We keep hearing Brazil's economy is coming back. But many of the country's airlines are not racking up profits. The problem? They make their revenue in local currency, but many of their costs and much of their debt is in U.S. dollars. And the Brazilian currency has been losing significant value against the dollar.
Fuel prices are up, the U.S. dollar is rallying and that means stormy skies for Brazilian airlines.
Gol Linhas Aereas Inteligentes SA is leading Brazil’s Ibovespa index losses month-to-date, with a 21 percent drop so far. The company is also heading for its biggest quarterly drop since its initial public offering in 2004. Gol and Azul SA are down 51 percent and 44 percent, respectively, in the past three months and LATAM Airlines Group SA fell 29 percent.
Oil prices are up 14 percent in New York for the period — the fourth consecutive quarterly advance — and the Bloomberg Dollar Spot surged 6 percent as risks to global oil supply pile up. At the same time, the real lost 14 percent of its value against the dollar. The combination is damaging for the local carriers, which get the bulk of their revenue in local currency while more than half of their expenses, including fuel and aircraft maintenance, are linked to the dollar.
On June 25, Morgan Stanley slashed the price target of Gol American depositary receipts to $7 from $15, noting the high sensitivity of company’s earnings and net income to currency and jet fuel movements.
“We stay equalweight given today’s elevated political uncertainty, the high beta nature of the stock and a potential scenario of further real weakening,” analysts led by Josh Milberg wrote in the report.
About 85 percent of Gol’s gross debt was U.S.-denominated by the end of the first quarter, and revenue is almost entirely in reais. The weaker real, combined with a limited hedging policy, leaves it more exposed to foreign exchange fluctuations than its rivals, said Citigroup Inc. analyst Stephen Trent in a phone interview.
“From an operational perspective, the differences are not as significant but from a balance sheet perspective the differences can be significant,” Trent, who has a neutral rating on the stock, said. “How they funded the right side of the balance sheet might now be having an impact.”
Sao Paulo-based Gol declined to comment on its foreign-exchange exposure and its hedging policy for this story.
Azul, Brazil’s third-largest airline, had 35 percent of its total debt denominated in U.S. dollars by the end of the first quarter, according to its quarterly statement. Its hedging policy is also designed to shield the company from the foreign exchange swings, Chief Executive Officer John Rodgerson said in an interview.
“We have a lot less exposure to the dollar than any of our competitors do,” Rodgerson said in a June 6 interview. “We made the decision to hedge all of our unsecured debt; our competitors haven’t done that. We still have aircraft financed in local currency, the Embraers, and we’ve got U.S. dollar-denominated assets, like our ownership in TAP in Portugal.”
Azul’s lower exposure to foreign exchange risk hasn’t, however, prevented its shares from dropping 20 percent this month, the second-worst performance in the IBX index, behind Gol. Santiago-based Latam Airlines Group SA, the second-largest player in Brazil, fell 13 percent in the month, the second-worst performance in the IPSA Chilean benchmark index.
Latam didn’t immediately return a request for comment.
–With assistance from Ricardo Strulovici Wolfrid and Aline Oyamada.
©2018 Bloomberg L.P.
This article was written by Vinícius Andrade and Fabiola Moura from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to [email protected].
Photo credit: Gol Airlines' stock is suffering as the carrier struggles with higher fuel prices. Pictured is a Gol Boeing 737. Smart Junco / Flickr