Brazilian Aviation Agenda 2020 1
Mission To encourage the habit of flying in Brazil by planning, implementing, and supporting actions and programs to promote the growth of civil aviation in a consistent and sustainable way, for both passenger and cargo transportation. 2
ABEAR members The association was created in August 2012 The founding companies Members Together we account for 99% of the domestic market** with 2,700 flights per day 492 aircraft * Trip and Azul were merged in 2013 under the name Azul **Measured in RPK (Revenue Passenger Kilometer). Sources: ANAC/2013; Airlines 3
Program areas Competitiveness Creation of an environment favorable to the development of the airline industry, with cost review and infrastructure improvements, to provide products and services of increasing quality. ABEAR s proposals include dialogue and participation in airport concession processes. Sustainability Adoption of sustainable practices across all links in the industry chain, with investments focused on:» Development of sustainable aviation biofuel» Continuous review of air traffic control procedures, to allow more direct flights and less waiting time in the air» Review of the airlines operational and administrative procedures, with a view to reducing environmental impact People Relationship with consumers. Investment in training, education, and specialization of professionals working in air transportation and supporting industries. 4
Generation of employment and income 1.2 million jobs 179,000 direct 432,000 indirect 276,000 induced* 329,000 by the effect on tourism US$ 1.7 billion in direct wages paid US$ 30.4 billion added to GDP US$ 10 billion direct US$ 8.3 billion indirect US$ 4.6 billion induced* US$ 7.5 billion by the effect on tourism US$ 9.2 billion in taxes paid US$ 4 billion direct US$ 3.3 billion indirect US$ 1.9 billion induced* Effect on tourism not measured US$ 5.7 billion in sales of aircraft and equipment Embraer is the world s 3 rd largest aircraft manufacturer, producing about 200 aircraft per year** Conversion rate: US$ 1 = R$ 2.4. * Effect of the consumption of direct and indirect employees. ** 2013 Sources: Study by Oxford Economics-IATA 2009; Bain & Co (estimate in January 2013); Wages reported by the ABEAR members; Embraer 5
Turnover of goods and services US$ 52.7 billion was the turnover of air transportation in Brazil s trade turnover (imports plus exports) in 2013 This represents 11% of the total turnover (of US$ 481 billion), but only 0.17% of the total weight carried Sources: MDIC; CNT 6
Brazil: the world s third largest domestic market Growth is the result of economic development and reduction in airfares Passengers carried (domestic, in millions) 700 648 600 500 400 300 317 200 100 92 60 55 0 USA China Brazil India Japan Sources: OACI 2013; DoT/Bureau of Transportation Statistics (USA) 7
More passengers each year Growth in domestic and international travels from 2002* to 2013 is 208% Passengers carried in Brazil (domestic and international, in millions) 100 208% growth 93 109 111 80 79 60 40 36 33 37 45 49 54 58 65 20 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 *In 2002, deregulation (pricing freedom) becomes effective in Brazil s domestic air transportation Source: ANAC. Includes regular and non-regular, fare-paying and non-fare-paying air passengers, as well as frequent-flyer program passengers, recorded by Brazilian airlines in all Brazilian airports. 8
An expanding market Brazilians are flying more and more Progress in the number of passengers compared to population growth (2002-2013) 0.60 0.51 0.55 0.50 0.48 0.40 0.31 0.34 0.41 0.30 0.25 0.26 0.29 0.20 0.20 0.20 0.18 0.10 0.00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sources: ANAC; SRE; GEAC The United States and Australia showed the highest ratios of air passengers to population, with over 5 trips per inhabitant per year. Spain has a ratio above 4. Other European nations such as France, Germany, and Italy have ratios above 2. While the world s most populous country, China, has less than one trip per inhabitant. 9
