The $320 million deal for VRG Linhas Aéreas, or New Varig, the successor to Brazil's bankrupt flag carrier Varig, was unveiled in late March and it surprised the market.

The move came after rival TAM urged Chile's LAN to join it in buying New Varig. TAM's aim was mainly to block Gol from doing exactly what it has done. LAN's interest was in expanding in Brazil through a new unit much as it has done elsewhere in South America.

Gol claims LAN's option to purchase New Varig shares has been pre-empted. Gol will buy all of New Varig's shares for $98 million in cash, a share transfer, and the assumption of $100 million in Varig obligations.

Gol stresses that it is not assuming any of the old Varig's debts. New Varig will by owned by a holding company that also owns Gol. New Varig's present shareholders will own about 3% of this holding company.

Brazil's civil aviation agency has approved the takeover. From its perspective, putting New Varig in the hands of a stable airline is a positive step that may end the skirmishing over Varig's use-or-lose deadlines for routes, slots, and airport terminal space.

CADE, Brazil's competition agency, has yet to approve the deal and it may scrutinise the takeover closely because Gol and New Varig have a combined domestic market share of about 50%. In anticipation, Gol has gone to some lengths to stress that New Varig will retain its own brand and operate as a separate airline.

The two carriers will probably rationalise their domestic networks. Gol plans to standardise New Varig's domestic fleet by the end of this year with 20 Boeing 737s. Gol says New Varig will keep domestic routes where Varig traditionally has been strong. It will operate a single-class domestic service "differentiated" from Gol's low-cost model.

New Varig's main emphasis will be to create a long-haul network that feeds traffic to and from Gol's domestic flights. Gol envisages New Varig returning to Frankfurt, London, Madrid, Miami, Milan, New York, and Paris and continuing to serve five Latin American cities. If the takeover is approved, New Varig would compete with TAM on most of these routes.

A challenge will be to revive dormant route rights before they expire in June. It is unclear when New Varig will have the fleet it needs for these flights, but Gol says it will help acquire 14 Boeing 767s in a two-class configuration.

Converting New Varig into a long-haul arm for Gol follows a pattern by several other low-cost carriers. Gol's domestic loads have started to soften with the addition of new capacity, an early sign that its local market may be reaching saturation. Similar trends have encouraged Australia's Virgin Blue and Canada's WestJet to plan and consider a long-haul launch.

Source: Airline Business