As Brazil suffers with shortcomings in its airport infrastructure, the airport management business around the world is increasingly attracting the interest of investors. Larger or smaller sized premises, both in developed and developing countries, are even attracting capital from other sectors seeking to profit from the worldwide growth in air transport.
A recent example is that of the Dubai Aerospace Enterprise (DAE), a company of the United Arab Emirates, which is currently negotiating the purchase of 51% to 60% of the shares at Auckland International Airport Limited (AIAL), which operates the Airport of Auckland, in New Zealand, for US$ 2 billion. The board of directors at AIAL has already approved the proposal, which should be submitted to the company’s shareholders in November.
The DAE was established last year, and is run by other Dubai-based state-owned companies that operate in several fields, such as Emaar and Istithmar, of the real estate sector, Amlak Finance, of the finance sector, and the government of the emirate itself.
The aim of DAE is to seek investment opportunities in the aerospace sector around the world. Last week, for example, it completed the purchase of two United States-based aircraft maintenance companies, Standard Aero and Landmark Aviation, for US$ 1.9 billion.
But one need not seek in New Zealand or the United States to find similar examples. They also exist in our surroundings. Also last week, Fraport, the company that manages the Frankfurt Airport, one of the world’s busiest, announced the acquisition of 100% of the shares at the Lima International Airport, in Peru. Since 2001, Fraport has owned 42.75% of the shares, and it leads a consortium that has won a 30-year concession for the airport.
According to the company, the number of passengers in Lima increased from 4 million in 2001 to 6 million last year, and US$ 206.8 million have been invested in the airport since the beginning of the concession period. In 2006, the consortium posted revenues of US$ 110.3 million. Besides Frankfurt and Lima, Fraport operates several other airports around the world, such as Cairo’s Gandhi Airport, in India, and the Dakar Airport, in Senegal.
Another neighboring example is that of the Santiago International Airport, in Chile, operated since 1998 by a consortium that includes Vancouver Airport Services (YVRAS), a subsidiary of the Vancouver International Airport Authority, in Canada. Since the beginning of the concession period, according to the company, US$ 220 billion have been invested by the consortium in the Chilean airport.
But what led an organization such as this to seek internationalization? The answer is supplied by the senior project director in charge of business development at YVRAS, Brian Bohmi. “It started out in 1993. We noticed that only 1% of all airports were in the hands of private enterprises, and we realized that this would be a great market for our expertise, an opportunity to take to other places the best practices adopted at the Vancouver Airport”, Bohmi said.
The first experience of YVRAS outside Canada was in the Bermudas. Now, the company owns stakes in 18 airports in places like the Dominican Republic, Cyprus, Bahamas, Jamaica, the Caribbean islands of Turks and Caicos, besides Chile and Canada.
According to Bohmi, the business is a profitable one, so much so that, according to him, the company remained profitable even in the midst of international turbulence, such as the aerospace crisis triggered by the attacks of September 11th, 2001, in the United States. This partly explains the growing interest of international companies in the airport business.
Another example is that of Macquarie Airports (MAp), which is managed by Australian bank Macquarie. Presently, the group owns majority stakes in the airports of Sydney; Copenhagen, in Denmark; Brussels, in Belgium and Bristol, in the United Kingdom.
According to the press office at the company, MAp became listed on the Australian Stock Exchange in 2002, at a market value of AU$ 1 billion (US$ 856 billion), and the current amount stands at 7 billion AU$ (US$ 6 billion).
Yet another major international operator is the British BAA, which is controlled by the Spanish group Ferrovial. The company operates seven airports in England, including London’s Heathrow, the world’s third busiest in passenger transportation, in addition to premises in the United States, Australia, and Canada.
The Brazilian Case
Companies such as those, which have large sums of capital and capacity to attract heavyweight partners, have a stated interest in continuing to seek investment opportunities around the world, and according to specialists, the Brazilian market has great potential.
One only has to look at the figures. Brazil is the Latin American country with the highest air traffic level, followed from a distance by countries such as Mexico, Colombia, Argentina, and Puerto Rico, according to information supplied by the Airport Council International (AIC), an international association of airports.
According to the Brazilian Airport Infrastructure Company (Infraero), the airports that it manages served 102 million passengers in 2006, a 6.3% increase over 2005.
Just to have an idea, the growth rate was higher than the average global rate. According to the AIC, there were 4.4 billion boardings and deboardings worldwide in 2006, an increase of 4.8% compared with 2005. This was cause for celebration.
In the first half of this year the number of passengers in Brazil surpassed 55 million, 8.6% more than in the same period of last year. The Brazilian aerospace sector achieved a positive performance, in spite of the air crisis that ensued following the accident involving the Boeing 737 of Gol Airlines, which crashed in the midwestern Brazilian state of Mato Grosso in September last year, leaving 154 dead. In addition to the loss of lives, of inestimable value, long delays and flight cancellations became a constant ever since.
