Brazilian Overview Monthly Report - FEB 2020

February/20

WORLD EVENTS AND THE BRAZILIAN ECONOMY ..............................2 LATIN AMERICA MACRO DATA RESUME..................................................... 2 CONSUMPTION ..........................................................................................3 CONFIDENCE INDEXES................................................................................3

TOURISM INDUSTRY MORE THAN 100 MILLION AIR PASSENGERS........................................4 AIRLINES ..................................................................................................4 CORPORATE TRAVEL ...............................................................................5 SAA STOPS FLYING TO BRAZIL AFTER 50 YEARS..................................6 UNITED STATES REVOVERS.....................................................................6 FORUM PANROTAS 2020..........................................................................6

WORLD EVENTS AND THE BRAZILIAN ECONOMY World events at the beginning of the year have brought severe turbulence to the global economy. At first, the focus was on the trade war between China and the United States. Soon afterwards, the conflict between the United States and Iran emerged. And the topic of the moment is coronavirus whose health and economic impacts are still difficult to be measured.

As the virus originated in China, especially in cities with important industrial activity, it tends to affect economic activity, as well as its exports and imports, which will lead to a slower growth rate in the world, given the importance of the Chinese economy. And investors are more cautious while watching this movement, mainly in relation to emerging markets.

The Brazilian economy follows the trend of what is happening in other nations. The stock market, which almost reached 120 thousand points at the end of January, has been oscillating and was close to 115 thousand points in the second week of February. The dollar has been reaching historic highs, above R$ 4.30, due to the risk of weakness in the global economy, the uncertain influences of the coronavirus, but also due to the internal interest rate.

This is because this month the Central Bank of Brazil decided to reduce the basic interest rate of the economy from 4.5% to 4.25% per year, a historic record low, and signaled that the decline cycle has ended. With inflation just over 4% and the country still lacking investment grade, which would provide more security, it becomes a less profitable market and scares off foreign investors. Due to this scenario, we had the biggest dollar overflow in 38 years, about 45 billion dollars.

Therefore, it reinforces the need of the reform agenda of the Brazilian economy to be continued. The return of the Congress recess at the beginning of this month has brought back the discussions of the two main reforms expected for 2020, the tax and the administrative reforms. Only if the government and Congress show signs that they are moving towards resolving them foreign investors should return to increase their bets in the country. Being an electoral year, negotiations are more difficult because of deputies who will be candidates for mayor and also because of the contribution of parliamentarians in regional campaigns, being absent of the Congress daily routine. Therefore, the government must make an effort to speed up negotiations and votes for the first semester.

Latin America Macro Data Resume

Argentina

Brazil

Chile

Colombia

Mexico

Peru

Unemployment rate

9,70%

11,80%

7,00%

9,50%

2,90%

6,10%

Basic interest rate

48,00%

4,25%

1,75%

4,25%

7,25%

2,25%

Inflation (LTM - jan*)

53,80%

4,19%

3,54%

3,62%

2,83%

1,88%

*LTM - Last Twelve Months Until January (except Mexico and Argentina) Legend: Green, Red and Black The data get better, worth and equal than last month.

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CONSUMPTION Still about the domestic economy, the reduction in the basic interest rate has had a very beneficial effect on household consumption. The average rate for consumers ended the year at its lowest level since February 2014, at 47.3% per year. And credit use by consumers grew 15.5% in 2019. It is interesting to note that sales of home appliances, for example, a credit sensitive sector, had a decrease of 2.7 and 2.9% in the first and second quarters, respectively, but managed to revert it in the third quarter presenting an increase of 3.6% and ended the last three months with an increase of 11.5%.

Brazil is managing to advance, even if not at the desired or ideal pace. But there are important structural changes taking place, giving more freedom to the private sector through a more favorable business environment, which are supporting the economy’s growth more steadily, avoiding the bumps that the country has had in the last years.

OTHER IMPORTANT DATA: nRetail sector ended 2019 with a 3.9% growth in sales , the third consecutive year with a positive balance. In December, specifically, the best time for retailers (Christmas time), there was an annual growth of 4.1%, especially for the home appliance industry, which showed an increase of 20.6%. In the accumulated result for the year, the highlight was the automotive industry, with an increase of 10% in sales. in January, quite below the 1.15% of December, influenced by the increase in the price of meat. The percentage of this first month was the lowest since 1994 (beginning of the Real Plan). In the accumulated of the 12 months period, the variation is 4.19%.

nBrazil’s official price index (IPCA) showed an increase of 0.21%

n The industry ended last year with a retraction of 1.1%. It was a very difficult year for the sector,

which faced the problem of the Brumadinho dam disaster in the beginning of the year, and also the Argentine recession which impacted the production and export of Brazilian vehicles and the US-China trade war, which interferes in all global production chains.

CONFIDENCE INDEXES: The Consumer Confidence Index (ICC) of the city of São Paulo started the year with the same score as in December, 121.3 points. However, even remaining stable in January, the rise of 13% in the second semester of 2019 still indicates a good moment for consumers in São Paulo. The more favorable labor market and greater availability of credit provide conditions for consumer optimism to be kept.

