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Legal Update

Brazil Closer to an “Open Skies” Agreement with the U.S.

9 March 2018
Tauil & Chequer Legal Update

In theory, the broader definition of “Open Skies” relates to those agreements in which two or more countries authorize the free operation of air services, through airlines designated by their respective governments, encompassing - in general - the capacity offered, frequency of flights, prices and types of aircraft.  The first successful initiative of this nature in Latin America dates back to 1979, when Chile established the policy of “Open Skies (with Reciprocity)”.  More than 30 years later, in 2010, the Latin American Civil Aviation Commission (“CLAC”) also managed to establish a “Multilateral Agreement for Open Skies between Member States of CLAC”, which has been adopted by a few countries in the region to date (such as Uruguay, Panama and Colombia).  Notwithstanding the fact that Brazil executed CLAC’s convention in 2012, local authorities have yet to implement the necessary formalities for the agreement to be enforced.

This week, however, the Brazilian Federal Senate finally approved the Open Skies Bilateral Agreement (“Agreement”) entered into between Brazil and the US in 2011.  Although the agreement has a limited scope, as soon as the new rules are promulgated by the Brazilian president, they will represent the end of the current cap of 301 weekly flights between these two countries.  Restrictions applicable to cabotage flights (i.e. domestic flight operated by foreign companies) will remain unchanged.  The bilateral agreement does not change the current rules in relation to the participation of foreign investment capital in Brazil (limited to 20%, as per Article 181 of the Brazilian Aeronautical Code 1986).  However, considering the restrictions imposed by the American antitrust authorities for M&A operations involving companies from countries that do not have an open skies policy with the US, the effective implementation of the agreement with Brazil will no doubt assist in expediting the approval of one of the most anticipated modifications to the archaic Brazilian Aeronautical Code.  The agreement also sets forth new rules on other relevant topics, such as air safety in civil aviation, tax exemptions and remittance of profits.

Supporters of the new agreement believe that the “open skies” between Brazil and the US will expand the connectivity between these countries and encourage the development of new businesses.  Critics, however, argue that the opening of the Brazilian market will put the domestic airlines in a difficult position, as their new competitors do not have the disadvantage of heavy labor and tax burdens faced by the Brazilian carriers.

The full text of the Draft Decree no. 5/2018, approved on 7 March 2018, can be found at the following link (in Portuguese only).

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