2006-world Lcc Congress_gol Strategies_prof.respicioespiritosanto

ESPIRITO SANTO JR., R. A. (2006) “Challenges and Strategies of Operating a Low-cost Airline in Brazil”. World Low-Cost Airline Congress Americas, Miami, United States (June 2006).

CHALLENGES AND STRATEGIES OF OPERATING A LOW-COST AIRLINE IN BRAZIL

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

Related topics: Low-cost carriers; Low-fares; Airline marketing; Strategic planning.

Author’s contact: UNIVERSIDADE FEDERAL DO RIO DE JANEIRO Att.: Prof. Respicio A. Espirito Santo Jr. Ilha do Fundão, Centro de Tecnologia, Bloco H – sala H-106 Programa de Engenharia de Transportes, PET-COPPE/UFRJ Rio de Janeiro, RJ 21945-970

BRASIL

[email protected] [email protected]

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ESPIRITO SANTO JR., R. A. (2006) “Challenges and Strategies of Operating a Low-cost Airline in Brazil”. World Low-Cost Airline Congress Americas, Miami, United States (June 2006).

1. INTRODUCTION Any Brazilian airline wishing to adopt the low-cost(LC)/low-fare(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

fares,

thus

consolidating

the

government policy towards increasing competition to favor the consumers’ well being. Anywhere in the world the reduction of ticket prices 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 directly contribute with this increment in the demand. In short, the present article aims in describing the main challenges and the main strategies of Gol Linhas Aéreas Inteligentes S.A. (or simply Gol), the first successful low-cost carrier to operate scheduled services in Brazil and Latin America. For this, we will present some of the interesting and powerful strategies used by this airline, while pointing some of the main differences in operating a LC/LF carrier in Brazil if compared to North America and Europe. Moreover, brief comments about the other Brazilian carriers that label themselves as LC/LF carriers are also indicated.

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ESPIRITO SANTO JR., R. A. (2006) “Challenges and Strategies of Operating a Low-cost Airline in Brazil”. World Low-Cost Airline Congress Americas, Miami, United States (June 2006).

2. CONSIDERATIONS CONCERNING THE BRAZILIAN DOMESTIC MARKET Brazil is a country larger than the continental U.S., with a population of more than 180 million people. Unfortunately, only about 10% of the families in Brazil earn more than 20 minimum wages per month (1 minimum wage approximately US$160 in May/2006), and just about 13% of the families earn from 10 to 20 minimum wages per month. Not to say that the majority of these families live in the capitals of the Southeast, South and Center-West regions. This still limiting social-economic reality makes air transportation very inaccessible for the great majority of Brazilians. Moreover, DAC (Department of Civil Aviation; now ANAC – National Civil Aviation Agency) and SNEA (Airlines’ National Union –or– Brazilian Air Transport Association) data from 2003/2004 indicate that at least 70% of the passengers flown in Brazil take their trips for business reasons. In fact, if we observe carefully the almost 37 million passengers flown domestically in the country in 2004, and if we could divide them into two distinct groups, we would not be incurring in any major mistake if we assumed that about 12-13 million flew once, and about 5 million flew 5 times that year, in average. This form of calculation was repeatedly announced by former TAM president Daniel Mandelli Martin in 2003 as a common constant for Brazil. We tend to agree with this simplistic, but yet representative overview of the passenger profile in Brazil. But something may be changing in the middle-term… Preliminary figures for 2005 point to a growth of more than 20% in terms of RPKs (Revenue Passenger Kilometers). Interesting enough, this does not reflect the continuous limited economic growth of the country. The main reasons driving this growth in the number of people flying are (but are not limited to): 1. The three major carriers (more specifically VARIG and Gol) are repeatedly offering huge discounts on selected flights (VARIG’s 70-90% discounts and Gol’s web fares at R$50 [US$22.70] and, more recently, R$25 [US$11.30]); 2. Gol and another self-declared LC/LF carrier in Brazil, BRA, are offering payment plans for their tickets that go all the way to 36 months, with interests;

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ESPIRITO SANTO JR., R. A. (2006) “Challenges and Strategies of Operating a Low-cost Airline in Brazil”. World Low-Cost Airline Congress Americas, Miami, United States (June 2006).

