Hyderabad Airport: Project Finance

Topics: Hyderabad International Airport, Airport, GMR Group Pages: 12 (3719 words) Published: November 9, 2011
GMR Hyderabad International Airport Limited (GHIAL)
Course Instructor: Prof. Padmalatha Suresh Submitted By: Presented By: Group 8, Section-B Abhishek Singh Shashi Bhushan Dwivedi Vivek Sinha Chaitanya Kini Isha Agarwal Kshitij Varshney (2010062) (2010167) (2010176) (2010192) (2010201) (2010206)



Mr A. Subba Rao, CFO of GMR Infrastructure was wondering about the success of building international airports. On a fine summer morning in 2007, sitting in his office he is analysing the sustainability of a very important project and its impact on the future cash flow of the company. While thinking about aeronautical & non aeronautical revenues generated from Hyderabad International Airport in future Mr A. Subba Rao is thinking about risks involved in this project that have direct impact on company’s revenue, accordingly he has to negotiate about the UDF (User Development Fee) with the government. UDF is to be considered only in cases and years where the target revenue of a major airport is projected to fall short of the admissible expenditure. He knows that UDF is a huge source of revenue but only for initial years of operations, after that revenues generated through non aeronautical operations becomes crucial. So his major concern is the impact of non-aeronautical revenue on GHIAL’s balance sheet in later period. Also the main parameter which he was thinking is of air traffic forecast which is subject to degree of risks and uncertainties in the dynamic changing business environment. Mr A. Subba Rao knows that it is not possible to determine events like timing of recessions, fuel shortages, etc. The cyclical nature of tourism and economic growth would be difficult to capture by any existing model. The aviation sector in Hyderabad was not in a good position and the coming years were neither good. Mr A. Subba Rao was in the final phase of completing the international airport at Hyderabad and all these concerns were hovering in his mind. The world aviation sector in 2007 is experiencing decline in the global passenger traffic. The main reason was the global economic crisis and inflation in the consumer commodities. He is worried about its impact on airline industry and specially the domestic airlines. This would result in approximations in the forecast instead of accuracy. The company started the construction in September 2005 and the project is about to complete in few months so before the full-fledged operation of HIAL these issues needs to be addressed.

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Sector Background

The civil aviation traffic has seen an unprecedented traffic in the past few years on account of booming Indian economy, growing tourism industry & entry of low cost carriers in the private sector, liberalization of international bi-lateral agreements and liberalization of civil aviation policy. In future also the civil aviation traffic is expected to grow at the same pace despite current slowdown due to global recession. But airport infrastructure has not kept pace with the growth of the civil aviation traffic. This has resulted in congestion and inefficient services in major airports, limited landing slots, inadequate parking bays and congestion during peak hours for airlines. Development of quality infrastructure will have an impact on international competitiveness and economic growth. This requires faster development of civil aviation infrastructure on public private partnership mode. In tune with the requirement many initiatives have already been started in the 10th five year plan and they are expected to continue in the 11th plan also. Of a total number of 454 airports and airstrips in India, 16 are designated as international airports. The Airports Authority of India (AAI) owns and operates 97 airports. A recent report by Centre for Asia Pacific Aviation (CAPA) states that over the next 12 years, India's Civil Aviation Ministry aims at 500 operational airports. The Government aims to attract private investment...
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