Brazil's airline subsidies to benefit Embraer

The Brazilian government is to subsidise airlines flying regional jets on local routes in a move that should improve Embraer’s aircraft sales.

The manufacturer’s shares climbed 3.2 per cent to BRL24.02 ($9.36) after confirmation that Brazil’s congressional commission had approved the bill that allows the subsidisation.

It restores a core part of president Dilma Rousseff’s regional aviation plan, in which airlines flying aircraft with up to 60 seats on less profitable routes to smaller cities will receive government support. Brazil will spend BRL1.3bn ($500m) a year to subsidise those flights.

Senator Fernando de Souza Flexa Ribeiro, the opposition lawmaker overseeing the bill, told Reuters that he wished to remove a limit of 60 subsidised seats, changing it to a subsidy on 50 per cent of passengers on flights to smaller cities.

But Antonoaldo Neves, CEO of Brazilian airline Azul Linhas Aereas, had argued that removing the cap according to Ribeiro’s plan would create unfair competition in favour of larger aircraft built by Boeing and Airbus. 

Indeed, he threatened to cancel Azul’s orders with Embraer should the cap be removed. (At this year’s Farnborough Airshow the carrier signed a letter of intent for 30 firm orders for the E195-E2 with options for a further 20 aircraft, adding to its outstanding order of 11 E-Jets.)

Supporting investment in larger aircraft would lead to more passengers flying to hubs and large airports, but at the cost of smaller ones.

Ahead of the subsidies decision Neves told Reuters that if the plan was approved without a seat limit he would “pull out of 20 cities next year”. “I'll take those resources and put them into cities where I can fly bigger planes,” he said.

As Azul is currently the only airline to fly Embraer jets in Brazil, it’s very good news for the OEM that the Brazilian authorities chose the alternative route for its subsidies.

It will also provide extra incentives for Gol, Avianca Brasil and Tam of Latam Airlines which have each confirmed they are considering buying Embraer aircraft but have yet to place an order.

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