Avianca Brasil Sits Out Gol-Tam Fare Fight With Bet on Free Food

Avianca CEO Jose Efromovich
Jose Efromovich, chief executive officer of Avianca Brasil, speaks during an interview in New York on May 15, 2015. Photographer: Michael Nagle/Bloomberg

Avianca Brasil is staying out of the fare fight between Brazil’s two biggest airlines, betting that perks such as free hot meals can help it fill planes as a slumping economy saps travel demand.

“If somebody flies with us and he has to pay a little bit more, he will pay because the product is differentiated,” Chief Executive Officer Jose Efromovich said in an interview at Bloomberg’s New York headquarters. “We don’t need to get in the middle of this war.”

Avianca Brasil’s commitment to offering passengers free extra leg room and individual televisions while keeping prices stable contrasts with the strategy being taken by rivals. Gol Linhas Aereas Inteligentes SA charges more for certain seats as well as food, and both Gol and Latam Airlines Group SA’s Brazilian unit Tam are keeping fares low to help make up for a decline in corporate demand.

Avianca Brasil isn’t seeing that same drop in business travel, Efromovich said. The Sao Paulo-based company is filling the highest percentage of seats in the Brazilian industry. It had a load factor of 84 percent in March, compared with 79 percent for Tam, 74 percent for Gol and 78 percent for Azul SA, created by JetBlue Airways Corp. founder David Neeleman, according to the Brazilian airline association known as Abear.

The trade-off: abandoning any hope of a profit this year, after Avianca Brasil also failed to meet a 2014 goal of positive net income, Efromovich said. He said he would be happy with a break-even 2015 for the airline, owned by Synergy Group Corp., which belongs to Efromovich and his brother German Efromovich.

‘Tough Year’

“It’s going to be a tough year,” Efromovich said.

A drop in business travel is the biggest reason Brazil’s airlines are feeling pain, along with the financial strain from debt and fuel both priced in U.S. dollars. The devaluation of the Brazilian currency helped drag Gol to a first-quarter loss of 673 million reais ($223 million). Latam lost $40 million in the period, according to regulatory filings.

Avianca Brasil is still poised to expand seating capacity this year, growing 12 percent to 15 percent as it swaps out smaller jets for larger models, Efromovich said. Asked whether he expected to add capacity in 2016, he said that if pressed to make a decision now, he wouldn’t do so.

Rival Azul, based in Barueri, Brazil, is also holding back on adding capacity as it awaits the start of a regional aviation subsidy program that will pay for flights to and from small, underserved cities. Avianca Brasil, Tam and Gol have been looking at adding regional jets or turboprops as a result of the subsidy.

A merger with Synergy Group’s Avianca Holdings SA is still likely at some point, said Efromovich. Consolidation across Latin America will also occur, with five or six major carriers dominating over the next decade, Efromovich said. He wouldn’t discuss which airlines he expects to survive.

“It will happen,” Efromovich said. “Maybe economics will delay a little bit the process or speed up the process, but consolidation, I believe, it’s something that in this industry will happen.”

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