Thursday, April 21, 2011

Latin American Liberalization

Despite its longstanding resistance to air transport liberalization, Brazil is on the cusp of relaxing its airline investment rules as part of the country's plans to improve its transport infrastructure before the 2014 World Cup and the 2016 Olympics.  See Samantha Pearson & Joe Leahy, Airline Ownership Reform Aims to Boost Investment, Fin. Times, Apr. 20, 2011 (available here).  The move will help foster the pending merger between Brazil's largest international airline, TAM, and Chile's LAN--a deal currently awaiting the green light from Chilean courts.

Brazil's decision to liberalize its investment rules, coupled with its recent agreement to an incremental "Open Skies" pact with the United States, is another sign that the Latin American region is moving toward a free trade environment for air services.  Chile, which has no airline investment limits, has aggressively pursued liberal air services agreements which have even included cabotage rights.  Meanwhile, several Latin American carriers, including LAN and the recently merged TACA/Avianca, have acquired subsidiaries across the region in an effort to build-up authentically multinational aviation enterprises. 

The question which remains to be answered is how far will this crossborder investment go and what, if any, response will come from States situated outside the region.  Under the nationality clauses contained in most States' air services agreements, only airlines which are owned and controlled by citizens of their home States are eligible to perform international services.  Once the LAN/TAM merger is complete, the U.S. could, in theory, invoke the nationality clause under its agreement with Brazil to limit or revoke TAM's market access privileges.  While the United States has apparently engaged in a policy of granting tacit waivers to its Open Skies partners, there is nothing to legally prevent the U.S. from switching gears and demanding citizenship purity from Brazilian airlines.

Currently, the U.S. has little-to-no incentive to play hardball with its Latin American partners.  Though growing, none of the major Latin American airlines are major competitive threats to U.S. carriers.  Moreover, U.S. airlines are currently courting several Latin American airlines to join one of the three major airline alliances--oneworld, SkyTeam, and Star.  If, however, one or more of the expanding Latin American airlines opts to follow the Emirates model of rejecting the alliance system and attempting to compete independently, it may not be long before one or more of the American carriers is lobbying the U.S. to take a stronger stance on international airline ownership rules.  The same could happen if one or two of the alliances loses out in the battle to lure large Latin American carriers into their respective folds.

Incidentally, our friends in the Brazilian aviation academy are not quite so sanguine about the impending change of rule as reported by the FT. One leading professor told us that the law is languishing “in a drawer or on a shelf” somewhere in the bowels of the Parliament building in Brasilia and that nobody can find it. Whether he meant that statement literally or metaphorically, his point is that legislative change in Brazil, especially for the airline industry, comes exceedingly slowly.

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