A Brazil tale of two airport concessions
The contrasting fortunes of the companies involved offer a sobering lesson in business models and financing
by Dom Phillips
As President Michel Temer’s administration continues to seek ways to repair a gaping fiscal deficit, the government has revived an airport concession programme begun by Temer’s predecessor, Dilma Rousseff. In March this year four airports were tendered out; a further 14 are due to follow next year.
With no interstate passenger rail network, air travel is vital in this continent-sized country. But that is no guarantee that every concession will succeed. In 2012, Presidente Juscelino Kubitschek international airport in Brasília and Viracopos international airport in Campinas, São Paulo state, were tendered out — with very different results. The former has flourished, while Viracopos has struggled and its concessionaires want to give up the contract.
The Car Wash graft investigation into contracts at state-run oil company Petrobras hit concession partners at both airports. But while recession cut into traffic at Viracopos, its impact on Brasília was less severe because the capital city had established itself as a regional hub.
Orlando Lima Júnior, a professor of logistics and transport at the State University of Campinas, says the success of a concession depends on “the conditions of the market it is in, but also the model and the financing”.
In 2012, the Inframérica consortium, comprising Argentina’s Corporácion América and Brazilian construction company Engevix, bought 51 per cent of Brasília airport. At R$4.5bn (then about $2.3bn) the consortium paid 500 per cent more than the R$582m minimum allowable bid. The same year, Aeroportos Brasil Viracopos (ABV) — formed by logistics company Triunfo, construction and engineering business UTC and French infrastructure group Egis — paid R$3.8bn for 51 per cent of Viracopos airport, 160 per cent over the R$1.5bn minimum. In each case, Infraero, the government airports authority, retained 49 per cent.
Despite the price difference, Brasília was the better deal, because of differences in “enterprise cost”, according to Stephen Trent, a transport analyst at Citigroup in New York. Brasília had 15.4m passengers a year, he says, which gave it an enterprise cost per passenger of $310, far less than the $540 for Viracopos, with an annual flow of 7.5m passengers. Enterprise cost is calculated from the price the consortiums paid for their share of the concession (in each case 51 per cent), 12-month passenger flow and any assumed debt. “That really explains a lot,” Trent says. “It’s unclear why one of those two entities decided to pay such a big US dollar enterprise cost per passenger in comparison to the other.”
Corporácion América had a track record in airports — today it operates passenger and cargo terminals at 53 airports in Latin America and Europe — but at ABV, only minority shareholder Egis had experience of airport management. This gave Corporácion América the edge over the Viracopos operation, says Marcela Corrêa, an aviation specialist at law firm Felsberg in Rio de Janeiro. “When you have experience, you know more or less the territory you are in,” she says.
“We knew from scratch we had to compete with the other major airports,” says Carolina Barros, chief communications officer at Corporácion América. “We couldn’t compete on scale, but we could in quality and services to the passengers.”
Inframérica had learnt valuable lessons after picking up a trial concession in 2011 in Natal, in Brazil’s north-east, a greenfield airport built for the 2014 World Cup. In 2013, the federal district of Brasília cut state taxes on aviation fuel from 25 to 12 per cent, while São Paulo state left it at 25 per cent. In 2015, when consortium partner Engevix pulled out after becoming embroiled in the graft probe, Inframérica took over the whole concession.
The company invested R$1.7bn in Brasília airport, doubling the terminal size and expanding the runways to receive one aircraft a minute, making it the only airport in South America that can operate parallel runways simultaneously. It also added an upscale VIP lounge. “We were handling very special passengers — politicians and all the officials that work with the government in Brasília. That was like being in front of a jury,” Barros says. “Brazil is a Latin American country, so as Argentines we know the state of mind.”
Brasília has been praised for its comfort, facilities and design — it even has a bakery. Inframérica has increased Brasília’s Monday to Thursday traffic, in effect the working days at congress in the capital, making it Brazil’s biggest regional hub.
The contraction in Brazil’s economy has worked in Brasília’s favour, says Corrêa. During Brazil’s commodities boom years, an expanding lower middle class boosted demand for flights. But by 2014 the country’s economy was faltering, and in the second half of 2015 passenger numbers were falling. Airlines started to cut underperforming routes but, says Corrêa, “you can’t cut Brasília, because it is the capital”.
By 2015 the airport’s 15m-plus passengers had risen to 19.8m, falling back to 17.9m last year, Inframérica says. “Our Brazilian operations are still in ramp-up, and we are strongly optimistic,” says Barros. For 2018, R$900m will be spent expanding the check-in area and building a new international pier.
When it won its bid, ABV had ambitious plans for Viracopos. Campinas is Brazil’s 10th-richest city, ringed by successful companies and close enough to São Paulo to become a second international airport option.
More than R$3bn was invested in a new terminal, with capacity for 25m passengers a year. Viracopos was judged the best cargo airport in Brazil in 2014 and five times passengers’ favourite Brazilian airport in quarterly surveys from 2013 to 2017.
But demand never met expectations. Instead of the 17.9m passengers forecast for 2016, just 9.3m passed through.
Cargo movement was 166,000 tonnes in 2016, against 409,000 projected. In 2012, after the contract was signed, the government reduced a levy airports charge on cargo from R$0.50 a kilo to R$0.08 — a change only partially compensated for after the government had recognised the impact, a Viracopos spokesman says.
Works took longer than planned. Consortium member UTC, with 45 per cent, was swept into the Car Wash investigation, and Ricardo Pessoa, chief executive of its engineering arm, was jailed. In July, UTC entered into bankruptcy protection proceedings. Triunfo, too, which also had a 45 per cent stake, has entered extra-judicial bankruptcy protection proceedings.
The same month, Odebrecht Transport, part of the Odebrecht conglomerate, which is also heavily embroiled in the graft probe, agreed to sell its controlling stake in the consortium running Rio’s international Galeão airport to China’s HNA. Because the Chinese company also owns shares in the Viracopos-based Azul airline, it could decide to transfer Azul’s flights to Rio’s Galeão, further depleting Viracopos.
Concerns such as this led to an extraordinary general assembly of ABV shareholders on July 28, which authorised ABV, as Viracopos concession holder, to seek a re-tendering of the contract to run the airport. In effect, ABV is relinquishing its concession to run the airport. This year, tenders worth R$3.7bn have been awarded only to foreign companies that already run airports: France’s Vinci in Salvador, Fraport of Germany in Porto Alegre and Fortaleza, and Flughafen Zürich of Switzerland in Florianópolis. None of the companies in the Car Wash probe was considered.
Brazil is learning from past mistakes, says Jorge Medeiros, a specialist in air transportation at the University of São Paulo. “It was a clearer process to choose the best company,” he says.