The Economic Benefits of Opening Aviation Markets Between The EU and Brazil

FINAL REPORT
The Economic Benefits of Opening

Aviation Markets between the EU and
Brazil
Prepared for:
Directorate-General Energy and Transport
European Commission

In association with:
Integra A/S
Vedbaek, Denmark

Mr Erwin von den Steinen
Dr Ingomar Joerss
Dr Pablo Mendes de Leon

London
June 2009

This document is confidential and is intended solely for
the use and information of the client to whom it is addressed.

Booz & Company
Date: June 2009 Study on the Economic Benefits of Opening
Aviation Markets between the EU and Brazil
Prepared for: European Commission
Directorate General for Energy and
Transport
i

Table of Contents
1. INTRODUCTION 1
1.1 GENERAL REPORT 1
1.2 OBJECTIVES OF THE STUDY 1
2. MARKET ANALYSIS 2
2.1 POLITICAL AND ECONOMIC BACKGROUND 2
2.1.2 Brazilian Economy 4
2.1.3 EU-Brazil Relations 7
2.1.4 EU-Brazil Economic Relations 7
2.2 BRAZILIAN TOURISM AND AIR TRAFFIC DEMAND DRIVERS 9
2.2.1 Brazil Inbound Tourism 9
2.2.2 Brazil Outbound Tourism 13
2.3 AIR PASSENGER TRAFFIC 16
2.3.1 Domestic Air Transport Market 16
2.3.2 International Air Transport Market 18
2.3.3 EU - Brazil Aviation Market 22
2.4 CAPACITY IN THE MARKET 25
2.5 BRAZILS CARGO MARKET 28
2.5.1 Market Overview 28
2.5.2 Cargo Market Brazil-EU 33
2.6 INFRASTRUCTURE 35
2.6.1 Airports 35
3. ECONOMIC IMPACTS ANALYSIS 39
3.1 THE BENEFITS OF LIBERALISATION 40
3.2 REGULATORY CONSTRAINTS IN THE EU-BRAZIL MARKET 42
3.2.1 Implicit Restrictions 43
3.2.2 Comparison of Capacity Utilised with Traffic Rights Available 44
3.3 EXPERIENCE WITH COMMUNITY NEGOTIATIONS TO LIBERALISE 3RD COUNTRY MARKETS 48
3.3.1 The Open Aviation Area with the United States 48
3.3.2 The Euro-Mediterranean Agreement with Morocco 52
3.4 TRAFFIC GROWTH ANTICIPATION AS RELATED TO BRAZIL 54
3.4.1 Background 54
3.4.2 Brazils strategic location 55
3.4.3 Prospects for Growth 55
3.5 CALCULATION OF BENEFITS ARISING FROM GROWTH 57
3.5.1 Consumer Benefits 57
3.5.2 Employment 58
3.5.3 Tourism 59
3.6 CONCLUSION ON ECONOMIC GROWTH 60
3.7 ENVIRONMENTAL IMPACT 60
4. AEROPOLITICAL AND REGULATORY ANALYSIS 62
4.1 OVERVIEW OF BRAZILIAN AIR TRANSPORT POLICY AND REGULATION 62
4.2 MULTILATERAL AND REGIONAL AIR TRANSPORT POLICY 62
4.2.1 Regional Cooperation 64
4.2.2 Inter-regional Cooperation with the EU 66
4.3 BILATERAL AIR TRANSPORT RELATIONS WITH EU MEMBER STATES 67
4.3.1 General Aspects of Air Services Agreements between Brazil and EU Member States 67
4.3.2 Individual Aspects of Brazilian Air Service Agreements 69
4.3.3 Regulatory and Doing Business Issues Arising in Brazil-EU Market 71
4.3.4 Summary Views on International Market Access and Regulation 73
4.4 BRAZILIAN REGULATION IN RELATION TO THE AIR TRANSPORT ACQUIS 73
4.4.1 Introduction to this Section of the Study 73
4.4.2 Brazilian Policy: the general framework 74

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4.4.3 The Institutional Framework 76
4.4.4 Market Access and Ancillary Regulation 79
4.4.5 Competition and State Aid 87
4.4.6 Safety 89
4.4.7 Air Traffic Management (ATM) 93
4.4.8 Security 93
4.4.9 Environment 94
4.4.10 Alternative Fuels Biofuels 95
4.4.11 Consumer Protection 95
4.4.12 Social Aspects 97
4.5 CONCLUSIONS 99
4.5.1 Air Transport Law and Policy in Brazil General Findings 99
4.5.2 Summary Views on the Degree of Regulatory Parallelism between the EU and Brazil 100
5. THE STRATEGIC SETTING FOR EU-BRAZIL RELATIONS 102
5.1 LONGER TERM PROSPECTS IN THE EU-BRAZIL MARKET 102
5.2 CONCERNS OF STAKEHOLDERS 103
5.3 OPPORTUNITIES AND RISKS FOR OPERATORS 103
5.3.1 Competition issues for Community Carriers in a liberalised market 104
5.3.2 Competition issues for Brazilian carriers in a liberalised market 105
5.4 CONTEXT FOR THE FUTURE EU-BRAZIL RELATIONSHIP 105
5.5 ILLUSTRATIVE ISSUES TO BE ADDRESSED 106
5.5.1 Progressive expansion of market access 106
5.5.2 Establishing joint positions on environmental policy including the ETS 107
5.5.3 Safety coordination and air navigation procedures 107
5.5.4 Security and facilitation 107
5.5.5 Airport access issues 108
5.5.6 Efficient operating and marketing framework for all-cargo services 108
5.5.7 Code-sharing liberalisation to expand market access and benefit competition 108
5.5.8 Marketing freedom and consumer protection 109
5.5.9 First and second freedom rights 109
5.6 FINAL OBSERVATIONS AND CONCLUSIONS 109
ANNEX 1 - BRAZILIAN AIRLINES 111
APPENDIX I ADDITIONAL INFORMATION ON CALCULATION OF MARKET GROWTH 126
I.1 THE OPEN SKIES AGREEMENT WITH THE UNITED STATES 126
I.2 EURO-MEDITERRANEAN AGREEMENT WITH MOROCCO 130
APPENDIX II CALCULATION OF CONSUMER SURPLUS 134

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1. INTRODUCTION
1.1 GENERAL REPORT
This document forms a final report that assesses the potential impact of liberalisation of
market access between the EU (including overseas territories of EU member states) and
Brazil.

Booz & Company Ltd of London and its subcontractors, Integra A/S, Mr Erwin von den
Steinen, Dr Ingomar Joerss and Dr Pablo Mendes de Leon have prepared the study.
1.2 OBJECTIVES OF THE STUDY
The European Commission has engaged the Project Team to assess the potential economic
impact of negotiating a more open air transport market relationship for passenger and cargo
services with a high level of regulatory convergence between the EU and Brazil.

Past studies have determined that a general liberalisation, created under fair and uniform
competitive conditions, is likely to lead to significant economic benefits for both the EU and
the partner countries.

This study will therefore:

Analyse the aviation market between the EU and Brazil.
Analyse expected economic impact of an aviation agreement between the EU and
Brazil including the wider economic effects and/or benefits for consumers and the
aviation sector (airlines, airports etc.).
Provide analysis of the expected effects on investment, labour market and trade in
the aviation sector.
Examine the potential impact of liberalising air services between the EU and Brazil
on the environment.
Assess the steps needed to achieve a convergence of the aviation regulatory
approaches and the potential benefits of such regulatory convergence in an EU-Brazil
aviation agreement.
Analyse how cooperation in the field of civil aviation (e.g. ATM, airworthiness
certification, research) could be included and reinforced in the framework of a
comprehensive and open aviation agreement (OAA) between the EU and Brazil.
Describe and evaluate alternatives for reaching such an OAA including the benefits
of transition phases in an EU-Brazil aviation agreement.
Provide an assessment of risks and opportunities for the EU air transport industry
(airlines, airports) with full market opening and a consideration of like impacts on
the air transport industry (airlines, airports) and the tourism industry in Brazil.

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2. MARKET ANALYSIS
This chapter examines and reviews the present Brazilian aviation market and provides an
overview of the economic and political setting. The main focus will be on the air transport
market between Brazil and the European Union, underlining the foundations of the current
situation, while considering historical, political, social and economic factors.
2.1 POLITICAL AND ECONOMIC BACKGROUND
Brazil is a Federal Republic consisting of 26 States and the Federal District. States have
considerable autonomy, being responsible for, e.g. education. The President is both Head of
State and has executive power. Elections for President and Congress take place every 4
years. The last elections were held in October 2006, and the next are scheduled for October
2010. The head of state is President Luiz Inacio Lula da Silva, in office since January 2003.

Key Figures: Brazil
Population 189.3 million
Area 8,512 sq km
GDP per capita 7,390.79 (2007)
National carriers TAM Linhas Areas, GOL
Annual scheduled seats available to/from EU 6,795,776 (2008)
Total scheduled passengers 4,152,154 (2007)
Non-scheduled passengers 244,754 (2007)
Main international airports So Paulo Guarulhos, Rio de Janeiro Galeo
Source: OAG, EUROSTAT, Booz & Company Analysis
Table 1: Key Figures

Vast natural resources including large oil reserves, a large labour pool, and prudent
economic and monetary policies, make present-day Brazil South Americas prime economic
power and regional leader.

Source: US Government websites
Figure 1: Map of Brazil

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2.1.1.1 Population Total, Density and Distribution
Brazil has a surface area of more than eight and a half million km, slightly smaller than the
United States (but larger than the continental US). It is the fifth largest country in the world
by surface area, and the largest country in South America bordering Argentina, Bolivia,
Colombia, French Guiana, Guyana, Paraguay, Peru, Suriname, Uruguay and Venezuela.
Brazil is the worlds fifth most populous country and fourth largest democracy.

Population growth over the period 2000 to 2006 is estimated at 8%, as is shown below.
150
155
160
165
170
175
180
185
190
Million
2004 2005 2006 2000 2001 2001 2003
Population Brazil (millions)
2000 - 2006
Source: World Development Indicators, World Bank Group

Figure 2: Population of Brazil, 2000-2006

Overall population density is around 20 people per square km. An estimated two thirds of
Brazils population live on or near the coast, and over half in cities. The focus of population
is on the South East Coast, in particular the metropoles of Rio de Janeiro, Sao Paolo and Belo
Horizonte.

Brazil has eleven cities with more than a million inhabitants. So Paulo is one of the most
populous cities in the world, with over 20 million people. In the North, the principal cities
are Belem, at the mouth of the Amazon, and Manaus, 1600 km inland at the junction of a
number of the Amazons tributaries. The table below lists the twenty-one Brazilian
agglomerations estimated to have a population of more than one million people.

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Place in list of
world's largest cities
Name of city
Estimated
population
7 So Paulo incl. Guarulhos 20,600,000
21
Rio de Janeiro incl. Nova Iguau, So
Gonalo
12,300,000
51 Belo Horizonte 5,750,000
83 Porto Alegre 4,200,000
92 Recife 3,800,000
93 Braslia 3,750,000
101 Fortaleza 3,575,000
103 Salvador 3,575,000
108 Curitiba 3,375,000
141
Campinas
2,825,000
186 Belm 2,200,000
197 Goinia 2,050,000
244 Manaus 1,790,000
248 Santos 1,740,000
254 Vitria 1,730,000
352 So Lus 1,320,000
367 Natal 1,270,000
389 Macei 1,200,000
409 Joinville 1,120,000
438
Joo Pessoa
1,060,000
461
Florianpolis
1,010,000
Source: Th. Brinkhoff: The Principal Agglomerations of the World,
http://www.citypopulation.de, 2007-09-30
Table 2: Population of Brazilian Cities, 2007

The principal origin groups of the Brazilian population are European, particularly
Portuguese, but also including immigrants from Germany, Italy and Britain, making cultural
and ethnic relations close. Other groups include indigenous populations and African
descendents.
2.1.2 Brazilian Economy
2.1.2.1 Economic Development Scale and Growth
Brazil has the tenth-largest economy in the world, and the largest in South America with,
according to World Bank Figures, a 2006 GDP of over a trillion dollars. Brazil has seen
financial stability, appreciation of its currency, and sustained current US$ GDP growth since
2002. Brazils recent GDP growth is shown below.

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2002 2003 2004 2005 2006 2007 2008
1.400
600
1.800
400
1.200
200
1.000
1.600
800
0
Brazil current GDP US $ Billion

Source: Global Insight County Report/World Bank Data
Figure 3: Brazilian GDP $US Billion

Brazil's economy grew 3.7% in 2006, compared to 2.9% in 2005. It continued to accelerate in
2007, fuelled by strong demand for commodities. The outlook for 2009 is more conservative.
A strong decline in demand caused by slow growth rates in the US, a decline in commodity
prices and general monetary tightening, are the main factors for a slight slowdown of the
economy.

Per capita GDP in Purchasing Power Parity terms is roughly double GDP at current US
Dollars - reflecting the broad self-sufficiency of Brazil in key economic areas, including food,
services and energy. The latter is a notable contributor to economic stability, with 82% of
mains electricity generated from hydro-electric power, and thus not affected by world
market shocks.

2000 2001 2002 2003 2004 2005 2006
Brazil GDP pc
1.000
5.000
2.000
4.000
3.000
6.000
8.000
7.000
Brazil GNI pc PPP
Brazil GNI pc Atlas
9.000
Current USD
GDP and GNI per capita, current US $, and GNI per capita, PPP $, Brazil, 2000 to 2006
2000 2001 2002 2003 2004 2005 2006
Brazil GDP pc
1.000
5.000
2.000
4.000
3.000
6.000
8.000
7.000
Brazil GNI pc PPP
Brazil GNI pc Atlas
9.000
Current USD
GDP and GNI per capita, current US $, and GNI per capita, PPP $, Brazil, 2000 to 2006

Figure 4: Brazilian GDP and GNI per Capita
.

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2.1.2.2 Structure of the Economy
Brazil has a developed economy, with a strong base in industry and services.

In agriculture, Brazil is the worlds largest exporter of soya, and will soon be the largest
exporter of frozen meat. Other agricultural products include coffee, wheat, rice, corn,
sugarcane, cocoa and citrus fruits.

Industrial products include textiles, shoes, chemicals, cement, lumber, iron ore, tin, steel,
aircraft, motor vehicles (parts), and other machinery and equipment.

Brazil is about to become self-sufficient in oil and it is believed to have major undiscovered
reserves. It is also an exporter of gas, and supplies the great majority mains electricity needs
from hydro-electric power.
6% 6% 7% 7% 7% 6% 5%
2006
64%
31%
2005
64%
30%
2004
63%
66% 67%
27%
27%
2001
67%
28%
2002
Services
Industry
Agriculture
65%
28%
30%
2003 2000
Brazil shares of economy by sector value added, %, 2000-06

Figure 5: Components of Brazilian Economy, 2000-2006

2.1.2.3 Trade
Brazil is a net exporter, reflecting its resource and industrial strength, and its trade surplus is
becoming increasingly marked: World Bank data shows that exports have grown to 15% of
GDP over period 2000-2006, against imports remaining steady at around 10% of GDP.

Brazil benefits, as shown below, from a relatively diversified export clientele in which,
especially as a client for raw materials including iron ore, paper and metals, China plays an
increasing, but not dominant, role.

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Brazil exports by country
$160.6 billion f.o.b. (2007 est.); %ages 2006
Brazil imports by country
$120.6 billion f.o.b (2007 est.); %ages 2006
4%
4%
8%
60%
Netherlands
Germany
Argentina
China
9%
US
14%
Other
8%
8%
55%
Germany
Argentina
China 9%
US
20%
Other
4%
4%
8%
60%
Netherlands
Germany
Argentina
China
9%
US
14%
Other
8%
8%
55%
Germany
Argentina
China 9%
US
20%
Other

Figure 6: Brazils Major Trading Partners, 2006

Principal exports include transport equipment, iron ore, soybeans, footwear, coffee, motor
vehicles. Principal imports are primarily high value items, including commodities
machinery, electrical and transport equipment, chemical products, oil, automotive parts and
electronics.
2.1.3 EU-Brazil Relations
Brazil and the EU have close relations. The present relationship is governed by the EC-Brazil
framework co-operation agreement, signed in 1992, whereas many economic aspects are
covered in the EU-Mercosur Framework Co-operation Agreement, agreed in 1995.

In May 2007 the EU proposed to launch a strategic partnership to further deepen its ties with
Brazil, with the first ever EU-Brazil Summit held in Lisbon during the Portuguese
presidency. A second summit was held in Rio de Janeiro in December 2008, which adopted a
Joint Action Plan. In accordance with the December 2008 Declaration, the strategic
partnership aims at effective multilateralism, enhancing the economic partnership,
sustainable development, regional cooperation, cooperation in science and technology, and
fostering people-to-people exchanges. An increased cooperation in aviation is expressly
foreseen in the Joint Action Plan.
1

This new relationship places Brazil, the Mercosur region and South America higher on the
EUs political map.
2

2.1.4 EU-Brazil Economic Relations
The EU is Brazil's largest trading partner, accounting for 22.5% of total trade. Brazil is
currently the single largest exporter of agricultural products to the EU, accounting for 13%
of total EU imports.

1
See Section 1.5 of the Action Plan of 12.12.2008.
2
Mercosur, or Mercado Comum do Sul in Portuguese, is a regional trade agreement and customs union between Brazil,
Argentina, Paraguay and Uruguay founded in 1991 with the signing of the Treaty of Asuncion. Bolivia, Ecuador, Chile and
Peru and Colombia are associate members. The Mercosur agreement is both political and economic and aims to reduce
barriers on the movement of goods, people and currency. A customs union with a common external tariff is already in place.
Mercosur, however, does not address air transportation.

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In goods, the EU runs an overall trade deficit with Brazil of over 11 billion, although it has
a surplus in services trade of 500 million. The EU is also the prime foreign investor in
Brazil. Key figures of EU-Brazil economic relations are indicated by the figure below.

5
0
5
10
15
20
25
30
35
Billion
Brazil EU
Trade in Services
1.1
5.1
Foreign Direct Investment
4.6
Trade in Goods
32.3
21.2
EU27 Brazil trade overview
Source: Eurostat, Booz & Company Analysis

Figure 7: Brazil-EU Trade Overview

Main EU imports from Brazil are primary products, in particular agricultural products, such
as soy, wheat, fruit and frozen meat. However, manufactured products such as machinery
and transport equipment, in particular aircraft (Embraer) and cars, represent almost one
third of Brazilian exports to the EU. The EU exports mainly manufactured products to
Brazil, such as machinery, transport equipment (Airbus) and chemicals. Further detail of
EU-Brazil trade in goods is indicated by the figure below (note that figures do not add due
to incomplete years).
17,759
14,473
1,117
927
8,707 8,866
17,376
13,948
349 405
793
481
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
Million
Jan-Sept 2008 Jan-Sept 2007 Jan-Sept 2008 Jan-Sep 2007
Other Manufactured Primary
Exports Imports
EU27 trade in goods with Brazil

Figure 8: EU27 Trade in Goods with Brazil, 2007-2008: ( Million)

Trade in services is dominated by transportation and travel, while construction, IT and
financial services also take an important place. Details are set out in the table below:

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Credit ( M) Debit ( M) Net ( M)
2006 2007 2006 2007 2006 2007
Total 5,259 6,417 4,650 4,791 609 1,626
Transport 2,119 2,320 1,497 1,577 622 743
Travel 1,221 1,403 1,441 1,408 -220 -5
Other services 1,921 2,694 1,712 1,804 210 890
Source: Eurostat
Table 3: EU27 trade in services with Brazil ( Million)
2.2 BRAZILIAN TOURISM AND AIR TRAFFIC DEMAND DRIVERS
2.2.1 Brazil Inbound Tourism
The key demand drivers for travel to Brazil can be defined as:
Tourism: Brazil is a country with a rich history and culture, not to mention the
pleasant climate and the rapidly developing tourism sector.
Business: Brazil is the tenth largest economy in the world, with So Paulo as the
financial capital of South America. Brazil has a leading position on the commodity
market as a net-exporter of agricultural products and is quickly developing in
manufacturing (aircraft, cars) and services. In general, the development of the highly
specialised oil and financial industry is strongly connected with a growing demand
for air travel.
Family, friends and relatives (VFR). As a country of immigrants, Brazil retains strong
bonds with the former suppliers of its inhabitants, mainly Portugal, Italy and
Germany. Large Brazilian communities are based in Portugal, Spain and France.

Brazils principal tourism drivers are:
Historic and cultural sites, from the colonial and modern period, including the Oscar
Niermeyer-designed capital, Brasilia
Sites of natural beauty, conservation value, or offering opportunities for adventurous
tourism
Lifestyle and cultural events, including the beaches and beach life of both the South
East and North East coasts, the annual Carnaval, particularly in the cities of Rio,
Salvador and Olinda, and sports
Brazil is to host the FIFA World Cup in 2014, and this is expected to be a major driver
both of tourism and of tourism infrastructure
Brazil has a large number of sites on the UNESCO World Heritage Site list.

Brazil has a relatively liberal visa policy: ninety day tourism visas are available on arrival for
citizens of most EU countries, plus those of New Zealand and South Africa, and can be
extended once. Australians, Americans and Canadians, however, need visas in advance.

The total number of inbound visitors to Brazil in 2007 was just over 5 million. Given the
geographical limitations of most of the inbound traffic outside Latin America, the majority
of passengers arrived by air. In 2007, some 3.4 million visitors arrived by air.
3
Principal
nationalities of visitors to Brazil are set out below:

3
Euromonitor

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2006 2007
0.4
0.8
0.7
0.6
0.1
0.0
Other
0.88
0.3
0.2
1.0
0.9
0.84
Canada
0.06 0.06
Switzerland
0.5
Million Visitors
United
States
0.70
0.72
Argentina
0.92
0.99
1.1
0.28
Chile
0.26
0.18
Italy
0.27
0.29
Portugal
0.28
0.30
0.08
0.07
Netherlands
0.08 0.09
United
Kingdom
0.18 0.17
Spain
0.26
0.21
France
0.25
0.28
Germany
0.26
Number of Visitors by Country of Nationality, 2006-2007 (Total: 5.0 million)
EU Member States are highlighted
Source: Embratur & Brazil Federal Police

Figure 9: Visitors to Brazil by Country of Nationality, 2006-2007

Whereas details are not given for all EU Member States, nationals of the highlighted
Member States accounted for 1.58 million, or 31%, of the total 5.02 million visitors to Brazil
in 2007. UNWTO figures suggest that the total number of visitors from the EU to Brazil is
1.74 million, or 35% of the total, development of which since 2003 is shown in the table
below. The number of EU visitors to Brazil fell by some 2.6% in 2007 compared to 2006 (and
had peaked in 2005).

Country 2003 2004 2005 2006 2007
% change
06-07
Share of
total (%)
Austria 16,745 21,034 22,558 17,147 24,557 43.2 0.5
Belgium 28,237 28,549 32,741 30,037 31,073 3.4 0.6
Denmark 19,722 15,555 19,672 23,288 26,042 11.8 0.5
Finland - - 21,827 21,732 22,217 2.2 0.4
France 211,347 224,160 263,829 275,913 254,367 -7.8 5.1
Germany 283,615 294,989 308,598 277,182 257,719 -7.0 5.1
Greece 7,013 10,703 12,106 13,340 12,636 -5.3 0.3
Hungary - - 16,364 5,870 7,103 21.0 0.1
Ireland - - 13,125 12,574 18,091 43.9 0.4
Italy 221,190 276,563 303,878 287,898 268,685 -6.7 5.3
Netherlands 83,999 102,480 109,708 86,122 83,554 -3.0 1.7
Poland - - 19,535 15,347 17,280 12.6 0.3
Portugal 229,594 336,988 357,640 299,211 280,438 -6.3 5.6
Spain 122,641 155,421 172,979 211,741 216,373 2.2 4.3
Sweden 26,939 37,809 45,764 36,118 39,846 10.3 0.8
UK 138,281 150,336 169,514 169,627 176,948 4.3 3.5
Total 1,389,323 1,654,587 1,889,838 1,783,147 1,736,929 -2.6 35
Source: UNWTO
Table 4: Development of EU Visitors to Brazil, 2003-2007

Note that the above figures relate to nationality of visitors, which may not correspond to
number of passengers travelling between countries (i.e. does not account for connections, or
for residents who may be nationals of other countries): details of air transport markets
follow in the next section.

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The World Tourism Organisation reports that the appreciation of the Brazilian Real has
made Brazil a more expensive destination for inbound tourists. The Brazilian government
has set out a strategy for the promotion of tourism in a national tourism strategy, (Plano
Nacional do Turismo) setting out clear goals to be reached in 2010. The strategy seeks to make
considerable investments in the tourism infrastructure, as well as the setup of a clear and
recognizable marketing campaign.

Tourism accounts for more than half of the visits to Brazil, whereas business travel is also an
important demand driver. Euromonitor indicates the leisure/business split as indicated
below
4
.
Visitors (million)
5.5
5.0
0.5
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.0
2007
5
3
(66%)
2
(34%)
2006
5
3
(68%)
2
(32%)
2005
5
4
(70%)
2
(30%)
2004
5
3
(72%)
1
(28%)
2003
4
3
(75%)
1
(25%)
2002
4
3
(70%)
1
(30%)
Visitors to Brazil, Purpose of Visit 2002-2007
Source: Euromonitor
Leisure Business

Figure 10: Vistors to Brazil by Purpose of Travel

It is notable that far less variation in the number of business than leisure travellers is
evident, particularly in 2006 and 2007, following Varigs bankruptcy. Forecasts by
Euromonitor, as indicated below, suggest a faster rate of growth for business traffic.

4
Note: Total market figures given by Euromonitor, Embratur and ANAC differ.

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Analysis of Expected Visits 2007-2012
Source: Euromonitor
2007 2008 2009 2010 2011 2012
Leisure
1
2
4
3,5
Business
1,5
3
Million
2,5

Figure 11: Forecast visits, 2007-2012

Given Brazils growing importance as one of the leading world economies, and with So
Paulo as South Americas financial capital, business travel can expected to grow more
sharply within the near future. Next to that, tourism is a potentially important factor for
growth, given the many opportunities Brazil has to offer, as well as the impact of the 2014
football World Championship.

At present, tourism accounts for 6.2% of Brazils 2008 GDP. According to research by the
World Travel & Tourism Council it is expected to rise by 4.2% per annum within the next 10
years. The rising value of the expected contribution of tourism to GDP is indicated by the
figure below, which will certainly contribute to opportunities for air transport.

0
10
20
30
40
50
60
70
80
90
$ USD Billion
2018F 2008F 2007E 2006 2003 2004 2005
Contribution of tourism to GDP
Source: World Travel & Tourism Council

Figure 12: Tourism Contribution to GDP

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2.2.2 Brazil Outbound Tourism
Brazil ranks 27
th
in the world by outbound tourism expenditure, according to World
Tourism Organisation figures. Outbound tourism expenditures in 2006 stood at $5.8bn, and
in the year to October 2007 had already seen 33% growth, as shown in the figure below.

0
1
2
3
4
5
6
7
1995 2000 2005 2006
Outbound tourism expenditures, current US$bn, Brazil
U
S

$
b
n
2007 Year to October
33% increase over 2006
0
1
2
3
4
5
6
7
1995 2000 2005 2006
U
S

$
b
n
0
1
2
3
4
5
6
7
1995 2000 2005 2006
U
S

$
b
n
2007 Year to October
33% increase over 2006

Source: World Tourism Barometer, October 2007
Figure 13: Brazil Outbound Tourism Expenditure

Outbound tourism expenditure is likely to continue to increase, given that Brazil has a
rapidly rising middle class and good connections to the rest of the world. However, the
majority of Brazilian tourists seems to prefer domestic travel and explore the vast tourism
resources in the country itself.

The number of Brazilian outbound departures grew by 15% in 2007 and is expected to grow
even farther. One of the key drivers of outbound tourism is appreciation of the Brazilian
Real vis a vis the Dollar, although it is mainly the United States that benefits from that
development. Overall, international outbound travel has more than doubled since 2002, as is
set out below.

Developments in Brazilian International Departures (2002-2007)
2002 2003 2004 2005 2006 2007
0.0
1.5
Million Travelers
4.5
6.0
3.0
Source: Euromonitor International

Figure 14: Developments in Brazilian International Departures

Booz & Company
Transport
14

The most popular destination for Brazilians remains Argentina, followed by the United
States. Popular EU destinations are Portugal, Spain, France and the UK. Visa restrictions are
currently hampering tourism towards the United States, while on the other hand the EU
offers a more flexible visa 90 day visa option that can be obtained upon arrival.

Tourism and business remain the key drivers of travel for Brazilians travelling to the EU. We
have no data available on VFR traffic, but we can assume that trips defined as leisure to
will in some cases certainly involve VFR visits, given the presence of large Brazilian
communities in the popular destinations. In that respect, the EU has a natural advantage in
the fact that most Brazilians are of European descent; many have family or friends living
abroad and many have relatives that have immigrated to Europe. These factors could up to a
certain extent explain the relative popularity of Portugal, Germany and Italy. However, this
data is solely based on points of entry; it is certainly feasible that Brazilians visit multiple
countries while within the EU. Also, it goes without saying that the EU possesses some key
drivers of tourism, given its historical and cultural diversity. The number of Brazilian
nationals visiting EU countries, compared with other major destinations is set out below
(note that data was not available for all EU countries, including Portugal).

639,431
308,156
1,851
1,351
6,615
828
289
229,384
14,585
156,272
4,031
842
21,225
228,779
2,285
23,408
742,232
131,487
Bulgaria
Belgium
Argentina
Czech Republic
Estonia
France
Germany
Greece
Italy
Latvia
Lithuania
Poland
Portugal
Slovakia
Slovenia
Spain
United Kingdom
Finland
Chile
United States
Brazil Major Outbound Tourism Destinations + EU
2007
Source: UNWTO, Booz & Company analysis
Note that data was not available for entire EU27

Figure 15: Brazilian Major Outbound Destinations in 2007

Considering the development of Brazilian visitor travel to EU countries, the United Nations
World Tourism Organisation (UNWTO) reports growth as shown below. This indicates that
all EU markets have experienced overall growth since 2003, as shown below. In the 2006-07
period, growth was evident in all markets except for Poland, where Brazilian visitors
declined by 10% from the previous year.

Booz & Company
Transport
15

Country

2003 2004 2005 2006 2007 % change
06-07
Belgium 12,579 13,843 15,181 18,048 23,408 29.7
Czech
Republic
- - 11,652 16,513 21,225 28.5
Estonia - - 450 435 842 93. 6
Finland 2,136 2,691 3,331 3,518 4,031 14.6
Germany 70,499 83,184 93,836 156,196 156,272 0.1
Greece 2,625 3,680 8,760 11,267 14,585 29. 5
Italy 86,246 128,722 181,762 219,059 229,384 4.7
Latvia 115 170 168 151 289 91.4
Poland 2,800 4,733 6,935 7,364 6,615 -10.2
Portugal 118,246 - - - - -
Slovakia 319 526 674 801 1,351 68.7
Slovenia - - 1,032 1,563 1,851 18.4
Spain 97,392 183,749 221,645 256,581 308,156 20.1
UK 70,000 78,000 92,000 112,068 131,487 17.3
TOTAL 462,957 499,298 637,426 803,564 899,496
Source: UNWTO
Table 5: Development of Brazilian Visitors to EU, 2003-2008

According to Eurostat, Brazilians visiting the EU spend 876 million Euros in 2006,
compared to EU citizens spending 1,297 million in Brazil. Considering the large difference
in the number of Brazilians visiting the EU versus EU nationals visiting Brazil (c. 900,000
versus c. 1.74 million), these figures appear reasonably proportionate (note that not all
visitors necessarily travel by air, or direct: air passenger traffic is discussed in the next
section) although duration of visit information is not available.

876
1,297
0
100
200
300
400
500
600
700
800
900
1,000
1,100
1,200
1,300
Million
Brazil EU27
EU27-Brazil Tourism Expenditure/Receipts in 2006
EU expenditure
in Brazil
Brazilian
expenditure in
EU

Figure 16: EU-Brazil Tourism Expenditure, 2006

Booz & Company
Transport
16

2.3 AIR PASSENGER TRAFFIC
This section provides an overview of the size and scope of the Brazilian passenger aviation
market, followed by an analysis of traffic demand drivers between the EU27 and Brazil.
2.3.1 Domestic Air Transport Market
According to World Air Transport Statistics 51
st
Edition, published 2007, Brazil is the fourth
busiest domestic aviation market in the world and the shuttle service between So Paulo
and Rio de Janeiro is one of the worlds busiest routes. The Brazilian domestic scheduled
market encompasses seven times more frequencies than the international market (i.e.
number of flights).
0
5000
10000
15000
20000
25000
30000
35000
40000
International Domestic*
2005
2008
International frequencies from Brazil by arrival country, October 2005 and 2008
0
5000
10000
15000
20000
25000
30000
35000
40000
International Domestic*
2005
2008
International frequencies from Brazil by arrival country, October 2005 and 2008
Domestic & International frequencies from Brazil, October 2005 vs 2008
Source: OAG, Booz & Company analysis

Figure 17: Domestic & International Frequencies from Brazil, 2005 vs 2008

Brazils exceptionally large surface area and difficult topography (that has made road and
rail network development challenging) have resulted in greater modal reliance on air
transport. Brazil thus has strong domestic as well as worldwide passenger and freight links
by air.

So Paulo State accounts for around 35% of passengers through Brazilian airports, and
three-quarters of traffic is handled by just 10 airports in the South and North-East.

The So Paulo - Rio de Janeiro route is just 300 miles; airports are congested and have their
expansion constrained. A Rio-So Paulo high speed rail link is currently being tendered, and
if this goes ahead, could eventually relieve capacity problems and schedule punctuality.

Domestic aviation, without the regulatory constraints applicable to international services,
has grown rapidly. Brazil has had three principal domestic airlines; Varig, TAM and Gol.
The first, a state-owned corporatised flag carrier, went bankrupt in 2006 and lost its place in
the Star Alliance. After a series of rescue attempts, its operations were sold to Gol, a fast-
growing LCC focused on the domestic and regional South American market. Gol has
continued a limited number of Varigs operations, withdrawing from the market outside
South-America.

Booz & Company
Transport
17

An interesting new entry in the market is Azul, owned and managed by Brazilian-born
JetBlue founder David Neeleman. The new airline, using JetBlues business model, aims to
target the domestic dominance of TAM and GOL.

From 2005 to 2008, a 20% growth in frequencies in the Brazilian domestic market, driven by
growth of LCCs, has outstripped growth in the international market. TAM and GOL have
increased seats available by roughly half, more than making up for the loss of capacity
resulting from Varigs bankruptcy.

Seats (000)
83
309
2,217
2,261
3,074
5,000
4,500
1,500
500
2,500
3,500
4,000
3,000
2,000
1,000
0
8 13 14 15 23
P
a
n
t
a
n
a
l
Top 10 Carriers by Domestic Seats Available
2005 vs 2008
C
o
n
t
i
n
e
n
t
a
l

L
a
n
A
i
r
l
i
n
e
s
A
m
e
r
i
c
a
n

U
n
i
t
e
d

500
1,500
2,500
3,500
4,000
4,500
5,000
3,000
2,000
1,000
0
6 13 15 15 25
P
a
n
t
a
n
a
l
46
283
541
4,047
4,494
O
c
e
a
n
a
i
r
T
A
M
G
O
L
V
a
r
i
g
B
A
T
A
M
V
a
r
i
g
G
O
L
V
A
S
P
B
A
L
a
n
A
i
r
l
i
n
e
s
C
o
n
t
i
n
e
n
t
a
l

A
m
e
r
i
c
a
n

N
H
T
Source: OAG

Figure 18: Domestic Seat Capacity by Carrier, 2005 vs 2008

The seats available shown above are only in terms of end-to-end seats; actual flight
opportunities are much more numerous, because of the number of en-route calls (up to four)
some flights make. This bus style of service is notably different from a conventional LCC
point-to-point network. The cause is likely to be the extent to which flights are operated
along axes (in particular, the coastal, and South East-South West axes), rather than either
around a hub, or criss-crossing each other, as is the case in Europe and the United States.

On specific routes, in 2008, nine out of the top ten flows were into So Paulo. In 2005, that
had been seven, and the role of Rio (in five out of ten of the top flows, versus three in 2008)
was greater. The figures provide a comparison of the top ten domestic routes in October
2005 and 2008.

Booz & Company
Transport
18

393
460 460
545
654
839
430 440
871
2,169
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
SSA
- GIG
CGH
- SSA
CGH
- POA
CWB
- CGH
GIG -
GRU
BSB
- GIG
SSA -
GRU
BSB -
CGH
CGH
- SDU
REC
- GIG
Frequency
Top 10 Domestic Routes by Frequency, 2005 vs 2008
439
469 473
545
558 572
598
626
665
2,186
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
REC -
GRU
POA -
GRU
GRU
- POA
CWB
- CGH
GIG -
GRU
BSB
- GIG
SSA -
GRU
CNF -
CGH
BSB -
CGH
CGH
- SDU
Source: OAG LEGEND
CNF = Belo Horizonte Tancredo Neves
BSB = Brasilia
CWB = Curitiba Afoso Pena
POA = Porto Alegre
REC = Recife
GIG = Rio de Janeiro Galeo
SDU = Rio de Janeiro Santos Dumont
SSA = Salvador Dois de Julho
CGH = Sao Paulo Congonhas
GRU = Sao Paulo Guarulhos
2008 Total: 7,131 2005 Total: 7,261

Figure 19: Top 10 Domestic Routes by Frequency, 2005 vs 2008

The So Paulo to Rio shuttle market, with as many as 70 flights per day in each direction, is
almost four times as busy as the flow with the next greatest number of frequencies.