Flying is increasingly cost-effective In 2002, there were no tickets for less than R$ 100 (US$ 41.7). In 2013, they accounted for almost 10% of seats sold Seats sold by average airfare ranges Actual average airfare range (in R$) 2013 2002 From 2002 to 2013, the average domestic fare dropped by 40%, from R$ 545.62 (US$ 227.34) to R$ 326.72 (US$ 136.13) Seats sold (%) 35 30 25 20 15 10 5 0 9.81 0.03 > 0 and < 100 29.58 4.05 >= 100 and < 200 15.55 >= 200 and < 300 19.50 19.04 17.67 13.77 >= 300 and < 400 8.97 >= 400 and < 500 14.15 5.95 >= 500 and < 600 8.50 3.93 >= 600 and < 700 5.14 2.66 >= 700 and < 800 >= 800 and < 900 Fares less than R$ 100 (US$ 41.7) 2002 = 0% of seats 2013 = 9.8% of seats >= 900 and < 1.000 >= 1.000 and < 1.100 >= 1.100 and < 1.200 >= 1.300 and < 1.400 >= 1.200 and < 1.300 Fares less than R$ 300 (US$ 125) 2002 = 23% of seats 2013 = 58.9% of seats 4.28 2.45 2.62 1.69 1.31 0.87 1.84 0.82 1.82 1.23 0.77 0.53 0.39 0.40 0.18 0.50 >= 1.400 and < 1.500 >= 1.500 10 Conversion rate: US$ 1 = R$ 2.4. Sources: ANAC/SRE/GEAC, Tarifas Aéreas Domésticas, ANAC, February 25, 2014
Democratization of air travel in Brazil An effect of increasing income in Brazil and cheaper tickets 800 700 600 Minimum wage (per month, in R$) 107% 545 622 678 724 500 415 465 510 400 350 380 300 200 100 0 2006 2007 2008 2009 2010 2011 2012 2013 2014* *First quarter Source: IPEA. Cheaper airfares + Increasing income of Brazilians = The new consumer is flying more 11
Consequences of economic growth Increase in Brazilian travel spending (2000 to 2012) Distribution of passengers* by monthly household income Number of travels per year* (% of passengers) 242% 6% 9% 64% 36% 41% 19% 41% 85% 10% 15% Social class AB C DE Up to 10 minimum wages More than 10 minimum wages 15 travels or more 7 to 15 travels 4 to 6 travels 3 travels 2 travels 1 travel It is in the new middle class that travel spending has increased the most over the past ten years 36% of all passengers carried by Brazilian companies are middle class The high percentage of first-time travelers reinforces the trend towards democratization Source: Market research by Data Popular Source: Study on the Brazilian Air Transportation Industry, BNDES, 2010 Source: Study on the Brazilian Air Transportation Industry, BNDES, 2010 * Domestic and international travels 12
Supply of seats to meet the growing demand The number of seats on flights growed continuously on the last decade in Brazil Available capacity in domestic flights (ASK billions)* 150 100 50 49 43 45 51 57 137% 67 75 86 103 120 116 116 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: ANAC * Acronym for Available Seat Kilometer. The variable, which represents the supply of passenger air transportation, is obtained by multiplying the number of available seats by the number of kilometers flown 13
More satisfied passengers Respect for the consumer is a constant point of attention for airlines Number of comments* from passengers Since 2010, the number of comments from passengers has decreased by more than 68%** 40,000 30,000 20,000 10,000 0 39,579 2010 24,680 2011 14,725 12,555 2012 2013 Industries that most respect consumer rights 1 is the one that least respects and 15 is the one that most respects 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Cosmetics Food and beverage Automotive Insurance Civil aviation Interstate buses Electric power Health plan Wireline Electrical/electronic Broadband Credit cards Pay TV Mobile phone Banking *Reviews, complaints, questions, and compliments **ANAC s ombudsman report Source: Instituto Ibero-Americano de Relacionamento com Cliente (April 2013) 14
Growth potential Passenger transportation is forecast to grow by 109% and cargo transportation by 58% until 2020 Potential number of passengers carried in Brazil (domestic and international, in millions) 300 109% 211 200 100 101 105 114 127 141 156 172 191 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 Exports + imports by air (US$ billions) 50 51 54 57 61 66 72 76 81 Source: Bain & Co (estimate in January 2013) data prior to the revision date of this edition and projections are kept as in the original study 15
