Home This Week Front-Page Story PPP for Luis Muñoz Marín Airport in 2011
Issued : Tuesday, September 7, 2010 12:00 AM
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PPP for Luis Muñoz Marín Airport in 2011

By : CARLOS MARQUEZ
Edition: September 9, 2010 | Volume: 38 | No: 35

PPP for Luis Muñoz Marín International Airport preparing for takeoff

Upfront lump sum to the PRPA and $167 million in capital improvements expected; deal to be closed in 2011 between a private concessionaire and Ports Authority










It has become increasingly apparent that Luis Muñoz Marín International Airport (LMMIA) in Carolina does not adequately serve the needs of Puerto Rico’s air travelers, nor does it provide a substantial financial benefit to the Puerto Rico Ports Authority (PRPA), the public corporation that oversees operations at the Caribbean region’s largest and busiest airport.

The causes of the decline in quality of services at LMMIA are the result of several factors, the most important of which are recent cutbacks in air passenger service to Puerto Rico by some key carriers, especially American Airlines and American Eagle, the negative impact of the global economic slowdown on air travel and other forms of international transport and increased competition from other destinations in the greater Caribbean region, most notably the Dominican Republic and Miami.

Beyond these industry factors, ongoing issues at the PRPA, including a fl agging financial performance, poor credit profile, reliance on Government Development Bank (GDB) credit lines, misalignment with the objectives of the airlines and deficiencies in specialized airport managerial practices, limit LMMIA’s ability to improve its operations.

As such, the PRPA has concluded that it must significantly change the way LMMIA currently operates. To accomplish this, PRPA has determined that it must leverage private-sector expertise through a public-private partnership (PPP) to improve service delivery at the airport.

The airport PPP is one of 13 PPP projects the administration of Gov. Luis Fortuño expects to close by 2013, with an investment of $4.537 billion. Another 21 projects will continue through 2017, for a total cumulative investment of $6.214 billion and the creation of 99,735 jobs.

Alberto Escudero, executive director of the PRPA, said his public corporation “has determined that the PPP should include a clear identification and transfer of risks associated with the future capital and operating improvements of LMMIA between PRPA and a private consortium, implement a capital improvement plan to upgrade and enhance airport infrastructure,identify and realize additional revenue sources that will improve the airport’s financial profile along with its services and amenities,and identify and implement cost-management initiatives that will also contribute to improve the airport’s financial profile, making it a more attractive partner for existing and new air carriers.”

Request for qualifications (RFQ) to operate LMMIA are expected to be issued before the end of the year and request for proposals (RFP) should follow in early 2011, government officials say.

David Álvarez, executive director of the Public-Private Partnerships Authority (PPPA), explained that a transfer of risk out of the hands of the cash-strapped PRPA is a vital component of switching to a PPP model for LMMIA operations (see chart on page 19).

“PRPA has elected to implement a PPP and rely on private-sector expertise through a long-term lease of the airport to a consortium that includes a concessionaire and an airport operator,” he said. “A concession agreement between the concessionaire and the PRPA would shift a large part of the risk to the private sector, while PRPA retains the facility.”

Under a PPP arrangement, PRPA will grant the concessions to a consortium, which is usually composed of an infrastructure capital fund and an airport operator. Depending on the amount of new construction, a construction company may join the consortium.

It has been determined that a $167 million investment in capital improvement projects is needed at LMMIA. That is money the PRPA doesn’t have nor can obtain through borrowing on the bond market given its low credit rating. In addition to the investment, the PRPA also expects an upfront payment—of an amount to be negotiated—by a lessee that will offset repayment of LMMIA debt.

Taking into account the project costs, the PRPA would be able to realize upfront net proceeds from a PPP transaction within the scope and framework of the U.S. Federal Aviation Administration (FAA) Pilot Program, versus the unfavorable financial impact of implementing the projects on its own. Thus, LMMIA could be the first airport to carry out a concession under the FAA Pilot Program (see side bar, “What are the Federal Laws for Airport Privatization Programs?”)

“Lump sum is a structure that is under evaluation,” Álvarez said. “The PRPA can also evaluate a revenue-sharing structure or a combination of lump sum and revenue sharing. However, given the precarious fiscal situation of the PRPA, it is important to have a lump sum payment that will prevent the PRPA from further fiscal deterioration.

