TAM, Brazil’s new global airline, consolidating domestically, leveraging internationally


TAM, Brazil's network carrier now provides both a comprehensive domestic network and is fast expanding its intercontinental reach. This, the third in a CAPA series on Brazil's airlines, looks at TAM's rise, resilience and outlook.

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Unlike much of the world, in Brazil it is a good time to be an airline. Following the slow and sad collapse of Varig, new carriers have emerged as profitable enterprises and the nation’s growing economic power is reflected in a healthy and vibrant aviation sector. The country provides an example of each of the various business models that are currently operating; GOL, the low-cost upstart, Azul, David Neeleman’s attempt to transfer the more-upscale JetBlue model to Brazil; TAM meanwhile is taking on the mantle of the country's international long-haul operator as well.

A 50-year history, gradually edging out Varig

Though founded in 1961 as an air taxi service, the current company emerged in 1976 when its iconic head, Rolim Amaro, became a majority shareholder and began to chart a course for the airline that has led to its current structure.

During the 1980s, the airline expanded its routes to more points in Brazil utilizing F-27s, and by the 1990s, jet operations had begun using F-100s, by 1996 boasting a network that had expanded to cover most of Brazil. As a result, in the late 1990s TAM joined with TACA and LAN jointly to place an order for 150 Airbus aircraft, beginning an era in which new, rather than used, aircraft were acquired.

In 1998, TAM began service to Miami and Paris using newly-obtained long-haul aircraft, picking up the slack created by Varig’s persistent demise. And there were very strange bedfellows in the mix. Varig and United, as members of Star, operated code-shared flights from both New York and Miami. TAM, though unaligned at the time, operated in conjunction with American on US routes and with SkyTeam’s Air France to Paris.

American, in its partnership with TAM, while strong in Miami, still battled with Varig, VASP, and United on services to Sao Paulo. Transbrasil, linked with Delta, also had its hat in the ring. In today’s environment, with AA so powerful at Miami, it is odd to recall that American has only held its powerful role at the airport for less than a decade.

TAM prospered domestically from 2000-2005

Like everywhere else, the events of September 11 affected Brazil, yet TAM continued to grow with a respectable 31% increase through late 2001 and 2002. And by the middle of the decade, TAM added aircraft, destinations and agreements with other domestic carriers to expand its reach. In Dec-2004 TAM had a 40% domestic share, a dominant position it had held in the home market for 18 consecutive months.

In 2005, its traffic grew at a rate of 44.7% and more international services were added. By mid-2006, TAM had a 50.6% domestic market share, and its major domestic market rival was now GOL.

This was an era when long-haul international competition was provided almost exclusively by foreign carriers. In 2003 the airline produced 18 billion ASKs; 80% of them domestic.

By 2009, TAM's profile then started to take on a long-haul look, as it filled the vacuum left by Varig. 64.7 billion ASKs were produced, with 40% generated internationally. The movement towards an international presence was steady but the airline continued to be a primary player in the domestic market.

Filling Varig's shoes while growing domestically

In May 2010, TAM took over Varig's founder role in Star, becoming the 27th member of the alliance. Upon joining, it was in 7th place amongst Star members in terms of passengers transported. Worldwide, it was the world’s 19th largest carrier and was operating in a home market that had shown a 32% increase in demand (RPK) for the January-April 2010 period.

Nonstop services to points beyond Central/South America (Star Alliance partners in italics)

SAO to Airline RIO to Airline
Amsterdam KL Atlanta DL
Atlanta DL Charlotte US
Chicago UA Houston CO
Dallas AA Lisbon TP
Doha QR London BA
Dubai EK Luanda DT
Frankfurt LH,JJ Madrid IB
Houston CO Miami AA,JJ
Istanbul TK New York JJ
Johannesburg SA Paris AF,JJ
Lisbon TP Porto TP
London BA,JJ Manaus to  
Los Angeles KE,DL Atlanta DL
Luanda DT Miami JJ
Madrid IB,JJ,CA Brasilia to  
Miami AA,JJ Atlanta DL
Milan JJ Lisbon TP
Newark CO Fortaleza to  
New York AA,JJ,JL,DL Atlanta DL
Orlando JJ Lisbon TP
Paris AF,JJ Recife to
Porto TP Lisbon TP
Rome AZ Miami AA
Tel Aviv LY Salvador to  
Toronto AC Lisbon TP
Washington UA Miami AA
Zurich LX Belo Horizonte to  
SAO/VCP to   Miami AA
Lisbon TP Natal to  
    Lisbon TP

Clearly, from this, TAM has yet to re-establish the network that was once the domain of Varig. Many of the cities that had been a part of Varig’s network are now served only by Star partners. But at least TAM is able to claim a presence, where codeshares are in place.

According to the carrier’s own calculations, and shown in the chart, its global presence is currently maintained substantially through partnerships.

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As a measure of that market presence, it is interesting to note that TAP Portugal operates more weekly services from Lisbon and Oporto to Brazil than TAM does to all of its European gateways combined.

