[The Practical Nomad Newsletter] The Amazing Race 13, Episode 1 (airline routes)

[Edward Hasbrouck]

This column with links:

http://hasbrouck.org/blog/archives/001537.html

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The Amazing Race 13, Episode 1:

Los Angeles, CA (USA) - Salvador, Bahia (Brazil)

The first leg of "The Amazing Race 13" took the reality-TV racers from  
the Los Angeles Coliseum to the city of Salvador, in northeastern  
Brazil.

As usual, the flight choices for the first leg (on American Airlines  
and United Airlines, we were told) were prescribed by the TV  
producers, and the actual route and connections were omitted or  
obfuscated. So viewers aren't likely to have realized that even given  
a free choice of flights, the racers would have needed to change  
planes at least twice. And they couldn't have arrived in Salvador on  
American or United, since neither flies any closer than Rio de  
Janiero, 800 miles away: at one of their connection points, they must  
have had to transfer to some other airline.

In fact, northeastern Brazil is by far the largest and most populous  
region so close to the USA without direct flights to and from the USA.  
The reasons why are a case study in airline and government  
decision-making:

International airline routes are determined by airlines, as business  
decisions of how to maximize expected profits. Profitability and  
passenger numbers are not the same: A flight that is typically  
emptier, but serves a city pair between which a wealthier clientele  
are willing to pay higher average fares, may be more profitable (with  
a higher average revenue per seat, even counting the empty seats into  
the equation) than a flight between more popular but lower-revenue  
destinations.

Profits, load factors (percentages of seats typically filled, which  
may be different in coach/economy than in business or first class),  
average fares (ditto), and other costs (such as differential landing  
fees) aren't the whole story, however: Airlines must work within  
(although their lobbyists work hard to influence) the rules of  
bilateral and multilateral aviation treaties, the terms of which are  
negotiated by governments on the basis of their perceived national  
political, economic, and other interests.

The USA is party to some so-called "open skies" agreements, but they  
are far from free trade agreements, since they don't override a  
variety of other protectionist laws and subsidies that favor USA-based  
airlines over foreign competitors. More often, aviation agreements set  
limits on how many airlines based in each country can operate flights  
between them (each country wanting to protect the profits of its "own"  
airlines by protecting its share of the total market), which gateways  
in each country they can fly between (people who travel from country A  
to country B may come from, and want to go to, different places in  
both countries than those travelling from B to A) and sometimes what  
fares they can charge. Nominally balanced bilateral agreements may  
have very different effects on the two countries, their airlines, and  
their travellers.

Those rules aren't necessarily bad: Market forces would produce  
airline route maps even more skewed toward the travel patterns of the  
world's richest people, and even less oriented towards the interests  
of the largest numbers of potential air travellers, than they are  
today under many of these agreements. Air travel is very heavily  
subsidized by taxes -- including taxes paid by people who can rarely  
afford to fly -- and it's only fair for governments to make sure the  
airlines that receive those subsidies operate, at least to some  
degree, in the public interest.

The problem is that airline lobbyists, and other economic interests  
(especially business travellers), have much more influence on the  
negotiating process than ordinary travellers.

When I was in Brazil last year, I talked about this issue over lunch  
with the U.S. Consul in Recife, Brazil, in the context of the  
bilateral USA-Brazil aviation agreement which was then being  
renegotiated.

For historical reasons the U.S. Consulate General serving the entire  
northeast of Brazil has long been located in Recife, despite the fact  
that Salvador is now marginally larger, wealthier, better known, and  
more popular with tourists. My great-uncle Nathaniel P. Davis -- no  
relation to the other better-known Nathaniel Davis with whom his  
career in the State Department partially overlapped -- served as head  
of the U.S. mission in Recife in the 1920's. Since I was passing  
through (the TAP Air Portugal flights between Recife, other cities in  
northeastern Brazil, and Lisbon are some of the shortest and most  
affordable connections between South America and Europe), I was  
curious to see what had become of the places where my great-uncle and  
aunt had lived and worked.

The current U.S. Consul in Recife is a diplomatic history buff, fluent  
in Portuguese, who started her career in government service as a Peace  
Corps volunteer near Salvador, many years before fulfilling her wish  
to return to the region as head of the U.S. diplomatic mission. (She  
says the transition from the Peace Corps to the U.S. Foreign Service  
is less uncommon than one might think, perhaps because of the paucity  
of U.S. citizens with any sort of international experience.) She was  
unable to find out anything for me about the former locations of the  
U.S. Consulate or the Consul's residence. And the Consulate is  
woefully understaffed (typical of the neglect of northeastern Brazil  
by the central governments of both the USA and Brazil), with only  
three other American officers, in addition to the Consul herself, to  
conduct the required in-person interviews and make decisions on all  
visa applications from a catchment area with a population of more than  
50 million people.

