In the soccer-obsessed nation of Brazil, it’s good to be called Gol, which means
goal in Portuguese. Gol has certainly scored with air passengers – and
shareholders, too.
Even today, in the 21st century, most of Brazil’s 186 million citizens – lacking
any meaningful interstate passenger rail services – travel by bus rather than
air. In 2003, for example, over 132 million passengers trekked by interstate bus
companies, while the domestic airline industry transported less than 30 million
passengers, according to the Brazilian Department of Highways.
The reason: Air transportation has historically been affordable only to the
higher income segment of Brazil’s population.
Enter Brazil’s only no-frills airline, Gol Linhas Aereas Inteligentes (NYSE:
GOL). Gol’s low-cost, low-fare business model has played a major role in
significantly increasing the use of air transportation in Brazil. As a result,
total air travel is up nearly 20% from year-earlier levels, and Brazil’s market
now ranks second, only behind China, in terms of projected air-travel growth.
Gol’s secret to success is simple: keep costs down.
By maintaining a simplified, single-class aircraft fleet that is one of the
industry’s newest, Gol is able to reduce maintenance costs and limit its planes’
down time. It also relies heavily upon low-cost distribution channels and sales,
with approximately 80% of the company’s ticket sales purchased online. And
unlike the U.S. air market, where labor costs can amount to 40% of overall
costs, in Brazil that figure is closer to 10%.
The end result is that Gol’s cost per available seat kilometer – at less than
six cents – is one of the lowest in the airline industry worldwide, and 30%
lower than its primary competitors.
It’s certainly doing something right.
In less than five years, Gol has captured nearly 30% of the domestic Brazilian
market, measured by revenue passenger kilometers, and now stands as the
country’s number-two airliner behind TAM Linhas Aereas SA. It also boasts
industry-leading load factors – the percentage of aircraft seating capacity that
is actually utilized – and margins.
And while, clearly, Gol’s business model deserves most of the credit for its
impressive market share gains, as they say, one company’s loss is another
company’s gain. That is, the country’s oldest airline, Viacao Aerea Rio-Grandense
SA, or Varig, filed for bankruptcy in June, struggling under the weight of its
$3.4 billion debt load.
As recently as 2004, Varig dominated the Brazilian air travel market, carrying
56% of the passengers who flew on domestic and international flights. As Varig
focuses on working out its reorganization plans, it’s seen its market share get
cut in half. Meanwhile,TAM and Gol have reaped the benefits, surpassing besieged
Varig as the number one and two Brazilian airlines, respectively.
Now, Gol is taking the same formula that has served it so well domestically and
applying it to international markets.
The company began its operations in January 2001 with six single-class Boeing
aircraft serving five cities in Brazil. Today, with its fleet of 39 Boeing 737
planes, Gol offers 430 daily flights to 49 major business and tourist
destinations in Brazil, Argentina, Bolivia, Paraguay, and Uruguay.
While impressive, the company’s growth spurt is still underway.
Gol plans to double its fleet in the next five years, increasing the
opportunities to serve new markets in Brazil and the rest of South America.
Then there’s Mexico.
In mid-December, Gol announced that it was investing $19 million of the $40
million tab to set up a new, low-cost airline in Mexico, which will begin
operations in mid-2006. Mexico’s 20 million annual air passengers already make
it Latin America’s second-largest aviation market after Brazil. But only about
5% of the country’s 106 million residents currently fly the friendly skies
because few can afford full-priced airfare. So it comes as no surprise that the
country’s aviation chief recently said that new discount airlines – like the one
Gol is preparing to start-up – will double the country’s domestic air travel.
Gol’s low-fare entry in Mexico will be an attractive value proposition to
millions of people, and the company is likely to rapidly gain share – just like
its conquered Brazil in five short years.
