Column: Air Transport Regulation in Brasil

As it has been widespread in market economies, air transportation in Brazil has a history of strict regulation. Curiously, the activity does not present any characteristic of natural monopoly: there is no relevant scale and scope economies to be explored in face of market dimensions; there are no relevant barriers to entry; the investment required can be financially leveraged and recouped without losses and so on. Thus, regulatory mechanisms for decades reflected a different logic: the aim was not neutralize the damages of monopoly power but to avoid competition to lead the market.

The air transportation market, let to itself, presents an intense competitive dynamic, generating instability in the short run, although one can expect an horizon of stability, in terms of sustainable configuration of the market, in the long run. Instability in public service provision is not a desired result for governments. That is the main reason behind pervasive intervention in this market.

During the nineties, Brazil economy experienced a new time of deregulation and it was no different for air transportation. By the beginning of this decade, new companies have entered the market, prices were free and demand has increase in a significant way.

Nonetheless, in the macroeconomic scenario, there were turbulence, with two cambial crisis (1999 and 2002) and years of recession. Not surprisingly, this environment brought huge problems to incumbent firms, namely Vasp, Transbrasil and Varig that, with Tam divided the domestic market. Vasp and Transbrasil left the market and Varig, the dominant firm so far, drowned itself in high costs and debts till recently, when a tiny reflect of its ancient exuberance – 10% of market share against the 50% of old times – was bought a month ago.

By 2003, the official diagnosis was that competition was responsible for the incumbent companies crisis, so, the liberalization program was revised. The step behind meant basically supply control, avoiding new entries and expansion of recent entrants.

In the meanwhile, the regulation environment was changed wit the creation this year of a new Regulatory Agency, ANAC, following the model of independent and technical decisions. The expectations over its performance are great, as the Brazilian air transportation market became highly concentrated: two companies, Tam and Gol – this entered the market in 2000 – dominate more than 90% of the market. Hopes are that ANAC will promote new entry and expansion of smaller companies, in benefit of tourism and business travelers, and the multiplication effect of this expanded demand.

Professor Lucia Helena Salgado, researcher in regulation and competition. (Instituto de Pesquisa Econômica Aplicada – IPEA – and Universidade do Estado do Rio de Janeiro – UERJ).