In less than five years, Gol Airlines has become one of the most profitable and fastest-growing airlines in the world. Pursuing a policy of controlling costs and investing in such modern equipment as the latest generation Boeing 737-700, Gol has managed to increase its fleet of airplanes from five, initially, to 36 planes now. Gol has become, during the first half of 2005, the third-largest airline in Brazil with 26.24% of the market, behind TAM, which has 43.03% and Varig, the former leader, which has a 28.32% share. During the same period of time, Gol earned a profit of 162.78 billion reais (just under $71 million) — 39% higher than during the first six months of 2004.
The miracle worker was Constantino de Oliveira Jr. When Oliveira decided to introduce in Brazil the low-cost model that had done so well for Southwest in the U.S. and Ryanair in Europe, few gave him much chance to succeed. Oliveira was barely 32 and had no experience in commercial aviation. However, Oliveira did have some managerial experience with the Aurea Group, his family-owned land transportation company, which has been in business for more than 50 years.
Tarcisio Gargioni, vice-president of marketing and services at Gol, believes that the Aurea Group’s heritage was a key to Gol’s success. “In the course of 50 years, Aurea has created quite a significant number of companies.” The year before Gol opened for business, says Gargioni, “the Aurea Group transported more than 400 million passengers. So, in reality, we have a long history, and our philosophy and way of providing services are totally proven. We merely had to transfer it to the aviation business. To enable that, Oliveira surrounded himself with a group of people who were knowledgeable about aviation. He used that knowledge to create Gol, and there were no weak points in that process.”
The high quality of Gol’s management has drawn attention in the marketplace. Economist Paulo Roberto Bittencourt Sampaio, an aviation consultant, puts it this way: “Gol is a company that makes very few mistakes compared with its competitors. No one has had such success making business decisions over the past four and a half years. This reflects its high business efficiency. It seems to me that the learning curve of Gol’s president, who came from the land transportation sector, has been very fast. Gol should be congratulated.”
According to Sampaio, another decisive factor in Gol’s success has been the elaborate planning undertaken when the company was established. “The business plan was very well conceived. It began with five planes and a network that was already quite extensive.” Gol also began flying at just the right moment, when other companies were abandoning the national scene. Sampaio adds, noting that “2001 was the last year of life for Transbrasil [airlines]. At that time, the company was already in great pain. Vasp was also suffering greatly, although it survived until January 2005. Those two airlines were in total decline. In addition, Varig was facing serious financial problems (and continues to do so). Given these conditions, the main competitor was TAM. Gol knew how to profit from this situation by creating a very low cost structure.”
In an interview in Conexão magazine, Oliveira revealed just how ambitious his plan was from the very beginning. When Gol was launched in 2001, says Oliveira, “Our goal was to convert it into a global model for low costs and low prices.” According to Oliveira, Gol has already achieved this goal. In addition to global recognition, Oliveira cites the success of Gol’s initial public offering in June 2004. In addition, his airline has made the largest airplane order of any airline in Latin America — 101 planes to be delivered by Boeing through 2012.
Gol consistently earns profit margins that are much higher than the average low-cost company in Europe and the United States. Gargioni attributes that to technical factors. “Our planes fly more than other airlines’ planes do. They carry more people, and spend less time on the ground, on average. That makes a difference. Basically, our work is more focused on costs, and we have a record of achievement that translates into higher productivity than other companies.”
Gol’s competitive advantage is not simply expertise at managing costs and optimizing its operational efficiency. “Gol has always been a low-cost company, but it was never a low fare airline. Its ticket prices are lower than other Brazilian companies’ prices but if you compare them with Europe and the United States, Gol’s prices are not low,” notes Sampaio. Gilso de Lima Garofalo, a professor at the Pontifical Catholic University of São Paulo, agrees. “The reality is, Gol does not have low fares.”
Garofalo cites another factor that contributed to Gol’s success. “What made the difference was that Gol arrived on the scene with a new fleet. As a result, its maintenance costs were extremely low. In addition, it was operating on routes that were short and had a high density of traffic. It was selling tickets almost exclusively on the Internet, the way it is still doing today.” According to Garofolo, that approach means that Gol enjoys considerably lower sales costs per ticket.
Gol has managed to change some paradigms of the Brazilian aviation sector, which traditionally valued such concepts as sophistication, elegance and glamour when marketing air travel, Gargioni adds. “The big concepts were broken by the simplicity, practicality and simplification of” Gol’s operations.
Aggressive International Expansion
Gol has its sights set on higher goals now. Oliveira has served notice on several occasions that his new goal, over the next five years, is to become the company that popularizes air travel throughout Latin America.
