Skift Take

Gol's timing has been wrong on everything for the past few years. Will it's current moves break this chain of errors?

Gol Linhas Aereas Inteligentes SA’s borrowing costs are plunging by the most in emerging markets after its decision to eliminate 4,000 jobs helped Brazil’s largest airline rebound from unprecedented losses.

Yields on Gol’s $221 million of bonds due 2017 plunged 4.45 percentage points to 8.70 percent in the past month as the carrier had its first quarterly operating profit in a year, according to data compiled by Bloomberg. The decline in yields, which doubled in a month to a high of 14.72 percent in April, is the biggest among 1,422 securities tracked by Bank of America Corp.’s Emerging Markets Corporate Plus Index over that span.

Gol is regaining investors’ confidence after new Chief Executive Officer Paulo Kakinoff helped cut its workforce by 20 percent in the past year and reduce domestic flights to stem operating losses that swelled to a record 906 million reais ($443 million) in 2012 amid a slowdown in Latin America’s biggest economy. Gol trimmed operating expenses as a percentage of sales to 97.3 percent last quarter, from 111 percent last year, which was the worst of any airline in the world, data compiled by Bloomberg show.

“Everything seems to be pointing in the right direction,” Revisson Bonfim, an analyst at Espirito Santo Investment Bank in New York, said in a telephone interview. “The fact the country is growing so little makes it real difficult to turn around unless they cut a lot of capacity out. I’m certainly more optimistic about it, but I want to make sure we see a couple quarters of good performance and see them continue to trim capacity.”

‘Our homework’

The rally in Gol’s bonds shows investors understand the company’s strategy to cut capacity and costs, which produced the best result in two years, according to Chief Financial Officer Edmar Prado Lopes Neto.

“We’re doing our homework, and the margin we delivered in the first quarter is a sign of that,” Lopes Neto said by phone. “We’re adjusting the size of the company to its new capacity. We cut flights, and there’s no sense in doing that without cutting the structure.”

Operating income advanced to 101 million reais in the first three months of the year as Gol’s margin rose to 4.9 percent, above its own forecasts of 1 percent to 3 percent. The carrier had the worst margin among airlines globally tracked by Bloomberg in the fourth quarter, losing 16.9 cents for every dollar of revenue. It cut flights in Brazil by 16 percent.

‘Much better’

Gol’s earnings before interest, taxes, depreciation, amortization and rent surged to 367 million reais, cutting its ratio of net debt to Ebitdar to 17.8 times from 25.7 times three months earlier.

The company plans to use proceeds from the 1.1 billion real initial public offering of its Smiles SA frequent-flier unit last month to buy back debt and further reduce net leverage.

The cost cuts helped Gol narrow its first-quarter loss by 83 percent compared with the previous three months, to 75.3 million reais.

“This year will be much better than the last,” Bianca Faiwichow, an equity analyst at GBM Brasil Dtvm., said by telephone from Sao Paulo. “Everyone expected some improvement in results, but it was still positive. It’s still below ideal, but compared to what they reported last year, it was very good, especially considering fuel prices are still high, and the dollar is still pressuring.”

International hub

Fuel prices surged 14 percent while airport and connection fees jumped 10 percent from a year earlier. The real’s 9.6 percent depreciation against the dollar over the past year also increased the cost of aircraft leases and servicing foreign- currency debt, which makes up 73 percent of obligations. Gol earns about 93 percent of revenue in reais, Lopes Neto said.

The airline plans to double its share of foreign-currency revenue in five years as it boosts routes outside Brazil. Gol plans to open an international hub in Santo Domingo, Dominican Republic, with service to North and Central America starting in the second half, Kakinoff said May 15 in an interview at Bloomberg headquarters in Sao Paulo.

Gol filled only 67.3 percent of available seats in the first quarter, the second-lowest among airlines globally that have reported first-quarter results and less than the 67.9 percent of its seats a year earlier.

On average, carriers filled 79.6 percent of available seats last quarter, data compiled by Bloomberg show.

‘Negative view’

Passenger traffic has fallen 1.3 percent this year through March after Brazil’s economic expansion slowed to 0.9 percent last year, the worst since 2009.

Paul Marty, a credit analyst at Spread Research Ltd. in Lyon, France, said in a May 15 note to clients that investors should stay away from Gol’s bonds because of the company’s high level of indebtedness.

“We have a negative view on Gol due to the very high leverage and the lack of compelling improvement prospects,” he wrote. “Leverage is likely to remain permanently at elevated levels.”

Gol’s borrowing costs surged to the highest since October 2011 last month after Fitch Ratings lowered the airline’s credit grade by two levels to B-, or six below investment grade, with a negative outlook. The rating company said the cut reflected Gol’s deteriorating credit profile and expectations for limited recovery in cash flow generation this year.

The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries was little changed at 191 basis points, or 1.91 percentage points, at 6:55 a.m. in New York, according to JPMorgan Chase & Co. indexes.

Default swaps

The cost of protecting Brazilian bonds against default for five years was little changed at 132 basis points, according to data compiled by Bloomberg. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

The real rose 0.3 percent to 2.0440 per U.S. dollar yesterday. Yields on interest-rate futures contracts due in January declined two basis points to 8.11 percent.

Gol shares have plunged 17 percent this year.

The second quarter is historically the weakest for Brazilian airlines and the low occupancy rates don’t change Gol’s planning, Lopes Neto said. The company will benefit from more cuts to domestic flights, according to GBM’s Faiwichow.

“They’re going for improving yields rather than load factors,” she said. “Capacity reduction is the right path, because that helps you both in pricing and in filling up the planes.”

With assistance from Christiana Sciaudone in Sao Paulo. Editors: Lester Pimentel, Robert Jameson. To contact the reporters on this story: Boris Korby in New York at [email protected]; Julia Leite in New York at [email protected]. To contact the editors responsible for this story: David Papadopoulos at pap[email protected]; Michael Tsang at [email protected]. 

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Tags: earnings, gol, labor

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