Gol banking on lower MRO costs driving higher profitability

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Brazil's Gol expects to reduce its maintenance costs as it starts to work with Delta TechOps in certifying its MRO facility with the US FAA.

Gol has been working on securing certification for its MRO facility at Belo Horizonte's Confins airport since last year as part of a plan to expand its maintenance capacity and start pursuing third-party work from Boeing 737 operators outside Brazil. Gol recently announced a partnership with Delta TechOps in which Delta will help Gol in maintenance workflow planning, facility optimisation as well as the FAA certification process. In exchange, Gol has agreed to send Delta TechOps at least half of its CFM International CFM56-7 engines.

Gol CFO Leonardo Pereira told the 3 February Raymond James 2011 Global Airline conference that MRO is one of several areas Gol is striving for improved efficiencies and reduced costs as part of a broader bid to improve profitability. Pereira explains if Gol is successful in securing FAA certification of its MRO facility "our redelivery costs will come down by at least 40%".

Gol now has to outsource heavy checks for 737s exiting its fleet because leasing companies require their aircraft are returned with a fresh heavy check from an FAA-certified repair station. Gol typically returns 10 to 20 737s per year as it has an aggressive fleet renewal programme in which its older 737NGs are replaced with new 737NGs.

Once it secures FAA certification, Gol will be able to in-source pre-lease return heavy checks and to start overhauling foreign-registered 737s. Gol now only does limited third-party MRO work for other Brazilian operators.

Linking up with Delta TechOps should help Gol more quickly secure FAA certification and also improve the overall efficiency of its MRO operation. "We are working very closely with other MROs so we can transfer that knowledge," Pereira says.

He says Gol is expecting a 1.5 percentage point improvement in its operating margin in 2011 compared to 2010. In addition to lower maintenance costs, Pereira expects this improvement in profitability to be driven from lower operating costs as it now has a more streamlined fleet.

Last year Gol returned its last 737-300s, leaving the carrier with only 737NGs in its scheduled operation. Pereira says getting out of the 737-300s saves Gol $40 million per year in fuel costs. Gol was also still paying leases last year on several 737-300s that were grounded.

Gol's projection for higher profits is also driven by some improvements on the revenue side, in particular cargo and ancillaries. Pereira says Gol just completed a revamping of its cargo division to increase cargo's contribution to total revenues from 3% to 4%.

"We believe as we progress it [cargo] will be a major contributor," he says.

Gol counts cargo under ancillary revenues, which the carrier expects will account for 15% of all revenues by 2014. Three years ago ancillaries only accounted 6% of Gol's revenues.

One of the other major new sources of ancillary revenues for Gol is on board food and beverage sales. Pereira says Gol's new buy-on-board programme was recently extended to 84 flights and has so far been highly successful.

While Gol is bullish on demand as the Brazilian economy is expected to continue to grow rapidly this year, the carrier is taking a conservative approach to capacity. Gol for now is only planning to expand the size of its fleet by four aircraft this year.

But Pereira points out that Gol also has flexibility to add capacity by improving utilisation. He says one additional block hour per day per aircraft would result in 10% additional capacity.

"Our fleet plan is relatively modest but we still have a lot of flexibility in how we manage capacity," Pereira explains. "We can still fly more hours."

Gol also has the flexibility to add capacity and expand the size of its fleet by extending the leases on aircraft which are scheduled to be returned.