Brazilian Airline GOL Reaps Rewards From Varig's Headaches (GOL, TAM)

Gol Linhas Aereas Inteligentes SA (GOL), one of my favorite companies and largest holdings, enjoyed a very quick move up yesterday.

Looking at the Google Finance or Yahoo Finance pages, you might be inclined to guess that it moved up because they announced, just as the shares began to accelerate, that they were among the first foreign companies to comply with Sarbanes-Oxley.

But uhhh, no. While I love the company's disclosure policies and think they're as shareholder friendly as any foreign company I'm aware of, that's not really news -- and it's not going to bump the shares up by 13%.

No, the good news for GOL is the bad news for Viação Aérea Rio-Grandense, more commonly known as VARIG: Varig, the longtime flagship airline of Brazil, is floundering -- and president Lula just kicked them a little while they're down, reassuring investors that the government wouldn't step in to help Varig too much at the expense of their competitors.

There's a good article on this at Reuters entitled Brazil Seizes Varig Pension Fund -- not only is the government not helping Varig financially, they actually stepped in to take control of their pension fund assets so the company wouldn't be tempted to use them to cover its unmanageably high operating costs.

But there's more detail in a Bloomberg story as well, including a quote from the CEO that "these types of actions will force Varig to ground its planes very soon." Dow Jones is reporting that "Shares in Brazilian airlines TAM SA (TAM) and Gol Linhas Aereas Inteligentes (GOL) surge on reports the government is drafting a contingency plan for the two to pick up routes from rival Varig (VAGV4.BR) in case its planes are grounded amid bankruptcy procedures," which is the first I heard that the other carriers might benefit this directly. To add fuel to this fire, some of the small upstart carriers have been hurt as well -- Oceanair has been forbidden from buying Varig's routes, and Vasp and Transbrasil have been grounded.

A slightly updated story is at the Wall Street Journal for those who subscribe, but whether or not the government will allow the workers to buy out the airline with their pension funds, or some other rescuer comes in, it appears that capitalism is being allowed to work in Brazil, even when it works to the detriment of a proud national company with a long and historic heritage (and high costs, and ridiculous union deals, and insular management...). Lula has been quoted as saying that his administration is not obligated to 'rescue private companies from bankruptcy.'

This makes me quite optimistic about Brazil in general, even though there are reports that higher US yields will hurt Brazilian investments in relative terms, and it's seems likely that Gol will benefit significantly from this fight over Varig -- the government wouldn't even let Varig sell its routes and slots to Oceanair, a small Gol competitor, which means that all the planes and routes that Varig can't afford to fly are not being absorbed -- that means higher seat occupancy for Gol, and perhaps even higher prices, though Gol's mission has always been to lower prices. Varig is being forced to let several planes sit while it can't afford to fly them, and they've even had to return planes to the leasing agencies. This has every appearance of being a death spiral, though I expect Varig will find a way to restructure and refinance itself -- it's a measure of my faith in Gol's management that I think even a restructured Varig will have no hope of competing domestically with GOL in the long run.

Varig is still a significant presence, with a lot of activist employees who enjoy their jobs. And this fight over Varig's future is still very fluid -- it may have turned on a dime by the time you read this, and Varig may become an employee owned airline that is to some extent reenergized ... they still won't be able to compete with Gol and the other smaller, lower cost fliers, though, and this is just another sign that the government is at least going to keep the playing field relatively level.