San Juan Int'l Forges New Territory with Public-Private Partnership

Jodi Richards
Published in: 

Luis Muñoz Marín International Airport (SJU) in San Juan, Puerto Rico, is forging new territory for a U.S. or U.S territory airport with its public-private partnership (P3). In July 2012, Aerostar Airport Holdings, a joint venture between Highstar Capital and Aeropuertos del Sureste (ASUR), was awarded a 40-year lease to operate SJU via a request for proposals process. Last February, Aerostar received its operator certificate from the FAA and assumed control of the northeastern Caribbean airport.

Since the inception of FAA's Privatization Pilot Program (originally established under the 1996 Reauthorization Act), several airports have expressed interest in the business model, but only SJU and Hendry County Airglades Airport in Clewiston, FL, are currently enrolled. Puerto Rico Ports Authority (PRPA), which owns and previously operated SJU, was approved for the FAA Privatization Pilot Program in December 2009.

Airport privatization is, however, more common outside the United States - for instance Fraport at Frankfurt Airport in Germany, Ferrovial at London's Heathrow and Aeropuertos Argentina 2000 in Buenos Aires. Additionally, there is continued interest from the private sector in such partnerships.

Project: Public-Private Partnership
Location: Luis Munoz Marin Int'l Airport
Airport Owner: Puerto Rico Ports Authority
Airport Operator: Aerostar Airport Holdings
Contract Length: 40 years
SJU Airline Consortium Rep: Morrison & Foerster
Sell-side Advisory Services to Puerto Rico Public-Private
Partnership Authority:
Consultant: Jacobs Consultancy
Puerto Rico Ports Authority Financial Advisor: Credit Suisse

San Juan's government was very aggressive on privatization, says Ismael Bonilla, manager of SJU under Aerostar. "The economics were not sustainable for the airport," says Bonilla. "They (PRPA) saw that the airport needed some vast improvements both infrastructure-wise and operational-wise that at that time the Ports Authority was not able to do."

More than six private operators responded to the Ports Authority's request for proposals, he adds.

Andy Wilson, chief development officer with Aerostar, notes that the private operator's executives saw the opportunity both as a good investment and an opportunity to improve the airport and region. Aerostar not only brings an infusion of funds to improve SJU, but also best practices and the experience necessary to bring SJU into the future. "Aerostar addressed the P3 process with a very solid core group of professionals from the aviation and financial industry," Wilson explains. "That permitted them to put together a well-thought out, comprehensive improvement program."

ASUR, which is part of the Aerostar joint venture, also operates nine airports in Mexico, including Cancun International.

Aerostar officials are determined to establish the airport as a world-class facility and prove that P3 programs can be beneficial to both the private operator and the public. "We're not just here to make money," stresses Aerostar's chief executive officer, Agustin Arellano. "We're here to govern an airport and prepare an airport for the future. We're providing good services and bringing the airport to a level of competitiveness that will match Santa Domingo or Panama or other competitors."

A private operator can be more flexible and responsive in executing work - especially with federal agencies, Wilson notes. Aerostar, in particular, also brings continuity and stable leadership, Arellano adds. Before Aerostar assumed operations at SJU, there were years of constant changes in the executive level of the Ports Authority. The instability limited a team environment from forming - something Aerostar officials say is in place now. "We've proven it works," says Bonilla. "And that has allowed us to gain the trust of those who opposed it initially."

The P3 relationship is good for the government, because it ensures that a professional team will be in place for a long time and will operate SJU in a manner that makes it a modern and competitive facility, summarizes Arellano.

40-Year Investment

Under the terms of the lease agreement, Aerostar made an upfront payment of $615 million to the PRPA. Throughout the 40-year lease, Aerostar's capital improvement program is projected to invest more than $1.4 billion at SJU, $240 million during the initial years of operation. The Puerto Rican government estimates it will receive more than $2.6 billion in revenue and other benefits from the P3 transaction over the term of the lease.

In addition, the PRPA will receive annual lease payments of $2.5 million for the first five years of the contract, 5% of the airport's gross revenues during the next 25 years, and 10% of its gross revenues during the final 10-year period. In addition to the leasehold fee, the Airport Use Agreement requires Aerostar to establish the Puerto Rico Air Travel Promotion and Support Fund and provide $6 million in an escrow account to reward signatory airlines that increase their international service during the first three years of the Airport Use Agreement.

Aerostar financed the upfront leasehold fee through a combination of debt financing of $350 million in investment grade bonds and $265 million of equity.

During the first five years of the 15-year Airport Use Agreement, the total annual aggregate airline fees are capped at $62 million. After the sixth year, the total annual airline fees may be increased annually by a percentage not to exceed the rate of core inflation.

Under the lease, Aerostar is required to complete certain capital improvement projects within 18 months of closing at no additional costs to the airlines (loading bridges, elevators, escalators, deteriorated flooring and deficient lighting), in addition to adding Wi-Fi service and making electrical upgrades. These projects are well underway, notes Wilson.

