By Carole Shifrin in São Paulo Photography by Iara Venanzi
In the capable hands of chief executive Constantino de Oliveira Junior, Brazilian low-cost carrier GOL is enjoying double-digit margins that are envied around the world
Taking its lead from the tactics of the best of US and European carriers, GOL has risen to become the second-largest domestic carrier in Brazil, capturing more than a quarter of the market in less than five years.
The low-fare, low-cost airline surpassed Varig – Brazil’s fading grande dame of aviation – in domestic traffic market share in June for the first time and is second now only to TAM, a 29-year-old full-service airline. TAM, which became Brazil’s market leader in mid-2003, continues to grow, but two other carriers in the market when GOL entered, VASP and Transbrasil, are gone and bankrupt Varig is retrenching.
GOL was an outgrowth of Grupo áurea, a 50-year-old family-owned conglomerate, one of Brazil’s largest ground transportation businesses. The airline began flying as a subsidiary, headed by the then 32-year-old Constantino de Oliveira Junior, one of four sons of the company’s founder.
The name GOL, which means “goal” in Portuguese, was not chosen because of Brazil’s famous obsession with football. “We would prefer to translate our ‘GOL’ in terms of target, in terms of victory, in terms of strong force,” says president and chief executive Oliveira.
It seems clear that GOL has achieved a number of its “GOLs” already. After a loss the first year, the airline, whose official name GOL Linhas Aereas Inteligentes means “GOL intelligent airline”, has been increasingly profitable. Last year, GOL had operating revenues of $738 million and operating expenses of $521 million, producing an operating profit of $217 million. Net profit was $144 million. GOL’s double-digit margins are envied around the world, and the carrier expects 2005 to be no different.
GOL’s fleet, route network and passenger loads have been expanding according to plan while costs remain in check. Last month it operated 400 flights a day with 39 Boeing 737s – mostly Next Generation -700s and -800s – to 43 cities in Brazil, plus Argentinian capital Buenos Aires. By the end of 2005, it will have 42 aircraft and a few more destinations in neighbouring countries on its route map. GOL’s load factors are climbing as traffic gains outstrip substantial monthly capacity increases. In September, the carrier saw a 78% jump in passenger traffic on a 59% increase in capacity, producing a 76% system load factor. Break-even load factor in the second quarter was 61.6%.
During an interview in his modest office near São Paulo’s Congonhas airport, Oliveira credits hard work for GOL’s success, but is the first to admit there has been some luck involved, especially in the beginning. He and his family studied the idea of an airline for nearly seven years, seeking to understand how the airline industry works and examining the past successes and failures of low-cost carriers, the Brazilian economy and regulatory environment, and potential competitors. Grupo áurea already had experience carrying passengers – an estimated 1.2 million a day in 2000 – by bus in Brazil.
Fast start-up
Once a decision was made, operations began in seven months. “We were lucky. All things went well,” says Oliveira. The company resolved to go forward in June 2000, setting a date of 15 January 2001 for first flight. “It was somewhat optimistic, but it was the target,” Oliveira says, “and we didn’t need to change it.”
During that period GOL created a business plan, selected aircraft, service providers, software, route network, culture, human resources – “everything,” he says. Carriers studied included Go, easyJet, JetBlue Airways, Ryanair and Southwest Airlines.
Ironically, although Oliveira refers to the “GOL effect” of traffic stimulation in newly entered markets, just like the “Southwest effect”, the would-be carrier’s emissaries were not permitted to visit Southwest. “At that time, Southwest was growing very fast and they received – as we do now – this kind of request from many people,” Oliveira says. “And at that time, we were just a group from the ground transportation sector that would like to start an airline.”
Because GOL started as a subsidiary of Grupo áurea it did not need to raise the $20 million seed money from outside sources. It could also use the company’s infrastructure for accounting and purchasing without investing in back-office functions immediately.
GOL took advantage of Brazil’s determination to deregulate the airline industry and allow new competition – a decision it has since scaled back significantly. Since 2003, Brazil’s department of civil aviation (DAC) has sought to control what it came to believe was excess capacity and too much competition. It now requires airlines to seek approval to add new aircraft, routes or additional frequencies on existing routes.
GOL went public last year, listing shares on the Brazilian Bovespa and New York stock exchanges. A follow-on offering this spring brought total shares outstanding in public hands to about 26%; the family holds the remaining 74%. With 943 million reais ($422 million) in cash at the end of June (on which it earns 19% interest in local currency), GOL has all it needs to fund ambitious new-aircraft plans.
