Monday, May 31, 2010

Is privatization of Brazil's air travel industry possible?

Brazil's air travel industry has all the right elements to become a world power. The country has a young population of almost 200 million people along with a rapidly expanding economy and a growing middle class. Brazil has won the rights to host not only the 2014 World Cup, but also the 2016 Summer Olympics in Rio de Janeiro. Different from the US airlines, Brazilian carriers are actually making money. Different from Europe and Japan, the airline industry doesn't have any competition in terms of trains. The BBC recently gave a shiny report (video) on Brazil's aviation sector.
With all these positives, it's hard to imagine any obstacles, right? Wrong. This 66-page government study (Portuguese) on the "Panorama and Perspectives for Air Transport in Brazil and the World" explores all facets of Brazil's air industry and gives a particularly realistic view of its challenges. One particular impediment may be that "Brazil's airports serving World Cup 2014 venues are saturated and eight are on the brink of operational collapse", including both of Sao Paulo's airports and Rio's domestic airport.
Part of the problem lies with Infraero, the Brazilian government's corporation in charge of 67 airports, 80 air navigation support units, 32 warehouse logistic terminals, and 97% of passenger and cargo air transport. Since Infraero is not a private company, it doesn't have any incentive to perform above expectations. It does its job, some of the time, and moves on, usually losing money in operations -- very similar to the US Postal Service or Amtrak.


Interestingly enough, the government study gave five options for improving the airport situation, all of them involving some sort of privatization (see p. 50), from simply privatizing Infraero, to privatizing the airports themselves.


Another obstacle mentioned was the high corporate tax rate for airline companies, close to 39% for Brazilian companies, versus 7.5% in the US - as well as the service taxes (ICMS) that vary from state to state plus abusive storage costs from the monopolistic Infraero.


What do you think will happen? Will the air industry stay in public hands? Or will a move be made towards privatization?


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