Gol Linhas Aereas Inteligentes SA (GOL) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the GOL Airlines 2Q '08 Results Conference Call. Today with us, we have Mr. Constantino de Oliveira Junior, President and CEO, and Miss Anna Bettencourt, Finance Director and Investor Relations Officer.

We would like to inform you that this event is recorded and all participants are in a listen-only mode during the Company's presentation. After GOL's remarks, there will be a question and answer session for industry analysts and then for press. At that time, further instructions will be given. (Operator Instructions). Today's live webcast, including both audio and slide show, may be accessed through GOL's website at www.voegol.com.br/ir.

Before proceeding, let me mention that forward-looking statements will be made under the Safe Harbor of the Security Litigations Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of GOL management and information currently available to the Company.

They include risks, uncertainties and assumptions [because] their results of further events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions and industry conditions and other operating factors could also affect the future results of GOL and could cause results to differ materially from the expressed in such forward-looking statements.

Now, I will turn the conference over to the President and CEO, Mr. Constantino Oliveira, who will begin the presentation. Mr. Oliveira, you may begin your conference.

Thank you. Good morning and afternoon everyone and welcome to GOL's second quarter 2008 results conference call. The second quarter of 2008 was a challenging quarter for the air transportation industry. Fuel prices reached record levels at a pace faster than sales could be registered, especially in the quarter where we were facing ramp up of our recently launched flight networks. Our costs were largely impacted by fuel prices, which resulted in a negative effect on our results and margins.

During the second quarter of '08, we consolidated our new flight network launched on March 24th. We achieved positive results from the network chains with the net load factors above 67% during the quarter, representing a more than 20 percentage point increase for VRG. Completion and punctuality were also back to optimized standard levels.

On June 26th, we received approval from the Brazilian anti-trust authority for the acquisition of VRG. On July 3rd, we submitted for an ANAC approval proposal for an organizational reorganization of our subsidiaries, GTA and VRG, to merge them into one airline. Additional information on the reorganization will be provided later in this call. We remain committed to our strategy of profitable expansion base, based upon a low-cost [exiture], quality customer service, and developing our flight network.

On slide one, we see that the second quarter was very challenging. Fuel prices increased 29% versus second Q '07. Deals were affected by high competition in the sector, costs associated with shutting down VRG's intercontinental destinations, significant promotional activities and seasonal impacts in the second quarter, which is historically the weakest quarter for the Brazilian entire transportation industry.

The second domestic passenger demand, as measured by RPK grew 11% year-over-year, demonstrating solid underlying demand for air travel, supported by a strong Brazilian economy. Consolidated net loss of R$171 million in the second quarter was driven by record high fuel prices, lower yields and higher consolidated cash resulting from lower aircraft utilization.

Load factors averaged 67% and 55% on the domestic and international markets respectively during second Q '08. Combined load factors were at 65%, a 1 percentage point decrease over second Q '07 and an increase of 3 percentage points over first Q '08. Consolidated average passenger yield decreased 11% when compared to the first quarter of 2008.

Second Q '08 consolidated passenger volumes grew 1% compared to first Q '08 and 20% year-over-year. Average fares were R$196 or $119. Operating costs per gate reached R$0.605 in the second quarter, increasing 15% when compared to the same period last year.

Please move to slide number two in the presentation. During the recent months, fuel prices reached record high levels faster than we could raise fares to offset the higher costs. Our costs were pressured by fuel prices, which caused a negative effect on our results and margins.

While crude oil prices in international markets, represented by [other TIs] increased 91% versus second Q '07, the Company's consolidated yields increased only 8% in the same period. 27% of the total fuel increase in the second Q '08 were offset by exchange rate appreciation, 17%, and our hedging programs helped to mitigate 10% of our fuel cost increase. Fuel costs in second Q '08 represented 42% of our total costs versus 38% in the second half of 2007.

Turning to slide number three and four, we show initiatives to offset fuel price increases. With the peak renewal plan, which is one - sorry, sorry. -- which is on its final execution step we expect to reduce fuel consumption per SK up to 30% on the 737-300s as we replace them with 737-NG aircraft. By the end of the year, the average age of our fleet will be -- will drop to 5.6 years from nine years at the end of 2007.