One of the realizations that emerged during that period is the fact that the country needs to increase its airport infrastructure and modernize the sector’s management. But if the Brazilian market is so inviting, then why are international companies not investing here? According to experts, the problem lies in the model adopted in the country, in which a single state-owned company manages all of the major airports.
Infraero operates 67 airports, which handle the vast majority of passenger and cargo traffic. “The current model is utterly impervious to private investment, foreign or domestic,” said the professor for air transport at the Federal University of Rio de Janeiro (UFRJ), Respício Antônio do Espírito Santo, who is also president at the Brazilian Institute for Strategic Studies and Public Policies in Air Transport (Cepta).
According to him and other specialists, the national model creates two main problems: first off, since management is unified, revenues generated at one airport are not necessarily invested in that same airport, as they might be allocated to other premises, which might even be located in another state; furthermore, there is no competition between airports, because the fees charged are the same across each category, thus leading airline companies to always seek the busier hubs.
In Santo’s assessment, airport administration in Brazil needs to be decentralized, which does not necessarily entail privatization, as operations can be assigned to state administrations, municipalities, and other public organizations.
To him, it must be ensured that funds derived from operation of a given airport are invested in that same airport, and also that there be competition between different premises, which can be attained through free pricing, in order to create greater capillarity in the airline network.
“Why must a tourist coming from Colombia, for instance, make a stop in São Paulo (in southeastern Brazil) to go to Belém do Pará (NE)? If fees were competitive, then international airlines might become interested in flying directly to Belém,” he said. Furthermore, assigning operations to third parties would lead to new investments. “The winner of a tender has incentive to invest,” Santo claimed.
Citing other Latin American countries that privatized the sector, such as Colombia, Ecuador, Peru, and Mexico, Brian Bohmi, of the Canadian YVRAS, claims that outsourcing enables government access to new sources of capital, reducing public expenditure, and attracting partners that might improve the business management.
“There are lots of opportunities in the market nowadays, new players, such as construction funds, and banks. There is new money coming in from other sectors,” said Bohmi.
In principle, there are no legal obstacles to the entry of private investment, domestic or foreign, into this sector, although the federal government is in charge of the activity. There is even a legal decision by the National Civil Aviation Council (Conac), from October 2003, regarding a National Aerospace Plan, according to which authorities should seek ways of encouraging private investment in the sector.
“Air transport in Brazil is the sole jurisdiction of the federal government, but there may be concessions to private enterprises,” said the lawyer Carlos Paiva, who specializes in the sector, and whose list of customers includes large companies such as Emirates Airline, Qatar Airways, and Saudi Arabian Airlines. This applies not only to new airports, but also to existing premises, even if they are under the management of Infraero.
“In airports where demand exists, private participation is perfectly viable. There are no obstacles, provided that things are carried out under the rule of law. There is a belief in Brazil that airports only concern the Infraero,” said engineer and economist Adyr da Silva, former president at Infraero and a professor at the University of Brasília (UnB). He said that he has, in his office, 10 airport-related projects forecasting private participation. “The only thing that is missing are the investors,” he stated.
In fact, there are airports in Brazil managed by state governments, municipalities, and even private companies, but these only account for a small share of total national air traffic. “There are no obstacles to private investment, but there is no political willingness to do it either,” said Respício do Espírito Santo. In practice, the control of Infraero over the main airports in the country constitutes a monopoly.
After the accident that occurred in July with the TAM Airbus A-320, in the Congonhas Airport, in São Paulo, in which 199 people were killed, the air crisis worsened, and the government announced a series of possible measures to make the sector more dynamic, such as opening the capital of Infraero, and having greater participation of the private capital, by means of Public-Private Partnerships (PPPs).
We contacted for this story the press offices at the Brazilian Ministry of Defense, the National Civil Aviation Agency (ANAC) and the Infraero, seeking draft projects in the field, but there were no replies after over a week of wait.
There is no definitive model: airport management systems vary in countries with large volumes of air traffic. In the United States, according to information supplied by the Federal Aviation Administration (FAA), airport premises are usually owned and operated by local governments, such as states, municipalities, counties, and other public organizations linked to the sector. According to the FAA, few airports are under management contracts to companies.
In Canada, airports are the responsibility of local airport authorities, as is the case with Vancouver. These are non-profit organizations run by a board of community leaders, although business revenues can be invested in the managed airports and in subsidiaries, such as the YVRAS.
In Britain, the sector was privatized, and is now controlled by companies such as BAA, which operates seven airports in the country, and many others abroad.
The Dubai International Airport (DIA) is managed by the emirate’s Department of Civil Aviation, a state-owned organization. During the first half of this year, 16.2 million passengers used the DIA, according to information provided by the DIA press office, representing an 18% increase over the same period of last year.
Just to have an idea, passenger flow was slightly lower than recorded in the airports of Congonhas and Guarulhos, in the southeastern Brazilian city of São Paulo, the two busiest in the country, which together received 17.7 million passengers in the first six months of 2007.
