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Puerto Rico's San Juan airport privatization attracts intense interest
Travel Markets Insider / August 14, 2011

By Larry Luxner

San Juan’s Luís Muñoz Marín International Airport, one of the busiest airports in the Caribbean, is well on its way to being privatized — a process government officials hope to have wrapped up by April 2012.

On Aug. 9, the island’s Public-Private Partnership Authority announced that it had received requests for qualification bids from a dozen consortia — including the operators of airports from Switzerland to South Korea —all hoping to manage LMM in tandem with the Commonwealth government. The unique arrangement would make San Juan the first sizeable airport under U.S. jurisdiction to be privatized under a pilot program now being rolled out by the Federal Aviation Administration. It would also allow the airport to double the number of passengers it currently serves.

“Officials expect a large upfront payment, of as much as $1 billion, from the bidder, plus a multimillion-dollar investment commitment over the life of the contract,” reported Caribbean Business, a weekly newspaper based in San Juan. “Most of the proceeds will be used to pay off the debt of the cash-strapped Ports Authority, which has a financial situation so tenuous it cannot go to the bond market to raise money.”

The 12 consortia interested in managing LMM are: Fraport AG y Goldman Sachs Infrastructure Partners; GMR Infrastructure e Incheon International Airport Corp.; AENA Internacional; Puerto Rico Gateway Group; TAV Airports Holding; Grupo Aeropuertos Avance (GAA); AGUNSA (Agencias Universales SA); Consorcio Flughafen Zürich AG; Public Sector Pension Investment Board (PSP); Camargo Corrêa e IDC; Grupo Aeroportuario del Sureste (ASUR) and Highstar Capital; Grupo Aeroportuario del Centro Norte (OMA); Corporación América SA, and Advent International Corp.

“These consortia are the most experienced institutions in airports worldwide, and are willing to invest in Puerto Rico to make a reality the world-class airport that our people deserve,” said David Alvarez, executive director of the PPPA, describing the bidders as “mature companies looking to enter destinations with growth potential.”

Alvarez, speaking to reporters, added that “not many jurisdictions succeed in attracting investors today. Puerto Rico has the opportunity to modernize our airport at the hands of the world’s best.”

The RFQ announcement coincided with one of the most unpredictable weeks on Wall Street in years, with stocks fluctuating wildly and investors panicking.

Yet Juan Carlos Batlle, president of Puerto Rico’s Government Development Bank, said the intense interest in LMM’s privatization was a sign that the island remains an attractive investment.

“Despite the turbulence and volatility that we’ve seen in U.S., global and local markets, we have been managing this process normally, and what we’re seeing here is a great interest by world-class companies,” he told reporters. “World-class companies normally do not invest in places where they see no future.”

In 2010, LMM reported passenger volume of just over 8.57 million passengers, a 3.9% increase from the 8.25 million passengers who flew in and out of the airport in 2009. But those figures are way down from 2005 — LMM’s busiest year ever — when a record 10.77 million passengers used the airport.

JetBlue Airways is the largest carrier in Puerto Rico, currently operating 27 daily flights. The second-largest operator is Executive Airlines, operating under the American Eagle name, with 25 flights.

LMM’s top 10 domestic destinations for outbound passengers in the 12 months ending April 2011 were New York JFK, Orlando, Miami, Atlanta, Fort Lauderdale-Hollywood, Philadelphia, Boston, Chicago ORD, Charlotte and Dallas-Fort Worth.

In the Caribbean, LMM’s most popular routes are to Santo Domingo, Punta Cana, St. Thomas, St. Kitts and Tortola. Farther afield, Copa links San Juan to Panama City, British Airways to London-Gatwick, Iberia to Madrid, Condor to Frankfurt and Air Canada to Montreal and Toronto.

Late next month, Miami-based C&T Charters will begin once-a-week flights to Havana, having gotten the green light for charter flights from both U.S. and Cuban authorities. That makes LMM one of only 13 airports in the United States to be able to offer such service. Direct air service between Puerto Rico and Cuba hasn’t existed for nearly 50 years. And once San Juan-Havana flights get underway, C&T will eventually expand round-trip service to Santiago de Cuba, located in the island’s Oriente region where many Cuban exiles living in Puerto Rico still have family members.

