IN FOCUS: Airports look for private route to growth

Washington DC
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Privately-run airports are growing in number, with the rise in many locales fuelled by a need for investment as a result of a decreasing pool of public funds.

The Puerto Rico Ports Authority awarded the first airport concession in the USA in July, four years after a deal for Chicago's Midway airport collapsed. Brazil also closed its first round of major airport concessions in June. While in Europe, where private airports are much common, the Greek government is negotiating an extension of the 30-year concession for Athens airport and Portugal is looking to privatise its aiports operator Aeroportos de Portugal.

"With the global crisis, obviously many governments look at the option of privatisation as the way forward," says Rafael Echevarne, director of economics and programme development at the Airports Council International (ACI). A need to develop the infrastructure and the limited access to funds are leading drivers of this shift, he adds.

"For a few years, the market for privatisation was down, but now, given the government restrictions on spending, we can see that there is pressure to privatise," says Echevarne.

ACI statistics show 450 of the world's airports are operated under a form of a private concession. The highest concentrations are in Europe and Latin America, while the lowest are in the Middle East and North America.

Public airport operation remains the dominant model. Echevarne says many of these facilities have adopted aggressive marketing and revenue maximisation strategies that were long hallmarks of their private peers. Good examples of these are Singapore's Changi and Amsterdam's Schiphol airports, he says.

The US Transportation Research Board's Airport Cooperative Research Programme (ACRP) said in a recent report that airlines do not consider well-run airports, like Changi and Schiphol, to be good candidates for privatisation. But facilities that have governance problems or lack operational independence are viewed as more suitable for privatisation.

These factors and the need for significant capital investments drove the decisions to privatise airports in Brazil and Puerto Rico. The respective governments and airlines are now looking forward to significant upgrades and operational improvements to these facilities.

Brazil and the USA are arguably the two largest commercial aviation markets without a significant number of privatised airports. Commercial airports in these countries have long been operated by either the state or national governments in the former, while they are operated locally through a myriad of governance structures in the latter.

The National Civil Aviation Agency of Brazil awarded long-term concessions for three of the country's busiest airports - Brasília, São Paulo Guarulhos and Viracopos-Campinas - to local consortiums earlier this year. Private concessions were pursued after the government operator, Infraero, was unable to deliver promises of upgrades to the facilities and because of impending traffic spikes from the 2014 World Cup to the 2016 Olympics in Rio.

Inframerica Aeropuertos (Engevix Engenharia/Corporacion America) won the 25-year Brasilia concession with a R4.5 billion ($2.2 billion) upfront payment, while Invepar/Airports Company of South Africa/OAS won the 20-year Guarulhos concession with a R16.2 billion offer and Aeroportos Brasil (Triunfo Participacoes e Investimentos/UTC Participacoes/Egis Avia) won the 30-year Viracopos concession with a R3.8 billion bid. Infraero retains 49% equity stakes in each concession and has the right to veto decisions.

The concessionaires are expected to make significant investments in the airports as well as implement international operational standards. Inframerica must invest R2.2 billion in Brasilia, Invepar and its partners R4.8 billion in Guarulhos and Aeroportos Brasil R6.3 billion in Viracopos over the terms of the concessions. Brazilian development bank BNDES will finance up to 80% of the capital costs.

Airlines and passenger groups have complained that the high upfront values could drive up fees, which they say they would be forced to pay. However, it is expected that these costs will at least be partially absorbed by the expected strong growth of air traffic and continuing economic development in Brazil.

Puerto Rico is a wholly different story. Public management of the San Juan airport lacked cohesion as positions were veritable revolving doors for political appointees and the port authority lacked the funds to upgrade ageing airport infrastructure. The concession is seen as a way to address and stop a long-term decline in traffic, while also rebuilding the airport's status as the gateway to the Caribbean.

"A big advantage is cohesion of management and a unified vision," says Emmett McCann, managing director at Highstar Capital, an investor in the San Juan airport concession. "One of the things with a lot of government-run agencies is that you lose continuity in management."

The port authority selected Grupo Aeroportuario del Sureste and Highstar-owned Aerostar Airport Holdings as the preferred bidder for the 40-year concession in July. If approved by the US FAA, the concessionaire will make a $615 million upfront payment to the grantor and about $585 million in revenue sharing over the term of the contract. It will also invest $195 million in the facility during the first three years and $1.4 billion over the life of the agreement.

"It's really viewed as the best possibility in order to provide better quality facilities at a financial structure that would work for all the stakeholders," says Kevin Costello, chair of the San Juan Airport airline affairs committee and director of properties and airport affairs for JetBlue Airways. "With all that investment, there's still an acknowledgement that efficiencies need to be built in and passed on to the airlines' cost structure."

Private airports may be on the rise but they still have their drawbacks. The ACRP report says disadvantages include the loss of public control, lengthy procurement times and, at least in the USA where the municipal debt market is strong, a higher cost of financing. "Privatised airports are there to maximise shareholder value and one way they can do that is to maximise concession opportunities," says Rhett Workman, managing director of corporate real estate and government affairs at US Airways.

"It's great for the customer because they have all sorts of retail opportunities, but sometimes it's challenging for an airline operation because the occasional traveller may not always gauge how much time they need from the check-in to the gate and can be lured away by the concession offerings and we're scrambling to make sure we have on-time departures."

Alfonso Lacamara, chief executive of SCL Terminal Aereo Santiago in Chile, says one of the issues they face as a private operator is a lack of co-ordination with other aspects of the country's transportation network. A connection between the airport and Santiago's metro network "makes a lot of sense", but is beyond the scope of the concession, he says.

Despite these points, he still has praise for private operations. "Private airport operators can bring solutions from different experiences and backgrounds whereas a public operator scope is more limited," says Lacamara."

Agunsa, FCC, Grupo ACS, Inmobiliaria Parque Tres and Vantage Airport Group-owned SCL Terminal won the 15-year concession for the airport in 1998 and has invested more than $220 million. It is planning on bidding for the airport again when the Chilean ministry of public works retenders the concession with $500 million of additional investment in 2013.

But the difference between public and private airport operators is shrinking. As ACI's Echevarne puts it, there are just as many publicly-run airports lobbying for air service and developing non-aeronautical commercial revenue as their private counterparts. "It's difficult to point out the real differences between public and private airport operators because of the focus on revenue optimisation even by public operators," he says.

The trend toward privatisation will continue, especially in markets where it is still small today. Brazil is already preparing concessions of the Rio de Janeiro Galeao and Belo Horizonte Confins airports, while public operators around the USA are considering the FAA pilot programme or pursuing terminal-only deals that bypass the regulator altogether.

"We have a saying in our line of business - you've been to one airport, you've been to one airport," says JetBlue's Costello. Every airport is different and every situation will require a different public or private solution.