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

Amparo breathes a sigh of relief now that hiring has begun again. "All the copilots laid off are now back on board, If we continue growing at this pace, in 2005 we will begin to bring back the pilots," he says. To keep costs down and to be able to face its competitors with greater efficiency, TAM is investing in infrastructure, including opening a technology center in Sao Carlos, in the interior of Silo Paulo state. The center will do all of the major maintenance work on the Airbus and Fokker aircraft in the fleet, which in the past was done outside Brazil. "Sao Carlos can service Brazilian and foreign aircraft, like those owned by LanChile, which has the same kind of aircraft that we do, the [Airbus] 320," says Amparo. The 4.6 million-square-meter complex will require a $35 million investment during the next five years. Last year, the company cut costs by $5.5 million, plus an additional $4 million by buying parts made in Brazil.

Bologna's take on the numbers back up his optimistic forecasts for TAM. "There are 180 million Brazilians, 34 million of which fly each year and close to 12 million flying three times in the period, if 24 million people started flying, the Brazilian market would double," he says.

Besides flying cheap, Gol has bet an improving Brazilian economy will make it grow even more. It has reason to celebrate. Last year, the airline flew its 20-millionth passenger, of which 5.2 million traveled in the first quarter alone. In terms of capacity, Brazils third-largest airline flew its planes 71% full during the first eight months of 2004, compared to the 65% average for the entire sector. Net income was $34 million for the third quarter of 2004, which brought year-on-year earnings at the time to $91.4 million, more than double earnings by September 2003. The company is neck-and-neck with Irish carrier Byan Air for the title of most profitable airline in the world.

Gol bet on the low-cost model early, when it was something new in Brazil. For Tarcisio Gargioni, vice president of marketing, research and services at Gol, the formula is simple: "Make it easy to buy, demystify the glamour of flying, price, reliable planes, good service with a smile and simplicity." Backed by this philosophy and the slogan 'Anyone Can Fly," Gol reports that 9% of its passengers are flying for the first time in their lives. "This is a democratization process. Through research, we found that these people really wanted to fly but they are afraid of the unknown," Gargioni says.

To keep cost down, 74% of the company's passenger sales are made on the Internet. The company works with 25 Boeing 737-700 or 737-800 aircraft and has another 18 due for delivery in 2009, as well as the option to acquire another 24. "In 2006 and 2007, we could renew the fleet, if the market grows and we have the opportunity to fly to new destinations, these 24 options could become firm orders." says Gargioni.

Gol seems to be in quite a hurry to grow. In 2004 the airline lofted a successful initial public offering on the Sao Paulo and New York stock exchanges and drew up plans to go international in 2007, beginning with two daily flights from Sao Paulo to Buenos Aires. Gol expects to offer travel across South America in the same way it serves its 30 destinations in Brazil from Sao Paulo to Manaus, which is not much of a stretch considering the distances it would have to fly abroad are the same as those it already flies inside Brazil's borders. "We believe that it is possible to fly around South America with the same model under which we operate in Brazil," says Gargioni.