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

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FINAL REPORT

The Economic Benefits of OpeningAviation Markets between the EU andBrazil

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 2009This document is confidential and is intended solely forthe use and information of the client to whom it is addressed.


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Date: June 2009 Study on the Economic Benefits of OpeningAviation Markets between the EU and Brazil

Prepared for: European CommissionDirectorate General for Energy and

Transport

i

Table of Contents

1. INTRODUCTION 1

1.1 GENERAL REPORT 11.2 OBJECTIVES OF THE STUDY 1

2. MARKET ANALYSIS 2

2.1 POLITICAL AND ECONOMIC BACKGROUND 22.1.2 Brazilian Economy 42.1.3 EU-Brazil Relations 72.1.4 EU-Brazil Economic Relations 7

2.2 BRAZILIAN TOURISM AND AIR TRAFFIC DEMAND DRIVERS 92.2.1 Brazil Inbound Tourism 92.2.2 Brazil Outbound Tourism 13

2.3 AIR PASSENGER TRAFFIC 162.3.1 Domestic Air Transport Market 162.3.2 International Air Transport Market 182.3.3 EU - Brazil Aviation Market 22

2.4 CAPACITY IN THE MARKET 252.5 BRAZILS CARGO MARKET 28

2.5.1 Market Overview 282.5.2 Cargo Market Brazil-EU 33

2.6 INFRASTRUCTURE 352.6.1 Airports 35

3. ECONOMIC IMPACTS ANALYSIS 39

3.1 THE BENEFITS OF LIBERALISATION 403.2 REGULATORY CONSTRAINTS IN THE EU-BRAZIL MARKET 42

3.2.1 Implicit Restrictions 433.2.2 Comparison of Capacity Utilised with Traffic Rights Available 443.3 EXPERIENCE WITH COMMUNITY NEGOTIATIONS TO LIBERALISE 3RD COUNTRY MARKETS 48

3.3.1 The Open Aviation Area with the United States 483.3.2 The Euro-Mediterranean Agreement with Morocco 52

3.4 TRAFFIC GROWTH ANTICIPATION AS RELATED TO BRAZIL 543.4.1 Background 543.4.2 Brazils strategic location 553.4.3 Prospects for Growth 55

3.5 CALCULATION OF BENEFITS ARISING FROM GROWTH 573.5.1 Consumer Benefits 573.5.2 Employment 583.5.3 Tourism 59

3.6 CONCLUSION ON ECONOMIC GROWTH 603.7 ENVIRONMENTAL IMPACT 60

4. AEROPOLITICAL AND REGULATORY ANALYSIS 62

4.1 OVERVIEW OF BRAZILIAN AIR TRANSPORT POLICY AND REGULATION 624.2 MULTILATERAL AND REGIONAL AIR TRANSPORT POLICY 62

4.2.1 Regional Cooperation 644.2.2 Inter-regional Cooperation with the EU 66

4.3 BILATERAL AIR TRANSPORT RELATIONS WITH EUMEMBER STATES 674.3.1 General Aspects of Air Services Agreements between Brazil and EU Member States 674.3.2 Individual Aspects of Brazilian Air Service Agreements 694.3.3 Regulatory and Doing Business Issues Arising in Brazil-EU Market 714.3.4 Summary Views on International Market Access and Regulation 73

4.4 BRAZILIAN REGULATION IN RELATION TO THEAIR TRANSPORTACQUIS 734.4.1 Introduction to this Section of the Study 734.4.2 Brazilian Policy: the general framework 74


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4.4.3 The Institutional Framework 764.4.4 Market Access and Ancillary Regulation 794.4.5 Competition and State Aid 874.4.6 Safety 894.4.7 Air Traffic Management (ATM) 93

4.4.8 Security 934.4.9 Environment 944.4.10 Alternative Fuels Biofuels 954.4.11 Consumer Protection 954.4.12 Social Aspects 97

4.5 CONCLUSIONS 994.5.1 Air Transport Law and Policy in Brazil General Findings 994.5.2 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 1025.2 CONCERNS OF STAKEHOLDERS 1035.3 OPPORTUNITIES AND RISKS FOR OPERATORS 103

5.3.1 Competition issues for Community Carriers in a liberalised market 1045.3.2 Competition issues for Brazilian carriers in a liberalised market 105

5.4 CONTEXT FOR THE FUTURE EU-BRAZIL RELATIONSHIP 1055.5 ILLUSTRATIVE ISSUES TO BE ADDRESSED 106

5.5.1 Progressive expansion of market access 1065.5.2 Establishing joint positions on environmental policy including the ETS 1075.5.3 Safety coordination and air navigation procedures 1075.5.4 Security and facilitation 1075.5.5 Airport access issues 1085.5.6 Efficient operating and marketing framework for all-cargo services 1085.5.7 Code-sharing liberalisation to expand market access and benefit competition 1085.5.8 Marketing freedom and consumer protection 1095.5.9 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 126I.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 ofmarket access between the EU (including overseas territories of EU member states) andBrazil.

