Airline Weekly - January 16, 2012

Cover Story

Good Gol, Bad Gol: Brazil’s largest LCC has flashes of brilliance and episodes of distress. Which will it be next?

Few other airlines worldwide experienced as up-and-down a 2011. One moment, the Brazilian airline Gol was on top of the world, earning double-digit profit margins. Then it seemed mired in crisis, posting double digit losses. Will the real Gol please stand up?

As Gol’s management describes it, the real Gol is the Gol that earned a 10% operating margin in the first three months of last year, which followed an 11% margin for all of 2010, in each case outperforming its close competitor TAM. The real Gol, executives say, is the Gol that’s only beginning to tap the potential of an enormous home market with an emerging middle class eager to travel. Indeed, it’s the Gol that not only had a good 2010 but also managed solid profits in 2005, 2006 and even 2009.

But there’s another Gol: the one that lost money in 2008 and barely broke even in 2007, a good year for the airline industry. It’s the Gol that ill-advisedly acquired bankrupt Varig that same year, leading to a disastrous foray into longhaul flying while complicating its low-cost business model and burdening its fleet with unwanted B767s. And it’s the troubled Gol that reported a huge loss in last year’s second quarter and a significant loss in the third quarter as well, again at a time when nearly all airlines in the Americas were making money.

These recent losses stem first and foremost from a nasty fare war within Brazil, one that hit Gol particularly hard given its heavy dependence on domestic markets—international routes account for only 8% of the carrier’s ASK capacity. To be clear, the Brazilian airline market continued to grow rapidly throughout 2011. In the first 11 months of the year, the country’s airports handled 163m passengers, up a bullish 16% y/y, according to Infraero. But as India’s airline market also demonstrates, strong traffic growth doesn’t mean strong yield growth but in many cases just the opposite—rapid expansion stimulated by falling fares. In fact, Gol’s yields dropped 14% y/y in Q2 and 8% y/y in Q3, figures that were only partly mitigated by higher load factors.

But Gol had cost problems during the second and third quarters as well, and not just fuel cost problems. It faced, for example, a 24% Q2 spike in labor costs, driven by a 9% wage hike and additional pilot and flight attendant hiring to avoid... (421 of 1,685 words)

Also Inside this Issue:

Is it true? Might Delta buy American? It’s far too early to say, but just the fact that Delta is considering such a thing had the industry buzzing last week. You can be sure of one thing: Q4 earnings calls, which begin this week, won’t be boring.

Neither is what’s transpiring at Air France/KLM. An industry high-flyer for much of the 2000s, the Franco-Dutch giant is now nursing the wounds of the past three years, in which its debt burden swelled and its financial results lagged. While its longhaul business is healthy, its shorthaul business is a cancerous tumor that needs to be treated immediately, and unfortunately the medicine—labor concessions—won’t be easy to swallow.

As management freely admits, the Air France side of the company—not the KLM side—is the part that’s losing the most money and the part in need of the most radical restructuring. But at least things are good enough to justify new B787s, an order for which was finalized last week.

Also finalizing a big plane order was Mexico’s Volaris, a low-cost carrier that’s buying A320-NEOs. In Russia, meanwhile, Aeroflot acquired more B737-800s and -900ERs.

On the alliance front, Singapore Airlines is tightening links with Star partner SAS to strengthen and expand its Scandinavian presence. Ryanair, which has no friends but lots of happy investors, announced its 50th base. And FlyDubai announced its 50th destination.

This week, Southwest kicks off Q4 earnings season. And at some point soon, American will release its financial results for the month of December.

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