Traveling by air between Sao Paulo and Rio de Janeiro once meant paying Brazil’s highest domestic fares. Now fliers are discovering bargains on that route as the economy heads for its worst year since 1992.
“I’ve been finding really cheap tickets,” said Brooke Swartz, a 34-year-old communications consultant who recently noticed a $20 one-way ticket from Rio to Sao Paulo. Last year, that same 352-kilometer (219-mile) trip between Brazil’s two biggest cities on Gol Linhas Aereas Inteligentes SA cost as much as $480.
Airlines’ pain is so far proving to be consumers’ gain in Latin America’s largest economy. Instead of cutting back on available seats ahead of a slowdown in travel, the country’s three biggest carriers — Azul SA, Gol and Tam — are maintaining their fleets and discounting travel to keep their planes as full as possible.
“Lower prices are part of the game,” said Gianfranco Beting, director of brand, product and communications at Azul, the airline created by JetBlue Airways Corp. founder David Neeleman. “We have to work in the short term with revenue that is less robust in function of a market that has become more favorable for buyers. There’s an erosion in the quality of revenue.”
That approach threatens to extend losses at airlines whose turnaround strategies have failed to end annual deficits, according to Savanthi Syth, a Raymond James Financial Inc. analyst in St. Petersburg, Florida. Santiago-based Latam Airlines Group SA, which owns Tam, hasn’t posted an annual profit since 2012, and Gol last reported full-year net income in 2010. Avianca Brasil and Azul are both closely held.
“Gol and Tam have some ability to withstand things a little longer and put pressure on the other guys,” Syth said. “In the near term, from an earnings perspective, it’s going to be worse, but maybe long term that’s the right strategic move.”
Gol has fallen 48 percent this year while Latam has fallen 16 percent.
Executives say they’re willing to put up with losses, for now, rather than pull back on flying and risk seeing travelers switch to another carrier or lose flying rights at airports where the government controls access.
Gol has reduced prices as much as 50 percent on some routes, said Chief Executive Officer Paulo Sergio Kakinoff.
“The logic is simple: between departing with an empty seat and departing with a less-profitable seat, obviously, it’s the latter,” Kakinoff said at a March 24 travel industry event in Sao Paulo. “But today’s prices aren’t high enough to cover costs.”
Sao Paulo’s Congonhas airport, a departure point for flights to Rio, is among those with government controls on flight slots. Airlines that serve Congonhas and Rio’s Santos Dumont must meet on-time and cancellation targets or be forced to return that route authority — a requirement that becomes more burdensome with the threat of dwindling traffic.
“No one wants to lose slots,” said Avianca Brasil CEO Jose Efromovich said at a Brazilian tourism conference on March 24. “We’re going to the extremes of creativity to find ways out.”
Avianca Brasil is only discounting occasionally and on select routes, he said in an interview April 12.
Tam didn’t respond to a request for comment on fares.
Travel demand in peak summertime in January and February grew by 4.1 percent, according to the Brazilian airline association, known as Abear. Business travel fell in that time, said Abear President Eduardo Sanovicz, in a March 26 statement.
“We have to see March results,” he said. “That will give us an indication for the rest of the year.”
Latam’s demand contracted 0.5 percent in total in March, and remained flat in Brazil. International demand fell 2.2 percent, according to a regulatory filing.
Gol hasn’t reported March traffic figures yet.
Over the past few weeks, there has been a marked deterioration in the Brazilian international air travel market, with tumbling confidence levels affecting passenger volumes on top of ongoing yield pressure, a team of Banco Itau BBA analysts, led by Renato Salomone, wrote in an April 12 note about Panama-based Copa Holdings SA.
Brazil’s airlines can handle the difficult scenario in part because of dropping oil prices, said Bernardo Velez, an analyst at brokerage Corporativo GBM SAB in Mexico City.
“We could see airlines sharing some of the benefits of the fall in oil prices with consumers in order to continue stimulating demand and high load factors,” Velez said in an April 9 phone interview.
This article was written by Christiana Sciaudone from Bloomberg and was legally licensed through the NewsCred publisher network.