The strength of this market is to some extent an indicator of the problem of deficient surface
networks mentioned above. The road distance from centre to centre of these two cities is 429
km. Many flows of such a distance between major European cities would be served by a
high speed rail link. Examples are Eurostar, linking London to Paris in 2 hours, 15 minutes,
and to Brussels in 1 hour, 51 minutes, which has captured more than 70 percent of the
market from airlines and Thalys which links Paris with cities like Brussels and Geneva
5
.
2.3.2 International Air Transport Market
International capacity of Brazilian carriers has remained static in the period 2005 to 2008,
with load factors apparently dropping. Varigs bankruptcy has reduced the network of
international services available, with, in October 2008, neither Varig nor its owner Gol
operating beyond South America.

International departures are overwhelmingly from So Paulo and (to a lesser extent) Rio de
Janeiro airports. Services within the Americas are followed by services to Europe. At
individual country level, the international market is dominated by services to Argentina and
the USA, which together make up almost half of all international frequencies.

Services to the Rest of World have seen a change of pattern from 2005 to 2008, with direct
services to Australasia being replaced by services to the Far and Middle East - in particular,
services through UAE (Emirates commenced services in 2007). There are no direct services
to China (possibly infeasible due to distance), although Air China provides for a connection
via Madrid. Most services to China appear to be routed via the United States or South
Korea, with limited connections offered via Frankfurt and Paris.

5
Booz & Company Market Intelligence

Booz & Company
Transport
19

International Frequencies from Brazil
October 2005 vs 2008
3,563
1,201
105 115
1,119
3,735
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Americas Europe RoW
2005 2008
Source: OAG

Figure 20: International Frequencies from Brazil by Region, 2005 vs 2008

Growth in international frequencies has been by far strongest, in relative and absolute terms,
in the Argentinean market - through a combination of LCC growth, a relatively enabling
regulatory climate and the resurgence of the Argentinean economy. Frequencies to the
United States have been static, reflecting consolidation in the United States carrier market,
and limited penetration of LCCs.
6
Services to Europe account for around 23% of total
international frequencies to/from Brazil. A comparison between frequencies in 2005 and
2008 at country level is shown below.

International Frequencies from Brazil by Arrival Country
October 2005 and 2008
0
100
200
300
400
500
600
700
800
900
1,000
1,100
1,200
1,300
1,400
Frequency
K
o
r
e
a
J
a
p
a
n
N
e
w

Z
e
a
l
a
n
d
A
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t
r
a
l
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U
A
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M
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a
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a
y
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u
y
a
n
a
F
r
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G
u
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c
u
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C
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o
m
b
i
a
C
h
i
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e
B
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i
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i
a
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t
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a
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S
A
C
a
n
a
d
a
P
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n
a
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a
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e
x
i
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o
S
u
r
i
n
a
m
S
o
u
t
h

A
f
r
i
c
a
C
a
p
e

V
e
r
d
e
A
n
g
o
l
a
EU
2008
2005
Source: OAG

Figure 21: International Frequencies from Brazil, 2005 vs 2008

Trends in seats available to international destinations are generally similar to those in
frequencies, as is shown in the graph below. The US market is a notable exception, where
demand has been concentrated onto fewer flights, with larger types. Following the leader

6
As we have described in other studies, LCC services tend to concentrate in short to medium haul markets.

Booz & Company
Transport
20

Argentina, individually Spain, Portugal and France have also seen a strong rise in seats
available although the overall EU seat capacity available is slightly down.

International Seats Available from Brazil by Arrival Country
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
220,000
240,000
260,000
280,000
300,000
320,000
A
n
g
o
l
a
U
A
E
A
u
s
t
r
a
l
i
a
N
e
w

Z
e
a
l
a
n
d
J
a
p
a
n
K
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a
M
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t
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H
a
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a
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y
P
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P
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a
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G
u
y
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a
F
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G
u
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C
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o
m
b
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h
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B
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a
A
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t
i
n
a
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S
A
C
a
n
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d
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P
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n
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o
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r
i
n
a
m
S
o
u
t
h

A
f
r
i
c
a
C
a
p
e

V
e
r
d
e
Seats
EU
2008
2005
Source: OAG

Figure 22: Seat Capacity from Brazil, 2005 vs 2008

The figure below shows the trends in average seats per international flight. This indicates
that smaller aircraft are operated to the UK than most other European destinations
(exception: Switzerland). In the case of Germany and the Netherlands, increase in aircraft
size compensates for the reduction in frequencies.

Average Seats per Flight from Brazil by Arrival Country
0
50
100
150
200
250
300
350
400
C
a
p
e

V
e
r
d
e
A
n
g
o
l
a
S
o
u
t
h

A
f
r
i
c
a
S
u
r
i
n
a
m
M
e
x
i
c
o
P
a
n
a
m
a
C
a
n
a
d
a
U
S
A
A
r
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e
n
t
i
n
a
B
o
l
i
v
i
a
C
h
i
l
e
C
o
l
o
m
b
i
a
E
c
u
a
d
o
r
F
r
e
n
c
h

G
u
i
a
n
a
G
u
y
a
n
a
P
a
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a
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u
a
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a
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a
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a
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q
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e
n
m
a
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F
r
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G
e
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m
a
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a
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N
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e
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l
a
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s
P
o
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S
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K
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A
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w

Z
e
a
l
a
n
d
J
a
p
a
n
K
o
r
e
a
Seats
2005 2008
Source: OAG

Figure 23: Average Seats per Aircraft, 2005 vs 2008

Despite the scale of the market being largely unaltered, there has been significant change in
the pool of international carriers from 2005 to 2008. TAM is now the only Brazilian carrier
operating to Europe. The fast-growing Gol has a tight focus on the domestic (as indicated
earlier in Section 2.3.1), and regional markets.

Booz & Company
Transport
21

Seats (000)
150
50
250
350
0
25 27 27
32
39
L
u
f
t
h
a
n
s
a
43
54
57
89
345
200
100
300
Top 10 Carriers by International Seats Available
2005 vs 2008
A
e
r
o
l
i
n
e
a
s

A
r
g
e
n
t
i
n
a
s
U
n
i
t
e
d

A
i
r
l
i
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s
I
b
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r
i
a
T
A

d
e
l

M
e
r
c
o
s
u
r
150
0
250
350
300
50
27
33 34
40
48
A
m
e
r
i
c
a
n

A
i
r
l
i
n
e
s
52
68
78
135
207
200
100
V
a
r
i
g
T
A
M
G
O
L
T
A
P
A
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r
o
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i
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s

A
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V
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A
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l
i
n
e
s
I
b
e
r
i
a
A
i
r

F
r
a
n
c
e
Source: OAG

Figure 24: International Seat Capacity by Carrier, 2005 vs 2008

The great majority of international flights depart from So Paulo followed by Rio de Janeiro ,
as is shown in the charts below. Belo Horizonte, the third largest city in Brazil, has
remarkably few flights for an agglomeration with a population of almost 6m, but has seen
growth of direct services to Lisbon, and service to Paris with a stop at So Paulo, from 2005
to 2008. Another 18 cities/agglomerations, each with populations of more than 1 million
people, have relatively few international flights.

600
550
450
50
500
Seats (000)
400
350
300
250
200
150
100
0
8 9
12 12 15
M
A
O
19 21
33
231
577
Major Brazilian Airports by International Capacity
(thousands) 2005 vs 2008
F
O
R
C
W
B
R
E
C
B
S
B
500
0
12 14 17 20 21
S
S
A
22
28
42
193
587
50
100
150
200
250
300
350
400
450
550
600
C
N
F
G
R
U
G
I
G
P
O
A
M
A
O
G
R
U
G
I
G
P
O
A
S
S
A
V
C
P
C
W
B
F
O
R
R
E
C
B
S
B
Source: OAG
LEGEND
GRU = Sao Paulo Guarulhos
GIG = Rio de Janeiro Galeo
POA = Porto Alegre
CNF = Belo Horizonte Tancredo Neves
SSA = Salvador Dois de Julho
REC = Recife
SDU = Rio de Janeiro Santos Dumont
BSB = Brasilia
FOR = Fortaleza
CWB = Curitiba Afoso Pena
MAO = Manaus

Figure 25: Major Brazil Airports by International Seat Capacity

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2.3.2.1 North East Brazil
The North East of Brazil deserves special mention. Regional disparities in Brazil have been
significant and the North East has lagged behind the rest of the country. Since the 1960s,
several attempts have been made to reduce inequalities on the federal, state and regional
levels. In 1988, the new constitution included provisions to develop the North East. Several
regional investment programs were created. During the Cardoso and particularly the Lula
da Silva presidencies, more substantial and effective programs were put in place.

The Cardoso government was the first that focused on developing tourism in the North East
with the Prodetur program. Between 1995 and 2000, the federal government and the States
invested US$ 736 million in improvement works, largely funded by the Inter-American
Development Bank. Among the projects were the renovation of the historic centres of
Salvador and Recife, 1020 kilometres of new roads and the construction and expansion of
the airports of Recife, Salvador, Natal and Fortaleza.

Prodetur was accelerated by the Lula government, which initiated the second phase in 2003.
It created a Ministry of Tourism and set out a new tourism strategy for 2010 in order to:

To increase the number of foreign tourists to 9 million.
To increase the number of travellers using domestic flights to 65 million
To generate 1,200,000 new jobs.
To reach the annual figure of 8 billion dollars in foreign currency.
To diversify the tourism offer, developing at least three quality products in each of
the State.
At the moment, as will be explored further below, EU holiday carriers are currently offering
flights to Salvador, Recife and Natal. They include Livingston and Air Italy from Italy,
TUIFly from The Netherlands, First Choice from the UK and Condor from Germany.
Scheduled services from the EU to the North East are offered by TAP and TAM.
2.3.3 EU - Brazil Aviation Market
This section analyses the main EU supply and demand drivers of passengers travelling to
Brazil. Data in this section differ from that in the preceding discussion on tourism, which
were concerned with nationality of visitors to Brazil, and instead focus on passenger
carriage between the EU and Brazil.

The total number of passengers carried between the EU and Brazil has increased quite
rapidly since about 2004, reaching nearly 4.4 million by 2007 according to Eurostat data.
Growth slowed with the bankruptcy of Varig in 2006 (even declining in that year); although
the market recovered quickly, it may still be below levels that might otherwise have been
attained in that time frame.

According to Eurostat, the vast majority of passengers arrive on scheduled services. We note
that carriers such as Condor and TUI, which frequently operate non-scheduled services, in
the case of Brazil offer package travel to destinations in Northern Brazil (e.g. Natal and
Fortaleza) which are operated on a scheduled basis. This may be in response to higher costs
for non-scheduled traffic or regulatory constraints. A breakdown of market size on
scheduled and non-scheduled carriage is shown below:

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Passengers Carried between EU and Brazil
(thousands)
4,055
4,397
2006
4,152
2007
245
2000
2,787
2,727
60
3,771
284
2005
4,153
3,821
331
2004
3,584
3,367
217
2003
3,074
2,912
162
2002
2,808
2,715
93
2001
2,763
2,654
109
Non-scheduled Scheduled
Source: Eurostat

Figure 26: Passengers between EU and Brazil

Whilst Eurostat indicates there were 4.4 million passengers between the EU and Brazil, the
figure given by ANAC is slightly lower at 3.72 million passengers in 2007. The following
analysis of airline market share is based on ANAC records of passenger carriage, and
therefore does not give the same total as that indicated at the beginning of this section.
Nonetheless, the analysis is useful as an indicator of airline market shares.

The following figure shows the number of passengers carried (two directions) by airlines
operating between Brazil and the EU in 2007.

5,623 45,356
137,792
145,810
151,897
186,703
198,160
286,046
477,972
552,714
562,498
972,701
3.5
4.0
0.5
TAM Air
France
TAP
Million Passengers
Iberia
3.0
2.5
2.0
1.5
1.0
0
Third
Country
Carriers
Condor
Flugdinst
Varig BA Air
Europa
Alitalia KLM Lufthansa
Passenger Carriage by Carrier, EU-Brazil, 2007
Source: ANAC

Figure 27: 2007 Passenger Carriage by Carrier, EU-Brazil

The largest share of passengers is carried by TAP Air Portugal, which in 2007 carried nearly
twice as many passengers as each of the next three carriers (TAM, Air France, Iberia) did

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individually. The above figures are based on recorded arrivals and departures of all the
airlines operating direct service in the particular bilateral markets. As should become quite
normal as a reflection of service structure in the EU from one of segmented national markets
to one of an integrated Community market, a comparison of traveller nationality to traveller
itinerary (as undertaken below) shows interestingly that there are large differences between
the number of nationals of EU States or Brazil visiting, see also Table 4 and Table 5 above,
and the number of passengers carried by all carriers in the bilateral air transport markets of
the respective Member States and Brazil. The table below provides a comparison:

EU
Nationals
Visiting
Brazil
Brazilian
Nationals
Visiting
EU
Total
Nationals
Potential
Air
Passengers
Passengers
Arriving
in Brazil
Passengers
Departing
Brazil)

Total Air
Passengers
Austria 24,557 n/a
24,557 49,114
Belgium 31,073 23,408
54,481 108,962
Czech Rep. n/a 21,225
21,225 42,450
Denmark 26,042 n/a
26,042 52,084
Estonia n/a 842
842 1,684
Finland 22,217 4,031
26,248 52,496
France 254,367 n/a
254,367 508,734 430,014 470,987 901,001
Germany 257,719 156,272
413,991 827,982 226,426 229,035 455,461
Greece 12,636 14,585
27,221 54,442
Hungary 7,103 n/a
7,103 14,206
Ireland 18,091 n/a
18,091 36,182
Italy 268,685 229,384
498,069 996,138 140,908 154,184 295,092
Latvia n/a 289
289 578
Netherlands 83,554 n/a
83,554 167,108 90,299 107,861 198,160
Poland 17,280 6,615
23,895 47,790
Portugal 280,438 n/a
7

280,438 560,876 483,241 491,384 974,625
Slovakia n/a 1,351
1,351 2,702
Slovenia n/a 1,851
1,851 3,702
Spain 216,373 308,156
524,529 1,049,058 305,363 333,211 638,574
Sweden 39,846 n/a
39,846 79,692
UK 176,948 131,487
308,435 616,870 131,718 128,641 260,359
Total 1,736,929
899,496 2,636,425 5,272,850
1,807,969 1,915,303 3,723,272
Source: UNWTO, ANAC, Booz & Company analysis
n/a = data not available
Table 6: Visitors and Air Passenger Carriage EU-Brazil, 2007

There are several points apparent from the above table. First, (and logically) that travellers
to/from EU countries without direct air services with Brazil are transiting over those EU
countries that do (here the point should be made that travellers will select the best
connection, irrespective of whether it is in their home country or not. A traveller from
Manchester in the UK, for example, is just as likely to choose to travel via Lisbon as London,
even though air services are available from his or her home country, if not home city).

7
No data on Brazilian visitors to Portugal is available. We consider that the total is very unlikely to be zero, and
consequently Brazilian visitors are under-recorded.

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Additionally, there are significantly more visitors between the EU and Brazil than air
travellers. Each unique visitor from Brazil to the EU and from the EU to Brazil, is likely to
constitute an arrival and a departure. With a total of 2.6 million unique travellers
8
, the
potential number of air passengers in 2007 was thus 5.2 million. ANAC statistics indicate
that there were a total of 3.7 million air passengers (arrivals and departures) between Brazil
and the EU in that year, suggesting that around 1.5 million passengers (or 750,000 unique
visitors) travelled by other means or itineraries. Although this number could include some
one-way travel, and passengers arriving by other modes (e.g. cruise ships), it is likely that
many are travelling via third countries (see earlier discussion at section 2.2.2). We note that
Eurostat indicated 4.4 million air passengers in 2007, however, even if this statistic is correct,
a large number of visitors remain unaccounted for in air passenger statistics.

The above table also suggests that capacity directly available in some EU-Brazil markets is
insufficient to meet consumer demand, specifically for those countries with a greater
number of nationals visiting Brazil than passengers on services between that country and
Brazil (i.e. Italy, Germany and UK). This will be explored further in the following section,
which examines capacity available in the market.
2.4 CAPACITY IN THE MARKET
EU carriers currently provide around three quarters of seat capacity available between the
EU and Brazil: in October 2008, the EU carrier offer was around 225,000 seats, whilst TAM
(the only Brazilian carrier) was offering about 66,000 seats respectively 77% and 23% of the
total. For TAM, this represents a substantial increase from 2007, when its offer was around
4% of total capacity (at a time when the airline lacked suitable long range aircraft). Airline
Business analysis, in October 2007, was that the share of international traffic carried by
Brazilian airlines has plunged from 79% before (sc. Varigs) bankruptcy to 4% today In the fourth
quarter of last year the Europeans added capacity to Latin America as fast as they could, averaging
12% growth per month. This was twice as fast as the European carriers' growth anywhere else in the
world.
Share of EU-Brazil Scheduled Seat Capacity
October 2008
23%
TAM
EU Carriers
77%
23%
29%
4%
10%
5%
4%
13%
TUI
1%
1%
Air Europa Air Caribes
TAM
1%
Air France
Air Italy
Alitalia
BA
1% Condor
0%
First Choice
Iberia
6%
KLM
1%
Livingston
Lufthansa
TAP
0%
Source: OAG Total: 207, 052 seats

Figure 28: Scheduled Seat Capacity, EU-Brazil, October 2008

8
Note: The number may be higher, as UNWTO statistics do not appear complete. For example, no Brazilian visitors to
France or Portugal are recorded.

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Whilst EU carriers currently dominate capacity offer in the overall EU-Brazil market, at
individual market level, there is considerable variation. The table below shows the market
share in individual EU markets on the basis of available seats in October 2008, broken down
by carrier.

Airline Capacity Offer from Brazil to EU destinations, October 2008
Carrier Frequency Seats %
France
Air France 116 34,270 53%
TAM Linhas Aereas 134 29,840 47%
Grand Total 250 64,110
France carrier total 116 34,270 53%
Brazilian carrier total 134 29,840 47%
Germany
Condor Flugdienst 13 3,497 12%
Lufthansa German Airlines 52 16,868 59%
German carrier total 65 20,365 71%
Italy
Air Italy 10 2,420 10%
Alitalia 40 11,640 47%
Livingston 6 1,602 6%
Italian carrier total 56 15,662 64%
Netherlands
KLM-Royal Dutch Airlines 31 10,745 94%
TUI Airlines 3 690 6%
Dutch carrier total 34 11,435 100%
Portugal
TAP Air Portugal 291 77,726 100%
Portuguese carrier total 291 77,726 100%
Spain
Air Europa 13 3,419 10%
Iberia 87 23,778 70%
TAM Linhas Aereas 31 6,975
Spanish carrier total 187 27,197 20%
United Kingdom
British Airways 45 13,023 50%
First Choice Airways 5 1,165 5%

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Airline Capacity Offer from Brazil to EU destinations, October 2008
Carrier Frequency Seats %
UK carrier total 50 14,188 55%
Source: ANAC, OAG, Booz & Company Analysis
Table 7: Frequency & Capacity EU-Brazil, October 2008

Amongst European carriers, TAP Air Portugal offers the greatest number of flights between
the EU and Brazil, around 27% of the total market, and is the only carrier operating on
Portugal-Brazil routes. TAP has expanded its service rapidly since 2000, from 17 to 67
weekly flights. Although TAM does not operate its own aircraft to Portugal, it has an
extensive codeshare agreement with TAP. TAM places its code on all of TAP's flights to
Brazil, in return carrying TAP passengers to onward destinations in Brazil. TAP reported in
July 2008 that all its Brazilian routes were profitable except the new Lisbon-Belo Horizonte,
which had only been launched in February and was growing well. Basing from Portugal,
TAP has an advantage in terms of connections from the rest of Europe to Brazil (reflected in
the significantly higher number of overall passengers than Portuguese nationals discussed
earlier in section 2.3.3). TAP and TAM will most likely become partners in the Star Alliance,
reinforcing their respective positions.

Iberia offers a 70% capacity share on Spain-Brazil routes, and 10% of the total EU-Brazil
capacity. Competition on Spain-Brazil routes comes from Air Europa and TAM. Iberia
operates a twice a day flight from Madrid to So Paulo with an Airbus A340-300 and A340-
600. A daily flight also departs for Rio de Janeiro, utilising an A340-600. Air Europa operates
a flight from Madrid to Salvador de Bahia. TAM has a daily flight So Paulo-Madrid.

Air Frances offer was the fourth highest in 2007 (behind TAP, TAM and Iberia) and 12% of
total EU-Brazil capacity. Air France operates twice daily flights to both Rio de Janeiro and
So Paulo. Although TAM offers a greater number of frequencies, Air France offers greater
capacity due to larger aircraft type: Air France operates Boeing 777-200, 747-400 and Airbus
A330, whereas TAM has a mixed operation of MD11, A330, A340-500 on its routes from So
Paulo, Rio de Janeiro and Recife to Paris.

Lufthansa takes an important position on both the passenger and cargo market to Brazil, but
takes a larger share with regard to cargo (discussed further in section on cargo). Lufthansa
offers a capacity share of 6% on the EU-Brazil passenger market (59% of Germany-Brazil)
and operates daily flights to So Paulo from Munich and Frankfurt with the A340-300 and
Boeing 747-400. In 2007 Lufthansa entered into a codeshare operation with TAM, in
anticipation of the latter joining the Star Alliance. In addition, Condor operates flights from
Frankfurt to Recife and Salvador de Bahia.

KLM operates a daily service to So Paulo from Amsterdam with a Boeing 777-300. It
currently has no direct competitors on the route, and it also offer codeshares with Air France
via Paris. KLMs partnership with TAM has terminated. TUI Airlines operates seasonal
flights to Fortaleza and Natal.

Alitalia operates daily flights to So Paulo from Milan and Rome with a Boeing 777. Other
Italian operators include holiday carriers Air Italy and Livingston, which mainly fly to the

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tourist destinations in the Northeast. TAM operates a daily flight to Milan Malpensa with an
A340-500.

British Airways operates flights to So Paulo and Rio de Janeiro from London Heathrow,
utilizing a Boeing 747 and 777 respectively. The So Paulo flight continues to Buenos Aires.
TAM has commenced a daily service to London Heathrow. First Choice offers services to the
Northeast.

A limited number of services to Brazil from the French Overseas Territories is provided by
Air Caribes. Air Caribes is a French regional carrier based in Guadeloupe, operating flights
within the region and to Paris. Services to Brazil were operated from Guadeloupe,
Martinique and French Guiana towards Belem, using Embraer 190 and 175 equipment.
However, in March 2009, services from Martinique and Guadeloupe have been ceased.
Specific routes in each market are shown below, and include load factors achieved where
this information could be obtained from airline annual reports.

Obtaining definitive information on load factors achieved by carriers for individual routes
operated is not possible. However, information on load factors achieved regionally is given
amongst traffic statistics on airline websites. These figures are given as average regional
load factors and are indicated below for carriers operating in the EU Brazil market from
their Q1 2009 reports, covering the period of October 2008:

Airline Load factor
Lufthansa 71.4%
Iberia 83.7%
TAM Linhas Aereas 72%
Air France 81.3%
British Airways 80.8%
Air Italy 75%
Alitalia 73.9%
KLM-Royal Dutch Airlines 81.30%
TAP Air Portugal 78.3%
Table 8: Regional Load Factors EU-South America, October 2008

2.5 BRAZILS CARGO MARKET
The importance of air cargo in Brazil needs to be understood in the context of its large land
mass, physically difficult terrain and regional linkages. Unlike in Europe, where the majority
of air cargo is international, in Brazil a large amount of domestic cargo travels by air. The
following analysis is primarily concerned with the movement of international cargo, except
for consideration of how domestic cargo aircraft movements affect airport capacity.
2.5.1 Market Overview
Considering the international cargo market only, the following figure indicates that the
regions with the greatest amount of air cargo traffic are North America, followed by Europe
and South America. Air cargo to/from the rest of the world is comparatively minor.

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000 Tonnes
600
550
500
50
450
400
350
300
250
200
150
100
0
594
Europe
198
95
103
Asia
1
1 0
South America
126
80
46
North America
229
83
146
Central
America
24
13
11
Africa
16
8
8
Outbound
Inbound
Brazil Inbound/Outbound Cargo Regions
2007 (000 Tonnes)
Source: ANAC

Figure 29: Brazils International Air Cargo, Regions and Countries, 2007

As indicated above, the US is by far the country with the greatest amount of air cargo
to/from Brazil (accounting for almost all North America cargo), with Germany in second
place and France, Portugal and Spain also in the top 10. The United States and Brazil have
signed a new bilateral agreement in June 2008. The number of flights will be gradually
increased until 2010. US carriers were granted access to five new destinations: Brasilia,
Fortaleza and Curitiba, as well as three destinations to be decided by the United States.

More importantly, in order to meet growing cargo demand, several substantial changes
were made with regard to cargo traffic. The number of weekly cargo flights was expanded
from 24 to 35, increasing to 42 in 2010. Cargo charter flights are increased from 750 to 1,000
per year, with 1,250 allowed in 2010. US cargo carriers may now also offer transfer services
to allow intermodal traffic by road.

All Cargo Carriage - Volume and Percentage of Total
2007
Tonnes (000)
80
60
40
20
140
120
100
0
Europe
37.8%
34
40
Asia
0%
0 0
South America
44.7%
45
11
North America
63.9%
40
106
Central
America
67.4%
8
8
Africa
48.5%
2
6
160
Outbound
Inbound
Source: ANAC, Booz & Company analysis

Figure 30: Cargo Carriage on All-Cargo Services, 2007

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In the above chart, the percentages given indicate the proportion of cargo volume that is
carried on all-cargo services, as a percentage of the total cargo market. As shown, the
proportion of cargo carried on all-cargo services (rather than as bellyhold, or on combination
services) is greatest in the North American and Central American markets. In South America
and Africa, all-cargo services carry slightly less than half of all cargo, dropping to around
38% in the European market and the percentage is zero for the Asian region. In the next
section, we consider available capacity on scheduled all-cargo services.
2.5.1.1 All-Cargo Capacity & Frequency
All-cargo flight growth has been limited, in both international and domestic markets. The
domestic all-cargo market is of even greater volume than the international market, reflecting
issues of accessibility and distance, as well as the shortage of competing modes for time-
sensitive products (see infrastructure section below). The figure below compares available
capacity offer on scheduled all-cargo services from Brazil (to world) in October 2005 versus
2008, indicating near-static volumes.

Available Cargo Capacity - International & Domestic
All-cargo Services Only
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
2005 2008
International
Domestic
33,196
43,192
76,388
33,437
44,095
77,532
Tonnes
Source: OAG

Figure 31: Available All-Cargo Capacity, International and Domestic, October 2005 & 2008

In some cases, dedicated freight services appear to have given way to combination services.
The strength of the Chile and Ecuador markets reflect the difficulty of accessing markets
across the Andes by land. We believe these flows are likely to include traffic to and from
Europe being consolidated in Brazil before proceeding onwards. The increase in
Argentinean traffic, as with passenger flows, appears to be associated with recovery of
Argentinean economy.

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Tonnes (000)
9
8
7
6
5
4
3
2
1
0
B
o
l
i
v
i
a
0
V
e
n
e
z
u
e
l
a
0
P
u
e
r
t
o

R
i
c
o
0
A
r
g
e
n
t
i
n
a
1
M
e
x
i
c
o
1
C
a
p
e

V
e
r
d
e
1
P
e
r
u
1
F
r
a
n
c
e
1
L
u
x
e
m
b
o
u
r
g
2
G
e
r
m
a
n
y
2
C
o
l
o
m
b
i
a
3
S
e
n
e
g
a
l
3
E
c
u
a
d
o
r
4
C
h
i
l
e
5
U
S
A
8
International Cargo Capacity from Brazil by Country (dedicated cargo flights)
October 2005 versus 2008
0
0
0
2
4
6
V
e
n
e
z
u
e
l
a
1
M
e
x
i
c
o
1
F
r
a
n
c
e
7
Tonnes (000)
A
n
g
o
l
a
P
e
r
u
B
o
l
i
v
i
a
1
3
C
a
p
e

V
e
r
d
e
1
5
1
2
S
e
n
e
g
a
l
3
L
u
x
e
m
b
o
u
r
g
3
E
c
u
a
d
o
r
4
G
e
r
m
a
n
y
4
U
S
A
5
C
h
i
l
e
6
8
9
2
A
r
g
e
n
t
i
n
a
2
C
o
l
o
m
b
i
a
2005: Total 33,196 Tonnes
2008: Total 33,437 Tonnes
Source: OAG

Figure 32: International Cargo Tonnage Offered from Brazil by Country, October 2005 & 2008

Considering frequency, whilst international cargo frequencies have grown modestly, there
has been consolidation of domestic tonnage onto a significantly smaller number of flights.

Cargo Frequency - International & Domestic
Dedicated Cargo Flights Only
369
404
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200 2,125
1,756
Domestic*
International
2008
1,553
1,149
2005
Source: ANAC; Booz & Company analysis
* Domestic frequencies are halved, in order to avoid double counting

Figure 33: Cargo Frequencies, October 2005 & 2008

We only have routing information for 2008, but it is clear from it that many freighter flights
in 2008 were making multiple stops in Brazil and the United States: so some of the
consolidation in tonnage above may simply be a reflection of longer end-to-end flows.

Indications from frequency distribution are similar to capacity shifts, though there has been
an increase in frequencies to Chile, disproportionate to the slight increase in available cargo
capacity - suggesting higher value/time sensitive cargos.

Booz & Company
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32

4
5
8
9 9
13 13 13
19
22
29
33
35
53
104
0
10
20
30
40
50
60
70
80
90
100
110
Frequency
B
o
l
i
v
i
a
P
u
e
r
t
o

R
i
c
o
A
r
g
e
n
t
i
n
a
M
e
x
i
c
o
C
a
p
e

V
e
r
d
e
V
e
n
e
z
u
e
l
a
P
e
r
u
F
r
a
n
c
e
L
u
x
e
m
b
o
u
r
g
C
o
l
o
m
b
i
a
S
e
n
e
g
a
l
E
c
u
a
d
o
r
G
e
r
m
a
n
y
C
h
i
l
e
U
S
A
International Cargo Frequency from Brazil by Country (dedicated cargo flights)
4
7
9
13
16
18
22 23
32 32
37
50
69
72
0
10
20
30
40
50
60
70
80
90
100
110
E
c
u
a
d
o
r
G
e
r
m
a
n
y
C
h
i
l
e
U
S
A
P
e
r
u
F
r
a
n
c
e
M
e
x
i
c
o
A
n
g
o
l
a
V
e
n
e
z
u
e
l
a
Frequency
C
o
l
o
m
b
i
a
C
a
p
e

V
e
r
d
e
S
e
n
e
g
a
l
A
r
g
e
n
t
i
n
a
L
u
x
e
m
b
o
u
r
g
2005: Total 369
2008: Total 404
Source: OAG

Figure 34: International Cargo Frequencies from Brazil by Country, October 2005 & 2008

The table below shows the principal departure airports for dedicated cargo flights (note that
flows within Brazil are not halved in this instance). A broad range of locations, including in
the North East and North West are served. So Paulo Campinas is intended to be a
dedicated cargo airport but it is notable that, for reasons likely to include proximity to the
commercial and industrial centre of So Paulo, and opportunities for cross-dock
transhipment onto international services, Guarulhos is still favoured though having lost
business in both absolute and market share terms in the last three years. Infraero has far
reaching plans for the expansion of Campinas as South Americas cargo hub.

73
77
93
108
118
138
162
178
242
629
0
50
100
150
200
250
300
350
400
450
500
550
600
650
Frequency
B
r
a
s
i
l
i
a
B
e
l
e
m
S
a
l
v
a
d
o
r
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a
n
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s
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o

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l
e
g
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e
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r
i
t
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a

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f
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e

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s
S
a
o

P
a
u
l
o

V
i
r
a
c
o
p
o
s
Top 10 Cargo Airports by Departure Frequency (dedicated cargo flights)
2005: Total 1,818 2008: Total 1,435
Source: OAG
45 46
61
85
91
99
109
150
268
481
0
50
100
150
200
250
300
350
400
450
500
550
600
650
Frequency
S
a
l
v
a
d
o
r
F
o
r
t
a
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z
a
R
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o

d
e

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a
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o

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o

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r
a
c
o
p
o
s

Figure 35: Top Ten Cargo Airports in Brazil by Frequency, 2005 & 2008

Booz & Company
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2.5.2 Cargo Market Brazil-EU
As indicated in the preceding section, all-cargo services carried some 75 thousand tonnes of
cargo
9
, or around 38% of the total between the EU and Brazil (slightly above their 30% share
of available cargo capacity). Lufthansa Cargo is by far the individual carrier carrying the
largest share of capacity, with Air France combination services occupying the second place
ahead of VarigLogs dedicated cargo service. Likewise, TAP Air Portugal combination
services, in fourth place, carry a greater amount of cargo than the dedicated cargo services
offered by Cargolux.

All-cargo services are operated only between 5 EU markets and Brazil, including Brazils
major trading partners, Germany and the Netherlands, but excluding Portugal, which
nevertheless has the largest capacity due to its passenger services. In total, nearly 70% of
available cargo capacity is in combination services. ANAC data indicate that the proportion
of cargo carried on these services is around 62% (versus ca. 38% on all-cargo services in 2007).
The figure below indicates carriage of cargo
10
between Brazil and the EU in 2007,
highlighting those services operated as dedicated cargo flights.

6,595
3,238
6,208
6,471
8,469
9,088
12,179
13,180
14,398
14,629
19,929
20,590
22,405
39,640
654
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
T
h
i
r
d
-
c
o
u
n
t
r
y

C
a
r
r
i
e
r
s
Tonnes
V
a
r
i
g

V
i
a
c
a
o
30
C
o
n
d
o
r

F
l
u
g
d
i
n
s
t
A
i
r

E
u
r
o
p
a
B
A
A
l
i
t
a
l
i
a
N
o
v
a

V
a
r
i
g
K
L
M
L
u
f
t
h
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n
s
a
T
A
M
I
b
e
r
i
a
C
a
r
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o
l
u
x
T
A
P
V
a
r
i
g

L
o
g
i
s
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a
A
i
r

F
r
a
n
c
e
L
u
f
t
h
a
n
s
a

C
a
r
g
o
Cargo Carriage by Carrier, EU-Brazil, 2007
Source: ANAC

Figure 36: Cargo Carriage Brazil-EU, 2007

The majority of cargo is carried on scheduled services, but a significant minority travels on
non-scheduled services. The figure below indicates that distribution between 2000 2007
11
.

9
Note: Air France dedicated cargo services are not separately captured by ANAC statistics, thus the total carriage on
dedicated cargo services is likely to exceed the indicated 75,000 tonnes / 38% of the market
10
Figures are for freight only, and exclude carriage of mail.
11
Note: Eurostat and ANAC figures for cargo carriage differ, but indicate a similar overall scale.

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Cargo Carriage by Service Type, EU-Brazil
2000 - 2007
2000 2001 2002 2003 2004 2005 2006
40,217
178,275
171,874
25,991
2007
188,833
159,574
168,525
19,590
161,146
143,833
12,449
156,282
141,555
12,919
181,444
133,582
16,264
188,897
138,058
12,335
184,210
26,135
214,968
172,633
Scheduled Non-scheduled
Source: Eurostat

Figure 37: Scheduled and Non-Scheduled Cargo Carriage, EU-Brazil

In the early part of this decade, carriage of cargo on non-scheduled services accounted for a
sizeable portion of overall cargo transport. This portion had gradually declined to around
7% of the total in 2006, before climbing again in 2007 to reach 12%. Notably, a similar
increase in carriage of passengers on non-scheduled services is not apparent.

0
2
4
6
8
10
12
14
16
18
20
22
24
2000 2001 2002 2003 2004 2005 2006 2007
Passengers
Percent of Total
Cargo
Carriage on Non-scheduled Services
2000 - 2007
Source: Eurostat

Figure 38: Proportion of Carriage on Non-Scheduled Services, 2000 - 2007

Total all-cargo capacity in the market between the EU and Brazil has increased significantly
in 2007. The bankruptcy of Varig explains the decrease in Brazilian capacity. The increase in
EU capacity appears to result principally from increased belly-hold cargo capacity in
passenger planes.

