Brazil’s Aviation Paradox: Record Passengers, 95% of Global Lawsuits, and a Looming VAT

Global aviation margins are compressing. At the 82nd IATA Annual General Meeting in Rio de Janeiro, the industry association halved its 2026 global net profit forecast to $23 billion, a steep drop from the $45 billion recorded in 2025.

The consolidated net profit margin for the industry fell to 2.0%. Airlines will retain an average of $4.50 per passenger. The profit collapse stems from supply chain failures and energy costs, not demand. Global revenue is projected to reach $1.165 trillion on a record 5.1 billion passengers, but total operating expenses will jump 13% to $1.117 trillion. Jet fuel contracts face sustained geopolitical pressure, with IATA projecting an average of $152 per barrel for 2026. Fuel now accounts for 31.4% of total airline operating expenses.

An 18,000-aircraft backlog across Airbus and Boeing assembly lines forces operators to keep older, fuel-inefficient planes in service just as energy prices peak. The global commercial fleet now averages 15.2 years of age.

LATAM exploits regional capacity gaps

LATAM Airlines Group used the summit to formalize its post-Chapter 11 market position. CEO Roberto Alvo assumed the chairmanship of the IATA Board of Directors for the 2026-2027 term. Operating with a restructured balance sheet, the carrier is shifting its domestic strategy to target secondary markets.

LATAM Brasil will introduce 24 Embraer E2 jets, with options for 50 more, to break Azul Linhas Aéreas' hold on mid-sized regional markets. The strategy targets 200 South American cities with populations between 200,000 and 500,000. Half of these cities are in Brazil. Historically, LATAM relied on the Airbus A320 family, which restricted frequency on lower-density routes. The 130-seat E2 allows the carrier to double daily flight frequencies in regional centers, capturing corporate travelers who require schedule flexibility.

Competitors are also restructuring capital. GOL Linhas Aéreas exited Chapter 11 under the control of the Abra Group, which now holds an 80% stake and plans pan-American network coordination with Avianca. Azul recently raised R$7.2 billion in international bonds to secure liquidity and fund long-haul expansion.

Structural liabilities in the Brazilian market

Brazil processed 130 million passengers in 2025, breaking its domestic record. Yet only 10% of the population buys airline tickets. Growth is constrained by congested airports in São Paulo and Rio de Janeiro, alongside severe legislative and judicial risks.

Brazil generates 95% of the world's civil aviation lawsuits. Consumer protection laws and digital litigation firms cost the three major domestic airlines over R$1 billion annually in legal penalties. Courts frequently hold airlines strictly liable for delays caused by air traffic control directives or extreme weather. This legal environment operates as a barrier to entry, deterring international low-cost carriers from establishing local subsidiaries.

Two proposed federal laws threaten the sector's cost structure:

Tax Reform (VAT): The current proposal imposes a 26.5% standard value-added tax on airline tickets. IATA projects this would add $195 to an average $740 international fare, eliminating 3.6 million international connections and reducing domestic demand by up to 30%.

Labor Law (PEC 8/2025 and PL 1838/26): Lawmakers are pushing to mandate a standard 40-hour workweek with fixed weekend days off, overriding the specialized "Aeronaut Law" that governs crew scheduling. LATAM executives warned the Ministry of Labor that applying standard corporate hours to aviation would paralyze long-haul routes to the US and Europe, where crews routinely cross multiple time zones.

SAF production and state liquidity

Brazil controls the feedstock required to scale Sustainable Aviation Fuel (SAF) production. The aviation industry must secure 500 million tons of SAF by 2050 to meet net-zero emissions mandates. Brazilian agricultural and ethanol infrastructure can produce an estimated 60 million tons of certified biomass, covering 10% to 12% of projected global demand.

By 2030, Brazilian refineries expect to convert 18 million tons of ethanol into 12 million tons of SAF, vastly outproducing the 2.4 million tons available globally in 2026. IATA supports the "Book-and-Claim" accounting system for these outputs. This model allows European airlines to buy carbon credits for SAF injected into the fuel supply at Brazilian airports, satisfying environmental mandates without forcing physical supply chain disruptions.

To offset the immediate currency and fuel shocks, the Brazilian government authorized an R$8 billion emergency credit line through the National Civil Aviation Fund (FNAC). Disbursed by the BNDES, the funds carry a 4% base rate with spreads capped at 4.5%. The program offers a 12-month grace period and 60-month amortization. The government also exempted jet fuel from federal PIS and COFINS taxes, cutting the cost per liter by R$0.07, and deferred air traffic control fees to year-end settlements to ease airline cash flow during off-peak months.