Airlines’ Highest Fuel Expense Boosts Gol Currency Risk

Gol Linhas Aereas Inteligentes SA is spending more on jet fuel than any other airline its size in the Americas, spurring analysts to predict that Brazil’s tumbling currency will squelch a rebound in the stock.

Fuel accounted for 41 percent of second-quarter operating expenses, the most among 16 carriers in the region with at least 100 planes, data compiled by Bloomberg show. Air Canada’s 29 percent was the least among peer airlines, and Latam Airlines SA, Latin America’s biggest carrier, was at 34 percent.

Gol is being pinched by a real falling the most in the past three months among major currencies against the dollar, the basis for fuel pricing. While Gol rose 16 percent through yesterday from Aug. 13 after a quarterly loss, analysts have cut their 12-month price forecasts by 36 percent in the past three months and 2014 per-share earnings estimates by 57 percent. The shares dropped 2.2 percent at 11:26 a.m. in Sao Paulo.

“The currency is now, by far, the main problem for Gol,” Luis Gustavo Pereira, head strategist at Futura Corretora brokerage, said in a phone interview from Sao Paulo. “It was already struggling to boost profitability before the currency plunge, with sales declining. Things are even worse now.”

The Sao Paulo-based carrier is pushing to increase revenue in dollar terms by adding international routes and expanding agreements with airlines to put their booking codes on each other’s flights. Current partners include Delta Air Lines Inc., which owns a 2.8 percent stake in Gol.

Quarterly Losses

Gol reported losses for the last six quarters even as it announced in June flight cuts of 9 percent, up from a projected 7 percent for 2013, and reduced its workforce to the lowest level since 2008.

A spokesman for Gol declined to comment on how the real and fuel bills are affecting the business. Chief Executive Officer Paulo Kakinoff told reporters in Sao Paulo on Aug. 22 that some routes may no longer be viable because of increased costs from the real’s depreciation. Gol also may cut even more capacity because of the currency swings, Kakinoff said.

“Each route has a different cost structure, and the dollar has an impact on the operational margins of each in distinct dimensions,” Kakinoff said.

Gol’s recent rally began after it said a gauge of airline operating costs excluding fuel would be lower in 2013 than previously forecast. That helped pare its year-to-date decline to 33 percent, more than twice the slide for the benchmark Ibovespa index.

Currency Outlook

At the same time, Gol is reducing its estimates for the real, saying in an Aug. 12 regulatory filing that the currency would trade in 2013 at an average range of 2.1 to 2.2 reais per dollar, up from a range of 2.08 to 2.18. The real gained 0.2 percent to 2.3543 per dollar today.

“Over the past few weeks, we have witnessed increasing concerns with the sustainability of the industry” in Brazil given the currency plunge, JPMorgan Chase & Co. analysts including Fernando Abdalla wrote in an Aug. 27 research note. “It’s all about the exchange rate” for Gol, wrote the analysts, who rate the stock the equivalent of hold.

Jet fuel for immediate delivery in New York Harbor closed 5.9 percent lower yesterday than a year earlier, at $3.12 a gallon.

Even with the second-quarter loss, Gol’s hedging contracts helped bolster results. Those operations produced a net gain of 43.3 million reais ($18.4 million), according to an Aug. 20 regulatory filing, with 20.9 million reais in losses from fuel hedging offset by gains of 49.1 million reais in foreign-currency hedges and 15.1 million reais from interest-rate swaps.

Weakening Real

Brazil’s real has dropped 9.9 percent in the three months ended yesterday, close to its weakest level since 2009, even after the central bank announced a plan on Aug. 22 to shore up the currency by auctioning $1 billion of dollar loans each Friday and offering $500 million of currency swaps Monday through Thursday for the rest of the year.

“More critical than the depreciation of the real is the volatility itself, which makes it hard to plan long-term,” Kakinoff said. “We don’t know where it will stabilize and what impact that will have. The appreciation of the dollar has had an intense effect on our cost structure, and today’s economy means we can’t pass prices on.”

While fuel costs remain a concern as the real slumps, Gol could offset higher expenses by continuing to shrink operations, said Bianca Faiwichow, an analyst at GBM Brasil Dtvm who rates the company buy, along with four other analysts surveyed by Bloomberg. Five say hold and two say sell.

More Cuts

“If fuel prices go up more, they can cut even more capacity,” Faiwichow said in a telephone interview from Sao Paulo. “It’s better to have more flights than less, but it took a while for Gol to realize that those flights need to be profitable. Now, Gol doesn’t have a problem reducing capacity where needed.”

The retrenchment helped Gol post an 18 percent increase in July in passenger revenue from each seat flown a kilometer, an industry benchmark, according to an Aug. 19 regulatory filing.

Pedro Galdi, head strategist at Sao Paulo-based brokerage SLW Corretora, said Gol can’t count on help from a buyer for all or part of itself. Brazilian law prohibits a foreign owner from holding more than a 20 percent stake, though newspaper O Estado de S. Paulo reported Aug. 30 that the government was considering raising the ceiling to at least 49 percent.

No Buyout

“A stake sale is something that can’t be ruled out, as Gol needs something to improve its capital structure as soon as possible, but we can’t count on that happening in the short term,” Galdi said. “And I don’t see any Brazilian airline interested in a deal like this one.”

Gol’s high gross debt level of 5.6 billion reais weighs on profitability, said Galdi, who rates the stock as hold. Total debt is 1,549 times earnings before interest, taxes, depreciation and amortization, the highest ratio in the industry, data from Bloomberg show.

“It’s complicated when a company has so much debt, it ends up eating into its profits,” Galdi said in a telephone interview. “The cost of aviation fuel is a big problem, and when on top of that you have a high level of indebtedness, it makes it very hard to be optimistic about the company.”

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