Brazil’s Budget Airlines Gain Share

Upstart airlines are nudging their way into Brazil’s aviation market, where carriers TAM SA and GOL Linhas Aéreas Inteligentes SA have dominated the market in recent years.

Led by Azul Linhas Aéreas Brasileiras, a budget airline set up by JetBlue Founder David Neeleman, small airlines like WebJet Linhas Aéreas and Trip Linhas Aéreas have been busy adding aircraft and routes, serving secondary markets and low-end travelers. As a result the smaller airlines have raised their collective market share of Brazil’s $6.5 billion domestic aviation market to 14% from 8% over the past year.

New local airline Azul Linhas Aereas Brasileiras S.A president Pedro Janot, fourth from right, sprays champagne on the airline’s first aircraft at the airport in Rio de Janeiro, Sept. 17, 2008. Azul Linhas Aereas is scheduled to start operations in January 2009.
Associated Press

New local airline Azul Linhas Aereas Brasileiras president Pedro Janot, fourth from right, sprays champagne on the airline’s first aircraft at the airport in Rio de Janeiro.
New local airline Azul Linhas Aereas Brasileiras S.A president Pedro Janot, fourth from right, sprays champagne on the airline’s first aircraft at the airport in Rio de Janeiro, Sept. 17, 2008. Azul Linhas Aereas is scheduled to start operations in January 2009.
New local airline Azul Linhas Aereas Brasileiras S.A president Pedro Janot, fourth from right, sprays champagne on the airline’s first aircraft at the airport in Rio de Janeiro, Sept. 17, 2008. Azul Linhas Aereas is scheduled to start operations in January 2009.

While they may not challenge the dominant carriers in the key business traveler market — which represents 70% of air travelers here — the smaller airlines are targeting potential growth in tourist and secondary markets. In Brazil, with a population of 190 million, passengers took just 100 million flights last year. In comparison, in the U.S., with a population of 300 million, passengers took 650 million flights.

“We see great potential for growth without competing head on with TAM and GOL,” said Adalberto Febeliano, Azul’s institutional relations director. “We can tap into first-time fliers, different markets. There is a lot to do.”

Directly challenging Brazil’s big two carriers would be difficult. TAM and GOL command 44% and 41% of the market, respectively, and control the majority of landing slots at major airports such as São Paulo’s Congonhas airport and Rio de Janeiro’s Santos Dumont airport, where there is little room for expansion.

They each have vast domestic networks of flights, which allow them to offer connections that are important to business travelers. And they likely have lower unit costs because of economies of scale, said Vanessa Ferraz, aviation analyst at HSBC.

“Twelve airports account for 90% of revenues in Brazil, and TAM and GOL account for 92% of operations at those airports,” said David Barioni, chief executive at TAM. “We have a strong presence, which will be tough to budge.”

But Brazil’s airports and air-traffic control system are already struggling to cope with volume on the main routes, and the resulting supply bottleneck has kept prices high.

As a result, many Brazilians travel hours, or even days, on long-distance buses from the big urban centers to visit homes in smaller cities or rural areas, while people in second- and third-tier cities use airlines little because of the lack of reasonably priced flights.

Azul and other small airlines are targeting these potential passengers.

Azul started operations in December by offering flights from the southern city of Porto Alegre to Viracopas, an underutilized airport 60 miles north of Brazil’s industrial hub of São Paulo. In Viracopas one can connect to a flight to Salvador, one of the many holiday destinations in Brazil’s sun-drenched and beach-rich northeast.

“We offered a cheap way for people from the south to holiday in Salvador, without having to make terrible connections,” said Mr. Febeliano.

The Viracopas-Salvador route carried 35 passengers a day before Azul started flying in December. Now some 400 passengers fly the route daily, Azul said. As of August Azul had 5% of the total domestic market.

WebJet, which commanded 5% of the market in August, is also going after the northeast holiday market. The airline was bought by CVC, Brazil’s largest travel agency, in 2007 to run its customers up to holiday destinations such as the northeastern cities Natal and Recife. It sells excess seats at cheap prices — WebJet’s flight from São Paulo to Recife is $65, beating TAM’s fare on the route of $91.

The smaller Trip, with 1.8% of the market, focuses on air taxi services in the north of Brazil, although it has expanded into other regions.

Azul, WebJet and Trip announced plans to invest a total of $430 million in new planes and to add new routes next year. Azul, currently with 12 jets, has orders for 34 more with Brazilian plane maker Embraer.

But the focus outside the major airports of Rio and São Paulo could limit the smaller carriers’ growth, and TAM and GOL have made life difficult by cutting fares and laying on extra flights on their routes.

“Azul will need to go through the major airports if they grow substantially, and it’s natural that we will react, adding new flights in competition to their routes,” said TAM’s Mr. Barioni.

GOL, which itself was set up in 2001 as a low-fare airline, warns the road ahead for Azul could be rocky.

“Azul is benefiting from the expectations placed on the newcomer, something GOL also experienced at the beginning of our operations,” said Constantino Oliveira Jr., GOL’s chief executive. “But more than launching an airline, the challenge is to continuously innovate to find new forms of success.”

Brazil’s overall travel demand managed to grow 7% in 2008, although the recession damped growth. Recent signs have pointed to a stronger upturn. Domestic air travel jumped 26% in July, and shares of TAM and GOL, the only carriers listed, regained ground. GOL shares have risen 88% so far in 2009, while TAM shares are up 34%.