3. Gol has established several corporate contracts with middle- and large-size firms (Gol’s passengers in those 5 million that fly 5 times a year in average, tend to fly more than this nowadays and in the years to come…); 4. New carriers expanding services and now offering scheduled flights like BRA, Oceanair, and WebJet are aggressively marketing their products, including some very very low fares (see next sections); 5. The open competition between tourist sites and between travel agencies all over the country, combining tickets with hotel stays (tour packages), is filling more planes than ever; 6. VARIG’s crisis is pushing forward an interesting competition for its passengers (the major problem will be if VARIG ceases all operations, thus putting the market with only two large carriers: TAM and Gol; see Figure 1 for details on VARIG’s maket-share downsizing and both TAM and Gol’s extraordinarily, unquestionably powerful and dominant presence over the other carriers [and over travel agents, consequently]). According to the DAC, flights between Rio de Janeiro and São Paulo (the famous Rio-São Paulo air bridge, one of the three most heavily flown links in the world – the other two being NY–Washington D.C. and London–Paris) represented 11.3% and 10.8% of all domestic passengers enplaned in 2003 and 2004 respectively. The six topmost flown city pairs in the country accounted for 25.3% and 22.2% of all domestic passengers enplaned in 2003 and 2004 respectively. In 2003 and 2004, the ten busiest Brazilian airports (all under INFRAERO – Brazilian Federal Airports Authority – management) accounted for 74.9% and 69.6% of all domestic traffic respectively. In the next sections we will see some of the main strategies behind Gol’s success and what other carriers are trying to do in order to position themselves as Brazilian low-cost/low-fare airlines.

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ESPIRITO SANTO JR., R. A. (2006) “Challenges and Strategies of Operating a Low-cost Airline in Brazil”. World Low-Cost Airline Congress Americas, Miami, United States (June 2006).

Figure 1 – BRAZILIAN MAJOR AIRLINES’ DOMESTIC MARKET-SHARE (%) IN TERMS OF RPKs: 2000–2006 Source: Department of Civil Aviation (DAC)

50 45 40 35 30 25 20 15 10 5

1. 00 3. 00 5. 00 7. 00 9. 00 11 .0 0 1. 01 3. 01 5. 01 7. 01 9. 01 11 .0 1 1. 02 3. 02 5. 02 7. 02 9. 02 11 .0 2 1. 03 3. 03 5. 03 7. 03 9. 03 11 .0 3 1. 04 3. 04 5. 04 7. 04 9. 04 11 .0 4 1. 05 3. 05 5. 05 7. 05 9. 05 11 .0 5 1. 06 3. 06

0

Transbrasil (1) VARIG (5)

VASP (2) Oceanair (6)

TAM (3) BRA (7)

Gol (4) WebJet (8)

Notes: (1) Transbrasil ceased operations December 2001. (2) VASP ceased operations January 2005. (3) TAM is a result of TAM Regional, TAM Meridionais, Brasil-Central, and Helisul. (4) Gol began operations January 2001. (5) VARIG: Until March 2003 counted only as itself; afterwards counted as itself plus Rio-Sul and Nordeste; began code-share with TAM on March 2003, ending in 2005. (6) Oceanair began operations Jan/03 (data only from Oct/03). (7) BRA authorized for scheduled operations Aug/05 (DAC data only from Jan/06). (8) WebJet began operations July/05 (data only from Feb/06).

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ESPIRITO SANTO JR., R. A. (2006) “Challenges and Strategies of Operating a Low-cost Airline in Brazil”. World Low-Cost Airline Congress Americas, Miami, United States (June 2006).

