The Law and Regulation of Airspace Liberalisation in Brazil

What is the Way Forward?

Delphine Defossez

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000609790
• Edition: 1
• Topic: Derecho
• Subtopic: Teoría y práctica del derecho

The book starts from the premise that the current aviation framework, in Brazil, cannot sustain a full liberalisation in the long run. While the competition rules in place offer a strong framework, which only requires small modifications, these rules are not "enough" to foster a "healthy" liberalisation. In fact, until recently, Brazilian airlines were operating in a homogenous market, where competition was artificial. This artificial competition, obtained through the imposition of a legal obligation to provide water and a snack and grant a 23kg bag allowance, has resulted in a highly concentrated domestic market with very few players. Compared to other same size markets, such as China or India, Brazil is far behind in terms of airlines operating at national level. Consequently, the opening of the domestic market must be closely regulated to avoid national carriers suffocating under external pressure. For this reason, state intervention during the liberalisation process is crucial. State intervention is also with regard to the protection of passengers.

The other major problem is the protection framework for passengers which is much too uncertain and burdensome. In a sense, it is detrimental to the domestic market and passengers. Indeed, there is no harmonisation of passenger compensation leading to contradictory judgments and possible high moral damages which hinders legal certainty for airlines. Compared to the situation in the EU, in Brazil, airlines have a limited range of defences, which are often dismissed by courts.

This book, therefore, critically analyses the policies and regulations in place by mainly comparing the Brazilian framework to the European one. This choice has been motivated by the fact that European liberalisation is considered the best so far, and as Brazil is starting this process much later, it could benefit from the European experience.

This book will be of particular interest to scholars and practitioners interested in the Brazilian system.

1 Setting up the scene

DOI: 10.4324/9781003252788-1

To achieve air transport globalization, complete liberalization of the sector is required, including the removal of national ownership restrictions; thus, the question is not whether to liberalize, but how.¹

Aviation serves as a vehicle for promoting commerce between regions and nations around the world. In a more and more interrelated world, liberalisation becomes a necessary evil with an increased need for cooperation between States and global stakeholders. While many countries have liberalised, some are still reluctant to do it, and this includes Brazil.

The current situation in Brazil, governed by bilateral agreements and market restrictions, is not only detrimental to national passengers and carriers, but also international carriers and passengers. The COVID-19 pandemic has shed light on the fragility of the Brazilian aviation market, both domestically and internationally. Indeed, while the pandemic has been beneficial to one Brazilian carrier in particular, Azul – which obtained market leadership on domestic routes in the first quarter of 2021 – it has also resulted in LATAM Brazil – one of the major companies – to sought Chapter 11 bankruptcy protection in July 2020 – after the parent company, sought similar protection in May 2020.² The pandemic has helped Azul to consolidate its monopoly on the majority of the routes it operates. Even more worrying was Azul’s wish to acquire LATAM Brazil in early 2021. Although unlikely, such a merger – LATAM-Azul – would result in them obtaining a dominant position in the Brazilian market, around 60% of the domestic market, putting the remaining carrier, GOL, in a very weak position.³

Going forward, the country will need to open up more, by, for instance, enacting more open skies agreements. As Brazil is starting its liberalisation process, it could draw some conclusions from liberalisations that have already occurred in other parts of the world. Although a comparison with the US system could be considered more adequate, at least with regard to the national market, the author did not select it for two main reasons. First, the EU liberalisation has been considered the best so far. Additionally, the gradual approach used in the EU example seems better suited to Brazil’s needs. Second, passenger protection in the US is almost non-existent.⁴ Passenger protection is one of the most problematic areas in Brazil: the author, therefore, deems it more adequate to compare the Brazilian and EU systems, rather than the Brazilian and US systems. The EU is therefore taken as reference point for ‘successful liberalisation’.

However, the aviation industry is full of contradictions; it is international by nature, yet bound to national, bilateral and sometimes multilateral economic regulations and restrictions. Contradictions are also present at the passenger level; there is an increased demand for lower fares in addition to high comfort standards and a strong protective framework.⁵

1 The Brazilian aviation landscape until 2019⁶

Brazilian civil aviation has gone through various transformations, from an insipid market with few airlines to its current shape. Between 1989 and 1997, government policies were put in place to stimulate the entry of new airlines in the Brazilian market. The government policies implemented since the 1990s resulted in an increase in competition with lower fares and market expansion. However, compared to other markets, Brazil has fewer carriers operating in a highly concentrated domestic market with artificial competition. In fact, Brazilian airspace is underused, with a daily flight average of 2,650 in 2018,⁷ compared to 30,168 in the European Union.⁸ For the size of the country and its population, this number is astonishingly low, especially so after the recent conclusion of the Brazil-US open skies agreement.⁹

Until 2019 and Avianca’s bankruptcy, the Brazilian market was controlled by four carriers holding 99% of the market – GOL, Azul, LATAM and Avianca. Four small regional carriers, the largest of which is Passaredo, account for the remaining 1%. Compared to other markets, the Brazilian market is highly concentrated with very few Low-Cost Carriers (LCCs). For instance, the US domestic market encompasses more than 50 airlines with the largest holding 68.2% of the market in 2017.¹⁰ The six remaining airlines have shares of the US domestic market varying between 5.5% and 1.6%.¹¹ LCCs hold almost 30% of the US domestic market. In the US, Ultra-Low-Cost Carriers (ULCCs) are starting to emerge with Spirit Airlines and Frontier gaining market share. In 2016 the Argentinian domestic market was dominated by Aerolineas Argentinas at 80%; the rest of the market was divided between LATAM and a handful of other companies. However, the market was modified with the entry of Flybondi, a national LCC, and Norwegian Airlines, a ULCC.¹²

