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TAM opts to make a regional push with or without Brazilian government subsidies

Article from CAPA centre for aviation

Brazilian airline TAM has opted to solidify its regional aviation strategy ahead of a decision by the country’s government of a proposed programme to subsidise routes to certain regional airports. It plans to make its own push from Brasilia and has lined up a partnership with Brazilian regional airlinePassaredo to access passengers in smaller markets.

TAM is also in advanced discussions with airframers over a regional aircraft order including Brazil’sEmbraer. TAM cited those discussions after rival Gol also stated it was also evaluating an order forEmbraer jets.

The timing of TAM’s regional push is interesting given that Brazil’s economy remains tenuous. But TAM may be setting the stage to regain some market share it has lost during the last couple of years as it worked to turnaround its domestic operations in Brazil. Whatever TAM’s motivations are, it appears to be positioning itself to capture more traffic within Brazil’s smaller markets, creating new competitive.

TAM and Gol examine smaller Embraer jets as Brazil weighs regional subsidies

TAM, part of the LATAM Airlines Group, in late 2014 stated it was evaluating regional aircraft including 18 Embraer E2 jets. At the time it outlined those plans, TAM also stated it would add four to six new regional destinations per year beginning in 2015.

The outlining of its plans occurs as the fate of the proposed Regional Aviation Development Program in Brazil is in the hands of legislators. The initiative entails subsidising regional operations to airports with less than one million passengers annually.

At one point, legislators were considering removing a portion of the proposal that limited the subsidies to 60 seats per flight and instead subsidising 50% of passengers on flights to underserved destinations, but fast growing Brazilian airline Azul quickly criticised that proposal and warned that its own potential order for 30 E2 jets could be in jeopardy if the provision was removed. Gol in Sep-2014 stated it too was evaluating the re-engined Embraer E2 jets.

The smallest aircraft type in TAM’s fleet are its 144-seat A319 narrowbodies while Gol’s smallest jets are its 144-seat Boeing 737-700s.

Unlike Gol, TAM avoids placing a value on potential subsidies

The value of the proposed subsidies has been pegged at roughly BRL500 million (USD185 million), according to news outlet Bloomberg. Gol has previously stated that it could net USD20 million from the programme, but TAM has refrained from making any estimates of the benefits it could reap from potential subsidies. “It is very hard today to define, probably our competitors are doing some sort of estimates, but today it is very hard to define how the subsidy will be distributed, which will be the formula for calculating it and how much will each company be entitled to,” TAM CEO Claudia Sender Ramirez recently explained.

She remarked that regardless of how Brazil’s government proceeds, there are regional cities TAM is interested in serving with its current and new fleet.

See related report: Gol’s 3Q2014 losses widen even as the airline continues working to improve its financial leverage

TAM selects its stronghold of Brasilia for regional expansion

Subsequent to Ms Sender’s remarks, TAM unveiled its plans to acquire smaller aircraft and has announced new service from Brasilia toRio Preto, Boa Vista and Iguassu Falls beginning in Feb-2015 and continuing through Apr-2015. It is also adding new international service from Brasilia to Orlando in Jun-2015 after cutting flights from Rio de Janeiro to Orlando in 2013.

Brasilia is Brazil’s capital and third busiest airport based on aircraft movements and the fourth busiest measured by passenger throughput. It is primarily a domestic airport with only 3% of its seats deployed into international markets. TAM is the largest airline in Brasilia measured by seats deployed with a nearly 43% share. Brasilia is TAM’s third largest base measured by seat deployment behind the two airports it serves in Sao Paulo – Guarulhos International and Congonhas.