SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Introducing the Low-cost/low-fare Concept in Brazil: Gol Airlines”. 7Th Annual Air Transport Research Society Conference, Toulouse, France. INTRODUCING THE LOW COST-LOW FARE CONCEPT IN BRAZIL: GOL AIRLINES Erik Novaes de Almeida Silva M.Sc. student in Transportation Engineering Federal University of Rio de Janeiro, Brazil Respicio Antônio do Espirito Santo Jr., D.Sc. Associate Professor Federal University of Rio de Janeiro, Brazil Authors’ contact: Universidade Federal do Rio de Janeiro – UFRJ Att.: Prof. Respicio A. Espirito Santo Jr. Departamento de Engenharia de Transportes Ilha do Fundão, Centro de Tecnologia, Bloco D – sala D-209 21945-970 Rio de Janeiro, RJ BRASIL [email protected] [email protected] ABSTRACT This paper presents the introduction of a low-cost/low-fare (LC/LF) concept in Brazil by Gol Airlines, beginning from 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 still cannot be implemented at all. Moreover, the paper 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. The recently announced possible-future merger between the two largest Brazilian carriers, VARIG and TAM, is addressed as a major adversary to the growth of Gol’s operations 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, we will present some of the strategies already being implemented by the LC/LF carrier to counter this threat, plus another major step towards Gol’s 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 quarter of 2003. Keywords: Low-cost/low-fare airlines; New business models; Deregulation. 1 SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Introducing the Low-cost/low-fare Concept in Brazil: Gol Airlines”. 7Th Annual Air Transport Research Society Conference, Toulouse, France. 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 fares 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 of the price of the aviation fuel; the September 11th terrorist attacks; and the consequent reduction of the rhythm of the expansion of the economic activity 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 2 SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Introducing the Low-cost/low-fare Concept in Brazil: Gol Airlines”. 7Th Annual Air Transport Research Society Conference, Toulouse, France. 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. 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 the 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 worldwide, 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. 3 SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Introducing the Low-cost/low-fare Concept in Brazil: Gol Airlines”. 7Th Annual Air Transport Research Society Conference, Toulouse, France. 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, phased deregulation) started early in the 90s by the DAC. MARKET SHARE -(Seats km Offered) MARCH 2003 OTHERS VASP GOL 2% 14% 17% VARIG TAM 35% 32% Exhibit 1 – Brazilian Domestic Scheduled ASK Market Share (%) (Source: DAC, 2003) 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 environment. 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 4 SILVA, E. N. A. and ESPIRITO SANTO JR., R. A. (2003) “Introducing the Low-cost/low-fare Concept in Brazil: Gol Airlines”. 7Th Annual Air Transport Research Society Conference, Toulouse, France. 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. 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.