Booz & Company Ltd of London and its subcontractors, Integra A/S, Mr Erwin von denSteinen, 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 cargoservices with a high level of regulatory convergence between the EU and Brazil.

Past studies have determined that a general liberalisation, created under fair and uniformcompetitive conditions, is likely to lead to significant economic benefits for both the EU andthe 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 theaviation sector (airlines, airports etc.).

Provide analysis of the expected effects on investment, labour market and trade inthe aviation sector.

Examine the potential impact of liberalising air services between the EU and Brazilon the environment.

Assess the steps needed to achieve a convergence of the aviation regulatoryapproaches and the potential benefits of such regulatory convergence in an EU-Brazilaviation agreement.

Analyse how cooperation in the field of civil aviation (e.g. ATM, airworthinesscertification, 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 benefitsof 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 onthe 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 anoverview 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 currentsituation, 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 haveconsiderable autonomy, being responsible for, e.g. education. The President is both Head ofState and has executive power. Elections for President and Congress take place every 4years. The last elections were held in October 2006, and the next are scheduled for October2010. 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 AnalysisTable 1: Key Figures

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

Source: US Government websitesFigure 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 theUnited States (but larger than the continental US). It is the fifth largest country in the worldby 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

170175

180

185

190

Million

2004 2005 20062000 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 ofBrazils population live on or near the coast, and over half in cities. The focus of populationis on the South East Coast, in particular the metropoles of Rio de Janeiro, Sao Paolo and BeloHorizonte.

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


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Place in list ofworld's largest cities

Name of cityEstimated

population

7 So Paulo incl. Guarulhos 20,600,000

21

Rio de Janeiro incl. Nova Iguau, So

Gonalo 12,300,00051 Belo Horizonte 5,750,000

83 Porto Alegre 4,200,00092 Recife 3,800,00093 Braslia 3,750,000101 Fortaleza 3,575,000

103 Salvador 3,575,000108 Curitiba 3,375,000

141 Campinas 2,825,000

186 Belm 2,200,000197 Goinia 2,050,000

244 Manaus 1,790,000248 Santos 1,740,000254 Vitria 1,730,000352 So Lus 1,320,000367 Natal 1,270,000

389 Macei 1,200,000409 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, particularlyPortuguese, but also including immigrants from Germany, Italy and Britain, making culturaland ethnic relations close. Other groups include indigenous populations and Africandescendents.

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 seenfinancial stability, appreciation of its currency, and sustained current US$ GDP growth since2002. 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 in2007, 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 commodityprices and general monetary tightening, are the main factors for a slight slowdown of theeconomy.

Per capita GDP in Purchasing Power Parity terms is roughly double GDP at current USDollars - 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% ofmains electricity generated from hydro-electric power, and thus not affected by worldmarket shocks.

2000 2001 2002 2003 2004 2005 2006

Brazil GDP pc1.000

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 pc1.000

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

Source: World Development Indicators, World Bank Group

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 largestexporter 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 undiscoveredreserves. It is also an exporter of gas, and supplies the great majority mains electricity needsfrom 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%

20032000

Brazil shares of economy by sector value added, %, 2000-06

Source: World Development Indicators, World Bank Group

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 isbecoming increasingly marked: World Bank data shows that exports have grown to 15% ofGDP 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 anincreasing, 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

China9%

US

14%

Other

8%

8%

55%

Germany

Argentina

China9%

US

20%

Other





4%

4%

8%

60%

Netherlands

Germany

Argentina

China9%

US

14%

Other

8%

8%

55%

Germany

Argentina

China9%

US

20%

Other

Source: World Development Indicators, World Bank GroupFigure 6: Brazils Major Trading Partners, 2006

Principal exports include transport equipment, iron ore, soybeans, footwear, coffee, motorvehicles. Principal imports are primarily high value items, including commoditiesmachinery, electrical and transport equipment, chemical products, oil, automotive parts andelectronics.

2.1.3 EU-Brazil Relations

Brazil and the EU have close relations. The present relationship is governed by the EC-Brazilframework 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 withBrazil, with the first ever EU-Brazil Summit held in Lisbon during the Portuguesepresidency. 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 strategicpartnership aims at effective multilateralism, enhancing the economic partnership,sustainable development, regional cooperation, cooperation in science and technology, andfostering people-to-people exchanges. An increased cooperation in aviation is expresslyforeseen in the Joint Action Plan.1

This new relationship places Brazil, the Mercosur region and South America higher on theEUs 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 iscurrently the single largest exporter of agricultural products to the EU, accounting for 13%of total EU imports.