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The Evolution of Carrier Shares for Cargo
Cargo Tonnage in 000s
17
200
150
50
100
1998 1999
0
2000
17
297
Brazil
EU
Other
158
122
296
152
128
286
162
100
24
9
139
151
299
4
123
137
264
5
135
126
266
4
110
138
252
3
146
136
285
3
161
107
271
4
269
71
345
2001 2002 2003 2004 2005 2006 2007
250
300
350
Source: OAG schedules; Booz & Company analysis

Figure 39: Brazil : EU Cargo Capacity Tonnage 1998-2007

The most recent capacity figures available indicate little growth in capacity between 2005
and 2008, suggesting that figures for 2007 were an anomaly rather than the beginning of a
trend. The current economic downturn could dampen volumes significantly in 2009;
however, we may infer an underlying market at present of ca. 250,000 - 300,000 tons
annually, which should expand significantly once global growth resumes.

Cargo Tonnes October 2005 October 2008
Country All-Cargo Combination All-Cargo Combination
Portugal 3,670 - 6,705
Germany 2,393 4,083 4,344 913
France 1,430 2,942 681 3,948
Spain 1,497 - 4,012
Luxembourg 2,337 2,829 -
Italy 2,763 - 1,490
United Kingdom 770 - 1,246
Netherlands 3,162 - 736
Market Share 25% 75% 29% 71%
Total (October) 6,160 18,886 7,854 19,049
Source: OAG schedules; Booz & Company analysis
Table 9: Cargo Capacity by All-Cargo and Combination Services, 2005 & 2008

2.6 INFRASTRUCTURE
2.6.1 Airports
Brazilian airports are managed by Infraero, which is headquartered in the capital Braslia.
The full title of Infraero is Empresa Brasileira de Infra-Estrutura Aeroporturia. It was
established in 1970, is organised under of the Ministry of Defence, and manages 68 airports,
which account for 97% of Brazil's air traffic. It also manages 81 air navigation stations and
32 cargo logistics terminals (see also more detailed institutional discussion in Chapter 4).
Infraero reports that it employs around 28,000 people, including subcontractors.

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The airport system is organised into eight geographical regions - North, West-Central,
North-East, North-West, South, East, South-East and East-Central.

The South-East region, which includes five airports in So Paulo state and three in Mato
Grosso do Sul, has the highest concentration of traffic. The state of So Paulo incorporates
21.5% of Brazil's population, generates 35% of gross national product and accounts for 35%
of exports. Its five airports - Guarulhos, Congonhas, Viracopos/Campinas, Campo de Marte
and So Jos dos Campos - were responsible for just over 36 million passengers in 2006, or
35% of Infraero's total. These generate almost half of Infraero's revenues. Of the eight
airports out of 67 that recorded a profit last year, three - Guarulhos, Congonhas and
Campinas - are located in So Paulo state. Only two small airports are privately operated:
Cabo Frio in Rio State and the tourist airport of Porto Seguro in Bahia.

The market size of the major international airports is indicated below, in terms of aircraft
movements and passenger throughput.

Aircraft Movements
40
200
20
180
160
140
120
100
0
SP
Campinas
32
8
24
RJ
Santos-
Dumont
72
0
71
Confins
60
4
56
SP
Congonhas
187
1
185
SP
Guarulhos
194
74
120
RJ Galeo
131
25
105
Brasilia
141
3
139
Aircraft (000)
80
60
5 1,079
RJ
Santos-
Dumont
3,629
0
3,629
Confins
5,190
5,029
SP
Congonhas
13,672
0
13,672
SP
Guarulhos
20,400
8,846
11,555
RJ Galeo
10,717
2,215
8,502
Brasilia
10,443
169
10,274
Pax (000)
8,000
6,000
4,000
22,000
160
2,000
18,000
16,000
14,000
20,000
10,000
0
SP
Campinas
1,084
12,000
Source: Infrarero
Passengers

Figure 40: Major Airport Traffic, 2008

Notwithstanding some anomalies (such as Congonhas airport reporting international
aircraft movements, but no international passengers), it is apparent that the vast majority of
aircraft movements and passengers handled there are domestic. Only in the case of
Guarulhos is a significant proportion of international traffic reported.

A general description of each of the main airports follows.
2.6.1.1 So Paulo Congonhas Airport
Congonhas is So Paulos domestic airport. It is 8km from the centre of So Paulo. It is
owned by the City, and managed by Infraero. In 2007, it was the busiest airport in Brazil in
terms of aircraft movements and the second busiest in terms of passengers, handling,
according to Infraero, 205m aircraft movements and 15m passengers.

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Congonhas has been in operation since 1936. It has two relatively short runways, at 1940m,
pending works to shorten the runway and create a runoff area, and 1435m respectively. The
growth of the city around the site means there is effectively no opportunity to expand. The
largest aircraft now operating at Congonhas are the Boeing 737-800 and the Airbus A320 .

Infraero delivered an upgrade project in 2004, but this only brought Congonhas up to a
relatively minimal standard: for example, eight jet bridges were added, but up to twenty five
aircraft can be in boarding at once meaning that the majority of access to aircraft remains
by bus, which is as inefficient as it is time-consuming. Plans to link Congonhas to the metro
system through a tunnel have not yet materialised.
2.6.1.2 So Paulo Campinas Airport
With a much longer runway and better weather conditions, Campinas International Airport
was the main international airport serving So Paulo until 1985, but its very distant location
in Campinas, 100 km (62 miles) from downtown So Paulo, with limited transport links
made it unattractive. Campinas is the second busiest Brazilian airport for cargo operations,
both domestic and international, with a range of facilities, including for live cargo.
2.6.1.3 So Paulo Guarulhos Airport
Guarulhos Airport opened in 1985, in Guarulhos, a separate city within the So Paulo
agglomeration, around twenty five kilometres from the centre of So Paulo. It now handles
all international passenger traffic to and from So Paulo, and saw almost 19m passengers
(above its nominal capacity), and 187,960 aircraft movements in 2007, according to Infraero.
Guarulhos has two runways of full length, with capacity to take types up to Boeing 747.

The Southeast Regional Administration of Infraero is undertaking a major 1 billion Reais
development at Guarulhos, which is being financed out of the national growth plan.
Infraero expects to increase the capacity by constructing a third terminal to the 17 million.
Plans also include a third runway, and an airport express rail link to the city.

Long-term plans include a fourth terminal, with a master plan forecast of traffic reaching
25m passengers by 2013.

Guarulhos is reportedly the third worst place in the world in terms of delayed flights. It is
also Brazils (and South Americas), most important cargo airport in terms of total tonnage.
2.6.1.4 Rio de Janeiro-Galeo
Rio de Janeiro-Galeo was built in 1952 on Governador Island, approximately twenty
kilometres from the city center. By 1970 the airport was Brazil's major air-hub. In that year,
its administration was assumed by Infraero. Galeo was Brazils principal international
gateway, until the opening of So Paulo-Guarulhos.

Galeo has two runways, of 4000m and 3180m respectively. The airport reportedly had
significant over capacity, driven by a controversial second terminal development for which
Infraero was criticized for prioritizing Rio over So Paulo but has recently seen rapid
traffic growth, handling over 10m passengers, and 119,890 aircraft movements in 2007,
driven by reassignment of flights from the overloaded central Rio Santos Dumont Regional
Airport to Galeo. Reported capacity is 15m at two terminals, each of 12 jetways.

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2.6.1.5 Rio de Janeiro-Santos Dumont
Santos Dumont Airport is two kilometres from central Rio. It is built on reclaimed land,
with no space for expansion. A fire closed the main terminal for six months in 1999.

Santos Dumont has the shortest runways 1320m and 1260m on which small Boeing and
Airbus aircraft regularly land.

Since late 2004, the airport has been focused on flights to Congonhas-So Paulo International
Airport and smaller regional flights. In 2007, the airport handled 3.2m passengers and 65,689
aircraft movements. The airport is reportedly at terminal capacity.

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3. ECONOMIC IMPACTS ANALYSIS
In this section, the potential economic impact of increased liberalisation of air service
agreements is estimated. For the purposes of analysis, liberalisation is taken to mean
complete opening of the market.

This chapter is organised as follows:

A general overview of the benefits of liberalisation, including an exploration of the
different aspects of liberalisation and the degree to which the aviation market can be
liberalised. This provides the background and the economic rationale behind the
calculation of the impact of liberalisation.
We next consider various specific factors which may be constraining supply or
demand including a comparison of the capacity currently utilised in the Brazil : EU
market with traffic rights granted. This gives an indication of the degree to which
the market, as it is currently organised, may be constrained. The picture presented is
of necessity conservative, and for this reason it must be complemented by analysis of
historical cases where liberalisation has occurred.
Two historical cases where liberalisation has occurred are analysed in order to
ascertain the impact on the traffic growth.
The potential for growth of the Brazil : EU market is then considered, with an
estimate made of the likely growth in the event of liberalisation.
Quantitative benefits of traffic growth are then calculated, in the form of consumer
surplus, increased employment and direct tourism expenditure due to traffic growth.
Knock-on benefits to the economies of Brazil and EU Member States, such as those
arising from increased trade and the wider effect of tourism, are not calculated.

The chapter concludes with reference to other economics benefits which, although
substantial, are beyond the scope of this report. Finally, the impact of Brazil : EU
liberalisation on the environment is considered at a high level.

The potential economic benefits estimated to result from the liberalisation of the EU- Brazil
air transport market are summarised given in overview form in the table below. These do
not, and cannot, capture all potential benefits. Furthermore, they are calculated on the basis
of one year only. As explored below, liberalisation can give rise to benefits for many years.

Estimated
benefit
Lower bound Upper bound
Traffic stimulated (passengers) 335,000 300,000 460,000
Consumer surplus () 327,000,000 298,000,000 460,000,000
Employment: jobs created
(excluding tourism)
980 870 1360
Direct tourism expenditure () 145,000,000 130,000,000 203,000,000
Table 10: Summary of Quantified Economic Benefits for First Year of Liberalisation

Booz & Company
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3.1 THE BENEFITS OF LIBERALISATION
In context of aviation, the concept of liberalisation fundamentally concerns the removal of
quantitative limitations or barriers to market access coupled with qualitative controls that
will build consumer confidence in the air transport product and encourage and protect fair
and open competition. In this section certain aspects of liberalisation are described in a
general context, providing the background to the analysis of the specifics of the Brazil : EU
market that follows.

LIBERALISATION
Regulatory convergence / compatibility
Safety Commercial law Social & Political aspects
Removal of
investment
restrictions for
carriers
Ownership
Alliances
Mergers
Liberalisation of
aviation
infrastructure
Airports
Air
Navigation
Service
Providers
Removal of
bilateral
restrictions
Routes
Designation
Capacity
Frequency
Pricing
LIBERALISATION
Regulatory convergence / compatibility
Safety Commercial law Social & Political aspects
Removal of
investment
restrictions for
carriers
Ownership
Alliances
Mergers
Liberalisation of
aviation
infrastructure
Airports
Air
Navigation
Service
Providers
Removal of
bilateral
restrictions
Routes
Designation
Capacity
Frequency
Pricing

Figure 41: Aspects of Liberalisation

These different aspects to some extent build upon each other, so the total effect may be
greater than the sum of the parts. It is not necessary for all of these aspects to be present to
gain economic benefits, but disentangling the effect of each element independent from the
whole is difficult and can only be done to a limited extent.

Considering each aspect by turn, first, there is the issue of market access, which has
historically been limited by bilateral agreements detailing restrictions on designation,
frequency, routing and capacity in 3
rd
, 4
th
and 5
th
freedom markets. The 7
th
freedom rights,
that is, the right to operate flights between two countries with no connection to the home
state of the carrier, are an extension of these rights. Restriction of these freedoms limits the
ability of airlines to fly certain routes, thus constraining supply. This applies equally to
passenger and cargo flights.

A further form of market opening to international competition would occur by granting so-
called cabotage (8
th
and 9
th
freedom) rights permitting foreign carriers to uplift traffic
moving between domestic points. This could occur by permitting uplift of domestic traffic
on a continuation flight segment of an originating international service (e.g. a KLM flight
with an itinerary Amsterdam-Rio-So Paulo) creating a so-called 8
th
freedom operation; or
by permitting fully independent lift between points within another country, so-called 9
th

freedom operations.

Booz & Company
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Price regulation has also been a feature of many agreements. Such regulation limits the
ability of airlines to set prices as a competitive tool in response to the market conditions and
thus may keep price artificially high with a dampening effect on demand.

Co-operation between, and investment in, firms is another area which can benefit from
liberalisation. Restrictions remain on alliances between airlines and on mergers and
acquisitions of airlines. Code share restrictions, which may appear necessary to prevent the
emergence of market dominance, should not limit airlines ability to co-ordinate their
schedules and offers to provide consumers with better service.

Mergers and acquisitions offer the potential for further benefits where they drive more
efficient behaviour. In such circumstances airlines may, for example, be able to generate cost
savings in operations or gain economies of scale in capital expenditure (e.g. aircraft
purchases) in a merged company, which were not possible on an individual basis; they may
also adopt new service patterns which can offer more efficient routings, for example by
replacing connecting services with direct flights.

Then there is the issue of liberalisation of foreign investment into air carriers. Removal of
constraints on foreign investment in the air transport industry allows the flow of capital
across international borders, granting airlines access to international capital and foreign
investors the ability to invest in firms with good potential for growth.

Finally, the liberalisation of airport services (e.g. the ground-handling market) allows
carriers to choose whether to use their own employees, to subcontract these services to the
airport, to an independent company, or even to another airline. This has the effect of
creating a competitive market and helping to drive down the cost to the airline. This
benefits the airlines and potentially the consumers, if the cost savings are passed onto the
passengers in the form of reduced fares.

There are further facets to infrastructure liberalisation. Increasingly, airports are being taken
out of direct government control and there are now many examples of private sector
participation in airports throughout the world. The influence of the private sector in air
navigation service provision is also becoming well-established with many providers being
corporatised and some part-privatised. This, however, lies beyond the scope of this report.

Underpinning the above aspects of liberalisation are the regulatory measures to ensure a
shared high standard of quality controls and a level playing field are maintained. This has
an important impact on the safety of the passengers and their confidence in the system, as
well as, potentially, increasing international understanding and cooperation, aiding closer
political alliance in the future. Such measures are examined in more detail in the following
chapter.

Liberalisation creates a number of economic benefits. The removal of bilateral restrictions
allows existing firms, that is, the airlines, to fly the routes and frequencies they wish, and to
charge a market-appropriate fare, as well as allowing new entrants to the market. This leads
to increased competition and thus, providing a competitive market is maintained, to
increased efficiency and lower prices. It can also lead to a service more closely matched to
customer requirements. The removal of ownership and control restrictions can further
enhance the competitiveness of the market. Consumers benefit from greater choice in terms
of routes and carriers as well as lower fares. The increased availability of routes and lower

Booz & Company
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fares stimulates demand and allows for increased tourism and international business
activity. International connectivity is enhanced, meaning that barriers to trade and foreign
direct investment are reduced. This, in turn, stimulates GDP and creates employment.

Airlines
Airlines
Consumers
Consumers
Economy
Economy
More routes
New entrants
More capacity
More choice
Lower fares
Employment created
Economy stimulated
Connectivity enhanced
Airlines
Airlines
Consumers
Consumers
Economy
Economy
More routes
New entrants
More capacity
More choice
Lower fares
Employment created
Economy stimulated
Connectivity enhanced

Figure 42: The Benefits of Liberalisation

As far as possible, these benefits are quantified, at a high level, to provide an indication of
the size of the potential gains of liberalisation.

These economic benefits calculated below result from the liberalisation of passenger
markets, but cargo markets can also gain from liberalisation. The freedom to fly the routes
and frequencies they choose, utilising 5
th
, 6
th
and 7
th
freedoms, allows firms to make the most
efficient and profitable routings. This can result both in increased supply and lower prices,
facilitating the import-export industry and stimulating the economy.

There is yet another benefit to liberalising markets with Brazil, in that the provision of more
frequent and better services between the EU and Brazil may raise Brazils profile as a as a
potential tourist destination and thus stimulate passenger demand. An example of this
occurred when Morocco liberalised its aviation market and considerably enhanced its
appeal with the increase in air services which made it more accessible (See section 3.3.2
below).
3.2 REGULATORY CONSTRAINTS IN THE EU-BRAZIL MARKET
As will be described and analysed in greater detail in Chapter 4, the bilateral agreements
between Brazil and the Member States of the EU and the operational and regulatory
arrangements resulting from them (as well as from the implementation of certain Brazilian
national laws and policies) have historically imposed a considerable range of restrictions on
market access and doing business. As a point of departure and even taking into account
some variance in the freedom of market access and competition in the individual Brazil-
Member State markets we can say that the EU-Brazil market is more constrained today
than was the case in the EU-US market prior to the new EU-US air transport agreement.
Thus under reasonably stable overall market conditions, the stimulative effect of

Booz & Company
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liberalisation should at least match or exceed that of the new agreement on the North
Atlantic.

While certain liberalising steps clearly have taken place in recent years, historic regulatory
constraints continue to exist to a greater or lesser degree in a number of areas. These affect
Brazilian at least as much as EU carriers and have included explicit restrictions on:

Route rights: Typically agreements between EU Member States and Brazil limit the
number of points to be served, especially in third countries (5
th
freedom). While
such 5
th
freedom rights may not currently enjoy great attractiveness in passenger
service, they are highly relevant for all-cargo services.
Capacity: All agreements between EU Member States and Brazil limit the number of
flights that can be offered. While the authorities have on the whole made timely
efforts to adjust supply periodically to anticipated demand, the simple existence of
such controls exerts a serious dampening effect on potential new entry (see implicit
constraints below) and tends to promote oligopolistic competition.
Pricing: While Brazilian authorities are becoming far more flexible in permitting
price competition, entrepreneurial freedom to market new products and offer
innovative pricing for travel originating in Brazil has been constrained in the past.
Network development: While agreements between EU Member States and Brazil have
mostly all been modified in recent years to include scope for code sharing rights;
these too have often been limited to specific numbers of points. In the all-cargo and
express area, Brazil-EU agreements in general also lack provision for intermodal
rights.
Restricted franchising: Considering the size of the country, the growth orientation
(especially recently) of its economy and the importance of air transport (see Chapter
2) for economic development the economy, the number of established Brazilian
scheduled service operators seems modest if not small. While the national law does
not limit the number of AOCs and airline designations, licensing practice seems to
have favoured forms of concessionary franchising. So far Brazil has not, for example,
as a general matter designated more than one combination airline in any inter-
continental market.
Ownership: While there are signs of interest in liberalising rights of foreign investors
and a few multinational arrangements have emerged, Brazilian law at present limits
foreign ownership to minority participation (see Chapter 4)
Infrastructure limitations: Brazils most important international gateway (GRU)
suffers slot constraints at present and this (as well as perhaps other factors and
considerations) has led to formal limitations on the free exercise of traffic rights.
User charges and taxes: Market growth will also be constrained by regulation if
governments increase the costs of doing business my imposing non-cost related
charges on industry. As discussed in Chapter 4, such charges have created periodic
issues in Brazil. These will tend to affect Brazilian operators disproportionately.
3.2.1 Implicit Restrictions
In addition to direct effects of the formal limitations on market growth described above, it is
important to note certain indirect effects. Most importantly, the existence of formal capacity
regulation in 3
rd
and 4
th
freedom services (see 3.2.2 below) will tend to undermine rights of

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multiple designation. That is, as long as growth is rationed, governments, when allocating
scarce capacity, will face the need to consider the needs of incumbent carriers in competition
with any possible new entrants. This will add transactional costs, narrow scope for planning
and inhibit entrepreneurial entry.
3.2.2 Comparison of Capacity Utilised with Traffic Rights Available
Considering the EU : Brazil market, we commence with an investigation of the current use of
frequencies between country pairs, and compare it against the traffic rights granted. This
gives an indication of the extent to which the carriers who are already in the market, that is,
the incumbent firms, are constrained by the bilateral air service agreements currently in
place. What it does not do is provide an indication of the potential for expansion and new
entry, since it is merely an examination of the market as it currently stands, not as it would
be if open to competition.

Bilateral air services agreements, henceforth ASAs, which, as in the case of Brazils ASAs
with EU Member States, still follow the classical Bermuda pattern of managed competition,
aim, as a policy matter, to prevent excess capacity. That is, the authorities will often agree
among themselves a minimum level of capacity which must be approvable which they can
in turn also allocate to their own carriers. Because these allocations will change periodically
they are not set forth in the main body of ASAs but rather provided for either in Annexes or
simply in Memoranda of Understanding (MOUs), which may also be treated entirely or in
part as confidential documents.

Thus it can be difficult to know the exact scope and conditions attached to capacity
approvals, all the more so because in addition to formal allocations established
government to government airlines are always entitled to apply for additional frequencies
or extra section operations on an ex-bilateral basis or, in the framework of historic
competitor cooperation practices, where these are still authorised, to borrow frequencies
from the flag carrier of the other side in the context of capacity and/or revenue sharing
arrangements.

The table below shows on the one hand the weekly frequencies that to our knowledge have
been formally negotiated between Brazil and the respective EC Member State, and, on the
other, their utilisation by EU carriers in accordance with currently published schedules.
12

Some of the capacities are generally available for any authorised city pair. Others, in the
case of Brazilian destinations, constitute additional rights that be only utilised for flights to
the North or North East of Brazil (see Market Analysis 2.3.2.1). Finally the number of flights
to So Paulo Guarulhos (GRU), have in some cases been made subject to agreed caps on the
number of flights allowed. In addition, there are specifics relating to many countries which
are given in the footnotes.

12
We use here OAG sources and have taken October, 2008 as a snapshot month. More recent data indicates a reduction in
operations which is almost certainly due to the current economic crisis, and, as such, are less useful in ascertaining market
equilibria

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Traffic Rights Capacity Utilised (EU carriers Oct08)
Country
All
Cargo
Combination
So Paulo
GRU (max)
All
Cargo
Combination
Total
So Paulo
GRU only
Austria 4
Belgium
13
7 7 2
France
14
3 28 26 2 26 14
Germany 7 21 7 15 12
Greece 2
Italy 4 16 + 5 (NE) 16 9 + 4 (NE) 9
Luxembourg 7 7 0 11
Netherlands
15
3 7 + 7 (NE) 7 7 + 1 (NE) 7
Portugal
16
35 + 39 (NE) 14 40 + 26 (NE) 14
Spain
17
7 37 + 14 (NE) 14 19 + 3 (NE) 14
UK
18
7 21 + 14 9 7
French Guiana 14 5
Note: (NE) refers to flights to the North and North East of Brazil only
Source: Analysis of relevant ASAs, MOUs and OAG schedules
Table 11: Comparison of Traffic Rights with Capacity Utilisation BR : EU (Oct08)

Considering first the passenger (combination) flights, as the table above shows, there is
variation in the uptake of capacity. While the majority of countries do not utilise all the
capacity legally available to them (two countries, Austria and Greece, do not exercise their
rights at all), three EU Member States operate at maximum agreed capacity levels
19
,
including Portugal which has the largest capacity in the Brazil : EU market. The
Netherlands has seven flights a week to So Paulo GRU, the maximum allowed, while Spain
and Portugal have 14 flights to So Paulo, again, the maximum allowed. Portuguese carriers
also appear to be operating more flights to non-North East destinations than the limits set in
their agreements. Thus, of the nine EU Member States operating flights to Brazil, three of
them are operating up to or even in excess of at least the key elements of their entitlements.
Taken together with France (which is nearly at full capacity), these markets provide a
substantial majority of the total Community lift.

This would appear to indicate that, in some cases at least, limits on capacity agreed
bilaterally may be acting as a constraint. Against this, it is noticeable that it is not the total
number of flights but the number of flights to the key point of So Paulo where the supply of

13
Brazilian Government shows 7 combination frequencies + all-cargo, but MOU of 2008 provides that only all-cargo rights
to be exercised.
14
Three all-cargo frequencies currently available, 4
th
from winter 09/10.
15
MOU indicates that the Netherlands could obtain additional combination frequencies for Rio plus the 7 for the North
East. Combination frequencies can be converted to maindeck partial cargo or all-cargo; there are 3 all-cargo only frequencies.
16
Portuguese allotment consists of: 23 basic + 32 for North and Northeast only + 7 to the North and NE on the basis of a
cooperation agreement with a Brazilian carrier + 12 additional frequencies based on Portugals acceptance of a limit of 14 on
Portugal-So Paulo plus provision of services to Brasilia. Portugal has no all-cargo rights per se, but parties can operate
their frequency allotments as either combination or all-cargo.
17
MOU contains provision that appears to authorise the carriers of both parties to operate 23 weekly combination
frequencies + 14 to points other than So Paulo + 7 all cargo. Spain also appears to enjoy rights to operate 14 to points in
the Northeast.
18
Each side gets 14 additional frequencies April 2010 provided pricing liberalisation has been agreed. NB: This appears to
be a UK condition.
19
For the snapshot period considered - October 2008

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capacity reaches agreed limits, although France, with 26 flights to Brazil a week, operates
almost as many as the 28 frequencies allowed.

As stated at the outset, this table can only provide information about the market as it stands.
A market restricted in various ways, such as the number of designated carriers and
regulated pricing, may undersupply compared with a market that is fully liberalised,
indeed, this is a truism in economic theory. The fact that the capacity limits are reached in
only some EU-Brazil markets (two of which are the largest individual EU-Brazil markets) is
not evidence that there are no constraints on capacity in other EU-Brazil markets such
reasoning is highly questionable and must be emphatically challenged.

In the majority of cases, there are two or three carriers operating in the markets. Only Brazil
: Italy has four carriers, while Brazil : Portugal, the biggest market, has only one TAP Air
Portugal
20
. Under normal economic assumptions, a monopoly results in under-supply and
higher prices, compared with the competitive market. Similarly, an oligopoly of two or
three firms will under-supply and charge more highly than a competitive market
21
.

Capacity Constraints and Considerations of Methodology

Thus, even where the traffic rights negotiated do not appear to be constraining supply,
market liberalisation can result in price decreases and capacity increases, with all the
attendant benefits to the consumer and the economy.

Nevertheless, it is reasonable to posit that where quantitative agreements are actively
restricting supply, the market is more suppressed than where they are not, ceteris paribus,
and therefore such markets may experience greater growth upon liberalisation than the
Brazil : EU market as a whole.

Our estimation of benefits takes account of this by running a scenario where quantitatively
suppressed markets grow at a higher rate compared with the other markets, and this
estimate is bracketed by a lower bound scenario where all markets grow at the lower rate,
and an upper bound scenario, where all markets grow at the higher rate
22
. For the purpose
of analysis, markets where capacity is supplied up to the agreed limits are assumed to be
subject to suppressed capacity supply, although, as explored above all markets can be
thought of being restricted by the air service agreements currently in place.

Considerations with respect to the EU-Brazil Cargo Market

Cargo traffic rights are a more complex matter since, unlike passenger traffic which can
broadly assumed to consist of symmetric return flights, cargo itineraries, in all cases in the

20
On which Brazilian carrier TAM code-shares
21
The Betrand model of oligopolistic competition contends that firms will charge same price and supply the same quantity as
firms in a perfectly competitive market. However, this model depends crucially on an assumption of free movement of price,
which, given the tariff regulations in place in the Brazil : EU market, is not an appropriate assumption for the market as it
stands. Cournot competition, another model of oligopolistic competition which assumes no quantity restrictions, may be a
better model in cases where the capacity restrictions are not cutting. It results in a higher price and lower output compared
with perfect competition.
22
Note: these upper and lower bounds do not represent the maximum and minimum benefits possible, they simply represent
a view of a reasonable range of expected benefits.

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Brazil : EU market, operate multi-stop roundtrips. Such itineraries utilise 5
th
and, in some
cases may utilise 7
th
and 8
th
freedom rights with multiple countries.

The figure below illustrates the major routes flown by freighter-only services
23
:

AIR FRANCE: CDG GRU EZE; CDG GRU MVD LUFTHANSA: FRA DKR VCP EZE; FRA VCP UIO
CARGOB: BRU DKR VCP UIO CARGOLUX: LUX VCP CWB LTX BOG; VCP CWB PNZ LUX
All Cargo Routes: EU Carriers
Sources: OAG Schedules; Great Circle Mapper
VARIG LOGISTICA: FRA SID VCP CWB GRU; GRU DKR FRA LAN CARGO: FRA VCP SCL
All Cargo Routes: South American Carriers

Figure 43: Major All Cargo Routes Brazil : EU

All the all-cargo flights take in other South American countries and, in some cases, Africa as
well. To obtain a fuller picture, the routes of the major South American carriers operating
Brazil : EU, Varig Logistica and Lan Cargo, are also given. It is worth noting that while the
majority of all-cargo flights are routed through So Paulos cargo airport, Viracopos (VCP),
approximately a third of freighter-only Brazil : EU frequencies route through So Paulos
main airport, Guarulhos (GRU), which implies that the airport is not running at full capacity
in as far as air transport structure is concerned.

As Table 11 detailed above, both Germany (Lufthansa) and Luxembourg (Cargolux) have
cargo flights up to the limit negotiated, with possibly by obtaining ex-bilateral permission
for extra sections or to use its combination rights to fly in excess of its cargo-only limit. As
explored below in section 4.3.2.2, some cargo carriers have apparently had difficulties in
negotiating their air service agreements, with restrictions being placed on their 5
th
freedom

23
Routes which take in only subsection of the stops displayed are not shown for ease of viewing

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rights. This may be reasonably described as sub-optimal, and likely to have a depressing
effect on the cargo market.

Having duly considered the current situation in the Brazil : EU market, we now consider
two cases where market liberalisation has occurred, allowing new entrants into the market
and liberalising pricing, and investigate the effect such normalisation of the air transport
industry has on traffic growth.
3.3 EXPERIENCE WITH COMMUNITY NEGOTIATIONS TO LIBERALISE 3RD
COUNTRY MARKETS
In order estimate the effect of liberalisation on air passenger growth, we now consider other
cases where the market has been liberalised. We consider here two case studies where air
transport industry market access between the European Union as an integrated market and
a third country has now been significantly liberalised and standardised through adopting
EU-wide provisions aimed at establishing harmonisation of competitive conditions as well
as by removing major quantitative barriers to market access. These are:

The Open Skies with the United States
The Euro-Mediterranean agreement with Morocco

The EU : US air transport market was well-developed even prior to liberalisation, and
represents a huge market of approximately 50 million passengers per annum. It is a long-
haul market with the vast majority of passengers travelling on scheduled flights. The EU :
Morocco market, by contrast, was much smaller market, with a large percentage of
passengers travelling on non-scheduled services. Both of these case studies, we believe,
offer insights on the potential for growth of the Brazil : EU market.

The results of the traffic analysis and market impact are considered briefly in this section,
with more detailed information provided in Appendix 1.
3.3.1 The Open Aviation Area with the United States
In 1992 an Open Skies Agreement was signed between the United States and the
Netherlands, this was swiftly followed by further agreements in 1995 with several European
countries: five EC members Austria, Belgium, Denmark, Finland, and Sweden, as well as
Switzerland, Iceland, Norway and Sweden. In subsequent years, from 1996-2001, Germany,
Italy, Portugal, Poland and France also signed up to Open Skies.

The two major new elements in these agreement which liberalised the market were:

1) the opening up of the US market with unrestricted 3
rd
, 4
th
, 5
th
, and 6
th
freedom rights
granted; and
2) the acceptance of cooperation agreements between the host country carrier(s) and a
US carrier if all other US carriers enjoyed free access rights and alliance arrangements
seemed in the public interest.
In addition, there was further liberalisation with respect to charters and especially all-cargo
and air express markets (for which the new US model now also offered exchange of 7
th

Freedom rights as well as providing significant network liberalisation through intermodal

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rights that facilitated feeder services by permitting airlines to participate, for example, in
cross-border trucking).

In 2007, an Open Skies agreement was initialled between the EU and US, thus liberalising
agreements between the US and the remaining EU Member States.

Considering the EU-US market as a whole, there is a strong overall trend of market growth,
reaching an initial peak of 48 million in 2000, followed by a contraction of the market from
2001 until 2003, and then renewed growth, with the number of passengers in 2007 reaching a
new high of 51 million. This pattern of growth and contraction is pro-cyclical, closely
tracking US GDP, with events such as the terrorist attacks of 9/11 and the SARS scare
augmenting this.

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Passengers (millions)
0
Total
Total scheduled
Total Non-scheduled
10
40
50
25
35
20
55
15
30
45
5
48
51
Passengers flying between EU and US
Source: Eurostat, Booz & Co Analysis

Figure 44: Total Air Passengers between the EU and US

As the graph illustrates, the vast majority of passengers travel on scheduled flights, the
market share of non-scheduled falling from 9% in 1993 to just 2% in 2007. In contrast to the
Morocco case study given below, it is not sufficient to consider only the total passenger
traffic, since European countries liberalised their air services agreements with the US at
different times.

In order to consider the impact of liberalisation, EU Member States have been divided into
three groups depending on when they came to make Open Skies agreements with the US:

1992-95 Group comprising the Netherlands, Austria, Belgium, Denmark, Finland,
and Sweden;
1996-2001 Group comprising Germany, Italy, Portugal, and France;
2007 Group/Others comprising all the remaining EU Member States (including
states joining in 2004), of which the principal one by far in terms of significant EU:US
traffic was the United Kingdom.

The traffic development of these groups of countries is shown in the graph below.

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1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
8
22
22.8 24
4
6
1996-2001 Group
2007 Group
0
10
12
14
16
18
2
20
1992-95 Group
17.7
7.2
23.4
19.6
7.7

Figure 45: Passengers Travelling between the EU and US by Country Group

All groups of countries experienced a similar overall pattern of growth, with the market
growing to a peak in 2000, followed by a contraction, followed by renewed growth and a
new peak in passenger traffic obtained in 2007. This indicates that they were all affected by
the turbulent political and economic environment of the early twenty-first century.

However, if market growth is considered, another pattern emerges.

2007
149
Growth
1993 1996 1995 1994
159
193
2006
0
2004 2003 2002 2001 2000
146
144
182
1999 1998 1997
1996-2001 Group
2007 Group
100
150
200
1992-95 Group
2005
Growth of Air Services between EU and US
1995 = 100

Figure 46: Frequency Growth between the EU and US by Country Group

As the above graph clearly shows, the countries that signed Open Skies agreements with the
US in 1992 and 1995 experienced greater growth in the years immediately following
liberalisation. This was despite having a lower rate of growth prior to liberalisation. This is
strong evidence that liberalisation enhances growth. Overall, considering the period from
1995 to 2007, the group of countries that experienced greatest growth were those that
liberalised the earliest (the 1992-95 Group).

The air traffic data analysed above suggest that Open Skies agreements have a short term
effect on the growth rate, increasing it in the years immediately after the agreement is
signed. This is consistent with the theory that they release extra capacity within the market.
Once the market has adjusted to the new regulations, no further effect on growth is

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observable, and it is the behaviour of the individual countries which once again becomes
key.

This effect was observable both for the 1992-95 Group, and for the 1996-2001 Group.
Unfortunately, it is too early to draw any firm conclusions about the impact of the new first
stage EU-US agreement. The agreement only could take serious economic effect in spring
2008, when major designation restrictions were lifted at London airports. The onslaught of
the current economic crisis, which has disrupted growth patterns worldwide will also mean
that the first year of the agreement cannot produce expected growth effects.

The prior analysis indicated a link between traffic growth and liberalisation. We now wish
to take this a step further and quantify the effect that Open Skies has on traffic growth, as
well as test the statistical significance of the link between the two.
As with all statistical analysis, it is correlation not causation that is measured. No statistical
technique, however sophisticated, could prove that an event, such as Open Skies
agreements, is the cause of change in an observed variable, such as traffic growth. What can
be done is to measure the correlation between them and test whether this correlation could
be due to chance alone.

In order to test the significance and magnitude of the effect of liberalisation, a series of
multivariate regression analyses were performed. As in the previous case study, the effect of
liberalisation was modelled as a dummy variable.

The analysis above suggested that Open Skies had a positive effect on traffic growth rates
over the five year period following the signing of the agreements. It further revealed that
countries respond to liberalisation at different rates. Therefore, the data has been analysed
at an aggregate level, and the effect of Open Skies has been modelled as having a duration of
five years (this period was varied from 3-6 years, but the best fit was obtained with 5 years).

In a previous study
24
, the 1992-95 group of countries were analysed in aggregate, alongside
other European countries, Switzerland, Iceland, Norway and Sweden, which also liberalised
their agreements with the US in the same year. The regression yielded a positive coefficient
for the Open Skies effect as a 6.4% increase in growth (with an upper limit of 12.7%). This
implies that the rate of traffic growth was improved by 6.4 percentage points over the period
that liberalisation took effect. This result was significant at the 95% confidence level.

We applied a similar methodology to the updated data for the 1996-2001 group. As we had
seen above, this group of countries performed better than other European countries in the
years following liberalisation. However, as noted, the years 2001 to 2003 were a period of
contraction for air passenger traffic, so it is unsurprising that regression analysis revealed no
significant impact due to Open Skies.

