Brazil just approved 100% foreign ownership of airlines, up from the previous maximum of 20%. This presents an opportunity for foreign carriers to increase investment in a currently troubled economy with strong future potential. Currently the Brazilian airline industry is troubled, along with the Brazilian economy. Domestic air traffic declined by 8.2% during the first five months of 2016 when compared with 2015, and airline losses are mounting.
This combination of circumstances — airlines with lower values in a market that appears to be at a cyclical nadir — provides the opportunity to acquire strong assets at low prices. As an important node for global networks and alliances, this presents an opportunity for airlines looking to strengthen their presence in Brazil.
Domestically, the four major players account for nearly all of the traffic, as shown in the chart below:
Let’s examine the potential suitors and candidates.
Today, Delta is already a minority owner in GOL, and could substantially increase its shareholding, as the companies already code-share some flights. Delta would not want to lose its existing investment, and is a likely candidate to increase shareholdings to at least a controlling 51% in GOL, and could increase that stake.
LATAM is a multi-country operation with strong international and domestic operations, and could be a target for several companies. The carrier chose membership in the oneworld alliance, and is affiliated with American.
United will need to protect its southern flank, and Avianca Brasil is already affiliated as a member of the Star Alliance. An investment by United into Avianca Brasil would make sense and enable a closer relationship for code-sharing operations.
Each of the big 3 North American carriers has a natural potential partner in Brazil based on their alliance participation or existing relationships.
That leaves Azul as a potential suitor for a carrier investing internationally. Would Etihad invest in Azul and continue their “alliance by joint venture” strategy? Or could someone like JetBlue, with a similar business model, each founded by David Neeleman, acquire an interest in Azul to provide network expansion? Azul may be the potential candidate without a natural acquirer, and thus the ideal target for foreign investors seeking an entry point in Brazil.
Rather than North to Alaska, this gold rush may be South to Rio.
