Varig's decline sparked a scramble by airlines to fill the flag carrier's routes and respond to the soaring demand for air travel in Brazil

Airline management has never been for the fainthearted, and that is especially true in Brazil. Apart from contending with the everyday challenges faced by the whole airline industry, such as rising fuel costs and the vagaries of local economies, Brazilian carriers wage a running battle against factors virtually unknown to their overseas counterparts. Burdened by airport, communications and navigation fees that are among the highest in the world, Brazil's airlines are required to operate in an environment beset by an array of state and federal taxes - 74 at the last count - that drain roughly 39% of a carrier's gross revenue.

Despite these pitfalls, and apart from flag carrier Varig's fall from grace, Brazilian airlines are flourishing. The industry has steadily grown. From the 25.1 billion revenue passenger kilometres flown in 2003 by the 15 airlines then in existence, the number soared last year to 39.8 billion revenue passenger kilometres shared among Brazil's 19 current scheduled carriers. With the number of passengers leaping by roughly 12% in 2006 alone, this surge is mainly attributable to a recovering local economy. Since the wildly fluctuating Brazilian real versus US dollar exchange rate settled down in the middle of 2005, Brazilians have taken to the skies in ever-increasing numbers. The more settled foreign exchange rate has also eased the burden on local carriers, which earn their revenue in local currency, but disburse expenses mainly in US dollars.

Varig will continue to operate independently following its acquisition by Gol in late March

Varig, Brazil's flag carrier since the 1960s, has been slowly shedding its domestic and international routes since 2001, having endured a protracted battle to stay afloat. A major portion of its fleet and routes were sold to its erstwhile subsidiary VarigLog last July, with the enterprise becoming Varig Linhas Aéreas - now popularly called "New Varig".

Reduced to 19 airliners - 15 Boeing 737-300s, two 767-300ERs and two MD-11s - Brazil's civil aviation authority ANAC promptly took away 119 domestic and international routes inherited by New Varig. This was expected because the new airline was clearly unable to fly what remained of the old Varig's route network.

Seat losses

Coupled with Varig's shrinking international route network over the past 24 months, last year alone Brazil's airline industry lost around 400,000 passenger seats on international flights.

To fill the gaps, rival carriers have accelerated their fleet expansion plans and others have scrambled to address the demand. The most prominent are repeat orders from Gol and TAM for 20 737-800s and 31 Airbus A319/A320s, respectively. In its haste, TAM even strayed from its traditional supplier by ordering four Boeing 777-300ERs while leasing an equal number of MD-11s to allow its immediate entry into European and North American routes surrendered by Varig. Moreover, it signed firm orders for six more Airbus A330-200s.

Similarly, smaller carriers such as Ocean Air have quickly set out to find aircraft to gain a solid foothold in the domestic void left by Varig. Aside from acquiring a further six Fokker F28s and two F27s to add to its existing fleet, the carrier has recently received a 767-300ER, with which it intends to launch services to Luanda in Angola and Lagos in Nigeria - both former Varig destinations. Rio de Janeiro-based Ocean intends to add two 737-300s to its domestic network and plans to launch regular services to Mexico City. Striking while the iron is hot, the carrier's rapid fleet expansion has already paid dividends - its domestic market share grew by 363% in January alone, placing it fifth among Brazil's domestic airlines.

But Ocean faces competition. Regional carrier Trip has set its sights on absorbing many of the regional routes flown by Varig and its subsidiaries in south-east Brazil. In January Trip ordered seven ATR 72-500s, with deliveries scheduled for late this year, as well as options for a further five of the twin turboprops. Other regional carriers such as Air Minas and NHT have also launched fleet expansion plans in a bid for the spoils left by Varig.

Yet Brazil's airline industry is still in a state of flux. New Varig is hard-pressed to maintain operations, but accounted for 4.55% of the domestic market and 12.63% share of international routes flown by Brazilian carriers - the latter down from the 80% slice it held in 2000. Earlier this year it benefited from a $17.1 million cash injection from LAN Airlines, a move that sparked speculation that the Chilean carrier was negotiating a share in New Varig to gain a foothold in the Brazilian market. But it was newcomer Gol that snatched the prize late last month after acquiring New Varig for $320 million - 30.6% in hard cash and the balance in the form of non-voting shares. Gol and Varig will operate independently - the former mainly to international destinations in Europe and North America, but also key domestic destinations. According to Gol's management, by the end of 2007 the two airlines will hold the lead in Brazil's domestic and international market.

Notwithstanding Varig's acquisition by Gol, Brazilian airlines are cautious about their short and mid-term plans. In the wake of last September's mid-air collision between a Gol 737-800 and an ExcelAir Embraer Legacy, the air transport system has been thrown into disarray owing to several factors - but mostly to air traffic control problems.

Industrial action

With 86.4% of the domestic market, TAM Linhas Aéreas and Gol averaged a 96% on-schedule departure/arrival on flights between January and October 2006. That average plummeted to 57% after industrial action by air controllers and dipped to 45% last December. Consequently, the industry has experienced an across-the-board load factor reduction. And because of those ATC problems, Gol has indicated that it might post lower than expected financial results for the last quarter of 2006.

ATC difficulties are not the only problem looming. São Paulo's Congonhas is the country's most important airport and a major slice of Brazil's air transport industry relies heavily on it. Geared to handle roughly 350 flights a day and 12 million passengers a year, Congonhas last year averaged 663 flights a day and 18.5 million passengers. With the airport beyond its saturation point, the most minor of delays is enough to send ripples up and down Brazil's domestic route network, with flight delays and cancellations. While the government is seeking a short-term solution by transferring flights to adjacent Guarulhos, that can only be a palliative.

Source: Flight International