2003 Gol Challenges And Opportunities Iiamerc

SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

GOL LINHAS AÉREAS: CHALLENGES AND PERSPECTIVES OF OPERATING A LOW COST-LOW FARE AIRLINE IN BRAZIL

Erik Novaes de Almeida Silva M.Sc. student in Transportation Engineering Federal University of Rio de Janeiro, Brazil

Respicio A. Espirito Santo Jr., D.Sc. Associate Professor Federal University of Rio de Janeiro, Brazil

Related topics: New business models; Low-cost/low-fare airlines; Market concentration; Airport and airline marketing.

Authors’ contact: UNIVERSIDADE FEDERAL DO RIO DE JANEIRO Att.: Prof. Respicio A. Espirito Santo Jr. Ilha do Fundão, Centro de Tecnologia, Bloco D – sala D209 Departamento de Engenharia de Transportes, DET/EP-UFRJ Rio de Janeiro, RJ

21945-970

BRASIL

[email protected] [email protected]

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SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

ABSTRACT

This paper presents the introduction of a low-cost/low-fare (LC/LF) concept in Brazil by Gol Airlines, beginning in January 2001. We will show that some of the core LC/LF strategies of operations and management decisions put into action by North American and European carriers like Southwest and Jetblue, and Ryanair and easyjet, respectively, could not be implemented by Gol in the beginning of its operations, while several others will be unable to be implemented at all.

The paper also analyses the impacts and contributions that have resulted from the introduction of Gol Airlines and its “Brazilian LC/LF concept”, while presenting and discussing the main issues within the crisis involving the major airlines of Brazil.

Moreover, the recently announced possible-future merger between the two largest Brazilian carriers, VARIG and TAM, is addressed as a major opponent to Gol’s survival and its desired expansion in the Brazilian air transport market. While discussing some of the possible outcomes of this merger to the Brazilian domestic market, some of the strategies already being implemented by the LC/LF carrier to counter this threat are presented, together with another major step to guarantee Gol’s survivability and future growth: the go-ahead of the Brazilian government on the injection of capital from AIG, to buy 20% of the airline’s shares in the first months of 2003.

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SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

1. INTRODUCTION Any Brazilian airline wishing to adopt the low-cost/low-fare (LC/LF) concept would fit in the measures of flexibility that have been established by the Brazilian Government since the early 90s, and that have increased since late 1997 (Espirito Santo Jr., 2000). These measures, under the term Flexibilização (literally flexibilization, a phased deregulation process), have become crucial in permitting the airlines to determine their own fares, thus consolidating the government policy towards increasing competition to favor the consumers’ well being (for an update on a possible re-regulation, see section 7). According to Oliveira and Mulller (1999), reduction of fares has a positive effect on the consumers, not only because of the collapse of prices itself, but also because of the possibility of additional generation of demand produced by this reduction. In that way, the LC/LF carriers may contribute with this increment in the demand.

Questions concerning the results of the companies need to be prioritized, mainly when the reduction of tariffs can be closely related to the quality of services. In a scenario internally and externally affected by economic downturns, there must be a constant adequacy of the functional structure of the organizations, mainly in order to guarantee their position in a competitive market. The depreciation of the Brazilian currency in relation to the U.S. dollar and the Euro; the increase in the price of aviation fuel; the September 11th terrorist attacks; and the consequent reduction in the rhythm of the expansion of economic activities give more relevance to these questions.

In Brazil, incumbent carriers experienced a loss of approximately R$580 million (approximately US$270 million in early 2003) accumulated from January to September 2002, with a growth of only 0.9% in the number of passengers, comparatively to the numbers of the previous year. The debts presented are superior to US$1 billion (DAC, 2002).

In short, the present article aims in describing de operations of Gol Linhas Aéreas (Gol Airlines), the first successful low-cost/low-fare airline to operate regularly in Brazil. For this, we will present some aspects involving the Brazilian domestic market, while pointing some of

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SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

the main differences in operating a LC/LF carrier in Brazil if compared to the U.S., Canada and the European Union.

2. CONSIDERATIONS CONCERNING THE BRAZILIAN DOMESTIC MARKET Since 1999 the performance of the Brazilian commercial air transport market has been influenced by unfavorable conditions of the national economy as well as by external events. Dating back from the Asian crisis in 1997/98, the recession of the world-wide economy, the devaluation of the Real (beginning in January 1999), the U.S. economic downturn in 2000, and the Argentinean crisis, just to mention a few relevant aspects, resulted in a scenario very unfavorable to the sector, impacting negatively Brazil’s domestic and international markets, at least in short/medium term.

According to the Department of Civil Aviation (DAC, 2001), currency devaluation inflicts a great negative impact in the airlines’ performance, as leasing, maintenance, fuel, etc. are directly linked to the U.S. dollar. Moreover, the September 11th terrorist attacks have contributed even more to the already instability in place and the amounting negative results of the industry, not only in Brazil, but anywhere in the world, as insurance costs increased enormously and the demand for the international segment decreased significantly. According to the data supplied by the DAC almost every major Brazilian carrier had financial losses between January and September of 2002 (Table 1). According to this data, carriers totaled losses of R$580.7 million. Meanwhile, the average profitability of the industry is negative, if counted since 1998. Table 1 – Major Brazilian Airlines’ Losses in 2002 Airline

Period

Losses (in R$)

TAM

January-September

305 million

VARIG

January-September

208,9 million

VASP

January-September

66 million

GOL

January-December

PROFIT of 5,4 million

Source: DAC (2002) and Gol Linhas Aéreas.

