Luis Muñoz Marín International Airport to become world-class facility
Luis Muñoz Marín International Airport ready for takeoff under private management
Complaints on regional airports, federal funding and concessions are misinformation
Far from selling off or leasing for cheap a prime government asset, the proposed 40-year public private partnership (P3) at the Luis Muñoz Marín International Airport (LMMIA) is the only feasible way Puerto Rico can properly maintain and invest in what is the main gateway to the island and a crucial piece of infrastructure for its economic development, top administration officials told CARIBBEAN BUSINESS.
Residents and visitors who use the airport will feel its improvements brought by private management right away.The deal is about much more than ensuring clean bathrooms as the private operator will be introducing top-notch services, such as Wi-Fi and a VIP lounge worth its name, and cutting-edge retail, commercial and entertainment offerings, the officials added. The investment and operational improvements made by the private administrator will ensure that the airport's value will be maximized over the life of the 40-year contract.
"Forty years from now, when the contract expires, we will receive back a facility that will be in much better condition than today and providing much better service than what we are delivering today," Government Development Bank (GDB) President Juan Carlos Batlle said.
"The proposed long-term lease of the airport is the most effective way of ensuring the long-term development of the airport into a world-class facility," added Public-Private Partnerships Authority (PPPA) Executive Director David Álvarez.
The Federal Aviation Administration (FAA) is open to receiving public commentary on the deal through Nov. 19, and is expected to decide whether to approve it by the end of the year.
Criticism, especially by opposition lawmakers, has been on the upswing since the government announced in late July a $2.57 billion deal with the winning Aerostar Airport Holdings LLC consortium, reaching a crescendo just before the recent public hearing held by the FAA at a hotel in the Isla Verde area of Carolina.
Yet, while there are legitimate concerns regarding such a sweeping administrative change at LMMIA, many of the complaints don't hold up to scrutiny against the facts of the actual contract. Officials say there are sufficient safeguards in the deal to ensure that the public interest, as well as of current airport stakeholders, is protected.
Most importantly, the deal won't only improve the Ports Authority's bottom line, but it will also modernize and grow Puerto Rico's main airport and its image to all visitors worldwide,which will have a beneficial effect on the tourism industry and throughout the general economy, officials said.
"We want to transform the airport in a very positive way. We want to grow the airport in terms of passengers and airlines. We have lost a lot of connectivity to the rest of the world, and we really need to be connected to the global economy," the PPPA's Álvarez said.
"The spirit of this is growth in terms of passengers, getting back connectivity, increasing competitiveness, investing in the infrastructure and having a world-class airport," he added.
REGIONAL AIRPORTS' CONCERNS AND OTHER MYTHS
Much of the criticism of the LMMIA P3, spearheaded by Popular Democratic Party Reps. Jaime Perelló and Charlie Hernández, has focused on Section 3.22 of the contract, which they claim will hamper development of Puerto Rico's regional airports by requiring the government to provide compensation to the private operator of LMMIA for any lost business to other local airports. This criticism that this clause restricts the growth of these other regional airports is just not true. The restrictions do not exist.
The three regional airports currently constituted as so-called 139-certified airports by the federal government (which can have scheduled flights with more than nine passengers on board) are specifically exempt from the clause. These are Aguadilla's Rafael Hernández, Ponce's Mercedita and Vieques' Antonio Rivera Rodríguez airports.
In addition, this section of the contract, which has certain restrictions on non-139-certified airports, lasts for 20 years and also doesn't restrict the other airports from continuing what they are doing now or increasing activity related to cargo and charter flights. Nor does it stop such airports as Mayagüez's Eugenio María de Hostos and Ceiba's José Aponte de la Torre from seeking the federal 139 certification, according to the contract.
Álvarez said the clause is "fully consistent" with Ports' regional-airport development plans, as well as with the government plans regarding the development of the former Roosevelt Roads Navy base, which the government has estimated will require an investment of more than $400 million and a 20-year development time frame before Ceiba's Aponte de la Torre Airport is ready to launch full-scale commercial operations.
Batlle said many steps would have to take place before developing another international airport in Ceiba, including the construction of required jet-fuel infrastructure, which isn't functioning any more, and new area development to drive up demand to the point of a second large airport being needed.
The clause, Álvarez said, is aimed at protecting the interest of the private administrator to protect it against a loss of income prompted by the deliberate action of the government. It doesn't prohibit the development of the other airports in any way, but would compensate the operator under the unlikely situation in which the government developed an international airport that essentially looked to "steal" major business from LMMIA.
