State-market relations in the Brazilian air transport industry

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State-market relations in the Brazilian air transport industry1

Cristiano Fonseca Monteiro Rodrigo Vilela Rodrigues

Gabriela Teixeira Lopes de Paula School of Humanities and Social Sciences

Fluminense Federal University, Brazil 1. Introduction In almost two decades of pro-market reforms, the air transport industry has become an important issue within the Brazilian public agenda. The extinction of a whole set of regulations, giving airlines greater freedom to set prices and explore domestic routes, resulted in major changes in the structure and in the actors of this economic activity. Traditional airlines – Transbrail, Vasp and Varig – bankrupted and quit the market, and with them, the strategy of focusing on higher-income, business travelers was also abandoned. They were substituted by Tam airlines, which started exploring domestic and international routes during the 1990s, still with a focus on higher quality services aimed at business travelers. An alternative model would not appear until the early 2000s, when Gol Airlines, the country’s first successful “low cost, low fare” carrier, entered the market.

While in the turn of the millennium the Brazilian air transport industry was marked by a structural crisis, with all its major carriers presenting losses, more recent years have been characterized the vigorous growth both in the number of passengers and profit margins. Even if the bankruptcy of traditional carriers has concentrated more than 90% of the market in the hands of Tam and Gol, people have benefited from lower fares and greater number of flights, especially in the routes between bigger cities. Workers who had lost their jobs with at the traditional airlines have been absorbed by Tam, Gol and other new companies, a surprising picture for those used to listening to the recurrent complaints of airlines’ businessmen about the difficulties faced in earlier times.

This upward turn in the Brazilian air transport was due to both a recovery in the country’s economic activity, with higher GNP growth rates in recent years, and to the capacity of the airlines to adopt new strategies, reducing costs and optimizing the use of their fleets, establishing a new, more popularized model of service. However, as this upward turn took place, it soon led to a new, astonishing crisis, which became known in Brazil as “apagão aéreo”. In a country where air transport services were traditionally dedicated to a small portion of the population, the rapid increase in the number of passengers transported soon led to the exhaustion of the available infrastructure.

The uncertainties and challenges faced by the air transport sector in this beginning of century are typical of a globalized and more competitive capitalism. The relationship between politics and the economy and, more specifically, between State and market, is at the core of the debate on the strategies to adapt to such an environment. A first wave of interpretations suggested that competitive pressures and the need to attract private investment would force different national trajectories to converge into a more homogeneous model of market economy, in which politics would

1 Paper to be presented at the 21st Annual Meeting of the Society for the Advancement of Socio-Economics, Science Po, Paris, July 16-18, 2009. Email: [email protected].

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given room to pure economic forces. In such context, choices regarding adaptation to the new environment would be restricted.2 The state, considered a central actor in the definition of such strategies, would have limited options in terms of courses of action. Its role would be to create a capital-friendly environment, or it would be punished by economic agents who would move to best fit locations.

For a while, neoliberal reforms were seen as the only available path in many developing countries. The main strategy was to free economic activity from political influences, as market was expected to auto-regulate “in the long run”. State activism started to be seen as a source of inefficiency, usually opening the way to rent seeking practices. In order to avoid such “risks”, state action had to be restricted to the maintenance of a “healthy” macroeconomic environment (low inflation, fiscal stability), in which private investment would do most of the job. In determined sectors, usually public facilities or infrastructure, such as transports, the role of the state should also include regulatory action of a technical character. In other words, state action could not move beyond a very limited number of prescribed roles.

The adoption of market-oriented reforms in economic activities such as air transport involved, therefore, a double task: first, to liberalize the market; and then, to reform its regulatory structure, with the adoption of new regulations and the creation of an autonomous regulatory agency, inspired in the North-American model. The Brazilian experience, however, showed a great imbalance between the political investment made in the liberalization of the market, and the lack of investment in the reform of the state structure in charge of the regulation. The Department of Civil Aviation (in Portuguese, DAC), a section of the Air Force created in the early 1930s, under the inspiration of an interventionist regulatory model, continued to be the bureaucracy in charge of the activity as long as 2006, i. e., sixteen years after the reforms started being implemented. Even after the creation of the National Civil Aviation Agency (in Portuguese, ANAC), the main legal reference of the activity is still the Brazilian Aeronautics Code of 1986. Finally, one must highlight the abandonment of the mechanisms of dialogue between state actors and economic agents along the 1990s, a process which has not been completely reversed in the present decade. This paper aims to show that the lack of an institutional structure compatible with the new dynamism of the market, to which added the poor quality of the mechanisms of interaction between state and economic agents, has been an important cause for the Brazilian air transport industry’s persistent crisis.

2. State, market and politics

Two complementary approaches sustained neoliberal reforms: neoclassical and neo-utilitarian theories. Both of them are based on the same premises regarding human behavior: individualism and utilitarianism. But while for the first one, the maximizing individual is the very reason for the good functioning of the market, for the second one, it becomes the vice of political institutions. Because actors are always maximizing their gains, those occupying positions in the state structure will always tend to bargain with business for political support, usually in exchange for some sort of privilege. Rent seeking theories are based on such premise, and the solution for that would be, in the first place, to reduce state influence over the economy (via deregulation, privatization,

2 For a version of such kind of perspective in Brazil, see Bacha (1995). Diniz (2000), Berger and Dore (1996), Drache (1996) and Ferrer (1997), among others, provide critical analyses of the arguments of “convergence theory”.

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and trade opening); and second, to eliminate existing formal links between state actors and economic agents (Cf. Evans, 1995, p. 51-57; Schneider and Maxfield, 1997, p. 3-4; Chang, 2002, p. 104-111). Different kinds of concertation arrangements, then, were condemned by neoliberal reformers.

