In spite of July's fatal crash and a year of turmoil in the Brazilian airline sector, TAM's Marco Antonio Bologna is focused on consolidating its market dominance
Few would deny it has been a tough year for Brazil's TAM Linhas Aéreas. After enduring months of air traffic control strikes, frequent airport delays and flight cancellations, TAM was thrust into the spotlight in July when one of its Airbus A320s overran the runway at São Paulo Congonhas airport in a catastrophe that claimed 199 lives.
TAM president Marco Antonio Bologna has since had to deal with wild media speculation and a very public blame game over what caused the crash. This contributed to a climate of fear and mistrust that saw load factors plummet by a quarter in the aftermath. Not wishing to further prejudice proceedings, Bologna is reluctant to talk too much about the accident other than to describe the measures taken by TAM to assist the victims' families. Instead, he prefers to focus on his steely determination to further consolidate TAM's domestic market dominance and to continue building its international network.
 |
|---|
| Captain's choice Marco Antonio Bologna is a relative newcomer to the airline business, but he brought to TAM experience in finance, engineering and management. He graduated from the Universidade de São Paulo with a degree in production engineering, and later obtained a degree in financial services from the Manchester Business School in the UK. Bologna held senior positions from 1977 with Banco Frances e Brasileiro, Lloyds Bank, Chase Manhattan Bank, Banco Itamarati and Banco SRL, as well as Inter American Express Bank. In 2001 he accepted Captain Rolim Amaro's invitation to become TAM's vice-president finance. Amaro's tragic death in a helicopter accident soon after was a bitter blow, but it was only a matter of time before Bologna reached the pinnacle of becoming president in 2004. Since then he has led the airline to pre-eminence within Brazil and internationally. |
From its roots as an air-taxi operator in the 1960s, TAM has risen to become one of Latin America's leading carriers and its largest by revenue. The year 1998 was a turning point, says Bologna. At that time, when its domestic market share was just 20%, TAM received a capital injection, moved to an all-jet fleet, and started services to Miami. The platform for today's TAM was laid down. Today the carrier has grown to account for half of all air traffic in Brazil.
The carrier's rise is in sharp contrast to the fall of Brazil's Varig, which for years dominated the country's airline scene. But mounting debt and fierce competition, as well as internal power struggles, took their toll on Varig which went into bankruptcy protection in 2005. TAM had planned to enter the intercontinental market by forging a codeshare with Varig in 2003, with the intention of merging the two airlines and retaining the well-known Varig brand. "This would have been an easier way into the market," Bologna recalls. "But now that Gol has bought Varig, the situation is different. When we realised in 2004 that the merger would not go ahead, we decided to create our own standalone operation.
"On the other hand, Varig presented a good opportunity for Gol, and while we now have a strong competitor in the international market, I feel comfortable with the situation," says Bologna. "We now have more certainty, more rationality and it made more sense for Gol and ourselves to prevent a third party from getting control of Varig." By mid-2006, TAM had become the leader in both domestic and international markets.
How much TAM's flight to pre-eminence in Brazil is due to the demise of the old Varig and names like Transbrasil and VASP, and how much to sound judgement, remains open to debate. But Bologna has no such doubts: "I would say [our success] is not a consequence of any particular circumstance. It was a decision by the company to add capacity at the right time in the belief that the market would grow. But against the odds we survived the turmoil of the economic rollercoaster and political vagaries. We also survived the disruptive effect of ATC strikes and the government controlled price structure on domestic operations. We showed huge endurance, while the other airlines failed to realise that they had to change. When we started flying abroad, we had to compete with all three, now we have only the new Varig as a competitor.
"But reduced numbers do not tell the whole story," adds Bologna. "We are now also in a much healthier situation. Both companies [Gol and TAM] are pursuing the same culture, both companies have to deliver results, both are under the same type of governance, both are listed on the New York stock exchange. We used to have to compete with companies that failed to pay taxes and other dues and were to all intents and purposes propped up by government. We now have a unique situation we never had before."