Figure 2 – BRAZILIAN MAJOR AIRLINES’ MONTHLY AVERAGE DOMESTIC LOAD-FACTOR (%): 2000–2006 Source: Department of Civil Aviation (DAC)

85 80 75 70 65 60 55 50 45 40 35

1. 00 3. 00 5. 00 7. 00 9. 00 11 .0 0 1. 01 3. 01 5. 01 7. 01 9. 01 11 .0 1 1. 02 3. 02 5. 02 7. 02 9. 02 11 .0 2 1. 03 3. 03 5. 03 7. 03 9. 03 11 .0 3 1. 04 3. 04 5. 04 7. 04 9. 04 11 .0 4 1. 05 3. 05 5. 05 7. 05 9. 05 11 .0 5 1. 06 3. 06

30

Transbrasil (1) VARIG (5)

VASP (2) Oceanair (6)

TAM (3) BRA (7)

Gol (4) WebJet (8)

Notes: (1) Transbrasil ceased operations December 2001. (2) VASP ceased operations January 2005. (3) TAM is a result of TAM Regional, TAM Meridionais, Brasil-Central, and Helisul. (4) Gol began operations January 2001. (5) VARIG: Until March 2003 counted only as itself; afterwards counted as itself plus Rio-Sul and Nordeste; began code-share with TAM on March 2003, ending in 2005. (6) Oceanair began operations Jan/03 (data only from Oct/03). (7) BRA authorized for scheduled operations Aug/05 (DAC data only from Jan/06). (8) WebJet began operations July/05 (data only from Feb/06).

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ESPIRITO SANTO JR., R. A. (2006) “Challenges and Strategies of Operating a Low-cost Airline in Brazil”. World Low-Cost Airline Congress Americas, Miami, United States (June 2006).

Figure 3 – MAJOR CARRIERS OPERATING IN BRAZIL IN THE LAST 10 YEARS TRADITIONAL CARRIERS

THE “YOUNGER OF THE OLDER”

THE “YOUNGER ONE”

THE “ONE THAT WAS WITHOUT EVER BEING”

THE NEW KIDS ON THE BLOCK:

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ESPIRITO SANTO JR., R. A. (2006) “Challenges and Strategies of Operating a Low-cost Airline in Brazil”. World Low-Cost Airline Congress Americas, Miami, United States (June 2006).

3. A LOW COST AIRLINE IN BRAZIL: GOL Gol 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 low-cost model, it needed a powerful marketing campaign to draw attention of the traveling public and, most of all, the non-traveling 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! Moreover, “Gol” is the name of the most well-known and widely sold car in Brazil (Gol, the car, is manufactured by Volkswagen since 1980). On the strategic and operational sides, the carrier’s profile is based on international benchmarking and proven examples: from Southwest came the concept of fleet commonality, the aggressive marketing strategies, the simple but attentious and caring in-flight service, and direct point-to-point flights. These were the main starting points. Then from easyJet came the idea of outsourcing whatever could be outsourced, and from Ryanair and JetBlue the fundamental importance of building a strong and reliable, strict cost control and information technology-based operation. 3.1. Main Strategic Issues Behind Gol’s Success 3.1.1. Availability of Highly-skilled Professionals 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

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ESPIRITO SANTO JR., R. A. (2006) “Challenges and Strategies of Operating a Low-cost Airline in Brazil”. World Low-Cost Airline Congress Americas, Miami, United States (June 2006).

Transbrasil restructuring plans starting in the late 90s. Transbrasil ceased operations in December 2001, while VASP terminated all international flights the same year, and ended ceasing all operations in 2005. VARIG’s continuous crisis since 2000 also contributed decisively with dozens and dozens of highly skilled professionals being laid-off by the traditional Brazilian flag carrier 1. In view of this, several ex-Transbrasil and ex-VASP highly qualified professionals were hired by Gol, along some ex-VARIG personnel. This has motivated an internal slogan used by Gol until 2005 (when WebJet arrived in the scene): “the youngest and most experienced airline in Brazil”. 3.1.2. Wise Marketing no. 1: Careful attention towards Passenger Profile In today’s world, more and more women travel for business purposes. Not to mention women traveling for leisure and other kinds of tourism. Then, why not having a toiled exclusively for women aboard the aircraft? Gol was one of two very first airlines to introduce this concept. 3.1.3. Wise Marketing no. 2: Partnerships throughout the Web To multiply accessibility to its website (and then to the most affordable fares), Gol has a great variety of partners in the Web showing its logo (and consequently the link to its website). 3.1.4. Wise Marketing no. 3: Reintroduce Air Transportation in the Media Airlines’ participation in TV commercials, magazine and newspapers ads, street outdoors, radio messages, etc., had been diminishing considerably since VARIG’s crisis started in the end of the 90s. TAM never had a great presence in the media if compared to what VARIG used to do in terms of commercials, magazine ads, outdoors, jingles, Christmas-related marketing, and the like. In its good times, VARIG was simply unbeatable as a the charming and the very attractive airline for the media. Gol came to reintroduce the airline business into the vast majority of magazines, newspapers, TV and radio commercials, plus a

