BY LATIN AMERICA ADVISOR
David Neeleman, founder of U.S. discount carrier JetBlue Airways, announced last month he would create a low-fare domestic airline in Brazil to tap into the country's growing demand for air travel. What is the outlook for the new, as yet unnamed, airline? Will it be able to compete with TAM Linhas Aereas and Gol Linhas Aereas, which together control more than 90 percent of Brazil's domestic air travel market?
David Beckerman, Vice President for Analytical Services at OAGback Aviation Solutions: The proposed low-fare carrier will fly Brazilian-made Embraer 195 jets and has $150 million in start-up financing in a country that has experienced strong air travel demand but, according to Mr. Neeleman, pays too much. Mr. Neeleman's airline faces two strong competitors. One, Gol, is a low-cost, low-fare carrier that has driven Brazil's air travel growth since it begin flying in 2001. According to ANAC, the Brazilian aviation regulatory entity, Gol has 42 percent of the domestic market, and 46 percent if one includes Brazil's once proud Varig, now owned by Gol's parent. The other major player is TAM Linhas Aereas with a 52 percent market share. The duopoly itself may represent the opportunity for Mr. Neeleman. He is bullish on growth, yet so are his competitors. TAM plans to add about 20 domestic aircraft over the next four years and Gol 32, together representing a 30 percent increase in the domestic fleet. Several industry analysts, including Raymond James, believe the Brazilian market is heavily underpenetrated given Brazil's robust economic performance in recent years. Mr. Neeleman claims that Brazilians pay 50 percent more than U.S. travelers for domestic travel on a per-unit basis. If he succeeds in lowering fares sufficiently, he may indeed fill his planes. His US airline, JetBlue, lowered fares by approximately 40 percent in most markets it entered, resulting in passenger increases of over 100 percent in many cases. Whether his Brazilian effort can find the same opportunities and how the duopoly will react remain to be seen.
Amaryllis Romano, an Industry Analyst at Tendencias Consultoria in Brazil: Consumers often benefit from increased competition in differentiated product settings. However, it does not happen in the Brazilian airline market. Unfortunately, at the moment, we are facing many infrastructure problems in the air industry. A new low-fare domestic airline in the country will face many problems, such as occupied slots and bad airport access conditions. These two issues could become an impediment to the entering company's growth. To solve these problems, a methodical strategic plan is necessary, led by federal authorities, with the objective of filling medium- and long-term demand. In addition, it is important to increase routes in the internal market to meet domestic demand. The government should regulate the airline market in order to incentivize private investment in the industry. The consequence of this investment would be an increase in airway infrastructure and low-fare tickets. Demand in Brazil has increased 186 percent in the last nine years. Because of the good economic scenario in Brazil, due to domestic income growth and good credit conditions, this segment is expected to grow 15-20 percent per year over the next three years. Now that Brazilian consumers are able to buy airline tickets, they need to reach airports on time, and have low-fare public transportation and reliable flight control systems.
Bobby Booth, Chairman of AvGroup, Inc. and a former airline executive: I believe the outlook is excellent. David Neeleman knows the business and knows Brazil. The aircraft decision is the right one for a domestic operation linking all markets in Brazil, many of which do not have nonstop air service, and he plans to serve all of them with a low cost, superior product. The potential market is huge—less than 5 percent of the country's 180 million people use air travel—with the economy improving and poverty declining. Neeleman has already stated he is going after the 150 million bus riders as well as those who cannot afford the existing service. He has stated he is not competing with TAM and GOL/Varig for the existing market, but is going to stimulate the market and create his own share from those who don't yet use air transportation—the Southwest effect! I believe David will be very successful and hopefully will eventually expand and become a regional airline serving Argentina and other markets.
Republished with permission from the Inter-American Dialogue's weekly Latin America Energy Advisor newsletter.