Torres, R. R., Matera, R. W., And Espirito Santo Jr.,

TORRES, R. R., MATERA, R. W., and ESPIRITO SANTO JR., R. A. (2003) “The Air cargo Market in Brazil: Challenges, Opportunities and Perspectives”. 7Th Annual Air Transport Research Society Conference, Toulouse, France.

THE AIR CARGO MARKET IN BRAZIL: CHALLENGES, OPPORTUNITIES AND PERSPECTIVES Roberta de Roode Torres M.Sc. student in transportation Engineering Federal University of Rio de Janeiro, Brazil

Rafael Waltz Matera Architect

Respício A. Espírito Santo Jr., D.Sc. Associate Professor Federal University of Rio de Janeiro, Brazil

ABSTRACT In a developing country like Brazil, the economy depends on an intense flow of goods, both domestically and internationally. In order to cope with the continental dimensions, the transportation system become an essential factor for the country’s development, and the air transportation with its countless advantages, is demonstrating its importance in the international market. Nevertheless, despite the fact that air cargo in Brazil is still dominated by foreign airlines and suffers dramatically with the economy oscillations, this segment has been receiving significant investments from many organizations, not only airlines, conforming its potentiality to grow. In this paper, a general overview of the air cargo segment in Brazil will be presented, with emphasis on the international market. By identifying the country’s major international partners of foreign commerce, the paper will identify some of the challenges and opportunities nested within the activity, primarily regarding Brazilian carriers. For this, the authors will highlight the main characteristics of the air cargo segment, its relationship regarding international trade, its influence over the economy, and vice-versa.

Keywords Air Cargo, Airport Infrastructure, Logistics.

Authors’ contacts: [email protected], [email protected] and [email protected]

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TORRES, R. R., MATERA, R. W., and ESPIRITO SANTO JR., R. A. (2003) “The Air cargo Market in Brazil: Challenges, Opportunities and Perspectives”. 7Th Annual Air Transport Research Society Conference, Toulouse, France.

1. INTRODUCTION Starting from 1990, a new set of economic policies in Brazil has gradually pushed forward incentives for market access and free competition. In November 1991, the 5th National Conference on Commercial Aviation (V CONAC), gathered several representatives from the industry with the primary objective of discussing the major subjects involving Brazilian civil aviation in the regional, national, and international scheduled and non-scheduled markets. In that year the Brazilian aeronautical authority (the Department of Civil Aviation, DAC) initiated a period called “flexibilization” (flexibilização, in Portuguese), in order to adapt the air transport industry with the new national policies and objectives of liberalizing market access and freeing competition. Since then, the DAC has conducted a phased, quasi-deregulation of the domestic market, culminating with the total liberalization of fares in mid-2001. In the international market, bilaterals continued to be the basic formula for establishing commercial ties via air transport, while both domestically and internationally non-scheduled traffic has been almost fully liberalized (restrictions under the Brazil-U.S. bilateral on non-scheduled traffic being one of the very few exceptions). Moreover, the policy of easing access to the domestic markets prompted the birth of several new regional airlines and all-cargo carriers, the later almost in its totality operating as non-scheduled carriers with access to the international market as well. 2. BASIC CHARACTERISTICS The air cargo segment is built of very specific characteristics; according to Pedrinha (2000), air cargo functions primarily to support industries and markets that are sensitive to time (speed) and safe deliveries. Moreover, the transportation of several seasoned products worldwide by air and the linking of markets that were once often subjected to accessibility constrains by the other modes of transportation, have made the transportation of products and goods by air one of the most important industries of the second half of the 20th century. Complementarily, air cargo has been responsible for almost the entirety of medium/longdistance transportation of high value products (microchips, precision instruments, jewelry, etc.), arts and historical objects (a museum exposition in another country, for example), plus perishables (vegetables, newspapers, flowers, etc.), urgent hospital deliveries (medicines, organs for transplants, blood, tissues, etc.) and assorted fragile objects, not to mention animals (live fish and champion horses and bulls, for instance) and mail. For its characteristics of speed, reliability and safe transportation, air cargo has catapulted itself into “air trade”, prompting the emergence of several new businesses that could not exist without it. Celebration of particular dates with particular foods (season fruits) or beverages (liquors and wines, for example) were not possible if it were not for the air transportation of these products to anywhere in the world almost instantly. As an illustration, a French wine can be shipped from Paris to New York, Los Angeles, São Paulo, Singapore and Tokyo on the 2

TORRES, R. R., MATERA, R. W., and ESPIRITO SANTO JR., R. A. (2003) “The Air cargo Market in Brazil: Challenges, Opportunities and Perspectives”. 7Th Annual Air Transport Research Society Conference, Toulouse, France.

