Liberalisation is proceeding at a leisurely pace. 'Any new step towards open skies will be taken step by step to try and protect local carriers,' declares air transport consultant Mario Sampaio.
Still, tentative steps are being made. In March this year, Brazil joined the other Mercosur nations - Argentina, Brazil, Chile, Paraguay and Uruguay - in signing an accord giving airlines rights to fly third and fourth freedom routes not covered by existing bilaterals.
Opposition to complete open skies is fierce. Brazilian carriers quiver at the prospect of further foreign invasion, and the relaxation of cabotage rights would be anathema. The four key Brazilian carriers, Vasp, Varig, Transbrasil and TAM, are busy with internal restructuring and external tie-ups, but in the meantime foreign majors are stealthily invading Brazilian markets.
Brazilian carriers face low fares, tough competition and losses on most international routes, says Sampaio, while domestic operations offer lower revenue potential so the airlines are unable to cross-subsidise unprofitable international services.
Worse, Brazilian carriers face far steeper unit costs than the USmajors, with burdens such as higher social costs and fuel prices.
There's no denying that the carriers urgently need to cut costs if they are to tackle foreign competition effectively. Varig is moving in the right direction, with restructuring efforts that trimmed costs by US$140 million in 1996 and a projected further US$50 million this year. Varig's domestic counterparts are gradually following suit. All Brazil's majors hope to wipe out significant amounts of debt when the government settles law suits arising from government-imposed price freezes in the 1980s.
Ironically, the foreign enemy may also be the ally that the Brazilian carriers need. Increased foreign participation in Brazilian carriers may well provide the Brazilian airlines with access to foreign capital, expertise, and membership of global alliance groups.
Under anew Brazilian air code to be published later this year, foreign carriers will be able to buy up to 49 per cent of a Brazilian airline, up from the current 20 per cent. This is consistent with the Brazilian movement towards privatisation. 'Governments can no longer lead the way to industry changes; that task is left to the private businessman,' says consultant José Martinelli of EuroLatin.
Transbrasil is eager to pursue foreign capital and partnership and TAM plans a shares flotation. Varig is following the alliance route, building up non-equity ties via the Star Alliance. The Canhedo group wants to keep control of the management reins at Vasp, and plans to increase its 60 per cent shareholding as Vasp pursues its policy of buying other airlines in the region.
Now that its economy is more stable than ever, the largest aviation market in South America is becoming more attractive to the mega-carriers, and Brazil's four major airlines face tough strategic decisions. They have no time to lose.
Survey by Lois Jones.
Source: Airline Business
