In terms of statistics, Brazil is one of the most dynamic aviation markets in the world today, with 18 airlines serving a population of more than 180 million, the largest in Latin America. Collectively those statistics make Brazil the fourth largest domestic market in the world according to IATA’s statistics.
As always seems to be the case though, the headline numbers hide some of the important facts. Two airlines, TAM and GOL, together control over 90% of the domestic air traffic in Brazil while most of the remaining carriers serve small or niche regional markets. Of those smaller carriers only Oceanair and WebJet appear to have the aircraft type and business model to challenge the leaders.
Up until 2003, the Brazilian aviation market had, like many markets in the world, grown around two times faster than GDP; the classic ‘multiplier’ once again proving to be true. Yet in Brazil the traffic multiplier has in the last five years averaged over four times GDP as a combination of emergent market dynamics and low-cost airline development stimulated demand. The entrance of GOL in 2004 as the first successful low-cost carrier in Latin America was a major catalyst for this development and the airline continues to be highly regarded as a driver of economic activity in the region. More recently, the growth factor has reverted back to more conventional multiplier levels of between one-and-a-half and two-times GDP and although – like most other markets in the world – 2008 will have been softer in Brazil, the expectations remain that positive growth will have been recorded.
The first half of 2008 certainly appears to have been positive with steady year-on-year growth being reported despite the cost of fuel and the economic uncertainty that surrounded the wider region. In part that growth in domestic air demand was fuelled by the diversity of the economy with areas such as grain production and steel manufacturing continuing to support it.
ANAC (the Civil Aviation Authority of Brazil) reported that airlines such as TAM and GOL responded to the market conditions experienced during the first half of 2008 by increasing capacity (through to the end of November), by 14.2% and 16.4% respectively compared with 2007.
Yet their growth in passenger kilometres flown grew by only 11.2% and 6.8% respectively, which meant that their load factors suffered. Nevertheless, there were few markets in the world last year where the two largest carriers expanded capacity by more than 10% and even fewer where the market responded positively to such expansion.
However, the sudden turn of global economic events at the end of the third quarter has left the airlines possibly heading towards turbulence in 2009. The decline in the price of oil of more than 65% during the second half of last year was partially offset by the depreciation of the Real by 19% from September through early December. And although both TAM and GOL may have a natural currency hedge out of their international routes, the fact remains that a good portion of their obligations – such as leases and fuel prices – are in US dollars.
In such a context, the arrival of a new airline player entering Brazil at the end of the year in the form of Azul represents either a masterstroke of strategic vision or perhaps an unfortunately timed investment.
Azul, the brainchild of the legendary David Neeleman, founder of low-cost carrier JetBlue in the United States, began flying on December 16 using 118-seater Embraer 195 jets. Azul currently has some 70 such aircraft on order and it expects to fly to 25 cities by the end of 2009 using 16 of the ordered fleet.
Thereafter, the Azul plan calls for an additional aircraft each month through the end of 2011, a statement of confidence in the market opportunity if ever there was one.
According to a press release by the company, Azul plans to avoid the congested hubs of Brazil and offer point-to-point service from airports such as Viracopos in Campinhas, Salvador and Porto Alegre. A hub by-pass strategy in such a large market seems to be a reasonable approach in filling a gap that may exist in the market if sufficient frequency can be established. Only time will tell if the market responds to the offer.
Such capacity growth, however placed, increases the pressure on the aviation infrastructure in Brazil.
Airports are generally in dire need of new investments for both safety and security reasons as they struggle to keep up with increasing demand on the air and land sides. At the end of 2008, the Ministry of Defence, which is responsible for running the airport system through Infraero, announced the launch of a ‘diligent analysis’ to prepare for the participation of the private sector. The ministry is expected to announce the privatisation model it will follow by the end of the second quarter of 2009, and will also prepare and publish a tender process by the end of 2009. The publication of that tender document will be eagerly awaited around the world as the Brazilian market is seen as one of the few remaining opportunities for private investment in the airport sector in the region.
Looking forward, the economic outlook for Brazil in 2009 will pose some challenges to all the airlines, both established and emerging, as GDP is forecast to grow at less than 1% or even close to zero. Meanwhile the government continues to hold an optimistic view of a 3.2% growth year although such growth is discounted by most experts. The cost of fuel is predicted by IATA to hover around the $60 mark, while the Real and the commodity prices are expected to remain depressed throughout the year as the export markets in developed countries remain in a recession.
Unsurprisingly, IATA expects that the Latin American carriers may see losses around the $200 million mark in 2009. For the Brazilian airlines it will take much better capacity management coupled with aggressive marketing to stay away from being a major contributor to that statistic.
This article is featured in Routes News 2009 Issue 1