AENA wins another group of Brazilian airports in the latest concession round

Summary

• The seventh concession round for Brazilian airports has been completed.
• Spain's AENA's bid for an 11-airport group, including Congonhas, the country's second busiest, was successful.
• Despite there being no competition, it paid more than 230% in excess of the minimum set price.
• Some of the airports may be peripheral to the main one, Congonhas, but that will be no cash cow.
• Political uncertainty overshadows not just this one, but all the concessions.
• The smaller North Block concession winner is a consortium of bus terminal operators, but one has airport terminal management experience.
• The General Aviation Block of two major city airports did not attract a premium to the asking price.
• With two of these three concessions uncontested and only one generating a premium on the asking price, is the procedure flagging now?

More than 90% of Brazilian air traffic will be handled through concessioned airports; seventh round winners announced

The airport concession programme to date in Brazil has transferred 77.5% of national traffic to the private sector between 2011 and 2021. With the seventh round, the forecast is that the percentage will reach 91.6% of passengers served at airports granted in the country.

The Brazilian regulator ANAC has announced the winners of the seventh round of airport concession auctions, which included a block of general aviation airports and a 'North Block' of two smaller commercial passenger airports.

It was possible for the same bidder to win all three tenders, but the airports are too disparate for that. Moreover, one of the groups is the smallest recorded so far in terms of annual passenger traffic, while another is limited to general aviation/business airports - albeit in São Paulo and Rio de Janeiro.

Two of the blocks attracted only one bidder each.

Multi-state block 'Frankenstein's Monster' goes for 230% over asking price to AENA

The block that has attracted the most media attention by far (although only one bidder) is referred to as 'SP-MS-PA-MG Block,' which relates to the (geographically diverse) states the airports are located in: SP is São Paulo, MG is Minas Gerais, and so on.

And in particular, this state block contains the wholly domestic São Paulo Congonhas Airport, which is the country's second busiest, serving Brazil's and South America's largest city, and was held back (along with Rio de Janeiro's Santos Dumont airport) from previous auctions. The intention was for it to be concessioned separately, while Santos Dumont has since been rolled up in a package deal that should come to fruition in 2023 and also involves a retender for the Galeão International Airport in the same city.

Instead, Congonhas was included in a group comprising 11 airports in all - what one experienced local observer called a 'Frankenstein's monster,' arguing that it would have been better for Congonhas to have been tendered alone, and it would certainly have been more attractive for the bidders.

Some of the airports in the block are almost four hours from Congonhas by air (although some other previously concessioned airport blocks have a similar characteristic), and while Congonhas is expected to be a 'cash cow', the addition of 10 more airports (a great deal of 'bone on the steak' to use the local expression) has certainly made it less digestible for bidders.

Moreover, the other airports in the SP/MS/PA/MG block are notably small.

Campo Grande airport was the busiest in 2019, with 1.5 million passengers, followed by Uberlândia with 1.1 million. No other airport had more than 500,000 passengers in that year, and one had just 4,000.

In sharp contrast Congonhas handled almost 22 million domestic passengers in 2019.

The full list of airports included in this block is as follows: São Paulo Congonhas Airport; Campo Grande International Airport Ueze Elias Zahran; Corumbá International Airport; Ponta Porã International Airport; Santarém Maestro Wilson Fonseca Airport; Marabá Airport; Carajás Airport; Altamira Airport; Uberlândia César Bombonato Airport; Uberaba Airport; Montes Claros Airport.

Whatever the local sentiment about the block's sale prospects, it didn't stop Spain's partially privatised operator AENA pitching for it by way of its 'Internacional' division, which already operates a raft of airports across Latin America. These include six in Brazil which it took under concession in 2019 on a 30-year contract - Recife Guararapes International Airport; Maceió Zumbi dos Palmares Airport; João Pessoa Castro Pinto Airport; Aracaju Airport; Campina Grande Airport; and Juazeiro do Norte Airport.

That block had combined traffic of more than 13.7 million passengers in 2018, representing 6.5% of total Brazilian traffic.

Recife Airport was eighth in Brazil by total passenger traffic and fifth in international passenger traffic.

They are operated as AENA Aeroportos do Nordeste do Brasil.

Active airports for AENA Aeroportos do Nordeste do Brasil

Source: CAPA - Centre for Aviation.

