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Attractive airport infrastructure deals in Latin America. Part 1 - Santiago Airport Terminal

The Latin American continent is experiencing a great deal of both construction and privatisation activity in the airport sector.

In Feb-2015 the Chilean government selected a consortium for the concession of the Santiago Arturo Merino Benítez International Airport by which a new terminal will be built at the capital city airport of a country that is quickly gaining in importance regionally and globally.

As that procedure comes to a conclusion preparation work is already under way for the construction of the new Mexico City airport, one that was long delayed but which is being spoken of in some quarters as “probably the most advanced modern airport project worldwide.” This report  some details both of these important projects.

1. Introduction: the economic backdrop

Chile: Relatively unknown Chile has South America’s strongest sovereign bond rating

Chile has a market-oriented economy with high levels of foreign trade and a reputation for strong financial institutions and sound policies that have given it the strongest sovereign bond rating in South America. Exports of goods and services account for approximately one-third of GDP, with commodities making up some three-quarters of total exports. Of those commodities copper alone once provided up to 19% of government revenue though its contribution to GDP has fallen from 13.27% in 2011 to 9.76% in 2013.

From 2003 through 2013, real growth averaged almost 5% per year, despite the slight contraction in 2009 that resulted from the global financial crisis. Chile signed a free trade agreement with the US, which took effect on 01-Jan-2004 and now has 22 trade agreements covering 60 countries including agreements with the European Union, Mercosur (Latin America’s leading trade bloc), China, India, South Korea, and Mexico. It has joined the United States and nine other countries in negotiating the Trans-Pacific-Partnership (TTP) trade agreement (not to be confused with the problematic Transatlantic Trade and Investment Partnership, which has a similar acronym, TTIP).

The Chilean Government has accumulated surpluses in sovereign wealth funds during periods of high copper prices and economic growth. As of end 2012, those sovereign wealth funds - kept mostly outside the country and separate from Central Bank reserves - amounted to more than USD20.9 billion. In May-2010 Chile signed the OECD Convention, becoming the first South American country to join the OECD.

The country’s GDP is USD335 billion (2013 estimate), ranking it #43 globally. The latest GDP growth rate figure (2013 estimate) was 4.2%, ranking Chile #71 in the world by that measure. A dip in 2014 – attributed to falling copper prices - is expected to be followed by a consistent recovery through to the end of the decade.

GDP Growth of Chile (Percent change)

Inflation fell back to 1.7% in 2013 ranking Chile #52 globally. While it was expected to climb quite dramatically in 2014 it is anticipated this will be a blip and that an average rate of around 3% per annum will prevail in the following five years.

Inflation, average consumer prices of Chile (Percent change)

The unemployment rate declined dramatically between 2009 and 2013 and although it has bottomed out no significant increase is anticipated through to 2019. Chile ranked 62 globally in 2013 in this category.

Unemployment rate of Chile (Percent of total labour force)

The population is steady at 18 million and is expected to remain at that level until the end of the decade.

Finally, Chile is proving to be a popular place to visit, for business or leisure purposes. Tourist arrivals grew by 33% between 2008 and 2013.

Chile annual tourist arrivals, 2008-2013

Chile allocates USD18 billion to public works projects through 2021 – 3.5% of GDP

Economic confidence in the country has prompted an array of infrastructure spending across many sectors. In Jul-2014 President Michelle Bachelet presented a national infrastructure plan that includes USD9.9 billion in new concessions until 2020 and USD18 billion in public works projects until 2021, including highways and reservoirs as well as airports. The Costanera Central highway for example dwarfs the airport expenditure at almost USD2 billion but the Santiago Airport concession is the first large one in any sector.

The plan also involves the expansion of regional airports. At present the CAPA Airport Construction & Cap Ex Database lists only four small airport projects other than at Santiago with a value of USD112 million in total, through to 2020.

The overall programme will increase public infrastructure spending to 3.5% of GDP from the current 2.5%. However, the investment is still below the USD58 billion that the Chilean Construction Chamber estimates the country needs to pump into infrastructure in the next four years.

Mexico: not a five-star rating like Chile’s but benefits from membership of NAFTA

Mexico’s economy does not carry the same five-star rating as does Chile’s but it has drawn many benefits from its membership of NAFTA (the North American Free Trade Agreement) along with Canada and the US since 1994. Mexico’s USD1.3 trillion economy, supporting a population of 120 million (world ranking #12) has become increasingly oriented toward manufacturing in the 21 years since NAFTA came into force, frequently drawing both low and hi- tech manufacturing businesses from its neighbours.

Mexico has become the US' second-largest export market and third-largest source of imports. But per capita income is only one-third that of the US while income distribution remains highly unequal. 47% of the population is below the poverty line (asset-based definition).

That is an important reason why ‘low cost’ airlines failed initially to have the same impact as they did in most other countries; they weren’t low cost enough, with many people preferring to stay with the bus as the primary means of transportation. Right up until 2007 LCC penetration was below 10% as measured by seat share. (Latterly there are many budget services in the domestic market [around 60% of all seats], but LCC representation on international services remains low [around 22% of all seats]).

