airport sector is likely to sustain the Omicron impact. In addition to the adequate debt servicing cushions, the credit quality is supported by a healthy liquidity cover of around six months⁴ of debt obligation over fiscal 2023 and strong financial flexibility.”

Healthy financial flexibility stems from the long remaining concession life (of over 40 years) compared with the debt tenure (of around 10 - 18 years). This ‘tail’ provides flexibility to push back repayment and structure debt obligations, if required, to match traffic recovery. In fact, these airports raised over Rs 3,200 crore in 2021 to refinance bulk of 2022 upcoming repayments.

That said, the credit profiles remain sensitive to the evolution of the virus. A deeper-than-anticipated impact of Omicron on mobility and the economy or a more-than-expected upsurge in Covid-19 cases may breach our recovery estimates.

¹ Recovery denotes traffic of trailing 12 months compared to the same period of fiscal 2020
² In comparison to total passenger traffic of around 74 million in the third quarter of fiscal 2022
³ Source: CoWIN portal of Government of India for data on number of fully vaccinated people and eligible population
⁴ Liquidity cover = (unencumbered cash + working capital lines)/debt obligation for fiscal 2023