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Economic decline creates headwinds for Brazil's domestic airlines

It has been an eventful 2019 for Brazil’s aviation market since Avianca Brasil ceased operations and Brazil’s largest airlines began jostling for some of the defunct airline’s more attractive assets. 

Azul joined other airlines in working to obtain Avianca Brasil’s slots (particularly at São Paulo Congonhas airport) and now, armed with new slots, the airline is launching flights on the key Rio de Janeiro business route. Its service on the route will pale in comparison to those of GOL and LATAM Airlines Brazil, but breaking into that market is key for Azul’s domestic evolution. 

As the shakeout in Brazil’s domestic market after Avianca Brasil’s exit continues, Brazil’s economy is facing some headwinds after its growth forecast for 2019 has been cut, and general overall recession concerns are rising for countries worldwide. 

Summary

  • The shakeout in Avianca Brasil’s domestic market continues as Azul gears up to launch service on the strategic São Paulo Congonhas-Rio Santos Dumont route pairing. 
  • Azul makes a push for ATR operators to operate from auxiliary runways at Congonhas
  • Brazil’s economic prospects are dimming just as concerns are growing about potential oversupply in the country’s domestic market. 
  • It appears that the country’s economic recovery is taking a sideways trajectory, and capacity creep could create headwinds for its domestic aviation market in the latter half of 2019. 

Azul injects interesting competition in the key Congonhas-Rio route 

Brazil’s fourth largest airline Avianca Brasil sought creditor protection in late 2018 and ultimately ceased operations in May-2019.

Throughout that period the airline’s operations continually dwindled, and ultimately Brazil’s other airlines picked up passenger share, reflected in increases posted by GOL, LATAM Airlines Brazil and Azul during 1H2019. 

Domestic passenger share among Brazil's airlines in 1H2018 and 1H2019 

Airline  Share in 1H2018  Share in 1H2019 
GOL 33.2% 35%
LATAM Airlines Brazil 30.4% 31.3%
Azul 22.9% 26.3%
Avianca Brasil  12.8% 6.9% 

Overall passenger numbers in Brazil’s domestic market grew 1.4% year-on-year in 1H2019, to 44.8 million. Capacity (ASKs) fell 1.4% and traffic notched up 1.1%. 

The divestiture of Avianca Brasil’s assets, mostly coveted airport slots, was somewhat convoluted, and ultimately the country’s government decided to allocate the slots. 

See related report: Brazilian Aviation: scramble for Avianca Brazil’s slot allotments 

Slots at São Paulo Congonhas airport were the most attractive, given that the airport is a key market for business travellers taking the air shuttle to Rio de Janeiro Santos Dumont airport. 

Azul received 15 slots at the airport, which now gives the airline a total of 41 daily slots at Congonhas versus 236 for LATAM Airlines Group, 234 for GOL, 14 for the ATR operator Passaredo and 12 for the domestic charter operator MAP. 

Azul now plans to launch services in late Aug-2019 from Congonhas to Santos Dumont, with 34 daily services.

Data from CAPA and OAG for mid-Aug-2019 show that for the same period in 2018 Avianca Brasil had a 17.4% seat share on the route, compared with a 43% share for GOL and LATAM Airline Brazil’s 40% share. After Avianca Brasil exited the route, GOL’s seat share increased to 53.6% and LATAM’s share grew to 46.4%. 

Airline seat share from São Paulo Congonhas to Rio Santos Dumont in mid-Aug-2018 and mid-Aug-2019 

Azul’s management has said that the company is looking forward to bringing more competition to Brazil’s largest domestic market. According to Panrotas, Kayak reported a 42% drop in average airfares on the route after Azul began selling tickets. 

Azul pushes for a reshuffle of turboprop operations at Congonhas 

As it settles into operating on the strategic Congonhas-Santos Dumont route, Azul appears to be pressing Brazil’s government to require Passaredo and MAP to possibly use auxiliary runways at Congonhas. Azul executives have stated that the landing speed for ATR turboprops on the main runways is 120kn, but the aircraft’s approach speed on the main runway is below those levels. 

Recently, Azul CEO John Rodgerson told analysts and investors that a lot of work was being done with the government regarding ATR operations at the airport (both Passaredo and MAP have all-ATR fleets).

“…We are kind of standing by to see what happens”, Mr Rodgerson said. He explained that “certainly there is a possibility” that those ATR operators could move to the airport’s auxiliary runway, which would allow for more distribution at Congonhas’ main runway. 

“We are not against MAP and Passaredo getting into the airport, I think it is great overall”, Mr Rodgerson said. “But I think we want to use the most efficient asset possible, which is using the main runway to fly larger aircraft.”

Brazil could be heading toward a recession as domestic capacity grows 

As Brazil’s domestic market evolves into a concentration among three airlines, the country’s economic prospects are dimming: the country’s GDP growth forecast for 2019 has been cut from 2.2% to 1.6%.

The Washington Post recently reported that Brazil, the largest economy in South America, shrank 0.2% in 1Q2019, and if negative growth occurs again in 2Q2019, that would mark a recession. 

“Some thought Brazil would benefit as China sought to buy soybeans and other products somewhere other than the United States, but slumping commodity prices have hurt”, the publication stated. 

Recently, Brazil’s largest domestic airline GOL expressed some concerns about capacity creep within the country. Its executives recently stated that the company would post 3% domestic capacity growth in 2Q2019, but noted that industry growth would settle towards 12%.

“We [the industry] don't have demand growing at that level”, stated GOL CFO Richard Lark. 

If Brazil does in fact sink into a recession, the uptick in capacity could create pricing pressure in the country’s domestic market, which has recovered in fits and starts as Brazil has struggled to gain sustained positive momentum during the past few years.

If supply significantly outstrips demand in 2H2019, yields at GOL, LATAM Airlines Brazil and Azul will suffer. 

Brazil's airlines could face some headwinds as the country's economy sags 

Brazil is one of Latin America’s most import aviation markets and no other country in the region has passenger levels close to its levels. Its domestic passenger levels grew from 50 million in 2008 to 96 million in 2015, before falling to 91 million in 2017 due to the country’s economic weakness. 

It appears that the country’s economic recovery is taking a sideways trajectory, and capacity creep could create headwinds for Brazil’s domestic aviation market in the latter half of 2019. 

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