IN FOCUS: San Juan airport gets the private touch

Washington DC
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Puerto Rico is setting the stage for privatised airports in the USA. The deal is the first since the failed Chicago Midway deal four years ago and, if approved, would be the only privatised airport in the country.

The Puerto Rico Port Authority advised by the Puerto Rico Public-Private Partnerships (PPP) Authority awarded a 40-year concession for the San Juan Luis Munoz Marin airport to Grupo Aeroportuario del Sureste (ASUR) and Highstar Capital-owned Aerostar Airport Holdings consortium in July.

prpppa source

Puerto Rico PPP Authority

The concession is part of the US Federal Aviation Administration's (FAA) airport privatisation pilot programme. It would be the first deal to close under the programme since Newburgh's Stewart airport, which was privatised in 2000 but returned to public control when the Port Authority of New York and New Jersey bought out the concession in 2007. The programme has slots for up to 10 airports with three taken, including one by Midway that has the only one allowed for large hub facilities.

Aerostar will make a $615 million upfront payment to the Port Authority as well as about $585 million in revenue sharing over the term of the contract, as part of the San Juan airport agreement. The grantor will use these funds to retire $505 million in outstanding debt and invest the balance in other airports on the island.

"The [San Juan] airport is a gateway to Puerto Rico and this project will enhance the quality of service standards, terminal offerings and travel options for residents and visitors, while also having an extraordinarily positive effect on our economy," said Puerto Rico governor Luis Fortuno in July.

Emmett McCann, a managing director at Highstar, says infrastructure investments and the experienced team at Aerostar will turn Puerto Rico's vision into reality: "By improving the aesthetics of the airport, providing an enhanced commercial offering, and modernising the security and ticketing infrastructure we'll be able to make LMM [Luis Munoz Marin] a better facility for both airlines and passengers."

"Pairing these infrastructure improvements with a dedicated and active route development team that understands how to stimulate new routes will play a significant role in increasing volumes at the airport," he adds.

Aerostar is awaiting the record of decision from the FAA on the deal, which could be issued anytime after the public comment period ends in mid-November. The consortium is targeting a first quarter 2013 financial close.

Airlines see the deal as a plus to their operations and bottom lines. Rhett Workman, managing director of corporate real estate and government affairs at US Airways, says that the certainty of costs for the first 15 years of the concession is a big selling point for the airline. Fees will be flat for the first five years and rise at a rate pegged to annual US consumer price inflation for the next 10 years, he says.

"You offer fair rates and charges to the airlines, [and] they can offer fair fares to the customers, which drives more traffic through," says Kevin Costello, chair of the San Juan Airport airline affairs committee and director of properties and airport affairs for JetBlue Airways. He reiterates the importance of keeping costs low for airlines and notes that Aerostar understands that they cannot make investments in the airport at the expense of air carriers.

"It's a win-win for the airlines and for the airport," he says.

San Juan is a focus city for JetBlue and the largest station outside the continental USA for US Airways. The airlines combined carried more than a third of the airport's enplaned passengers during the year ending in July, according to US Department of Transportation statistics.

Terminal improvements will be Aerostar's first order of business once the deal closes. It will make $195 million in investments during the first three years of the concession, which will include a reconfigured and expanded ticketing lobby, expanded security screening areas, additional concessions, and concourse and terminal interior upgrades, according to the application with the FAA.

"The airport is saddled with excess capacity and terminal space," says Workman. "Its very expensive to provide the upkeep on the terminal space. There's lots of opportunity in San Juan to mothball or shed some terminal space [and] make what's remaining much more efficient."

San Juan has about 333,333 square feet (30,968 square metres) for every one of its 2.8 million annual passengers compared to ASUR's widely lauded Cancun airport which has about 222,177 square feet for every one of its 1.35 million annual passengers, he says.

Costello also talks about rationalising the terminal facilities into a smaller space but says that one big thing for JetBlue is the promise to build a US federal inspection services (FIS) facility in terminal A. The addition would eliminate the need for the airline to tow aircraft from the existing FIS in terminal C to its gates in A after passengers disembark. He says that this would allow JetBlue to expand its international operations in San Juan.

Financing for the upfront payment and terminal improvements will come from an about $410 million bond issue, according to the FAA application. If Aerostar is unable to raise the debt on the capital markets, the consortium has commitments from FirstBank Puerto Rico, Royal Bank of Canada and UBS to provide bank financing for the concession. ASUR and Highstar will split $265 million in equity equally.

"The model works," says McCann. "All Aerostar can do is the best job we can in terms of implementing and making this a best in class airport to show the market that this is something that can be done successfully."