ABEAR - The Brazilian Airlines Association OUTLOOK 2014 THE BRAZILIAN AIR TRANSPORT INDUSTRY DATA AND ANALYSIS

Transcription

1 OUTLOOK 2014 THE BRAZILIAN AIR TRANSPORT INDUSTRY DATA AND ANALYSIS

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3 SUMMARY 5. Presentation 7. Introduction 11. ABEAR and its associates 25. Air transportation: importance and competitiveness 31. Basic statistics, employees and fleet 45. Service quality 57. The domestic passenger air transport demand in Brazil and market shares 69. The domestic market concentration in several countries 73. The penetration of air transport in the domestic passenger market in several countries 77. Origin and destination traffic of passengers 83. The domestic cargo air transport demand in Brazil 91. The domestic cargo market air transport penetration in several countries 95. Origin and destination traffic cargo 103. Flight safety 107. Fuel consumption and CO 2 emission 111. Evolution of useful average distances 117. Transport prices and costs 127. Organ transport 130. References and visited sites OUTLOOK 2014 [ 3 ]

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5 PRESENTATION It is a great pleasure for us to deliver OUTLOOK 2014, the third edition of this document consolidated by ABEAR from the gathering of data and analysis on the Brazilian air transport industry, within the context of larger and more mature markets around the globe. To ensure quality and pertinence of this material, we have heard since early this year a number of aviation industry professionals who use ABEAR s Outlook editions. We wanted to understand how much our previous editions were useful to the work performed by each one of them and the improvements they thought were required to make the document still more relevant. This new and enhanced edition of Outlook includes some of the remarks and suggestions we have received. New informative material has been added, such as accident statistics based on data supplied by ICAO, which have been providing further evidence of the very high safety standards achieved by Brazilian aviation. With no accident record for many years, our associates show their commitment to safety with more than 2,700 flights in the skies every day. Several planning process, checks and maintenance tasks are behind the achieved safety level and are a reason for pride of our associates. For the first time, our Outlook edition will be outlining origin and destination figures, both for cargo and passengers. In both cases, our surveys cover the country s twenty major airports. This information provides a clear picture of traffic flows among major economic centers in Brazil and help the industry professionals in their planning activities. We have also advanced in detailing and improving the information data supplied by ANAC, which include a survey conducted by this agency that shows the satisfaction levels experienced by passengers with the services provided by our airlines at Brazilian airports. We hope this publication will be still more useful to you! Eduardo Sanovicz President of ABEAR DATA GATHERING AND ANALYSIS Mauricio Emboaba ABEAR Technical Consultant ABEAR TEAM Eduardo Sanovicz President Adrian Alexandri Communications Director Antônio Augusto do Poço Pereira Administrative and Financial Director Airton Pereira Institutional Relations Director Ronaldo Jenkins Flight Safety & Operations Director Daniela Sarmento Project Coordinator David Maziteli Press Agent Priscila Santana Press Agent Paulo Roberto Alonso Technical Consultant Rogério Benevides Carvalho Technical Consultant Luiz Caversan Communications Consultant Marcos Diegues Technical Consultant EDITORIAL BOARD AVIANCA - Tarcisio Gargioni Commercial Vice President, Marketing and Cargo AZUL - Gianfranco Beting Communications, Brand and Culture Director GOL - Alberto Fajerman Institutional Relations Director TAM - Gislaine Rossetti Institutional Relations and Sustainability Director OUTLOOK 2014 [ 5 ]

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7 INTRODUCTION Outlook 2014 is the third edition of this ABEAR s publication that covers the air transport industry in Brazil with data and analyses. Just like in the previous editions, Outlook 2014 provides an extensive coverage of the air transport industry from a globalized perspective. Thus, whenever applicable, for comparative scenarios in Brazil and abroad, information about the same topics is supplied regarding other countries. A benchmarking technique is used for this analysis. Within this context, benchmarking means the systematic search for information on the best practices found in corporate activities, such as organizational learning strategies, designed to improve performance. In fact, because of its high degree of standardization around the world, the air transport industry is especially appropriate for benchmarking. The origin of this air transport standardization around the world dates back to the 1944 Convention on International Civil Aviation (also known as the Chicago Convention). The convention now has more than 188 member countries which are also called Member States. Article 67 of said convention provides for that each Member State undertakes that its international airlines shall, in accordance with requirements laid down by the Council, file with the Council traffic reports, cost statistics and financial statements showing, among other things, all receipts and the sources thereof. The Chicago Convention created the International Civil Aviation Organization (ICAO), now a specialized agency of the United Nations. ICAO works together with the Convention s 191 Member States and global aviation organizations to develop international standards and recommended practices (SARPs) which the States use as reference when developing their legallyenforceable national civil aviation regulations. There are currently over OUTLOOK 2014 [ 7 ]

8 OUTLOOK ,000 SARPs reflected in the 19 Annexes to the Chicago Convention which ICAO oversees 1. In this context, statistical and financial information available from ICAO s 2 database provides a valuable repository of benchmarking studies which were largely used in this Outlook edition. In addition to ICAO s database, other important sources of information, including the Agência Nacional de Aviação Civil ANAC (National Civil Aviation Agency), significantly increased the volume of data available for public reference from its website ( in Another relevant source of information for the development of this work was the US Department of Transportation (DOT, whose database shows accuracy and extent hardly matched. These three sources ICAO, ANAC and DOT do not exhaust the innumerous list of references used. In the first quarter of 2015, ABEAR conducted quantitative and qualitative surveys to find out the receptiveness of our Outlook 2013 edition and gather information to improve this publication. A questionnaire with 15 open and closed questions was used for the quantitative survey. The qualitative survey used the in-depth interview technique which was individually applied to ten outstanding people in the industry, including specialists, scholars and executive officers with significant experience in the area. These surveys provided valuable contributions, most of them included in the Outlook 2014 edition. 1. International Civil Aviation Organization ICAO, Convention on International Civil Aviation, 9th edition, 2006, available from 2. International Civil Aviation Organization ICAO, ICAO Data Plus, available from [ 8 ] OUTLOOK 2014

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11 ABEAR AND ITS ASSOCIATED AIRLINES Created in August 2012 with the mission to stimulate the habit of flying in Brazil, ABEAR has been supporting actions and programs to foster the conscious and sustainable growth of civil aviation. This applies to both the passenger and cargo segments. More than 99% of the domestic airline market is currently represented by the association s founding members (AVIANCA, AZUL, GOL and TAM). BOEING, TAM Cargo and TAP are also among ABEAR s associates. OUTLOOK 2014 [ 11 ]

12 OUTLOOK 2014 Since the beginning of its operations, AVIANCA has chosen its priority: offering the best quality product to the Brazilian market, focused on client service, a differentiated cattering, modern fleet and punctuality. It was the first airline in Brazil to be awarded the ANAC s A Class certificate for its aircraft seat spacing and the only domestic airline to offer this spacing for 100% of its seats. By including the City of Goiânia in its flight network, AVIANCA now has 41 aircraft in operation and serves 24 airports and 23 destinations in Brazil. AVIANCA carried around 7.4 million passengers in In the last three years, the company reached an expressive growth rate, which would be remarkable in any industry of the Brazilian economy. This was only possible thanks to a clearly defined strategy excellence in customer service, besides the work of a team of more than 4 thousand employees today. This growth is also reflected in its fleet expansion, with the arrival of seven A320 Airbus aircraft, capable of carrying 162 passengers each. The successful growth of the company is the result of constant investments in the expansion of its operations, modernization of its technological platform, hiring of new employees for the various areas of the company and service differentiation. AVIANCA now has one of the most expressive passenger load factors in the market, a fact that demonstrates the assertiveness of its business model. All these changes have helped strengthen the focus and the pillars of its qualified client service, differentiated cattering, [ 12 ] OUTLOOK 2014

13 entertainment and comfort that had already been recognized in the last few years. The awards achieved are the result of all this: Excellence in Customer Service granted by Modern Consumer Magazine in 2013; Best Brazilian Airline in Customer Service granted by the Brazil s Customer Relations Institute, published by Exame magazine, in 1010, 2011 and 2013; best Brazilian airline by Editora Abril s Guia Quatro Rodas and Viagem e Turismo magazine, in 2013; and the Award for Outstanding Performance as the Best Domestic Airline Granted by Companhia de Viagem magazine. OUTLOOK 2014 [ 13 ]

14 OUTLOOK 2014 AZUL Linhas Aéreas was created with a proposal of offering differentiated services connecting cities that were not covered by other Brazilian airlines. In the beginning of its operations, in December 2008, AZUL had become the world s most capitalized airline (in the start up) in the history of world aviation with US$ 200 million in capital. Its initial flights connected the cities of Campinas and Salvador and, after only eight months of operation, the company had already reached the milestone of 1 million passengers carried. Four months after, AZUL had already carried 2 million passengers. This figure doubled once again in July Another important chapter in the history of AZUL was written in 2012 when David Neeleman, Chairman of AZUL s Board of Directors, together with Renan Chieppe and José Mário Caprioli, respectively chairman of the board and chief executive officer of TRIP Linhas Aéreas entered into an investment agreement to merge the two companies. As a result of this agreement, AZUL TRIP S.A., was created as a new holding company. In April 2014, AZUL made another great announcement: 12 large size aircraft A330 and A350 Airbus models had been leased by the company to start its international operations with flights to the USA. The first destinations are Fort Lauderdale, Orlando and New York. With six years of existence, AZUL has recorded expressive results: the company has a fleet of 140 aircraft, more than 10,000 employees, operates almost 900 daily flights - more than 30% of the total number of takeoffs in Brazil - and has the most comprehensive network in Brazil, with more than 100 destinations served. [ 14 ] OUTLOOK 2014

15 VISION Build together the world s best airline. MISSION Serve, serve, serve. VALUES }Safety: respect life in all its actions. }Consideration: treat everyone the way you would like to be treated. }Integrity: honor your word and act ethically. }Passion: add passion to what you do to serve people. }Innovation: innovate in everything you do and try to renew yourself always. }Excellence: do your best to get exceptional results. OUTLOOK 2014 [ 15 ]

16 OUTLOOK 2014 GOL Linhas Aéreas Inteligentes was the first airline to implement in Brazil the low cost, low fare model to offer more affordable prices to its passengers and so assume a key role in the democratization of air transport in Brazil. Three years after its foundation, the company went public and started its international operations with flights to Argentina. In 2006, the company opened its Aircraft Maintenance Center at the Confins Airport (MG) - Latin America s largest and most modern center of its kind. The First Voe Fácil (Fly Easily) physical store was opened at Largo Treze, in São Paulo s south zone. Now, there are 13 points of sale in large public places that make everybody s dream of flying a reality. In the same year, GOL adopted a new cattering model for longer flights by offering more products that are charged separately. In 2013, the company announced the new GOL+ configuration that offers more space and comfort to its passengers. More space between seats is now offered for 100% of the company s fleet. In addition, since the beginning of its operations, GOL has been investing in technologies that improve services and speed up travel processes. The company innovated by facilitating sales and checkin on the Internet and, more recently, made a new geolocation-based mobile functionality available. An exclusive and pioneering service in the world s airline industry, it allows the passenger to receive, before the trip and while on the way to take a flight, information on the estimated time to reach the airport. With a young and modern fleet of Boeing and Next Generation aircraft, the company has been keeping a daily frequency of about 900 flights to 73 destinations, 56 of which are domestic flights and 17 international flights to countries in South America and [ 16 ] OUTLOOK 2014

17 to the United States. Its SMILES loyalty program allows its passengers to earn miles and redeem award tickets to more than 700 places all over the world. The company also provides the Gollog logistic service that collects and delivers cargo and parcels in more than 3,5 thousand Brazilian and 8 foreign cities. MISSION Bring people together with intelligence and safety. VISÃO Be the best airline to travel, work and invest in. VALUES Safety, intelligence, service and lowest cost. OUTLOOK 2014 [ 17 ]

18 OUTLOOK 2014 Since its foundation in 1976, TAM has kept its commitment to offer its clients differentiated high quality services at competitive prices. The company grew based on this philosophy, becoming one of the Brazilian largest airlines and now occupies an outstanding position in the international scenario. Its mission is to be people s preferred airline, with joy, creativity, respect, responsibility and the the vision that working with the spirit of serving makes people happier. In its trajectory, TAM undertook a large expansion project between the 1990 s and the years 2000, which started with the incorporation of the Fokker 100 jets used in its regional flights. followed by the expansion of its national territory network, the creation of TAM Mercosul (after the acquisition of the former state-owned Paraguayan airline LAPSA) and the consolidation of its international operations with the purchase of aircraft and increase in the flight frequency to destinations in all continents. In 2012, the company s association with LAN Airlines led to the creation of the LATAM Airlines Group, which includes LAN Airlines, LAN Cargo, TAM S/A and its affiliated companies TAM Linhas Aéreas, TAM Airlines (currently nomenclature of TAM Mercosur) and Multiplus S/A. That was how Latin America s largest group of companies operating an air transport network was established to offer passenger transport services to 135 destinations in 24 countries and air cargo service to approximately 144 destinations in 26 countries. [ 18 ] OUTLOOK 2014

19 LATAM Airlines Group S/A has more than 53 thousand employees, 28 thousand of them belonging to TAM. Its stocks are traded at Santiago, New York (as ADRs) and São Paulo stock exchanges (as BDRs). Starting in March 2014, TAM became a member of the Oneworld Alliance. Today, the alliance serves 150 countries at almost one thousand airports with 14 thousand daily flights. OUTLOOK 2014 [ 19 ]

