Azul, Trip To Merge As Rival Brazil Airlines Consolidate
05/28/2012| 06:12pm US/Eastern
--Azul Trip formed by tie-up of 3rd and 5th largest Brazil airlines
--Combined companies to have revenue of BRL4.2 billion in 2012
--Azul Trip see regional aviation continuing to drive growth as bigger rivals shrink
By Paulo Winterstein
David Neeleman, founder of JetBlue Airways Corp. (>> JetBlue Airways Corporation), is expanding in Brazil, with the first major deal by his local start-up venture Azul Linhas Aereas, as he seeks a larger share of the world's fourth-largest aviation market.
Azul, Brazil's third-largest airline in the domestic market, unveiled plans Monday to merge with Trip Linhas Aereas SA, the fifth-largest airline, creating a company with nearly 15% market share and estimated revenues this year of 4.2 billion Brazilian reais ($2.1 billion). That puts it in a better position to go up against the industry's two dominant players, TAM SA (TAM, TAMM4.BR) and GOL Linhas Aereas Inteligentes SA (GOLL4.BR, GOL).
"There are some things we couldn't do without this association," Neeleman said, pointing to the extensive reach of Trip's routes. "It's better for Brazil than having two separate companies."
It is the latest merger in the Brazilian market, which has been through a number of evolutions since the collapse of the Brazilian flagship airline, Varig, some seven years ago. GOL, which took over the Varig operations in 2007, recently purchased a smaller rival, Webjet Linhas Aereas Economicas, putting it on a par in the domestic market with TAM. Both airlines have around 40% market share.
TAM, meanwhile, is in the final stages of merging with Chile's LAN SA (LFL, LAN.SN), which will create Latin America's largest airline.
Yet while its two biggest rivals have seen profitability decline, prompting cuts in service, Azul Trip executives see no reason to stop growing. According to civil-aviation agency Anac, while TAM flew 6% less in April than the year-earlier month, and Gol grew just 1%, Azul expanded operations by 41% and Trip flew 69% more passengers.
That is partly because both Azul and Trip focus on regional flights, using a fleet that is mostly made up of aircraft with fewer than 90 seats produced by Brazil's Embraer SA (ERJ, EMBR4.BR) and France's ATR. Smaller planes can land at airports the larger aircraft operated by TAM and GOL can't serve, and the new company is planning to keep adding to the fleet.
"We have more planes arriving in 2013, 2014 and 2015," said Neeleman, who, having been born in Brazil, got around restrictions on foreign ownership of Brazilian airlines. "We think there will be lots of passengers to put on those planes."
For analysts, the merger could help rein in the overeager expansion of routes in Brazil. In the midst of competition between carriers, supply expanded too quickly last year, leaving many seats empty and pulling down returns.
"The consolidation process can bring more discipline," UBS analyst Victor Mizusaki wrote in a note. Azul may also be able to help Trip, which saw profitability decline over the past year, he said.
Azul's shareholders will own two-thirds of the new company, while Trip's owners will own the other one-third. The airlines plan to merge operations once they secure regulatory approvals, but are still studying whether to extinguish one of the brands.
Neeleman also discarded the possibility of an initial public offering in the near term. Though the eventual goal is to list the airline's shares, current investors are "patient" and "have deep pockets," so there is no urgent need for cash, Neeleman said.
The deal with Azul also ends Trip's talks with other potential partners. TAM had agreed last year to buy a 31% stake in Trip, but that agreement expired in January; Trip also recently bought back a 26% stake it had sold to SkyWest Inc. (SKYW), Caprioli said.
-By Paulo Winterstein, Dow Jones Newswires; 55-11-3544-7073;