Deregulation and resulting fare wars continue to bite hard into profits at Brazil's four main airlines, with no sign that the worst is over. Varig is blaming the fare wars for its Real $197 million ($168 million) loss reported for the first half year. This is almost triple the figure for the same period in 1997.

Airlines and analysts say it is still too early to predict the long-term effects of the Brazilian fare war, which has continued to rage over the last three months. TAM, another of Brazil's four national carriers, is also expected to announce a reduction in profit for the first half of the year.

Varig announced the loss, even though revenues increased from R$1.58 billion in the first half of last year to R$1.7 billion this year. Company president Fernando Pinto says that domestic fares were on average 25-30% cheaper than at the same time last year. Pinto also blames the soccer World Cup, held in France in June and July, for the poor result, claiming that it caused a significant reduction in the number of Brazilians travelling. "They preferred to stay at home and watch the football," he says. But Pinto is predicting a repeat of last year's performance when a first-half loss was turned into a second-half profit. Given the helter-skelter in ticket prices since a partial deregulation came into effect, that may be a tough promise to fulfill.

The fare battle began when Brazil's Civil Aviation Department (DAC) announced at the start of the year that airlines could offer discounts of up to 65% on internal flights. It also allowed any company to fly charter flights on any route, with certain conditions, and opened up the strong Rio de Janeiro-Sao Paulo shuttle service to any company. This has resulted in a plethora of new routes, with airlines selling a limited number of seats on each flight at discounts of as much as 60%, in VASP's case.

Discounting is attracting new business. More than 16% of passengers in the last three months are first-time fliers. But this in itself is posing new problems for the established carriers. Varig employees have been given circulars on how to deal with their new customers and TAM say that the average length of phone calls from would-be passengers is four times longer than last year.

There have also been major changes on the Rio-Sao Paulo shuttle. Varig has pulled out of the pool which it previously operated with VASP and Transbrasil, and now operates a pool with its own subsidiary, RioSul. The battle has reached international routes, with VASP, which has a controlling stake in Lloyd Aéreo Boliviana and Ecuatoriana, now offering Sao Paulo-New York return flights at R$540. The airline backed down from a R$450 fare, which an alarmed DAC threatened not to authorise.

One analyst says he does not now expect all the majors - Varig, VASP, Transbrasil and TAM - to survive intact. He points out that the greatest hindrance to Varig, in particular, is the R$2.1 billion debt it carries. In the middle of the deregulation turmoil, Varig has announced a major shake up. The airline has changed the livery of its RioSul aircraft, making them identical to those operated by the parent company in all but name.

Source: Airline Business