Nevertheless, the Dubai Airport is undergoing expansion works, at a value of US$ 4.5 billion, to raise its capacity from the current 25 million passengers per year up to 75 million. The first phase of the expansion should be concluded halfway through next year, and the second phase should be delivered in 2009. Congonhas, on the other hand, has run out of capacity, and Guarulhos is near the limit, and also requires expansion.
Although specialists agree that the Brazilian aerospace market is very attractive and that there are no legal obstacles to foreign investment, there is no consensus with regard to the model that the country should adopt.
“I do not oppose the state-owned model, there are good examples of it. At the same time, there are cases in which privatization did not yield good results, as in Argentina,” said the lawyer Carlos Paiva. To him, the model used by Infraero is still the best for Brazil, but needs to be perfected in order to cater to the country’s current needs.
Respício do Espírito Santo, of the UFRJ, favors the demise of the current system. “First of all, it takes political will to extinguish the Infraero, because the current model is obsolete. Privatization is not mandatory, but airport individualization must be maximized,” he says. “The federal government should consider it very seriously,” he adds.
Espírito Santo warns, though, that due to the size of the Brazilian territory and to regional, social and economic idiosyncrasies, it is difficult to conceive a single model for the entire country. “Brazil could host many different models,” he states.
Two Private Examples
There are examples of airports managed by private companies in Brazil, although they account for a small share of the country’s air traffic, and are surrounded by expectations, more than concrete results. One of these is the Cabo Frio Airport, located in the Lakes region of the southeastern Brazilian state of Rio de Janeiro, operated by concessionaire Costa do Sol since 2001, after a tender was issued by the city hall and the Brazilian Air Force.
The airport just underwent expansion works, which are scheduled to be inaugurated soon, and the president at the manager company, Murilo Junqueira, is optimistic regarding future perspectives, especially in the cargo sector.
“Two relevant events occurred since we won the tender: first there was the global aviation crisis prompted by the attacks of 2001 in the United States; and then there was the economic crisis in Argentina. At that time, the main activity at the airport was that of flights bringing Argentine tourists to Búzios. After the Argentine crisis, the concessionaire faced problems,” said Junqueira. “Then, we detected a demand, in the oil industry, for equipment imports,” he stated.
The demand is generated by companies that supply products or services, or companies prospecting for oil in the Campos Basin, based mostly in Macaé, in the north of the state of Rio. In order to cater to the sector, the concessionaire initially invested in the construction of a customs bonded cargo terminal.
More recently, 35 million reais (US$ 18.3 million) were invested in expanding the runway, the terrace, and the security system. The runway is now 2,600 meters (8,500 feet) long and, according to Junqueira, it can receive any type of aircraft.
He is also betting on cargo diversification, after the signing of an agreement with the National Health Surveillance Agency (Anvisa), which will allow inspections at the site, as well as transportation of goods that require inspection, such as medication.
According to Junqueira, out of the total invested, 30 million reais (US$ 15.7 million) came from public funds and 5 million reais (US$ 2.6 million) came from the concessionaire. After a year without landings and takeoffs due to the expansion works, now he is expecting, in addition to increased cargo transportation, the return of tourist flights.
The businessman claims that two regular flights from Buenos Aires are forecasted, on Saturdays and Sundays, besides chartered flights coming also from Argentina and from Chile.
In the cargo sector, Junqueira expects companies to install themselves within the airport premises, so that they can take advantage of the logistical, customs, and sanitary surveillance facilities.
“We are working with the concept of an industrial airport,” he said. Differentials highlighted by Junqueira include lower prices charged for services such as cargo storage and handling than those charged by larger airports in the region. Costa do Sol also operates the Angra dos Reis Airport, in the southern coast of Rio.
Another example is the Porto Seguro Airport, in the northeastern Brazilian state of Bahia. There, the vocation is purely for tourism purposes. According to the president at concessionaire Sinart, Henrique Pedreira, the airport currently receives around 700,000 passengers per year, compared with 400,000 in 2000, when the concession period began.
As in the case of Cabo Frio, in the beginning the foreign tourists were mostly Argentineans and also Uruguayans, a share now comprised of Europeans. Nevertheless, Brazilian visitors are the majority. The flights that land in the 2,000-meter runway are mostly chartered.
According to Pedreira, in recent years, 3 million reais (US$ 1.5 million) have been invested in reforms and equipment purchases for the airport. He says the business is profitable, but the investments that it requires are high, which reduces the profit margin.
Furthermore, movement in the airport is seasonal, limited to weekends and the high season, between January and February. “That is why there is no strong retail stores here, as there is in airports such as that of Brasília (the Brazilian capital), for instance,” he said.
Pedreira also claimed that his company has just won the concession for the Juiz de Fora Airport, in the southeastern Brazilian state of Minas Gerais. Nevertheless, he said the cost of operations is too high for the revenues, therefore complementary funding from public authorities will be required.
Anba – www.anba.com.br