Not surprisingly, Gol already offers regularly scheduled flights to Buenos Aires, Argentina. By the end of this year, it plans to provide service to Montevideo (Uruguay) and to Asunción (Paraguay). Gol’s earlier plan to inaugurate service to Santa Cruz, Bolivia, last June, was frustrated by political problems that brought Bolivia to the edge of a civil war. The airline is awaiting a better time to begin flights to that country. Gol is also planning to enter the Mexican aviation market.
Gol recently signed a letter of intention with a Mexican company, Inversiones y Tecnicas Aeroporturias, owned by entrepreneur Fernando Chico Pardo. The deal involves the creation of a low-cost, low-fare airline company in Mexico. Gol believes that there are great growth opportunities in that country. As befits its usual style, Gol has released only a brief statement about the agreement. “Regarding Mexico, we are only exchanging ideas, merely discussing intentions,” says Gargioni.
There is a good reason for his caution. Only a few days earlier, two Mexican millionaires, Carlos Slim and Emilio Azcárraga, announced they intend to create an airline company that has the same business model as Gol. The Mexican millionaires even gave the company a name – Vuela Compañia de Aviación. Their plan could put a damper on Gol’s plans for Mexico.
For his part Sampaio does not have a positive view of Gol’s goal to enter Mexico. “It seems to me, this is the biggest risk that Gol has considered taking until now. Everything outside of Brazil is more complicated [for Gol]. Nowadays, the Mexican market is practically divided between Aeroméxico and Mexicana airlines. Both are owned by the Mexican government, and they are going to be privatized before the end of this year. Besides that, other airlines that have low costs and offer low air fares are showing up in Mexico; Gol is just one of them. One of those airlines belongs to Carlos Slim’s Televisa, the largest Spanish-language television network. Another belongs to a different Mexican millionaire. That means the competition will be greater. The players are all positioning themselves, and Gol is not the only player that has experience with low costs and low fares. This seems like a risky business.”
Prospects for the Domestic Market
The crisis that affects Varig could transform the Brazilian market. Varig faces serious liquidity problems as a result of its debt, which exceeds 9 billion reais (about $3.9 billion). Varig’s management hopes to obtain help from companies and financial institutions that can contribute resources that restore balance to the situation.
Gol and the other airlines have taken advantage of Varig’s condition to improve their positions in the market, and to conquer new air routes. “We are in second place in the market,” says Gargioni. “Ahead of us is TAM, and Varig is slightly behind us…. Given this landscape, the prospects are the following: Brazilian demand must grow because Brazil is going to grow and Brazilians are going to fly more. We are contributing to the creation of new markets. We are providing incentives to people so they will travel more, and change their way of traveling [by moving] away from cars and buses and toward air travel. Given these factors, I can say that our prospects are positive because the economy is going to grow, and that will stimulate the market. We are prepared to absorb that growth. We are preparing ourselves by planning for the purchase of airplanes through the year 2012.”
Like any business, air travel offers both opportunities and dangers. Growing competition in the domestic market can eventually become a source of concern for Gol. Not long ago, a new airline called Webjet was launched with two airplanes that connect Rio de Janeiro, Brasilia, São Paulo and Porto Alegre. Webjet charges only one fare, the equivalent of $73, less than other competitors charge. At the beginning of August, Brazil’s Department of Civil Aviation (DAC) permitted two other companies, BRA and TAF, to provide scheduled air services. The two carriers had been in the market, but they did not have regularly scheduled routes. For example, BRA carried 1.5 million passengers in 2004 through a system of charter flights. The question now is whether those two companies can adapt to the demanding rules established for airlines that offer regularly scheduled flights.
Regarding this new threat, Gargioni says, “First of all, we respect all our competitors. Whenever someone enters the aviation sector, it is because they are competent. Second, Gol was born in a competitive environment, and it has to continue to be competitive; it has to keep renewing itself, and we are working to make that happen. Third, the low-cost market serves customers who are sensitive to prices. Clearly, however, the price-sensitive market now requires a high level of quality, regularity and confidence; companies have to achieve at least that level.”
Despite his cautious comments, Oliveira does not seem to be very worried about new competition [in Brazil]. Sampaio mentions a statement by Oliveira confirming that he still does not consider Webjet to be his competitor. According to Sampaio, Oliveira “will not make any changes because of the rise of Webjet, because he considers TAM and Varig to be his competitors. And he is completely right. Webjet has no volume; there is nothing that it can do to get a well-positioned company [like Gol] to change its competitive strategy…. As for BRA, I don’t think that it is ready to become a full-fledged company. It obtained a permit because of pressure on Brazil’s civil aviation agency. Other companies pressured the agency, arguing that although BRA was serving regular air routes, BRA did not have the same obligations as other companies that run such routes.”
What are the prospects for growth in the Brazilian aviation market? “It seems to me that there is space (for considerable expansion),” concludes Garofalo. “This year the domestic air market is growing at a pace of between 14% and 15%. That is quite promising.”