Brazil's aviation market is a mix of flux and opportunities
Brazil's aviation market appears to be in a state of flux.
Two of the country's largest airlines are in the throes of financial struggles, and currency headwinds remain an overhang.
Yet at the same time, the government seems poised to finalise some financial assistance for Brazilian operators broadly four years after the onset of the COVID-19 pandemic.
As GOL and Azul work to improve their financial stature, Brazil's dominant airline, LATAM Airlines Brazil, continues to build on its leading position in the domestic market.
LATAM's evolution could possibly entail a pivot to a different aircraft type, which could potentially increase competition on some of the country's domestic routes.
- The Brazilian carriers Azul and GOL take different paths to improve their finances.
- GOL’s parent Abra has attempted to branch out beyond its interests in South America.
- The government of Brazil moves closer to solidifying financial aid for airlines.
- LATAM uses its strategic advantage to solidify its leading position in Brazil.
- Brazil remains a ripe market for air travel demand.
GOL and Azul opt for different paths to shore up their finances
It's been an eventful year for Brazil's airlines.
GOL filed for US Chapter 11 bankruptcy protection in Jan-2024, due in part to a weak balance sheet. This was a remnant from the COVID-19 pandemic that reflected an absence of financial assistance from Brazil's government.
See related CAPA - Centre for Aviation report: GOL's Chapter 11 reorganisation reflects lingering post-pandemic challenges
GOL's rival Azul, meanwhile, undertook a complex financial restructuring in 2023 to reduce its lease payments by USD1.1 billion over the course of four years.
The package was "essentially COVID deferrals that our lessors agreed to transform into essentially what is interest-free debt, where Azul has the option of paying in cash or equity", Azul CFO Alexandre Malfitani explained during an earnings call in Aug-2024.
After an 11.7% devaluation of Brazil's currency in 2Q2024, Azul again is undertaking negotiations with lessors. The airline's CEO John Rodgerson explained that lessors are partners with Azul, "...and they've seen what's happened. I don't think anybody expected the exchange rate to devalue 12% inside of a quarter. I've been here [at Azul] 15 years. We've never seen that."
As partners, he added, "You sit down at the table, and we work through it and figure out what's the best path forward."
"Azul will be engaging with six lessors that are part of [an] equity instrument, and cumulatively account for about 95% of Azul's leases," said Raymond James analyst Savanthi Syth in a recent research report. "The tentative plan is to conclude lessor negotiations in the next month or so and complete additional debt financing vis-a-vis the [Azul] Cargo business in the following month."
In an 29-Aug-2024 update Azul said that cash-raising opportunities included an ability to use Azul Cargo as collateral, with a first-out capacity of up to USD800 million.
The airline also disputed a Bloomberg report describing Chapter 11 as an option that was "on the table" - calling the article misleading.
GOL's parent Abra works to remain nimble in a changing environment
As GOL continues its restructuring process, Bloomberg has reported that the airline's parent company Abra Group had held talks with Castlelake to raise USD1.3 billion of funds from the investment firm to avoid defaulting on its bonds. Abra is also the parent company of Avianca Holdings.
During 2Q2024 GOL posted a net adjusted loss of BRL1 billion, compared with BRL416 million profit the year prior.
One challenge all of Brazil's airlines faced in the quarter was the closure of Porto Alegre airport due to flooding. Azul has stated that the closure had affected its 2Q results by BRL200 million. The airline's posted a loss of BRL3.9 billion in the quarter, compared with a profit of BRL498 million in 2Q2023.
Despite the financial headwinds each airline faces, Azul and GOL launched their domestic codeshare in Jul-2024; this will create more than 2,700 travel itineraries for GOL customers, with just one connection.
Apart from reportedly negotiating new financing, Abra has also taken a stake in the Spanish airline and wet-lease operator Wamos Air, and forged a memorandum of understanding with Airbus for five A350-900 widebodies - even as Avianca's widebody fleet consists of Boeing 787s.
Abra and the Spanish low cost airline Volotea opted to end plans for a joint venture after IAG abandoned its bid to take over Air Europa.
Abra and Volotea formed the partnership in order to gain slots at Madrid Barajas airport, as part of a remedy package put forward by IAG. But IAG opted to walk away from the purchase after claiming the European Commission's conditions on the deal were too onerous.
