With six new airports under construction and expansion projects planned or recently completed at five more, the Brazilian aviation industry is sending out positive smoke signals. And, according to growth consulting company Frost & Sullivan, the airport airside services (AAS) market is set to feel the benefit.
In 2007, Brazilian AAS markets earned around $300m, a figure Frost & Sullivan expect to increase by nearly 30% over the next five years, hitting $385m by 2012.
“Brazil had problems with delays and luggage at its airports which was down to problems with its infrastructure and not having enough air traffic controllers,” says Frost & Sullivan analyst Matheus Salvadori. “Now the problems have been addressed and lots of airports have been upgraded to international status. More passengers are being handled and more airlines are flying.”
So what’s driving the boom? What opportunities are opening up? And what challenges do companies wishing to enter the market face?
The main driver behind the predicted growth in AAS is the revitalisation of Brazil’s commercial aviation sector. Spurred by the financial troubles at main flag carrier Varig, other airlines like Gol and TAM increased their market presence and the subsequent competition fostered 13% growth in the sector in 2007.
In March Gol bought Varig for $275m and announced its intention to increase the number of seats offered at low fares to stimulate further Brazilian growth in air travel.
“With this acquisition, Brazil will maintain an important flag in global aviation, the industry will benefit from an increase in jobs and demand will be better served,” says GOL’s CEO Constantino de Oliveira Junior. “We are confident that throughout this acquisition GOL will continue its mission of popularising air travel and consolidate its position as one of the leading low-cost carriers in the world. We will work so that our companies become the Brazilian carriers of choice for both domestic and international passengers.”
Matheus Salvadori thinks that, just as GOL and Tamas emerged to take on and ultimately takeover Varig, new entrants will appear in the commercial aviation sector, stimulating further growth in the country’s AAS market.
“The growth in commercial aviation is the key to the predicted growth in the AAS market,” he says. “The market is currently dominated by two airlines but as it attracts more players, more opportunities will open up.”
As the number of flights departing from Brazil’s airports increases, the pressure on AAS providers to increase their turnaround times will increase. If they can succeed in fulfilling this need, they will be able to generate more revenue.
“Every minute is precious to an airline,” says Salvadori. “When they are on the ground, they are not making money. If AAS providers can become more efficient and reduce the amount of time planes spend on the ground, it will be an enormous benefit to the aviation and, subsequently, AAS market.”
Aviation provides a vital link between Brazil’s agricultural businesses and the country’s main regional hubs. New airports in Alagoas, Rio Grande do Norte, Paraíba, Amazonas, Amapá and Rondônia, all currently under construction, provide testament to the potential growth in Brazil’s regional aviation sector.
“Regional aviation is important,” says Matheus. “It is not strong in Brazil now but we expect more in future as the smaller airports feed the main hubs. Smaller airports have different needs to big ones and AAS providers will need a physical presence in every kind of airport if they are to benefit from this growth.”
The Brazilian AAS market was previously controlled by one company, Serviços Auxiliares de Transporte Aéreo (SATA), but the market doubled with the appearance of Swissport in 1997 and future expansion driven by a growth in commercial aviation may open up opportunities for others further down the line, according to Salvadori.
“When Swissport came into the market they found it hard in the beginning,” he says. “But they addressed some of the issues SATA were ignoring and added value. Entry into the Brazilian AAS market is restricted for global players as you have to have to be present but the market is growing and, if the government can expand the network, there may be opportunities in future. A key aspect in this respect will be offering specialist services rather than trying to provide all aspects of AAS.”
Like the rest of the industry, Brazilian carriers are having to battle against the high price of oil. The solution, according to Salvadori, is outsourcing.
“Airlines know they can’t pass on the burden of high fuel prices to their customers because people will stop using their planes,” he says. “So they are outsourcing, getting rid of non-core activities, because it enhances their efficiency and reduces cost.”
Another potential problem is that, whilst the Brazilian government has invested heavily in the country’s airport infrastructure, doubts still remain about the long-term solidity of the sector.
“The growth of the AAS market is dependent on airport infrastructure,” says Salvadori. “Money has been invested and issues have been addressed but no one can ever be 100% certain that the problems of a few years ago won’t happen again. The equilibrium is a little bit slight.”
Despite the challenges of infrastructure and high fuel costs, Salvadori predicts 7%-10% annual growth in the Brazilian AAS market over the coming years, with the biggest opportunities in ground and passenger handling.
“The airports are confusing at the moment,” he says. “Because there are more passengers than the airports can handle. That will make ground handling and passenger handling key over the coming years.”
And what about AAS? Where will the next major growth market be?
“The country that most people are speaking about is Russia,” says Salvadori. “They’ve had more or less the same problems as Brazil, in that they were under the control of one company, but they are now opening up. It’s closer to Europe, which should help, but the investment trade-off is complicated.
“Russia’s acceptance of global players is based on expected investment. They don’t care so much what services the people will get it’s more about the money. The government wants public private partnerships to address the areas it cannot. In Russia, the potential return on investment is high, but so is the risk.”