Panel SA: Pressure suffered by truck driver is similar to airline, says Latam

When the debate in Brasilia about the adoption of emergency measures to mitigate the impact of the war in Ukraine on oil heated up, airlines decided to position themselves not to be left out, according to Jerome Cadier, president of Latam in Brazil.

“At the beginning of this discussion, we realized that aviation kerosene was getting a little out of the debate. It’s diesel, it’s gasoline. We wanted to remember that it is also having an impact. And this was partially recognized”, says the executive.

The concern of airlines when it comes to filling the tank is similar to that of truck drivers, although the sector does not make the same noise. Instead of the threat of a strike, in aviation, the result appears in the price of the ticket.

“The impact is clearly similar, insofar as we are talking about fuel, price pass-through, tariff impact, drop in demand”, says Cadier.

This Friday (11), the executive expressed relief with the approval by Congress, on Thursday (10), of the bill that would zero PIS/Cofins rates on fuel this year.

“This helps us, without a doubt, it softens the impact. Although it is small, it softens. And there was the other one, which was a request of ours, mainly from Latam, but this one was not answered, which was to unify the ICMS rates”, he says. Cadier.

The single rate must be applied to gasoline, diesel, ethanol and cooking gas. Initially, it would also be valid for the QAV (aviation kerosene), but the deputies excluded the possibility.

The measure for ICMS was not a consensus in the airline industry. In the Azul model, which flies to small airports in regional aviation, it is better to maintain the current charging system, which allows the company to reduce rates to increase the spraying of the network in the country.

The war reversed the good winds that had been blowing in the sector in recent weeks. On the exact day that Russia invaded Ukraine, Latam was getting ready to give positive news in the international aviation market, the reopening of the company’s flights to Boston and Rome.

The movement, which signaled a reinforcement of the resumption after the hit suffered by the pandemic, was interrupted by the war, which brought the skyrocketing price of fuel.

A few days later, Jerome Cadier, president of the airline in Brazil, went public to warn that the ticket was going to be more expensive.

What will happen to the flights to Boston and Rome that were going to start flying from July? We are not 100% sure. We will keep, but maybe not on the same date. We are studying postponing the start of these flights. What happens is you review the plans. Does not delete route and destination. We still want it and will fly, but with this fuel, we may have to wait a little longer for a stronger recovery. The international was slowly recovering. We always said it was 2024. We are already starting to be a little more cautious in this still slow recovery in the international market.

A few days after that good news of more international flights, Mr. he was also the messenger of the bad news, who went public to announce a finding that affects the entire sector: the increase in QAV (aviation kerosene), because of the war, would raise the price of tickets. What is the dimension of this? In a basic account: Latam not only in Brazil, Latam completes, consumes in fuel the equivalent of 25 million barrels of oil in a year. We saw fluctuations this week, up and down, of US$ 30 or US$ 40. This joke alone impacts the cost of the company by US$ 1 billion. We are talking about magnitude of significant price increases.

The exchange rate helped us a little here in Brazil, because it hit R$5.70 or R$5.60. It is closer to R$ 5.10. That was a help, in essence, of 10%. But the magnitude of the increase in oil is so great that we are talking about increases in the order of 25% to 30% below the tariff. People are already increasing. In January and February there were already several increases. And I think it will stay that way in March and April.

And what is the impact on the flight market domestic? We were more optimistic about the domestic than the international. Latam had already planned, in this first quarter, to fly more than in the same period of 2019. We will fly the same or a little less. We already adjusted, because of the Ômicron, in January, and in March, because of the oil. In the second quarter, we should have been 5% or 8% above 2019. We will be slightly below or in line with 2019. This is more or less the adjustment we see due to the price increase that affects demand, and then you adjust the offer accordingly.

Does the war mess with the demand for international travel to Europe? You can already feel cancellation or reduction of demand for there? Incredibly, demand for Europe is better than demand for the United States. And then, maybe, it has something to do with the dollar, as shopping gets expensive in the US, because a lot of the reason to travel to the US is shopping related. It is less attractive for Brazilians to buy there, so we see the market for Europe comparatively better and we do not see any impact, for the time being, of the war.
We are very little exposed from the point of view of destinations, because we fly to Frankfurt and not beyond Frankfurt. In the end, western Europe hasn’t felt it yet.

