Legal uncertainty affects the entry of new airlines into the country

Legal uncertainty has been an obstacle to the entry of new airlines into the Brazilian market. “It’s a subject that scares potential investors”, says the president of the Brazilian Association of Airlines (Abear), Jurema Monteiro.

Competition is limited in the Brazilian airline sector. Three companies (Latam, Gol and Azul) dominate 99.5% of domestic passenger transport, according to the National Civil Aviation Agency (Anac). In the last 20 years, this concentration has increased. In February 2004, the three leaders at the time (Varig, TAM and Gol) had 84.8% of the market.

Marcelo Guaranys, specialist in aviation law at Demarest Advogados and former president of Anac, points out that the main problem is the constant attempt to change the rules of the sector’s regulatory framework. According to him, Brazil has a good framework that allows the entry of companies with 100% foreign capital.

Aviation regulatory framework suffers interference attempts

The most recent examples are government interference in the routes that can be established from airports and the possibility that companies will once again be banned from charging for checked baggage.

In the second half of 2023, the federal government imposed restrictions on flights to Santos Dumont airport, in Rio de Janeiro. The measure aimed to preserve the quality of service provided by the airport, operated by the state-owned company Infraero.

The action was justified as an attempt to extend the concession of Tom Jobim (Galeão), Rio de Janeiro’s international airport. The terminal faced problems in executing its contract due to lower-than-expected passenger demand, resulting in idleness that reached 80%.

Every now and then, charging for checked baggage in the hold of planes is discussed again. The practice was authorized by Anac in 2016 and implemented in 2017. In 2022, Congress tried to overturn it by modifying a provisional measure with rules for the sector.

However, President Jair Bolsonaro (PL) vetoed the parliamentarians’ initiative. According to him, the measure went against the public interest, as it would lead airlines to review ticket prices due to increased operating costs.

“Charging for baggage check-in is a fundamental issue for the operation of low-cost companies”, says Guaranys.

The need for high investment is also a barrier for new airlines

High investment costs are also an obstacle to the entry of new companies into the airline sector. Experts point out that it is necessary to have scale to start operations.

“It’s not possible to start with just three planes,” says Guaranys. Gol, today the second largest in market share, began operations in January 2001 with seven aircraft.

Engine, parts and aircraft manufacturers are struggling to meet growing global demand. “There is not enough aircraft production to meet orders worldwide,” says Bruno Corano, a fund manager in the United States.

The airline sector had a strong start to the year. According to the International Air Transport Association (IATA), total travel demand increased by 16.6% in January compared to the same month in 2023.

Corano points out that there are no spaces on the most interesting routes, which are more profitable. In many cases there are almost no slots (authorizations for landings and takeoffs at a certain time). “Even if a company wanted to establish itself, it would require a huge investment, in a very risky and volatile sector, with small margins and which demands high capital. It’s not attractive at all,” he says.

Update of the regulatory framework has not yet brought foreign investment

Despite updating the regulatory framework in 2018, Brazil has not yet attracted foreign investors. In 2019, Air Europa, a Spanish company, considered the possibility of establishing itself in the country through a subsidiary, but negotiations did not progress.

Ricardo Jacomassi, partner and chief economist at consultancy TCP Partners, states that the entry of a new competitor into the Brazilian market could benefit consumers. This would require companies to adopt a more competitive stance.

Recently, Chilean JetSmart, controlled by the American fund Indigo Partners, signaled interest in operating in Brazil. The fund has stakes in airlines in the Philippines (Cebu Pacific), the United States (Frontier), Canada (Lynx), Mexico (Volaris) and Europe (Wizz).

The company, which recently entered the Colombian market, sees Brazil as a potential destination. One of the attractions is the future availability of aircraft. Currently, the airline has 35 planes, operating in Chile, Peru, Argentina and Colombia. Around 100 aircraft are on order.

In February, a JetSmart executive told the Exame portal that, without the Brazilian market, the company would not be able to operate with the new planes. The company already operates international flights to Brazil.

Judicialization is also a challenge for the sector

Another significant challenge for the airline sector is judicialization. The three largest airlines in Brazil are required to set aside R$1 billion annually to comply with court decisions, according to Abear. These processes range from direct company responsibilities, such as customer service issues, to meteorological issues.

The president of Abear describes the situation as a “stock industry”. The volume of processes is already affecting companies’ airline networks. The northern region of the country, especially Rondônia, is one of the most impacted. The companies Gol and Azul reduced the number of flights due to the large volume of legal demands.

A survey by the International Air Transport Association (Iata) revealed that, before the pandemic, the three largest North American airlines (American, Delta and United) faced one lawsuit for every 1.2 million passengers. In Brazil, the index rose to one share for every 227 passengers after problems with Covid-19.

To try to minimize the problems, the sector has been looking for solutions. In December, Abear, Iata, the Latin American Air Transport Association (Alta) and the Board of Representatives of International Airlines (Jurcaib) signed a partnership with the Association of Brazilian Magistrates (AMB) and UnB. The objective is to carry out a study on judicialization in the country, which should be completed within one year.

In an attempt to contain the problem, experts suggest the development of strategies that involve the Judiciary and entities such as the National Council of Justice (CNJ). Guaranys, former president of Anac, highlights the need to train Justice.

Last year, the São Paulo Court of Justice (TJ-SP) developed an initiative to train conciliators and mediators in sessions involving demands from the airline sector. Last March 20, airlines and the Court of Justice of Paraná (TJ-PR) signed a partnership to facilitate the extrajudicial resolution of conflicts in the airline sector.