Generation of jobs The projected growth for the airline industry has the potential to generate 600,000 new jobs Number of employees in the airline industry in Brazil (thousands) 2,000 1,500 1,000 500 0 939 254 213 334 138 2009 1,097 297 249 390 161 2010 1,178 319 267 419 173 2011 1,215 329 276 432 179 2012 660,000 new jobs (about 100,000 direct jobs in airlines) 1,275 345 289 453 187 2013 1,344 363 305 478 197 2014 1,431 387 325 509 210 2015 1,518 411 344 540 223 2016 1,605 434 364 571 236 2017 1,695 458 384 603 249 2018 1,785 483 405 635 262 2019 1,875 507 425 667 276 2020 Tourism Induced Indirect Direct 16 Sources: RAIS; ANAC; Study by Oxford-IATA; Bain & Co (estimate in January 2013) data prior to the revision date of this edition and projections are kept as in the original study
Contribution to GDP By 2020, the Brazilian airline industry is expected to add R$ 146 billion to the country s gross domestic product Value directly added by the airline industry to GPD (in billions of nominal R$) For every 1% increase in GDP, the airline industry grows by 2.5% 300 200 R$ 146 billion 191 219 166 145 100 42 54 65 73 83 94 109 126 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Share in GDP 1.3% 1.4% 1.6% 1.7% 1.6% 1.7% 1.7% 1.8% 1.8% 1.9% 1.9% 2.0% Source: Bain & Co (estimate in January 2013) data prior to the revision date of this edition and projections are kept as in the original study 17
Poor geographic distribution Passenger air transportation is currently concentrated in a few regions Air transportation by IBGE mesoregion (2012) 98 Number of airports* 18 24 56 97 Number of passengers (millions) 74 19 4 Regions with more than 5 million passengers Regions with 1 to 5 million passengers Regions with up to 1 million passengers Regions without airports Source: Bain & Co (estimate in January 2013) *Airports managed by Infraero and by DAESP 50 100 150 18
Airport overload Out of the twelve major airports in the country, eight are already operating at or above their declared capacity Declared capacity vs. use in major Brazilian airports (in millions of passengers) 40 30 31 32 Use Capacity In 2012, the following airports were given in concession to the private sector: Guarulhos in São Paulo; Viracopos in Campinas; and Juscelino Kubitschek in Brasília. In 2013, Galeão in Rio de Janeiro and Confins in Belo Horizonte 20 10 42 17 17 16 16 17 17 10 10 9 9 13 9 13 8 7 9 8 7 8 6 6 6 0 São Paulo Guarulhos São Paulo Congonhas Brasília Rio de Janeiro Galeão Belo Horizonte Confins Rio de Janeiro Santos Dumont Salvador Porto Alegre Campinas Curitiba Recife Fortaleza Sources: Infraero; concessionaires 19
High operational costs Fuel prices and taxes represent major bottlenecks ATF Prices* Fuel accounts for up to 40% of the costs of an airline Any difference in the ATF final price has a great impact on business ICMS on ATF Currently ICMS rates range from 4% to 25% in major airports A result of the different tax rates, it is a common practice for companies to plan the network to fuel up at the point with the lowest ICMS This practice has negative consequences for everyone:» Environment: the higher fuel consumption increases pollutant gas emissions» Airlines: operational inefficiencies» State governments: the tax rate war reduces tax collection in states with higher ICMS rates» Passengers: tickets become more expensive * Aviation turbine fuel 20
Fuel cost Pricing formulas and taxes raise the price of the input for domestic aviation and affect the competitiveness of companies Although approximately 75% of the volume is produced in Brazil, ATF is priced on import parity Estimated ATF price composition in Brazil (as % of the price, average in 2009) 100 80 81.5 6.9 6.3 1.5 3.8 100 60 Sum = 14.7% 40 20 0 US Platts Freight Pipelines and storage AFRMM Others ATF Price Sources: ANP; IATA 21