Inter-continental long-haul routes are better served than Latin American city pairs

As previous CAPA reports on South America have discussed, the continent’s airlines focus more on service to Europe and the US than they do on other South American cities. Thus, from Rio de Janeiro to Paris CDG, there are 19 widebody services each week; to Lima, the only nonstop flight is a five times weekly TACA A-320.

From Sao Paulo, there are more seats each week to Johannesburg than there are to Caracas.

Brazil also has an expatriate Japanese community numbering more than a million. Varig, for many years, flew daily from Rio to Tokyo over Los Angeles. The yields were good and with fifth freedom rights from LAX to NRT, the flight was profitable – until September 11 and the draconian visa requirements put in place by the US government.

The complexity and expense of getting a visa, even if only in transit, made the route unappealing to most travelers and shifted the traffic to connections in Europe instead, destroying the flight’s value and making it unlikely, under the present rules, that TAM will initiate a similar pattern. This traffic is doubtless also a part of the Gulf carriers’ strategy, which provides access to Tokyo with a 4 hour connection in Dubai or a 3 hour stop in Doha.

According to Marcelo Varella, TAM’s Director of Alliances and International Relations, TAM sees limited possibility of serving Tokyo, but intends to use Star partners to operate the route. An agreement with ANA over Heathrow is pending. Mr Varella believes that that route will never again be “owned” by any single operator, but rather shared across a range of airlines and routings.

Can TAM partner with Star Alliance and LAN as well?

TAM currently also codeshares with LAN, another powerful aviation provider and a member of oneworld.

Mr Varella noted that during the opening discussions with Star, TAM made clear the importance of the LAN connection for its South American services. Despite the cross-alliance nature of the link, the Star carriers agreed to allow the relationship to continue as long as its scope was limited solely to within South America. Within these parameters, Star is comfortable with the link.

This is undoubtedly an important relationship for TAM, as it seeks to stamp its impression within Latin America - in the process though also assisting LAN's growing intra-regional role.

As Star becomes more ubiquitous, it is constantly running up against this sort of issue, especially with its newer members which have existing relationships that are core to the new partner's strategy. This form of flexibility can sometimes benefit the Star Alliance members as a whole; in other cases there will be value leakages to competitors.

TAM's goals in replacing Varig: greater focus on domestic

In looking at Varig’s legacy and previous position in the global marketplace, Mr. Varella noted that Varig’s status was that of a “flag-carrier”, a designation that, as the industry evolved, had little benefit but continuing responsibility as the “national” carrier.

As for legacy carriers elsewhere, GOL’s domestic low cost challenge made profitability in the domestic market ever more elusive. Also, as others have done, Varig had continued an aggressive international presence but increasingly lacked the domestic feed necessary to support that global reach. This eventually drained its networking and revenue needs.

TAM has learned from that experience and views its domestic network as the “jewel” of its operations – a strong presence in a growing and vibrant economy that forms the underpinning for its global ventures.

TAM views its domestic feed as being the greatest strength that it brings to Star and sees its primary role, at present, as one of linking Brazil with its Star partner hubs and allowing much of the previous Varig service to be operated by others in the alliance. When asked about medium-term plans, Mr Varella repeatedly emphasised that the goal is to consolidate and strengthen current routes - as opposed to pursuing a vigorous expansion with its own metal.

Hence, established destinations like Paris and Miami are getting additional service and adding Rio rather than opening new routes. The fleet-plan up to 2104; the introduction of the A350, for which it is the launch customer, foresees a widebody fleet of roughly 30 aircraft. There is, however, a willingness to add aircraft should promising opportunities arise, but this is not presently anticipated.

Addressing the complexity of a double hub...

Addressing the dual-hub conundrum presented by having both Rio and Sao Paulo as important gateways, he again looked at the Varig experience. It was an airline based in Rio required to cope with the growing reality of Sao Paulo as the nation’s, and perhaps the region’s, economic leader. While Varig did make the shift, it had been problematic and difficult.

In contrast, TAM is clear that its primary hub is Sao Paulo and that while it will be a competitor and even a leader in RIO, the home base is Sao Paulo. The airline currently operates from Rio to Miami, New York JFK and Paris CDG and will soon add nonstops to London Heathrow and Frankfurt as well.

...and ensuring the hub facility is adequate

TAM is addressing, with Infraero, the government operator of the facilities, redesigns and improvements that will make them more user friendly as hubs. Mr Varella believes the operator’s mindset needs to be updated, as the nation’s primary gateways transition from O & D airports to their new roles as hubs, designed to facilitate transfer traffic.

This will be particularly critical as the government moves to privatise some or all of the nation's airports. With the Olympic Games and a football World Cup now flagged for Brazil, there will be increased time pressure for the country's major infrastructure projects to be effectively upgraded.

A clear vision with a plan

Mr Varella presented the picture of a company secure in its present and optimistic about its future, eager to establish a new role for Brazil’s sole intercontinental carrier. Unlike Varig, that carried much of the past as baggage and entered Star shortly after the alliance's inception, TAM has become a partner in a mature and multifaceted group. Vienna or Hong Kong will not be on TAM's radar anytime soon. But the carrier will instead be bent on entrenching its domestic position, enhancing its Latin American presence and leveraging its Star Alliance relationships.

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