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SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

The year 2001 presented opposing landmarks of great relevance for the Brazilian air transport. If on the one hand the terrorist attacks of September 11th and the demise of Transbrasil and its regional subsidiary Interbrasil Star had stressed the difficulties, on the other hand, the launch of Gol, bringing in new operational and organizational innovations, contributed directly in raising the level of competition in the domestic market, one of the main objectives of the flexibilization policy (gradual deregulation) started early in the 90s by the DAC.

3. THE INTRODUCTION OF THE LOW-COST/LOW-FARE CONCEPT In 1971 Southwest Airlines initiated its operations introducing the low-cost/low-fare model along several other customer-oriented strategies (catchy livery, young and smiling flight attendants, extremely simply fare structure, cheerful on-board service, high frequency, convenient and on-time schedules, fast turnarounds, etc.) that have been copied throughout the world by other similar-minded airlines. Not registering a single year of losses since 1973, Southwest has become the most copied and most studied business model in the airline industry. Indeed, other successful LC/LF airlines were created and operate through adapting the Southwest model to its particular market. These carriers include Irish Ryanair, U.K.-based easyJet, WestJet (Canada), and Virgin Blue (Australia/New Zealand), not to mention JetBlue (U.S.), with its somewhat different approach as a business (acquisition of LiveTV, for instance). The latter was the first low-cost/low-fare carrier to operate an all-Airbus fleet since the very first day.

In very brief terms, the LC/LF model emphasizes the affordable, safe, timely, direct and most convenient means of air transport between two points that, in general, are apart by a less-thantwo-hours flight. The airlines wishing to adopt the LC/LF model must realize that it is based on providing the customer with basic, uncomplicated air transportation, simply that. The main and constant objectives are to reduce costs as much as possible, while maximizing revenues through an extremely competent and reliable service, backed by carefully detailed market studies and customer surveys. Through all of this plus a wise and committed top management working side-by-side with every single employee in the organization, these carriers are successful in offering convenient services and substantially lower fares than their competitors.

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SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

Last but not least, several strategies and operating procedures complete the LC/LF model; the most widely known being: 1. Fleet Standardization (fleet commonality) Fleet standardization reduces the costs of maintenance, spare parts and supplies. Moreover, standardization eases and reduces the costs of training for mechanics, flight crews and several contracted services. Generally seen simply through the aircraft and engine manufacturers, a comprehensive fleet standardization comprises as much commonality as possible throughout all other aircraft, avionics, tools, and engine parts. 2. Simplification or elimination of in-flight service LC/LF carriers are also labeled as “no frills” exactly in regard to their simple in-flight service. In general, there are no hot meals, no free newspapers, even no differentiation between a “breakfast-time flight” and a “dinner-time flight”. Instead, LC/LF commonly serve peanuts, candy bars, and biscuits in (very) small packs. The business model under this umbrella has proved that the elimination of hot meals, besides generating huge saving with catering providers, also reduce flight attendants workload, frees more space for additional seat rows (after all, the galleys are smaller!), eases and reduces costs with galley-equipment maintenance, eases cabin cleaning and waste disposal, and directly contribute with the fast turnaround procedure (see item 9). 3. Secondary airports Secondary, low-cost airports, are extremely important for LC/LF airline operations. These carriers opt to service these many times not famous sites in exchange for reliable and low-cost aeronautical services (landing and parking fees, ramp and gate space, offices and check-in utilization, handling, catering, etc.) associated with good ground infrastructure for passenger convenience (terminals, parking lots, access roads, driving time/distance to city center, etc.). Secondary airports also tend to be far less congested, paving the way for non-sloted operations and fast turnarounds. 4. Direct sales to the consumers The use of the Internet and call centers, plus self-serving kiosks, not to mention airport counters, allows the airlines to divert from the huge costs associated with the traditional distribution channels such as high fee GDS/CRSs and high commission travel agents. 6

SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

5. Ticket-less or Electronic tickets (e-tickets) The elimination of the conventional paper tickets by e-tickets or no ticket at all (ticketless) eases all passenger operations, reduces the number of employees in the department of financial control, and minimizes problems with frauds and ticket embezzlements. 6. Short-haul, direct flights and no interlining Direct flight are much more convenient to the customer that through-hub (connection) flights. Combined with being short-haul, it functions and can be operated almost as a shuttle service, with high frequency. No interlining reduces cost with handling and interconnection with other airlines and their systems (and the associated constrains). 7. Single-class cabin lay-out The aircraft is configured as with a single-class layout. Passengers are treated and seen as equal, while there is no in-flight service differentiation. It also allows the carrier to put as many seats as possible in each aircraft, thus maximizing the opportunity to fill the seats through an uncomplicated fare structure. 8. Simple or no frequent-flyer programs Generally, LC/LF carriers do not offer frequent-flyer programs. If they do, it generally uses the most simple manner of counting frequency: the number of flight taken by the customer. This “number-of-flights” program reduces control costs and drastically simplifies (or even eliminates!) the control over the myriad of mile-per-dollar-spent partnerships with hotels, car rentals, gift-shops, etc. that usually participate in the traditional frequent-flyer programs. 9. High level of fleet utilization The LC/LF model dictates the carrier must have a high level of aircraft utilization, meaning each aircraft will fly as much as possible to bring in revenues. This is translated into fast turnarounds at airports (shortest ground time as possible), high employee productivity (flight attendants are responsible for putting away all in-flight service disposals before landing to minimize the need for ground cleaning personnel to board the aircraft; ramp personnel must be agile but attentious to detail; baggage handling must be quick but careful with all luggage) and highly committed service providers acting as “partners” (fuel, catering if any, lavatory/waste disposal, etc.) 7

SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

10. Highly motivated employees (but not necessarily well paid) LC/LF airlines usually tend to grow in moments of crisis, where customers are willing to shift from the full-service carrier with its complicated and restriction-imposed fare structure to a much more simple fare regime. Crisis also favor LC/LF carriers because incumbent carrier often incur in layoffs. When this happens, LC/LF carriers can easily recruit highly skilled employees on a fraction of their “original” costs. Moreover, even with a workforce earning a below-average salary (Southwest is an exception in this regard), virtually all LC/LF carriers are successful in motivating their employees through vertical integration, a very good working environment, and profit sharing policies.

4 – A LOW COST- LOW FARE AIRLINE IN BRAZIL: GOL LINHAS AÉREAS Gol Linhas Aéreas Inteligentes Ltda. (Gol Intelligent Airlines, Ltd.) was officially established on August 1st, 2000 and began operations on January 15, 2001. Gol (meaning “goal” in Portuguese) was created by Constantino de Oliveira Jr. (or “Junior”), one of the sons of a great entrepreneur (Nenê Constantino) head of the Grupo Áurea, a bus conglomerate giant in Brazil. To create and launch Gol, Junior teamed with a handful of highly skilled and experienced professionals that today are in key positions in the airline’s organizational structure. Designed since the very beginning to operate under the LC/LF model, it needed a powerful marketing campaign to draw attention of the travelling public and, most of all, the non-travelling public as well! The name “Gol” came exactly to fulfill this primary objective. The logo design with a double “o” was created to give the visual impression of “gol” (goal) being shouted by vibrant masses in a soccer game! Indeed, having linked its name to one of the most common and vibrant words in the Brazilian Portuguese language, every time a goal is seen, said, and shouted anywhere in Brazil, the airline is being marketed!

On the strategic and operational sides, the carrier’s profile is based on international benchmarkings and real-case, proven examples: Southwest’s concept of fleet commonality, a simple but attentious and caring in-flight service and direct point-to-point flights was the starting point. From easyJet came the idea of outsourcing whatever could be outsourced, and

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SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

from Ryanair and JetBlue the fundamental importance of building a strong and reliable information technology-based operation.

4.1 – Two Strategic Tools for Gol’s Low-Cost Operations In the present section we will focus on two of the main strategic tools used by Gol to plan and run its low-cost operations: (1) an IT-based real-time maintenance; and (2) an IT-based reservation system, its outsourcing, distribution costs and IT-innovations.

4.1.1 – The IT_based real-time maintenance Gol uses the Amis-2000 logistics and maintenance planning software. It monitors about 24,000 aircraft parts, checking each one’s mileage, cycles and depreciation. Because almost 100% of these parts must be imported, Brazilian airlines’ cost with maintenance and spare parts inventory are huge! By using the Amis-2000 software, Gol can plan when and where a specific part must be maintained, while also planning when and how to move the specific mechanics to do the job. It works in a structured manner, in order to built a “phased”, continuous maintenance program, in contrast of the traditional “aircraft-must-park-formaintenance” used by several incumbent carriers.

The Amis-2000 alone does not get all the job done. Gol has taken clear advantage of the layoffs occurred in the domestic market from late 1999 onwards. The layoffs were the results of VARIG, VASP and Transbrasil restructuring plans starting in the late 90s. Transbrasil ceased operations in December 2001, while VASP terminated all international flights the same year. In view of this, several ex-Transbrasil and ex-VASP highly qualified professionals were hired by the new airline, from maintenance managers and mechanics to pilots and firstofficers. This has motivated an internal slogan for Gol as being “the youngest and most experienced airline in Brazil”.

4.1.2 – IT-based reservation system, its outsourcing, distribution costs and IT-innovations Just like other LC/LF players, Gol decided to adopt ticket-less operations. Tickets are like receipts of grocery stores, printed on yellow or white 3” (8 cm)-wide thermal paper rolls with multiple “Gol” logos on the back side. With it comes the boarding pass, in a user9

SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

friendly easily detachable manner. Prior to start its operations, the Department of Civil Aviation (DAC) recommended that the airline should use the conventional ticket, as “it was mandatory in Brazilian aviation regulations”. Firmly attached to its original business plan, Gol requested the DAC the exact regulation where it was “mandatory” the use of conventional paper-tickets. Not finding it anywhere because it did not exist at all, the DAC was forced to let Gol adopt ticket-less travel, paving the way for one more extraordinary aspect of cost-cutting in this business.