20 OUTLOOK 2014 BOEING opened a business office in Brazil in 2011 when it started a new cycle of its relationship with the country. The company s first delivery of commercial aircraft to Brazil took place in Today, GOL Linhas Aéreas and TAM are among Boeing s main commercial clients. The company created a Research & Technology Center in São José dos Campos to reinforce its relations with the Brazilian research and development community and help it potentialize new capacities that are aligned with the country s economic and technological development goals.the Boeing s 2015 Market Outlook indicates that Latin America s airlines will be purchasing about three thousand aircraft at the cost of US$ 340 billion in the next 20 years, 40% of them being expected to be purchased by Brazilian airlines. Boeing is the world s largest aerospace company and the leading manufacturer of commercial-purpose aircraft and defense, space and safety systems with more than 170 thousand employees in 70 countries. [ 20 ] OUTLOOK 2014

21 TAM Cargo is the air cargo company of the LATAM Airlines Group in Brazil, handling the air transport of cargo, express and special deliveries. TAM Cargo and ABSA, former subsidiary of LAN in Brazil, merged their operations in This merge process made their freight transportation more effective and multifaceted, thus meeting local dimensions and requirements. TAM Cargo operates direct flights to 42 Brazilian airports, collecting cargo in more than 400 cities for delivery to more than 4 thousand locations all over Brazil. The company has 51 cargo terminals using cargo hubs in São Paulo -Guarulhos, Rio de Janeiro -Galeão, Brasília, Manaus and Campinas. Its cargo operations make use of four cargo and 163 passenger aircraft of TAM Linhas Aéreas. The LATAM Airlines Group s cargo operation is made up of LAN CARGO, MasAir, LAN CARGO Colombia and TAM Cargo. Together, they serve 165 destinations in 27 countries all over the world. OUTLOOK 2014 [ 21 ]

22 OUTLOOK 2014 TAP Portugal is the Portuguese market leading airline and a member of Star Alliance since It started operating in 1945 from its hub in Lisbon, a strategic gateway to all Europe, Africa, North and South Americas. The TAP network covers 76 destinations in 34 countries in the world. The company operates more than 2.45 thousand flights a week with a fleet of 61 Airbus aircraft and an additional 16 aircraft operated by PGA - its regional airline company, reaching a total number of 77 aircraft. Being a customer-oriented company, TAP has been continuously investing in innovation and use of new technologies, providing smart products and services with quality and safety. TAP has also established partnerships to provide a broader range of destinations served in codeshare operations with other companies, besides a number of other associated benefits and advantages. TAP was selected as the World Leading Airline to Africa and South America by the World Travel Awards and Europe s Best Airline by the Global Traveler Magazine. [ 22 ] OUTLOOK 2014

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25 AIR TRANSPORT: IMPORTANCE AND COMPETITIVENESS The economic importance of air transport is little known. According to the Air Transport Action Group (ATAG), the world air transport industry employs more than 58 million people, carries 3 billion passengers a year and generates US$ 2.4 trillion of the world s GNP. In parallel, one third of the world s whole trade in value is carried by air transport and aviation is a key component of global business. OUTLOOK 2014 [ 25 ]

26 OUTLOOK 2014 In Brazil, in 2014, foreign and domestic airlines carried almost 120 million passengers on domestic and international flights. These companies are carrying now in Brazil and between Brazil and foreign countries more than 1.3 million tons of high-added value freight. By extrapolating the information contained in a study conducted by Oxford Economics in 2011, the number of direct, indirect and induced jobs generated in Brazil by aviation and related industries (airports, ground and aerospace services) is estimated to have reached 1.2 million. If tourism-related jobs is added to the aviation industry, this figure will reach 1.6 million. Similarly, the the economic chain led by aviation is estimated to contribute 1.3% of the Brazilian GNP. COMPETITION IN AIR TRANSPORT It is a well-known fact that air transport is little profitable. However, the structural reasons that determine such a low profitability level characterized by the rate of return on long term investments around 3.5 a year, that is, much lower than the world s long term fundraising average rates, estimated to be around 7-8%2 are not widely known. The same source shows an EBIT rate of 0.1% on the airline s average earnings. In 2012, it was 1.1%3. On the other hand, air transport is a high technology industry requiring high specialization of its operators. It is a much more concentrated industry than other segments of the world economy. These factors alone might justify the existence of high rates of return and not the opposite as shown. In this context, the perception remains that airlines often act irrationally and are involved in frequent disputes with competition. Sometimes, they reduce prices 1. Oxford Economics, Economic Benefits of Aviation from Air Transport in Brazil, 2011, available from 2. International Air Transport Association IATA, Vision 2050 Report - IATA, 2011, available from 3. International Air Transport Association IATA, Profitability and the Air Transport Value Chain, in IATA Economic Briefing n. 10, 2013, available from [ 26 ] OUTLOOK 2014

27 strongly and realize significant losses; sometimes, they increase the offer of flights exaggeratedly at a time the economic conjuncture would not recommend this, and so forth. This apparent paradox is unraveled below. According to the analytical model of the five forces that drive competition 4, the profitability of an industry is the result of the interaction of the following factors: threats from new entrants, power of suppliers, power of buyers, substitute products and intensity of rivalry among competitors. Also according to Porter, the more intense these factors are, the lower the profitability of the industry under analysis will be. By applying Porter s analytical tools, the conclusion is that few are the industries that gather together these factors with so much intensity at the same time to depress profitability. There are five main structural reasons for these factors to act this way on air transport 5 : Perishable product. Difficulty of supporting product differentiation. High fixed and low marginal costs. Competitors with diverging objectives. Capacity increments in degrees (generating idle capacity periods). Volatile markets dependent on the GNP, oil prices and exchange rate. Low barriers to entry. Access to market increasingly free. Limited economies of scale in the operations. Easy access to distribution channels and low consumer switching costs. High and increasing customer bargaining power. Much concentrated channels and travel agents aggressive in the defense of corporate customer's interests. High bargaining power of suppliers of several critical supplies The aircraft manufacturers from a high concentrated oligopoly. 4. Porter, Michel E., Industrial Organization and the Evolution of Concepts for Strategic Planning: The New Learning, in Managerial and Decision Economics, sep. 1983, p International Air Transport Association IATA, Vision 2050 Report - IATA, 2011, available from OUTLOOK 2014 [ 27 ]

28 OUTLOOK 2014 Airports, final suppliers and handling companies are local monopolies. }Suppliers obtain capital returns higher than their capital cost. Their returns are significantly higher than those of the airlines. } Substitute products are getting stronger: high-speed trains, private jet aircraft and videoconferencing equipment with increasingly better technology. } A number of airline strategy choices appear individually rational, but in the aggregate they contribute to a market environment that is worse for everyone. In Brazil, these general aspects are also found, resulting in systematic price drops against continuous cost increases and despite the fact that this industry is more concentrated than the country s average. That is, the fact that in the domestic air transport market, for example, four companies hold almost the whole demand does not imply a high market power. In fact, with regard to the world s twenty largest domestic markets, the market concentration found in Brazil occupies an intermediary position (see page 70). [ 28 ] OUTLOOK 2014

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31 BASIC STATISTICS, EMPLOYEES AND FLEET The year 2014 was marked by important advances in terms of operational efficiency. As shown in the following pages, the domestic industry demand increased by 6%, while the offer of services measured in available seat kilometers (ASK) increased by 1% only. As a result, flight usage increased by four percentage points reaching 80%, a figure close to the US domestic industry. A similar picture is found in the international area. In 2014, the offer by Brazilian companies dropped by 2% while demand increased by 5%. OUTLOOK 2014 [ 31 ]

32 OUTLOOK 2014 The combination of these elements led to an increase of flight usage by five percentage points reaching 82%. That is, a significant increase in operational efficiency for both the domestic and international services, which meant carrying more with practically the same fleet. It is interesting to note that the total number of flown hours for domestic and international flights (main variable cost driver) remained stable, despite a 6% demand increase regarding the previous year. In other words, the main action taken in the industry to face the increasing cost and declining price scenario was to improve efficiency in a sensible manner. EMPLOYEES AND FLEET 2014 The fleet and number of employees of ABEAR s associates remained stable in 2014, even with traffic increase. The current number compares to sizable airline structures in developed countries. NUMBER OF EMPLOYEES AS OF DECEMBER 31, 2014 TAM Cargo AVIANCA AZUL GOL TAM ABEAR Total Other Airlines Brazil Total Pilots and co-pilots ,391 1,599 2,041 5,567 NA NA Air stewards ,824 3,195 5,087 10,867 NA NA Maintenance personnel ,551 2,606 3,458 8,309 NA NA Airport personnel 235 1,581 3,408 4,884 1,486 11,594 NA NA Other employees 2, ,706 3,902 13,361 21,932 NA NA Total 2,697 4,073 9,880 16,186 25,433 58,269 NA NA Sources: AZUL Linhas Aéreas Brasileiras S/A; OCEANAIR Linhas Aéreas S/A (trade name: AVIANCA); TAM Linhas Aéreas S/A; VRG Linhas Aéreas S/A (trade name: GOL). [ 32 ] OUTLOOK 2014

33 FLEET AS OF DECEMBER 31, 2014 Type of aircraft TAM Cargo AVIANCA AZUL GOL TAM ABEAR Total Other Airlines Brazil Total BOEING F 0 BOEING F BOEING BOEING BOEING AIRBUS A AIRBUS A AIRBUS A AIRBUS A FOKKER MK AIRBUS A AIRBUS A BOEING BOEING ATR ATR ERJ ERJ ERJ ERJ Outros 7 7 Total Sources: AZUL Linhas Aéreas Brasileiras S/A; OCEANAIR Linhas Aéreas S/A (trade name: AVIANCA); TAM Linhas Aéreas S/A; VRG Linhas Aéreas S/A (trade name: GOL).; Airfleets.net. OUTLOOK 2014 [ 33 ]

34 OUTLOOK 2014 BASIC OPERATIONAL STATISTICS 2014 TAM Cargo Airline Flight type Revenue passengers carried [ 34 ] OUTLOOK 2014 Passageirosquilômetros pagos (000) Available seat kilometers Best use Tons of load carried Flown kilometers (000) Take-offs Avg. leg (km) Flown hours Avg. duration (min) Domestic Regular ,601 6,325 3,520 1,797 9, Non-regular , , Total ,051 6,506 3,640 1,787 10, International Regular ,629 4,231 1,228 3,446 5, Non-regular , , Total ,201 4,746 1,455 3,262 6, Total ,252 11,252 5,095 2,208 16, AVIANCA Domestic Regular 6,708,002 7,629,002 9,206,994 83% 26,790 67,667 64,888 1, , Non-regular 51,063 53,710 67,452 80% ,115 1, Total 6,759,065 7,682,712 9,274,446 83% 27,129 68,306 65,461 1, , International Regular 1,337 5,434 16,093 34% 3, , Non-regular Total 1,337 5,434 16,093 34% 3, , Total 6,760,402 7,688,145 9,290,540 83% 30,139 68,428 65,491 1, , AZUL Domestic Regular 19,332,679 14,908,730 18,655,110 80% 40, , , , Non-regular 801, , ,253 76% 2,066 10,096 13, , Total 20,134,107 15,625,531 19,599,363 80% 42, , , , International Regular Non-regular 21, , ,558 83% , Total 21, , ,558 83% , Total 20,155,338 15,769,849 19,772,921 80% 42, , , , Source: International Civil Aviation Organization ICAO, ICAO Data Plus. Avg. speed (km/h)

35 GOL Airline Flight type Revenue passengers carried Revenue passengers kilometers (000) Seatskilometers (000) Best use Tons of load carried Flown kilometers (000) Take-offs Avg. leg (km) Flown hours Avg. duration (min) Domestic Regular 34,403,780 32,149,343 41,231,789 78% 86, , , , Non-regular 1,306,967 1,579,017 2,137,609 74% 1,783 12,636 10,981 1,151 21, Total 35,710,747 33,728,360 43,369,398 78% 88, , , , International Regular 1,880,544 4,224,236 5,956,205 71% 1,869 33,718 16,371 2,060 50, Non-regular 62, , ,984 75% ,970 1, Total 1,942,832 4,353,488 6,129,189 71% 1,869 34,685 16,862 2,057 52, Total 37,653,579 38,081,848 49,498,587 77% 89, , , , TAM Domestic Regular 31,028,364 34,137,482 41,798,133 82% 156, , , , Non-regular 1,152,559 1,457,430 1,877,765 78% 4,625 10,545 9,055 1,165 17, Total 32,180,923 35,594,911 43,675,898 81% 160, , , , International Regular 4,297,244 24,042,940 28,248,747 85% 125, ,310 22,860 4, , Non-regular 142, , ,905 77% 1,806 3, ,625 4, Total 4,439,377 24,650,124 29,038,652 85% 127, ,844 23,835 4, , Total 36,620,300 60,245,035 72,714,550 83% 288, , ,173 1, , ABEAR Total Domestic Regular 91,472,825 88,824, ,892,025 80% 403, , , ,400, Non-regular 3,312,017 3,806,957 5,027,080 76% 11,262 34,097 34, , Total 94,784,842 92,631, ,919,105 80% 415, , , ,463, International Regular 6,179,125 28,272,610 34,221,045 83% 168, ,382 40,489 3, , Non-regular 225, ,755 1,136,447 78% 6,391 5,651 1,787 3,162 7, Total 6,404,777 29,153,365 35,357,492 82% 174, ,033 42,276 3, , Total 101,189, ,784, ,276,597 81% 589, , , ,673, Avg. speed (km/h) OUTLOOK 2014 [ 35 ]

36 OUTLOOK 2014 Airline Flight type Revenue passengers carried Revenue passengers kilometers (000) Seatskilometers (000) Best use Tons of load carried Flown kilometers (000) Take-offs Avg. leg (km) Flown hours Avg. duration (min) Other Brazilian airlines Domestic Regular 1,027, , ,052 70% 42,510 18,136 32, , Non-regular 119,326 71, ,465 51% 40,402 6,440 9, , Total 1,146, ,470 1,077,517 68% 82,912 24,576 42, , International Regular % Non-regular % Total % Total 1,146, ,471 1,077,521 68% 82,912 24,576 42, , Brazil Total Domestic Regular 92,500,465 89,484, ,830,077 80% 446, , , ,448, Non-regular 3,431,343 3,878,586 5,166,545 75% 51,665 40,538 44, , Total 95,931,808 93,362, ,996,622 80% 498, , , ,526, International Regular 6,179,125 28,272,610 34,221,045 83% 165, ,382 40,489 3, , Non-regular 225, ,756 1,136,451 78% 6,553 5,753 1,819 3,163 8, Total 6,404,789 29,153,366 35,357,496 82% 174, ,135 42,308 3, , Total 102,336, ,516, ,354,118 80% 672, , , ,735, Avg. speed (km/h) [ 36 ] OUTLOOK 2014

