On Thursday morning, Avelo Airlines — a new low-cost U.S. airline based in Houston — announced it had begun selling…
ASTA: The Challenges of Running a Subregional Airline in Midwest Brazil
As the saying goes, the best way to become a millionaire is by having a billion dollars and opening an airline. Aviation is a high-risk industry, with high costs and narrow margins. The risk of losing money is amplified in the regional markets. The low capacity brings costs per seat to very high numbers – especially in Brazil, a country with a devalued currency and very high fuel prices.
Still, there are airlines in the country that find their space under these circumstances. AirlineGeeks had the chance to visit ASTA Linhas Aéreas’ headquarters in Cuiabá, midwestern Brazil, to understand what is the secret behind success in such challenging conditions.
ASTA Linhas Aéreas
“ASTA is a passion”, says Fabiano Oliveira, the company’s commercial director. Oliveira, who has worked with several airlines before, currently leads ASTA’s sales and distribution efforts. “This is not the [most] profitable business of our owner — it’s really a passion, and this is transmitted to everyone [at the company].”
Founded in 1995, ASTA – an acronym for “América do Sul Táxi Aéreo” – started operating two small Seneca turboprops out of Cuiabá, state of Mato Grosso capital city, mostly transporting bank bags for financial institutions.
As the years passed, the banking digitalization process took place and finding another solution was needed to keep the business alive. The best solution found was starting passenger operations. There, ASTA Linhas Aéreas was born.
A pilot which also worked for several airlines and even served as the Operational Vice-President of Brazil’s largest airline, GOL, Adalberto Bogsan accepted the challenge of leading ASTA’s future. Now CEO of the company, he explains how the transition from the bank bags worked.
“We saw a market trend that pointed bank bags [transportation] would end, so we started to think in another sustainable model — we found transporting passengers was the way to go. This started around 2008. We were still an air taxi, and air taxis had a model called ‘systematic airline.'”
In Brazil, air taxi companies are allowed to regularly fly between two unserved city pairs as a “systematic airline,” without the need of certification bureaucracies to become a regular airline. ASTA opted for starting as one.
“With that, we supplied all [financial] necessity we had of bank bags by selling passenger tickets and started implanting the lines”, Bogsan adds. “With the success of the lines, in three months, the revenue we had with bank bags, was converted to revenue with passengers.”
It was only in 2018 that ASTA felt safe to completely get rid of the air taxi business and transform itself into a “pure” airline. The company currently operates three nine-seater Cessna C208B Grand Caravans and serves eleven cities regularly, all of them in Mato Grosso, while also operating charter flights.
Although it is not the most profitable business of its owner, ASTA is profitable indeed. In an industry where much larger airlines, counting with much more economies of scale, struggle to make ends meet, it is a true feat that this small carrier in one of the least densely populated states of Brazil can have positive results. The secret is behind a series of factors.
The conditions that make ASTA viable
“There is no magic,” says Oliveira; “It’s a lot of work, a lot of dedication by the whole team. We operate in cities in which the [roads] situation is complicated, we don’t have competition with the road transportation, so the passenger basically has to come by plane – otherwise it takes a day in the road.”
Mato Grosso is the third largest state in Brazil, and if it was a country, it would be placed as the 34th largest in the world. With unsafe roads and long distances, flying appears as an interesting option. ASTA’s longest route, connecting Cuiabá to Aripuanã, takes about 14 hours to be covered by car. Meanwhile, the Caravan covers this distance in three hours.
The state is also one of the country’s agriculture hubs and is known as “Brazil’s barn,” translating in a solid economic growth even during crises. For instance, Mato Grosso registered the highest GDP growth amongst all other states in 2017 – 12.1 percent, says G1, against the national growth of one percent.
Despite a good economic performance over the years, the state is not immune to the national issue with infrastructure. As Bogsan says, “The agriculture market spreads into cities without a good infrastructure. So the airports we serve today are airports that only the Caravan can serve.” This protects ASTA from competing with larger airlines.
This conjunction of factors – long distances, rich economy, poor infrastructure – transform Mato Grosso into a unique yet perfect place for the growth of an airline like ASTA, which has its slogan “as asas do agronegócio” — “the wings of agribusiness.”
“Our success comes from this kind of aviation, which is a small one, where you cannot have a big scale – that is, it’s a niche market,” according to the CEO.
That’s why ASTA considers its aviation to be not regional, but rather “subregional.” It has such a small scale compared to the major regional airlines that it can’t be compared the same way.
The Difficulties That Make ASTA a Very Challenging Business
Despite the favorable settings for ASTA, succeeding is easier said than done. Many companies have tried and failed over the years under fairly similar conditions. Difficulties are many, and it all starts with the aircraft.
The Cessna Grand Caravan, labeled by Fabiano as a “fantastic aircraft,” is extremely robust and reliable, perfect for the poor infrastructure conditions in Brazil. However, the aviation authorities in Brazil determine it can only carry nine passengers, instead of twelve or even 14 – a “political limitation”, says Oliveira.
