Invited by the Experts Guide – Ed. 2019 to focus the Brazilian Market in the aviation industry, Ricardo Bernardi, co-founder of Bernardi & Schnapp, pointed out that deregulation and legal certainty are keys to the development of the aviation industry in our country.
Air Carriage in the context of the development of Brazil and the significance of legal certainly
As a result of the tariff liberalization initiated in 2001, a process of deregulation of air transport services was inaugurated in Brazil, which has been perfected over time by an increasingly efficient regulation adopted by the Brazilian Civil Aviation Agency – ANAC, allowing the necessary freedom for airlines to adopt efficient commercial strategies in a competitive environment.
The Provisional Measure n. 863 of 2018, which has finally eliminated the restriction on the participation of foreign capital in domestic airlines, will also play a key role in this process, if it is converted into Law (what depends on approval by the Congress) since it will increase sources of financing to the benefit of domestic air carriers.
After the economic crisis that hit the country in recent years, especially in 2015 and 2016, when Brazil experienced contractions in the GDP with a large negative impact on the air carriage sector, we can already envision a resumption from 2017 onwards. In this new scenario, demand is identified waiting for a more adequate offer of air services to specific needs of passengers, opening the market for companies that operate according to the low-cost business model.
Of course, the liberation of foreign capital in domestic airlines and the encouragement of low-cost operations can significantly increase the sector’s growth projections, but there are several factors that must be fulfilled to make this feasible. Within the limits of this article, we wish to dedicate ourselves to two of them, which we consider fundamental, in the legal sphere: a) adoption of modern and efficient regulation, which stimulates economic activity above all; and b) enforcement of the international treaties and modernization of local laws applicable to air carriage.
Modern regulation fostering the air carriage sector
Efficient regulation is essential to ensure the existence of a market suitable for the implementation and development of low-cost air transport services.
Low-cost airlines, as well as legacy carriers that to a certain extent compete with them, demand a regulatory and legal framework that allows the commercialization of unbundling services, which presupposes wide freedom and flexibility to offer different types of services to consumers, according to the specific needs of each one. This business model is based on the sale of tickets from a basic fare, which offers the passenger only transportation, without the conveniences or ancillary services traditionally available to service users, such as seats marked in advance, baggage carriage included in the price of the ticket, catering, among others. If one wants services and facilities besides pure transportation, the airline can also offer them, for segregated price and according to the desired service. In this way, passengers can enjoy the type of service that best suits their needs, resulting in a price per ticket that meets the individual expectations of each one. In general, given supply and demand, this system allows very competitive basic fares.
The implementation of low-cost based services in Brazil, with its unbundling features, has been legally feasible from 2005 on, when the Brazilian Congress passed Law 11,182/2005. This legislation created ANAC and implemented the so-called tariff freedom regime, meaning that the Government cannot interfere in the formation of prices for air carriage services.
Acting in accordance with its legal competence and in search of industry development, ANAC has been modernizing regulations in a very efficient way. As an example, we can refer to Resolution 400/2016, which, among other innovations, eliminated the baggage allowance rules, according to which airlines were required to carry luggage based on a minimum weight (23 kg for domestic transport and 32 kg for international transportation), without any cost , whether passengers intended to carry luggage or not. Thus, after this Resolution, airlines have the option of offering or not baggage allowance, adding this characteristic as a competitive differential. Thus, one of the imbalances that prevented low-cost companies from developing their business model in the country was eliminated.
However, it is fundamental that all sectors of Brazilian society understand this progress and the advantages associated with changing rules, which has not been happening easily in our country, perhaps due to: i) an obsolete idea about air carriage, ii) short term views about how to offer good services to consumers and iii) lack of visibility about what is required for airlines to compete in this very difficult business. State interference in the formation of prices for air carriage services and how services are offered in the market, besides violating the tariff freedom regime, would eradicate low-cost companies from the country, which have the unbundling pricing as the basis for its business model. This would undermine competition in the airline industry, reduce rivalry between competing airlines and certainly would entail detriment against the ones the government legitimately sought to protect: the consumer.
Enforcement of the international treaties and modernization of local laws applicable to air carriage
Also, lack of enforcement of the specific legislation governing air carriage brings serious legal uncertainty, and therefore, an obstacle to the healthy and rapid development of the sector.
Brazil has undertaken internationally to adopt the rules set forth in the Montreal Convention, which was duly approved by the National Congress through Legislative Decree n. 59/2006 and promulgated by Presidential Decree n. 5,910/2006. In view of interpretations in the sense that the aforementioned international treaty would conflict with Brazilian Federal Laws, notably the Consumer Defense Code, Brazilian courts are prone to deny enforceability of certain provisions of the Convention, which has caused a significant increase in the volume of lawsuits filed in the country against airlines over the years as well as exaggerated and disproportionate damages, in clear violation of the principles affirmed by Brazil with the international community not only when the country ratified the treaty but also when it internalized such treaty as a part of national legislation by act of the National Congress and the Presidency of the Republic.
In 2009, in view of the great debate about the application or not of the Conventions, the Brazilian Supreme Court accepted to review a case about baggage loss, where the applicability of the Convention was discussed. On May 25, 2017, the Plenary of the Court ruled that conflicts of this nature should be resolved by the rules established by the International Conventions on the subject, ratified by Brazil. The following thesis (Tema 210) was thus drafted: “Under article 178 of the Federal Constitution, rules and international treaties limiting air carriers´ liability, especially the Warsaw and Montreal Conventions, are prevalent in relation to the Consumer Protection Code”
Though, even after issuance of the Supreme Court ruling (Tema 210), we have heard different interpretations from local courts on the subject. Several rulings issued by lower Courts have found that the effects of the Supreme Court decision would be limited to cases involving baggage loss, specifically to limit air carrier´s liability under article 22 of the Montreal Convention to property damage (Courts have awarded moral damages above the liability limits), so such Courts have not been generally applying the Convention in any other circumstances. This is wrong since the Convention unequivocally regulates not only the indemnification regime in cases of loss, damage or delay of baggage, but also carriage of cargo, as well as situations of flight delays, among other subjects.
Until the Supreme Court ruling is not followed in a consistent way and unless Courts understand that the Convention must be applied in its entirety, it is probable that more disputes will arise in Brazil, thus contributing to discouragement of investments in the airline sector. The reluctance of Brazilian Courts to ensure the full validity of the Convention is also a true obstacle to the emergence of low-cost services, mainly due to the legal uncertainty arising from this situation.
In the area of domestic transportation, a significant modernization of the current legislation is urgently needed, to incorporate the principles of the Montreal Convention to local laws governing domestic air carriage. This was among the goals of the Special Commission for Reform of the Brazilian Aeronautic Code created by the Senate under the Act of President n. 11 of 2015, of which we had the honor to participate, and that is currently under analysis in the Federal Senate.
Until we can raise awareness in all sectors of the Brazilian society about the relevance of having legal certainly to support the necessary investments in the sector, in the form of modern and effective regulations and full respect for the special rules and international treaties in force, barriers to the entry of new airlines and new investments to existing airlines will continue to exist, and therefore, the country will suffer with lower connectivity, lower level of competition and therefore less efficient and more expensive services, thus preventing the democratization of air transport in the country.