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Last week it was reported that Flughafen Zurich AG, which operates the Zurich airport will sell 12% of it’s 17 per cent stake in the Bangalore International Airport Ltd (BIAL), which operates the private Bengaluru International Airport, to fund its further growth in India.
A lot of people asked me on Twitter why Unique Zurich was taking this step, and that too within 18 months of the new airport being opened.
The answer came in today’s Times of India newspaper.
Why Zurich Airport is making a killing
Bangalore Airport Monopoly Could Give Investor 760% Return In 4 Years
Anshul Dhamija & Sujit John | TNNBangalore: If you had invested in a sensex index fund four years ago, your money today would be roughly double that, a 100% growth. If you had invested in a Kisan Vikas Patra four years ago, it would be 2014 by the time your money doubled.
But in four years, Zurich Airport will be walking away with an over 760% return on the investment it made in the Bangalore International Airport Ltd (BIAL) if it gets the valuation it is seeking.
The company last week said it is planning to offload 12% of its 17% stake in BIAL for 100 million Swiss Francs, which is about Rs 460 crore. Zurich Airport had invested 18 million Swiss Francs (or about Rs 75 crore at the then exchange rate) as equity in the airport. We assume the full money came in 2005, which is when the financial closure happened and the construction started.
For the 12% stake it is proposing to offload, that works out to a return of 768% in rupee terms and 687% in terms of Swiss Francs in four years.
At a time when the airline industry is going through severe financial troubles and is struggling to get funding, the phenomenal return on an airport investment looks completely at odds. But there’s a simple reason for that: the monopoly of airports, in contrast to the competition in airlines.
Zurich Airport declined to comment further on its proposed transaction, but analysts and industry leaders say it’s the government’s sweet-coated policies towards building private airports and the watertight concessions agreements that are skewed in favour of private operators that are the main reasons for private airports delivering such returns.
“Traditionally, airports are stable long term investments, as the revenue models of airports help achieve good returns,” says Kapil Kaul, CEO (India) of Centre for Asia Pacific Aviation (CAPA). But in respect to BIAL he says, “the two clauses in the concessions agreement, one to close the old HAL airport and not to allow another airport to come up in a 150 km radius, have immensely lifted BIAL’s value.”
Bangalore airport handles around 10 million passengers a year, making it the third busiest airport in India after Mumbai and New Delhi. Bangalore’s air traffic in recent years has been growing annually at 30% to 40%, barring in the latest year when traffic dipped. The average growth has been around 15 to 20 percentage points higher than the national growth figures.
Aviation entrepreneur Capt G R Gopinath says the government merely replaced the public monopoly of AAI (Airports Authority of India) with private monopolies across the country.
The government in addition gave a host of concessions. The Rs 350 crore loan given by the government has to be repaid by BIAL in 20 equal half yearly installments, the first installment of which will be only paid in the 11th financial year of the company. BIAL has been exempted from entry tax and property tax for five years; its land is leased on concessional rent; stamp duty and registration charges have been waived; it has been exempted from fees for change of land use and from payment of road cess.
Despite this BIAL claims it has been making operational losses ever since it opened the airport in May last year because it has not been getting the User Development Fee it had asked for. But the valuation expectations of Zurich Airport indicate that the airport remains an investor paradise.
Monopolies however benign are never good for the overall business environment.
