With the news of Avianca Brasil filing for court-supervised reorganization and the warning from the International Air Transport Association (IATA) about the financial situation of Latin American airlines, Brazilian president Michel Temer has issued a decree allowing air carriers to be entirely owned by foreign capital.
Since taking office, Mr. Temer has never hidden his intent to liberalize the airline market. He sponsored a bill in Congress to allow foreign companies and capital to own Brazilian airlines, but it was voted down by the Senate. Eliseu Padilha, Mr. Temer’s Chief of Staff, said at the time that it was only an attempt to legalize something which already occurred unofficially. “Of course we know that our airlines are not all controlled by Brazilians,” he said.
The original draft of the bill, issued by impeached president Dilma Rousseff, raised the limit of foreign ownership from 20 to 49 percent – but Mr. Temer pushed it all the way to 100 percent. For the government’s allies, it would be a way to create a more competitive environment.
Today, only a handful of airlines control the majority of the Brazilian market.
Now, with the crisis of Avianca, Brazil’s fifth-largest airline, Mr. Temer has spotted an opening to push the change through by decree. The decision will be analyzed and voted on by Congress, but comes into effect immediately until that date. With the lack of Brazilian alternatives available, foreign investors will now legally be allowed to own national airlines.
Avianca issued a request for court-supervised reorganization yesterday, with debts of BRL 493.9 million. The process is the final stage before bankruptcy.
Not a magic solution
Despite the government’s enthusiasm, experts disagree that allowing foreign companies to be the sole owners of airlines would improve the market and bring ticket prices down. “The problem for Brazilian airlines is more connected to the cost of doing business in Brazil than to an alleged lack of competition,” says Jorge Eduardo Leal Medeiros, a specialist in infrastructure and professor at the University of São Paulo.
“Companies controlled by foreigners would have to obey the same legislation and work in the same environment as the Brazilians – which would bring their operational cost up in the same way.”
Brazil now becomes one of the few countries in which foreigners can obtain 100 percent ownership of air carriers, joining India, Chile, and Colombia. Countries such as the U.S., Canada, and the United Kingdom, however, only allow for overseas capital to control a maximum of 20 percent.