Brazil's Azul could join Avianca-United Airlines alliance

(This Nov. 3 story corrects BlackRock participation in Azul, clarifies Avianca executive title)

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SAO PAULO (Reuters) - Two Brazilian airlines, Azul SA AZUL.N and Avianca Brasil, are targets for expansion in the new alliance between United Continental Holdings Inc UAL.O, Avianca Holdings AVT_p.CN and Copa Airlines CPA.N on U.S.-Latin America routes, an Avianca executive said.

There was little reference to Brazil, by far Latin America’s largest market, when the joint venture was announced on Friday, but Avianca Holdings’ Executive Vice President for Business Units, Gerardo Grajales, told Reuters on Monday that the partners already had in mind Azul and Avianca Brasil, which operates independently of Colombia-based Avianca Holdings.

“The two airlines complement each other in the Brazilian market,” Grajales said. “From the beginning we thought that Brazil should be covered by our agreement. However, no partnership would be authorized if it did not have an Open Skies agreement.”

The Open Skies agreement between Brazil and the United States was signed into law in May, when discussions among the three airlines were already advanced, he said.

Azul said in a statement that it was “monitoring the negotiations between the companies and evaluating its options.”

The airline agreement mimics a partnership between American Airlines AAL.O and Chile's Latam Airlines LTM.SN which has been mired in regulatory scrutiny.

Like its main U.S. rivals, No. 3 U.S. carrier United has been eyeing untapped potential for leisure and business travelers in Latin America, where many still travel long distances by car and bus.

The announcement between the United Airlines parent, Avianca and Panama’s Copa capped off almost two years of negotiations. United will loan Avianca’s majority shareholder almost $500 million to be spent on ventures outside of the airline.

Depending on how it is repaid, United could end up owning a large chunk of the Colombian carrier. United is making no monetary investment in Copa or its affiliates.

United already owns an 8 percent stake in Azul, and has a codesharing agreement with Avianca Brasil, formerly known as Ocean Air.

The world’s largest asset manager BlackRock disclosed late on Friday that it had sold a stake in Azul’s preferred shares and kept a 10 percent participation. Hours earlier, the carrier said in another securities filing that it sought to double in size in the next five years.

Shares in Azul sank almost 5 percent on Monday in Sao Paulo, before trimming losses to around 3 percent.

Reporting by Marcelo Rochabrun; Editing by David Gregorio and Rosalba O’Brien