That means that airlines currently servicing LMMIA could add flights to a future developed Ceiba airport without triggering the clause, and could probably cancel a flight or two at the main airport without the clause kicking in. It has to be a "significant" loss of revenue tied to a deliberate government action to activate the "reasonable restitution" clause, Álvarez explained.
In the case of the Aguadilla, Ponce and Vieques airports, they are exempt from the clause and could attempt to steal business from LMMIA even with direct government action and not have to pay restitution, according to Section 3.22 of the contract.
In a related concern, critics said the deal would also eliminate an important source of financial support for the regional airports because LMMIA revenue subsidizes these operations. However, that's not so. Ports has always commingled funding between its maritime and aviation operations and no single revenue source has been specifically applied to the regional airport system. In addition, a 1999 settlement prohibits the inclusion of regional airport costs in the LMMIA rate schedule.
Moreover, the government will use the estimated $552 million it will receive over the life of the 40-year contract to support regional airport operations, Álvarez said. Those payments begin at $2.5 million annually during the first five years of the contract, but then steadily increase over the course of it.
Ports is also working on a plan, in collaboration with the FAA, to cut costs and increase revenue at the money-losing regional airports, as well as increase traffic at them.
However, having 11 regional airports on a 100 mile by 30 mile island that serves 4.3 million passengers annually is likely unsustainable.
"We have 11 airports and not one of them is world-class. LMMIA now serves nine out of every 10 passengers in Puerto Rico, with one out of 10 using all the other airports combined. This deal is about making that one airport that serves nearly all local passengers and visitors world-class," Álvarez said.
Another complaint is that this is simply bad business for Puerto Rico, and the federal funding available to the airport will ultimately go to support the bottom line of the new airport manager rather than assisting the airport. However, while the new administrator will apply for and receive federal funding, such funding still has to be spent entirely on airport improvements. Moreover, federal funding has been on the decline and is due to shrink further because of an expected $1.2 trillion U.S. government-spending cut.
The local government estimates that the $1.4 billion capital-improvement plan proposed by the new administrator will be paid for with 70% in private capital and 30% from federal funds.
The deal also doesn't contemplate any increase in rates and charges to airlines that use LMMIA and should result on the contrary, in lower travel costs, Álvarez said.
Another major concern has been the job security of Ports employees who work in the LMMIA operation, but Álvarez said their jobs will be guaranteed. There are 32 direct jobs at LMMIA and an additional 236 Ports employees working off the site whose jobs are tied to the airport.
Workers can choose to remain as Ports employees and their jobs will be guaranteed, although they will likely be assigned new tasks. Employees can also interview with Aerostar for a job, with Álvarez stating the operator will present a "very competitive" compensation package. Employees with more than 10 years' experience can keep their Ports retirement package, with Aerostar picking up the government's employer contribution.
Other complaints concern the future of concessionaires at the airport, who will have to negotiate lease renewals and new opportunities with the private operator. Government officials underline, however, that the consortium will respect all current concession contracts.
The new management will likely shutter portions of the airport not currently in use, renovating them for future use as part of its redevelopment plan. That is likely the case of the American Airlines terminal's areas, of which only a small portion is in use with the decline of the airline's operations. Therefore, it may make sense for some concessions, including the big Margaritaville restaurant, to relocate to busier areas of the airport, but there will be no concession cancellations.
"The operators want to increase the number of concessions to increase their revenue. This will create jobs, not eliminate them," the GDB's Batlle said.
THE DEAL IN DETAIL
If approved by year's end as expected, the $2.6 billion deal will immediately give the government $615 million upfront and another $552 million in annual payments throughout the 40-year life of the contract, with annual payments starting out at a fixed $2.5 million through the initial few years.
The government will use $505 million of the original upfront payment to pay off Ports Authority debt, including $385 million tied to the LMMIA. The remaining $110 million will be used for the operation of regional airports, to fund an early retirement program for Ports workers and to cover certain contract obligations and transaction costs.
The $552 million in proceeds the government will receive over the life of the contract will be used for other Ports projects, but regional airport operations will take a priority. In addition, Aerostar will pay the municipality of Carolina about $500,000 in annual taxes.
Most of the remaining $1.4 billion will go toward construction and investment to improve the airport, with $200 million being invested in the first three years of the contract.
