The Secret Key to Success - A look into Brazil Airlines' growth strategy

This is my first piece... I actually wrote this back in May for the magazine of the Brazilian SWISS Chamber of Commerce. There's actually much more to this subject and I could go on for quite a while, but for starters, I think this will have to do.

The Secret Key to Success - A look into Brazilian airlines' growth strategy

According to the International Air Transport Association (IATA), Latin America was the only region worldwide with a profitable outcome in the air transport sector in 2009 and the region is supposed to grow even stronger in 2010. Brazil in particular deserves a special attention. In a year where most airlines were announcing capacity cuts and incurring losses, Brazilian airlines were in fact growing: according to the Agência Nacional de Aviação Civil (ANAC), year-over-year capacity grew by 11% and the actual passenger number grew by 12%.

It is a known fact that Brazil has been more resilient to the global economic downturn than most, however one needs to have a closer look at the work being performed by Brazilian airlines in order to fully grasp why airlines such as TAM Linhas Aéreas and Gol Linhas Aéreas have succeeded, opposed to many legacy carriers (and even some low-cost carriers) worldwide, to close the “Annus Horribilis” on a positive note, with more passengers on a year-over-year comparison and a profit.

In a year where yields slumped, airlines all over the world, including in Brazil, were forced to take drastic measures in order to secure revenue and prevent further losses. Such measures included, among others, a stricter cost control; capacity trimming; fleet harmonization; seamless network planning; fuel hedging; more specific, target-oriented marketing actions and more volume-oriented sales actions. Nevertheless, such measures would have had little effect if the overall revenue kept on falling. Furthermore, airlines such as Gol, TAM and newcomers Azul Linhas Aéreas faced a very distinct and tough challenge in trimming capacity. These airlines have a considerable backlog of airplane orders at Airbus, Boeing and Embraer, respectively, and several deliveries planned for the coming years. Postponing deliveries was therefore not an option given the quantity of airplane orders and the severe cancellation/postponement penalties imposed by airframe constructors and leasing companies. Airplanes would have kept on coming regardless of the market situation.

In the face of rising (idle) capacity airlines were forced to think of alternative ways of securing additional revenue. The answer came in the form of Brazil’s “new middle class” which emerged in the wake of the country’s recent economical development. Brazilian Airlines had suddenly found a way of “creating demand” where there was none.

Gol forecasts that “Brazil has a potential market of more than 100 million people with sufficient disposable income to travel by air”. According to a study prepared by the Instituto Brasileiro de Geografia e Estatística (IBGE) and Fundação Getúlio Vargas (FGV), Brazil’s middle-class increased from around 70 million people in 2003 to more than 100 million people in 2008. Additionally, there has been major shift from the “E” to the “D” and “C” middle classes, in effect creating Brazil’s “new middle class”. The latest figures indicate that nowadays only around 16 million people actually fly, making Brazil one of the highest potential growth markets in the world for the airline industry.

Stimulating demand in Brazil’s new middle class has become a priority for all Brazilian carriers and the work being carried out is based on the following principles: offering competitive fares, comparable to those offered by interstate bus companies (as long as booked in advance); payment in long-term monthly installments (Azul, Gol and TAM go as far as offering 60 monthly installments); and, a specific, directed marketing strategy based on specific channels with segmented ads in publications and media outlets in regions and neighborhoods with high density of middle class. Webjet Linhas Aéreas for instance, has pursued a marketing strategy to advertise promotional fares on intercity buses, while TAM has partnered up with the countries largest Bank, Banco do Brasil, to sell tickets at governmental lottery houses. Gol on the other hand has taken a more “hands-on” approach and inaugurated a “VoeFácil” store, specifically created to tend this “new public”, strategically located in the Largo 13 de Maio region, one of São Paulo’s main middle-class commercial centers.

In the form of Brazil’s “new middle class”, domestic airlines might have found the key to their success. More importantly, they found the key to unlock its full potential: offer ease of acquisition, not only pricing (low fares). Airlines have discovered that through initiatives such as combining ease of payment, targeted marketing and guidance for first-time flyers, they can win more passengers, generate more revenue and, more importantly, more quality, high-yield revenue. The strategy seems to be working because TAM, Gol and Azul are predicting a healthy growth for the current year while at the same time reporting yield increases.