Brazil’s TAM is beginning to reap the rewards as the challenge from low-cost rival GOL inspires it to take a firmer grip on its business

As difficult as it may be to start a new airline, legacy carriers around the world are finding that adapting to the new competitive realities is not easy either.

That has been the challenge for chief executive Marco Antonio Bologna at TAM, a full-service airline that has continued to gain domestic market share in the past two years despite strong competition from fast-growing, low-cost, low-fare GOL.

“GOL is the company that made us wake up earlier,” Bologna says, spurring TAM to reinvent itself. GOL began service in 2001 in a deregulated environment, acquired routes TAM took years to get, began with new aircraft scheduled to maximise utilisation, and came into being in the internet era, facilitating direct ticket sales through the web, he says.

Bologna is not complaining, though. “This sort of thing happens in different times of the economy,” he says. But it motivated TAM to develop ways to reduce its overheads to compete with “more lean” GOL. TAM is more efficient now and has reduced costs per available seat kilometre, he says, by such measures as increasing flight hours, altering its network and creating its own web portal for travel agents to reduce reliance on more costly global distribution system sales. TAM is not trying to match GOL’s costs, which would be impossible, Bologna says.

Moreover, TAM already has carved out its own niche, attracting a loyal following among business travellers. With 75% of the traffic in Brazil concentrated in 10 main airports, TAM is market leader in eight of them, he says.

The airline also learned from a two-year codeshare it had with ailing Varig, begun with government blessing in 2003 as a preliminary step to a possible merger. In the end, a merger was considered impossible because of the financing required and difficulty of implementation, Bologna says, and the codeshare ended in May.

Effective on 57% of TAM’s domestic network, the codeshare was based on block seats, instead of a free-sale scheme, causing inconvenience for both customers and TAM, Bologna says. “Managing inventory, managing yield was very difficult because we were managing only 50% of each aircraft.”

In the process, however, TAM’s fleet of ageing Fokker 100s was reduced so capacity came down. “We learned that capacity control is a main driver in the airline,” Bologna says. “Excess capacity is a huge destroyer of profits. So instead of being a low load factor company with high yield, we learned that to compete, we have to be a higher load factor company with competitive fare structures offering a differentiation.”

TAM’s proposition is to offer passengers more than GOL offers them, at just a slightly higher fare. “It’s not only price,” Bologna says, noting that nearly two-thirds of Brazilian passengers are business travellers. “They will pay a little bit more for some conveniences,” he says. “So we offer more conveniences for a reasonable price.”

Product distinction

The carrier operates aircraft with first and economy classes and offers more nonstops than GOL between some destinations. It has airport lounges and a popular frequent-flyer programme under which travellers can redeem points for flights without capacity or black-out restrictions. It serves meals and provides individual video screens for in-flight entertainment.

Its concept appears to be working. Passenger load factors are up, and in September, TAM had a 43.2% share of Brazil’s domestic market, up from 35.7% a year ago, and a 20.5% share of the international market, up from 13.7% a year ago.

“We fly where Brazilian business travellers want to fly,” Bologna says. TAM has twice-daily Airbus A330 services to Paris and Miami, with a business class equipped with seats that convert to beds. It is also starting nonstop flights between São Paulo and New York this month with a new A330, initially four times a week. In April, it will offer daily services when one of its subleased A330s comes back. Besides 44 destinations in Brazil, TAM also flies to Argentinian capital Buenos Aires and Santiago in Chile.

TAM continues to take delivery of new Airbus A320s from an order for 10 new A320 family aircraft placed last year, to which it added 20 more this year. By the end of 2005, TAM will operate seven A330s (three more leased out will return in 2006), 35 A320s, 13 A319s and 18 Fokker 100s.

Bologna says TAM will decide by year-end on a Fokker 100 replacement for lower-density routes. A strong candidate is the 100-seat Embraer 190, but the carrier is also considering A318/319s, he says.


Source: Airline Business