The economic disaster that befell the airline industry in the pandemic promises to change the configuration of the Brazilian civil aviation market, generating greater concentration — which brings back the debate about the risks of lack of competition for the final price of tickets.
According to IATA (International Air Transport Association), there was a drop of almost 70% in global passenger demand. The decline in revenue reached 61%.
“The pandemic was the biggest shock in the history of the aviation industry”, says the analyst at Lafis Consultoria, Felipe Souza. In Brazil, the impacts were extended to airport concession contracts, he says.
“The significant drop in demand, with the corresponding loss of tariff and commercial revenues, together with the stoppage of services and unexpected variations in exchange rates, complicated the life of the sector”, he says.
In this scenario, the largest companies organize themselves in search of acquisitions to try to regain scale and maintain their routes.
On Tuesday night (8), Gol announced the purchase of Amazonian MAP, for R$ 28 million, which should make it the leader in the number of slots (departure and arrival times) at Congonhas airport, the most competitive market and the second largest in the country, just behind Guarulhos International Airport (Cumbica).
On the other hand, Azul spreads its wings over Latam Brasil, whose parent company, the Chilean group Latam, filed for bankruptcy protection a year ago in the United States, with debts of almost US$ 18 billion (R$ 91 billion).
Azul would be waiting for Latam to present its recovery plan in order to make a purchase proposal for the Brazilian operation to the Chilean group’s creditors. Its affiliates, including Latam Brasil, are also under judicial reorganization.
Meanwhile, the company advances through the interior of the country. This Thursday (10), Azul announced what it called the largest regional expansion plan in the history of Brazilian aviation in the Amazon. He stated that, in the second half of the year, he will add eight new stretches to the air network in the state: Barcelos, Apuí, Eirunepé, Itacoatiara, Humaitá, Borba and Novo Aripuanã.
The disclosure was made during a meeting with the Minister of Infrastructure, Tarcísio de Freitas, the Minister of Tourism, Gilson Machado, and parliamentarians from the state bench.
These movements occur at a time when the three largest national airlines –Gol, Latam and Azul– reported losses of R$ 6.2 billion in 2020, due to the new coronavirus pandemic.
One of the biggest challenges is to further lower your fixed costs. Latam alone cut about 30% of its staff last year in Brazil. The impacts of these movements on the consumer generate controversy.
André Castellini, a partner at the consulting firm Bain & Company, recalls that, before Gol, there were four major players in the market –Varig, Vasp, Transbrasil and TAM–, without strong competition. “The fees were expensive and the companies were accommodated, there was no strong capital market, with shareholders demanding performance”, he says.
“With Azul and Gol, Brazil can return to the duopoly of the early 2000s, when the biggest operators were TAM and Gol, and that doesn’t seem bad to me,” says Castellini. “The fierce rivalry between the two ensured an increase in supply and a drop in rates.”
Leonardo Nascimento, partner at Urca Capital Partners, has another opinion. “The scenario is bad for the consumer, as it concentrates a market that is already very concentrated. Brazil is an oligopolist in commercial aviation”, he says, referring to the participation of Gol (37.8%), Latam Brasil (31.4%) and Azul (30.3%). In other words, in a virtual purchase of Latam’s local operation, Azul would have more than 60% of the Brazilian market.
According to Nascimento, the possible acquisition of Latam by Azul is still uncertain and would need to pass through the scrutiny of Cade (Administrative Council for Economic Defense). “But the conversations exist and are advanced, due to the precarious situation that Latam Brasil is experiencing”, he says. The purchase of MAP by Gol, he says, is already a “counter-attack” to the possible merger between the rivals.
Sought out, Azul confirmed its intention to advance in the market via acquisitions. In a statement released at the end of May, the company stated that “the movement of consolidation is a trend in the sector in the post-pandemic and Azul is in a strong position to lead a process in this regard,” he said. The company has already hired consultants to evaluate the opportunities. Gol, on the other hand, did not return until the end of this report.
In the opinion of Castellini, from Bain, Latam Brasil is a valuable asset that Azul will have to compete with foreign players. “Large companies such as Qatar Airways, American Airlines and United Airlines may be interested in the operation, which occupies a strategic position in Latin America,” he says.
Another possibility would be the union of a group of investors with entrepreneurs in the sector. “That’s how Azul was born, by the way”.
Regardless of which configuration the Brazilian civil aviation market takes in the coming months, it is essential that companies promote the restructuring of their services, says Castellini. “It is necessary to renegotiate contracts such as aircraft rental and leasing, for example, because aircraft is an asset that will be left over for a long time in the market”, he says.
The account also includes debts with creditors and executive salaries. “All so as not to worsen the services, not to break the value proposition, because Brazilians may not have money, but they like good service”, he says. “It’s not by offering half a glass of water on the flight that companies will solve their problems.”
In the opinion of Henrique Estéter, an analyst at Guide Investimentos, Gol and Azul faced the pandemic period better than Latam Brasil.
“They were able to capitalize on the market and cut costs a lot,” he says. In the consolidation scenario, it remains to be seen how aggressive Azul will be. “The company has just raised US$600 million [R$ 3 bilhões] in the American market, in bonds with a term of five years, at a rate of 7.35%”, he says.
In a report by Itaú bank, signed by analysts Thais Cascello, Gabriel Rezende, Luiz Capistrano and Mateus Raffaelli, another potential chance of merger is raised: Azul and Gol. Whatever the consolidation movement – between Azul and Latam Brasil or with Gol – they say, “this type of transaction would make sense in terms of the complementarity of the network”.
“But we asked ourselves about the potential structure of a business (considering Azul’s high indebtedness) and what criteria Cade would take into account when analyzing it,” they say. “We estimate that both merger scenarios can generate a relevant range of synergies.”
In the trading session this Thursday (10) on B3, the share of Gol fell 4.37%, quoted at R$ 26.25, while that of Azul rose 0.31%, to R$ 47.78.