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  • ​Aviation in Brazil hampered by litigation, taxes, regulation

​Aviation in Brazil hampered by litigation, taxes, regulation

A litigious culture, high taxes and regulatory issues are the main obstructions to aviation growth in Brazil, South America's most populous country, and one that is generally considered still severely underserved in terms of air transportation.

A panel of two aviation executives, a regulatory official and a government representative speaking at the ALTA Airline Leaders Forum in Brasilia on 29 October agreed that the number of legal cases being brought to the Brazilian courts by disgruntled, delayed passengers as well as arduous administrative barriers are big drags on the sector.

"The cost of this judicial-isation [litigation] is paid by whom? In the end it is the customer," says Gol’s chief executive Paulo Kakinoff. Legal costs are passed on to the consumer through higher ticket prices for air travel. "This cost will be reflected in the fares that everyone is going to pay."

Aviation is a much criticised industry in Brazil, and suffers from a lack of understanding by the general public, Kakinoff says. "It's complex communication, but we have to recognise that we are not doing a good job on this." Gol is Brazil's leading domestic low-cost carrier.

"Passengers need to know that if they take a flight, that flight may not happen for many different reasons," says Ricardo Catanant, superintendent for aviation services at Brazilian regulator ANAC. "Often it is totally beyond the responsibility or control of the airlines."

LATAM Airlines Brazil chief executive Jerome Cadier says that while 50% of the airline's operating costs have their origin in Brazil, the country accounts for 99% of its legal costs. He echoes Kakinoff’s calls for improving consumer education about the aviation industry, but also that of the judicial officials who decide the cases that are brought against the airline.

Ronei Glanzmann, the Brazilian secretary of aviation infrastructure, tells conference participants that Brazilian judges say they are not sufficiently schooled in aviation law and therefore have a minimal understanding of it. The government is making an effort to counter this unfamiliarity by offering courses in the legal framework that governs the sector, in collaboration with the country's association of federal judges.

"For them it's a matter of a contract, but they don't have the context for what that means for aviation," he says. "For example, that you cannot control the weather."

Supplementary taxes are also deterring more Brazilians from travelling by air within their own country, Gol's Kakinoff complains. The so-called ICMS levy is a tax on sales and services and applies to the movement of goods, transportation and communication services.

He gave an example of two aircraft from the same airline which receive fuel from the same tanker truck, with one aircraft going to Buenos Aires, while the other is headed to a domestic destination of equal distance.

"The fuel going into the plane to Buenos Aires has zero ICMS and the plane next to it has a 25% ICMS," Kakinoff says. "That tax structure has a very damaging impact, stimulating Brazilians to spend their vacations in Buenos Aires rather than in Brazil."

More than half of Brazil's 27 states have begun reducing their fuel taxes, with Sao Paulo state's tax rate down to 12.5% from 25% previously. This has led to an increase of 591 flights per week from Sao Paulo's airport, with another 200 planned, officials say.

LATAM's Cadier also calls for industry deregulation to accelerate, which would lead to more competition.

"When passengers have two options for a route, companies are going to be extremely aggressive to capture these passengers," he says. "We need to think about how to stimulate these routes where now just one company is running it."

Glanzmann says the new government has a very pro-market agenda and supports deregulation. It is now in a position to tackle long-overdue issues and to open up the country to more competition. "We are working on this institutional regulatory environment," Glanzmann says. "It's the first time that we have a highly competent team and all the conditions necessary for this to work."

In order for the industry to flourish, Brazil must also factor in competition from abroad, Cadier says. Restrictive labour laws and diverging rules between countries are another differentiator when it comes to the cost of flying.

"My crew members are less protected flying to France then a French pilot coming the other way," he says. "We need to think about the impacts about the Brazilian companies' capacity to compete with other companies that are not subject to the same Brazilian labour laws."

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