very same day, and can be consumed hours after arrival to celebrate a particular important date in each of these cities. Complementarily, other businesses such as the commerce of tropical flowers and fruits and the supply of rare fish for ornament aquariums and collectors could not reach distant markets (thus adding considerable value to the products) if it were not for the air transport of cargo. In fact, globalized customers are willing to pay more not only for the rare product itself, but also for the speedy delivery only made possible by the popularization and the worldwide coverage of air trade. 2.1 Main documentation, main categories of cargo operators and fleet Commercial air cargo is documented through the airway bill (AWB), being the AWB the most important document of this mode of transport. It can be issued in the form of an AWB itself, representing a cargo that has embarked directly as an unitary item, or in the form of the grouped MAWB (master airway bill) and HAWB (house airway bill), representing consolidated cargo. Although air cargo is structured and operated through strict regulations appointed by IATA and individual government authorities, plus the documentation cited above, the segment is still very difficult to study and analyze due to a variety of reasons. One relates to the difficulties in obtaining reliable and updated data, and the discrepancies that exist between the available sources. Another reason is related to the air cargo suppliers, that are heterogeneous groups of operators offering multiple different types of services and levels of logistics specialties. In this regard, according to Brewer, Button and Hensher (2001), there are three main categories of air cargo operators: 1) Line operators: The responsibles for moving the cargo from airport to airport, counting on the “freight forwarders” and/or the consolidators for the direct contact with the customer. Line operators make use of all aircraft available, from the pure freighter, the “Combi” aircraft (combined passenger and cargo) to the conventional passenger aircraft (freight hold). Examples. Cargolux, Arrow Air, Lufthansa Cargo, Korean Cargo, etc. 2) Operators Integrators/Courier/Express: Their business is to move consignments doorto-door, with delivery services in a predetermined and defined schedule. They operate multimodal networks, offering a variety of services to shippers including supplemental air services with ground transport and, if necessary, logistics specialties to support justin-time inventory control in several customers. Examples. UPS, FedEx, TNT, DHL, etc. 3) Niche operators: This group operate specialized equipments, or still specialties, building their businesses in order to fulfill out of the ordinary requirements (extra-large cargo, for instance).

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TORRES, R. R., MATERA, R. W., and ESPIRITO SANTO JR., R. A. (2003) “The Air cargo Market in Brazil: Challenges, Opportunities and Perspectives”. 7Th Annual Air Transport Research Society Conference, Toulouse, France.

Examples: Heavylift, Challenge Air Cargo, etc. When moved by air, cargo is transported by a great variety of aircraft types. As a simplification, one could assume that these aircraft are divided into four distinct groups according to its internal configuration: (1) the Combis (combined passenger and cargo: upper deck divided with a passenger cabin and a cargo section plus the conventional underfloor cargo hold); (2) the pure freighters (an all-cargo aircraft, either originally built as so or converted from a passenger aircraft); (3) the conventional passenger aircraft (passenger cabin in the upper deck plus the underfloor cargo hold); and (4) the “quick-change” aircraft (passenger aircraft with reinforced cabin floor, palletized seat rows, fuselage cargo door, etc., to be converted from all-passenger to all-cargo configuration in a very short period of time, usually less than 2 hours). Since the 80s, passenger aircraft built in the 60s and 70s have been converted to an all-cargo configuration to perform the majority of air cargo activities. These 707s, 727s, 737-200s, 747100s/200s, DC-8s, DC-10s and A300s were first used by North-American, European and Asian carriers during the 80s and early 90s as a means of building low-cost, all-cargo fleets in commonality with the existing passenger aircraft fleet in operation. These aircraft are now, at their most, flying in Latin American, African and other developing countries were airlines experience severe difficulties in acquiring new freighter aircraft such as 767Fs, A300-600Fs and 747-400Fs, or even converting newer-generation passenger aircraft like the MD-11s, 767200s and 737-300s into all-cargo configurations. In Brazil, both VARIG and VASP operate converted aircraft, basically DC-10-30s (VARIG) and 737-200s and 727-200s (VASP). Total Linhas Aéreas operates converted 727-200s, and so did now-defunct Itapemirim Transportes Aéreos (ITA). Other non-scheduled cargo carriers in the country like Brasair, Beta, TCB and Skymaster all operated 707s, while ABSA (Aerolinhas Brasileiras S.A.), an all-cargo operator with ties to the LanChile group, operates reengined DC8s (71F) and a 767 freighter. 3. MODAL DIVISION Brazilian transportation infrastructure is still insufficient to cope with the country’s continental dimensions and to cope with its multiple near-to-mid-term opportunities for growth. The low integration between the modes of transportation that points to the almost non existance of a true intermodal system, precludes the much needed gains in quality, reliability, safety and confidence in the transportation system as a whole. In fact, Brazilian economists and government officials routinely point out that one of the main cost drivers of the so-called “custo-Brasil” (a set of internal cost multipliers due to the country’s inefficiencies and bureaucracies) lies exactly in the yet to be modernized domestic transportation infrastructure and transportation operation. The predominance of road transportation over all other means of 4

TORRES, R. R., MATERA, R. W., and ESPIRITO SANTO JR., R. A. (2003) “The Air cargo Market in Brazil: Challenges, Opportunities and Perspectives”. 7Th Annual Air Transport Research Society Conference, Toulouse, France.

transportation (specifically in respect of cargo; see Table 1) severely limiting an efficient flow of export/import products and goods through the transportation corridors, thus imposing barriers for a greater economic growth, a true income distribution, plus limiting technological and even social integration. “The productivity gap separating countries of the region with developed countries on the frontier of technology and best practice production is strong and generalized throughout Latin American economies, and not restricted to a few sectors. Total factor productivity levels in the region are on the order of 40% of those in the United States [ECLAC, 1995]. Labor productivity differentials are, of course, even greater. For example, in the case of Brazil, these average 27% for all sectors, varying from lows of 14% and 18% in food retailing and food processing, respectively, to a maximum of 88% (steel); and even important modern sectors, such as airlines, telecommunications, banking and auto assembly register less than half of U.S. productivity levels [McKinsey Global Institute, 1998].” (in Ramos, 2000) [underlines are marked italics in the original text; bold text marked by the authors for this paper] In view of this, in order to foster the insertion of Brazil in the globalized economy, the government must emphasize the modernization of the entire transportation system. Regarding air transportation, the two terms under president Fernando Henrique Cardoso (1995-2002) were marked by liberal policies and, mainly, by the modernization of several major airports in the country. International airports of Fortaleza (SBFZ/FOR), Salvador (SBSV/SSA), Porto Alegre (SBPA/POA), Brasília (SBBR/BSB) and Rio de Janeiro (SBGL/GIG) have gone through deep modernization programs and the construction of new passenger and/or cargo terminals. INFRAERO, the Federal Airport Authority, is responsible for managing these listed facilities and 60 other major or capital airports in the country. The importance of these 65 airports managed by INFRAERO can be measured by the fact that more than 95% of the passenger and 99% of the cargo flow through these facilities. Table 1 – Percentage of Cargo Distribution (in TKU) in Brazil: 1993/95/97/99 Air