1See Section 1.5 of the Action Plan of 12.12.2008.2Mercosur, 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 reducebarriers 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 hasa surplus in services trade of 500 million. The EU is also the prime foreign investor inBrazil. Key figures of EU-Brazil economic relations are indicated by the figure below.

5

0

5

10

15

20

25

30

35

Billion

BrazilEU

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, suchas soy, wheat, fruit and frozen meat. However, manufactured products such as machineryand transport equipment, in particular aircraft (Embraer) and cars, represent almost onethird of Brazilian exports to the EU. The EU exports mainly manufactured products to

Brazil, such as machinery, transport equipment (Airbus) and chemicals. Further detail ofEU-Brazil trade in goods is indicated by the figure below (note that figures do not add dueto incomplete years).

17,759

14,473

1,117927

8,7078,866

17,376

13,948

3494057934810

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Million

Jan-Sept 2008Jan-Sept 2007Jan-Sept 2008Jan-Sep 2007

OtherManufacturedPrimary

Exports Imports

EU27 trade in goods with Brazil

Source: Eurostat, Booz & Company Analysis Figure 8: EU27 Trade in Goods with Brazil, 2007-2008: (Million)

Trade in services is dominated by transportation and travel, while construction, IT andfinancial 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 743Travel 1,221 1,403 1,441 1,408 -220 -5Other services 1,921 2,694 1,712 1,804 210 890Source: 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 commoditymarket as a net-exporter of agricultural products and is quickly developing inmanufacturing (aircraft, cars) and services. In general, the development of the highlyspecialised oil and financial industry is strongly connected with a growing demandfor air travel.

Family, friends and relatives (VFR). As a country of immigrants, Brazil retains strongbonds with the former suppliers of its inhabitants, mainly Portugal, Italy andGermany. 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 OscarNiermeyer-designed capital, Brasilia

Sites of natural beauty, conservation value, or offering opportunities for adventuroustourism

Lifestyle and cultural events, including the beaches and beach life of both the SouthEast 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 driverboth 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 forcitizens of most EU countries, plus those of New Zealand and South Africa, and can beextended 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 thegeographical limitations of most of the inbound traffic outside Latin America, the majorityof passengers arrived by air. In 2007, some 3.4 million visitors arrived by air.3 Principalnationalities of visitors to Brazil are set out below:

3Euromonitor


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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

0.90.84

Canada

0.060.06

Switzerland

0.5

Million Visitors

UnitedStates

0.700.72

Argentina

0.92

0.99

1.1

0.28

Chile

0.26

0.18

Italy

0.270.29

Portugal

0.280.30

0.08 0.07

Netherlands

0.080.09

UnitedKingdom

0.180.17

Spain

0.260.21

France

0.250.28

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 highlightedMember States accounted for 1.58 million, or 31%, of the total 5.02 million visitors to Brazilin 2007. UNWTO figures suggest that the total number of visitors from the EU to Brazil is1.74 million, or 35% of the total, development of which since 2003 is shown in the tablebelow. The number of EU visitors to Brazil fell by some 2.6% in 2007 compared to 2006 (andhad peaked in 2005).

Country 2003 2004 2005 2006 2007% change

06-07Share oftotal (%)

Austria 16,745 21,034 22,558 17,147 24,557 43.2 0.5Belgium 28,237 28,549 32,741 30,037 31,073 3.4 0.6Denmark 19,722 15,555 19,672 23,288 26,042 11.8 0.5Finland - - 21,827 21,732 22,217 2.2 0.4

France 211,347 224,160 263,829 275,913 254,367 -7.8 5.1Germany 283,615 294,989 308,598 277,182 257,719 -7.0 5.1Greece 7,013 10,703 12,106 13,340 12,636 -5.3 0.3

Hungary - - 16,364 5,870 7,103 21.0 0.1Ireland - - 13,125 12,574 18,091 43.9 0.4Italy 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 1.7Poland - - 19,535 15,347 17,280 12.6 0.3Portugal 229,594 336,988 357,640 299,211 280,438 -6.3 5.6Spain 122,641 155,421 172,979 211,741 216,373 2.2 4.3Sweden 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 3.5Total 1,389,323 1,654,587 1,889,838 1,783,147 1,736,929 -2.6 35Source: 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 tonumber of passengers travelling between countries (i.e. does not account for connections, orfor residents who may be nationals of other countries): details of air transport marketsfollow in the next section.


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The World Tourism Organisation reports that the appreciation of the Brazilian Real hasmade Brazil a more expensive destination for inbound tourists. The Brazilian governmenthas 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 makeconsiderable investments in the tourism infrastructure, as well as the setup of a clear andrecognizable marketing campaign.

Tourism accounts for more than half of the visits to Brazil, whereas business travel is also animportant demand driver. Euromonitor indicates the leisure/business split as indicatedbelow4.

