Worst Currency Decline Imperils Gol’s Turnaround Strategy

Gol Linhas Aereas Inteligentes SA, Brazil’s largest airline, is losing the cost savings from flight and job cuts as the real tumbles, erasing a rally that the company triggered with its turnaround effort in the past year.

The real’s 7 percent plunge in the month ended June 28, the worst performance among the 16 most-traded currencies against the dollar, is swelling Gol’s foreign debt and fuel expense. Gol’s 39 percent free fall since the start of April is deeper than all 31 carriers in the Bloomberg World Airlines Index.

Brazil’s slumping currency and weak economy are hampering Chief Executive Officer Paulo Kakinoff’s bid to return to profit as he unwinds Gol’s growth-at-any-price approach. The airline posted losses in seven of the past eight quarters, and analysts surveyed by Bloomberg project a third straight annual deficit this year.

“Gol has been cutting capacity in the domestic market and making difficult cost-cutting decisions,” Duane Pfennigwerth, an Evercore Partners Inc. analyst in New York, said by e-mail. “However, the company needs a more favorable currency scenario. Specifically, a weaker real increases their dollar-based expenses and dollar-based debt in local currency. Current management inherited this dollar-based liability mismatch.”

Kakinoff Rally

The stock surged 69 percent after Kakinoff became CEO on July 2 through Jan. 29 as he had lessors take back planes from the 2011 purchase of discount carrier Webjet, agreed to sell part of the Smiles frequent-flier plan and began what is now a 20 percent workforce cut since 2012’s first quarter, to 16,470.

Gol has surrendered all those gains, with the shares down 19 percent during his tenure to 7.17 reais on June 28. That left Sao Paulo-based Gol with a market value of about 1.99 billion reais ($896 million), less than the list price for nine of the Boeing Co. 737 Max jets ordered last year. Gol fell 1.3 percent to 7.08 reais, the lowest closing price in a week.

“We’re in a difficult situation,” Alberto Fajerman, vice president of government relations at Gol, said in an interview in Sao Paulo. “The market doesn’t like the airline sector because of the currency increases, the fuel costs.”

For Gol and other carriers in Brazil, the weaker real makes everything from fuel to airline parts and plane leases more expensive. About 60 percent of Gol’s expenses are dominated in dollars, Fajerman said. While some costs are hedged, he declined to specify how much.

Industry Concern

“The currency is really worrying the sector,” said Victor Celestino, director of institutional relations at Azul Linhas Aereas Brasileiras, the Brazilian airline controlled by JetBlue Airways Corp. founder David Neeleman. Celestino made the comments at an industry event in Sao Paulo last week, as Gol completed a first-half slide that left the shares down 44 percent for 2013, twice as much as the benchmark Ibovespa index.

About 70 percent of Gol’s 5.3 billion reais in debt is based in dollars, while 93 percent of its 2012 revenue came from sales in Brazil, according to data compiled by Bloomberg. That dependence on its home market hurts with consumer confidence falling to a three-year low in May.

While Kakinoff said in May that Gol was nearing the limits of its ability to keep cutting expenses, he signaled last week that he’s willing to keep paring operations to stem losses. Gol said its 2013 pullback in seating capacity would be 9 percent, two percentage points deeper than forecast.

‘Responding Constructively’

“The industry is responding constructively by rationalizing capacity and pricing for profitability,” Goldman Sachs Group Inc. analysts led by Tom Kim said in a June 28 report. Their neutral rating on Gol’s Brazil shares is equivalent to the equalweight on the American depositary receipts from Evercore’s Pfennigwerth.

Gol’s revenue for each seat flown a kilometer, an industry benchmark, rose 11 percent in May from a year earlier, according to a June 17 filing. Yield, or the average fare per kilometer, also was up 11 percent, suggesting that Gol was gaining power to charge more for tickets.

The airline’s challenge is finding more travelers. Traffic, or the number of kilometers flown by paying passengers, fell 2.7 percent in May. Even with the pullback in seats, Gol’s jets flew only 66 percent full, among the worst rates in the Americas.

Goldman Sachs also cut its estimate for earnings before interest, taxes, depreciation, amortization and rent -- known as Ebitdar -- for 2013 and 2014 as the real boosts costs and Brazil’s street protests curb travel.

Of the 11 analysts who rate Gol’s shares, four say buy and six recommend holding while one says sell, data compiled by Bloomberg show. That’s down from six buys, three hold ratings and one sell at the start of April, before the real’s tumble.

“When the dollar goes up, our costs automatically go up,” Gol’s Fajerman said. “We have absolutely no way to manage this.”

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