São Paulo Airline Market Entry: PEST and Five Forces Analysis

Introduction

Brazil remains one of the most influential countries in South America. Its economy has been rising over recent years, and the country continues to be regarded as one of the largest democracies in the world. The country has a democratic federal republic form of government. It is important to note that although the country still experiences a wide gap between rich and poor, various policies have been adopted by the government in recent times to address the situation. With a population of 208 million, Brazil ranks fifth in country population comparisons according to estimates by the Central Intelligence Agency (CIA), effectively making it one of the most populous countries in the world.

PEST Analysis of Brazil

In basic terms, "PEST analysis concentrates on four important factors in an environmental scan — Political, Economic, Social, and Technological factors" (Walters, 2006, p. 208).

It is important to note, from the outset, that corruption has been an issue of concern in Brazil. Subsequent governments have attempted to address this problem, but the political will to do so has not always been strong enough. The country has not experienced serious political turmoil or instability in recent times, though it remains prone to politically instigated violence. There have been instances of protesters clashing with police in the streets, but the situation has not spiraled out of control.

As the eighth-largest economy in the world, and thanks to a large population and a substantial workforce, Brazil has considerable potential for growth. Data from the Organization for Economic Co-operation and Development (2018) indicates that the country's economy began to rebound after experiencing a decline over eight consecutive quarters. Foreign direct investment (FDI) figures for the prior year fell by 10% in comparison to 2016 (Trading Economics, 2018). However, compared to other countries in the same region, Brazil's FDI figure remains impressive. The relevance of FDI inflows to the country cannot be overstated, particularly with regard to enhancing productivity growth.

The country still has a significant gap between rich and poor, but the government has in recent times been addressing income inequality through fiscal policy. Brazil has a rich ethnic and religious composition, and Portuguese is both the most widely spoken and the official language. Although the country has one of the largest populations in the world, its population growth rate has been slowing since the 1960s (CIA, 2018). This has been attributed to a "rapid fertility decline since the 1960s" (CIA, 2018). The median age of the country is 32 years for both sexes, and the urban population is estimated at 86.2% of the total population (CIA, 2018). Notably, Brazil has a stably growing middle class.

In recent times, Brazil has experienced what appears to be a technology boom after a period of stagnation. The country's IT sector is projected to experience significant growth in the current year. Heng, Heermann, Samaranayake, and Sath (2018) point out that there has been a sustained push by elected officials to establish technology centers across Brazil. This will further strengthen the country's position in terms of technological advancement.

Five Forces Analysis of Brazil's Airline Industry

The Five Forces analysis of Brazil's airline industry is designed to identify the various factors likely to affect an airline's profitability and serves as an important strategic tool in this context.

Some of the major players in the Brazilian airline market include LATAM and Avianca Airlines. Other players include Virgin America, JetBlue, Gol, and Azul Airlines. It is important to note that Brazil's airline industry has recently been focused on consolidation. This is evident given that the two largest players emerged from mergers, rebranding, and acquisitions — with LATAM having formed after Brazil's TAM merged with LAN Airlines of Chile, and Avianca (previously OceanAir) having rebranded after its parent company merged TACA Airlines with its Colombian airline, also named Avianca. Going forward, the market is likely to be dominated by very few large airlines — perhaps two or three — which will largely compete on the traditional bases of low fare and full service. Our proposed airline will avoid competing along those categories.

Unlike in other industries, supplier power in the airline industry is significant, and the situation is no different in Brazil. The industry's three primary inputs — labor, aircraft body and parts, and fuel — are often significantly influenced by forces beyond the industry's control. Labor unions in Brazil have considerable sway in bargaining for better pay and allowances. Fuel prices are subject to unpredictable market forces. Aircraft bodies and parts are sourced from Boeing and Airbus, meaning the industry effectively has only two suppliers to choose from.

Price wars are commonplace in this industry, with players outside the big two seeking to compete on cost. Thanks to multiple ticket-booking channels, customers are motivated to engage in price discovery. Online ticketing and distribution systems are increasingly popular, and intermediaries are being progressively displaced from the value chain.

At present, the industry faces no direct threat from substitutes. This is especially true for international flights, where no comparable alternative to air travel exists for transatlantic or inter-continental routes.

The airline industry is tightly regulated, and gaining regulatory approval can be an intensive and time-consuming process. Furthermore, capital outlay can be substantial, particularly for the niche market segment we intend to target.

Conclusion

Young urban professionals work hard and want to unwind. They are accustomed to formal settings and wish to break away from that norm. Meanwhile, hip and creative-industry individuals seek environments that are both artistic and non-restrictive. Our airline will offer what larger carriers cannot. It will provide a fully accommodating environment for this target clientele — from stylish, designer-clad flight attendants to a curated selection of in-flight music that reflects their tastes. It is this innovative spirit that will distinguish our airline from the other players in the industry.

References

CIA. (2018). South America: Brazil. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/geos/br.html

Heng, A., Heermann, J., Samaranayake, C., & Sath, L. (2018). Technology trends in Latin America. Retrieved from https://cs.stanford.edu/people/eroberts/cs181/projects/2010-11/TechnologyTrendsLatinAmerica/brazil.html

Organization for Economic Co-operation and Development. (2018). Brazil — Economic forecast summary (November 2017). Retrieved from http://www.oecd.org/eco/outlook/brazil-economic-forecast-summary.htm

Trading Economics. (2018). Brazil foreign direct investment. Retrieved from https://tradingeconomics.com/brazil/foreign-direct-investment

Walters, D. J. (2006). Operations strategy. New York, NY: Thomson.