Judicial Recovery – Airlines Increasing in Brazil
Written by Nicole Cunha with Basch & Rameh in Brazil
www.linkedin.com/in/nicolerenecunha
This week, the market was informed of Azul’s request for Judicial Recovery in the United States through Chapter 11. The industry in Brazil has historically faced a question: how to keep an airline operating when more than 80% of its costs are tied to the dollar, while its revenue is practically in Reais in the same proportion? How can we balance this equation, especially with a highly unfavorable exchange rate and foreign airlines with revenues in dollars and euros competing in the same market?
Perhaps we need to reflect that, beyond the exchange rate difference, there are tax issues across various segments such as fuel, imports, labor, social security, services, and goods. The weight of competition for Brazilian airlines seemingly has a deadline where the balance begins to tip heavily against the return on investments, especially when refinancing starts.
Several legislative changes have attempted to assist with the difficulties faced by the sector. Not so long ago, up to 20 years ago, a public service concession airline could not file for bankruptcy. In 2005, Law 11.101 brought significant change in this regard, allowing for judicial recovery requests and the sale of the company’s productive unit separately within the airline sector.
Following the globalized world and the remedies found in other jurisdictions, Law 14.112 of 2020 was enacted, bringing, among other aspects, greater flexibility in negotiations with creditors. It is also worth remembering that until the enactment of MP 863/2018, later converted into law in 2019, airlines needed to structure legal frameworks that allowed for foreign control, as the law limited the participation of foreign shareholders in the share capital of an airline.
With the change in the Brazilian Aeronautics Code, the entry of foreign capital was facilitated or at least became more transparent. The Cape Town Convention (Decree 8.008 of 2013) provided greater legal security for financiers regarding the publicity of interests and encumbrances on aircraft registered internationally, as well as procedures for repossession and deregistration in local jurisdictions.
In a globalized market where creditors and sources of financing are spread around the world, we have seen different situations compared to the past with Varig and Oceanair, for example, where judicial recovery processes are being sought abroad, utilizing Chapter 11 in the United States. Creditors can have greater oversight and control over the restructuring.
New operational structures are emerging, ranging from simple code-share agreements to exchange contracts where foreign-flag companies operate in the Brazilian market. Increasingly, the sector is being controlled by foreign companies. The observation made here is not necessarily negative but rather a reflection on how difficult it has been to keep the sector viable in Brazil.
What remaining solutions could there be, if any, to keep “Brazilian” companies operating here? We had previous experiences in Brazil using such remedies and were not able to work them out. Unlike what was seen in the early 2000s, we now observe a movement towards assistance in foreign legislation, specifically Chapter 11 in the United States, and I believe this is an increasingly growing trend. Ideally, there would be a market where Brazilian airlines could withstand currency exchange adversities without having to go through recurring economic crisis situations.
In this way mergers/acquisitions, judicial recoveries, among other corporate legal strategies, have been alternatives for the sector in the Brazilian market. Government subsidies are also an essential aid for maintaining the sector and preserving competition. However, what should be the limit of this support, and for how long? Is it possible to develop a fair market for the Brazilian aviation industry soon while still keeping foreign investors interested in supporting the sector without making it too costly for local airlines?”