Free Food Brings Avianca Brasil Fliers Back to Future

Free airline food, a casualty of years of cost cuts, is making a comeback at Avianca Brasil as the closely held carrier woos fliers by not charging for meals, entertainment and roomier seating.

Focusing on service in Avianca Brasil’s coach-only cabins draws business travelers and helps the airline sell more seats on each jet than its domestic rivals, Chief Executive Officer Jose Efromovich said. Demand is so strong that this year’s 82 percent load level can be sustained even as new, bigger planes boost 2014 seating capacity by 30 percent, he said.

“The only way we could do it is offering something different,” Efromovich, 58, said in a Nov. 20 interview at Bloomberg’s Sao Paulo office. “We brought back food to the airplanes in Brazil. Brazilian travelers were not used to that anymore, so we are providing a different product.”

Complimentary food and other comforts buck the industry’s practice of selling perks in coach cabins to generate revenue. Avianca Brasil’s expansion also runs counter to the cutbacks at Gol Linhas Aereas Inteligentes SA (GOLL4) and Latam Airlines Group SA (LAN)’s Tam, the country’s largest airlines, after travel demand slumped following an increase in fleets over the last decade.

Ebitda Outlook

Efromovich said 2013 earnings before interest, taxes, depreciation and amortization will be positive for the first time since the turnaround begun in 2008 under the ownership of Synergy Group Corp., the firm led by his brother, Brazilian investor German Efromovich. He didn’t give details beyond saying that margins on that basis would be less than 5 percent.

Avianca Brasil has grown to No. 4 in the domestic market by traffic, with 7.1 percent this year through September, according to Anac, Brazil’s aviation regulator. That trails Tam’s 40 percent, Gol’s 35 percent and the 17 percent for Azul Linhas Aereas Brasileiras SA and its Trip unit.

Free meals for economy fliers began vanishing along with other perks in the past two decades as carriers sought savings and extra revenue.

Fees for checked bags, for example, generated $3.49 billion for U.S. airlines last year, a sevenfold surge from 2007, according to Transportation Department data. On Dublin-based Ryanair Holdings Plc (RYA), passengers who fail to check in online and don’t print a boarding pass are charged 70 euros ($94).

‘Gaping Hole’

“As the largest and most prominent airlines take away more and more passenger comforts, a gaping hole has been created that smaller, more innovative carriers are stepping up to fill,” Alan Bender, a professor of aeronautics at Embry-Riddle Aeronautical University in Daytona Beach, Florida, said by e-mail. “Some of the best airlines in the world are doing exactly what Avianca Brasil is doing.”

Unlike its U.S. peers, JetBlue Airways Corp. (JBLU) still offers free snacks. Canada’s Porter Airlines does, too, along with Wi-Fi at no extra cost.

The 12 Airbus SAS A320s being delivered to Avianca Brasil next year will replace an equal number of Fokker 100 jets, keeping the airline’s fleet at 34 planes, Efromovich said. Capacity will rise because the A320s seat 162 passengers, compared with 100 on the two-decades-old Fokkers.

Also on order for later this decade are 10 wide-body A350-800s, opening up the possibility of flights to the U.S., Europe and Africa, Efromovich said.

Embraer Discussions

The airline is negotiating with Embraer SA (EMBR3), the largest regional-jet maker, to buy about 30 planes from its upgraded E-jet family for delivery as soon as 2018, Efromovich said. Embraer, based in Sao Jose dos Campos, Brazil, said by e-mail it doesn’t discuss business prospects.

“It’s not reckless growth,” Avianca Brasil Chief Financial Officer Frederico Pedreira said. The airline isn’t flooding the market with planes “like some crazy newcomer.”

Yields, or the average fare per kilometer, are greater than those of the carrier’s biggest competitors, said Pedreira, who declined to provide details.

Gol and Tam are paring seating capacity amid a 0.1 percent drop in air travel this year, Anac data show. They’re also being squeezed by a drop in the real, because jet fuel is priced in dollars. While jet fuel is down 3.7 percent this year, the real has weakened by 11 percent against the U.S. currency.

Gol, Latam

“Our goal is to go back to profitability,” Gol Chief Financial Officer Edmar Lopes Neto said yesterday in an interview at Bloomberg’s Sao Paulo office. “We have lost market share; we don’t care about it.”

Tam’s parent, Santiago-based Latam, has been pulling back as well. By offering fewer seats, airlines can trim expenses and gain pricing power. “Our strategy enabled Tam to improve load factors and to increase revenue,” Latam CFO Andres Osorio Hermansen told analysts on a conference call last week.

Avianca Brasil eventually will confront financial pressures in trying to keep its no-charge offerings, said Robert W. Mann, a former American Airlines executive who now runs aviation consultant R.W. Mann & Co. in Port Washington, New York.

“Ultimately, the economics of a situation dictate whether or not that’s sustainable,” Mann said in a telephone interview. “They have the same fuel costs as everyone, they have the same aircraft costs as everyone, they have the same airport operating costs as everyone.”

The airline also will have to add flights to provide the frequency prized by business fliers, Mann said. CEO Efromovich said winning those travelers is central to his strategy.

Seat Pitch

Seat pitch, the distance from a point on one row to the same spot in front or behind, is 32 to 33 inches (81 to 84 centimeters) on all jets, Efromovich said. Gol’s comparable seats are at 30 to 31 inches, and Tam’s are 31 to 33 inches, according to travel website SeatGuru.com.

Theo Abreu, a partner at Rio de Janeiro law firm Campos Mello Advogados, said he tries to fly Avianca Brasil to Sao Paulo for business for its fares and “super comfortable” jets.

“The only problem is on the way back,” Abreu said by e-mail. “Since I often have to change my flight because of uncertain meeting times and Sao Paulo traffic, I tend to fly other airlines, which have more options.”

With the fullest flights in Brazil for much of the past three years, Avianca Brasil’s new capacity will be welcome, CFO Pedreira said. Efromovich said the packed planes force some travelers onto other carriers.

“We have more customers that would like to fly with us,” Efromovich said. The flights “are always full.”

To contact the reporter on this story: Christiana Sciaudone in Sao Paulo at csciaudone@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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