The Brazilian airline industry is facing a critical juncture as the price of aviation kerosene (QAV) has seen a substantial increase. This surge, coupled with previous hikes, is significantly escalating operational costs for carriers, leading to urgent concerns about the future expansion of flights within the country.
The Associação Brasileira das Empresas Aéreas (Abear) has issued a stark warning, stating that the recent adjustments to QAV prices will push fuel costs from just over 30% to a formidable 45% of airlines’ operational expenses. This dramatic shift is expected to have immediate and severe repercussions on the sector.
The immediate consequence, according to Abear, will be a slowdown in the expansion of flight offerings by domestic airlines. This development is particularly concerning given Brazil’s recent record-breaking numbers in air passenger volume, a trend that has fueled demand for increased frequencies and new routes. This information was disclosed by Abear.
Fuel Price Hikes and Operational Impact
The latest QAV price adjustment, effective from Wednesday, adds to a previous 9.4% increase in March, bringing the total impact on airlines’ bottom lines to a critical level. Abear emphasizes that unlike gasoline, QAV prices are directly linked to international oil market values, even though over 80% of the fuel consumed in Brazil is produced domestically. This pricing model makes the Brazilian market highly susceptible to external shocks.
This cost escalation comes at a time when Brazil is experiencing unprecedented growth in air travel. Both domestic and international routes have seen a surge in passenger numbers, creating a demand for more flights and services to underserved destinations. However, the sharp rise in operational costs is now acting as a significant counterforce to this positive momentum.
Airline Association’s Plea for Mitigation
In response to the escalating costs, Abear has been actively advocating for the implementation of mechanisms aimed at cushioning the blow of QAV price increases. The association seeks to ensure the continued development of air transport, maintain national connectivity, and preserve the economic sustainability of airline operations.
Juliano Noman, president of Abear, had previously expressed the airlines’ expectation that Petrobras, the national oil company, would act as a stabilizing force for commercial aviation in Brazil. Given the predominantly domestic production of QAV, Noman had requested that Petrobras avoid simply passing on international price fluctuations, especially in the context of prolonged Middle East tensions.
Petrobras’s Payment Plan for Distributors
In an effort to mitigate the immediate impact, Petrobras announced on Monday afternoon that it would allow QAV distributors to opt for a staggered payment schedule for the price increase. A term of adherence will be made available until April 6th.
This initiative aims to ease the financial burden on distributors serving commercial airlines. Under this plan, distributors who sign up will pay an equivalent of an 18% increase in April, a figure significantly lower than the 54.8% stipulated in their contracts. The remaining balance can then be paid in six installments, with the first payment due in July.
Petrobras stated that this installment mechanism for the price increase may be extended to the following two months, subject to further calculations. The company’s objective is to preserve product demand and mitigate the effects of the price adjustment on the Brazilian aviation sector, thereby ensuring the smooth functioning of the market.
Government Explores Tax Relief Measures
The Brazilian government is also considering measures to alleviate the pressure on the aviation sector. Among the options being studied are the elimination of the IOF (Tax on Financial Operations) for airlines and a reduction in PIS and Cofins (social contributions) taxes on aviation fuel. These measures are intended to prevent a significant increase in ticket prices, which is estimated to rise by up to 20% due to the more expensive QAV.
Industry executives have indicated that airlines have been seeking cost relief from the government. The focus on taxation is strategic, as fuel costs represent a substantial portion of operational expenses. Furthermore, with the Brazilian Real’s depreciation against the dollar, a significant portion of airlines’ expenses are denominated in foreign currency, making QAV price increases even more impactful and potentially leading to unavoidable fare hikes.
Last year, airlines noted that a decree increasing the IOF on foreign transactions, including aircraft leasing, led to a nine-fold increase in the tax rate. Additionally, the Income Tax on leasing, which was reduced to stimulate the sector post-pandemic, has seen gradual increases from zero in 2022-2023 to 3% this year, with a scheduled return to 15% by 2027.
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