Bloomberg News

Gol Cuts Jobs for Elusive Profit Seen as Years Away

May 22, 2012

Gol Linhas Aereas Inteligentes SA (GOLL4), Brazil’s second-biggest airline, is accelerating reductions in jobs and flights to avoid falling further behind Tam SA (TAMM4), whose pending acquisition will create the world’s largest carrier by market value.

Fuel-guzzling jets and a struggle to raise fares underscore Gol’s challenges, said Pedro Galdi, SLW Corretora de Valores e Cambio analyst. Gol was the lone Latin American airline with a first-quarter loss, and the only one with a negative operating margin in 2011, according to data compiled by Bloomberg.

“Their aggressiveness in the past few years got out of hand,” Galdi said in a telephone interview from Sao Paulo, where Gol is based. “They have to cut into the flesh and take a few steps back.”

Tam’s purchase by Chile’s Lan Airlines SA (LAN), which is due to close next month, threatens to increase pressure on Gol, which already was filling fewer seats on its planes. Even without that threat from a Brazilian rival, Gol faced weaker demand and a drag from the decline of the Brazilian real against the dollar.

“There are a number of measures we can take that could help us have a much better performance than what we had last year,” Chief Financial Officer Leonardo Pereira said in an interview at the Rio Investors Day 2012 conference in Rio de Janeiro. “Our priority is profitability, not market share.”

New Environment

Gol dismissed 131 flight crew members, four directors and 26 managers in April, citing a “new operational capacity and economic environment” before it reported a first-quarter loss of 41.4 million reais ($20.3 million). The airline also eliminated 80 flights from a daily schedule of about 900.

More flight cuts are a possibility, and 1,200 jobs are being trimmed from a workforce of about 20,500 people “mainly by not replacing employees leaving the company,” Pereira said.

Gol has more than doubled its capacity in the past five years, with more than 90 percent of available seats on domestic routes, according to data compiled by Bloomberg. Its market share on flights within Brazil was 34 percent at the end of the first quarter, down from 37 percent in March 2007, according to Anac, Brazil’s civil aviation regulator.

Operating results show the pinch on Gol’s finances in an air-travel market where traffic growth overwhelmed airport infrastructure in recent years, triggering widespread delays and disruptions.

Declining Yields

Yields, or the average fare for each kilometer flown, rose 2.5 percent to 0.2025 real in the first quarter, while still lagging behind Tam’s 0.2310 real, according to data compiled by Bloomberg. Gol’s full-year yield in 2011 was lower than in 2006, the data show.

“Tam and Gol fought a fare war that was very harmful to both, but especially to Gol, which flies mainly domestic routes,” SLW’s Galdi said. “And all that was happening within an environment of banana-cheap prices, falling demand and chaos in airports.”

As yields slumped and Gol’s capacity grew, the share of seats filled on each plane fell. First-quarter load factor dropped three percentage points to 67.9 percent, only 0.2 percentage point more than Gol’s break-even level, according a May 17 presentation later sent to Brazil’s securities and exchanges regulator, known as CVM.

Gol spent 0.0680 real on fuel for each seat flown a kilometer last quarter, topping Tam’s 0.0640 real. Fuel accounted for 44 percent of Gol’s costs, compared with 39 percent for Tam.

‘Identity Conflict’

“Tam has always had higher costs and thus needed to worry about it, and prepared itself better for rough times,” Leonardo Nitta, a Banco do Brasil SA (BBAS3) analyst in Sao Paulo, said in a telephone interview. “Gol faced an identity conflict, and is realizing just now what needs to be done and is starting to do it.”

Gol once was a favorite with Brazilian investors because its low-cost, low-fare strategy helped win business last decade. It switched its approach, purchasing VRG Linhas Aeras SA, or Varig, in 2007 to add flights outside the country, then abandoned the routes a year later.

Buying domestic carrier Webjet Linhas Aereas SA in August to serve Sao Paulo’s Congonhas airport brought Gol some operational challenges: the smaller airline’s 28 aging, less- efficient Boeing Co. (BA:US) 737-300s.

Older Planes

That model went out of production in 1999, and some of the Webjet planes are more than 21 years old. Until the Webjet acquisition, Gol’s 737s were all newer versions that Boeing says can fly higher, farther, faster and on less fuel than the -300 variant. Gol has 120 planes, all of them Boeings.

After Gol’s 2004 initial public offering, the shares more than doubled, reaching 82.8 reais in 2006. The stock plunged 6.3 percent today, closing at 9.32 reais, the lowest in almost 10 months. Tam rose 0.2 percent to 41.27 reais. Year to date, Gol fell 25 percent, while Tam rose 16 percent and Brazil’s benchmark Bovespa index declined 3 percent.

Tam will be delisted once Lan completes the acquisition via a share-swap offer than runs through June 11. The combined airline’s market value will be about $12 billion, vaulting it past Air China Ltd. (753) and Singapore Airlines Ltd. (SIA)

Moody’s Investors Service reduced Gol’s debt rating by two grades to B3 from B1 on April 19, citing weaker-than-expected operating performance in 2011 and weak prospects for 2012. Gol can’t weather “continued high fuel prices” and is vulnerable to a real that is losing value against the dollar.

Dollar Debt

More than 90 percent of Gol’s lease-adjusted debt and more than 55 percent of operating expenses are denominated in dollars, Moody’s said. The real fell 8.6 percent against the dollar this year before today, the most among major currencies.

“The currency affects our accounting but not our cash position, since we don’t have any down payment in dollars due before 2017,” CFO Pereira said.

Gol is playing catch-up with revenue-boosting steps taken in the last decade at carriers around the world, such as expanding third-party maintenance work and charging for inflight meals. So-called ancillary revenue rose 2.7 percent in the first quarter, to 241.8 million reais, or about 12 percent of the total, according to Gol’s latest earnings report.

Smiles, Gol’s frequent-flier program, may be spun off this year, as occurred with Tam’s loyalty-rewards business, Multiplus (MPLU3), in 2010. Gol hired Boston Consulting Group to study whether to sell the unit’s shares in an IPO, without committing to such a course.

Gol expects a rebound to start this quarter, the first period in which the airline will be able to show the benefits of its flight and job cuts, even in a seasonally weak period for the airline industry, CFO Pereira said.

“I believe it will be better than last year,” Pereira said. That was the period when Gol posted its lowest quarterly sales of 2011, and a loss of 358.7 million reais.

Nitta of Banco do Brasil agreed that second-quarter results may show evidence of a turnaround, without being enough to prevent another annual loss in 2012. SLW’s Galdi said winning back the investor trust Gol once enjoyed will take even longer than that.

“It’s a matter of years, not quarters,” Galdi said.

To contact the reporter on this story: Jose Sergio Osse in Sao Paulo at josse1@bloomberg.net

To contact the editor responsible for this story: Helder Marinho at hmarinho@bloomberg.net


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