Airline Bonds’ 21% Jump Fueled by Gol Flight Cuts: Brazil Credit

Gol Linhas Aereas Inteligentes SA's Planes
The airline said its net loss shrank to 174 million reais ($77 million) in the second quarter from 715 million in the same period two years ago. Photographer: Dado Galdieri/Bloomberg

Gol Linhas Aereas Inteligentes SA’s planes have never been more filled with passengers. That’s translating into a windfall for bond investors in the biggest airline in Brazil.

Its $500 million of notes have rallied since Aug. 13, when Gol beat analysts’ sales estimates for a fifth quarter and said a record 81.2 percent of seats on its planes were occupied in June and July. That’s pushed returns on the Sao Paulo-based airline’s bonds to 21 percent this year, triple the average in emerging markets, according to data compiled by Bloomberg.

Two years after laying off about 20 percent of its workers and reducing flights by 15 percent, Gol has narrowed net losses by more than half. Moody’s Investors Service raised its outlook on Gol to positive this month, saying it may lift the company’s rating from B3, the sixth-lowest junk rating.

“The company has been doing its homework and they’re on a positive trend,” Carlos Gribel, the head of fixed income at Andbanc Brokerage LLC, said by telephone from Miami.

Yields on Gol’s $300 million of notes due 2020, which have fallen to 8.5 percent from a high of 14.3 percent in September, may decrease 1 percentage point more if results continue to improve, according to Gribel.

‘Different Level’

“The movement of the bonds reflects the improved outlook for company,” Gol Chief Financial Officer Edmar Lopes said by telephone. “It shows we’re on a different level now.”

The airline said its net loss shrank to 174 million reais ($77 million) in the second quarter from 715 million in the same period two years ago. Its revenue rose to 2.4 billion reais, beating analysts’ estimate for 2.2 billion reais. The company carried more passengers on its planes during the World Cup, when analysts were concerned a drop in business travelers would leave more empty seats.

Carlos Legaspy, who oversees about $350 million in emerging-market debt at InSight Securities, said fuel costs are among the reasons he’s shunning Gol’s bonds.

Gol’s costs increased 20 percent in the second quarter from a year ago after a 13 percent jump in fuel prices, a slump in the real and a pick-up in inflation.

“I stay away from the airlines,” Legaspy said. “It’s a confluence of a fairly elastic demand, a high percentage of fixed costs and a really volatile input, which is fuel. All of those things can conspire in a really bad squeeze.”

The Brazilian was little changed today at 2.2601 as of 2:20 p.m. in New York.

Growth Outlook

In an Aug. 7 report, Moody’s said Gol has implemented “significant capacity adjustments” that balanced its revenue amid weaker economic growth in Brazil.

Latin America’s biggest economy will expand 0.79 percent this year, versus 2.5 percent in 2013, according to the median estimate from analysts in a central bank survey released today.

On Aug. 13, Gol reaffirmed its guidance for operational margins between 3 percent and 6 percent. The measure was at 3.7 percent in the first six months this year, more than double the 1.7 percent in the first half of 2013.

“They’re moving along well,” Revisson Bonfim, the head of emerging-market analysis at Sterne Agee & Leach Inc., said in an e-mail. “The bonds are up so much already, but the market continues to trade with a positive bias. Bond performance should follow operational performance.”

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