The construction work should create 3,500 jobs in the next three years and 13,000 in the next 10 years. The biggest improvement will be the construction of a new 35,000-square-foot (3,250-square-meter) area with retail outlets and other amenities that will become the airport's new center, officials said. The first improvements will target public bathrooms, lighting, stairs, air conditioning, Wi-Fi and the parking lot's security system.
"We will see results immediately. The contract calls for Aerostar to invest $50 million in improvements to the airport during the first three years; nevertheless, they have further committed to increase that amount to $200 million," Álvarez said. "These funds will be used for infrastructure development and many other areas such as landscaping and passenger-facilities improvement, among others."
"They are proposing to reconfigure the terminals around a center commercial area, so passengers can directly access services when arriving at the airport. This will be very positive for them in terms of convenience, and to the businesses in the area. Most big international airports are designed that way," Batlle added.
Beyond the money, Aerostar is expected to deliver "world-class" service that all airport users will experience firsthand. The operator will be tied to International Air Transport Association standards in a series of areas, including check-in and baggage-claim wait of 12 minutes or less, a five-minute wait for taxis, and public restrooms that are cleaned every 90 minutes. Consistent violations of these standards would be grounds for the government to rescind the contract.
Moreover, Aerostar is expected to increase flights and passenger traffic. Aerostar Airport Holdings comprises Grupo Aeroportuario del Sureste SAB de CV, which operates nine airports in Mexico; and Highstar Capital, an infrastructure investment company which has invested in Baltimore and London and has close relationships with the U.S. cruiseship industry, British Airways, Lufthansa and Air France, among others.
In exchange for its $2.6 billion investment, Aerostar will take over airport operations, receiving fees from airlines and concessionaires. It will also continue receiving federal funds under two programs, one where federal grants are aimed at specific projects and passenger service charges (PSC), which are also aimed at airport improvements.
In addition, the contract stipulates that the private administrator will pay the Ports Authority $250,000 a year for the agency to hire personnel or contract a third party of its choosing to monitor compliance with the contract, Batlle said. The GDB will also be involved in the monitoring process.
Álvarez said the P3 structure was chosen because, under it, "there is alignment of interests among stakeholders to enhance the value of the airport."
Under a simple management contract with a private operator, the government couldn't use deal proceeds for non-airport uses, such as paying off a wider portion of Ports debt as it currently plans to do. And under a management contract, the government couldn't count on the private capital that Aerostar is bringing to the deal, ensuring the well-being of the airport through a sustained capital- improvements program.
"One of the main purposes of this transaction is to lower Ports Authority debt as much as we can; we will eliminate as much as 45% of the debt, and with the remaining funds, we will restructure the rest of the debt so as to give Ports better financial stability," Batlle said.
Most importantly, however, under the P3 structure, Aerostar will have the incentive to grow airport operations because they will increase their profits by doing so, and that is the other driving goal of this transaction, after decades in which the LMMIA stagnated, losing airlines and passengers as other airports stepped up to increase traffic.
"Aerostar has already submitted a plan to increase traffic at the airport during the first year. The company has a specialized unit of route development that is projecting that it will open some routes immediately," Álvarez said. "We expect the airport to grow in terms of traffic and passengers. This will have an immediate impact on our local economy by fueling growth; additional passengers visiting the island will spend money in hotels, services, retail purchase, taxis and restaurants, among others."
THE TRACK RECORD OF AIRPORT P3S
The Puerto Rico government has failed to manage the airport effectively over the past 20 years, with its hardships accelerating since 2000.
A skid in competitiveness has kept air traffic essentially flat during the past 30 years, bouncing between 4.5 million and 5.5 million passengers, while other Caribbean airports have become more attractive, officials indicated. Puerto Rico's share of the Caribbean air-travel passenger market has fallen to 26% today, from 35% in 2005, according to Ports figures.
Despite LMMIA's recent decline, Puerto Rico's international airport is still the busiest in the Caribbean, with 4.2 million total boardings in 2011, and officials believe it has tremendous potential for growth as a natural air-transportation regional hub, as it was for many years.
One of the big failings has been a lack of continuity in capital works, management and air-traffic growth plans by the government. "Another important thing LMMIA will get from this transaction is management continuity. Ports has had 10 executive directors in 10 years; there is no way you can have effective management and long-term plan implementation under these circumstances With a private operator, long-term planning will be a possibility," Álvarez said.
Airport P3s are still a rarity in the U.S., with the LMMIA deal on track to be the first transaction of its kind in the U.S. under an FAA pilot program. However, Batlle, who last week discussed the deal in New York City at a forum sponsored by Bloomberg News, believes that is about to change.