But the consul herself graciously made time to share her perspective  
on the relationship between Brazil's Northeast, the centers of  
Brazilian economic and political power in Sao Paulo and Brasilia, and  
her own superiors at the U.S. Embassy in Brasilia and in Washington.

I don't always agree with the official views expressed by U.S.  
diplomats. Then again, they don't always agree with the governmental  
views they are required (unless they want to quit their jobs) to  
represent. Regardless of those disagreements, I've always found it  
worth going out of my way, and worth taking advantage of any  
opportunity, to hear what they have to say about the places they are  
stationed. In general, I think U.S. foreign policy would be greatly  
improved by giving more weight to the opinions of diplomats "in the  
field". (A point on which I suspect my Uncle Pen might have agreed, at  
least most of the time, despite his role in bringing greater  
administration standardization and centralization to the operations of  
U.S. missions overseas) Within the limits imposed by diplomacy, I've  
found individual diplomats to be surprisingly forthright about most  
things, even on the record.

You aren't likely to snag an invitation to meet the head of a large  
and busy diplomatic mission. And the U.S. Embassy is such a lightning  
rod for anger in some places (Sana'a, Yemen, for example) that it's  
best to stay away unless it's unavoidable. But in a place like Recife  
-- as much a backwater today as it was in my Uncle Pen's day, in the  
eyes of most Americans as well as those of most wealthy, white, and  
southern Brazilians -- diplomatic courtesies are often extended even  
to casual tourist visitors from the diplomats' home country, if you  
ask nicely.

So what were the issues, and why, in the USA-Brazil aviation talks?

The majority of the wealth in Brazil is in greater Sao Paulo. The  
continent's largest and overwhelmingly wealthiest city, it's the  
destination of most of the high-revenue business travel from the USA  
to Brazil, and the source of most high-revenue business and leisure  
travellers from Brazil to the USA. Most tourists from the USA, on the  
other hand want to go to Rio de Janiero, mainly at Carnaval and  
relatively few the rest of the year.

Since the bankruptcy of Varig and a succession of short-lived  
competitors, there is only one long-haul Brazilian airline flying to  
the USA, TAM, and only one other Brazilian airline (discount domestic  
and regional airline GOL) potentially interested and able to do so.  
Allowing more airlines from the USA to share the USA-Brazil market  
would only dilute the Brazilian market share.

The USA doesn't allow Brazilian or any other foreign airlines to fly  
within the USA. So Brazilian airlines want to fly directly to as many  
places as possible in the USA, and places that are destinations for  
Brazilians, while airlines based in the USA can feed people through  
pretty much any hub (even one that's neither an origin nor a  
destination for many travellers) to and from places throughout the USA.

This means that the Brazilian government is mainly interested in  
limiting the number of airlines from each country allowed to serve Sao  
Paulo, Rio, while getting rights for them to serve as many places as  
possible in the USA. If airlines from the USA add more flights, Brazil  
would rather they be required to serve other provincial Brazilian  
cities, preferably those chosen by the Brazilian government, where  
they would promote targeted regional economic development and reward  
the provincial and Northeastern support base of the governing Workers'  
Party without undercutting TAM's profits to and from the big-money  
centers of Sao Paulo and Rio.

In arguing that USA-Brazil relations would benefit from direct flights  
between the USA and the northeast of Brazil, the U.S. Consul in Recife  
may have had more in common with Brazilians from the Northeast than  
either she or they had with either country's officials in Brasilia or  
Washington. But as Consul, she had no direct role in the negotiations,  
and could only forward her advice (privately) to her superiors, for  
them to consider, or not, as they saw fit.

The government of the USA, on the other handed, wants as many airlines  
as possible (most of which will be from the USA) to operate as many or  
as few flights as they wish (to maximize profits from large seasonal  
fluctuations in demand) from a few hub cities in the USA of their  
choosing (to suit their hub-and-spoke domestic route systems) to Sao  
Paulo and Rio.