37 BASIC OPERATIONAL STATISTICS 2013 Airline Flight type Revenue passengers carried Revenue passenger kilometers Available seat kilometers Best use Tons of load carried Flown kilometers (000) Take-offs Avg. leg (km) Flown hours Avg. duration (min) Average speed (km/h) TAM Cargo Domestic Regular ,675 13,321 7,394 1,802 20, Non-regular , ,983 1, Total ,571 14,018 7,746 1,810 21, International Regular ,526 8,706 2,438 3,571 11, Non-regular , ,271 1, Total ,048 9,413 2,654 3,547 12, Total ,619 23,431 10,400 2,253 34, AVIANCA Domestic Regular 5,926,816 6,300,446 7,671,997 82% 31,597 59,911 60, , Non-regular 4,200 5,614 7,371 76% , Total 5,931,016 6,306,060 7,679,367 82% 32,098 59,974 60, , International Regular Non-regular Total Total 5,931,016 6,306,060 7,679,367 82% 32,098 59,974 60, , AZUL Domestic Regular 18,482,994 14,545,964 18,338,884 79% 44, , , , Non-regular 413, , ,895 71% 14,911 8,408 12, , Total 18,896,725 14,907,810 18,849,779 79% 59, , , , International Regular Non-regular Total Total 18,896,725 14,907,810 18,849,779 79% 59, , , , Source: International Civil Aviation Organization ICAO, ICAO Data Plus. OUTLOOK 2014 [ 37 ]

38 OUTLOOK 2014 GOL Airline Flight type Revenue passengers carried Revenue passengers kilometers Seatskilometers Best use Tons of load carried Flown kilometers (000) Take-offs Avg. leg (km) Flown hours Avg. duration (min) Domestic Regular 32,117,356 29,838,715 42,061,130 71% 116, , , , Non-regular 1,316,335 1,380,323 2,049,586 67% 4,374 3,201 4, , Total 33,433,691 31,219,038 44,110,716 71% 120, , , , International Regular 1,579,825 3,292,412 5,275,180 62% 3,459 29,366 15,275 1,923 44, Non-regular 45, , ,388 70% - 1, ,255 2, Total 1,625,459 3,464,870 5,522,568 63% 3,459 30,722 15,876 1,935 46, Total 35,059,150 34,683,908 49,633,283 70% 124, , , , TAM Domestic Regular 32,117,443 34,721,108 43,718,211 79% 226, , , , Non-regular 414, , ,536 74% 5,901 3,537 3,393 1,042 6, Total 32,532,387 35,182,545 44,344,747 79% 232, , , , International Regular 4,523,858 24,012,055 29,951,575 80% 879, ,125 24,364 4, , Non-regular 64, , ,007 68% 8,402 2, ,573 2, Total 4,588,796 24,314,153 30,395,583 80% 888, ,229 24,824 4, , Total 37,121,183 59,496,698 74,740,330 80% 1,120, , ,134 1, , Total ABEAR Domestic Regular 88,644,609 85,406, ,790,221 76% 885, , , ,424, Non-regular 2,149,210 2,209,219 3,194,388 69% 48,583 15,906 20, , Total 90,793,819 87,615, ,984,609 76% 934, , , ,457, International Regular 6,103,683 27,304,467 35,226,755 78% 1,213, ,198 42,077 3, , Non-regular 110, , ,395 69% 32,924 4,165 1,277 3,262 5, Total 6,214,255 27,779,024 35,918,150 77% 1,246, ,363 43,354 3, , Total 97,008, ,394, ,902,760 76% 2,180, , , ,676, Avg. speed (km/h) [ 38 ] OUTLOOK 2014

39 Airline Flight type Revenue passengers carried Revenue passengers kilometers Seatskilometers Best use Tons of load carried Flown kilometers (000) Take-offs Avg. leg (km) Flown hours Avg. duration (min) Other Brazilian airlines Domestic Regular 828, , ,548 65% 80,105 19,084 39, , Non-regular 40,519 27,691 50,895 54% 77,515 6,386 7, , Total 869, , ,443 65% 157,620 25,470 46, , International Regular Non-regular Total Total 869, , ,443 65% 157,620 25,470 46, , Total Brazil Domestic Regular 89,473,104 85,870, ,501,769 76% 965, , , ,476, Non-regular 2,189,729 2,236,910 3,245,283 69% 126,098 22,292 27, , Total 91,662,833 88,107, ,747,052 76% 1,091, , , ,521, International Regular 6,103,683 27,304,467 35,226,755 78% 1,213, ,198 42,077 3, , Non-regular 110, , ,395 69% 32,924 4,165 1,277 3,262 5, Total 6,214,255 27,779,024 35,918,150 77% 1,246, ,363 43,354 3, , Total 97,877, ,886, ,665,202 76% 2,338, , , ,740, Avg. speed (km/h) OUTLOOK 2014 [ 39 ]

40 OUTLOOK 2014 VARIATION 2014/2013 Airline Flight type Revenue passengers carried TAM Cargo Passageiros- -quilômetros pagos Seatskilometers Best use (percentage points) Tons of load carried Flown kilometers (000) Take-offs Avg. leg (km) Flown hours Avg. duration (min) Domestic Regular % -53% -52% 0% -52% 1% -1% Non-regular % -74% -66% -24% -72% -18% -7% Total % -54% -53% -1% -53% 0% -1% International Regular % -51% -50% -4% -51% -2% -2% Non-regular % -27% 5% -31% -23% -27% -5% Total % -50% -45% -8% -48% -6% -2% Total % -52% -51% -2% -51% -1% -1% AVIANCA Domestic Regular 13% 21% 20% 1-15% 13% 7% 6% 11% 4% 2% Non-regular 1116% 857% 815% 3-32% 920% 1046% -11% 950% -8% -3% Total 14% 22% 21% 1-15% 14% 8% 6% 12% 4% 2% International Regular 0% 0% 0% - 0% 0% 0% 0% 0% 0% 0% Non-regular 0% 0% 0% - 0% 0% 0% 0% 0% 0% 0% Total 0% 0% 0% - 0% 0% 0% 0% 0% 0% 0% Total 14% 22% 21% 1-6% 14% 8% 6% 12% 4% 2% AZUL Domestic Regular 5% 2% 2% 1-9% -1% -1% 0% 0% 1% -1% Non-regular 94% 98% 85% 5-86% 20% 15% 5% 20% 5% 0% Total 7% 5% 4% 1-28% 0% 0% 0% 1% 1% -1% International Regular 0% 0% 0% - 0% 0% 0% 0% 0% 0% 0% Non-regular 0% 0% 0% - 0% 0% 0% 0% 0% 0% 0% Total 0% 0% 0% - 0% 0% 0% 0% 0% 0% 0% Total 7% 6% 5% 1-28% 0% 0% 0% 1% 1% -1% Avg. speed (km/h) [ 40 ] OUTLOOK 2014

41 GOL Airline Flight type Revenue passengers carried Revenue passengers kilometers Seatskilometers Best use (percentage points) Tons of load carried Flown kilometers (000) Take-offs Avg. leg (km) Flown hours Avg. duration (min) Domestic Regular 7% 8% -2% 7-26% 0% 1% 0% 0% 0% 0% Non-regular -1% 14% 4% 7-59% 295% 169% 47% 209% 15% 28% Total 7% 8% -2% 7-27% 4% 3% 1% 4% 0% 1% International Regular 19% 28% 13% 9-46% 15% 7% 7% 14% 6% 1% Non-regular 36% -25% -30% 5 0% -29% -18% -13% -27% -10% -3% Total 20% 26% 11% 8-46% 13% 6% 6% 12% 5% 1% Total 7% 10% 0% 7-28% 5% 3% 2% 4% 1% 1% TAM Domestic Regular -3% -2% -4% 2-31% -6% -7% 0% -6% 1% 0% Non-regular 178% 216% 200% 4-22% 198% 167% 12% 190% 9% 3% Total -1% 1% -2% 2-31% -3% -4% 1% -3% 1% 0% International Regular -5% 0% -6% 5-86% -8% -6% -2% -8% -2% -1% Non-regular 119% 101% 78% 9-79% 68% 112% -21% 71% -19% -2% Total -3% 1% -4% 5-86% -7% -4% -3% -6% -2% -1% Total -1% 1% -3% 3-74% -5% -4% 0% -4% 0% 0% ABEAR Total Domestic Regular 3% 4% -1% 4-54% -2% -2% 0% -2% 0% 0% Non-regular 54% 72% 57% 7-77% 114% 73% 24% 91% 10% 12% Total 4% 6% 1% 4-56% 0% 0% 0% 0% 1% 0% International Regular 1% 4% -3% 5-86% -6% -4% -3% -6% -2% -1% Non-regular 104% 86% 64% 9-81% 36% 40% -3% 35% -4% 1% Total 3% 5% -2% 5-86% -5% -2% -3% -4% -2% -1% Total 4% 6% 0% 4-73% -1% 0% 0% 0% 0% 0% Avg. speed (km/h) OUTLOOK 2014 [ 41 ]

42 OUTLOOK 2014 Airline Flight type Revenue passengers carried Revenue passengers kilometers Seatskilometers Best use (percentage points) Tons of load carried Flown kilometers (000) Take-offs Avg. leg (km) Flown hours Avg. duration (min) Other Brazilian airlines Domestic Regular 24% 42% 32% 5-47% -5% -16% 13% -8% 10% 3% Non-regular 194% 159% 174% 3-48% 1% 32% -23% 20% -8% -16% Total 32% 49% 41% 3-47% -4% -9% 6% -3% 7% -1% International Regular 0% 0% 0% - 0% 0% 0% 0% 0% 0% 0% Non-regular 0% 0% 0% - 0% 0% 0% 0% 0% 0% 0% Total 0% 0% 0% - 0% 0% 0% 0% 0% 0% 0% Total 32% 49% 41% 3-47% -4% -9% 6% -3% 7% -1% Brazil Total Domestic Regular 3% 4% -1% 4-54% -2% -2% 0% -2% 1% 0% Non-regular 57% 73% 59% 6-59% 82% 62% 12% 72% 6% 6% Total 5% 6% 1% 4-54% 0% -1% 1% 0% 1% 0% International Regular 1% 4% -3% 5-86% -6% -4% -3% -5% -2% -1% Non-regular 104% 86% 64% 9-80% 38% 42% -3% 37% -4% 0% Total 3% 5% -2% 5-86% -5% -2% -3% -4% -2% -1% Total 5% 6% 0% 4-71% -1% -1% 0% 0% 0% 0% Avg. speed (km/h) The table in page 43 compares the age of the Brazilian fleets and those of operators in other countries per reference airline. As can be seen, the Brazilian fleet is approximately five years younger than the sample fleet considered. There is a rational argument that justifies the reason for this alternative chosen by Brazilian airlines. [ 42 ] OUTLOOK 2014

43 BRAZILIAN AND FOREIGN AIRLINES FLEETS AND AVERAGE AGE From a strictly economic point of view, one of the basic differences between the operation of a young and an old fleet is that, in the first case, expenditures with maintenance and fuel are lower than in the second case. However, ownership costs are much higher in modern fleets. On the other hand, these costs are based on the international market prices and lower prices paid for older aircraft reflect their lower operational efficiency. In this context, market forces balance the economic advantages and disadvantages between one and another option. It so happens that fuel prices are exceptionally high in Brazil, particularly because of taxes on aviation fuel as discussed in the section that follows. Airline Country Average age (years) Quantity GOL Brazil TAM Brazil AZUL Brazil TAM CARGO Brazil AVIANCA BRAZIL Brazil ABEAR AVG Other companies AMERICAN AIRLINES United States DELTA United States AIR FRANCE France BRITISH United Kingdom LUFTHANSA Germany KLM The Netherlands JAL GROUP Japan SINGAPORE Singapore ANA Japan EMIRATES UAE SOUTHWEST United States LAN Chile AVIANCA Colombia AVG. OTHER COMPANIES SAMPLING AVG Sources: Airfleets.net, International Civil Aviation Organization ICAO, ICAO Data Plus. OUTLOOK 2014 [ 43 ]

44 OUTLOOK 2014 Shutterstock [ 44 ] OUTLOOK 2014

45 SERVICE QUALITY Market surveys show that the on-time ratings and the baggage proper handling are among the services most valued by passengers flying Brazilian airlines. The tables in the coming pages show that the Brazilian airlines have also been providing world-class services regarding these items. But the services at the airports, most of them provided by the airlines, have also been under the focus of attention. A survey conducted at the end of 2014 by the Civil Aviation Department to ascertain the passenger satisfaction regarding the services provided at the airports, including those offered directly by the airlines, achieved excellent results. OUTLOOK 2014 [ 45 ]

46 OUTLOOK 2014 ON-TIME RATING As shown, the average on-time rating (15 minutes) for domestic flights in Brazil changed from 84%, in 2013 to 85% in 2014, a rate above the one shown shown for the United States. In the U.S., the rage was 79% and 78% in 2013 and 2014, respectively. ON-TIME PERFORMANCE RATINGS IN BRAZIL IN 2014 AND 2013 DOMESTIC FLIGHTS 100% 95% 90% 85% 80% 75% 70% jan feb mar apr may jun jul aug sep oct nov dec On-time rate min - Avg: 84% On-time rate min - Avg: 92% On-time rate min - Avg: 84% On-time Rate min - Avg: 97% On-time Rate min - Avg: 92% On-time Rate min - Avg: 85% Source: Agência Nacional de Aviação Civil ANAC (National Civil Aviation Agency), VRA Database, available from [ 46 ] OUTLOOK 2014