The data suggest that Open Skies agreements have a significant effect on traffic growth rates
in the short term, lasting approximately five years, as extra capacity is released within the
market. In the long term the discernable effect decreases, and it is the policies of the

24
The Economic Impacts of an Open Aviation Area between the EU and US, Booz Allen Hamilton, 2007.

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individual countries and the strategies of individual airlines which once again shape the
markets development.
3.3.2 The Euro-Mediterranean Agreement with Morocco
The Commission negotiated a Euro-Mediterranean air transport agreement with Morocco,
on the basis of a mandate agreed on 10 December 2004. The negotiations were launched in
May 2005 and, the Agreement was initialled on 14 December 2005. After completion of
internal procedures on both sides, the Agreement was signed on 12th December 2006. Thus,
the formal process took place over two years, giving the aviation market ample time to
anticipate and react to the changes. The chart below shows passenger traffic development
between 1993 and 2007.

0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Total Non-scheduled
Total scheduled
Total
Passengers
2007*
Passengers flying between EU and Morocco
EU:Morocco
agreement
initialled

Figure 47: Annual Passengers Flying between EU and Morocco, 1993-2007

It is noticeable that passenger traffic growth has accelerated from 2004 onwards. This
growth is exclusively in scheduled services, which have grown 144% since 2004. Although
the Agreement was not applied until its signature in December 2006, increases in airline
capacity and passenger carriage are likely to have been influenced by an anticipatory effect
clearly visible from 2005 onwards.

0
50
100
150
200
2006 2005 2004 2003 2002 2001 2000
Total Non-scheduled
Total scheduled
Total
1999 2007* 1997 1996 1995 1994 1993
Growth
1998
Growth of Air Services between EU and Morocco
2005 = 100
EU:Morocco
agreement
initialled

Figure 48: Growth in Passenger Numbers Flying between EU and Morocco, 1993-2007

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Considering the growth in air passenger traffic, from 1994 to 2004 the compound annual
growth rate (CAGR) stood at 5.6% (6.7% for scheduled and 4.2% for non-scheduled
services). From 2005 to 2007, this has risen to a massive 20% annual growth. In the case of
scheduled services, annual growth stood at 35%.

If the growth in 2007, after the agreement came into force, is compared with the growth rate
of the previous year, the growth rate was 3.4% higher post-agreement. If the growth in 2007
is compared with the growth in the five years immediately prior to it, the growth rate was
over 10% higher. However, this in itself is not sufficient to equate the increased growth with
liberalisation for three major reasons:

The increased growth may have been a continuation of a trend of increasing growth;
Liberalisation did not occur overnight but was anticipated for at least two years
prior to the document being signed;
The increased growth may have been due to other factors rather than liberalisation.

With regard to the last point, it is perhaps worth noting that liberalisation in and of itself
cannot generate increased growth, it can only enable growth to take place, other factors
(supply and demand side) must also be present; when we talk about liberalisation causing
traffic growth, what is actually meant is that a more liberal market allows and enables
growth to occur, and this is one reason why the effect of liberalisation varies depending
upon the specific market.

Prior to the agreement of the mandate, scheduled service routes between Europe and
Morocco were dominated by the traditional flag carriers.
25
In only three cases ( Netherlands,
Germany and Spain) were other scheduled operators flying on routes between Morocco and
European countries than just the corresponding traditional flag carriers. Even in France,
which had the most routes, only two scheduled carriers operated: Air France and Royal Air
Maroc
26
.

To quantify the magnitude of the impact the agreement had on traffic growth, a series of
multivariate regressions were performed. In order to take account of any anticipatory
reaction to the signing of the mandate, analysis was performed with the effect of the
agreement variously modelled as starting in 2005 (after the mandate was agreed at the end
of 2004), 2006 (after the agreement was initialled) and in 2007 (after the agreement was
signed).

Liberalisation was found to have a significant effect on the growth of scheduled traffic, from
26% to 33%. These figures varied depending on when liberalisation was modelled to have
commenced (2005 in the first case, and 2007 in the second). These results are significant at a
99% confidence interval. This provides strong evidence to support the hypothesis
liberalisation has a large and significant effect on the growth on scheduled air traffic.

The effect of liberalisation on total air traffic was still discernable, but somewhat more
muted than in the case of scheduled services. With the agreement modelled as commencing

25
In contrast, the non-scheduled market provided significant capacity, but often packaged it with accommodation as a
holiday.
26
A Study of the Aviation Sector in Morocco, prepared for DG-TREN by Booz Allen Hamilton, July 2004

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in 2005 (in terms of its influence on the aviation market), it was found to have an effect on
the growth rate of 12%. This result was significant at a 95% confidence interval.

Regression analyses were also performed modelling the effect of liberalisation on total air
traffic as commencing in 2006 and 2007. These also indicated a positive effect on the growth
rate (8% and 11% respectively) but there were large standard errors attached to these results,
which means that they cannot be regarded as statistically significant.

This case study provides strong evidence to support the hypothesis that air transport
liberalisation results in an increase in scheduled services, with a statistically significant effect
on the growth rate which, at its lowest, is over 20%, and could be more than double that.

The effect on total air traffic is less pronounced, supporting the argument that liberalisation
diverts passengers from non-scheduled to scheduled services. However, there remains
strong evidence that liberalisation has increased absolute growth in passenger air traffic in
the region of 10% per annum.
3.4 TRAFFIC GROWTH ANTICIPATION AS RELATED TO BRAZIL
3.4.1 Background
As stated above, a market constrained by regulatory limits on output such as those subject
to restrictive bilaterals will tend to result in an undersupply if the limit imposed by the
regulation is less than the optimum level of output for the market. Lower output implies
higher prices; this imposes a cost on society in the form of a deadweight loss.

A process of liberalisation which includes loosening or removing constraints will, in general,
be expected to result in an increased supply with an accompanying effect downward
pressure on prices. This market adjustment towards the new level of prices and supply may
not be immediate, but it is reasonable to assume that after a period of change a new
equilibrium will be reached.

In addition, where there is a constraint on the flow of capital, the cost of capital is likely to be
higher, and this may be an impediment to growth for firms that wish to expand. This has
the effect of reducing capacity available for consumers, or, if the airline accepts a higher cost
of capital, of increasing the fare offered, and therefore, potentially, making that carrier less
competitive in the international market. Thus, the removal of ownership and control
restriction is another factor to be considered when liberalising the market.

We have already considered the theoretical case for liberalisation, as well as two case
studies, the Euro Mediterranean Aviation Agreement with Morocco, and successive Open
Skies agreements with the US, where economic benefits occurred in practice. We have also
considered the current uptake of capacity rights in the Brazil : EU market. On this basis, and
with reference to the market analysis in the previous chapter, we will now consider the
particularities of the Brazil : EU market and its prospects for growth in the event of
liberalisation.

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3.4.2 Brazils strategic location
As the graph below illustrates, Brazil has a strategic location that makes it a natural choice to
be a South American hub, particularly for flights coming in from regions lying to the east
and north-east, principally Africa, the Middle East and Europe.

Source: Great Circle Mapper, Booz & Co analysis

Figure 49: Range of Medium Haul Flights to/from Brazil (<3,000km)

Thus, the removal of capacity constraints on 5
th
(and 6
th
) freedoms is a key element in
enabling carriers to take advantage of Brazils potential to become a hub. Allied to this, the
development of regional airports is essential, in order to handle the increase in traffic, as
well as to ensure easy medium haul access to the rest of the continent. This is the case, not
only for passenger services, but also especially for cargo carriers which operate multi-stop
routes. Furthermore, as highlighted in Section 2.5 above, US cargo operators are taking
advantage of the recent liberalised US-Brazil bilateral to expand services. If they capture
some of the Brazil : EU market, there may be negative consequences for EU cargo carriers as
well as for the environment.

In this connection, it is worth considering the importance of First Mover Advantage, the
concept that the first mover into the market gains a strategic advantage over later entrants.
This concept can be applied both to EU cargo carriers wishing to establish a more systematic
cement their position in South America, and to the Brazilian aviation sector, which is in a
prime position, geographically, to act as a base from which EU : South American freight is
forwarded on to the rest of South America or, conversely to collect and distribute outbound
loadings for Europe (and then utilising Europes excellent internal distribution systems) to
provide rapid, reliable end-to-end service.
3.4.3 Prospects for Growth
Returning to the two case studies, and considering what they can tell us about potential for
growth in the EU : Brazil market, it is worth noting that the differences in benefits obtained
in liberalised markets are due to a number of factors including:

Motivation for travel leisure travel is more price sensitive, and therefore more
responsive to the reduction in fares enabled by liberalisation
Under-exploited potential for development as a destination

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Journey length a short haul market is more conducive to a low cost carrier model
Economic climate most travel is pro-cyclical and closely correlated to the GDP of
the relevant countries
Degree of liberalisation negotiated

Brazil is a long haul market for the EU, and in this respect resembles the EU : US market.
However, it has a strong tourist market, with 66% of visitors travelling for leisure
purposes
27
, and is relatively under-developed, and in these respects may be more
comparable to the EU : Morocco market.

Taking account of the current uptake of capacity rights, we have modelled the markets
where output is supplied at its agreed capacity limit as likely to experience growth at a
higher rate upon liberalisation, compared with markets where capacity limits are not
reached and, as such, a lower rate of growth is expected
28
. In order to temper this rather
narrow definition of restricted market, we use the two case studies to provide range: an
upper bound based upon the Morocco experience, and a more conservative lower bound
based upon the EU : US experience to date. Note that these rates of growth assume full
liberalisation. If the agreement reached with Brazil was less open, it is likely that a lower
level of benefits will be obtained. The benefits of liberalising the cargo market have not been
calculated separately, but would also be expected to grow, with benefits for trade and thus
for the economy as a whole.

Finally, it is essential to mention the current global economic downturn. Under such
conditions, the estimates of growth may seem unduly optimistic. However, even if such
growth is not immediately realised, liberalisation should facilitate growth in the medium to
long term. It is also important to consider that economic performance can also be less bad
under some conditions than under others. That is, particularly in a tough economic climate,
consumers will be very price-sensitive and will curtail their consumption of discretionary
purchases of goods and services less when these seem affordable.

For the purposes of this report, we have modelled the effect of liberalisation as if it were to
commence in 2010. However, it is our considered opinion that the benefits of liberalisation
on this scale are unlikely to be realised that early, particularly given the general state of the
global economy.

On the basis of the comparable cases, a simple model has been constructed to calculate the
potential passenger traffic growth, based upon current traffic, the expected growth rate, and
likely impact of liberalisation derived from the case studies considered:

( ) tionFactor Liberalisa owthRate ExpectedGr Traffic Traffic
y y
+ + =
+
1
1

For the sake of this projection, the additional growth is applied in 2010
29
, as an illustrative
timeframe for deregulation. On this basis, traffic growth is estimated at 335,000 extra
passengers, with an estimated range of 300,000 to 460,000 extra passengers in the Brazil - EU

27
Leisure travellers in 2007, Euromonitor International
28
Note: it is not necessarily the case that these markets will grow faster, the outcome will depend on a variety of factors,
including, for example, the strategic decisions and interaction of the many firms and possible new entrants within the Brazil
: EU market.
29
Boeing passenger forecasts are used to estimate the base rate traffic in 2010

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market in the first effective year of liberalisation. In the absence of negative shocks to the
market, this may be expected to continue year on year for a number of years, as more
airlines take up the opportunity to supply this market.
3.5 CALCULATION OF BENEFITS ARISING FROM GROWTH
3.5.1 Consumer Benefits
In order to calculate the benefits to the consumer, the concept of consumer surplus will be
used, which assesses the benefit to consumers in terms of lower fares. Consumer surplus
does not fully capture all the benefits to consumers, but it is a standard economic calculation
which measures the benefits arising from the effect of price and demand changes. In
addition to consumer surplus, depending on the state of the market and the strategic
decisions of the airlines, quality of the service may improve. More direct flights may
decrease journey times and increase convenience for many travellers. The value to
consumers of these quality and convenience factors is clearly positive, but has not been
quantified.

Liberalisation of a market, with associated capacity increase, will tend to result in a decrease
of prices. This is for two main reasons. First, increased capacity and competition mean that
fares are priced at nearer their competitive market level. Second, increased competition may
mean that more efficient carriers take market share from less efficient carriers, alongside the
entrance of lower cost models of operating, both of which can result in lower fares.

The most direct method of assessing consumer surplus would be to consider past cases
where liberalisation has occurred and the effect this has on fares. However, reliable data is
difficult to find, and the pattern is complicated by the pro-cyclical nature of air fares, which
often fall in a recession in order to stimulate the dampened demand; this means that time
series analysis of fare data can be misleading. Therefore, in line with other studies, this
paper imputes the change in fares from the growth in traffic already calculated.

In the calculation, we have distinguished between the benefit accruing to existing
passengers, i.e. passengers who would have travelled in the absence of increased capacity,
and new passengers, who would not have travelled otherwise. All passengers stand to
benefit from reduced fares. Full details of the methodology are provided in Appendix 2.

Consumer surplus () Estimated values Lower bound Upper bound
Previous passengers
322,000,000 286,000,000 430,000,000
New passengers
11,000,000 8,000,000 15,000,000
Total
327,000,000 298,000,000 460,000,000
Table 12: Consumer Surplus

Thus, liberalisation is estimated to produce 322 million euros consumer surplus, with a
lower bound of 286 and an upper bound 430 million euros. The majority of this consumer
surplus accrues to existing passengers who benefit from reduced fares.

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In our analysis, consumer surplus is calculated on the basis of similar operational models
being in use. Consumer surplus calculations are most meaningful when the quality remains
constant and the price falls.
3.5.2 Employment
Additional air traffic not only brings a consumer surplus but also requires additional
resources to handle the increases. This includes staff at airports as well as, due to the
multiplier effect of aviation, in supporting industries.

Commercial air transport generates significant economic impacts for national and regional
economies. Air transport is essential for leisure and business travellers, as well as for
shippers of high-value, time-sensitive cargo. Air service providers including airlines, airport
operators and related service firms directly create a high level of jobs from both air and
ground activities. The direct transport-related impacts generate additional induced
employment impacts as industry revenues and employee earnings are used to purchase
goods and services from other industries.

Employment impact can be considered in relation to the following categories:

Direct relating to the increase in jobs on or near the airports or directly related to
the provision of aviation services such as airlines, ground handling companies etc.
Demand stimulation will further stimulate supporting services (e.g. airport
operations, ground transportation, concessions, freight forwarders, air logistics)
Indirect relating to expenditure on goods and services not directly in the aviation
field including spend on travel agents, hotels and retail at airports etc, as well as
purchases from companies within the supply chain
Induced relating to expenditure of direct and indirect employment incomes (e.g.
purchases made by airport employees)
Catalytic deriving from economic activity stimulated by the increased efficiency of
and improved access to air transportation. Existing analyses indicate that the
catalytic impact of airports on the wider economy is significant
30
.

This study calculates potential employment impacts in the first three of these categories.

The impact of current and projected levels of passenger traffic associated with increased
liberalisation depends on the mix of airlines that handle any stimulated traffic, the
passenger-to-employee ratio representing airline efficiency, and the geographic distribution
of impacts between Brazil and the EU. Using statistics on employment within airports and
airlines in Brazil and the EU, the number of jobs per passenger can be estimated.

Assuming rates of productivity remain constant, and that market shares of Brazilian airlines
relative to EU airlines remain the same, the estimated direct and indirect/induced
employment impact is shown in the following table. As before, these are based on benefits
being realised in 2010; it is likely that the market will not respond that quickly, but when it
does it should stimulate employment as below for a number of years.

30
One study indicates that the impact of aviation growth equated to approximately 3% of the trend increase in GDP The
contribution of the aviation industry to the UK economy, Oxford Economic Forecasting, 1999

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Estimated jobs Lower bound Upper bound
Direct jobs 310 280 440
Indirect jobs 660 590 930
Total jobs
31
980 870 1360
Table 13: Employment Impacts (exc. Tourism) in the First Year of Liberalisation

These figures do not include employment stimulated in business sectors, due to the
increased connectivity that facilitates trade between Brazil and the EU. Neither does it
include new jobs created in the tourist industry, with the exception of those employed
within immediate environs of the airport. As such, these figures represent only a small
fraction of the employment which could be created should passenger demand increase post-
liberalisation.
3.5.3 Tourism
In this section, the word tourists is taken in its broadest definition to encompass travellers
arriving for business, visiting friends and relatives, as well as those on vacation.

Tourism growth does not automatically result from liberalisation of air transport. However,
cheaper fares and more origins and destinations served, combined with good marketing and
a good reputation, may encourage more people to choose Brazil as a destination. This is also
true in the reverse, with Brazilians more likely to choose the EU as a holiday destination,
with all the associated benefits to EU countries.

According to the Brazilian Tourist Board, Embratur, European tourists are high value: the
EU accounts for around 33% of all international tourists which puts it on a par with South
America but EU tourists stay longer and spend more, so are of greater value to the
Brazilian economy.

As Brazils economy grows in global importance and per capita wealth of this population
increases (and especially in light of cultural ties to Europe) a rising level of travel to the EU
from Brazil may also be confidently anticipated. See Section 2.2.2 in the Market Analysis for
more details.

Using Eurostat figures on expenditure, the direct expenditure due to the increased number
of visitors is estimated below:

Brazil EU Total
Lower
bound total
Upper
bound total
Direct income from
tourism spend ()
86,000,000 59,000,000 145,000,000 130,000,000 203,000,000
Table 14: Direct Tourism Spend

This figure represents direct spend only, i.e. the money that the visitor spends in-country on
hotels and restaurants etc, and is a fraction of the total economic impact of tourism.

31
Note: Due to rounding, totals may differ from the sum of the individual components.

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Following a similar logic to that elucidated in the Employment section above, there will also
be indirect effects, as suppliers of the tourist industry are paid, and induced effects, as the
additional people who are employed in the industry spend their wages in a wide range of
sectors. Such effects will further stimulate the economy, and are likely to be several degrees
of magnitude larger than the number calculated above. In addition, business visitors would
have a much greater effect on the economy than simply the money they spend when in the
country.
3.6 CONCLUSION ON ECONOMIC GROWTH
Where possible, the economic impact of air transport liberalisation has been quantified, in
terms of increased passengers, consumer surplus, employment and direct tourism income.

Arguably, the most important benefits to this region are less quantifiable. The application of
a shared regulatory and safety standard will allow assist in the development of high
standards for its aviation transport system, as explored in Chapter 4. In addition, the
economic impact of confidence building through international agreements between the EU
and Brazil should not be underestimated.
3.7 ENVIRONMENTAL IMPACT
While there have been enormous social and economic benefits from the growth stimulated
by air transport, there is also growing awareness of the environmental impact of aviation.
Assessment of this in any detail is beyond the scope of the report.

Aircraft emit a number of gases and particles into the atmosphere which may have an effect
on climate change. These emissions include carbon dioxide, nitrogen oxides, water vapour
and soot and sulphate particles. In the EU, it is estimated that approximately 3% of carbon
dioxide emissions are due directly to aviation,
32
furthermore, analysis suggests that due to
the altitude at which these pollutants are emitted, their global warming impact may be 3.5
times greater than if they were emitted at ground level.

As traffic grows, emissions are forecast to rise substantially over the coming years. More
efficient aeroplanes and more direct routing may help alleviate this to some degree. For
example, subsonic aircraft being produced today are about 70% more fuel efficient per
passenger-km than 40 years ago.
33
Moreover, it is estimated that improvements in air traffic
management (ATM) and other operational procedures could reduce aviation fuel burn by
between 8 and 18%.
34

The air passenger traffic between EU and Brazil forms approximately 1% of the world
market by available seat kilometres. The most energy-intensive segments of the flight are
take off and landing, therefore, to the extent to which liberalisation allows passengers to fly
direct rather than indirect, it will decrease the emissions produced. Thus, any increase in
emissions due to greater passenger numbers should be weighed against this positive impact.
In addition, while liberalisation could, in the medium term, increase traffic by up to 10%, in
practice this is likely to come in part through increased efficiency in the use of aircraft, since

32
Europa
33
Aviation and the Global Atmosphere, Intergovernmental Panel on Climate Change (IPCC)
34
Ibid.

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liberalised markets generally achieve a higher load factor as a result of competition. In
addition, a more buoyant air transport market will be in a better position to buy new fleet
which are substantially more fuel efficient, and look set to become even more so in the
future; fuel efficiency has improved by 20% over the last ten years, and the continued high
price of fuel has made this issue even more important to aircraft manufacturer.

Thus, the increase in air traffic enabled by liberalisation, if it occurs as a result of increased
competition, is likely to coincide with utilisation of newer aircraft, more efficient routing and
higher load factors, and thus could have a negligible impact on emissions. Under current
operating conditions, the increased traffic could increase carbon dioxide emissions by up to
600 million kilograms, but against this, increased efficiencies should reduce emissions, so
that total effect may be negligible.

It is important to weigh up the total costs and benefits of aviation, including environmental,
social and economic effects. In addition, there is a political dimension which cannot be
totally ignored. Closer relationships make it more, not less, likely that the EU and Brazil will
be able to cooperate on issues such as environmental standards and inclusion in the ETS.

In the case of Brazil, there are additional concerns of the impact that increased passenger
traffic and tourism may have on the natural environment. Brazil has the worlds largest
reserves of tropical forest, freshwater and of bio-diversity. Balancing concern for the
environment against the needs of a developing economy has been a contentious political
issue in Brazil for many decades. The effect of increased tourism is ambivalent on the one
hand, the resources required by an influx of visitors can encourage irresponsible
development, which can be particularly damaging where the environment is fragile. On the
other hand, the income generated by visits to admire Brazils rich natural environment puts
a real value on its preservation, as well as providing funds which can be used to protect
against environmental damage. Government policy, as well as the actions of national and
international agencies have a key part to play in ensuring that any such development is
sustainable and supportive of, rather than destructive to, the natural environment.

Section 4.4.9 examines the regulatory issues with respect to the environment.

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4. AEROPOLITICAL AND REGULATORY ANALYSIS
4.1 OVERVIEW OF BRAZILIAN AIR TRANSPORT POLICY AND REGULATION
From the early days of aviation, air transport services have played a key role in the Brazilian
economy because of the countrys size and geography. As Brazils interests have expanded,
both regionally and globally, this importance has significantly increased and is reflected in
the high level attention given by its policymakers to air transport modernisation.

As will be discussed below, over the years Brazil has created a systematic and extensive
institutional structure to develop or guide the air transport sector and its performance
internationally as well as domestically. Policy, as most recently reflected in the Decreto
6780/2009 signed by President Lula da Silva,
35
establishes responsibilities for a range of
bodies as coordinated and led by the Council for Civil Aviation (CONAC) supported by the
newly organised Secretariat for Civil Aviation (SAC) under the overall guidance of the
Ministry of Defence. This structure reflects a perception that air transport remains a
strategic industry of importance for national security as well as being an engine for
economic development.

Notwithstanding this high level federal focus, Brazilian policy especially in its day-to day
execution does and must reflect the diverse pressures of a large country with competing
sub-regional and local as well as institutional interests. As will be discussed below,
international airlines doing business in Brazil must deal with a range of regulatory bodies
and political influences which can impose complex and difficult demands.

With respect to international air transport policy and regulation, Brazilian policy cannot be
put into any stereotype. That is, while the government is clearly interested in having a
sound and strong national industry and has historically supported certain typical forms of
industrial policy in the air transport field, it has also been sensitive to its social role and
acted to regulate on behalf of users and consumers.

The Brazilian government has also shown sensitivity to the importance of air transport in
international relations and has acted as a leader both in the South American region and
globally (as a permanent Member of the ICAO Council). In addition to its relationships in
the immediate region, Brazil has also moved to strengthen intercontinental air transport
links, notably with North America and Europe, while also displaying growing interest in
other key trading regions such as Asia. Thus there is growing Brazilian interest in inter-
regional relationships at the international level. This said, market access continues to be
regulated by a network of some 70 bilateral air services agreements with national
governments of which 15 are with Member States of the European Union.
36

4.2 MULTILATERAL AND REGIONAL AIR TRANSPORT POLICY
The following table sets out Brazils position in relation to the principal multilateral aviation
treaties.

35
See the Official Gazette (Diario Official) of 19 February 2009.
36
See Brazilian government website listing of air services agreements in force at
http://www.anac.gov.br/anac/sri/acordosBilaterais.asp

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Treaty

Subject
In
force
Number
of States
party
Entry into
force for
Brazil
Warsaw Convention
(1929)
Second party liability in international
carriage by air
Yes 151 13.02.33
Chicago Convention
(1944)
Constitution of international civil
aviation
Yes 190 06.08.46
International Air Services
Transit Agreement (1944)
Multilateral exchange of first two
Freedoms of the Air
Yes 128 No
International Air
Transport Agreement
(1944)
Multilateral exchange of five Freedoms
of the Air
Yes 11 No
Geneva Convention (1948) Rights in aircraft Yes 89 01.10.53
Rome Convention (1952) Third party liability for surface
damage
Yes 49 19.03.63
Hague Protocol (1955) Increases liability limits Warsaw
Convention (1929)
Yes 136 14.09.64
Guadalajara Convention
(1961)
Distinction re liability actual and
contractual carrier
Yes 84 09.05.67
Tokyo Convention (1963) Offences on board aircraft Yes 183 14.04.70
Hague Convention (1970) Hijacking Yes 182 14.01.72
Montreal Convention
(1971)
Sabotage of aviation Yes 185 24.07.72
Montreal Protocol (1)
(1975)
Conversion of Gold francs Warsaw
convention into SDR
Yes 48 15.02.96
Montreal Protocol (2)
(1975)
Conversion of Gold francs Hague
Protocol into SDR's
Yes 49 15.02.96
Montreal Protocol 3 (1975) Conversion of Gold francs second
party liability conventions into SDR's
No 21 27.07.79
Montreal Protocol 4 (1975) Cargo liability; limits expressed in
SDR's
Yes 53 14.06.98
Montreal Protocol (1978) Increases limits of the Rome
Convention (1952)
Yes 9 25.07.02
Article 83 bis (1980)
Chicago Convention
Transfer of state responsibility in case
of lease, charter and interchange of
aircraft
Yes 153 30.10.90
Article 3 bis Chicago
Convention (1984)
Prohibition of acts of violence against
civil aircraft in flight
Yes 137 21.07.87
Montreal Protocol (1988) Prohibition of acts of violence at
airports
Yes 163 08.07.97
Convention on the
Marking of Explosives
(1991)
For the purpose of detection Yes 137 03.12.01
Montreal Convention,
1999
Replaces Warsaw Convention as
amended; second party, unlimited
liability
Yes 86 18.07.06
Cape Town Convention
(2001)
On international interests in mobile
equipment
Yes 20 no
Cape Town Protocol
(2001)
Specifications of international interests
for aircraft
Yes 20 no
Table 15: Brazils Adherence to Multilateral Aviation Conventions

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It follows that Brazil actively participates in multilateral regimes governing aviation
activities, especially so in the field of private international air law.

From this perspective it is striking that Brazil has not yet adhered to the International Air
Services Transit Agreement of 1944. Its large airspace and favourable geographic position on
the South American continent may account for this fact, as the Brazilian aviation authorities
may have wished to keep transit rights as a negotiating chip in bilateral and perhaps also
regional arrangements.
37
We understand, however, that the Brazilian authorities are
examining a possible accession to the International Air Services Transit Agreement of 1944
as well as the Cape Town Convention on international mobile equipment (2001).

Reluctance to adhere to the Transit Agreement may also be explained by reference to the
constitutional requirement of reciprocity (as to which see further below).
4.2.1 Regional Cooperation
4.2.1.1 LACAC
Brazil takes part in the Latin American Commission for Civil Aviation (LACAC). LACAC is
affiliated with ICAO. Under LACAC, participating states set up a regional Safety Oversight
Cooperation System.
38

4.2.1.2 Mercosur
Argentina, Brazil, Paraguay and Uruguay are participating in the Mercosur agreement
designed to create a common Market for the South for free trade in South America. In
addition to the four parties cited above, there are six associated states to wit: Bolivia, Chile,
Colombia, Ecuador, Peru and Venezuela.
39

Mercosur finds its legal foundation in the Asuncion Treaty of 1991, which is based on the
doctrine of the reciprocal rights and obligations of the member states. While it does not
include air transport in its scope, the Asuncion Treaty clearly implies a liberal approach
toward opening markets within the region and lays down the following objectives:

Free transit of production goods, services and factors between the member states
with amongst others, the elimination of customs rights and lifting of non-tariff
restrictions on the transit of goods or any other measures with similar effects;
Fixing of a common external tariff (TEC) and adopting of a common trade policy
with regard to non-member states or groups of states, and the coordination of
positions in regional and international commercial and economic meetings;
Coordination of macro-economic and sectoral policies of member states relating to
foreign trade, agriculture, industry, taxes, monetary system, exchange and capital,

37
Brazilian air services agreements as a general matter provide 1
st
and 2
nd
Freedom authority in the Grant of Rights
Articles. For any non-agreement state, such as the 12 EU Member States who do not have a bilateral with Brazil, it would
be necessary for any of their airlines overflying Brazils large territory in the performance of scheduled services to another
state to obtain ad hoc permissions.
38
See: http://clacsec.lima.icao.int/Reuniones/2006/DGAC%20Marzo/EngCLACNI%20SEGOP%20correction.pdf
39
See: http://www.mercosur.int/msweb/

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services, customs, transport and communications, and any others they may agree on,
in order to ensure free competition between member states;
40

The commitment by the member states to make the necessary adjustments to their
laws in pertinent areas to allow for the strengthening of the integration process.
4.2.1.3 Fortaleza Agreement (1996)
In 1996, Argentina, Brazil, Uruguay, Chile, Bolivia and Paraguay concluded a Sub-regional
agreement in Fortaleza designed to promote economic integration. Air transport plays a
catalytic role in this process.

The Fortaleza Agreement (1996),
41
in this sub section also referred to as the agreement
entered into force on 9 April 1999, on which date it also entered into force for Brazil upon
approval by the Parliament.
42
Its principal purpose is to permit the operation of new,
scheduled air services on new routes between points in the territories of the sub-regional
partners, which are not effectively operated under their bilateral air agreements, so as to
promote and develop new markets, and respond to consumer needs.
43

The agreement lays down the following conditions:

The agreement supplements but does not replace existing bilateral air services
agreements between the mentioned participating states;
ownership and control of airlines remains in national hands;
the Freedoms of the Air as identified in the agreement are exchanged (for the
carriage of intra-regional traffic only);
the exercise of extra regional fifth Freedom rights is allowed subject to third country
approval (e.g. if a new route were to be extended);
consecutive or 8
th
Freedom cabotage is allowed as long as national law does not
prohibit this (which the Brazilian Aviation code does, as to which see below);
44

the agreement contains a Most Favoured Nation clause;
tariffs are to be set by reference to Country of Origin approval;
the level of capacity and frequencies on the new routes can be set by operators but
must bear a relationship with potential traffic demand; excess capacity is to be
avoided (Bermuda I principle);
45

there are no clauses pointing at the establishment of a common position towards
third states or other regional organisations.

Hence, the Fortaleza Agreement (1996) liberalises intra-regional air traffic; however, the
rights granted by this agreement may not affect the rights exchanged under bilateral air

40
(italics added)
41
See: www2.mre.gov.br/dai/servaeros.htm
42
By Decreto N
o
. 3.045 of 5 May 1999
43
See Article 1 (Spanish text): El presente Acuerdo tiene por objeto la realizacin de nuevos servicio areos subregionales
regulares, en rutas diferentes a la regionales efectivamente operados en el marco de los Acuerdos Bilaterales, a fin de
promover y desarrollar nuevos mercados y atender debidamente a la demanda de los usuarios.
44
See Article 8(1)
45
See Clause 7 of Annex 1

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services agreements made between the participating countries.
46
As the major air routes, for
instance, Sao Paolo Buenos Aires, are governed by the bilateral air services agreement
between Brazil and Argentina, it follows that the Fortaleza Agreement (1996) forms the legal
basis for the operation of extra-bilateral, mostly thinner, routes. The current parties try to
extend the Fortaleza Agreement to all Latin American countries.
4.2.1.4 UNASUR Union of South American Nations
On May 23, 2008 at a Heads of States Summit held at Brasilia, 12 South American nations
signed a Constitutive Treaty committing themselves to create an economic union
modelled on the EU within the next decade (by 2019). Essentially states of the Andean Pact
and Mercosur as well Caricom Members (Guyana and Surinam) aim to cooperate in
establishing an open market as well as common institutions.

If is too early to tell (and well beyond the scope of this study) to discuss the prospects and
implications of UNASUR and its possible meaning for aviation markets. Such
developments, however, highlight the great interest that the creation of the EU has
stimulated globally and give evidence of the strong interest of key states like Brazil in
pursuing regional relationships.
4.2.2 Inter-regional Cooperation with the EU
As will be outlined below, an extremely active dialogue addressing a wide range of fields
(so far only to a limited extent in aviation) already exists between the Community and
Brazil. Notably on December 12, 2008, meeting at Rio de Janeiro, the parties agreed a
sweeping Action Plan with an ambitious agenda for cooperation and action.
47
These steps
reflect a strong expansion of relationships over the past 15 years.
4.2.3.1 Framework Agreement EEC-Brazil (1995)
48

The EEC and Brazil concluded a framework agreement for cooperation between the parties
in 1995.
49
The purpose of this agreement is to foster sustainable economic and social
development.
50

46
See, Art. 3 of Annex 1 to the Fortaleza Agreement (1996), prohibiting duplication of routes under this Fortaleza
Agreement and bilateral air services agreements, while giving precedence to the routes governed by the bilateral agreements
in place. The mentioned Article (3) refers to the operation of sub regional routes rotas sub-regionais.
47
In the air transport sector, both Parties underline the importance of further strengthening cooperation between Brazil
and the EU in aviation matters. Both sides confirm their mutual interest in a horizontal agreement in the field of air
transport between Brazil and the EU, as well as a Brazil-EU agreement on aviation safety, with a view to signing both at a
suitable occasion agreed by both sides.
Furthermore, Brazil and the EU intend to:
Stimulate the exchange of information regarding air transport policies;
Explore the potential for cooperation in other areas of air transport policies, such as the SESAR project for the
modernization of air traffic management.
See 2008-12-22 Rio Plan Action Final EN21.12.DOC
48
See: The Framework Agreement for Cooperation between the European Economic Community and the Federative Republic
of Brazil - Exchange of Letters between the European Economic Community and the Federative Republic of Brazil on
maritime transport (1995)
49
See Council Decision 95/446
50
Article 15 Cooperation in the field of transport:
Recognizing the importance of transport to economic development and the intensification of trade, the Contracting Parties
shall adopt the necessary measures to further cooperation in this field.
Cooperation in the area of air, road and rail transport and in that of infrastructure shall centre on the following:
- the interchange of information on subjects of common interest, including policies,
- training programmes aimed at economic operators and those in charge of public-sector departments,

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4.2.3.2 EU-Mercosur (1995)
In December 1995, the EU and its Member States and Mercosur and its Party States signed
the 10th Framework Cooperation Agreement. The explicit objective of this agreement is to
establish an interregional association linking the two regions in a political, economic,
financial, social, and cultural relationship. The implicit objective is to reach an agreement on
free trade. Since 1995, a number of meetings between the EU and Mercosur have been held
in Europe and South America.
51
Air transport is, at least not yet, on the agenda of the EU-
Mercosur programme.
4.2.3.3 Mercosur-European Union Business Forum (2003)
The Mercosur-European Union Business Forum (MEBF) was held in Brasilia in 2003 in order
to facilitate development and regional integration between Mercosur and the EU.
52
In the
area of services, the Forum suggested that negotiators define the extension of the Brasilia
agreement,
53
which should include air transport.
4.3 BILATERAL AIR TRANSPORT RELATIONS WITH EU MEMBER STATES
As of year end 2008 Brazil has negotiated bilateral air services agreements covering the
markets of 15 Member States.
54
Otherwise in Western Europe, it also has an agreement with
Switzerland, and its Scandinavia agreement also covers Norway. Only some of these
markets currently enjoy inter-continental direct service. As discussed in Chapter 2, direct
services presently exist in 9 markets: Belgium, France, Germany, Italy, Luxembourg,
Netherlands, Portugal, Spain and the UK.

As will be discussed below, while these agreements contain special individual features, they
are marked by a significant degree of consistency, both with respect to areas covered and,
arguably, with respect to certain areas ignored. As considered in the next subsection, the
language of Brazils agreements, in our judgement, reflects a strong consistency of strategic
approach.
4.3.1 General Aspects of Air Services Agreements between Brazil and EU Member States
Brazilian aeronautical authorities actively pursue timely adaptation of air transport
agreements to changing conditions with all states of interest to Brazil. For example,
agreements with EU Member States either are very recent or active negotiations to revise
them are underway.

In negotiations, Brazil appears to pursue the following policies with respect to key
provisions:

- technical assistance particularly in connection with programmes for the modernization of infrastructure, replacement of
rolling stock, vehicles and craft, and the introduction of technology relating to combined and multi-mode transport..
51
See: http://www.sice.oas.org/TPD/MER_EU/MER_EU_e.asp
52
See: http://www.mebf.org/en/plenary/4plenary.html
53
See: http://www.mebf.org/en/document/MEBF_Brasilia_Declaration_Final.pdf
54
Austria, Belgium, Denmark, France, Germany, Greece, Hungary, Italy, Luxembourg, Netherlands, Poland, Portugal,
Spain, Sweden and the United Kingdom.

