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How Airlines in Brazil Are Responding to the COVID-19
Like most large aviation markets around the world, Brazil was living within optimistic times at the start of 2020. Demand, as well as unit revenue. was growing at a healthy pace.
However, the outbreak of the COVID-19 pandemic, along with the rise of confirmed cases in the country, heavily affected the positive figures. Airlines promptly started reacting to the quick fall of the demand, trying to stanch the losses.
To make matters worse, in the middle of the crisis the Brazilian Real suffered a strong devaluation against the dollar, severely affecting costs and international demand. On February 15, one dollar was worth 4.30 BRL. On Friday, it was worth 4.86 BRL.
GOL, Brazil’s largest airline, was the first to report its fourth-quarter results, on Feb. 20. This was before the first case was confirmed in the country, so the investor’s conference was not surrounded by the Coronavirus concern. Richard Lark, GOL’s Chief Financial Officer, did, however, address it as a potential threat at the time.
However, with the demand drop after the first confirmed patient, GOL started taking effective actions. In order to preserve cash, the airline canceled the proposal of reacquiring Smiles, its frequent-flyer program, which is negotiated in São Paulo’s Stock Exchange.
In a video to customers released on Friday, GOL’s CEO, Paulo Kakinoff, said: “our flight schedule passed through adjustments that aim to ensure the balance between the new demand scenario and the quality and amplitude of our network”, although no changes have been officially announced.”
The second-largest airline of the country, LATAM Brasil, is the most exposed to the international market and was the first to feel the effects of the pandemic. It firstly canceled its flight from São Paulo to Milan (its only operation to Italy) until April 16.
In order to be better prepared for the expected effects, in its investor’s conference on March 4, it also announced the freezing of “all non-essential hiring and discretionary expenses and investments.”
In a video sent to employees, CEO of LATAM Airlines Group Enrique Cueto and CEO-elect Roberto Alvo mentioned the group would slash international capacity in 30 percent for April and May, says Chile’s Diario Financiero. The airline also suspended it’s capacity and demand guidance for this year.
Azul, the third-largest carrier in Brazil and the one with the most growth in recent years, has been the most outspoken about the actions to be taken, given it was the last to provide the investor’s conference, well into the local spread of the virus.
At the call, which happened on March 12, Abhi Shah, Azul’s Chief Revenue Officer, mentioned that the effects over international demand were first noticed two weeks prior to the conference. Measures were taken immediately after the demand reductions, which came along with the BRL devaluation.
“We’ve seen about [a] 20 percent to 30 percent reduction in international demand”, said Shah, saying that the capacity was cut parallel to this drop, ” Mr. Shah commented.
Flights to Fort Lauderdale and Orlando, for instance, have had some frequencies canceled in the short term. Azul canceled its route to Porto, Portugal, until September, and postponed the start of its flights to New York from June to September.
However, the demand shock was not necessarily translated into a higher number of no-shows. Most of it was perceived in the lack of new bookings, says Shah. Additionally, the domestic demand is yet to see a drop in comparison to the last year.
Additionally, Azul’s domestic growth will be reduced for this year — with general capacity and demand guidance withdrawn — as well as incremental deliveries of its new Airbus A320neo and Embraer E195-E2. The E1s will continue to be replaced, although in a slower pace for the time being.
The Government Plans to Assist the Airlines
Seeing the difficulties local airlines will face amidst the coronavirus threat, the Brazilian government is expected to announce a number of measures to assist the companies this Monday. It is said that the government identified a drop of 30 percent on domestic demand and of 50 percent on international demand.
Folha de São Paulo says that the government will postpone the charging of several taxes over the airlines. It will also extend deadlines for airlines to refund customers — currently, the companies must return the values immediately.
The government also sees the possibility of opening emergency lines of credit for working capital. This would give airlines a stronger position during the crisis, says Folha.
Although the actual plan is expected to be announced on Monday, the newspaper claims studies for a second round of assistance to the local airlines are already being looked at. However, this further assistance would only come after the current situation stabilizes to help airlines avoid any further financial issues.
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