GOL Gol Linhas Aereas Inteligentes SA

Controlled costs: GOL has the lowest unit costs in its markets. Unit costs based on Cost per Available Seat Kilometer (CASK), excluding non-recurring expenses, decreased by 12.8%, from 24.19 cents (R$) in 4Q18 to 21.10 cents (R$), partially impacted by 17% decrease in the average fuel price and a 2% reduction in fuel consumption per flight hour. Fuel costs per ASK decreased 15.6%, mainly due to a reduction of fuel taxes. CASK ex-fuel, excluding non-recurring expenses, increased by 11.1% primarily due to increased productivity (operating efficiency, aircraft utilization and increase in ASKs), and a reduction in aircraft maintenance expenses due to a decrease in aircraft returns in the 4Q19, partially offset by:

(i)        A 32.6% increase in depreciation due to the addition of 16 aircraft in the fleet and a reduction in the depreciable life of capitalized engine maintenance and large components; and

(ii)         A 23.8% growth in personnel expenses, mainly due to an increase in the federal payroll tax rate to 20%, and the hiring and training of 819 new employees due to the expansion of operations, new routes and new bases.

Healthy margins: Due to strong cost control, capacity, and yield management, the Company achieved operating profits for the 14th consecutive quarter. 4Q19 demand enabled GOL to achieve a recurring EBIT margin of 26.5%, the highest achieved by the Company since 2004. Recurring operating income (EBIT) was R$1,006.3 million in the quarter and R$2,645.0 million in 2019; R$830.0 million and R$1,601.1 million higher than in 4Q18 and 2018, respectively. Recurring EBITDA margin was 38.5% in the period, an increase of 22.2 p.p. quarter-over-quarter.

Balance sheet strengthening: GOL reported operating cash flow generation of approximately R$1.0 billion in the quarter. Total liquidity was R$4.3 billion, R$238.4 million higher in comparison to September 30, 2019 and R$1.3 billion higher than December 31, 2018. In 4Q19, the Company repaid R$617.1 million in principal debt and leasing payments, R$50.2 million of interest on own capital and repurchased R$102.4 million of shares. The net exchange and monetary variation gains in the quarter totaled R$372.4 million. Net debt (excluding perpetual bonds and Exchangeable Senior Notes) to LTM EBITDA was 2.4x as of December 31, 2019.

Guidance: GOL’s 2020 and 2021 guidance is on page 14 of this document.

1Q20 Outlook

Based on current cost trends, GOL estimates first quarter 2020 recurring CASK ex-fuel to increase by approximately 4% to 6%, year-over-year. The Company has hedged approximately 90% of its fuel consumption for 1Q20 and 68% for 2020.  Currently, passenger booking and revenue trends remain healthy, and the Company expects first quarter 2020 RASK to increase between approximately 4% and 6%, compared to the first quarter of 2019.

Management’s Comments on Results

In 2019, GOL accomplished a number of significant milestones in its business strategy to be The First Airline for Everyone and to grow its network both internationally and domestically.

“Be The First Airline For Everyone”

Strong customer demand, especially in the corporate segment, combined with our capacity discipline enabled us to deliver excellent operating results in 4Q19. We’d like to particularly thank the dedication and engagement of the Team of Eagles who, amid challenging market conditions, met the demands of our customers in Brazil and abroad in a fast and safe manner.

We transported almost 10 million passengers in 4Q19, a growth of 8.0% over the same period last year.

This year, we also achieved a Black Friday sales record with more than 450,000 tickets sold, which corresponds to more than R$120 million in just one day, and a total sale in the promotional period of more than R$250 million. That represents an increase of more than 50% in sales compared to Black Friday of 2018.

“The excellent sales numbers in the fourth quarter underline our purpose of being The First Airline For Everyone, by providing the best customer experience in terms of products and services, with the lowest cost in the market”, said GOL CEO, Paulo Kakinoff.

Our Net Promoter Score (NPS) was 35 in the quarter and is indicative of the winning combination of our best-in-market product and our highly engaged customer service team. For the third consecutive year, we won the Top of Mind award from Datafolha São Paulo Institute as the most remembered and preferred airline by Brazilians. We also won, for the sixth time, the Companies of the Decade award by Consumidor Moderno, being the only airline among the winning companies.

