This year has turned out significantly different than expected. The spread of covid-19 has triggered what may be the worst public health and financial crisis in modern history. Many industries are suffering severe consequences, but among the worst hit is the aviation sector. Machado Meyer Advogados partners Fabio Falkenburger and Marina Estrella, and lawyer Vitor Barbosa discuss the uncertain market scenario for airport concessionaires in Brazil and find that broader measures are needed to save the industry.
The highly contagious nature of the coronavirus has led governments to restrict access to public and private spaces to contain the spread. Airport terminals have become a very different sight in the past few months; they are mostly empty, nearly all of their stores and restaurants are closed and a great number of aircrafts are grounded due to the decrease in demand for flights. While some countries have already started softening restrictions, Brazil continues to have a large number of confirmed cases and deaths due to the disease. Although some Brazilian states have decided to gradually reopen stores and shopping malls, the aviation sector remains in a critical phase.
Aircraft manufacturers and lessors are experiencing a serious recession. Airport concessionaires are facing huge financial difficulties due to loss of income. Airlines are still waiting for government initiatives to help them survive this crisis. In this chaotic scenario, Latin America’s largest airline LATAM (which has a significant participation in the Brazilian market), recently filed for Chapter 11 in the US.
An uncertain new terrain
It is worth making a digression to describe how the airport infrastructure works in Brazil. Since 2011, there has been a government effort to promote airport concessions (the so-called concession rounds) to develop and improve the quality of airport infrastructure and services in Brazil. The effort came after state-owned airport operator Infraero failed to keep local airports up to international standards and conditions. This led the granting authority (the federal government) to start an airports concession programme aiming at ultimately having all federal airports in Brazil privately operated.
On 18 March the federal government published executive order 925/20, which provides emergency measures for the Brazilian civil aviation industry due to the covid-19 pandemic. It extended the deadline for payments of fixed and variable contributions in airport concession contracts until 18 December 2020.
This extension is important, but there are other matters to consider – for example, the drastic decrease of concessionaires’ income and the uncertain comeback of airport activities. Firstly, it is possible that concessionaires will not be able to pay the contributions by the end of the extended term. Secondly, the concessionaires may need financial assistance not only to pay the fixed and variable contributions provided by the concession agreements, but also monthly contributions, if the current situation remains unchanged for a longer period.
Airport concessionaires, along with other stakeholders, are discussing with financial institutions such as the Brazilian development bank BNDES the need for credit lines for working capital to avoid the collapse of existing concessions. BNDES has announced it will launch emergency loans for the aircraft industry, but there has been no concrete response yet in respect to airport concessionaires.
In the coming months, it is expected that the economic and financial rebalance provisions of airport concession agreements will be triggered and the terms of such documents will have to be renegotiated with the granting authority. The legal department of the Ministry of Infrastructure recently issued a legal opinion indicating that covid-19 can be considered an event of force majeure, capable of triggering the financial rebalance clauses of concession agreements. Although focused on land transportation, this legal opinion is an indicative of how the legal departments of government agencies are interpreting the effects of this unprecedented crisis.
Notwithstanding the opinion issued by the Ministry of Infrastructure, the Minister of Infrastructure recently declared that the economic rebalance of concessions shall be made based only on the financial problems caused by the pandemic, since the intention is not to renegotiate debts existent prior to the pandemic or caused by conditions other than the significant reduction of passengers flow caused by the imposed restrictions. Regarding the financial rebalance clauses, the Ministry of Infrastructure recommend the regulatory agencies cautiously analyse each case individually, to avoid concessionaires that were defaulting before the pandemic taking advantage of the deferrals and contracts’ review considered due to the covid-19 crisis.
It is also important to analyse how the pandemic will affect concessions that were already in a difficult financial situation, such as the Viracopos airport. The concessionaire of that airport is under a judicial recovery process and a re-bidding process for the concession was recently approved by the National Agency of Civil Aviation (ANAC). With no airport operation in the foreseeable near future, the financial distress of said concessionaire is likely to get even worse. For that reason, it is possible that the re-bidding cases in Brazil (which are due to financial difficulties or amicable return of the concession, such as in the case of São Gonçalo do Amarante airport in the state of Rio Grande do Norte, which also had its re-bidding process recently approved) will need to be reformulated in order to comprise elements that were not provided before the covid-19 crises, such as tax exemption and payment deferral provisions, among others.
Will new concession rounds go ahead?
As part of the Federal Government Investments and Partnerships Programme (Programa de Parcerias e Investimentos – PPI), in 2020 Infraero had planned to sell its existing ownership in the concessionaires of Guarulhos in São Paulo; Galeão in Rio de Janeiro; the international airport in Brasília; and Confins in Minas Gerais. Because of the covid-19 crisis, however, such plan will probably be delayed. Due to the financial consequences of covid-19 faced by airport concessionaires, it is very likely that the value of these assets will be depreciated in a future purchase and sale process.
The sixth airport concession round is scheduled for October 2020, unless the current crisis causes delays. There have already been discussions by potential bidders that certain terms and conditions of the bidding process may have to be amended, such as the clauses on force majeure and act of God; environmental studies and flight demand forecasts. Another point under discussion is the current design of the concessions, which establishes that the airport operator must own at least 15% of the special purpose company to be incorporated as the concessionaire. As the covid-19 crises continues, more bidders and airport operators think it is likely that – should the federal government not move the date of the scheduled concession round – the number of bidders will decrease, since they will be too preoccupied keeping other airport operations afloat and securing working capital.
In light of the current crisis, along with the multiple comments that ANAC has received from bidders about the sixth concession round, it would be appropriate to consider certain changes to the concession structure and documents. If the documents are amended to exclude the obligation of the airport operator to own a portion of the concessionaire (which, based on recent comments by government officials, seems likely), it is possible that the airport concessions will remain attractive to operators, because operators would be retained only as service providers and not shareholders, giving them different liabilities.
The growing crisis may even drive operational concessionaires in Brazil into insolvency, and it will be necessary to rely on federal and local governments and other actors to support the survival and rebuilding of the airport concession infrastructure.
The measures published so far by the federal government are important to relieve concessionaires’ short-term financial obligations, but they do not seem to be enough to tackle the seriousness of the situation and the uncertainties surrounding the industry’s return to regular operation.
Despite the challenges imposed on the aviation sector by the pandemic, the state government of São Paulo still intends to grant private sector companies the right to operate 22 airports for a 30-year period. A public consultation ended on 26 May and the intention is to have the final version of the bid notice published in the second quarter of 2020, in order to conclude the concession process by the end of 2020 or early 2021. The airports will be divided in two blocks (one with 13 airports and the other with nine) and the winner will be the one to present the higher fixed contribution amount. Although these concessions require less investment and comprises regional airports, there are high expectations within the local government and among major players, since the airports are located in the wealthiest state of the country and, prior to the public health crisis, had important growth potential, especially in the aviation sector.
Besides the proposed measures, other initiatives are likely also needed for the industry to survive this period of crisis. Considering that the aviation industry is complex and involves multiple players, this unprecedented global situation will require a joint effort between the federal government, airlines, financiers, consumers and airport operators to ensure continuity in providing public services and to continue the development of activities like tourism, cargo and the transportation of people.
(Latin Lawyer - 29.06.2020)