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Brazil's airlines: a perpetual great future June 2002 Download PDF

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Brazil has been considering the health of its airline industry post September 11. The Ministry of Development, Industry and Trade commissioned the Brazilian National Development Bank (BNDES) to examine the sector, and its findings were released in April.

The BNDES study, "The Brazilian Aviation Sector — Study and Preliminary Diagnosis" finds the airline sector at an all time low. Of the five largest carriers in the country, only VASP was able to report a profit in 2001, but that did not prevent it joining Transbrasil and Varig as being described in the report as being either "actually or technically insolvent". Only TAM and GOL escape this status.

The BNDES study was commissioned partly to answer demands from some airline officials that the industry should receive financial support from the Brazilian government post September 11 in the same way that the Bush administration has supported carriers. The Brazilian government has after all been down this road before when it bailed out the banking industry in the 1990s. As with airlines worldwide, Brazilian carriers were already having a poor 2001 prior to the terrorist attacks in the US. Factors such as the depreciation of the Real versus the Dollar, the electrical energy crisis and the cooling of the domestic economy were all negative for Brazilian carriers.

No rescue operation

Unfortunately for the ailing Brazilian airlines, the BNDES study concluded that a whole–scale special rescue operation was inappropriate (it is interesting to note that despite September 11, domestic traffic grew at a respectable 6% in Brazil in 2001).

Instead, BNDES proposed several fiscal relief measures, rather than direct official financial support for the sector. These relief measures include:

  • Lowering of income tax rates for airlines;
  • Lowering or curtailment of taxes on aviation fuel and on aircraft leases; and
  • An improvement in the government’s own bureaucratic procedures in regard to the import of aviation spares and components.

The report blames some of the sector’s financial woes on poor airline management. Particularly, Brazilian airline managers are blamed for over–ambitious expansion plans putting too much financial strain on weak balance sheets. The BNDES study also encourages airlines to capture a greater market share of the air cargo market in the future.

However, the report singles out the main problem of the industry as an oversupply of airlines. The study suggests that given the size of the Brazilian market, there should only be room to accommodate two domestic airlines and a single flag carrier. As with the EU, the Brazilian government is encouraging consolidation among its own carriers.

Nevertheless, the BNDES study supports the attitude of the Brazilian government itself, and falls short of recommending direct interference in the rationalisation process. While state aid is definitely not on the agenda for "insolvent" Transbrasil, Varig or VASP, BNDES can provide new capital to airlines for "viable operational projects".

Thus, as Brazilian carriers seek to find new financial investors, BNDES may choose to play an influential role regarding which airlines survive and which fail.

The government is setting up a new industry regulatory agency, the National Civil Aviation Agency (ANAC), which may be able to encourage consolidation. ANAC, unlike its predecessor the Civil Aviation Department (DAC) has no military input or interference.

Also, ANAC is charged with monitoring the financial and economic health of the airlines, which hopefully will prevent a repetition of the chaos caused when Transbrasil collapsed in December 2001.

Brazil’s five main players are profiled below.


The airline and its advisors (Banco Fator and Credit Lyonnais) are touting a business plan to investment banks, pension funds, institutional investors and to BNDES which aims to raise some $400m in fresh equity.

The airlines largest shareholder, the Ruben Berta Foundation which owns 87.5% of the voting stock, has approved of the planned capital increase but declared it will not participate in it. It would appear that current plans call for a domestic flotation on the stock market with several "major investors already identified".

Consolidated losses of $203m were recorded in 2001, the worst in the airline’s 74–year history. The size of the loss was reduced by the $370m sale and leaseback transaction carried out with Boeing, covering two MD11s and four 737 aircraft in December 2001.

The carrier’s regional subsidiaries, Rio Sul and Nordeste also recorded losses in 2001. Varig is in the process of re–positioning these carriers in the marketplace as part of its strategy to combat the increasing threat posed by low–cost carrier Gol. These subsidiaries are losing their autonomy, as strategic decisions are now being taken at a Varig Group level.

In response to the threat of Gol, Varig is removing many of its fare restrictions and is also offering a range of lower fares where it faces direct competition. The full impact of these turf battles has yet to be felt in the airline’s financial results. Lower fuel prices and a stabilisation of the Real saw Varig record a less than encouraging net loss of $ 57.3m in the first quarter of 2002, which at least was a 31% improvement on the same quarter in 2001.