JetBlue was and is a wild card for both the USA and Brazil: JetBlue's  
chairman, David Neeleman, was born and lived as a child in Brazil, and  
returned there for a time as a young adult Mormon missionary. JetBlue  
has made a success of serving secondary international destinations in  
other countries, such as Santiago in the Dominican Republic. If any  
airline in the USA would have noticed the potential profits and lack  
of competition for flights between the USA and northeastern Brazil,  
most people -- including me -- assumed that it would be JetBlue. But  
as a dual citizen of the USA and Brazil, Neeleman is eligible to own  
airlines in both countries, under their parallel protectionist laws.  
After resigning as president of JetBlue, he announced earlier this  
year that he is starting a new airline (yet to be named) that will  
focus on domestic routes within Brazil. There's no clear indication  
yet that either JetBlue or Neeleman's new Brazilian airline wants to  
fly between the two countries. Neeleman's choice makes sense: average  
airfares per passenger-mile within Brazil are substantially higher  
than on most USA-Brazil routes, in either direction.  Most  
middle-class Brazilians travel by bus, even for thousand-mile  
journeys.  GOL has yet to saturate the potential market for  
lower-fare, but still profitable for the airlines, domestic air service.

The new bilateral agreement concluded in June 2008 reflects a typical  
set of diplomatic compromises. The limit on the number of airlines  
from the USA allowed to fly to Brazil was lifted -- a key goal of the  
USA. The limits on the numbers of cities in Brazil and flights per  
week to and from Brazil by airlines from the USA -- key Brazilian  
desires -- were retained, although increased. Of five new permitted  
Brazilian destinations for USA-based airlines, Brazil was allowed to  
designate two (Curitiba and Fortaleza, an interior and a Northeastern  
city neither of which would likely have been the first choice of the  
USA or any of its airlines), while the USA is allowed to pick the  
other three.

Most of the new flights will be additional frequencies, and flights on  
more USA-based airlines, between their hubs in the USA, Sao Paulo, and  
Rio de Janiero. But a few of the new flights will be to other cities  
in Brazil, including the first direct flights to the Northeast. In  
November, American Airlines will start direct fights between Miami and  
Salvador (the flights that didn't exist when "The Amazing Race 13" was  
filmed), Fortaleza (stay tuned!), and Belo Horizonte.

But while AA is adding a fourth daily flight between Sao Paulo and  
Miami (in addition to its flights between Sao Paulo, Dallas/Ft. Worth,  
and New York), they will have only one flight a day to Salvador, and  
only four flights a week to Belo Horizonte. That doesn't necessarily  
mean they expect more traffic to and from Salvador than Belo  
Horizonte: More likely, it's because most travel to and from Salvador  
will be by wealthy tourists from the USA, while business to and from  
Belo Horizonte will come mainly from the large number of  
Brazilian-Americans from Minas Gerais state, their families, and their  
friends. (I went to Belo, and found it interesting and worthwhile.  
Among other things, it's the center of the Brazilian clothing  
manufacturing industry, with garment-district prices on distinctive  
Brazilian fashions. But it's definitely not on the typical tourist's  
radar.) Those different passenger demographics will mean higher yields  
(average fares) to Salvador and profits even with some empty seats in  
the back of the plane, while the large year-round volume of  
lower-yield "visiting friends and relatives" (VFR) traffic to Belo  
Horizonte will only allow them to make a profit if they keep the  
number of flights small enough that they can count on filling almost  
every seat. That's the kind of calculus that airline route planners go  
through in prioritizing the use of expensive aircraft.

As for the Brazilian airlines, TAM's first new route to the USA under  
the new agreement will be between Sao Paulo and the most desirable  
destination for Brazilian tourists that isn't an international hub for  
any major USA-based airline: Orlando.

Back in 2000, American Airlines had nonstop Sao Paulo-Orlando service,  
but dropped it after 11 September 2001, when it became too difficult  
for even upper-class white Paulistas to get tourist visas to take  
their families to Disney World. Today, people in Sao Paulo have to  
wait an average of more than 2 months just to get an appointment for  
the in-person interview required for all tourist or transit visa  
applications.

The U.S. Embassy in Brasilia, along with the U.S. consulates in Sao  
Paulo, Rio, and Recife, has been working hard -- within the limits of  
the visa rules set in Washington -- to speed up visa processing and  
mitigate its hassles. The consul in Recife, for example, was  
rightfully proud of having added an air-conditioned waiting area and  
an ATM inside the consular grounds, so visa applicants are no longer  
at the mercy of thieves who used to know that everyone standing in  
line on the street outside the consulate had at least US$131 on their  
person in cash to pay their visa fees.

It remains to be seen if things have changed enough, or if there is  
simply enough pent-up demand, for TAM to make money on a Sao  
Paulo-Orlando route that depends on enough Brazilian tourists getting  
visas to the USA.

-- 

Edward Hasbrouck
<edward at hasbrouck.org>
<http://hasbrouck.org>
+1-415-824-0214

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