One of the key bidders for the management of LMM, Puerto Rico Gateway Group, is a consortium led by GE Capital Aviation Services (GECAS). It brings together the Allegheny County Airport Authority (which operates and manages Pittsburgh International Airport); TIAA-CREF, a leading U.S. financial services firm with $470 billion in combined assets under management; OPTrust, one of Canada’s largest public pension plans, and Airmall USA, manager of retail concessions at international airports in Boston, Cleveland, Baltimore and Pittsburgh.

“GE has strong relationships with airlines and over 84 years of experience of operating in Puerto Rico,” said Marcus Balmforth, managing director at GECAS Airports. “The consortium combines this experience with the strength of the ACAA as an FAA-approved operator and the proven track record of Airmall, coupled with long-term experienced infrastructure investors TIAA-CREF and OPTrust. This uniquely positions the Puerto Rico Gateway Group to provide the best outcome for the PPPA as it seeks to create a world-class gateway to the island.”

That authority must now refer information received from the 12 interested parties to a committee that will have until Aug. 31 to analyze the documents and pare down the group to create a short list, reports San Juan-based journalist Michelle Kantrow Vázquez.

“The government is justifying its initiative of turning over LMM to a private operator on several factors,” Kantrow reported. “These include its financial inability to invest the necessary millions into the facility to turn it into a world-class airport, and its desire to spur LMM’s growth and competitiveness, and to reposition the Port Authority’s finances.”

The concession will likely be for 40-50 years, said Alvarez, explaining that the selected company will have to invest between between $35 million to $85 million over the next five years; earlier feasibility studies put the total required investment at $167 million. Officials said that in order to lure more passengers and flights to LMM, private management would likely add first-class lounges as well as more upscale retail concessions to the airport.

Alvarez said his agency’s goal is to make LMM “the preferred facility to use for business, tourism, pleasure, visiting family or simply to make a stopover. Passengers should always prefer Puerto Rico’s airport. That’s our vision.”

Many of Puerto Rico’s Caribbean competitors have turned their main international airports over to private managers. These include the Dominican Republic, which placed all six of its international airports under private management in 2000, as well as Jamaica and Curaçao, which leased out their major airports in 2003.

The Puerto Rico Ports Authority has lobbied hard to get at least 65% of the airlines serving LMM to back the privatization proposal, as required. So far, AirTran, American Airlines, American Eagle, Delta, FedEx, UPS, JetBlue and US Airways — which represent a combined 80% of LMM’s carriers — have gotten on board.

The government’s inability to improve the airport facility’s physical plant has caused the LMM’s passenger to remain virtually unchanged for the past 20 years.

“The number of boardings has not exceeded 4-5 million passengers since 1990,” said Álvarez. “We’re not seeing a sustained effort to maximize the airport.”

Meanwhile, Alberto Escudero, executive director of the Puerto Rico Ports Authority, said 80% of the operations of the LMM are already in private hands, from concessions to maintenance and the hotel.

“We have a quasi-private operation as it is, but we don’t have a single entity to the lead it without variations in port directors, among other things,” said Escudero. “LMM is so important for economic development that there has to be a long-term vision for it, which is not how it is now.”

A consultant to one of the 12 bidders, who asked not to be identified, believes the San Juan airport privatization could benefit the island in a variety of ways.

“The PPP concession for San Juan's Luís Muñoz Marín International Airport could become the economic development stimulus needed to transform the Caribbean's busiest airport into a regional and international hub for tourism, trade and services,” he said.

“The $1bn+ deal will also serve to stabilize the finances of the struggling Puerto Rico Ports Authority and private management will be the ‘game changer’ needed for the airport to finally take off and realize this potential.

A private airport operator in San Juan will focus on attracting more airlines and passengers to the airport, as well as more concessions, to increase revenue. This in turn will help Puerto Rico's tourism industry and boost the island's presence as a Caribbean transportation hub especially in face of growing competition from airport hubs like Miami and Panama.”

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