Altogether, neoclassical and neo-utilitarian theories contributed to an oppositional view of the relationship between the economy and politics, and to the relationship between State and market as well. On the other hand, sociological and political theories have advanced in approaching the issue from a more balanced perspective. Not only have they questioned the utilitarian, atomized individual as the building block of both the economy and politics, but they have also questioned the neo-classical and neo-utilitarian emphasis on the equation “more market, less state”, which is typical of the neoliberal agenda. Within sociological theory, it has been Economic Sociology (Swedberg and Granovetter, 1992; Smelser and Swedberg, 1994) which has dedicated itself to criticize the homo economicus-based concept of action. Along with different versions of institutional analysis (Powell and DiMaggio, 1991; Brinton and Nee, 1998; Nee and Swedberg, 2005), it has also questioned the notion of the market as a “spontaneous order” which would be inherently efficient. Another important point for the institutionalist version of Economic Sociology is the focus on the political dimension that underlies market structures. Legal frameworks, formal political institutions, informal arrangements, and conflicts of interest all play a role in structuring markets. By calling attention to such aspect of economic life, sociological theory has come closer to institutional theories in Political Sciences (Thelen and Steinmo, 1992; Hollingsworth et al., 1994; Lécours, 2005) in that they are concerned with highlighting the role of politics in defining the trajectories – some of them successful, some of them not – of national, regional or sectorial economies into the twenty-first century globalized capitalism.

Economic Sociology has criticized the homo economicus and the idea of “free market” based on the reinterpretation of Polanyi’s concept of embeddedness (1944, 1977). Granovetter’s network approach has been a pioneering reference in this theoretical enterprise (Granovetter, 1985, 2000). However, it has been criticized by authors who have proposed a more politically-oriented perspective to understand the way the economy is embedded in society. These authors have been identified both with Economic Sociology and institutional theory (e. g., Bourdieu, 1997; Dobbin e Dowd, 2000; Fligstein, 2001; Nee, 2005), and they have focused on issues of power relations, state structures, and the role of interests, confrontation of ideas, negotiation and compromise between state actors and economic agents in the definition of legitimate courses of action, firm strategies, and, more generally, in the structuration of markets.

Another strand of investigation is represented by Institutional Political Economy, of which Peter Evans’s “comparative institutional approach” is an outstanding reference (Evans, 1995). By studying the cases of South Korea, Brazil, and India, he proposed the notion of “developmentalist states”, i. e., those states capable of promoting industrial transformation and economic development. For Evans, such capacity would depend on an “embedded autonomy” relationship between state actors and economic agents. The internal coherence of bureaucracies in charge of promoting economic change (autonomy), and the formal and informal ties linking state actors and economic agents (embeddedness) would enable sinergies between state and market, generating information flows, trust, and, a sense of safety that would stimulate private capital to advance into new enterprises, while the robustness of state bureaucracies would be a barrier for rent seeking of other forms of collusion.

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The works brought together in Maxfield and Schneider (1997) and the work of Weiss (1998) present additional analyses demonstrating that not all links between state actors and economic agents will degenerate into rent seeking. Such findings suggest that the neoclassical and neoutilitarian reductionist view of the relationship between State and market, in which the only valid question is “How much state should we have?”, and the only acceptable answer being “the minimal”, should be substituted by a broader view, aimed at the quality of that relationship.3 This kind of approach brings social-political variables to the fore of the analysis. The next three sections present the empirical analysis of state-market relations in the Brazilian air transport industry in three different cycles: before the reforms (1960-1980); during the reforms (1990-2002), and after the reforms (2003-2007).

3. State and market in the Brazilian air transport industry before the reforms

The development of the air transport in Brazil during most of the twentieth century was marked by the existence of close ties linking government officials and businessmen. However, the activity was under slack regulation until the early 1960s. More than twenty airlines were created after the end of the second World War, when DC-3s used in the war were sold by very low prices. Ten years later, airplanes became bigger, faster and more expensive – the first commercial jets started flying by the end of the 1950s – and it was harder for entrepreneurs to stay in the market. Congress comissions were created to investigate what came to be considered a major crisis in the activity, with successive bankruptcies, accidents, and claims for state aid by surviving airlines.4

As a response to this crisis, authorities proposed a new regulatory regime for the activity. This new regime started being discussed in the two first Civil Aviation National Conferences (in Portuguese, CONACs), which took place in 1961 and 1963 in the cities of Petrópolis and Rio de janeiro, respectivelly. Representatives of the airlines, the Civil Aviation Department, and economic authorities participated in these meetings, which had little practical results, considering the political instability of the period. However, they helped strenghening the ties between business leaders and aeronautical authorities, in a context in which the whole air transport system was under strong criticism by public opinion. On the other hand, the two first CONACs opened up the debate for propositions such as the stronger control of market access, in order to stabilize the finances of the existing airlines. Among the propositions, was also the support to a model based on privately-owned airlines (Vasp was then, the only major state-owned one) and, consequently, the repudiation of the labor unions’ proposition for the creation of a new state-owned company to operate international flights.

It was in the third CONAC, in 1968, when the sector had already undergone a long process of consolidation,5 that the regulatory principles of “fare realism” and 3 See also Block (1994) and, for a survey of the literature on the issue, Diniz (2000, cap. 3). 4 For a narrative on this period from an academic point of view, see Fay (2001). Ribeiro (2001) presents the point of view of aeronautical authorities, and Pereira (1987), the point of view of labor unions. 5 There were, then two companies exploring international routes: Cruzeiro do Sul, flying to South America and Caribe; and Varig, flying to Asia, North America and Europe (flights to Africa would start during the 1970s). These companies shared with Transbrasil and Vasp the domestic market. A fifth company, Paraense, was still operating, but it would stop in 1970. At least two of the major airlines between the 1940s and 1960s, Real Aerovias and Panair do Brasil, had stopped flying. Varig was able to negotiate with the federal government and aeronautical authorities support to incorporate routes, equipment, airport areas, and human resources from these airlines. The most dramatic episode was the

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“controlled competition” were settled. The first one meant that the users were supposed to afford the totallity of the costs of the air transport service, putting an end to the state aid that had been given to airlines. The second one was aimed to reduce what was considered an “excessive expenditure of resources”, due to the concentration of services in the main routes. Authorities mentioned frequent cases of two or more airplanes taking off from the same airport to the same destination, at the same time, with few passengers. The risk of a predatory competition (with the increase in the discounts offered in these major routes) and the fact that most of the airlines were abandoning the flights to smaller towns were considered additional problems that the principle of “controlled competition” was aimed to solve.