The fleet renewal plan will reduce maintenance expenses and crew expenses per SK. We have already implemented operational improvements to reduce fuel consumption. Our aircraft are already flying slightly slower and they are shutting down on one engine after landing and we will further improve efficiencies by adding wind lags to the fleet.

We will continue to employ a disciplined hedging program to protect the Company from significant change in the fuel prices. We expect this to reduce distribution costs by increasing sales through the Internet and modernizing and investing in our distribution systems.

In the fourth quarter '08, we plan on constraining commissions paid to travel agents to third-parties, significantly reducing a large portion of those distribution costs. As shown on slide number four, we will also continue to increase ancillary revenues, particularly cargo, where we expected to export -- sorry, we are expected to transport 30% more volume per SK versus 2007, driven by a new product and added value to the service, such as cargo express.

We are expanding our hold share and interline agreements with strategic partners, which increased load factors without incurring distribution costs. Our flexible fleet plan will allow us to reduce ASKs by 11% in the second half of 2008 through the end of the year. And eight aircraft will cease operations. Additionally, by integrating the VRG and GTA networks, we will be able to eliminate overlap and to reduce service on less profitable routes, with lower yields.

Going to slide number five, on July 3rd, we submitted to ANAC approval a proposal for the organization reorganization -- sorry, organizational reorganization of our subsidiaries, GTA and VRG into one airline as presented on this slide. The [rest to Turin] will optimize the Company's operating [strategy] to allow us to provide more efficient services as it will be possible to integrate GTA and VRG, increasing synergies between the two companies, integrating GTA and VRG operations we will also allow the Company to optimize revenues and costs as well as maximize the consolidated Company's operational, financial and subsidiary revenue capabilities.

With the reorganization, the Company will assume all the rights and obligations currently held by VRG and GTA and the GOL [empire] brand will be maintained. The rest of Turin does not have any impact on our public shareholders.

On slide number six, we can see that synergies we expected to obtain with the corporate reorganization. Regarding the network, we will [only acquire] GTA and VRG networks into one consolidated network, increasing flight options, improving market segmentation, reducing redundance and increasing connectivity, which will improve efficiency on the single network. With an [Ax] approval, we will have more operational flexibility in aircraft utilization as well as -- sorry, as we will be able to use GOL and VARIG aircraft on our flights operated by the Company.

Through fleet standardization and integration, we also expect to optimize the use of inventory and spare parts. We also intend to integrate all the systems, including ERP, sales and distribution systems. Additionally, we, with the integration, we will be able to better utilize tax credit benefits.

Moving to slide number seven, where we show our network integration. Today, the VRG network's limited to its 18 destinations and its fleet. With the corporate reorganization, we will be able to operate a more efficient network with less redundancy, more flight options and greater connectivity. Combined, GOL and VARIG have one of the largest flight networks in South America, offering more than 730 flights per day.

On slide number eight, we show our [disciplined] capacity growth. Over the next several quarters, we will reduce Domestic ASKs by lowering aircraft utilization, as we shut down operations on [product] VRG, final intercontinental routes and significantly reducing -- reduce our international supply.

In the domestic markets, this would represent a 5% sequential reduction in the third quarter of '08 and a 1% sequential increase in the fourth quarter. This capacity reduction will be achieved through the net return of eight leased aircraft in the second half of 2008.

I will now turn the call over to our Finance Director and Investor Relations Officer, Anna Cecilia Bettencourt, who will discuss financial and operating performance for the quarter in more detail. Please, Anna?

Thank you, Junior. Good morning everyone. Please move to slide number nine in the presentation, which shows our capacity and network expension in more detail. During the quarter, the consolidated Company operated an average of 109 aircraft, a 25% increase over second quarter 2007 and a 1% reduction over first quarter 2008. GTA added nine daily flights frequency in the first quarter and also 56 destinations, while VRG added 21 new daily flight frequencies, bringing its total destinations up to 18.

Combined, we served 69 destinations, the most of any Brazilian airline group. When compared to the same quarter last year, our capacity expanded 22% in terms of ASK volume to approximately 11 billion while RPK increased 20% to 6.1 -- 6.9 billion, 5.1 billion at GTA and 1.7 billion at VRG. This capacity expansion permitted the consolidated company to reach over 740 flights per day at the end of June 2008. When compared to the first quarter 2008, ASKs decreased 3.4%, while RPKs increased 0.9%.