1

In fact other carriers worldwide have taken advantage of VARIG’s crisis: several of the carrier’s highly skilled pilots and first officers now fly for Ryanair, EVA Air, Air China, and Emirates, to mention a few.

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ESPIRITO SANTO JR., R. A. (2006) “Challenges and Strategies of Operating a Low-cost Airline in Brazil”. World Low-Cost Airline Congress Americas, Miami, United States (June 2006).

series of non-media exposures (postal card-like fliers in restaurants, for example). And although being a low-cost carrier, Gol’s appearances are anything but low-profile! This prompted TAM to react and start paying attention to the media as well, not to mention VARIG’s efforts to reintroduce itself in a field it so majestically ruled in the 70s, 80s and 90s. This positive posture of exploring the media made Gol an airline very much known anywhere in the most important regions of the country, especially state capitals and important cities in the countryside (in fact exactly where the airline operates!). Being well-know both to the masses and to the high-yield individuals results in a wide range of potential customers. Southwest, easyjet, and Jetblue are examples in this arena too. 3.1.5. Wise Marketing no. 4: Pinpointed Super-Cheap Promotional Fares Gol created havoc in 2004 when launched system wide web-fares at R$50. Its site was congested to the point no one could do anything in it for a few days. Media coverage was extensive, and so was the prompt reaction by competitors: VASP (now extinct) matched the fares instantly, and so did TAM a day or so later. But the main issue was the regulatory body: with its old-fashioned approach towards competition, DAC officials blocked the promotional fares “until second order” stating that Gol could be underpricing its fares and promoting an “unfair, ruinous competition”. This prompted a huge reaction not only by potential passengers and the media, but by the Brazilian Congress. The Senate called a hearing on the matter on May 2004 (which the author attended as thenconsultant for the National Confederation of Commerce – CNC), which resulted in passionate speeches by some Senators in defending Gol’s attempt to “make air transportation more affordable to the average Brazilian”. CEOs from VARIG, TAM, and VASP also testified before the Sub-Commission of Tourism of the Brazilian Senate, and so did the Director of the DAC. The result was obvious: a positive overexposure of Gol (“the airline that tried to bring air travel closer to the average Brazilian”), and a total lack of technical, economic or political explanation by the DAC on why the promotion was cancelled. Coincidence or not, one week later the Director of the DAC was removed from office.

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ESPIRITO SANTO JR., R. A. (2006) “Challenges and Strategies of Operating a Low-cost Airline in Brazil”. World Low-Cost Airline Congress Americas, Miami, United States (June 2006).

3.1.6. Wise Marketing no. 5: Be the “Good Guy” All Time, Any Time The above mentioned “wise marketing” strategies combined with average lower fares than its competitors in periods closely preceding the planned flight (see 3.2 below) has been functioning perfectly for Gol. In fact, it is just like a symphony orchestra. Indeed, it functions so well that if you ask anyone wishing to take a plane from point A to point B in Brazil, he or she will point to Gol as either the cheapest to fly (even not having searched for the fares yet!! see next section for an example) or as the “alternative” airline to fly if no bookings are possible through TAM or VARIG. The fact that almost everyone associates Gol with lowfares is a direct result of the extremely positive and wise marketing strategies set forward by the airline since day one. And another interesting point to be carefully and attentiously observed: the orange livery, the constant commercials and colorful ads, the smiling flight attendants, the low-fare relationship solidly built, the widely aired slogan of “the airline with the youngest fleet in Brazil” and an always growing presence in all major airports in the country has made Gol if not the most well known airline among children and teenagers, one of their topmost references in terms of modern transportation. 3.2. A True Low-Cost; But How Much “Low-Fare”? If arguing Gol’s presence as a low-cost (LC) carrier in today’s air transport world is simply not news anymore, arguing its position as of being a true “low-fare” (LF) carrier certainly is. A very simple simulation was done by the author in June 1st (2006) for flights between Rio de Janeiro Tom Jobim/Galeão International Airport (GIG) and Porto Alegre (POA) and between GIG and Salvador (SSA). Porto Alegre is the capital of the southernmost state of Brazil (Rio Grande do Sul) and Salvador the capital of the state of Bahia, very famous for its cultural, historical, and tourist sites. Although Porto Alegre tend to attract both business and VFR trips, it also attract leisure trips for nearby (1h40min drive) tourist sites of Gramado and Canela. Salvador is a worldwide famous city for the Carnaval period, but has constantly attracted several types of businesses and events.