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Designation and revocation: Multiple designation and, in the case of the EU, willingness to
accept the Community designation clause, subject to safeguards against free riders. Most
agreements with Member States (Greece and Scandinavia are exceptions) provide for
multiple designation.

Capacity: Predetermination. Brazilian ASAs require all international scheduled carriers to file
schedules for each traffic season (and for any extra section operations) subject to advance
approval of aeronautical authorities.
55
Airlines are also required to provide traffic statistics
to enable ex post facto review of actual carriage. As far as we can determine Brazils
international markets, including that of the USA, are all subject to such quantitative
frequency restrictions. However, the more important agreements do include multi-year
arrangements that embody scope for growth of capacities in the out years.

Route access: Bermuda model. While Brazilian agreements in some cases appear to provide for
an open route description,
56
as a general matter rights to hold out and carry commercial
traffic under these agreements are enumerated and/or named. That is, they set forth
(restrict) the number of points (or the number of services to individual points) that can be
served between the signatories (3
rd
and 4
th
freedom) or on a 5
th
freedom basis between the
other partner and a third country.

Tariff regulation: Country of Origin. Brazil favours a regime under which the state on whose
territory traffic originates enjoys the final right to approve or disapprove prices that airlines
wish to offer in the marketplace. Roughly half of the agreements with Member States now
contain this form of regulation (see further discussion in next subsection). Brazil also seeks
to include a paragraph in its tariff articles that calls upon competent authorities to monitor
sales and marketing in an active manner. In the case of sales in the Brazilian market, such
oversight can be quite active.

Airline Coordination: Absence of Conditions. While most Brazilian agreements still contain the
classical Bermuda injunction that airlines of one side should act so as not to affect the
commercial position of their foreign competitors unduly, the most recent tariff or capacity
articles do not contain language compelling or encouraging coordination with possible
competitors.

Modern cooperative context: Code-sharing. Brazilian aeronautical authorities have actively
moved in recent years to put code-sharing authority and regulation in all Brazilian
agreements. As will be further discussed in the following section, such arrangements and
their implementation are actively monitored for their competitive effect.

Modern provisions on safety and security. All of the recent Member State agreements with
Brazil contain safety and security articles that provide scope for active monitoring and
enforcement and, in most cases, ability to act rapidly and unilaterally if necessary.

Areas not generally covered: Notwithstanding the fact that Brazils agreements with Member
States have mostly been revised or replaced in 21
st
Century negotiations, a number of issue

55
Scope for capacity approval in the form of bilateral weekly frequency quotas is generally established through consultations
with the partner country on the basis of reciprocity.
56
While a number of Brazilian route descriptions create fairly general (so-called) blind sector rights that authorise flying
via other countries, rights to uplift traffic generally must be specified.

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areas (that have been addressed for example in EU negotiations with the US and Canada)
have generally not yet been tackled in discussions with this major intercontinental partner.
These include not only questions such as environmental, social and consumer protection
regulation but also relevant market access issues such as rights of investment, pro-
competitive competition rules and, importantly, fair and efficient opportunities for the
development of timely all-cargo and express services with an increasingly important trading
partner. Most of todays bilaterals are either silent in these areas or, where isolated
provisions do exist, they tend, as will be discussed in the following section, to create
discriminatory conditions.

Agreements implementation. As will also be discussed in following sections of this chapter,
Brazilian authorities have tended to pursue an active approach to regulation of foreign
operators. Similar to the United States, for example, foreign airlines are monitored carefully
and are expected to comply with conditions of operation contained in local laws and
procedures that implement the relevant international agreements or are authorised by them.
4.3.2 Individual Aspects of Brazilian Air Service Agreements
In the foregoing Subsection we described aspects of Brazilian international policy that apply
more or less generally. In this section we focus on areas of where there is less consistency as
well as on certain individual cases and issues.
4.3.2.1 Tariff Regulation
A number of (mostly older) agreements with Member States contain dual approval (as
opposed to country-of-origin) pricing regulation. These agreements Scandinavia 1969
(amended 1987), Austria 1993, Greece 1997, Hungary 1997, Portugal 2003 and the
Netherlands 1976 (amended 2007) also still contain provisions for IATA tariff coordination.

The newer, country-of-origin agreements are on the whole similar in their provisions. All
agreements contain standard historical Bermuda language on standards airlines should
employ in calculating prices; however, differences exist with respect to the standards
aeronautical authorities are to employ in reviewing tariff filings. In the case of two recent
agreements with Spain (2007) and the UK (2008), authorities are only authorised to reject
fares (make interventions) from the standpoint of consumer interests and to prevent anti-
competitive and discriminatory pricing. In several other recent agreements, the authorities
are only enjoined to pay particular attention to anti-competitive issues while otherwise
retaining final discretionary powers to disallow any tariff originating in their territory.
Note: Tariff review policies continue to be taken seriously in Brazil, notwithstanding an
evident trend by ANAC to authorise more flexible pricing in international air services (see
below). So far, with the limited exception of cargo price deregulation authorised under the
UK-Brazil agreement, Brazil does not appear to have accepted dual disapproval pricing in
any international market.
4.3.2.2 All-cargo and Express Market Regulation
Compared to other major relationships, such as with the US, the European agreements with
Brazil seem notably under-developed in the all-cargo sector. For example, in only one of the

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new agreements being negotiated (Brazil-Germany draft of 2007) is there any provision for
inter-modal rights.
57

While we lack complete information in this sector (in which conditions of implementation of
rights can affect matters more than the rights themselves), it also seems evident that there is
considerable disparity in traffic rights among Community carriers -- related to the
agreements they must now operate under. For example, in two separately concluded
agreements in 2008, airlines operating from the UK on the one hand have been granted
unrestricted 5
th
freedom rights (as well as pricing freedom) for all-cargo, whereas Belgium
had to forego all 5
th
freedom rights in order to obtain all-cargo frequencies.
58

In another example, Luxembourg (home to a major global all-cargo carrier, Cargolux) has
experienced some difficulty obtaining Brazilian agreement to negotiate scheduled air
transport rights at all. And while it has now been able to reach an air services agreement
with Brazil (2008), it appears that Brazilian authorities have both restricted 5
th
freedom
rights and also attempted to achieve reciprocity (that is, compensation for Brazil in the
absence of Brazilian operator interest in Luxembourg) by imposing an obligation on
Cargolux to provide a quantified level of uplift capacity and three weekly operations to the
airport of Petrolina. The need for these operations seems to be policy- as opposed to market-
driven; that is, an industrial policy effort by government to stimulate economic activity.

Comment: In light of the importance of networking flexibility for the increasingly important
all-cargo and air express industries, these restrictions are not trivial. If continued, they will
have the effect of increasingly diverting cargo flows between Brazil and the EU over
intermediate hubs, such as in the USA. They may also affect fair competition among
Community carriers inasmuch as cargo markets are now so networked on a Community-
wide basis that national air cargo markets for all practical purposes no longer exist.
4.3.2.3 Charter Operations
Brazil, as is the case with many states, regulates international charter operations in
accordance with Chicago Convention standards outside the bilateral framework; that is, the
operators apply directly for requisite operating or marketing permissions while in
individual cases perhaps raising issues with their own national authorities if they experience
market access or other regulatory problems in particular markets. An exception to this rule
for Brazil is its agreement with the US which provides for formal allocations of charter
authority that is, frequencies for which US operators can apply to the US authorities to
operate.

No Brazil-EU (Member States) agreements contain such charter capacity provisions.
However, charter market access issues have arisen in bilateral consultations. UK authorities
in particular have monitored such issues and pressed for simplification and clarification of
marketing rules and for efficiency and promptness in processing applications.

57
Given the excellent cross-border trucking and strong rail systems in the EU, intermodal rights could also be of
considerable interest for Brazilian operators.
58
See Belgium-Brazil agreement of 2008. NB: Because all cargo movements, in contrast to passengers, are all one-way
rather than roundtrip, directional capacity imbalances are typical in the all cargo business and it is often necessary,
especially in long haul operations, to combine loadings from more than point at either end of the itinerary to achieve
reasonably balanced capacity utilisation. Availability of 5
th
freedom capacity thus can be a vital contributor to efficient
operations. This is especially the case when geography and infrastructure (as is the case in South America) provide reduced
potential for inter-modal (e.g. surface) feeder services.

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4.3.2.4 Particular Aspects of the UK-Brazil Agreement of 2008
On October 28, 2008, the UK and Brazil initialled and agreed to implement with immediate
effect a new air services agreement which possesses several unique aspects in addition to the
all-cargo route rights and pricing freedom mentioned above. For example, in its Article 15,
Fair Competition this agreement introduces new provisions to prevent protectionist
practices just as it removes the language on avoidance of undue effects on competitors
otherwise characteristic of agreements with Brazil. The Article calls upon competition
authorities to cooperate and also makes clear that the Agreement is not to be understood in
any way to require or favour any form of concerted practice among possible competitors.

The new UK-Brazil agreement also includes new articles on leasing and taxation.
4.3.3 Regulatory and Doing Business Issues Arising in Brazil-EU Market
Our impression, based substantially on conversations with industry stakeholders, is that
doing business in Brazil can be complex because of the institutional practices and
procedures of various regulatory bodies. For example, the permitting procedure associated
with filing schedules can reportedly put airlines in legal difficulties if operational issues
cause them to deviate from schedules. That is, the aeronautical authorities are not merely
concerned to ensure that airlines do not exceed authorised capacity. They also monitor
conformity with proposed arrival and departure times, which can create a so-called chicken
and egg situation for the carrier who must have a schedule to apply for a slot (to one
authority) but logically would also need to have the assured slot to apply for the exercise of
the economic rights to another authority. To the extent that capacity is also scarce, as has
been the case recently at So Paulo (see also Chapter 2), an already difficult situation can be
made more complex. Foreign airlines would welcome a more structured slot allocation and
coordination procedure.

While Brazil does not appear to have a systematic traffic distribution scheme, it is evident
that Brazilian authorities might welcome a certain reordering of traffic that might include
greater use of Rio de Janeiro for international arrivals, less concentration on So Paulo and
the initiation of new services to other major Brazilian cities, notably in the north east.
Policies involving disincentives (e.g. the capacity restrictions at Cogonhas and the proposed
high parking fees at Guarulhos) to push traffic away as well as incentives to move it
elsewhere appear to have been considered.
4.3.3.1 Policy Issues on Taxation and Charges
Member States have addressed questions of Brazilian user charging policy in recent
consultations, for example with respect to seeking assurances that fee revenue stay within
the air transport system.
59
A particular concern has been the so-called ATAERO tax, which
we understand is expressed as a 50% surcharge paid by all airlines on all their user fees (and
reportedly results in collections of ca. US$800 million annually at present). These charges of
course affect Brazilian carriers the most, but they are also significant for international
operators.

59
All of Brazils bilaterals with Member States (and presumably in general) provide for user fee charging policies in
accordance with Article 15 of the Chicago Convention; that is, they provide for national treatment so that charges may not
exceed what would be charged to national operators conducting or obtaining the same service. Typically the relevant articles
also provide (in greater or lesser individual detail) for coordination or consultation with affected users when resetting
charges, based in principle on the cost of providing the service.

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While we understand that these taxes help defray certain costs of the ATM system we have
also been told that significant and growing balances now amount to some US$2 billion in a
fund whose overall purpose and legal mandates seem unclear.
60

Airlines have also protested, through IATA as well as their national authorities, with regard
to the very high parking fees that were proposed for Guarulhos, reportedly in order to
motivate international airlines to fly on to Rio de Janeiro with or without traffic. The airlines
have otherwise also sought dialogue on various questions involving charges and taxation.

While Brazil appears to have respected the letter of its obligations under air services
agreements to provide exemptions from taxes and import duties, airlines have also argued
that taxes or charges not related to service provision placed on some of their suppliers have
become inappropriately internalised in the prices they have had to pay. Issues have also
periodically arisen with respect to efforts by state or local authorities to apply certain forms
of tax (a problem that has also arisen periodically in the USA). At the federal level, customs
issues reportedly arise from time to time.

Another area of contention has been the determination of jet fuel prices by the monopoly
supplier Petrobas, which apparently have included additions to cover theoretical shipping
costs from the US. We understand that such issues are for the moment either resolved or
subject to a constructive dialogue with Brazilian authorities.
4.3.3.2 Marketing and Sales Issues
Brazils regulatory procedures in the area of marketing and sales regulation, while they have
been liberalised by the regulator (ANAC) to create zones or bands that give airlines
somewhat greater freedom to price dynamically in marketing international air services, still
appear to remain rigid in light of 21
st
Century marketing practices. We understand that
fares or programmes that have not been formally approved by ANAC may not be legally
displayed in CRS systems, for example.

We understand from ANAC that there are no regulations on CRS per se.

ANAC may of course be under some pressure from national operators to use tools available
under air services agreements to maintain a controlled pricing environment.
61
EU and other
foreign operators are thereby constrained from competing aggressively. Another concern,
raised with Brazil by the UK government in consultations, is a restriction on scheduled
airlines to market travel packages and ancillary services to travellers destined for Europe.
The position of the Brazilian government appears to be that such sales may only conducted
by an independent company or local subsidiary (presumably licensed for such purposes).

In light of such marketing and sales restrictions, the UK is pressing for significant further
liberalisation of tariff regulation.

60
We understand that Brazilian carriers may be challenging the legality of this fund.
61
In late December 2008, the Brazilian Airline Association SNEA sought and obtained a court injunction to prevent ANAC
from introducing authority for individual airlines to offer discounts within an approved range on established fares on the
grounds that this policy had not been adequately consulted and would damage TAM, Brazils only current carrier in
international markets outside Latin America. See Dow Jones Newswires, 30 December 2008.

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4.3.3.3 Consumer and User Protection
While aspects of Brazilian policy (such as capacity controls) clearly imply traditional
industrial policy objectives, it is also clear that the government wants consumers to benefit
from fair and reasonable conditions and that it may act to prevent airlines from taking steps
that could mislead the public or reduce the rights of travellers. For example, Brazil has
opposed unilateral modifications by airlines of baggage allowances that would penalise
passengers. See also discussion of consumer protection legislation below.
4.3.4 Summary Views on International Market Access and Regulation
Brazils policies on international market access and economic regulation reflect both a
traditional Bermuda perspective (designed to promote and protect national flag carrier(s) in
international markets) and modern policies to promote and develop a sound, safe and
secure global air transport system. The significant number of very recent agreements
and/or far reaching negotiations that Brazil has been conducting with EU Member States
reflect the conscious if not systematic efforts of Brazilian authorities to create new trans-
Atlantic context and development of air transport services.

As presented in Chapter 2, it is evident that Brazils airlines have been experiencing a period
of considerable weakness in international markets (even well prior to the current general
downturn). This circumstance could lead to reluctance to risk significant liberalisation.
However, it could also lead to a questioning of the effectiveness of traditional forms of flag
carrier protection, which arguably supported internal resistance to modernisation and made
formerly leading airlines into progressively weaker players in the national and regional as
well as global marketplaces.
4.4 BRAZILIAN REGULATION IN RELATION TO THE AIR TRANSPORT ACQUIS
4.4.1 Introduction to this Section of the Study

4.4.1.1 Understanding the Issue of Regulatory Convergence from the EU Perspective

The European Union and its air transport industry are committed to free trade under fair
competitive conditions. Such conditions are shaped by efficient, transparent regulation that
establishes a level playing field and enables dynamic competition while, at the same time,
ensuring quality controls and adherence to minimum standards in key public interest areas
such as: safety, security, facilitation, performance standards for infrastructure (including air
traffic management), environmental and consumer protection, rules on safe and healthy
working conditions, employee rights and social standards as well as framework rules
governing airline licensing and market access and preventing anti-competitive behaviour
and unfair competition.

For Member States of the EU, the level playing field is established by means of binding
Community legislation and national implementation of Community directives that
constitute a body of law that is known as the air transport acquis. For a number of other
European states (who are members of the European Common Aviation Area) and other
neighbouring states (that border on the EU) agreements have been reached that establish
commitments to convergence of national legislations so that in effect the terms of the acquis
extend to create a larger area governed by the same or very similar rules.

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Beyond the regional level, regulatory cooperation is important when creating common
aviation areas with efficient regulation, and open, fair competition in larger markets is a goal
of Community international relations policy. Trans-Atlantic relationships with major
partners in markets such as the United States, Canada and potentially Brazil therefore have
attracted particular attention in order to determine the readiness of such partners to engage
in a close cooperation in various aspects of aviation policy.
4.4.2 Brazilian Policy: the general framework
Brazilian federal government regulation governs the air transport sector -- not only in the
areas of safety and security but also in the economic field -- in its constitutional as well as in
its air transport law. This appears from the regulation of this sector in various legal
documents, to begin with the Brazilian Constitution.
62
Air transport regulation is an
exclusive task of the federal government.

The public service character of air transport can also be understood by the institutional
framework in which it is organised.
63
For instance, the Brazilian Civil Aviation Authority,
ANAC (the National Agency for Civil Aviation), is part of the organisational structure of the
Ministry of Defence. However, unlike its predecessor, the Civil Aviation Authority (DAC)
which it replaced in March 2006, ANAC is an independent body.

ANAC, as to which see further below, is subject to the guidelines, directives and policies
made by CONAC, which is the Civil Aviation Council (see also below) which is supported
by a recently created Secretariat for Civil Aviation (SAC) which, among other things, is
intended to provide efficient coordination support with interested institutions and
ministries so as to stimulate effective and comprehensive policy formulation. This said, the
Minster of Defence remains, under the President of Brazil, ultimately responsible for the
implementation of civil aviation policy.

The Constitution proclaims that the principle of reciprocity has to be observed in
international air transport agreements.
64
This is or may be one of the reasons why the
Brazilian government, in particular the Ministries of Defence and Foreign Affairs, may have
taken a reserved stance towards agreements laying down free competition.

62
Constitution of Brazil of 1988 (as amended):
Art. 178: The law shall establish the regulation of air transport and shall be subject to the international transport legal
framework as well as the international agreements signed by the Union, taking into account the principle of reciprocity.
Par. 1 cabotage only applies to transport by water; aerial cabotage is governed by the Aviation code of Brazil, as to which see
below.
Art. 178. A lei dispor sobre a ordenao dos transportes areo, aqutico e terrestre, devendo, quanto ordenao do
transporte internacional, observar os acordos firmados pela Unio, atendido o princpio da reciprocidade. (Redao dada pela
Emenda Constitucional n 7, de 1995)
Pargrafo nico. Na ordenao do transporte aqutico, a lei estabelecer as condies em que o transporte de mercadorias na
cabotagem e a navegao interior podero ser feitos por embarcaes estrangeiras. (Includo pela Emenda Constitucional n
7, de 1995)
63
For a relevant national understanding of the legal and policy implications of the Constitutional provision, see, for
instance, the following quote from the website of the Brazilian carrier TAM:
Scheduled air transportation services are considered public services in Brazil and, accordingly, are subject to extensive
regulation by the High Command of Aeronautics of the Ministry of Defense, or the High Command of Aeronautics,
CONAC and ANAC. Scheduled air transportation services are also regulated by the Brazilian federal constitution and by
the Brazilian Aviation code.
See: http://www.mzweb.com.br/tam/web/conteudo_en.asp?idioma=1&tipo=9150&submenu=1&img=5455&conta=44#2
64
See note 14 above, referring to Article 178 of the Brazilian Constitution

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However, the official policy laid down in a resolution adopted by the Council of Ministers
also reflects commitment to free competition, or perhaps more accurate: healthy
competition see the term used in a directive made by CONAC (Concurrncia saudvel)
65

- and open access among airlines, subject to oversight by ANAC.

The Ministries of Justice and Finance also deal with air transport matters through their
administration of the competition law regime (see below). It appears that these ministries
are sympathetic to liberalisation, promotion of private and foreign investment and free
competition.

For competition matters, the federal agency (CADE)
66
charged with the protection of
competition complements the tasks of ANAC. Whereas ANACs role is focussed on the a
priori regulation of airline behaviour in the field of, for instance, inter-airline cooperation
and pricing,
67
CADE must control improper market behaviour after the fact. Hence, ANACs
role has a more preventive character as compared with that of CADE which is tasked with
corrective actions (a posteriori), that is, in case airline behaviour proved to be anti
competitive.
4.4.2.1 Brazilian rulemaking process and procedures
As indicated, the principal underlying Act generally is the Constitution, as referred to above.

Otherwise there are Leis (laws), Decretos (regulations) and Portarias (administrative rulings)
which are made at the governmental level. Leis have to pass the Parliament.

Resolues (administrative rulings) and Decises (administrative decisions) are made at the
administrative level, for instance by ANAC.

The principal legal acts are the following:

Generally:
The Constitution of Brazil of 1988;
The Civil Code of 2002, as amended (Act No. 10.406);
The Consumer Protection Act of 1990 (Act No. 8.078)

Air transport related Acts are:

The Aviation Code of 1986 (Act N
o
. 7.565) as variously amended, stipulating that
Brazilian air law is regulated by treaties, international agreements to which Brazil is a
party, the present Aviation code and regulations made under it,
68
as well as the
principle of complete and exclusive sovereignty of the state of Brazil over its airspace
and territorial sea;
69

The Aeronautical code (aviation personnel) of 1984 (Act N
o
. 7.183),

65
See Resolution No 002/2003 made by CONAC on the Establishment of Principles for a Civil Aviation Policy
66
As to which see below, sub-section 4.4.5.1
67
See sub sections 4.4.4.2 and 4.4.4.8 respectively
68
See Article 1(1)
69
See Article 12

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The Act creating ANAC of 2005 (Act 1 N
o
1.182) plus regulations derived from
international agreements to which Brazil has acceded;
Various regulations (Decretos) on policy and general matters;
Legislation (in various forms) on specific subjects including but not limited to:
- Accident and incident investigation;
- Aircraft (registration, nationality marks; maintenance etc.);
- Airports;
- Carriage of cargo;
- Carriage of passengers;
- Pricing;
- Security;
- Aerial operations;
- Ancillary services;
- Charges (airports and air navigations services);
- Taxes
- Public air transport and commercial air transport.

All acts are drawn up in Portuguese. Except in one case, that is, Regulation 129 regarding
Operations of Foreign Air Carriers within Brazil (see below), English translations are not
available.

The above acts, decisions and regulations are published on the website of ANAC which has
a transparent and comprehensive list of legislation, including legislative texts thereto.

4.4.3 The Institutional Framework

Brazilian Aviation System
CENIPA
(Aeronautic Accident
Commission of Investigation)
CONAC
PRESIDENT
DECEA
(ATC)
Air Force
Infraero
ANAC
Agencia Nacional de Aviacao Civil
(Safety, Security, Inspection,
Airport Regulation, Aircraft Registration,
Certification, Air Services,
Ergonomics, Human Resources)
Ministry for Defense
new
Secretariat for Civil Aviation
Source: ANAC

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Figure 50: Brazilian Institutional Structure

4.4.3.1 CONAC
The Civil Aviation Counsel for Civil Aviation (Consuelo de Aviao Civil), hereafter also
referred to as CONAC is an inter-ministerial body chaired by the Ministry of Defence, and
must advise the President in matters of aviation policy. It draws up directives for Brazilian
engagements in relation to international aeronautical treaties.

CONAC consists of representatives of various ministries, to wit the Ministries of Defence,
Foreign Affairs, Finance, Economy Affairs, Tourism, and a representative of the Cabinet of
the President.
4.4.3.2 The Ministry of Defence
The Ministry of Defence includes the aforementioned Secretariat for civil aviation which
supports CONAC (as to which see below). Three major bodies are attached. That is, a
department for regulatory and policy affairs, ANAC, a department for the airport
infrastructure, INFRAERO, and a department for the regulation and organisation of aerial
navigation, DECEA.
70
Military aviation is handled by a separate body, named the Comando
da Aeronutica.

Also institutionally separated in Brazil (as is the case in the USA where the NTSB is
organised separately from the FAA) is responsibility for accident investigation, which is
established in CENIPA (Centro de Investigacao e Prevencao de Acidentes Aeronauticos)
the Aeronautic Accident Commission for Investigation, a body organised under the Air
Force Command.

The division of tasks and responsibilities, and institutional links between the
aforementioned bodies on the one hand, and ANAC on the other hand are not laid down in
the legal acts creating ANAC, as to which see below. ANAC, however, exercises regulatory
oversight in certain areas such as reviewing the fee structures proposed by airports operated
under INFRAERO.
4.4.3.3 ANAC
ANAC is Brazils principal regulatory and oversight body. It replaced the previously
existing military run and structured Department of Civil Aviation (Departmento de Aviao
Civil, henceforth abbreviated as: DAC), which was a military organisation under the then
Ministry of Aeronautics which is currently the Air Force Command.
71
As stated above, civil
aviation now comes under the general oversight of the Ministry of Defence giving it a direct
line to the ministerial level.
72

In summary, ANACs tasks are to:

implement aviation laws and policies;

70
See: https://www.defesa.gov.br/estrutura/organograma.pdf
71
See: Respicio Antonio do Espirito Santo Jr., D.SC, and others, Airport Privatization in Brazil: Challenges and
Opportunities; paper presented at the IInd Aviation Management Educational Research Conference, Montreal, Canada
(2003) at p. 16
72
As created by Law (Lei) 11.182 of 27 September 2005, and Regulation (Decreto) No 5.731

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represent Brazil in international organisations and bodies;
negotiate and draw up international agreements;
regulate the operation of air navigation and services,
73
and related products,
including maintenance;
regulate the designation of Brazilian air carriers on international air services;
manage security of airports;
approve technical certificates and licences;
administer the Brazilian aircraft register;
examine civil aircraft in order to enhance safety of flight;
regulate and examine the infrastructure of air transport, including airports so as to
enhance safety;
licence and approve business plans of airports;
establish a regime for airport charges;
certify aeronautical products
regulate general aviation;
establish a system for the investigation and prevention of area accidents named
SIPAER;
prevent infractions of aeronautical rules, and apply sanctions;
consider all matters which fall under its competencies, including but not limited to
interpretation of legislation, and international standards, the operation of aerial
services and infrastructure of civil air transport;
publish regulations;
promote studies on air transport and inter-modal transport;
organise meetings with other public bodies and ministries, and foreign public bodies.

The above tasks summarise the tasks which are laid down in the constituent documents of
ANAC.
74
Also, ANAC leads the Brazilian delegation in the conduct of air negotiations which
are also attended by representatives of the Ministry of Defence.

ANAC comprises eight principal bodies,
75
which are set up for the purpose of organising its
work. The bodies include an executive body, an accounting office, on ombudsman, an office
for the legal representation of ANAC, a postal office, a council, a chief administration, and
regional offices.

On 7 August 2008, ANAC adopted its internal regulations.
76
A large number of departments
and services dealing with all aspects of air transport such as bilateral and multilateral
negotiations, airport infrastructure, slot allocation, ground handling, airport charges,
aviation security and pricing are established by virtue of this regulation.

73
Specific oversight of the ATM system is provided by another body, DECEA (as to which see _____ below).
74
See Article 4 of Annex 1 of Regulation 5.731 cited above
75
See Article 9 of Section 1 of Law 11.182 cited above
76
See: Regulation (Resoluo) N
o
. 38 of 7 August 2008, on the internal regulation of ANAC
76
o
2 of 3 July 2006

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4.4.3.4 INFRAERO
INFRAERO is another governmental body concerned with civil aviation and also linked to
the Ministry of Defence.
77
INFRAERO is charged with the management of the principal
airports in Brazil.
78
The mission of INFRAERO is to achieve efficiency, safety and quality of
airport related activities in order to contribute to the economic development of Brazil.

INFRAERO is divided into seven regional division (SRs) each responsible for a certain
region of Brazil and its designated airports. Control is centralised in the capital Brasilia.

The centralised structure has implications for, for instance, pricing. Airport charges must be
established in INFRAEROs headquarters. Regional offices are not allowed to set charges for
the airports coming under their responsibility.
79

Organisation and financing of INFRAERO may be coming under review and may lead to
consideration of changing its governance in the direction of corporatisation
80
.
4.4.4 Market Access and Ancillary Regulation
In this and the immediately following subsections we examine specific areas of air transport
law and regulation as might correspond to the relevant functional areas of the Community
air transport acquis.

Access to the Brazilian air transport market is regulated under the Aviation Code of 1986,
and related regulations. For an airline to enter the air transport market it must have a
concessionary licence from ANAC. ANAC delivers such licences to carriers operating
scheduled and non-scheduled combination and all-cargo services.

Specifications of substantive requirements and procedures are concisely explained below.
4.4.4.1 Substantive requirements for a commercial licence
An applicant for a concessionary licence must demonstrate:

Technical capability to carry out the concerned services;
Financial fitness, both in relation to second and third party liability (insurance) and
to the performance of its business plan;
Feasibility of the business plan;
Appropriateness of the aircraft types;
Qualifications of the staff (pilots, other crew members);
Adequate insurance.

77
Created by Law 5.862/72
78
See: www.infraero.gov.br
79
(2003) at p. 5
80
The Brazilian National Development Bank (BNDES) has launched a tender in March 2009 for the restructuring of
Infraero. The project objective is provide a "corporatization" of Infraero, encompassing several issues - from redefining its
legal and accounting status, to reviewing its strategic plan and operating/governance model. It does not appear to be geared
to a straightforward privatization, but to the underlying hypothesis of at least having Infraero ready for an IPO.

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The Brazilian Aviation Code also has detailed ownership and control-related provisions,
which apply equally to scheduled and non-scheduled carriers.
81
As under US law,
ownership is expressed in the shareholding of the airline, whereby a distinction is made
between voting and non-voting shares.

The applicant must demonstrate that:

It has its principal place of business (sede) in Brazil;
As much as 80 per cent of the voting shares are held by Brazilians, even in the case of
increase of the capital of the airline;
Voting shares in anonymous companies are named shares, the transfer of which
voting shares, even if they fall within the 20 percent margin which is allowed for
foreigners, is subject to approval by ANAC;
Up to 50 percent of the equity is issued in non-voting shares; so that, by the
combined effect of provisions of the Aviation code and the Company Law Code:
foreign investors can purchase up to 60 percent of a Brazilian airline (50 % of the 100
percent non-voting shares and 50 % of the 20 percent voting shares), whereas:
The board of directors must consist of (exclusively; exclusivamente) Brazilian
nationals, or at least 80 percent Brazilian nationals.

In addition, the following rules apply:

The airline (company)s articles of foundation or statutes must contain an express
prohibition regarding the conversion of non-voting preferential shares into voting
shares;
Foreigners may buy shares in case of capital increase as long as the 20 percent ceiling
for holding voting shares (see above) is respected;
It is allowed to emit preferential shares up to 2/3 of the total share capital.

The Brazilian Council of Ministers is considering raising the 20 percent ceiling for foreign
investment to 49 percent. It appears to be likely that that proposal will be adopted. It is not
clear whether the effective control provisions are going to be adapted.

The EC-Brazil Framework Agreement for Cooperation includes a paragraph on investment, but
makes investments subject to the permissibility under national law.
82

81
See Article 181
82
Article 9 of the above Framework Agreement for Cooperation between the European Economic Community and the
Federative Republic of Brazil (1995) states the following on Investment:
The Contracting Parties agree, so far as their competence, rules and regulations and policies permit:
- to encourage an increase in mutually beneficial investment,
- to examine the possibility of setting up operations and mechanisms to improve the climate for such
investment in keeping with the guidelines of paragraph 38 of the Rome Declaration on relations

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4.4.4.2 Procedural Requirements for Obtaining an Operating Licence (AOC)
ANAC controls the procedure. Applicants must submit their applications for a licence to
ANAC in accordance with detailed national planning criteria.
83

Amongst others, those rules pertain to supervision of shareholding indemnity in case of
transfer of shares. Also, applicants must demonstrate affiliations with other companies.

The Aviation code also contains a section on the exit side.
84
The Executive Power (Poder
Executivo) must supervise and is entitled to take measures in case of Chapter 11
(Interveno), liquidation and bankruptcy of the airline.

If airlines want to cooperate in the form of a consortium, pool, joint venture, consolidation or
merger they must seek a priori approval from ANAC.
85

Services performed by airlines are subject to the rules of the competition law regime (see
below). ANAC can at any time change modify frequencies, capacity, tariffs, schedules and
routes. Such changes must be warranted by the objective that competition should not be
counter-productive and that air services must be economically viable.
86
It is not clear how
this provision relates to the powers of the competition authorities.
4.4.4.3 Operation of Domestic Air Services
Carriage of traffic between points in the national territory Brazil, as defined under the
Aviation Code,
87
is reserved to Brazilian carriers. The relevant provision of the Aviation
Code, however, bases nationality on the legal personality of the undertaking in question
rather than on details of ownership structure.
88

For instance, if the LAN group, which has been evolving from its original Chilean base into
a regional operator, sets up a subsidiary operation established in accordance with the
corporate laws of Brazil, it may be allowed to carry domestic traffic. We do not exclude that
such permission is not only based on legal but also on policy considerations.
89

CONAC has established guidelines for the economic regulation of scheduled air services in
the domestic services, including the provision of public services.
90
Under this regulation, a
fee of 1 percent of domestic ticket sales proceeds of domestic airline companies must be
allocated to airlines operating unprofitable routes. It is uncertain whether this measure has
been enforced in practice; see also the following sub section.

between the European Economic Community and its Member States and the countries of the Rio
Group. (italics added)
83
See Articles 184-186
84
See : Chapter III, Section III, Articles 187-191
85
Article 192
86
Article 193
87
See Article 215
88
See Article 216: Os serviios areos de transporte pblico domstico so reservados s pessoas jurdicas brasleiras.
89
We assume that in such cases that a path (such as ownership positions of dual nationals or perhaps subcontracting to an
airlift provider by the foreign owned company) has been found to comply with the statutory requirement of 80%Brazilian
national ownership. The scope of this study has not permitted detailed examination of such cases.
90
See CONAC Resolutions 002/2003 and 003/2003 of 30 October 2003, as amended in 2007

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4.4.4.4 Public Service Obligations (PSO)
In the past, airlines received direct subsidies for the operation of (remote) air routes, for
instance, in the North East region, but this is not the case anymore.

Currently there is system of cross subsidies in place, designed to financially support airlines
operating low traffic services. The financial support for the operation of these air routes
comes from a supplemental tariff which non-subsidised airlines have to impose on the
operation of normal domestic routes. Airlines that want to operate such subsidised air
services must apply to an agency called Horrio de Transport (HOTRAN).

There have been questions on the legality of the above system. CONAC had issued a
resolution instructing DAC to draw up a system for the operation of essential air services.
91

ANAC is currently examining the Norwegian model which may serve as an example for
Brazil.
4.4.4.5 Route Licensing Regulations and Processes
If more than one licensed airline applies for the operation of the same route, ANAC will
organise an auction to grant authorisation. Also, ANAC has the power to redistribute route
rights and slots in exceptional circumstances.

Airlines can appeal from decisions made by ANAC through administrative procedures
coming under the auspices of the Ministry of Defence. If all local remedies have been
exhausted, an airline can seek judicial review of the decision made by ANAC.

In exceptional circumstances, local remedies do not have to be exhausted in order to seek for
judicial review. For instance, a bankruptcy court issued binding injunctions against ANAC
for preserving Varigs route rights and slots, even though Varig was not using them.
4.4.4.6 Licensing and Approval of Charter Operations
The Aviation code appears to set forth a hierarchical order between scheduled and non-
scheduled services. The operation of non-scheduled services is only authorised if they do
not impede the operation of scheduled services.
92

Applicant carriers for the operation of non-scheduled services are subject to the same
substantive requirements and procedures to demonstrate fitness as those which apply to
carriers wishing to operate scheduled services. Foreign airlines are, however, not required to
provide documentation on their economic and financial fitness in order to obtain approval
for the operation of their international services.

Licences for the operation of non-scheduled services are granted for a period of five years.
This period is renewable.
93
The operation of non-scheduled international flights is subject to
special permission.
94
Special provisions apply to the operation of taxi services.
95

91
See CONAC Resolution 003/2003 of 30 October 2003; see also: Portaria 101/GC% of 22 February 200
92
Article 194
93
See Article 217
94
See Article 219
95
See, Article 21(XII)(c) of the Brazilian Constitution, Article 220 of the Aviation Code and Articles 26 and 36 Lei N
o
7576
of 19 December 1986

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4.4.4.7 International Market Access: Designation of Brazilian Carriers
International market access also comes under the Aviation Code under the heading of
designation. Brazilian carriers wishing to be designated by the Brazilian government for the
operation of international air services must request approval from the foreign competent
authorities established in the state into which the Brazilian carrier wishes to operate the
concerned services.

When designating a carrier, the Brazilian government must take into account the
achievement of a number of policy objectives such as the promotion of economic results in
international trade, the stimulation of tourism and the contribution to political, cultural and
cultural relations. Designation and acceptance thereof are confirmed via diplomatic
channels.