"Traditionally, U.S. mainland airports have received more federal funds than LMMIA. These monies have allowed them to better maintain their facilities and, because of this, they haven't had the need to look at the private sector for these types of deals. With the upcoming federal budget cuts, this is about to change, and you will probably see more of these transactions taking place in the near future," he said.
Elsewhere, airport P3s have been quite successful at improving traffic. (See related sidebar on page 20).
CONFIDENCE IN RESTORING GROWTH AT LMMIA
Aerostar and government officials are confident that the LMMIA airline and passenger traffic will be able to grow under the consortium's management and that it will comfortably surpass projected passenger growth of 200,000 annually.
"The company is targeting direct flights to Mexico, other countries in Latin America and cities in the U.S. mainland West Coast; routes to Mexico City should be in place by early next year," Álvarez said. "They have also identified key markets with potential to Puerto Rico such as Canada, Europe, the Far East and Eastern European countries such as Russia."
The deal's financial partner, Highstar Capital, will also prove an asset to attract new business, Batlle said. "Highstar has long term investments in 32 of the main ports on the eastern coast of the U.S. and has excellent relations with the cruiseship industry. They could help bring in additional cruiseship passengers to the island."
In a recent interview, Aerostar President Agustín Arellano Rodríguez told CARIBBEAN BUSINESS that the first new route to open will probably be the Mexico City-San Juan route, which used to operate until Mexicana Airlines ceased operations. He called the route "attractive" to both the Mexican and Puerto Rican markets.
"If you add a new route three times a week to your normal capacity, this will add approximately 180,000 passengers a year. So just with one new route three times a week you already have the 200,000 additional passengers," Arellano said. "If you add more flights within the Caribbean, and then open routes to Europe and South America, even charters, for sure we will surpass this number. The 200,000 increase is for sure, but we are planning to surpass that figure."
Every increase of 200,000 of additional air passengers creates some 2,000 jobs, injects $138 million into the economy and raises some $17 million in new tax revenue, according to official government estimates. Each new domestic flight Aerostar attracts will inject $77 million into the local economy while each international flight will inject $105 million.
Arellano said new routes and more passengers would come through a mix of improved service at the airport and the promotion of routes and tourist packages. Aerostar's renovation plans are also substantial, and will make LMMIA into a much more welcoming place.
"We will do this working with the airlines and the government in the promotion of destinations to different tourist groups," he said. "We are committed to taking LMMIA to the next level to better serve the people of Puerto Rico and strengthen Puerto Rico's standing as a top tourism destination."
Airport P3s common throughout the world
Privately managed airports stem back to 1930s, continue to grow
Privately administered airports are in wide use in the Caribbean and Latin America, Europe and Asia, and are expected to become common in the U.S. shortly. The reason is simple. They have been hugely successful at driving up air-passenger traffic and flights while improving airport infrastructure, service and offerings.
These goals are a major factor in the Luis Muñoz Marín International Airport (LMMIA) public-private partnership (P3) agreement with Aerostar Airport Holdings LLC.
The Dominican Republic—whose Las Américas International Airport is the region's second busiest, with 2.5 million annual outbound boardings— placed its six airports under private management in 2000, while Jamaica and Curaçao leased out their major airports in 2003. During the 1990s, most South and Central American nations leased out their airports, and more recently, England, Germany, India, Australia, Russia, China and Singapore have gotten into the game.
Canada leased out its Vancouver and Montreal airports in 1992.
London's Heathrow Airport is one of the best known operated by a private operator, while Germany's Frankfurt Airport is perhaps the world's oldest, having been operated by the private Fraport AG company since 1936.
More and more airports are continuing to take the P3 route as the benefits of bringing private capital and expertise into airport administration become more apparent. Brazil also just announced plans to turn to the private sector to manage and drive investment at its five airports, to be ready to host the 2014 soccer World Cup and the 2016 Olympic Summer Games, as concerns have grown that with the improvements to date they won't be ready on time to handle the increased traffic.
In most cases, airport P3s have seen positive, and often dramatic, results. In Mexico, Cancún International Airport—leased out in November 1998 and run by one of the partners of Aerostar, the consortium vying to run LMMIA—saw its passenger base grow from 7.7 million annually in 2000 to 12.4 million in 2010.
Another positive example has been the Sydney, Australia airport, which saw its annual passenger base surge to 35.6 million in 2010 from 23.9 million in 2002, when it was first leased out.
