Brazil's President Dilma Rouseff is reportedly considering raising the cap of foreign investment in Brazilian carriers from its current 20% to "at least" 49% as the best way to aid Brazilian carriers under increasing cost pressures, with a debate reportedly ongoing whether or not to allow majority foreign ownership. According to a Agencia Estado report, the government is now reportedly considering reviving a nine-year-old bill to revise the country's aeronautical code, which is reportedly ready to be voted on in the Chamber of Deputies, which would allow for an increase in foreign capital in Brazilian carriers. Regarding the other proposals recently put forward by TAM Airlines, Gol, Azul and Avianca Brazil, reducing taxes is reportedly seen as difficult in the current budget climate, especially considering the greater public and infrastructure spending demanded by protestors across the country recently, with aid to airlines potentially seen as contentious considering widespread popular demand for public transport improvements. Intervening in fuel costs is also reportedly seen as politically and economically costly.
Brazil President sees raising cap on foreign participation in carriers as best way to aid industry
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After two years of weak demand and pricing, some signs of stabilisation are emerging in Brazil; however the country’s two largest airlines are adopting an understandably cautious tone in their assessment of the operating environment. Although both LATAM Airlines Brazil and Gol have significantly reduced their domestic capacity during the last year and a half, both airlines have concluded that some excess supply remains in the market place. Fast-growing Azul has opted to slow its capacity growth in 2016, but Brazil’s fourth largest airline Avianca Brazil has continued growth in order to build its market share within the country.
LATAM Airlines Brazil also believes its performance on routes between the US and Brazil is improving, which is a similar conclusion drawn by US airlines operating between the two countries. For LATAM, the improved performance is offsetting some weakness on other long haul routes from its Spanish-speaking countries.
Neither airline has offered specific capacity guidance for 2017, but LATAM Airlines Brazil and Gol are likely to keep their supply restraint intact. Pricing in the domestic market has yet to stabilise, and competitive capacity actions will result in those airlines keeping their own ASK increases at bay in order to sustain a favourable supply/demand balance.
Brazil's Azul relies on an arsenal of resources to counter weak domestic demand
Brazil’s third largest domestic airline Azul has been forced to curb its once rapid growth as the country’s economy will endure its second consecutive year of contraction during 2016. Similarly to all Brazilian airlines, Azul has been plagued by soft domestic demand and a sharp currency decline that creates challenges for expenses denominated in the USD – such as fuel and aircraft costs.
Although it will take some time for Brazil’s economy to recover fully from its current recession, some encouraging trends are beginning to take effect. Recently the BRL has gained some ground against the USD, which is a welcome sign for Brazilian airlines.
Azul has used many tools to adapt to Brazil’s current economic slump, including a new relationship with the European airline TAP and equity infusions from foreign investors. It has also show a willingness to lower fares in some markets, particularly to the US, to ensure that it retains a strong market presence once Brazil embarks on a steady path to economic recovery.