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 LeisureBusiness Figure 10: Vistors to Brazil by Purpose of Travel

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

4Note: 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 SoPaulo as South Americas financial capital, business travel can expected to grow moresharply within the near future. Next to that, tourism is a potentially important factor forgrowth, given the many opportunities Brazil has to offer, as well as the impact of the 2014football 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 10years. The rising value of the expected contribution of tourism to GDP is indicated by thefigure below, which will certainly contribute to opportunities for air transport.

0

10

20

30

40

50

60

70

80

90

$ USD Billion

2018F2008F2007E20062003 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 27th in the world by outbound tourism expenditure, according to WorldTourism Organisation figures. Outbound tourism expenditures in 2006 stood at $5.8bn, andin 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

US$

bn

2007 Year to October33% increase over 2006

0

1

2

3

4

5

6

7

1995 2000 2005 2006


US$

bn

0

1

2

3

4

5

6

7

1995 2000 2005 2006


US$

bn

2007 Year to October33% 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 arapidly rising middle class and good connections to the rest of the world. However, themajority 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 groweven farther. One of the key drivers of outbound tourism is appreciation of the BrazilianReal vis a vis the Dollar, although it is mainly the United States that benefits from thatdevelopment. Overall, international outbound travel has more than doubled since 2002, as isset 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


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The most popular destination for Brazilians remains Argentina, followed by the UnitedStates. Popular EU destinations are Portugal, Spain, France and the UK. Visa restrictions arecurrently hampering tourism towards the United States, while on the other hand the EUoffers 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. Wehave no data available on VFR traffic, but we can assume that trips defined as leisure towill in some cases certainly involve VFR visits, given the presence of large Braziliancommunities in the popular destinations. In that respect, the EU has a natural advantage inthe fact that most Brazilians are of European descent; many have family or friends livingabroad and many have relatives that have immigrated to Europe. These factors could up to acertain extent explain the relative popularity of Portugal, Germany and Italy. However, thisdata is solely based on points of entry; it is certainly feasible that Brazilians visit multiplecountries while within the EU. Also, it goes without saying that the EU possesses some keydrivers 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 + EU2007

Source:UNWTO, Booz & Company analysisNote 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 NationsWorld Tourism Organisation (UNWTO) reports growth as shown below. This indicates thatall EU markets have experienced overall growth since 2003, as shown below. In the 2006-07period, growth was evident in all markets except for Poland, where Brazilian visitorsdeclined by 10% from the previous year.


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Country 2003 2004 2005 2006 2007 % change06-07

Belgium 12,579 13,843 15,181 18,048 23,408 29.7Czech

Republic

- - 11,652 16,513 21,225 28.5

Estonia - - 450 435 842 93. 6Finland 2,136 2,691 3,331 3,518 4,031 14.6Germany 70,499 83,184 93,836 156,196 156,272 0.1Greece 2,625 3,680 8,760 11,267 14,585 29. 5Italy 86,246 128,722 181,762 219,059 229,384 4.7Latvia 115 170 168 151 289 91.4Poland 2,800 4,733 6,935 7,364 6,615 -10.2Portugal 118,246 - - - - -Slovakia 319 526 674 801 1,351 68.7Slovenia - - 1,032 1,563 1,851 18.4Spain 97,392 183,749 221,645 256,581 308,156 20.1

UK 70,000 78,000 92,000 112,068 131,487 17.3TOTAL 462,957 499,298 637,426 803,564 899,496Source: 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 spending1,297 million in Brazil. Considering the large differencein the number of Brazilians visiting the EU versus EU nationals visiting Brazil (c. 900,000versus c. 1.74 million), these figures appear reasonably proportionate (note that not allvisitors necessarily travel by air, or direct: air passenger traffic is discussed in the nextsection) although duration of visit information is not available.

876

1,297

0

100

200

300

400

500600

700

800

900

1,000

1,100

1,200

1,300

Million

BrazilEU27

EU27-Brazil Tourism Expenditure/Receipts in 2006

EU expenditurein Brazil

Brazilianexpenditure in

EU

Source: Eurostat, Booz & Company Analysis Figure 16: EU-Brazil Tourism Expenditure, 2006


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2.3 AIR PASSENGER TRAFFIC

This section provides an overview of the size and scope of the Brazilian passenger aviationmarket, 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 51stEdition, published 2007, Brazil is the fourthbusiest domestic aviation market in the world and the shuttle service between So Pauloand Rio de Janeiro is one of the worlds busiest routes. The Brazilian domestic scheduledmarket 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 andrail network development challenging) have resulted in greater modal reliance on airtransport. Brazil thus has strong domestic as well as worldwide passenger and freight linksby air.

So Paulo State accounts for around 35% of passengers through Brazilian airports, andthree-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 theirexpansion constrained. A Rio-So Paulo high speed rail link is currently being tendered, andif 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 inthe 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 hascontinued a limited number of Varigs operations, withdrawing from the market outsideSouth-America.


