Is Brazil’s aviation sector about to take off once more?

. Dec 01, 2020
airlines brazil Confins International Airport in Belo Horizonte. Photo: Antonio Salaverry/Shutterstock

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Today, what the future holds for Brazilian airlines. New restrictive measures amid a second wave. And the woes of remote work in pandemic times.

Are Brazilian airlines poised for a rally?

Without a doubt, the aviation industry was one of the sectors hit the hardest by the pandemic.

But November demonstrated a spectacular rally for major airlines, with shares of Gol and Azul gaining 53 and 70 percent, respectively. The resurgence continued on Monday, even as states began rolling back their reopening processes ahead of a potential second coronavirus wave (more below).</p> <div class="flourish-embed flourish-chart" data-src="visualisation/4524121"><script src=""></script></div> <p><strong>What is behind the rally.</strong> A few reasons explain the recent recovery, among them:</p> <ul><li><strong>Improved cash flow: </strong>Azul and Gol renegotiated aircraft leases, reduced costs, and postponed the delivery of new planes. They have also frozen investment and reduced wages under a federal program to help companies during the pandemic.</li><li><strong>Demand is creeping back:</strong> In Q2, Gol and Azul suffered a decline in demand of 90 and 84 percent, respectively. But that number has been climbing back up, and Gol plans to end the year with 500 daily flights — 60 percent of its pre-pandemic levels.</li><li><strong>The dollar plunge:</strong> Airlines have many of their expenses pegged to the U.S. Dollar, which lost 6.8 percent against the Brazilian Real in November (despite gaining 33 percent in the year).</li><li><strong>Foreign investors are back: </strong>The election of Joe Biden in the U.S. and positive news about a coronavirus vaccine have enticed investors&#8217; appetite for risk&nbsp;— which is good for emerging economies. São Paulo&#8217;s Ibovespa stock index was the world&#8217;s best performer in November.</li></ul> <p><strong>But, but, but … </strong>A second wave could reignite the crisis, though at this point Brazilians are fed up with restrictive measures and have largely returned to business as usual.</p> <p><strong>Long term bet.</strong> In a report to customers, investment bank BTG Pactual warned of a &#8220;binary scenario&#8221; for airlines. A second wave represents the main overhang for the industry in the short-term, while “potential vaccine developments should intensify going forward, positively affecting the sector&#8217;s stock performance.” They labeled airlines Azul and Gol as a &#8220;buy.&#8221;</p> <ul><li>These two companies are the preferred picks in the aviation sector, as they are more dependent on Brazil’s domestic market — as opposed to competitors Latam and Copa Airlines. This focus on flights within Brazil is a major upside as coronavirus infections rise in multiple regions of the world, potentially leading to more <a href="">restrictions on international flights</a>.</li></ul> <p><strong>There can be only two.</strong> Brazil&#8217;s airlines market is dominated by three major players: Gol, Azul, and Latam. A top executive at Gol told <strong>The Brazilian Report</strong> that, given the crisis, there will only be room for two — and regulators will have to allow an already condensed market to become even more concentrated.</p> <hr class="wp-block-separator"/> <h2>After elections come the restrictions</h2> <p>As we warned, the state of São Paulo has tightened isolation measures amid a rise in Covid-19 cases and deaths. A reassessment of the pandemic in the state was scheduled for November 16 (one day after the first round of the municipal elections),&nbsp;but was moved to yesterday — just one day after the runoff stage took place. Governor João Doria denies that his decision was politically motivated, in order to give his ally in São Paulo — incumbent Bruno Covas — a better chance to win re-election.</p> <ul><li>New rules include limited hours for commerce (at reduced capacity, in order to avoid crowds). School openings, however, remain unaltered. The state has already confirmed 1.2 million Covid-19 cases and over 42,000 deaths.</li><li>According to local authorities, new daily deaths rose 12 percent over the past week and hospitalizations are up 7 percent.</li><li>Tedros Adhanom Ghebreyesus, head of the World Health Organization, called Brazil&#8217;s pandemic situation &#8220;very, very worrying,&#8221; and urged the country to take serious action.