Negative Outlook for Brazilian Airlines

Fitch Ratings earlier today revised the Outlook to Negative on the ratings of the two main Brazilian airlines, TAM and GOL. Fitch expects the near-term outlook for the global airlines sector to remain difficult, and the Brazilian airline sector is no exception.

The negative outlook reflects Fitch’s concerns regarding the challenges the industry is expected to face in the near-term, high jet fuel price being the predominant factor, which is likely to delay improvements in their operating performance and ability to restore profitability that would enable them to achieve more adequate credit ratios for the current rating category.

Uncertainty regarding the Brazilian airline industry recovery in the near-term has grown. Only a more rational environment in terms of competition, where the principal players focus more on profitability rather than market share, coupled with increased demand, will enable the companies to limit the continued drop in their operating margins.

The Brazilian airline market is controlled by a duopoly comprised of TAM and GOL, which together represent a market share around 93 percent. In the past five years, the sector has shown aggressive growth, with passenger traffic rising from 28 million in 2004 to 44 million in 2007.