47 ON-TIME RATING IN BRAZIL AND IN THE U.S. IN 2014 DOMESTIC FLIGHTS 100% 95% 90% 85% 80% 75% 70% 65% 60% jan/14 feb/14 mar/14 apr/14 may/14 jun/14 jul/14 aug/14 sep/14 oct/14 nov/14 dec/14 On-time Rate Brazil 60min Avg: 97% On-time Rate Brazil 30min Avg: 92% On-time Rate Brazil 15min Avg: 85% U.S. On-time Rate 15 min Avg: 78% Sources: Agência Nacional de Aviação Civil ANAC (National Civil Aviation Agency), VRA Database, available from United States Department of Transportation DOT. OUTLOOK 2014 [ 47 ]

48 OUTLOOK 2014 It should be noted that delays caused by weather conditions are less frequent in Brazil (16% in 2014) than in the United States (31% in 2014). In effect, hurricanes and winter storms such as blizzards are frequent in the United States and they do not exist in Brazil. However, the aeronautical infrastructure in North America is much more developed than that in Brazil, thus bringing a decisive contribution to flight on-time ratings. The effects of weather conditions in flight delays in Brazil decreased from 2013 to 2014, changing from 19% to 16%. Thus, it is reasonable to relate the exceptional drought period in Brazil s Southeast (region with greater air traffic concentration) in 2014 to the ontime departures. DELAYS OVER 15 MINUTES CAUSED BY ADVERSE WEATHER CONDITIONS IN 2014 DOMESTIC FLIGHTS IN BRAZIL AND IN THE USA 40% 35% 30% 25% 20% 15% 10% 5% 0% jan/14 feb/14 mar/14 apr/14 may/14 jun/14 jul/14 aug/14 sep/14 oct/14 nov/14 dec/14 USA Avg: 31% Brazil Avg: 16% Sources: Agência Nacional de Aviação Civil ANAC (National Civil Aviation Agency), VRA Database, available from United States Department of Transportation DOT. [ 48 ] OUTLOOK 2014

49 ROLE PLAYED BY WEATHER CONDITIONS IN DELAYS IN EXCESS OF 15 MINUTES IN 2014 AND 2013 DOMESTIC FLIGHTS IN BRAZIL 35% 30% 25% 20% 15% 2013 Avg: 19% 2014 Avg: 16% 10% 5% 0% jan feb mar apr may jun jul aug set oct nov dec Source: Agência Nacional de Aviação Civil ANAC (National Civil Aviation Agency), VRA Database, available from Another classification that should be made is the one that puts together the causes of delay based on the party responsible for the delay. That is, delays that are the responsibility of airlines are different from those that are not. To make these statistics, the definitions followed here are those used by the U.S. Department of Transportation (DOT). According to the DOT, the causes for delay are 1 : 1. United States Department of Transportation DOT. }Responsibility of the operator: the cause of cancellation or delay results from circumstances within the company's control (for example, problems involving maintenance or the crew, cleaning of the aircraft, baggage loading, replenishments, etc.). }The responsibility of the aeronautical system: a broad set of conditions, such as extreme weather conditions, airport operations, traffic volume and air traffic control. }Safety: delays or cancellations caused by the evacuation of a terminal, aircraft reboarding because of safety violations, tracking equipment out of operation or long queues in screening areas. }Non-specific causes: causes that are not clearly identified or that do not fit the previous groups. OUTLOOK 2014 [ 49 ]

50 OUTLOOK 2014 By analyzing the aforementioned ANAC s VRA database one may conclude that, in 2014, 19% of the domestic flight delays were caused by reasons for which the operator was responsible 2 ; 72% were those for which the aeronautical systems were responsible 3 ; 2% are assignable to safety (prevention of illicit acts) 4 ; and 7% related to other causes They correspond to occurrences with the following ANAC s codes for justification of delays or cancellation: DF, DG, GF, HB, IR, MA, RA, ST, TC, TD, VE, VI, VR, WI, XL, XM and XN. 3. They correspond to occurrences with the following ANAC s codes for justification of delays or cancellation: AA, AF, AG, AI, AJ, AM, AR, AT, FP, HÁ, HD, HI, AO, RI, RM, WA, WO, WR, WS, WT, XA, XB, XI, XJ, XO, XS and XT. 4. They correspond to occurrences with ANAC s AS code for justification of delays or cancellation. 5. They correspond to occurrences with ANAC s MX code for justification of delays or cancellation. CAUSES OF DOMESTIC FLIGHT DELAYS WITH ASSIGNABLE RELIABILITY % 7% 19% Reliability of the aeronautical system 72% Reliability of the carrier Non-specific delays (MX) Safety (prevention against illicit acts, AS) Source: Agência Nacional de Aviação Civil ANAC (National Civil Aviation Agency), VRA Database, available from Among the delays caused by the operator, 45% resulted from delays awaiting connections; 29% due to aircraft defects, 11% due to ground equipment failure and 15% assignable to other causes. The chart on the page on the right illustrates the proportion of causes assigned to carriers. [ 50 ] OUTLOOK 2014

51 CAUSES OF DOMESTIC FLIGHT DELAYS CAUSED BY THE CARRIERS % 11% 29% 45% Aircraft rot ation (RA) Aircraft defect (TD) Ground equipment failure (MA) Others Source: Agência Nacional de Aviação Civil ANAC (National Civil Aviation Agency), VRA Database, available from In 2014, among the causes assigned to the aeronautical system, 18% resulted from an airport with operational restrictions, 18% from unpenalized aircraft return, 4% from weather-related occurrences and 60% 60% from other causes. The chart below illustrates the proportion of the causes of delay assigned to the aeronautical system. DOMESTIC FLIGHT DELAYS CAUSED BY THE AERONAUTICAL SYSTEM % 18% 4% 18% Airport with operational restrictions (AR) Unpenalized aircraft return (RM, RI) Adverse weather conditions (WO) Others Source: Agência Nacional de Aviação Civil ANAC (National Civil Aviation Agency), VRA Database, available from OUTLOOK 2014 [ 51 ]

52 OUTLOOK 2014 BAGGAGE HANDLING The main problem with regard to baggage refers to mishandling. Like in the previous year, the performance of ABEAR s associates in 2014 was 3.1 occurrences per one thousand passengers boarded. That is, less than half the world average (7.3 events per one thousand passengers boarded) and equivalent to the rate in North America, as shown in the chart below. MISHANDLED AND DAMAGED BAGGAGE PER 1,000 PASSENGERS BOARDED Asia North America Europa World avg - ABEAR Companies Note: Data on ABEAR s associates refers to the number of administrative cases opened while the data on other countries refers to the number of mishandled volumes. Thus, there may be variations resulted from the criteria adopted. Sources: Societé Internationale de Télécommunications Aéronautiques SITA, 2015 Air Transport Industry Insights The Baggage Report, 2014, available from AZUL Linhas Aéreas Brasileiras S/A; OCEANAIR Linhas Aéreas S/A (trade name: AVIANCA); TAM Linhas Aéreas S/A; VRG Linhas Aéreas S/A (trade name: GOL); United States Department of Transportation DOT. [ 52 ] OUTLOOK 2014

53 However, this performance was not an isolated fact. As can be seen in the chart below, the performance of ABEAR s associates remained in their relative position with regard to the US and the world rate. MISHANDLED AND DAMAGED BAGGAGE PER 1,000 PASSENGERS COMPARISON ABEAR 2013 ABEAR 2014 United States 2012 Domestic United States 2013 Domestic World avg 2013 World avg 2014 Note: The data on ABEAR s associates and on the United States refers to the number of administrative cases opened while world data refers to the number of mishandled volumes. Sources: Societé Internationale de Télécommunications Aéronautiques SITA, 2015 Air Transport Industry Insights The Baggage Report, 2014, available from AZUL Linhas Aéreas Brasileiras S/A; OCEANAIR Linhas Aéreas S/A (trade name: AVIANCA); TAM Linhas Aéreas S/A; VRG Linhas Aéreas S/A (trade name: GOL); United States Department of Transportation DOT. OUTLOOK 2014 [ 53 ]

54 OUTLOOK 2014 SERVICES AT THE AIRPORTS A survey of customer satisfaction regarding the services provided at the airports was conducted by the Civil Aviation Department in the last quarter of The starting point was the holding of big events in Brazil (the 2013 Confederations Cup, the 2013 Youth World Journey, the 2014 World Cup and the 2016 Olympic Games). All the international airports in the World Cup host cities were selected, as well as airports that, although located in other cities, are directly related to those in the host cities. A total of 12,992 interviews were held among domestic and international passengers. This sampling included questionnaires containing forty-eight satisfaction indicators divided in five groups. The interviewed people were requested to assign grades from 1 to 5 according to their degree of satisfaction, 5 being the highest grade and 1 the worst. The results per group of indicators can be seen on the chart on the side page. [ 54 ] OUTLOOK 2014

55 GENERAL AVERAGE PER GROUP OF INDICATORS Airport Airport commercial 2.00 Public agencies Airline area 1.00 Public transportation Source: Secretaria de Aviação Civil SAC (Civil Aviation Department), Report on operational performance at the airports 4th quarter 2014, October-December, 2015, available from The indicators related to the airlines and the respective grades assigned were as follows: 1) Time in the check-in queue (self-check-in), 4.45; 2) Time in the check-in queue (service window), 4.14; 3) Check-in employee efficiency, 4.37; 4) Checkin employee cordiality, 4.41; 5) Ease to make connections, 3.64; 6) Baggage return speed, 3.77; and 7) Baggage integrity, In other words, the degree of satisfaction regarding the services provided at the airports by airlines is high. The same applies with regard to other services provided at these locations. OUTLOOK 2014 [ 55 ]

56 OUTLOOK 2014 Shutterstock [ 56 ] OUTLOOK 2014

57 THE DOMESTIC PASSENGER AIR TRANSPORT DEMAND IN BRAZIL AND MARKET SHARE The statistical analysis of the demand confirms that the Brazilian domestic market is clearly on the way to a mature stage. One of the criteria often used in econometrics for an assessment of the market maturing process whether it is about air transport or other products and services is an analysis of demand elasticities with regard to the GNP and the product or service average price being studied 1. As a result, as markets mature, absolute values of demand elasticities regarding the GNP and price tend to unity. OUTLOOK 2014 [ 57 ]

58 OUTLOOK 2014 In the statistical analysis of the passenger air transport demand in the 45-year period from 1970 to 2014, the demand elasticity value with regard to the GNP was found to be 1.88 (studies conducted in the first half of the last decade showed this value to be around 2.00). That is, in average, for each GNP percentage point increase in the period the domestic air transport demand increased by 1.88 percentage point. On the other hand, the same statistical study led to the elasticity to price value as being (in an analogous way, in studies conducted in the first half of the last decade this value was around -0.30). That is, the values found for the demand elasticity-price with regard to the GNP and price are converging to unity, indicating that the market is becoming mature. The statistical analysis summed up above clears up the paradox of the air transport demand in 2014 having increased 6.00% while Brazil s GNP had increased about 0.2%. It so happens that the average prices less inflation, as measured by Yield (average airfare paid by passengers per flown kilometer) dropped 15%. If these were the single aspects affecting demand, it should have increased around 9.5% (0.2% % 0.62). That is, demand increased less than the variables GNP and price should have led us to assume. The reason for this is that the statistical estimates in this case admit an error of 1.7%, and there were atypical events in 2014, such as a presidential election and the Soccer World Cup. 1. By aggregate demand elasticity of a product or service with regard to the GNP is meant the percentage variation of this demand that corresponds to the unit percentage variation of the GNP. In an analogous way, by aggregate demand elasticity with regard to the average price is meant its negative percentage variation to a positive unit percentage variation of the average price. When the elasticity absolute value is greater than 1, demand is said to be elastic with regard to the economic variable considered (in this case, the GNP or the price). When the elasticity absolute value is less than 1, demand is said to be little elastic with regard to the economic variable considered. [ 58 ] OUTLOOK 2014

59 DOMESTIC DEMAND (RPK 000) 120,000, ,000,000 80,000,000 Econometric Estimate In(RPK) = In(GDP) In(Yield) Dummy Dummy2 R2 = ,000,000 40,000,000 20,000, Source: Agência Nacional de Aviação Civil ANAC (National Civil Aviation Agency), air transportation yearbooks, available from Another relevant aspect to be taken into account is the persistent yield drop trend (drop in the average airfare price paid by passengers per flown kilometer) in Brazil s domestic air transport. At the 2014 prices, the domestic yield Trend y = x x2 + 3E + 06x - 5E + 06 RZ = dropped from R$ to R$ from 1970 to 2014, which corresponds to an average drop of 2.7% a year. This annual rate corresponds to the world s historic averages in this industry and comes close to its average increases Real Econometric Estimate Trend in operational efficiency in the industry. These earnings are related to technological advances in aircraft and operating systems and productivity gains by operators taken as whole all over the world. This acknowledgment harmonizes OUTLOOK 2014 [ 59 ]

60 OUTLOOK 2014 with the structural analysis in the industry and reinforces the idea that this industry transfer all its productivity gains to the buyers as a result of the interaction involving the five forces that drive the competition as we have commented earlier. On the other hand, it should be noted that the big fall of the yield value started in 2002 (year when the price DOMESTIC YIELD (2014 R$/KM) Real Regression Mobile average 3 months Trend Tendência y = 1E - 07x 5-1E - 05x x x x R² = [ 60 ] OUTLOOK 2014

