Brazil’s perfect storm

Breaking with global best practice is hindering Brazil’s aviation potential and holding back economic development.

Latin America is having a tough time of it. Even though the International Air Transport Association (IATA) is predicting the global industry will finish some $33 billion in profit in 2015, the region’s airlines will post a $300 million loss. Weak commodity prices, adverse currency fluctuations and an unfavourable business environment are all playing their part.

Overall, the future looks brighter, though not dazzling. New governments in Argentina and Venezuela provide a glimmer of hope in these countries. Additionally, Latin America is home to some strong airlines, which compete globally and have experienced double-digit growth in recent years.

These factors, combined with strong demand for regional links to the US – which is behind a 5.6% rise in capacity in 2015 and an anticipated 7.5% rise in 2016 – will at least allow Latin American carriers to escape from the red in the next 12 months and register a modest $400 million profit by end 2016.

There is one dark cloud on the horizon that does not appear to be drifting away any time soon, however. Brazil, once a driver of the region’s economic performance, is now acting as an anchor.

According to IATA, Brazilian carriers saw their costs rise 24% in 2015 compared with the previous year but revenues increased just 3.7%. Year-end figures for 2015 will confirm heavy losses for the country’s airlines, which stood at BRL3.7 billion for the first nine months of the year.

Aviation’s ability to stimulate trade and prosperity is well documented. In Latin America, it supports 4.9 million jobs and contributes $153 billion to GDP. Despite this – and despite being a vast country that relies heavily on air transport for internal connectivity – substantial changes are needed to Brazil’s aviation environment.

“Brazil is engulfed in a perfect storm as airlines struggle under the burdens of a deepening recession, a deteriorating currency and government policies that impose crushing costs on the industry,” says Peter Cerda, IATA’s regional vicepresident.

“Due to the size of Brazil, its dire situation is impacting the entire Americas region. The government has not shown a strong commitment to develop and support aviation during these difficult times. The country is overly bureaucratic and a very difficult place to do business. It has become one of the most expensive countries for airlines to operate in.”

Fuel prices are often cited as typifying Brazil’s onerous costs. Fuel supply is controlled by state-owned Petrobras and priced as if it were imported, even though 75% is produced domestically. This overpricing adds a significant cost to the airline bottom line.

There is also a state tax with which to contend. The domestic aviation fuel tax can be as high as 25% and while airlines have been able to negotiate the tax down in some states, it merely adds to what is already a stiff jet fuel price. In fact, in Brazil, fuel accounts for 34% of airline costs versus the 26% global average.

It puts Brazilian carriers at a competitive disadvantage and means they will struggle to maximise their potential impact on the country’s economy. A transparent national fuel policy would go a long way to resolving this issue but there are no signs of this happening just yet.

Fuel may be the poster child for Brazil’s aviation woes but it is far from the only concern. Consumer rights is another area where the country’s legal framework jars with the international norm.

Even though Brazil is a signatory to the 1999 Montreal Convention (MC99), which governs such matters, resolution 141 passed by the National Civil Aviation Agency (ANAC) directly contravenes some of MC99’s stipulations.

Airline charges can only be applied to excess baggage, for example. For domestic travel in Brazil, one 23kg bag is free and two 23kg bags are allowable for international travel. Airlines are therefore prevented from responding to those passengers that only want to travel with hand baggage.

Meanwhile, compensation awards for flight delays and cancellations often exceed MC99 limits, resulting in an inconsistency that inhibits airline planning. Travel disruptions end up being unnecessarily complicated and expensive.

“Brazil needs to adhere to all of the Montreal Convention and promote a single and consistent legal framework for airlines that they can operate in with confidence and invest in without legal uncertainty,” says Cerda.

A robust platform would also alleviate growing tensions surrounding airport slots. IATA’s Worldwide Slot Guidelines are generally acknowledged as international best practice in this field but ANAC has proposed amendments for monitoring regularity and punctuality.

It has gone as far as retroactively requesting carriers to provide information about slots during the 2014 World Cup. Airlines received an estimated 50,000 notifications for this information even though during the World Cup Brazilian airports had some of the best operations ever, with punctuality and regularity exceeding world averages.

Brazil’s Slots Regulation 338 seemingly ignores the WSG recommendation of a Slot Performance Committee to address these issues and has subsequently become a topic of much discussion. Airlines argue that the slot allocation process is a planning tool that determines services at least six months in advance. Punctuality, on the contrary, is a daily operational issue caused by any number of factors, most of which cannot be directly attributed to the airline.

“The lack of harmonisation with global standards for slots is a major problem in Brazil and increases the costs for air travellers and airlines,” says Cerda. “This needs to be rectified urgently to bring Brazil into the fold of international standards.”

It is not all bad news. Brazil will host the Olympic Games in the summer, a sure-fire generator of new routes, new business and economic growth. And despite the high-profile areas of concern, ANAC is believed to favour moving towards a deregulated aviation industry as far as possible. Intensive lobbying work by industry associations, including IATA and the Brazilian Airline Association have helped in this regard.

The associations are busily promoting the benefits of aviation, especially in economic terms. Already, aviation supports more than 800,000 Brazilian jobs, boosts GDP by some $17 billion and pays some $1.76 billion in tax. It could do even better. An extra $660 million is thought to be on offer if Brazil could improve its global connectivity just 10%.

There is a regional aviation programme, which would make $100 million available in subsidies to carriers that start up regional services within Brazil, but the project, and others like it, still have to prove their effectiveness. It all adds up to an uncertain future. Brazil, once the powerhouse of Latin America, now struggles with tentative steps. “A roadmap is needed to guarantee the country’s air connectivity and to ensure Brazil’s air hubs are able to compete on equal footing with others in the region,” Cerda asserts. “If the pressing issues are addressed in Brazil, it will be good for the flying public, the Brazilian economy and the health of the airlines in Brazil.”

(This article first appeared in Routes News – Issue 1, 2016)

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