Abear (an association that brings together Gol and Latam) has defended that the emergency measures that may be adopted to contain the pressure on prices also include aviation kerosene. Demand from the airline industry is similar to that of truck drivers. How do you dialogue with the government to place yourself in this demand for fuel? The impact is clearly similar, insofar as we are talking about fuel, price pass-through, tariff impact, drop in demand. During the beginning of this discussion, we realized that jet fuel was getting a bit out of the picture. It’s diesel, it’s gasoline. We just wanted to remind you that it is also having an impact. This has been partially recognised.

Yesterday, in Congress, the PIS/Cofins theme was voted on until the end of this year. This helps us, no doubt, softens the impact. Although it is small, but it smoothes. And another request, which was ours, mainly from Latam, but this one was not answered, which was to unify the ICMS rates. This was approved for gasoline and diesel but not approved for jet fuel.

Latam is in favor of unifying the rate. Today Brazil is extremely inefficient because some states operate with very different rates than others. With that, you do tankering, which is transporting fuel, because it is cheaper in some state. You spend fuel to carry fuel because there is a different ICMS rate from one state to another.

But we have to be included because the impact is very similar [com o dos caminhoneiros], but I honestly don’t have a recommendation of what the government has to do. The impact today is very difficult to measure. How long will it last? What is the account size? Maybe there’s no way to subsidize. Now, you have to recognize that the price has increased so much lately, that the tax collection of the states has really increased a lot. I think the proposal that was voted on yesterday is a coherent proposal that part of the positive impact that the states saw with the increase be used to soften the impact on the final consumer.

Hadn’t this problem of the sector having to do tankering been solved or alleviated, which was that need to supply in states where the rate is lower to try to cut costs, when you could supply in another destination? Was this not mitigated in 2019, when the Doria government reduced the QAV rate in São Paulo? São Paulo is a big hub. Obviously, when the big hub charged a more expensive ICMS, you looked to other states for a condition to be more efficient by tankering. So, São Paulo going to 12% or 13%, which is the rate today, has reduced the impact of that, but there are some states that have 2% or 5%.

It remains relevant from one state to the other. In some states I pay 25%. In others, Azul pays 2%. So, even though SP has reduced the rate, tankering is a phenomenon.

People are always counting. How much is it worth for me to load up on fuel here. Tankering is spending fuel to transport fuel.

This impact of the war on costs has some impact on the Latam judicial reorganization process in the United States, the so-called chapter 11? I think it’s too early to say if it impacts chapter 11 because there’s no trading going on right now. We are waiting for a decision from the judge and we hope that his pronouncement will be quick in the next one or two weeks, so that he can release it for a vote. The exit conditions, ie the financial conditions and all conditions have already been discussed and negotiated. It’s too early to speak. If this war lasts for another six months, then we don’t know what will happen. But the market is very volatile.

At some point, he missed a plane. At another time, at the beginning of the pandemic, there were planes left. So you could increase your fleet because there was a lot on the market. In the middle of last year, there was a shortage of planes. And, incredible as it may seem, in the last two weeks planes have started to appear again.

The fact that Russian companies no longer have access to Boeing, Airbus, parts, in other words, the isolation of Russia, has now left planes again. The market changed again within a week. This brings a different dynamic because you start to think: is there room to grow?

We’re very cost-effective in leaving chapter 11 because we’ve done a lot of cost reduction, a lot of homework. So, the big question here is: immediately, there is a reduction in supply, which is what we are doing now, but is it not an opportunity for Latam? Because Latam is fitter than its competitors right now.

This has been an interesting discussion that we’ve had here.

The first answer is: raise the price and reduce the supply. This everyone is doing. But what about in the medium term? Does this dynamic of higher fuel, of remaining planes on the market, does it not open up possibilities for Latam up front? That’s a good self-talk here for us.

And your relationship with Azul, those conversations about the possibility of Azul buying Latam finished? Since May of last year, this conversation has been a conversation between Azul and the capital markets, analysts, and the media. We don’t have any conversations with Azul. We are not interested in having it. We made that super clear and it hasn’t changed. And in the last two or three months the media themselves stopped asking because they realized that it was something that was not going to happen.

Time will prove that our position was correct from the start. We were always very aggressive commercially and they and Gol, too. This market is very aggressive in conquering space, airport, market, this has always continued.

Now it will continue even further. With the demand that will suffer the impact of the price increase, there are fewer passengers. That is, growth is reduced, and aggressiveness is even greater.

Joana Cunha with Andressa Motter and Ana Paula Branco