The Brazilian Congress has amended the Brazilian Aviation Code to remove restrictions on foreign ownership and control of national airlines. The move is expected to increase competition and foreign investment and impact the finance and insurance markets.
What has changed?
The Brazilian Aviation Code regulates which national airlines can operate in the country. Previously, any airlines hoping to establish themselves in Brazil would encounter several restrictions. Notably, a cap of 49% was applied to foreign ownership and the airline was required to have exclusive Brazilian management and control. Both provisions made it difficult and unattractive for foreign entities to invest in the domestic industry.
Attempts to remove the foreign ownership cap in 2016 were unsuccessful due to a presidential impeachment. The good news is that following a recent amendment to the Brazilian Aviation Code international airlines can now own a subsidiary company in Brazil. The current requirement for this is that the airline’s legal entity is set up in Brazil, in accordance with Brazilian law, and its headquarters and administration are based in the country.
The change is a long-awaited permanent implementation of a provisional measure established in 2018.
Carrier Liability Insurance and Reinsurance in Brazil
Carrier Liability Insurance is an obligatory insurance in Brazil and, as such, it can only be underwritten by accredited local insurance companies.
However, the reinsurance market is open to international players. Following 70 years of a State Reinsurance Monopoly and another decade of liability caps being applied to the limit of risks/premium that could be ceded to international reinsurers, Brazil opened its doors to international investment more widely in December 2017. The only restriction that still applies in this regard is that local reinsurance companies have a right of first refusal of 40% of these risks.
Practical implications of the change
It is hoped that removing these restrictions on foreign ownership and control of national airlines will increase investment and domestic competition for Brazil’s airlines, either through foreign airline investment (like Delta’s US$ 1.9 billion investment in Chile’s LATAM airline, that operates across South America) or through other forms of financing, such as private equity. International airlines may also enter the Brazilian market by establishing a local subsidiary. The change could have implications for the insurance and re-insurance market, as international players increase their presence in Brazil.
The Brazilian airline market is currently concentrated with Gol and LATAM. These two airlines alone covered over 85% of Brazil’s 94 million domestic journeys in 2018, according to CAPA’s April 2019 report. Another big player, Avianca Brasil, was entered into liquidation recently. With this most recent regulatory amendment, the market is one to watch.
CAPA, 7 April 2019, Brazil aviation outlook: positive trends and Azul still opportunistic
Contributing author: Gregor Hunter