Brazilian air travel: the future is private

</p> <p><strong>You served under four presidents and helped in the transition to the current administration. How would you assess the current economic agenda, which seeks to empower the private sector?</strong></p> <blockquote class="wp-block-quote"><p>Airport concessions began with the Dilma Rousseff administration, and continued under Michel Temer and now, with Jair Bolsonaro. They are not ideology-based, instead they are a pragmatic way to provide a public service with quality and efficiency, enabling investments. That&#8217;s the way forward for the airport sector, as well as other infrastructure areas. I have no doubt that private infrastructure management will be present, regardless of the political path Brazil takes in the future.</p></blockquote> <p><strong>But Brazil has earned a reputation as a country that is highly dependent on its government.</strong></p> <blockquote class="wp-block-quote"><p>Privatizations should be demystified. As a matter of fact, private control over infrastructure services is the rule, not the exception. It has been the case for centuries. Brazil&#8217;s first electricity supply was already private —it was owned by [Canadian power company] Light— and public transportation has always been privately provided, even back to the days of trams. It can work well, as long as a country provides legal predictability. And we have evolved a lot in that regard.</p></blockquote> <p><strong>What is the current situation of the airport industry?</strong></p> <blockquote class="wp-block-quote"><p>Undoubtedly, the quality of airports today is better than in the past. We used to have less than half the travelers we currently have. Imagine having the current amount of planes and people, but with the structures of the past, and the government being unable to invest … It can&#8217;t work.</p></blockquote> <p><strong>What is the next big-time project for investors?</strong></p> <blockquote class="wp-block-quote"><p>Congonhas Airport in São Paulo, and Santos Dumont Airport in Rio de Janeiro. They are some of the busiest in Brazil. But, once again, it all depends on the rules the government will decide for the auction—which we don&#8217;t know yet.</p></blockquote> <p><strong>Both the federal and the São Paulo state administrations have talked about stimulating the construction of regional airports. Are these good investments?</strong></p> <blockquote class="wp-block-quote"><p>Indeed they are. Regional airports can help correct a major flaw in the Brazilian system, which is the lack of regular regional flights for various reasons, often a lack of passengers. We need a way to develop regional aviation in Brazil, as this is a great opportunity for growing demand.</p></blockquote> <p><strong>What is the biggest problem faced by airport concessionaires in Brazil?</strong></p> <blockquote class="wp-block-quote"><p>The biggest problem is legal insecurity, and this is also true for all infrastructure sectors and other business activities. We had a problem in Rio de Janeiro with the registration of employees. Every time you hire an employee, a notary registration is required. But turnover is high, making this cost high, as each registration costs BRL 150. This is unnecessary. It&#8217;s something that can be done online at no cost.</p><p>It is only natural that a country such as ours, with a young, maturing economy, will suffer from changes in legislation and the interpretation of those laws.</p></blockquote> <p><strong>What about our tax system?</strong></p> <blockquote class="wp-block-quote"><p>The tax issue generates a lot of litigation. There is more than BRL 2 trillion in dispute around Brazil on account of tax cases. But airports have their own issue: with high investments, concessionaire&#8217;s end up accruing accounting losses, which are to be deducted soon after. But a number of legal restrictions prevent this deduction from taking place during the concession contract. The term ends and there is an accumulation of tax credit.</p></blockquote> <p><strong>What about contracts?</strong></p> <blockquote class="wp-block-quote"><p>Contracts are naturally complex and many issues that are not dealt with or that give rise to questions or conflicting interpretations are difficult to resolve. It has been about eight years since the beginning of the airport concession project; it is very recent. If we take the first and fifth round of contracts, for example, they have undergone very significant changes.</p><p>Previously, the grant was fixed and the demand and exchange rate risks were placed 100 percent on the concessionaire. Today, demand is variable and the risk is shared. It is evident that along the way this causes problems, but they are issues that we will have to face for the next 20 years.</p></blockquote> <p><strong>And the regulatory frameworks?</strong></p> <blockquote class="wp-block-quote"><p>The country launches a new regulation every day. They are often conflicting demands created by many different government agencies. There are new requirements and companies are forced to comply with them. There are also federative issues with <a href="https://www.anac.gov.br/A_Anac/institucional/superintendencias/superintendencia-de-regulacao-economica-de-aeroportos-sra">regulation</a>: for example, if a municipality wants to regulate on a particular issue, but then is told it does not have the jurisdiction, as it is a federal or state matter. This is a constant problem.</p></blockquote> <p><strong>Does the small number of airlines operating in the sector affect the efficiency of the network?</strong></p> <blockquote class="wp-block-quote"><p>Whether there are two companies or five companies, it does not affect our financial results, because what matters is the volume of travelers. But competition is always positive. We will always be in favor of healthy competition. However, it is not easy to operate air transport in Brazil, we have a history of airlines going out of business. The country is continental-sized, with large distances between cities and concentrated density of passengers.</p></blockquote> <p><strong>How does the creation of NAV Brazil [<a href="https://brazilian.report/power/2019/12/10/nav-brasil-new-secretive-company-created-jair-bolsonaro/">a state-owned company set to absorb air traffic controlling duties</a>] influence the market? One of the reasons for its creation is that Infraero&#8217;s navigation sector, Infraero NAV, is nearly bankrupt. Is there any way to make this part of the business profitable?</strong></p> <blockquote class="wp-block-quote"><p>This is an administrative and financial issue of the government&#8217;s operational management. We have Decea, which operates some towers, and others are managed by Infraero. Some areas are profitable and others are not. Apparently, Infraero was left with more loss-making areas. The government chooses to create a company that will manage everything and the result will be positive from a financial and managerial point of view, because it allows for better coordination between the system&#8217;s actors.</p></blockquote> <p><strong>And what about prospects for the future?</strong></p> <blockquote class="wp-block-quote"><p>The sector is recovering well and we expect a 5 percent growth in passenger volume. This <a href="https://brazilian.report/power/2020/01/07/brazilian-stories-missed-holidays-bolsonaro/">holiday season</a>, movement is increasing and airports are full. Accompanying the economic cycle, when the economy grows 1 percent, the sector grows more. We had some difficulty with the bankruptcy of Avianca, but recovery has been good. <a href="https://brazilian.report/society/2019/11/23/latin-america-boom-bust-frustrations/">Latin America has 10-percent growth</a> in the sector, but when we are coming out of a five-year cycle without growth, 5 percent growth is very important.