In this context, the few existing airlines enjoyed privileged access to DAC and other government authorities, by means of both formal and informal meetings. The fact that the sector was controlled by the Air Force, in the context of a military dictatorship, provided additional stability for the airlines. Other social forces capable of contesting the status quo, such as labor unions, had been excluded from the CONACs since the beginning of the 1960s, and with the military coup of 1964, the most active union leaders had been banned, some of them being exiled. Therefore, public policies in the air transport sector were designed and implemented without public scrutiny.

The beginning of the 1970s was a period of outstanding economic growth rates in Brazil, reflecting in the air transport industry. Table 1 shows that growth rates reached two digits and the country’s participation in the total world traffic almost doubled between 1970 and 1975. However, the political arrangement that sustained this performance started being challenged with the end of the military dictatorship in 1985, which would coincide with the gradual abandonment of nationalist-developmentalist ideology, and the greater room given to stabilization and market-oriented policies. Within the Executive branch, taming inflation by means of strict control of prices became a top priority, and aeronautical authorities would find it harder to maintain the principle of “air fare realism”.

Table 1. Evolution of the industry in Passengers/Kilometer (Brazil and World): 1970-1985 (selected years)

Year Brazil (in millions)

Annual Average rate (%)

World (in millions)

Annual Average rate (%)

Participation in the world traffic (%)

1970 5,488 - 460,000 - 1.19

1975 15,973 23.82 697,000 8.67 2.29

1980 22,284 6.89 1,089,000 9.33 2.05

1985 28,456 5.01 1,361,000 4.56 2.05

Source: Departament of Civil Aviation/Brazil and International Civil Aviation Organization (cited in IAC, 2002).

Alongside with the loss of power vis-à-vis economic authorities, the position of Air Force and DAC was confronted by the reemergence of organized labor in the

one involving Panair do Brasil, which was declared bankrupt by a government decree, in the middle of a series of discretionary acts aiming to attack the company’s owners, who supported political leaders that opposed the military regime that governed Brazil between 1964 and 1984. For further discussion, see Monteiro (2000, ch. 3).

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political arena. Among the numerous subjects discussed in the Constitutional Congress elected in 1986, was the creation of a civil agency to substitute DAC in the control of air transport, proposed by labor unions. The “Pássaro Civil” (Civil Bird) campaign, as it was known, mobilized workers and progressive political leaders, but the proposition did not pass. Aeronautical authorities, with the strong support of airlines, successfully lobbied Constitutional congressmen against it. Even if the redemocratization process exposed air transport to new challenges, the close ties linking state actors and economic agents were strong enough to resist them. However, new challenges were on the way with the election of Collor de Mello in 1989, which will be discussed in the next section.

4. State and market during the first cycle of market-oriented reforms: 1990-1994

In 1989, Fernando Collor de Melo was elected president, proposing to start an ambitious economic modernization program based on pro-market reforms. Under the new government, a first round of changes took place in the Brazilian air transport industry with the ratification of the new International Air Transport Agreement between Brazil and the United States (signed in 1989 and approved by Congress in 1991), and the privatization of Vasp, which was acquired in October of 1990 by entrepreneur Wagner Canhedo. With the new agreement between Brazil and the United States, Varig started sharing routes between these two countries with Vasp and Transbrasil,6 after years of exclusiveness as the only Brazilian airline designated for international flights.

At the same time, as the new owner of Vasp, Canhedo acted as a challenger of the air transport market in Brazil, launching an aggressive strategy of expansion, both at domestic and at international services, which was partially tolerated, if not approved, by aeronautical authorities. In practice, the strategies adopted by Canhedo violated both the principles of “controlled competition” and “air fare realism”. In the first semester of 1991, Vasp started scheduling flights for some of the main destinations at hours that coincided with flights offered by other airlines, with greater discounts.7 Varig and Transbrasil protested against such initiatives, presenting complaints to DAC, arguing that Vasp was using unfair competition practices, which were not compatible with the traditional functioning of the market. Canhedo replied with a radical defense of the liberalization of air transport, by means of interviews and articles published in the press accusing the other airlines of not being prepared for competition (Canhedo, 1991a,

6 Most of the bilateral air transport agreements negotiated since the Chicago Convention of 1944 until recently were based on a reciprocity principle, including the one between Brazil and the United States. Therefore, the permission for Vasp and Transbrasil to fly these routes implied that two other North-American airlines would also be granted such permission, so that a total of six airlines started competing in the routes between Brazil and the United States in the beginning of the 1990s. 7 The decision to offer discounts in fares obeyed a different logic during the years of heavy regulation. In the first place, discounts were rare, being offered only during the “high season”, i. e., vacations (especially during the summer vacations, which in Brazil occurs in January and February). The whole system was structured in order to serve frequent users, most of them people traveling for business purposes, who had their tickets paid by employers (in many cases, the government). Because this kind of passenger usually does not have the option of not traveling, and considering that roads and railroads are of very poor quality in Brazil, firms and government agencies had no alternative but to pay for air transport services if they needed it. Thus, discounts were limited to those months when there was a drop in business activity, during the summer, when more people flew for leisure purposes.

