Gol's new long-haul unit is dropping three of its five European routes following heavy losses
In a major U-turn, Brazil's Gol has decided to drop three of Varig's European routes only a few months after their launch.
VRG Linhas Aereas, which was acquired by Gol last year and operates as Varig, revealed plans at the end of January to drop at the end of March services to Frankfurt, London Heathrow and Rome. The network changes are an unexpected setback for the new Varig as the routes were only launched in late October with much fanfare. Gol president Constantino de Oliveira Jr, who travelled to Europe several times last year to promote the services, said in December the routes were performing well.
But after Varig posted a $64 million loss for the fourth quarter Gol was forced to acknowledge passenger loads on Varig's long-haul services were undesirable. The loss at Varig pushed Gol into the red, with the group reporting a $51 million fourth quarter loss.
Gol cites several reasons for the major course correction. In the case of Rome, passengers disliked the Paris stop. Chief financial officer Richard Lark says Varig was discouraged from launching Rome nonstops by the plans of Alitalia and TAM to serve the route.
Lark says London was such a stretch for Varig's Boeing 767s that it could not operate without a fuel penalty. He also cites increased competition from British Airways on the London route. Rival TAM has expressed interest in taking over the London route.
The final reason is that Varig lacked codeshare or favourable interline agreements at London or Frankfurt for passengers travelling on from these cities to other parts of Europe. This was especially true in Frankfurt, where Varig lost its codeshare with Lufthansa after the Star Alliance dropped Varig as a member.
Varig will continue serving Madrid and Paris, which it launched in January. Varig codeshares with Air Europa over Madrid and has interline deals with Iberia in Madrid and Air France-KLM in Paris. Varig thus concluded that it makes sense to concentrate on these European routes and drop the others.
Varig will continue to operate four of its 10 767s to Paris and Madrid, and will shift the others to Gol's medium-haul Latin American routes, like Bogota, Caracas and Santiago. The 767s will also be used to launch a Varig route from São Paulo to New York in the second half, but previous plans to serve Miami from São Paulo have been dropped after Gol decided the route would not be commercially viable.
Lark says that Varig's long-haul flights will continue to drain Gol's profits through the first half of 2007 because they are still in the launch phase. He adds Gol is studying "how to reduce operating costs of the 767s before we grow aggressively".
Despite the losses, De Oliveira has reiterated his previous prediction that Varig will break even starting in the third quarter.
Source: Airline Business