Foreign carriers wishing to operate air services into Brazil must submit the following:

registration in their home country;
financial year reports;
their social statute;
information on activities and operations, including the presence of financial assets, in
Brazil;
documentation on capital structure;
Records of the legal representative in Brazil.
96

Foreign carriers operating non-scheduled or scheduled air services into and from Brazil
must also comply with the requirements laid down in Regulation 129, which is available in
English. This regulation draws up a number of standards on safety, security, use of language
and administration of the service. A foreign air carrier must complete the attached forms
whereas an authorised representative must sign it.
97

The designated foreign air carrier, whose designation has been accepted by the competent
Brazilian authorities (ANAC), is required to forward the following information to ANAC:

operational plans and technical information, in accordance with applicable
procedures and forms;
tariffs;
Schedules
98
-- including modifications thereof, as allowed under the terms of the
applicable bilateral agreement.
99

Foreign carriers are permitted to establish offices, affiliate companies and agencies, and to
appoint representatives for the purpose of marketing and selling their air services, of so

96
See Article 206 and Article 208
97
See: http://www.anac.gov.br/biblioteca/rbha/rbha129.pdf
98
See Article 212
99
See Article 213

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approved by the competent authorises, in accordance with local rules and procedures.
100

Here too, reference is made to the principle of reciprocity.
101

The Brazilian authorities are entitled to refuse a foreign carriers designation if such
designation contravenes the national interest.
102
The designation can be cancelled in case the
applicable bilateral agreements is cancelled,
103
or pursuant to other provisions laid down in
such an agreement designed to suspend or cancel the agreed services, or when the
designated carrier infringes local laws.
104

4.4.4.8 Pricing
The Aviation code prescribes that ANAC has the power to establish tariffs for the operation
of scheduled air services,
105
and to change them at any time in order to avoid the negative
effects of competition and to enhance the economic viability of such operations.
106
In
practice, fares tend to be freely determined by local air carriers which is in line with a
relatively recent act (of 2005) dictating tariff freedom.
107
However, fares and rates must be
communicated to ANAC prior to its application, within a specified period of time.

Fares, including domestic and international fares, must be filed at most five days after the
beginning of their application. ANAC draws up reference fares for the operation of domestic
services.
As did its predecessor organisation DAC, ANAC issues directives on the establishment of
tariffs from time to time. Thus, there are administrative rulings on the establishment of
domestic air fares, in which the price as expressed in the local currency (R$) is related to the
distance flown (in km.), with mention of the concerned flights (for instance Brasilia-
Fortaleza-Brasilia).
108
Promotional fares for passenger services below 35 percent of the
reference fare calculated by ANAC must be registered with ANAC at least five days before
the commencement of their application. ANAC has set special tariffs for flights from points
in Brazil to other South American countries.
109

4.4.4.9 National Implementation of the Community Air Carrier Clause
On 18 May 2008, ANAC adopted a resolution confirming the acceptance of the Community
air carrier clause in relation to EC Member States having engaged into bilateral agreements
with Brazil. Designation of an EC carrier and revocation of authority are thus formalised in
domestic law.
110
The above resolution entered into force on the day of its publication (20
May 2008).
4.4.4.10 Airport and Airport Services Access Issues
Generally

100
See Article 214
101
See Article 214 2
102
See Article 207, with attached procedural requirements
103
See Article 210
104
See Article 298
105
See Article 193
106
See Articles 194
107
Law (Lei) 11.182 of 27 September 2005 cited above
108
See Administrative ruling (Portaria) DAC N
o
447/DGAC of 13 May 2004
109
See Administrative ruling (Portaria) ANAC N
o
016 of 27 February 2008
110
Resolution No. 027, published in the Official Journal of Brazil (Dirio oficial da Unio) No 95, of 20 May 2008, at p. 18

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As airports are considered as public goods they are publicly owned, that is, either by the
government or by public bodies.
111
The federal government owns all Brazils major airports
through INFRAERO,
112
which manages 65 airports in Brazil, from the most major airports
(such as Sao Paolo and Rio de Janeiro International airports) to airports handling general
aviation. This is not to say that foreign investors will not be allowed to purchase Brazilian
airports. There are signs which may result from studies carried out on the subject that the
current airport management model may be changed.

INFRAERO issues licences for commercial use of airport space, in particular for retail
vendors and facility operators, including providers of ground handling (see also below).

Airport charges

ANAC must approve charges as determined by INFRAERO.
113
Users must pay charges for
all airport related activities including but not limited to airline operations, cargo, ground
handling, maintenance and also passenger terminal stores. INFRAERO is entitled to waive
charges in the public interest. INFRAERO also draws up charges for the use of navigation,
radio, hangar and landing at airports, whether international or domestic. Special rules
apply to the operation of air taxi services.

Airport charges are set in accordance with tables, differentiating between the weights of the
aircraft, the period of time of parking and the area of the airport which the aircraft is using.
Users must pay the charges to INFRAERO.

Brazilian airports are ranked in four categories for the purpose of establishing airport
charges: the first category comprises the 16 largest airports of the country, the second
category the regional airports, the third category the local airports and the fourth and largest
(in numbers) category all other airports.
114

ANAC has made regulations for the various charges.
115
There are also embarkation charges,
both for domestic and for international flights.
116

In practice, foreign airlines are not certain that charges are cost related as dictated by
applicable international regulations. Also, it is feared that the revenues of charges are used
for non-aviation purposes (see discussion of the ATAERO tax above). Since the last fifteen
years, foreign carriers are also engaged in law suits before Brazilian courts; their claims
pertain to the avoidance of double taxation and amount to approximately 25 million Euros.

111
See Article 38 of the Aviation Code
112
Pursuant to Article 2 of Lei N
o
5862 of 12 December 1972
113
See Article 37 1 of the Aviation Code and the Act creating ANAC (Lei 11.182, see above); see also: Law (Lei) No. 6.009
of 26 December 1973 on the use and exploitation of airports
114
See: Administrative ruling (Portaria) ANAC N
o
199/SIE of 26 February 2007 (classification of airports for the purpose of
establishing charges)
115
See, amongst others: Regulation (Resoluo) N
o
17 of 7 March 2008, Administrative ruling (Portaria) DAC N
o

447/DGAC of 13 may 2004, and Administrative ruling (Portaria) DAC N
o
1282/DGAC of 21 December 2004 (charges for
the operation of domestic flights)
116
See, amongst others, Law (Lei) 9.825 of 23 August 1999 on the establishment of an international embarkation charge,
Regulation (Resoluo) N
o
. 008 of 13 March 2007 and Regulation (Resoluo) N
o
. 017 of 7 March 2008

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4.4.4.11 Slot Allocation
ANAC allocates slots pursuant to an airlines business plan and upon presentation of the
submission of the required documentation.
117
The system is regulated by a regulation dated
3 July 2006 as modified by Resolution N.02/2007.
118
This regulation applies to domestic
scheduled air services on which passengers are carried. It provides grandfather rights for
incumbents (subject to use-it-or-lose-it rules), permits swaps and may provide new entrant
preference for newly available slots. Reportedly authorities are also considering auctions as
well as leasing in a secondary market.
119

We understand that slots for the operation of international air services have not yet been
addressed in formal slot regulation and have not been allocated pursuant to transparent and
efficient procedure. However, discussions to integrate such planning with the scheduling
efforts of IATA and to make slot allocation more efficient are reportedly underway.
120

4.4.4.12 Ground Handling

Absent a specific regulation on this matter, ANAC licences providers of ground handling
services.
121
Access to the provision of ground handling services is free subject to a set of rules
and procedures made by governmental authorities (that is, DAC, predecessor of ANAC).
Other operators than airlines, whether domestic or foreign, must set up a company in Brazil
in order to qualify for the provision of ancillary services.

In practice, only one provider offers the concerned services, so that there is no competition.
Self handling by national flag carriers and foreign air carriers is permitted subject to
reciprocity.
122

4.4.4.13 Airport Privatisation
ANAC is currently studying various privatisation models, as stimulated by the Ministry of
Finance (as to which see also above).
123
In Portuguese language privatisation does not mean
the purchase of governmental assets by private investors but the grant of concessions or
lease of public assets, including services, or private persons for managements by such

117
See also: Art. 36, XVIII of Regulation (Resoluo) N
o
. 38 of 7 August 2008, on the internal regulation of ANAC
118
o
2 of 3 July 2006
119
See presentation of ANAC Director Marcelo Pacheco dos Guaranys of May, 2008 at Transport and Logistics Conference
organised by the Deutsche Bank.
120
The only airport which knows a slot allocation system is Sao Paolo/GRU, into which international flights and regional
flights (which were increased at GRU after the TAM crash led to capacity reductions at Cogonhas) are operated. Sao
Paolo/GRU has a level 2status under IATA procedures for slot allocation. We understand that airlines have sent their
flights schemes to the slot coordinator of Sao Paolo/GRU, but that replies were not forthcoming.
121
Pursuant to Articles 102-104 of the Aviation code, and Administrative ruling (Portaria) N
o
467/GM5 of 3 June 1993 (on
the performance of ancillary services at Brazilian airports)
122
See Art. 102 2 of the Aviation code; see also: Article 2 of the Administrative ruling (Portaria) N
o
467/GM5 of 3 June
1993 (on the performance of ancillary services at Brazilian airports); see also Instruction (Instruo de aviao civil IAC
163-1001A) on the Execution of ancillary services in air transport (Execuo de Servios Auxiliariares de Transporte
Aero) dated 5 May 2004
123
(2003) at p. 11

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private oppressions. Hence, privatisation refers to private management of public assets and
services.
124

In the current proposals, the central role of ANAC with respect to the supervision of airport
management, including but not limited to the establishment of airports charges and the
regulation of slot allocation, is being critically examined. In addition, the proposed models
for privatisation would do away, partly or entirely, with the predominant role of
INFRAERO in relation to the management of airports.
125

4.4.5 Competition and State Aid
4.4.5.1 Institutional Structure
As stated above, ANAC is charged with the responsibility for the sound and economic
operation of air services.
126
ANAC must promote competition and has regulatory powers
but is not entitled to enforce competition regulations by limiting or remedying illicit anti
competitive practices.

The Brazilian administration knows competition authorities, to begin with the
Administrative Council for Economic Defence (CADE), which is an autonomous agency.
Other bodies are the Economic Law office (SDE) in the Ministry of Justice and the Secretariat
for Economic Monitoring (SEAE) in the Ministry of Finance. CADE has adjudicative powers
in the Brazilian competition law system, whereas SDE is responsible for investigation, and
SEAE provides economic analysis.

The above institutional framework is in the process of being revised:

The tasks of CADE are to be combined with those of SDE;
The role of SEAE would have to be re-examined;
A system of mandatory pre-notification of a merger or similar transport should be
introduced;
Changes may be made in the substantive and remedial provisions.
4.4.5.2 Scope and Substantive Provisions of the Brazilian Competition Law Regime
The Brazilian competition law regime, principally laid down in the main Competition Law
of Brazil,
127
applies to regulated sectors such as the airline sector. Hence, as a general rule,
there are no exemptions from the application of the competition law regime for any of the
regulated sectors. Subject to any international agreements to which Brazil is a party, the
Brazilian competition law applies to acts which are entirely or partly performed in the
Brazilian territory, or to acts the effects of which are suffered in Brazilian territory.
128

124
(2003) at pp. 8-9
125
(2003) at p. 12-17
126
See, Article 193 of the Aviation code, and Law 8.884 (1994), cited above
127
Law N
o
. 8.884/94
128
See Art. 2

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The main substantive provisions are laid down in three articles, to wit Articles 20, 21 and 54.
Whereas Articles 20 and 21 are designed to regulate anti-competitive conduct other than
mergers, Article 54 deals with mergers, acquisitions ands similar transactions.

Under Article 20: any act in any way intended or otherwise able to produce the effects
listed below, even if such effects are not achieved, shall be deemed a violation of the
economic order. The effects referred to in this provision are to:

Limit, restrain or in any way injure open competition or free enterprise;
Control a relevant market of a certain product or service;
Increase profits on a discretionary basis; or
Abuse market control.

Article 21 draws up a long list of activities which are deemed to fall under the prohibitions
of Article 20. They include various kinds of horizontal and vertical abuses of market power.

In 1999, CADE produced enforcement guidelines regarding actions coming under the above
Articles 20 and 21. For either horizontal or vertical restrictions to be found illegal there must
be evidence of market power as well as an anti-competitive effect on a substantial share of
the relevant market. Although the guidelines do not specify that cartels are illegal per se,
there is an assumption of anti-competitiveness once a cartel possesses market power.
129

For the air transport sector, the relevant market is defined by the dimension of the air
services, that is, carriage of passengers, and by geographic dimensions, that is, routes, and
city pairs. In this respect, the approach is not so different from that adopted by the EC
competition authorities.
4.4.5.3 Competencies of Competition and Aviation Authorities
The relationship of the powers between CADE on the one hand and ANAC on the other
hand does not appear to be explicitly regulated; there is, however, a conceptual division of
roles. CADE is tasked to prevent airlines from behaving in an anti-competitive fashion,
whereas ANACs task is more focused on the regulation of uneconomic behaviour, and
enforcement thereof as it has the power to, for instance, modify frequencies, capacity,
schedules, tariffs and routes.
130
ANAC must also take the economic viability of the service
into account. CADE must remedy anti-competitive which may be different from
uneconomic behaviour.

In March and in July 2003, ANAC published two administrative measures forbidding the
increase of air services. Based on its powers referred to above, ANAC claimed that there was
at the time an excess of supply of commercial services, affecting the profits of the airlines.

CADE has applied the competition law regime to the airline sector, that is, in a domestic
case. However, in the light of the above cited provisions of the Aviation code, ANAC may

129
See: OECD, Competition Law and Policy in Brazil, Policy Brief 1-3 (2005)
130
See sub section 4.4.2, above

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be called upon when foreign interests are at stake. The application of the Brazilian
competition law regime to the operation of international air services has yet to be made.

Proposed mergers and related agreements are subject to review by CADE (under Article 54).
Advance notification is not mandatory. There is a penalty system in place in case of late
filing of the transaction.

The investigative and analytical bodies of the Ministry of Justice and Finance (see above)
handle -- that is, analyse -- airline alliances as mergers. Competition issues raised in the
context of alliances and mergers are regulated by CADE as an autonomous body under the
Ministry of Justice (see above, and below). ANAC only has a secondary role (o papel
acessria da Agncia em relao aos rgos de defesa da concorrncia (art. 6)) with respect to the
protection of competition.
131

4.4.5.4 Remedies and Enforcement
CADE is entitled to impose fines and other measures. Its final decisions are subject to
judicial review.

CADE has investigated an inter-airline case concerning a price fixing cartel, the so called Rio
de Janeiro Sao Paolo airline cartel. It took its decision in 2004, relying on Brazilian sales
rather than world wide sales of the concerned airlines.
132

4.4.5.5 State Aid
There is no law prohibiting state aid. In the past, state aid has been granted to Varig. There
are no current recipients of state aid.
4.4.6 Safety
Brazil is classified in Category 1 in the FAA IASA (International Aviation Safety Program),
along with most major countries of the world. This means that FAA after review considers
that Brazil complies with the ICAO Standards.

However, a September 2007 IATA report, produced in collaboration with the Brazilian
government and aviation agencies, found that Brazil's aviation accident rate was about 3.5
times the world average, and assessed the principal causes as: shortcomings in air traffic
control, poor communications and substandard airport operation.

Both major Brazilian airline groups, TAM and Gol, have suffered multi-fatality crashes in
Brazilian airspace within the last two and a half years; in addition, there have been a number
of other incidents in these and preceding years.
133

131
See Art. 6 of the Act creating ANAC
132
See: OECD, Competition Law and Policy in Brazil, A Peer Review 59-61 (2005)
133
Gol mid-air collision 2006. On 29th September 2006, a Gol Transportes Areos Boeing 737-800SPF and an Embraer
Legacy collided over Brazil's Amazon region. All 154 occupants aboard the Gol 737 were killed. The other aircraft and its
occupants survived. A report by CENIPA, the Brazilian air accident investigation bureau, found 11 contributing factors,
most of them ATC procedural errors.
TAM Congonghas crash 2007. On 17 July 2007, an A320 operated by TAM unsuccessfully attempted a go-around at Sao
Paolo's Congonhas airport, and collided with a building just past the runway end. 187 people on board and 12 people on the
ground were killed. CENIPAs report of August 2007 focused on the crew not having retarded the No 2 engine's thrust
lever on touchdown: a later communication from the European Joint Aviation Authorities clarified that the lever should have

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4.4.6.1 Safety Oversight
Safety Oversight in Brazil rests with ANAC. The agency adheres in general to the ICAO
Standards, but Brazil does not notify ICAO of non-compliance with the standards.

The agency comprises a number of functions of which the following are concerned with
safety and safety oversight:

SSO, responsible for safety and security
SAR, responsible for airworthiness
GGPI, responsible for accident investigation and prevention.
Also, ANAC is responsible for the Brazilian Aircraft Registry. Incident reporting from all
aviation activities is mandatory; its effectiveness and follow-up is not known.

Safety Oversight of airports and Air Traffic Management is in practice carried out by
Infraero and DECEA respectively via oversight of the Safety Management Systems (SMSs)
established at airports and Air Traffic Management functions.
4.4.6.2 Latin American Aviation Regulations (LARS)
In the 1990s the Latin American Civil Aviation Commission (LACAC) initiated through an
understanding with ICAO the establishment of a regional safety oversight system to be
administered by ICAO through its regional office. Based on an agreement to be signed by at
least 10 States a Regional Safety Oversight Cooperation System (SRVSOP) became effective
in 2001; Brazil is a signatory to the agreement.

In the period 2001 - 2005 SRVSOP established the first regional regulations, known as LARS,
setting the foundations for the establishment of the regional safety oversight system.

The LARs are developed using different regulatory models, such as the United States
Federal Aviation Regulations (FAR), EASA requirements, the regulatory model proposed by
the FAA (MCARs) and, the regulations of all participating States.

These models are used as a source of study and reference for the development of the LAR
regulatory framework, which has initially focused its strategy on obtaining a regional
harmonised scheme whereby all major operators are certified to the same standard,
operators have their aircraft maintained by maintenance companies certified to the same
standard (LAR 145), the staff in charge of aircraft operations and maintenance is certified
according to one same set of regulations, and is trained at training centres that are certified
according to one single set of regulations.

been moved to idle. Mechanical failure, however, was not ruled out, CENIPA drawing attention to a cockpit voice recording
reportedly saying that the lever was jammed.
Manaus Aerotaxi crash 2009. In February 2009 an EmbraerEMB-110P1 Bandeirante turbo-prop aircraft operated by
Manaus Aerotaxi departed the Amazon city of Coari on a domestic flight to Manaus. The airplane crashed in the
Manacapuru River. Of 28 persons aboard only four passengers were found alive by rescue personnel. The EMB-110P1 has a
(certificated) maximum number of passenger seats of nineteen; 26 passengers had boarded the flight, including eight small
children.

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It is recognised that the development and subsequent implementation of such regulatory
framework is not an easy task as it requires changing a number of paradigms that exist in
the region.

SRVSOP has developed inter alia the following LARs and related documents: LAR 1 on
Definitions, Abbreviations and Symbols, LAR 11 on Rules for the Formulation, Issuance and
Amendment of LARs, LAR 145 on Approved Maintenance Organisations, LAR PEL on
Personnel Licensing, LAR OPS on Air Operations and Certification, RVSM Approval
Requirements and the Airworthiness Inspector Manual.

It is unclear to what extent and depth the regulations have been implemented by the States.
4.4.6.3 IATA Operational Safety Audit (IOSA)
As defined by IATA the IOSA programme is an internationally recognised and accepted
evaluation system designed to assess the operational management and control systems of an
airline. IOSA uses internationally recognised quality audit principles and is designed to
conduct audits in a standardised and consistent manner.

Only one Brazilian Airline participates: TAM; according to the IOSA website the audit of
the airline has not caused any remarks. The authors of this study have no admittance to the
audit reports in detail.

In the context of IOSA IATA has developed a programme for assisting also South American
States in achieving ICAO safety standards and it appears that Brazil takes part in the
programme.
4.4.6.4 US Federal Aviation Administration (FAA) Assistance to Brazil
Following the mid-air collision in 2006 FAA has offered assistance to the Brazilian
Authorities to improve the quality of regulations, procedures, processes and training. The
FAA fiscal year 2008 indicates that also in this period Brazil has the attention and priority of
the FAA assistance programmes.
4.4.6.5 EASA and Brazil
EASA works at facilitating the free movement of European aviation products and services
worldwide. This is achieved by assisting third country regulators certifying European
products and service providers. Reciprocally European certificates can be issued on the basis
of third country certificates when there is sufficient confidence in the regulatory system of
partner authorities to use their findings. To do so, bilateral agreements or working
arrangements have to be concluded by the Community or the Agency, depending on the
nature of the subject to be covered.

Such working Arrangements have been concluded in February 2004 between Brazilian
Authorities and EASA by which the rules, standards, practices, procedures and system
applied by Brazilian Authorities (now ANAC) for the approval, monitoring of design,
production organisations and continued airworthiness are accepted as an alternative to the
corresponding EASA rules etc. Although the arrangement does not cover all aspects of
safety oversight it goes a long way in eliminating redundancy and duplication of the
activities of EASA and ANAC.

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It is understood that although working relations and confidence between ANAC and EASA,
and between EASA and Embraer is satisfactory EASA looks forward to the establishment of
a Bilateral Safety Aviation Agreement (BSAA) between the Community and Brazil to
include all aspects of the safety oversight activities relations, including also maintenance and
licensing. It is also understood that ANAC has shown strong interest in a more
comprehensive agreement.

The Brazil European Union Strategic Partnership Joint Action Plan also foresees increased
cooperation between the partners in the field of aviation development including the
negotiation of an EU-Brazil Aviation Safety Agreement (see 2.1.2.5 above).
4.4.6.6 SAFA
In the EU, a special safety programme, Safety Assessment of Foreign Aircraft (SAFA), aims
at raising the level of safety of commercial flight activities within Europe. Managed centrally
by EASA and operated by National Authorities it is performed via spot checks of aircraft
and their documentation of any nationality at airports throughout Europe.

The Member States that are engaged in the EC SAFA programme (being either an EU
Member State or a non-EU ECAC Member State who have entered into a Working
Arrangement with EASA) are obliged to perform SAFA ramp checks on the aircraft of third
country operators flying into their state. And, when needed, take appropriate corrective
measures in addition to disseminate the results of these inspections to other participants in
the EC SAFA programme.

Since the programme began in 1996 as a voluntary ECAC programme, the Member States
had by February 2007 performed some 37,000 SAFA inspections.

The SAFA data are entered into a data bank, which forms a comprehensive basis for
analyses performed every four months in accordance with a system of factors related to inter
alia kind, severity and frequency of findings from the ramp checks. The analyses establish
statistical overview and knowledge of specific carriers and States related to safety, and result
in lists of rankings of carries and States relative to the findings.

However, it should be noted that the data, even when investigated in detail, can provide
only indications and trends of safety of specific carriers and safety oversight by States.

The outcome of the analyses are evaluated by EC assisted by a group of experts and
representatives of the SAFA Member States, and when appropriate carriers and States are
informed of the findings.

The outcome of the SAFA programme is also used to provide basis for decisions in the
context of Banned air carriers described below.

Relative to Brazilian carriers operating into Europe and the authorities of Brazil it is
understood that the findings of ramp checks of the Brazilian carriers do cause some concern
in EC and that the Brazilian authorities and carriers have been notified by EC.

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4.4.6.7 Banned Air Carriers
Finally, an EU regulation establishes a Community list of air carriers subject to an operating
ban within the Community. None of the airlines included in the latest published list (14
November 2008) are registered in Brazil.
4.4.7 Air Traffic Management (ATM)
ATM is provided by the Departamento de Controle do Espao Areo, (DECEA), which is part of
the Air Force, reporting to the Ministry of Defence.

The ATM system includes Flow Management, Air Traffic Control of the air space areas,
approach and departure control at bigger airports and local control at most airports
(Infraero delivers local air traffic control at some domestic airports). Meteorological, Flight
Information and Communication services, and Flight Inspection of Navigation and
Communication facilities are also ATM entities.

The organisation of ATM reflects the size of the country: 5 Area Control Centres are
supported by 79 sub-centres in addition to 66 Aeronautical Information Service and
numerous approach/departure facilities.
4.4.7.1 Air Traffic Control (ATC)
Although ATC is provided by a military organisation it appears to adhere to the ICAO
provisions (Brazil does not notify ICAO on non-compliance with ICAO Standards).

ATC functions are certified by DECEA HQs in accordance with ICAO Standards. The HQs
supervises and inspect the ATM system and its functionality. According to ANAC it is its
responsibility to perform safety oversight of ATM. While it is unclear how the division of
responsibility is organised it seems that separation of oversight and provision of services is
established, at least functionally.

Safety Management Systems are established at all operational ATC functions. The quality of
the systems is not known to the authors of this report. But there have been reports of pilots
complaining of bad language skills of the controllers.

Congestion causes some airborne and ground delays but does not cause safety concern at
DECEA. Following a major accident in 2006 capacity was reduced with focus on reducing
airborne delays. At present efforts are concentrated on reducing delays on the ground.
DECEA has invested in improved software tools to improve flow management and in
software to help optimise the design and use of airspace.

While traffic normally follows a fixed route structure DECEA has declared that user-
preferred routing may be provided upon request. Direct routings initiated by ATC are rarely
used.

The organization is staffed by mostly military staff and falls under military regulations.
4.4.8 Security
Civil Aviation Security in Brazil is the responsibility of ANAC in particular to establish
security rules for aircraft and airports, including those related to the transportation of
dangerous loads.

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Within ANACs structure the responsibility for security as well as safety lies with the
Operational Safety Superintendence (Superintendncia de Segurana Operacional - SSO)
except for airport security, which is the responsibility of the Airport Infrastructure
Superintendence (Gerncia Geral de Facilitao e Segurana GGFS) who establishes
technical guidelines, standards and rules for security against unlawful acts. GGFS is also
responsible for accepting and approving security programs for airports, airlines, cargo
operators, airport services etc.

In line with ICAO Annex 17 Brazil has established a National Civil Aviation Security
Programme (PNAVSEC) defining the objective, roles and responsibilities for safeguarding
civil aviation against acts of unlawful interference. The programme established in 2003
under the responsibilities of the Department of Civil Aviation (DAC), the former Authority
of Civil Aviation in Brazil, was expanded considerably with additional security regulations
in 2005. As a consequence of the transition of the responsibilities from DAC to ANAC as of
March 2006, the aeronautical legislation is currently being revised, with the update of the
PNAVSEC in final phase of approval. In accordance with the approved text of this
regulatory instrument, the many regulations of Security of Civil Aviation will be revised,
with foreseen signoff period for the beginning of 2010.

Brazil has adopted the ICAO standard regarding the transportation of liquids, aerosol and
gel in hand baggage for international flights with effect from 28 of February 2007.
Passengers are required to carry liquids, aerosol and gel in clear resealable 1 litre plastic
bags (max size 20cm x 20cm) in individual containers no larger than 100ml.

The implementation of Advanced Passenger Information (API) for flights to and from Brazil
has been an issue for many years. According to IATA several of the Brazilian Border Control
agencies are now working actively together to move the initiative forward. Led by the
Brazilian National Police, they are actively seeking information from the air transport
industry. IATA has supported this initiative by conducting a second Information Exchange
Seminar for Brazilian government officials in Brasilia, in August 2008.

According to IATA the National Police, which is also the lead agency in developing API in
Brazil, now fully understands and recognises the value of aligning their own proposed
systems with existing standards. As a next step, IATA has proposed the creation of a
Government/Industry Working Group tasked with making recommendations that would
ultimately be adopted into the Brazilian API Implementing Regulation.
4.4.9 Environment
The Ministry of Environment has overall authority for protection of the environment from
civil aviation in Brazil. Under the supervision of the Ministry ANAC is responsible for
ensuring compliance with the environmental standards of ICAO (contained in Annex 16 to
the ICAO Convention related to aircraft noise and emissions) while Infraero is responsible
for airport facilities to be in accordance with national and international environmental laws.

ANAC sole focus is directed towards compliance with Annex 16 in terms of aircraft noise
and aircraft engine emissions. No measures are actively being taken to periodic measure the
effects of civil aviation, although some airports do monitor noise and emissions.

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Infraero has implemented an Environmental Management System which guides the many
programs and environmental actions taken by the organization including environmental
licensing of airports (where aircraft with more than 60 seats operate), environmental
assistance to airports, programs for alternative energy and efficiency in use of fuels.

Under Infraero supervision its airports has obtained environmental licensing in compliance
with national legislation. The quality of the many environmental initiatives taken by
Infraero is not known to the authors of this report. However, the sheer amount of initiatives
taken seems to indicate an acknowledgement of the importance of addressing the
environmental challenges within civil aviation.

It seems that there is currently not much interaction between the Ministry of Environment
and ANAC/Infraero.
4.4.10 Alternative Fuels Biofuels
A pioneer in the development of alternative energy sources, such as fuel alcohol, during the
1980s, Brazil has backed research and development of alternative fuels for air transport.

Between 1980 and 1984 Brazil developed PROSENE, an alternative combustible lipofuel
(vegetable oil) used as an alternative to aviation kerosene. Pure biokerosene was used to
power Embraer EMB-110 Bandeirante turboprop aircraft, between the cities of So Jos dos
Campos and Braslia.

The biokerosene application was developed by the Brazilian General Command for
Aerospace Technology (CTA). CTA observed that the reduction of CO2 emissions from an
EMB-110 airplane in operation, by the use of a blend of 90% aviation kerosene and 10%
PROSENE, could reach 7.8% per year (on average) compared with the same airplane
propelled only by aviation kerosene. In 1984, however, Brazil ceased its National
Biokerosene study due to lack of interest by both energy companies and the economic
community in Brazil. In 2005 CTA estimated that PROSENE could be fully developed by
2018 for fuelling large commercial jets.

Although the Brazilian government sponsored research was terminated in 1984, sugar cane-
based ethanol fuelled planes made by Embraer subsidiary, Industria Aeronautica Nevia, are
widely used in the Brazilian agricultural industry today. In 2004, Embraer certificated the
piston-powered Ipanema
134
to fully run on Ethanol, but last year Embraer rejected concepts
to convert turbine engines to mixed alcohol- and kerosene-based fuel mixtures as the
company expects to wait several years before unveiling a new commercial airliner.
4.4.11 Consumer Protection
4.4.11.1 Liability and Consumer/Passenger Rights
Consumer protection derives from various legal sources. The Brazilian Consumer Code
includes provisions which are designed to regulate the contractual relationship between the
air carrier and passengers or shippers of cargo.
135

134
Industria Aeronautica Neiva estimates that in Brazil there are approximately 1.3 thousand Ipanema aircraft operating in
the spraying of crops.
135
See Title VII, in particular Chapter III thereof

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The Aviation Code dedicates a chapter to the contractual liability of the carrier in relation to
passengers, crew members and shippers of cargo. Liability is limited to the equivalent of
approximately US$42,000 per passenger in cases of death and injury; US$ 1,800 in cases of
delays and losses or damage to baggage; and US$36 in cases of damages to cargo. The
indicated values in US$ can fluctuate as the unit in which the limits are expressed do not
have a stable exchange rate with the US$. Limits do not apply in case of wilful misconduct
or gross negligence of the air carrier.

The above limits exceed the limits laid down in the Warsaw Convention (1929) as amended
by the Hague Protocol (1955). However, Brazil has ratified the Montreal Convention, 1999,
providing for unlimited compensation on international journeys as defined by this
convention.

Taking into account the international framework on air carrier liability providing for
unlimited compensation, and potential conflicts between the provisions of the Aviation code
on the one hand and rules and principles laid down in general civil law of Brazil such as the
Civil Code and the Consumer Protection Code on the other, airlines are not certain that the
limits set forth by the Aviation code can in all cases be enforced.

There are currently plans to set up regulations designed to provide compensation to
passengers having experienced delay of at least two hours. On December 5, 2007, the
Brazilian Minister of Defence announced that airline companies will have to indemnify
passengers for flight delays. The idea is to create a system that rewards the passenger and
discourages flight delays. The penalty fee will only be applied when the delay is caused by
the airline company and will not be enforced in cases involving delays of 30 minutes or less.
For delays of 30 minutes to one hour, the penalty fee will be five percent of the cost of the
airline ticket; for one-to-two-hour delays, ten percent; and so on with progressively
increasing penalty fees. In delays involving more than five hours, the company will have to
pay 50 percent of the cost of the ticket.
136

4.4.11.2 Third Party Liability in Relation to Terrorist Acts
The Brazilian government assumes third liability for the compensation of damages
following a terrorist act or an act of war against Brazil aircraft operated by Brazilian airlines,
excluding air taxis, up to a limit of US$ 1 billion. This subject is currently being examined by
ICAO in the context of the establishment of a new international agreement, which will be
discussed during a diplomatic conference which will be held end of April-early May 2009.
4.4.11.3 Enforcement: Case Law
To begin with, consumer complaints on the operation of air services are directed to ANAC.
ANAC can take a variety of measures to remedy the complaint. Another instance is the
SNDC the Sistema Nacional de Defesa do Consumidor (SNDC), coming under the consumer
department falling under the auspices of the Ministry of Justice.

The above is confirmed by case law. If passengers suffer damage on international flights
exceeding the limits laid down in the Warsaw Convention (as amended) courts tend to
apply the higher limits of the Consumer Protection Code.
137
Also, they frequently rely on the

136
See: Empresas Areas tero de Ressarcir Usurios por Atrasos, O GLOBO (O)NLINE, Dec. 5, 2007
137
See: Jurisprudence of the civil court of Rio Grande, Processo 70011860950, decision of 1 October 2008

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provisions of the Civil Code in order to justify their decisions. A myriad of cases deal with
question of the permissibility of the compensation of immaterial damages, which
compensation is not permitted under international private air law, that is, the Warsaw
Convention as amended by The Hague Protocol and the Montreal Convention, 1999, but
may be allowed under Brazilian private law.
138

In a relatively recent case involving an international flight to which the Montreal
Convention, 1999 applied (Lisbon-Fortaleza-Lisbon), the court relied on the provisions of the
Consumer Protection Code in order to determine the compensation due by the airline to the
passenger in a case of lost luggage.
139
This is not uncommon in Latin America: as courts are
not familiar with international agreements such as the Montreal Agreement, 1999, they tend
to apply domestic law with which they are more acquainted.

There have been various cases on overbooking.
140
Those cases have been judged under the
Consumer Protection Code as the contract between carrier and passenger had been breached
by the carrier. International agreements do not apply to such cases.
4.4.12 Social Aspects
4.4.12.1 Generally
Brazil has a vast body of laws regulating social policy. Here again, the Constitution provides
some basic concepts (as to which see below), which are elaborated in various acts on
employment, the prohibition of discrimination between sexes, the elimination of child
labour and the protection of young persons, the establishment of labour contracts, social
security, disability, the position of old persons and survivors benefits, unemployment
benefits, migrant workers, sea farers and public and civil servants.
141
Brazil has ratified
various conventions drawn up by or under the auspices of the International Labour
Organisation (ILO) regarding Equality of Opportunity and Treatment, Migrant Workers and
Working Time.
142

The right to collective bargaining is recognised, but public employees do not enjoy the right
to bargain collectively because under the Constitution their remuneration can be set or
modified only by specific legislation. A National Labour Forum has been created in order to
examine whether certain categories of public servants can be allowed to negotiate
collectively to fix their conditions of employment, as is already the case in state enterprises
and joint venture companies.

Union representation appears to be well established and organised. Each sector pilots,
providers of ground handling services, crew members and airport employees has its own
union. They are assembled in the National Syndicate for Aeronautic Personnel (Sindicate
Nacional dos Aeronautas), which was founded as early as 1942. Various collective labour
contracts have been established for aeronautical personnel working in the principal airlines,
to wit Varig S/A and TAM Linhas Areas S/A, regarding compensation of working on

138
See, the Section Jurisprudncia laid down in:
www.tex.pro.br/wwwroot/06de2005/odever_douglasfischer.html
139
See: Processo 700.152.532-90, decision of 27 June 2006, and Processo 2.000.00.474489-6/00 decision of 28 April 2006
140
Processo 70010446342, decision of 7 April 2008, Processo 588.172; Processo 628.828, decision of 4 October 2004
141
See: http://www.ilo.org/dyn/natlex/country_profiles.nationalLaw?p_lang=en&p_country=BRA
142
See: http://www.ilo.org/dyn/natlex/country_profiles.ratifications?p_lang=en&p_country=BRA

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holidays by double payment of salary, standards for the guarantee of jobs in case of forced
reduction of work force, guarantees for pre-pension leave, and implementation of provisions
of collective labour agreements.
143
Air traffic controllers are participating in another
syndicate.
4.4.12.2 Organisation of Mobile Workers in Air Transport
The Aviation Code provides the following rules on nationality:

No more than one third of the crew may be foreign on any international flight;
144

This number (one third) may be increased if agreement is reached on this increase in
a bilateral air services agreement, and reciprocity is given;
145

In case there are not enough Brazil crew members, foreign crew members may be
allowed to serve on international flights, as a temporary measure, in which case their
contract may not exceed six months.
146

4.4.12.3 Rules Establishing Flight Time Limitations and Crew Rest Period Requirements
Flight time limitations and rest periods are governed by a Law (Lei),
147
stipulating the
working conditions of aeronautical personnel. Working days start on the moment the
aeronautical workers are present in his or her working environment; he or she must be there
at least 30 minutes before the flight starts. The working day is supposed to end 30 minutes
after the engines have been turned off.
148

A maximum working day shall consist of 11 hours in case of a single crew member, 14 hours
in case of multiple crew, and 20 hours in case crew members work in shifts.
149
Total
working time per week shall not exceed 60 hours per week and 176 hours per month,
including flight time, preparation of the flight, transfer time and the reception of instructions
in flight simulators.
150
Special rules apply to crew of air taxis.
151

Crew members may be on call during a specified period, not exceeding twelve hours. In
such cases they must show up within 90 minutes at the airport.
152
Employers that is, the
airline may not require the above on call status of their employees for more than two
times per week or eight times per month.