Regarding distribution channels, the airline opted to go as deeply as possible on the Internet. The main questions were: in Brazil, are there enough passengers and potential passengers with access to the Web? If there are, would they be confident to buy on-line? The answers not only could be found in benchmarking other on-line sales in the country, but could also come from small travel agents that were totally dependable on consolidators. Today this response is divided as follows: 65% of the tickets sold are via the Web, with 50% of this coming from those small travel agents, that have become true Gol partners! Today the airline has more than 5,000 travel agents catalogued as “partners”, selling seats and tour packages all over the country through their exclusive login/password connection in the airline’s website. The other 50% come from individuals accessing themselves (or via their secretaries and assistants) the website. Leaving behind the traditional CRS/GDS channels as the main source of revenues (circa 8-10% sales still come from SABRE), the carrier can impose an almost total control on its distribution costs.

A powerful tool within the main reservation system is that the carrier can operate almost without any overbooking. All forms of reservations made via the outsourced system (direct sale via the web, web-based travel agents, airport counters and self-service kiosks) require a 48-hour payment. If no payment is registered within the 48-hour window the system automatically cancels the reservation.

Another new form of distribution in Brazil used by Gol is the “supermarket kiosk”. The idea was put in practice in two major supermarkets in São Paulo, primarily with a lease space agreement with the mega-stores. Nowadays the airline is implementing the second phase of 10

SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

this program: over 50 supermarket kiosks are being installed in several Carrefour mega-stores on a risk-partnership contract. This means that there is no leasing for the space occupied by the kiosk, and means that the Carrefour stores will have a percentage of the revenues coming from each selling point. This “risk-sharing” partnership will force the supermarket to study the best location where the kiosks must be installed, a practice not done before on the leaseper-area-used contracts!

A more conventional distribution adopted by Gol was the call-center. The airline was one of the first users in the country of the new 0300 service. In contrast with the 0800 toll-free services, now being abandoned by almost all private organizations regarding sale transactions in Brazil, the 0300 is a pay-per-minute service (0800 toll-free calls are still used by FAQs services, customer relations, technical support and non-direct sale contacts). The new service reverts the costs of the calls to the customer, not to the selling part, thus reducing the latter costs of selling its products and services.

Another interesting point used as a strategic catalyst is the direct cooperation existing between LC/LF carriers around the world. The “LC/LF club” promotes several cooperative studies, arranges partnerships in software usage and updating, and performs collaborative crew training. In the words of VP-Operations David Barioni, “(...) don’t be surprised if in the near future you see a sort of ‘International Low-cost/Low-fare Airline Association’ being created by all of us in this business.”

4.2 – Beyond the Price-driven Competition Just as its LC/LF sisters abroad, Gol’s hardest challenge is to be a much more efficient company than its competitors. For this, highly motivated employees play a critical role. By building a brand new fresh atmosphere to work in, and by establishing a direct, vertical access to the very simple organizational structure, has prompted a high motivation throughout the workforce. This is translated not only in smiling and caring flight attendants (indeed, very rarely seen in incumbent carriers!!) and check-in personnel, but in highly productive mechanics and airport agents. Moreover, a paradigm-breaking culture means that whatever costs that can be cut or reduced, they will be! From paperless memos, aeronautical charts 11

SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

printed only on demand, no-frills in-flight service, and in-house cheap solutions for complex problems, Gol knows exactly what a continuous US$10,000-per-month saving can represent in the year-long run!

4.2.1 – Fleet and crew allocation model, plus the “fuel decision sheet” solutions When in the process of creating Gol, the senior executives had several problems in hand to be solved. Easily one of the greatest related to fleet and crew allocation modeling. Offers from various top-line software companies and aviation consultant firms landed in the executives’ hands instantly. But they faced another huge problem: cost. The more traditional software packages were offered from US$200,000 to more than US$1 million. That was unacceptable by that LC/LF initiative. So a real indigenous solution should be tried: planning and software experts from Grupo Áurea (the land transportation giant where Gol was born) were brought in to study the possibility of adapting the current software used by the bus companies for the upcoming airline. The general idea worked extremely well, and the cost was just under US$5,000. In fact, the newly developed software by any means matches the traditional softwares used worldwide, but in the words of VP for IT Wilson Ramos “It was designed for Gol by people within the Group and it is serving us extremely well.”

Regarding fuel, in 2002 it accounted for 23.2% of the Brazilian airlines’ costs, according to the Department of Civil Aviation. But the main problem regarding fuel prices in Brazil is directly tied to currency devaluation and the pricing policy exercised by the State-owned giant Petrobras. An example of the extremely negative influence of these two factors combined over aviation fuel (both jet fuel and avgas) is pinpointed by the DAC in a recent study (Table 2).

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SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

Table 2 – Variation of Jet Fuel, U.S. Dollar, Consumer Price Indexes and Inflation rates in Brazil

Variation between Jan/1999

Jet fuel

US$ (dollar)

IGP-DI

INPC

IPCA

684.73%

125.61%

85,75%

45.93%

42.04%

and March/2003

Note: IGP-DI is a common index for measuring the inflation rate; INPC is the general consumer price index; and IPCA is the consumer price index measured through wholesale businesses. Source: Department of Civil Aviation, 2003.