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1991b). DAC, on its turn, demonstrated some sympathy for Vasp’s strategies, suggesting that these events represented an “adjustment” process.8

Canhedo’s disposition to challenge the market, however, was short-lived. After a few months after Vasp launched its most aggressive strategies, the press started publishing a sequence of articles about the airlines’ debts with several suppliers. Eventually, Canhedo had to retreat from his most aggressive moves and give up the reputation of challenger, inviting other airlines for some kind of operational agreement that would re-establish the previous market structure. At the same time, a congressional comission was created in 1992 in order to investigate the privatization of Vasp, motivated by evidences that the process had been fraudulent. Key members of the federal government, such as the ministry of the Economy, Zélia Cardoso, were accused of having favored Canhedo (Cf. Salomão, 1993).

Such evidence demonstrates that Canhedo’s aggressive, competitive style, apparently in line with the new president’s platform of economic modernization, was actually anchored in the same traditional clientelistic mechanisms that characterized traditional public-private relations in Brazil. In this sense, this first round of liberalization in the Brazilian air transport was a rather superficial one. One can say that it helped to publicize the neoliberal agenda, but it did not actually break up with the previous pattern of relationship between state and economic agents. The fifth CONAC, which took place in Rio de Janeiro, in October of 1991, would ratify the liberalization agenda, as it sanctioned measures such as the increase in the margin for discounts, authorized regional airlines to operate jets from the central airports of São Paulo (Congonhas) and Rio de Janeiro (Santos Dumont) to Belo Horizonte, Curitiba and Brasília, aiming at business travelers, and, finally, opened the market for new players. On the other hand, the meeting maintained the compromise with the principles of “controlled competition”.9

Despite the maintenance of such principle, the macro-economic scenery was not favorable to airlines in the first years of the 1990s. Raising inflation, economic recession and the political crisis that lead to the impeachment of president Collor de Melo in 1992 were the main features of a period of severe losses for all national airlines, as can be seen in Table 1. It was in this context that the proposal for the creation of a Câmara Setorial (Sectoral Chamber) emerged, in which representatives of the airlines, government and workers would discuss and negotiate alternatives for the sector.

The Câmaras Setoriais represented an important institutional change in the relationship between state and society in Brazil. It aimed to expand the traditional corporatist model in which state and business used to negotiate, apart from other social forces. Inspired by European-style neocoporatist arrangements, labor was introduced as an active party in the negotiation process. By focusing on the production chain, instead of exclusively viewing the major firms of the economic sectors in which these chambers were created, this institutional arrangement was also meant to incorporate the plurality of interest within business community itself (Cf. Arbix, 1997; Diniz, 1996, chap. 4).

8 See “DAC considera disputa aérea mero ajuste”, Jornal do Brasil, 30/5/1991; “DAC considera em parecer que a Vasp não pratica dumping”, O Globo, 7/6/1991. 9 According to a document by DAC: “A more flexible approach to regulation was adopted, with stimulus to the exploration of markets, routes and new schedules, always preserving the competitive equilibrium among airlines, under a less rigid price system. The policy prescribes the liberalization of fares as a goal to be pursued, but reminds the recent deregulation experience in other countries, recommending the necessary care in its adoption” (Ribeiro, 2001, p. 140, italics are ours).

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Table 2. Industry profitability: 1990-1999 (%)

Year Domestic International Total

1990 n/a n/a - 13.6

1991 - 17.34 - 4.24 - 10.39

1992 - 6.02 - 15,40 - 11.42

1993 0.54 - 9.32 - 4.91

1994 14.45 0.16 6.96

1995 13.47 - 0.38 6.45

1996 14.95 - 15.33 - 0.16

1997 12.77 - 2.66 4.85

1998 4.45 - 2.73 0.81

1999 - 0.38 - 5.55 - 2.96

Source: Department of Civil Aviation, Brazil.

Notwithstanding the severity of the crisis, and the success of the Câmaras Setoriais created in other sectors, such as the automobile industry, aeronautical authorities and airlines businessmen did not accept some of the main principles of such arrangement. They resisted providing information that would subsidize a diagnosis of the sector, and rejected negotiation of measures to overcome the crisis. Thus, the Câmara was shut after a few meetings, while economic crisis became even worse.10

Along the year of 1993, the crisis struck Vasp and Transbrasil harder, as they had to start lay off programs, and renegotiate debts with suppliers and airplane lessors. It was not until the beginning of 1994 that Varig, still the leading Brazilian airline, openly recognized that lay-offs would be inevitable, while it failed to meet obligations with leasing companies. Because of Varig’s default, some airplanes did have to stop flying or were arrested due to judicial mandates.

The airlines’ strategy to cope with the crisis was to demand some kind of aid from the state, reproducing the traditional pattern of public-private relations in Brazil. In fact, air transport businessmen started negotiating with the Brazilian state-owned financial bank BNDES and top government officials for a special loan that would help airlines to restructure and have enough cash to get through the hard time. Labor unions, on their turn, criticized such aid, arguing that it was not fair to use public funds to help companies to adopt restructuring programs that would lead to more lay-offs. They also criticized the negotiation process, considered “obscure”, as it was not open to public scrutiny. They proposed that any program aimed to deal with the difficulties of the Brazilian airlines had to be discussed in an open forum. Thus, they proposed the creation of a new Câmara Setorial, which was eventually accepted by government officials.

Despite the support from some important actors within the executive branch, and the fact that aeronautical authorities and airlines did accept to provide some of the necessary information to support the work of the second Câmara, once again, the

10 Inflation reached above 1,100% in 1992 and 2,500% in 1993. GDP growth rates, on their turn, were even worse: after dropping to -4,35% in 1990, they raised to a modest 1% in 1991, going back down to -0,47% the next year.