“The value [of a PPP arrangement] is clear: net proceeds in present value terms under a PPP exceed the net costs in present value terms under the status quo.”

According to the “Affordability analysis” section of the “Study of Desirability and Convenience for Luis Muñoz Marín International Airport” (June 2010), prepared by the PPPA and the PRPA with the assistance of the PRPA’s financial advisor Credit Suisse Securities (USA) LLC: “The magnitude of the upfront payment will be determined through an extensive auction process whereby potential concessionaires will base their bids on the perceived level of economic output that LMMIA could conceivably generate over the prolonged lease period, accounting for certain operational upgrades and required capital improvements funded by the Concessionaire.

“After receipt of the upfront payment, PRPA will no longer be entitled to any compensation from the airport or the Concessionaire. The PRPA will bear neither liabilities nor new debt associated with LMMIA. PRPA can utilize the upfront proceeds to defease [satisfy] debt obligations attributable to the airport and toward other infrastructure projects in Puerto Rico.”

Álvarez pointed out that under a PPP arrangement, a private concessionaire would be in a desirable position to maximize the profitability of commercial activities at the airport by “entering into agreements with third parties.”

“This is no different than the Sydney Airport, Gatwick and Heathrow in London, Barajas in Madrid and many other leading airports where concessionaires have a better understanding of the commercial potential of airports,” he said.

A successful PPP for LMMIA is expected to deliver a world-class concessionaire bringing best practices to the operation of the airport, resulting in a more user-friendly experience for Puerto Rico’s residents and visitors alike that in turn can be expected to generate more customer satisfaction. Such a makeover of the island’s—and the region’s—key airport would include the use of modern technology and more efficient management practices.

“It is also expected to increase airport traffic via a broader spectrum of airlines, offering greater traveling choices for the local population and increased fl ow of tourists into Puerto Rico,” Escudero added.

Proponents also point to an increase in employment opportunities for island workers driven by capital/ construction projects, expanded retail, food and beverage vendors and increased air traffic.

“The project provides an integrated solution for LMMIA that should enhance the value of the airport as an infrastructure asset and attract significant investment for the benefit of Puerto Rico,” Escudero said.

MOUNTING PROBLEMS AT LMMIA

LMMIA, Puerto Rico’s main commercial airport with the largest number of passengers and cargo activity in the Caribbean, represents an important infrastructure asset for the island’s tourism and economic development.

However, management deficiencies in recent years have plagued LMMIA, which served more than 4.2 million passengers and 222,931 short tons of cargo in fiscal year (FY) 2009- 10, causing it to fall far short of its perceived full potential.

The airport has lost ground to regional competitors in the Dominican Republic, Miami and Costa Rica, which have managed to boost their attractiveness as travel destinations as LMMIA’s has dwindled.

“LMMIA’s performance has lagged behind key Caribbean peers in total passenger growth. Dominican Republic airports and Miami International Airport saw increases in traffic in 2008, while the traffic at LMMIA declined,” reads the PPPA study’s executive summary. “Additionally, LMMIA has been losing European inbound market share to the Dominican Republic since 2005.”

There has been a decline in passenger traffic at LMMIA from 5.3 million enplanements in FY 2005 to 4.6 million in FY 2008 due to service levels, the decision by American Airlines to reduce seat capacity to the airport by 45% and the inability to develop an alternative long-term growth strategy.

Meanwhile, the airport has been unable to control costs, as seen by a hike in landing fees, which makes it less attractive to new airlines. Financial efficiency would be a major source of value for a PPP partner, as decreased landing fees would make LMMIA more competitive against other airports and potentially increase traffic.

Enplanements have decreased over the past three years and the airport has been unable to recover the lost enplanements related to the American Eagle announcement in 2008 to reduce capacity at LMMIA.

Despite these losses, the airport still has strong aero-revenue compared to many of its peers. However, it underperforms significantly, vis-avis its peers, in food and beverage revenue and car rental and parking revenues on a per-passenger yield basis.

The PPPA study highlights food and beverage as one area of so-called “non-aero revenue” where LMMIA fails to earn high marks.

