Brazil's macroeconomic underperformance will weigh on the airport sector as lower real incomes, FX devaluation, credit availability and overall confidence will diminish travel activity, according to Fitch Ratings.

A recent report from the Agencia Nacional de Aviancao Civil indicates that air travel demand fell by 1.1% over the past six months, with November 2015 being the fourth consecutive month of domestic demand contraction. During that time, Brazil's international traffic declined by 2.3% and 2.2%, respectively, at Guarulhos and Galeao airports. They are the largest Brazilian gateways and together account for approximately 85% of the country's total international traffic.

Fitch forecasts that Brazil's economy will contract by 2.5% in 2016, likely putting further pressure on passenger traffic, cargo and commercial revenues. This will have long-term implications as many airport business models depend on revenue to meet growing debt service obligations and high concession fees, including BRL1 billion (USD250 million) per year for Guarulhos and BRL160 million (USD39.6 million) per year for Viracopos. Fitch's scenarios incorporate a 0% growth for both airports in 2016.

The lower than expected financial performance of the airports will also likely have a negative impact on the government's plans to privatize four airports over the next six months. The federal government announced these plans in mid-2015 in the Plano de Investimento em Logistica II. Traffic at them has been mixed. Florianopolis rose by 3.1% and Porto Alegre fell by just 1.6%, while Fortaleza's traffic fell by 6.2% and Salvador's dropped by 10.7%, indicating varied results in 2015.

Also, Fitch expects decreased traffic to pressure bid prices for these airports, along with their less strategic locations, more prohibitive concession frameworks (25% of their concession fee payments are due up front) and less government ownership. The government plans to raise a minimum of BRL3 billion (USD740 million) in concession fees for these airports. Furthermore, after privatization, these airports will have to invest BRL8.5 billion (USD2.1 billion) in terminal and runways expansions.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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