Government makes final adjustments to airline package to make flights cheaper – 03/12/2024 – Market

The government is putting the finishing touches on an airline rescue plan to deal with a challenge that the United States and Europe faced much earlier, shortly after the pandemic.

The package, which is expected to be announced in the coming days, will use public funds as collateral for BNDES loans to struggling airlines, according to a person familiar with the matter. But the plan is still being defined, and the expectation is that it will be more of a temporary relief than a solution to all of the sector’s problems.

Cutting fares enough to allow low-income people to fly regularly has become something of an obsession for President Luiz Inácio Lula da Silva. The high cost of aviation fuel in Brazil is a complicating factor, with Petrobras under pressure to review its pricing formula.

Former president Jair Bolsonaro’s inaction after Covid-19 pushed national airlines to the limit. The new government has sought to reach an agreement on a path forward, and when Gol filed for judicial recovery at the end of January, the issue jumped to the top of the agenda. Azul is now exploring a possible acquisition of the struggling competitor.

The exact value of the government package has not yet been defined. Some members of the government are pushing for up to R$8 billion, while the Finance Ministry prefers a figure closer to R$5 billion, according to two sources, who spoke on condition of anonymity because the discussions are not public.

“Airlines in Brazil did not receive help from the government, and at some point the bill arrives,” said Ygor Araujo, an analyst at Genial Investimentos, in an interview. According to his estimate, a rescue of the size being considered “will bring relief for six to eight months, but it is not a solution.”

In addition to high fuel costs, airlines face delays in the production of new aircraft, legal uncertainty and an extremely high number of lawsuits filed by dissatisfied customers. They raised fares to compensate for rising costs, with ticket prices increasing by almost 50% in December compared to the previous year.

The president does not hide his frustration. “There is no explanation for the price of air tickets in this country,” said Lula at an event in Amapá at the end of last year, adding that some tickets to the North region cost up to R$10,000.

Many low-income people believe in the president and await results. Dulce da Conceição, a domestic worker for over 35 years in Brasília, is waiting for the reduction in air fares so she can visit her family in the Northeast more frequently. “It would be much better to go by plane than by bus,” she said in an interview.

The aerial ones have hot ears. At an industry forum in São Paulo last week, Azul CEO John Peter Rodgerson said companies faced weekly rebukes from the government throughout 2023 as tariffs rose. Latam and Gol admitted at the same event that high prices make access to travel difficult.

But just guaranteeing BNDES loans will not be enough to reduce consumer prices. “The BNDES line does not resolve the issue. The line would not be used to subsidize tickets, but rather to help with companies’ liquidity issues,” said Carolina Chimenti, a credit analyst at Moody’s, adding that exchange rate and fuel costs are the main factors. factors that influence tariffs.

Despite the judicial recovery, Gol remains eligible for the BNDES credit line, according to a person familiar with the matter. The company did not respond to a request for comment.

Latam confirmed that it is in discussion with the government about ways to reduce fares and said in an emailed statement that it sees increasing the supply of seats and reducing structural costs as fundamental conditions.

Azul, on the other hand, believes that the sector is not growing as fast as it should in Brazil, citing comments by Rodgerson in a recent interview with Bloomberg, in which the CEO said that a national credit line could mitigate the impact of exchange rate fluctuations and, ultimately, analysis, help increase capacity.

The Lula government is studying other measures to reduce ticket prices. A new program under discussion, known as Voa Brasil, aims to allow airlines to offer reduced fares to students and retirees.

Regarding fuel costs, the government is pressuring Petrobras to change its pricing policy, but has so far met with strong resistance. Although Brazil produces almost all of the aviation kerosene used in the country, the state-owned company calculates prices as if the fuel were imported, which brings exchange rate volatility to the formula.

Industry executives see reducing fuel prices as a long-term process. But this could change if Lula decides to intervene directly in the state-owned company’s affairs, as she reportedly did last week when orchestrating the rejection of a proposal for the payment of extraordinary dividends by the Petrobras board. The decision eliminated R$55 billion from the oil company’s market value in one day.

Another challenge is the extremely high number of lawsuits, which cost airlines millions every year.

Brazilian airlines face between 8,000 and 10,000 lawsuits per month. The combination of a strong consumer protection code, which applies to airlines, and an accessible legal system means that dissatisfied customers in Brazil are 800 times more likely to seek legal action than American consumers.

Competition is also a problem. Anac (National Civil Aviation Agency) said that, of the eight new airlines with licenses to operate in the country since 2019, two stopped flying and another never started.

“A firm reduction in fares will be achieved with an increase in the supply of seats – a tremendous challenge around the world after the pandemic,” said José Roberto Afonso, an economist and researcher at the University of Lisbon who also teaches at IDP in Brasília.

The International Air Transport Association agrees that there is no magic solution for the Lula government.

“Brazil needs to effectively resolve its structural problems, such as the high cost of aviation fuel, especially when compared to main markets, the prohibitive cost of capital and excessive judicialization, which act as significant obstacles to the sector’s enormous growth potential”, said the global industry association in response to written questions.