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In Push for Tax Incentives, Azul Launches Routes in Brazil’s Southernmost State
As airlines in Brazil look to their continuously evolving 2021 schedules, Azul — the country’s third-largest airline by domestic traffic figures — has announced new services connecting Porto Alegre, Brazil, the capital of southern state Rio Grande do Sul, to eight new destinations elsewhere in the district. Ticket sales are expected to start in March.
The flights, all departing from Porto Alegre’s Salgado Filho Airport, will connect the city to Bagé, Canela, Erechim, Santa Cruz do Sul, Santa Rosa, Santana do Livramento and Vacaria. All of these will be operated by Azul Conecta, Azul’s subregional subsidiary, using its nine-seat Cessna C208B Grand Caravans.
It is still not clear if flights serving Santana do Livramento will be operated to Rivera, Uruguay — as they were previously by TwoFlex — or to Livramento’s own airport, which has a much poorer infrastructure. Although they are in different countries, Rivera and Livramento are twin cities, and passage between the two is relatively straightforward. TwoFlex, which used to operate that route, was folded into Azul Conecta after it was acquired by Azul last year.
The new routes are likely a result of Rio Grande do Sul’s state government’s measure to provide tax benefits for airlines that operate regional flights to cities throughout the state. This will come in the form of a cut in a crucial tax on jet fuel that has proven to be a significant cost to airlines in recent years.
In the state, a tax on the movement of goods and services will be decreased to a ceiling of 7.5% of the price of the fuel to a minimum of 4%, down drastically from a peak of 17% in previous years. The discounts will be provided progressively, as airlines begin to serve more routes inside the state. To benefit from the progressive discounts under 7.5%, airlines must be compliant with the State Program of Development of Regional Aviation (PDAR-RS).
“We will be the most connected state in the country whilst we have the sixth largest population,” claimed Rio Grande do Sul Governor Eduardo Leite. “It’s great news since, besides connecting people, whether it is for tourism, or to visit loved ones, [it] represents an important logistics increment. And logistics are fundamental for the development of a state, that’s why it’s one of the cornerstones of the government agenda towards competitiveness.”
Leite signed the agreement with Azul on the airline’s headquarters in Barueri, Brazil on Feb. 12.
“Rio Grande do Sul will be the most-connected state of the country, with the most cities served between all states, with more flights now than in pre-COVID times,” said Azul CEO John Rodgerson. “We searched for the last 50 years, and Rio Grande do Sul has never that many destinations, not even in the times of the old VARIG.”
Indeed, it’s likely that since the times of the late VARIG — an airline born in Rio Grande do Sul — and the phase-out of its DC-3s, that the state’s cities have never been as well connected as they likely will be in the months ahead. Additionally, via Porto Alegre, customers from the newly-served cities will be able to connect to the rest of Azul’s network, with flights to Campinas, Belo Horizonte, Curitiba, São Paulo and other key cities.
Why Do These Flights Make Sense?
During the summer, Azul flew Azul Conecta’s Grand Caravans from Porto Alegre to Canela and Torres, two tourist-focused cities in the state. The load-factors were relatively low. In a live stream for press, an Azul network planning manager said that more than 200 flights were operated, with more than 1200 passengers carried.
In a rough calculation, this would provide a load-factor of around two-thirds in an aircraft type that is very expensive to operate. Its cost to operate per passenger mile is already much higher than other typical commercial aircraft, but in Brazil, it can only carry nine passengers instead of the typical 12, as AirlineGeeks discussed in an article about ASTA Linhas Aéreas in early 2020. This pushes the cost per passenger — and per passenger mile — up even higher, a metric exacerbated by the fact these aircraft can only operate on short routes.
In addition, the airline operated these routes with much lower prices than would be sustainable in the long run. So while these flights served as more of a “test” — the airline did not have any historical data in Canela and Torres to calibrate its fares— it had a reason behind these running flights at a loss.
Ultimately, the entire operation in the state will be benefitted if these routes do get off the ground, as the tax discounts will serve for all flights leaving the state. That’s one of the reasons why Azul bought TwoFlex in early 2020, later rebranding it as Azul Conecta. Even if the performance of these new regional flights is subpar, every time an Airbus A320neo or an Embraer 195 takes off from Porto Alegre with discounted fuel, it helps to pay off those losses in a move that will earn the airline more opportunities down the line.
But considering Azul’s network strength — and in particular its codeshare with LATAM Brasil to help bring in new customers — it is not unlikely that some of these new flights may actually prove profitable when the airline begins operation later this year.
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