90% of Mexican international business is covered by free trade agreements

Mexico has free trade agreements with over 50 countries including Guatemala, Honduras, El Salvador, the European Free Trade Area, and Japan - putting more than 90% of business under free trade agreements. In 2012 Mexico formally joined the Trans-Pacific Partnership negotiations and formed the Pacific Alliance with Peru, Colombia and Chile.

Mexico's current government, led by President Enrique PENA NIETO, emphasised economic reforms during its first year in office (from Dec-2012), passing education, energy, financial, fiscal and telecommunications reform legislation. The tri-party "Pact for Mexico" reform agenda aims to improve competitiveness and economic growth across the Mexican economy.

Using three of the same criteria as that applied in the case of Chile (GDP growth, inflation, and unemployment rate), it is clear that:

1. Mexico experienced a similar GDP growth dip in 2013-14, in this case a steep slowdown in the industrial sector being the root cause. A recovery is now in place but not enough to avoid budgetary cutbacks as described later.

GDP Growth of Mexico (Percent change)

2. Inflation has come down from a high of 2.3% in 2009 and looks set to stabilise around the 3.3% mark in 2015/2016.

Inflation, average consumer prices of Mexico (Percent change)

3 .Unemployment rates are in decline and should continue to do so.

Unemployment rate of Mexico (Percent of total labour force)

While these data are only broad brush strokes one could say with some confidence that both countries’ airport infrastructure would appear attractive as an investment prospect both domestically and internationally. That is what happened in Santiago and what may happen in Mexico City although the new airport there is only in the first stages of what will be a long road to completion and potentially fraught with difficulty.

2. The Projects

2.1 Chile's Santiago Airport terminal concession

The Chilean Ministry of Public Works first unveiled its USD700 million master plan for Santiago Arturo Benitez International Airport in May-2013. The project would increase airport capacity to 29 million passengers per annum by 2030 and to 45 million passengers by 2045, and make the airport the most modern in South America. Phase 1 of the plan rapidly got underway, a USD50 million expansion of the existing facilities to bring capacity up from nine million ppa to 15-16 million ppa p/a, and was completed throughout 2013 and into mid Jul-2014.

The Phase 1 works are detailed below.

  • Expansion of terminal area to 7700sqm and increasing capacity to 16 million passengers per annum;
  • Installation of exclusive shopping and dining areas to expand commercial offerings;
  • Increase in immigration control booths from 24 to 36, increase in baggage carousels from nine to 12, increase in hand-baggage inspection points from five to seven;
  • Construction of a remote boarding lounge to be accessed via shuttle buses;
  • Increase in baggage handling system capacity from 650 to 798 bags per hour.

Phase two was then launched, the construction of a new 186,000sqm terminal building (T2), remodelling of the current T1 for domestic traffic only and the renovation of taxiways and aprons. The award of the airport's expansion tender was to take place in 2014, with the winner to assume operation of the airport for 15 years from 2015. The tender was to be launched in 2H2013 but was delayed until 1H2014.

In excess of 30 companies pre-qualified to participate in the tender. In May-2014 the concession was amended by the Ministry of Public Works to remove restrictions on the number of participants in the process in order to lower barriers to entry and streamline the tender.

The tender was officially launched on 20-Jun-2014, with bids due by 30-Sep-2014. Interested parties included Mexico's Grupo Aeroportuario del Pacifico (GAP), Argentina's Corporación América, Colombia's Opain, Germany's Fraport and Flughafen Munchen and France's Aeroports de Paris (including subsidiaries Aéroports de Paris Management and ADP Ingénierie); also Vinci. Subsequently the bidding deadline was extended to 04-Feb-2015 to allow interested parties more time to prepare their bids for the project and to deal with the number of queries presented by potential bidders.

13 parties were pre-qualified, those named above plus, inter alia, Ferrovial, AENA (despite its own [stalled] privatisation), OHL and Sacyr – all Spanish. Six firms were expected to submit formal bids. Five did so.

By now AdP and Vinci Airports had formed 'the Nuevo Pudahuel’ (NP)consortium to represent their bid, identifying Santiago as a regional hub, an access door to Latin America from Europe, the United States and Asia in the future. Pudahuel is an alternative name for the airport. In the meantime the airport completed (Dec-2014) its runway maintenance project in Dec-2014 so the runway would be fully operational in Mar-2015 for larger aircraft operations.

NP concession bid accepted on price competition grounds; revenue ratio fixed at 77.56%

The NP consortium was selected by the Chilean government as having presented the best offer for the concession. The ‘preferred bidder’ classification means its bid was the most competitive, offering the highest revenue share, but the decision must still be ratified by the government.

Its composition is Aéroports de Paris (45%), VINCI Airports (40%) and Italy’s Astaldi (15%), a construction company. The new concession contract will be granted from 01-Oct-2015 (at the end of the current one). Renovation of existing installations and ongoing redesign and extension of the current terminal remains a key part of it along with the funding, design and construction of the new terminal; also the operation and commercial development for the duration of the concession (20 years) of the main infrastructures, existing terminal and new terminals, car parks and future property developments.