AENA won the tender for the SP-MS-PA-MG Block with a bid of BRL2.45 billion (USD474.03 million), which was 231% over the minimum asking price. AENA has been a bidder in the concession programme generally since 2017.

All the individual concessions are valid for 30 years, with AENA intending to invest BRL5 billion (USD967.40 million) over the period. The estimated revenues over the concession period are BRL11.6 billion (USD2.24 billion).

AENA Internacional may set up another Brazilian subsidiary to operate them, as it did with Aeroportos do Nordeste.

Active airports for AENA Internacional in Brazil, with these latest additions

Source: CAPA - Centre for Aviation

High price achieved for this concession despite economic woes and political uncertainty

Due attention should be paid to the financial figures here because they are testament to the enduring appeal of these Brazilian airport concessions internationally.

All this despite the economic traumas the country often goes through, the impact of the COVID-19 pandemic and the political uncertainty that continues to surround the government and the President, Jair Bolsonaro, who faces a presidential election in Oct-2022 and is being challenged by Luiz Inácio Lula da Silva, a previous president who was jailed for money laundering in 2017.

'Lula' as he is known is leading in the polls.

Lula was president from 2003 to 2010, predating the airport concession procedure by one year; the procedure having begun during the presidency of his successor, Dilma Rousseff, who was subsequently impeached and removed from office. Both were socialists, but at least Rousseff was a trained economist.

There are no guarantees about what Lula will do about the airport concession programme.

Before taking office Lula had been a critic of privatisation. In his government, however, his administration created public-private partnership concessions for numerous federal roadways, which pre-dated the airport concessions initiated by Ms Rousseff and her successor, Michel Temer.

Those high valuations have been challenged in the past, and continue to be

To return to the financial figures, bids of hundreds of percent over and above the minimum asking price have been commonplace since the procedure first began in 2011.

For example, in the second round proper in 2014 precisely that happened in respect of Rio's Galeão International Airport and Belo Horizonte Tancredo Neves Airport.

Subsequently, representations were made concerning exaggeration of traffic forecasts and of the country's economic prospects and the Rio airport will be re-tendered, along with others. As this report is written ANAC approved concessionaire RIOGaleao's request for its concession contract for Rio de Janeiro Galeão International Airport to be revised. Under the revision, RIOGaleao will be entitled to a BRL428.6 million (USD83.87 million) sum due to low passenger volumes in 2021.

But it hasn't dampened enthusiasm for Brazil's airports both within and outwith the country despite the political uncertainty.

It is undoubtedly the case that AENA's principal interest was in Congonhas, but there is no 'cherry picking' permitted in the Brazilian concessions. The operator will be required to make investments in all the airports that require them, irrespective of the amount of return on those investments that it reasonably expects.

That is where the 'Frankenstein's Monster' comment comes in.

AENA experienced in handling the needs of smaller and remote airports at home

On the other hand, it could be argued that AENA domestically has plenty of experience of operating small and unprofitable airports, which are subsidised by Madrid, Barcelona and the mainland 'costas' and islands airports with their multitudes of foreign visitors.

The law which privatised it did not permit it to 'offload' those small airports.

Managing Congonhas is not for the faint-hearted

At the same time, Congonhas will be no easy ride either.

Situated in a heavily built-up area it is one of five Brazilian airports with slot restrictions, being permitted a maximum of 30 operations per hour. Short runways dictate that the largest aircraft operating there are A320 and Boeing 737 series.

The congestion existed before the Guarulhos airport opened in 1985 and did not improve afterwards. There are no known intentions to permit international operations there.

So AENA has inherited an airport with limited operations, which are unlikely to increase, on small aircraft, and with limited space in which to manipulate non-aeronautical activities.

The only real benefit it offers is its conveniently short distance from downtown and from the major business areas of Paulista, Faria Lima and Luís Carlos Berrini avenues, which still makes Congonhas a favourite of business passengers.

But if it cannot grow, then what is the attraction other than to hike fees?

If it didn't exist and there was an empty piece of land two kilometres square, the last thing you would build there would be an airport.

Hemmed in on all sides - Congonhas Airport, São Paulo BR

Source: Google Maps

Despite these issues there has been some passenger traffic growth

Traffic growth has been broadly able to keep pace with that of the Guarulhos airport (+3.5% vs. +4.8% at Guarulhos in the period 2012-2019; 2012 being the first year of the concessions). Also, that it is growing again twice as fast in 2022 as Guarulhos.