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

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

Seats (000)

83309

2,2172,261

3,074

5,000

4,500

1,500

500

2,500

3,500

4,000

3,000

2,000

1,000

0813141523

Pantanal

Top 10 Carriers by Domestic Seats Available2005 vs 2008

Continental

LanA

irlines

American

Unite

d

500

1,500

2,500

3,500

4,000

4,500

5,000

3,000

2,000

1,000

0613151525

Panta

nal

46283

541

4,047

4,494

Ocea

nair

TAM

GOL

Varig

BA

TAM

Varig

GOL

VASP

BA

LanA

irlines

Continental

American

NHT

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 flightopportunities 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 LCCpoint-to-point network. The cause is likely to be the extent to which flights are operatedalong axes (in particular, the coastal, and South East-South West axes), rather than eitheraround 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, thathad 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 October2005 and 2008.


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393460460

545654

839

430440

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

439469473545558572598

626665

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 LEGENDCNF = Belo Horizonte Tancredo Neves

BSB = Brasilia

CWB = Curitiba Afoso Pena

POA = Porto AlegreREC = Recife

GIG = Rio de Janeiro Galeo

SDU = Rio de Janeiro Santos Dumont

SSA = Salvador Dois de JulhoCGH = Sao Paulo Congonhas

GRU = Sao Paulo Guarulhos

2008 Total: 7,1312005 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, isalmost 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 surfacenetworks mentioned above. The road distance from centre to centre of these two cities is 429km. Many flows of such a distance between major European cities would be served by ahigh 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 themarket from airlines and Thalys which links Paris with cities like Brussels and Geneva5.

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 ofinternational services available, with, in October 2008, neither Varig nor its owner Goloperating beyond South America.

International departures are overwhelmingly from So Paulo and (to a lesser extent) Rio deJaneiro airports. Services within the Americas are followed by services to Europe. Atindividual country level, the international market is dominated by services to Argentina andthe 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 directservices 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 servicesto China (possibly infeasible due to distance), although Air China provides for a connectionvia Madrid. Most services to China appear to be routed via the United States or SouthKorea, with limited connections offered via Frankfurt and Paris.

5Booz & Company Market Intelligence


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International Frequencies from BrazilOctober 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 2008Source: 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 enablingregulatory climate and the resurgence of the Argentinean economy. Frequencies to theUnited 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 totalinternational frequencies to/from Brazil. A comparison between frequencies in 2005 and2008 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

Korea

Japan

New

Zealand

Australia

UAE

Martinique

Haiti

Guadeloupe

Aruba

Venezuela

Uruguay

Peru

Paraguay

Guyana

FrenchGuiana

Ecuador

Colombia

Chile

Bolivia

Argentina

USA

Canada

Panama

Mexico

Surinam

SouthAfrica

CapeVerde

Angola

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 infrequencies, as is shown in the graph below. The US market is a notable exception, wheredemand has been concentrated onto fewer flights, with larger types. Following the leader

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


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

International Seats Available from Brazil by Arrival CountryOctober 2005 and 2008

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

Angola

UAE

Australia

New

Zealand

Japan

Korea

Martinique

Haiti

Guadeloupe

Aruba

Venezuela

Uruguay

Peru

Paraguay

Guyana

French

Guiana

Ecuador

Colombia

Chile

Bolivia

Argentina

USA

Canada

Panama

Mexico

Surinam

South

Africa

Cape

Verde

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 indicatesthat smaller aircraft are operated to the UK than most other European destinations(exception: Switzerland). In the case of Germany and the Netherlands, increase in aircraftsize compensates for the reduction in frequencies.

Average Seats per Flight from Brazil by Arrival CountryOctober 2005 and 2008

0

50

100

150

200

250

300

350

400

CapeVerde

Angola

SouthAfrica

Surinam

Mexico

Panama

Canada

USA

Argentina

Bolivia

Chile

Colombia

Ecuador

FrenchGuiana

Guyana

Paraguay

Peru

Uruguay

Venezuela

Aruba

Guadeloupe

Haiti

Martinique

Denmark

France

Germany

Italy

Netherlands

Portugal

Spain

Switzerland

UnitedKingdom

UAE

Australia

NewZealand

Japan

Korea

Seats

2005 2008Source: OAG

Figure 23: Average Seats per Aircraft, 2005 vs 2008

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


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Seats (000)

150

50

250

350

0

2527273239

Lufthansa

435457

89

345

200

100

300

Top 10 Carriers by International Seats Available2005 vs 2008

A

erolineasArgentinas

U

nitedAirlines

Iberia

T

AdelMercosur

150

0

250

350

300

50273334

4048

AmericanAirlines

5268

78

135

207200

100

V

arig

T

AM

G

OL

T

AP

A

erolineasArgentinas

Varig

TAM

TAP

American

BritishAirways

U

nitedAirlines

La

nAirlines

Iberia

A

irFrance

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, hasremarkably few flights for an agglomeration with a population of almost 6m, but has seengrowth 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 millionpeople, have relatively few international flights.

