Brazilian carriers have battled tough conditions this year in their domestic market, although actions taken by airlines in recent months have helped them fight against the headwinds.

Rising fuel prices, the depreciation of the Brazilian real and weaker than expected demand have proven to be hurdles impeding growth at Brazil's major carriers TAM, Gol and Azul.

TAM and Gol have vastly reduced domestic capacity in 2013, and both announced in the summer that they would further slash full-year domestic available seat kilometres (ASKs). TAM's parent LATAM Airlines Group announced in August it would reduce full-year domestic capacity in Brazil by 7% to 9%, instead of the 5% to 7% estimate it provided previously.

TAM cut domestic capacity by about 10% to 11% in the first six months of 2013, its chief executive Claudia Sender said in August. Sender said then the airline is likely to reduce domestic ASKs in the 5% to 6% range for each of the third and fourth quarters this year.

Gol announced in June it would further cut 2013 domestic capacity. The airline forecasts full-year domestic capacity to fall 9% instead of 7% as previously forecast. Domestic available seat kilometres declined 7% in the third quarter and fell 11% year-on-year in the first six months of 2013.

The airlines' capacity discipline come as they struggle with slower growth in the Brazilian gross domestic product and the depreciation of the Brazilian real which has led to rising fuel prices.

In its September traffic release, Gol says fuel prices rose 7% during the month following the depreciation of the real against the dollar in July and August. On a third quarter basis, fuel prices were up also 7% compared to the corresponding quarter in 2012. Year-to-date, fuel prices have gone up 5% as of the end of the third quarter, says Gol.

Depreciation of the Brazilian real was blamed for being a factor behind LATAM's second quarter net loss of $330 million. The airline said in August it was working to minimise its exposure to the depreciation of the real, by increasing sales in US dollars and increasing the percentage of costs made in Brazilian reals. LATAM appears to be succeeding in this area, and said it has reduced this exposure by about $100 million a year.

However, this has not stopped the airline from shedding jobs. TAM said in October it laid off 780 employees over two months, losing about 4% of LATAM's total workforce. It has said there will be no further cuts, and now employs 29,500 people in Brazil.

So far, the airlines' capacity discipline appears to be bearing some fruit. LATAM's domestic Brazil load factor grew nine percentage points to 77.8% during the second quarter, and revenue per available seat kilometre grew more than 14% year-on-year. Over the first nine months of 2013, its domestic Brazilian load factor grew to 79.2%, a 7.6 percentage point increase over the same period in 2012.

Gol says its third quarter passenger revenue per available seat kilometre (PRASK) has grown 21% year-on-year, or 14% year-to-date. Yields in the third quarter rose 29% year-on-year, and 18% year-to-date.

Unlike TAM and Gol, low-cost carrier Azul is still adding capacity as it continues growing its network of mostly second and third tier Brazilian cities. From January to August, it grew capacity by almost 24% year-on-year, according to the latest available figures from Brazil's civil aviation authority ANAC. However, the conditions in Brazil have not left the airline completely unscathed - it scrapped its initial public offering in August almost three months after filing for it, saying it would not go ahead due to unfavourable macroeconomic conditions.

Despite the challenges in the Brazil market, LATAM and Gol are not projecting negative operating results for 2013. LATAM says it expects its full-year operating margin to come in at between 4% and 6%. Gol's chief executive Paulo Sérgio Kakinoff said in August the airline is on track to reaching its goal of a low single-digit operating margin of between 1% and 3% for 2013. The airline posted a 1.7% operating margin over the first six months of 2013, compared with a negative 8.7% margin in the same period in 2012.

Source: Airline Business