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arrangement did not work. Airlines eventually managed to obtain the aid from BNDES, while the Plano Real – the economic reform program implemented in the beginning of 1994, which would effectively tame inflation and open the way to the implementation of most radical neoliberal reforms in Brazil – produced a substantial improvement in the economic activity as a whole, directly benefiting airlines profitability (Table 2) and the industry’s growth rates (Table 3). Crisis, then, gave room to a cycle of expansion of the Brazilian economy which would diminish the interest of airlines in carrying on the work of the Câmara.

Table 3. Evolution of Domestic and International markets in Revenue Passengers per Km (1990-1999):

Domestic International Year

RPK Growth rate (%) RPK Growth rate (%)

1990 14 281 498 --- 14 021 526 ---

1991 14 321 856 0.3 14 070 729 0.4

1992 11 806 194 -17.6 17 096 706 21.5

1993 12 269 534 3.9 18 671 503 9.2

1994 13 494 206 10.0 21 059 933 12.8

1995 15 646 560 16.0 22 742 364 8.0

1996 16 031 909 2.5 24 227 066 6.5

1997 16 359 007 2.0 27 164 030 12.1

1998 21 775 892 33.1 27 749 158 2.2

1999 19 377 229 - 11.0 18 424 992 -33.6

Source: Department of Civil Aviation, Brazil.

One can say that the first wave of liberalization in the Brazilian air transport industry, carried out between the years of 1990 and 1994, had a limited impact. It helped to publicize the neoliberal agenda more than to effectively break up with regulatory restrictions or to introduce new competitive practices. The possibility of offering greater margins of discount was a timid change, as many restrictions were maintained regarding routes and the use airports. While international flights were liberalized to a greater extent, separation between domestic and regional segments were maintained, favoring those airlines that could fly from the central airports of São Paulo and Rio de Janeiro – the ones preferred by passengers flying for business purposes, which were consequently more willing to pay higher fares.

State-market relations, on their turn, can be said to have changed little. It is true that a new component was recognized as a legitimate part in this relationship, with the participation of labor unions in such institutional settings as the fifth CONAC and the Câmaras Setoriais. These forums, however, had modest practical consequences for the development of air transport. The CONAC did actually ratify some of the practices that had already been undertaken with the privatization of Vasp, while the Câmaras were not able to advance, due to the resistance of aeronautical authorities and airlines to provide information and to negotiate the content of policies. On the other hand, public-private relations in the Brazilian air transport industry did not change in substance, as

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the privatization of Vasp and the negotiation for the BNDES loan in 1994 demonstrated. Substantial changes, however, were on the way, as Fernando Henrique Cardoso took office in the beginning of 1995.

4. The radicalization of neoliberal reforms under Cardoso: 1995-2002

If the improvement in economic indicators after the Plano Real was enough of a reason to justify the lack of interest of airlines to keep engaged in the Câmara, new policy prescriptions also played a role in the failure of such arrangement. In fact, with the election of Fernando Henrique Cardoso, in 1994, a new technocratic elite, profoundly committed with the neoliberal agenda, ascended to power. This new technocracy advocated that state bureaucracy in charge of economic affairs had to be insularized from political forces, so that former formal forums and ties linking state and market were progressively extinguished. Therefore, the kind of concertation strategies represented by the Câmaras were banned, while liberalization agenda was to be pushed further.

From the point of view of aeronautical authorities, a very restrictive perspective of liberalization was still predominant. The discourse of key representatives of the Air Force Ministry and DAC in the bulletin DAC Notícias, published between 1994 and 1999, make such perspective evident. Brigadier Renato Pereira da Silva, for example, says about discounts and the increase in the number of flights offered by airlines right after the Plano Real:

“Discounts exist only to increase the access of passengers when the market is weak. In principle, discount should exist only in such circumstances. However, with the implementation of Plano Real, airlines were not fast enough to eliminate such discounts. (...). Some people might not be able to fly during high season due to the unavailability of seats on airplanes; on the other hand, airlines should increase their fleets very carefully. There must be some sort of planning... right now, air transport users are being favored, but there must be an equilibrium.” (PEREIRA, 1994, p. 5, italics are ours)

Airlines, on their turn, would once more have to deal with the stiffening of the control over price readjustments by economic authorities. According to the legislation that created the Plano Real, public utilities and services, in which air transport is included in Brazil, would have their fares adjusted on a yearly basis, and the raises had to be authorized by economic authorities.11 It was during this period that President Cardoso’s Civil Cabinet and economic authorities started threatening aeronautical authorities and the airlines with the opening of the domestic market for foreign airlines,

11 Between 1996 and 1997, government and airlines would struggle around the issue of the prices of tickets. Airlines were accused of cartelization and abusive fares, and entities such as the Brazilian Consumers Association started campaigns against the companies, while public authorities started investigating airlines and the Air Force Ministry, charging the former of anti-competitive practices, and the latter of allowing such practices – see “Ofensiva para derrubar o valor das passagens aéreas”, O Globo, 27/7/1996 and “Ponte aérea pode ser cartel”, Jornal da Tarde, 23/9/1996.

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which would allow much more powerful companies from North America, Europe and Asia to transport passengers between Brazilian cities.

