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After taking major losses in South America for several years, especially in Brazil, where the economy has been in recession since 2014, two airlines report they’re finally starting to see improvements in the long-haul market.
In some ways, this is to be expected. Carriers have slashed so many flights to Latin America — and Brazil in particular — that capacity is finally catching up to demand. At an investor event Thursday, Daniel Cravens, managing director for investor relations for American Airlines, said American has cut Latin American capacity by 40 to 50 percent from the airline’s peak. With fewer seats to sell, airlines usually have better pricing power.
“It does feel things are getting a little bit better down there,” Cravens said at Morgan Stanley’s 4th Annual Laguna Conference. “At least we’ve reached the bottom, and we’re seeing some improvement.”
In Brazil, Cravens said American has been buoyed by the recent relative strength of the Brazilian Real, the country’s currency. As recently September 2015, it took 4.0665 Reals to match one U.S. dollar, a 21-year exchange rate low. But the currency had rebounded, and the exchange rate is now about 3.34 Reals per dollar. Craven said the strength of the Real is providing a nice “tailwind” for American in Latin America.
While the Olympics provided a short-term benefit, American Chief Integration Officer Beverly Goulet said Thursday the carrier is expecting Brazil’s improvement will last longer term. American’s new regional concerns are Asia, where capacity is growing faster than demand, and Europe, where travelers are jittery because of economic woes and terrorism fears.
“In terms of the international entities, I think Latin will be our stronger entity going forward,” Goulet said. “We’ve bottomed out in Brazil, which is certainly a good thing, given our network.”
Good news for Brazil’s Azul Airlines
The Brazilian Real’s improvement has been even better for Azul Airlines, Brazil’s third-largest airline. David Neeleman, founder and CEO of Azul, said in interview this week that 65 percent of his airline’s cost are in U.S. dollars, which made the Real’s weakness a major problem.
“Obviously, when the exchange rate went over 4 to 1, that was very challenging for us,” said Neeleman, who founded JetBlue in 1999 and was CEO until 2007. “We weren’t able to recover that in the revenues.”
Neeleman predicted Azul will make money again the third quarter, with the airline finally able to charge fares that cover its costs.
“Demand has never really been an issue,” Neeleman said. “We’ve always flown a lot of people. It just that we had to do it at a fare where we could not cover the increased costs. With fuel staying down, and now that the exchange rate is coming down, I think there’s new optimism in Brazil.”
During the worst of times, Azul did what it could to survive, Neeleman said.
“During the times when things were horrific in Brazil, we were selling $400 round-trip tickets [on long-haul flights],” Neeleman said. “That’s what we had to do to fill the airplane up. Now, we’re, thankfully, we’re more than double that.”
Still, Neeleman seems to be betting that American, usually considered the strongest of the three major U.S. carriers in Brazil and Latin America, may not grow so quickly in Brazil. He noted American tried in 2014 to add a flight between Miami and Viracopos, Brazil, but the airline quickly suspended the route. Viracopos is a major base for Azul.
“They literally had 30, 40 people on every flight,” Neeleman said. “They didn’t last long.”