ANALYSIS: TAM's departure from Star renews race for Brazil domestic market

Washington DC
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Brazilian carrier TAM's impending departure from Star Alliance for Oneworld is likely to refocus attention on the growing Brazilian domestic market and renew attempts by Star and SkyTeam to clinch a share of this lucrative pie.

TAM's decision, announced on 7 March, confirmed months of speculation that the Brazilian carrier would join its partner LAN in Oneworld. Chile-based LAN and TAM closed their merger on 22 June 2012, creating LATAM, one of the biggest carriers in the world with affiliates in several Latin American countries.

In approving the merger, anti-trust regulators had stipulated that LATAM could not be in the same airline alliance as AviancaTaca, the other major Latin American airline group. AviancaTaca's entry into Star Alliance in June 2012 essentially eliminated any possibility of ties between LATAM and Star, with LATAM's chief executive Enrique Cueto telling Flightglobal in November 2012 that he would "prefer" for both LAN and TAM to be in the same alliance.

TAM's entry into Oneworld would cement the alliance's position in Brazil, one of the fastest growing markets in Latin America. The Brazilian market accounts for about 40% of air passenger traffic in the continent. The International Air Transport Association forecasted late last year that Brazil will be the third largest market for domestic passengers by 2016 with 118.9 million passengers. That puts it only behind the USA and China.

TAM was the biggest domestic carrier in Brazil in 2012, with a 40.8% market share, followed by Gol with a 33.9% share. In 2011, TAM carried almost 38 million passengers, generating revenues of $7.6 billion. As of March 2013, TAM and Gol together operate the lion's share of seat capacity in the Brazilian domestic market, with about nine million seats between the two airlines, Flightglobal data shows,

On the international front, capacity into Brazil was dominated by Star Alliance - a scenario that would no doubt shift in Oneworld's favour when TAM leaves Star in 2014.


Market share of airline alliances on capacity into Brazil, March 2013

Source: Flightglobal FlightMaps Analytics


While Star boosted its presence in the Latin American market when AviancaTaca and Panama's Copa Airlines joined in June 2012, neither airline can boast of the same dominance in the Brazilian market possessed by TAM.

Star could perhaps turn to Avianca Brazil, but it is not clear yet if the Brazilian domestic carrier would be ready to join a global airline alliance anytime soon. Formally known as OceanAir, Avianca Brazil operates separately from the AviancaTaca group despite having the same branding and livery. AviancaTaca's membership in Star does not include Avianca Brazil, which is wholly owned by the Synergy Group, the majority stakeholder of AviancaTaca.

AviancaTaca's chief executive Fabio Villegas sought to play down expectations last year that Avianca Brazil would be brought into the AviancaTaca family and become a member of Star, saying then that integrating Avianca Brazil into the airline group would involve a complicated process.

Avianca Brazil president Jose Efromovich told Flightglobal in November 2012 that the airline's current passenger service system was not "robust" enough to support the airline becoming a global airline alliance member. "Our system is not prepared for us to get into Star Alliance," he said then, referring to the local Brazilian web booking system the carrier uses. Efromovich had explained that the airline would have to migrate to a more sophisticated platform before it can operate codeshare or international services.

Even if Avianca Brazil were to become a Star member, the alliance would need more than the airline to make an impact in the Brazilian domestic market. Flightglobal data shows that Avianca Brazil was the fourth largest Brazilian domestic carrier in 2012 in terms of departures, trailing far behind TAM, low-cost carrier Gol, and Azul-Trip.


Market share of airlines in domestic Brazilian market in 2012

Source: Flightglobal Capstats


Gol, the second largest carrier in Brazil, is already closely linked with SkyTeam even though it has not sought full membership in the alliance. The Brazilian carrier is codesharing with SkyTeam carriers and has a particularly close relationship with SkyTeam member Delta Air Lines. Delta invested $100 million in Gol in 2011.

It is not certain if Gol will become a member of a global airline alliance anytime soon, but recent developments at the airline indicate that it has other priorities to focus on. The carrier is still grappling with the troubled acquisition of Webjet, which it was authorised to acquire in October 2012. A month later, Gol said it would shut the carrier down and lay off its 850 employees, a move that has sparked outrage from Webjet staff. Gol is due to release its 2012 financial results on 26 March, when it is expected to report a full-year loss after losing money each quarter.

Brazil's third-largest carrier, Azul-Trip, got the green light from Brazilian anti-trust regulators last week to merge. The two carriers' combined network of more than 100 destinations in Brazil will make it a candidate worthy of wooing by Star.

Whether Azul-Trip indicates interest in becoming part of a global airline alliance could depend on how its international network ambitions play out in the following years. The airline has said its main priority is to grow its domestic network but it has not ruled out expanding to regional destinations such as Buenos Aires.