Case 036Commercial and market casesCore
An airport services business at a regional airport handles 1.2 crore passengers a year: aero revenue is regulated at Rs 400 a passenger, non-aero revenue is Rs 180 a passenger and growing 10%, and traffic grows 7%. Value the business and say where the upside and the regulatory risk sit.
1The situation
Vihang Airport Services holds a long concession to run a regional airport that handles 1.2 crore passengers a year, growing 7% a year. Airlines pay aero charges, landing, parking and passenger fees, which the regulator sets at about Rs 400 a passenger for the current five year control period. Aero operations cost Rs 240 crore a year, rising 5% a year.
Non-aero revenue, from shops, food courts, car parking, lounges and advertising, is Rs 180 a passenger today, Rs 216 crore in all, and grows 10% a year as traffic rises and each passenger spends more. Most of it is a share of concessionaires' sales, so it carries a 75% EBITDA margin. For valuation, assume a buyer pays 10x EBITDA for the regulated stream and 14x for the unregulated one.
2Your task
Build revenue and EBITDA for today and year 5, value the business, and say where the equity upside and the regulatory risk sit.
Quick check
Non-aero is about a third of revenue. Roughly what share of the five year growth in value does it supply?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
About Rs 4,668 crore today on EBITDA of Rs 402 crore, rising to about Rs 7,322 crore by year 5 on Rs 628 crore. Aero revenue grows with traffic at a regulated tariff; non-aero grows 10% at a 75% margin. Non-aero is 34% of revenue but supplies 52% of the value growth, so the equity upside sits there. The risk sits at the tariff reset: a 10% cut costs about Rs 673 crore of value.
Step 1How do you split an airport's revenue before valuing it?
Think of a railway station canteen: the ticket price is set by the railway, but what each traveller spends on tea and samosas is the canteen's own business. An airport has two businesses under one roof: a regulated one, where the tariff is set to give the operator a fair return on its assets, and an unregulated one, where every extra rupee a passenger spends is the operator's to keep. Value them separately, because they grow differently and carry different risks. Aero revenue today is 1.2 crore passengers x Rs 400, Rs 480 crore; less Rs 240 crore of cost, Rs 240 crore of EBITDA. Non-aero is Rs 216 crore of revenue and Rs 162 crore of EBITDA.
Step 2What do the two streams look like in year 5?
Traffic grows to 1.68 crore passengers. At a flat Rs 400 tariff, aero revenue reaches Rs 673 crore and aero EBITDA Rs 367 crore; non-aero, growing 10% a year, reaches Rs 348 crore of revenue and Rs 261 crore of EBITDA. Total EBITDA rises from Rs 402 crore to Rs 628 crore. Non-aero edges up from 31% to 34% of revenue, a small shift that matters more once the multiples are applied.
| Rs crore | Year 0 | Year 5 | Multiple (assumed) | Value year 0 | Value year 5 |
|---|---|---|---|---|---|
| Aero revenue | 480 | 673 | |||
| Aero EBITDA | 240 | 367 | 10x | 2,400 | 3,669 |
| Non-aero revenue | 216 | 348 | |||
| Non-aero EBITDA | 162 | 261 | 14x | 2,268 | 3,653 |
| Total | 402 | 628 | 4,668 | 7,322 |
Step 3Why does the equity upside sit in non-aero?
Because the regulator gives back aero outperformance at the next reset and does not reach non-aero in the same way. Aero charges are set so the operator earns an allowed return on its regulated asset base; if traffic beats the forecast, the next tariff order lowers the charge, so aero upside is temporary. Non-aero is different under a dual tillA tariff method where the regulator sets aero charges from aero costs and assets alone, leaving non-aero profit with the operator. Under a single till, non-aero profit is used to lower aero charges. or hybrid till: better retail, a bigger food court or a multi-level car park lifts profit the operator keeps. That is why the case gives non-aero a higher multiple, and why a buyer's value creation plan for an airport is mostly a non-aero plan. Which till applies, and how much of non-aero profit counts towards the tariff, is set by the regulator's methodology for each airport; confirm the current tariff order before relying on it.
Step 4Where does the regulatory risk sit, and how big is it?
At the end of the control period. If the regulator cuts the aero charge 10% at the year 5 reset, aero revenue falls by about Rs 67 crore with no change in cost, and at 10x that is Rs 673 crore of value, about 9% of the year 5 figure. A move from a hybrid to a single till would be worse, because part of the non-aero profit would then lower aero charges. Ask three things in diligence: the regulated asset base and allowed return in the last tariff order, the true-up mechanism for traffic shortfalls, and the concession terms on non-aero, including any revenue share owed to the airport owner.
The view: Vihang is a bond-like aero stream with a growth business on top, and the price should pay a utility multiple for the first and a growth multiple only for non-aero the operator can show it keeps. The limit of this answer is the flat Rs 400 tariff; a real model follows the regulated asset base and capex, which drive the allowed tariff, and would show aero EBITDA moving in steps at each reset.
Where candidates lose it
The usual loss is valuing the airport on one blended EBITDA multiple and one growth rate. That hides both the upside, which is non-aero, and the risk, which is the tariff reset, and the interviewer asked about both.
The second miss is treating aero growth as owned upside. Traffic above forecast is handed back at the next reset, so it should not be paid for at a growth multiple.
What the interviewer asks next
- Traffic grows 10% instead of 7%. How much of the gain does the operator keep after the reset?
- The concession has 12 years left. How does that change the valuation?
- Which non-aero lever would you pull first in a regional airport, and why?
Asked at Bain Capital, Generalist, Boston, 2023 (Wall Street Oasis): some random accounting questions, and a case about an airport company.
Company names and figures are illustrative.