61 control was lifted). In this way, between that year and 2014, the average rate of yield drop was 6.7% a year. The chart below illustrates the price lifting effect on the air transport demand, showing a rupture in the parallelism between the curves of the GNP and demand evolution, as well as the abrupt yield drop since then. GNP, YIELD AND DOMESTIC AIR TRANSPORT OF PASSENGERS IN BRAZIL 100,000,000 90,000,000 80,000,000 70,000,000 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 PRE- -RELEASE TRANSITION POST- -RELEASE GNP (2014 R$ x 100,000,000) Demand (pax-km) Yield (2014 R$) IPCA Note: GNP (2014 R$) means GNP in average reais of 2014 and yield (2014 R$) IPCA means yield adjustments based on the IPCA index to the average reais of Sources: International Monetary Fund IMF, World Economic Outlook Database, available from Agência Nacional de Aviação Civil ANAC (National Civil Aviation Agency), air transportation yearbooks, available from OUTLOOK 2014 [ 61 ]

62 OUTLOOK 2014 The domestic demand forecasts for the coming years are based on the forecasts of the most important variables that explain the demand (independent variables) which, in this case, are the GNP and the yield. Forecasts of future GNP values were published by the International Monetary Fund2. The yield forecasts are based on a statistical model summed up below. The table below shows the GNP and yield forecasts for the period. The domestic demand forecasts for the same period are summarized by the chart on the page on the right. 2. International Monetary Fund IMF, IMF World Economic Outlook (WEO), Apr FORECAST ASSUMPTIONS Year GNP (2014 R$ bn) GNP Growth (%) In GNP (2014 R$ bn) Yield (2014 R$) IPCA In yield (2014 R$) IPCA Dummy 1 Dummy ,084, % ,131, % ,228, % ,348, % ,478, % ,611, % Note: GNP (2014 R$ bn) means the GNP in average billion reais in 2014 and Yield (2014 R$) IPCA means yield adjustments based on the IPCA index for Source: International Monetary Fund IMF, World Economic Outlook Database, available from [ 62 ] OUTLOOK 2014

63 DOMESTIC DEMAND FORECAST (RPK 000) 160,000, ,000, ,000, ,656, ,053, ,854, ,000, ,000, ,000, ,000,000 90,000,000 80,000,000 70,000, ,949, ,482, ,442, ,148, ,193, ,546,918 98,427,502 91,934,103 94,254,441 87,893,169 83,347,991 79,037,856 75,130,182 70,173,740 71,944, Most probable Optimistic Pessimistic OUTLOOK 2014 [ 63 ]

64 OUTLOOK 2014 DOMESTIC DEMAND FORECAST (PAX CARRIED) 160,000, ,000, ,490, ,478, ,000, ,000, ,000, ,000, ,000,000 90,000,000 80,000,000 70,000, ,914, ,046, ,448, ,335, ,914, ,816, ,034, ,791,835 96,518,533 94,142,458 90,004,456 85,350,098 80,936,429 76,934,888 71,859,387 73,673, Most probable Optimistic Pessimistic [ 64 ] OUTLOOK 2014

65 MARKET SHARE The airlines market shares in the Brazilian domestic market for supply (ASK) and demand (RPK) can be seen in the charts below. These charts show that, although there were relevant changes regarding the market shares held by the operators from 2012 to 2013, they practically remained stable in the year that followed. SHARE IN THE OFFER 2012 (ASK X 1000) 5% 5% SHARE IN THE DEMAND 2012 (RPK X 1000) 5% 5% 14% TAM GOL 15% TAM GOL 40% 35% AZUL/TRIP AVIANCA Others 41% 34% AZUL/TRIP AVIANCA Others Source: Agência Nacional de Aviação Civil ANAC (National Civil Aviation Agency), supply and demand monthly reports, available from OUTLOOK 2014 [ 65 ]

66 OUTLOOK 2014 SHARE IN THE OFFER 2013 (ASK X 1000) 1% 7% SHARE IN THE DEMAND 2013 (RPK X 1000) 1% 7% 16% GOL TAM 17% TAM GOL AZUL/TRIP AZUL/TRIP 38% 38% AVIANCA Others 40% 35% AVIANCA Others SHARE IN THE OFFER 2014 (ASK X 1000) SHARE IN THE DEMAND 2014 (RPK X 1000) 1% 8% 1% 8% 17% GOL 17% TAM TAM GOL 37% 37% AZUL/TRIP AVIANCA Others 38% 36% AZUL/TRIP AVIANCA Others Source: Agência Nacional de Aviação Civil ANAC (National Civil Aviation Agency), supply and demand monthly reports, available from [ 66 ] OUTLOOK 2014

67 OUTLOOK 2014 [ 67 ]

68 OUTLOOK 2014 Shutterstock [ 68 ] OUTLOOK 2014

69 DOMESTIC MARKET CONCENTRATION IN SEVERAL COUNTRIES A recurring issue is the assumed market concentration existing in the Brazilian domestic aviation. However, the characteristics of the air transport industry, particularly with regard to the very high minimum scale of profitable operation and the large volume of resources required led it to be naturally more concentrated than other sectors in the economy. In this manner, the most adequate assessment is made by comparing the market concentration in Brazil with the same air transport segment in other countries. The appropriate indicator for this measurement is the Herfindahl-Hirschmann Index - HHI. OUTLOOK 2014 [ 69 ]

70 OUTLOOK 2014 As can be seen in the chart below, the market concentration in the domestic aviation in Brazil was in an intermediary position in 2013 with regard to the 20 major domestic markets in the world which corresponded to 90% of the domestic demand and about 80% of the world GNP. CONCENTRATION OF THE DOMESTIC PASSENGER AIR TRANSPORT MARKET HERFINDAHL-HIRSCHMAN INDEX (HHI) Median = SAUDI ARABIA FRANCE ITALY MALAYSIA COLOMBIA SOUTH KOREA GERMANY JAPAN TURKEY CANADA BRAZIL AUSTRALIA INDONESIA UK MEXICO ÍNDIA SPAIN RUSSIA CHINA USA Notes: The HHI was calculated using as a basis the number of passengers boarded in 2013 in the 20 largest domestic markets in the world, which corresponded to 90% of the world domestic demand. The HHI in Colombia corresponds to the year An HHI is defined by the sum of the squares of the market shares of the companies that operate in a certain market, expressed in percentage Source: International Civil Organization ICAO, ICAO Data Plus. points. It varies from 1 to 10,000. Interpretation: / An HHI below 100 indicates a highly competitive market; / An HHI below 1500 indicates a non-concentrated market; / An HHI between 1500 and 2500 indicates a moderate market concentration; / An HHI above 2500 indicates a high market concentration. [ 70 ] OUTLOOK 2014

71 OUTLOOK 2014 [ 71 ]

72 OUTLOOK 2014 Shutterstock [ 72 ] OUTLOOK 2014

73 PENETRATION OF AIR TRANSPORT IN THE DOMESTIC PASSENGER MARKET IN SEVERAL COUNTRIES The market penetration tool is used to assess the demand growth potentialities of an industry. It is a market saturation measurement. As a result, a low market penetration indicates the existence of a market of relevant size which has not been fully exploited yet. If that is case, the greater the chances are of demand growth in the future. Thus, very low market penetrations indicate a very high potential of explosive demand growth. In these contexts, the sales growth is remarkable and OUTLOOK 2014 [ 73 ]

74 OUTLOOK 2014 the profitability margins tend to be very high because rivalry among competitors tend to be low. In situations where market penetration is very high, a demand growth at high rates occurs only if there is a significant price drop with a corresponding intensified rivalry among competitors or a remarkable reduction of current production costs. On the other hand, it is common to find assessments in which the demand growth potential in domestic passenger air transport in Brazil is considered enormous. These assessments are usually based on a comparison between market penetration in Brazil and in developed countries. However, the correct comparison should be made considering the local income level (GNP per capita). The chart on the right shows the penetration of air transport in 2013 in the 20 major world markets which together correspond to 90% of the world domestic demand and about 80% of the world GNP. It should be noted that the market penetration in Brazil is greater than its GNP would lead us to assume considering the interpolatory line of twenty points representing the countries whose market penetrations are being compared. DOMESTIC PASSENGERS AND GNP PER CAPITA World avg Canada 1 Malaysia Japan Colombia Saudi Arabia 0.5 Turkey Spain Indonesia Brazil UK France Russia Italy Germany China Korea India Mexico 0-10,000 20,000 30,000 40,000 50,000 60,000 Domestic passengers per capita (GNP PER CAPITA) Interpolation curve = 1E-09x2-4E-05x R 2 = Polynom (domestic passengers per capita) Notes: 1. Data on passengers carried in Italy refers to 2012; data on other countries refers to GNP values in US$ are current for Sources: International Civil Aviation Organization ICAO, ICAO Data Plus; International Monetary Fund IMF, World Economic Outlook Database, available from USA Australia [ 74 ] OUTLOOK 2014

75 THE PENETRATION OF AIR TRANSPORT IN THE DOMESTIC PASSENGER MARKET IN SEVERAL COUNTRIES 2013 COUNTRY Passengers carried in % of passengers carried (World) GNP 2013 current US$ (billion) GNP % (World) Population in 2013 Passengers carried per capita in 2013 GNP per capita 2013 current US$ India 60,330, % 1, % 1,243,337, ,509 Indonesia 74,874, % % 247,954, ,510 China 327,271, % 9, % 1,360,763, ,959 Colombia 22,031, % % 47,121, ,031 Mexico 31,542, % 1, % 118,397, ,650 Malaysia 21,922, % % 29,948, ,457 Turkey 37,499, % % 76,484, ,721 Brazil 89,813, % 2, % 201,032, ,173 Russia 37,234, % 2, % 143,700, ,591 South Korea 12,784, % 1, % 50,220, ,975 Saudi Arabia 16,737, % % 29,994, ,953 Spain 23,472, % 1, % 46,610, ,150 Italy 18,179, % 2, % 59,685, ,715 UK 19,438, % 2, % 64,087, ,372 France 23,857, % 2, % 63,660, ,098 Germany 22,792, % 3, % 80,800, ,999 Japan 91,054, % 4, % 127,341, ,468 Canada 43,311, % 1, % 35,105, ,037 Australia 56,958, % 1, % 23,319, ,579 USA 663,984, % 16, % 316,373, ,001 SUBTOTAL 1,695,091, % 58, % 4,049,557, ,515 Others 184,422, % 15, % 3,125,055, ,094 World total 1,879,514, % 74, % 7,174,612, ,412 OUTLOOK 2014 [ 75 ]

76 OUTLOOK 2014 Shutterstock [ 76 ] OUTLOOK 2014

77 ORIGIN AND DESTINATION TRAFFIC OF PASSENGERS The table on pages 78 and 79 shows the domestic traffic Origin -Destination Link (ODL) 1 for the 20 major airports in Brazil among the 161 airports where commercial boarding operations took place in These 20 airports represented about 85% of the boarding operations and the traffic among them reached 35% of the domestic total. In other words, 12.4% (20/161) of the Brazilian airports would correspond to 85% of the boardings and 1.5% ( / ) of the city pairs or markets would correspond to 35% of the traffic. This level of market concentration reflects the high economic concentration that exists in Brazil. OUTLOOK 2014 [ 77 ]

78 OUTLOOK 2014 ORIGIN AND DESTINATION TRAFFIC OF PASSENGERS FOR MAJOR BRAZILIAN AIRPORTS 2014 SBGR SBSP SBBR SBGL SBCF SBRJ SBKP SBSV SÃO PAULO - GUARULHOS SBGR , , , ,838-1,235,436 SÃO PAULO - CONGONHAS SBSP 2,462-1,089, , ,703 1,989, ,387 BRASÍLIA SBBR 702,190 1,068, , , , , ,572 RIO DE JANEIRO - GALEÃO SBGL 718, , , ,290 1, , ,096 BELO HORIZONTE - CONFINS SBCF 702, , , , , , ,042 RIO DE JANEIRO - SANTOS DUMONT SBRJ 504,268 2,011, ,496 1, , ,275 30,764 CAMPINAS SBKP , , , , ,569 SALVADOR SBSV 1,200, , , , ,343 34, ,081 - PORTO ALEGRE SBPA 1,016, , , ,810 73,448 76, ,396 49,820 CURITIBA SBCT 730, , , , ,235 88, ,501 25,809 RECIFE SBRF 1,004,296 23, , , ,139 3, , ,544 FORTALEZA SBFZ 881,396 5, , ,563 60, , ,659 BELÉM SBBE 234, , ,084 65, ,521 11,459 VITÓRIA SBVT 328, ,141 76, , , , ,524 64,226 FLORIANÓPOLIS SBFL 503, ,190 93, ,288 6, , GOIÂNIA SBGO 378, , ,834 34, ,426 40, ,772 1,747 CUIABÁ SBCY 421,656 94, ,395 37,622 26,885 12, ,682 1,093 MANAUS SBEG 254, , ,471 18,226 1,449 65,672 12,365 MACEIÓ SBMO 371, ,789 97,660 18, , ,721 SÃO LUÍS SBSL 138, , ,732 59,955-2,356 7,919 Source: Agência Nacional de Aviação Civil ANAC (National Civil Aviation Agency), statistical database, available from 1. The origin-destination traffic on the line corresponds to the traffic of passengers between a city pair by air transport without any flight number change. As a result, if a passenger makes a connection to complete an itinerary, that passenger is counted twice: the first time as a passenger travelling between the point of boarding and the point of connection, and the second time as if another passenger is travelling between the point of connection and the final destination. [ 78 ] OUTLOOK 2014

79 SBPA SBCT SBRF SBFZ SBBE SBVT SBFL SBGO SBCY SBEG SBMO SBSL 1,005, ,300 1,027, , , , , , , , , , , ,306 13,981 11, , , ,985 97, , , , , ,228 80,121 96, , , , , , , , , , , , ,275 34,324 36, ,562 93, ,956 67, , ,414 77,065 60, ,093 5, ,675 24,120 19,384 18,300 64,211 73,349 89,530 3,269 1, ,909 1,561 41,182 5,941 1, , , ,158 74,130 20, , , , ,256 63,725 51,162 1,330 39,807 23, , ,523 12,564 65,109 1, , ,984 7, ,975 8,266 12,394 2,739 1, ,586 2,563 3,590 2, ,565-9,409 11,287 3, ,402 3,404 32,043 1,599 1,225-21,782 10, ,516 44,542 9,306-11, ,792 23,424 42,570 13,022 10, , , , ,893 1,976 3,508 45, , ,680-61,449 1, , , ,176 6, , ,013 3,856 4,306 1, ,595 2,876-63, ,294 37, ,634-4, ,194 1,619 13, , , , , , , ,978 67, , OUTLOOK 2014 [ 79 ]