“These acknowledgments are the result of the continuous innovation across our products and services, and they reflect the close relationship we maintain with our customers in their daily lives,” added Kakinoff.

Growth of the GOL Network

In the quarter, we expanded our reach in regional markets in Brazil, adding three more destinations. In addition, we enhanced our partnerships with two regional carriers that added 22 new destinations for GOL customers.

GOL is the largest regional carrier in Brazil, as measured by ASKs. The new regional destinations have strengthened our overall network, increased connectivity, and reduced our exposure to highly competitive markets. These destinations also generate even more feeder traffic from customers connecting to our international hubs in Guarulhos, Rio de Janeiro, Brasília and Fortaleza.

We continued our long-term term growth strategy in international markets in the quarter. We began regular flights between São Paulo and Lima, Peru. In the period, we also launched weekly flights between Manaus and Orlando and seasonal flights between Porto Alegre and Punta del Este. In addition, we renewed our strategic partnership with Air France-KLM for another five years, through which we have already jointly carried more than 1 million customers. Our partnership currently covers over 99% of the demand between Brazil and Europe, and one in four Air France-KLM passengers choose to make connections with GOL flights

At the end of December, GOL also celebrated 15 years of operating in Argentina, where we have transported over 12 million passengers on 77 weekly flights.

We seek to continue our growth in domestic and international markets.

In February 2020, we announced a new codeshare with American Airlines. The flights will operate from GOL’s hubs in São Paulo (GRU), Rio de Janeiro (GIG), Brasília (BSB) and Fortaleza (FOR), and will add to GOL’s existing regular flights to Miami and Orlando.  Also, we signed a new codeshare with Avianca Holdings that includes 60 domestic Brazil GOL destinations and 16 GOL international destinations, in 11 countries, and 26 domestic Colombia Avianca destinations and another 50 in America and Europe.    

“By strengthening these partnerships, we reiterate our expansion plan in both domestic and international markets and consolidate our purpose of being The First Airline For Everyone. Our codeshare with Air France-KLM covers more than 18 countries, including 66 cities in Europe and more than 30 cities in Brazil. In addition, our recently announced codeshare with American Airlines will offer more daily flights between South America and the U.S. than any other airline partnership. It will double the number of seats we offer in this market, enabling GOL’s customers to travel seamlessly to more than 30 destinations in the U.S,” added Kakinoff.

Agile Fleet Management

Despite the temporary grounding of the 737 MAX aircraft, the flexibility of our fleet plan enabled us to serve all of our markets with a high utilization rate of our aircraft, which reached 12.2 hours in the quarter. GOL’s route network is based on a high connectivity with the main markets. This sophisticated model has enabled us to create greater capillarity for corporate routes and to reduce the average stage length. When combined with the intensive use of data analytics and a focus on the personalization of our services, this has best positioned GOL to capture economic growth. Based on Boeing’s latest forecast, we believe that the regulatory agencies will approve the return of MAX aircraft at the beginning of the second half of 2020.

At the beginning of the fourth quarter, 14 aircraft went under unplanned maintenance on pickle forks, in compliance with FAA Airworthiness Directive. Maintenance was 100% completed at the end of December when the aircraft returned to the fleet, thanks to the prompt response of GOL Aerotech.

In November 2019, GOL Aerotech was formally launched; a new business unit that leverages GOL’s aircraft maintenance expertise to provide aircraft and components maintenance, repairs, and overhauls to third-party airlines. This generates a new source of revenue and reduces our costs for the Company. With 760 employees and over 600,000 hours of availability per year, GOL Aerotech is qualified by ANAC, FAA and EASA to perform maintenance services for four Boeing models: the 737 Classic, the 737 Next Generation, the 737 MAX, and the 767 family. Aviation Capital Group (ACG) and Dubai Aerospace are among our first customers. In 2020, we expect revenues of R$140 million from GOL Aerotech.

Effective Balance Sheet Management

Despite several operational challenges, such as the temporary grounding of the MAX and the unplanned maintenance on the pickle fork, GOL posted outstanding results. We registered record revenues and high margins, with operating cash flow generation around R$1.0 billion in the quarter. Through this, we implemented a R$102.4 million share repurchase program and improved our credit profile.

