A Risky Merger for Azul and TRIP in Brazil

Let’s shift from the Middle East and head down to Brazil, shall we? Big news came across the wires when Azul and TRIP announced they would merge to form the third largest airline in Brazil with just under 15 percent of the market. On paper, it looks great. But this is a risky move in a country where things have a habit of changing very quickly in the airline world.

Azul TRIP Merger

In 1998, I went on vacation to Brazil. When we looked at our best options for travel around the country, the three airlines that came to mind were Varig, VASP, and Transbrasil. None of those fly planes today. Less than 15 years later, the big three are TAM, Gol, and now Azul/TRIP. This underscores how quickly things can change in this country.

(Very) Little History
Varig was the flag carrier with a long, proud history. After others were allowed to begin competing, it failed like many others. VASP was also an airline with a long history, but it was a domestic carrier until later years when it reached into the international world. Again, it failed miserably. Last was relatively young upstart Transbrasil which was a smaller player that grew quickly. It grew itself right into the grave.

What resulted from all these failures was a big shift in the type of transportation offered in the country. TAM became the de facto flag carrier. It eagerly gobbled up opportunities to expand through the 1990s and 2000s as the big guys floundered. Today, it is the standard-bearer and really the only legacy airline in Brazil. It has designs on the entire continent, something that’s easily achievable as part of its nearly-completed merger with LAN.

Gol has a very different past. Gol didn’t even start flying until 2001 when it brought the idea of a low cost carrier to the country. It has grown very quickly since that time, partially internally but also through acquisition. It actually bought some of the remains of Varig, but you won’t see airplanes flying around with the Varig name anymore. It also bought growing competitor Webjet. While Gol is a low cost carrier, it has adopted more of a hybrid model that many other low cost carriers have adopted as they grow up. Today, Delta owns a piece of the airline and the two have increased cooperation.

The Heart of the Matter
That, finally, brings us to TRIP and Azul. TRIP started on the small side with props on thinner routes. Since TRIP was founded in 1998, it has grown to have a fleet of just over 50 airplanes. Though it is firmly an ATR turboprop operator, it grew into operating Embraer jets in the 70 to 90 seat aircraft category. TRIP serves small destinations all across Brazil and was considered strategically important enough that TAM tried to buy the airline at one point. A codeshare still exists between the two.

Azul was something different. After JetBlue ousted CEO David Neeleman, he went south to Brazil to create a new version of JetBlue. He even named it Azul, or “Blue” in Portuguese. Azul went in the opposite direction of TRIP. It started primarily with Embraer 190 and 195 jets and recently decided to go for smaller markets with, you guessed it, ATR turboprops. It now also has about 50 airplanes total. The airline’s main base of operations is at Viracopos, an airport about 60 miles northwest of Sao Paulo. But it has grown to have a fairly extensive network around the country.

On paper, TRIP and Azul look like a match made in heaven. They operate similar fleets, have relatively low overlap, and have an incredible presence in smaller cities around Brazil.

So why do I say this is risky?

Culture, Culture, Culture
If you think about what David Neeleman tried to do at JetBlue, it was to create an overwhelming, positive culture that would make the airline great. He wanted to do the same thing at Azul. If you’re really focused on culture, probably the most harmful thing you can do is to merge with another airline. Now, Azul is larger than TRIP, so maybe it will be able to absorb those employees into its culture, but it’s still a risk.

But does culture matter in this case? It probably depends on who you ask.

Azul’s mission has been to open up air travel to those groups in the middle class, folks who couldn’t afford it and had to travel by ground. So far, Azul has done that well. With TRIP, it can expand its reach further into smaller cities and reach those very same people. If the culture suffers, will that make a difference? I’m not sure. It’s not like there are many others trying to do the same thing.

The only other airline in Brazil with more than a blip of market share is Avianca Brazil, an airline that is closely tied with Avianca/TACA, the giant of Central and Northern South America. That airline would have a strategy more similar to TAM than anything else. So Azul has an opportunity to try to really corner the market here knowing that if there are culture hiccups, it should be able to survive.

That being said, it’s amazing how quickly things have changed in Brazil. It can always change again just as quickly, and if Azul and TRIP aren’t careful, they could end up in the graveyard like many others. As I said, this merger looks great on paper, and its success depends on how well it’s implemented.

[CAPA has a good analysis for those who are interested.]


22 Responses to A Risky Merger for Azul and TRIP in Brazil

  1. JRS says:

    Is this the same Azul that tried to get into the US market a few years ago
    by concentrating on smaller airports with a connection to big cities such
    as New York? They called themselves Azul Air and I think later changed the
    name to Jet America or something like that. Anyway, they never got off
    the ground as they couldn’t get landing rights at Newark and ended up refunding
    a lot of advance tickets that had been sold. I’m not sure if everyone got their
    money back or not.

    • Ted says:

      Nope – that one was a scam operated by losers with no airline street-cred. This is a company led by one of the great personalities and innovators in the industry, David Neeleman.

  2. Don says:

    It could work. Isn’t this how David Neeleman was associated with WN when he merged his own airline in with them. There was even rumors he was talking to DL when he was the head of operations at jetblue.

    • CF says:

      Don – David Neeleman was with a very small Morris Air when Southwest acquired the airline. He joined Southwest briefly but was a terrible fit and didn’t last long there. Southwest successfully absorbed Morris into its culture, so it could be done again. But Morris was much smaller as compared to Southwest, I believe.