Moving to slide number 10, we can see that our consolidated net revenues in the second quarter 2008 increased by 27%, dropped off in R$1.5 billion. Higher than expected load factors were partially offset by lower than expected yields and lower aircraft productivity. Although there was a reduction in aircraft utilization compared with the same period last year, we achieved consolidated aircraft utilization of 12.8 block hours per day during the quarter. Consolidated [RASK] increased 3.5%, mainly due to the incorporation of VRG results and a reduction in load factors and aircraft utilization rates.

Breakeven load factors increased 5.7 percentage points year-over-year. Ancillary revenues also contributed to results, growing 18.3%, reaching R$125 million this quarter. Slide 11 shows year-over-year comparisons to our operating results. The drop in aircraft utilization was caused by a reduction in the 767 aircraft day utilization caused by the closing of the intercontinental destinations, based on the revelation that the [start] minimum down time between landing and take off at all [destination] airports, non-recurring expenses related to the closing of the long-haul destinations and the aircraft maintenance services.

EBITDAR, an indicator of our -- of operating results before accounting for aircraft ownership expenses, such as aircraft rents, reached a negative number of R$90.4 million in the quarter. Total cash, at R$0.165, including fuel costs, increased R$0.0220 per ASK, or 15% year-over-year due to increases in fuel expenses, maintenance, salaries, wages and benefits and [appreciation], partially offset by reduced in traffic servicing and aircraft rent per ASK.

Debt to expenses per ASK increased 20% over the same quarter last year, due to a 29% increase in average fuel price per liter, but was partially offset by a 16.7% appreciation of the Brazilian real against the US dollar and our fuel hedge improvements. Our consolidated non-fuel CASK increased 12% to R$0.097. Please move to slide 12 in the presentation, where we show the factors that impacted our costs in the second quarter 2008.

During this quarter, lower aircraft utilization affected both GTA and VRG domestic operations. Moreover, we have extraordinary expenses during the quarter of approximately R$35 million related to the closing of routes to Europe and Mexico, including passenger accommodations and maintenance of the 767 and 737-300s that are being returned. The difference between GTA and VRG's total costs was only 4% in the second quarter 2008.

The next slide, slide 13, shows our net financial results. Financial income in the quarter increased R$29 million to R$120 -- R$102 million, mainly due to [positive] exchange variations of R$87.4 million during the quarter. We have invested over 700 million of cash on an average 13.4% per annum in reals. Our total financial expenses decreased R$5.6 million due to an increase in total debt in reals as a result of appreciation of the real against the US dollar. We have approximately R$1.8 billion of long-term financing with an average maturity of 7.2 years at an average rate of 7.2% [are earned] in US dollars. Our net financial results for the quarter were R$70.3 million.

Slide 14 highlights the effective net income compared to the second quarter 2007. Running through the main differences, net revenues increased R$113 (sic, see slide presentation) million, jet fuel costs increased by R$237 million or 20% per ASK due to an increase of 58 million more liters consumed and a 29% increase in fuel costs per liter due to a 91% increase in [WTI] and a 78% increase in GOL's costs, jet fuel.

These fuel costs were partially offset by the results of our fuel hedging program and the 17% appreciation of the Brazilian real. Commercial expenses increased by R$37 million overall and 16% per ASK due to higher sales incentives and lower air traffic utilization.

Ticket sales on GOL's website accounted for almost 79% of total sales during the quarter. VRG sold [15]% of its tickets over the Internet and 85% through its GPS and call centers. Labor expenses increased R$67.4 million overall and 12% per ASK due to a 5% cost, with an increase in salaries and an increase of 24% in the number of full time equivalent employees related to the internalization of call center employees affected -- effected in 2007.

Other operating expenses increased by R$178 million, principally due to an increase of 60% in insurance expenses, costs related to the termination of intercontinental destinations, passenger accommodation expenses, cancelled flights and crew lodging expenses, partially offset by the appreciation of the Brazilian real. Net financial results increased R$25 million in the quarter, year-over-year. In the second quarter 2008, reported consolidated losses were R$0.85 per share or R$0.52 -- US$0.52 per ADS and reported net loss was R$171.7 million. These were the main factors impacting net income in the second quarter 2008.