600

550

450

50

500

Seats (000)

400

350

300

250

200

150

100

089121215

MAO

192133

231

577

Major Brazilian Airports by International Capacity(thousands) 2005 vs 2008

FOR

CWB

REC

BSB

500

0

1214172021

SSA

222842

193

587

50

100

150

200

250

300

350

400

450

550

600

CNF

GRU

GIG

POA

MAO

GRU

GIG

POA

SSA

VCP

CWB

FOR

REC

BSB

Source: OAG LEGENDGRU = Sao Paulo GuarulhosGIG = Rio de Janeiro GaleoPOA = Porto Alegre

CNF = Belo Horizonte Tancredo NevesSSA = Salvador Dois de JulhoREC = RecifeSDU = Rio de Janeiro Santos Dumont

BSB = BrasiliaFOR = FortalezaCWB = Curitiba Afoso PenaMAO = 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 beensignificant 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 regionallevels. In 1988, the new constitution included provisions to develop the North East. Severalregional investment programs were created. During the Cardoso and particularly the Lulada 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 Eastwith the Prodetur program. Between 1995 and 2000, the federal government and the Statesinvested US$ 736 million in improvement works, largely funded by the Inter-AmericanDevelopment Bank. Among the projects were the renovation of the historic centres ofSalvador and Recife, 1020 kilometres of new roads and the construction and expansion ofthe 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 ofthe State.

At the moment, as will be explored further below, EU holiday carriers are currently offeringflights 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 toBrazil. Data in this section differ from that in the preceding discussion on tourism, whichwere concerned with nationality of visitors to Brazil, and instead focus on passengercarriage between the EU and Brazil.

The total number of passengers carried between the EU and Brazil has increased quiterapidly 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); althoughthe market recovered quickly, it may still be below levels that might otherwise have beenattained in that time frame.

According to Eurostat, the vast majority of passengers arrive on scheduled services. We notethat carriers such as Condor and TUI, which frequently operate non-scheduled services, inthe case of Brazil offer package travel to destinations in Northern Brazil (e.g. Natal andFortaleza) which are operated on a scheduled basis. This may be in response to higher costsfor non-scheduled traffic or regulatory constraints. A breakdown of market size onscheduled 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 ScheduledSource: Eurostat

Figure 26: Passengers between EU and Brazil

Whilst Eurostat indicates there were 4.4 million passengers between the EU and Brazil, thefigure given by ANAC is slightly lower at 3.72 million passengers in 2007. The followinganalysis of airline market share is based on ANAC records of passenger carriage, andtherefore 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 airlinesoperating between Brazil and the EU in 2007.

5,62345,356137,792145,810

151,897186,703

198,160

286,046

477,972

552,714

562,498

972,701

3.5

4.0

0.5

TAM AirFrance

TAP

Million Passengers

Iberia

3.0

2.5

2.0

1.5

1.0

0

ThirdCountryCarriers

CondorFlugdinst

VarigBAAirEuropa

AlitaliaKLMLufthansa

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 nearlytwice 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 theairlines operating direct service in the particular bilateral markets. As should become quitenormal as a reflection of service structure in the EU from one of segmented national marketsto one of an integrated Community market, a comparison of traveller nationality to traveller

itinerary (as undertaken below) shows interestingly that there are large differences betweenthe 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 ofthe respective Member States and Brazil. The table below provides a comparison:

EUNationalsVisiting

Brazil

BrazilianNationalsVisiting

EU

TotalNationals

PotentialAir

Passengers

PassengersArrivingin Brazil

PassengersDeparting

Brazil)

Total AirPassengers

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 42,450Denmark 26,042 n/a 26,042 52,084Estonia n/a 842 842 1,684Finland 22,217 4,031 26,248 52,496France 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 54,442Hungary 7,103 n/a 7,103 14,206Ireland 18,091 n/a 18,091 36,182Italy 268,685 229,384 498,069 996,138 140,908 154,184 295,092

Latvia n/a 289 289 578Netherlands 83,554 n/a 83,554 167,108 90,299 107,861 198,160

Poland 17,280 6,615 23,895 47,790Portugal 280,438 n/a7 280,438 560,876 483,241 491,384 974,625

Slovakia n/a 1,351 1,351 2,702Slovenia n/a 1,851 1,851 3,702Spain 216,373 308,156 524,529 1,049,058 305,363 333,211 638,574

Sweden 39,846 n/a 39,846 79,692UK 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 availableTable 6: Visitors and Air Passenger Carriage EU-Brazil, 2007

There are several points apparent from the above table. First, (and logically) that travellersto/from EU countries without direct air services with Brazil are transiting over those EUcountries that do (here the point should be made that travellers will select the bestconnection, irrespective of whether it is in their home country or not. A traveller fromManchester 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).