During the second semester of 1997, reducing air fares became a top priority for government authorities, and the Civil Cabinet started a workgroup12 in charge of implemeningt new liberalization measures within the Brazilian air transport market. Confirming a new pattern of relationship between government and airlines, the latter were not invited to participate or to discuss the new policies. It was during this period that the influential minister of the Economy, Pedro Malan, proposed the creation of a new civil agency that would substitute DAC.13

Civil Cabinet officials and economic authorities struggled with the Ministry of the Air Force, DAC and airlines to impose a new round of liberalization. Under the threat of opening the domestic market to foreign airlines and creating a civil agency that would put an end to DAC’s control over commercial aviation, aeronautical authorities progressively eliminated regulatory restrictions regarding the offer of discounts, control over routes and the use of central airports. An article by the General Director of DAC in 1998, Masao Kawanami, suggested that the traditional principle of “controlled competition” was being substituted by a “healthy competition”. Airlines, on their turn, responded with an aggressive competition, in which fares dropped while the number of passengers grew in more than 20% (Kawanami, 1998, p. 1).14

As the presidential election of October 1998 was getting closer, however, the liberalization agenda weakened, and it would be virtually dropped after the president was re-elected. In January of 1999, a few days after Cardoso took office for his second term as president of Brazil, and in the middle of a series of global financial crises, economic authorities decided to implement an important change in the exchange-rate policy, by introducing a more flexible system in which the value would float. Real, which so far had been worth approximately one dollar, devaluated to next to half of that. Firms and individuals that had signed contracts in dollar for local transactions saw their costs double in less than a month. Brazilian airlines were specially affected by this change, as their revenues in the domestic market were in reals, while most of their costs (fuel, leasing, maintenance, insurance) were in US currency. Since fares could not be updated, airlines had to bear the losses of the sudden devaluation.

In the domain of the economic agenda, another important change took place. Cardoso’s first term had been characterized by a widespread consensus on the priority of stabilization policies. After reelection, so-called developmentalists claimed that such policies could not be restricted to the control of inflation, introducing the question of economic growth (Cf. Diniz, 2000, p. 96ss). While economic authorities tended to stick to the stabilization priorities (Ministry of Finance, Ministry of Planning, and the Central Bank), production-related authorities, such as the Ministries of Development, Transports and Tourism, tended to question the exclusive focus on stabilization, demanding some kind of pro-growth state activism.

12 The minister of the Civil Cabinet, Clóvis Carvalho, was the head of the workgroup, which was composed of representatives of the main agencies involved with economic policies, including anti-trust, and the Brazilian tourism agency, Embratur. 13 “Malan propõe agência reguladora para transporte aéreo: meta é baixar tarifas”, O Globo, 8/8/1997. 14 Another publication by DAC narrated this period of changes as follows: “Airlines accepted the measures implemented by DAC and reduced their fares. As a result, between February and August (of 1998) there was a 25% increase in the number of passengers in domestic flights, both in the national and in the regional segments. Only during the month of July, 250,000 people traveled by air for the first time, people who had never boarded into an airplane before” (Ribeiro, 2001, p. 146).

12

In relation to air transport, an indication that neoliberal orthodoxy might be loosing strength was the creation, in April of 1999, of a workgroup to elaborate a program to support airlines, after the shock caused by the devaluation of the Brazilian currency. The program, however, was not implemented. At that moment, the search for solutions for the crisis was limited to the formation of another workgroup, this time under the responsibility of the newly created Ministry of Defense.15

Airlines, on their turn, adopted new strategies in this context. As the traditional links to state bureaucracy, which had allowed the negotiation of loans, tax reliefs and other forms of protection in previous times had been banned by economic authorities, they had no alternative but to look for other forms of political action. From 1998 on, airlines invested in the legitimation of their claims, publicizing their action, and extending their alliances to civil society entities (such as universities and associations), labor unions and Congress. Their discourse changed: instead of “protection”, airlines demanded measures that would assure equal competitive conditions with foreign companies.16

In December of 2001, Transbrasil stopped flying, as suppliers refused to provide crucial services such as fuel, due to successive delays in the payment. Vasp and Varig also depended on frequent renegotiations of debts with fuel suppliers, catering services, and lessors. It was in this context that the Ministry of Development, along with the Ministry of Defense and other key government officials representing the developmentalist group within the executive branch, accepted the proposition by labor unions to create a “Competitivity Forum” for air transport. The forum resembled the previous Câmaras Setoriais, serving as a concertation arrangement in which government authorities, airlines and workers would discuss the sector’s weaknesses (and strengths, if there were any) and possible measures to overcome the crisis.17

The creation of such forum, after years of radical opposition to the existence of this kind of arrangement by neoliberal orthodoxy, was evidence that things were changing. The Forum, in fact, was successful in advancing measures proposed by airlines, with the support of labor unions and developmentalist sectors within the government.18 Basically, government offered temporary tax reliefs, exempted airlines from taxes on imported airplane parts, simplified procedures to import such parts and opened new credit lines. Even though these measures were announced in September 2002, a few months before the end of Cardoso’s term, they undoubtfully indicated that state-market relations were moving away from neoliberal orthodoxy.

At the same time, market reforms were not fully accomplished during Cardoso’s two terms, as his cabinet was not able to advance in the creation of a new, non-military

15 The Ministry of Defense incorporated the three military ministries: Army, Marine and Air Force. 16 Airlines argued that the level of taxation in Brazil was above 35% of total revenue, while in other Latin American countries it was around 20%. In Europe, average was 15%, while in the United States, less than 10%. They also complained about the long time needed to import airplane parts, which forced them to maintain an excessive number of spare accessories, raising costs. North-American, European and Asian airlines also enjoyed better conditions on leasing and insurance contracts, so that Brazilian airlines demanded measures that would minimize such differences. See Monteiro (2008) on this issue. 17 The opening session took place in January 23, 2002, with the presence of ministers Sérgio Amaral (Development) and Pedro Malan (Finance), representatives of the Ministry of Defense, airlines executives, labor unionists and DAC. 18 Rego Fiho (2002) analyzes such measures from an economic perspective, considering them a return to undesirable paternalistic, politically-driven measures. He does not discuss, however, the argument of airlines businessmen, union leaders and developmentalists about the need to balance the airlines’ competitive conditions with their counterparts in other countries.

