Brazil’s TAM, Gol Move to Boost Profits

By Ben Tavener, Senior Contributing Reporter

RIO DE JANEIRO, BRAZIL – The heads of Brazil’s two biggest airlines, TAM and Gol, have said they are planning on taking steps to boost their companies’ profits after the global financial crisis dealt a severe blow to each. However, both companies have also announced major investments in their fleets, signaling an expectation of a return to strong profits in coming years.

TAM, which recently merged with Chile’s LAN to form LATAM – potentially one of the world’s biggest carriers, said it was looking to use its fleet more efficiently, by reducing its route capacity by seven percent in 2013, on top of a two-percent cut in 2012.

“Starting in 2009 the sector saw demand grow significantly. But as the economy is now not increasing the way expected, we are running service with spaces, [hence] a change of plans and a reduction in capacity,” TAM Airlines CEO Marco Bologna told Valor.

TAM says it will reduce the number of aircraft in active service and their flying hours; they hope more reserve aircraft will translate into improved customer satisfaction through more on-time departures and fewer cancellations.

Although the nine-percent growth target for 2012 is now looking increasingly like seven percent, the company expects its profits to improve by 2014. With this in mind, TAM announced a US$1 billion deal to buy four new Boeing 777s, which it hopes will boost its global business.

Brazil’s other major airline, Gol, has been faring worse, posting losses of R$354.6 million (US$174.8 million) in the second quarter of 2012, after similarly poor results in the first quarter and in 2011 overall.

With new CEO Paulo Kakinoff now in place, the company is hoping to turn its fortunes around by changing tactics. In an interview with O Globo newspaper, he said the company would switch to a new “low cost-best fare” business model (as opposed to “low cost-low fare”).

Under the new model, passengers would “customize” their flights, paying for what they use – including a number of add-on services, and plans to enhance in-flight sales by extending the option to buy food and drink on board to all flights.

Gol also plans to cut costs, including by saving paper through smaller tickets and smartphone boarding passes, and reducing excess weight through more efficient restroom water usage – which when multiplied by the number of customers flying every day would generate “millions of reais” in savings, says Kakinoff.

Gol also has since announced the “biggest purchase of aircraft in South American aviation history,” signing a deal to buy sixty Boeing 737 MAXs, totaling US$6 billion, which should start entering service from 2018.

Gol justified the move by saying the company’s losses were temporary and that high oil prices in the future meant the fleet had to modernize through new, more efficient aircraft.

Both TAM and Gol have seen profits hit hard in recent times, which they attribute to the price of oil, the value of the U.S. dollar and airport taxes – as well as the general slowdown in Brazil’s economy.

Business consultant Tom Reaoch, who also hosts the Talk2Brazil radio show, says the answer as to why the bigger airlines have suffered lies in an inability to exploit new lucrative parts of the market: “TAM and Gol’s large aircraft run with empty seats on the bigger routes as smaller companies can easily compete and wage a price war,” he tells The Rio Times.

“More important is that smaller companies also have the benefit of running smaller planes that can service smaller destinations, a rapidly-expanding area of the market that bigger companies are failing to exploit.”