The above law lays down the following duty and rest periods:

nine hours and 30 minutes of flight and five landings of the aircraft in case of a
simple or minimum crew;
twelve hours of flight and six landings in case of multiple crew;

143
See: http://www.aeronautas.org.br/convenc/convenc.html
144
See: Article 156 3
145
See: Article 157
146
See: Article 158, and 158 1
147
Lei N
o
7.183 of 5 April 1984
148
See: Article 20. Similar criteria are laid down in Annex III of EU-OPS Regulation Subpart Q, regulating Flight Time
Limitations for air crew. However, those criteria do not include an extra 30 minutes after the engines have been turned off.
149
See: Article 21
150
See: Article 23
151
See: Article 24
152
See: Article 25

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Fifteen hours flight and 4 landings in case of a crew working in shifts.
153

The flight time limits in conventional aircraft may never exceed 100 hours per month, 270
hours per three months and 1000 hours per year. Special rules on flight time limits apply to
flights made by helicopters.
154

Crew members are entitled to a rest period of:

twelve hours of flight and six landings in case of multiple crew twelve hours after a
working day of twelve hours, as defined under the act;
16 hours rest after a working day of twelve to fifteen hours;
24 hours rest after a working day of more than fifteen hours.

The above act (Lei N
o
. 7.183) also contains rules on remuneration of, for instance, night
flights. In most but not all instances remuneration is, however, left to the freedom of contract
between the concerned parties.
4.5 CONCLUSIONS
4.5.1 Air Transport Law and Policy in Brazil General Findings
The Brazilian legislation for civil aviation is detailed and up-to-date. It is easily accessible on
internet in Portuguese. The principal subjects are covered by laws and secondary
legislation, whereas the Constitution itself also includes provisions on the conduct of air
transport relations. The rule of law is thus strongly present in the area of civil aviation,
especially so in the area of economics as well as in the technical and operational areas of
safety and security (which are dictated by a complete set of rules and regulations).

Unlike typical practice in the EU, the air traffic management system for civil aviation in
Brazil (as in some other states in the South American region) is provided by the military as a
governmental service without direct, service-related charges. Its operations have been the
subject of some debate and controversy in recent years.

In general, the safety and reliability of the air transportation and its infrastructure (airports
and ATM) as well as the scope of its services attract a high level of public and political
attention in Brazil for economic, social and national security reasons. Desired improvements
are being pursued.

On the economic regulatory side, the principle of reciprocity shows up in all levels of
regulation: in a general fashion in the Constitution, in the Aviation Code and in special
regulations on ground handling and hiring of foreign crew. In such cases, reference is made
to bilateral agreements as the legal instrument for securing reciprocity.

153
See: Article 29
154
See: Article 39. European Regulations prescribe a maximum of 900 block hours per year and 100 hours per 28 day period
for flight crews. See Council Regulation 1899/2006 and its Annex III Subpart Q (as amended by Commission Regulation
8/2008) and Directive 2000/79.

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Pricing of air services is subject to governmental control and fees for infrastructure services
(while logically subject to governmental review to control against abuse of monopoly
provider power) are not always clearly related to the costs of providing services as the
government itself has been dictating charges (e.g. the ATAERO tax) that are not cost-based.

Competition regimes are in place and even enforced domestically but are not yet applied to
the operation of international air services. The relationship between the a priori control of the
air transport regime (e.g. through capacity policy) on the one hand and the a posteriori
control of the competition law regime has yet to be determined. We understand that the
aeronautical authorities and the competition authorities are supposed to work together but
how that is or should be achieved in case of conflicting interests is an open question.

The institutional framework is marked by a strong presence of ANAC, the principal aviation
authority, in the Ministry of Defence. Generally, civil aviation seems to be strongly marked
by the presence and the influence of the Brazilian state bodies generally and the military in
particular. However, other bodies have increasingly important inputs and may be gaining
in influence.

Passenger protection is increasingly looked at. Recent flight delays call for government
intervention and protection of passenger rights. Otherwise there is a solid body of civil law
laying down rights for consumers.

Labour arrangements look relatively protective for workers in civil aviation. Their rights
seem well secured in acts and collective agreements.
4.5.2 Summary Views on the Degree of Regulatory Parallelism between the EU and Brazil
While there are certain general differences in the structure of regulation and authority
between the EU and Brazil, notably including the role played by the military in policy and
(in the case of ATC) also operations, there are also interesting general similarities. That is,
Brazilian law and policy in their own way reflect conscious and comprehensive concern
with respect to public interest, corporate responsibility, social rights and the level playing
field. Similarly the government of Brazil has played a leadership role at the regional and
global level (e.g. at ICAO) in the development of aviation standards and will be a key
partner in developing global policies aimed at creating sustainable growth that are efficient
and progressive in areas such as environmental protection.

In the modest time frame permitted for this study, it has not been possible to compare
reliably the detailed content in each of the regulatory areas of Community concern. We can,
however, say two things: 1) a clear basis for dialogue among experts as well as general
policymakers exists; and 2) we see a considerable interest and need for further dialogue on a
range of important practical as well as general issues between the EU and Brazil.

As will be examined in the next Chapter, industry stakeholders in the EU endorse and even
attach priority to an issue-based dialogue with Brazil aimed at establishing more open,
efficient and predictable market access conditions, lowering costs of doing business and
creating greater regulatory efficiency. We note that some ministries (especially Tourism,
Justice and Finance) appear to be favour freer market access conditions than others yet may.
As Brazil continues to expand its role in global trade, new investment opportunities seem
likely to emerge. Liberalisation of restrictions on foreign investment in airlines is under
discussion as is expanded participation of private capital in airport development.

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Brazil may first want to test liberalisation at the domestic and regional level (see the
Mercosur and the Fortaleza arrangements). However, we believe that an intensified trans-
Atlantic dialogue can be critical in laying new foundations for cooperation.

The Brazilian authorities are also trying to tackle the major new issues on the horizon such
as environmental protection. It is also clear that Brazilian operators, from their perspective,
look increasingly to the European market as a whole and no longer so much to its individual
national parts.

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5. THE STRATEGIC SETTING FOR EU-BRAZIL RELATIONS
In this concluding chapter we try to look beyond the turmoil that is currently affecting air
transport markets worldwide in order to consider the relevance of developing air transport
relations with Brazil at Community level to enable and promote sustainable growth. Our
analysis, which also recapitulates findings of earlier chapters, will consist of six parts; it
considers:

Longer term prospects in the EU-Brazil market
Concerns of stakeholders
Opportunities and risks for operators
Context for the future EU-Brazil relationship
Illustrative issues to be addressed
Final observations and conclusions.
5.1 LONGER TERM PROSPECTS IN THE EU-BRAZIL MARKET
Brazil is the most important market in Latin and South America and a leading member of
the G-20 at global level. In recent years its international trade has grown significantly,
though -- as has been pointed out to us by stakeholders (as to which see below) -- the
country is also experiencing its share of the current global downturn. Brazilian as well the
airlines of other states are being hard hit. In the air transport market bookings are down.

Longer term, however, there is general agreement that the Brazilian economy embodies
enormous potential and that relations with Europe should play a critical role. Air transport
services which should include much stronger development of air freight and air express
networks as well as passenger services will be an essential element or underpinning of
general economic relations.

Liberalisation of market access and removal of formal constraints embodied in current air
services agreements between Brazil and EU Member States will in future be a vital element
in enabling sound and efficient market expansion. During the current period of softened
demand, however, some of the important restrictions in these agreements notably
quantitative controls on capacity will play a less dampening role for the time being. This
situation argues for taking a strategic view and organising now for the longer term as well
confronting any possible emergencies.

For the Brazilian side it may be important to consider that the still-weak position of Brazilian
operators in terms of international market share pre-dates the current crisis. That is, events
such as the deterioration of Varig were not prevented by the classical regulatory
arrangements intended to strengthen the position of national flag carriers. Successor
operators such as TAM will therefore probably not be helped by more of the same. Arguably
they require a new, more modern regulatory context that enables and challenges them to be
competitive and efficient.

In the longer term it seems reasonable and desirable for a number of diverse and dynamic
operators on both the Brazilian and Community side to establish strong positions based on

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free market access, while meeting the highest standards of safety, security, health as well as
consumer and environmental protection.

Finally, in developing free market access over the South Atlantic, discussions with Brazilian
authorities have shown that Brazil wishes to take into account the developments of market
integration in South America in the context of expanding relations with the EU.
5.2 CONCERNS OF STAKEHOLDERS
Industry stakeholders on both sides of the Atlantic on the one hand seem in general inclined
to take a cautious approach in the current environment. On the other hand, even the most
established airlines have associated themselves in very recent initiatives to urge
governments to permit greater market access in such areas as liberalisation of investment
and freedom to develop global networks.
155
A considerable and general concern is that the
industry needs more business certainty (protection against political interventions),
regulatory efficiency and reduction of charges and user fees, wherever possible.

The Brazilian operators are concerned particularly that policies imposed or permitted by the
government (monopoly provider pricing of jet fuel is an example of the latter) that raise
their operating costs undermine their competitive position. Community carriers for their
part also express concern about high user fees sometimes based on seemingly arbitrary
policies and other actions by authorities that have imposed costs on their operations.

Perhaps also as a consequence of the high priority and political importance of aviation in
Brazil (that attracts the attention and participation in policy of key individuals and
institutions) transactional costs for airlines in dealing with a range of political and
bureaucratic requirements are also high. Simpler, clearer and stable policies in areas such as
airport slot policies and capacity management generally also seem to be a general concern of
operators.

The most immediate concern of operators at the moment is the deterioration of bookings a
matter beyond the reach of any obvious or direct government policy. Longer term, as was
stressed to us by several Community carriers, it will be very important for the EU to work
with key states like Brazil in the new regulatory areas shaping air transports future most
notably in the definition of sound and sustainable environmental protection policies.
5.3 OPPORTUNITIES AND RISKS FOR OPERATORS
In this section we consider the outlook for EU and Brazilian carriers respectively in the
liberalised environment of an Open Aviation Area. We first review the current situation and
the starting points if offers.

As demonstrated and discussed in Chapter 2, in the wake of the collapse of Varig
Community carriers have recently been carrying >75% of the traffic in EU-Brazil market and
seem likely to retain a strong position, even as TAM and possibly other carriers rebuild

155
In 2008 for example, IATA, in its Agenda for Freedom adopted at Istanbul, has urged governments to ease terms of
market access, placing particular stress on the need to remove restrictions against cross-border investment. See:
http://www.agenda-for-freedom.aero/agenda/faq.htm#1

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Brazilian carrier market share. On neither side is there a significant position yet in long haul
operations of low cost or charter operators. Services also tend to concentrate for the most
part at major hubs on both ends notably So Paulo in the case of Brazil.

Services to and from Portugal that now serve up to 8 points in Brazil constitute the one
strong exception to this general pattern. Looking beyond the current downturn, a stronger
diversification of services to new points in the EU as well as to underserved markets in
Brazil seems plausible if market access is liberalised. Improved and more comprehensive
connecting services behind and beyond gateways (through greater and more open code-
sharing or 5
th
freedom liberalisation) should also stimulate new market development over
time as well as building traffic.

As tourism markets in both directions recover and probably expand (as Brazils unique
natural resources command increasing attention of EU travellers just as Brazilian citizens
increase both private and professional travel to Europe), significantly greater participation of
leisure market operators and perhaps low cost carriers (latter is less likely because of long
distance and thin frequency) could also occur.

In the air cargo and air express area, removal of present route right constraints could create
considerable new opportunity rather quickly and possibly over time stimulate a significant
services improvement through growth of non-stop South Atlantic services (with less routing
via North American points). A key element here could also be regional liberalisation in
South America enabling airlines to achieve far greater directional efficiency than is possible
at present.
156

5.3.1 Competition issues for Community Carriers in a liberalised market
European operators are concerned that liberalisation is accompanied by the establishment of
fair competitive conditions (the level playing field) and an efficient regulatory environment.
Development of new services to South America in general and Brazil in particular are logical
commercial goals.
157
Community carriers with strong international networks can benefit
through the ability to develop greater market penetration through cooperative agreements
with Latin American carriers as well as through opening new service points. It is also
possible that they will be interested in making future commitments of capital in the form of
investments in existing or new airlines and/or in facilities.

Conversely smaller Community carriers might see cooperative support of Brazilian or other
South American airlines as a means to gain a foothold in a distant but growing
intercontinental market. As time passes and the market expands through growing demand
on both ends, low cost European operators as well as possible specialists in charter lift or
business services will look for selective individual opportunities to establish point-to-point
services in attractive markets, which could include a reinvigoration of services to Rio de
Janeiro as well as new services to cities other than So Paulo. Modern trade in goods and

156
Cargo shipments are almost all one-way. Consequently the ability of carriers to combine and integratc cargoes from
various points on either end is critical to achieve effective utilization of capacity.
157
We note that Air France/KLM, according to Le Monde, is placing high priority in developing a leading position for the
Skyteam Alliance in South America. The carrier has just concluded a significant code sharing agreement with GOL. See
Air France/KLM deviant le premier operateur entre LEurope et LAmerique Latine at
http://www.lemonde.fr/economie/article/2009/04/03/air-france-klm-devient-le-premier-operateur-entre-l-europe-et-l-
amerique-latine_1176425_3234.html

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services will also expand demand for air cargo, especially in large geographic areas like
Brazil.

Exploitation of these opportunities will depend importantly on both the growth of general
demand and on the efficiency of operations as demand for air travel, a derivative good is
very price sensitive. Therefore, the quality and affordability of infrastructure in the EU as
well as in Brazil will make a considerable difference as will the quality of regulation and its
ability to ensure transparency of competition.
5.3.2 Competition issues for Brazilian carriers in a liberalised market
Brazils airlines have experienced difficult times in recent years. However, the strong
aviation tradition coupled with the dynamic stimulus of Brazils strength in key sectors of
21
st
Century economics (such as its assets in energy, especially renewable energy, and the
great potentials of its environment as well as its strong modern business skills) clearly
suggest new sources of demand and potential for future leadership in regional and global
air transport markets.

As the Brazilian economy (and the economies of its South American neighbours) produce
growth in per capita incomes, and as a larger and stronger middle class emerges, the
demand of its citizens for inter-continental travel will increase. This development will give
Brazilian airlines increased first mover advantages, since traveller origin can be an
important factor shaping airline opportunity. These advantages can be applied in serving
new demands of the South American region as well as of Brazil itself.

The quality of customer service of course must be maintained and enhanced. Airlines who
must compete for market share under open market access conditions will, if the market
access is also efficient and fair, therefore tend to perform much better than airlines who
depend on economic protection (which in any case often comes with a price).

Brazilian stakeholders in their own way have expressed to us at least as high a level of
concern about having a level playing field as have Community stakeholders. Thus a
concern for them as well as for the airlines of their competitors is the need to make
regulation transparent and efficient, assure adequate, affordable infrastructure and to
provide business certainty to attract and facilitate investment as well as opening dynamic
perspectives.
5.4 CONTEXT FOR THE FUTURE EU-BRAZIL RELATIONSHIP
As also described in Chapter 4, Brazilian policymakers appear to see regional market
development (e.g. the organisation of Mercosur as well as the concept of a South American
Union) as having a fundamental logic for their region, as well as being a stepping stone
toward greater efficiency and integration in the global market. At the same time Brazil is an
increasingly important national player at the global as well as the regional level.

There is an important recent history of EU cooperation with both Brazil and Mercosur;
however, relatively little inter-regional activity has so far taken place in the air transport
field, where the bilateral air services agreements have for the most part regulated economic
relations. Meanwhile work within ICAO has been a primary forum for technical policy
coordination. Recent trends, however, suggest a clear shift in orientation.

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As a meaningful participant in global civil aerospace, Brazilian industry has a growing
interest in closer cooperation with the EU in the definition of technical standards. An EU-
Brazil Airworthiness Agreement is under discussion with the objective of concluding
negotiations still in 2009. On the economic side, Brazilian authorities have recently agreed to
respect areas of Community competence in air transport regulation and recognise them in
bilateral air services agreements. Brazil accepts the logic of the Community designation
clause, and a so-called Horizontal Agreement is also expected to be concluded in 2009
between Brazil and the Community, which will supersede restrictions still existing in some
bilaterals and free up the way for the tackling of other issues.

As summarised in the following Section, issues to be addressed include areas that have not
been covered by traditional air transport agreements. Reforms are needed in the regulation
of opening (as opposed to limiting or closing) competition. Most importantly perhaps,
especially with Brazil, will be the issue of environmental protection policy. Brazil is giving
environmental protection policy greatly increased attention, notably in its leadership in the
development of bio-fuels (see Chapter 4) as well as in dealing with the challenges if faces in
the protection and sustainable exploitation of natural resources.
5.5 ILLUSTRATIVE ISSUES TO BE ADDRESSED
In the most recent bilateral negotiations with Member States, Brazil has effectively
recognised the role and importance of Community-level competence in a number of air
transport regulatory areas. Evidence also suggests that Brazilian industry looks at the
European market from an inter-continental perspective, in which traffic flows will need to
integrated and distributed to and from European destinations rather than being thought of
in terms of individual points or narrow national markets.

In a complex, inter-continental relationship with a major player such as Brazil, each of the
parties will have priorities just as both parties are likely to agree that certain issues may have
particular importance and/or can be dealt with most efficiently at the Community-Brazil
level. Illustratively, an EU-Brazil Aviation Agreement could seek to address current issues in
the following nine areas:
5.5.1 Progressive expansion of market access
As discussed in Chapter 3, moving toward an Open Aviation Area by liberalising market
access would produce important gains for general economic development and consumers.
Airlines would also benefit by obtaining the freedom, stressed by IATA, to develop markets
globally and regionally and not just bilaterally to create efficient intercontinental networks
that are presently impeded by restrictions on investment as well as by restrictions on route
rights and capacity.

Even when aeronautical authorities (as has been the case with Brazil) seek to anticipate the
economys needs for growth and/or react sympathetically to airline requests for extra
frequencies to meet peak demand, capacity restrictions under the traditional bilateral
system, as described in Chapter 4, will work to discourage new entry. While the current
economic downturn has eased the pressure of formal capacity constraints for the near term,
it may be all the more important to create new growth perspectives and opportunities in this
high potential market. Opening 3rd/4th Freedom route rights, either entirely at once or in

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agreed phases, could send a valuable signal and be an early goal of negotiations.
158

Liberalisation of other freedoms of the air could follow as well as agreeing an exchange of
investment rights.
5.5.2 Establishing joint positions on environmental policy including the ETS
Environmental policy coordination aimed at establishing globally-effective systems that cap
and reduce net emissions of GHG, though fraught with difficulties, could easily be the most
important point on an EU-Brazil agenda. While this study does not enjoy the scope to explore
this complex issue in depth, we note at least two possible points of departure for such a
dialogue.

First, jet fuel pricing in Brazil, even for international operators, enjoys a certain history of
having non-market or non-direct cost-based elements added to the price. These arguably are
externalities albeit of an unorthodox form. As such, they may bear a broad analogy to
policies now being contemplated by Australia to apply emissions caps on fossil fuels
production and then to require fuel producers to purchase tradable emissions credits whose
external cost would then be internalised in prices paid by consumers as well as by
commercial users of fuels.

Second, Brazils leadership in the development of bio-fuels suggests that joint policy might
seek ways for operators to get emissions certificate credits for both sponsoring joint industry
projects and by having any environmental surcharge revenue paid on the fuel prices be
credited for mileages flown on the east-bound legs. Agreements might also provide that
revenues from surcharges be applied to research on fuels, power plants and/or
environmental remediation.
5.5.3 Safety coordination and air navigation procedures
The inter-regional dialogue should include joint consultations to harmonise rules on safety
standards for equipment (airworthiness), operating procedures and operator licensing as
well as individual qualifications and working rules (such as flight time limitations for flight
and cabin crews). Similarly the efficiency of ATM procedures, including the management of
oceanic as well as national airspaces should be coordinated among the appropriate
authorities just as concepts for new systems such as the SESAR project of the EU should be
developed with the aim of creating environmental benefits as well as enhancing safety and
efficient use of airspace.
5.5.4 Security and facilitation
As discussed in Chapter 4, Brazils Constitution calls upon the government to implement
reciprocity in international relations. Thus any imposition of new requirements by another
state in any area would raise this question for Brazil. The reciprocity issue, for example, was
raised for Brazil with respect to visa entry requirements, when the USA several years ago
imposed new charges and procedures which then resulted in Brazil imposing similar
constraints on US visitors to Brazil.

At present, temporary visitors to Brazil from the EU as a general matter do not require
advance visas. The US example, however, highlights the importance of coordinating the
implementation of any new security or c.i.q. procedures in advance with Brazil and in

158
Removing capacity restrictions would also eliminate the need for any capacity hearings or like proceedings at Member
State level to allocate scarce traffic rights.

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general maintaining an active cooperation with a view of getting Brazilian support, as
relevant, for Community policies such as one-stop security.
5.5.5 Airport access issues
Key airports on both sides of the Atlantic, such as So Paulo-Guarulhos and London-
Heathrow, are congested and require slot allocation. Rules that apply equally, fairly and
efficiently to international as well as national operators are needed and should function
transparently in order to enable both business certainty and flexibility. Similarly joint
policies on user fee standards, their formulation and application should be established.

Finally, airport capacity questions that often affect the award or allocation of traffic rights
can also be justifications for first phases of market access liberalisation. That is, policies
could be agreed that provide positive incentives for new services to underserved airports.
For example an early step analogous to the UKs policy on open access to its regional
airports (as a European example) or Brazils liberalisation of access to unserved or
underserved routes (as expressed both in the Fortaleza Agreement discussed in Chapter 4
and in its policy for cities in the North of Brazil)-- could be to remove routing and capacity
controls in underserved regions such as the Brazilian North East or, more ambitiously, at all
airports in the EU and Brazil beyond an agreed short list of major and congested airports.
5.5.6 Efficient operating and marketing framework for all-cargo services
While the scope of this study has not permitted reaching hard conclusions in this area, there
is considerable evidence that regulations, procedures and practices governing the air cargo
market require a serious modernisation that effectively recognises the modern nature of that
market, which is inter-regional.

That is, Brazilian all-cargo carriers would benefit significantly from having efficient and
guaranteed inter-modal rights in Europe, including access to cross-border trucking and rail.
While Brazils current surface infrastructure does not provide an equivalent benefit for the
EU side, liberalisation of beyond air services including intermediate and beyond 5
th
freedom
rights could be valuable as reciprocity for Community carriers, could improve payloads and
reduce empty flying (and thus provide environmental benefits), and, importantly could
serve to strengthen demand for direct services between the EU and South America (as
opposed to shipments moving over North American hubs). Cooperation of authorities
could also serve to reduce the costs of shippers by improving security and facilitation
procedures (see above) as well as the efficiency of the customs services.
5.5.7 Code-sharing liberalisation to expand market access and benefit competition
In the case of connections within the EU, many if not most of the service points or route
segments of interest for cooperating airlines involve crossing national borders; in the case of
Brazil service to interior points may be relatively more important but having connecting
rights within the region to support wide-body intercontinental services can also contribute
importantly to efficient network development as well as marketing support. Thus code-
sharing arguably is a regional rather than a bilateral issue. And it is increasingly debatable
whether policy on such rights can still be managed effectively at national level.

Implementation of such rights needs to be viewed from two key perspectives: 1) efficiency
and scope of individual networks; and 2) the impact on overall competition (the latter in the
EU is an area of Community competence). In the case of Brazil, evidence suggests that
Brazilian authorities confront the issue in a similar way, which has also led to transactional

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costs as individual carriers have had to submit cases for review and approval. Coming to
common guidelines for open code-sharing in the absence of discriminatory market access
effects might be an early goal of EU-Brazil negotiations.
5.5.8 Marketing freedom and consumer protection
As noted in Chapter 4, Brazil has no rules on the regulation of CRS. However, it has
considerable legislation on consumer protection and marketing regulation, and authorities
are concerned that airlines not market ancillary products (without an independent licence to
do so) and in general that they not offer prices or services subject to government approval
that is, without having first received approval when approvals are legally required.

These procedures in our view are somewhat in conflict with current market logic and
developments in online marketing (which we have explored in some depth in other recent
studies). On the other hand, stakeholders and regulators in Europe are also concerned from
the standpoint of consumer protection that purchasers of services sold on the internet are
properly informed about rights and risks. Thus we can imagine establishing a constructive
linkage between freedom to price competitively and agreeing standards for consumer
protection (an area not covered in any current bilaterals with the Member States).
5.5.9 First and second freedom rights
As noted in Chapter 4, Brazil is not a signatory to the Transit Agreement of 1944 (though it is
reportedly contemplating accession to it). This means that any airlines licensed in the 12
Member States not having ASAs with Brazil, as well as those of ECAA states, would have to
apply individually for over flights of Brazilian territory, just as Brazilian operators who
might in future be flying to Asia via European airspace might face gaps in with respect to
guaranteed rights of transit in parts of EU/Eurocontrol airspace. While problems here, for
the moment at least, may be more theoretical than real,
159
these gaps create an unnecessary
area of uncertainty that a logical EU-Brazil relationship should remove. Finally,
liberalisation of airspace rights among important global partners could send a useful signal
to other states whose policies in this area still work to restrict fair and efficient international
trade.
5.6 FINAL OBSERVATIONS AND CONCLUSIONS
The long term strategic interests of the EU and of its air transport industry require
establishing deepened relations with Brazil at Community level. There is no question that
Brazil will be one of the EUs most important future markets, just as we believe that
strengthened relations with Europe are in the profound national interest of Brazil.

Though global economic recession in 2009 has temporarily dampened growth of demand for
international transportation, the data suggest that the Brazil-EU market should recover a
faster than average rate of growth in light of the resilience of todays Brazil and its strong
position in industries of the future. We believe that under conditions of open market access
and efficient regulation Brazilian airlines should enjoy excellent opportunities to recover
market position as travel demand may grow more rapidly for travel originating eastbound
from Latin America to Europe. Such growth will of course also benefit the European tourist

159
We do note, on the basis of its recent discussions with Member States, that Brazil appears to be contemplating operating
West to East services to East Asia via European airspace.

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industry, just as affordable travel opportunities will also facilitate growth of European
tourism to Brazil.

The coordination and convergence of regulatory positions and policies in key areas such as
environmental protection and the progressive movement toward an emissions neutral air
transport industry must be a high priority in the EU-Brazil relationship. This view is not
only shared but advocated by industry stakeholders who also place a general priority on
achieving greater regulatory efficiency and lowered costs in the provision of infrastructure.

Finally voluntary, pro-competitive forms of cooperation as made possible by liberalisation of
opportunities to establish networks through greater freedom to invest as well as tools such
as code-sharing and removal of restrictions on route development, marketing and pricing
can stimulate both new entry and the efficiency of current operations. Thus, as set forth in
Chapter 3, liberalisation can produce gains in consumer surplus and employment over what
is possible under traditional industrial policies that administer and allocate market access.

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ANNEX 1 - BRAZILIAN AIRLINES
Gol / Varig
Gol Linhas Aereas SA is the holding company for two airlines - Gol Transportes Aereos SA,
and VRG Linhas Aereas (trading as Varig). Gol was founded in 2000 by the Constantino de
Oliveira family.

Gol launched simultaneous initial public offerings on the New York and So Paulo stock
exchanges in June 2004. More than 70% of the stock remains in the control of the
Constantino de Oliveira family through, successively, Aviopar Participaes and then
Fundo de Investimentos em Participaes Asas.

Gol has grown rapidly, acquiring the operations of Varig, the bankrupt Brazilian flag-
carrier, in 2007. At December 2007, Gol Transportes Areos S.A. operated to 59 destinations,
51 in Brazil, the rest within South America. GOL claimed 41% domestic market share. VRG
Linhas Areas operated to 23 destinations, 14 in Brazil; it had a 3% domestic market share,
and an 18% share of the international market carried on Brazilian carriers. Since then, it has
further shrunk its international network. Gol slipped into operational loss at the end of 2007
and in Q1 2008.

VARIG History & Bankruptcy

Varig (Viao Area Rio Grandense) was founded in 1927, in Porto Alegre, as a local
operator. Ruben Berta, the airlines first employee, later become its President, and remained
so until his death in 1966. Varigs first international route was to Montevideo in 1942. The
airline took over the REAL consortium in 1961, making it the largest airline in South
America. With the closure of Panair do Brasil in 1965, Varig became the countrys effective
flag carrier.

Varig developed an extensive international and domestic network, but was at various times
required by successive governments to operate unprofitable services, to operate services at
unprofitable tariffs, and to undertake excessive social overheads, accumulating losses.

Long-running discussions to merge Varig with TAM ended unsuccessfully in 2004. At that
time VARIG was transporting 13 million passengers annually and had over 11,000 full-time
employees. In May 2005, Varig's share of passengers flying into or out of Brazil was 43% for
the South American market, 17% for the United States market, 35% for the European market,
and 48% for the Asian market. It had around a quarter of the domestic market.

At May 2005, Varig operated 87 aircraft (76 passenger, 11 cargo), with an average age of 13.2
years. 83 of the 87 had operating leases; the remaining four had finance leases. At June 2005,
Varig reportedly had a negative net worth of approximately US $2.5 billion, with balance
sheet debt of $2.8 billion and off-balance-sheet debt of $2.0 billion.

In June 2005, the airline went into judicial reorganization a debtor-in-possession form of
bankruptcy established by the New Bankruptcy and Restructuring Law of Brazil, which had
become effective only eight days earlier. Varig continued to trade while its productive units
were sold off. Its cargo subsidiary, VarigLog, was sold to the Volo do Brasil consortium,
with the involvement of the US Matlin Patterson fund, in January 2006. VEM Maintenance &

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Engineering, Varig's maintenance centre, was sold to a consortium led by TAP. In May
2006, an attempt was made to auction VARIG as a going concern. Later in the month, one of
its aircraft was seized for unpaid lease fees.

A consortium of employees attempted to purchase Varig, but was unable to make its first
payment. At the end of June, VarigLog made a bid for a reported $500 million
consideration, including an immediate $20 million payment: it is not clear from the record
what share of legacy debts were intended to move with the company for this price, and
some accounts suggest only $24m was in fact either bid or paid.

A plan to cut 60% of an almost 10,000 strong workforce was announced. The airline was
suspended from Star Alliance in January 2007, and was reportedly incurring heavy monthly
operational losses.

On March 28, 2007, Gol Linhas Areas Inteligentes, the parent company of budget carrier
Gol Transportes Areos, purchased Varig for, according to its report of the transaction,
R$558 (c$300m).

Brazils competition body, CADE (See Section 4.4) approved Gols purchase of Varig,
following an analysis of the merger by Brazil's fiscal observation agency SEAE, jointly with
the country's Secretary of Economic Law. The approval allowed Gol to proceed to integrate
the airlines though it appears to intend to keep the Varig brand distinct. In July 2008, Gol
responded by seeking approval from ANAC for a restructuring to combine [Gol and Varig]
into a single airline company, while retaining both brands.

Business Progress and Restructuring

Gol slipped into operating loss in 2007. The key driver of the loss was the integration of
Varig; it was reported that, excluding VRG, GOLs net profit for the quarter increased to just
over R$200 million. GOL reported that it was making progress in improving Varig
performance, citing a 43% to 69% month-on-month increase in load factor in April 2008, and
in repositioning Varig from the international to the domestic premium market, aimed at
making Varig profitable by Q3 2008. At the end of June 2008, GOL received formal
regulatory clearances for its purchase of Varig, enabling further integration of the two
businesses. In the third quarter of 2008, GOL had 15,963 employees, of which 3,298 are ex-
Varig.

GOL, and by extension the controlling Constantino de Oliveira family, expressed confidence
in the business strategy through a share buy-back in January 2008 of 8.8% of preference
shares.

Market Share

Gol reports
160
that in 2007 it has a 44% and 43% share of Brazilian domestic ASKs and RPKs
respectively, as well as 32% and 28% shares in cross-border ASKs offered by Brazilian
airlines.

160
See Company Annual Reports

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In May 2008, the aviation press reported that Gol's share of the Brazilian domestic market, in
RPK terms, had moved within a point of TAMs, to 46.2%, particularly driven by the
improvement in Varigs loadings.

Routes

In 2007 and 2008, Gol significantly decelerated the expansion of its own network. It also had
to enable a new route and price-point strategy for reform VARIG from an international to a
business/higher fare carrier in the domestic and short haul market.

In 2007, Gol had added just four domestic destinations, Maraba, Cruzeiro do Sul, So Jos
dos Campos and Presidente Prudente, and one international one, Lima, Peru. The total
number of destinations currently stands at 60.

Alliances

Varig, was expelled from the Star Alliance in 2006 for no longer meeting membership
criteria. At present 40 new agreements have been signed between GOL and international
partners, principally Skyteam members, including Continental, Delta, Aerolineas Argentinas
and Air France. The demise of its international network made new code-share agreements a
necessity. There were reports in July 2008 of discussions between Gol and Skyteam. GOLs
revised strategy for VARIG might be seen in this light; it offers a high-end service to
secondary destinations from the main Brazilian hubs, providing good connections to
potential alliance partners from the United States and Europe.

Fleet

Gol has consistently followed a classic Low Cost Carrier single type fleet strategy, using
Boeing 737s. VARIGs more eclectic fleet is being reshaped to match this pattern. In 2007,
Gol announced a fleet modernisation plan, including the replacement of all 737-300s by Next
Generation models, with the aim of reducing average age and fuel consumption and
increasing productivity. In its 2007 Annual Report, Gol promised that the narrow body
fleets of VRG and Gol would be entirely Next Generation by the beginning of 2008. Target
average age by end 2009 was 5.5 years, to be maintained, with, by end 2012, 70% of the
narrow-body fleet to be of the 737-800 SFP (Short Field Performance) type, with winglets to
improve take-off performance and economize on fuel. The table below shows Gols
projections for the combined Varig and Gol fleet.

Aircraft 2007 2008 2009 2010 2011 2012 2013 2014
B733
28 - - - - - - -
B737NG 31 40 40 40 40 40 40 40
B738
19 31 4 15 11 4 - -
B738 SFP
24 37 52 68 80 95 106 110
B763 9 - - - - - - -
Total
111 108 113 123 131 139 146 150
Source: GOL Annual Report
Table 16: GOL/Varig Fleet Projection

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According to the Gol annual report, 92 aircraft in the fleet are on operational leases, with
terms ranging from immediate out to 2019. Gol entered into a contract with Boeing in 2006
for 38 firm commitments (now exercised), and 64 options to buy 737-800s. Gol thus has
relative flexibility to adjust its fleet size to growth.

The Varig fleet currently consists of 27 Boeing 737, both -300, -700 and -800. VARIGs 767s
have been taken out service, while some of them remain stored at Belo Horizonte.

Gol plans to adjust their fleet so that Varig is predominantly equipped with 737-700s, with a
34-inch seat pitch, and Gol with 737-800s, with a 31-inch pitch.

Marketing

Gol has invested heavily in e-commerce, reporting 80% of bookings made by internet. Gol
has a number of innovative marketing schemes that are not completely typical of the low
cost carrier market, including:

the facility to make changes and cancellations to bookings, including up to and
(cancellations) on the day of travel;
a reward programme Smiles which combines a frequent flyer programme with a
multi-vendor customer loyalty program;
interlining agreements for example with Copa, the Continental-associated
Panamian carrier.

Gol has particularly invested in making air transport affordable for the poor and lower
middle class, by enabling tickets to be bought on credit at low interest rates, for a period of
24-36 months, with credit provided by a range of sources including not only banks and
credit card companies but also friends.

On-Time Performance

Gol and Varig, like all carriers operating in Brazil, faces punctuality challenges from the
condition and congestion of air traffic infrastructure. In its Annual Report for 2007, Gol
noted that its internal performance measures for domestic and international flights were
87% and 86% for Gol, and 64% and just 22% for Varig it is not clear on what punctuality
window and exclusions these were calculated, but the gap between the two carriers is
notable in itself.

However, Gol reported that, according to ANAC data, Gol and Varig had domestic
punctuality scores of 50% and 77% respectively in 2007: Gol attributed these relatively low
scores to the crisis in the air transport system after the Congonhas disaster and during the
closure of the same airport in May and June 2007 for runway surface works, and through
lack of system resilience to poor weather.

Gollog

In another divergence from a standard LCC pattern, Gol has a dedicated freight operation,
with bases at So Paulo Congonhas and Cumbic airports, and 2007 carryings of 56,500
loaded tonnes.

