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A LATAM Brasil A320 taxies in São Paulo/Guarulhos. (Photo: AirlineGeeks | João Machado)

Azul and LATAM Brasil Suffer Falling Out Over Potential Takeover

As this week went on, another controversy, perhaps the most surprising of the year so far, surrounded the news within Brazilian commercial aviation, as talks from Azul’s management were unveiled where the airline would be interested in acquiring LATAM Airlines Brasil.

On Monday, the news broke that LATAM Brasil would strongly grow as this year goes on and that, as a result, its codeshare agreement with Azul — signed in the midst of the height of the Covid-19 pandemic last year — would be ended in the next 90 days.

“This codeshare agreement was an alternative identified by both airlines to face the fall on sales and network reduction during the peak of the pandemic”, said LATAM Brasil CEO Jerome Cadier in a press release. “Besides, both the expansion and the passenger volume that benefit from this agreement were under LATAM’s initial expectations during the year 2021.”

Pre-Covid-19, Azul was Brazil’s third-largest carrier domestically in Brazil, with LATAM Brasil the second largest. The codeshare agreement was signed in June last year with the goal of joining both airlines’ domestic network capabilities, unlocking more demand for both.

After LATAM’s announcement, Azul posted an update to its investor relations website regarding “the market on its codeshare with Latam Airlines Brazil and possible industry consolidation,” mentioning that it “has hired advisors and is actively exploring industry consolidation opportunities in the region.”

“We also realized that industry consolidation would be important for the post-pandemic recovery and Azul would be a key part of any such activity,” Azul CEO John Rodgerson said. “At the end of the first quarter of 2021, we hired financial advisors and are actively exploring consolidation opportunities. We believe the cancelation of the codeshare by Latam is a reaction to that process.”

Needless to say, the release made huge waves in the market, with Azul’s stock jumping over 11% the following day.

That next day, Cadier rebuked the idea that the Brazilian unit of LATAM Airlines Group could be sold.

“There is no intention of separating the Brazil operation from the group”, he told O Estado de São Paulo newspaper; “LATAM’s force is in the complementarity of operations [in different countries]. To separate does not make economic sense to the group.”

However, sources told a different story. It is not that Azul was seeking LATAM to buy out the Brazilian unit, but rather that Azul was looking for LATAM’s Chapter 11 creditors to negotiate a potential deal. LATAM’s Chapter 11 recovery plan has still not been approved by its creditors. “There were attempts to buy and even direct negotiation with the creditors of the Chilean-Brazilian rival,” EXAME magazine reported.

The outlet also reported on two factors that could prevent an eventual takeover: Azul’s debt, and the huge market concentration that would follow from an eventual merger. Around 60% of market share would be dominated by the combined company, which would likely be impeded by Brazilian antitrust authorities.

An Azul Embraer 195 taxiing in Manaus. (Photo: AirlineGeeks | João Machado)

The news of negotiations with LATAM’s creditors triggered an inquiry by Brazil’s Securities and Exchange Commission into Azul.

“As part of this active study of industry consolidation opportunities, the company can evaluate several types of consolidation, including acquisitions, mergers, societary and/or operational agreements or other business combinations, as well as it has maintained and will maintain contact, by itself or through its consultants, with several stakeholders and other participants in the markets it operates,” Azul CFO Alex Malfitani said in its formal answer. “However, to this date, there is no proposal or binding agreement signed regarding such consolidation opportunities.”

João Machado
João Machado
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