Even though Varig is moving to reassert itself under the ownership of Gol, Brazil's hugely successful low-cost airline, TAM has moved quickly to dominate the international scene. It has regional services to Argentina, Bolivia, Chile, Paraguay, Uruguay and Venezuela. Services out of Asuncion (the capital of Paraguay) are operated by TAM Mercosur, which is 95%-owned by TAM and 5%-owned by the Paraguayan government.
| Crash course A fireman lights a candle in front of the site of where the TAM Airbus A320 overshot the runway at São Paulo Congonhas and exploded. Measures were immediately put into action to provide assistance to the families of the 199 victims. TAM set up a free telephone number for support, it organised and paid for travel, accommodation and meals for affected families, and also covered funeral expenses. More than 300 volunteers were assigned to support the bereaved and TAM offered a 24-month healthcare plan to family members. Assistance was given with legal expenses and, in conjunction with Unibanco AIG, support with compensation. TAM also supplied equipment and technicians to speed up identification of the victims, and hired Global BMS to handle the return of personal items. But most important, Bologna says, was to keep the families informed at all times. "We also had to deal with three further issues," he says. "First the main investigator, contrary to the Chicago Convention, has drip-fed information to the media, which has resulted in wild speculation implicating the flight crew and airport. Congress is undertaking its own investigation, which is creating further unhelpful publicity. The final accident report is not expected until next year. "Secondly, we have made a lot of effort in providing the families of the victims with all the support we can offer, always being frank and trying to avoid confusion. We are taking our social responsibility very seriously. "Thirdly, we had to move flights to [São Paulo] Guarulhos, which impacted on capacity and costs." |
TAM saw an opportunity to expand its reach and take advantage of Paraguay's open skies, freedom of foreign capital investment and important bilaterals with other Latin American countries. "We have a flagship carrier here in Brazil and a flagship carrier in Paraguay," says Bologna. TAM is also flying to Miami and New York and across the Atlantic to London, Paris and Milan, with Frankfurt to be added at the end of November and Madrid in December.
Bologna says TAM has a clear strategy, which is focused on keeping and growing its domestic leadership and the fast build up of intercontinental services. It flies to 50 cities in Brazil, including all 26 state capitals and the Federal District (Brasilia), plus another 33 through its codeshare agreements with NHT, Pantanal, Passaredo, Total and TRIP - and is becoming a stronger player in South America and elsewhere. Its strength in the region makes it an attractive partner.
TAM has codeshared with Air France since 1999, it added TAP Air Portugal this year, and will begin codesharing with Lufthansa next year. For US routes it is switching partners from American to United Airlines. In October, TAM began codesharing with the LAN Group, covering LanArgentina, LanChile and LanPeru. "This creates an interesting network coverage," says Bologna. "Both Argentina and Chile are strong markets and inter-regional flights are growing. And we want to provide additional connectivity through Miami, which is the main US gateway into South America. We already have good coverage of Europe."
TAM is studying whether to join a global alliance, but its strategy has been to achieve penetration through codeshares on a bilateral basis. "We chose those strong airlines in countries we are flying to that were best suited to our interests," says Bologna. "We moved from American to United [which like Lufthansa and TAP is a Star Alliance member] because the latter has a more complementary network. It does not link New York to Miami. Its network is structured more towards the Far East than to South America. Looking to the future, we will be flying to Los Angeles, which is the major [west coast] hub for United.
"We have a codeshare on intercontinental routes with Air France, which is a member of SkyTeam, and our agreement with LAN links us into oneworld. It is important to understand that Brazil is a final destination continent, so our main objective is to distribute traffic to other South American countries. We also need a strong distribution [through Lufthansa] at Frankfurt because our figures show that the German city is the final destination for only 30-35% of passengers between the two countries. Before making a decision to join a global alliance we have to fully understand the benefits, but it is true to say that we are closer to Star than the others." Bologna emphasises that should TAM join Star, it would not affect its present codeshare deals with Air France and LAN: "Our codeshare with LAN only covers the region and not long haul, so it is a different situation."
