Brazil Freight Transport Report Q1 2008

In mid-2007 Brazil's air traffic control system was teetering on the brink of a systemic failure. On July 28 the main runway at Congonhas Airport in So Paulo, Brazil's busiest, reopened, 11 days after a TAM passenger jet skidded off its rain-slicked surface and crashed, killing 199 people. It is now clear that capacity at Congonhas, the country's busiest airport, had been stretched beyond safety margins. The runway's closing after the crash forced airlines to cancel hundreds of flights and caused a ripple effect of delays around the country. The accident triggered a political crisis for President Luiz Inacio Lula da Silva.

Even before the crash, public confidence in flying was at an all-time low, with widespread frustration at delays and cancellations. Last September, a plane belonging to the carrier Gol Linhas Aereas Inteligentes (Gol) collided over the Amazon jungle with a US-registered executive plane and crashed, killing all 154 people aboard. The two crashes were the worst in Brazil's history. The weekend after the crash, an electrical failure closed down all air traffic control capacity over the Amazon, resulting in more cancellations and forcing numerous international flights on their way to Brazil either to turn back to the United States or land in Central American countries. The underlying problem is that scant investment has been made in infrastructure, including at airports and in-air traffic technology. That said, in this Freight Transport Report, BMI still projects annual average air freight growth rate of 9.1% over the 2007-2012 period.

Various factors support this prediction. Fundamentally, we believe Brazilian aviation is experiencing a crisis of unrestrained and unplanned growth. We now expect a correction, but the fundamentals will still point to expansion. Annual Brazilian GDP growth will average 4.5% in the 2007-2012 period (up from 3.2% in the preceding five-year period). While this will underpin general air-freight demand, aviation will benefit from even faster demand growth for high-value/low-bulk cargoes.

The overall freight picture will be encouraging. There continue to be no reliable statistics on Brazilian road-freight haulage. However, based on BMI estimates, we expect freight carried to be growing at an average of around 6.6% per annum, because investment to improve and repair the highway network is still lagging. The largely privatised rail-freight sector will do better, aided by Brazil's commodity export boom, particularly in mining. We now expect the growth figure in 2007-2012 to be an annual average of 10.2%. Total tonnage handled by Brazil's main seaports will rise by an average of 8.5% per annum in the forecast period, down on the 8.7% registered in the preceding five years. The main reason for this is that after the foreign trade and export boom peaked in 2004 and another strong year in 2007, we see both import and export growth moderating significantly in the next few years, when domestic consumption is likely to be the main engine of macroeconomic growth.

Brazil performs reasonably well in our freight transport industry business environment matrix, scoring significantly above the regional average. Freight growth, infrastructure growth, the regulatory and competitive environment all score well. Economic and political risk is comparable to the Latin American peer group. The transport intensity index is also above the regional average, although there is something of a question mark over the future dynamism of the country's foreign trade. Foreign trade still represents only around 25% of GDP, although on the other hand the sheer geographical size of the country means there will be healthy internal demand for freight transport.

According to our latest estimates, the total value of transport and communications GDP will rise to US$108.7bn in nominal terms by 2012, representing 5.5% of Brazil's GDP. The transport and communications sector employed 4.26mn people, or 4.7% of the labour force, in 2006. We see these figures rising to 5.47mn - and 5.2% - by 2011.