Water

Pipeline

Rail

Road

1993

0,29%

4,21%

11,15%

22,61%

61,74%

1995

0,32%

3,95%

11,53%

22,29%

61,91%

1997

0,26%

4,54%

11,56%

20,73%

62,91%

1999

0,35%

4,58%

13,83%

19,46%

61,82%

Source: DAC, INFRAERO and GEIPOT/Ministry of Transport

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TORRES, R. R., MATERA, R. W., and ESPIRITO SANTO JR., R. A. (2003) “The Air cargo Market in Brazil: Challenges, Opportunities and Perspectives”. 7Th Annual Air Transport Research Society Conference, Toulouse, France.

Complementary to the air cargo industry is intermodal and logistics distribution, both activities that have been directly linked to air transportation through an ever increasing array of technologies. In fact, intermodality appears as an intrinsic characteristic to the air cargo segment, since seldom a product or good would be transported from its origin point to its final destination entirely by air. The door-to-door service, for instance, can be made possible only through the integration of air and ground transportation. According to the study developed by Pedrinha (2000) for the four basic modes of transportation in Brazil, if considering factors such as quality, regularity, safety and reliability, air transportation would present the best overall performance, while being the least appropriate if only cost factors were involved. Road transportation, despite being the one appointed as of having the least level of safety/security and reliability, stands out in such factors like time and flexibility. Transportation professionals and experts interviewed during the aforementioned study indicated that both air and road transportation would be most appropriate for integration, while also having the most favorable conditions to function as near/mid-term economic multipliers of the Brazilian economy. Despite several advantages regarding the low-cost flow of products and goods through import/export corridors, water and rail-based transportation were considered of lower efficiency than road and air transportation in the near/mid-term, mainly due to a much needed infrastructure modernization. Without the later, both water and rail modes of transportation in Brazil, nowadays, lack the necessary modern integration with each other and with road transportation. 4. THE INTERNATIONAL MARKET During 2002, as a slow recovering from the 9/11 terrorists attacks in the U.S. was taking place in the air cargo segment, the same globalization that demands speed, punctuality and safety in the transportation and movement of products and goods, generated several problems to markets in developing countries, like Brazil. High interest rates and fast pacing currency devaluation associated with the possible change of the Brazilian government from the liberal wing of president Cardoso candidate to the left-wing Workers Party of now president Luis Inácio Lula da Silva prompted a major shakedown in the segment in Brazil. Nowadays, factors like a continuing non-cooperative environment between INFRAERO and the Customs Department (virtually all INFRAERO airports operate in a 24-hour status, while Customs Offices in these airports’ cargo terminals usually operate from 8:00 to 17:00h), outdated customs regulations, lack of integrated policies of the main government agencies involved with cargo activities, low-efficient ground transportation companies and constrained ground infrastructure accesses, plus high airport and storage fees associated with cargo have resulted in a great variety of difficulties for the segment’s growth in Brazil. For this, the newly elected Workers Party government must pursue a serious, sound and effective set of policies to correct this extremely unfavorable situation and working environment. 6

TORRES, R. R., MATERA, R. W., and ESPIRITO SANTO JR., R. A. (2003) “The Air cargo Market in Brazil: Challenges, Opportunities and Perspectives”. 7Th Annual Air Transport Research Society Conference, Toulouse, France.

Despite these drawbacks, participation of the air cargo segment in the total value of products and goods transported domestically and internationally have been growing since 1980 mainly due to a substantial increase in the volumes of transporting high value products and perishables. The two following tables present the 10 major markets for Brazilian inbound and outbound international scheduled cargo traffic between 1995 and 2001. Table 2 – International Regular Traffic: OUTBOUND – Summarized by the 10 Major Markets in 2001 Cargo (kg)

10 Main Destinations

1995

1996

1997

1998

1999

2000

2001

United States

60.120.386

61.501.582

79.881.385

81.380.696

99.499.205

93.173.300

95.557.341

Argentina

11.395.615

16.460.116

31.179.168

23.871.719

22.742.482

25.130.874

23.718.114

Germany

13.825.634

11.993.877

15.064.864

15.446.944

18.477.131

23.137.100

19.615.126

Chile

8.890.172

5.246.416

9.861.029

7.098.864

6.929.297

14.039.326

17.247.291

France

3.179.316

4.650.862

7.859.486

6.242.993

8.769.548

13.092.886

13.435.473

Portugal

3.709.287

3.370.641

5.668.495

5.191.274

6.840.231

9.792.767

9.514.808

Spain

2.643.652

2.202.657

7.471.477

4.593.007

5.678.173

6.817.505

8.337.135

U.K. *

2.265.932

2.830.267

4.912.083

5.785.882

7.145.425

7.922.248

8.054.788

Holland

3.602.819

3.435.793

4.460.402

5.252.281

4.633.113

3.782.229

6.426.173

Italy

3.884.331

4.157.362

4.460.402

3.876.875

4.684.493

4.516.742

5.675.695

Table 3 – International Regular Traffic: INBOUND – Summarized by the 10 Major Markets in 2001 Cargo (Kg)

