The expansion of low cost airlines and the optimism about the growth of aviation in Latin America were wiped out by the COVID-19 pandemic. In a few months, the region’s air transport market was on the verge of zero activity and, despite some signs of recovery, it should reconfigure itself with fewer airlines and return to pre-crisis passenger movement levels only in 2025, according to projections made by ICF, a consultancy.
Some companies have already folded, like TAME in Ecuador, while others are deeply shaken. Seeking to survive and keep operations, three of the largest carriers in the region – Aeromexico, Avianca and Latam – filed for bankruptcy in the United States. The International Air Transport Association (IATA) estimates a $18 billion drop in passenger revenue in 2020 due to the pandemic.
“Some companies have already disappeared, but because they are small, we don’t see them. Others will surely vanish in the next two years. And this will increase market concentration”, warns Eliseo Llamazares, head of aviation and tourism in Latin America at KPMG.
There is also an important impact on concentration due to reduced supply. With few airlines, we have less connectivity and less capacity.
Eliseo Llamazares, head of aviation and tourism in Latin America at KPMG.
One of the aspects that made airlines in the region more vulnerable was the lack of financial aid from governments. Iata points out that Latin America was the continent that received less government support. At least 13 of the 20 largest airlines in the world received direct aid from governments, which irrigated coffers at companies such as Germany’s Lufthansa, Air France, Dutch KLM, Portuguese TAP and Britain’s Easyjet. At least $123 billion was allocated to these and other carriers.
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“We did not receive financial support to accelerate the recovery and therefore we will have to find another way out”, says José Ricardo Botelho, CEO of the Latin American and Caribbean Air Transport Association (Alta). The statement was made during a videoconference of the World Travel & Tourism Council.
Expectation in Brazil
Direct government assistance is still a hope for Brazilian airlines. Azul, Gol and Latam have been negotiating a loan to relieve balance sheets since the beginning of the crisis with the National Bank for Economic and Social Development (BNDES). According to information provided during the announcement of the bank’s financial results for the second quarter of this year, the director of Privatization at the institution, Leonardo Mendes Cabral, confirmed that the three firms should receive an aid of BRL 6 billion, with the BNDES lending BRL 3.6 billion and the rest coming from private partners.
“The loan that companies requested from BNDES is still under debate. We expect that this will be resolved soon, but so far it has not yet been resolved. No airline has received any type of loan until now”, confirms the president of the Brazilian Association of Airline Companies (Abear), Eduardo Sanovicz.
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In addition to the loan, the sector negotiated two other economic issues with the government. The first is the end of taxation on aircraft engine leasing, which started to be charged this year. The other is a limited release of airlines’ employees’ severance fund. Both demands were met by the National Congress, but were vetoed by President Jair Bolsonaro.
There has been a reduction in navigation tariffs, a review of air routes and regulation rules. In addition, Law No. 14,034, enacted on August 5, presented some advances: an end to the additional international boarding fee of $18 and a non-obligation of airlines to respond for material or moral damage in the delay or cancellation of flights due to “unforeseeable circumstances or force majeure”. According to Abear, companies lost about BRL 300 million per year with the judicialization of these cases.
“On the subject of judicialization, the Brazilian rule is now closer to international ones and restricted the field of action of those who are known as “vulture sites”, which fish in the judicial swamp. They ended up burdening the system”, celebrates Sanovicz.
“We are experiencing the worst crisis in the history of aviation and, therefore, government support is of fundamental importance to maintain the value of aviation to all of society”, says the director general of Iata in Brazil, Dany Oliveira. “That is why we continue to reinforce that support measures must go beyond the initial emergency. Cost savings, in any form, are critical to recovery. Without support we will come out of the crisis in a slower and more painful way”, he adds.
While the economic agenda with the government does not come out, companies have adjusted to stay alive. In addition to the return of aircraft and adjustments to the workload and staff, they have been offering lower rates to try to attract passengers more quickly.
The crisis even encouraged the unexpected codeshare agreement between Azul and Latam, announced in June. With it, the two companies will expand their flight offers to passengers on 64 routes on which they are not currently competing. The agreement caused the investment bank Bradesco BBI to point to a possible merger, with Azul acquiring Latam. This move, however, is seen as unlikely by industry experts.
“Even though they are competitors, the codeshare agreement makes sense, even if temporarily. But the fact that there is a codeshare agreement does not mean that there is any negotiation in progress”, analyzes the head of aviation at Machado & Meyer Lawyers, Fabio Falkenburger.
Honestly, I don’t believe there is room for a large transaction between airlines. For that to happen, there would have to be liquidity. Not to mention that in order to acquire Latam, they would need to go through the New York court, which is very complex
Eliseo Llamazares, head of aviation and tourism in Latin America at KPMG.
In addition, a merger like this would need to go through regulatory bodies, such as the National Civil Aviation Agency (Anac) and the Administrative Council for Economic Defense (Cade), which would assess a possible relevant economic concentration. “I don’t think a merger is the best way out for the market. There would no longer be competition and there would be fewer options for passengers, ”says Falkenburger.
Uncertainties in Argentina
Domestic flights in Argentina were interrupted by the government in March and so far there is no return date. After so many months grounded, the first victim was the subsidiary of Latam in the country, which closed its doors. Flybondi, the first low cost to operate in the country, claims to be at its limit, so much so that it only has one plane for a possible resumption. JetSMART, another low cost, also counts the days for the aircraft to take off again.
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The workers’ unions of the two companies released a note in late August in a tone of desperation to try to convince the government to allow flights to return. “Flybondi and JetSMART workers need clarity on the recent statements by the Minister of Transport who, in his last statements, mentioned that flights could return in 60 days, 120 days or even 180 days. Those deadlines would mean the disappearance of the airline industry.”