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


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Additionally, there are significantly more visitors between the EU and Brazil than airtravellers. Each unique visitor from Brazil to the EU and from the EU to Brazil, is likely toconstitute an arrival and a departure. With a total of 2.6 million unique travellers8, thepotential 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 Braziland the EU in that year, suggesting that around 1.5 million passengers (or 750,000 uniquevisitors) travelled by other means or itineraries. Although this number could include someone-way travel, and passengers arriving by other modes (e.g. cruise ships), it is likely thatmany are travelling via third countries (see earlier discussion at section 2.2.2). We note thatEurostat 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 isinsufficient to meet consumer demand, specifically for those countries with a greaternumber 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 theEU 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 thetotal. For TAM, this represents a substantial increase from 2007, when its offer was around4% of total capacity (at a time when the airline lacked suitable long range aircraft). AirlineBusiness 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 fourthquarter of last year the Europeans added capacity to Latin America as fast as they could, averaging12% growth per month. This was twice as fast as the European carriers' growth anywhere else in theworld.

Share of EU-Brazil Scheduled Seat CapacityOctober 2008

23%

TAM

EU Carriers

77%

23%

29%4%

10%

5%

4%

13%

TUI

1%

1%

Air EuropaAir Caribes

TAM

1% Air France

Air Italy

Alitalia

BA

1% Condor0%First Choice

Iberia

6%KLM

1%

LivingstonLufthansa

TAP

0%

Source: OAG Total: 207, 052 seats Figure 28: Scheduled Seat Capacity, EU-Brazil, October 2008

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


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Whilst EU carriers currently dominate capacity offer in the overall EU-Brazil market, atindividual market level, there is considerable variation. The table below shows the marketshare in individual EU markets on the basis of available seatsin 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%TAM Linhas Aereas 62 11,625 45%


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Airline Capacity Offer from Brazil to EU destinations, October 2008

Carrier Frequency Seats %


UK carrier total 50 14,188 55%

Brazilian carrier total 62 11,625 45%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 betweenthe EU and Brazil, around 27% of the total market, and is the only carrier operating onPortugal-Brazil routes. TAP has expanded its service rapidly since 2000, from 17 to 67weekly flights. Although TAM does not operate its own aircraft to Portugal, it has anextensive codeshare agreement with TAP. TAM places its code on all of TAP's flights toBrazil, 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 inthe significantly higher number of overall passengers than Portuguese nationals discussedearlier 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-Brazilcapacity. Competition on Spain-Brazil routes comes from Air Europa and TAM. Iberiaoperates 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 operatesa 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% oftotal EU-Brazil capacity. Air France operates twice daily flights to both Rio de Janeiro andSo Paulo. Although TAM offers a greater number of frequencies, Air France offers greatercapacity due to larger aircraft type: Air France operates Boeing 777-200, 747-400 and AirbusA330, whereas TAM has a mixed operation of MD11, A330, A340-500 on its routes from SoPaulo, Rio de Janeiro and Recife to Paris.

Lufthansa takes an important position on both the passenger and cargo market to Brazil, buttakes a larger share with regard to cargo (discussed further in section on cargo). Lufthansaoffers 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 andBoeing 747-400. In 2007 Lufthansa entered into a codeshare operation with TAM, inanticipation of the latter joining the Star Alliance. In addition, Condor operates flights fromFrankfurt to Recife and Salvador de Bahia.

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

Alitalia operates daily flights to So Paulo from Milan and Rome with a Boeing 777. OtherItalian 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 anA340-500.

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 theNortheast.

A limited number of services to Brazil from the French Overseas Territories is provided byAir Caribes. Air Caribes is a French regional carrier based in Guadeloupe, operating flightswithin 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 wherethis information could be obtained from airline annual reports.

Obtaining definitive information on load factors achieved by carriers for individual routesoperated is not possible. However, information on load factors achieved regionally is givenamongst traffic statistics on airline websites. These figures are given as average regionalload factors and are indicated below for carriers operating in the EU Brazil market fromtheir 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 landmass, physically difficult terrain and regional linkages. Unlike in Europe, where the majorityof air cargo is international, in Brazil a large amount of domestic cargo travels by air. Thefollowing analysis is primarily concerned with the movement of international cargo, exceptfor 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 theregions with the greatest amount of air cargo traffic are North America, followed by Europeand 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

11 0

South America

126

80

46

North America

229

83

146

CentralAmerica

24

1311

Africa

16

8 8

Outbound

Inbound

Brazil Inbound/Outbound Cargo Regions2007 (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 cargoto/from Brazil (accounting for almost all North America cargo), with Germany in secondplace and France, Portugal and Spain also in the top 10. The United States and Brazil havesigned a new bilateral agreement in June 2008. The number of flights will be graduallyincreased 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 changeswere made with regard to cargo traffic. The number of weekly cargo flights was expandedfrom 24 to 35, increasing to 42 in 2010. Cargo charter flights are increased from 750 to 1,000per year, with 1,250 allowed in 2010. US cargo carriers may now also offer transfer servicesto allow intermodal traffic by road.