“The lack of quality dining options in the airport is seen in a mere 16 cents of food and beverage revenue per enplanement,” it reads. “As the busiest airport in the Caribbean, it is important to offer satisfactory food and beverage options…which would likely generate significant revenue, as LMMIA serves as a major transit airport. In-transit travelers would likely take advantage of improved dining, as seen at other transit airports (New York JFK, Los Angeles LAX, Miami MIA and Chicago ORD).”

PORTS AUTHORITY IN A TIGHT SPOT

The financial profiles of both LMMIA and the PRPA and broader economic weakness impacting air travel have hampered the airport’s ability to render the necessary services in an efficient, cost-effective and satisfactory manner. To improve the services provided at the airport for all key constituents, the PRPA has determined that it must make upgrades to its infrastructure and improve the overall management of LMMIA.

“The PRPA’s current financial position has come under considerable pressure, particularly given the broader economic turmoil’s impact on marine and airport operations,” the PPPA study reads. “The PRPA is also highly susceptible to political and managerial risk, with leadership changing every four years, coinciding with government elections. As a result, the PRPA has limited resources, expertise, management continuity and control over the operations at LMMIA, its largest, and most important, asset.”

Meanwhile, the study says, costs at the PRPA have continued to rise. In FY 2009, operating expenses reached $186.4 million, up 8.1% from the preceding fiscal year and a whopping 38% from FY 2007. In that two-year period, PRPA’s operating expenses have outstripped operating revenue.

“Costs at the PRPA have increased substantially as a percentage of revenue over the same period,” reads the study. “Overall, salaries and benefits along with general and administrative costs haveincreased 2.7 percentage points and 4.1 percentage points, respectively,since 2007.”

As a result of the financial performance and the PRPA’s capital structure, the credit profile of the PRPA has come under close scrutiny by credit-rating agencies Moody’s and Standard and Poor’s (S&P). The public corporation is rated BBB- (stable) by S&P and Baa3 (negative) by Moody’s.

“Most importantly,” reads the PPPA study, “Moody’s cited [in its May 13 rating affirmation] the ‘explicit and implicit financial support provided by the Government Development Bank (GDB) for Puerto Rico, which provides liquidity support as needed…The standalone credit strength of PRPA, if considered without the GDB support, would be substantially lower than the Baa3 headline rating.’”

A review of the PRPA’s finances makes it clear that the government body lacks the financial capacity and thus cannot afford on its own the substantial investment necessary to improve operations at LMMIA. Recognizing this stark reality, the PRPA has embraced the PPP model as a means of project implementation that would minimize the agency’s capital investment costs and risk exposure, and provide significant upfront proceeds.

“Ensuring capital improvements is what PPPs are all about,” Álvarez said. “The concession agreement to be executed with the preferred bidder will have a detailed schedule of mandatory capital improvements, which are to be completed by the concessionaire. Not completing them can result in serious penalties and fines from the PRPA.”

“Part of the objective under a PPP is for PRPA to receive an upfront payment, which could then be used to defease the current debt of LMMIA and other PRPA obligations and free PRPA of future liabilities and expenses associated with LMMIA,” added the PPPA chief. “This results in net proceeds today.

In addition, the PRPA bears no costs for maintaining the airport under the PPP. In other words, the PRPA would not be responsible for the capital investments, nor the costs of implementing financial initiatives.”

PPP TO ADDRESS PROBLEMS

The PPP plan for LMMIA represents a concrete step by the PRPA toward confronting its structural and fiscal inadequacies as the overseer of operations at the airport. The agency has identified opportunities, including better financial management practices, improving airport amenities and services and raising the profile of LMMIA as an international hub to South America.

Capital investments in infrastructure and operational initiatives represent the potential scope of work for a PPP model of operations management at the airport.

“To properly address the service needs of airport users, the PRPA has determined that a private partner or concessionaire should implement a capital investment plan that upgrades the airport’s infrastructure and improves its attractiveness to travelers, air carriers and cargo carriers,” Escudero said. “We need a revenue-generation plan that analyzes revenue opportunities, particularly coming from commercial or non-aeronautical activities, including food and beverage outlets, car parking and car rentals and improved financial efficiency aimed at lowering general, administrative and overhead expenses at the airport. These expenses have reduced profitability over the past three years and limited PRPA’s ability to continue funding the necessary capital improvement program.”