A more comprehensive breakdown and explanation of our expenses can be found in our earnings releases -- release, available on our website at www.voeGOL.com.br/ir.

Our slide number 15, we show our cash flow for the second quarter 2008. Cash balances at the end of the quarter were R$738 million. Net cash used by operating activities during the quarter was R$99.8 million, mainly due to negative operating results of R$171.7 million, an increase in the operating income side of R$148.6 million, partially offset by a decrease of R$170 million in air traffic liability.

We expect the consolidated company will generate positive results in the first quarter 2008. GOL has approximately 560 million [deposited in the] Company, primarily for future aircraft and engine maintenance. GOL has R$329.9 million of accounts receivable, with no hold back of these receivables. I will elaborate more on our liquidity position in the next slide.

Net cash used in investing activities was R$144 million, mainly due to the acquisition of R$118.9 million in property and equipment and R$29.9 million in aircraft (inaudible) deposits. GOL has approximately R$730 million deposits with [voice] as advantaged for future aircraft acquisitions.

Net cash used by financing activities during the second quarter 2008 was R$60.4 million, mainly due to the payment of R$28.1 million (inaudible) on debt and R$[40.2] million from the decrease in long term debt in reals caused by depreciation of the Brazilian real against the US dollar on our US denominated -- US dollar denominated debt. We maintain approximately R$485 million in short-term working capital lines.

Slide number 16 shows our liquidity and investments and financing plans through 2010. On June 30, 2008, GOL had a total liquidity of R$2.8 billion comprised of R$1.5 billion in gross cash liquidity and R$1.3 billion in aircraft cash deposits. Our investment plan for the next three years anticipates R$1.3 billion in aircraft acquisitions, R$910 million in pre-delivery payments for aircraft acquisitions and R$530 million for investments in our maintenance center, IT and spare parts inventories. Of this total, we rely on financing for approximately R$2.1 billion in long-term financing for aircraft [for two reasons], guaranteed by 18 banks, funding for pre-delivery payments, among other sources of funding.

Please move to slide 17. We have [sustained] resources to finance our fleet plan. In order to continue our fleet renewal and modernization strategies in our products with our disciplined growth plans, we have been reviewed and adjusted the fleet plan to better adapt to recent fuel price increases, respond to higher competition in the air transportation industry and accelerate our fleet renewal program, which we announced in December 2007, while improving our low-cost structure.

In addition to [divert] operational changes to reduce fuel consumption, we are reducing our future capacity growth. We are also in the final phase of our plan to replace all 737-300s, and 767 aircraft with 737-700s and 800s for operations on short and regional haul routes. In addition to reducing the fleet's average age, these aircraft have low operational costs and are more fuel efficient. The 737-[3700]s NG aircraft provide us with greater flexibility at airports with operating restrictions and the ability to offer more direct flights to medium-sized cities with lower traffic volumes.

By the end of 2008, we expect that the fleet will be comprised entirely of Boeing [727]-NGs, reducing the average age of the fleet to 5.6 years. At the end of 2012, 65% of the fleet will be comprised of 737-800 [SSP] aircraft, reducing the average to 5.5 years. The total fleet is projected to be 104 aircraft by the end of 2008, 108 aircraft by 2009, 115 by 2010, 121 by 2011 and 127 by 2012, representing a 6% compound average growth rate [indices] from 2008 to 2012.

At the end of second quarter 2008, we have 98 remaining firm orders for Boeing 727-800-NGs to be delivered between 2008 and 2014, and an additional 40 options for a total order 167 727-800-NGs as 29 have already been delivered at the end of the second quarter 2008.

This is one of the largest contracts in the world for Boeing 727-800 aircrafts and guarantees GOL's expansion and position as one of the largest LCCs in the world. Our Boeing order provides us the flexibility to convert 800 positions into 700 positions, allowing us to quickly adapt to market conditions.

Please move to slide number 18. In January, the Board of Directors authorized the Company to implement a share repurchase program of up to 5 million preferred shares, at top market price, representing 9.1% of the total preferred shares outstanding in the market as of June 30th, 2008. To date, we have repurchased 1.6 million shares.