The Airport Use Agreement also requires Aerostar to invest at least $34 million to complete the Initial Capital Projects to the extent not completed by the PRPA before the transfer (construction of new access road to the general aviation area, relocation of some existing baggage inspection facilities, etc.).

The Ports Authority is required to oversee all of the improvements at SJU, as stated in the FAA Record of Decision, including the investments Aerostar was mandated to make. The upfront cash payment was segregated into several "pots," says Wilson. Much of it went toward outstanding debt the PRPA had accumulated in the last 20 years, he specifies.  Other portions are earmarked for support development and operation of the airports that the Ports Authority continues to oversee, air service development and to compensate the various agencies that participate in the privatization process.

Transition Challenges

Converting from public to private has included some difficulties. "We knew it would be a challenge; we knew there would be things we weren't aware of," Arellano reflects. "We are going strong and committed to complying with the agreement of having a modern, very efficient airport in years to come."

The first challenge came shortly after Aerostar was announced as the preferred bidder. A new government was voted in "that was not really positive of us," Arellano recalls. Aerostar did, however, receive the new party's approval after presenting a "clear vision" of the benefits the company would provide to the airport and Puerto Rico, he explains. Company officials also described how its team would remodel and transform SJU into a "world-class airport."

The transition period was a demanding time, agrees Wilson. "All of a sudden, all of the Ports Authority employees were suddenly employees of Aerostar," he explains. According to Bonilla, less than 20 of about 400 airport employees remained through the transition.

"We opened the doors for everyone that would like to participate, as long as they comply with the profile that we were requiring and the expertise and skills," Arellano explains. In addition to bringing in talent from outside the airport community, Arellano says the firm was fortunate, because it had access to workers who had been laid off by American Airlines when it dehubbed at SJU. "So we could take the opportunity of having these well-trained and skilled people to be a part of Aerostar," he notes. Currently, the airport has a strong team of 310 employees, Arellano reports.

Security was another challenge area. It was, after all, the first time a private operator took over an airport security program, Wilson points out. "Everyone faced a learning curve, including TSA," he recalls. Improving the outdated security program that the Ports Authority had in place at the time of the transition was one of the requirements of the Record of Decision, he adds. The Airport Security Program had to be updated and approved by TSA before operations were transferred to Aerostar, specifies Wilson. "That, in and of itself, became a fairly challenging exercise," he recalls.

The conversion from a public agency to a private company was difficult, Wilson acknowledges. Issues ranged from the change in business practices and creating a capital improvement program to developing new relationships with the FAA and creating FAA-compliant guidelines for selection of professional services, a competition plan and new passenger facility charge application.

When Aerostar took over operations at SJU, it also took control and became the sponsor of several major projects in various stages of completion, such as NAVAID upgrades, runway safety area improvements and taxiway construction. The challenge was in documenting or developing the financial processes in-house to assume the responsibility for grants that were to be jointly held between the Ports Authority and Aerostar, including a contractual obligation to consult with engineers and construction firms that were on board executing these projects, Wilson relates.

Cultural issues also complicated the transition. Because Aerostar was an off-island firm taking over the airport, there was "quite a bit of suspicion" among the citizens of Puerto Rico, Wilson explains. "We've had to work hard to gain that trust, and I think we have," he reflects.

Building Traffic

Per its operating lease, Aerostar has partnered with the Puerto Rico government to promote tourism and increase traffic at SJU. When American Airlines dehubbed the airport in 2008, passenger numbers dropped, Bonilla explains. In addition, after 9/11, the U.S. Department of Homeland Security closed down SJU's in-transit facility, which resulted in a direct decline in its overall traffic of about 1 million annual passengers. "We've committed with the government of Puerto Rico working hand-in-hand, because an airport can't do it by itself," he says.

During the first 12 months Aerostar operated SJU, growth exceeded the firm's projections, Wilson reports. Currently, SJU serves more than 8 million annual passengers from 15 airlines.

Another portion of the uptick is attributed to the return of the cruise industry traffic, Bonilla adds.

Under the partnership, the participants are marketing Puerto Rico as more than a beach location, he explains. "Puerto Rico is one of the most advanced islands in the Caribbean when it comes to medicine, banking, business and shopping," Bonilla elaborates. "There's a lot of things that are very attractive to Puerto Rico besides the beach, sand and sun." 

"We're improving the facilities; we're improving the operations of the facility; we're bringing professionalism in here that companies and the traveling public are noticing," he continues. "And even though we're in the middle of infrastructure upgrades, people are seeing the difference already."

The addition of new service is another kind of fruit SJU has been cultivating. Last year, service was added to Bogota, Colombia, and scheduled service to Madrid began in late May. SJU is more attractive to airlines and some are even considering it as a hub location, Bonilla reports.


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