ANALYSIS: Belo Horizonte and Rio airport awards reflect evolution in Brazil

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By most measures Brazil’s civil aviation authority (ANAC) met its objectives for the Belo Horizonte Confins International and Rio de Janeiro Galeão International airport concessions.

Instead of high bids by local pension funds partnered with smaller or lesser known operators, the region’s biggest names in concessions – CCR and Odebrecht – joined with some of the world’s leading operators – Flughafens Munich and Zurich, and Changi Airports International, respectively – to win the airport deals in the country’s second round of concessions that were awarded on 22 November.

ANAC set the goalposts high in order to attract world-class operators, requiring that bidders operate airports with at least 22 million passengers annually, and succeeded while also landing bids that were nearly triple the minimum amounts that it set earlier this year.

Proceeds from the concession payments will be placed in Brazil’s National Civil Aviation Fund (FNAC), which will be used to improve more than 200 existing regional airports as well as build new facilities throughout the country.

“I believe the government learned from its prior experience and improved the process accordingly,” says Zane Gresham, a partner at Morrison and Foerster, who observed this round of airport concessions and advised one of the consortia in the first round in 2012.

GALEÃO

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Aeroportos do Futuro won the 25-year Galeão concession with a Brazilian real (R) 19.01 billion ($8.22 billion) offer. Odebrecht Transport owns 60% and Changi 40% of the consortium, which itself owns 51% of the concession with state-owned airport operator Infraero holding the remaining 49%. The bid was 294% higher than the R4.83 billion minimum.

“They’re making a pretty big bet on Rio,” says Gresham. This reflects the long-term economic prospects of the city, which is the centre of Brazil’s rapidly growing oil and gas sector, and not just the 2016 Olympics, which will run for two weeks that August, he says.

The concessionaires will invest at least R3.9 billion in Galeão over the term of the concession, including about R1.4 billion in 26 new jet bridges, additional car parks and other improvements by April 2016. Brazilian development bank BNDES will provide 70% of the financing for capital improvements.

Changi says that it plans to increase capacity to 60 million passengers per year by 2038, thus consolidating Galeão’s “status as the international gateway for Brazil and South America”.

The airport has the opportunity to grow as a connecting hub for both Brazil and Latin America. It has room to expand its terminal complex and add runways whereas its main competitor, Sao Paulo Guarulhos International, is constrained by development surrounding the airfield.

The government of Brazil anticipates passenger traffic to grow at an average annual rate of 8.3% through 2018 to 28.2 million passengers that year, according to Moody’s Investor Services.

“Our priority will be the rendering of high-quality services to the passengers and users, thus being able to achieve the best international standards,” says Paulo Cesena, president of Odebrecht Transport, in a statement. “Additionally, we must focus immediately on the expansion of the Galeão airport.”

The airport handled 17.5 million passengers in 2012 – roughly the size of San Diego International airport – making it the second busiest in Brazil and fourth busiest in Latin America, according to Moody’s. About 85% of that is origin and destination (O&D) traffic.

CONFINS

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Aerobrasil Consortium won the 30-year Belo Horizonte Confins airport concession with a R1.82 billion offer, which was just 66% higher than the R1.1 billion minimum. CCR owns 75%, Flughafen Zurich 24% and Flughafen Munich 1% of the project company that itself owns 51% of the concession. Infraero holds the remaining 49%.

The airport is a solid domestic hub in Brazil, with large operations by Azul and Gol, handling 10.4 million passengers with 88% of them O&D in 2012, according to Moody’s. Traffic grew an average rate of 19.6% annually from 2008 to 2012 and is expected to continue grow at 5.6% annually through 2018.

Confins is the fifth busiest airport in Brazil and 10th in Latin America after Lima, according to the rating agency.

Aerobrasil must invest at least R2.4 billion in the airport over the concession period, including R1.3 billion in a new terminal by 2018. BNDES debt will be available for 70% of capital costs.

Flughafen Zurich says that it plans to invest about Swiss francs (Swfr) 65 million ($71.6 million) in its equity stake in Confins. The operator plans to expand its position as a major domestic hub over the term of the concession.

Flughafen Munich says that it is “delighted to have won our first concession of this kind” and will consider raising its equity stake in the airport to 12.5% at a later date.

FEE CONCERNS

Many of the same concerns that plagued Brazil’s first round of airport concessions surround the Belo Horizonte and Rio deals. These include the impact on airlines and passengers as concessionaires recoup their billion dollar investments.

Aeronautical fees, including landing, cargo and passenger tariffs, are set by ANAC but other ways remain for the concessionaires to raise revenues. These include increased car park and retail concession fees, as well as higher facility leasing tariffs for airlines.

“[These fees] will certainly be accompanied by a vast improvement in the quality of concessions – a benefit to passengers – as the current concessions offering at both airports leaves much to be desired,” says Carlos Ozores, a principal at aviation advisory firm ICF SH&E. “Developing the commercial revenues at both airports is the primary lever available to the new operators to fund their acquisitions.”

He agrees that the second round was a success for ANAC and Brazil's Secretary for Civil Aviation (SAC) from the point of view that it attracted world-class operators.

With adequate or subpar facilities at many of Brazil’s airports, the higher fees and other financial penalties are widely accepted as necessary evils in order to bring the country’s airports up to world-class standards and meet the demands of rising air traffic.

The concessions for Confins and Galeão are expected to close in March 2014 with improvement projects beginning later in the year.