In Brazil, the exact final price for any fuel is given by the state following the application of its own sales tax. For this reason, an airline should have tight control of fuel expenses in each state, while having in mind the “lets-try-to-refuel-wherever-the-fuel-is-cheaper” kind of approach.

In view of this, Gol and other Brazilian carriers have developed a simple

calculation sheet to be used wherever its aircraft flies. The calculation is done by the crew in order to decide where in the programmed landing airports it will be more cost saving to refuel. In a business where fuel costs are critical, a 1 cent per litre cost-cutting measure can represent huge savings at the end of the month.

4.3 – Major Differences from Other Low-Cost/Low-Fare Airlines In this section we will explore some of the major differences of operating a LC/LF airline in Brazil regarding other countries’ experiences, mainly the U.S., Europe and Canada. This include: (1) Operating in secondary airports and in downtown airports; (2) delays and fast turnarounds; (3) having an individual airline unionized workforce; and (4) operate in a niche market.

4.3.1 – Secondary and downtown airports Gol’s LC/LF role models in the U.S. and Europe usually operate in secondary or even tertiary airports to escape from high airport fees and congested facilities. Southwest’s operations in Islip (NY) and Fort Lauderdale (FL), JetBlue’s operations in Long Beach (Calif.), Ryanair’s operations in Beauvais (some 80 km north of Paris) and Charleroi-Gosselies (Brussels-South) and easyJet’s operations in Ciampino (15 km outside Rome), cannot be copied by Gol!

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SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

Simply put, there are no secondary airports near major Brazilian cities able to handle 737 operations! In fact, in Rio de Janeiro, São Paulo, Belo Horizonte and Florianópolis (state of Santa Catarina) there are three cities with more than one airport capable of receiving commercial jet services (Table 3). But if we look more closely, the facilities in these cities range from international airports, downtown highly congested airports or general aviation airports. There is no Ciampino-like or Charleroi-Gosselies-like airports in major Brazilian cities, with probably the exceptions of Viracopos International Airport (SBKP), in Campinas (if considered as a “secondary” airport), in the Greater São Paulo, and Navegantes (SBNF), near Florianópolis. Table 3 – Multiple Airports in Major Brazilian Cities City

International airport

Downtown airport

“Secondary” airport

Rio de Janeiro

Galeão/Tom Jobim

Santos Dumont

GA (not able to operate commercial jet service)

Greater São Paulo

Viracopos (Campinas) Cumbica (Guarulhos)

Congonhas (São Paulo)

GA (not able to operate commercial jet service)

Belo Horizonte

Confins/Tancredo Neves Pampulha

-------

Florianópolis

Hercílio Luz

Navegantes

-------

Without the existence of secondary airports and their lower charges, Gol must rely on the country’s centralized federal airport management run by the Empresa Brasileira de Infraestrutura Aeroportuária (Federal Airport Authority, INFRAERO) and the country’s still-to-be modernized policies towards differentiated airport charges (in fact, landing and parking fees are set by the DAC, not by INFRAERO). INFRAERO manages 65 of the country’s largest airports, through where more than 95% of the passenger and 99% of the cargo flows. This put, the centralized management does not see Santos Dumont and Congonhas downtown airports, for instance, as premium facilities that should have premium airport charges. Flights linking these downtown airports and others with heavy business traffic alike (Pampulha and Brasília) are extremely profitable, but the airlines are charged less than when operating in unconggested, free-space-for-all airports like Galeão/Tom Jobim! The high value of their citycenter location, good transportation facilities and, most of all, the capacity of attracting high-

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SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

yield business travelers are not passed on to the airlines. In view of this, Gol can operate in every major airport in all major cities, whilst paying reasonable airport fees.

4.3.2 – Fast turnarounds Fast turnarounds are a common practice for LC/LF players. With them airlines can maximize aircraft flying time, maximize personnel productivity and reduce airport charges. Gol’s flight operations are designed to do the same, with some great achievements already registered. But as several major Brazilian airports do not yet operate regularly in Cat. II, several flights are forced to be retained in their origin or destination points due to weather conditions. This can be relatively well understood by the frequent traveler or even excused by the common passenger if he or she is flying a full-service airline. But try to explain this to the eventual traveler or to that passenger paying much less for his or her tickets! One of the authors, while flying Gol for 4 consecutive flights experienced not less than 3 delays, one of which lasted 1 hour and 40 minutes! In this particular occasion, the surrounding talks were all relating to the “inexpensive tickets leading to these constant delays” or “if we had flown TAM or VARIG this would not be happening; the guys have many more airplanes and are much more organized”. On the other occasions, although the delay was not as long as this in particular, it was common to hear almost the exact comments!

4.3.3 – Individual airline unionized workforce Employees of Brazilian carriers are unionized under the Sindicato Nacional dos Aeroviários and the Sindicato Nacional dos Aeronautas (affiliated to the IFALPA – International Federation of Air Line Pilots Association). In view of this there is no union representing only Gol’s flight crews, cabin crews or office personnel, as happens, for instance, with some U.S. carriers.