All Cargo Carriage - Volume and Percentage of Total2007

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

CentralAmerica

67.4%

88

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 iscarried on all-cargo services, as a percentage of the total cargo market. As shown, theproportion of cargo carried on all-cargo services (rather than as bellyhold, or on combinationservices) 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 around38% in the European market and the percentage is zero for the Asian region. In the nextsection, we consider available capacityon 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. Thedomestic all-cargo market is of even greater volume than the international market, reflectingissues of accessibility and distance, as well as the shortage of competing modes for time-sensitive products (see infrastructure section below). The figure below compares availablecapacity offer on scheduled all-cargo services from Brazil (to world) in October 2005 versus2008, indicating near-static volumes.

Available Cargo Capacity - International & DomesticAll-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 marketsacross the Andes by land. We believe these flows are likely to include traffic to and fromEurope being consolidated in Brazil before proceeding onwards. The increase inArgentinean traffic, as with passenger flows, appears to be associated with recovery ofArgentinean economy.


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Tonnes (000)

9

8

7

6

5

4

3

2

1

0 Bolivia

0Venezuela

0

PuertoRico

0

Argentina

1

Mexico

1

CapeVerde

1

Peru

1

France

1

Luxembourg

2

Germany

2

Colombia

3

Senegal

3

Ecuador

4

Chile

5

USA

8

International Cargo Capacity from Brazil by Country (dedicated cargo flights)October 2005 versus 2008

00

0

2

4

6

Venezuela

1

Mexico

1

France

7

Tonnes (000)

Angola

Peru

Bolivia

1

3

CapeVerde

1

5

1

2

Senegal

3

Luxembourg

3

Ecuador

4

Germany

4

USA

5

Chile

6

8

9

2

Argentina

2

Colombia

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, therehas been consolidation of domestic tonnage onto a significantly smaller number of flights.

Cargo Frequency - International & DomesticDedicated 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 flightsin 2008 were making multiple stops in Brazil and the United States: so some of theconsolidation 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 beenan increase in frequencies to Chile, disproportionate to the slight increase in available cargocapacity - suggesting higher value/time sensitive cargos.


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45899

13131319

22

293335

53

104

0

10

20

30

40

50

60

70

80

90

100

110

Frequency

Bolivia

PuertoRico

Argentina

Mexico

CapeVerde

Venezuela

Peru

France

Luxembourg

Colombia

Senegal

Ecuador

Germany

Chile

USA

International Cargo Frequency from Brazil by Country (dedicated cargo flights)October 2005 versus 2008

479

131618

2223

323237

50

6972

0

10

20

30

40

50

60

70

80

90

100

110

Ecuador

Germany

Chile

USA

Peru

France

Mexico

Angola

Venezuela

Frequency

Colombia

CapeVerde

Senegal

Argentina

Luxembourg

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 thatflows within Brazil are nothalved in this instance). A broad range of locations, including inthe North East and North West are served. So Paulo Campinas is intended to be adedicated cargo airport but it is notable that, for reasons likely to include proximity to thecommercial and industrial centre of So Paulo, and opportunities for cross-dock

transhipment onto international services, Guarulhos is still favoured though having lostbusiness in both absolute and market share terms in the last three years. Infraero has farreaching plans for the expansion of Campinas as South Americas cargo hub.

737793

108118138

162178

242

629

0

50

100

150

200

250

300

350

400

450

500

550

600

650

Frequency

Brasilia

Belem

Salvador

Manaus

Porto

Alegre

Curitiba

AfonsoPena

Riode

Janeiro

Cuiaba

SaoPaulo

Guarulhos

SaoPaulo

Viracopos

Top 10 Cargo Airports by Departure Frequency (dedicated cargo flights)October 2005 versus 2008

2005: Total 1,818 2008: Total 1,435

Source: OAG

454661

859199109

150

268

481

0

50

100

150

200

250

300

350

400

450

500

550

600

650

Frequency

Salvador

Fortaleza

Recife

Riode

Janeiro

Porto

Alegre

Brasilia

Florianopolis

Manaus

SaoPaulo

Guarulhos

SaoPaulo

Viracopos

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


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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 ofcargo9, or around 38% of the total between the EU and Brazil (slightly above their 30% shareof available cargo capacity). Lufthansa Cargo is by far the individual carrier carrying thelargest share of capacity, with Air France combination services occupying the second placeahead of VarigLogs dedicated cargo service. Likewise, TAP Air Portugal combinationservices, in fourth place, carry a greater amount of cargo than the dedicated c

Documents

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