“What is the new normal?” is a significant question that markets have been wondering as economies begin to rebound after the outbreak of COVID-19. This could not be more relevant to the aviation sector, and the future of Brazilian passenger carriers lies on expectations upon a new demand and sector-specific developments in corporate finance.

        A macro overview of Brazil suggests that the country will continue to face economic consequences of the pandemic for at least until 2023. GDP contraction is expected to be 4,5% in 2020 and there was the biggest increase in the unemployment rate since 2017. The Central Bank of Brazil has recently announced a decrease in the federal funds rate in response to the current inflation rate below its target. The dovish policy of the Central Bank could be positive for Brazilian airlines looking for a bailout, but that relief is not guaranteed.

        There are three main passenger carriers in Brazilian skies: Azul, GOL and LATAM. Airlines throughout the globe have suffered a severe fall in revenue due to a negative demand shock for flights during the COVID-19 pandemic. The difference between this global trend and the regional occurrence in Brazil lies in what is being done to ease the liquidity crisis. Meanwhile American carriers can rely on the CARES Act, and British ones can count on CCFF, Brazilian airlines have been unlucky in negotiations with BNDES (National Bank for Economic and Social Development) for a subsidy since March.

        Although BNDES recently increased the airlines’ bailout, the process has taken so long that all three carriers have already taken different strategies. LATAM is currently filing a Chapter 11 bankruptcy in the U.S., GOL has already sold its stake in TAP to raise cash, and a representative of Azul has already stated: “We have survived so far without the bailout. [The package] is not going to be cheap money”. Indeed, it is a complex plan under BNDES alongside private banks.

        A significant challenge faced by the sector is the speculation around the future demand for flights. In Brazil the full recovery of the overall demand is expected in 2023, but what is the “new normal” going to look like? If the post-pandemic world continues to hold most business meetings in online platforms the Brazilian demand for flights will be forever reshaped, as in 2019 approximately 60% of passengers were corporate travellers.

Would tourism replace corporate travels in the aviation sector? There are different expectations regarding international and domestic tourism in the country. There is this historical common sense that Brazilian passengers tend to prefer destinations abroad rather than inside borders. This could mean a brighter future for LATAM, the biggest supplier of international flights in Brazil. Nevertheless, the average Brazilian does not even fly that often: the ratio of number of passengers and the total population is about 0,5 in Brazil, compared to 2 in the U.S. “There is a tremendous potential for increase in demand in the following years” affirms Jerome Cadier, LATAM’s CEO. The number of passengers increased 1.2% in 2019 and if there is to happen this boost in the future it might be in the sector of domestic tourism, as flight tickets are more financially accessible. This would spark the demand for Azul and GOL’s domestic flights.

Is there still hope? Success in the civil aviation sector in the short-term requires airlines to sustain acceptable liquidity levels with or without BNDES’ package, and new strategies appear every day. In the long-term, passenger carriers must keep an eye on the profile of the post-pandemic traveller, after all nothing will be exactly the same as before.