In Europe, in 2017, LCCs had up to 43% of market share in Western Europe.¹³ ‘Europe’s top seven airline groups control 55% of seats to/from/within Europe in summer 2018, compared with an 82% share for North America’s top seven.’¹⁴ According to Pearce, ‘it takes 28 airlines to provide 80 per cent of available seats, compared to just seven airlines in North America’.¹⁵ This has created a market that is much less concentrated than North America’s. The companies with the highest capacity growth in after one year were all LCCs or ULCCs, while the capacity growth was much more restricted for Full-Service Carriers (FSCs).¹⁶ This evidences the growth of LCCs and their increased importance in the market. Although the Brazilian air sector went through a process of deregulation in the 1990s with monopolies being broken up to allow new companies to enter the market, Brazil has fewer airlines than similar-sized markets and the level of competition is lower than in other similar markets.¹⁷

Another example of the underusage of the airspace is found in the increase in traffic flow and airport saturation. While some European airports, which are already considered saturated, have difficulties in following the growth trend, in 2017, most of the 20 biggest Brazilian airports experienced negative growth in terms of take-offs.¹⁸ The major concentration of flights is in the southeast of the country, including Rio and São Paulo, which is eight times higher than in the North region.¹⁹ São Paulo has a higher number of take-offs in the region and the whole country, with 241,693 in 2017 compared to 90,029 in Rio. Looking at both 2016 and 2017, the number of flights dropped in nearly all the regions except for the Southern region. Compared with 2017, São Paulo kept its dominant position, with a slight increase in the number of take-offs (250,887) while Rio experienced a slight decrease (82,908).²⁰ When launching its third hub in Brazil, and its new airline, Air France-KLM chose Fortaleza in the Northeast region, the second biggest region after the southeast region. Creating a hub in Fortaleza allows for better connections with other famous cities and beaches in that region.²¹ Other companies such as Royal Air Maroc and Norwegian Airlines are interested in starting operations in Fortaleza. Still domestic airlines have not followed the trend by operating newer international routes departing from Fortaleza.

Although Brazilian domestic air transport is a fast-growing industry and is very lucrative, it has not reached its full potential. Over the past two decades, the Brazilian aviation market has experienced sporadic and irregular growth; some years, such as 2010, experienced extreme growth, while others, like 2016, had relatively limited or even negative growth. Until 2016, the annual number of passengers consistently increased; however, that year the number dropped by 6.9% from 2015. This was largely attributed to political uncertainties and economic downturns.

Since then, the aviation market has tried to recover, with 2018 showing the highest number of passengers on international flights ever recorded.²² In 2018, airline passengers totalled 117.6 million, with 24 million on international flights and 93.6 million on domestic flights, a slight increase over the previous year.²³ The same year, the total number of passengers travelling in the EU was 1,106 million, representing an increase of 6.0% compared with 2017 (1,043 million).²⁴ In 2019, the number of passengers increased by 1.4% in Brazil compared to 3.8% in Europe.²⁵ Even if the Brazilian population constituted less than half of the European population, the difference in passenger flow is still astonishing. This difference is even more alarming because, size wise, Brazil is twice as big as the European Union, with fewer infrastructures.²⁶

One reason for such a gap resides in the difference in economic power. However, this argument is partially contradicted by the Chilean example: Chile is much smaller and less populated than Brazil but transported more passengers (24.5 million for both domestic and international flights).²⁷ Unlike Brazil, Chile liberalised in 1979 and has experienced an increase in traffic well above the regional and world average.²⁸ Indeed, the Chilean air transport market grew by 57.3% between 1985 and 2015, compared to 22% for Brazil over the same period.²⁹ This example demonstrates the benefit of air liberalisation on national markets. There is a great difference in the capacity’s growth: the capacity growth between 2017 and 2018, on flights to or from Europe, of the top ten airlines varies from 0.4 to 19.6% compared to a projected capacity growth of 0 to 10% for the Brazilian domestic market.³⁰

The irregular growth in aviation is also evidenced by the fact that in 2017, the aviation sector represented 1% of the Brazilian Gross Domestic Production (GDP) and 0.7% of the Brazilian labour market, both figures largely unchanged from 2009. This irregular growth has forced some regional airlines out of the Brazilian market or obliged airlines to merge or buy other carriers, such as Pantanal Linhas Aéreas, which was bought by the-then TAM, leading to the consolidation that Brazil now faces.

Brazil also has a high number of bankruptcies, one every two years.³¹ The most recent bankruptcy is Avianca in 2019. In fact, up until its bankruptcy, Avianca was one of the highest growth airlines in Brazil. As Avianca’s tragedy has demonstrated, the Brazilian government did not step in to avoid market concentration as, for instance, the Italian government did with Alitalia. Avianca’s saga also highlights the divergence in opinion and approaches within Brazil’s judiciary, with some judges more concerned with passenger protection while others were more interested in the economic side.

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Table of contents

• Cover
• Half Title
• Series
• Title
• Copyright
• Contents
• List of tables
• Preface
• Acknowledgements
• List of abbreviations
• 1 Setting up the scene
• Part I European liberalisation
• Part II Brazil liberalisation
• Index