Azul

Continued erosion in Brazil’s domestic demand triggers stringent capacity discipline for Gol and TAM

Brazil’s two largest carriers Gol and TAM have further refined their already-reduced capacity guidance for 2012 as traffic growth in the country’s domestic sector continues at a much slower pace than during the last couple of years. The continued discipline is part of a broader effort that began in mid-2011 by the carriers to improve their yield performance. But the rebuilding process is progressing more slowly than each carrier would have liked as TAM has concluded customers in the Brazilian domestic market place are becoming more price adverse as the country’s economy is slowing from historically high growth levels during the last several years. Brazilian carriers are also facing added pressure from government-imposed increases in navigation and landing fees.

During 1Q2012 demand (RPKs) in the Brazilian domestic market grew just 7.3% on capacity growth of 11.3%. The growth in 1Q2012 is much slower than the 15.3% growth recorded year-over-year in 1Q2011 and the 33% growth during 1Q2010.

Brazil’s Gol and TAM continue domestic capacity restraint in attempt to improve yields

Brazilian low-cost carrier Gol has revised its domestic capacity plan for 2012 to a zero growth scenario and is hinting its domestic ASKs this year could even fall after growing by 7.4% in 2011. The country’s largest carrier, TAM, also plans less than 2% domestic capacity growth for 2012 after expanding its domestic ASKs by 9.5% in 2011. Both carriers are exhibiting capacity discipline in the hopes of continuing a yield recovery that began during 2H2011. But at the same time other domestic Brazilian operators, including Azul, Avianca Brazil and TRIP, continue to rapidly expand.

Gol revised its capacity forecast as it posted last week a BRL710 million (USD389 million) loss for 2011 and a negative 2.5% pre-tax margin. The losses were largely due to a 23% hike in the carrier’s fuel costs, currency fluctuations and non-recurring expenses related to aircraft returns.

Gol and new Gol domestic subsidiary Webjet have begun the process of cutting 80 to 100 daily domestic flights. This represents about 8% of their current combined offering of 1100 daily flights. Gol agreed to purchase Webjet in Jul-2011 and while the acquisition has not yet been completed, 87 days of Webjet's operation were included in Gol's 2011 results.

Azul plans more rapid expansion, expects to capture 15% share of Brazilian market by end of 2012

Azul is planning more rapid expansion in 2012 despite the expected slowdown in the growth curve of the overall Brazilian market. The low-cost carrier, which so far this year has launched 14 new destinations while adding 17 aircraft, sees plenty of opportunities to further stimulate demand on secondary domestic routes where there is relatively limited service.

Azul is now Brazil’s third largest domestic carrier after Gol and TAM. Azul accounted for 8.4% of domestic RPKs through the first three quarters of 2011, according to data from Brazilian civil aviation authority ANAC. In 3Q2011, Azul’s share of the Brazilian market exceeded 9% for the first time.

Azul chairman David Neeleman told CAPA along the sidelines of the ALTA Airline Leader Forum in Brazil earlier this month that he expects the carrier will capture 15% of the market by the end of 2012.

Brazil airport privatisation plan comes under attack at ALTA forum

Brazil’s new plan for privatising three of its largest airports has already started to draw criticism from Latin American carriers as well as IATA and the Latin American airline association ALTA. The upcoming privatisation of Brasilia, Sao Paulo Guarulhos and Viracopos-Campinas airports was a hot topic at last week’s ALTA Airline Leaders Forum in Rio de Janeiro.

ALTA, which represents airlines throughout Latin America and the Caribbean, and IATA are concerned the three concessions as currently outlined will result in higher fees and a large chunk of the generated revenues not being reinvested in modernising the airports. But ALTA, IATA and the airlines in the region widely recognise the potential benefits of airport privatisation as Latin America struggles to cope with infrastructure challenges that are now threatening to curtail continued growth.

Sao Paulo dominates Brazil's busiest domestic and international routes

Sao Paulo Guarulhos International Airport is Latin America's busiest international hub, but ranks only 57th in the world by international seats per week (or 24th by ASKs). Guarulhos is also Latin America's biggest domestic hub, ranking 35th in the world by domestic seats per week. Guarulhos is one of seven Brazilian airports among the world's top 100 domestic airports (by seats) but is the only Brazilian airport in the international top 100. This shows Brazil's market still remains very much a domestic-dominated market – similar to China.

Profitability in Brazilian domestic market plummets as yields drop

Intense competition in the Brazilian domestic market led to a sharp drop in yields in 2Q2011 and is expected to have a major impact on profitability throughout the Brazilian airline sector for the remainder of the year. Gol, which is primarily a domestic operator, has particularly been impacted by the suddenly unfavourable market conditions with a BRL359 million (USD221 million) net loss incurred in 2Q2011. TAM also has been impacted but has the benefit of a large profitable international operation, allowing it to remain in the black in 2Q2011.