Competition in Brazil heats up

Washington DC
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It may not be the best year to wage a market share war but Brazil's carriers are holding up relatively well despite the seemingly brutal combination of overcapacity and a global recession.

Rapid expansion at start-up Azul, low-cost carrier Webjet and regional airline TRIP have driven a significant capacity increase in Brazil's already highly competitive domestic market. Domestic ASKs shot up 10% over the first six months and 15% in July. But RPKs only grew by 3% in the first half, resulting in a 4.2 point drop in load factor to 63.2%.

Brazil's two big carriers, Gol and TAM, both saw their domestic load factors slip into the 50s for a couple of months during the first half. But after incurring losses for 2008 both were back in the black for the first half, with Gol and TAM reporting healthy first half profits of 415 million reais ($227 million) and 845 million reais, respectively.

Gol chief executive Constantino Oliveira Junior estimates there is now 10% to 15% too much capacity in Brazil's domestic market but "even in this environment we've been able to achieve profitability" by focusing on reducing unit costs. He says Gol's break even load factor is now only 56%, still a respectable four points below its average load in the second quarter. "We've been working better to position Gol for this competition," Oliveira says, pointing out "we are now competing with Azul and Webjet in 100% of their destinations".

Azullaunched last December and has already passed the million passenger market to become Brazil's third largest carrier with a 5% share of the market. "To be able to go in seven months from 0 to 5% flying only 11 aircraft and surpass WebJet, which flies 17 aircraft that are bigger than ours, speaks volumes," says Azul marketing director Gianfranco Beting. "We're very happy with the position we have achieved and the positive feedback we have been getting from our customers."

Azul now has a fleet of seven Embraer 190s and five Embraer 195s, including 11 flying aircraft and one spare. It has almost 30 more 190/195s on order with a business plan that envisions one delivery every month although it has decided to take only two more aircraft this year.

RAPID GROWTH

Webjet also has been growing fast, doubling its share of the domestic market over the last year to 4%. Webjet, which operates Boeing 737-300s, has just taken five more of the type. Beting expects this could give Webjet the capacity to overtake Azul in August and briefly reassume the spot of Brazil's third largest carrier.

Adding capacity at a steady 50% clip is TRIP, which operates 22 ATR turboprops and in June took its first jet, an Embraer 175. The carrier now operates four 175s and its president, Jose Mario Caprioli dos Santos, says the carrier plans to have at least 30 of the type by the end of 2013. He says TRIP also plans to keep 20 to 24 turboprops in its fleet although its ATR 42s and ATR 72-200s will be replaced over the next three years with ATR 72-600s. US regional SkyWest, which has acquired a 16% stake in TRIP, is helping fund the carrier's expansion.

Caprioli says TRIP has traditionally focused on smaller regional destinations, with 20% of its routes in the Amazon where there is no competition. It has competition on the remaining 80% of its routes with Gol, which overlaps on over half of TRIPs' routes, its biggest competitor and TAM, which has virtually no overlap with TRIP, a codeshare partner. Caprioli says the 175s enable it to step up competition onroutes against Gol, and to a lesser extent OceanAir and Webjet, because Brazilian business travellers prefer the 175 over turboprops and narrowbodies.

He says TRIP is also using about half of its 175s to open new routes including some major trunk routes which are "not traditional markets" for the carrier. Most of the new trunk routes are from Rio de Janeiro Santos Dumont, where TRIP and Azul are the main beneficiaries of a new policy opening the coveted downtown airport to destinations other than Sao Paulo Congonhas and airports within the state of Rio. Caprioli says bookings on the new trunk routes have already exceeded expectations but TRIP plans to focus more on launching routes which currently have limited or no service, "We want to be innovative," he says. "We don't want to be more of the same. We want to be not in the densest markets but all over Brazil."

Azul, which now serves 13 destinations from its hub at Campinas outside Sao Paulo, has a similar strategy. Beting says the low-cost carrier plans to eventually serve about 25 destinations from Campinas but over the next year will focus on new "hub bypass" routes which now have little or no service: "We're not on a very aggressive plan to grow destinations but to grow our network by connecting the dots."

While Oliveira says Azul "is flying today the same destinations we are flying" Beting claims there was no competition on 75% to 80% of its routes when they were launched but other carriers quickly followed, persuaded by Azul's high load factors which reached 85% in July. Oliveira credits Azul for stimulating the market and says competition is healthy but claims "the demand is artificial given their low fares".

Despite the intense competition all the players are bullish. They point to a Brazilian economy holding up relatively well in the global context and an outlook of healthy GDP growth for the second half and 2010. With airline traffic growth typically more than double GDP growth, the extra seats added over recemt months should start to fill up. Already in July there was a big improvement over the first six months of the year, with Gol for example reporting a 29% surge in domestic traffic and a 75% load factor although Oliveira says this was driven partly by H1N1 prompting Brazilians to switch from overseas holiday plans.

"We're in a fantastic moment in the Brazilian economy," Oliveira says. "We still have great potential for growth in the airline industry in Brazil."