Bloomberg News

Gol Considers More Flight Cuts in 2014 as Fuel Costs Rise (1)

September 12, 2013

Gol Linhas Aereas Inteligentes SA (GOLL3) may trim seating capacity further in 2014 to stem losses amid rising costs for fuel and stagnant travel demand, the Brazilian carrier’s chief executive officer said.

“There is the possibility that we will cut capacity,” CEO Paulo Sergio Kakinoff said in an interview yesterday in Sao Paulo. “But we see absolutely no reason and have no plan to cut jobs in the short and mid-term.” Gol reduced its workforce by 13 percent in the first half from a year earlier.

A 2014 pullback would build on a plan to chop 9 percent of available seats this year as Gol heads toward a third annual loss, pinched by the weakening of Brazil’s real against the dollar, the basis for fuel pricing. Shrinking operations helped Sao Paulo-based Gol boost a benchmark revenue gauge by the most in two years in July.

Gol’s long-term, 146-jet purchase agreement with Boeing Co. (BA:US) and relationship with lessors, to which it can return old planes, gives it the flexibility to adjust capacity by as much as 10 percent a year, Kakinoff said. The decision, made on a monthly basis, must be taken 12 months in advance.

“The problem is that unfortunately, one year makes a huge difference,” said Bianca Faiwichow, an analyst at GBM Brasil Dtvm, who recommends buying Gol shares. “The dollar in January is nowhere near where it is now.”

Currency Drag

The real slid 9.8 percent against the dollar this year through yesterday, the fourth-worst performance among 16 major currencies, according to data compiled by Bloomberg.

Fuel accounted for 41 percent of Gol’s second-quarter operating expenses, the most among 16 carriers in the Americas with at least 100 planes, data compiled by Bloomberg show.

As costs rise, Brazilian domestic demand for air travel is leveling off. The number of domestic passengers, which almost tripled from 2002 to 2012, is starting to stabilize at 100 million a year, according to the nation’s airline association.

Gol got 93 percent of its 2012 revenue from its home market, according to data compiled by Bloomberg. The company said on Aug. 19 that it had cut domestic capacity by 4.8 percent in July from a year earlier.

Kakinoff, 39, who took over as CEO in July 2012, said his turnaround plan is showing results even with the cost pressures at an airline that has posted losses in eight of the past nine quarters.

‘Strategic Measures’

“Gol still has numerous strategic measures to be taken, which we cannot presently reveal, that should help guiding the company in the recuperation of margins that we’ve been seeing,” he said.

The company said on Sept. 10 that it would implement a new frequent-flier model for domestic flights, which would accrue reward miles based on price rather than distance. Promotional fares would no longer be eligible for miles, according to a statement. The Sao Paulo state consumer protection agency yesterday asked Gol for clarification about the program changes.

Gol forecasts a margin for earnings before interest and taxes this year of 1 percent to 3 percent, which at the low end would be an improvement of almost 14 percentage points from 2012, Kakinoff said. The weakening of the real is the reason the company has not seen better results, the CEO said.

Gol shares gained 1.4 percent in the 12 months through yesterday, as the benchmark Ibovespa index fell 9.8 percent.

Brazil’s government is considering exempting jet fuel from social welfare taxes to bring down costs, O Globo, a Rio de Janeiro-based newspaper, reported yesterday, without saying how it got the information.

“If the government doesn’t help with the price of fuel, Gol will have to cut its capacity,” said Faiwichow, the GBM Brasil analyst, who is projecting a drop in domestic travel demand for 2014. “Any government measure can rebalance the profitability of some routes.”

To contact the reporter on this story: Christiana Sciaudone in Sao Paulo at csciaudone@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net


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