Brazil Airlines Can No Longer Pass Through Costs -ABEAR
First Published Monday, 17th December 2012 05:52 pm - © 2012 Dow Jones
SAO PAULO--Brazilian airlines can no longer raise prices to recover profitability because new flyers are very sensitive to increasing ticket prices, the association of Brazilian airlines, ABEAR, said Monday.
Whereas in the past airlines would only lose some passengers as ticket prices rose, in recent years elasticity of demand has increased. So while a decade ago a 10% increase in prices meant just a 7% loss in customers, today that same 10% increase in prices would lead to a 14% drop-off in customers, ABEAR technical consultor Adalberto Febeliano told reporters Monday.
"Raising ticket prices is no longer a way to recover lost margins," he said. "When they want to recover profitability they have to reduce supply. But it's import to make selective reductions in supply so that you don't lose more passengers."
Brazil's airlines as a whole will likely reduce supply -- as measured by available-seat kilometers, or ASK -- this year and next, ABEAR said. But while Brazil's larger companies Tam, now merged with Chile's Lan (LFL), and Gol (GOLL4.BR) are reducing seats offered, regional carriers such as Azul are expanding supply at a torrid pace. Demand will likely remain steady next year as taxes increase and fuel costs remain high, pressuring ticket prices. Should talks between airlines and the government lead to reduced fuel costs and lower taxes, demand could rebound, ABEAR said.
The expansion of flyers among Brazil's emerging middle class is one reason that sensitivity to price has increased, ABEAR said. Many of these passengers fly for tourism rather than business, and so even a slight increase in fares leads passengers to switch to buses or cancel travel plans, Mr. Febeliano and ABEAR President Eduardo Sanovicz said.
The planned cutbacks in supply "is a strategy in the industry to recover profit while avoiding passing through costs," Mr. Sanovicz said Monday.
Write to Paulo Winterstein at email@example.com
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