Spotlight: Can Brazil's airport sector be a hedge for international airport operators?

The conflict between Russia and Ukraine could have an effect on the appeal of Brazilian airport assets, as international players might see the domestic airport sector as a hedge for their operations elsewhere. 

"The auctions of airport concessions scheduled for this year in Brazil are linked to assets that serve domestic flights, which are not likely to be affected by the conflict in Europe. This fact might generate more interest from international operators as Brazil is a long way from the conflict and could be a natural hedge for those operators,"  Adriano Pinho, partner at financial advisory firm Vallya and former CEO of airport concession operator BH Airport, told BNamericas.

Various airport companies with existing operations in Brazil and interest in domestic assets include Spain's Aena, German airport operator Fraport, Zurich Airport and French firm Vinci Airports.

"Of course, the extension of the conflict could generate a financial impact on the operations of European companies, but at this initial moment I believe that they're looking at the sector in Brazil with even more interest, since the volume of domestic travel will tend to increase in the coming months," said Pinho. 

During the first half of this year, the government is planning to launch auctions for the concession of 15 airports, all focused on serving domestic flights, with associated private investments of 7.3bn reais (US$1.4bn).

The airports will be offered in three blocks, combining more profitable terminals with less profitable ones.

Even before the conflict, the airport sector was facing major challenges due to the persistent impacts of COVID-19. 

The number of passengers transported through the country's airports on domestic flights totalled 7.47mn in January, down from 7.75mn in December, according to national airport regulator ANAC. The number of passengers in January was also well below the 9.3mn passengers reported in January 2020, before the sector was hit by the pandemic.

"The volume of domestic flights in Brazil was weak in January, not because of the reduction in passenger volume, but because the advance of the Omicron variant of the virus among airline employees caused a reduction in available flights. We're already seeing the decline of Omicron and in March we will likely have a stronger return of domestic flights," said Pinho. 

The volume of passengers on international flights reached 1.01mn in January, up slightly from December, but still less than half of the 2.27mn passengers transported in January 2020, before the pandemic.

TAX EXEMPTION

Anticipating a more difficult scenario for its infrastructure agenda, given the escalation of tensions in Europe, in the coming days the Brazilian government plans to announce a tax exemption for foreign investors to acquire bonds issued by Brazilian companies, a measure that is likely to attract more international players to invest in local companies, thus increasing those firms' capacity to consider concessions.

“Private companies need cheap financing. In the past, when the government was the driver [of investments], we gave tax breaks for foreign investors to buy bonds. Now that the driver is private sector investment, we need to provide the same exemption. So, we're removing taxes on foreign investments in company securities. We will announce this next week," economy minister Paulo Guedes was quoted as saying in a interview with newspaper Folha de S. Paulo.

International investors currently pay 15% tax on bond issues by Brazilian firms, so the exemption is likely to lead to a loss of around 450mn reais (US$87mn) per year in tax revenues.