20-Dec-2012 4:00 AM

Gol’s latest attempt to serve the booming Brazil-US market faces challenges

Analysis

Brazil's Gol is testing out an unusual variation of the long-haul low-cost model by launching a one-stop operation between Brazil and the US. But the experiment will likely be short-lived as Latin America's largest LCC will face intense competition in the Brazil-US market and is not offering connections on either end.

On 15-Dec-2012, Gol re-entered the US market with new daily Boeing 737-800 services to Miami and Orlando. Both new scheduled flights operate from Santo Domingo in the Dominican Republic, which serves as a fuel stop and transit point for the operation. One of the flights originates at Sao Paul Guarulhos and the other flight originates at Rio de Janeiro Galeao. The flights are timed to reach Santo Domingo at the about same time, allowing for passengers from either Brazilian city to travel to either US destination.

Summary

Gol is testing a one-stop operation between Brazil and the US, but it is likely to face intense competition in the Brazil-US market and is not offering connections on either end.
Gol aims to tap into the growing demand in the Brazil-Florida market, where rival TAM has been rapidly expanding in recent years.
Expansion by TAM, American, and Delta has driven a 30% increase in capacity in the US-Brazil market over the last year.
Gol's capacity between Brazil and Florida represents a small portion of the total capacity in the market, and the carrier will need to find a price point that can attract enough passengers at a high enough yield to cover its relatively high costs.
Gol's decision to not pursue connections on either end of its US operation could be a disadvantage, as TAM can tap into hundreds of Brazil-Florida city pairs through its domestic network.
Gol's previous attempt at long-haul flights to the US failed, and its new one-stop narrowbody services could also face challenges without connections and with the stopover in Santo Domingo.

Gol launch comes after rapid expansion in Florida by rival TAM

With the new operation, Gol is aiming to tap into growing demand in the Brazil-Florida market. Rival Brazilian carrier TAM has been rapidly expanding in Florida in recent years, particularly at Orlando.

TAM only launched services to Orlando in Nov-2008, originally serving the central Florida city with one daily flight from Sao Paulo. In 2011 TAM added a second daily flight on the Sao Paulo-Orlando route and in Oct-2012 the Brazilian carrier launched a daily flight from Rio de Janeiro to Orlando. TAM, which operates all its Orlando flights with A330-200s, flew 330,000 passengers in its first three years on the Sao Paulo-Orlando route.

TAM has quietly become the second largest international carrier at Orlando after Virgin Atlantic based on ASKs (See background information). Gol it seems has noticed how successful its rival has been in the Orlando market and how hot Orlando has become as a destination for Latin Americans generally. Orlando's international passenger traffic has grown significantly over the last two years, led by the entrance of several Latin American carriers - including Avianca, TACA, TAM and Volaris - as well as several new international routes from JetBlue Airways.

TAM also has been growing at Miami, adding capacity this year from Brasilia, Manaus and Sao Paulo. (TAM also serves Miami from Rio de Janeiro and Belo Horizonte.) On Sao Paulo-Miami, which is now TAM's largest international route based on seat capacity, TAM transitioned in Oct/Nov-2012 its two daily flights from A330-200s to significantly larger Boeing 777-300ERs.

TAM CEO Marco Antonio Bologna told CAPA at the Nov-2012 ALTA Leaders Forum in Panama that the carrier will continue to look to further grow in the US while keeping capacity to Europe flat because the US market "continues to be strong for us" and "there's a lot of demand". He said there is particularly strong demand from Brazilians for Miami and Orlando. Mr Bologna added that for now TAM plans to focus on further growing its operations in Miami, Orlando and New York JFK and is not looking at adding a fourth US gateway.

American Airlines also has been expanding in Brazil despite its restructuring while in bankruptcy. In Jun-2012, American launched flights from Miami to Manaus and added frequencies from Miami to Brasilia and Belo Horizonte. (American also has selected Dallas-Sao Paulo as the first route for its new 777-300ER fleet, with service beginning in early 2013.)

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US-Brazil capacity has increased by 30% over the last year

Expansion by TAM, American and to a lesser extent Delta has driven a 30% increase in capacity in the US-Brazil market over the last year from about 50,000 to about 65,000 weekly one-way seats, according to Innovata and CAPA data. Florida-Brazil routes accounts for about 31,000 of these seats, up from 22,000 seats one year ago, representing a 41% increase.

Gol is eager to play in such a fast-growing market, particularly given the recent weakness in Brazil's domestic market. Almost 95% of Gol's seat capacity is currently allocated to the domestic market, according to Innovata data.

US-Brazil capacity by carrier (one-way seats per week): 19-Sep-2011 to 09-Jun-2013

Gol's capacity between Brazil and Florida represents a small drop in a huge bucket. Gol is now offering 2,618 weekly one-way seats to Florida, including 1,309 each to Miami and Orlando, according to Innovata and CAPA data. This would represent 4% of total capacity in the Brazil-US market and 8% of total capacity in the Brazil-Florida market if all of Gol's seats were included in the total figures (they are not included as Gol's US flights operate via the Dominican Republic).