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agency that would substitute DAC. In fact, a project to create this agency was prepared by the executive branch. It was designed by a restricted workgroup, with the participation of representatives of economic authorities, Air Force, and Infraero. Once again, airlines and labor unions were not invited to participate. When the project was sent to the Congress for approval, it was then open to public debate. Airlines identified a series of items that involved central issues for their competitivity.19 The project was under analysis in the Congress during six months, in which several public meetings were held so that representatives of the government, airlines, labor unions, and other entities could discuss it. Many demands by airlines and labor unions were incorporated in the substituting project presented by the commission. Cardoso’s cabinet, then, decided to withdraw it, and the creation of the new agency was left for the new president, the leader of the Workers’ Party, Luis Ignácio Lula da Silva, elected in October 2002.

5. State-market relations in the post-reforms (2003-2007)

Recent debate on the election of Lula da Silva suggests that it has represented both continuity and change in relation to the government of Fernando Henrique Cardoso (Cf. Diniz, 2006, Diniz e Boschi, 2007). President Lula has committed himself with the maintenance of macroeconomic stability, a legacy of Cardoso. On the other hand, he signaled that he would adopt more active strategies concerning the role of the state in the economy, with the introduction of a developmentalist agenda and the reopening of channels of dialogue between state and private agents. The previous section has shown that such process had been evolving during Cardoso’s second term, but with Lula da Silva, concertation strategies became a top priority, as exemplified by the creation of the Social and Economic Development Council (Tápia, 2007).

In fact, the treatment given by the new government to air transport, in its first two years, was a clear rupture with the neoliberal agenda. While the sector undergone another round of dramatic crisis (see Tables 4 and 5), the new minister of Defense, José Viegas, proposed to resume the “controlled competition” policies in order to give the airlines the chance to recover. Viegas and his assistants sustained that the crisis that had been affecting the whole industry since the beginning of the decade was due to “an excess of offer”. Therefore, the Ministry of Defense and the Civil Aviation Department published an ordinance which prohibited airlines to offer “abusive” discounts and to import new airplanes or create new services, unless they could prove that there was justifiable demand for that. At the same time, the Ministry created a workgroup with the participation of government officials, representatives of airlines, and labor unions. This workgroup presented a report to the Civil Aviation National Council (in Portuguese, CONAC), which proposed a series of policy directives according to which airlines were free to offer discounts or new services, but these would be subject to the control of aeronautical authorities, which could intervene to protect the market from “ruinous competition”. At the same time, those directives mentioned that airports and air

19 Airlines questioned such propositions as the introduction of new taxations, short-term concessions for the exploration of routes, and legal restrictions regarding the use of airport areas.

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communications needed greater investment, while Brazilian airlines deserved better conditions to be able to compete internationally. 20

Table 4. Industry profitability: 2001-2007 (%)

Year Domestic International Total

2001 - 7.24 - 11.08 - 8.70

2002 -8.37 - 4.00 - 6.72

2003 4.36 - 0.84 2.52

2004 7.84 - 11.08 3.22

2005 0.87 0.18 0.62

2006 2.49 -11.38 - 1.17

2007 -5.28 - 19.35 - 8.87

Source: Department of Civil Aviation, Brazil.

Table 5. Evolution of Domestic and International markets in Revenue Passengers per Km (2001-2007):

Domestic International Year

RPK Growth rate (%) RPK Growth rate (%)

2001 26 527 419 --- 22 287 921 ---

2002 26 711 136 0.7 21 558 401 - 3.3

2003 25 195 821 - 5.7 21 253 260 - 1.4

2004 27 962 478 11.0 22 904 516 7.8

2005 34 157 484 22.1 24 594 294 7.4

2006 39 261 092 15.0 17 318 461 - 29.6

2007 42 773 168 8.9 15 901 862 - 8.2

Source: Department of Civil Aviation, Brazil.

Besides the propositions of the CONAC, the executive branch also tried to implement a merger between the country’s two biggest airlines at that time: Varig and Tam. A code share agreement was settled as a first step towards the merger, with the support of the Ministry of Defense and BNDES. The process, however, did not advance because Varig’s controllers did not accept giving up control of the company, despite the risk of simply bankrupting it. Tam, on the other hand, eventually recovered from its financial difficulties and lost its interest in the merger. Finally, anti-trust authorities, which had temporarily accepted the code sharing due to the gravity of the crisis, later, rejected the transaction (Andrade, 2007).

While traditional airlines entered the 2000s in serious financial difficulties, newly created Gol Airlines drew the attention of analysts and the media. Its first flight took off in January 2001, offering a “low cost, low fare” service in a market dominated 20 The directives of the CONAC are available at http://www.aeronautas.org.br/conjunt/conac.html (consulted in Dec. 1st, 2007).

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by Varig and Tam, which offered more sophisticated services. Gol Airlines belongs to Grupo Águia, a larger economic group dedicated to (monopolistic, high profitable) interstate bus services. Thanks to its sound financial background, Gol was the first airline created after the market reforms to survive, and it eventually would become a new reference for the industry in Brazil. Aeronautical authorities under Lula da Silva initially adopted a restrictive attitude towards the strategies of Gol. In one of its most aggressive marketing campaigns, the airline offered flights at 50 reals (approximately 25 dolars) in several different routes, but DAC considered it abusive and prohibited it.

In 2004, José Viegas quit the Ministry after the Army Command made public statements defending the military dictatorship. That would represent the end of government dialogue with airlines, as the new minister and the Air Force declared that they did not recognize the legitimacy of the 2003 CONAC directives. But this change happened at the same time that the market was reaching two-digit growth rates (see Table 5). In this new cycle, Tam and Gol settled as the new leaders, sharing more than 90% of market share. Vasp stopped flying in January 2005 and Varig had to appeal to new Bankruptcy Law to continue its operations. After months of negotiation involving creditors, workers, government agencies, and courts both in Brazil and in the United States, part of Varig was sold to an association of entrepreneurs and Matlin Paterson, which later sold the company to Gol.

