It's been an interesting month or two for Gol Linhas Aereas Inteligentes (NYSE:GOL). Brazil's quest for the World Cup has overshadowed the fight over Varig, the former flagship airline of Brazil and one of its most well known companies, but the fight should be over before the champions take a victory lap in Berlin next month.
And I think it's not likely to matter that much for Gol in the long run.
Varig's bankruptcy has been an irresistible story -- the first company to go through the new Brazilian bankruptcy filing process ... Brazil's dominant international air carrier forced to ground planes and cancel flights to Europe just as thousands of futbol fans are trying to reach Germany (and get home) ... and a fight for ownership of Varig's assets that has illustrated just how far this star has fallen. Leasing companies, including Wells Fargo (NYSE:WF), GE (NYSE:GE) and others, are all trying to get their planes back but are temporarily being blocked by the bankruptcy judge, and about a quarter of Varig's planes are already grounded for failure to make maintenance or lease payments.
Varig was put up for auction by the bankruptcy courts earlier this year as a way to infuse new cash and management into the company after their debt is written off ... but the closest bid to the minimum of $800+ million was a bid for about $450 million from a group of employee and retiree unions.
And that's why I'm not so worried for Gol.
Even if these employee groups do succeed in buying Varig -- and it's up in the air whether they can raise enough money for even their minimal bid -- they'll still be beholden to themselves. Part of Varig's problem is much like General Motors' -- massive legacy and pension costs, and a company that has been run with much more focus on benefitting the employees and maintaining share than on benefitting shareholders. I don't think any company that is going to remain loyal to its longstanding employees and maintain those contracts will be able to compete effectively with Gol and TAM, the current market share leader in the country.
If the fallback position that's been developing -- that a consortium of investors led by Portugese carrier TAP and Air Canada will buy Varig -- comes through, I'm still not so worried. I think that it's too late for Varig to embrace a new business model and dramatically lower costs, though they may return to profitability as a legacy carrier much as some in the US have done. But if we draw that out further, I don't really think that a recovery by American Airlines (AMR) or Delta, for example, threatens the continued success of Southwest (NYSE:LUV).
GOL is creating new markets in Brazil, not just taking share from Varig. Gol apparently decided not to bid on Varig, though some of their planes and routes may have been attractive, and my guess is that's probably going to end up being a wise move. Why buy someone else's problems when you're doing an excellent job of growing and taking share on your own?
Gol had a good month in May -- traffic was up about 50% year over year domestically, and more than 100% internationally as they have been growing their route system. Yield per passenger kilometer has declined slightly, largely due to some longer flights, but they continue to have great load factors and incredible margins due to their efficiency programs. And they're using new cash raised through offerings and some new debt to significantly boost their fleet.
All that is to say, as the air transport business continues to expand in South America and Gol continues to add significant capacity without harming their admirable profit margins, I think it matters less and less what happens with Varig, the former titan that is now reduced to fighting for its life ... and for its paltry 14% domestic market share.
I feel bad for all the Brazilians who might be stranded in Germany if Varig's mess isn't figured out in the next couple weeks ... but I hope the games are worth it.