On August 6, 2008 the Company's Board of Directors has approved the [suspension] of dividend payments for the remainder of 2008 fiscal year, but this guarantees a minimum payment of 25% of the consolidated net income. Since 2004, GOL has paid R$664.7 million in dividends to our shareholders.

During the year, our ADS underperformed the American stock exchange airline index by 3% and underperformed the tier one [NTC] by 27%. Our [PN] shares have underperformed the (inaudible) index by 60% over the same period. Our average daily trading volume in the first half of 2008 was R$138 million. On slide number 19, we just say our 2008 guidance for investors and analysts to protect our results.

Changes versus our previous guidance related to the fleet renewal and capacity reductions and revised the assumptions for exchange rates and fuel costs. In 2008, we expect to transport 26 million passengers, down 10% versus our previous guidance. With system-wide ASK up 41 billion, down 5% when compared to our previous guidance. And RPKs of 26 billion, down 7%. Cargo and ancillary revenues are projected to grow to R$500 million and we will continue to increase revenues based on miles and (inaudible) programs as well as other ancillary revenue generating initiatives. We've projected our average fuel cost per liter at 2.30 -- R$2.30 for 2008, an increase of 22% compared to the previous guidance.

CASK ex-fuel is forecasted at R$0.094, up 8% when compared to the previous guidance, mainly due to expenses related to the closing of international [base] including maintenance expenses for returned aircraft and lower aircraft utilization. Capital expenditures are projected at R$950 million in 2008.

For the first quarter of 2008, reflecting reported [CR] increases, we expect consolidated global factors to be approximately 2%, with consolidated passenger yields at [approximately plane fares] R$0.20 -- R$[0.26]. For the third quarter, we expect consolidated non-fuel CASK to be in the range of R$0.094, a 5% increase -- decrease when compared to the second quarter 2008, as we will still expect to incur costs related to aircraft returns.

During the third quarter 2008, we will close the last VRG continental destinations by shutting down the [barricade]. We expect that the incorporation of a larger, more fuel efficient aircraft in our hedging program will vastly offset increases in fuel currencies. We expect a stable foreign exchange rate environment for the near term, supported by good economic fundamentals in the Brazilian economy.

I will turn now the call back over to our CEO to conclude our presentation. Please, Junior.

Thanks, Anna. I will finish with slide number 20, where we would like once more to reiterate our competitive strengths, which are essential to our successful business model. Our business cycle allows us to benefit from synergies, operate with the lowest cost possible, [materially] segments of the markets and to [boost military] drive profitability.

We rely on our highly productive work force and experienced management team to quickly adapt to changing market conditions, deliver sales in higher quality customer service, offer the lowest fares in the market and maintain the lowest costs in the industry to ensure strong brands and high profitability.

Thank you for your attention. Having now concluded this brief presentation, I would like to turn the floor over for Q&A during which we will be happy to respond to any questions you may have.

(Operator Instructions). Jim Parker.

The first question is regarding the outlook for the profitability of VRG. So you've cut that back hugely. And you will be ending Paris, I guess, this month. What -- how much of a drain do you anticipate out of VRG in the third quarter and when will this thing be completely cleaned up and be a part of GOL? And do you anticipate a profit from VRG in the fourth quarter?

Jim, as we mentioned, we expect to realize operating results in the third quarter. Okay? And improving even further during the fourth quarter. Closing the VRG in the fourth quarter, we expect also to have both companies consolidated into a single airline.

Okay. Now, Junior, I think you've -- you may have said to the financial community or maybe informally that your goal was, and your cost per ASK, to -- was to be 15% or more below TAM. And based on the numbers that you've reported and TAM has reported, that gap is well below the 15%. Do you think that -- is that still the game plan? Do you think you can achieve costs that are 15% below those of TAM?

Looking to our numbers, Jim. We can see there is a huge expense related to aircraft returns and the main -- the instantaneous reductions when we started the 767s for example, we'll reduce our ASKs dramatically and the costs increased at the same period because you have to pay to that -- [the lessors] to early terminate on the contracts and also to do a seat check to return all of these aircraft. Not only the 67s, but also the 300s in this period, during the second quarter.

Considering that and considering the possibility to reduce our commercial costs related to the travel agents' commission, which will be paid by the clients, as our competitor does from the beginning of this year, we will be able to reduce our costs, our CASK, ex-fuel, or our CASK in total, to mainly return to the similar conditions we had in the past. We are working to do that.