As to the domestic situation, Bologna points out that low-fare Gol flies to the same major cities: "The battlefield therefore is the same. Airport costs are the same, labour costs are the same. Internet penetration of sales is also lower than in other countries, although at 30% is higher at Gol than the 25% of TAM. More flights and higher utilisation of aircraft per day [around 14h compared to 12.5h for TAM] also give our rival an edge. [But] we offer a better network with more direct flights and a more convenient schedule.
"We have more business traffic. The downside is that with more business traffic, we have a greater dependency on travel agents incurring higher sales distribution costs. Something else that is different is overheads: we offer a loyalty programme, in-flight entertainment, a meal service, all things Gol does not. Furthermore, we have the additional cost of our international operations, something Gol will now also be incurring following the acquisition of Varig. Our advantage is that we offer greater convenience to our passengers, competitive prices and better service, while keeping a tight control on costs."
This cost control slipped in the second quarter of 2007, when external influences increased spending and outstripped the comparable boost in revenues. TAM lost $15 million for the three months ending 30 June, ending a string of several consecutive profitable quarters. "Both companies [Gol and TAM] entered a fare war, both added capacity, both fought for market share," says Bologna. "This resulted in a 91% drop in yield. Adding increased fuel costs, air traffic control strikes and infrastructure shortcomings that led to delays and cancellations, a loss became inevitable."
The third quarter was impacted by a sizeable drop in loads, which plummeted by a quarter in the immediate post-crash period, but traffic is now recovering and Bologna maintains that the company is still on course to meet its full-year revenue and profit growth predictions. TAM is expecting domestic market growth of 10-15% (it achieved 12.6% in the first six months) and average domestic market share above 50% (49.3% to date).
The first half of 2007 has been notable for a 12.6% revenue growth to $1.9 billion, with almost all the increase derived from international passenger traffic, now accounting for 26% of revenues. The figures show that TAM is sustaining its international push, which, between 2004 and 2006, has helped total revenue grow by 44% to $3.3 billion, with the international element almost doubling.
"We have added capacity since 1998 with a strong agreement with Airbus and have now also ordered the Boeing 777-300ER mainly for slot-restricted airports in Europe and the US," he says. "We decided that the fleet age has to be less than seven years, so we took the Fokker 100s out of service, at the same time becoming a single-type, single-aisle operator." It now has an all-A320 family narrowbody fleet of 77 aircraft with another 45 on order.
Bologna does not rule out a smaller aircraft if the market continues to grow and more of Brazil's secondary cities appear on TAM's radar. There are also opportunities to put such an aircraft on the trunk routes during off-peak hours, he adds. "For now we cover the thinner market through our agreements with our regional codeshare partners."
TAM's plan for the widebody fleet is more clearly defined, although its decision to buy Boeing after having operated (apart from the ageing Fokker 100s) an exclusively Airbus fleet surprised many. This is easily explained, says Bologna. "We had to increase capacity and we could do this only by increasing the size of the aircraft," he says. It compared the A340-600 and the Boeing 777-300ER and in August ordered another four 777-300ERs for delivery in 2012. The Boeing offer included the delivery of three MD-11s through Boeing Capital, pending delivery of the first four 777-300ERs next summer. In addition, the A340-600 will eventually be replaced by the A350 XWB and would have provided only an interim solution.
TAM currently operates 10 A330-300s in addition to the three MD-11s. In the competition to replace the A330s TAM chose the A350 XWB over the 787, with the Airbus product demonstrating a technological advantage over its rival while aggressive pricing also helped, says Bologna. The airline plans to order 10 A350 XWBs for delivery between 2013 and 2018.
There are now 125 chief executive interviews on our website, with more being added all the time. To view visit http://www.flightglobal.com/ceos
Source: Airline Business
