When Chilean Sky landed in Rio de Janeiro in November 2018, Brazil began a new era in its commercial aviation. A year after the arrival of the first low-cost airline, other companies have followed suit and more are coming. However, what we see so far in Latin America’s largest country is a movement from the outside in and not necessarily the existence of a healthy environment that offers domestic companies a low cost of operation or even lower passengers fares.

Since 2017, when Brazil’s National Civil Aviation Agency (Agência Nacional de Aviação Civil – ANAC) released changes to air transport regulations, with the permission to charge for seat marking and baggage clearance, for example, the debate over the subject has heated up. On one hand, the airlines celebrated and guaranteed that ticket prices would fall, and on the other, passengers and consumer organizations condemned what could result in higher fares.

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Years later, the issue seems to be resolved, at least for now. This is thanks to a Provisional Measure signed by President Jair Bolsonaro in June 2019 that increased foreign capital participation in airlines from 20% to 100%, and the maintenance by National Congress, in September, of the presidential veto to the item that prohibited charging for checked luggage. These two points are key to enabling low-cost airlines to set up and operate in the Brazilian domestic market. However, more needs to be done.

“We still don’t see the same conditions that other markets offer for low costs to thrive on. Approving foreign capital and allowing airlines to charge for baggage clearance is just the beginning,” says Ativa Investimentos analyst Ilan Arbetman.

The major obstacle is still the aviation costs in the country. The two main points are state fuel taxes and the devalued real against the American dollar. Brazil is the only territory in the world that taxes jet fuel regionally, an input that now accounts for about 33% of airline spending, according to industry data–the average of more mature markets such as the United States and Europe is 22%. In addition, approximately 52% of industry costs are pegged to the dollar, making the operation more expensive.

“QAV [jet fuel] is still a distortion, mostly due to the existence of the ICMS [Tax on Circulation of Goods and Services] and the pricing formula of Petrobras, which charges in dollar a product that is produced in Real”, explains the President of the Brazilian Association of Airlines (ABEAR), Eduardo Sanovicz. Agreements between airlines and state governments have reduced the ICMS tax on fuel, but the industry believes that the issue should only be resolved entirely through a tax reform that eliminates the tax.

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Another aspect that ABEAR poses as a hindrance is the judicialization of issues between passengers and airlines. “In Brazil, there is a huge difference in consumer regulations, blaming airlines for responsibilities that are not theirs anywhere else in the world,” says Sanovicz.

According to the industry, this clash generated BRL 150 million in costs to companies in 2018, which was eventually passed on to the ticket price. In the account are, for example, moral damage lawsuits for flight delays and cancellations due to adverse weather conditions.

The impact of foreign low-cost companies on the country

In addition to Sky, which started in 2018 flights between Santiago and Rio de Janeiro and Sao Paulo, two other foreign low cost airlines began flying to the country. In March this year, Norwegian debuted on the London-Rio de Janeiro route and Argentina’s Flybondi began linking Buenos Aires with Rio in October. In December, it will be JetSMART‘s turn with flights from Santiago to Salvador, and in 2020 with routes to Sao Paulo and Foz do Iguaçu.

The possibility of charging for baggage clearance was crucial for these companies to arrive in the country. The low cost model does not exist without this type of device. In addition, foreign airlines benefit from the fact that on international flights, the fuel is not taxed as in the domestic market.

Even operating only international routes initially, foreign airlines can even help the passenger adapt to new developments in the sector. Not always, a customer who is used to checking luggage free of charge realizes he was already paying extra to carry his bags in the airplane hold, since the amount had been added to the fare. Seeing lower prices, however, can convince this customer that it may be a good idea.

With the heated debate on the subject, at first, the Brazilian passenger shows signs of getting used to it. As long as the ticket is cheaper. “Today we are passing 60% of the tickets without luggage clearance. And almost seven out of ten passengers know exactly how to behave and know what’s going on,” says Abear’s president.

Moreover, if price is important, the arrival of these companies has shown to influence the industry, throwing down the price of fares. According to data from Kayak, a travel-planning tool, there was an average fare reduction of 23% on routes Norwegian and Sky take to Brazil.

“Prices may have decreased both because low-cost airlines are offering cheaper fares and because traditional airlines have been reviewing their strategy, that may include lowering their base prices and offering less services during their flights to remain competitive,” comments the operations manager of Kayak in Brazil, Eduardo Fleury.

The challenge is to carry this reduction to the domestic market. This would depend on the arrival of new, possibly foreign, companies bringing the low-cost model to the country. Globalia, which has just sold the low-cost Spanish company Air Europa to the IAG group, owner of British Airways and Iberia, has expressed interest in operating in the Brazilian domestic market.

As soon as the Provisional Measure that released 100% foreign capital was signed, the group applied for the concession to operate the regular passenger service, which was promptly authorized by ANAC. Globalia has not yet announced plans for Brazil or even if it will adopt the low cost model in the country.

Analyst Ilan Arbetman assesses as positive the possible coming of the European group to the country, which could attract other companies. “It needs to start. And the sooner the better for everyone, especially the consumer who gets more options. We need the airlines moving.” he says.

The president of ABEAR, on the other hand, is more cautious. “I believe that the market is completely open, there is nothing legal or institutional that prevents the establishment of new companies, but this will only happen with the recovery of economic growth. With a stagnant economy, rising currency and dollar costs, what happened this year was that a company [Avianca] broke down”, he warns.

In the same vein follows the president of the Latin American and Caribbean Air Transport Association (Associação da América Latina e do Caribe de Transporte Aéreo – ALTA), Luiz Felipe de Oliveira. In an interview with FlightGlobal, he said that the Brazilian market is not competitive for airlines and that low costs “need to have legal confidence that the market will continue as it is and will have no change in the near future.”

Translated by Jennifer Ann Koppe