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Gol earnings report a glimpse of dire times for Brazilian airlines

. May 04, 2020
Gol earnings report a glimpse of dire times for Brazilian airlines Empty airport Brasília. Photo: Antonio Salaverry/Shutterstock

Shares of Gol Airlines crashed by 11 percent at the opening of the market on Monday, after the company released grim projections on its Q1 earnings report that are set to be repeated across the entire commercial aviation sector. Though Brazil’s largest airline still managed to profit BRL 173 million in the first three months of the year, it forecasts a 70-percent drop in revenue for Q2 as a direct result of the Covid-19 pandemic — which has grounded nearly all planes in the country. Gol expects Brazil’s GDP to plunge 5 percent this year.

Looking closer at the earnings report’s details, Gol’s first-quarter results excluded non-recurring expenses which added up to

BRL 2.26 billion, including negative foreign exchange fluctuations of BRL 2.5 billion, one-off revenues of BRL 87.5 million and BRL 17.9 million in expenses related to exchangeable debts and capped call options.</p> <p>The airline says it managed to slash 2020 costs by roughly BRL 2.4 billion through cutting board members&#8217; salaries, reducing employee working hours and suspending job contracts, halting investments, and delaying payments to suppliers and taxes. As a result, Gol expects to reduce its daily losses from roughly BRL 22 million in March to &#8220;just&#8221; BRL 9 million in June, and BRL 7 million in the second half of the year.</p> <p>The company declined to make forecasts for the rest of the year due to the uncertainty caused by the Covid-19 outbreak, but it reckons it has enough cash flow to hold on until the end of the year, “assuming there are no improvements in current conditions.” As of March 31, Gol had BRL 4.2 billion in cash and it may also resort to BRL 3 billion in loans with the Brazilian development bank BNDES.</p> <p>“Gol will remain focused on cutting costs, protecting jobs, working alongside the federal government to provide domestic and rescue flights, and preparing itself to get back to normal,” the company announced, on its earnings report. “The paralysis of the Brazilian economy due to the pandemic will force the company to slash available seat kilometers (ASKs) in the second half of 2020, diminishing its fleet and network of routes.”</p> <div class="flourish-embed flourish-chart" data-src="visualisation/2242815" data-url="https://flo.uri.sh/visualisation/2242815/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <h2>Coronavirus hits airlines harder than any other sector</h2> <p>Gol&#8217;s earnings report sheds light on a grim scenario for airlines in Brazil. The immediate reaction had a spillover effect on the shares of competitor Azul Airlines, which also dropped by 12.8 percent. The slide extended the companies’ losses to 70 and 74 percent this year, respectively. Azul is expected to disclose its earnings on May 14.</p> <p>Around the world, airlines are turning to government aid to weather the crisis. Lufthansa, Germany’s largest airline, is <a href="https://br.reuters.com/article/topNews/idBRKBN22F0RG-OBRTP">reportedly resorting</a> to a EUR 10 billion bailout offer that would give the German government a 25-percent share in the group, which also owns Swiss and Austrian Airlines. Gol itself has thanked the <a href="https://oglobo.globo.com/economia/governo-anuncia-pacote-de-socorro-empresas-aereas-24312851">Brazilian authorities for their cooperation</a> — as the federal government allowed several of the mechanisms that meant the airline could cut costs — but there has been no mention of a similar bailout deal for Brazilian firms.</p> <p>Meanwhile, the Brazilian press has picked up on <a href="https://economia.uol.com.br/noticias/reuters/2020/04/29/exclusivo-montadoras-e-bancos-chegam-a-impasse-sobre-socorro-a-setor-automotivo-dizem-fontes.htm">a special aid package</a> negotiated with the BNDES, which would involve transferring BRL 10 billion to the sector in return for equity interest. Planemaker Embraer may the first to receive this aid after American manufacturer Boeing <a href="https://brazilian.report/newsletters/brazil-weekly/2020/04/27/amid-pandemic-bolsonaro-creates-pandemonium-brazil/">canceled its purchase</a> of the Brazilian firm&#8217;s commercial jet division. <a href="https://valor.globo.com/empresas/noticia/2020/05/04/depois-de-26-anos-embraer-deve-voltar-a-ter-aporte-estatal.ghtml">According to</a> newspaper <em>Valor Econômico</em>, the government is not expected to retake control of the once-state-owned company, but the planned USD 1-billion cash inflow from the BNDES would dilute the power of current shareholders, leading to a 10-percent plunge in stock value.</p> <p>On the other hand, Gol has stressed that its controlling shareholder, “which has a 60 percent stake, has not sold its shares, nor does it intend to make a capital contribution”. According to the company’s website, the Volluto fund — owned by billionaire Constantino family — owns 100 percent of the ordinary shares of Gol’s holding company.</p> <p>The market is keeping a close eye on these movements, especially after the founder of Azul Airlines, David Neeleman, sold 9.3 million of his preferred shares to pay off a personal loan, forcing the company <a href="https://www.seudinheiro.com/2020/empresas/azul-neeleman-vende-acoes/">to clarify the transaction</a>. While the move initially alarmed shareholders, Azul explained that the stocks were given as a warranty for a personal loan and that Mr. Neeleman did not sell his voting shares, maintaining his control of the company. Airlines have a special equity regime in Brazil, where only preferred shares — which offer more dividends but come with no voting rights — are offered to the general public.</p> <p>Among the investors that remain wary of airlines’ future is billionaire Warren Buffet. His conglomerate Berkshire Hathaway has sold its entire stake in Delta, Southwest, United, and American Airlines. “The airline business — and I may be wrong and I hope I&#8217;m wrong — I think it has changed in a very major way,” he said during a virtual investors meeting.

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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