10 Major Origins

1995

1996

1997

1998

1999

2000

2001

United States

85.660.279

91.410.774

118.751.262

115.714.992

89.933.678

88.336.816

100.696.055

Germany

17.190.408

19.520.949

18.599.213

19.702.044

27.040.386

26.751.395

23.861.629

Argentina

7.482.926

8.391.813

18.812.840

15.589.731

14.040.224

14.733.982

17.590.896

France

5.211.723

6.180.705

8.939.194

7.687.743

10.466.125

15.736.872

16.175.847

Chile

9.560.688

9.907.679

19.625.022

14.502.510

11.483.932

14.366.729

14.617.845

Holland

7.925.570

11.189.044

15.253.492

11.112.923

4.686.079

3.472.406

8.651.895

Portugal

6.605.693

6.381.731

8.510.928

8.277.846

7.475.380

8.772.599

8.418.099

Spain

4.360.875

7.113.359

8.114.029

6.621.686

6.528.936

7.462.862

7.494.653

U.K. *

2.557.444

2.790.729

4.060.963

4.629.031

4.981.302

6.286.068

5.665.789

Italy

4.733.862

5.198.117

5.080.476

9.179.459

5.505.675

5.021.616

4.975.100

Note: Between 1993 and 1996 the DAC Yearbooks mentions specifically “England” and not “United Kingdom”. Source: DAC Statistical Yearbooks

The numbers above clearly demonstrate the relevancy of the United States (topmost inbound and outbound traffic) and Argentina (2nd outbound and 3rd inbound traffic) as the major cargo 7

TORRES, R. R., MATERA, R. W., and ESPIRITO SANTO JR., R. A. (2003) “The Air cargo Market in Brazil: Challenges, Opportunities and Perspectives”. 7Th Annual Air Transport Research Society Conference, Toulouse, France.

partners of Brazil in the air trade segment. Argentina outranks Germany by the fact that the cargo to/from the later is much more suited for air transportation than the cargo to/from the neighboring Latin American country. In fact, Argentina can import and export almost all of its products and goods from/to Brazil by road due to the proximity of the main industrial sites of both countries. On the contrary, this cannot be applied to Germany, where its imports and exports from/to Brazil must be transported by sea or by air. Of course, this does not relieves Germany from being a key player in Brazilian air cargo segment, in fact being the major gateway to/from Europe. 4.1 – The Dependence on the U.S. and Argentinean Markets The importance of the U.S. and Argentina for the Brazilian economy and for the segment herein discussed mean that whenever both countries undergo any kind of economic downturn, Brazil will be directly and severely hit. It also means that when these countries experience a stable and/or favorable economic period, Brazil may be directly benefited by the positive situation. This means that when the U.S. experiences a major downturn in its domestic economy, Brazil will be severely impacted. This is what happened after the 9-11 attacks, as well throughout the American recovery that is still on a slow pace (the War with Iraq and the SARS disease were key players in holding down the U.S. economy). The very same applies to neighboring Argentina: the political and economic crisis that slashed the country in 2001/2002 prompted a major downturn in trade and businesses between the two South-American partners. As a direct consequence, Brazilian airlines operating both passenger and cargo to/from both Argentina and the United States saw their traffic fall sharply. Unfortunately, virtually all Brazilian airlines operating internationally are very much dependable to the U.S. and Argentinean markets. This has been a historical planning and management mistake by Brazilian carriers that have deeply concentrated their efforts in the two markets most subjected to both international and domestic political-economic influences, that in turn impact negatively the Brazilian economy whenever either one experiences any downturn. In fact, for the desperation of Brazilian airlines, both the U.S. and Argentina were struck by economic recession at the same time. 4.2 – The Real Economic Plan and the Impacts on Air Trade Exhibit 1 presents the variations of the Brazil-U.S. cargo market in respect to the Brazilian and the World’s GDP variation from 1994 to 2001. The extraordinary variation in 1994 and 1995 reflect how much a valued currency in Brazil can influence a trade between the two countries. In 1994 the federal government initiated the Real Plan, in which the domestic economy was completely modernized towards fostering a low inflation rate and a slow pace economic growth. Along with the Real Plan came the new currency (the Real, R$), at that time of its creation being stronger that the U.S. dollar. This ignited a massive import trend to 8

TORRES, R. R., MATERA, R. W., and ESPIRITO SANTO JR., R. A. (2003) “The Air cargo Market in Brazil: Challenges, Opportunities and Perspectives”. 7Th Annual Air Transport Research Society Conference, Toulouse, France.

virtually all kinds of products and goods, from music CDs and books to kitchen devices and heavy industrial equipment. For this, the years of 1994 and 1995 were the “dream years” for Brazilian airlines (as well as for all airlines operating to/from the country), but it happened to be the “nightmare years” for Brazilian international airports that simply were not ready to cope with the massive import flows. Several airports like São Paulo/Guarulhos (GRU) and Rio de Janeiro Galeão/Tom Jobim (GIG) had to rent inflatable warehouses to accommodate the inbound flow of products and goods. The inflatable warehouses had to be installed in the aircraft parking or in the apron areas, thus reducing aircraft mobility and usable space for loading and unloading, and compromising all the airport’s cargo area. The 1997 and 1999 peaks were basically a reflex of the stagnation of the previous years (1996 and 1998, respectively), although 1997 could still be considered a good year in terms of economic indicators (for example, exports and imports presented high growth rates, +52% and +41%, respectively). In 1998, mainly affected by the Asian crisis, the Brazilian international air cargo market was reduced in 8%, while the exports were reduced in 7% and the imports in 9% (Table 4). Exhibit 1 – Brazil/U.S. Air Cargo, Brazilian GNP and World GNP Annual Variations (%)

Annual Variation (%)

International Regular Cargo Traffic - Brazil / U.S. Annual Variation (%) 35 30 25 20 15

c

10 5 0 1993

1994

1995

1996

1997

1998

1999

2000

2001

Years

Carga Brasil-EUA

PIB-Brasil

PIB-Mundial

Notes: The annual variation between Brazil and the U.S. corresponds to the sum of imports and exports. PIB-Brasil = Gross Domestic Product of Brazil (% variation). PIB-Mundial = Gross Domestic Product of the World (average all countries; % variation). Sources: DAC Statistical Yearbooks and IMF/World Economic Outlook

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TORRES, R. R., MATERA, R. W., and ESPIRITO SANTO JR., R. A. (2003) “The Air cargo Market in Brazil: Challenges, Opportunities and Perspectives”. 7Th Annual Air Transport Research Society Conference, Toulouse, France.