</li></ul> <p><strong>Why it matters.</strong> Brazil botched its Covid-19 response earlier this year, letting the coronavirus run unchecked in many regions — such as the Amazon. With citizens fed up with restrictive measures and the government&#8217;s limited resources for stimulus measures that would allow low-income citizens to stay home instead of looking for work, the country could be en route for a repeat.</p> <hr class="wp-block-separator"/> <h2>Labor litigation skyrockets during pandemic</h2> <p>Remember when remote work was meant to be the future of labor? Now, with people working from home for some time now, things have become more complicated. With few regulations on remote work, clashes between companies and employees have reached unforeseen levels. A study by legal website Consultor Jurídico and consultancy Data Lawyer shows that the number of labor lawsuits filed in 2020 is almost five times higher than last year.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/4524629"><script src=""></script></div> <p><strong>By the numbers.</strong> There are over 151,000 labor lawsuits related to the pandemic — worth a total of BRL 15.6 billion (USD 2.9 billion). Of this total, 5,138 cases mention the English expression &#8220;home office,&#8221; used in Brazil to denote remote work.</p> <ul><li>The main complaints concern privacy issues, inadequate working conditions, and exhaustive hours, as it becomes more difficult to separate personal time from the business day.</li><li>However, working from home is also taking a massive toll on people&#8217;s mental health. Some plaintiffs complain about feeling alienated from the company&#8217;s environment.</li></ul> <p><strong>Why it matters.</strong> A second coronavirus wave could force companies to keep employees at home for much longer — which could see this number soar even more.</p> <hr class="wp-block-separator"/> <h2>What else you need to know today</h2> <ul><li><strong>Economy.</strong> Market analysts polled by the Central Bank improved their predictions for the Brazilian economy, forecasting a GDP slump of &#8220;just&#8221; -4.5 percent. Four weeks ago, expectations were at -4.81 percent. However, with <a href="">rising food prices</a> and a recent bump in electricity bills, inflation forecasts are at 3.54 percent, against 3.02 percent four weeks ago.</li><li><strong>Deforestation.</strong> Between August 2019 and July 2020, a total area of over 11,000 square kilometers was deforested in the Amazon. Data from the National Institute for Space Research (Inpe) shows a 9.5-percent increase in deforestation rates, making this the worst year for Amazon destruction since 2008. Vice President Hamilton Mourão correctly points out that deforestation began its current upward trend in 2012, but rates have significantly accelerated during the Jair Bolsonaro presidency, with experts blaming the government&#8217;s &#8220;<a href="">intentional depletion</a> of environmental controls.&#8221;</li><li><strong>Justice.</strong> Besides the <a href="">municipal elections</a>, Jair Bolsonaro was interested in another dispute for office this week: the one for the head of the Rio de Janeiro State Court, which will trial the <a href="">corruption case against Senator Flávio Bolsonaro</a>, the president&#8217;s eldest son. In the end, the Bolsonaro-backed candidate lost out to a judge endorsed by Supreme Court Chief Justice Luiz Fux. </li><li><strong>Hackers. </strong>An electoral court has authorized the Federal Police to access the emails of three people suspected to be involved in hacking the Superior Electoral Court&#8217;s systems <a href="">during the first round of the 2020 elections</a>. Personal data of civil servants were leaked in the attack, but ballot boxes were not tampered with as they remain offline until polls are closed. Investigators say the perpetrators are a group formed by Brazilian and Portuguese citizens — on Saturday, the eve of the runoff election, a 19-year-old Portuguese man was arrested.</li><li><strong>Rio de Janeiro.</strong> Mayor-elect Eduardo Paes is trying to extend an olive branch to the Bolsonaro clan, saying he plans to establish a partnership with the federal government. Mr. Paes has aligned himself with the president by saying that a lockdown is “<a href="">extreme and unnecessary</a>” and is not in his plans. He also praised City Councilor Carlos Bolsonaro, the president&#8217;s second-eldest son, who he called &#8220;very proper&#8221; and &#8220;elegant.&#8221;

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