Quarterly net revenue increased 18.8% year-over-year, with a record of R$3.8 billion in the 4Q19. Currently, trends in revenue and passenger bookings remain strong, and the Company expects the first quarter RASK to increase by 4% to 6%, compared to 1Q19.

GOL remains the lowest unit cost leader in South America for the 19th consecutive year. Recurring CASK in 2019 increased 1.9% over the previous year, to R$21.97. Based on current trends, the Company estimates that the recurring CASK in the first quarter of 2020 will increase approximately 0% to 2%, year-over-year. The Company has a high level of fuel hedging protection in place, with around 90% hedged in the first quarter of 2020 and 68% hedged in 2020.

“We are working hard to further increase GOL's competitiveness through fuel hedging," said Richard Lark, GOL’s CFO.

In 4Q19, recurring earnings per diluted share were R$0.88 and recurring earnings per diluted ADS were US$0.43. Operating activities generated R$1.0 billion in cash in the quarter. From the net cash flow generation of R$637.3 million in 4Q19, we repaid R$617.1 million in debt, paid R$50.2 million of interest on own capital, and repurchased R$102.4 million of shares. Before share repurchases and interest on own capital, free cash flow to equity was R$219.2 million. On December 31, 2019, total liquidity was R$4.3 billion, R$1.3 billion higher than on December 31, 2018.

“We continue to strengthen the Company's equilibrium through disciplined working capital management and capital structure optimization,” added Lark.

In February 2020, GOL signed sale and leaseback agreements for 11 Boeing 737 Next Generation (NG) aircraft. The transaction will reduce GOL’s net debt by approximately R$500 million, comprised of a R$130 million reduction in finance lease debt and a R$370 million increase in cash liquidity. The Company plans to use a portion of these proceeds to call the outstanding amount of its 8.875% Senior Notes due in 2022. The asset management income and reduction in interest expense will contribute over R$420 million to the Company’s 2020 earnings and improve GOL’s credit ratios by reducing the net debt/EBITDA ratio by 0.2x and increase the EBITDA/net interest expense ratio by 0.5x.

The results obtained in GOL’s aircraft disposals demonstrate the consistent market value of the Boeing 737 aircraft and the continuous creation of value for all GOL shareholders. Making GOL The First Airline For Everyone is what drives our best-in-Brazil aviation team. “We are, and will continue to be, an even stronger Company,” said Lark.

(1) Amounts restated in accordance with IFRS 16. (2) Source: Brazilian Central Bank; (3) Source: Bloomberg; (4) Fuel expenses excluding hedge results and PIS/COFINS credits/liters consumed; (5) Excluding non-recurring expenses. (6) Average operating fleet excluding aircraft in sub-leasing and MRO. Certain calculations may not match with the financial statements due to rounding.

Domestic market

GOL’s domestic supply increased by 7.0%, and demand increased by 6.6% in comparison to 4Q18. As a result, the Company’s load factor reached 82.5%. GOL transported 9.2 million passengers in the quarter, an increase of 9.5% compared with the same period in 2018. In 2019, GOL’s domestic supply increased by 3.5%, and demand increased by 6.2% year-over-year. The Company is the leader in transporting passengers in the Brazilian market.

International market

GOL’s international supply decreased by 0.9%, and international demand decreased by 2.6% in 4Q19 compared to 4Q18. The Company’s load factor in 4Q19 was 74.0%, a decrease of 1.2 p.p. During the quarter, the Company transported 0.5 million passengers in the international market, the same as in 4Q18. In 2019, GOL’s international supply increased by 27.3%, and demand increased by 31.6% year-over-year.

PRASK, Yield and RASK

Net PRASK increased by 13.3% in the quarter when compared to 4Q18, reaching 27.04 cents (R$), driven by a growth in net passenger revenue of 20.1% in the quarter. GOL’s net RASK was 28.69 cents (R$) in 4Q19, an increase of 12.1% over 4Q18. Net yield increased by 13.8% over 4Q18, reaching 33.17 cents (R$).

