With Brazil's air transport industry quickly recovering to 2019 traffic figures and April's historic lows looking like a small shape…
Azul and LATAM Brasil Team Up Through Domestic Codeshare Agreement
In a move that was unexpected by the market, Azul Linhas Aéreas and LATAM Airlines Brasil have announced a domestic codeshare agreement and a partnership between their frequent-flier programs, TudoAzul and LATAM Pass. The two are, respectively, the third and first airlines in Brazil by pre-COVID-19 domestic traffic, and plan to build up on each other’s networks connectivities for a post-pandemic market.
In the joint press release launched on Tuesday morning, the carriers disclosed the agreement will firstly cover 50 non-overlapped routes throughout the country. These will either leave or arrive in seven airports that are key for at least one of the airlines. According to Folha de São Paulo, the agreement is expected to take effect from August.
“With Azul’s highly connected network, that serves many destinations in Brazil and with LATAM’s hubs, our fleet and network complementarity will offer customers the widest variety of travel options,” stated Azul’s CEO, John Rodgerson. “Besides, both airlines have a history and passion for customer service and we’re looking forward to show this together.”
The CEO of LATAM Brasil, Jerome Cadier, said that “As a signal of LATAM’s long-term commitment with the Brazilian market, this codeshare agreement will offer customers the access the largest network in the history of the country. We understand the COVID-19 crisis demands innovative answers to help boost the region economy, and today’s announcement makes part of this contribution to this effort.”
As per the frequent-flier programs’ partnership, Azul and LATAM Brasil have signed an agreement by which they allow customers of both airlines to choose whether they will score points with TudoAzul or with LATAM Pass when flying one of the two. TudoAzul currently has 12 million members, while LATAM Pass has 37 million, the press release added.
Despite eventual doubts about the market concentration that the agreement may bring – both airlines, together, owned 62,43% of the domestic market by RPKs in February – by current rules, a codeshare agreement does not require a previous request to Brazil’s antitrust body, the Administrative Council for Economic Defense (CADE). However, if it finds necessary, the body can ask for explanations, according to CNN Brasil.
Reactions to the Announcement
Such a big announcement, with so many potential consequences in the future of Brazilian aviation, triggered different reactions by the involved parties during the day.
John Rodgerson hinted, in a conference with journalists right after the news was published, that this first phase of the codeshare is still a clue of things to come. “We want to quickly reach 200 cities served [by the agreement]“, said the CEO of Azul, most possibly referring to 200 routes. He also denied there are any plans to merge the airlines.
Abhi Shah, Azul’s Chief Revenue Officer, explained the partnership to the airline’s employees in an internal video, leaked by Aeroin. “When the crisis started in March I thought, ‘it will bounce back fast, maybe we can get to 500 flights a day in July’. But now we’re only getting to half this number. […] And we need to think of different ways [to adequate Azul] in costs, but also of different ways in revenue. So this innovative agreement with LATAM is an example of thinking differently about revenue.”
While Rodgerson denied the possibility of a merger, Jerome Cadier, didn’t discard the hypothesis in an interview to CNN Brasil. However, the news outlet reports he “explained negotiations to an eventual union of both companies are complex and impossible in this moment because of the crisis, while the codeshare is much simpler.”
The CEO of GOL, both airlines’ main competitor in the domestic market, Paulo Kakinoff, reacted very positively to the announcement. In a live stream with YouTube channel Teaching For Free, he said any movement towards a market rationalization, including any eventual mergers that could come out of this first step, is very positive to the market as a whole.
Why The Codeshare Agreement Makes Sense For Both
The press release seems to make clear where each airline will focus and, therefore, benefit from this codeshare partnership. The key airports where all codeshared flights will leave are, in this first moment, Brasília and São Paulo/Guarulhos, major hubs of LATAM Brasil, and hubs/focus cities of Azul: Belo Horizonte/Confins, Campinas, Curitiba, Porto Alegre and Recife.
Azul is known for its very capillar network. An important part of it is driven by its ATRs, that connect the smaller cities to the larger airports, and from there, to rest of the network. While the 70-seater is a key asset to Azul’s business model, LATAM Brasil does not count with this kind of advantage – its smallest aircraft, the Airbus A319, has 138 seats, and therefore it cannot serve these smaller cities profitably.
LATAM had also shifted into a heavily hub-and-spoke oriented network. It has managed to stack itself in key airports Brasília and Guarulhos, into which Azul, for various reasons, never adventured itself apart from high-density routes. In Guarulhos, specifically, Azul was managing to grow heavily with the lower-cost A320neo. However, all this effort came undone with the implosion of air travel due to the COVID-19 pandemic.
With the long restructuring process that comes ahead, all direct efforts and resources of the airlines will be fully set where each is stronger. Therefore, it will make sense for one airline to be able to sell where the other is stronger; it will bring increased connectivity at a virtually very low investment, in a time where lower-cost, highly-connective networks will be fundamental to induce travel growth.
For instance, a traveler leaving from Marília, São Paulo state, will now be able to reach Rio Branco, Acre, with a single ticket, benefitting from the codeshare. The passenger will firstly head to Campinas, Azul’s fortress hub, in an ATR. Then they will proceed to LATAM’s Brasília hub, that drives immense connectivity to all regions of the country due to its privileged location. The final flight would be operated by LATAM to Rio Branco, a city that was still unserved by Azul, but now will be, without the added costs of a new station.
History: TAM’s Codeshare Agreement With VARIG
When the news came out, many in the Brazilian aviation community remembered a similar agreement between two major airlines in Brazil. In February 2003, TAM (which would become LATAM Brasil years later) and the struggling VARIG announced a protocol of understanding by which both would merge. The process would first start with a codeshare agreement.
The agreement started in the same month and leveled fares of both airlines which, by 2003, owned more of 60% of the domestic market, according to Folha de São Paulo.
Due to a series of misunderstandings between both parts, merger intentions refrained a year later. However, the codeshare kept existing until an agreement in January 2005 with CADE, Brazil’s antitrust body, that deemed it unnecessary given the merger was cancelled, as per O Estado de São Paulo newspaper.
How the current partnership will evolve, however, will be an interesting topic to watch over the next months. Financial and economic developements caused by the COVID-19 crisis, especially in aviation, are particularly quick and unpredictable. As Jerome Cadier told CNN Brasil, “if I was asked in January if we would have a codeshare with Azul, I’d certainly say ‘no.’ This agreement was made in function of this crisis”.
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