Gol Shifts to Add Routes Abroad With Cuts Reaching Limit

Gol Linhas Aereas Inteligentes SA, Brazil’s biggest airline, is counting on routes outside the country to boost revenue as it exhausts possible cost savings after eliminating jobs, flights and planes.

Additional service will start in 2013’s second half between Santo Domingo in the Dominican Republic and North America, Central America and the Caribbean as Gol opens an international hub in the nation’s capital, Chief Executive Officer Paulo Sergio Kakinoff said yesterday.

“We are very close to our limit in cost cutting,” Kakinoff said in an interview at Bloomberg’s office in Sao Paulo. Flying abroad will help double Gol’s share of foreign-currency revenue, now at about 8 percent, in five years, creating a “natural hedge” against exchange-rate swings that balloon dollar debt, leasing and fuel bills, he said.

Kakinoff, 38, the former Brazil head of Audi AG, is undoing a growth-at-any-price strategy that bulked up Sao Paulo-based Gol with mergers and new routes before a 71 percent stock-price collapse in the five years through 2012. Since becoming CEO in July, he has moved to dump all the jets from a 2011 acquisition and sold part of the Smiles frequent-flier plan in an initial public offering raising 1.1 billion reais ($544 million).

Gol has jumped 20 percent since June 18, the day Kakinoff’s hiring was announced, while the benchmark Ibovespa index fell 2.5 percent. The shares slid 3.6 percent to 11.37 reais at the close today in Sao Paulo.

Foreign Currency

Building out the Santo Domingo base will let travelers in the U.S. and elsewhere fly to the Dominican Republic on a new Gol unit, advancing the goal of generating revenue in currency beyond the real, Kakinoff said. Such sales are important because jet fuel, Gol’s biggest expense, is priced in dollars.

With only 12 percent of Gol’s seating capacity outside Brazil, more international flights also would cushion the blow of the nation’s slide in passenger traffic, which dropped 1.3 percent this year through March. Economic growth tapered off to a rate of 0.9 percent in 2012 after a 2.7 percent advance in 2011.

Gol is in talks with three carriers in Europe and two in Asia for a so-called code-sharing agreement, enabling passengers to seamlessly book an itinerary across multiple airlines, said Kakinoff, who declined to identify the prospective partners.

Delta Alliance

Such an accord would be similar to one with Delta Air Lines Inc. that takes full effect in July, Kakinoff said. As part of that deal, Delta bought more than 8 million shares, giving it a 6.15 percent of Gol’s outstanding stock. While a deal with European or Asian companies “wouldn’t necessarily” include a stake sale, it’s part of the talks, Kakinoff said.

“We can add passengers with no additional costs,” Kakinoff said. “We are being super conservative and we are considering that the domestic scenario will stay the way it is. That’s what going to guarantee the survival of the company.”

While Gol’s rally suggests that investors are betting on a Kakinoff-led turnaround, the carrier still hasn’t returned to profit after net losses in seven of the past eight quarters. Of seven analysts surveyed by Bloomberg, four list the shares as a buy, two say hold and one rates Gol as sell.

Fuel and the depreciation of the real continue to weigh on results, said Rodolfo Amstalden, an analyst at consultant Empiricus Research who doesn’t publish recommendations.

Not Enough?

“Cost cuts and the possibility of expanding international operation and regional routes around Brazil may help to improve revenue, but will not be enough to put the company back on the profitability track,” Amstalden said by telephone from Sao Paulo. “How can I recommend that investors buy shares of a company that says it’s focusing its efforts on survival?”

Gol’s net debt ballooned to as much as 64 times earnings before interest, taxes, depreciation and amortization in 2012’s third quarter from a ratio of 1.8 at the end of 2010 after costs increased and Brazil’s real plunged 11 percent, boosting the value of dollar liabilities. Gol said about 73 percent of its debt is denominated in a foreign currency.

The airline did post a first-quarter operating profit of 101 million reais on May 13, a feat that it had failed to accomplish since the same three-month period -- a span that includes Brazilian summer travel -- a year earlier.

Gol’s success in curbing expenses surprised the market, said Matheus Mufarej, an analyst at Victoire Brasil Investimentos, which owns 77,000 shares of Gol, according to data compiled by Bloomberg. It has 2.1 billion reais under management.

Cost Surprise

“Costs were expected to have grown,” Mufarej said. Fuel accounted for 46 percent of Gol’s first-quarter operating expense.

Kakinoff has been trimming spending. First-quarter seating capacity was chopped by 15.7 percent and will fall by 5 percent to 8 percent for all of 2013, according to Gol, and the workforce has been shrunk to 16,200 from a peak of 20,525 in 2011 before the CEO’s arrival. In November, Gol said it was returning 20 older-model Boeing Co. 737 jets to lessors while shutting the newly acquired Webjet unit.

In targeting Santo Domingo as a place to reach into the U.S. and other markets and boost sales in foreign currency such as the dollar, Gol is taking a “logical” step, said Stephen Trent, a Citigroup Inc. analyst in New York.

“They are tapping into high-density long-haul traffic where there’s been a low supply of Brazil-originating flights to the U.S.,” he said. “These guys really are in a good position to return to more normal growth and profitability.”

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