Brazil–US: Expert Market Analysis

Brazil and the United States recently signed a Memorandum of Understanding (MoU) for the phasing in of an Open Skies Air Transport agreement, which will result in remaining capacity limitations being removed from October 1, 2015.

This new agreement between the two most populous countries and largest economies in the Americas is a significant achievement after many years of negotiation. Despite the size of the countries and their economies, passenger air service between Brazil and the US is relatively underdeveloped. Geography is partly to blame: Brazil’s major cities on the South Atlantic coast are a long way from the population centres of the US. However, the US–Brazil Open Skies Agreement is a vote of confidence in the South American country’s aviation sector and its international competitiveness.

TAM is a major airline, although it is nowhere near the size of United, Delta or American. For TAM, its biggest news in 2010 was its tentative merger agreement with LAN Airlines, which is based in Santiago, Chile with passenger subsidiaries in Argentina, Peru and Columbia, where it recently acquired the Columbian airline Aires. The LAN and TAM combination, which is to be named LATAM, will be by far the largest airline in South America. The combined operations include nonstop services to the United States from Peru and Colombia as well as Brazil and Chile.

The history of Open Skies agreements is that markets develop in ways that regulators never foresaw or allowed. We should therefore expect surprises from US–Brazil Open Skies. American Airlines and TAM dominate the market and both focus on Miami and São Paolo, where capacity is limited – no additional frequencies will be allowed until infrastructure problems are alleviated at São Paulo. Delta, United and US Airways are also all operating in the US– Brazil market from their major hubs.

The opening of new market opportunities often precipitates aggressive scheduling as competing airlines try to gain strategic advantage. TAM would be able to add São Paolo frequencies, which will not be available to its US rivals, and it may face more competition in “other” markets.

American Airlines already has the strongest position in the Brazil market and is likely to gain none of the new Rio de Janeiro frequencies in 2011 and few in 2012. It might be able to add some Miami frequencies to Brasilia or Tancredo Neves. Delta will want to build Atlanta frequencies to Rio de Janeiro and possibly some to “other” airports, bringing Atlanta closer in parity with Miami. For United, adding service from Houston seems the most likely option, while US Airways may seek to bring Charlotte Douglas–Rio de Janeiro to a daily service. Most of the Brazil routes are too long for the current LCC fleets. One of them could expand into longer-haul aircraft within five years but it would be unlikely to move much capacity into Brazil, as it will by then be a competitive market.

* Read the full analysis by ASM’s Sandy Rederer in the latest edition of Routes News here. A copy of the world air service development magazine is also in all delegate bags at Routes Americas and Routes Tourism Mediterranean.