The Retail Businessmen Confidence Index (ICEC) of the city of São Paulo follows the upward trend, with the fifth consecutive increase, and starts the year of 2020 with 123.2 points, a raise of 0.9% in relation to December and 3,4% compared with the same period last year. Businessmen maintain their optimism based on the government’s reform agenda and also already seeing results of the economic policy on a daily basis, such as greater job generation, cheaper credit and higher household consumption.

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Consumer Confident Index (ICC) and Comerce Businessman (ICEC)

Note: The ICC and ICEC range from 0 to 200 points. The level from 100 to 200 points is considered optimistic and below 100 points, pessimistic.

Although the indicators are from the city of São Paulo, they follow the trend of what is happening in the rest of the country since the largest city in Brazil represents 11% of the national GDP.

TOURISM INDUSTRY MORE THAN 100 MILLION AIR PASSENGERS Brazilian airlines carried a total of 104.4 million paying passengers in 2019, on domestic and international flights, which represented a growth of 1.35% in relation to the 103 million paying passengers transported in 2018. In the domestic market, 95.3 million paying passengers were transported last year, a rise of 1.7% compared to 2018.

In this calculation, each passenger is a flight segment. Thus, for a round-trip ticket for the same passenger, the Brazilian authorities calculated two passengers. The total of absolute passengers is estimated between 30 and 35 million for domestic flights and around 8.5 million for international flights.

AIRLINES In terms of participation by airline, at the end of December, Gol was the leader of the domestic flight market, with a 38.6% share, followed by Latam (37.7%) and Azul (23.3%).

In the international market, considering only Brazilian airlines, in December 2019 the leadership remained with Latam, with a 65.5% share, followed by Azul (22.5%) and Gol (12%).

The demand for international flights, operated by airlines, remained stable in 2019, compared to 2018, but the seat supply decreased 2.2%.

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CORPORATE TRAVEL

Domestic flight market grows and dollar’s rise compensates the decrease of international flight market The overall result for the year 2019, compared to 2018, measured by the sales survey of Abracorp, the main entity of corporate travel agencies, shows an overall increase of 9.5% in sales volume of the approximately 30 associated TMCs, which corresponds to an increase from R$ 10,404,702,216 to R$ 11,388,808,954 (about US$ 2,81bi) Once again, the positive result recorded in 2019 was due, in large part, to the positive performance of the national airline (14%) and hospitality (21%) industries. Together, they represented more than R$ 6.9 billion of the calculated monetary value.

The international airline segment grew only 0.9% in the year from R$ 2,790,599,415 to R$ 2,815,485,642. In fact, the exchange rate favorable to the dollar compensated a decrease of 8% in the number of tickets issued (642.6 thousand).

Practically all the companies presented a decrease in the number of tickets and most of the companies also had a decrease in the amount of reais generated. United Airlines and Copa were exceptions in the Top 10, followed by Gol and Qatar.

Latam led the way with an 18.4% share of international sales, but had a decrease of 3.1% in tickets: 122.6 thousand, for a total sales of R$ 518.6 million. The results of Latam and American (second position) were decisive for Oneworld to be the most sold alliance by Abracorp. The bad news is that Latam says goodbye to the alliance on May 1, 2020.

American Airlines, with 11.6% share, sold 48.6 thousand tickets (-21%) and generated R$ 327.9 million (+ 1.5%).

United appears in the third position with 42.6 thousand tickets (stable compared to 2018), but had an increase of 21% in sales, reaching R$ 310.9 million.

In fourth position, with 9.3% share, comes the Air France-KLM group, with a 12.4% decrease in tickets (42.6 thousand) and R$ 261.9 million in sales (-5%).

In fifth position was the Lufthansa/Swiss group, with 26.3 thousand tickets issued by Abracorp (-18.3%), with 6.6% share in sales, for a total of R$ 186.2 million (-17, 9%).

International airline segment - Jan to Dec

(Source: Abracorp)

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SAA STOPS FLYING TO BRAZIL AFTER 50 YEARS The financial crisis of South African Airways (SAA) led the company to cut some global routes, and São Paulo was one of the chosen ones. As of March, 31, the company no longer flies to Brazil, after 50 years of uninterrupted operations.

South Africa will continue with a direct connection offered by Latam Airlines (which plans to make this flight a daily flight later this year) and with indirect connections by the African companies TAAG, from Angola, and Ethiopian, from Ethiopia. Arab companies are also flight options to South Africa.

UNITED STATES WILL RISE AGAIN The offer of flights between Brazil and the United States is gradually recovering. Azul announced that it will fly between Campinas (SP) and New York, and American Airlines and Gol Linhas Aereas announced a codeshare agreement, which expands the options for passengers from all over Brazil.

The agreement between Gol and American is the result of the end of the relationship that both had with Delta and Latam, respectively.

Latam Airlines, which leaves Oneworld on May 1, also announced that it has closed bilateral agreements with almost all the companies in the alliance, except American Airlines, since it now has Delta as its preferred partner in the US.

FORUM PANROTAS 2020 On March 17 and 18, in São Paulo, the 18th edition of the PANROTAS Forum will gather more than 1,200 tourism leaders in Brazil. Gol President Paulo Kakinoff, CVC Corp President Luiz Fernando Fogaça, Marriott Regional Vice President Louise Bang, Best Western Global Sales Director Matt Teixeira and Air France Vice President Catherine Villar and Virgin Atlantic vice president Yuli Thompson are among the speakers this year.

Register and check the complete schedule at forum.panrotas.com.br.

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