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CEO Interview - In Demand

Constantino de Oliveria Junior, CEO of GOL

Constantino de Oliveira Junior, CEO of GOL, says airlines should be creating demand, not just satisfying it

You have some innovative pricing and payment policies. How has this affected the airline?

Brazil is a country of some 200 million people and gross domestic product per capita is rapidly increasing. It is also a large country geographically and in many parts of it there are no trains. Air travel is the best means of connectivity. But you have to be reasonable about what you charge because this is not yet a rich country.

This is not about public service, either. We see it as a business opportunity. If you can ensure your service is simple and efficient while keeping consistency in operations and quality, there is room for profit even at low prices. All of the usual methods apply: a quick turnaround, high aircraft utilization rates, and a tight rein on costs. It is a virtuous circle. Low prices force greater efficiency and in turn that allows even lower prices. The important point is that offering cheap fares stimulates demand. We have created our own market. Without doubt, this is behind the tremendous growth in Brazilian domestic traffic.

So our pricing policy has a structure designed to keep demand high and ensure passengers fill our seats. When you combine that with efficiency and intelligent yield management you have a winning formula.

Our payment innovations are based on the same premise. For example, we have a card with which customers can pay for their tickets in up to 36 installments. The first payment when you book a flight can be as low as $6. There are interest rates of course, so again it is about the intelligent management of cash flows and providing a service that is welcomed by customers.

You use the Varig brand for longer flights. Is this two-pronged strategy easy to manage?

Each brand has its own product and is assigned to a specific journey profile. About 95% of our flights are domestic and less than 90 minutes long, so when customers book a short-haul flight they know it will be with the GOL brand.

But medium-haul international flights will be with Varig, which is a strong Brazilian name abroad. And there you will get everything you need to make you comfortable during four or five hours of flying, including hot meals and drinks. Varig also has a ‘comfort class’, which means more space between rows.

Your fleet is focused on the Boeing 737. What developments would you like to see in this aircraft?

We definitely want a new aircraft design. The trouble with putting new engines on an old design with some minor airframe modifications is that in effect it gives you a dual fleet.

From our point of view it would be better to go straight to a completely new design. Our aircraft orders are obviously very important given market growth but we’re prepared to wait now and see if Boeing does indeed offer a completely new aircraft in the 737 class. I think this development is vital to the future of the industry.

Is Brazil’s infrastructure coping with the huge increase in traffic, and can it be brought up to speed by the time the country hosts the 2014 World Cup or the 2016 Olympics?

There’s no doubt Brazil’s airport infrastructure is in critical condition and it needs massive investment to bring it up to scratch. For example, São Paulo and Brasilia are heavily congested and there are assorted problems across the country. Some facilities need more parking areas for aircraft, some need new taxiways, and others need new terminals.

But we’re very positive about the general outlook. The government understands the situation and is working hard to ensure the necessary funds are available to upgrade airport and air traffic management infrastructure. A consultancy firm, McKinsey, did a comprehensive study that showed exactly where the bottlenecks are, and where the money should be spent first.

There is a great desire to remedy the situation but I must admit we are leaving it late to be ready for the World Cup. It’s only three years away and some of the work should start immediately if it is to be done in time. Still, I’m sure we’ll make a great impression on visitors. We will handle the huge increase in traffic—we’re used to dealing with rapid growth now!

Fuel is a growing cost for every carrier but it’s an even bigger problem in Brazil. What can be done to solve the problem?

The local supplier, Petrobras, is making huge margins on jet fuel supply. Basically, it is including the cost of infrastructure that does not exist. When you add this on to the spiraling cost of oil it creates a massive problem for Brazilian carriers. At GOL, fuel accounts for nearly 35% of our total costs.

We need the government to manage this situation but for now we have to live with it. We’ve got some hedges in place, but if the price of oil goes up much further we’ll have no choice but to pass on some of the cost to our passengers. It will definitely dampen demand but fortunately growth is so strong that we’ll have room to maneuver.

Can the Brazilian Government do more to support biofuels?

Brazil will be critical to the development of the biofuel industry. It is already one of the largest biofuel producers, thanks to the sugar cane industry, and some large areas of land have been earmarked for alternative fuel development. GOL will be getting involved through partnerships with sustainable biofuel producers. I think there is enough interest at all levels to make commercial ventures viable. I’m optimistic about the future.

Is the industry doing enough on the environment?

I think the industry is doing a fantastic amount of work but it is one of those situations where you can always do more. GOL is doing everything it can and is fortunate in being a young company. It means we have been able to grow in an environmentally friendly way.

The company’s maintenance center in Confins has been endorsed by the Ministry of the Environment and is one of Latin America’s most modern facilities. The hangars are equipped with units for processing chemical waste. The waste is processed in accordance with global best practices for environmental protection.

A lot of other airlines are working in similar ways and overall the industry is making great progress. But we need the help of all other stakeholders in the aviation value chain, particularly the governments.

What will help Latin America sustain its recent strong performance? Is liberalization the key?

The main thing is that the market needs to remain competitive. Competition always helps create strong companies—it makes them more efficient, and forces them to invest in innovative new products and processes.

It’s important to note that liberalization isn’t the same thing as competition. Countries in the Latin American region are very distinct and each has different taxes, laws on labor, and so forth. So there isn’t a level playing field and full liberalization in the area would be very difficult.

I do think the market should be opened up to foreign investment, however. At the moment, Brazil has set a limit of 20% foreign investment for an airline and there is talk of increasing this to 49%. But why stop there? Why not make it 100%? All we are talking about is money coming in to further enhance the competitiveness of the industry. That’s a positive trend.

In any case, I’m sure Latin America will continue growing. Brazil is the engine for that growth and GOL is driving Brazil. But again, I have to emphasize that it is price-sensitive growth. It’s not a bad thing—it means we have to keep on improving efficiency if we want to keep growing. That is very good news for the customer. Since 2004, yields in Brazil have dropped by half. That is the real reason why demand is so high. It shows how efficient an airline can be because we’re still returning a profit. And it also shows how efficient an airline must become if that trend continues.

Will we ever see the industry return its cost of capital?

Airlines can make money but the conditions in which we operate have to be right. Some of these conditions are under our own control. The big problem here is overcapacity. Carriers have to be more disciplined.

But of course, this is partly the fault of governments that think they are doing the right thing by opening skies without fully studying the consequences. You must not create a predatory environment. This is a capital-intensive industry and a predatory environment simply encourages short-term thinking, and stifles all long-term investments. It condemns airlines to inefficiency and ensures they will never generate a decent return.

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