Adalberto claims the restriction has no technical justifications, despite the authorities allegedly reducing the capacity for performance reasons. “If they had reduced the limit for performance reasons, they should reduce the aircraft maximum take-off weight, and that didn’t happen. […] I can put nine seats and then fill it with cargo, but my maximum take-off weight is still the same.”
This restriction harms the airline results, for it brings the cost per seat to an even higher level. If the aircraft operated with 12 seats, costs could be diluted and ticket prices would be brought down. Small operators are trying to show the authorities that the Caravan can safely operate with three more seats, although the airline does not know when – and if – the restriction will be ended.
Another challenge ASTA faces is the difficulty to sell its product to customers. “Many times the passenger sees the size of the aircraft and gets worried with it. He is used to flying big, last-generation jets in asphalt runways […] but all standards we adopt are to assure a safe flight under those runway conditions.”
Both Oliveira and Bogsan were very proud to say, insistently, that ASTA’s safety standards were the highest, mentioning it makes its own maintenance services in its own hangar. Bogsan says that “The most difficult for ASTA is to show [the passenger] that this aviation, despite small, is a safe aviation.”
ASTA’s unique method to attract passengers
Indeed, one of the biggest difficulties in this kind of aviation is to find enough passengers to break even. Although there may be a high corporate demand between the destinations ASTA serves, the high seat cost of the Grand Caravan is too high when compared to larger planes. This results in much higher ticket prices, which may make passengers back out.
For instance, the flight between Cuiabá and Juara, Northwestern Mato Grosso, is sold for as little as BRL799 (USD182.02 as of Feb. 21), a two-hour trip. Meanwhile, the bus ride, which can take up to 14 hours, is sold for BRL153 (USD34.86).
To address this issue, ASTA developed a very innovative solution, labeled “Avance Club.” It is a package paid each month which gives the member a right for a number of flights monthly – usually four, but it depends on the city. Bogsan compares it to a pre-paid phone plan.
“I buy a phone package for x time, where I do a pre-payment. Then I use the credits I have; it’s nothing more than that.”
Tickets are cumulative until the end of the year, as long as the member is compliant to the installments, and can be nominated to any person, which is especially convenient to companies who need to transport workers. Some larger businesses usually sign more than one membership. Also, the membership guarantees the passenger always pays the best price.
At the current point, Avance Club is so important to ASTA that the airline only opens a new destination if it has enough packages sold in the city.
“When we have a minimal number of sold packages, then we start the line, because then I know I have the break-even of the flight. […] And then every [extra] revenue that enters the airline will be the margin we will have in that flight,” said the CEO.
Fabiano says the Avance Club is a jump start on the maturation process of a route. “Every route you start, [especially] because they are at very small cities, has a maturation time. Usually this time is a loss to the company. What we do is to dilute this cost and to turn the process sustainable.”
Local city halls also have a big role in opening new routes, especially because most airports served are managed by the cities, says Oliveira. “There’s no way the public authority doesn’t take part at the process, even if it’s by clearing the airport or adapting it. […] 90 percent of the cities participate [of the process], encourage it, help publicizing it, so there’s always a good support.”
More than just starting up a new route (“it’s always a party at the start”, says the CEO), Avance Club must help to maintain the operation alive. So even after the inaugural flights, ASTA keeps in touch with town halls, commercial associations and the state government to maintain the awareness of the importance of these routes and a good number of memberships, says Adalberto.
“It’s about showing the society how important air service is to them, in the function of agility and of the quality of service we offer, and of how much it costs. So they can look and say, ‘it’s important having an airline, so I can be connected to a large center, and so that from there I can fly anywhere in the world.'”
ASTA’s Expansion Plans
Avance Club pays an important role in ASTA’s finances, but it cannot fully support all of the flight expenses, with only 30 percent of the seats at each flight blocked to the program. Of the airline revenue, agencies represent 50 percent and the airline website counts to around 20 percent.
Despite being a relatively small airline, ASTA has large ambitions. Last year, the airline got national media coverage upon the announcement of an interline partnership with Azul, Brazil’s third-largest airline and the largest in Cuiabá. With that, Azul will sell all ASTA flights on its website.
“Azul will be a showcase,” said Fabiano. “They will sell ASTA. So you will be able to buy a Campinas-Primavera do Leste ticket. You will go from Campinas to Cuiabá with Azul and from Cuiabá to Primavera with ASTA in a single ticket.”
System integrations are still on the way, but ASTA expected the sales to start in Azul’s website in February. The subregional carrier believes this will be a huge leap to the airline’s results.
“Once I have my portfolio, my network in Azul’s system, I will have a big exposure,” according to Bogsan. “So we should start with about 10 percent of exposure [share of its revenue brought by Azul], getting to 30 percent through Azul’s website.”