Escudero added that such longterm leases typically include three or four principal agreements that in LMMIA’s case would involve the airlines, the concessionaire, the airport operator and the PRPA. It is expected that these agreements would include a new Airport Use Agreement, an Operating Standards Agreement and a Concession Agreement.

Among the determinations made under the agreements would be the estimated value of LMMIA, which would be based on financial perspectives and opportunities that PRPA and the bidders believe exist to improve traffic and financial performance at the facility. The value determination would likely come under the pro forma Airport Use Agreement and would depend, in significant part, on subsequent airline charges generated at the airport.

Álvarez said a PPP arrangement at LMMIA would simply be another step in a global trend born of economic necessity, whose results on the whole have been positive.

“Airport PPPs are common practice around the world. Numerous PPPs have occurred in Europe, Asia, the Pacific and South and Latin America,” he explained. “In each of the concessions, world-class airport operators have significantly improved the service offerings for airport users.”

So far there has not been a completed airport PPP in the United States that complies with the requirements of the FAA Pilot Program. Puerto Rico’s PPP at LMMIA has the opportunity to be the first of its kind at an FAAregulated airport and would set the precedent for airports to follow on the U.S. mainland.

However, there are plenty of examples of privately managed airports in the United States, such as the Orlando Sanford International Airport, which is managed and operated by TBI Airport Management, a company of global infrastructure operator Abertis (see sidebar, “Global players interested in LMMIA airport PPP”). Another example of public-private arrangements in airports is Terminal 4 at New York’s JFK International Airport, which is managed by world-leading airport operator Schiphol Group.

BENEFITS OF THE PPP

“The LMMIA concession will transform it into a world-class airport and a gateway to Puerto Rico and the rest of the Americas—one that the people of Puerto Rico will be proud of and will contribute to Puerto Rico’s economic development,” Álvarez said.












Álvarez also believes that a world-class concessionaire delivering best practices to the operation of the airport will result in a more user-friendly experience for Puerto Rico’s residents and visitors alike. This would include the use of modern technology and more efficient management practices.

The PPPA study includes the following as results expected from “a successful PPP at LMMIA: increased airport traffic via a broader spectrum of airlines, offering greater travel choices for the local population and increased fl ow of tourists into Puerto Rico, and an incremental increase in employment opportunities for the people of Puerto Rico driven by capital/construction projects, expanded retail, food and beverage vendors and increased aircraft traffic.”

According to an independent economic report prepared by Advantage Business Consulting, each tourist to the island in 2009 had an average impact on the island’s gross product of $690 per passenger, including direct and indirect benefits. The report projects 5.6 million total visitors per year by 2015. Increasing the total number of visitors by 400,000 would have a significant impact on the local economy by increasing Puerto Rico’s gross product by $276 million and tax collections by $34 million, and creating 3,772 new jobs.

OTHER REVENUE SOURCES

Two other important non-aero revenue sources are car rental and car parking. Here again, LMMIA severely lags behind its peers. This could represent an area of significant opportunity for value creation at LMMIA.

“While many tourists visiting the island rely on taxis to get to their respective hotels/cruise ships, increased awareness of tourist activities on the island could lead to improved car rental revenue,” Escudero said. “A private concessionaire would be inclined to promote the many tourism activities around the island, which would ultimately benefit the local communities and the broader economy through gross product, tax revenue and job creation.”

LMMIA AS A MAJOR INTERNATIONAL HUB

“The strategic location and sea level elevation of LMMIA make it an ideal destination to serve as a major hub between North America and Europe to South America, Central America and the Caribbean,” Álvarez said. “As LMMIA reaches its full potential in this area, the profile of Puerto Rico as a major Caribbean destination could be enhanced, the airport traffic could increase and the number of destinations could improve.”

A major hub facility improves the number of fl ights and convenience of fl ight schedules, both of which can be major tools for attracting visitors and transfer passengers as well, officials say. The resulting new traffic from developing LMMIA as a major hub would positively contribute to the top-line revenue of the airport and the broader Puerto Rican economy through gross product, tax revenues and job creation.

