Fasten your seatbelts: cutting costs, TAM Airlines follows low-cost Gol's model to cater to Brazil's growing airline business

Latin Trade, March, 2005 by Carlos Adese

Lucas Oliveira arrives with his parents at the check-in counter at an airport in Congonhas, Sao Paulo prior to departing for Florianopolis. in Santa Catarina state. The airline employee checks the boy's document to find it's his 10th birthday He shares the information with a tall, agitated man, who runs to a microphone to inform the hundred passengers in line that it's Lucas' birthday and asks that everyone join in singing "Happy Birthday." It's that kind of spirit that has helped Gol Linhas Aereas Inteligentes, a Brazilian low-cost airline, to conquer 22% of the domestic market since its startup in January 2001.

The man at the microphone, Wandrey Passetto, is Gol's airport director. He moves among 19 fully staffed counters in an area he calls "the war zone" Going by the nickname Xando. Passetto is the brains behind Gol's combination of party atmosphere and efficiency at the check-in counters. "This is the moment of truth. The employees have to be quick, happy and do everything. Gol's style is the style of the future" says Xando.

For rival TAM Linhas Aereas, the future has already begun. The domestic leader, TAM controls 35% of the market. It nevertheless has faced up to the task of battling stiff and innovative competition from Gol, an advance by regional airline OceanAir and the whatever crisis that could be provoked by its longtime, yet ailing, competitor Varig. TAM earned more than US$103 million during the nine-month period ending in September 2004. a 236% gain over results posted during the same time in 2003. "We are experiencing a very favorable market for worldwide air transportation and very strong growth in the domestic Brazilian market," says Marco Antonio Bologna, president of TAM.

To cut costs, Bologna did not shy away from studying his sudden competitor, Gol. "We even copied some parts of it" he says, Competition between a company that is restructuring, such as TAM. and another under construction, like Gol, could help both companies fly higher in the future, Bologna asserts. "We are the major competitors, the big players fighting over the domestic market," he says. While TAM has made headway in cutting costs, Gol has raised the number of flights and routes it provides.

Both companies aim to grow and to do so by learning from the good examples set by all of their competitors, yet not stray from their own business models: TAM focuses on the executive traveler while Gol, because of its low fares, tends to appeal to ordinary individuals. "You want to kill TAM's character? Then do this: Get rid of the red carpet at the airport.

The day that happens is the day TAM is done for," says Bologna. The way in which TAM relates to its customers is based on high levels of service geared to executives with direct flights and a larger number of destinations. The low-cost business model, on the other hand, competes more on price than on convenient departures, TAM's goal is to offer better service at a price that is only slightly higher than that of its rival. The company lowered fares to 25% more than Gol's average prices, then to 12%. The airline's plan is to keep cutting costs until the difference is down to single digits.

Lessons learned. Bologna says he hasn't forgotten the effect that the Sept. 11 terrorist attacks had on passenger traffic, oil prices and security costs, but he points out that all of these factors also accelerated changes that were a long time coming. "New concepts were already being introduced to the market, independent of September 11: The low-cost, low-fare model, which showed a new way for airlines to operate at lower costs, to enter the market with competitive prices and slowly catching up to traditional airlines, which had to undergo a process of adjustment and reengineering." TAM was just taking on that tough task soon after preparing itself for a domestic air travel boom--expected between 2001 and 2003--that never took place. The company meanwhile took delivery of 39 new Airbus aircraft, in retrospect an expensive choice given the immediate decline in air travel after the attack on the United States.

After spending some time in the red, TAM started on a tough restructuring plan at the beginning of 2003. Cuts to the employee roster were deep, including firing nearly 200 pilots and co-pilots. "We cut back on a valuable, hard-to-replace workforce in which we had invested strongly in terms of training. But it was necessary. We had no other way out[ says Buy Amparo, technical and operational vice president at TAM. A pilot, for example, spends nearly five months training to meet TAM's specifications, while equipment costs, mainly flight simulators, cost the company between US$15,000 and $20,000 per team of pilot and copilot.

Layoffs aside, the company dramatically cut its domestic routes, suspended some international routes and implemented a code-sharing plan with Varig to maximize its use of flight schedules. The year 2003 was a year of great change, Bologna says, and TAM moved from posting losses to making money. "In 2004, we had to diligently continue our search for efficiencies, and the great challenge for 2005 is to maintain leadership, irrefutably so, in the domestic market," he says.