And also, it's very important to see this number adjusted per stage length. That means we are reducing our stage length as we are stopping our long-haul flights and we have to consider this point too when we see this number. So again, we are working hard to really reduce our costs and to return them to normal conditions, to stable conditions, and we expected to see that happen and during this year, still during this year. That means between the third and fourth quarter.

Okay. Duane has a question as well.

Hi, Anna. This is Duane Pfennigwerth. Just on your CASK, ex-fuel guidance for the full year, based on the model, it looks like it would imply a sequential increase from the third to the fourth quarter. And I was wondering, do you expect CASK ex-fuel to be higher in the fourth quarter? Could you provide some more color there? Thanks.

Actually what we expect for the fourth quarter, a slight decrease as Junior mentioned, in our CASK ex-fuel, okay? But it will be higher from historical levels that we presented in the rest.

Okay. Thanks. And then can you just quantify in total sort of the non-recurring shutdown costs, not the operating costs, but the cost of shutting down the business in terms of VRG long haul, the accruals that you've had there, again, some of the aircraft that you're returning. Is there a number that you could put to that in the current quarter?

Well, in the -- during this quarter, second quarter 2008, this represented approximately R$35 million of additional expenses.

Thank you.

Stephen Trent.

Just quick ones for me. First of all, following-up on a question from Jim Parker's colleague, the 35 million you mentioned, just wanted to be sure that's in US GAAP as opposed to Brazilian GAAP?

It's US GAAP. All the numbers that we are commenting here are in US GAAP.

Okay. Great. Also just curious, I've seen you guys mention competition a couple of times, so you've gotten -- you're pretty much shutting down international long-haul, in Brazil's domestic market there is a foreign ownership limit as to really who can come in there. Any color as to where this increased competition is coming from? Hello?

Sorry, Steve. You wanted to talk about competition is the scenario has changed. We are expected to receive a newcomer soon. And even during this quarter, the second quarter, we face some -- we cannot say a newcomer, but the Webjet, for example, to say names. Webjet increased their operations and also we faced a very competitive environment domestically with other regional carriers and our main competitors. So that's the competitive [strength]. We are still working on the free market and it means we have an open market where the competition is free. So that's the case.

Okay. Thanks, Junior. I'll let other speakers ask questions. Thank you.

Thank you, Steve.

Michael Linenberg from Merrill Lynch.

Hi. Yes. Good afternoon, Junior. And a few questions here. On one of the earlier slides, you talked about some of the cost savings and revenue savings. I think it was R$460 million of revenue savings in reals and I think it was maybe R$130 million on costs. And then subsequent to that, there was another slide that talked about some of the synergies of integrating Varig and GOL, which I know recently you got approval for. Are the Varig and GOL numbers, the R$180 million, does any of that show up in the R$460 million or R$130 million? Or is that incremental to the detail provided on the earlier slides?

It's a more incremental. It's more related to cost savings instead of revenue initiatives. So we believe that these synergies will start to show up -- better to show up in our results in the fourth quarter and will be presented during the 2009 results mainly.

Okay. And then just my second question, on a slide you also broke out the RASK for GOL and Varig. And I think when you look at the Varig RASK of R$0.129 and GOL's is at R$0.156, recognizing that stage length is obviously having some impact here on the Varig numbers. But if we were to adjust for stage length, what sort of premium are you seeing on the Varig operation vis-a-vis GOL? And if you're not seeing a premium, are actions or measures underway to get that premium up, given that it is a better product in the market?

Steve, it's Junior. When we see these numbers provided during the second quarter, we have to understand that the Varig new network was launched on March 24th and there were some residences with the GOL fleet network and considering that, we also faced during this second quarter a kind of tight competition, as I was explaining on the previous questions, where our main competitor is much more focused on the market share than results domestically.

And considering that, Verig faces a very tough competition this year, we were able to achieve good load factors also to give to our customers the opportunity to experiment our service at Varig. And when we see this number on the main routes or where the business or corporate passengers are, Varig is still very strong. But we are suffering on the new routes, that means new destinations like destinations in the northeast and north of our [12] countries where we added new service. That means we almost doubled the capacity of VRG during this period and we faced a very tough competition at the same time.

