Gol Operations Gains Offset by Declining Real: Corporate Brazil
The real’s 12 percent drop against the U.S. currency in the past year is squeezing Brazil’s second-largest carrier because 77 percent of its debt is denominated in dollars, while Gol gets most of its revenue from within the country, data compiled by Bloomberg show. Jet fuel, Gol’s biggest expense, is priced in dollars as well.
Gol’s struggles are repeated across the Brazilian industry because of the real’s slump and a drop in traffic amid a slowing economy. Latam Airlines Group SA (LAN) and Azul Linhas Aereas Brasileiras SA also have seen operating expenses more than double, and analysts surveyed by Bloomberg forecast Gol will extend its loss streak when it reports earnings later today.
“The problem is Gol is hyper-indebted, and the dollar hurts them,” said Bianca Faiwichow, an analyst at GBM Brasil Dtvm in Sao Paulo. “I wouldn’t put my hand in the fire for any airline, for better or worse, because it’s really hard to know. They depend a lot on fuel.”
Representatives of Gol declined via e-mail to comment on the company’s performance ahead of today’s results. The adjusted net loss for the quarter is projected to narrow to 142.7 million reais ($61.2 million) from 309.4 million reais a year earlier, according to the average of analysts’ estimates compiled by Bloomberg.
Chief Executive Officer Paulo Sergio Kakinoff has been cutting flights to reduce costs and boost revenue from each seat flown a kilometer, an industry benchmark. Sao Paulo-based Gol has posted monthly gains of as much as 24 percent this year on that basis, compared with a 2012 high of 7 percent, regulatory filings show.
Gol’s challenge is that those increases should begin to subside this month because of tougher year-earlier comparisons, according to Victor Mizusaki, an equity analyst at UBS AG in Sao Paulo. His buy rating is the equivalent of Faiwichow’s market outperform.
The stock remains under pressure, falling 23 percent this year, while the benchmark Ibovespa index was down 15 percent. The shares slid 4.3 percent to 9.97 reais today in Sao Paulo, its sixth straight day of declines. The real was little changed at 2.3321 per dollar.
Gol is trying to return to profit with jet fuel accounting for 41 percent of operating expenses in the second quarter, the most among 16 carriers in the Americas with at least 100 planes, according to data compiled by Bloomberg.
Jet kerosene has increased more than 40 percent since November 2009, while the drop in Brazil’s currency is the biggest among major Latin American dollar counterparts this year.
As costs rise, industrywide demand is slowing in Brazil. The number of domestic passengers rose 6.8 percent after annual gains of 16 percent in 2011 and 25 percent in 2010, according to the Brazilian aviation regulator, known as Anac.
About 77 percent of Gol’s 5.6 billion reais in debt was in U.S. dollars at the end of the second quarter compared with 70 percent a year earlier, according to filings. To boost sales in foreign currency, Gol began partnerships to share booking codes with Delta Air Lines Inc. (DAL) and Alitalia SpA and is in talks with Air France-KLM and Deutsche Lufthansa AG for similar accords.
Gol has projected a 2013 margin of earnings before interest and taxes of 1 percent to 3 percent and wants to reach a “double-digit” tally, Chief Financial Officer Edmar Lopes said on a conference call last month, without specifying a timeframe.
“We will not be able to get there in 2014,” Lopes said. “But we will for sure be in better shape, we will see some improvements down the road. How much is still unclear, because it depends on macro environment, it depends on FX, it depends on supply, it depends on competition.”
The market is “confident that Gol will be able to meet its ebit margin guidance of 1 to 3 percent for 2013,” said UBS’s Mizusaki. “Next year, with this capacity discipline in the sector, if there is an improvement in the economy, flights will be fuller and ebit margins can expand.”
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