New Airport Partners
Will fresh sources of airport investment have an impact on airlines and the traveling public?
With global economic conditions uncertain, governments are more reluctant to splash the cash on infrastructure development.
But many older airport facilities in the western hemisphere are in desperate need of upgrading or replacement. And in some developing economies of Latin America and Asia the existing infrastructure is simply not able to cope with the rapid growth of air traffic.
The preferred solution to this conundrum has often been an invitation to the private sector to build and/or run airports.
Several important airport privatizations in Latin America have resulted in new infrastructure being developed—with Quito, Lima, and Bogota being prime examples. During 2012, three major airports in Brazil were privatized, and more are scheduled to follow. In Mexico, all eyes are on a possible new greenfield airport to replace the existing heavily congested facility at Mexico City.
In Southeast Asia, Vietnam is looking to the private sector to develop new airport infrastructure to cope with booming domestic demand and to compete with neighboring Thailand, Malaysia, and Singapore for international traffic. New greenfield international airports are being planned to serve Ho Chi Minh City and Hanoi.
In a major policy shift in Japan, in December 2012 the government announced that it intends to contract out the management of the two airports serving Osaka to the private sector. This is a first for Japan, where infrastructure projects have traditionally remained firmly in state control. The government has made it clear that foreign investors are welcome although it will keep 100% of the shares. The aim is for a private company to step in and make the facilities more competitive. Any deals are expected to be completed in 2015. Other privatizations in the country could follow if this is successful.
All of these come on the back of other well-known privatization agreements such as the United Kingdom’s British Airports Authority (BAA). Europe has been strong on privatization with airports in private hands in a number of key cities, including Copenhagen, Vienna, Brussels, and Zurich. In the United States, the July 2012 agreement on the privatization of Luis Muñoz Marín International Airport in San Juan, Puerto Rica, by Aerostar Airport Partners, was welcomed by airlines and IATA.
There has been no shortage of bidders for major international airport privatizations. In many cases, however, the companies or institutions putting up the cash have little or no experience of developing and operating airports.
Pension and investment funds have been looking at airports as investment opportunities, for example. In one
Airport was the country’s leading coffee shop operator.
“I don’t want it to sound as if the airport and airline business is rocket science, but there is actually a lot of evidence to suggest that the airport business is rather different from many other large infrastructure projects,” says David Stewart, IATA’s Head of Airport Development. “Too many errors of judgment have been made by companies coming in from other industries to run airports.”
He cites the example of London Heathrow. “When the new owners took over in 2006 they did not seem to fully understand that there was a need to redevelop the existing terminal infrastructure without any scope to meaningfully increase the airport’s overall capacity [due to the fact that the runway system was saturated],” he says. “Their experience was previously limited to other types of infrastructure projects. Airports often prove to be more complicated.”
Stewart says this is a problem that is being repeated in the current spate of Latin American privatizations. “I am surprised, in some cases, with the lack of requirement for proper technical analysis during the bidding process,” he says. “Typically, there would be a two-phase bidding process, with a technical bid evaluating biographies, background, relevant experience, safety programs and airspace management programs. Then there would be a financial bid. A balanced scoring mechanism would normally be put in place to evaluate both technical expertise and the financial offer. But recently in Brazil it seems that financial considerations have taken precedence over any technical evaluation.”
The first three airport privatizations in Brazil went through very quickly. An airport privatization process normally takes two to three years, but these projects were completed in just 18 months. For a second round of privatizations the government has introduced more robust criteria.
“The airport infrastructure we have today is basically the same as 10 years ago,” says Eduardo Sanovicz, president of ABEAR (Brazilian Association of Airline Companies). “However, the number of passengers has increased a lot since then. In 2002, the traffic of domestic and international passengers in Brazil was 36 million, against 97 million in 2012. So, it is evident that the existing infrastructure no longer adequately serves the industry.”
Sanovicz believes the privatization model will help. “The structural renovations and both public and private investments are quite significant,” he says. “We believe the prospects for improvement in the airline industry will be felt by users very soon.”
Indeed, the move to airport privatization in Brazil is still young. Lessons are being learned quickly and already there are signs that the new concessionaires are willing to engage constructively with the airline community.
Another challenge with fresh sources of investment is a realistic assessment of the financial environment. Peter Cerda, IATA’s Director of Safety, Operations & Infrastructure for The Americas and Atlantic says that there is sometimes a certain naivety on both sides, with governments and concession companies alike thinking that aviation is glamorous and a free ticket to making money. “At times you might be forgiven for wondering if the concession company has really done its due diligence,” he says. “The challenge in the Latin American region for privatization, for example, is to ensure that deals take place at a sensible price.”
