Analysis: Azul-Gol airline merger could be ‘necessary evil’ in crowded Brazilian market Reuters
By Patricia Villas-Boas and Kylie Madry
SAO PAULO (Reuters) – A plan to merge Brazil’s two main airlines to create a major airline will win regulatory approval as the government’s push for a financially healthy sector outweighs fears of restricted competition, experts and lawyers told Reuters.
The floated combination of Gol and Azul, which was formalized in a memorandum of understanding last week, will give the new company greater control over the country’s domestic market.
But both have faced financial turmoil since the outbreak, along with the local unit of Brazil’s current No. 1 carrier, LATAM Airlines (NYSE: ). Costs are high and air travel remains limited in Latin America’s largest country and largest economy.
A cocktail of factors – and the support of President Luiz Inacio Lula da Silva’s administration – means the integration process is likely to continue despite some pushback.
“The impact[of the merger]has to be considered in terms of the nature of the alternative,” said Andre Castellini, a senior partner at Bain & Company. “It’s a necessary evil.”
Thumbs up from Lula officials
Brazilian airlines have been hit by high taxes, strict consumer protections and the recent weakening of the Brazilian real against the U.S. dollar – used for expenses such as jet fuel and aircraft leases – said Nicole Villa, a lawyer specializing in aviation law. .
Lula’s administration has pledged support for the airlines, as Azul has had to restructure its debt with bondholders and terminate agreements with suppliers, and Gol is currently in Chapter 11 bankruptcy proceedings in the United States.
Gol and Azul “may have received this thumbs up from the government, and they saw a real possibility (that the merger would be approved),” said lawyer Xavier Rosales.
Ports and Airports Minister Silvio Costa Filho told reporters last week that the merger could be positive.
“In the worst case, the companies will go bankrupt,” he said.
Given Brazil’s current travel demand, only two airlines are needed to operate in the country, analysts at Seaport Research Partners argued in a note.
Castellini and Villa said the domestic market could shrink further if the merger is blocked.
“Azul was slowing down the network,” Castellini said.
Azul chief executive John Rodgerson told Reuters the airline had cut some routes due to the weakened real route, a move he described as “normal”.
“Without (CADE’s) approval, the market may not be as good as approved,” he said, although he dismissed concerns that Azul could be cut if the deal with Gol falls through.
They can be oppositions, concessions.
Still, the merger “will not be an easy process,” Rosales said, with LATAM opposing the deal and competition regulator CADE seen as ordering carriers to give up flight frequencies and slots at busy airports.
LATAM declined to comment on the matter.
Flights at Gol and Azul, Brazil’s largest airports, could be disrupted, Castellini said, adding that LATAM could take over some of the operations. International routes to and from Miami can be explored, Rosales said.
But LATAM had to prove it had the capacity to provide the additional service, Villa said.
Is it good for competition?
Analysts said the deal could ultimately open up opportunities for rivals, despite the merger’s weightings for Gol and Azul.
Much of the market remains untapped in a country the size of Brazil, Villa said.
Latham has the “crucial set” to remain competitive, and the combination could benefit in the short-term from the distractions it creates against Gol and Azul, Castellini said.
In the years after the merger, the new airline may lack the capacity to make aggressive expansion plans, Santander (BME:) analysts wrote in a note to clients.
Barring Gol’s Chapter 11 proceedings, which are expected to be completed in May, the merger “could close in more than a year,” Rosales said. “There is a real opportunity for success here.”
