Losses At Gol May Add To Headwinds

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Published: May 4, 2012

The path to recovery for Brazilian airline Gol, which may post its third quarterly loss in a year, looks increasingly unclear as management struggles with slipping seat occupancy, a jump in fuel prices and a weakening currency.

The company will report first-quarter results on Thursday after the market close.

Shares of Gol have tumbled 53 percent in the past 12 months, raising doubts about the company’s vision of a low-cost airline in a country struggling with expensive staff costs, an unwieldy tax burden and overcrowded airports.

As air traffic in Latin America’s largest economy slows from years of double-digit growth, Gol is paying the price for growing too fast. Chief executive Constantino de Oliveira Junior’s expansion plans last year met with a glut of available seats in the market and plunging ticket prices, just as fuel prices and payrolls drove costs higher.

Gol lost BRR710 million reais (USD$ 369 million) in 2011, and Oliveira, the son of the bus magnate who founded the airline, is reversing course to stop the bleeding.

Analysts say they are still waiting for results from his plan to restore profitability at the cost of growth by trimming fleet plans, cutting at least 80 flights daily, laying off employees and dropping free refreshments from many routes.

Some creditors have already lost patience. Yields on Gol’s dollar-denominated notes due in 2020 have climbed nearly 2.5 percentage points since late March to 11.36 percent in Thursday trade. Yields move inversely to prices and rise as market risk perceptions of the bond deteriorate.

Moody’s Investors Service warned that the airline could struggle if it faces further losses, lowering its credit rating from “B1” to “B3” in April, six levels below investment-grade.

“Gol’s current credit profile and capital structure do not provide the capacity to absorb continued high fuel prices and anticipated weakening of the real,” Moody’s analysts wrote in their note. If losses in 2012 significantly erode Gol’s cash position, they said, the company will likely have to raise cash through the sale of new debt or shares.


So far, Oliveira’s turnaround plan is reflected in higher ticket prices, but loads have contracted as a result. Gol’s load factor fell 5.1 percentage points from a year earlier to 66.6 percent in the first quarter, below the market average of 69.5 percent.

“The recovery path remains unclear,” BTG Pactual analyst Rodrigo Goes told clients in a note. “While Gol’s conservative approach and ongoing capacity cuts are clearly a positive remedy to weather a still weak domestic environment, high unit costs should largely offset these measures.”

Morgan Stanley analyst Nicolai Sebrell told clients that Gol’s cost cutting and fleet discipline may help restore profit margins in late 2012 or 2013, when government stimulus is expected to spur recovering demand.

Current share prices look cheap for investors betting that more of Brazil’s growing middle class will swap long-distance buses for plane trips, he said.

But in the short run, analysts see no easy profits. Several industry tricks to raise revenue without scaring off passengers, such as fuel and baggage surcharges, aren’t allowed in Brazil.

Sebrell expects a seasonal lull to trigger another net loss for the airline in the second quarter.


Gol’s newfound discipline will also do nothing to hold back smaller rivals from ramping up capacity and depressing fares thanks to their lower operating costs.

Privately held Azul is growing its fleet by 12 planes before the end of the year. Avianca Brasil expects to receive five new jets this year and five more in 2013 as part of a plan to add 50 new planes in five years.

The combined market share of Avianca, Azul and smaller peer Trip jumped to 19 percent in the first quarter from 13 percent a year earlier. In the same period, Gol’s market share fell to 34 percent from 39 percent.

Gol may now find itself with a weaker market position when Brazil hosts the 2014 Soccer World Cup and 2016 Olympic Games. With less penetration, the airline also loses clout in negotiating code sharing deals with foreign operators.

Local media has reported that Delta Air Lines, which bought a 3 percent stake in the carrier in December, may increase its stake. Both airlines have denied such negotiations.


The airline has seen its operating expenses and debt-servicing costs jump this year as a result of its exposure to currency swings, in what Moody’s analysts called “arguably the weakest link in Gol’s business model.”

Revenue is concentrated overwhelmingly in reais, but 70 percent of its debts and about 60 percent of its operating costs are in dollars. By not protecting those liabilities from currency swings, Gol left itself vulnerable to a government plan to bolster exporters by weakening the real.

Now the company is paying the price, as the central bank’s market interventions and interest rate cuts have helped to weaken the currency 18 percent in the past twelve months.

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