Lower Airfares Offered by Brazil´s Gol Could Bring Problems to Rival Carrier VARIG

A significant slash in the price of airfares offered by Brazilian airline Gol –that reported a 120 percent increase in gains at the end of 2004- could drag rival company VARIG into bigger financial woes at a time when the administration of President Lula da Silva is demanding fiercer competition in the aviation sector.

“If VARIG doesn´t act quickly, it could close 2005 as the country´s third airline, trailing behind TAM and Gol,” said Gianfranco Beting, editor of Jetsite.Com and former vice president of downtrodden airline Transbrasil.

Founded in 2001, Gol announced plans to slash all airfares by as much as 56 percent in a market that´s been lagging behind for the past two years due to lack of competition in the industry.

The company requested permission recently to operate routes from Brazil to Montevideo and Asuncion, grabbing nearly a quarter of the Brazilian market and marching behind rival carriers TAM and VARIG.

Moreover, Gol is waiting for 26 Boeing 737-800 Next Generation jetliners due out for delivery between 2006 and 2010.

Gol´s aggressive advance in the domestic market and its low-airfare strategy could wind up bringing some ripple effects on VARIG, a much smaller firm with no strength to enter a knock-down-and-drag-out competition right now.

For its part, VARIG operates international flights to nearly all countries in South America, as well as routes to Mexico, the United States, Europe and Japan. The carrier´s debt has been tabbed at 8 million reals and most of that money is owed to the state.

The administration of President Luiz Inacio Lula da Silva has been trying to work out a solution to the crisis, but sources from the Ministry of Economy believe the only plausible way out is in the market and in competition.

When Mr. Lula took over the presidency of Brazil, his government pushed hard for a merger between VARIG and TAM, a process that got cranked up with the opening of codeshare flights between the two airlines. However, the initiative laid an egg as soon as demand sagged, prices went up and operational results plunged.

These codeshare flights between VARIG and TAM will official come to an end three months from now.