In reality Gol's share of the Brazil-US market is even less because Gol has pick-up rights at Santo Domingo and the carrier is marketing its Brazil-Santo Domingo and Santo Domingo-US services. Therefore the carrier only needs to persuade a very small number of Brazil-Florida passengers to opt for its one-stop service over the non-stops provided by other carriers.

Gol believes it can attract sufficient passengers by undercutting the incumbents in the market. Promotional round-trip fares started at only USD400 plus taxes but such fares are not sustainable. Gol could struggle to find a price point where it can attract enough passengers at a high enough yield to cover the relatively high costs Gol is incurring for its US operation. The US operation is more expensive than a normal LCC operation given the stopover and need to rest the crew.

(Gol has been looking at establishing a Dominican subsidiary to operate US flights which would lower its costs. But given the small size of the Dominican market such a subsidiary would not likely be large enough to achieve any economies of scale. LAN early last decade had a subsidiary in the Dominican Republic but the carrier never reached a significant size and stopped operations.)

A senior Gol executive, speaking to CAPA recently, acknowledged the carrier faces big challenges in selling the service even with its rather limited capacity. "How do you compete with a better non-stop product?" he asked.

The extra stop compared to American and TAM is not only an inconvenience but the other carriers offer more frequencies. Only in the Orlando-Rio de Janeiro market does TAM have the same number of frequencies as Gol (one). In the Miami-Sao Paulo market American has four daily flights and TAM has two while in the Miami-Rio de Janeiro market American has two daily flights and TAM has 11 weekly frequencies. In the Orlando-Sao Paulo market, TAM also has double the number of frequencies as Gol.

Inability to offer connections could doom Gol's US services

American and TAM also give passengers the option of day or overnight frequencies on all the routes except Orlando-Rio de Janeiro. Gol's flights operate during the day in both directions, which is rather strange for a LCC as it limits aircraft utilisation.

The daytime flights also mean that Gol cannot offer any domestic connections at Rio de Janeiro or Sao Paulo. The Gol source says both of the carrier's US flights takeoff and land in Brazil too late for any connections. He says there was a debate within the company on whether the flight can be sustainable without the connections and some executives do not believe the route will work with the current schedule.

A large portion of Brazilians holidaying in Florida originate in cities other than Sao Paulo and Rio de Janeiro. Brazil's secondary cities have been booming, leading to a growing middle class with growing discretionary incomes. It is Brazil's middle class which has fuelled rapid growth in the country's domestic market and is now starting to fuel rapid growth in the international market, starting with Florida as Florida remains the most popular international holiday destination for Brazilians (far more popular than any international destination in South America).

Gol and TAM both have large domestic operations at Rio de Janeiro Galeao and Sao Paulo Guarulhos. While Gol is not making use of these operations for its US flights, most of TAM's flights to and from Florida connect to its domestic network as well as to some regional international destinations such as Buenos Aires and Montevideo. This gives TAM a huge advantage as it can tap into hundreds of Brazil-Florida city pairs while Gol can only offer four.

According to Innovata data, TAM has about 1,350 weekly domestic frequencies at Guarulhos and Gol has about 1,100. At Galeao, Gol has about 850 weekly domestic frequencies while TAM has about 800.

Gol could potentially learn the hard way and later re-time its US flights to better tap into its hub status at Galeao and Guarulhos. Gol's strong domestic presence at Brazil's two main international gateways has made it an attractive codeshare and interline partner to several foreign carriers, including Delta Air Lines. Gol should be able to recognise the value of domestic connections within its own network as it expands internationally. In fact, Gol already times most of its international flights to maximise domestic connections.

Gol is also not offering any connections on the US end although the timing of both its Orlando and Miami flights are suitable for US domestic connections. Delta Air Lines is a codeshare partner and minority investor in Gol but is not codesharing on Gol's new US services. Gol is completely relying on local demand, primarily inbound demand to the south Florida and central Florida markets.

Gol previously served the US

Gol is not completely new to the US market but its track record with US services has been far from stellar. Gol briefly operated scheduled flights to Miami with Boeing 767s following its 2007 acquisition of bankrupt flag carrier Varig. But the Miami flights and Gol's entire long-haul network was dropped after only one year due to huge losses.

The carrier later launched long-haul charter operations, including to the US, using some of the 767s it had leased for the short-lived scheduled long-haul operation and was unable to return. But the 767 charter operation was also discontinued in early 2011. Gol now operates an all-737 fleet, with a small international network consisting of about 12 destinations in South America, the Caribbean and now North America.

Gol initially decided earlier this year to return to the US market using its 737-800 narrowbody fleet. But its original plans were to serve the US via Caracas in Venezuela had to be dropped after Gol was unable to secure the required authorities.

