Brazilian Law no. 14,034 and its impact on airlines
Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados, Brazil
Marcelle Fazzato Lopes
Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados, Brazil
As a constantly evolving industry, aviation impacts countless lives around the world and is a key sector for the economy, both regionally and globally.
Considering the historical expansion and positive economic expectations for the next decade, industry experts were optimistic about the potential growth of the sector in 2020. According to a study presented by the International Air Transport Association (IATA) in 2019, several factors were expected to enable financial stability for airlines in 2020, such as expected recovery in global growth and world trade, reduction in fuel costs and increase in airline capacity.
IATA even forecasted a rise in airlines’ net post-tax profits of USD 29.3bn, a better performance than in earlier decades. Recovery from low financial and economical performances were expected for Latin American airlines, evidencing the aspiration for improvement in 2020.
However, as is well known, the aviation industry has been severely impacted by the ongoing coronavirus pandemic. In order to stop the spread of the virus, several governments imposed lockdowns and travel restrictions, which directly affected airlines, airports, passengers and all companies involved with air transportation. As indicated by IATA, airlines were faced with a high cash burn due to a reduction in demand and an obligation to bear fixed and semi-fixed costs, as 2020 reveals itself to be one of the toughest years in the history of aviation. Airport administrators that operate under concession agreements and other air companies also face similar scenarios.
Representing almost half of all airlines’ costs and expenses, the fixed and semi-fixed costs mentioned above include depreciation, the payment of leases and employees (crew and administrative), maintenance, repairing and overhauling costs.Without revenues, IATA estimated that 75 per cent of the researched airlines would have cash to cover less than three months’ worth of non-avoidable costs.
Considering the current scenario and looking forward to preserving airlines and air companies, the Brazilian government enacted the Provisional Presidential Decree No. 925, further converted into Law No. 14,034, of 5 August 2020, to promote changes in the Brazilian regulatory environment and ease the burden imposed on air companies.
Provisional Presidential Decree No. 925
Effective as of the date of its publication, a Provisional Presidential Decree (PPD), as its name suggests, is a temporary rule issued by the President in cases deemed relevant and urgent. Valid for sixty days, which may be extended for a further sixty-day period, a PPD must be converted into law by the National Congress to remain in force.
Following the World Health Organization’s declaration of the pandemic on 11 March 2020, the Brazilian government promptly issued PPD No. 925, of 18 March 2020, seeking to promote immediate cash relief for air companies. The proposed measures were:
- the postponement of the payment of fixed and variable contributions related to airport concession agreements until 18 December 2020; and the
- extension of the deadline for reimbursement of airline tickets for transportation contracts entered into until 31 December 2020.
On 13 December 2016, the Brazilian Civil Aviation Agency (ANAC) issued Resolution No. 400/16 to establish general conditions of air carriage (Resolution No. 400/16). Among other subjects related to air transportation, such as baggage allowance and cancellation rights, Resolution No. 400/16 defines that airlines shall have a seven-day period to reimburse passengers. As determined by PPD No. 925, the reimbursement period was extended to twelve months.
As a further measure to encourage passengers to maintain their tickets and prevent airlines from being obligated to reimburse several tickets at once, the PPD No. 925 exempted consumers from contractual penalties if a credit reimbursement for use within twelve months is chosen.
Law No. 14,034/2020
During the discussion of PPD No. 925 by the National Congress, several amendments were inserted for the inclusion of measures not directly related to the original wording of the PPD No. 925, but deemed relevant for the air sector in general. Law No. 14,034 was then issued by the President, with vetoes on measures related to airport concessionaires, pilots and air service employees.
Most of the suggested inclusions were approved and were later converted into Law No. 14,034. Furthermore, original dispositions brought by the PPD No. 925 were also amended to clarify its applicability. The new rules shall apply for flight cancellations that occurred between 19 March and 31 December 2020, and the rules of the contracted service shall still be applied, such as the provision of material assistance by airlines when applicable.
On top of the initial measures proposed by the PPD No. 925, Law No. 14,034 extended the use period of the voucher for passengers from twelve to eighteen months, also including the possibility of credit use by third parties (other than the original passenger) to further encourage the choice for credit reimbursement.
However, considering the extension to twelve months for cash reimbursement, the deadline for refund of the amounts paid to government entities, such as airport fees, was maintained at seven days from the passenger’s request.
In addition to the measures related to cancelled flights and reimbursement, although not related to the initial purpose of the PPD No. 925, the Brazilian Aeronautical Code (BAC) was amended by Law No. 14,034 to restrict indemnity claims arising from emotional distress to require proof of the distress or suffering caused to the passenger, such as by flight cancellations or delays.
As was highly expected by the industry long before the pandemic, the BAC was also amended to determine that air carriers are not liable for delays on contracted services that occur because of unforeseeable circumstances (force majeure), if it was impossible to avoid the distress/suffering by adopting the available measures. BAC now provides for the following hypotheses of force majeure:
- restrictions imposed by the relevant authorities on take-off and landing due to adverse weather conditions;
- restrictions on take-off and landing due to unavailability of airport infrastructure;
- restrictions on flight, take-off and landing arising from determinations of the civil aviation authority or any other relevant authority (which may be held liable); and
- pandemic decree or the issuance of government acts resulting from it, with the intent of preventing or restricting air transportation or airport activities.
In all cases, the obligation to provide material assistance, reimbursement and other alternatives to the passenger shall remain in force.
Additional Tariff to International Boarding
Also brought by Law No. 14,034 is the repeal of the Additional Tariff to International Boarding (ATIB), scheduled for 1 January2021. Initially provided for by Law No. 9,825/1999, the ATIB is a federal taxand its collection is directed to the National Civil Aviation Fund, a fund destined to the development and promotion of the civil aviation sector and the airport and civil aviation infrastructures.
