In June 2019, President of Brazil Jair Bolsonaro approved a bill permitting foreign airlines to undertake domestic flights in the country. This new law offers opportunities for foreign carriers in the largest air market (and more generally, the largest economy) in Latin America.
The government’s aviation agenda has been preoccupied with this debate for years; now, dominating domestic-operating airlines will more easily access foreign investment. This falls in step with several recent moves by the government to promote foreign investment in the country.
We explore the new law and the potential it offers foreign-controlled airlines.
Brazil airline market
Three airlines currently dominate Brazil’s air travel industry:
- Gol Linhas Aereas Inteligentes
- Azul SA
- LATAM Airlines Group.
Collectively, these carriers control 92% of the country’s domestic flights. Until now, regulations against foreign ownership and operation have held international airlines back from establishing a presence in the market.
Law reform for foreign ownership and operations
Former President Michel Temer set this reform in motion as one of his final acts in office in late 2018. Temer signed a proposed amendment to a law in Brazil’s Aeronautical Code, called Law No. 7,565/86. The amendment made two key policy changes:
- Foreign carriers would be allowed to operate domestically in Brazil
- The ‘cap’ of foreign ownership of airlines would be lifted from 20% to 100%.
The clock started ticking for the new government to take action, as although the two policy changes were made effective immediately, National Congress had to approve them within 120 days. Without this approval they would become void.
While the Chamber of Deputies and Senate both approved these changes, they added a provision enforcing complimentary checked-in luggage on domestic flights. This change required Presidential sign-off.
Though Bolsonaro approved the two measures, he did however veto the section of the bill that regulated baggage fees imposed by airlines. This provision was staunchly opposed by the airline industry. Airlines are not required to offer complimentary checked-in luggage.
What does this mean for business?
This new law evens the playing field for competition between foreign airlines and a very concentrated Brazilian airline market.
Previously, airlines could operate with a maximum of 20% foreign ownership. Now, 100% foreign-owned carriers can enter the mix. This allows international companies to establish domestic subsidiaries in a lucrative air market.
The law also enables foreign investors and carriers to buy up local carriers. Some speculation exists that this law was motivated in part to relieve pressure on Avianca, one of Brazil’s largest airlines who was hit hard by the 2016 financial crisis. Avaianca’s debt sits at US$144.6 million, and the company recently filed for bankruptcy.
Though officials haven’t connected the law change with Avianca’s financial troubles, the reform does offer a lifeline to Brazilian airlines struggling to source funding.
Foreign airlines are moving quickly
Air Europa, a Spanish airline company, has already seized this high-reward opportunity. The Brazilian government granted Air Europa ‘preliminary authorization’ to set up in the country. Infrastructure Minister Tarcisio Gomes de Freitas expects the airline will launch domestic flights towards the end of 2019.
Additionally, three more foreign airlines are engaging with the Brazilian government in the hopes of setting up domestic flights. Though these companies cannot yet be publicly named, their speedy response demonstrates the value of this newfound access.
The three dominating airlines mentioned above have also already been approached by foreign carriers. They each received minority investments earlier this year. Now, Qatar Airways owns 10% of LATAM, Delta Airlines Inc. owns 9.4% of Gol, and United Airlines owns 8% of Azul SA.
Increased investment and connectivity
This law reform, alongside the 2018 Open Skies law, puts Brazil in a good position for greater regional and global connection. Open Skies aims at increasing flight routes between Brazil and the US.
Brazil’s government is expecting a boost for Brazil’s tourism industry as a result of the amendment. Minister of Tourism, Vinicius Lummertz says the new law will “promote the opening of new routes, the creation of new flights, the reactivation of airports and the reduction of the price of tickets for the traveler, because it deconcentrates and encourages the growth of the market.”
The expected investment to flow from changes to foreign ownership regulations will also feed into improved infrastructure and reduced travel costs for passengers.
Is Brazil foreign-investment friendly?
Brazil’s shift to make itself more open to foreign investment is paying off, considering how quickly foreign operators have jumped at this opportunity.
But this isn’t the only area Brazil is targeting to make itself more attractive to overseas investors. A recently signed provisory law, liberates startups from crippling bureaucracy. The law, called the Economic Freedom MP, makes company formation more accessible and industry innovation more achievable.
Furthermore, Brazil’s government has introduced a new type of legal entity for entrepreneurs to categorize their business. This new structure is called ‘Empresa simples de crédito,’ or Simple Credit Company. It eases regulations and licensing requirements for small and medium enterprises (SMEs), which contribute to 27.5% of Brazil’s GDP.
With targeted reforms to support business and investment, Brazil removes barriers for commercial actors to enter the market.
We can help you get started
Brazil demonstrates increasing potential as a Latin American investment destination. Now, new legislation improves access to its market and impressive economy. With a progressive, business-focussed government at the helm, there has never been a better time to get involved.
With the right strategy, your Brazilian expansion can achieve long-term success. For help getting started, you should seek accounting and legal support from knowledgeable experts.
At Biz Latin Hub, our Brazil team offers comprehensive market entry and back-office services. This includes accounting, legal and recruitment support. To find out more, contact our Brazilian business experts at [email protected].