Up, Up, and Away!

Having criticized Brazil for the mishandling of the recent auction of Pre-Salt oil fields, it is only fair that I give them credit for the success of their latest auction of airport concessions.

As the FT reports,  Singapore’s Changi Airport, together with Brazil’s Oderbrecht group, paid $8.3BN to run Rio’s Galeão airport, whilst a consortium of Zurich and Munich Airports teamed with CCR to win the Belo Horizonte Airport concession with a bid of $790M.

This comes after similarly successful auctions last year for concessions to operate São Paulo’s Guarulhos, Viracopos in Campinas and Brasilia’s airport.

All the concessions were contested by a variety of consortia, comprising local and international players, and in contrast to the oil auction went for multiples of the minimum bid price. Current airport operator, Infraero, will remain as minority partner of all the projects ostensibly for investment purposes.

The success of these auctions shows just how profitable for the country well constructed concessions can be. The $9bn investment for the latest auction will help to close some of the budget deficit; the international portion will boost the Capital Account, whilst future expansion and improved efficiency will boost economic growth. All this comes at a time when people are worried about slowing growth and a widening current account.

Meanwhile Infraero, a pretty poor airport operator, is going to get instruction from some of the world’s best airports on how to do things better, and will have a strong financial incentive to follow that advice.

What are the opportunities that the winning bidders are buying?

The concession for Guarulhos last year stipulated increasing aircraft movements from 46 an hour to 56 an hour. Heathrow operates at 54 on a daily average, but operations are restricted between 23:00 and 07:00, so obviously operates at a much higher rate during the day. I assume the concession for Galeão stipulates similar increases.

Increased plane movements are not the only source for increased traffic. I am embarrassed to say, but I do not know if either airport is capable of handling the new A380. Having said that, my various journeys through both suggest not, as they struggled to handle even midsize jets. If carriers are able to use the newer bigger jets, passenger traffic would increase dramatically, yet the investment necessary to accommodate these jets adequately was way beyond Infraero’s capabilities.

Anyone who has travelled through Changi, Heathrow, or even Cancun will tell you that the opportunities for shopping at these airports is tremendous. From the ability to buy a decent meal before boarding the flight, through to buying an iconic last minute gift, you have a captive audience that is looking for something to help while away the time.

Some airports, like Heathrow, set a maximum return so shopping profits offset landing and parking fees, whilst others, such as Cancun allow the operator to keep both revenue streams. At first sight it looks like these Brazilian concessions fall into the later category, making them more valuable.

Finally, these airports suffer from the same poor reputation that all Brazilian ports do for freight handling, the famous gasto do Brazil. More efficient handling will allow for greater transportation of high value cargos; Heathrow handles about 1.5 Million tons of cargo a year.

So that’s the opportunity.

More recently several of the Canadian Pension funds (CPPIB and AIMCo),  have expressed doubts about the valuations that Alternative Investments including infrastructure deals are currently going for. They didn’t specifically mention these deals, but it would be reasonable to assume that they looked at them long and hard given their track records not only in infrastructure but also Brazil.

It would also be good to know how much these bids are dependent on BNDES funding, rather than commercial rates. The size and composition of the consortia means they should have no problem getting long-term funding rather than depending on the National Development bank.  Subsidized funding should be directed to projects that do not enjoy such access to long-term funds, whilst projects like this would be invaluable for helping develop and deepen local bond markets.

Finally, returning to one of the themes from my opening post, these deals show that the slow money that measures deal success over decades rather than months isn’t put off by short-term variations in exchange rates or the threat of QE tapering, to them that is just noise.