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TAM
Txi Areo Marlia was founded in 1961 by a group of air taxi pilots, operating short
passenger and cargo trips in the states of Parana, Mato Grosso and So Paulo, initially with a
fleet of five Cessna aircraft. The firm was bought by an agricultural entrepreneur, Orlando
Ometto. Captain Rolim Amaro, a pilot with the group, took a 33% stake in 1971, increasing
to 50% the following year, as a reward for turning the firm around.

From 1976, TAM began to operate, in a joint-venture with VASP, a state-owned airline,
routes between So Paulo and Mato Grosso, first with Embraer Bandeirantes and then
Fokker 27s. By 1981, TAM had flown 1 million passengers, and 2 million by 1984.

The company went public in 1986, and, by acquiring VOTEC, a competitor, extended its
activities to the Centre-West and North. The company traded on the quality of its service,
but lost ground against other carriers operating larger types, until a fleet upgrade to Fokker-
100s. From the mid-1980s until the present, TAM has been the carrier with the greatest share
of the Brazilian domestic market.

In 1996, TAM, working with Lan Chile and Taca, made a consortium deal for 150 Airbus
types for the three airlines, of which 45 were for TAM. The new fleet enabled TAM to
launch international services, starting with the So Paulo Miami route in 1998, and then
services to Europe in 1999. TAM also began to use e-ticketing.

In 2001, Captain Rolim Amaro, the founder of the firm, died in a helicopter crash. TAM
maintained passenger growth through the 2001 and 2002 aviation downturn, adding
additional aircraft and carrying 14 million passengers in 2002.

In 2003, TAM began to codeshare on some flights with Varig but, in 2004, abandoned long-
running merger discussions. In 2004, TAM added "corujes" bargain night flights,
increased its European and Latin American network, and established a network of regional
carriers - Passaredo, Ocean Air, Total, Trip e Pantanal - connecting flights, stretching its
network in Brazil to 66 cities.

By 2005, TAM had expanded its international network to scale, with two flights per day to
Paris, five to Buenos Aires, a new route to New York, and increased frequencies within Latin
America. The company has remained profitable in the present decade, with 2006 profits of
R$ 556.0m.

Further international destinations and frequencies were added in 2006 and 2007, and
agreements reached with a number of Star Alliance carriers, including TAP, LAN, United
and Lufthansa. Deals were signed for 22 Airbus A350 XWB (Xtra Wide Body) types, and
four Boeing 777-300ERs, all destined for international services.

Subsidiary companies include:

TAM Viagens, a travel agent/tour operator
TAM Mercosur, operated since the acquisition in 1996, of the failed Paraguayan flag
carrier
TAM Express a cargo business, operative since 1996, with cargos transported on
TAMs passenger fleet, but including surface transport to final destinations

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TAM Jatos and TAM Txi Areo, air taxi services

Corporate Governance

TAM is listed on both the So Paulo and New York State Exchanges. It is closely held; one
recent report gives the Amaro family a 69%, Bank Garantia Fund 22%, and others 7%. The
wiring diagram below, from the TAM Annual Report 2007 shows that Amaro holding
companies have 46% of the stock, with a further 8% in Amaro Aviation S.A., apparently
another family company. The widow and two children of Captain Rolim Amaro are on the
Main Board of TAM, alongside five independent directors. The day-to-day management of
the company is in the hands of an Executive Committee of seven.

Source: TAM Annual Report, 2007
Figure 51: TAM Ownership & Subsidiary Structure, 2007

Marketing

By contrast with Gol, TAM is dependent on ticket sales through traditional outlets; TAM
reports that indirect sales represent 83% of sales by value, and internet sales, just 7%.

Routes

The historical note above has described the progressive expansion of TAM from a domestic
airline until 1998, to a network covering Europe, North and South America.

Presently, TAM reports that it serves 47 cities in Brazil, and 17 direct international
destinations: New York, Miami, Paris, London, Milan, Frankfurt, Madrid, Buenos Aires,
Crdoba, Santa Cruz de la Sierra, Cochabamba, Santiago de Chile, Asunion, Ciudad del
Este (Paraguay), Montevido, Punta del Este and Caracas. TAM Mercosur presently has an
effective monopoly of carryings to and from Paraguay.

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Among recent developments have been:

In July 2007, TAM received authorization from ANAC to fly seven days a week to
Frankfurt and Madrid, with new services beginning in November and December
respectively; these frequencies had been reallocated from Varig
New services to Los Angeles (codeshare with United), and, after Varigs route rights
expired in mid-2008, to London
In June 2008, TAM was granted approval by ANAC for daily flights from So Paulo
Guarulhos to Lima, following on from a codeshare with LAN Peru established earlier
in the year
Announcement of a service to Johannesburg (possibly on codeshare with South
African Airways, anticipating Star Alliance membership)

Amongst Brazilian carriers, TAM currently has a market share of 82% on the international
market, compared to 53% on the domestic
161
.

Alliances and Code-sharing

In the last two years, TAM has come out of the shadow of Varig, formerly a Star Alliance
partner, by assuming code-shares with Star Alliance carriers including TAP, United and
Lufthansa. In doing so, TAM has abandoned a number of previous code-shares, including,
in October 2007, with American Airlines (Oneworld) and Air France. TAM is due to
officially join the Star Alliance in mid-2009. TAMs involvement is important for Star
Alliance, which has lost two major Latin American members in Varig and Mexicana.

The United-TAM codeshare, established in mid-2007, covers between, behind and beyond
gateway access by both carriers to each others' domestic networks.

In December 2007, TAM established an extended code-sharing agreement with Lufthansa,
covering points beyond Frankfurt including points in Germany, and also Geneva and
Zurich and points beyond So Paulo, within Brazil and onwards to Santiago in Chile,
Buenos Aires in Argentina and Montevideo in Uruguay.

TAM retains a relation with regional carriers including NHT, Pantanal, Passaredo, Total and
Trip, aimed at taking the number of domestic destinations served from 47 to 79. It expressed
the wish to eventually reach the whole country, bringing the total number of destinations to
100.

Fleet

TAM operates an almost fully-Airbus fleet, with the exception of two Boeing 777-300s and a
temporary lease of four Boeing 767. It has an exclusively A320 family fleet for South
American routes. Recent Airbus orders have included a firm contract in 2005 for 20 A320s,
with an option for a further 20. In 2007, a MoU for 22 A350-XWBs, to be delivered in 2013-
2018 was agreed, plus an option for a further ten, to replace its A330 fleet. A six year leasing

161
Source: ANAC

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agreement with Air Canada for two A340-500s was agreed in 2007 to enable rapid
international growth after the demise of Varig.

TAMs first 777-300 entered into service in mid-2008. Three more are to follow until 2012. In
2008, it also added a pair of former Alitalia 767s. Three ex-Varig MD11s were loaned from
Boeing to overcome capacity constraints until delivery of further 777s and A330s.

It was reported in 2007 that TAM was scaling back its narrow-body fleet, based on a
downward revision of domestic demand assumptions to 98 aircraft in 2008, 101 in 2009, 107
in 2010 and 110 in 2011, against a previous plan of 103 Airbus narrow-bodies in 2008, 106 in
2009, 112 in 2010 and 115 in 2011.

At the end of 2007, TAM reported it had a fleet of 115 aircraft, with an average age of 6.7
years. The figure below shows the evolution of TAMs fleet over the past five years, and
plans for the next five years.
18
20
22
24
14
24
0
50
100
150
4
101
123
2008
4
104
128
2009
4
110
136
2010
4
2011
3
88
10
115
2007
MD11
2012
147
Widebody
F100
141
8
Narrowbody
B77W
115 113
TAM Fleet Total
Source: TAM annual report

Figure 52: TAM Fleet Projection

Fleet Finance

TAM leases all its aircraft through its subsidiary TAM Linhas Areas. It appears from
TAMs Annual Report that it uses a mixture of conventional dry lease and its own
aggregated borrowing. In 2007, a bond offer, with Calyon as the lead bank, raised $330.9m
for pre-delivery payments for four B777s. Other financing partners include BNP Paribas,
which funded pre-delivery payments for Airbus types. TAM has also made a range of
public bond and debenture issues. Leasing arrangements have also included a recent deal
with the Irish lessor AWAS, and an innovative cross-border Spanish aircraft lease for an
A319 and A320.

Business and Profitability

TAM saw strong profitability in 2004-2006, driven by growth in capacity utilisation.
However, in 2007 TAMs loadings fell and costs increased, with a $15 million loss in Q2
2007. This was largely due to a price war with GOL, leading to a dramatic drop in yields.
Increased fuel costs, air traffic control strikes and infrastructure shortcomings that led to
delays and cancellations, worked further to make a loss inevitable. At the same time, TAM

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was pursuing a programme of integrating ground staff, leading to a 55% increase in staff,
from 13,195 in 2006 to 20.469 by the end of 2007.

The third quarter saw utilization dropping in the disruption following the Congonhas crash,
and some erosion of loadings, but profits were delivered in this and the fourth quarter. By
the end of 2007, TAM reported that that it had suffered a 77% fall in profit However, it was
clearly a considerable achievement to maintain profitability in a year of major change,
integrating so many new staff into the company, and dealing with major adverse factors
including the Congonhas accident and the disruption ensuing from it.

TAMs strategy for 2008 was relatively diversified, including growth of enrolment in
frequent flyer programme, development of external services by its maintenance centres
(granted EASA Certification for the Airbus fleet in December 2008), the addition of three
international destinations and growth of domestic capacity by 14% using of larger types,
rather than new routes.

Q3 of 2008 reported a net loss R$ 113 million ($53 million), mainly driven by losses in fuel
hedging schemes (the operating profit margin rose from 5 to 6%).

Employment

In the third quarter of 2008, TAM had 23,871 employees on the payroll.

Congonhas Accident

TAM made exceptional arrangements in 2007 for the families of victims of the Congonhas
crash, including a free telephone number for support, travel, accommodation and meals for
affected families, funeral expenses, a health plan, help with legal expenses, arrangements
with government and insurers and particular emphasis on keeping families informed.
TAMs handling of these arrangements appears to have mitigated from public criticism of
TAM over the issues that are reported to have led to the crash.
Comparisons between TAM and Gol
The extent to which these two carriers dominate the Brazilian market, and the wealth of
information available in their annual reports may make it useful to provide some
comparison of performance.

The figure below indicates respective growth in number of passengers carried.

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0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
2003 2004 2005 2006 2007
TAM
Pax (millions)
GOL
Passengers Carried
2003-2007
Source: TAM and GOL Annual Reports

Figure 53: Comparison of TAM and GOL Passenger Carriage, 2003-2007

TAM and Gol grew at similar rates from 2003 to 2006, the latter from a lower base. In 2007,
through a combination of organic growth and the acquisition of Varig, whose full year
operational results appear to be included in these figures, Gol caught up ground. The
following figure indicates the evolution of average air fares over the same period.

0
25
50
75
100
125
150
175
200
225
250
275
300
325
2003 2004 2005 2006 2007
TAM
$R
GOL
Average Fare
2003-2007

Figure 54: Evolution of Average Air Fare, TAM and GOL, 2003-2007

Both carriers average fares have remained relatively static (in the case of TAM, decreasing),
while suffering cost pressures - in particular, the price of fuel. Gol has not yet seen the rise
in average fare that might have been expected from its stated strategy of adding Varig as a
differentiated, high end service - and from the simple longer-distance scale of some of
Varigs routes.

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Airfares are, of course, dependent on a range of cost variables including distance. A better
comparison may be drawn from yield or revenue per ASK, as indicated below.

0.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
22.5
25.0
27.5
30.0
32.5
35.0
2004 2005 2006 2007
R cents
Yield and Revenue per ASK
2004-2007
TAM RASK
TAM Yield per passenger kilometre
GOL RASK
GOL Yield per passenger kilometre

Figure 55: Yield and Revenue per ASK

In both cases, a clear deterioration of yield expressed in Reals
162
is apparent. From near
identical levels in 2004, Gols revenue per ASK has declined further than that of TAM.

0
2
4
6
8
10
12
14
16
2003 2004 2005 2006 2007
Daily hours
GOL
TAM
Aircraft Utilisation
2003-2007

Figure 56: Aircraft Utilisation

Gol has operated a consistently very high rate of aircraft utilisation, based on a LCC single-
type model; TAM, while maintaining a multi-type fleet, and a wider route network, has

162
It will be remembered that the Brazilian Real experienced appreciation to the US dollar in this period.

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made notable progress in raising utilisation towards the levels delivered by Gol (to be
expected in light of shift toward long haul operations).

2003 2004 2005 2006 2007
Thousand
0
GOL
TAM
2
4
6
8
10
12
14
16
18
20
22
Number of Staff
2003-2007

Figure 57: Evolution of Staff Numbers

Both TAM and Gol have increased absolute staff numbers over the last five years, both at an
accelerating rate. TAM has increased staff numbers by a factor of three, Gol by a factor of
five. The figures are understood to include the addition of Varig staff for Gol, and, for TAM,
the direct employment of a range of previously contracted ground staff.
163
In both cases,
numbers of staff have increased more rapidly than outputs, as shown below.

0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2003 2004 2005 2006 2007
RPK (millions)/Staff
GOL
TAM
Output per Staff Member, RPK/Staff
2003-2007

Figure 58: Outputs per Staff Member

163
These staffing and productivity trends are in significant contrast to EU industry, especially following the
implementation of the Third Package.

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Although labour productivity is a popular measure for assessing performance, it may not
always be directly comparable. This is because airlines operate under various models and
the functions performed by staff may vary. For example, some airlines contract out functions
such as ground handling, catering and maintenance, whilst others perform those functions
in-house. Thus, the number of employees for an airline depends not only on true
productivity, but also on the range of services provided. Therefore, it is important to
understand that the relative performance indicated by the partial labour productivity
measures presented above may not reflect the true efficiency of an airline's personnel.
Nevertheless, it provides an interesting comparison and indication of change over time.

Despite being the avowed full service carrier, output per staff member, measured in terms
of revenue passenger km, at TAM, now exceeds that at Gol. As discussed above, the 2007
figure may be skewed by both firms having absorbed staff, but not necessarily digested.

A useful indication of the relative financial performance of the two carriers can be given by
examination of load factors (determined via a ratio of available seat kilometres versus
revenue seat kilometres) versus the airlines stated break-even load factor. This comparison
is presented in the figure below.

45.0
47.5
50.0
52.5
55.0
57.5
60.0
62.5
65.0
67.5
70.0
72.5
75.0
77.5
2003 2004 2005 2006 2007
Load Factor/BELFf
Annual Load Factors (RPK/ASK) versus Break Even Load Factor (BELF)
2003-2007
Source: TAM and GOL
Annual Reports TAM BELF
TAM Load Factor
TAM Load Factor (domestic)
TAM Load Factor (intl)
Gol Load Factor
Gol BELF

Figure 59: Comparison of Load Factor versus BELF

From 2003, both carriers saw their load factors increase to above 70%, before falling back in
the last year. Both carriers have seen their Break Even Load Factor (BELF) rise, particularly
in 2007, driven by rising fuel prices. There are, however, some special circumstances,
including reduction of capacity at Congonhas airport and (in the case of Gol) the absorption
of a Varigs business into the firm. It is notable that TAM has acheived higher load factors
on its international operations (Note: includes TAM Mercosur, its Paraguay-based
subsidiary) than on its domestic operations: this is impressive given the typically lower
frequencies and greater seasonality of international services than, for example, high volume
shuttle services between Rio and So Paulo.

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0
2
4
6
8
10
12
14
16
18
20
22
24
2003 2004 2005 2006 2007
$R
Gol
TAM domestic
TAM intl
TAM
Revenue per ASK
2003-2007

Figure 60: Evolution of Revenue per ASK

Both airlines have seen revenue per available seat km fall since 2003, and particularly during
2007. A key driver, clearly, is the fall-off in load factor both airlines have experience (Gol to a
greater extent than TAM). For both, the challenge, having built sales to near - or even below
- break even load factor, will be to rebuild profit margins.
Avianca/Oceanair
The nearest domestic competitor to Gol and TAM is Oceanair. It is owned by the same
holding company as the Colombian flag-carrier Avianca. Oceanair operates a full-service
model, with a base on Viracopos Airport, at Campinas, So Paulo state, which is effectively
So Paulos third airport (and freight hub). The company is owned by Synergy Aerospace
based in Bogota, and led by German Efromovich, a Bolivian-born entrepreneur with strong
Brazilian connections. In early 2008 Oceanair had 37 Brazilian destinations and a mixed fleet
of Embraer and Fokker turboprop types.

The holding company has announced plans, over the last eighteen months, to acquire 77
aircraft, a mix of wide and narrow body; allocations within the group of carriers have not
been confirmed.

Oceanair has itself announced, in early 2007, plans to set up a Paraguayan subsidiary, in
competition with TAMs Mercosur subsidiary.

In March 2008, Oceanair also announced plans for new routes from So Paulo to Los
Angeles and Luanda. However, in May 2008, Oceanair announced plans to cut 600 jobs, and
cut its fleet and network, reducing to 25 destinations, presenting these as a "logical step to
integrate the company into the Avianca system of Latin American airlines and to prepare it
for the Airbus fleet renewal". Oceanair is reportedly to receive the first new aircraft after
integration into the Avianca management structure in 2009.

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Azul
In early 2008, it was reported that David Neeleman, the founder and former CEO of JetBlue
had plans to found an LCC operation, using Embraer 190s, in Brazil. Neeleman was born in
So Paulo, Brazil and would not face Brazilian ownership limitations for foreigners.

The new carrier, named Azul (Blue) in late May 2008, announced an order of 40 Embraer
195s; it plans to operate an LCC style operation using to the JetBlue business model. It also
took over some of Jetblues outstanding order for E190s. It aims to fly point-to-point routes,
rather than the multi-stop services offered by current carriers, with the aim of bypassing
congested hubs.

Azul received its AOC in November 2008 and announced its first two routes. The airlines
base will be Campinas Airport near So Paulo from which it was to start to operate services
to Porto Alegre and Salvador de Bahai in mid-December. Services to Vitoria and Curitiba
were aimed to start in January 2009.

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APPENDIX I ADDITIONAL INFORMATION ON
CALCULATION OF MARKET GROWTH
The Commission has received two broad types of mandates from the Council of Ministers to
negotiate with third countries on air transport traffic rights following the November, 2002
decision of the European Court of Justice. In addition to a general horizontal mandate to
deal with all foreign partners (in coordination with Member States) in specified areas of
Community competence, the Council has also granted so-called vertical mandates issued
on an individual case basis to conduct comprehensive negotiations.

As of April 2008, the Council has granted seven such mandates and new formal
arrangements have been reached with Morocco, states of the Western Balkans (for an ECAA)
and the United States. While the experience of such agreements is very fresh, both initial
results in the EC-Morocco relationship (see below), trends in relationships with the Western
Balkans and actions being taken by airlines on both sides of the Atlantic in anticipation of
the coming into force of the US-EU first stage OAA suggest that the Community
negotiations can lead to both significant market stimulus and to improved overall
regulation.

For the purposes of this report, we consider the following two cases where the EU has
liberalised air transport traffic:

The Open Skies Agreement with the United States
The Euro-Mediterranean agreement with Morocco

For more detailed information on the Open Skies agreement and the full economic impact of
the proposed Open Aviation Area, see The Economic Impacts of an Open Aviation Area between
the EU and US, Booz Allen Hamilton, 2007.
I.1 The Open Skies Agreement with the United States
Background

In 1992 an Open Skies Agreement was signed between the United States and the
Netherlands, this was swiftly followed by further agreements in 1995 with several European
countries: five EC members Austria, Belgium, Denmark, Finland, and Sweden, as well as
Switzerland, Iceland, Norway and Sweden. In subsequent years, from 1996-2001, Germany,
Italy, Portugal, Poland and France also signed up to Open Skies.

The two major new elements in these agreement which liberalised the market were:

the opening up of the US market with unrestricted 3
rd
, 4
th
, 5
th
, and 6
th
freedom rights
granted; and
the acceptance of cooperation agreements between the host country carrier(s) and a
US carrier if all other US carriers enjoyed free access rights and alliance arrangements
seemed in the public interest.

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In addition, there was further liberalisation with respect to charters and especially all-cargo
and air express markets (for which the new US model now also offered exchange of 7
th

Freedom rights).

In 2007, an Open Skies agreement was initialled between the EU and US, thus liberalising
agreements between the US and the remaining EU Member States.

Air Traffic Development
Considering the EU:US market as a whole, there is a strong overall trend of market growth,
reaching an initial peak of 48 million in 2000, followed by a contraction of the market from
2001 until 2003, and then renewed growth, with the number of passengers in 2007 reaching a
new high of 51 million. This pattern of growth and contraction is pro-cyclical, closely
tracking US GDP, with events such as the terrorist attacks of 9/11 and the SARS scare
augmenting this.
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
0
Total
Total scheduled
Total Non-scheduled
10
40
50
25
35
20
55
15
30
45
5
48
51

Figure 61: Total Air Passengers between the EU and US

As the graph illustrates, the vast majority of passengers travel on scheduled flights, the
market share of non-scheduled falling from 9% in 1993 to just 2% in 2007. In contrast to the
Morocco case study given below, it is not sufficient to consider only the total passenger
traffic since European countries liberalised their air services agreements with the US at
different times.

In order to consider the impact of liberalisation, EU Members State have been divided into
three groups depending on when they came to make Open Skies agreements with the US:

1992-95 Group comprising the Netherlands, Austria, Belgium, Denmark, Finland,
and Sweden;
1996-2001 Group comprising Germany, Italy, Portugal, Poland and France;
2007 Group comprising all the remaining EU Member States, of which the principal
ones, in terms of significant EU:US traffic, are the United Kingdom, Greece, Spain,
Hungary and Ireland.

The traffic development of these groups of countries is shown in the graph below.

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1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
8
22
22.8 24
4
6
1996-2001 Group
2007 Group
0
10
12
14
16
18
2
20
1992-95 Group
17.7
7.2
23.4
19.6
7.7

Figure 62: Passengers Travelling between the EU and US by Country Group

All groups of countries experienced a similar overall pattern of growth, with the market
growing to a peak in 2000, followed by a contraction, followed by renewed growth and a
new peak in passenger traffic obtained in 2007. This indicates that they were all affected by
the turbulent political and economic environment of the early twenty-first century.

However, if market growth is considered, another pattern emerges.

2007
149
Growth
1993 1996 1995 1994
159
193
2006
0
2004 2003 2002 2001 2000
146
144
182
1999 1998 1997
1996-2001 Group
2007 Group
100
150
200
1992-95 Group
2005
1995 = 100

Figure 63: Traffic Growth between the EU and US by Country Group

As the above graph clearly shows, the countries that signed Open Skies agreements with the
US in 1992 and 1995 experienced greater growth in the years immediately following
liberalisation. This was despite having a lower rate of growth prior to liberalisation. This is
strong evidence that liberalisation enhances growth. Overall, considering the period from
1995 to 2007, the group of countries that experienced greatest growth were those that
liberalised the earliest (the 1992-95 Group), and the group that experienced the least growth
were those that did not enjoy such arrangements over that period (the 2007 Group).

Considering the traffic growth for the group of countries which liberalised agreement
between 1996 and 2001, if we look at their comparative growth putting the base year as
2001, a similar pattern can be observed :

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70
90
80
1999 1998 1997 1996 1994 1993
60
2007 Group
0
110
100
1995
50
130
Growth
120
1996-2001 Group
1992-95 Group
2007
123
2001 2000 2005
114
2006 2002 2004 2003
117
2001 = 100

Figure 64: Traffic Growth between the EU and US by Country Group (II)

Again, we see here that in the years following liberalisation, the group of countries that most
recently liberalised experience higher traffic growth compared to both the countries which
had not yet signed up to Open Skies, and also to the countries that had liberalised more than
five years previously.

It is interesting to note that the 1992-95 Group experienced slightly depressed levels of
growth compared with the rest of the market. This could be due, in part, to their rapid
expansion in the preceding years may have left them more vulnerable to negative shocks:
the new markets being less established and therefore less able to withstand short-term
downturn. However, looking at the entire period, it is clear that they have grown
considerably more than the rest of the market, and if they have performed marginally less
well in recent years, this is more than made up for by their performance in the latter half of
the 90s where their growth was spectacular.

The Effect of Liberalisation

The air traffic data analysed above suggest that Open Skies agreements have a short term
effect on the growth rate, increasing it in the years immediately after the agreement is
signed. This is consistent with the theory that they release extra capacity within the market.
Once the market has adjusted to the new regulations, no further effect on growth is
observable, and it is the behaviour of the individual countries which once again becomes
key.

This effect was observable both for the 1992-95 Group, and for the 1996-2001 Group.
Unfortunately, it is too early to draw any firm conclusions about the impact of the new first
stage EU-US agreement.

The prior analysis indicated a link between traffic growth and liberalisation. We now wish
to take this a step further and quantify the effect that Open Skies has on traffic growth, as
well as test the statistical significance of the link between the two.
As with all statistical analysis, it is correlation not causation that is measured. No statistical
technique, however sophisticated, could prove that an event, such as Open Skies
agreements, is the cause of change in an observed variable, such as traffic growth. What can

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be done is to measure the correlation between them and test whether this correlation could
be due to chance alone.

Regression Analysis

In order to test the significance and magnitude of the effect of liberalisation, a series of
multivariate regression analyses were performed. As in the previous case study, the effect of
liberalisation was modelled as a dummy variable.

The analysis above suggested that Open Skies had a positive effect on traffic growth rates
over the five year period following the signing of the agreements. It further revealed that
countries respond to liberalisation at different rates. Therefore, the data has been analysed
at an aggregate level, and the effect of Open Skies has been modelled as having a duration of
five years (this period was varied from 3-6 years, but the best fit was obtained with 5 years).

In a previous study
164
, the 1992-95 group of countries were analysed in aggregate, alongside
other European countries, Switzerland, Iceland, Norway and Sweden, which also liberalised
their agreements with the US in the same year. The regression yielded a positive coefficient
for the Open Skies effect as a 6.4% increase in growth (with an upper limit of 12.7%). This
implies that the rate of traffic growth was improved by 6.4 percentage points over the period
that liberalisation took effect. This result was significant at the 95% confidence level.

We applied a similar methodology to the updated data for the 1996-2001 group. As we had
seen in the section above, this group of countries performed better than other European
countries in the years following liberalisation. However, as noted, the years 2001 to 2003
were a period of contraction for air passenger traffic, so it is unsurprising that regression
analysis revealed no significant impact due to Open Skies.

Conclusions

In order to assess the impact of liberalisation in the transatlantic market, historical traffic
data has been examined for overall market patterns in countries before and after Open Skies.
We have attempted to isolate, as far as is possible, the effect on transatlantic traffic due to
liberalisation.
The data suggest that Open Skies agreements have a significant effect on traffic growth rates
in the short term, lasting approximately five years, as extra capacity is released within the
market. In the long term the discernable effect decreases, and it is the policies of the
individual countries and the strategies of individual airlines which once again shape the
markets development.
I.2 Euro-Mediterranean Agreement with Morocco
Background

The Commission services negotiated a Euro-Mediterranean air transport agreement with
Morocco, on the basis of a mandate agreed at the Transport Ministers Council of the
European Union of 10 December 2004. The negotiations were launched in May 2005 and,

164
The Economic Impacts of an Open Aviation Area between the EU and US, Booz Allen Hamilton, 2007.

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after five rounds of negotiations, the Agreement was initialled at Marrakech on 14 December
2005. After completion of internal procedures on both sides, the Agreement was signed in
Brussels on 12th December 2006. Thus, the formal process took place over two years, giving
the aviation market time to react to the changes.

Air Traffic Development

In the following analysis, we used data drawn from Eurostat. 2007 had to be adjusted since
Italy had not filed for the last quarter, 2007 figures are therefore estimates.

The chart below shows passenger traffic development between 1993 and 2007.
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Total Non-scheduled
Total scheduled
Total
Passengers
2007*
Passengers flying between EU and Morocco
EU:Morocco
agreement
initialled

Figure 65: Annual Passengers Flying between EU and Morocco, 1993-2007

It is noticeable that passenger traffic growth has accelerated from 2004 onwards. This
growth is exclusively in scheduled services, which have grown 144% since 2004. Although
the Agreement was not applied until its signature in December 2006, increases in airline
capacity and passenger carriage are likely to have been influenced by an anticipatory effect
clearly visible from 2005 onwards.

0
50
100
150
200
2006 2005 2004 2003 2002 2001 2000
Total Non-scheduled
Total scheduled
Total
1999 2007* 1997 1996 1995 1994 1993
Growth
1998
Growth of Air Services between EU and Morocco
2005 = 100
EU:Morocco
agreement
initialled

Figure 66: Growth in Passenger Numbers Flying between EU and Morocco, 1993-2007

Considering the growth in air passenger traffic, from 1994 to 2004 the compound annual
growth rate stood at 5.6% (6.7% for scheduled and 4.2% for non-scheduled services). From

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2005 to 2007, this has risen to a massive 20% annual growth. In the case of scheduled
services, annual growth stood at 35%.

The Effect of Liberalisation

If the growth in 2007, after the agreement came into force, is compared with the growth rate
of the previous year, the growth rate was 3.4% higher post-agreement. If the growth in 2007
is compared with the growth in the five years immediately prior to it, the growth rate was
over 10% higher. However, this in itself is not sufficient to equate the increased growth with
liberalisation for three major reasons:

The increased growth may have been a continuation of a trend of increasing growth;
Liberalisation did not occur overnight but was anticipated for at least two years
prior to the document being signed;
The increased growth may have been due to other factors rather than liberalisation.

With regard to the last point, to a large extent it is always the case that the increased growth
is due to other factors. Liberalisation in and of itself cannot generate increased growth, it
can only enable growth to take place. In order to tackle the first two points, we performed
regression analysis to identify the magnitude of the effect, as well as take account of any
anticipatory reaction to the signing of the agreement.

Regression Analysis

To further analyse the effect of the agreement, a series of multivariate regressions were
performed. Since the influence of the agreement arguably commenced with its mandate at
the end of 2004, analysis was performed with the effect of the agreement variously modelled
as starting in 2005 (after the mandate was agreed), 2006 (after the agreement was initialled)
and in 2007 (after the agreement was signed).

A dummy variable representing the impact of liberalisation was created which had a
positive value for the years following the signing of the agreements. Regressing the traffic
growth on this explanatory variable allowed us to determine the magnitude of its impact as
well as to test its statistical significance.

All the variables used were converted to year-on-year percentage change in order to
minimise the impact of growth over the period. This also has the advantage of decreasing
the potential for heteroscedasticity
165
, a common problem in analysing time series. The
model was deliberately kept as simple as possible. The priority was explaining as much of
the variation of the traffic volume with the minimum number of explanatory variables.

Liberalisation, modelled as a dummy variable, was found to be a significant explanatory
variable of the growth of scheduled traffic, with a coefficient ranging from 26%, with a
standard error of +/- 4%, to 33%, with a standard error of +/- 10%. These figures varied
depending on when liberalisation was modelled to have commenced (2005 in the first case,
and 2007 in the second). These results are significant at a 99% confidence interval. This

165
This arises when the variables have different variances which can produce a bias when applying regression analysis.

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provides strong evidence to support the hypothesis liberalisation has a large and significant
effect on the growth on scheduled air traffic.

The effect of liberalisation on total passenger air traffic was still discernable, but somewhat
more muted than in the case of scheduled services. With the agreement modelled as
commencing in 2005 (in terms of its influence on the aviation market), it was found to have
an effect on the growth rate of 12%, with a standard error of +/- 4.7%. This result was
significant at a 95% confidence interval.

Regression analyses were also performed modelling the effect of liberalisation on total air
traffic as commencing in 2006 and 2007. These also indicated a positive effect on the growth
rate (8% and 11% respectively) but there were large standard errors attached to these results
which means that they cannot be regarded as statistically significant.

Conclusions

This case study provides strong evidence to support the hypothesis that air transport
liberalisation results in an increase in scheduled services, with a statistically significant effect
on the growth rate which, at its lowest, is greater than 20%, and could be more than double
that.

The effect on total passenger air traffic is less pronounced, supporting the argument that
liberalisation diverts passengers from non-scheduled to scheduled services. However, there
remains strong evidence that liberalisation has increased growth in passenger air traffic in
the region of 10% per annum.

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APPENDIX II CALCULATION OF CONSUMER SURPLUS
Relaxation of quantity restrictions, and the entrance of new firms into the market, allows
capacity to rise. Providing that prices have been efficiently set in the past, this increased
supply must result in decreased prices, ceteris paribus, in order for a new market equilibrium
to be reached. Price reductions may be enabled by the greater efficiency of carriers
demanded by the greater competition, or by operational efficiencies.
As prices fall existing consumers benefit from saving money in the difference in the original
prices they paid and the new lower fares. This saving can then be spent on additional goods
and services further fuelling the economy. New consumers also benefit if the price they pay
falls below the price at which they would have travelled. This increase in the consumers
utility is known as consumer surplus.
The shifting supply curve
The basic microeconomic framework is illustrated below, with a downward sloping demand
curve and an upward sloping supply curve. Initially the price is P0 and quantity Q0 is
consumed. A reduction in costs means that the same quantity can be supplied at a smaller
price. In this case, that an airline can run an aircraft at reduced costs and therefore decrease
the price of its tickets.
This reduction in costs causes the supply curve to shift to the right. A new equilibrium is
then established with price set at P1 and quantity supplied at Q1. The graph below illustrates
this simple case.

Figure 67: Illustration of a shift in the supply curve

This corresponds to a reduction in the price of a ticket and an increase in the number of
passengers travelling.
Demand
curve
Price
Quantity
P1
P0
Q0 Q1
Supply
curve

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In the following analysis, this shift in the supply curve is assumed and only the demand
curve is modelled.
The demand curve and consumer surplus
The demand curve is illustrated below. As the price decreases from P0 to P1, the quantity
demanded increases.
Demand
curve
Price
Quantity
P
1
P
0
Q
0
Q
1
a b
c
d e
Demand
curve
Price
Quantity
P
1
P
0
Q
0
Q
1
a b
c
d e
Demand
curve
Price
Quantity
P
1
P
0
Q
0
Q
1
a b
c
d e

Figure 68: Demand Curve

The demand curve is modelled as:
elasticity the is
constant a is
price the is
P of function a as modelled quantity, the is
:
) (
k
P
Q
Where
kP P Q

=

Quantity corresponds to the volume of traffic and price to the cost of a ticket. k is a constant
which is derived from the data available and is the price elasticity of demand (see section
below).
The economic benefit that is derived from a cost reduction is the consumer surplus. This is
graphically represented as the area delineated by the letters a,b,c,e in the figure above.

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The area a,b,d,e is the benefit to existing passengers who will save the full value of any cost
reduction. The area b,c,d is the benefit to new passengers, i.e. those who are only travelling
due to the price reduction.
Total increase in consumer surplus, the area a,b,e,c, is calculated by taking the integral of the
demand curve between P0 and P1. The two areas are then separated in order to quantify
how the benefit is distributed between the new and existing passengers.
The benefit to existing passengers due to price reductions is arguably not a true benefit to
society, rather it is a transfer from the firms (in this case airlines) to the consumers. In
contrast, the consumer surplus of the new passengers is a net gain in welfare, with no
corresponding loss to the producers.
This model is calibrated using data from Eurostat to provide quantity figures (i.e. traffic
volume) and our own research to estimate price information.
This methodological framework is also used to calculate consumer surplus arising from
increased output. Increased output implies price decreases, assuming that the firms have
been efficient in setting their prices in the past. This in turn gives rise to a consumer surplus.
Price elasticity of demand
Elasticity is an expression of the relationship between market price and quantity of demand.
The nature of demand is such that a reduction in market price will usually lead to an
increase in quantity demanded. An elasticity is expressed as the proportionate change in
demand for any given proportionate change in price such that:
price base the is
) ( price in change the is
demand of level base the is
) ( demand in change the is
price respect to with demand of elasticity the is
:
) / (
) / (
0
0 1
0
0 1
0
0
P
P P P
Q
Q Q Q
Where
P P
Q Q

Markets, and specifically passengers, tend to fall into two broad categories, dependent on
the value of the elasticity, they are generally considered as either elastic or inelastic. An
elastic market is one where small changes in cost cause large changes in demand, inelastic
markets are the opposite, where large changes in cost cause only small changes in demand.
Studies have typically shown leisure passengers to have a demand curve that price elastic
(i.e. they are sensitive to changes in fares) and business passengers to be price inelastic (i.e. a
reduction in the cost of fares has little effect on their propensity to travel).
In addition, the distance involved affects the sensitivity to price. Very short haul flights may
face competition from alternative forms of transport, such as train and car, and are therefore
likely to have a higher price elasticity of demand

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For our analysis, two scenarios have been modelled: one with a constant price elasticity of
0.6 representing a comparatively inelastic demand, such as one might associate with
business travel, and another with an elasticity of 1.2 representing an elastic demand for
travel, which is more in line with revealed preferences of leisure travellers.
166
Using
industry data, we have identified typical fares for business and leisure travellers, and have
then produced a total figure, which reflects the business : leisure ratio for the specific
markets.

166
See, for example, Gillen et al,(2003)

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