80 OUTLOOK 2014 ORIGIN AND DESTINATION TRAFFIC OF PASSENGERS FOR MAJOR BRAZILIAN AIRPORTS 2014 PERCENTAGES OF THE TOTAL TRAFFIC SBGR SBSP SBBR SBGL SBCF SBRJ SBKP SBSV SÃO PAULO - GUARULHOS SBGR % 1.42% 1.43% 1.48% 0.98% 0.00% 2.58% SÃO PAULO - CONGONHAS SBSP 0.01% % 0.97% 1.59% 4.15% 0.00% 0.36% BRASÍLIA SBBR 1.46% 2.23% % 1.18% 1.51% 0.82% 0.75% RIO DE JANEIRO - GALEÃO SBGL 1.50% 0.84% 0.80% % 0.00% 0.79% 1.44% BELO HORIZONTE - CONFINS SBCF 1.46% 1.57% 1.15% 0.51% % 0.69% 0.59% RIO DE JANEIRO - SANTOS DUMONT SBRJ 1.05% 4.19% 1.49% 0.00% 1.08% % 0.06% CAMPINAS SBKP 0.00% 0.00% 0.85% 0.75% 0.65% 0.92% % SALVADOR SBSV 2.50% 0.35% 0.82% 1.45% 0.63% 0.07% 0.37% - PORTO ALEGRE SBPA 2.12% 1.59% 0.50% 1.06% 0.15% 0.16% 0.59% 0.10% CURITIBA SBCT 1.52% 1.42% 0.42% 0.74% 0.23% 0.18% 0.66% 0.05% RECIFE SBRF 2.09% 0.05% 0.66% 0.98% 0.28% 0.01% 0.25% 0.77% FORTALEZA SBFZ 1.84% 0.01% 0.77% 0.68% 0.13% 0.00% 0.16% 0.41% BELÉM SBBE 0.49% 0.00% 0.57% 0.25% 0.14% 0.00% 0.04% 0.02% VITÓRIA SBVT 0.69% 0.44% 0.16% 0.62% 0.54% 0.62% 0.22% 0.13% FLORIANÓPOLIS SBFL 1.05% 0.87% 0.19% 0.44% 0.01% 0.00% 0.25% 0.00% GOIÂNIA SBGO 0.79% 0.79% 0.58% 0.07% 0.25% 0.08% 0.31% 0.00% CUIABÁ SBCY 0.88% 0.20% 0.56% 0.08% 0.06% 0.03% 0.33% 0.00% MANAUS SBEG 0.53% 0.00% 0.44% 0.29% 0.04% 0.00% 0.14% 0.03% MACEIÓ SBMO 0.77% 0.00% 0.42% 0.20% 0.04% 0.00% 0.08% 0.31% SÃO LUÍS SBSL 0.29% 0.00% 0.43% 0.23% 0.13% 0.00% 0.00% 0.02% [ 80 ] OUTLOOK 2014

81 SBPA SBCT SBRF SBFZ SBBE SBVT SBFL SBGO SBCY SBEG SBMO SBSL 2.10% 1.52% 2.14% 1.83% 0.44% 0.66% 1.01% 0.84% 0.89% 0.52% 0.78% 0.27% 1.62% 1.41% 0.03% 0.02% 0.00% 0.44% 0.90% 0.80% 0.20% 0.00% 0.00% 0.00% 0.49% 0.45% 0.67% 0.77% 0.57% 0.17% 0.20% 0.50% 0.56% 0.47% 0.41% 0.44% 1.12% 0.74% 0.97% 0.72% 0.25% 0.64% 0.43% 0.07% 0.08% 0.28% 0.19% 0.22% 0.14% 0.23% 0.27% 0.16% 0.13% 0.52% 0.01% 0.25% 0.05% 0.04% 0.04% 0.13% 0.15% 0.19% 0.01% 0.00% 0.00% 0.63% 0.00% 0.09% 0.01% 0.00% 0.00% 0.00% 0.58% 0.65% 0.26% 0.15% 0.04% 0.21% 0.23% 0.31% 0.34% 0.13% 0.11% 0.00% 0.08% 0.05% 0.75% 0.43% 0.03% 0.14% 0.00% 0.00% 0.00% 0.02% 0.32% 0.02% % 0.02% 0.03% 0.01% 0.00% 0.41% 0.01% 0.01% 0.00% 0.00% 0.00% 0.65% % 0.02% 0.01% 0.00% 0.02% 0.01% 0.07% 0.00% 0.00% 0.00% 0.05% 0.02% % 0.09% 0.02% 0.00% 0.02% 0.00% 0.02% 0.05% 0.09% 0.03% 0.02% 0.60% % 0.00% 0.00% 0.00% 0.00% 0.25% 0.00% 0.30% 0.00% 0.01% 0.10% 0.39% % 0.00% 0.00% 0.00% 0.35% 0.00% 0.13% 0.00% 0.00% 0.02% 0.00% 0.00% % 0.01% 0.00% 0.00% 0.00% 0.00% 0.37% 0.01% 0.00% 0.00% 0.00% 0.00% % 0.00% 0.00% 0.00% 0.00% 0.01% 0.01% 0.01% 0.00% 0.00% 0.01% 0.01% % 0.00% 0.00% 0.00% 0.01% 0.08% 0.00% 0.00% 0.00% 0.00% 0.00% 0.14% % 0.00% 0.00% 0.00% 0.00% 0.03% 0.25% 0.34% 0.00% 0.00% 0.00% 0.01% % 0.03% 0.00% 0.00% 0.04% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% % 0.00% 0.00% 0.08% 0.28% 0.14% 0.00% 0.00% 0.00% 0.00% 0.04% 0.00% - OUTLOOK 2014 [ 81 ]

82 OUTLOOK 2014 Shutterstock [ 82 ] OUTLOOK 2014

83 THE DEMAND OF DOMESTIC AIR CARGO TRANSPORT IN BRAZIL Differently from the passenger domestic market whose demand has a close relationship with the country s GNP, the domestic air cargo market behavior is difficult to be modelled from the statistical point of view. That is why forecasts in the case of cargo air transport are less accurate. Among the most probable reasons for the difficulty involved in the statistical handling of this industry are a more intense modal competition than in the case of passenger air transport, the existence of a greater number of OUTLOOK 2014 [ 83 ]

84 OUTLOOK 2014 transport segments (industrial cargo, from the production and service sectors and their sub-segments, among others) and the great price dispersion. In addition, statistical records are much less accurate than those of passenger traffic. On the other hand, very often and also because of tradition, the cargo market sizing is based both on tons - kilometers carried and tons shipped. To cope with these peculiarities, supplementary econometric studies have been made and are detailed ahead, one of them dealing with the cargo market according to the weight loaded (in tons) and another based on weight loaded times the distance travelled (in tons - kilometers carried). The two approaches provide different points of view for the industry, besides improving the quality of demand forecasts. The chart in the page on the right summarizes quantitatively the demand behavior of the Brazilian cargo domestic market. As can be seen, the demand elasticity-price with regard to the GNP is less than the unity. As a result, the remaining unchanged environmental conditions being kept (ceteris paribus), the air cargo demand in Brazil measured in revenue ton kilometer (RTK) grows less than the GNP. In this case, for each growth percentage point of the GNP, the demand has decreased by 0.67 percentage point. Another aspect disclosed by the study is the average distance carried as a positive explanatory variable of the carried demand. The most probable explanation is that, although the average distance can be interpreted as a price proxy variable, it is a multiplicative factor in the composition of the carried demand (ton x km). This suggests that the average distance elasticity is below 1 in the air-shipped cargo statistics. This has been effectively ascertained in the subsequent econometric study. In short, there are signs that the cargo air transport demand is not significantly sensitive to prices with regard to longer distances in which surface transportation in Brazil is not competitive. The table on page 87 demonstrates what was discussed before. [ 84 ] OUTLOOK 2014

85 AIR TRANSPORT DEMAND CARGO DEMAND FOR DOMESTIC AIR CARGO CARRIED IN BRAZIL (RTK 000) 800, ,000 Trend y = x R 2 = , , , , , , Historic demand (ton-km 000) Demand forecast (ton-km 000) Trend Sources: Agência Nacional de Aviação Civil ANAC (National Civil Aviation Agency), air transportation yearbooks, available from International Civil Aviation Organization ICAO, ICAO Data Plus. OUTLOOK 2014 [ 85 ]

86 OUTLOOK 2014 The econometric study covering the statistics on the air-shipped cargo also indicated that demand is little elastic with regard to the GNP. In this case, keeping the remaining conditions unchanged (ceteris paribus) for each percentage point of the GNP growth, the air-shipped cargo grows an 0.77 percentage point. Likewise, the average distance flown showed that this is a significant independent variable, but marked with a negative sign, being equal to The interpretation of this result is that the air-shipped cargo is not sensitive to price in a significant way (in this case represented by the distance proxy variable), as suggested in the previous study. DEMAND FOR DOMESTIC AIR CARGO SHIPPED IN BRAZIL (TON 000) Trend y = x R 2 = Econometric Estimate ln(ton) = 0.77ln(PIB) ln(average distance) (dummy 1) (dummy 2) R² = Actual cargo carried ton (000) Estimated cargo carried ton (000) Trend Sources: Agência Nacional de Aviação Civil ANAC (National Civil Aviation Agency), air transportation yearbooks, available from International Civil Aviation Organization ICAO, ICAO Data Plus. [ 86 ] OUTLOOK 2014

87 Another predictive technique is the determination of the historic trend applicable to kilometers carried and the tons loaded forecasts. To conclude the industry s demand forecast study, the tables below have been developed including the GNP forecasts used for the study. It should be noted that the average distance forecasts have been developed using as a basis the division of the forecasts based on the historic tons-kilometers carried trend by the corresponding forecasts of air-shipped tons. It is important to point out that, although the econometric models have shown to be adherent to the data below the ideal level, the resulting forecasts were much consistent with one another. This confers them a high degree of reliability. FORECASTS (AVERAGE DISTANCE 000 KM) Year Historic trend Econometric ,478 1, ,470 1, ,463 1, ,455 1, ,457 1, ,432 1,462 FORECASTS (2014 R$ BN) Year GNP Variation on the previous year ,084, % ,131, % ,228, % ,348, % ,478, % ,611, % Source: International Monetary Fund IMF, World Economic Outlook Database, available from OUTLOOK 2014 [ 87 ]

88 OUTLOOK 2014 FORECASTS (RTK 000) YEAR Historic trend Variation with regard to the previous year Econometric Variation with regard to the previous year , % 581, % , % 576, % , % 580, % , % 587, % , % 596, % , % 606, % FORECASTS (TON 000) YEAR Historic trend Variation with regard to the previous year Econometric Variation with regard to the previous year % % % % % % % % % % % % [ 88 ] OUTLOOK 2014

89 OUTLOOK 2014 [ 89 ]

90 OUTLOOK 2014 Shutterstock [ 90 ] OUTLOOK 2014

91 PENETRATION OF THE AIR TRANSPORT IN THE DOMESTIC CARGO MARKET OF SEVERAL COUNTRIES The cargo air transport penetration is usually measured as a ratio between the air cargo shipped annually and the GNP, because most of the demand derives from economic activity. In effect, the consumer s participation is incipient. The chart on page 92 shows the penetration of the domestic air cargo market for the world s 20 major airports vis-à-vis the size of their respective economies. As can be seen, Brazil occupies an outstanding position in this assessment, being behind Japan and Indonesia. Therefore, the widespread belief that there is an OUTLOOK 2014 [ 91 ]

92 OUTLOOK 2014 unexploited domestic air cargo market is not corroborated by quantitative evidence. On the other hand, the low growth rate for the demand found and the modest perspectives of growth we have referred to before suggest that this market segment offers limited opportunities. As a matter of fact, the only evident opportunities seem to be found in the high margins charged on the cargo carried in the aircraft hold with regard to the respective (very low) marginal costs. On the other hand, current prices per kilo of cargo are at the same CARGO SHIPPED ON DOMESTIC FLIGHTS (TON) AND GNP (PPP US$ BILLION) IN ,000, ,000 Japan 800, ,000 Indonesia 600, ,000 Interpolation curve y= x x R 2 = Brazil 400,000 India 300, ,000 Malaysia Korea Russia Canada Australia Mexico 100,000 Colombia Saudi Turkey UK Arabia Italy France Germany - Spain Sources: International Civil Aviation Organization ICAO, ICAO Data Plus; International Monetary Fund IMF, World Economic Outlook Database, available from [ 92 ] OUTLOOK 2014

93 level as the airfare paid by passengers (considering an average weight of 90 Kg per person). Obviously, the transport of passengers has a much higher cost and complexity. Moreover, the use of the aircraft hold on domestic flights in Brazil is about ¼ of its potential (60%, if compared to US Alaska Airlines). This reasoning suggests that the current prices are very high. If so, an unexploited opportunity can be found there. CARGO SHIPPED ON DOMESTIC FLIGHTS (TON) AND GNP (PPP US$ BILLION) IN 2013 Country Tons shipped in 2013 GNP 2013 US$ PPP (billion) Colombia 51, Malaysia 190, Australia 137,660 1,053 Turkey 47,842 1,444 Spain 21,184 1,489 Canada 136,795 1,518 Saudi Arabia 56,559 1,553 South Korea 153,490 1,697 Italy 2,677 2,035 Mexico 96,828 2,059 UK 66,593 2,320 Indonesia 711,881 2,389 France 50,126 2,535 Brazil 379,046 3,013 Russia 220,903 3,492 Germany 15,414 3,513 Japan 924,205 4,668 India 373,782 6,776 Sources: International Civil Aviation Organization ICAO, ICAO Data Plus; International Monetary Fund IMF, World Economic Outlook Database, available from OUTLOOK 2014 [ 93 ]