It is interesting to observe that in January 1999 the federal government inflicted a major devaluation of the Real, thus substantially reducing the passenger flow of Brazilians travelling abroad. With the continuation of the devaluation, Brazilian airlines have suffered heavy losses from this heavy reduction of outbound passenger traffic, thus prompting these carriers to more aggressively pursue cargo markets in the original heavy passenger traffic countries (again this would point to the dependency over the Argentinean and the U.S. markets). In 2000 and 2001 the Real devaluation plus the inability of the Brazilian economy to grow effectively were followed by the U.S. recession and other international events (9-11, Argentinean crisis, etc.), thus impacting negatively the cargo market between Brazil and the U.S.

Table 4 – The Evolution of Brazilian International Cargo: 1992–2001 Years

Mail T/km

Cargo T/km

1992 1993 1994 1995 1996 1997 1998 1999 2000 2000 2001

29.183.935 30.362.888 28.205.530 27.613.296 30.212.823 21.828.555 21.159.128 16.527.112 15.150.790 25.508.737 24.914.293

905.297.949 948.377.906 1.104.783.116 1.160.715.864 1.456.819.150 1.646.776.096 1.551.391.310 1.271.687.549 1.206.160.450 1.482.757.433 1.342.191.318

Sources: DAC Statistical Yearbooks

4.3 – Relationships Between Air Trade and the Brazilian Economy The global activity and its escalating growth regarding economic and technological aspects can be seen as one of the major influence factors on air cargo. Since the 70s, the trend of depending continuously on air cargo for multiple industrial processes’ daily operations has become a major component in each country domestic economy, not to mention the international economy (Pedrinha, 2000). In view of this, as aforementioned, every sort of economic crisis inflicts damages to the air cargo segment, while any sign of economic growth promotes a great increase of the activity. However, in Brazil, the lack of a strategic policy (or even a true definition of policies by the federal government) regarding the air transport sector (thus including the cargo segment) in terms of international presence of Brazilian carriers, industry taxes and fees, jet fuel prices, and the development of several important and potential markets for trade, has contributed to reduce the already low performance of Brazilian carriers when compared to their foreign competitors.

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TORRES, R. R., MATERA, R. W., and ESPIRITO SANTO JR., R. A. (2003) “The Air cargo Market in Brazil: Challenges, Opportunities and Perspectives”. 7Th Annual Air Transport Research Society Conference, Toulouse, France.

Exhibit 2 demonstrates the relationship between the variations of the World’s GDP and the air cargo segment. The demand for air transport, resulting from a positive or a potentially positive economic activity creates several opportunities for growth in the air cargo segment. The appearance of multinational organizations with production plants located around the globe has also contributed decisively with the need for air cargo shipments. This “globalized production” trend is enhanced by any growth in the economy of developing countries like Indonesia, Malaysia, Thailand, India, China, Taiwan, Egypt, Bulgaria, Romania, Hungary, Mexico, the Dominican Republic, Chile, Argentina and Brazil, just to mention a set of the most important countries in this category. According to the World Air Cargo Forecast report by Boeing (1996), the growth of air cargo tends to be higher in developing countries, like Brazil and the others listed above, than in developed countries. This reflect exactly the above written, as these countries have started to house several of the “globalized production” plants, since they have offered multiples benefits to the establishing of these industries (i.e.: reduced labor and land costs if compared to highly developed countries, high productivity, taxes exemptions, etc.). However, it is important to notice that these countries’ growth in air trade has been toward the international market, and not the domestic market. This is exactly what has happened in Brazil, although the country has been experiencing a very positive upward trend in developing its domestic cargo segment (Exhibit 3). On the other hand, developed countries tend to experience a more balanced domestic and international demand. Exemplifying the statements above, in Exhibit 2 we observe that the major economic downturns of the world’s economy between 1973–1975 and 1978–1982, due to the oil crisis, and in 1991, due to the Gulf War, have directly impacted the air cargo segment. The same analogy can be made regarding the Asian crisis in 1997/1998, although not pictured in Exhibit 2. A very similar chain reaction can be foreseen for the present year (2003), mainly in response to the War with Iraq lead by the United States and Great Britain, and the SARS (severe acute respiratory syndrome) disease outbreak in Asia.

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TORRES, R. R., MATERA, R. W., and ESPIRITO SANTO JR., R. A. (2003) “The Air cargo Market in Brazil: Challenges, Opportunities and Perspectives”. 7Th Annual Air Transport Research Society Conference, Toulouse, France.

Exhibit 2 – Growth of Air Cargo x World Economic Activity – Annual Variation (%)

14 12 10 8 6 4 2 0 -2 -4 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 PIB Mundial (%)

ton/Km Mundial (%)

Notes: PIB-Mundial = Gross Domestic Product of the World (average all countries; % variation). Ton.km Mundial = Percentage variation of the world’s flow of air cargo in ton.km Source: Boeing World Air Cargo Forecast (1996/1997)

In the Brazilian case, Table 4 presents the annual variation of the two factors mentioned in the period from 1995 to 2001. As can be seen, while the country economy grows in terms of GDP, the air cargo segment experiences a similar evolution.

