Vertical takeoff: transportation conglomerate Grupo Aurea launches an airline to complement its existing offerings. But will there be room in Brazil's crowded skies for Constantino de Oliveira's carrier? - Strategies

ON JANUARY 15TH, THE Archbishop of Brasilia, D. Jose Freire Falcao, blessed Brazil's newest fleet of airplanes. Soon after, Gol Transportes Aereos took to the skies with one goal in mind: to offer the cheapest fares. Gol, which is modeled after Southwest Airlines in the US, is the largest of several new Brazilian airlines aimed at the nation's growing number of middle-and lower-middle-class consumers.

The 32-year-old CEO of Gol, Constantino de Oliveira Jr., has high hopes for the company Gol currently operates six Boeing 737-700s for 30 daily flights between the seven Brazilian cities of Rio de Janeiro, Sao Paulo, Brasilia, Florianopolis, Salvador, Belo Horizonte and Porto Alegre, promising fares 40 percent to 50 percent lower than the competition. His target: 8.5 percent of the market by mid-2002.

Though young, Oliveira is no stranger to the transportation industry. "I've been in the business since I was born," he says. At age 16, Oliveira already worked full-time for Grupo Aurea, a transportation conglomerate owned by his father, "Nene" Constantino de Oliveira. Gol is the latest addition to a portfolio of 38 companies owned by the Oliveira family Nene Oliveira started the company when he was 18 with the purchase of a truck, using money he saved while working as a farmhand in his home state of Minas Gerais. Nearly 50 years later, the company's 6,000 buses transport roughly 1.2 million passengers daily making it the largest bus company in Brazil, with 1999 sales topping US$580 million.

Oliveira hopes Gol will add another 120,000 passengers per month to that number. Although he has not disclosed the exact amount invested by Grupo Aurea, industry analysts calculate the figure at US$12 million to get the airline off the ground.

To be profitable, the airline has to maintain a minimum of 57 percent average occupancy During the first week of operations, most flights had about 30 percent of their seats occupied. But by week two, the percentage had increased to about 58 percent. Some routes operated at more than 80 percent, while others sold out, Oliveira says.

Brazilian aviation analyst and owner of the Web site Aviacao Brasil, Alexandre de Barros, says that Gol has found a winning formula, "If Gol maintains its current course, they should be quite profitable," he says. Aviation consultant and former airline CEO Robert Booth says the company has a solid plan. "As long as they keep costs down, they ought to be able to make it," he says. "For years, air travel has been overpriced in Brazil. There have been times when it has been cheaper to fly from Sao Paulo to Miami than to go from Sao Paulo to Recife." He adds that Gol will likely stimulate growth in the Brazilian air travel market, much like low-cost carriers did in the US.

As demand increases, Oliveira plans to add more planes and begin service to other cities, including Recife and Campinas in northeastern Brazil. "Our seventh plane should arrive in May the eighth and ninth planes in September and the tenth in October," he says. Oliveira says he expects to recoup his family's investment in a little more than three years.

One weapon in Gol's arsenal is the vast bus transportation network of its sister companies, which can feed in passengers from smaller towns around the cities it serves. "Eventually we hope to sell airplane tickets at all of our bus ticket counters and to integrate scheduling between our land and air routes," says Oliveira.

Gol's competition has already reacted to the low-cost startup. yang recently accused Gol of dumping, charging that it cannot possibly cover its operating expenses with such low fares. Oliveira denies varig's assertion, saying his airline isn't selling seats below cost. The savings, he says, come from programs similar to that of low-price pioneer Southwest.

For example, Gol only serves soft drinks and snacks on its flights. "We have decided to leave the restaurant business to restaurants," Oliveira jokes. He says people fly to get from one place to another, not for the food, and as long as passengers know that they will not be receiving a hot meal during the flight, the airline will not lose business.

Gol has also come up with other cost-saving measures. By leasing, rather than owning, the company's six Boeing 737-700s, Oliviera says he saves more than US$2 million in insurance. (According to analysts, insurance adds up to 5 percent to an airline's operating costs.) Additionally all of Gol's planes will be the same model, reducing the cost of maintenance and repair.

Gol also invested heavily in technology to keep costs down. The company uses integrated sales software that reduces paperwork and personnel, and allows for online purchasing. The company's tickets will be electronic. Once a ticket is purchased, passengers can use terminals located in the airport to print their boarding pass.

So far, so good: After just a few weeks of operation, the company was already selling around 30 percent of its tickets online. Gol is also taking advantage of economies of scale within the conglomerate, utilizing the administrative infrastructure of Grupo Aurea for accounting, purchasing, marketing and research.

As a result, Oliveira says his company ends up with a ratio of about 106 employees per airplane, including people contracted through other companies. The average number of employees per plane at other Brazilian airlines is roughly 170.

Many people close to the industry however, question the prudence of starting a new airline at this time. Most analysts believe the Brazilian airline market is currently saturated and in dire straits, yang, the bloated former flag carrier, continues to bleed red ink largely because of inefficiencies and a huge payroll. TAM and TransBrasil have flirted with merging to help stabilize their future. Making matters worse, since Gol has arrived on the scene, TransBrasil and TAM have lowered prices - in some cases by 58 percent--in an attempt to compete with the fledgling company.

Most observers agree that Brazil has more than enough airline capacity and that available seats outstrip demand. But Oliveira insists that Gol wants to grow the market, not just fight over existing travelers. "We started Gol to attract new customers--people who had been priced out of the market in the past--not to attract customers from other airlines." Still, how those other airlines react could determine much of Gol's flight pattern.

COPYRIGHT 2001 Americas Publishing Group
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