Meanwhile, Lima, Peru's airport registered 8.8 million passengers in 2009; more than double the 4.1 million it registered in 2001, the first year of private management.
Singapore's privately managed Changi Airport was designated the best airport in the world in 2011, while the Frankfurt Airport has the third-largest amount of air traffic in the world. Heathrow has the fourth-largest.
Aerostar partner Aeropuertos del Sureste, which will be the airport operator at LMMIA, runs a total of nine airports in Mexico, including Mexico City's Benito Juárez International Airport.
Meanwhile, Highstar Capital, Aerostar's financial partners, has invested in London City Airport, as well as at 42 U.S. seaports through its investment in Ports America Companies. These include some of the largest ports on the U.S. East Coast, such as those at Miami, Philadelphia and Newark, N.J., as well as West Coast ports, including Los Angeles and Seattle.
Aerostar had to beat out a dozen world-class consortia, made up of the biggest airport operators in the world and the biggest infrastructure investors, who competed for the concession to finance, operate, maintain and upgrade LMMIA.
The original dozen bidders were: Fraport AG and Goldman Sachs Infrastructure Partners; GMR Infrastructure and Incheon International Airport Corp.; AENA Internacional; Puerto Rico Gateway Group (GE Capital Aviation, Allegheny County Airport Authority, TIAACREF, OpTrust, Airmall USA); TAV Airports Holdings; Grupo Aeropuertos Avance (GAA) Macquarie and Ferrovial Aeropuertos; Agunsa (Agencias Universales SA); Flughafen Zürich AG, Public Sector Pension Investment Board (PSP), Camargo Corrêa Investimento em Infra-Estructura and Gestión e Ingeniería IDC; Grupo Aeroportuario del Sureste (ASUR) and Highstar Capital; Grupo Aeroportuario del Centro Norte (OMA); Corporación América SA; and Advent InternationalCorp. (Advent).
Chicago to decide whether to relaunch grounded Midway Airport P3
Partnership model already in place at Florida’s Orlando Sanford Airport
Puerto Rico's plan for its international airport wouldn't have been the trailblazing first public-private partnership (P3) under the Federal Aviation Administration (FAA) pilot program had plans by the city government of Chicago to lease out its Midway Airport for 99 years, which would have raised $2.5 billion, gone through.
The Chicago deal fell apart in 2009 when financing dried up for Midway Investment & Development Co. LLC in the wake of the world financial crisis. The deal would have provided annual revenue of $130 million in passenger facility, concession and other revenue, a figure expected to improve markedly under private management. The company would pay the city $2.5 billion in exchange for a 99- year operating lease.
And actually, the Orlando Sanford International Airport, located about 45 minutes away from downtown Orlando, in Sanford, Fla., is currently run under a unique P3 structure.
The airport is administered through a P3 between the Sanford Airport Authority and TBI Airport Management Inc., which manages its international and domestic terminals, develops additional air service, and provides ground handling and cargo services. The P3's "unique blend of local government and private investment" and private management "has created service benefits for Sanford Airport airline customers and passengers," airport officials said.
TBI is a part of Abertis Infraestructura SA, the Spanish infrastructure management giant that has long-term concessions to operate Puerto Rico's PR-22 and PR-5 highways, as well as the Teodoro Moscoso Bridge.
Chicago City Hall's Midway Airport deal would have generated $2.5 billion, with $1.15 billion of the proceeds going to pay off airport debt, and another $900 million for city infrastructure projects and shoring up worker pension funds, according to a Chicago Sun-Times report. That left $225 million for police and firefighters, $126 million in airport projects and another $100 million to spend how the city saw fit.
Chicago is still considering taking Midway to private management and has until the end of this year to inform the FAA if it will move forward, according to the Sun-Times. The city awarded a five-year, $41 million contract to manage the airport, but city officials told the newspaper that the contract didn't preclude moving forward with a P3.
Under the FAA program, only one large hub airport can participate, so if Midway drops out, other large airports are expected to request participation. Puerto Rico's Luis Muñoz Marín International Airport (LMMIA) is considered a medium-hub airport by the FAA.
The Airport-Privatization Pilot Program began in 1996 and was aimed at allowing airports to tap sources of private capital for airport improvement and development. In 2012, Congress doubled, to 10, the amount of airports allowed to participate.
Besides LMMIA and Midway, the only other airport in the program is the Hendry County Airglades Airport in Clewiston, Fla., 80 miles from Miami International Airport. The county-owned, general aviation airport has a 5,603-foot runway, a general aviation terminal and hangars.