Some Brazilian aviation professionals argue that Gol was “extremely lucky” with the layoffs made by VASP, VARIG and Transbrasil, and again “lucky” with the demise of the latter. Gol recruited extremely experienced flight crews, mechanics and office personnel from these carriers, thus reducing enormously its initial training costs. Thus, the future may reserve surprises regarding payroll increases and even new carriers that may enter the domestic 15

SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

market. As one DAC official put in a meeting in April: “Today a group may start an airline paying some 20% less than Gol to its flight and cabin crew. Just like Gol, this new carrier would already start with a high-skilled labor workforce, and an even lower cost structure.”

4.3.4 – Operating niche markets Point-to-point, short-haul, high-density links between major cities are a common for Southwest, JetBlue, easyJet and Ryanair. These carriers can plan their operations based on high-frequency services between major business and economic centers, trying to capture a great share of business passengers (Southwest’s Dallas–Phoenix and Phoenix–L.A., JetBlue’s NY–Chicago, and Ryanair’s London–Strasbourg flights are clear examples). Other routes are primarily implemented to serve the leisure travel market, backed by a good portion of middleclass residents in either side of a given city-pair. Instead, Gol must plan and market almost all of its flights with business passengers, VFR and leisure passengers in mind. Apart from the high-frequency shuttle services between the downtown airports of Rio, São Paulo and Belo Horizonte and the capital, Brasília, that attracts more business passengers than any other in the country, the other capital-to-capital routes have to be marketed primarily to the general public. The strategy then turns not only to attract passengers that would fly VARIG, TAM or VASP, but mainly to try to convince those individuals that the airline is a good choice, even if it does not have a frequent-flyer program and hot meals. The low fares ends up counting a lot for the VFR and the leisure passenger, but still do not represent a substantial deal to businessmen and government officials travelling on duty.

In view of this, there is almost no “niche market” in Brazil nowadays, if compared directly with the “niche” markets developed and explored by LC/LF airlines abroad. In fact, Gol did not explore any new route, any new city-pair! Even if it planned to capture a mass of potential passengers that were unable to fly and would then do it for 30-50% less, this objective has not yet been fully achieved! The main reason relies on the recession Brazil is suffering for the last several years. Table 4 shows that while only 8-10% of the families in Brazil earn more than US$1,560 per month, its great majority live in the Southeast, South and Center-West regions. With the concentration of the great majority of Brazilian business and economic centers in these regions, Gol’s strategy of flying to almost all state capitals must, at the 16

SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

preliminary level, be lead by attracting the already-flying public to their cheaper fares. In fact, the recession to where the country has dived in the last several years is helping Gol. In the words of Gol’s president, Constantino Jr.: “In weak times, we will be more and more successful, because the passenger will have the exact sense of the value of his money.” This demographic characteristic of Brazil has forced Gol to operate several flights with a stop in São Paulo and/or other cities with a larger demand (although the concept of hub does not exist in Brazil as it exist and is exercised in the U.S.. Europe and Asia, we can assume that Gol operates São Paulo/Congonhas downtown airport almost as a mini-hub). It is important to notice that only a couple of flights, say from A to B, will be non-stop, mainly during the peak hours, and with at least one stop during non-peak hours. Table 4 – Percentage of Brazilian Families Divided by Their Monthly Earnings (1996) Earnings Region

With no earnings at all

Up to 2 SM

North (3)

5,1

23,1

31,4

20,7

12,0

6,4

Northeast

5,1

40,6

30,2

11,9

5,4

3,6

Southeast

2,9

14,1

27,4

25,4

16,6

11,4

South

2,6

17,8

30,5

24,9

13,9

8,7

Center-West

4,3

21,7

32,1

20,0

11,5

8,7

3,7%

22,9%

29,2%

21,0%

12,5%

8,4%

BRAZIL

+2 to 5 SM +5 to 10 SM +10 to 20 SM

+ 20 SM

Notes: 1. Data relates to 1996, except for the state of Rio de Janeiro (1997). 2.

SM = Minimum wage (salário mínimo); SM in 1996 = R$120, at the time = US$110 (nowadays, the Brazilian minimum wage is R$240, which is equal to US$80 as converted in late April, 2003).

3.

Researched population does not include the rural areas of the states of Rondônia, Acre, Amazonas, Roraima, Pará and Amapá.

4.

RIGHTMOST COLUMM: the percentage of Brazilian families with the potential to fly at least once a year. Source: Brazilian Institute of Geography and Statistics (IBGE), via http://www.ibge.gov.br

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SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

5 – IMPACTS IN THE BRAZILIAN DOMESTIC MARKET Gol launched operations with only six aircraft, all 737-700s. At the end of 2001, the fleet had incorporated four more –700s. According to DAC data, in 2001 the airline carried more than 1.6 million passengers (all Gol’s scheduled operations are domestic; the airline occasionally operate charter flights to the Caribbean and plans to increase this segment to other Latin American tourist sites). In December 2002, Gol´s fleet was made up by nineteen aircraft, now counting with two 737-800s. Initial plans called for a fleet of twenty-five aircraft by late 2003, as the carrier continues to conquer the sympathy of the general public through a growing market-share, but recent government policies pointing to a re-regulation of supply may impede this growth (see section 7).