94 OUTLOOK 2014 Shutterstock [ 94 ] OUTLOOK 2014

95 ORIGIN AND DESTINATION TRAFFIC CARGO The table on pages 98 and 99 shows the source - destination traffic on line (ODL)1 involving the 20 major airports in the country among the 161 where commercial boardings of passengers took place in These airports represented about 94% of the air cargo shipments and the traffic among these airports reached 42% of the domestic total. However, the great concentration of shipments involves OUTLOOK 2014 [ 95 ]

96 OUTLOOK 2014 the eight higher traffic airports in Brazil (Guarulhos, Manaus, Brasília, Galeão, Congonhas, Fortaleza, Recife and Belém), with about 75% of the country s total cargo shipments. In other words, 5% (8/161) of the country s airports correspond to 75% of the cargo shipments. On the other hand, the 0.2% (8 7 2/ ) of the city pairs or markets correspond to 24% of the air cargo traffic. It is important to note that, differently from what is generally believed, the São Paulo-Manaus axis only represents 10% of the domestic cargo total traffic. It is certain that the ODL criteria for the data survey and organization tend to underestimate the importance of the connection points as traffic generating centers (while many times they are not), because they count the shipments twice: once as the cargo movement starts and another time at the point of connection. In this case, the ODL 1. The source-destination traffic on the line corresponds to the traffic of passengers between a city pair by air transport without any flight number change. As a result, if a passenger makes a connection to complete an itinerary, that passenger is counted twice: the first time as a passenger travelling from the point of shipment to the point of connection and the second time as if another passenger is travelling from the point of connection to the final destination. [ 96 ] OUTLOOK 2014

97 criterion favors the Brasilia market (point of connection) and unfavors the Manaus market (point of origin). Even in this case, it is important to take into account that about 4% of the domestic cargo shipped at Guarulhos (by far the largest air cargo generating center) is bound to or passes by Brasília. As a result, even if there are distortions inherent in the statistics based on the ODL criteria, they are, in this case, very small. The two most important airports regarding air cargo movements, Guarulhos and Manaus, represent 26% and 13%, respectively, of the total shipments. However, about 40% of the cargo shipped in Manaus is bound to Guarulhos, and less than 20% of the cargo shipped in Guarulhos is bound to Manaus. As a result, it seems correct to state that Guarulhos is the biggest air cargo hub and not the São Paulo- Manaus axis. OUTLOOK 2014 [ 97 ]

98 OUTLOOK 2014 ORIGIN AND DESTINATION OF THE AIR CARGO TRAFFIC FOR MAJOR BRAZILIAN AIRPORTS 2014 SBGR SBEG SBBR SBGL SBSP SBFZ SBRF SBBE SÃO PAULO - GUARULHOS SBGR - 40,207,561 4,520,819 3,815,347-6,499,045 9,772,510 3,766,984 MANAUS SBEG 39,908,682-2,374,882 1,287, , ,381 1,332,640 BRASÍLIA SBBR 1,360,452 3,325, ,220 2,551,074 1,270,874 1,486,260 3,478,708 RIO DE JANEIRO - GALEÃO SBGL 1,490,342 1,402,314 1,849, ,575 2,013,974 3,581,952 1,394,266 SÃO PAULO - CONGONHAS SBSP - - 7,464,951 1,064, FORTALEZA SBFZ 7,228,165 2,562,178 2,182,092 2,444, ,471,956 2,224,478 RECIFE SBRF 6,078, ,585 1,056,953 2,381,479-2,518, BELÉM SBBE 729,723 3,781, , ,893-1,224, SALVADOR SBSV 2,969, , , , ,498 1,283,396 - CAMPINAS SBKP 99, ,651 1,260, , , , ,984 PORTO ALEGRE SBPA 3,771, ,180 1,912,572 1,399, BELO HORIZONTE - CONFINS SBCF 3,018, , , , , , , ,245 VITÓRIA SBVT 1,159, ,266 2,509,387 1,896, CURITIBA SBCT 1,646,267-1,280, ,347 1,049, SÃO LUÍS SBSL 1,200, ,447 60, ,914-1,431,030 GOIÂNIA SBGO 707,854-1,732,626-1,090, NATAL SBSG 1,236, , , , FLORIANÓPOLIS SBFL 580, , , , SANTARÉM SBSN - 1,038, ,295,754 RIO DE JANEIRO - SANTOS DUMONT SBRJ 93, , , Source: Agência Nacional de Aviação Civil ANAC (National Civil Aviation Agency), statistical database, available from [ 98 ] OUTLOOK 2014

99 SBSV SBKP SBPA SBCF SBVT SBCT SBSL SBGO SBSG SBFL SBSN SBRJ 13,371, ,710 3,977,036 1,529,480 1,198,406 1,127, ,089 1,570,730 1,375, ,344-99,527 95, , , ,115,028-1,377, , ,114 1,039, ,785 1,074,064 1,084, , , , ,999 5,208, ,028 1,410, ,857 1,720,093 1,117, ,032 79, , , , ,706,133 2,148,790 1,456,297 1,380,665-1,798, ,227-1,825,855 1,183, , , ,208, , ,030, , , , ,223-77, ,235, ,567, ,890-1,276, ,835 1,461, , , ,688 1,039, , , , , , ,813 57, , , , ,548-84,039 1,106, , ,213-92,385 70, , , , , , , , , , , , , , , ,627 55, , , , , OUTLOOK 2014 [ 99 ]

100 OUTLOOK 2014 ORIGIN AND DESTINATION OF THE AIR CARGO TRAFFIC FOR MAJOR BRAZILIAN AIRPORTS PERCENTAGES OF THE TOTAL TRAFFIC SBGR SBEG SBBR SBGL SBSP SBFZ SBRF SBBE SÃO PAULO - GUARULHOS SBGR % 0.57% 0.48% 0.00% 0.82% 1.23% 0.48% MANAUS SBEG 5.04% % 0.16% 0.00% 0.08% 0.03% 0.17% BRASÍLIA SBBR 0.17% 0.42% % 0.32% 0.16% 0.19% 0.44% RIO DE JANEIRO - GALEÃO SBGL 0.19% 0.18% 0.23% % 0.25% 0.45% 0.18% SÃO PAULO - CONGONHAS SBSP 0.00% 0.00% 0.94% 0.13% % 0.00% 0.00% FORTALEZA SBFZ 0.91% 0.32% 0.28% 0.31% 0.00% % 0.28% RECIFE SBRF 0.77% 0.11% 0.13% 0.30% 0.00% 0.32% % BELÉM SBBE 0.09% 0.48% 0.08% 0.04% 0.00% 0.15% 0.00% - SALVADOR SBSV 0.37% 0.00% 0.08% 0.11% 0.09% 0.12% 0.16% 0.00% CAMPINAS SBKP 0.01% 0.04% 0.16% 0.10% 0.00% 0.05% 0.09% 0.04% PORTO ALEGRE SBPA 0.48% 0.00% 0.09% 0.24% 0.18% 0.00% 0.00% 0.00% BELO HORIZONTE - CONFINS SBCF 0.38% 0.02% 0.12% 0.05% 0.12% 0.03% 0.05% 0.03% VITÓRIA SBVT 0.15% 0.00% 0.10% 0.32% 0.24% 0.00% 0.00% 0.00% CURITIBA SBCT 0.21% 0.00% 0.16% 0.09% 0.13% 0.00% 0.00% 0.00% SÃO LUÍS SBSL 0.15% 0.00% 0.04% 0.01% 0.00% 0.12% 0.00% 0.18% GOIÂNIA SBGO 0.09% 0.00% 0.22% 0.00% 0.14% 0.00% 0.00% 0.00% NATAL SBSG 0.16% 0.00% 0.03% 0.05% 0.00% 0.05% 0.00% 0.00% FLORIANÓPOLIS SBFL 0.07% 0.00% 0.02% 0.05% 0.10% 0.00% 0.00% 0.00% SANTARÉM SBSN 0.00% 0.13% 0.00% 0.00% 0.00% 0.00% 0.00% 0.16% RIO DE JANEIRO - SANTOS DUMONT SBRJ 0.01% 0.00% 0.08% 0.00% 0.12% 0.00% 0.00% 0.00% [ 100 ] OUTLOOK 2014

101 SBSV SBKP SBPA SBCF SBVT SBCT SBSL SBGO SBSG SBFL SBSN SBRJ 1.69% 0.02% 0.50% 0.19% 0.15% 0.14% 0.12% 0.20% 0.17% 0.06% 0.00% 0.01% 0.01% 0.05% 0.00% 0.02% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.14% 0.00% 0.17% 0.04% 0.08% 0.13% 0.04% 0.14% 0.14% 0.13% 0.03% 0.04% 0.00% 0.11% 0.66% 0.07% 0.18% 0.12% 0.22% 0.14% 0.08% 0.01% 0.03% 0.04% 0.00% 0.00% 0.07% 0.00% 0.34% 0.27% 0.18% 0.17% 0.00% 0.23% 0.00% 0.11% 0.00% 0.23% 0.15% 0.05% 0.00% 0.03% 0.00% 0.00% 0.28% 0.00% 0.04% 0.00% 0.00% 0.00% 0.26% 0.02% 0.00% 0.06% 0.00% 0.00% 0.00% 0.00% 0.01% 0.00% 0.00% 0.00% 0.00% 0.01% 0.00% 0.01% 0.00% 0.00% 0.16% 0.00% 0.00% 0.00% 0.45% 0.00% % 0.00% 0.16% 0.00% 0.04% 0.18% 0.00% 0.01% 0.00% 0.00% 0.00% 0.09% % 0.13% 0.05% 0.04% 0.00% 0.05% 0.02% 0.03% 0.00% 0.04% 0.01% 0.09% % 0.00% 0.06% 0.00% 0.00% 0.00% 0.01% 0.00% 0.01% 0.14% 0.04% 0.01% % 0.01% 0.04% 0.02% 0.00% 0.00% 0.00% 0.02% 0.02% 0.05% 0.00% 0.04% % 0.00% 0.00% 0.00% 0.00% 0.00% 0.07% 0.03% 0.03% 0.06% 0.04% 0.00% % 0.00% 0.00% 0.00% 0.00% 0.00% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% % 0.00% 0.00% 0.00% 0.00% 0.00% 0.02% 0.00% 0.02% 0.00% 0.00% 0.00% % 0.00% 0.00% 0.00% 0.02% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% % 0.00% 0.00% 0.00% 0.05% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% % 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% % 0.00% 0.00% 0.00% 0.02% 0.02% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% - OUTLOOK 2014 [ 101 ]

102 OUTLOOK 2014 Shutterstock [ 102 ] OUTLOOK 2014

103 FLIGHT SAFETY As expected, flight safety is the most important attribute in the assessment of an airline and Brazilian airlines are well positioned for this requirement as outlined here. Increased flight safety has been one of the fundamental objectives of the International Civil Aviation Organization (ICAO) since it was created in The strategies of ICAO to OUTLOOK 2014 [ 103 ]

104 OUTLOOK 2014 attain this objective include the development and audit of the implementation of international standards, practices and operational procedures. In addition, ICAO has been monitoring the indicators and trends related to these occurrences. ICAO has created regional offices (Regional Aviation Safety Groups - RASGS) to perform these tasks. The statistics on the regular aviation per region are shown in the table below. ACCIDENTS IN A YEAR / MILLION TAKE-OFFS RASG Region Air accidents per million take-offs PA Americas 2.8 AFI Africa (except the Middle East) 12.9 MID Middle East 1.8 EUR Europe 2.7 APAC India, China, Pakistan, Oceania and others 2.2 World avg 2.8 Note: An aviation accident is defined by ICAO as an occurrence including one of the following elements: death or serious injuries Source: International Civil Aviation Organization ICAO, Safety Report 2014 Edition, 2015, available from [ 104 ] OUTLOOK 2014

105 Since these are very rare events, the indicator for the number of accidents per million take-offs in a country takes into account accumulated annual periods. The chart below summarizes the Brazilian statistics and shows that the performance of the airlines of this country is among the world s best with regard to flight safety standards. ACCIDENTS IN A YEAR / MILLION TAKE-OFFS ACCUMMULATED Note: The chart applies the 2008 index as the initial index. Thus, indexes from 2009 on are accumulated. Source: Agência Nacional de Aviação Civil ANAC (National Civil Aviation Agency), Aeronautic Accidents January to December, available from OUTLOOK 2014 [ 105 ]

106 OUTLOOK 2014 Shutterstock [ 106 ] OUTLOOK 2014

107 FUEL CONSUMPTION AND CO 2 EMISSIONS As can be seen in the table on page108, the performance of ABEAR s associates is comparable to that of US airlines with regard to fuel consumption and carbon dioxide emissions. Fuel consumption by ABEAR s associates is below that of US companies, because the Brazilian fleet is significantly younger. However, this difference would be expected to be greater, from 15% to 20%, since OUTLOOK 2014 [ 107 ]

108 OUTLOOK 2014 new generation aircraft prevails in Brazil. However, the country s aeronautical infrastructure deficiency reduces the operational efficiency by 11% approximately. Also, fuel consumption per RPK is greater in Brazil because flight usage here is less intense than in the United. To summarize, the domestic air transport performance in Brazil and in the U.S. is comparable, but the situation could be better if it were not for the restrictions imposed by the existing deficient aeronautical infrastructure in Brazil. FUEL CONSUMPTION, CO2 EMISSIONS AND INDICATORS FOR PASSENGER AND CARGO DOMESTIC FLIGHTS IN 2013 Consumption (million liters) RPKs ASKs Best use Consumption/ RPK Consumption/ ASK CO 2 emissions (kg/rpk) CO 2 emissions (kg/ask) US airlines 38, ,808,543 1,113,759,534 83% ABEAR Companies 3,755 87,666, ,040,447 76% Difference 3% -6% 3% -6% Sources: Department of Transportation DOT; Air Transport Action Group ATAG. [ 108 ] OUTLOOK 2014

