Brazil's major airlines, which are still suffering the consequences of a fares war last year, are now facing an economic crisis.
Latin America's largest economy is in turmoil after the Real, the currency introduced in mid-1994 as part of a plan which successfully halted inflation, collapsed in mid-January. The Brazilian government, which had tied the Real to the dollar, made the currency's strength the centre of its economic policy and its dramatic fall has seen the government struggling desperately to avoid a return of inflation.
VASP, Varig, TAM and Transbrasil reacted to the devaluation by abolishing some of their cheapest fares almost in unison, leading to accusations from some quarters of cartel-like behaviour.
The criticism was led by Caio de Carvalho, the president of the Brazilian government's tourist board Embratur, who , in retaliation, says he wants foreign airlines to be allowed to operate charter flights within the country if prices are not reduced again after the carnival season. An Embratur spokeswoman admits, however, that the Civil Aviation Authority (DAC) has indicated it will not approve the idea. Another government body, the Economic Law Service (SDE), has also made noises about investigations, which have so far not taken place.
The airlines claim they have not hiked prices, but merely cut discounts. Deregulation last year allowed airlines to offer discounts of up to 60% on official fares, which are fixed by the DAC, and most airlines took full advantage of this, to the delight of the Brazilian public. All the major carrriers are limiting discounts to a maximum of 30%.
The full impact of the crisis will not become clear until after the carnival when the airlines will also announce last year's results. As Sao Paulo-based analyst Jose Carlos Martinelli points out: "The year in Brazil doesn't start until after carnival."
The biggest immediate problem for the airlines is that many of their costs are in dollars while their revenues are in Reals. VASP is in the most comfortable situation because over half of its revenue is believed to be in dollars. Varig and Transbrasil are roughly half and half, while TAM, which began an international route to Miami in December and is to launch its Paris service from Sao Paulo in June, has nearly all of its revenues in Reals.
So far no dramatic cutbacks have been announced and the "medium and long-term prospects are still reasonable," says Martinelli. But he predicts that, once the carnival festivities are over, at least one other major company is likely to either merge or be bought up.
Source: Airline Business
