Brazilian airlines recently bounced back from the impacts of the COVID-19 pandemic and lockdown restrictions. Currently, the company is dealing with inflation, causing an increase in costs. Rising fuel prices diminish profit margins, while inflation reduces consumer purchasing power. The stock prices of airline companies have been volatile, rebounding after society reopened only to drop again when Petrobras, Brazil’s largest petroleum multinational, announced fuel price increases. Will Brazilian airlines be able to handle these challenges or will the industry experience a decline?
Turbulence amid COVID lockdowns
During the pandemic, air travel in Brazil experienced a significant decline. Although then-President Bolsonaro did not take COVID-19 seriously, local states implemented strict regulations and lockdowns to combat the spread of the disease. The lockdowns severely impacted the aviation industry, forcing airlines to adjust their strategies. Airlines shifted their focus from passenger travel to freight traffic to reduce expenses. This shift proved essential in facilitating the distribution of the vaccine rollout in Brazil, a vast country with logistical challenges for product delivery.
Brazilian airlines reawakening post-COVID
Brazil boasts the largest aviation industry in Latin America and has seen a marked uptick in domestic travel. Air travel is essential in Brazil due to its extensive geography, allowing for efficient coverage of large distances. With a land area measuring approximately 8,456,510 square kilometers, Brazil accounts for roughly half of South America’s total landmass. Brazil is the fifth-largest country in the world, after Russia, Canada, China, and the United States. It spans four time zones.
The transportation infrastructure is predominantly composed of roads, which limits the availability of alternative transportation options. Although bus travel in Brazil is generally of good quality, it can be time-consuming. Additionally, some cities for instance Manaus in the Amazon region, cannot be reached over land. Even though Brazil does have a vast railway network, it is not a practical option for passenger travel. It was originally designed to transport goods, especially agricultural and mineral products, and mainly connects production sites to ports. Since then, the railway network has seen little improvement to facilitate passenger travel.
Brazilian culture places a greater emphasis on personal relationships compared to European countries or the United States. Business travel in Brazil has returned to normal while other regions struggle, as conducting business in person remains the norm in Brazil.
Brazilian airlines profiting from small-city connections
Brazil is a popular tourist destination and the economic powerhouse of Latin America, thus attracting many airline companies to operate within its borders. Latam Airlines, the largest airline company in Latin America, primarily focuses on connecting the three major cities of Brasília, São Paulo, and Rio de Janeiro. As a result, local operators have entered the niche market of linking smaller cities in Brazil.
In Brazil’s domestic travel industry, the largest market share is held by Latam Airlines, carrying 13.7 million passengers, according to the latest data from the local government. Following closely behind are the other two top operators, Azul Linhas Aéreas and Gol Linhas Aéreas, with 13.07 million and 12.56 million passengers, respectively.
Gol Linhas
Before the pandemic, Gol Linhas Aéreas was the largest operator in Brazil measured by passengers carried but has lost some of its market share to competitors, Azul and Latam. Its low-cost carriers target a large audience of Brazilians seeking affordable flight options to travel large distances within the country. Although air travel is steadily increasing, the company has yet to recover to pre-pandemic levels. However, it surprised analysts with a net profit of 556.3 million reais ($117.42 million) in the second quarter, a reversal from a 2.8 billion real loss from the previous year mainly due to higher revenue and foreign exchange gains. CEO Celso Ferrer emphasized the company’s commitment to reliable operations, profitability, and efforts to strengthen the balance sheet.
Despite improving finances, the company recently has seen its share price drop sharply. The company announced a debt restructuring plan on the 15th of August, which was negatively received by the market, resulting in a 16% drop in the share price in the five days following the announcement. Analysts of Citigroup and Itáu fear a potential dilution risk of more than 80% for shareholders, causing them to downgrade the stock from Buy to Neutral.
Azul
A direct competitor in the Brazilian domestic air travel industry is Azul Linhas Aéreas, which also focuses on the connectivity of smaller cities within Brazil. Azul tends to cater to a wealthier segment of the Brazilian population, especially having a strong reputation in business travel, being one of the first aviation companies in the world to have fully recovered business travel to pre-pandemic levels.
Azul has managed to weather the COVID-19 pandemic without government aid, demonstrating great financial resilience. They have been reducing their debt and improving operational efficiency while continuing to grow. Azul continues to gain market share and has even surpassed GOL to become the second-largest airline operator in Brazil.
Brazilian airlines in an inflationary economic landscape
Post-pandemic demand has been fruitful for the aviation industry even though good times might only be short-lived. Macroeconomic clouds are appearing on the horizon as inflation is stickier than most people thought. A short relieve in energy prices has faired the airlines well, but inflationary pressures are making their presence felt in Brazil as global fuel prices are back on their way up following a short decline. The nation’s largest petroleum producer, Petrobras, has opted to hike jet fuel prices by 20%, directly impacting the operating costs of airlines Azul and Gol.
Airline travel is one of the first things people will save on in a recessionary environment making the sector particularly sensitive to market cycles. Brazilian airlines will also be hit by an economic downturn although they might be partly insulated due to the crucial part they play in mobility. The lack of other transportation methods will probably be beneficial to Brazilian airlines despite a worsening economic environment.
Brazilian airline stocks’ upward trajectory defying inflation’s tailwind
The recent pullback in Brazilian airline stocks can make for an interesting entry point for investors interested to invest in the industry. Currently, the market outlook remains positive as passenger numbers, measured by ASK (Available Seat Kilometres), keep increasing for domestic airlines in Brazil. This indicates that airlines keep expanding their business leading to a higher market share and potential benefits of economies of scale. Simultaneously, both Azul and Gol have managed to improve the profitability of their businesses by reducing costs and increasing efficiencies. For instance, Azul was the most on-time airline in 2022 and continues to be among the top-ranked airlines in 2023.
Although the macroeconomic outlook does not look too bright, Brazilian airlines seem to be relatively well positioned compared to the global airline industry. August traffic figures indicate demand to remain strong in Brazil in the near future. Furthermore, recent booking trends allow for confidence in the months ahead. Brazilian airlines found their niche market, particularly Azul seems to have sound financials to whether the storm.
