2003 gol challenges and opportunities iiamerc

8/14/2019 2003 GOL Challenges and Opportunities IIAMERC

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

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GOL LINHAS AREAS: CHALLENGES AND PERSPECTIVES OF OPERATING ALOW 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 Fundo, 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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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 Gols 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 Gols survivability and future growth: the go-ahead of the

Brazilian government on the injection of capital from AIG, to buy 20% of the airlines shares

in the first months of 2003.


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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 early90s, and that have increased since late 1997 (Espirito Santo Jr., 2000). These measures, under

the term Flexibilizao (literallyflexibilization, 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 producedby 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 Areas (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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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 Brazils domestic and international markets, atleast 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 Areas.


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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 launchof 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 flightattendants, 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-than-

two-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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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.


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5. Ticket-less or Electronic tickets (e-tickets)

The elimination of the conventional paper tickets by e-tickets or no ticket at all (ticket-

less) eases all passenger operations, reduces the number of employees in the departmentof 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.)


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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 farestructure 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 ALOW COST- LOW FARE AIRLINE IN BRAZIL: GOL LINHAS AREAS

Gol Linhas Areas 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 (Nen Constantino) head of the Grupo urea, 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 airlines 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 carriers profile is based on international

benchmarkings and real-case, proven examples: Southwests 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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from Ryanair and JetBlue the fundamental importance of building a strong and reliable

information technology-based operation.

4.1 Two Strategic Tools for Gols 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 about24,000 aircraft parts, checking each ones 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-for-

maintenance 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 first-

officers. 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 user-


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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 passengerswith 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 airlines 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 So Paulo, primarily with a lease space

agreement with the mega-stores. Nowadays the airline is implementing the second phase of


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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 comingfrom 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 lease-

per-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 transactionsin 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, (...) dont 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, Gols 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


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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 unacceptableby that LC/LF initiative. So a real indigenous solution should be tried: planning and software

experts from Grupo urea (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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Table 2 Variation of Jet Fuel, U.S. Dollar, Consumer Price Indexes and Inflation rates in

Brazil

Jet fuel US$ (dollar) IGP-DI INPC IPCA

Variation between Jan/1999

and March/2003684.73% 125.61% 85,75% 45.93% 42.04%

Note: IGP-DI is a common index for measuring the inflation rate; INPC is the generalconsumer price index; and IPCA is the consumer price index measured through wholesalebusinesses.

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

Gols 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. Southwests operations in

Islip (NY) and Fort Lauderdale (FL), JetBlues operations in Long Beach (Calif.), Ryanairs

operations in Beauvais (some 80 km north of Paris) and Charleroi-Gosselies (Brussels-South)

and easyJets operations in Ciampino (15 km outside Rome), cannot be copied by Gol!


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Simply put, there are no secondary airports near major Brazilian cities able to handle 737

operations! In fact, in Rio de Janeiro, So Paulo, Belo Horizonte and Florianpolis (state of

Santa Catarina) there are three cities with more than one airport capable of receivingcommercial 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 So Paulo, and Navegantes (SBNF),

near Florianpolis.

Table 3 Multiple Airports in Major Brazilian Cities

City International airport Downtown airport Secondary airport

Rio de Janeiro Galeo/Tom Jobim Santos Dumont GA (not able to operatecommercial jet service)

Greater So Paulo Viracopos (Campinas)Cumbica (Guarulhos)

Congonhas (So Paulo) GA (not able to operatecommercial jet service)

Belo Horizonte Confins/Tancredo Neves Pampulha -------

Florianpolis Herclio Luz ------- Navegantes

Without the existence of secondary airports and their lower charges, Gol must rely on the

countrys centralized federal airport management run by the Empresa Brasileira de Infra-

estrutura Aeroporturia (Federal Airport Authority, INFRAERO) and the countrys 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 countrys 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 Braslia)

are extremely profitable, but the airlines are charged less than when operating in

unconggested, free-space-for-all airports like Galeo/Tom Jobim! The high value of their city-

center location, good transportation facilities and, most of all, the capacity of attracting high-


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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. Gols 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 commonpassenger 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 dosAerovirios

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

Gols 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


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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 (Southwests DallasPhoenix and PhoenixL.A., JetBlues

NYChicago, and Ryanairs LondonStrasbourg flights are clear examples). Other routes areprimarily 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, So Paulo and Belo

Horizonte and the capital, Braslia, 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, Gols strategy of flying to almost all state capitals must, at the


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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 Gols president, Constantino Jr.: In weak times, we will be more and moresuccessful, 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 So 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 So 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 +2 to 5 SM +5 to 10 SM +10 to 20 SM + 20 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 8,7Center-West 4,3 21,7 32,1 20,0 11,5 8,7

BRAZIL 3,7% 22,9% 29,2% 21,0% 12,5% 8,4%

Notes:

1. Data relates to 1996, except for the state of Rio de Janeiro (1997).2. SM = Minimum wage (salrio mnimo); 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 Rondnia, Acre, Amazonas, Roraima, Parand Amap.

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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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 than1.6 million passengers (all Gols 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, Gols 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

Group VARIG 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 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, TAM-

Express/Regional, Brasil-Central, Helisul and Itapemirim Regional; Group Transbrasil = Transbrasil and InterbrasilStar.

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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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 performanceand 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 Gols strategy to gain market-share and win corporate contracts relies

on marketing the carriers 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, telecommunicationbusinesses 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


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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 toreturn 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 1999s 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 afterSeptember 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 airlines ability to recover. In the case

of TAM, the late Rolim Amaro, the carriers 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 VARIGs and TAMs 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


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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 bothmerging 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 organizationwithin the air transport business was confident on Gols 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, Gols opportunity to lever up the market

has been suddenly halted...

In April and May of 2003, the governments 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


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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, Gols future will be in jeopardy as well (as will be any carrier willing to start itsoperations 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 becauseBrazils 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 Transbrasils 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 low-

cost/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 carriers

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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References

DAC (2001) Anurio do Transporte Areo. Volume II. Dados Econmicos. Departamento de AviaoCivil, Rio de Janeiro, Brazil.

DAC (2002) Departamento de Aviao Cvil. http://www.dac.gov.br.

DAC (2003) Departamento de Aviao Cvil. http://www.dac.gov.br.

Espirito Santo Jr., R. A. (2000) Cenrios Futuros para o Transporte Areo Internacional de Passageirosno 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 Mller, C. (1999) A Acessibilidade de Novo Segmento e os Efeitos da Guerrade Tarifas no Bem-Estar do Consumidor. Anais do XII Encontro Nacional da Anpet AssociaoNacional de Pesquisa e Ensino em Transporte, So Carlos, Brazil.

SNEA (2001) Sindicato Nacional das Empresas Aerovirias http://www.snea.org.br.

2003 gol challenges and opportunities iiamerc

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