(1) Amounts restated in accordance with IFRS 16. (2) The difference with the amount disclosed in the statements of operations in the financial statements of the year ended December 31, 2019 is the Exchangeable and Capped Calls results. (3) Excluding unrealized ESN / Capped Calls mark-to-market gains and losses and exchange rate gains and losses on debt. (4) Excluding non-recurring net expenses (revenues). (5) Excluding effects of stock options and warrants related to the Exchangeable. (6) Including effects of stock options and warrants related to the Exchangeable.

Net revenue

Quarterly net revenue was R$3.8 billion, an increase of 18.8% when compared to 4Q18, mainly due to a 20.1% increase in passenger revenues and a 4.9% increase in cargo revenues, partially offset by a 4.0% decrease in loyalty program revenues, in comparison to 4Q18. In 2019, net revenue reached R$13.9 billion, an increase of 21.5% compared to 2018.

GOL carried approximately 9.7 million customers in the quarter (+8.0%), with 9.2 million in the domestic market (+9.5%) and 0.5 million in the international market (+0.3%). Net Passenger Revenue per Available Seat-Kilometer (PRASK) reached 27.04 cents (R$), an increase of 13.3%. Load factor decreased 0.4 p.p., and yield in the quarter increased 13.8% compared to the same period of 2018. 

Operating expenses

Total recurring CASK decreased by 12.8%, from 24.19 cents (R$) in 4Q18 to 21.10 cents (R$), primarily due to increased productivity (operating efficiency, aircraft utilization and increase in ASKs), partially offset by increases in depreciation and personnel. Fuel costs per ASK decreased 15.6%, mainly due to reductions in fuel taxes, partially offset by consumption of an additional 7.3 million liters due to the MAX delays. 

CASK ex-fuel, excluding non-recurring expenses, decreased by 11.1% in line with what was explained above, which reflects a better productivity (operational efficiency, use of aircraft and increase in ASK), partially offset by 32.6% higher depreciation. This was due to the addition of 16 aircraft in the fleet and a reduction in the depreciable life of capitalized engine maintenance and large components; a 23.8% increase on personnel expenses, mainly due to the increase in the federal payroll tax rate to 20%; and the hiring and training of 819 new employees due to the expansion of operations, new routes and new bases. Fuel costs per ASK decreased 15.6%, mainly due to reductions in fuel taxes.

Breakeven load factor (excluding non-recurring expenses) reduced by 17.4 p.p., reaching 60.0% versus 77.4% in 4Q18, due to passenger net revenue growth in the quarter. The breakdown of the Company’s operating costs and expenses is presented as follows:

Salaries, wages and benefits per ASK: increased 16.7%, mainly due to an increase in the federal payroll taxes rate from 0% to 20%, a 3.5% COLA, an increase on payments per hour due the higher volume of operating hours in 7.5% during 4Q19, and the hiring of 819 new employees for expansion of operations, routes and bases.

Aircraft fuel per ASK: reduced 15.6% primarily due to a decrease in the average fuel price per liter of 17.4%, this primarily due to the reduction of 4.7 p.p. in GOL’s average ICMS tax rate on jet fuel to 9.9% in 4Q19 from an average rate of 14.6% in 4Q18, and a 34.6% decrease in the ex-refinery price due to a 4.2% reduction in the USD oil price per barrel, partially offset by a 8.1% USD appreciation (average rate).

Landing fees per ASK: decreased 27.3% primarily due to the reduction of PIS and COFINS taxes.

Expenses with passengers by ASK: increased 1.0% principally due to an increase ramp and handling costs.

Services provided by ASK: reduced 0.7% principally due to a reduction in consulting expenses.

Sales and marketing per ASK: increased 7.3% primarily due to a 14.5% increase in sales commissions from the increase in net revenue.

Maintenance materials and repairs per ASK⁽¹⁾: decreased 47.6% mainly related to fewer NG aircraft redeliveries, partially offset by advanced scheduled maintenance on two aircraft to support high-season demand. 

Depreciation and amortization per ASK: increased 24.9% mainly due to the incorporation of 16 aircraft into the operational fleet and a reduction in the depreciation term for capitalized engine maintenance.

Other expenses per ASK: increased mainly due to the aircraft sales on 4Q18 of R$634.7 million, non-recurring in 2019.

(1) Scheduled maintenance is treated as recurring and un-scheduled maintenance related to the MAX delays is considered non-recurring.