Table 5 presents the evolution of the domestic market share: Gol was the only carrier that grew consistently in the last three years. Interestingly, from 2001 to 2002, there was a reduction of 3.75% in demand. As seen before, this may well prove that Gol is not, in fact, “creating” of “stimulating” demand, but taking passengers away from the traditional carriers.

Table 5 – Brazilian Domestic Market-Share in Terms of ASK (%) 1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

43.7

44.3

48.7

46

45.4

45.5

43.6

43.6

39.1

40.6

40.2

37.5

35.4

Group Transbrasil 19.7

20.8

24.1

23.8

20

18.6

17.1

15.1

16.2

13.6

7.4

---

---

Group VARIG Group TAM

3.1

4

6.6

8.4

13.2

15.4

17.8

19.3

23.8

28.8

32.6

37.2

32.5

VASP

32.2

29.5

18.4

18.9

18.5

18.5

19.2

18.1

17.2

15.3

13.7

13.2

13.8

GOL

---

---

---

---

---

---

---

---

---

---

4.5

10.7

16.7

All others

1.3

1.4

2.2

2.9

2.9

2

2.3

3.9

3.7

1.7

1.6

1.4

1.6

Notes: 1.

Market-share in terms of available seat-kilometers (ASK), expressed in percentages.

2.

Scheduled Domestic Market = All scheduled carriers performing scheduled services.

3.

Group VARIG = VARIG, Rio-Sul, Nordeste and Cruzeiro (1991/92); Group TAM = TAM-Meridionais, TAMExpress/Regional, Brasil-Central, Helisul and Itapemirim Regional; Group Transbrasil = Transbrasil and Interbrasil Star.

4.

All other (carriers) = All other scheduled carriers (regionals, etc.) not included in the groups or airlines listed.

5.

Data referring to 2003 depicts only March/2003.

6.

Gol launched operations in January 2001. Transbrasil and Interbrasil Star ended operations in December 2001. Source: Department of Civil Aviation Statistics Yearbooks and DAC website (2003 data)

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SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

Data from DAC Statistics (2001 and 2002) reveal that the LC/LF carrier load-factor is consistently higher than the competitors’ average. Official DAC data released through the Internet also reveal that the carrier has a very good rate in the regularity, on-time performance and operational efficiency indicators. During much part of 2002, Gol ranked in the most top position regarding these indicators, falling to the second place in the last two months of that year (in the start of the high season Summer vacations in Brazil).

An important aspect of Gol’s strategy to gain market-share and win corporate contracts relies on marketing the carrier’s low-fare side within industries that fight to cut that 1 cent in every item in order to pass on to the consumer lower and lower fares. In Brazil, telecommunication businesses are experiencing exactly this kind of outrageous competition for customers. This put, Gol has managed to win a corporate contract with giant Embratel, the main provider of telecommunication services in the country. Continuously pressed to reduce costs in order to compete directly with all other multinational telecoms established in Brazil nowadays, when Embratel decided to deeply reduce corporate spending in airline tickets, the partnership with Gol was obvious.

6 – THE POSSIBLE MERGER OF VARIG AND TAM Early in February, VARIG and TAM announced that they were starting a partnership involving not only code-share on several flights but pointing to the discussions of a possible future merger. In the joint press release, the carriers said the new company could be formed still in 2003, but denied disclosing any further details, apart from saying that the two fleets would remain intact until any major decision is materialized.

If approved by competition authorities the two carriers would control around 70% of the domestic market (measured in ASK) and literally 100% of the international market (nowadays only VARIG and TAM fly abroad; with the exception of flights to a few locations in Venezuela, Surinam and the Guianas, operated by a couple of Brazilian regional carriers). The joint effort is primarily aimed to overcome serious financial problems, particularly in VARIG and already reaching once fast-growing TAM. As announced, the code-sharing would initially involve only flights on domestic routes to principal cities, while reducing the number of 19

SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

flights by 30 percent. This put, since March 10 both carriers started code-sharing on nine domestic routes, reducing from 155 to 113 flights under the agreement. Due to the cutting in capacity and the much weaker conditions experienced by VARIG, the airline will continue to return several aircraft to its lessors, mainly 767s and 737s. Meanwhile, TAM agreed not to receive any new aircraft from Airbus in the upcoming months.

Both carriers were severely hurt by a continuous downward economy leading to an already several-years-long recession. This was exacerbated by January 1999’s devaluation of the Real, with the Brazilian currency being devaluated more than 100% since that time until March 2003. With all of this in hand, both VARIG and TAM suffered even more after September 11, as international traffic spiraled down everywhere in the world. Regarding VARIG, a great variety of cultural and organizational inconsistencies, plus mismanagement actions, have also played a key role in undermining the airline’s ability to recover. In the case of TAM, the late Rolim Amaro, the carrier’s charismatic president and CEO, grew the airline in a very fast pace, some even arguing that he opted for this strategy in a bet to see how much time VARIG and VASP would resist in the marketplace.