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While it is believed that Venezuelan authorities were not receptive to Caracas being used as the stopover point for Gol's US flights, the Gol source says the primary objection came from the US TSA. Gol was disappointed in the outcome of its Venezuela-US application as it was more confident in routing flights to Florida via Venezuela because Caracas-Miami is an under served high fare market. Bilateral restrictions limit expansion by US carriers to Venezuela and Gol thought it saw an opportunity and believed it was entitled to fly in the Venezuela-US market.

Gol was also already familiar with the Caracas market as it already serves Caracas from Sao Paulo with flights continuing onto Aruba and Punta Cana in the Dominican Republic. Gol has pick up rights in Caracas for Aruba and Punta Cana and technically also has pick up rights in Caracas for Miami.

Santo Domingo stopover is not ideal

Santo Domingo does not represent the same kind of opportunities for local traffic as Caracas, increasing the risk of Gol's new US operation significantly. The Gol source says the carrier aims to tap into the large Dominican population residing in the US. But it will be challenging for the carrier to market to the American Dominican community as Gol is a new brand in the US market. While Gol does have experience in the Dominican Republic, Punta Cana is a different market as it is an inbound leisure destination.

The Dominican Republic does not have its own flag carrier which should make it slightly easier for Gol. But US LCC JetBlue has a strong presence in the Dominican Republic and is in some respects the de factor flag carrier as it accounts for a leading 20% share of total capacity in the Caribbean country. In Santo Domingo, JetBlue accounts for a leading 27% share of total capacity, according to Innovata data.

With its four daily flights Gol now accounts for 11% of seat capacity in Santo Domingo, making it the airport's third largest carrier after JetBlue and American. But as a majority of its Santo Domingo passengers are heading to or from the US Gol's actual share of the Santo Domingo market is actually much smaller. (None of the other carriers serving Santo Domingo have a transit operation at the airport but it will be interesting to see if passengers opt to self-connect between JetBlue and Gol as JetBlue serves Santo Domingo from five US points while Gol only serves the two.)

Santo Domingo capacity (seats) by carrier: 17-Dec-2012 to 23-Dec-2012

JetBlue is now competing against Gol on both of Gol's new Santo Domingo routes and also serves Santo Domingo from New York JFK, Boston and San Juan.

JetBlue is the only other carrier operating between Santo Domingo and Orlando, offering one daily flight with 100-seat E190s. In the much bigger Santo Domingo-south Florida market, JetBlue operates two daily E190 flights but serves the Dominican capital from Fort Lauderdale rather than Miami. Spirit also serves Santo Domingo from Fort Lauderdale with one daily A319 flight. American is by a wide margin the market leader in the south Florida-Santo Domingo market, operating four daily flights on the Miami-Santo Domingo route with 757s and 767s.

Gol currently has a 19% share of capacity on Santo Domingo-Miami (excludes Santo Domingo-Fort Lauderdale capacity) and a 65% share of capacity on Santo Domingo-Orlando. But in reality its market share on these routes is significantly smaller as a majority of its Santo Domingo passengers will be flying through to Florida.

Santo Domingo to Miami capacity by carrier (one-way seats per week): 19-Sep-2011 to 09-Jun-2013

Santo Domingo to Orlando capacity by carrier (one-way seats per week): 19-Sep-2011 to 09-Jun-2013

Even if Gol is successful at marketing to the Dominican community living in Florida, it will need to sell a similar number of local tickets between the Dominican Republic and Brazil or face empty seats on one of the legs. Getting the balance right will be difficult as the Dominican Republic-Brazil route is a seasonal market that relies mainly on outbound Brazilian traffic.

Dominican Republic-Brazil is also a much smaller market than Dominican Republic-US. Gol is the only carrier serving the Dominican Republic from Brazil. In addition to the two new Santo Domingo flights, it currently serves Punta Cana with five weekly flights to Sao Paulo via Caracas.

Gol faces uphill battle in the US

Gol's new flights to the US represents a strategy shift as the carrier has been reducing international capacity in recent years and focusing more on routes of three hours or less, which are generally more attractive for LCCs given the current high price of fuel. Gol is now keen to re-look at international markets given the slowdown domestically, which has had a huge impact on the carrier's financials, and particularly sees opportunities in the booming Brazil-US market.

Gol is right to be attracted to the Brazil-US market but once again has picked the wrong strategy for tackling markets outside the Latin America and Caribbean region. The carrier's earlier experiment with 767s and long-haul flights failed miserably and in some ways Gol never fully recovered despite attempts to return to its roots as a short-haul LCC operator.

The latest experiment with one-stop narrowbody services to the US is relatively less risky and represents a much smaller investment. But some of its decisions in establishing the new operation, particularly the decision to not pursue connections on either end, are curious and could once again result in a short-lived US operation for Gol.

Background information

Orlando International Airport international capacity (ASKs) by carrier: 17-Dec-2012 to 23-Dec-2012

Orlando International Airport monthly international traffic: Jan-2010 to Oct-2012