Lilongwe - Malawi Aviation fuel price Cuiabá - Brazil (in US$ per gallon, Manaus - Brazil as of February 2014) Recife - Brazil Brazzaville - Congo Luanda - Angola Guarulhos - Brazil Addis Abeba - Ethiopia Harare - Zimbabwe Brasília - Brazil Accra - Ghana Bamako - Mali Galeão - Brazil N Djamena - Chad Lagos - Nigeria Kinshasa - Congo Manaus - Brazil Recife - Brazil Abidjan - Ivory Coast Guarulhos - Brazil Galeão - Brazil Beirut - Lebanon Beijing - China Santiago - Chile Johannesburg - South Africa Caracas - Venezuela Istanbul - Turkey Amsterdam - Netherlands Lima - Peru New York - United States Madrid - Spain London - England Miami - United States Delhi - India Mexico City - Mexico Tokyo - Japan Buenos Aires - Argentina Moscow - Russia Source: IATA 5.06 5.01 4.75 4.71 4.63 4.60 4.46 4.35 4.25 3.93 3.91 3,87 3.65 3.49 3.47 3.43 3.42 3.41 3.38 3.37 3.35 3.21 3.17 3.15 3.15 3.15 3.15 3.14 3.11 3.08 3.07 3.06 3.06 3.01 3.00 2.98 2.78 6.80 Domestic Flights, with ICMS International flights, exempt from ICMS Unlike domestic flights, fuel for international flights is exempt from ICMS 22
Expansion and construction The economic development and emergence of new regions are great opportunities to build or rehabilitate 71 and expand 49 airports Need for airports by passenger traffic 90 85 80 70 60 New 56 50 40 40 30 New 15 20 10 0 Expansion 18 Existing 11 0 to 1 million Expansion 21 Existing 4 1 to 5 million 12 Expansion 10 Existing 2 More than 5 million Regions with more than 5 million passengers Regions with 1 to 5 million passengers Regions with up to 1 million passengers Source: Bain & Co (estimate in January 2013) 23
Expansion of airports and air traffic control Expanding hubs responsibly requires investing in air traffic control and review of routes and flight procedures Investment in expansion and construction of new airports Expansion and construction of new airports implies the need to increase the capacity of existing airports, so that already congested hubs, such as São Paulo, can absorb a larger number of flights Review of routes and air traffic control procedures It is necessary to change routes and traffic control procedures to reduce the average flight time, cutting costs and promoting the market growth - in addition to allowing saturated airports, such as São Paulo, Rio de Janeiro, and Brasília, to receive more flights 24
Investments in aircraft For the industry to achieve its potential, airlines will have to invest R$ 26 to 36 billion in aircraft by 2020 Need for investment in aircraft (in R$ billion) 40 30 20 10 0 3 2013 2 3 2014 2 4 2015 3 4 2016 3 5 2017 3 5 2018 4 6 2019 4 6 5 36 26 2020 Accumulated total Highest estimate Lowest estimate Number of new aircraft 36 44 60 63 69 77 85 94 526 Note: average aircraft valuations are based on financial statements of Brazilian publicly traded companies Source: Bain & Co (estimate in January 2013) 25
Combined efforts To develop to its potential, the airline industry needs close collaboration between the government and private sector Government Private sector» Infrastructure: to enable investments in expansion, maintenance, and construction of airports, air traffic control, and development of new air routes» Costs: Unification of the ICMS rate at 4% in all states To start talks with Petrobras to review the ATF pricing formula» Regulation: to ensure a regulatory framework» Investment: to ensure investment in the new fleet necessary to meet the growing demand» Efficiency: constant gain in operational efficiency - to make air tickets more accessible»quality and safety: to continue to seek improvements in user service» Expansion of the air network: more destinations, more flights» Sustainability» Consumer care 26
Potential for 2020* Commitment and investments to resolve the industry s problems must take Brazilian air transportation to a new level 2012 2020 Passengers 101 million 110 million 211 million Airports 96 71 airports 167 Direct domestic routes 479 316 routes 795 Employees 1.2 million 660,000 jobs 1.9 million Fleet 450 airplanes* 526 airplanes** 976 airplanes** Investments Private: R$ 26-36 billion Public: R$ 42-57 billion *Approximate amounts and quantities **ABEAR Fleet Sources: Bain & Co (estimate in January 2013); Infraero; Daesp; ANAC; IATA; HOTRAN 27