Gol Distressed No More as Airline Job Cuts Spur Bond Gain

A year and a half after eliminating an unprecedented 4,000 jobs and cutting flights to stem losses, Gol Linhas Aereas Inteligentes SA is turning into the most lucrative investment in Brazil’s bond market.

The airline’s $925 million of notes have returned 15.9 percent this year, five times the average gain in emerging markets. Gol’s bonds due 2023 exited distressed levels for the first time in nine months as the extra yield investors demand over Treasuries fell below 10 percentage points in February.

Chief Executive Officer Paulo Kakinoff’s decision to cut 20 percent of Gol’s workers and pare hundreds of flights since taking over in July 2012 helped reduce losses by half last year. Brazil’s biggest airline said April 28 that its planes flew at 76.1 percent capacity last quarter, the most since 2006, which helped to offset higher fuel costs.

“They’ve certainly turned a corner,” Roger King, an analyst at CreditSights Inc., said in a telephone interview from New York. “There’s a ways to go, but the new management really changed things for the better. They cut costs, and that’s probably the biggest thing.”

Edmar Lopes, the company’s chief financial officer, said investors are starting to give Gol credit for showing “progress even in a still-challenging scenario.”

‘Daily Work’

“There’s no one-off solution,” he said in a telephone interview from Sao Paulo. “It’s daily work. Investors needed some time to see our reaction is here to stay, and that we’re at a new level of execution.”

The company’s net loss narrowed to 797 million reais ($356 million) in 2013 from a record 1.5 billion reais a year earlier. Earnings before interest, taxes, depreciation, amortization and rent relative to total revenue, or the company’s Ebitdar margin, surged to 17 percent in 2013 from 3.2 percent a year earlier, according to data compiled by Bloomberg.

Gol said April 28 that passenger revenue per available seat kilometer, an industry benchmark, climbed 18 percent in the first quarter from a year earlier because of fuller planes and higher ticket prices. The company is scheduled to report first-quarter earnings May 14.

‘Reassure Investors’

“You’re starting to get to the levels most global low-cost airlines operate at, which should reassure investors,” George Ferguson, a senior airline analyst at Bloomberg Industries in Skillman, New Jersey, said in a telephone interview. “The indicators they’ve given appear to be going in the right direction from a business standpoint. Now you really want to see where costs are going. You want to see that labor costs don’t come up and bite them again.”

Lower fixed costs allowed Gol to keep expenses excluding fuel relative to available seat kilometers flown from rising last year despite an 13 percent drop in the real.

The real gained 0.2 percent today to 2.2305 per dollar as of 4:57 p.m. in Sao Paulo.

Gol’s bonds, rated six levels below investment grade at B-by Standard & Poor’s and Fitch Ratings, are the second-best-performing among all emerging-market company bonds this year, trailing only Mexican telecommunications provider Axtel SAB, data compiled by Bloomberg show. The company’s shares traded in Sao Paulo have surged 36 percent this year, the best performer among 73 stocks on Brazil’s benchmark Ibovespa gauge.

Growth Outlook

Revisson Bonfim, the head of global emerging-markets analysis at Sterne, Agee & Leach, said Gol will face increasing difficulty sustaining cost reductions and boosting revenue as economic growth slows in Brazil.

Latin America’s biggest economy will expand 1.65 percent this year, down from 2.3 percent growth in 2013, according to a central bank survey of about 100 economists published April 28.

“The market is a bit too positive on Gol for what I’m seeing for the company and the sector,” Bonfim said in a telephone interview from New York. “It got a bit carried away with the company’s results. We’d have to see an increase in load factors. They have been improving a lot, but we want to continue to see that, especially this year, with growth slowing.”

Gol flew 36 percent of domestic passengers in the first quarter, second only to TAM Linhas Aereas SA, the Brazilian unit of Santiago-based Latam Airlines Group SA. Gol is also seeking to boost both its international market share and receivables in dollars to hedge against the volatility of the real. It flew 15.5 percent of all Brazilian transnational travelers in February, up from 12.3 percent a year earlier, according to data from the National Agency of Civil Aviation.

Gol had a record 3 billion reais of cash at the end of 2013, equal to 34 percent of annual net revenue. The company cut its ratio of adjusted gross debt relative to earnings to 6.9 times from 37.6 times at the end of 2012.

“Financial performance has been improving,” Bloomberg Industries’s Ferguson said. “We’d like to see load factors rise above 80 percent to see it perform where other carriers perform at, which would put them in a much more solid position.”

Before it's here, it's on the Bloomberg Terminal.