San Juan airport tender won by Aerostar, an ASUR–Highstar Capital consortium

During the bidding process the original field of 12 bidders was reduced to two. Grupo Aeropuertos Avance, a consortium of Ferrovial Aeropuertos (Spain) and Macquarie Infrastructure, and Real Assets and Aerostar Airport Holdings LLC, (AAH) the 50:50 joint venture alliance of Mexico's ASUR and Highstar Capital, delivered offers on 10-Jul-2012 to operate Luis Muñoz Marin International Airport (LMMIA) under a 40-year concession.

The contract was awarded to Aerostar on 24-Jul-2012, a week in advance of the expected date after what had been a lengthy period of delays. This paves the way for final US FAA approval in autumn 2012 and control of the airport to be transferred by the end of 2012.

Asur plans to be "leading airport group in Mexico and Latin America"

The agreement is expected to create USD500 million or more in revenue for the Puerto Rico Ports Authority as the private sector takes control of the Caribbean's busiest airport. Roughly eight million passengers travelled through LMMIA during 2011, a nearly 6% drop from the year prior. Only about half of the airport's facilities are in use, and the new operator will be under pressure to ramp up tourist arrivals.

Ferrovial and Macquarie's Avance consortium has ample global experience, and might seem marginally better suited to run LMMIA. Ferrovial operates, through BAA, six airports of varying sizes in the UK including London Heathrow, the world's busiest international airport. Until recently it had the operating lease at Antofagasta Airport in Chile and has also held equity and operational responsibility at Sydney Airport. Its partner, the investment fund Macquarie Infrastructure & Real Assets, (reputedly the world's largest infrastructure investment fund) has stakes in eight airports in Europe, India and Australia.

In contrast, Aerostar comprises Aeroportuario del Sureste (ASUR), the largest investor-owned airport group in Mexico, which operates nine airports in Mexico including Cancun; and Highstar Capital, which has a single airport investment in London.

Cancun does have the cachet of having been named Latin America's best airport for the last three years. ASUR's other airports include the small and mid-sized Merida, Cozumel, and Veracruz along with Huatulco, Minatitlan, Oaxaca, Tapachula and Villahermosa.

Ironically, Australia's MAp Airports (associated with but not part of Macquarie's Infrastructure Fund) once took a 16% stake in ASUR, but it was subsequently sold in Aug-2010 as MAp was "unable to bring its active management model to bear", at a loss of USD28 million. In another ironic twist it was Macquarie that guided Puerto Rico in formulating and developing its Public-Private-Partnership legislation, culminating in the 2009 formation of the Puerto Rico Public-Private Partnership Authority.

ASUR has largely restricted its operations to Mexico, and has invested heavily in the country spending USD80 million on Merida Airport to make it "globally competitive". Its vision is "to be the leading airport group in Mexico and Latin America". There was a feeling ASUR might be tempted to branch out into an international transaction after Mexican state airport operator ASA placed a bid in the initial Indian airports privatisation tranche.

Puerto Rico Port Authority is weighed down by debt

Aerostar has agreed to a USD615 million upfront payment to Puerto Rico's Ports Authority, as well as annual payments to the public corporation over the life of the contract that add up to USD550 million, an agreement to share in future earnings, and commitments on capital spending to the value of USD1.4 billion that specifically involve investments in upgrading and improving the airport, and an incentives fund to attract new routes and passengers. The new operators are expected to increase passenger traffic by 200,000 annually. While the deal will provide fresh cash to the Ports Authority, which is weighed down by nearly USD1 billion in long-term debt, officials say they also expect the agreement to yield increases in air routes, passengers and tourism for an island that has been in recession for six years.

The upfront payment is expected to be funded by a mixture of debt finance incurred by Aerostar as the principal entity and equity contributions by each of ASUR (through its Cancun Airport subsidiary) and Highstar Capital IV. During the term of the lease agreement, Aerostar will be required to make annual revenue-sharing payments to the Puerto Rico Port Authority (PRPA), fixed at USD2.5 million p/a for the first five years, 5% of gross airport revenues for the sixth through the 30th years and 10% of gross airport revenues for the 31st through 40th years. The agreement also unusually specifies Aerostar to make certain repairs and minor structural upgrades to the airport, such as replacing broken floors and installing Wi-Fi connectivity in the terminals, within 18 months of the closing of the lease agreement. Aerostar is also required to reimburse the PRPA for certain fire and police services that will continue to be provided by the PRPA.

