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

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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.

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