And AENA will be able to take some comfort from the fact that Congonhas has outscored the average growth rate of domestic traffic throughout Brazil in the same period (+1.9%).

Growth of 3.5% per annum over eight years, on average, though, is hardly noteworthy.

São Paulo Congonhas Airport: annual traffic, passenger numbers/growth from 2012 to 2022

Source: CAPA - Centre for Aviation and INFRAERO

North Block winner Novo Norte Consortium is based on two bus terminal operators - but one has airport terminal management experience

Turning briefly to the other two blocks auctioned in this round, the Novo Norte Consortium, formed by the Brazilian companies Socicam and Sinart, beat off (the already entrenched in Brazil) VINCI Airports for operating rights to the airports in the Pará state capital Belém (Val de Cans Airport) and the Amapá state capital Macapá-Alberto Alcolumbre International Airport.

Its winning offer was BRL125 million, 120% above the minimum bid.

Estimated revenues over the concession period are BRL1.9 billion (USD367.61 million).

Both airports are exclusively - or almost exclusively - domestic, but are well served by the country's main airlines (LATAM, Gol, Azul).

Again, both concessions are valid for 30 years.

Originally a bus terminal operator - before branching out into ports, airports, parking lots, shopping centres and citizen service centres and, from 2008, launching operations internationally in terminals in Chile and Peru - Socicam is already established as the largest private airport operator in Brazil, in the sense that it manages 24 airport terminals throughout the country.

Grupo Sinart is also powerfully positioned in the bus sector, managing more than 35 bus stations throughout Brazil.

General aviation block fails to generate a premium over the asking price

Finally, the General Aviation Block was awarded to the XP Infra IV FIP EM INFRASTRUCTURE consortium for BRL141.4 million (USD27.36 million), which was +0.01% over the asking price. XP Infra is a Brazilian Infrastructure Fund.

The concession comprises São Paulo Campo de Marte Airport and Rio de Janeiro Jacarepaguá Airport. The group was the only interested party in this transaction.

Estimated revenues over the concession period are BRL1.7 billion (USD328.92 million) and again, both concessions are valid for 30 years.

Some potential for commercial operations at Campo de Marte but not at Jacarepaguá

Launching operations in 1920, the Campo de Marte Airport (operated by the state entity Infraero) was the first airport built to serve the city of São Paulo.

The airport is practically in the city centre. It is a joint civil/military facility and receives no scheduled services. A number of flight schools, charter operators and general aviation aircraft are based at the airport and from 2012 to the present day it has suffered continuous and heavy traffic losses.

The Jacarepaguá Airport (also known as Jacarepaguá Roberto Marinho Airport) is located in the neighbourhood of Barra da Tijuca in Rio de Janeiro. Again, the airport has been operated by Infraero. Overall its traffic losses have also been heavy over the past decade, although there was strong growth in a couple of years.

Campo de Marte has a 1,600m runway that could handle commercial traffic, but Jacarepaguá's is only 900m and probably could not.

AENA would not be happy if commercial operations were subsequently authorised at Campo de Marte, and in any case - its physical location is every bit as constrained as that of Congonhas.

Is the decade-old process now starting to run out of steam?

One question that arises out of this concession tranche is: is it running out of steam now?

The multi-state block with Congonhas that AENA won went for well over the asking price and was in line with the original concessions, which included Guarulhos.

But in the case of the much smaller two-airport North Block the final price was a great deal less over the asking price, while with the general aviation airports it was at par.

Meanwhile, estimated revenues for those GA airports, neither of which have proved their value over a decade, are almost as much as for the North Block airports.

The eighth concession round, next year, will roll up Rio's Santos Dumont Airport, the domestic equivalent of Congonhas, with a reconcession of that city's international Galeão airport, which has been surrendered by the original concessionaire.

If there is to be a ninth concession round (not many airports remain now), more anomalies could follow.

In the meantime, the next step for this auction will be the receipt of the qualification documents of the winning bidders of each block, which is scheduled for 25-Aug.

The signature of the concession contracts must occur after the approval of the result by ANAC's board of directors, on a date yet to be defined.