This partnership will also involve cargo transportation for Azul Cargo in ASTA’s already existent flights. To manage this leap in revenue, the airline will manage and operate an Azul parcel franchise near its hangar.
Another major step for ASTA will be its fleet growth, starting in the next months. The airline has a signed letter of intent with the factory for three 19-seaters DHC-6 Twin Otters through operational leasing contracts – when the airline takes ownership of the plane at the end of the contract.
The first unit should arrive in Cuiabá between March and April. Fabiano says the first one should already have arrived if it wasn’t for the huge setback of the Brazilian Real devaluation, which brought uncertainty to the industry.
This new aircraft will come not for replacing the Caravans, but to add efficiency at the airline’s main routes. Adalberto said: “I can operate the Twin Otter at all runways I operate with the Caravan, but instead of operating with nine seats, I will operate with 19. So the cost of the Twin Otter compared to the Caravan is about 60 percent higher, but with twice the seats.”
While the Twin Otters should stay in Mato Grosso initially, ASTA plans to use it in other states – namely, Minas Gerais, where the airline signed an intention agreement with the state government to start up a regional network from Belo Horizonte/Confins Airport.
“We are still fighting for some assistance [with the local government]”, says Adalberto. “Today we have some incentives, but we’re fighting for more, especially over the ICMS [state taxation] over the fuel and, in some places, over airport taxes, we would have to pay. Because if we are to pay the ICMS, plus the airport taxes that are charged today, then we will not make it.”
The plan is to make the operation in Minas Gerais feasible by the same method it uses in Mato Grosso; the Avance Club memberships, the agency sales and its website sales. In this sense, the Azul partnership will also help and this is the reason that Confins Airport, hub of Azul, was chosen over Pampulha, which is way closer to downtown.
Back to Mato Grosso, ASTA has already five more cities mapped in the state. Lucas do Rio Verde will start receiving flights from March and the agricultural hub of Sinop will also join the network soon, although one or two additional airplanes would be needed to fully undertake these five destinations, according to Bogsan. The airline is also in talks with cities of neighbor states Goiás and Tocantins.
Further expansion apart from the next three Twin Otters, however, will depend on new investors. “We have searched for investors that are interested in airlines, or for this business model, so we can leverage the airline for the next years”, said Bogsan.
He confirmed that there are three investors already in talks with the airline, but made clear the airline would not be sold.
“The idea is not to sell ASTA, or to do something like that. Our idea is really to bring partners who believe the business, who look at it as promising and who will make an investment so we can not only buy airplanes but also make further investments on the company.”
Where ASTA Wants to Get
Asked where did they see ASTA in five years, both executives were optimistic. Oliveira said their hypothetical desire would be operating throughout Brazil. Realistically, he ended saying it depends a lot on investments, but that basically their plan is to continue true to their “wings of agribusiness” slogan, growing in this region.
Bogsan said he believes ASTA will be operating around 15 airplanes in around five states. The executive also mentioned an ambitious 10-year projection that will result in the airline having 26 aircraft – half Caravans, half Twin Otters, and that 76 cities are already mapped.
Still, he acknowledges the airline must take care not to grow excessively fast to the point which turns from profits to losses. ASTA expects to grow the revenue around 39 percent from BRL14 million to BRL19 million this year, a growth which Bogsan labels “aggressive, but healthy.”
The executive says that in this sense, ASTA is “Investing a lot in software that makes these analyses for us, that can bring consistent, close to reality reports,” so the airline can be fast in identifying and eventually closing down routes that are losing money.
The Role of Passion for ASTA’s Future
More than everything, subregional aviation is not an easy business, despite the good results. That’s why it all comes down to passion. The maintenance of high employee morale is a key aspect for ASTA’s success. Bogsan says everyone at the company “has a passion for aviation, and for ASTA itself”.
“And now, when they start to see the agreements being made, the growth the company is having — last year we started at 800 passengers a month, today we’re already in 1200 passengers –, the revenue is growing each day more, the aircraft utilization, the load-factor is consistent, so all of this moves them”, added the CEO.
Regardless of what the future holds for ASTA, the airline has well-fixed values to undertake whatever is to come. Asked about the three words that define the company, Bogsan did not think twice.
“Safety, passion and quality. That’s the three words that define ASTA today.”
- LATAM Brasil to Phase Out A350-900 Fleet by Next Week - April 8, 2021
- Brazilian Airlines Transport Vaccines Throughout Brazil - April 5, 2021
- LATAM Open to Exclusive E-Commerce Cargo Partnership - March 29, 2021
‘This is the worst it’s ever been:’ An Interview with Former American Airlines Chairman Bob Crandall
Airline industry tycoon Bob Crandall is no stranger to the peaks and pitfalls of the airline industry. As the former…
San Francisco-based Boutique Air is once again in the news. The carrier has expanded aggressively lately, and they certainly didn't…