MAXIMIZING COMMERCIAL REVENUE AND CARGO FACILITIES

Escudero said the current commercial offerings at LMMIA fail to capture the opportunity that exists in commercial revenue, something that could be remedied with an improved layout that would better encourage passenger spending at the airport.

Improving LMMIA’s amenities and services via technology upgrades, more retail, food and beverage offerings and additional amenities within the terminals should be a key priority of airport management, he added.

According to the PPPA study, LMMIA currently has the largest air cargo operation in Puerto Rico and, according to the PPPA, demand forecasts project 950 million short tons of cargo to be fl own by 2024. The airport serves 14 air cargo services, primarily represented by FedEx, UPS, USPS and commercial flights.

The PRPA is evaluating options for improving air cargo facilities at LMMIA, the study adds.

Global players interested in LMMIA airport PPP

CARIBBEAN BUSINESS has learned that various global airport operators are interested in the Public-Private Partnership (PPP) for Luis Muñoz Marín International Airport proposed by the Luis Fortuño administration.

Among the frontrunners for the long-term concession are the Barcelona-based infrastructure conglomerate Abertis, Germanbased Fraport AG, Canadian Yvras, Swiss Unique and Brazilian construction conglomerate Camargo Correa.

ABERTIS

Abertis Infraestructuras S.A. is ranked among the world’s leading airport operators, with a strong presence in Europe and America. The company has interests in 30 airports in nine countries, which handle more than 80 million passengers.

Abertis manages British airport operator TBI (90%) and Aena Internacional (10%). TBI’s network currently covers a total of eight international airports including London Luton Airport, Cardiff (Wales) and Belfast (Northern Ireland) International and Sweden’s Stockholm Skavsta. Abertis manages Sanford International in Orlando, Fla. as well as three airports in Bolivia: La Paz, Santa Cruz and Cochabamba.

It also has total or partial management contracts in five other airports in the U.S.: Hartsfield-Jackson Atlanta International, Bob Hope Airport in Burbank, Calif., Middle Georgia Regional and Downtown airports in Macon, Ga. and Raleigh- Durham International in North Carolina.

In 2007 Abertis acquired Desarrollo de Concesiones Aeroportuarias, a holding company with stakes in 15 airports in Mexico, Jamaica, Chile and Colombia. These include the 12 airports in Mexico managed by Grupo Aeroportuario del Pacífico.

FRAPORT AG

Fraport AG is among the leading groups of companies in the international airport business. With Frankfurt Airport in Germany, the company operates one of the world’s busiest air-transportation hubs. An experienced airport manager, Fraport is expanding Frankfurt Airport—along with its partners— into Frankfurt Airport City. In addition to covering the full range of airport services, Fraport AG is a proven partner in airport retailing and real-estate development.

As a full-service provider in the airport-management field, Fraport AG is active on four continents through investments and subsidiaries.

Fraport AG has been successfully operating the Frankfurt international air-transportation hub for decades. Fraport operates from 13 airports on four continents worldwide and provides its expertise through numerous subsidiaries—including Antalya Airport in Turkey, Jorge Chávez International in Lima, Perú, Pulkovo Airport in St. Petersburg, Russia and Xi’an Xianyang International in northwest China.

YVRAS

Yvras runs Vancouver International Airport located on Sea Island in Richmond, British Columbia, Canada, about 7.5 miles from downtown Vancouver. In 2009 it was the second busiest airport in Canada by aircraft movements (313,984) and passengers (16.1 million), with nonstop fl ights daily to Asia, Europe, Oceania, the United States, Mexico and the Caribbean. It is a hub for Air Canada, Air Canada Jazz and Air Transat as well as a focus city for West Jet.

UNIQUE

Unique (Flughafen Zürich AG) is a diversified company that operates Zürich Airport on behalf of the Swiss government. In 2008, the company employed a staff of approximately 1,500; it generated a total revenue of 855.1 million Swiss francs and reported a profit of 121.3 million Swiss francs.

Instituted in its present form in January 2000 and listed on the Swiss Stock Exchange, Unique (Flughafen Zürich AG) has established itself as a successful public-private partnership in Switzerland. While the majority of the share capital is in private hands, 33.3% is held by the Canton of Zürich and 5% by the City of Zürich. The company is also involved in the operation of other airports outside Switzerland together with local partners.