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TORRES, R. R., MATERA, R. W., and ESPIRITO SANTO JR., R. A. (2003) “The Air cargo Market in Brazil: Challenges, Opportunities and Perspectives”. 7Th Annual Air Transport Research Society Conference, Toulouse, France.

Exhibit 3 – Brazilian Domestic and International Air Cargo (in tons x 1000): 1991–2001 1.800 1.600 1.400 1.200 1.000 800 600 400 200 0 1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Domestic Cargo International Cargo Notes: Domestic Cargo only by Brazilian carriers – International cargo by Brazilian and foreign carriers – Only scheduled services appropriated herein – Mail not included. Source: DAC Statistical Yearbooks

Table 4 – Cargo Transported x Brazilian Annual GDP (1995–2001) Years

Cargo Transported (ton-km) Domestic + International RTK Mail Cargo

Evolution of GDP in billions of US$ (Average price of 2001)

1995

87.793.506

1.693.421.737

275,8

1996

91.516.666

1.843.988.916

382,4

1997

64.928.202

1.997.428.092

371,6

1998

63.577.405

1.934.669.356

390,2

1999

62.746.987

1.656.472.389

411,4

2000

71.542.134

1.786.378.232

463,8

2000

98.084.003

2.179.661.965

463,8

2001

78.899.580

2.096.522.530

505,7

Source: DAC Statistical Yearbooks and IBGE, via www.ibge.gov.br

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TORRES, R. R., MATERA, R. W., and ESPIRITO SANTO JR., R. A. (2003) “The Air cargo Market in Brazil: Challenges, Opportunities and Perspectives”. 7Th Annual Air Transport Research Society Conference, Toulouse, France.

5. MAIN AIRPORTS AND LOGISTICS The market liberalization was initiated by then-president Fernando Collor in 1989, when he started to apply the primary concepts of a liberal “market-based economy” for the country. The early 90s saw the first waves of imported products and goods arriving in the country. One clearly remembered by Brazilians was the arrival of the first regularly imported cars, mainly through BMW, Mercedes, General Motors and Ford manufacturers. In the wake of the imported cars came several other imported products, goods and equipment. The later were used to foster better productivity standards to the great majority of Brazilian manufacturers, the Brazilian agricultural business and several other public and private businesses. In 1994, with the start of the Real Plan, under then-president Itamar Franco (along his Ministry of Finance Fernando Henrique Cardoso, soon to be elected president for two mandates), a massive inbound flux of imports arrived continuously through the major capital airports. As herein noted, this was primarily due to the new currency being overvaluated to the U.S. dollar. As the airports were not prepared to deal with these massive imports, they soon collapsed, as did several of the cargo (it was common to hear at the time that cargo was lost or stolen at the airport apron, or that cargo had been damaged or spoiled by wind and rain as it sit at the apron for several days in open weather). In Brazil, while 164 airports operate with scheduled services, air cargo is concentrated over just 10 airports, these being responsible for 87% of the total movement in the country. As depicted in Table 5, the three topmost airports within this group are concentrated in the richest and most developed region of Brazil, the Southeast (states of São Paulo, Rio de Janeiro, Minas Gerais and Espirito Santo): São Paulo/Guarulhos International (GRU/SBGR), Campinas/Viracopos International (VKP/SBKP) and Rio de Janeiro Galeão/Tom Jobim International (GIG/SBGL).

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TORRES, R. R., MATERA, R. W., and ESPIRITO SANTO JR., R. A. (2003) “The Air cargo Market in Brazil: Challenges, Opportunities and Perspectives”. 7Th Annual Air Transport Research Society Conference, Toulouse, France.

Table 5 – Cargo + Mail (Dom + Int’l; in tons) through the 10 major airports: 1994–2000 Airport