Investors favored GOL as it appears to have overcome the teething problems associated with integrating former flagship carrier Varig, which it took over in 2006. It’s also successfully cut costs, including the renegotiation of the delivery of 20 Boeing aircraft for the 2011-14 period.

In the longer term, however, TAM can rely on its strong international operations, which promise to offer growing yields as Brazilians get richer.

GOL, in contrast, has a few South America destinations but mainly flies within Brazil, and nearly all the flights offered by the upstart carriers are domestic.

Upstart airlines are nudging their way into Brazil’s aviation market, where carriers TAM SA and GOL Linhas Aéreas Inteligentes SA have dominated the market in recent years.

Led by Azul Linhas Aéreas Brasileiras, a budget airline set up by JetBlue Founder David Neeleman, small airlines like WebJet Linhas Aéreas and Trip Linhas Aéreas have been busy adding aircraft and routes, serving secondary markets and low-end travelers. As a result the smaller airlines have raised their collective market share of Brazil’s $6.5 billion domestic aviation market to 14% from 8% over the past year.

While they may not challenge the dominant carriers in the key business traveler market — which represents 70% of air travelers here — the smaller airlines are targeting potential growth in tourist and secondary markets. In Brazil, with a population of 190 million, passengers took just 100 million flights last year. In comparison, in the U.S., with a population of 300 million, passengers took 650 million flights.

“We see great potential for growth without competing head on with TAM and GOL,” said Adalberto Febeliano, Azul’s institutional relations director. “We can tap into first-time fliers, different markets. There is a lot to do.”

Directly challenging Brazil’s big two carriers would be difficult. TAM and GOL command 44% and 41% of the market, respectively, and control the majority of landing slots at major airports such as São Paulo’s Congonhas airport and Rio de Janeiro’s Santos Dumont airport, where there is little room for expansion.

They each have vast domestic networks of flights, which allow them to offer connections that are important to business travelers. And they likely have lower unit costs because of economies of scale, said Vanessa Ferraz, aviation analyst at HSBC.

“Twelve airports account for 90% of revenues in Brazil, and TAM and GOL account for 92% of operations at those airports,” said David Barioni, chief executive at TAM. “We have a strong presence, which will be tough to budge.”

But Brazil’s airports and air-traffic control system are already struggling to cope with volume on the main routes, and the resulting supply bottleneck has kept prices high.

As a result, many Brazilians travel hours, or even days, on long-distance buses from the big urban centers to visit homes in smaller cities or rural areas, while people in second- and third-tier cities use airlines little because of the lack of reasonably priced flights.

Azul and other small airlines are targeting these potential passengers.

Azul started operations in December by offering flights from the southern city of Porto Alegre to Viracopas, an underutilized airport 60 miles north of Brazil’s industrial hub of São Paulo. In Viracopas one can connect to a flight to Salvador, one of the many holiday destinations in Brazil’s sun-drenched and beach-rich northeast.

“We offered a cheap way for people from the south to holiday in Salvador, without having to make terrible connections,” said Mr. Febeliano.

The Viracopas-Salvador route carried 35 passengers a day before Azul started flying in December. Now some 400 passengers fly the route daily, Azul said. As of August Azul had 5% of the total domestic market.

WebJet, which commanded 5% of the market in August, is also going after the northeast holiday market. The airline was bought by CVC, Brazil’s largest travel agency, in 2007 to run its customers up to holiday destinations such as the northeastern cities Natal and Recife. It sells excess seats at cheap prices — WebJet’s flight from São Paulo to Recife is $65, beating TAM’s fare on the route of $91.

The smaller Trip, with 1.8% of the market, focuses on air taxi services in the north of Brazil, although it has expanded into other regions.

Azul, WebJet and Trip announced plans to invest a total of $430 million in new planes and to add new routes next year. Azul, currently with 12 jets, has orders for 34 more with Brazilian plane maker Embraer.

But the focus outside the major airports of Rio and São Paulo could limit the smaller carriers’ growth, and TAM and GOL have made life difficult by cutting fares and laying on extra flights on their routes.

“Azul will need to go through the major airports if they grow substantially, and it’s natural that we will react, adding new flights in competition to their routes,” said TAM’s Mr. Barioni.

GOL, which itself was set up in 2001 as a low-fare airline, warns the road ahead for Azul could be rocky.

“Azul is benefiting from the expectations placed on the newcomer, something GOL also experienced at the beginning of our operations,” said Constantino Oliveira Jr., GOL’s chief executive. “But more than launching an airline, the challenge is to continuously innovate to find new forms of success.”

Brazil’s overall travel demand managed to grow 7% in 2008, although the recession damped growth. Recent signs have pointed to a stronger upturn. Domestic air travel jumped 26% in July, and shares of TAM and GOL, the only carriers listed, regained ground. GOL shares have risen 88% so far in 2009, while TAM shares are up 34%.

Investors favored GOL as it appears to have overcome the teething problems associated with integrating former flagship carrier Varig, which it took over in 2006. It’s also successfully cut costs, including the renegotiation of the delivery of 20 Boeing aircraft for the 2011-14 period.

In the longer term, however, TAM can rely on its strong international operations, which promise to offer growing yields as Brazilians get richer.

GOL, in contrast, has a few South America destinations but mainly flies within Brazil, and nearly all the flights offered by the upstart carriers are domestic.