Contributor - South America

Richard Pedicini

Sounding more like a partner than an antagonist of Brazil’s airline industry, the country’s Minister of Infrastructure, Tarciso Freitas, on Monday told the ALTA Airline Leader’s Forum in Brasilia of the government’s goal to increase the number of cities served by airlines to 200, and the number of passengers transported yearly to 200 million. More than that, he spoke of measures underway to reach those goals, including heavy investment in airport infrastructure.

 


“Brazil is the capital of aviation in the Americas, and it’s an honor having more than 450 delegates” at the event in Brasilia, ALTA chief executive Luis Felipe de Oliveira declared at the opening general session. “We're finishing a cycle at ALTA, at the end of my first two years. We've brought ALTA to Brazil, and we've brought Brazil to ALTA.”

 


Latin America and the Caribbean now account for 8 percent of the global air travel market, ahead of Africa and the Middle East together, de Oliveira noted, and forecasters project 2019 to match last year’s 5 percent growth. Meanwhile, there remains vast room for further growth, as the region's 0.4 trips per person per year remains far behind the two trips per year among Europeans. Two new Brazilian members joined ALTA, Gol Linhas Aéreas, and TwoFlex.

 


Ricardo Botelho, president of Brazilian Civil Aviation Agency ANAC, opened his speech with a clear proclamation on his country’s move toward liberalization: “Welcome to the country of liberty! Liberty of routes, liberty of fares, liberty of up to 100 percent foreign capital!” Air travel in Brazil now accounts for sixty percent of long-distance trips, he noted. “With population, GNP, and territory, [Brazil] is in the perfect situation to take off,” he said. But for that to happen, Botelho sees a need for “always, more liberty, and more liberty in the air.”&nbsp;

 


Botelho reviewed some of the victories of his term as president of ANAC, including the more rational taxation of aviation kerosene. He counted 22 airports conceded to private enterprise, and noted 22 more set for auction in 2020, for a total of 44. “We've done a lot;&nbsp;there’s more to do, even though many battles have won,” he said. Nearing the end of his term, he quoted Winston Churchill in calling liberalization “at the end of the beginning.” “There's vast room for growth in the country, for development, and we must keep up with the world,” he proclaimed. “Welcome to the country of liberty!”

 


Minister Freitas opened with a video on the “world's largest concession program,” seeking $50 billion in investment capital for projects weighted heavily toward transportation, including airports. The Savonarola government took office ten months ago&nbsp;but maintained the concession program he inherited and the technical teams in charge, as well as the effort to bring better governance to the concession program. “There have been 27 auctions this year, all of them successful, and there will be more before the end of the year,” said Freitas.

 


“The economy is starting to breathe again,” Freitas added, and put the attraction of the concession program in terms of simple math: Brazil is a vast country with a population over 150 million and an economy of more than a trillion dollars.&nbsp;Only three countries in the world meet those criteria, the others being the U.S. and China.

 


The coordination of fiscal and monetary policy has brought results (traditional policy historically elevated interest rates that choke off credit to fend off the inflationary pressure of an unbalanced budget), and along with the long-awaited public pension reform, he said he&nbsp;expects Brazilian bonds to soon return to investment grade. The government is working on modernization of the foreign exchange system&nbsp;to make transactions less expensive.

 


After several concessionaires, including airports, faced bankruptcy when foreign exchange shifts and economic recession rendered them unviable, Freitas said that new contracts seek to identify and reduce risk in the concession process. The contracts include exchange rate and arbitration clauses to resolve disputes without turning to the overworked and famously slow court system. “We're explicitly confronting risks we've never confronted before,” explained Freitas. “Not only is this the largest concession program in the world, but also one of the most sophisticated in treating risk.”

 


While public money has generated past growth cycles, this new cycle has arisen with private investment, the minister said.&nbsp;“We'll go through a long period of low inflation, low interest rates, with private money responsible for growth, and this will directly impact aviation,” he noted. “We're taking firm steps in the right direction. We've been working on eliminating barriers to competition, barriers to entrance, and we've have victories, such as the opening to foreign capital.” That measure, he said, generated immediate effects: “Immediately after the opening, we were approached by companies interested in entering the market. Who doesn't want to be in a market with 220 million consumers?”

 


The government has invested money from the National Civil Aviation Fund in regional aviation, increasing connectivity, the minister continued. “Brazil is moving, in the direction of meeting its destiny, of being great. And it’s getting there,” he said. He concluded by praising ANAC's civil servants, and lauded the agency's outgoing president Ricardo Botelho for his dedicated quest to opening the market “almost like Don Quixote against the windmills.”

 


The region’s longest-serving airline CEO, Pedro Heilbron of Copa Airlines and president of the ALTA executive committee, painted a picture of a region rich in potential, but weak in financial returns. He cited the region’s 8 percent share of global passenger traffic, 2.8 percent of global freight, and more than $30 billion in revenue. The region boasts the world’s youngest aircraft fleet and has seen 15 years of continuous aviation growth, always outperforming GPD growth. “By Boeing's projections, this will be one of the fastest-growing regions in the coming 20 years,” he observed. “In 2019 through July, the region has added 251 new routes—147 domestic and 104 international. Look at the map. Compared to twenty years ago, it's amazing.”

 


But, he said, airlines in the region have posted profits in only four of the last seven years, and this year the average profit equates to only fifty cents per passenger. “It's not enough to serve them all a cup of coffee,” he quipped. The region, he said, lacks competitiveness in areas such as taxes, infrastructure, and the price of fuel. He did point to good news, however, such as the reduction of cost of domestic jet fuel cost in São Paulo with the excise tax reduction from 25 percent to 12 percent, and in Rio from 12 percent to 7 percent. The air space redesign in Colombia increased operations per hour&nbsp;while reducing airline costs and carbon emissions. Open Skies agreements between the U.S. and Mexico, and the U.S. and Brazil&nbsp;marked another positive, as did Chile gradually reducing airport boarding fees by 30 percent. That country, which has seen a corresponding 20 percent increase in passengers, plans to cut those fees by another 10 percent.

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