GOL - Get Ready for Takeoff: Brazil to Loosen Foreign Ownership Rules for Airlines
Get Ready for Takeoff: Brazil to Loosen Foreign Ownership Rules for Airlines
(WSJ) With Brazil preparing to lift the foreign ownership cap on its air carriers from 20% to 49%, expect more mergers and capital-raising in the next two to three years - and opportunities for foreign airlines to penetrate Latin America's largest market.
With Brazil's buoyant economy and its role as host to the 2014 World Cup and 2016 Olympics, the country's airlines are cleared for take-off.
Bloomberg NewsAs of October, Brazil had 16 operating airlines. Two - TAM S.A. and Gol Linhas Aereas Inteligentes S.A. - are dominant, but there are at least four more substantial smaller carriers that could need capital or larger partners, or may want to go public.
The industry fundamentals are excellent. In the first half of the year, domestic traffic grew 28%, well above the 8% global growth rate, according Sao Paulo's brokerage Coinvalores. For the full year, the domestic Brazilian flights are likely to end up 20%, more than twice the robust 7.5% projected GDP expansion.
For 2011, air traffic is expected to remain strong due to both GDP growth and lower ticket prices, which are stimulating a wider demand.
This growth was the impetus for the planned hook-up, announced in August, between Brazil's largest carrier, TAM, and Chilean LAN Airlines S.A. Together the two companies will stake their claim to the larger South American market as well.
TAM and LAN are the companies most directly affected by the planned change in ownership rules, as they planned to combine under a single holding company, LATAM Airlines Group S.A. Their agreement, which is awaiting regulatory approval, was structured to comply with the 20% limit on foreign ownership in Brazil but is expected to be revised as soon as the new law is approved.
TAM supports the change in the law because it will bring more investments to the country, its CEO, Marco Antonio, said in an email.
The proposal should come to a vote in the next few months, according to Brazilian congressman Rodrigo Rocha Loures, who sponsored the bill. He expects it to be approved take effect before the end of the first half of 2011.
Gol, TAM's chief rival in Brazil, has signaled that it has no plans to follow in TAM's foosteps with a merger or JV. Privately held Gol is controlled by the family of its CEO, Constantino De Oliveira Jr. In contrast to TAM, which caters to corporate customers, Gol is a low cost carrier. It expanded its franchise by acquiring Brazil's flag carrier Varig in 2007, after Varig had gone through a judicial reorganization.