Sky tickets: high cost, stagnation, and the micron variable to resume flying and lower prices

SAO PAULO – the country’s three largest airlines – Azul, Latam and Gol – are on track to re-establish the pre-pandemic level on domestic flights by the start of 2022.

However, the speed of this recovery is threatened by rising costs in this sector, driven mainly by the devaluation of the riyal against the dollar, which affects the company’s spending on fuel and leasing (Leasingand aircraft maintenance.

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In addition to, current stagnation, the final recession in Brazil in 2022 (already predicted by banks such as Itaú and Credit Suisse) and moderate concerns about the Ômicron variant of the coronavirus still have the potential to slow the pace of passenger flow recovery, which is more robust in domestic than international aviation.

Analysts point out that the result of this combination of factors should be the transfer of costs to the consumer and increased caution on the part of companies in expanding the offer of flights, which makes it more difficult to reduce airfares. Between July and September, the average ticket price was the highest in eight years.

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Expensive tickets

In October, as vaccination progressed, the number of passengers on planes reached 76% of the pre-pandemic level on flights within the country, according to an analysis by consultancy Bain & Company.

Expectations indicate that the expansion in demand will continue at an accelerated pace during the summer holidays. The companies expect the movement to be close to 100% of that recorded in the same period of 2019.

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The consultancy estimates that passenger volume in December this year will represent 95% to 102% of the pre-pandemic level, but cost pressures and the economic situation make it difficult to maintain this level throughout 2022, after the high flight season.

Peak demand in the high season should last until March. Since then, with advanced vaccination, what determines the number of passengers is economic activity more than the epidemic. The performance of domestic aviation in 2022 will depend on the macroeconomic scenario, the exchange rate and the political environment – says Andre Castellini, partner at Bain.

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The Brazilian airline numbers have improved month by month, which is very different from the chaos of the beginning of the pandemic that left fleets on the ground, but the scenario remains unsustainable. All of them suffered a million losses in the third quarter of this year.

The international price of oil (a barrel of WTI has accumulated a 36% increase this year) and the estimated exchange rate already made tickets more expensive. The average price of domestic flights in the country was R$529.93 per segment in the third quarter, according to a survey by the National Civil Aviation Agency (Anac).

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This average is 12% higher than the same period in 2019, before the pandemic, and 45% higher than last year. It’s the highest number for the third quarter since 2013.

Fuel has practically doubled in the past year, dollar costs have taken a toll, and we’ve piled into debt due to the pandemic, but I’m optimistic — says John Rodgerson, president of Azul. Salvation fly. We’re testing new cities, running 130 destinations, versus 116 before the coronavirus. We will reach ten more cities in Parana in January.

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Azul’s strategy is similar to that of its competitors at the moment: focus on profitable regional roads and expand their reach, reaching areas with unmet demand.

– We enjoy a more aggressive position in the domestic market, which was strengthened a few months ago. We currently operate 49 domestic destinations, and by March 2022 we will reach 56. We have increased frequencies to Comandatuba (BA) and reached Juazeiro do Norte (CE) and Jericoacoara (CE) – says Jerome Cadire, President of Latam Brasil.

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Companies are landing in more cities across the country, but they still make fewer flights. In Azul, there are about 800 per day, compared to 920 before the epidemic. In Latam, there were about 630 flights, today there are 530. In Gol, there were almost 700 daily departures.

In October, there were 430. The company promised 730 between December and March, in the high season. With the increasing demand for tickets, the planes of the three airlines have fully flown, with occupancy rates close to 82%, a level considered good in the sector. But increasing the width of flights requires expertise in the midst of uncertainty.

– Fuel 40% of the cost and recently (aircraft kerosene) slightly increased. In the third quarter, the increase in the annual comparison was 70%. This makes us be careful when planning supply growth. The strategy is to increase capacity, while maintaining a higher aircraft occupancy rate, allowing fixed costs to be mitigated. In the high season, we will fly 105 aircraft, an increase of 30% – says Eduardo Bernardes, Vice President Commercial at Juul.

Cadier, of Latam, estimates that only in 2023 will the profitability of operations return to the level of 2019, mainly due to the slow resumption of international flights, which in the past were responsible for most of the company’s results. Bain estimates that international aviation should only fully recover in 2024, but it could reach 80% of the 2019 level next year, according to Castellini.

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In LATAM, there are 20 international tracks today (there were 26 in 2019). The current seat count is 35% of the pre-pandemic level. In 2022, the goal is to double the supply. In Jules, direct international flights resumed in November with Montevideo and Punta Cana.

This month, the company resumes contacts with Buenos Aires, and in January, flies to Paramaribo, Suriname. In May, he returned to Orlando and Miami. Azul currently only has five international destinations, and according to Rodgerson, it will continue to prioritize Brazil.

Pay attention to the rules

The new type of coronavirus remains a mild concern in the industry and a more sensitive one on international flights.

In any case, anyone traveling this year should heed a Congress-approved measure that guarantees rebooking, a credit for use in 18 months or gives companies 12 months to redeem canceled flights between March 19, 2020 and March 31, 2021.