The financial offer was fixed at 77.56%, expressing the proportion of revenue from the concession to be turned over to the government. The projected investment, influenced by the variation in the $ (USD) exchange rate is now put at USD900 million.

Building works will be executed by Astaldi (50% of conception-construction pool) and Vinci Construction Grands Projets (50%).

A transition process will be enacted with immediate effect before the NP consortium takes over the concession from Oct-2015. The current operator, SCL Terminal Aéreo Santiago, S.A. Sociedad Concesionaria, chose not to bid for the concession. SCL, which held the concession since Nov-1997, included Canada’s Vantage Group, which has acted as an investor, developer and project manager, along with Chile's Agunsa and Spain’s Grupo ACS. That concession was centred on a BOT contract for the existing terminal which was completed in 2001. In 2012, SCL negotiated an extension to the concession agreement with the Chilean government through to Sep- 2015.

Both AdP and Vinci have spoken glowingly of the airport’s future prospects, both as a gateway and as a hub for pan-Pacific traffic. AdP’s chairman talks of a "strong potential for growth and the creation of new routes that will enable it to become one of the main entry points to Latin America from Europe, the United States and soon, from Asia and of the project being consistent with the international strategy, will allow Aéroports de Paris to make full use of its expertise as a major airport operator and its engineering know-how.

He went on, “All the expertise and know-how of our consortium, together with that of our Italian partners, will be focused on this major project; a project which is not only fundamental to the success of our mission as concession holder, but also fundamental to the country as a whole, its sphere of influence and its population.”
 
VINCI’s chairman and CEO declared “very high ambitions” for Arturo Merino Benitez Airport, adding that the project will now spearhead its airport strategy on the South American continent.

Which does raise the questions of why an incumbent operator since 1997 (18 years) chose not to pitch for this 20-year concession and why such abundant initial interest was whittled down to five final bidders?

Santiago’s potential may be seen to outweigh pragmatic judgement

Airport concession agreements in nearby Brazil in both tranches of the privatisation process there have extracted huge sums in fees. NP has, so far, not given any indication of future revenue and income at Santiago. There is a lot of investment dollar to go in, for a little over 22% of the revenue. Could it be that the potential that Santiago holds has influenced bidder strategy to a greater degree than pragmatism calls for? That would be par-for-the-course for the region.

One potential impediment to growth is that the civil aviation facilities are shared with the Chilean Air Force.
 
In its favour it must be said that Arturo Merino Benitez Airport does hold its own statistically. While its 2014 passenger total of 16 million is only half that of Brazil’s Sao Paulo Guarulhos, the continent’s main hub, it is the sixth busiest gateway in South America, and is growing at around 10% per annum; a similar rate to that of Guarulhos and one that it has kept up consistently (on average) over two decades.

Santiago is regarded by many as Latin America’s most modern metropolitan city and the Chilean government is keen to benefit from such approbation and to position the airport as a Latin American entry point in particular for the growing number of trans-Pacific routes that connect it with Asia rather than the traditional European markets (and where Chile already has trade agreements with China, India and South Korea as mentioned earlier). There are existing non-stop services to Europe, Oceania and the Americas.

The following charts provide a snapshot of the airports’ current standing.

Santiago International Airport Network Summary (at 16-Feb-2015)

Total Airlines

25

Domestic only

2

International

23

Total non-stop passenger destinations

43

Domestic

14

Africa

0

Asia Pacific

2

Europe

2

Latin America

19

Middle East

0

North America

6

Total non-stop freight destinations

9

Domestic

1

Africa

0

Asia Pacific

0

Europe

0

Latin America

7

Middle East

0

North America

1

Santiago International Airport capacity seats, per week, by carrier (16-Feb-2015 to 22-Feb-2015)

LAN Airlines maintains its hub at the airport, as well as regional carriers PAL Airlines and Sky Airline. Connections to all Latin American capitals are offered by LATAM-group carriers and most national carriers in the region.


Santiago International Airport international capacity, seats by region (16-Feb-2015 to 22-Feb-2015)

Santiago International Airport capacity seats share by carrier type (16-Feb-2015 to 22-Feb-2015)

Santiago International Airport capacity seats share by alliance (16-Feb-2015 to 22-Feb-2015)

Santiago International Airport movements by hour for typical day (Monday) (16-Feb-2015 to 22-Feb-2015)

Taking as broad an overview as possible the airport scores highly on not being overly-influenced by home-based carrier group LATAM (66.7% or two-thirds of seats); having a growing proportion of routes that are not South American (exactly one third); being used almost exclusively by full service carriers; having a strong alliance presence (though they are dominated by oneworld) and having a full 24-hour operating span with no periods closed to operations.

For a previous report (2012) on Chilean airport infrastructure investment, refer to the report: http://centreforaviation.com/insights/analysis/chile-announces-usd14bn-in-infrastructure-investment-opportunities-77878

The second part of this report will detail
The new Mexico City airport at Texcoco

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