CEO Interview -& Living by the Rules
Captain David Barioni Neto
CEO of TAM
How has the financial crisis impacted on your business?
Following the financial meltdown in the US and the UK, we were expecting a deep crisis in our business from October 2008 onwards. Demand for domestic services was hit badly until June of this year but in July people started to travel again in the domestic market. In that month, we saw 25.7% growth. And we are expecting growth of 7-10% for the rest of the year.
The outlook for international operations is far less optimistic. Influenza A (H1N1) has shaken public confidence. Travel from Brazil to Argentina, for example, is down 25-30%. With summer approaching in the Southern hemisphere, flu cases should drop off and we are hopeful for more robust international demand.
We may be able to see light at the end of the tunnel in traffic, but yields are another story. Compared to 2006, they are down by almost a third. With strengthening demand, they may stabilize. We may even see a 5% improvement. But that is still far below 2006 and enough to threaten our financial results for this year.
Why does Brazil seem to be doing better than the rest of the world in the current crisis?
Firstly, we have a good internal market of about 60 million passengers. And secondly, the banking system in Brazil is strong. In the aftermath of our financial crisis a decade ago, the banking sector did its homework. As a result, the Brazilian financial sector was relatively unaffected by the global financial crisis.
To the outside observer, the industry in Latin America seems divided. A few carriers are performing well, while others have severe difficulties. Is that a correct perception?
This is a difficult business to manage. Safety is at the top of the priority list and many of our costs are outside of our direct control. It is the same on the revenue side, where yields are subject to many influences. Managing quality is not easy either.
There is a division in how companies are managed—but this is not limited to Latin America.
Privatized companies are not the only way to deliver good results. However, it is easier to align everybody with the common goals of safety, good results and quality service. For government-owned companies, there is always the temptation for political agendas to get in the way of business and the pursuit of profits.
That sounds similar to Captain Rolim Adolfo Amaro’s rules
Our founder, Captain Rolim Adolfo Amaro, was an incredible person—an icon for everybody. He wrote seven rules for employees, which link their work to our common goal of ensuring that TAM is a profitable company that provides quality and safe air transport to our customers. Even today, all 25,000 TAM employees—from myself to the newest recruit—are aligned by these rules. They are the cornerstone of the successful management of TAM.
Can Brazil’s aviation infrastructure cope with the 2014 World Cup?
We hope so, but it will be challenging. Using an average growth rate for air services that is double the growth in GDP—which is common in developing markets—by 2014 we can expect the market to reach 118 million passengers a year. That is about double the current market size. The impact of the World Cup will see an extra 1.5 million people travel to Brazil in a one-month period. That would simulate what we expect the market to be in 2020. The current infrastructure will not be able to cope with this.
There is no sign that the government is prepared to build another airport. At Guarulhos, São Paulo’s main hub, we may be able to make some terminal upgrades, but there is no scope for a third runway. Congonhas is a domestic city airport, where even a terminal expansion will be a major challenge.
I hope that the government will focus on Campinas, an under-utilized facility 80 km north of São Paulo that was originally intended to be a cargo hub. It has the capacity for an expanded terminal and a second runway. Because of the distance to the city and São Paulo’s infamous traffic, an efficient rail infrastructure would be needed to make this viable. Whatever option is chosen, we only have five years to complete. That’s a difficult timeline.
Who will pay?
There is a discussion about having mixed investment from government and private investors. But this will need to be resolved soon. The government is considering, in general terms, the potential for airport concessions in the form of partnerships with the private sector. This could speed up much-needed infrastructure improvements.
But to be successful, we will need to work with the government to set the right priorities in the concession contracts and establish an economic regulator to monitor performance and efficiency. We will be watching closely for the details, which are expected to be released during the third quarter.
ANAC, Brazil’s aviation regulator, recently changed from a military to a civilian organization. How important is this?
Everybody in the aviation sector now needs to learn how to deal with a civil organization. Since 1942, the regulator has been part of the military. ANAC’s first mandate was difficult as we went through a learning curve. The second is progressing much better. We need to work together. ANAC’s efforts to improve communications with stakeholders are a welcome sign that we are on the right track.
Brazil is a participant in IATA’s Agenda for Freedom. How important is the liberalization process for aviation in Brazil?
One of the key developments that we hope to see is the possibility for more foreign investment. There is a proposal in Brazil to increase foreign ownership from 20% to 49%. It still leaves some restrictions, but will be a huge step forward, creating opportunities for Brazilian airlines to access capital and for investors to take part in this growing market. We are already taking advantage of investment opportunities in other countries. In Paraguay, TAM owns 95% of TAM Airlines (formerly TAM Mercosur) with the final 5% in government hands.
Many people try to see South America as one market but in reality we are a continent of countries with very different cultures and links. There is little traffic between Peru and Paraguay, but Chile and Peru is a strong market. The Forteleza Agreement provides open access to the region’s secondary cities. It is a wide agreement, but with market realities it has created very limited business opportunities—only half a dozen routes.
Brazil’s market is 30% of all South American air travel. We need to have a balanced approach to market access. If we open our market, there must be reciprocity of benefits. I am for liberalization, but we must move carefully.
With an accident rate three times the global average, what needs to be done to improve safety in Latin America?
I am a captain and certified accident investigator. I have followed the process of improving safety in Brazil since the 1970s. If you split Brazil from the region, it stands out for its efforts on safety. We are proud of this, but not of how the region is performing.
Safety belongs to all the industry. Everybody must be focused on delivering good results—airlines, government, airports and air traffic control. Even as a CEO, I dedicate time to workshops and motivational speeches on building a safety culture. The industry also has a great tool with IOSA. We must use it to its fullest to deliver results in Latin America and around the world.
Environment is another priority. How is TAM approaching it?
We take our environmental responsibility seriously. Aviation represents 2% of global emissions, but it is very important that we deliver results. I am particularly interested in biofuels. If we can find a way to supply them at the right price, they will play an important part in our strategy. Alone, they are not the solution. IATA’s four-pillar strategy makes sense. And there will be cost benefits, as well as environmental benefits, by making the environment in which we operate more efficient.
You are joining Star Alliance. What benefits will this bring?
We are working hard to bring all of our systems in line with the alliance requirements by the time we join in April 2010. One example is the move from Sabre to Amadeus to help us manage our interactions with alliance partners. The biggest benefit for us is revenue generation. With access to Star’s network of 1,000 destinations, we forecast a $60 million benefit in the first year.
How are you controlling costs?
It is a constant challenge. IATA is helping. We made the 100% e-ticketing deadline and we are now putting a major emphasis on airport kiosks. Today, 60% of our airport check-ins use kiosks. Passengers like the quality and the cost savings are important for the bottom line. IATA’s role in spreading industry best practice is critical. I look forward to welcoming an IATA fuel team to TAM at an early date to assess our operations and provide valuable input on how we might cut some costs with respect to fuel.
What three things keep you awake at night?
Infrastructure, keeping our 25,000 people aligned and sustainability—both financial and environmental.
I have developed myself to be both a business administrator and a pilot. These have very different priorities in thinking—particularly on the approach to risk. As a pilot I accept no risk but in business administration you must accept risk, or there is no profit.
I believe the best CEOs are those with the broadest knowledge of the business. I still fly the Boeing 777 twice a month. When I fly, I pick up things about the mood of the company, the service that we offer. I talk with everybody, from the maintenance and ground staff, to the crew and passengers. They appreciate that a CEO does this, so I believe it is good for morale. For me, the most important thing that I can do as a CEO is to keep an open mind. Even with 35 years in the business, there are still many things to learn.