Fitch: Negative Outlook for Brazilian Airlines

NEW YORK--(Business Wire)--
Fitch Ratings earlier today revised the Outlook to Negative on the
ratings of the two main Brazilian airlines, TAM and GOL. Fitch expects
the near-term outlook for the global airlines sector to remain
difficult, and the Brazilian airline sector is no exception.

The negative outlook reflects Fitch's concerns regarding the
challenges the industry is expected to face in the near-term, high jet
fuel price being the predominant factor, which is likely to delay
improvements in their operating performance and ability to restore
profitability that would enable them to achieve more adequate credit
ratios for the current rating category.

"Both airlines will need to concentrate on yield improvement,
tighter non-fuel cost controls, strict capacity discipline and
liquidity preservation," said Fitch analyst Debora Jalles. "Fitch
believes that the companies ability to restore yields and load factors
will be a fundamental factor for improving profitability. The
unprecedented rise in crude oil over the last several months will put
increasing pressure on companies' margins and cash flow generation
capacity for the remainder of the year. The industry's capacity to
pass-through higher costs to its customers will be a predominant
factor as hedge operations and surcharges on international flights
will be able to compensate for less than half of the fuel price
increase. Until 2007, the run-up in oil prices were mostly compensated
by the appreciation of the local currency."

Uncertainty regarding the Brazilian airline industry recovery in
the near-term has grown. Only a more rational environment in terms of
competition, where the principal players focus more on profitability
rather than market share, coupled with increased demand, will enable
the companies to limit the continued drop in their operating margins.
"Fitch understands that continued growth of demand in the Brazilian
aviation sector could improve these companies ability to pass-through
cost increases by raising fare prices, we think the best time to do it
is in the third and fourth quarter of the year as demand is higher,"
said Fitch Director Revisson Bonfim.

The Brazilian air transportation sector experienced a structural
crisis at the end of 2006 and during most of 2007 due to the strong
growth of passenger flow, problems in air traffic control, the lack of
efficient government investments in infrastructure and the operational
model adopted by the leading companies adding increased supply.
Airport bottlenecks pushed flight cancellations and delays beyond
acceptable levels, impacting the performance of Brazilian companies.
Fitch believes that the Brazilian industry could continue to face
infrastructure bottlenecks over the next few years, as effective
investment in the airports to increase relevant additional capacity
have not come on line yet.

As a result of the infrastructure crisis and the intense
competitive environment, the financial performance of all Brazilian
airlines deteriorated significantly. From 2002 to 2006, the Brazilian
market reported increasing profitability, reflecting an efficient cost
structure and high load factors, despite a reduction in yields due to
the aggressive competitive environment. However, in 2007, the industry
faced great challenges, including over supply capacity, regulatory
measures that restricted operations in Congonhas and the short-term
negative effects on demand due to accidents. The cost structure side
was impacted by flight delays/cancellations and flight restrictions at
the main Brazilian Hub (Congonhas), which affected the companies'
strategy to maximize aircrafts and integrate flight network.

The Brazilian airline market is controlled by a duopoly comprised
of TAM and GOL, which together represent a market share around 93%. In
the past five years, the sector has shown aggressive growth, with
passenger traffic rising from 28 million in 2004 to 44 million in
2007.

Fitch's rating definitions and the terms of use of such ratings
are available on the agency's public site, www.fitchratings.com.
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality,
conflicts of interest, affiliate firewall, compliance and other
relevant policies and procedures are also available from the 'Code of
Conduct' section of this site.

Fitch Ratings
Debora Jalles, 21-4503-2600 (Rio de Janeiro, Brazil)
Revisson Bonfim, 212-908-0898 (New York)
Media Relations:
Christopher Kimble, 212-908-0226 (New York)

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