For its modus operandi, GOL did not take a template from a single successful low-fare carrier and copy it, but melded key elements from multiple airlines and packaged them to produce what GOL calls its superior customer value proposition. But the main tenets of flourishing low-cost, low-fare carriers are there: single-type aircraft fleet with high utilisation, substantial use of technology such as internet bookings and ticketless travel, outsourcing of functions outside its core business, single class of service with assigned seating, simplified on-board services and fast turnarounds.
GOL flies a single type of aircraft – almost. It started out with 737-700/800s, but also operates 10 737-300s brought in when it could not find NGs at appropriate lease prices. The -300s will be phased out by the end of 2007, at which time GOL will have taken delivery of 22 new 737-800s with a special performance package that officials are noticeably excited about. The advanced aerodynamics of the new aircraft, including improved take-off performance, obstacle clearance and reduced noise, will allow it to land and take off at every airport to which GOL operates, including Rio de Janeiro’s short-length, restricted Santos Dumont airport, Oliveira says. The aircraft will have winglets to reduce fuel consumption and will accommodate 178 passengers with a standard 32in (81cm) seat pitch.
Richard Lark, GOL’s chief financial officer, says the new -800 will have 25% more seats, but lower costs than the -700s, making it ideal for five slot-restricted airports. “We’ll have seamless route management,” he says. “In slot-restricted airports, we’ll be able to increase our seat capacity by 25%, without needing another slot. And as we migrate from the -700s to the -800s, we’re going to have a very nice reduction in costs.” The new -800 will bring down average fleet age from 6.8 years today to four years in 2009.
GOL has firm orders for 60 “800Xs”, as it calls them, and an additional 41 purchase options. It is also considering buying the aircraft, a significant departure. Because of unusual Brazilian laws, there are adverse tax consequences when an airline takes aircraft ownership, Lark explains. But commercial conditions and financing for the -800s, including an Eximbank guarantee, may produce a cost reduction for purchasing compared with operating leases, he says. The first aircraft will be delivered in June 2006.
High utilisation
However they are acquired, it is clear the aircraft will be operated efficiently. GOL’s aircraft utilisation is among the highest in the world. Utilisation was at 13.7 block hours a day in the second quarter, and Oliveira says it is approaching 14.5 hours now. GOL flies each aircraft between 10 and 11 times a day with 25-minute turnarounds between flights. A strong factor in its utilisation are night flights – nicknamed Corujoes (night owls) – begun in December 2003. Aimed at price-sensitive passengers, the flights are priced to compete with interstate bus travel, Oliveira says, and fares on some routes are even lower. Corujoes were an immediate hit, achieving load factors close to 90%, and are being expanded. In the second quarter, 26 of the 52 frequencies added were night flights.
Although Brazil is a huge country, GOL’s average flight time is just 55 minutes, in part a function of the way it has structured its route system and schedule. The company operates direct point-to-point flights on Brazil’s busiest routes and flies to secondary cities with stopovers, in some cases multiple stops. “An interesting aspect of our model is that 50% of our passengers either connect or are on through flights,” Lark says. “Schedule planning is done to maximise the ability of passengers to connect.”
Because of the 25-minute turnarounds, connections do not add that much time to journeys, but passengers benefit from the lower fares GOL can charge, Lark says. From an aircraft management perspective, GOL needs fewer aircraft and fewer available seat kilometres to meet the needs of its network, he notes.
Much of GOL’s growth has come in Brazil’s busiest air markets flown primarily by business travellers, who make up 70% of both GOL’s and Brazil’s air passengers. The route between São Paulo and Rio de Janeiro is an example. GOL operates 36 daily flights in each direction between the two cities: 26 between São Paulo Congonhas and Rio Santos Dumont; six daily roundtrips between Congonhas and Rio’s Galeao International airport, and six between Santo Dumont and São Paulo’s Guarulhas International airport.
“You have to understand the geo-economic distribution of population in Brazil,” says Oliveira. “The concentration is very high in the south and south-east of the country. So we developed our network to capture these people in certain time periods of the day. In this area, we offer direct flights with a lot of frequencies. We concentrated our initial growth here. Now, as we have the capability to expand our network to more distant destinations, we are doing that,” he adds.