1994

1995

1996

1997

1998

1999

2000

TOTAL

SBGR

392.266.603

408.628.916

419.513.545

404.481.588

366.921.572

418.139.613

380.193.872

2.790.145.709

SBKP

91.085.793

148.992.374

170.734.684

197.943.422

206.510.738

186.942.135

231.935.597

1.234.144.743

SBGL

153.581.854

162.709.535

157.531.918

161.687.733

147.365.484

129.287.974

144.572.369

1.056.736.867

SBEG

116.187.757

127.749.112

100.945.301

69.577.405

88.098.497

109.944.303

123.097.523

735.599.898

SBPA

37.976.945

43.522.869

49.042.069

54.015.735

55.170.971

55.369.202

53.692.692

348.790.483

SBBR

52.210.833

55.575.026

53.824.871

54.259.195

51.389.036

42.064.200

49.688.482

359.011.643

SBSV

29.945.065

35.768.444

32.640.230

41.857.403

42.110.017

43.466.969

40.631.831

266.419.956

SBRF

36.455.108

42.433.390

44.405.444

40.208.115

44.557.568

42.579.671

37.140.800

287.780.096

SBFZ

30.710.534

33.351.922

36.829.754

31.928.867

29.957.056

29.929.024

30.172.055

222.879.212

SBSP

12.994.174

16.830.815

21.449.655

28.063.898

30.866.754

33.740.727

34.442.966

178.388.989

Source: INFRAERO

São Paulo/Guarulhos and Rio de Janeiro Galeão/Tom Jobim are located in the two largest and most important metropolitan conglomerates of Brazil, the greater São Paulo and the greater Rio de Janeiro areas. Both airports operate as distribution centers of passengers and cargo. However, these airports do not necessarily operate as hubs, as commonly defined in the U.S., Europe and Asia/Pacific (in fact, maybe only São Paulo Congonhas downtown airport [CGH/SBSP] can be considered as a “hub” in Brazil). In contrast, Campinas/Viracopos airport has been developed primarily as an all-cargo facility (such as Memphis in the U.S.), after the construction of São Paulo/Guarulhos. The largest foreign carriers that operate express/courier services in Brazil (UPS, TNT, FedEx and DHL), move their cargo primarily through Campinas/Viracopos, where they have located their main logistics centers. Nowadays, logistics is a vital activity not only in the commercial aviation world but in throughout all transportation and distribution businesses. The intense competition of the contemporary multinationals plus the demands associated with supply and distribution of the multi-plant production means that air cargo operators are competing not only in the air operation itself, but also in the efficiency of ground operations and as partners to support logistics-specialized solutions. Airlines that dominate the logistics business in the air transport industry are FedEx, Lufthansa Cargo, UPS, DHL, Cargolux, and Korean Cargo, while in Brazil VARIGLOG and VASPEX can be cited as the most important players. 6. CHALLENGES AND OPPORTUNITIES As pointed by Tables 2 and 3, it is important to notice the growing relevancy of the European market for Brazil. Once totally dominated by American imports and exports, Brazilian air trade has achieved a state of equilibrium between the U.S. and the European countries. With 15

TORRES, R. R., MATERA, R. W., and ESPIRITO SANTO JR., R. A. (2003) “The Air cargo Market in Brazil: Challenges, Opportunities and Perspectives”. 7Th Annual Air Transport Research Society Conference, Toulouse, France.

the growing opportunities for trade, businesses and commerce being materialized between Brazil and several European Union nations lead by Portugal, Spain, France and Germany, it would be of no surprise if the E.U. bloc outranks the U.S. in the near future as the major inbound/outbound market for Brazilian air trade. This should be considered one of the main drivers for Brazilian airlines’ strategic planning, as it will be the central aspect to escape from the dependency on the U.S. and Argentinean markets (and thus, their economies). Another strategic option to be pursued by Brazilian carriers should be the marketing of Brazilian agricultural products, such as vegetables and fruits. Brazilian carriers would have to establish partnerships with cargo consolidators and large farming distributors in order to identify and market these products in Europe and Asia (primarily to destinations that Brazilian carriers currently serve). Another potential partner for this specific market would be the international airports, in the form of identifying and linking the interests of both airlines (with cargo space and destinations served) and the vegetables and fruit producers. This kind of strategic partnership has been set in the mid-90s between Phoenix SkyHarbor Airport, vegetable producers in Arizona and British Airways, to establish a daily shipment of vegetables from Arizona to London in order to cope with the demands of several British restaurants (8th Annual International Aviation Symposium, 1999). However, even if opting to go for a true strategic approach for their businesses, Brazilian airlines may well encounter a totally new operating environment in a very near future. Early in February, VARIG and TAM announced that they were starting a partnership involving not only code-share on several flights but pointing to the discussions of a possible future merger. In the joint press release, the carriers said the new company could be formed still in 2003, but denied disclosing any further details, apart from saying that the two fleets would remain intact until any major decision is materialized. In fact, the federal government is pushing forward the merger, pressing VARIG’s employees and the Rubem Berta Foundation (VARIG controller) to accept all the terms within the proposed merger agreement with TAM. The joint effort is primarily aimed to overcome serious financial problems, particularly in VARIG and already reaching once fast-growing TAM. Both carriers were severely impacted by a continuous downward economy leading to an already several-years-long recession. This was exacerbated by January 1999’s devaluation of the Real, with the Brazilian currency being devaluated more than 100% since that time until March 2003. With all of this in hand both VARIG and TAM suffered even more after September 11, as international traffic spiraled down worldwide. Regarding VARIG, a great variety of cultural and organizational inconsistencies, plus mismanagement actions, have also played a key role in undermining the airline’s ability to recover. In the case of TAM, the late Rolim Amaro, the carrier’s charismatic president and CEO, grew the airline in a very fast pace, some even arguing that he

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TORRES, R. R., MATERA, R. W., and ESPIRITO SANTO JR., R. A. (2003) “The Air cargo Market in Brazil: Challenges, Opportunities and Perspectives”. 7Th Annual Air Transport Research Society Conference, Toulouse, France.

opted for this strategy to see how much time VARIG and VASP would resist in the marketplace. If approved by competition authorities, the two carriers would control around 70% of the domestic passenger market (measured in ASK), more circa 90% of the domestic cargo market, plus literally 100% of the international market (nowadays only VARIG and TAM fly abroad; with the exception of flights to a few locations in Venezuela, Surinam and the Guyanas, operated by a couple of Brazilian regional carriers). If it all materializes, this new environment will place the new giant carrier as the sole Brazilian airline flying abroad, transporting either passengers or cargo. Moreover, during April and May of 2003, the government’s National Council for Civil Aviation (CONAC) organized a group of airline and union officials, plus representatives from several Ministries, the Air Force Command, and INFRAERO, in order to discuss and propose a new set of policies for the Brazilian air transport industry. The discussions not only involved market access/concentration, fares, foreign ownership and international agreements, but also airport management, labor concessions, financial opportunities and government influence. The central tone of the discussions aimed in trying to slightly re-regulate the industry, mainly in view of the devastating financial conditions of almost all Brazilian carriers (low-cost/lowfare Gol Linhas Aéreas is one of the very few exceptions). Probably in less than a year time, the Brazilian government will have made concrete actions in order to materialize the main issues discussed in the proposed re-regulation process. It could, by some means, limit the opportunities for growth for start-up carriers in the quest for passengers, cargo and other business within the industry. Moreover, since late March, any route now being operated can be cancelled, but no new route can be requested or put into operation. This decision by the DAC (Department of Civil Aviation) will be in effect until a new order is given by either the Air Force Commander or by the Ministry of Defense, in person. This re-regulation plus the imposed barrier for entry will certainly impede new carriers to start their businesses, as will concentrate even more the domestic and the international markets in the hands of the incumbent carriers. 7. CONCLUSIONS This paper has presented, in a simplified approach, the importance of Brazilian air transportation with emphasis on the cargo segment, focusing primarily the international cargo market. For its characteristics of speed, range, reliability and safe transportation, the participation of the air cargo segment in the total value of products and goods transported domestically and internationally have been growing since 1980, mainly due to a substantial 17