The dynamism of air transport from 2004 on can be explained, in part, by the recovery of the economy as a whole. On the other hand, there was an important change in the strategy of airlines, which were able to restructure and explore new concepts of service. But at the same time that the market restructured and gained new dynamism, the state structure did not change. Despite the changes in regulation along the years, air transport continued to have as it main reference the Brazilian Aeronautics Code of 1986. The creation of ANAC, proposed by Cardoso in 2000, would not happen until March 2006, sixteen years after the first round of reforms took place.

The increase in the number of flights and their concentration on specific, high-density routes, especially those departing from or destined to São Paulo, soon revealed the deficiencies in the airport infrastructure and in the air traffic control services. Airlines, labor unions and specialists had exhaustively mentioned such deficiencies along the years, even before the CONAC directives of 2003 formally recognized them. The new, non-military regulatory agency was created in 2006, when the sector was at its highest expansion cycle. It was in September of that year that a Boeing 737-800 of Gol Airlines was involved in an accident, when it was flying above the Amazon region. The airliner was struck by a private jet which was flying on the opposite direction. Because the precarious air traffic control system in the region was considered to have been one of the causes of the accident, controllers (which in Brazil are military) started a series of protests. Their movement caused frequent delays for several months. This sequence of events, which became known as "apagão aéreo", included problems with the runways of Congonhas, São Paulo’s central airport, which maintenance was overdue. The last episode of the "apagão" was the accident of an Airbus A320 belonging to Tam, which collided with a building near Congonhas airport, when it was attempting to land.21

The "apagão" made it evident that public investment in air traffic control 21 Because it was a rainy day, and pilots who had landed in the airport in the same day had reported difficulties because the runway was slippery, public opinion immediately associated the accident with the runway condition. Further investigation focused on the hypothesis of inadequate use of the throttle, causing malfunctioning in the breaking system.

16

facilities had not been enough, and that airport authorities had not invested at all in the operational facilities of congested airports such as Congonhas. Priority given to new passenger terminals since the 1990s indicated that the different instances of the government directly or indirectly involved with air transport did not pay enough attention to long-term planning. At the same time, different members of Infraero, ANAC, the air traffic control department, and the airlines recognized that the government had lost the capacity to coordinate actions in the air transport sector. Priorities were not clear and the necessary investments were not made.

If the "apagão" was seen as a consequence of the lack of state capacity to coordinate and plan its actions in relation to air transport, the response to it was no less problematic. All the main state actors directly responsible for the air transport system were substituted during the second semester of 2007: the ministry of Defense, the president of Infraero; and the whole board of directors of ANAC. The new minister of Defense, former president of the Supreme Court, Nelson Jobim, proposed measures such as the restriction of flights in Congonhas and the establishment of special fines in case of delays, especially in São Paulo airports. Airlines, on their turn, did not accept those measures, arguing that it was the state's responsibility to supply the necessary infrastructure for the whole system to work properly. Airlines also sued the state, charging it of being responsible for the losses incurred by the "apagão" (cancelled flights, extra fuel expenditure, food and housing expenses for passengers whose flights were delayed because of the controlers protest, and so on). 22

This way, despite the initial efforts made by Lula da Silva to reestablish the dialogue with the air transport industry, its trajectory during the whole period indicates the maintenance of a poor-quality relationship between state and market. 7. Conclusion Market reforms were successful in changing the elitist character of the market and what can be considered the undemocratic pattern of state-market relations implemented by aeronautical authorities between 1960s and 1980s. The reforms created a new, competitive dynamics in the industry, giving more people the opportunity to use air transport services. One must also mention the capacity of private agents to restructure and overcome the persistent crisis that struck the sector in the beginning of the decade, and sustain two-digit growth rates in the last few years. This is especially important if we consider that the sector remained under the control of national capital and, at the same time, was able to fly with modern aircrafts.

This paper has aimed to demonstrate that, despite the improvements that market-reforms produced, the unilateral emphasis in the liberalization agenda, without a parallel effort to restructure the public authority apparatus, has proved to be counterproductive in he middle range. The increase in economic growth rates in Brazil, and the increase in the number of flights allowed by the more popularized model that airlines have adopted in the last years, has caused air traffic to reach the limits of the available infrastructure. Government has not invested enough in the airports and air control facilities, despite the fact that airlines, workers and specialists advised authorities that those investments were urgently necessary.

22 See “Aéreas cobram prejuízo da União”, O Estado de São Paulo, 21/3/2007 and “Empresas querem ressarcimento”, Correio Braziliense, 5/7/2007.

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The existing literature on air transport in Brazil has demonstrated a strong bias towards the neoliberal agenda. For authors such as Salgado e Guimarães (2003) and Oliveira (2006), more liberalization is the answer for the difficulties faced by the sector in the last years, including the ones the “apagão” evidenced. Even if it is true that, for example, a more flexible management system for the Brazilian airports would have positive effects for the well-being of consumers and the development of the market as a whole, this paper tried to call attention to a different dimension of the problem: independently of how much liberalized/flexible is the air transport industry in Brazil, it will depend on a robust state apparatus to follow along private agents’ dynamism. On the other hand, if such robustness involves technical capacity, it also involves political ability to handle the complex interests that relate to the sector.

The emphasis on the quality of the relationship between State and market dislocates the policy debate on the performance of air transport from a mere technical matter, introducing politics as a key variable. This way, strategies aimed at “eliminating” political rationality from the functioning of the market, with the insularization of bureaucracy and state retreat, typical of the neoliberal agenda, should give room to strategies that take into account qualitative aspects of the way state agents and private interests interact. The quality of the state structure itself is a key variable on which state-market relations depend. Long term planning, coordination, and investments in infrastructure are responsibilities of the state, and the success of private economic agents is also a function of that.

Acknowledgement: The research based on which this paper was written has been supported by Faperj and CNPQ.

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