      • Rusty says:

        Morris had over 130 flights a day in Salt Lake and held a firm grip of the Northwest. Routes Southwest wanted, plus Orange County gates, plus all new planes.
        However, the culture at Morris was copied from Southwest. Only one type of aircraft, only point to point service, make flying fun, take care of the the crew members and the crew members will take care of the customer, and impeccable control of costs.
        Mr. Neeleman learned a lot about that merger good and bad and talks about it in a speech last week. http://vimeo.com/43664134

  3. JRS says:

    Thanks for the clarification, I was hoping it was not the same cast of characters
    that caused that mess in the US.

  4. Why do airlines think they need to grow and/or grow only by buying another airline. Has history shown that working out really well each time it’s happen?

    Remember the phrase: Slow and steady wins the race.

    Maybe if each airline took their time and added their own service in more markets when the time was right things would be better in the industry.

    • Ted says:

      I’m not saying that your point isn’t a valid one, but can you understand why an airline would take this approach?

      The choice is between buying equipment, hiring crews, etc, then going into the markets you want to serve and fighting it out with the competition. Not saying it can’t be successful, just that it might take longer and be more expensive in the long run (and probably has higher risk associated with it). I don’t think it’s black and white and people should say merge or don’t, but they should evaluate the situation and make a decision based upon their interpretation of it. So, I bet they are thinking this is the more conservative, profitable path for them.

      I know airline geeks hate it because you lose a livery to follow, but hope you can get the thought process.

  5. Bill Hough says:

    Cranky: “It actually bought some of the remains of Varig, but you won?t see airplanes flying around with the Varig name anymore.”

    Not true, at least as of May 26. Gol uses the Varig name for regional South American flights. See:
    http://www.airliners.net/photo/Varig/Boeing-737-7EA/2116977

    That said, I wouldn’t be surprised if Gol gradually phased out the Varig brand in the future.

    Re: TransBrasil. Although “relatively young” compared to Varig, which was founded in 1927, TransBrasil, originally Sadia, dates back to 1955.

    • CF says:

      Bill – Ok, so technically there may still be an airplane painted in Varig livery but there are no flights operated by Varig or sold as Varig. It’s all Gol (and some Webjet too). It’s just a matter of getting it to the paintshop, I believe. If you see it being sold as Varig somewhere, please let me know.

  6. Hi Cranky. Long-time lurker and part-time Brazil resident here. Gol operates under the Varig brand from Sao Paulo to Caracas and the Caribbean. Not sure yet if the planned flights to Miami via CCS will be branded Gol or Varig.

    • CF says:

      Thanks for chiming in, Fly Brother. Can you show me where it’s marketed as Varig? On Gol’s website it shows as Gol to Caracas and places like Punta Cana in the Caribbean. In the GDS, it uses the G3 code on the flights. I’m trying to figure out where they use the Varig name if they are in fact using it still.

  7. Well, after my own little web investigation, looks like Gol is indeed finally phasing out the Varig brand, but it hasn’t been put to bed completely. It took me a while, but I dug up the “brands” page on Gol’s site, which still describes Varig as the brand used for the airline’s longest international routes:
    http://www.voegol.com.br/pt-br/a-gol/quem-somos/marcas/paginas/default.aspx

    The page is clearly out-of-date, as the Bogota route was cancelled last year, but still shows up in this description. The Caracas airport website (http://www.aeropuerto-maiquetia.com.ve/2011/) lists airline information for Varig, including current flight information with an RG prefix. However, both Aruba and Barbados airport sites, as well as Brazil’s official Infraero site, list Gol flight numbers and contact information for all flights. As of last month, when I was in Sao Paulo, I saw a few Varig liveries going in and out of both Guarulhos and Congonhas and I know for a fact that the Varig brand was also going in and out of Brasilia in 2011 (I worked directly underneath the BSB flight path).

    I guess with the acquisition of WebJet, Gol finally realized that the Varig brand truly needed to be retired once and for all, but it has indeed been a slow retirement. I don’t even want to think about the confusion all these changes continue to cause at Brazil’s airports (especially since Gol operates out of one terminal at GRU and WebJet operates out of the remote warehouse-turned-Terminal 4).

    I’ll ask one of my buddies who works at GRU for some clarification and let you know what, if anything, he can dig up.

    • Hmm, the Varig logo is still featured at the very bottom of Gol’s blog (http://blog.voegol.com.br/). Curiouser and curiouser.

      • CF says:

        Great research on this. It seems like there may still be a few leftover places where Varig exists but that’s probably just because it was overlooked. If you get more info, please let me know.

        I didn’t mention it but in 1998, we chose Varig and had some fantastic flights. Did Sao Paulo to Manaus round trip on a 747-300 and rode in the jumpseat both ways. Also flew Sao Paulo to Iguazu, Curitiba to Florianopolis, and Florianopolis to Sao Paulo on 737-300s. The highlight was having a 737-200 from Iguazu to Curitiba show up in the old Varig white scheme with the blue cheat line. What a beauty.

  8. Biggles says:

    CF,

    Transbrasil tried to take on Varig in the 90s at Guarulhos and failed. Rolim Amaro at TAM stayed at Congonhas and built up a good regional business with Fokker 100s that gave the expansion plans a solid basis.

    BTW, Neeleman is a Mormon, so the header cartoon is a bit off…

  9. Hi,

    Varig is flying yet.
    Actually, Gol flies mainly domestic flights and Varig flies mainly international, I mean, Latin America.
    Almost all 737-800 are Gol and the old ones are Varig, take a look:
    http://www.airliners.net/photo/Varig/Boeing-737-7EA/2116977/&sid=094ca86ca5b437b925bf24d6a2ed8b67

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