Gol’s “mad dog August” – round two!

And here we go again… Almost two weeks after the ‘problem’ initially arose; the LCC is faced with it again. This time however, the general public is fully aware that it’s not simply a ‘software glitch combined with the season’s high demand’, but a full-scale, previously announced strike – and one which can be avoided.

The strike will be held by both, cockpit and cabin crew members. According to the “Sindicato dos Aeronautas” (SNA), the pilots and flight attendants local union, Gol crew members are demanding:

a) A full health insurance program;
b) A pension plan;
c) Gol is to fully comply with the professional regulatory act established in Brazil (meaning, pilots and flight attendants shouldn’t exceed the permitted flying hours per month);
d) A just and humane duty roster;
e) Pay increase by roughly 27%.

The airline is expected to make a decision, whether or not to accept the demands by Friday August 20th.

It is important to point out that right now a state of strike already exists and should demands not be accepted – or at least a counter-proposal be made – by next Friday, pilots and flight attendants will call for a strike some 72hs later. This strike is expected to affect 30% of the carrier’s flights, as stipulated by law.

On a side note, the timing for these strikes couldn’t be worse for Gol (or better for their crew members if you will): the airline has just announced a second-quarter loss of USD 29,7 million; the first ‘stealth strike’ scathed the airlines image and cost them dearly (public image, revenue loss, compensation costs, a hefty fine, the loss of corporate contracts, etc.); its fierce competitor, TAM, announced the intention to join forces with LAN and merge thereby creating on the world’s largest airline groups… In light of what we just outlined here, it is imperative that Gol makes the threat of a public strike – which, undoubtedly, could cripple them much worse than they could possibly imagine – ‘go away’. And they need to do it quickly and quietly.

Gol’s “mad dog August”

Yesterday (August 2^nd. 2010) Brazil’s pioneer low-cost/no frills carrier Gol suffered a heavy blow: approximately 12,5% of all their flights had to be cancelled and another 50% suffered delays. In other words, Gol cancelled more than 100 flights and had to delay another 410 (roughly)… That’s a major disaster given that Gol is the country’s second largest airline and holds a domestic market share of about 39% (as per ANAC’s June 2010 traffic statistics).

In an official (revised) statement, Gol said that the delays and cancellations are but a reflection of the problems the carrier suffered last Friday (July 30^th. 2010) when, as Gol claims, the airline had to transfer some of its operations from Congonhas (São Paulo’s city airport) to Guarulhos (São Paulo’s international airport) because the first airport closes at 11PM. According to Gol this “transfer” was the result of the increased demand of July’s last weekend (note: the last weekend of July marked the end of the winter vacation season in Brazil) and that as a result of this increased demand, several crew had reached the limit of flying hours permitted by law. In addition to that, Gol’s original statement, said that the carrier had implemented a brand new planning schedule software for the crew duty roster which malfunctioned.

We can all agree that complications can arise in a situation of increased demand; however, it is an airline’s job to foresee such complications and act accordingly. And let’s not forget: Gol is no “newcomer”, quite the opposite, the carrier will hit the 10-year mark next January and has already established itself as fully grown and experienced network carrier with a domestic market share of about 39%, only 3 percentage points behind TAM. With that said one can only conclude that the current problem, according to Gol’s own statement, can only have originated due to a) the planning of a completely incorrect crew duty roster or b) Gol has less crew than it needs to given their current fleet/network. And we haven’t even said anything about Congonhas’ 11PM restriction, which is anything but new to all airlines flying into/out of the São Paulo’s city airport…

Gol’s “official version” might sound plausible to the ‘untrained eye’, but for those working in the airline industry, the story has too many gaps. For starters, why did Gol take out the Congonhas’ 11PM traffic restriction out of their official statement? Probably because everybody knows this is a lame excuse and that this very same restriction also affects TAM – and they suffered no such problems what so ever… And why did Gol "remove" the problem of the new software responsible for the crew duty roster planning from their revised statement? Maybe because there never was any such problem?

The ‘real’ story, which makes more sense and explains why Gol experienced such a terrible day, is somewhat different. Yes, Gol had several crews’ which exceeded the flying time of their duty roster allowed by law. That part of Gol’s statement was spot on. But the LCC’s statement failed to mention that it forced, according to the “Sindicato Nacional dos Aeronautas” (SNA – Brazil’s version of the airmen labor union), both pilots and flight attendants to work double shifts and fly longer than is permitted by law. The SNA claims to have received several ca. 1000 individual complaints from crewmembers of Brazil’s major airlines (TAM, Gol, Webjet and Azul), 60% of which came from Gol crewmembers! Additionally, yesterday rumors arose that Gol’s pilots were already summoning a general strike – unofficially scheduled for August 13^th. Local newspapers and news agencies interviewed pilots who said the strike was called upon, initially, by co-pilots, who demand a more “humane duty roster” and a salary increase of up to 25%. It is expected that both captains as well as flight attendants join co-pilots in their strike if Gol takes no action to improve working conditions.

