Gol Linhas Aereas Inteligentes SA’s turnaround plan is faltering as the airline flies the emptiest jets in Brazil.
Even
after paring its schedule, Gol filled only 64.9 percent of available
domestic seats in February, a peak summer travel period because of
Carnival. Latam Airlines Group SA’s Tam unit, Sao Paulo-based
Gol’s biggest rival in Brazil, had a load factor of 75.1 percent.
More
cuts may be coming as Gol confronts losses that sent the shares to a
3.6 percent 12-month drop through yesterday, the third-worst among 19
Americas peers, based on data compiled by Bloomberg. Travel demand waned
when Brazil’s economy slowed in 2012, and new entrants such as Panama’s
Avianca Taca Holding SA are expanding in Latin America’s
largest airline market.
“Results should improve, but we still
assume losses in 2013,” said Duane Pfennigwerth, an analyst at Evercore
Partners Inc. in New York. “They’ve been active in reducing capacity in
the domestic market, which we view positively. However, we have not yet
seen these cuts drive profit improvement.”
At minus 28 percent,
Gol’s one-year return on equity is the lowest among 19 peers in the
Americas, according to data compiled by Bloomberg. Gol is poised to post
a sixth loss in seven quarters on March 25, according to analysts
surveyed by Bloomberg.
Analysts’ Ratings
The shares
fell 0.1 percent to 14.29 reais at the close in Sao Paulo. While the
February traffic announced yesterday probably will extend Gol’s January
distinction of having the industry’s least-full planes once all airlines
report, the results suggested that ticket prices were rising.
Yield, or the average fare for each seat flown a kilometer, rose 17 percent to a range of 23 to 23.5 centavos, Gol said.
Gol
shrank 2012 domestic capacity by 5.4 percent and has said seating would
fall as much as 8 percent in 2013’s first half. Chief Executive Officer
Paulo Kakinoff also has returned older jets to lessors and chopped jobs
since succeeding founder Constantino de Oliveira Jr., who is now
chairman, in July.
Marcus de Barros Pinto, a spokesman, declined to discuss Gol’s strategy ahead of the earnings release.
Market Share
Competitors
such as Panama City-based Avianca are nibbling at Gol’s standing as No.
2 in Brazil by domestic fliers after Tam, the local carrier acquired
last year by Santiago-based Lan Airlines SA. Tam’s January market share
of 42.5 percent slid from 43.4 percent two years earlier, while Gol’s
fell to 34.3 percent from 37.3 percent. Avianca’s share rose to 6.3
percent from 2.5 percent, according to the Brazilian aviation regulator,
known as Anac.
“Avianca is taking market share from a lot of
people,” said Pedro Galdi, chief strategist at Sao Paulo-based brokerage
SLW Corretora, who rates Gol as hold. “Those who can fly Gol or Avianca
will prefer Avianca” after Gol cut too many flights and amenities such
as onboard snacks.
Paring capacity is a common response to
bolster profit measures such as unit revenue, or what an airline makes
for each seat flown a kilometer.
Unit revenue “has not yet risen
sufficiently to get the company back to positive margins,” said
Pfennigwerth, who has Gol as equal weight. Third-quarter passenger
revenue for each available seat-kilometer rose 3.4 percent from a year
earlier, while costs on that basis climbed 9.4 percent, according to
Gol, which reported a net loss of 309 million reais ($157 million).
Fuel Spending
Spending
on fuel accounted for 43 percent of sales based on its most-recent
quarterly filing, the fifth-highest total in the Americas, according to
data compiled by Bloomberg.
Gol competes in an air-travel market
that’s cooling along with Brazil’s economy, whose 0.9 percent expansion
in 2012 was one-third of the year-earlier pace. The nation’s domestic
passengers increased 6.8 percent in 2012 after 2011’s 16 percent surge,
according to Brazil’s aviation regulator.
One bright spot is the
pending spinoff of Gol’s Smiles frequent-flier program, which will
provide a cash injection, said Matheus Mufarej, a research analyst at
Victoire Brasil Investimentos, which holds an undisclosed stake.
Gol
surged the most in 16 months on Dec. 26 after signaling it would hold
an initial public offering for Smiles. Tam’s Multiplus SA loyalty plan
has almost doubled since its 2010 IPO, and now expects to sell more
stock to raise 800 million reais.
“The benefit of the IPO is
something Gol needs,” Mufarej said. Of nine analysts in a Bloomberg
survey, six recommend buying the stock, two rate it as a hold and one
says sell.
Finding Savings
Kakinoff’s cost savings
include a November plan to dismiss 850 workers from the former Webjet
Linhas Aereas SA, which then- CEO Oliveira agreed to buy in 2011. Gol’s
third-quarter workforce of 18,356 was the smallest since the first three
months of 2010, according to data compiled by Bloomberg.
Capacity
reductions and the Webjet firings give Victoire a “positive vision” of
Gol’s prospects, Mufarej said in an interview in Sao Paulo.
Kakinoff
also is having lessors take back 20 aging Boeing Co. (BA) 737-300 jets,
a model built from 1984 to 1999, in the first half. Gol had an active
fleet at the end of the third quarter of 127 737-700s and 737-800s, in
addition to the -300s, according to the airline’s website.
“This
year, we expect a smoother scenario,” Mufarej said. “Gol is doing
everything it can to control costs. We believe in their strategy. They
can operate the company well.”
Margin Gain?
Gol’s
margin on earnings before interest, taxes, depreciation and amortization
as a share of revenue probably ended 2012 at 2.3 percent, based on
analysts’ estimates compiled by Bloomberg. It was 17.6 percent in 2006.
“It can get back to 15 percent,” Mufarej said. “The question is when.”
Along
with capacity and job cuts, Gol should be careful with aircraft
management, Evercore’s Pfennigwerth said. Gol said last year it was
buying 60 of Boeing’s new 737 Max jets, which have a starting list price
of $100.5 million. Deliveries would start in 2018.
“There is
also a bit of a disconnect, in our view, between the carrier’s presently
low returns, capacity cutting and continued investment in new
aircraft,” he said. “It is not entirely clear to us why the company
would continue to invest in new aircraft given the currently depressed
levels of profitability.”
Source: http://www.businessweek.com
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