TAM Airlines

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.

Carriers could benefit from US Government’s pledge to increase visa throughput for Brazil and China

Small steps by the US to increase visa processing capacity for Brazil and China are the result of a campaign by the country’s travel and tourism advisory board to enrich understanding about the economic repercussions of failing to bolster efforts to increase the annual number of visitors from those countries. If those initial moves to strengthen visa processing capacity are successful, more initiatives could follow to capitalise on the economic benefits in opening travel to more visitors from Brazil and China to the US. Airlines already entrenched in those markets stand to increase traffic from those countries if travel restrictions are further loosened.

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.

TAM plans US expansion in 2012 with B777-300ERs while Brazil domestic growth slows

Brazil’s TAM is planning further capacity expansion on US routes in 2012 as growth in the Brazilian domestic market shows signs of cooling down. The US expansion will be driven by the doubling of TAM’s B777-300ER fleet next year from four to eight aircraft. The B777-300ER, which is by far the largest aircraft type in TAM’s fleet, is now only used on European routes but will start to be deployed in the US during 2012.

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.

Latin America, a bright spot for aviation, with continued growth and robust aircraft requirements

IATA, Boeing and Airbus have again noted the potential of the Latin American market, with IATA describing the region as a “bright spot in the aviation world” and Airbus commenting that Latin America’s aviation sector “has never been stronger”, following a boom in the sector over the past five years. Boeing has similarly noted the large potential in the Latin America market in its market forecast.

Latin America is “the only region generating aggregate profits for three consecutive years," IATA CEO and director general Tony Tyler noted at ALTA this month. On the outlook for the region, he commented: “Taking a long-term view of Latin American aviation, one can only be optimistic. The economic potential of this vast and varied geography can only be realised with a successful aviation industry”.