Miércoles 22 de Mayo 2019
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Larry Pascal, chair of the Americas Practice Group and co-chair of the International Practice Group at Haynes and Boone. (Photo: Haynes and Boone)
Last year the cause of aviation liberalization spread to Brazil. Here São Paulo-Guarulhos International Airport, the country's largest. (Photo: Guarulhos International Airport.)
Wednesday, January 16, 2019

Latin America Aviation Bucks Global Trend

Latin America takes market opening steps and defies global trends.


While much of the world contemplates a more inward and protectionist trade policy, the Latin American aviation sector highlighted more openness and opportunities than expected in 2018 on several fronts.  The year also had some important highlights in international alliances that were announced, although ongoing challenges to Latin American aviation infrastructure remain a persistent issue.


Historically, the region has had a mixed approach to the liberalisation of international airline services, sometimes referred to as “open skies.” Some countries (such as Chile) have embraced it, while others (such as Argentina and Venezuela) have historically maintained restricted markets, although Argentina has recently taken steps to permit more market entrants to obtain their operating certificate, thereby increasing local competition.  In contrast, the EU and the US have traditionally embraced open skies, with the EU having open skies within its 28-country territory and the US having signed more than 110 such open skies agreements (nevertheless, the ongoing Brexit controversy poses challenges and uncertainty for the British and their EU counterparts in this sector). 

However, in August 2016, Latin America took an important step forward when the US and Mexico adopted an Open Skies Agreement.  The adoption of the Open Skies Agreement was closely linked to the approval of the Delta-Aeromexico Joint Business Agreement, which was made possible by the willingness of the two airlines (but particularly Aeromexico) to give up highly coveted slots at the current Mexico City International Airport in exchange for regulatory approval of their joint business. The new alliance is likely to compete more vigorously and challenge American Airlines and United Airlines which both have a strong presence in the country in the cross-border market between the countries.


In 2018, the cause of market liberalization spread to Brazil where Brazilian congressional approval for a long pending Open Skies Agreement was finally obtained and the bill was later signed by President Michel Temer.  The agreement has the support of local airlines LATAM, Gol, and Avianca Brazil, which have announced, or otherwise are working on, alliances with their US partner airlines – American Airlines, Delta, and United, respectively (see further discussion below as to the announced United Airlines – Avianca alliance).  The new Open Skies Agreement contemplates an unrestricted number of flights between the US and Brazil and is expected to lead to an increase in air service between the two countries.  The Open Skies Agreement’s entering into effect is also a prerequisite of the US Department of Transportation for the approval of the pending Joint Business Agreement between American Airlines and LATAM Group.  Brazil’s competition authority has already approved the transaction between the airlines.


Former President Michel Temer, who was recently succeeded by Jair Bolsonaro, signed a Provisional Measure to increase foreign investment in Brazilian airlines from 20 percent to 100 percent.  The signing of a Provisional Measure commences a process whereby the Brazilian Congress has 120 days to ratify the measure and passage is not assured at this time.  However, President Bolsonaro has announced its support for the Provisional Measure.  This step was taken on the heels of Avianca Brasil, the fourth largest airline in Brazil and controlled by German Efromovich, filing for bankruptcy protection in Brazil.  Some analysts cheered the Provisional Measure as an attempt to attract more capital and airlines (existing or new) to the largest South American nation with over 200 million people.  The Brazilian market is largely divided into four groups, with each airline participating in or otherwise associated with international carriers - Delta and Air France KLM hold shares in Gol, United Airlines holds a small interest in Azul, Avianca is part of a Colombian multinational group which recently announced a Joint Business Agreement with United Airlines and Copa, and LATAM is controlled by the Chilean shareholders in LAN Chile and has a Joint Business Agreement with American Airlines pending before US Department of Transportation.  If the Provisional Measure were to become law, it would immediately vault Brazil into a small and select group of countries with one of the most open foreign investment rules for airlines around the world.  In contrast, the EU rule for foreign voting shares in local airlines is 49 percent and the US is 25 percent.



In late November 2018, United Airlines announced a three-way Joint Business Agreement with Avianca (Colombia) and Copa (Panama).  The alliance will result in the three airlines sharing revenues, integrating service, and coordinating pricing and scheduling on their respective networks, excluding Brazil.  As part of the transaction, United has agreed to loan $456 million to a company controlled by Avianca’s main shareholder, German Efromovich.  The funds will be used to repay a loan from Elliot Management Corp., according to a report by The Wall Street Journal. The Joint Business Agreement is subject to regulatory approval in the countries.  Avianca is one of the largest airlines in the region with a fleet of over 180 aircrafts, but the airline is also heavily indebted.  The agreement also addresses the somewhat contentious relationship with Avianca’s second largest shareholder Kingsland Holdings Ltd. by offering Kingsland a put option with United.  The alliance agreement pointedly excludes Latin America’s largest country Brazil, where Avianca has a separately operated Brazilian affiliate which recently filed for bankruptcy protection, and United also holds an 8 percent interest in Azul.  The announced alliance agreement is likely to sharpen the competition between the two other largest US airlines, American and Delta, who both have taken steps to get stronger in the region either via their own joint business agreements or acquisitions of minority interests in Latin American airlines (or both).


