Airline deal announcement expected to create a giant with 60% domestic market share in Brazil; shares surged last week.
Negotiations between Abra, the parent company of Gol, and Azul for a merger between the two Brazilian airlines are set to shake up the aviation sector in Brazil in 2025 and will likely undergo intense scrutiny by the antitrust watchdog CADE. This will not be the first time CADE evaluates the segment. In 2019, the agency made strong statements regarding consolidations in the country involving the bankrupt Avianca Brasil.
On Thursday (16th), shares of Gol and Azul surged more than 10% during trading following the announcement that Abra and Azul signed a memorandum of understanding (MOU) to explore a potential merger of the Brazilian airlines, as previously reported by Valor. By the end of the day, Gol closed up 4.29% at R$1.70, while Azul rose 3.63% to R$4.57.
Members of CADE believe it is “almost impossible” to approve the merger of the airlines without restrictions. They consider this concentration act to be one of the largest the antitrust body will analyze in recent years, but initially, they do not see it as a case for rejection.
Within the agency, the airline merger is compared, in terms of magnitude and impact, to the sale of Oi to Claro, Telefônica, and Tim, approved in 2022 in a tight process marked by various controversies and tensions among Tribunal members at the time.
When approached, CADE said it had not been notified by the companies.
The notion of a bankrupt company, common in consolidations, would not apply to the Gol and Azul deal, as both are undergoing restructuring.
The case is expected to be decided by the agency only in the second half of the year, closer to the end of the year—by then, CADE will be under new leadership. This is because the term of Alexandre Cordeiro, the current leader, ends in July.
Members of the agency recall that in 2019, Cade was harsh when commenting on the structure of the passenger air transport market while analyzing the sale of seven Isolated Productive Units (UPIs) of Avianca Brasil.
At that time, the Economic Studies Department (DEE) of the agency concluded that the Brazilian air transport sector has enough characteristics to raise competitive concerns.
“The sector has particularities that limit competition, such as legal barriers to entry, infrastructure barriers at airports, and high levels of investment for operation, which together make the market highly concentrated,”
the exoerts noted at the time.
Back then, the DEE concluded that instead of selling Avianca units to competitors Azul, Gol, and Latam, the ideal for the market, from a competition standpoint, would be for a new entrant to take over the units' operations.
Gol's CEO, Celso Ferrer, said in a video released to company employees that the signing of the memorandum between Abra and Azul “is the beginning of a long process that may or may not end in consolidation.”
The global aviation market consolidation window is a common topic among major industry executives. The view—on one side—is that aviation is a segment for major competitors, who wield greater bargaining power when negotiating aircraft.
Azul itself, in the past, even attempted to purchase Latam Brasil during the competitor's restructuring. In mid-2021, Gol and Azul explored creating a joint venture as a way to join forces and navigate the pandemic. The deal did not progress due to the perception that a joint venture would be as complex to approve as a merger and, ultimately, would not bring the same benefits, according to sources. Later, in 2022, Gol and Avianca came together to form the Abra holding.
People close to the negotiations involving Gol and Azul's union indicated that the strategy to secure a positive verdict is to bet on a “growth remedy” from the agency - such as prohibiting route cancellations for some time.
Cleveland Prates, former CADE advisor and managing partner at the economic consultancy Microanalysis, said that one common consolidation thesis is that of a bankrupt company. But he noted that it only applies when the regulator sees no alternative. “Gol and Azul are resolving their issues [through restructuring],” he said.
Marcos Veríssimo, former CADE advisor and professor at the University of São Paulo (USP), emphasized that much is being said about the two companies' participation - together, they represent 60% of the domestic market share. However, Veríssimo pointed out that the sector is analyzed through route evaluations. To the market, Gol and Azul indicated a 10% overlap, which would be a low figure.
“Since this analysis is done route by route, it will determine the interventions CADE may or may not make. For example, if they find problems on the Rio-São Paulo route, there may be behavioral measures on that route,”
said Mr. Veríssimo, observing that the agency is likely to pay special attention to slots (landing and takeoff times) at airports, like Congonhas.
Competition is crucial for lowering fares. It was the fierce competition between Latam and Gol that drove airfares to their lowest levels in history in mid-2015 in Brazil.
In a statement to Valor, the Abra group said the purpose of the business combination is to improve connectivity throughout the country.
“Each company flies with different size aircraft and serves different destinations,”
it said. Azul and Gol did not comment.
However, within CADE discussions, one “player” is expected to stand out: Latam. Behind the scenes, it is widely anticipated that they will join as a third-party interested in the process. Latam was approached on the subject but did not comment.
Latam's Global CEO, Roberto Alvo, indicated last November to Valor, during an event in New York, that any consolidation of their competitors should undergo strict scrutiny by CADE.
Despite being discreet on the matter, Latam is known for its competitiveness. Its actions contributed to Avianca, also part of the Abra holding, abandoning plans in 2023 to merge with the Colombian company Viva, which has since exited the market.
In a report, the Bradesco BBI team said the merger is expected to generate significant revenue and cost synergies and will likely be approved by regulatory authorities with some restrictions. Goldman Sachs said that the deal has strategic merits by creating a company with greater scale.
XP expressed expectations for a lengthy evaluation process, noting that an assessment of potential synergies and returns to shareholders will only be possible once uncertainties are resolved, such as the share exchange ratio and which company will be integrated into the other.
Source: Valor International