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ESPIRITO SANTO JR., R. A. (2006) “Challenges and Strategies of Operating a Low-cost Airline in Brazil”. World Low-Cost Airline Congress Americas, Miami, United States (June 2006).

Table 1 depicts the lowest web-fares available for each major carrier, disregarding the time of the flight (the search was done as a “leisure traveler with plenty of time to spend, but price-sensitive”). Table 1 – Lowest Web-Fares Published by major Carriers: GIG-POA and GIG-SSA one-way (July 10) and roundtrip flights (July 10-20) One-way lowest webfare

Roundtrip lowest webfare

Flight

Carrier

Notes

GIG–POA

Gol

---

R$340.00

R$680.00

GIG–POA

TAM

---

R$199.50

R$629.00

GIG–POA

VARIG

---

R$199.00

R$398.00

GIG–POA

BRA

---

R$219.00

R$438.00

GIG–POA

Oceanair

Via CGH

R$1,002.00

R$1,934.00

GIG–POA

WebJet

---

R$215.00

R$430.00

GIG–SSA

Gol

---

R$247.00

R$494.00

GIG–SSA

TAM

---

R$159.50

R$319.00

GIG–SSA

VARIG

---

R$189.00

R$378.00

GIG–SSA

BRA

---

R$359.00

R$718.00

GIG–SSA

Oceanair

---

R$190.00

R$340.00

GIG–SSA

WebJet

---

R$153.00

R$306.00

Conditions for the simulation: (1) Web fares as published by the airlines’ websites June 1st, 2006 for planned one-way flights July 10, and roundtrip flights July 10–20, 2006; (2) Lowest web fares represent the cheapest fares published in the websites for the flights and conditions herein mentioned; (3) Search made as a leisure traveler with time to spend, but price-sensitive; (4) Oceanair flight GIG-POA via São Paulo downtown airport, then only the lowest fare for this option was picked; (5) All fares exclude passenger terminal charges (enplaning taxes, in Brazil).

As can be clearly seen by the simulation herein presented, not only Gol was not the lowest-fare carrier, but, on the contrary, it was close to being the highest fare player of both markets. Indeed, if not considering Oceanair’s through-SaoPaulo-Congonhas-busy-airport way to go from Rio to Porto Alegre, Gol HAS THE HIGHEST FARE of all in the GIG-POA flights under the conditions presented!!! Moreover, it ranked as the second HIGHEST fare in the GIG-SSA flight, only surpassed by BRA, another self-acclaimed low-cost/low-fare carrier!!!

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ESPIRITO SANTO JR., R. A. (2006) “Challenges and Strategies of Operating a Low-cost Airline in Brazil”. World Low-Cost Airline Congress Americas, Miami, United States (June 2006).

Interesting enough, when simulations are run for planning flights in just one week in advance (searching June 1st to travel on June 8th, for instance), Gol has almost unbeatable prices, only side-ranked by BRA and WebJet (although its fares are extremely attractive, this later carrier currently serves only Rio, Porto Alegre, Curitiba, and Salvador, and on a limited basis of 1 flight per day). 3.3. Beyond the Price-driven Competition Just as its LC sisters abroad, Gol’s hardest challenge is to be a much more efficient company than its competitors. By building a new brand, a fresh and challenging atmosphere to work, and by establishing a direct, vertical access to the very simple organizational structure, Gol’s top management has created a highly-motivated environment throughout the airline’s workforce. Moreover, a paradigm-breaking culture means that whatever costs that can be cut or reduced, they will be! From paperless memos, aeronautical charts printed only on demand, no-frills in-flight service, and in-house cheap solutions for complex problems, Gol knows exactly what a continuous US$20,000-per-month saving can represent in the long run! 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 low-cost 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$8,000. 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 in an interview with the

