No-Frills Norwegian Air Flies Into Brazil’s Red Tape

(Bloomberg) -- Welcome to Brazil and fasten your seat belt, Norwegian Air.

The European carrier has won approval from the Brazilian government to begin flying in the country, expanding its network of discount trans-Atlantic flights to South America. But the airline will face mounting regulation that could work against its no-frills model.

Brazil’s Senate approved a bill Aug. 8 prohibiting airlines from charging passengers to choose seats. And a big win for carriers in 2016 -- the ability to charge for luggage -- is at risk of being reversed as opponents protest the fees as excessive.

Norwegian Air is proceeding with caution. “In order to enter a new market -- and consequently creating new jobs and boosting economic value -- for Norwegian it is crucial to be able to operate as a modern airline, not as an airline from the past,” said Matias Maciel, a spokesman for Norwegian Air Shuttle ASA.

Bringing newfangled financial ways to Brazil is no easy task for carriers. While some global airlines rack up as much as 40 percent of sales with ancillary fees for items like baggage or priority seating, in Brazil they’ve struggled to get permission to levy those extra charges.

Ancillary Windfall

Last year, the 10 airlines earning the most from ancillary revenue reported almost $30 billion in additional sales -- up from $2.1 billion in 2007, according to a CarTrawler and IdeaWorks report.

After Brazilian regulators allowed airlines to start charging for luggage in 2016, Brazil’s own Gol Linhas Aereas Inteligentes SA saw the revenue category that includes ancillary sales rise 15 percent to 370 million reais ($89 million) in the fourth quarter of 2017 when compared to the same period a year earlier, according to the company’s filings.

Now that revenue is at risk, with the national lawyer’s association campaigning to eliminate baggage fees, calling the practice illegal and abusive to consumers.

Airlines operating in Brazil have been vocal supporters of less government interference. Speaking at an event in Sao Paulo this week, Gol Chief Executive Officer Paulo Sergio Kakinoff praised the 2002 decision to deregulate ticket prices.

Free Competition

“We’ve always been in favor of competition free from regulation,” Kakinoff said. “Gol wouldn’t exist were it not for the freedom to determine prices.”

Since deregulation, the average ticket price dropped to 200 reais from 600 reais, Avianca Brasil Chief Executive Officer Frederico Pedreira said in an interview. “It’s been more than proven that deregulation brings more competition and more economic development,” he said.

Following through with that sentiment, some airlines are speaking out against the Brazilian Senate’s proposal to outlaw fees for seat assignments.

Latam Airlines Group SA said in a statement it “laments the proposal of a regulation that goes against the service model adopted by global airlines.”

Senator Jose Reguffe, the author of the bill, told Agencia Senado that consumers have a right to choose their seat for free when they buy tickets for a flight.

Abusing Consumers

“To charge this fee is an indirect way for the companies to raise even more costs targeted to consumers,” he said.

Not all airlines are against the proposal. Azul SA, which was created by JetBlue Airways Corp. founder David Neeleman, has publicly agreed that no customer should have to pay for choosing a seat.

The bill now heads to the lower house, and if approved there it will go to the president for his signature.

If the proposal becomes law, it will be a blow to Norwegian Air’s plan to implement a low-cost model in Brazil with flights to London from Sao Paulo starting next year – what has typically been a high-cost route. A search shows flights on the route in October start at $760.

“It’s key, it’s very important for us to offer the passenger the option to pay for food, the seats,” Maciel said.

--With assistance from Samy Adghirni.

To contact the reporters on this story: Christiana Sciaudone in Sao Paulo at csciaudone@bloomberg.net;Vinícius Andrade in São Paulo at vandrade3@bloomberg.net;Fabiola Moura in Sao Paulo at fdemoura@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, ;Brendan Case at bcase4@bloomberg.net, Susan Warren

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