China’s Alibaba looks to invest in Brazilian airport for its new South America logistics hub, but it could face some heavyweight competition 

The Chinese Alibaba Group has expressed interested in acquiring concession rights to operate Brazil’s Campinas Viracopos Airport. The mainland China-based conglomerate is expected to collaborate with China’s Global Logistics Properties to bid for concession rights at Viracopos and aims to develop the airport as its logistics and cargo handling hub in Brazil, which is Alibaba’s fourth largest market. Separately, Flughafen Zurich, Brazilian private equity enterprise IG4 and conglomerate Camargo Correa have also expressed interest in operating Viracopos.


Summary:

  • Alibaba Group may collaborate with Global Logistics Properties to acquire concession rights at Campinas Viracopos airport in Brazil;
  • Until now other Chinese investors have shown preference to Europe for airport investments, but Brazil is Alibaba’s fourth largest market;
  • But taking on a concession, especially in Brazil, is not the same as simply building a cargo and logistics centre and could prove a step too far for the conglomerate.

Campinas Viracopos Airport was privatised by concession in the first tranche of Brazilian privatisation in 2012 to what is known in English as Aeroportos Brasil Viracopos or ABV (Triunfo/ Engenharia e Participações /Aeroports Egis Avia). But it has been a controversial transaction with the concessionaires embroiled in a dispute with Brazilian regulator ANAC.

This resulted in Jul-2017 with ABV taking the decision to return the concession to the government after passenger traffic and revenue failed to meet expectations, which attracted the attention of several investors, mainly in Europe.

CHART – Traffic levels at Campinas Viracopos Airport rose through the first half of this decade before a sudden -9.7% decline in 2016. They recovered slightly last year (up +0.1%) but have declined further over the first seven months of this year (-5.6%)Source: CAPA – Centre for Aviation and Campinas Viracopos Airport reports

But it never did that, possibly because the Brazilian economy started to improve. It set out instead to find an alternative investor to sell that proved unsuccessful. Then, late in Feb-2018, the government announced that it planned to re-tender the concession in Mar-2018 with ABV continuing to run the airport while the tender process was underway.

About that time the other investors mentioned began to show an interest with Flughafen Zurich and IG4 talking of a partnership to acquire Triunfo’s and UTC’s equity. Flughafen Zurich has since stated that it expects to move forward on the deal by the end of the year or it will rethink its commitment. Then, in Jul-2018, ABV presented a judicial recovery plan, proposing to direct all cash flow from the airport concession towards debt repayment.

Now enter Alibaba, the Chinese e-commerce giant and Asia’s largest firm with a market capitalisation of USD420 billion, which is a new entrant to airport investment with only one known foray into the business, a tentative investment proposal for Russia’s Irkutsk Airport to build a cargo terminal there. The Irkutsk Region plans to make Irkutsk Airport the centre for logistics in the east of Russia.

That fits Alibaba’s brief perfectly. Under-utilised smaller airports, preferably with good surface transport links (road, rail), and preferably within striking distance of major centres of population, where large logistics sites can be constructed, benefitting employment opportunities and thus currying favour with local authorities . Chinese investors have been seeking them out for decades, often in Eastern Europe, though they have tended to limit themselves to very small airports until fairly recently.

In Aug-2017 China’s HNA Group acquired an 82.5% equity interest in Frankfurt Hahn Airport from the state of Rhineland-Palatinate, describing it as “a strategic investment…in an airport which can become a leading hub of commerce between China and Europe…”

Since then, HNA has acquired a 35-year concession to operate Plovdiv International Airport in Bulgaria and put forward a tentative bid for Belgrade Airport. It was also the preferred bidder for Odebrecht’s share of RIOgaleao, the concessionaire responsible for Rio de Janeiro Galeão International Airport, but was unable to make the payment on time.

Where HNA prefers Europe, Alibaba’s selection of Viracopos fits its intentions better. That airport serves the southeast Brazilian city of Campinas, located 100km north of São Paulo, Latin America’s second biggest city. It is the second biggest cargo airport in Brazil with over 500 million kilos of cargo payload capacity in 2018. It is served by cargo airlines such as Atlas Air, ABSA, Cargolux, Martinair and Avianca Cargo as well as freight-oriented cargo airlines such as Korean. It has express facilities for courier traffic that are un-bureaucratic by Brazilian standards.

CHART – Campinas Viracopos Airport has recovered stronger from Brazil’s economic woes as a cargo centre with payload capacity growing +8.6% in 2017 and set to hit new heights in 2018Source: CAPA – Centre for Aviation and OAG

Alibaba’s partner Global Logistics Properties (GLP) provides modern logistics facilities and technology-led solutions worldwide. It has USD50 billion in assets under management across real estate and private equity segments, owns and operates a 62 million sq m property portfolio and 2,838 completed properties in 1,163 logistics parks globally.

Alibaba’s interest in Viracopos comes just as its founder, Jack Ma, announces he will step down as executive chairman of Alibaba Group Holding in 2019, handing the reins to Daniel Zhang, who became Chief Executive officer barely three years ago.

Mr Zhang, previously a long-serving CFO, is regarded as more of a financial mind than a technology visionary in Mr Ma’s mould and it is yet unclear what he will make of this recent interest in the airport sector. A quick glance at the figures and at some of the issues that have arisen since the concessions began in Brazil might prompt him to exercise caution.