The only Brazilian carrier to be in the black in 2001, VASP has adopted a strategy of closing its unprofitable international routes and concentrating its capacity on domestic routes. Net profits for 2001 of $15.6m were earned with the benefit of the sale of the carrier’s 50% stake in Lloyd Aereo Boliviano for $9.8m. Despite a 9.5% increase in passengers carried, lower yields saw overall revenues fall by 2%.

The largest problem for VASP appears to be its aging fleet. With an average age of 25 years, VASP has no aircraft on order, and it is unclear as to whether it has a balance sheet that can support the major fleet renewal programme that is clearly necessary. Much may depend on the airline’s majority shareholder, the VOE/Canhedo Group.


TAM was able to grow its revenue line by 31.6% to a record $1.26bn on the back of a 25% increase in passenger traffic. However the growth was, perhaps inevitably, at a cost to the airlines' bottom line. Record losses for TAM of $24.0m were recorded in 2001 after the carrier had been able to record a profit of $0.2m in 2000.

TAM has embarked on a cost–cutting programme that has helped see a profitable first quarter in 2002 producing net profits of $ 6.4m (versus a net loss of $42.5m for the same quarter in 2001).

The carrier has decided to scale back its international operations. During 2001, TAM dropped its services to Montevideo, Frankfurt and Zurich, and reduced its frequencies on Buenos Aires–Miami. The redeployment of capacity on domestic routes has consolidated the carrier’s already strong position.

It is possible that TAM may join Varig in representing Brazilian carriers in the global alliance battle. Discussions are believed to have occurred with SkyTeam, TAM already has a code–share agreement with Air France on Rio de Janeiro–Paris. However it should be noted that the carrier also has links with oneworld through its code–share with Iberia on Rio de Janeiro — Madrid.


GOL is the newest kid on the block in Brazil and is modelled on the low–cost airlines of the US and Europe. The carrier is owned by Grupo Aurea, which also owns Brazil’s largest long distance bus company.

In its first year of operation, 2001, Gol recorded losses of $2.3m, which were within the carrier’s expectations.

The airline operates a fleet of 737–700s and -800s, which are on seven–year operating leases. Plans are to grow the fleet to 19 aircraft this year, allowing the carrier to fly to some 20 destinations. The airlines' strategy calls for destinations to be served at least three times daily.

In March, Gol entered the prime Brazilian market operating between the two downtown airports serving Rio de Janeiro (Santos Dumont) and Sao Paulo (Congonhas). This city pair enjoys over a 100 daily frequencies with Varig and its subsidiaries offering 50 flights per day, TAM 35 flights, VASP 12 flights, and new entrant Gol 11 daily flights.


Transbrasil suspended all operations in December 2001. A bankruptcy case brought by GE Capital, one of the airline’s major creditors, has seen Brazilian judges vote two to one in favour of the aircraft lessor this April. The majority verdict has given Transbrasil some rights of appeal, and the case is likely to drag through the Brazilian courts for some time to come.

The airline, which is owned by the Fontana family, has some $400m of debt.

Commentators believe that there is no prospect of the carrier re–emerging from bankruptcy, and that the Fontana family’s prime concerns are to protect their non–airline assets.

The development of the airline sector in Brazil seems to depend on who is left standing. Varig is by far the largest carrier, enjoying dominance in the international market and a member of the Star alliance. If it can secure a stock market listing and a capital injection, then Varig should retain its position as the flag carrier for Brazil.

If the BNDES’s supposition is that Brazil needs only two domestic carriers, and it is assumed that the domestic operations of Varig is one of these, then only one player out of VASP, TAM and Gol may ultimately survive. VASP would appear the weakest of the three. If Gol continues to receive support from its parent, and its low–cost model is adhered to and accepted by Brazilians, then it would perhaps appear to have the strongest business model. This of course leaves TAM perhaps as a merger candidate for either Varig or Gol. It will be interesting to see whether Brazil’s politicians can resist interference in the consolidation process.

  Varig, Rio Sul
& Nordeste
Turboprops 14 5    
Emb145 15      
727 6     3
737-200 6     22
737-3/4/500 62     4
737-7/800 8   16  
767 12      
777 2      
DC10 3      
MD11 15      
A300       3
A319/320   27    
A330   7    
Fokker 100   50    
Fleet total 143 89 16 32
Av. age (years) 10.4 8.3 2.0 25.0
Orders 14 x 737NGs 8 x A319s None None
  6 x 767s 16 x A320s    
  4 x 777s 3 x A320s    
  Domestic International
Varig & subsidiaries 38% 81%
TAM 24% 19%
Gol 12% 0%
VASP 12% 0%

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