IN FOCUS: Brazil’s airports go private

São Paulo
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Brazil is on a crash course in airport privatisation. It closed deals for three of its busiest airports - Brasilia International, São Paulo-Guarulhos International and Viracopos-Campinas International - last November, launching much needed investment and capacity expansion at the three facilities.

Private operators have wasted no time in getting started. Construction works have begun at all three airports for various terminal expansions while operational improvements have been planned.

"The main thing we are now working on is to increase capacity," says Luiz Ritzmann, chief information officer of Concessionária Aeroporto Internacional de Guarulhos, which operates the airport in São Paulo. He explains that this is split between physical "concrete" expansion and technology improvements.

The Brazilian reais (R) 2.9 billion ($1.5 billion) physical expansion at Guarulhos includes a new 170,000m² (1.8 million ft²) terminal 3 that will increase annual capacity by 11 million passengers to about 40 million, and add 42 new aircraft parking positions for a total of 110.

Technology improvements include new systems to increase automation, for example, using technology provider MetraTech's MetraNet automated system to bill airlines.

The Invepar and Airports Company South Africa (ACSA) consortium won the 20-year Guarulhos concession with a R16.2 billion bid and must invest at least another R4.8 billion in the airport over the term of the contract. The Brazilian government-owned operator Infraero maintains a 49% equity stake in the airport.

Serious questions remain on how the concessionaires will improve operations at the congested airports and recoup their investments.

Operational ability

Brazil's airports are stretched to the limit. Guarulhos is designed for nearly 29 million passengers per year, but handled 32.8 million passengers last year, with increasing numbers of flights having to park at remote stands.

This story is repeated across the country. Congonhas airport near São Paulo's city centre is so crowded and sought after by airlines, that Brazil's National Civil Aviation Agency (ANAC) has proposed rules where airlines could be forced to divest slots as penalty for not meeting strict new on-time performance requirements.

"The airport infrastructure we have today is basically the same as 10, 20 years ago," says Eduardo Sanovicz, president of the Brazilian Association of Airline Companies (ABEAR). "However, the number of passengers has increased a lot, almost tripled, since then."

Domestic revenue passenger kilometres were up by 6.8% to 86.9 million last year, according to ANAC.

The concessions were designed to address this issue by expanding capacity and improving operations. The tenders outlined high capital investment requirements, but included vague language for operational improvements. Progress on the former is already evident, but evidence of the latter is still up in the air.

Capital investments are being made at both Brasilia and Viracopos, in addition to those at Guarulhos. Argentinian infrastructure investor Corporacion America and Engevix Engenharia-owned Consorcio Inframerica Aeroportos are investing $750 million to expand capacity by 4 million passengers to 20.7 million annually at Brasilia, says the private operator. It expects to add 50 new retail outlets and 15 new jet bridges for a total of 28 by 2014.

Investors Triunfo Participacoes e Investimentos and UTC along with Egis-owned Aeroportos Brasil have begun laying foundations for a new multi-pier terminal at Viracopos.

Brasilia was the country's fourth busiest airport with 15.9 million passengers and Viracopos the seventh busiest with 8.9 million passengers in 2012, according to data from Infraero.

Operational efficiencies are more difficult to achieve. Guarulhos is the most difficult of the three privatised airports for airlines to gain access to. It took US Airways over two years to secure take-off and landing slots at the airport after receiving the necessary US-Brazil frequencies in 2010, and it still had to settle for inopportune times that executives at the carrier described as simply better than previous offers.

Ritzmann says Guarulhos is working to reduce the time aircraft spend at the gate, speed passenger flow through the terminal and implement shared check-in counter space. "With these improvements, we will be able to handle more flights simultaneously," he says.

Progress is being made. US Airways secured its slots just a month after the private operator took over the airport, and new services from Abu Dhabi to São Paulo on Etihad and from Addis Ababa on Ethiopian Airlines are planned for later this year.

Doubts still exist regarding the private firms' abilities to significantly improve airport operations. The three winning consortiums are heavily skewed towards Brazilian pension funds, including Invepar and Triunfo. Minority stakes are held by smaller foreign operators, including ACSA and Egis, and not global heavyweights like Fraport or Changi Airports International.

The result was such that Brazilian president Dilma Rousseff called it "not optimal", and prompted ANAC to raise operational ability requirements for the next round of concessions. Operational experience may not be what Brazil needs. Sanovicz at ABEAR says the need for capital investments in the airports is so significant that improvements in operational efficiency will occur as a result of expanding facilities.

"The airlines need the infrastructure to operate more efficiently," he says. "Renovation and expansion of Brazilian airports will ensure an improved service."

Jose Efromovich, president of Avianca Brazil, put it another way at last year's ALTA Airline Leaders Forum in Panama City: "The expectations are high and we believe very good things will arise [from the concessions] because the costs of not complying would be high."

Fee questions

"Auctioning the concessions garnered some $14 billion for the Brazilian government - many times the minimum bid," said Tony Tyler, director general of IATA, at the ALTA forum.

Inframerica won the 25-year Brasilia concession with a R4.5 billion bid that was an impressive 60 times higher than the R75 million minimum. Invepar and ACSA's bid for Guarulhos and Aeroportos Brasil's bid for Viracopos were a less dramatic seven times the minimum.

"Safeguards were not put in place to ensure that the new owners recover their investment through efficiency gains and traffic growth, rather than by raising non-aeronautical fees which are monitored but not capped," Tyler adds.

ANAC structured the deals with restrictions on the fees charged to airlines and passengers, but not on other revenue sources. This is not uncommon as private airport operators typically make the bulk of their revenue from non-aeronautical sources such as retail and parking.

Ritzmann says Guarulhos's management is targeting a revenue split of about 40% aviation and 60% non-aviation. He adds that this is the global standard for privately-run airports. Revenues are currently split 60% aviation and 40% non-aviation at Guarulhos.

Most investors see rate increases as necessary to expand Brazil's airports. Pablo Sorj, a partner at Mattos Filho, who advised one of the unsuccessful international consortiums for the concessions, says that fees at the major airports have to go up, citing limited space. He adds that, while this will impact airlines, the large market share of, for example, Gol and TAM, will give them considerable bargaining power with the private operators. "[Airlines] will have to pay more for space that is fair," he says.

Loans from the Brazilian development bank BNDES that will finance up to 80% of the capital costs of the expansions at Brasilia, Guarulhos and Viracopos must be secured by dedicated revenue streams, which are typically airport facility charges or retail revenues.

Next round

The pending concessions of Belo Horizonte Confins International Airport and Rio de Janeiro Galeao International Airport will build on the first three. ANAC is including requirements that bidders must already operate a portfolio of airports that handle more than 35 million passengers per year, and operators have to provide at least 25% of the equity in the deals.

"The criticism is that the public sector is still heavily involved when you have the pension funds and BNDES as huge stakeholders, with the majority of the equity and debt," says Sorj on the first round of concessions.

Brazil hopes these structural changes will bring in the big international names absent from the first round. Aeroports de Paris and Schiphol Group are looking at the Belo Horizonte and Rio deals, reports say. Invepar expects the required investment in Belo Horizonte to be about R4.8 billion and in Rio, about R6.6 billion. The auction is set for September.

Airport privatisation will remain controversial. No matter how ANAC structures the deals, there will be naysayers. But with reforms following the first round of concessions, it is hoped that Brazil is on the right track to balance its expansion needs and investor requirements with airline and passenger protections.