GOL’s budding international expansion into adjacent countries generally extends from those more distant points. “Our plans are to expand from the frontiers of Brazil,” Oliveira explains. Services starting this month to Santa Cruz de La Sierra in Bolivia, for instance, will depart from Campo Grande, the closest Brazilian city served to Bolivia.
Argentinian ambitions
GOL started initial services to Buenos Aires from São Paulo, but has since added flights to the Argentinian capital from Porto Alegre and Florianopolis, two Brazilian cities close to Argentina. GOL is also studying service to Cordoba and Rosario in Argentina.
While some of GOL’s early success has been the result of taking market share from others, Oliveira says, low fares also have stimulated passenger growth. First-time flyers accounted for 4% of GOL’s passengers in its first year, and an estimated 10% this year.
Traditional passengers are flying more and the leisure portion of the overall air travel market is being expanded at a greater pace, Oliveira says, noting that the market grew 14% in 2004 and is growing even faster today. “We are stimulating the market,” he says. “Passengers who flew once last year will fly twice this year, and maybe three times next year.”
There is an enormous potential market. It is estimated that just 6-7 million of Brazil’s 186 million inhabitants accounted for the 30 million air enplanements last year. “We think five years from now that 7 million could be 20 million,” Lark says. Interstate buses remain the primary means of long-distance travel despite Brazil’s immense size and difficult road conditions. Government data shows that over 132 million interstate bus trips were taken in 2003 – with journeys between some cities taking two days, compared with two-hour nonstop flights.
GOL’s strategy to keep costs down includes serving just beverages and snacks on board. It also has eschewed “loyalty” programmes. “I say we have the best loyalty programme because people benefit from their loyalty as soon as they buy their ticket on GOL,” Oliveira says. “They get the lowest cost and they save money instantaneously. It’s not something they have to wait for.”
Maintenance venture
GOL outsources such functions as airport handling, its call centre and, to date, maintenance. But it is building a new aircraft maintenance centre in Confins which will bring in-house its 737NG maintenance and also generate revenue through third-party work, Oliveira says. The 30.5 million reais facility is being financed by local development banks. Fully operational next year, one hangar will be used for painting and a second will accommodate three aircraft undergoing maintenance.
In recent months, GOL has taken a number of steps that might seem to depart from its template, such as signing a distribution agreement with Amadeus and a new codeshare with Panama’s Copa Airlines. It is also thinking of investing in a Mexican low-cost carrier.
However, Oliveira says the Amadeus agreement enables GOL to capture additional international passengers, particularly in the USA and Europe, who have difficulty in booking GOL flights even via travel agents, he says. “It just adds people. We are not diverting our focus.” The agreement will not increase distribution costs nor change the percentage of sales the carrier gets through the internet, he adds. About 80% of GOL’s sales are booked online, although travel agents account for about 65-70% of it. Booking on the website requires a credit card, Oliveira notes.
The codeshare with Copa initially connects GOL flights from Rio de Janeiro and São Paulo with Copa flights operating to Panama from São Paulo, with later phases to increase the Brazilian cities served by the codeshare and add “beyond” destinations from Panama. Oliveira says Copa was flexible in adapting to the GOL way of doing business. “We are very open to receiving passengers from any legacy carrier,” he says. “Our main reason to be here is to provide passenger transport, so there is no reason to turn down business. But we have to respect our business concept, our business model.”
And the future? “Our vision for the next five years is to be recognised as the company that popularised air travel, not just in Brazil but in South America,” Oliveira says. “We are not expecting to change our concept – just to expand our operations to our neighbours, and give their people the benefit of low costs.”
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| Action man Constantino de Oliveira Junior clearly has transport in his blood – all kinds of transport. The 37-year-old president and chief executive of GOL, known by family, friends and colleagues as “Junior”, used to race cars and was the 1992 South American Formula Three racing champion. From 1994 to 2000, he was an officer of family-owned Grupo Áurea, a large Brazilian ground transport conglomerate that served as the launching pad for GOL in 2001. His last position at Grupo Áurea was general director for urban companies. A qualified pilot, Oliveira’s hobbies today include flying, kart racing and mountain biking. He studied business administration at the Universidade do Distrito Federal and attended the Executive Programme on Corporate Management for Brazil conducted by the Association for Overseas Technical Scholarships. Oliveira is one of seven children. Three brothers serve on GOL’s eight-member board of directors with him and their father, Constantino de Oliveira, is chairman. His three sisters are not involved in the airline. Oliveira is married and has two daughters.
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Source: Airline Business