Overall, the PPPA estimates the total economic value of the deal at USD2.6 billion.

The deal is subject to US FAA approval, which should be granted in 4Q2012, with the new operators taking over before year-end. In the interim, staff have protested against the plan. Port Authority President Ruben Hernandez-Gregorat argued, "the agency does not have enough funds to keep operating and improving the airport."

IATA and ACI praise airline cooperation in Puerto Rico

The Aerostar transaction amounts to the first full-fledged transaction completed under the FAA's Airport Privatisation Pilot Program, which was recently expanded by Congress to 10 airports. Because the deal received the consent of 80% of the airlines serving the airport, the lease proceeds may legally be used by the Puerto Rico Government for non-airport purposes. That was not the case in the only previous lease under the Pilot Program at Stewart Airport (Newburgh) in New York State. Without the required 65% airline approvals, New York had to use the lease proceeds within its state-owned airport system. That lease came to an end in 2007, seven years into a 99-year stretch, and Stewart Airport reverted to the control of the Port Authority of New York and New Jersey with a management contract being awarded to AFCO AVPorts in 2008.

According to Bob Poole of the Reason Foundation, a US think tank with many years experience of transport sector transactions, Puerto Rico's advisors on the procurement drew inspiration from the terms offered to airlines in the lease developed for Midway Airport several years ago - a deal that was blessed by the airlines serving Midway, but could not be financed owing to the credit market crunch.

The International Air Transport Association (IATA) praised Puerto Rico's process. "Airlines were a true partner in the development of the terms of this agreement. The unique approach that the PPPA has taken within the pilot framework set by the FAA provides an excellent template for future airport privatisations," the association said in a formal statement. Greg Principato, president of Airports Council International-North America, also praised the process, suggesting that the successful outcome in Puerto Rico may stimulate similar privatisations elsewhere in the US.

Aerostar will need to bolster passenger numbers

LMMIA generates over 8000 direct and indirect jobs and recently opened the newly-constructed Terminal A, which is currently served by JetBlue. Post-closing, Aerostar's management team will implement its plan to improve the airport to increase aviation services, upgrade essential infrastructure and strengthen Puerto Rico as a leading travel destination. In partnership with the PRPA, Aerostar must ensure all existing workers' jobs and benefits will be maintained.

Currently, 17 airlines serve LMIAA, offering flights to 44 cities. The majority of the markets served from the airport are concentrated in North American and Latin America.

San Juan Luis Munoz Marin International Airport network summary: 29-Jul-2012

Total airlines	17
Domestic only	1
International	16
Total non-stop passenger destinations	44
Domestic	2
Africa	0
Asia Pacific	0
Europe	2
Latin America	18
Middle East	0
North America	22
Total non-stop freight destinations	3
Domestic	0
Africa	0
Asia Pacific	0
Europe	0
Latin America	1
Middle East	0
North America	2

Source: CAPA - Centre for Aviation & Innovata

San Juan Luis Munoz Marin International Airport international capacity by region (seats per week, one way): 30-Jul-2012 to 05-Aug-2012

Source: CAPA - Centre for Aviation & Innovata

There is a relatively even split (52% to 46%) between network/full service and budget carriers operating from LLMIA. oneworld is the largest alliance as measured by seat capacity but almost half of that capacity is on unaligned carriers. oneworld's presence at the airport is driven by American subsidiary American Eagle Airlines operating a base from LLMIAA, which is closing down in Mar-2013.

It is not clear if other carriers will backfill the service gaps created by Eagle's exit, but JetBlue has been steadily building San Juan into a focus city as American has been gradually diminishing its once-dominant presence at LLMIAA during the last several years.