Operating results               

Operating income (EBIT) for the quarter was R$1,006.3 million, an increase of R$830.0 million when compared to the same period of 2018. In 2019, operating income reached R$2,645.0 million, an increase of 153% compared to 2018. Operating margin was 26.5%, an increase of 21.0 p.p. over 4Q18. On a per available seat-kilometer basis, recurring EBIT was 7.59 cents (R$) in 4Q19, an increase of 6.19 cents (R$) compared to 4Q18.

EBITDA totaled R$1.5 billion in the period, an increase of 180.5% over 4Q18. EBITDA per available seat-kilometer was 11.05 cents (R$), an increase of 6.88 cents (R$) when compared to the same period last year.

 (1) Amounts restated in accordance with IFRS 16. (2) Excluding non-recurring expenses. * In accordance with CVM Instruction 527, the Company presents the reconciliation of EBIT and EBITDA, whereby: EBIT = net income (loss) (+) income tax and social contribution (+) net financial result; and EBITDA = net income (loss) (+) income tax and social contributions (+) net financial result (+) depreciation and amortization. Some report values ​​may differ from the financial statements due to rounding.

Financial Results

Net financial expense was R$134.0 million, an increase of R$153.3 million compared to 4Q18. The variation is mainly due to issuance in March 2019 of Exchangeable Senior Notes. Net results on derivatives were R$75.9 million higher than 4Q18. The exchange and monetary variations resulted in gains of R$21.6 million lower compared to 4Q18.

Interest on loans: increased 9.2%, from R$307.0 million to R$335.3 million, mainly due to an average total debt approximately R$1.0 billion higher than the previous period and the average BRL exchange rate devaluation of 8.1%, partially offset by a reduction in the average interest rate from 6.9% to 5.9%.

Gains from financial investments: reduced R$4.0 million, mainly due to lower yields on investments in fixed income securities and investment funds.

Net exchange and monetary variation: totaled gains of R$372.4 million in 4Q19, a decrease of 5.5% compared to 4Q18. In 3Q19, the Company adopted hedge accounting corresponding to 50 lease agreements with a total volume de R$928.0 million. The total amount in 4Q19 of exchange variation expenses registered in other comprehensive income in shareholders' equity related to the hedge accounting corresponded to R$125.7 million, partially offset by the depreciation of the Brazilian Real vs. U.S. Dollar (end of the period) of R$3.1% in the quarter, from R$4.16 per U.S. Dollar as of September 30, 2019 to R$4.03 per U.S. Dollar as of December 31, 2019.

ESN and capped calls results: registered expenses of R$87.5 million, comprised of R$34.0 million of interest expense, R$110.5 million of unrealized losses on the mark-to-market of the convertible, partially offset by R$18.4 million of unrealized gains on the mark-to-market on the exchange features and capped calls.

Net result of derivatives: was a R$43.5 million gain in 4Q19, in comparison to R$32.4 million loss in 4Q18, mainly due oil price hedging operations.

Other financial expenses: totaled R$149.2 million of expenses in 4Q19, in comparison to R$61.4 million of expenses in 4Q18.

Hedge results

The Company uses hedge accounting for some of its derivative instruments. In 4Q19, GOL registered a net gain of R$31.8 million from hedge operations, of which R$10.5 million were losses recorded in operating income and R$42.3 million were gains recorded in financial income.

Fuel: fuel hedge operations made through derivative contracts tied to WTI resulted in a loss in operating results of R$9.1 million and a gain of R$43.6 million in the financial result in this quarter.

Interest: swap operations to protect the cash flow of future contracted leases, the installments of which are exposed to the volatility of the Libor rate until receiving aircraft, resulted in losses of R$2.1 million in 4Q19.

Exchange rate: the Company recognized R$0.6 million on exchange rate hedge losses in 4Q19.

Income taxes

Income taxes in the quarter represented a loss of R$124.5 million, compared to an income tax expense of R$74.5 million in 4Q18. The Company, GLA and Smiles have net operating loss carryforwards, comprised of accumulated income tax losses and negative basis of social contribution, their use is limited to 30% of the annual taxable income, without limitation period, in the amounts of R$159.6, R$5,017.2 million and R$8.3 million, respectively, and such amounts are not recorded in the Company's balance sheet.