The first indicators show that Gol’s “mad dog” August will continue today (August 3^rd. 2010). According to INFRAERO, out of 321 scheduled flights between midnight and 11AM (domestic and international), the airline has cancelled 27 (8,4%) and another 105 are already delayed (32,7%). Furthermore, reports coming from various sources claim that the situation has already gotten out of control and what was simply a problem of lacking crew to cover all flights has now become a “stealh strike” with several crew members “calling in sick”…

Azul goes regional – nation-wide!

Azul’s order for 20+20 ATR-72-600’s at Farnborough caught a lot of people by surprise – in a way, even yours truly! Aside from entering a market which is somewhat ‘abandoned’ in Brazil – regional aviation has been ‘dormant’ for a while and it wasn’t until recently that airlines woke up to realize the full potential this segment has –, Azul is on the right path to build the most comprehensive and extensive domestic network of any carrier in Brazil.

The ATR’s will offer Azul a distinctive advantage over its competitors, most notably Gol and TAM – though Trip ought to be scarred too, because our “blue friends” only plays for keeps: not only will Azul stamp its foot in the regional market, which so far has been pretty much up for grabs. Ok, that’s not entirely true: the regional market is pretty much Trip’s territory (if you look at the national coverage; there are other local regional carriers, but their market share is very small) and they have been doing whatever they feel like as they are/were the sole player. But, back to the point at hand: Azul will have the perfect aircraft with which to serve smaller markets and feed them directly into their hubs. Note that I’ve written hubs, not single hub. That’s because Azul will have the opportunity to create regional mini-hubs, a concept still more or less unexplored in Brazil. And there are plenty of mini-hub options for Azul to choose from: imagine if you can, creating small, regional hubs in Porto Alegre (Rio Grande do Sul state catchment area); Curitiba (Paraná state catchment area); Salvador (Bahia state catchment area); Brasília or Goiânia (the latter holds more potential as the airport is not quite as clogged); and especially the state of São Paulo which has plenty of potential and has a scattered, virtually ‘unconnected network’ (meaning its basically cut of from the main hubs in CGH, GRU and even VCP – there are exceptions, obviously). And there are many, many more potential regional hubs, I just listed a couple.

If (or should I say when?) Azul manages to create this proposed regional mini-hub system, the airline will be stimulating local traffic and thereby creating even more business opportunities. There is plenty of potential and one has to wonder why neither Gol nor TAM ever saw this potential? Regional code-shares are good and all – they are also the “safe” way of serving regional markets without generating additional costs – , but what Azul is doing seems to be a much more sound strategy.

So far so good, but it doesn’t stop there. If the creation of regional mini-hubs is indeed Azul’s strategy, they might have found the key to securing their long-term future. Here’s why:

1) Azul will push local traffic and create regional mini-hubs (meaning new business!);
2) Azul can stimulate new local traffic through its regional mini-hubs using their now widely accepted “Brazil's new middle class strategy": the combo “ease-of-acquisition” + segmented marketing + sporadic, specific pricing actions”.;
3) Use the “new regional business” to feed its mainline network.

Aside from the “commercial side of it”, the ATR’s Azul will use also offer an advantage other carriers simply don’t have: this particular airplane, designed to carry 70 passengers, can operate in and out of small airports, with short runways and reduced infrastructure (airports which Gol and TAM can’t serve because they simply don’t have the right airplane to do so – neither commercially, nor operation-wise). More than that, as it’s a designated “regional” turbo-prop, the ATR-72-600 is ideal for short and medium routes as its CASK simply can’t be matched by that of any jet of its size.

Everything fits like a glove. With everything we just covered above, Azul definitely looks set to take on the “big guys” Gol and TAM and give them a good run for their money, especially because one needs to remember that aside from expanding its network, Azul is set to introduce a hot new entertainment system by year’s end – something only Avianca Brazil could in theory match with their new A319’s; and so far they only have three – which will certainly ‘up the game’ by a notch. Furthermore, don’t forget that Trip, the carrier with the most number of destinations in Brazil, and so far the only regional carrier with national coverage, is reigning supreme only because it is alone and has no ‘real competition’. This is about to change.

Last but not least I do have one thing which has been bugging me. One needs to remember that Brazil has a huge airport infra-structure problem – all main airports are fully clogged – and the logical outcome of Azul’s discussed ‘regional hub’ strategy is that some traffic will flow into its mainline network. Or that’s the way it should be. But if there are no more slots available and your biggest jet serving the mainline network is the Embraer 195 with seating capacity for 118 passengers (and your average SLF is around 85%), you definitely risk loosing your ‘regional passengers’ to the competition. The only logical solution to this equation would, in my personal view, be the acquisition of new, larger airplanes (Airbus A320 family or Boeing 737NG family) which would take over the main trunk routes from the Embraer E-Jets (and thus also freeing them up to explore and open new markets). Knowing Azul you can only wonder: they’re certainly perfectly aware of what we just covered here and the big question becomes: do they have an ace up their sleeve (which nobody knows about)?

Finally, I almost forgot this: in my analysis I was only looking at Azul’s prospects in Brazil, but, as the airline itself already publicly stated, it intends to serve South America in a couple of years – the first charter flights to Buenos Aires and Bariloche in Argentina already took place this month (July 2010). It won’t be long before Azul’s reach goes beyond Brazil. Imagine what they could do in South America if they continue to pursue the same strategy they have in Brazil in the rest of South America…

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.