GRUPO CAMARGO CORREA

Also interested in the LMMIA concession is the Brazilian group Camargo Correa, which is in the process of developing a 22 million passenger airport in the Sao Pauloarea.

What are the federal laws for airport-privatization programs?

With the Federal Aviation Authorization Act of 1996, the U.S. Congress established a demonstration program authorizing the Federal Aviation Administration (FAA) to permit up to five public airport sponsors to sell or lease an airport and to exempt the sponsor from certain federal requirements that could otherwise make privatization impractical.

Congress established the FAA Airport Privatization Pilot Program to explore privatization as a means of generating access to sources of private capital for airport improvement and development.

An airport sponsor who wants to participate in the airport-privatization pilot program first must seek preliminary FAA approval, through an application process, to reserve one of the five slots available under the program. Once the preliminary application has been approved by the FAA, the sponsor can select a private operator to manage the airport, negotiate an agreement with the private operator, and prepare a final application for submittal to the FAA.

It authorizes the FAA to exempt an airport sponsor from certain requirements that could otherwise make privatization unattractive. First, the public airport sponsor may receive an exemption to use the lease or sale proceeds for non-airport purposes. Generally, all proceeds from the lease or sale of airport land must be used for the capital or to cover operating costs of the airport. This exemption requires the approval of 65% of the air carriers at the airport (by number of carriers and by landed weight). The public sponsor can also be exempted from an obligation to repay federal grants and return property acquired with federal assistance upon the lease or sale of the airport.

Of the five airports authorized by the legislation to participate in the program, at least one must be a general aviation airport and no more than one large-hub air carrier airport may participate. Under the pilot program, general aviation airports may be leased or sold, while the air carrier airport may only be leased.

The slot for a large commercial hub was awarded in 2008 to Midway Chicago Airport, but the transaction collapsed because of financing problems and Midway Chicago has until November 2010 to resume a transaction. Two of the three pre-application participation slots for commercial, midsize hub airports have been approved to the Louis Armstrong Airport in New Orleans, which is ready to issue requests for qualifications (RFQ), and to the Luis Muñoz Marín International Airport (LMMIA) in Carolina, which is at the same stage. There is still an open slot to be awarded on a first-come, first-served basis. The remaining fifth slot, for a general aviation airport, was awarded to the Briscoe Field Airport in Gwinnett County, Ga.

The Puerto Rico Ports Authority (PRPA) submitted its preliminary application to participate in the FAA Airport Pilot Program on Dec. 1, 2009 and the FAA completed its review of the preliminary application on Dec. 22, 2009.

The FAA’s acceptance of the PRPA application gave the PRPA the go-ahead to select a private operator to manage LMMIA, negotiate an agreement with the private operator and prepare a final application for submittal to the FAA for final approval.

There is no timetable for the FAA to complete its review of the final application. After the FAA reviews and approves the final application and lease, it publishes a notice in the Federal Register for a 60-day public review and comment period.

The FAA completes its review, prepares its Findings and Record of Decision (ROD), and addresses the public comments in the ROD. The FAA publishes its ROD and, if approved, observes the legal settlement and transfer of the airport from public owner and sponsor to the new private operator and sponsor.

Ultimate FAA approval is based upon a number of conditions. These include the private operator’s ability to prove it will comply with the public operator’s grant obligations, such as the obligation to ensure continued access to the airport on reasonable terms.

The private operator also must provide assurance that it will operate the airport safely, continue maintenance and improvements, provide security, mitigate noise and environmental impacts and abide by any collective bargaining agreements already in place. The public operator also must provide a plan for continued operation of the airport in case of bankruptcy or other defaults on the part of the private operator.

Under the pilot program, the private operator of an air carrier airport may receive Airport Improvement Program (AIP) entitlement and discretionary grants, collect passenger facility charges and charge reasonable fees.

However, unless approved by 65% of air carriers at the airport, the private operator may not increase air-carrier rates and charges at a rate that exceeds the consumer price index.

Airports participating in the pilot program are subject to the same federal oversight as other public-use airports. In particular, air carrier airports must comply with the requirements of FAA airport safety regulations and with Transportation Security Administration requirements for airport security.


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