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Potential airline consolidation in Brazil: more questions than answers

Analysis

There has been no shortage of smaller airlines in Latin America seizing on opportunities during the COVID-19 pandemic. But Azul’s reported pursuit of LATAM Airlines Brazil is the most ambitious move yet. 

After a consistent period of consolidation in Brazil during the last decade and a half, there is likely to be debate about the necessity for additional coupling among airlines, and how the country’s government would view further consolidation. 

And despite the fact that LATAM has apparently dismissed Azul’s overtures, LATAM’s restructuring in Chapter 11 bankruptcy protection adds a layer of uncertainty to the outcome, and possibly the future composition of Brazil’s domestic market. 

Summary

  • The codeshare between Azul and LATAM Airlines Brazil ran its course in a short period of time. 
  • If Azul formalises its quest to acquire LATAM Airlines Brazil, a lot of business and regulatory intricacies need consideration. 
  • There has been a solid amount of consolidation in Brazil during the past decade and a half, but the pandemic could usher new waves of rationalisation, if needed. 

An end to a short-lived codeshare creates intrigue in the strategic Brazilian market

The abrupt end to the Azul-LATAM Airlines Brazil codeshare that launched in Aug-2020, and subsequent reports in Reuters that Azul was pursuing an acquisition of LATAM Airlines Brazil, could potentially shake up an already unsteady Latin aviation landscape. 

LATAM Airlines Brazil’s parent, LATAM Airlines Group, is restructuring under Chapter 11, alongside Avianca Holdings and Aeromexico. After LATAM sought bankruptcy protection in May-2020, LATAM Airlines Brazil sought similar protection in Jul-2020. 

During its time in Chapter 11 LATAM has exited Argentina’s market, and entered into a codeshare agreement with Azul that was designed to equip each airline with a different toolset during the recovery from the COVID-19 crisis. 

At the beginning of 2021 Azul’s chief revenue officer Abhi Shah commented that “exceptional circumstances make you think differently”, and to LATAM’s credit, it was open to the idea of codesharing. 

At the end of 2020 the codeshare between the two airlines covered 151 nonstop domestic routes, and Mr Shah stated that it was a way for Azul and LATAM to bring their networks back online as quickly as possible, as well as reducing uncertainty. 

See related report:  CAPA Live: Azul Brazilian Airlines uses a range of tools in crisis

But now the codeshare has ended, with LATAM concluding that the expansion and volume of passengers that benefitted from the agreement did not meet its expectations in 2021. Azul, meanwhile, said the cancellation of the codeshare was a reaction to its hiring of advisors to actively explore opportunities for consolidation. 

Complexities abound if Azul formally launches a campaign to acquire its rival 

Those opportunities appear to include a pursuit of LATAM Airlines Brazil, which itself is the product of the 2012 merger of LAN and TAM. The tie-up gave LAN a key foothold in Latin America’s largest market and as of Sep-2019, Brazil represented 38% of LATAM’s trailing revenue by point of sale. 

During a recent CAPA Live conference LATAM Airlines Group CEO Roberto Alvo stated that “40% of our resources and our capacity sits in Brazil”. He highlighted LATAM’s position as one of Brazil’s largest domestic airlines, and its ability to provide global connectivity to and from Brazil

See related report: CAPA Live: LATAM Airlines Group ready for fierce competition

Taking all of that into account, it is not surprising that LATAM has been quoted in various media outlets declaring that it has no intention of selling its Brazilian franchise. 

Additionally, LATAM and Delta, which has a 20% stake in LATAM, have already gained approval from Brazilian authorities for their proposed joint venture. 

Of course, if Azul’s overtures are formalised, the bankruptcy court has to weigh in on an acquisition-merger offer, and it is unknown how the court would view that proffer.

Brazil’s government would also have to evaluate the benefits merger between two of its largest airlines. In 2019 GOL was Brazil’s domestic market leader, with a 39% share, followed by LATAM at 38%. Azul’s share was 23%. Avianca Brazil ceased operations in 2019, and the three remaining airlines absorbed that capacity, to varying degrees. 

Based on 2019 market share data, a combined Azul-LATAM Airlines Brazil would have an approximately 61% share, which could raise some concerns among Brazilian regulators. However, there would be minimal route overlap, and that could ease some competitive issues that could be raised. 

Consolidation has been a regular occurrence in Brazil in the recent past...

There’s also been a steady stream of consolidation in Brazil dating back to 2007, when GOL purchased Varig.

GOL then acquired Webjet in 2012. That was followed by Azul’s acquisition of Trip in 2012. More recently, Azul has acquired Flexjet to access smaller markets through the smaller airline’s nine-seat Cessna Caravans. 

Obviously the pandemic has changed aviation markets worldwide, and there has been discussion about potential consolidation in Latin America. But it is tough to see how LATAM would give up its Brazilian franchise.

Brazil’s trips per capita in 2018 were 0.5, compared with 0.6 for Peru and 2.7 for the highly mature US market. Brazil remains Latin America’s largest market, and its potential post-pandemic remains robust. 

At the CAPA Live conference Mr Alvo also said that “definitely three players in a market such as Brazil can work very well.” But it is a challenge to expect that regulators and the bankruptcy court will adopt the same view. 

...additional consolidation is far from certain, but ambition remains high

Obviously the speculation about potential for consolidation in Brazil raises more questions than answers.

But Azul is clearly drawing a line in the sand with its ambitions to usher in some form of additional consolidation in Latin America. Now it is time to wait and see if that ambition bears fruit. 

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