At Sao Paulo Guarulhos, one of the airports in the first tranche of Brazilian privatizations, the $7.91 billion (BRL16.2 billion) winning bid, from a consortium of Invepar and Airports Company South Africa (ACSA) was some $6.25 billion (BRL12.8 billion) above the minimum bid stipulated by the government.
“The amount paid by the winning bidder for the concession means that substantial revenues from the commercial side will be required,” says Carlos Ebner, IATA’s Country Director, Brazil. According to Ebner, IATA is very concerned that those amounts will not be sufficient to provide the expected return on investment, bearing in mind that the main airport charges are capped. He says that the association will insist that the Agência Nacional de Aviação Civil serve as a strong independent regulator to insure that there are no changes in the concession contract that will cause adverse financial impact to airport users.
Antonio Miguel Marques, President of the Invepar-ACSA consortium, disagrees with Ebner’s concerns.
“I do not doubt that Sao Paulo Guarulhos Airport is a great business opportunity and that the return on the invested capital will be very good,” he suggests. “Guarulhos is the main gateway into Brazil and will have capacity to handle 60 million passengers per year within a decade—practically double the number handled in 2011.
“Our proposal is to expand the participation of commercial revenues,” he continues. “Today, 65% of the revenue comes from airport charges and the rest from the lease of commercial spaces in the terminals. With the inauguration of Terminal 3 [due to open in 2014] the expectation is for this ratio to be reversed, so that commercial revenues will represent 65% of the total revenue. We estimate that we will be able to triple the revenue during the next two years.”
It is an ambitious goal. Even BAA—recognized as a world leader in non-aeronautical revenues—struggles to achieve 60% non-aeronautical revenue.
Underscoring this issue is the fact that the Brazilian concessions are 30-year agreements with very little scope for maneuver if traffic and revenue projections change in future.
Cerda points out that there are many unknowns in the aviation industry and boom times can suddenly turn to busts. He cites Montevideo airport in Uruguay as a prime example. The consortium running this airport has had its fingers badly burned, following the collapse of the national carrier, Pluna, in July 2012.
“Some 60% of operations at Montevideo have ceased, and Iberia will cancel its flight from Madrid because of the loss of feeder traffic,” he says. “The airport operator has lost half of its revenue and will struggle to meet its obligations. The airport industry does not come with a guarantee. It is a risky investment.”
The key to success
Clearly, airport privatization has its challenges and these can be exacerbated by inexperience. But it doesn’t mean airport privatization can’t be successful as long as some basic rules are applied.
“With a good, transparent process in place we have no problem with the concession model,” says Cerda. “However, we would like to see much more open dialogue between the parties involved—including the airline users. In some cases, such as the new airport in Quito in Ecuador, the industry has had little input as to what is required in terms of infrastructure and agreements have been signed that are not really aligned with what the airline users need. The result is that charges go up and yet the traveling public does not get the parallel increases in levels of service for which they pay.
Ultimately, a successful privatization cannot be measured solely on how much money can be generated for the government. It must be seen as part of a long-term vision for economic development. As such, a strong regulator and clear service level agreements must be in place. This requires better collaboration between governments, potential concession companies and airline users well before the privatization takes place.
Hot spots – some other potential airport hot spots in the Latin America region
Jorge Chavez International Airport
Comment: “Some things simply do not make good business sense,” says Peter Cerda, IATA Director, Safety, Operations and Infrastructure, The Americas and Atlantic. “It was specified in the concession contract that a new terminal and a new runway had to be built within a specific period with no flexibility and irrespective of market conditions,” says Cerda. Too much infrastructure too soon is just as much a problem as not enough infrastructure. Ongoing dialogue between the concessionaire and the government is focusing more on finger pointing than getting on with the much needed expansion.
New Quito International Airport
Comment: After three missed deadlines the new Quito International Airport is due to open in early 2013. The development has been hampered by many problems, including access roads not being completed on time. “We are concerned that the terminal only has six contact gates and 12 remote stands, and is not much bigger than the existing terminal,” says Cerda. “Planning will have to start soon for an expansion of the airport. We hope that there will be greater liaison with the airline community.”
El Dorado International Airport
Comment: The original growth projections were well short of the mark and traffic has grown much faster than previously anticipated. But the master plan was not revised quickly enough resulting in severe congestion in a new terminal. The relationship between the government and the concession company has become very strained and the government has taken a very aggressive stance, threatening to take away the concession.