See related CAPA - Centre for Aviation report: IAG/Air Europa: EU Competition Commission ignores wider airline economics
Brazil's legislators approve credit lines for airlines at a crucial point for the industry
Against the backdrop of Azul and GOL's work to bolster their respective financial positions, Brazil's congress recently approved a bill allowing airlines to access recurring credits lines of BRL5 billion, backed by the National Civil Aviation Fund.
Silvio Costa Filho, Brazil's minister of ports and airports, called the step an important one toward strengthening Brazilian aviation. The line of credit "will be essential for expanding the country's aircraft fleet, as well as increasing the number of seats and flights," he wrote in a statement about the measure, which now awaits approval from President Luiz Inácio Lula da Silva.
Mr Filho also stated, "In addition to improving services, it will help reduce operating costs for companies and, most importantly, reduce ticket prices."
There's been no distinct timeline for the distribution of the credit lines, which are being backed by Brazil's development bank BNDES, according to Bloomberg, which noted that GOL's eligibility for the government funds could be questionable. The publication stated that according to Brazilian law, companies that are restructuring their debts in court face restrictions when accessing credit from public funds.
The publication said that the government was seeking to work on a solution for GOL, with one possibility being GOL accessing funds through private partners. Quoting Mr Filho from an 13-Aug-2024 news conference, Bloomberg wrote, "We will have a meeting with BNDES and Gol and see how we can help."
Those nuances in Brazilian law could factor into Azul's negotiations with its lessors as the company seeks to shore up its financial position in the coming weeks.
LATAM Airlines Brazil works to reinforce its leading position in the country's domestic market
LATAM Airlines Group, whose Brazilian franchise as the leading airline in the country, recently showcased its ambitions to build on that position.
The company has outlined plans to invest USD2 billion in Brazil.
"We have very ambitious plans in Brazil," explained LATAM Airlines Colombia CEO Santiago Alvarez during the CAPA Airline Leader Summit Latin America & Caribbean held in Port of Spain, Trinidad, in Aug-2024.
The investment focuses on products, technologies and services for passengers and maintenance activities.
"Brazil right now is growing, and this is a moment where we should invest and try to capture the opportunity," Mr Alvarez stated.
LATAM Airlines Brazil is the market leader measured by domestic available seat mile deployment, according to CAPA - Centre for Aviation and OAG data for early Sep-2024.
Brazil domestic available seat miles, by airline, as of early Sep-2024
The airline's ambitions could shift into new territory going forward.
In Jul-2024 Reuters quoted LATAM Airlines Brazil CEO Jerome Cadier, who explained, "We have mapped out what growth could look like with a smaller (capacity) fleet. And this smaller fleet could come from Embraer, it could come from Airbus, and we're constantly looking for alternatives to increase growth".
The airline's rival Azul has a fleet ranging from Cessna Caravans, operated by its Azul Conecta subsidiary, to ATR turboprops, Embraer E1s and E2s and Airbus - narrowbody and widebody aircraft.
Azul mainline fleet, summary, as of early Sep-2024
In 2Q2024 Azul's executives noted that the airline was the only operator on 84% of its domestic routes - which is likely not lost on the airline's major rivals, GOL and LATAM.
LATAM Airlines Brazil, whose parent LATAM exited Chapter 11 bankruptcy protection in Nov-2022, could be positioning itself to evaluate smaller markets after seeing Azul's success in growing Brazil's passenger base.
Azul's President Abhi Shah told Aviation Week Network during the IATA annual general meeting in Jun-2024 that when the airline entered the market in 2008, Brazilian airlines transported approximately 50 million passengers. Over the past 16 years that has grown to 100 million, and Azul is responsible for 60% of the growth, flying approximately 30 million passengers, he explained.
It is yet to be revealed whether LATAM will ultimately add smaller jets to its fleet, but if the company decides to expand into smaller markets, it could add a new layer of competition in Brazil's domestic market and possibly create more options for customers leveraging the LATAM-Delta partnership.
The CAPA - Centre for Aviation Fleet Database shows the smallest gauge aircraft in LATAM Airlines Brazil's fleet is the Airbus A319, which could also be replaced by A220 or E-Jets; however, it seems as if the airline has potentially set its sights on new markets within Brazil.
LATAM Airlines Brazil fleet, summary, as of early Sep-2024
Airlines jockey for position in Brazil - a market still ripe for growing air travel demand
Although three major players have been the mainstay of the Brazilian market for quite some time, some of those airlines have grown both organically and through acquisitions.
It's a market to watch over the next few months, as Azul, GOL and LATAM Airlines Brazil positions themselves to capitalise on growth opportunities in a market where air travel's full potential has yet to be unlocked.