The birth of Gol did not play a major role in VARIG’s and TAM’s problems. In fact, both carriers where already in bad shape in January 2001, when Gol launched its first flight; VARIG was indeed in bad shape for several years, while TAM was beginning to hear the “alarm ring” being sounded throughout the airline. In any case, while not representing the main reason for the two incumbents’ crisis, certainly Gol did contribute with the situation: some may point out that Gol has tried to “stimulate demand” with its low fares (in fact still not so low for the average Brazilian middle-class!), but the majority within the aviation business will agree that most of the passengers now flying the airline were in reality flying VARIG, TAM, VASP and Transbrasil just a couple years ago. That would represent a simple “shift” in demand (or a “shift” in attitude!), a phenomenon happening almost everywhere in the world served by low-cost/low-fare airlines!

In this VARIG/TAM issue, the best scenario for Gol would encompass a no-merger situation. However, if the merger is approved, the LC/LF carrier will certainly suffer, even if only 20

SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

initially, the strength of the new airline with its totally renewed financial situation (several aviation experts in Brazil argue that the government itself would be one of the major shareholders of the new carrier, mainly through the conversion of the huge debts both merging carriers have with state-owned Petrobras, the national bank Banco do Brasil, and with INFRAERO, the federal airport authority)

7 – POSSIBLE FUTURE OPERATIONS In February, AIG Capital Partners became one of the major shareholder of Gol through a purchase of 20% of total voting shares (the maximum permitted by Brazilian law on foreign ownership). The transaction worth US$25 million proved that a major foreign organization within the air transport business was confident on Gol’s opportunities to conquer a prosperous future. This injection of capital could have levered the LC/LF airline much more than originally planned, even marketing fares that could have “stimulated demand” as the original business plan stipulated. In fact, one huge fare sale was marketed by Gol in a few weeks of February and March: on selected flights, the roundup fare was the one-way fare plus a mere R$1 (US$0,33). But, even not triggering a fare war, Gol’s opportunity to lever up the market has been suddenly halted...

In April and May of 2003, the government’s National Council for Civil Aviation (CONAC) organized a group of airline and union officials, plus representatives from several Ministries, the Air Force Command, and INFRAERO, in order to discuss and propose a new set of policies for the Brazilian air transport industry. The discussions not only involved market access/concentration, fares, foreign ownership and international agreements, but also airport management, labor concessions, financial opportunities and government influence. The central tone of the discussions aimed in trying to slightly re-regulate the industry, mainly in view of the devastating financial conditions of almost all Brazilian carriers (Gol is one of the very few exceptions).

Probably in less than a year time, the Brazilian government will have made concrete actions in order to materialize the main issues discussed in the proposed re-regulation process. It could, by some means, limit the opportunities for growth for Gol and any new start-up carriers 21

SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

in the quest for passengers and other business within the industry. Moreover, if market access and free fare setting issues are not clearly defined in a mid-term between full deregulation and re-regulation, Gol’s future will be in jeopardy as well (as will be any carrier willing to start its operations or any existing carrier willing to grow its present operations).

8 – CONCLUSIONS The introduction of a low-cost/low-fare airline in Brazil have promoted a great renewal in the business. This has happened primarily in regard to the organizational model and the stile of doing business and not necessarily in promoting a completely new and competitive environment. Not being able to “stimulate demand” as originally foreseen, mainly because Brazil’s economic situation is still under the wings of either a very-slow-paced timid growth or, as usual, a constant recession, Gol has benefited directly from Transbrasil’s demise and the financial and organizational problems within VARIG and, more recently, TAM.

Being innovative, flexible, and agile in doing business and running its operations, Gol is proving other Brazilian airlines, the aeronautical authority and the general public that the lowcost/low-fare model can be put into practice in the country with significant positive returns. This has also been tracked by international investor, in the name of AIG, whose US$28 million share acquisition of the airline pointed towards a heavy confidence it the carrier’s business plan and in the Brazilian market.

This positive situation can be altered by the span of the re-regulation process that began being designed by the government in April/May in response to a constant weak financial crisis of all other incumbent carriers. Only time will tell if Gol will have to re-write parts of its business plan in order to cope with the new regulations and if the Brazilian domestic market will continue to drive positive attention of foreign investors, as have recently began with the success of this LC/LF carrier.

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SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Gol Linhas Aéreas: Challenges and Perspectives of Operating a Low-cost/low-fare Airline in Brazil”. II Aviation Management Educational Research Conference, Montreal, Canada.

References DAC (2001) Anuário do Transporte Aéreo. Volume II. Dados Econômicos. Departamento de Aviação Civil, Rio de Janeiro, Brazil. DAC (2002) Departamento de Aviação Cívil. http://www.dac.gov.br. DAC (2003) Departamento de Aviação Cívil. http://www.dac.gov.br. Espirito Santo Jr., R. A. (2000) Cenários Futuros para o Transporte Aéreo Internacional de Passageiros no Brasil [Future Scenarios for the International Air Transport in Brazil]. Doctor Science thesis, Transportation Engineering Program, Federal University of Rio de Janeiro, Brazil. Oliveira, A. V. M. e Müller, C. (1999) A Acessibilidade de Novo Segmento e os Efeitos da Guerra de Tarifas no Bem-Estar do Consumidor. Anais do XII Encontro Nacional da Anpet – Associação Nacional de Pesquisa e Ensino em Transporte, São Carlos, Brazil. SNEA (2001) Sindicato Nacional das Empresas Aeroviárias http://www.snea.org.br.

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