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ESPIRITO SANTO JR., R. A. (2006) “Challenges and Strategies of Operating a Low-cost Airline in Brazil”. World Low-Cost Airline Congress Americas, Miami, United States (June 2006).

author in 2003: “It was designed for Gol by people within the Group and it is serving us extremely well.” 3.4. 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; and (2) operate in a niche market. 3.4.1. 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. 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 2). 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, in Campinas (if considered as a “secondary”

airport),

in

the

Greater

São

Paulo,

and

Navegantes,

near

Florianópolis.

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ESPIRITO SANTO JR., R. A. (2006) “Challenges and Strategies of Operating a Low-cost Airline in Brazil”. World Low-Cost Airline Congress Americas, Miami, United States (June 2006).

Table 2 – 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

3.4.2. 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 middle-class 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 the new carriers arriving in the arena (BRA, Oceanair, and WebJet), 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 and the super-discounts promotions (such as the recent “fly anywhere for R$50 or even R$25”) ends up counting a lot for the VFR and the

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leisure passenger, but still do not represent a substantial deal to businessmen and government officials traveling 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. As seen previously, only about 10% of Brazilian families earn more than 20 minimum wages per month, and the great majority live in the Southeast, South and Center-West regions (see Table 3 for details). 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 preliminary level, be lead by attracting the already-flying public to their more convenient, but, as seen, not always cheaper fares. In fact, the slow growing alternated with recession periods the country has experienced in the last several years ends up helping a lot Gol. In the words of its president, Constantino Jr.: “In weak times, we are 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.

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Table 3 – Percentage of Brazilian Families Divided by Their Monthly Earnings (2003-2004) With no Up to 2 SM earnings at all BRAZIL

4%

22%

+2 to 5 SM

+5 to 10 SM

+10 to 20 SM

+ 20 SM

30%

21%

13%

10%

Notes: 1.

Data is approximate and relates to 2003/2004.

2.

SM = Minimum wage (salário mínimo); SM ≈ US$160 (April/2006).

3.

RIGHTMOST COLUMN: the percentage of Brazilian families with the highest potential to fly at least once a year. Source: Based on data from the Brazilian Institute of Geography and Statistics (IBGE).

4. CONCLUSIONS The introduction of a low-cost airline in Brazil has 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” in the volume and proportions it has 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 the disappearance of both Transbrasil and VASP, plus the serious crisis involving VARIG since 2000, and deepened after 2003. 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 low-cost model can be put into practice in the country with extremely positive returns. On the other hand, Gol has not presented itself as a true low-fare carrier. Simulations of web-fares for two distinct flights originating from Rio de Janeiro proved that the carrier is far from being a real representative of the low-fare

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ESPIRITO SANTO JR., R. A. (2006) “Challenges and Strategies of Operating a Low-cost Airline in Brazil”. World Low-Cost Airline Congress Americas, Miami, United States (June 2006).

club. Instead, incumbent carriers such as TAM and VARIG routinely offer lower fares than Gol, not to mention newcomer WebJet with its single-aircraft fleet. In view of this, the result of combining an extremely aggressive marketing, an extremely cost-controlling and competent management team, a highly-motivated group of employees, and a set of “average” fares along true rock-bottom fares and really high fares is one of the most widely known and successful airline in the world.

References DAC (2005/2006) Departamento de Aviação Civil (Department of Civil Aviation; now ANAC – National Civil Aviation Agency) www.dac.gov.br (now under the website of the ANAC: www.anac.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. IBGE (2004) Instituto Brasileiro de Geografia e Estatística (Brazilian Institute of Geography and Statistics) www.ibge.gov.br. SNEA (2001) Sindicato Nacional das Empresas Aeroviárias (Airlines’ National Union –or– Brazilian Air Transport Association) www.snea.org.br.

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