The ATIB of USD 18,00 integrated the cost of all tickets of international flights departing from Brazil and was added to the Tariff to International Boarding which, in turn, is the applicable fare destined to airport operators as remuneration for the use of the airport facilities.
Unlike the Tariff to International Boarding which is calculated on the actual ticket prices established by the airlines, the ATIB value is determined solely by the government and could artificially elevate the total cost of airline tickets. Additionally, as a fixed value – opposed to a percentage of the ticket total price – the ATIB has greater impacts on lower value tickets.
Impacts to the sector
The measures proposed by the PPD No. 925 (as converted into Law No. 14,034) are intended to aid in the preservation of airlines, seeking to reduce the immediate cash outflow and allow aviation companies to reorganise their debts and maintain operations during the pandemic and post-pandemic scenarios, while also being designed to protect passengers’ rights and preserve the initially contracted services.
In order to promote an environment more conducive to the development of airline businesses, the changes made by Law No. 14,034 in relation to airlines’ liability aim to reduce an excessive reliance on courts and to reduce risks and costs involved in the sector.
According to ANAC, in 2017, judicial claims in air transportation represented a cost of almost BRL 1bn a year, which, divided by the tickets sold in the same period, reached an estimated cost of BRL 10 per ticket.The judgments arising from passengers’ claims accounted for approximately one per cent of the costs and operating expenses of Brazilian airlines – equivalent to BRL 311m, as a result of more than 60,000 law suits.These costs and expenses are inevitably transferred to the final consumer, diluted in the airfare.
In that sense, by requiring indemnity claimants to prove the distress suffered by the passenger and by clarifying the scenarios in which airlines shall not be held liable due to force majeure circumstances, Law No. 14,034 seeks to discourage the filling of unsubstantiated claims.
COMISSA~O MISTA DA MEDIDA PROVISO´RIA No 925, DE 2020
MEDIDA PROVISO´RIA No 925, DE 2020
Aligned with the intent to attract new business models to Brazil, such as ultra-low cost companies, the repeal of the ATIB is expected to reduce the costs of operating international routes in Brazil and to promote a relevant price reduction, especially in short-distance routes.
As an example, if we consider low-cost flights operated between Rio de Janeiro, Brazil and Buenos Aires, Argentina, with tickets purchased in October 2019, the ATIB represented 20 per cent of the total airfare.If the ATIB continued to represent one fifth of the final price for ultra-low-cost tickets in short-haul flights departing from Brazil, the success of such business model could be impaired.
It is impossible to foresee how the impacts suffered during the coronavirus pandemic will continue to affect the aviation sector, as well as to predict how far the social-distancing measures arising from this pandemic scenario will advance. However, it is possible to notice that companies are working alongside the relevant authorities to mitigate risks, preserve businesses, and ensure the safety of its employees and passengers.
The measures adopted by the Brazilian government are expected to drive change and create a more favourable setting for air companies to operate in Brazil, attracting new players to the industry and increasing competition. It is important to highlight that the development of the air sector is beneficial not only to the country’s economy, but also to consumers. All of the suggested changes are intended to motivate the reduction of airfares, which may, in turn, attract more consumers to the air transportation system.
All of the measures outlined in this paper are material but may be limited in their effect. Despite not being granted so far, a government support package is expected to be available for airlines in the near future. While subsidies are not granted, it is expected for the outlined measures to provide cash flow relief and incentivise an increase in air travel, respecting safety and sanitary standards.
‘Economic Performance of the Airline Industry’ (IATA, 11 December 2019), see www.iata.org/en/iata-repository/publications/economic-reports/airline-industry-economic-performance---december-2019---report/accessed 31 August 2020.
‘Economic Performance of the Airline Industry’ (IATA, 8 June 2020), see www.iata.org/en/iata-repository/publications/economic-reports/airline-industry-economic-performance-june-2020-report/accessed 31 August 2020.
Brian Pearce, ‘Covid-19: Cash burn analysis’ (IATA, 31 March 2020), see https://www.iata.org/en/iata-repository/publications/economic-reports/covid-19-cash-burn-analysis/accessed 8 March 2020.
‘Covid-19: Airline’s liquidity crisis’ (IATA, 17 March 2020) https://www.iata.org/globalassets/iata/pressroom/covid-19-airlines-liquidity-crisis.pdfaccessed 8 March 2020.
'Custo da judicialização no setor aéreo é de R$ 1 bi ao ano, apontam diretores da ANAC’ (ADBIB, 19 June 2020), see https://www.abdib.org.br/2020/06/19/custo-da-judicializacao-no-setor-aereo-e-de-r-1-bi-ao-ano-apontam-diretores-da-anac/#:~:text=DESTAQUE-,Custo%20da%20judicializa%C3%A7%C3%A3o%20no%20setor%20a%C3%A9reo%20%C3%A9%20de%20R%24%201,ano%2C%20apontam%20diretores%20da%20ANAC&text=Dados%20das%20companhias%20a%C3%A9reas%20nacionais,R%24%201%20bilh%C3%A3o%20por%20ano.accessed 8 March 2020.
‘Commisão mists da media provisória No 925, de 2020, Medida Provisória No 925, de 2020’ (Camara, 7 July 2020), see www.camara.leg.br/proposicoesWeb/prop_mostrarintegra?codteor=1910777&filename=PPP+1+MPV92520+%3D%3E+MPV+925/2020accessed o8 March 2020.
‘Extinção do adicional da tarifa de embarque internacional’ (Jota, 12 August 2020), see www.jota.info/opiniao-e-analise/artigos/extincao-do-adicional-da-tarifa-de-embarque-internacional-12082020#_ftn5accessed 8 August 2020.