TORRES, R. R., MATERA, R. W., and ESPIRITO SANTO JR., R. A. (2003) “The Air cargo Market in Brazil: Challenges, Opportunities and Perspectives”. 7Th Annual Air Transport Research Society Conference, Toulouse, France.

increase in the volumes of high value products and perishables being transported. Even after the impact of a continuos downward economy and the terrorist attack of September 11, 2001 in the United States, recovery signs were seen in the beginning of the year of 2002, so much in the accentuated traffic in Asia as in the American domestic market. As observed, Brazil’s major international partners for trade through air transportation are the United States and Argentina. Both countries have a strong influence over Brazil, since any variation in their economic activities directly influence the Brazilian economy. This also leads to another important fact, the strict relationship between air trade and the international and a particular domestic economy. As pointed herein, the demand of air transportation, resulting from a positive or a potentially positive economic activity creates several opportunities for growth in the air cargo segment. But we should not forget that for the financial health of the segment, it is necessary that cargo must exist on both inbound and outbound markets. Totally different from passengers, cargo transported by air very rarely is subjected to roundtrip journeys. In view of this, the segment needs to be flying always with a reasonable load-factor, either in volume (space occupation) or tonnage. We have also highlighted that Brazilian transportation infrastructure is still insufficient to cope with the country’s continental dimensions. The predominance of road transportation over all the other means of transportation severely limits the efficient flow of export/import products and goods through the transportation corridors, thus imposing several barriers for a greater economic growth. In view of this, we emphasize the government’s urgent need to heavily invest in an entirely modern and reconceived transportation system, mainly in terms of logistics distribution, in order to foster the better insertion of Brazil in the contemporary economy. As competition shifts from head-to-head battles between firms to competition between supply chains, a firm’s success will increasingly depend on its ability to coordinate and integrate the production activities at geographically dispersed and organizationally distinct locations with its logistics operations. Besides this, it is important to mention the existence of other impediments to the free trade and export, as the bureaucracy, unmodernized labor regulations, plus constant structural and economic limitations (such as high interest rates, and the currency devaluation), not to mention the non-cooperative environment between INFRAERO and the Customs Department, thus prompting the maintaining of the so-called “custo-Brasil”, and severely limiting the development of the country. Through this overview of the Brazilian air cargo segment, this paper have also presented some of the current challenges faced by the national operators, while also pointing to some opportunities for developing and/or enhancing the presence of Brazilian carriers in some important markets. In view of this, the perspectives are positive, with several “windows of 18

TORRES, R. R., MATERA, R. W., and ESPIRITO SANTO JR., R. A. (2003) “The Air cargo Market in Brazil: Challenges, Opportunities and Perspectives”. 7Th Annual Air Transport Research Society Conference, Toulouse, France.

opportunity” already opened to be explored by Brazilian carriers and cargo agents. In fact, although a great volume of planning and multiple regulatory and political reforms are urgently needed to modernize the Brazilian air cargo segment, it should be pointed that it an activity with has great potential to grow and to reach a respectful international position.

References & Bibliography 8th Annual International Aviation Symposium (1999) Airline Ownership: Are Citizenship Laws Passé? Phoenix, Arizona, Unites States. AIRBUS Industry (2000) Global Market Forecast 2000-2019. BOEING (2002) World Air Cargo Forecast 2002-2003. BREWER, A. M., BUTTON, K. J., and HENSHER, D. A. (2001) Handbook of Logistics and Supply-Chain Management. 1st Edition, Pergamon - Elsevier Science, Kidlington, Oxford, UK. PALHARES, G. L. (2001) Aeroportos, Turismo e Desenvolvimento Sócio-econômico [Airports, Tourism and Socioeconomic Development]. M.Sc. dissertation. Transportation Engineering Program, COPPE/UFRJ, Federal University of Rio de Janeiro, Brazil. PEDRINHA, A. J. (2000) Carga Aérea no Brasil: Características Gerais de Mercado e Fatores Influentes [Air Cargo in Brazil: General Characteristics of the Market and Influential Factors]. M.Sc. dissertation. Transportation Engineering Program, COPPE/UFRJ, Federal University of Rio de Janeiro, Brazil. GUIA DE CARGA AÉREA (2002) Mercado – Balanço Completo do Setor [Overview of the Brazilian Air Cargo Market]. Aviação em Revista Editora Ltda., ano 4, nº 4. BURMAN, P.K., (1999) Uma análise de crescimento do Segmento de Carga Aérea Doméstica no Brasil. M.Sc. dissertation. Industrial Engineering Program, COPPE/UFRJ, Federal University of Rio de Janeiro, Brazil. DUARTE, P. C. (1999) Modelo para o desenvolvimento de Plataforma Logística em um Terminal: Um estudo de caso na Estação Aduaneira do Interior – Itajaí/SC [Developing a Logistics Platform Model for a Terminal: A Case Study of an EADI in Itajaí/SC]. M.Sc. dissertation, Industrial Engineering Program, Federal University of Santa Catarina, Florianópolis, Brazil.

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