BRAZIL CIVAIR: BUDGET AIRLINE BRA SHUTS DOWN OPERATIONS

UNCLAS SECTION 01 OF 02 SAO PAULO 000900 SIPDIS SENSITIVE BUT UNCLASSIFIED SIPDIS STATE FOR WHA/EPSC AND EEB/TRA STATE PASS USTR FOR KATE DUCKWORTH FAA FOR CCAPESTANY, GBURDICK DEPT OF TRANSPORTATION FOR BHEDBERG BUENOS AIRES FOR TSA ATTACHE MEXICO CITY FOR TSA ATTACHE MGALVAN USDOC FOR 4332/ITA/MAC/WH/OLAC USDOC ALSO FOR 3134/USFCS/OIO NSC FOR TOMASULO TREASURY FOR JHOEK SOUTHCOM FOR POLAD USAID FOR LAC/AA E.O. 12958: N/A TAGS: EAIR PGOV ECON EINV BR SUBJECT: BRAZIL CIVAIR: BUDGET AIRLINE BRA SHUTS DOWN OPERATIONS REF: BRASILIA 290 ¶1. (SBU) SUMMARY. After operating for eight years, the Brazilian low-fare airline BRA (Brasil Rodo Aereo Transportes) suspended operations on November 7 and gave thirty days notice to its 1100 employees of a possible dismissal. In a last-ditch effort to avoid shutting down entirely, BRA is seeking USD 30 million from the company's minority shareholder group Brazil Air Partners. Few observers expect the airline to survive. BRA's difficulties further heighten the domination of Brazil airline sector by two carriers, TAM and Gol. END SUMMARY. ¶2. (U) BRA had been pursuing an ambitious plan to grab market share in the local regional air travel from market leaders TAM and GOL. BRA's owners, brothers Humberto and Walter Folegatti, had started the charter and freight company in 1999 to compete with bus transport, but by late 2005 BRA was operating like a low-cost passenger carrier. From then, BRA's financial problems grew as the company offered flights priced significantly below competing airlines, and often operated below capacity. ¶3. (U) BRA's suspension of operations follows a difficult month for the company. The National Civil Aviation Agency (ANAC) launched an audit of BRA's operations and maintenance on October 10 after receiving an excessive number of complaints of delays and cancellations. On October 18, ANAC suspended BRA's international sales, and the following day the company reduced its fleet by half to five aircraft. On October 22, the company announced the departure of its president Humberto Folegatti, after Brazil Air Partners voted to remove him. BRA then suspended its international operations on October 30. (Note: BRA was flying three international routes to Milan, Madrid and Lisbon. End Note.) ¶4. (U) Earlier this year, BRA had ordered 20 regional jets from Brazilian regional (mid-size) aircraft manufacturer, Embraer, and in August took options on 20 more. Overburdened with debt of USD 100 million, BRA was unable to pay its daily operational costs and was behind on payments to its suppliers, including a reported USD 1.4 billion to Embraer. According to the local press, General Electric's aircraft leasing division began legal proceedings in November against BRA for back-payments on two of its leased Boeing aircraft, and has begun legal proceedings in Brazil to recover the two planes. ¶5. (SBU) In December 2006, BRA's financial problems had forced the Folegatti brothers to sell 20 percent of BRA for 180 million Brazilian reais (about USD 103 million) to Brazil Air Partners, a consortium of seven investors including Bank of America, Goldman Sachs, Development Capital, and Millennium Global Investments, and the Brazilian investment company Gavea Investimentos. (Note: Brazilian law limits foreign ownership to 20 percent in the airline industry. End Note.) According to industry observers, the investors had hoped to recapitalize the company for a quick sale, and had invested without closely analyzing the company's financial situation. ¶6. (SBU) BRA's departure from the sector solidifies the duopoly of the two leading Brazilian carriers, Gol and TAM, who together hold SAO PAULO 00000900 002.3 OF 002 90 percent of the domestic industry. According to the latest information from ANAC, in September TAM held 48 percent of the domestic market and 70 percent of the international market. Gol, together with its acquisition of Varig (reftel),controls about 42 percent of the domestic market and 26 percent of the international market. BRA was the third largest domestic carrier with almost five percent of the domestic market and about four percent of the international market. OceanAir, another small domestic airline that had recently concluded a code-sharing agreement with BRA, controlled about three percent of the domestic market. ¶7. (U) COMMENT: BRA's decision to suspend flights is sure to translate into more headaches for travelers in Brazil, who have been subjected to repeated delays and cancellations for more than a year. Although BRA said the suspension is temporary, the company is unlikely to return to operations. BRA's departure will strengthen TAM and Gol's commanding market position. END COMMENT. WHITE