109 OUTLOOK 2014 [ 109 ]

110 OUTLOOK 2014 Shutterstock [ 110 ] OUTLOOK 2014

111 EVOLUTION OF THE USEFUL AVERAGE DISTANCES The table on page 113 and the chart on page 114 show the evolution of the useful distances per flight block hour in Brazil and in the United States. As illustrated, the performance of the airlines in Brazil is lower than in the United States. Thus, the greater efficiency of the aircraft operated by Brazilian companies on domestic routes (much younger fleet) is neutralized by the existing aeronautical infrastructure deficiencies. A comparative performance analysis was made covering the fleets of both countries with regard to the OUTLOOK 2014 [ 111 ]

112 OUTLOOK 2014 flight economic speed indications shown in the manufacturer s operation manuals of the various types of aircraft used. In this way, if the differences shown in percentage values (GAPs) are negative, this means that the aircraft are flying at an average speed higher than the ideal speed (from the point of view of the minimum fuel consumption). Otherwise, if GAPs are positive, this means that they are travelling useful distances per flight hour shorter than those recommended by the manufacturers. Because in the table on the right side page block hours are being considered, the main causes of positive GAP values (corresponding to a low system efficiency) can be: high taxi-out time (aircraft ground displacement from the point of passenger boarding to the runway end point in the beginning of the trip); aircraft retention in orbit or reduction of its speed because of air [ 112 ] OUTLOOK 2014 traffic; aircraft retention in orbit or reduction of its speed as a result of the unavailability of apron positions at the destination airport. It should be noted that all the assumptions listed are related to aeronautical infrastructure inefficiencies, either during the flight or on the ground. The chart on page 114 shows that the GAP values in the United States are very much close to zero. That is, the aircraft in the United States operate very much close to their fleet ideal parameters. This does not happen in Brazil. Before 2004, the Brazilian aircraft operated above their ideal speed, consuming more fuel than it was strictly necessary. However, the situation changed in 2005 and, in 2007/2008, the system started to show signs of being overloaded. In parallel, in that period, the system started to operate with traffic volumes above 650 thousand take-offs a year. The number of annual take-offs then continued to grow reaching about 950 thousand. With this new standard of system use, its operational inefficiency reached the 10/11% stage and no longer dropped. This fact suggests that the Brazilian aeronautical infrastructure is not capable of efficiently handling air traffic volumes beyond 600 thousands take-offs a year. These limitations have not been clearly perceived by the operators and air transport system managers in Brazil, because the useful distances travelled per flight hour have been kept stable, suggesting that performance is not degrading. However, this perception is not correct. Thus, the average legs have been increasing significantly, changing from 600 km in the beginning of the years 2000 to almost 850 km in The increase of the average leg should imply an increase in the useful average distance travelled by flight hour, because in the 30 initial minutes of the trip (taxi-out plus ascending

113 to cruzeiro altitude), the average distance travelled per time unit is much shorter than on the rest of the trip. It is also possible to conclude that the acknowledged efforts of the Brazilian aeronautical authorities have only been successful in not letting the situation become more serious. In addition, the conclusion is that the economic advantages inherent in the modernity of the flight equipment operated by Brazilian airlines have been neutralized by aeronautical infrastructure limitations. ANNUAL OPERATING STATISTICS OF THE PASSENGER DOMESTIC AIR TRANSPORT IN BRAZIL, USEFUL AVERAGE DISTANCES TRAVELLED PER FLIGHT HOUR AND REFERENCE VALUES Year Take-offs Kilometers flown Flown hours Avg. leg (km) Avg. useful distance per hour (km/h) - Real) Avg. useful distance per hour (km/h) - Reference (b) (*) Difference (b) - (a)(km/h) Difference (b - a) / (a) , ,097, , % , ,957, , % , ,918, , % , ,145, , % , ,207, , % , ,053, , % , ,643, , % , ,604, , % , ,573, , % , ,448,745 1,102, % , ,082,692 1,309, % , ,367,324 1,503, % , ,515,234 1,547, % , ,478,427 1,487, % , ,297,197 1,496, % Note: The useful average distance per reference flight hour corresponds to the weighted average of the economic speeds of the Brazilian domestic fleet aircraft (as recommended by manufacturers in their respective manuals) in every year by the respective annual average uses. Sources: Agência Nacional de Aviação Civil ANAC (National Civil Aviation Agency); Airbus, flight operation manuals; The Boeing Company, flight operation manuals; Embraer S/A, flight operation manuals; Fokker Technologies, flight operation manuals. OUTLOOK 2014 [ 113 ]

114 OUTLOOK 2014 USEFUL DISTANCES PER FLIGHT HOUR, REFERENCE VALUES AND DIFFERENCES (GAP) % 11% 11% 11% 12% 10% 10% 7% 3% 2% 3% 3% 1% -1% -4% -4% 0% -5% -1% -2% -1% -1% 0% 0% 0% -1% -1% -2% -1% % 33% 28% 23% 18% 13% 8% 3% -2% -7% -12% Useful distances per flight hour (km/h) in Brazil Real Useful distances per flight hour (km/h) in Brazil Reference GAP Brazil GAP USA Notes: 1. The useful average distance per reference flight hour corresponds to the weighted average of the economic speeds of the brazilian domestic fleet aircraft (as recommended by manufacturers in their respective manuals) in every year by the respective annual average uses; 2. The 2014 data regarding the United States has not been made available by ICAO till the date of this publication. Sources: Airbus; The Boeing Company; Embraer S/A; Fokker Technologies; International Civil Aviation Organization ICAO. [ 114 ] OUTLOOK 2014

115 OUTLOOK 2014 [ 115 ]

116 OUTLOOK 2014 Shutterstock [ 116 ] OUTLOOK 2014

117 PRICES AND COSTS OF THE SERVICES PROVIDED The remarkable drop in the domestic airline ticket prices in Brazil is not something new. However, the reasons for this drop are seldom discussed. As previously discussed in the section that deals with competition in air transport (page 25), the nature of this industry is its high competitiveness. In industries where this happens, productivity earnings are quickly transferred to the buying sector. It is necessary to know the evolution of the airlines productivity earnings, including the evolution of unit costs, to be able to understand the air ticket price evolution. OUTLOOK 2014 [ 117 ]

118 OUTLOOK 2014 The chart below shows the evolution of the nominal values of the operational unit costs and the industry s unit revenue evolution, that is, the yield. The yield is an essential indicator for the air transport industry and, in the case of passenger air transport, it corresponds to the average price paid by passengers per kilometer flown. The most important cost item in air transport is the aircraft fuel whose nominal price increased by 141% between 2002 and However, the total costs incurred by Brazilian airlines in their domestic operations increased 51% in the same period. That is, the industry was capable of mitigating the impact of the extraordinary price increase of its main cost item by their productivity gains. EVOLUTION OF NOMINAL COSTS AND AIRFARES (YIELD) DOMESTIC SECTOR Indexes for the main cost items (2002 = 100) Fuel QAV Domestic airfares (Yield) Leasing and maintenance IPCA Total costs Airport Charges [ 118 ] OUTLOOK 2014

119 The cost evolution described refers to the cost composition illustrated in the table on next page. As shown by the table, aviation fuel (QAV) represents 23.4% of the total costs in 2002, reached its peak value in 2012, representing 41.3%, and went back to 38% in However, the impact of fuel price increases was not restricted to total operational costs. Actually, by representing more than 80% of the variable costs today, jet fuel price increases made it impossible to keep a large number of low-fare night flights that existed in the middle of the last decade whose costing was only based on variable costs. The airlines started flying less and, as a result, the unit fixed costs (leasing, for example) started having a heavier weight. This scenario might suggest the economic unfeasibility of air transport. However, the greater productivity gain occurred as a result of an improved demand management. Flight usage increased about fifteen percentage points and is now equivalent to the world s high standards. However, the most important perspective is obtained by adjusting costs and airfare of airlines based on inflation. By making this adjustment, the conclusion is that the average airfare in 2014 is 60% lower than in 2012 and the aviation fuel price, main cost item, increased by 15%. On the other hand, total costs dropped 28%. There are few sectors worldwide where there was a remarkable price drop without a proportional drop in total costs. In addition, it is much probable that a total cost reduction of this magnitude has no precedent in the world aviation industry at the same time as the most important isolated item the QAV, responsible for about 40% of the total costs increased by 15%. To make this possible, in an approximate way, cost reduction except for fuel (about 60% of the total costs) was around 57% as simple arithmetic can demonstrate. On the other hand, in the same period, US dollar (which has a direct impact on maintenance and depreciation costs and aircraft leasing, besides other general flight costs, equivalent to 15% of the total costs), depreciated 19.5% and inflation rate was around 110% (IPCA). (Note of the translator: IPCA corresponds to the initials of an official inflation rate indicator in Brazil). The composition of these cost variations except for fuel, weighted by their respective impacts on costs, indicate that the airlines productivity gains were around 64%. OUTLOOK 2014 [ 119 ]

120 OUTLOOK 2014 COST INTERNAL COMPOSITION (%) DOMESTIC SECTOR 100% 90% 80% 70% 60% Airport Charges 50% 40% 30% 20% 10% 23.4% 27.0% 41.3% 37.5% 38.2% 38.9% 38.0% 33.4% 33.4% 32.8% 31.2% 31.4% 28.1% Flight equipment depreciation and insurance Communication and navigation aid Other operational costs Leasing and maintenance Administrative expenses Personnel expenses 0% Fuel QAV [ 120 ] OUTLOOK 2014

121 EVOLUTION OF THE INDUSTRY S NOMINAL COSTS AND AVERAGE AIRFARES (YIELD/PAX-KM) DOMESTIC Indexes for the main cost items (2002 = 100) Fuel QAV Domestic airfares (Yield) Leasing and maintenance Total costs Airport Charges OUTLOOK 2014 [ 121 ]

122 OUTLOOK 2014 The importance of aviation fuel in the air transport total costs in Brazil make it mandatory to recapitulate the permanent distortion of its prices as compared to prices effective in other countries. The aviation fuel price for domestic flights in Brazil is about 52% higher than the world average as shown in the chart below. About 12% of this price corresponds to the price imposition determined by the absolute market concentration of the supplying sector while the rest reflects to taxes levied on the product. The main taxes paid by domestic airlines on fuel are PRICES OF AIRCRAFT FUEL AT VARIOUS AIRPORTS IN THE WORLD (US$/GALLON) 6.00 Domestic flights Cuiabá Manaus Recife Luanda Guarulhos Addis Ababa Harare Brasília Libreville Accra Galeão Lagos Maputo Dakar Abidjan Beirut Cairo Amman Nairobi Beijing Santiago Caracas Istanbul Amsterdam Lima Paris Bogota New York Madrid London Miami Atlanta Chicago Frankfurt Houston Lisbon Washington Panama Zurich Dubai Mexico Tokyo Rome Buenos Aires Geneva Singapore Note: In Brazil, differently from domestic flights, international flights do not pay ICMS tax on fuel. Source: IATA, June/14. Source: International Air Transport Association IATA, worksheet, [ 122 ] OUTLOOK 2014

123 21% (in average) of ICMS, 4% of COFINS and 1% of PIS. An interesting comparison can be made between the evolution of domestic nominal yields in Brazil and in the United States as shown in the chart below. This chart shows that, in 2002, domestic nominal yields in Brazil were more than 30% higher than in the United States and less than 5% higher in But this comparison can be further improved by adjusting the yield values based on the average segments travelled by passengers as explained below. EVOLUTION OF YIELDS (BRL/RPK) IN BRAZIL AND IN THE USA (NOMINAL VALUES) Domestic yield USA Domestic yield Brazil Source: Airlines for America. OUTLOOK 2014 [ 123 ]

124 OUTLOOK 2014 Just like in other modals, air transport unit operational costs decline according to the distances travelled and, as a result, prices tend to assume a parallel behavior. In the case of air transport, for example, fuel consumption is greater during the first minutes of flight, because there is a very large use of energy to lift an aircraft from immobility to its cruize altitude. Other costs as maintenance are proportional to the engine cycles and not only to the duration of its operation. This makes shorter trips to be proportionally more costly. To render operational costs and prices comparable among companies, the financial market introduced an adjustment coefficient. For this purpose, yields and costs are adjusted based on a multiplicative factor which translates them to an average leg of 1,000 km. This factor corresponds to the square root of the relationship between the average leg considered, expressed in kilometers, and 1,000. As a result, the costs and yields of the average legs shorter than 1,000 km are adjusted to lower values and those longer than 1,000 km to higher values. Afterwards, this adjustment factor is applied to the data of the previous chart and this results in the chart below. As can be seen, yields in Brazil from 2003 to 2010 were greater than those in the United States, were equal in 2011 and became lower starting in In 2014, the US domestic yields were 27% higher than those of Brazil. [ 124 ] OUTLOOK 2014

125 EVOLUTION OF YIELDS (BRL/RPK) IN BRAZIL AND IN THE USA (NOMINAL VALUES) Adjusted for the average leg of 1000 km Yield Domestic EUA Yield Domestic Brazil OUTLOOK 2014 [ 125 ]

126 OUTLOOK 2014 Shutterstock [ 126 ] OUTLOOK 2014

127 ORGAN TRANSPORT The air transport of human organs and tissues for transplantation is the social nature of activity performed by Brazilian airlines that has been the object of repercussions and praise. This service has gained impulse after the formalization of a cooperation agreement involving the Ministry of Health, ABEAR, the Civil Aviation Department, the Brazilian Air Force, Infraero (Note of the Translator: Infraero is the state owned company that operates more than sixty airports in Brazil) and airports with awarded OUTLOOK 2014 [ 127 ]