Fairfax India foresees delay in Bangalore Airport expansion due to Covid-19

First phase of the Terminal-2 expansion likely to be completed six months beyond schedule, cost escalation seen

The lockdown and the resulting suspension of construction activities are expected to delay the completion of the first phase of the Terminal-2 expansion of Bangalore International Airport Limited (BIAL). Its aeronautical and non-aeronautical revenues have been significantly impacted during the quarter ended March 31, due to a 43 per cent drop in domestic traffic and 72 per cent decline in international traffic, said Fairfax India, which has invested in the airport.

In the company's financial result announcement, Fairfax India said, "In the first quarter of 2020 the Covid-19 pandemic significantly impacted BIAL's airport business, which faced reduced passenger traffic starting in February 2020." 

All domestic and international commercial airlines scheduled March 25 onwards, ceased operations as a result of the lockdown. Cargo flights and flights catering to medical emergencies and other essential requirements remain operational. Construction activity at BIAL's capital projects has also been suspended. The airport is expected to be operational immediately upon lifting of the present lockdown though may be subject to certain restrictions, it said in the interim report for the quarter ended March 31.

"The lockdown and resulting suspension of construction activity are expected to delay the completion of the first phase of the Terminal-2 expansion by approximately six months till September 2021. The total cost of the Terminal-2 expansion is expected to increase primarily due to incremental interest and pre-operational expenses. BIAL has sufficient liquidity in place to continue its operations," it said.

As a result of the business disruptions due to the pandemic, free cash flow projections were revised by BIAL's management in the first quarter of 2020 to primarily reflect a temporary reduction in passenger traffic and it is expecting a gradual recovery in passenger traffic over two years to levels expected before the pandemic. It is expecting updates to estimated airport tariffs for the third control period commencing in BIAL's fiscal year 2022 to reflect a recovery of lost return during the lockdown and subsequent period and there would be delays in BIAL's capital projects and real estate development plans.

At March 31, 2020 Fairfax's internal valuation model indicated that the fair value of the company's investment in BIAL was $1,349,199 (December 31, 2019 - $1,429,854) which approximates the equity valuation of BIAL implied by the Anchorage transaction. There has been no passenger traffic in April 2020, which is expected to continue until the lockdown and related travel restrictions are lifted.

Fairfax, which has picked up 54 per cent stake in BIAL during 2017 and 2018, is planning to restructure around 43.6 per cent equity interest in BIAL of its 54 per cent equity interest such that it will be held through Anchorage, a company formed by FIH Mauritius in 2019 as its flagship companies for investing in companies and opportunities in the airport and infrastructure sectors of India and as a platform to bid for airport privatisation projects in the country. 

This restructuring will imply an equity valuation of BIAL of around Rs 18,970 crore for 100 per cent. Upon closing of the transaction, the company’s effective ownership interest in BIAL will decrease to approximately 49 per cent.