Will Brazil return to rapid growth? Run-up to World Cup and Olympics may offer boost

  • April 3, 2013

At the end of January, American Airlines put its first B777-300ER aircraft into service, and the route it picked for the new plane was Dallas/Fort Worth-Sao Paulo. The 777-300 means a significant boost in cargo capacity over the 777-200, which until now was the airline’s biggest cargo carrier – just the kind of plane for a market that has shown rampant growth in recent years.

Until last spring, that is. Contrary to widespread expectations, Brazil’s airfreight market contracted sharply in the following months. “All the industry thought that Brazil would continue to grow, but it decelerated. The second half of the year was tough for all of us,” Cristian Ureta, CEO of LAN Cargo, says.

Imports fell by about 10 percent last year, while exports dropped almost 18 percent, according to Roberto Schiavone, senior vice president, airfreight for South and Central America at Kuehne + Nagel.

Inbound traffic showed some improvement toward the end of the year, but exports continued to decline at an alarming rate. CASS statistics show a 38 percent slump in October, followed by a 41 percent drop the following month.

For the carriers, the pain was exacerbated by the huge influx of capacity between 2011 and the spring of 2012, when Latin America was one of a few remaining bright spots in the global downturn, and Brazil the region’s chief engine, drawing in freighter capacity from European, Middle Eastern and even Asian carriers. Most other South American economies remained buoyant last year, but their growth could not compensate for the weakness of Latin America’s largest economy, Ureta notes.

As their yields fell precipitously, a growing number of airlines tried to step on the brakes and reduce capacity. Singapore Airlines, which had launched weekly B747-400 freighter flights to Sao Paulo via Dallas in the summer, suspended the operation after just two weeks. Korean Air had signaled plans to turn its B747-400F charters serving Brazil into scheduled flights but has not shown any signs of going ahead with this. Air Cargo Germany, which had announced plans to mount Brazil flights, has refrained from doing so for now.

“We cancelled a few flights because of low demand, but now there is no need for further flight cuts,” says Daniel Bleckmann, regional director for South America, the Caribbean and Florida of Lufthansa Cargo, adding that the situation improved toward the end of last year, notably on the import side.

There is confidence that growth will return this year, but it lacks the previous optimism. “I assume it cannot continue to go down, so I expect an increase, maybe 5 percent,” Schiavone says. “Commodities overall are pretty flat. I do not see anything that shows huge momentum.”

Two mega events that Brazil will host – the 2014 FIFA World Cup and the 2016 Summer Olympics – are expected to generate strong demand for TVs and related electronics. The run-up to the 2010 World Cup saw Asian carriers fly freighters loaded to the rafters with flat-screen TVs to Miami, where the loads transferred to freighters bound for Brazil. A repeat is in the cards, but on a reduced scale, Schiavone says. Recently, Manaus, Brazil has emerged as a manufacturing area for this type of product, which should go some way toward meeting domestic demand, he says.

Down the road, the mega events may stimulate cargo flows, but for now they add to the grief of freighter operators, as passenger carriers have begun to build up routes in preparation for the masses travelling to the venues.

Belly capacity is on the rise and will continue to increase, Schiavone says.

American Airlines is certainly stepping up its presence in Brazil. Last year, it added Manaus and a second New York-Sao Paulo flight, and later this year it intends to launch flights from Miami to Porto Alegre, Brazil and to Curitiba, Brazil.

Kenji Hashimoto, the U.S. airline’s president of cargo, says he feels confident in the Brazilian cargo market, pointing to the oil and gas business, and in future demand related to the World Cup and the Olympics.

The rise in belly capacity means that operators like LAN have to be nimble with their freighters. “We adjust our freighter capacity on a weekly basis. There is no flexibility with the belly space,” Ureta says.

A flexible approach to freighter schedules has been one way of coping with this situation; another way is a greater drive to attract perishables. “We are focusing again more on fruit. We had focused less on it because of the lower yield, but with the overall yield decline, it has become more of a focus for us and the other carriers,” Bleckmann says.

As a result, perishables shippers find it easier to get space, Schiavone says. “Yield decline, lack of hard freight make perishables more viable,” he said.

In the wake of the marriage between LAN and TAM, there has also been a boost in transit cargo to and from other countries in Latin America passing through Brazil. “We have a big presence in South America, especially on the west coast. We are connecting this to Brazil to take advantage of TAM’s capacity to Europe and to the United States. Now we move a lot of exports from other Latin American countries through Brazil,” Ureta says.

He says the operational integration of the two carriers on the cargo side is largely completed. In line with the model pursued by LAN with its subsidiaries elsewhere, local brand identities will remain in place. However, LAN Cargo is looking to integrate ABSA, its Brazilian freighter subsidiary, with TAM Cargo, a plan that is subject to government approval.

Ureta says he hopes that this can be completed within the first half of 2013.

If there is a silver lining to last year’s downturn, it is that the lower volumes have taken some pressure off Brazilian airports’ chronically strained infrastructure. Recently, there have no problems with airport
capacity, Bleckmann reports.

Dire warnings that the country’s airports are not ready for the volume of travelers expected for the World Cup and the Olympics have produced some frantic activity to refurbish passenger terminals or build new ones. Cargo operators have been watching this with some concern. At best, the overwhelming emphasis on passenger facilities entails some neglect of cargo concerns; at worst, passenger developments might impede cargo activities, some operators have warned.

For his part, Bleckmann has not seen any developments that could negatively affect existing cargo infrastructure. However, he views the inactivity in cargo development during the current lull in volume as a wasted opportunity.

Without question, cargo operators could do with more facilities.

“Sometimes, it is a problem to get a parking position for an additional freighter because the airport is congested with small planes,” Bleckmann says.

Part of the government’s late push to speed up airport development and efficiency has been the privatization of some airports and of on-airport activities that previously were in the hands of monopolies such as Infraero, which has been in charge of the handling at Brazil’s major airports. Like Brazilian customs, Infraero had a fair amount of criticism over the years for lack of flexibility. Some operators have seen signs of improvement, but most find it too early to make a valid judgment.

“The first thing that they change is the prices. Then they change the processes,” Schiavone says. At Sao Paulo’s Viracopos airport, storage fees have gone up 80 percent.

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