Friday, January 8, 2016
Brazil’s Recession and its Impact on the Aviation Industry
[Avionics Today 01-08-2016] Latin America’s business aviation industry — a flourish of promise and profitability just a year ago — is seeing a significant slowdown as political scandals throw Brazil, a leader in the region, into a deepening economic recession. Consumer and investor confidence has been slammed by a corruption and bribery scandal involving the country’s government-controlled oil company, Petrobas — a scandal that reaches the very highest levels of federal politics, including Brazil’s President Dilma Rousseff. As the scandal takes hold, investor confidence is plummeting and progress with aviation infrastructure comes to a halt, presenting new barriers to the business aviation industry in the region.
|Bahrain International Airport. Photo: Bahrain International Airport|
“Macroeconomic conditions have changed significantly over a fairly short period of time, hitting Brazil hard. Key challenges are sharply reduced commodity prices — principally oil, iron ore, and coffee — coinciding with a slowdown in demand from some of Brazil’s most important trading partners like China,” aviation consultant Rolland Vincent of Rolland Vincent Associates told Avionics Magazine.
As a result, the country’s Gross Domestic Product (GDP) fell 3 percent in 2015 according to the World Economic Outlook Database, a huge blow when compared to Brazil’s climbing GDP in previous years. Vincent notes that the impact on business aviation has been significant with the country’s economic and political climate vastly different than it was in 2014, when Brazilian business aviation airframer Embraer spoke to Avionics Magazine and predicted a coming boom in the industry.
“The scandal has led to sharply lower capital investment. It has caused many Brazilians to lose confidence in their elected and corporate leaders, and even in the future of the country, which was, until recently, Latin America’s economic shining star and a powerful member of the [Brazil, Russia, India and China] BRIC club,” said Vincent, noting that unemployment and inflation have increased to 8 percent in Brazil.
Most notably for businesses, the U.S. dollar has strengthened by 46 percent over Brazilian currency, the real, in just a 12-month span. Embraer has seen the latest fallout from this in its most recent third quarter 2015 report, lowering revenue in its 2016 outlook.
“In order to reflect the recent devaluation of the Brazilian real versus the U.S. dollar, the company now expects 2015 consolidated revenues to range from $5.8 to $6.3 billion ($6.1 to $6.6 billion previously),” Embraer noted in its third quarter report.
Currency devaluation aside, a plummeting demand from China, as it faces its own economic issues, is taking a toll on Embraer alongside other business jet manufacturers, “cutting off what had become an important export market, at the same time as commodity prices have fallen,” Vincent said.
Despite these economic and political drawbacks, the Latin American business jet market doesn’t seem to be taking too much of a hit as of yet. According to JetNet, which provides business aircraft market research, there were 830 business jets based in Brazil at the end of the third quarter of 2015, placing the country in the No. 3 position worldwide behind the United States and Mexico. There were 838 business jets based in Brazil one year ago, based on JetNet data, so “the fleet appears to be down by about 1 percent as some pre-owned aircraft leave the market in search of new owners,” said Vincent.
It’s difficult to say, as of yet, how much of a slowdown Embraer will see as a manufacturer in the region. The company turned out steady profits in 2015 despite the roll back in its 2016 forecast to account for currency devaluation.
“Embraer is well positioned in the regional aircraft segment, and investments in the E2 family of regional jets should maintain its leadership. They are well positioned for additional market share capture in their executive jets division, especially as more and more flight departments become aware of the value and technology offered in the Legacy 450/500,” said Vincent, noting that the defense division is much more exposed to a single customer — the Brazilian Government — and programs like the KC-390 have already been curtailed in response to changing government priorities and limited government funding.
Aviation infrastructure in the region is likely to take a hit, also. Brazil has been investing heavily in a growing network of airport and Air Traffic Control (ATC) facilities, but government indebtedness and the corruption scandal has distracted attention away from these projects, according to Vincent. In turn, the government has begun seeking more involvement from the private sector, but many of these investments will benefit commercial aviation in the form of airport improvements and terminal building expansions or renovations, impacting the business aviation community much less.
“The notable exception is at Sorocaba Airport outside of Sao Paulo, where improvements include new [Original Equipment Manufacturer] OEM business jet service center facilities for Embraer, Dassault and Gulfstream,” Vincent notes.
Going forward, the Latin American business jet market is taking a “longer-range view” of market opportunity, according to Vincent. While the United States still harbors 60 percent of the business aviation fleet, the industry is destined to become more global, in both the fleet’s international distribution and in flight operations. However, in the near term, growth opportunities are still focused in the U.S.
To cater to the United States market and respond to the shift, Embraer is focusing investments in new designs such as the Phenom 100/300 and Legacy 450/500 that have been well received in the country.
Not all is lost for Latin America, however. With the United States at the epicenter of the market in the next few years, Mexico will benefit in terms of aircraft sales and flight operations, according to Vincent. “Proximity to the U.S., including relatively unimpeded market access back-and-forth across the border, is a benefit to investment flows within the [North American Free Trade Agreement] NAFTA region,” he added.