VZCZCXRO3312
PP RUEHRG
DE RUEHSO #0900/01 3121624
ZNR UUUUU ZZH
P 081624Z NOV 07
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC PRIORITY 7661
INFO RUEHBR/AMEMBASSY BRASILIA 8774
RUEHAC/AMEMBASSY ASUNCION 3166
RUEHBU/AMEMBASSY BUENOS AIRES 2930
RUEHCV/AMEMBASSY CARACAS 0595
RUEHME/AMEMBASSY MEXICO 0824
RUEHMN/AMEMBASSY MONTEVIDEO 2491
RUEHLP/AMEMBASSY LA PAZ 3550
RUEHSG/AMEMBASSY SANTIAGO 2192
RUEHRI/AMCONSUL RIO DE JANEIRO 8428
RUEHRG/AMCONSUL RECIFE 3870
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 2943
RHMFISS/CDR USSOUTHCOM MIAMI FL
RUEAIIA/CIA WASHDC
RHMCSUU/FAA NATIONAL HQ WASHDC
RUEAYVF/FAA MIAMI ARTCC MIAMI FL
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RUEHC/DEPT OF LABOR WASHDC

UNCLAS SECTION 01 OF 02 SAO PAULO 000900 
 
SIPDIS 
 
SENSITIVE BUT UNCLASSIFIED 
 
SIPDIS 
 
STATE FOR WHA/EPSC AND EEB/TRA 
STATE PASS USTR FOR KATE DUCKWORTH 
FAA FOR CCAPESTANY, GBURDICK 
DEPT OF TRANSPORTATION FOR BHEDBERG 
BUENOS AIRES FOR TSA ATTACHE 
MEXICO CITY FOR TSA ATTACHE MGALVAN 
USDOC FOR 4332/ITA/MAC/WH/OLAC 
USDOC ALSO FOR 3134/USFCS/OIO 
NSC FOR TOMASULO 
TREASURY FOR JHOEK 
SOUTHCOM FOR POLAD 
USAID FOR LAC/AA 
 
E.O. 12958: N/A 
TAGS: EAIR PGOV ECON EINV BR
SUBJECT: BRAZIL CIVAIR: BUDGET AIRLINE BRA SHUTS DOWN OPERATIONS 
 
REF: BRASILIA 290 
 
¶1.  (SBU) SUMMARY.  After operating for eight years, the Brazilian 
low-fare airline BRA (Brasil Rodo Aereo Transportes) suspended 
operations on November 7 and gave thirty days notice to its 1100 
employees of a possible dismissal.  In a last-ditch effort to avoid 
shutting down entirely, BRA is seeking USD 30 million from the 
company's minority shareholder group Brazil Air Partners.  Few 
observers expect the airline to survive.  BRA's difficulties further 
heighten the domination of Brazil airline sector by two carriers, 
TAM and Gol.  END SUMMARY. 
 
¶2.  (U) BRA had been pursuing an ambitious plan to grab market share 
in the local regional air travel from market leaders TAM and GOL. 
BRA's owners, brothers Humberto and Walter Folegatti, had started 
the charter and freight company in 1999 to compete with bus 
transport, but by late 2005 BRA was operating like a low-cost 
passenger carrier.  From then, BRA's financial problems grew as the 
company offered flights priced significantly below competing 
airlines, and often operated below capacity. 
 
¶3.  (U) BRA's suspension of operations follows a difficult month for 
the company.  The National Civil Aviation Agency (ANAC) launched an 
audit of BRA's operations and maintenance on October 10 after 
receiving an excessive number of complaints of delays and 
cancellations.  On October 18, ANAC suspended BRA's international 
sales, and the following day the company reduced its fleet by half 
to five aircraft.  On October 22, the company announced the 
departure of its president Humberto Folegatti, after Brazil Air 
Partners voted to remove him.  BRA then suspended its international 
operations on October 30.  (Note:  BRA was flying three 
international routes to Milan, Madrid and Lisbon.  End Note.) 
 
¶4.  (U) Earlier this year, BRA had ordered 20 regional jets from 
Brazilian regional (mid-size) aircraft manufacturer, Embraer, and in 
August took options on 20 more.  Overburdened with debt of USD 100 
million, BRA was unable to pay its daily operational costs and was 
behind on payments to its suppliers, including a reported USD 1.4 
billion to Embraer.  According to the local press, General 
Electric's aircraft leasing division began legal proceedings in 
November against BRA for back-payments on two of its leased Boeing 
aircraft, and has begun legal proceedings in Brazil to recover the 
two planes. 
 
¶5.  (SBU) In December 2006, BRA's financial problems  had forced the 
Folegatti brothers to sell 20 percent of BRA for 180 million 
Brazilian reais (about USD 103 million) to Brazil Air Partners, a 
consortium of seven investors including Bank of America, Goldman 
Sachs, Development Capital, and Millennium Global Investments, and 
the Brazilian investment company Gavea Investimentos.  (Note: 
Brazilian law limits foreign ownership to 20 percent in the airline 
industry.  End Note.)  According to industry observers, the 
investors had hoped to recapitalize the company for a quick sale, 
and had invested without closely analyzing the company's financial 
situation. 
 
¶6.  (SBU) BRA's departure from the sector solidifies the duopoly of 
the two leading Brazilian carriers, Gol and TAM, who together hold 
 
SAO PAULO 00000900  002.3 OF 002 
 
 
90 percent of the domestic industry.  According to the latest 
information from ANAC, in September TAM held 48 percent of the 
domestic market and 70 percent of the international market.  Gol, 
together with its acquisition of Varig (reftel), controls about 42 
percent of the domestic market and 26 percent of the international 
market.  BRA was the third largest domestic carrier with almost five 
percent of the domestic market and about four percent of the 
international market.  OceanAir, another small domestic airline that 
had recently concluded a code-sharing agreement with BRA, controlled 
about three percent of the domestic market. 
 
¶7.  (U) COMMENT:  BRA's decision to suspend flights is sure to 
translate into more headaches for travelers in Brazil, who have been 
subjected to repeated delays and cancellations for more than a year. 
 Although BRA said the suspension is temporary, the company is 
unlikely to return to operations.  BRA's departure will strengthen 
TAM and Gol's commanding market position.  END COMMENT. 
 
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