GOL forced to re-think network expansion strategy; abandons VRG’s European routes and long-haul 767s

Image: GOL
Constantino de Oliveira Junior, president of GOL, announced the agreement to buy struggling rival VRG Varig on 29 March 2007. He explained that the deal to acquire VRG Varig, Brazil’s former flagship carrier, included $98 million in cash, 6.1 million non-voting shares and the assumption of $45 million of debentures.

Logo: GolOne of the great aviation success stories of the last few years has been the emergence of GOL, Brazil’s first low-cost carrier, which began operations in January 2001 and within six years had gained a 40% share of the booming Brazilian market. With breakeven load factors at one point of less than 50% the airline was generating operating margins of between 20% and 30% between 2003 and 2005, among the best in the world.Sadly, the decision in 2007 to acquire VRG Varig, the re-born version of the failed national airline Varig, combined with the rise in fuel prices has badly affected the airline’s financial performance during the last 12 months. In the second quarter of 2008 its breakeven load factor had shot up to 77.8% while actual load factor was just 64.6% resulting in an operating margin of minus 20.4%.

Chart: GOL group traffic 2001-2008
Source: GOL and anna.aero estimates

GOL’s market share of the Brazilian domestic market has grown from 4.7% in 2001 to 11.8% in 2002 and 19.4% in 2003. By 2006 GOL had one third of the domestic market and in February 2007 it claimed a 40% share for the first time. In April this year Gol’s share peaked at 46.4%.

Since the start of this year the airline has twice revised its passenger projections, first from 32 million to 29 million and more recently from 29 million to 26 million. In August the airline’s domestic market share fell to below 40%.

Over 800 weekly departures from Sao Paulo’s two airports

GOL’s biggest base is at Rio’s main international airport (GIG) but by serving both Sao Paulo airports it ends up with a bigger presence in that city.

GOL has a 44% share of scheduled capacity at GIG compared to TAM’s 37%. It serves 17 domestic destinations from the airport compared with TAM’s 18 (plus one international route to Buenos Aires).

Much of VRG Varig’s domestic network currently overlaps with that of GOL and the plans are that the two airlines will be more closely integrated, enabling better connections between flights. At present GOL’s fleet operates 640 daily flights to 57 destinations while Varig’s operates 120 daily flights to 14 destinations.

Image: Gol aeroplane on runway
By 2006 GOL had one third of the domestic market. In April this year GOL’s share peaked at 46.4%. The airline has revised its passenger projections twice since the start of the year – from 32 million to 29 million and then to 26 million. In August GOL’s domestic market share fell to below 40%.

International focus on South America; Europe abandoned

GOL began international flights in 2004 when it started serving Buenos Aires. Since then it has expanded its network to include two further Argentinian destinations (Cordoba and Rosario) as well as Asuncion (Paraguay), Bogota (Colombia), Caracas (Venezuela), Lima (Peru), Montevideo (Uruguay), Santa Cruz (Bolivia) and Santiago (Chile).

For a while VRG Varig was operating transcontinental services to London, Madrid, Paris and Rome using Boeing 767s. Varig’s nine 767s will be disposed off by the end of this year resulting in a fleet reduction to around 104 aircraft. By 2012 the fleet is now expected to have grown modestly by just 6% per annum to around 127 aircraft consisting of 87 737-800s and 40 737-700s.

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