Gol remains bullish despite prospect of higher oil prices

Washington DC
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Brazil's Gol is confident of further profitability improvements in 2011 even under a scenario of escalating oil prices.

Gol this week posted a fourth quarter pre-tax profit of R$218 million ($130 million), a 369% improvement compared with the R$46 million pre-tax profit from the fourth quarter of 2009. Gol's EBIT operating margin for the quarter was 14%, which CFO Leonardo Pereira pointed out in a call with analyst was its "best margin in the last few years".

Pereira says the carrier is well positioned to continue delivering double-digit profit margins even in an environment of increasing fuel costs because GOL is focused on further improving its efficiency and productivity.

"We continue to have an obsession with cost. We continue to have an obsession with productivity. And we continue being very cautious and prudent in how we expand capacity," Pereira says.

He adds this cautious approach and focus on costs rather than capacity is "very important" as the airline industry faces the prospect of increasing oil prices. Gol, which saw its share of Brazil's domestic market drop in January from 41% to 37%, is not concerned about losing market share to faster growing competitors Azul, Webjet, TRIP and Avianca Brazil.

"What's the point of having a 15% market share or a 60% market share if you are not profitable and if you don't provide a return for your shareholders? We need to focus on efficiency," Pereira says.

"We are not measured by market share. We are basically measured by the return. The question is do you want to have an airline for the next quarter or an airline for the next 10 years."

Gol believes it has a stronger balance sheet than its competitors, with R$2 billion cash on hand at the end of 2010 compared to R$1.2 billion only three months earlier. The carrier also believes its fleet, which consists entirely of fuel efficient Boeing 737NGs as its last 737-300s were returned last year, gives it an advantage over competitors if oil prices increase. Gol also points to its more comprehensive network and its leading position at Brazil's main airports.

"The important thing is we are very well prepared to deal with this event risk," Pereira says, referring to higher oil prices.

Pereira adds it is too early to speculate how high oil prices may rise given the political instability in North Africa and the Middle East but the carrier has to plan for the worst. It also cannot assume it will be able to increase fares and yields to offset any potential increase in oil costs.

"This will upset the entire industry and we don't know how it will affect economies in general. At this stage I'd rather talk about cost excluding fuel, about flying more hours [increasing aircraft utilisation] and about being more efficient than about raising fares," Pereira says.

In the "worst" scenario, Gol projects an 11.5% EBIT operating margin for 2011, which would still be an improvement over the 10% margin for 2010. Under the "best" scenario Gol foresees a 14% EBIT operating margin for 2011.

Gol is planning to only increase its operating fleet from 110 to 115 aircraft in 2011. Capacity is projected to increase between 3% and 13%, with Gol having the flexibility to achieve the 13% figure by further increasing aircraft utilisation if demand warrants the additional capacity.

Gol grew capacity by 13% last year, including a 10% increase in the fourth quarter. Overall, capacity in the Brazilian industry grew last year by 16% domestically and 13% in the international market.

"We have been very prudent. We don't bring planes until we are very certain there will be demand," Pereira explains. "The bottom line is we have to be profitable."

Gol's revenues were up 16% for both the fourth quarter and full year to R$1.9 billion and R$7 billion, respectively. Operating costs increased by 7% in the fourth quarter and by 12% for the full year to R$1.6 billion and R$6.3 billion, respectively.

"There is no doubt that this company today is totally different than this company a few years back. We've managed to cope with the growth. We've managed to cope with the challenge we had with the integration of Varig. And today we have a very efficient fleet," Pereira says.