In late 2017, Boeing and Embraer announced that they were in discussions about a possible acquisition by Boeing of the commercial division of Brazilian regional aircraft manufacturer Embraer. The potential transaction is viewed as a response by Boeing to the joint venture on the C Series Program previously announced by Airbus and Bombardier of Canada. However, the Brazilian government holds a golden share in Embraer that enables it to block extraordinary transactions.

In July 2018, further news of the proposed Boeing – Embraer transaction was released.  Some of those details of the proposed transaction included: (1) Boeing acquiring an 80 percent interest in the commercial aircraft unit of Embraer (i.e. ERJs, E-Jets and E-Jets E2, (2) the commercial aircraft unit of Embraer being valued at US$ 4.75 billion, (3) Embraer retaining its executive jet business and its defense business, and (4) Boeing and Embraer separately exploring the establishment of a joint venture related to Embraer's KC-390 heavy lifter.

The transaction is still pending closing.  Flight Global, an aviation market intelligence service, has reported that the transaction is expected to close by the end of 2019.  However, recently President Bolsonaro has expressed some reservations about the transaction, while still acknowledging its positive benefits.  The transaction requires the approval of the Brazilian Government.


In early 2018, Brazil implemented an e-visa program for travelers from certain countries (e.g. the United States, Canada, Australia, and Japan) to apply on-line for a Brazilian visa (e-visa), making it easier to get to the country without having to apply for a visa in person at an embassy or consulate abroad. In addition, Brazil has significantly reduced the cost of the visa and the visa is valid for both business and leisure travel.  Although the term varies by nationality, it generally is valid for two years.  The new e-visa has been cited as helping to halt the decline of US visitors to Brazil in recent years. 


Earlier this month, as part of a broader package of market reforms, President Bolsonaro announced via Twitter his plans to privatize twelve airports and four sea ports in Brazil.  He asserted the move would raise 7 billion reais (US$1.85 billion).


In Mexico, 2018 ushered in political change as candidate Andres Manuel Lopez Obrador campaigned against the completion of the new Mexico City International Airport, which had been announced by President Enrique Peña Nieto in September 2014 at an estimated cost of $ 13 billion.  The new airport was to be built in the Texcoco area of the State of Mexico about ten km northeast of the current airport and contemplated an integrated operation, with the closing of the current international airport Benito Juarez.  However, a public referendum was held in October 2018 at the insistence of then incoming President Lopez Obrador in which voters were asked to select between the two options – the Texcoco site and the Santa Lucia Military Air Force Base (used in conjunction with the existing airport).  The Santa Lucia site is located 40 KM north of the existing Benito Juarez Airport.  Analysts have asserted that the Santa Maria site is too close to the Benito Juarez Airport and suggested it would result in reduced traffic for the Mexico City area.  Voters selected the Santa Lucia site in the referendum and as a consequence President Lopez Obrador has vowed to suspend ongoing construction at the Texcoco cite.  Mexico is currently negotiating with foreign bondholders who hold approximately $4 billion in project debt and negotiations continue.


After a prolonged period of uncertainty over NAFTA prompted by President Trump’s criticism of the trade pact, in October 2018, the US, Mexico, and Canada announced that they had reached an agreement on an updated trade agreement called the United States Mexico Canada Agreement (USMCA).  The signing of the USMCA, which is still subject to ratification by each country’s legislative branch, is likely to remove an important investment cloud that had emerged after President Trump took office. 


It is ironic that while the world passes through a period of tension as to trade liberalization and market access, the historically restricted Latin American aviation market has seen in recent years important advances in market liberalization.  These include Mexico in 2016 with the Open Skies Agreement with the US, 2018 with the US-Brazil Open Skies Agreement coupled with the potential for an increase in 2019 in the foreign investment limit, and the approval of the Macri Administration of new start-up airlines in Argentina.  (Ironically, although the United States is an industry leader as to Open Skies Agreements with foreign countries, it has a relatively low foreign investment limit which constrains new entrants with access to foreign capital.)  These liberalization measures should lead to greater investment, increased supply in the market, and overall greater economic activity, particularly for markets in the region dependent on tourism.

Larry Pascal serves as the chair of the Americas Practice Group and co-chair of the International Practice Group at Haynes and Boone. He wrote this column for Latinvex. 

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