See related article: American Eagle's exit from San Juan leaves gap in small intra-Caribbean markets

San Juan Luis Munoz Marin International Airport international capacity by carrier (% of seats): 30-Jul-2012 to 05-Aug-2012

Source: CAPA - Centre for Aviation & Innovata

Tourism has been a money generator for Puerto Rico for many decades as it is host to diverse natural wonders, cultural and historical buildings, concerts and sporting events as well as some of the best beaches in the world. Visitors from the US do not need to offer a passport thus guaranteeing its attractiveness. But Puerto Rico also attracts visitors from Mexico, the Dominican Republic and Venezuela, with rather less from Europe (France and Germany). It has made little impact in the UK.

The downside is a degree of edginess over violence levels, including violence directed at tourists, and much of it drug-related. In 2011 there were in excess of 1000 murders - the highest homicide toll ever - at an average of one every 7.5 hours. Proportionally, the level of violence in Puerto Rico is higher than in Mexico, let alone that in every US state.

Several important European airlines such as Lufthansa, Air France and Virgin Atlantic have served the main gateway airport previously, but no longer do so.

ASUR eschews Brazil's Natal Airport and others in favour of Puerto Rico

In Feb-2011 ASUR declared it was interested in bidding for the Natal Airport in north-eastern Brazil ahead of the FIFA World Cup and Olympic Games, as well as other airports in the region such as Puerto Rico and Guatemala. In Apr-2011 it hinted it could partner with another Mexican airport operator, GAP, to bid in the Brazilian privatisations. ASUR was prevented from bidding for the Tulum (Riviera Maya) green field airport project in Mexico, as the incumbent operator at Cancun, on competition grounds. The Government later declared the project bids null and void.

In Jul-2011 ASUR stated it was no longer interested in airport concessions in Brazil, owing to the weak returns expected from the ventures. But in Aug-2011 it did submit the Puerto Rico concession bid in consortium with Highstar Capital, reiterating that it planned to seek new investment opportunities in the Latin American airport market.

Subsequently, it returned to a market it had written off - Brazil - and made a joint bid with the US private equity firm Advent International to participate in the bidding process for three Brazilian airports: Brasilia International Airport, Sao Paulo Guarulhos International Airport and Sao Paulo Campinas Viracopos Airport. However, this was unsuccessful and ASUR focused instead on the LMMIA concession, which has become its first active foreign venture.

Highstar Capital, infrastructure investor, has held a stake in London City Airport

ASUR's partner Highstar Capital is an independent, owner-operated infrastructure investment fund manager that currently manages USD5.6 billion including funds in energy, transportation, and environmental infrastructure. Highstar's transportation infrastructure sector includes ports, airports, terminal and inter-modal operations, surface transportation, logistics companies and other service providers to the transportation sector.

Since 2008 Highstar has held 25% stake in London City Airport, with Global Infrastructure Partners owning the remaining 75%. But in 2010 Highstar let it be know it aimed to offload its ownership in the airport, which could potentially generate up to GBP200 million, and had approached infrastructure and pension funds. The economic downturn combined with London Gatwick Airport's low selling price appears to have weakened Highstar's interest in holding onto its London City stake.

Highstar has also recently been involved in other high-profile business deals. The day before it completed the LMMIA deal, Highstar agreed to pay USD1.9 billion for Veolia ES Solid Waste.

Both the operating consortia, Aerostar and Avance, have records of increasing flights and passengers and have close relationships with many of the world's largest airlines, according to PPPA executive director David Álvarez. The Aerostar offer, which Puerto Rico Governor Luis Fortuno described as "beating everyone's expectations", has evidently been the key to the deal.

With the withdrawal of Gwinnett County's application for the Briscoe Field airport in Georgia to the US Federal Airport Privatisation Pilot Program as a result of local opposition, and with no sign of resurrection of the Chicago Midway Airport deal, the LLMIA lease has taken on great significance for airport privatisation in the US and its commonwealth. Apart from this airport only Midway and the Hendry County Airglades airport in Florida, which is touted as a cargo reliever airport for Miami, remain in the FAA programme.