So looking towards the future, we -- I can tell you that probably we -- probably not, I am sure that we will face much better RASK for Varig on the domestic market as we are seeing that we are restituting our route network and the passengers now are recognizing the value of the Varig service and Varig brand.

Okay. All right. Thanks a lot, Junior. Thanks, Anna.

Thank you.

Thank you, Michael.

Rodrigo Goes.

Hi. Good afternoon. Just one quick question on your general guidance. One of the lines there talks about the fuel price in reals per liter. And you've changed that from one spot 89 to two spot 30. Now, which would imply a WTI of somewhere in the 170, 180 neighborhood in the back half of the year. Is that what you're working with? What is your assumption for WTI in the second semester?

Rodrigo -- Hi, Rodrigo. Well, I think that there are -- you have to take into consideration the exchange rate and other things. But looking to these numbers that we are considering -- including in this forecast, we are seeing WTI as of 100 -- not that we are seeing, but to consider to arrive at this number, we used $135 WTI.

$135? It doesn't circulate out.

$135 WTI.

Yes. The $135, even with your FX of 167? It doesn't --

Exactly. [It's the handset, okay]. It's $135 average for the year.

$135 average for the year.

Yes.

Okay.

Okay. So you're -- okay. All right. I'm guessing you're working with -- at least internally, you're working with a big spike from current levels for -- I'm getting to, I don't know, 160 for the back half of the year. I would guess that would get you closer to that 230. Okay. All right. That works. Thanks a lot, Anna.

Thank you. Bye.

Isabela Bacchi from JP Morgan.

Hi, guys. Hi. Good morning. My question is just regarding the CapEx. I see that in the slides, seeing you're commenting about R$2.7 billion for 2008, 2010. But when I look at the press release, on the page 11, and I get all the aircraft purchase commitments from 2008 to 2010, plus the activities, I get something around R$4.2 billion. I just wanted to understand the difference here between those numbers?

Well, in terms of the guidance of what we have here, on the presentation is that 2008 and 2010, okay, R$2.7 billion in CapEx, which includes aircraft acquisitions, PDP payments, and other investments, such as I mentioned [hammer IT vehicles]. So this is what we will get on the presentation. And what we have here on page 11 is pre-delivered deposits from June 2008 to 2010. So some of these deposits were already made. So, the difference is that six months difference. And also we used that -- the deposits are based also on list price.

And the aircraft purchase commitment?

I'm sorry?

The same thing applies for the aircraft purchase commitment?

Exactly, aircraft commitment.

Okay. And among those I understand you have aircraft loans for R$1 billion, which means that part of that commitment you're going to finance with your own cash generation, right?

Well we have financing for the deliveries from 2008 to 2010. Actually, they are fully financed, fully committed. So through two types of financing, either sale lease-back or financing which we have the guarantee from [Exing] Bank.

Oh okay, so in 2010, all the aircraft commitments are already fully financed.

In place, yes. Financing for the deliveries are fully in place.

Okay perfect, thank you.

You're welcome.

Keith Weissman from Calyon Securities.

Good morning. I was wondering if you can discuss your expectation for the impact of Azul entering the market in 2009. And I see you've put your domestic capacity increase at 4% for next year, I was wondering if you expected them to come out of the gates with pretty low introductory fares and if we could expect to see potentially yield declines in the Brazilian market next year.

For 2009 we expect to see the market growing almost two times or two and a half times GDP. That means our expectation is to see something between 8% and 10% or 9% and 11% growth in the demand for 2009. And so considering that, we will review our growth plans from the second half of this year and for 2009. So that's our plans to these projections of industry growth.

With that we are expecting to see a stable market environment or competitive environment related to the yields and price for next year, considering that we have a seasonal period during the year. Did I answer your question?

Yes. So you expect the yields to remain flat versus this year, or hold up generally.

We are looking for periods during the second half of this year, when you compare it to the first half, and we are considering some instability using the second half of 2008 as a base case.

Okay thanks, got that. In terms of your cash balance, you burned about R$300 million in the quarter and are down to about R$738 million. I mean you suspended the dividend for the remainder of the year, what level of cash do you start to become concerned about having sufficient reserves?

I'm sorry, could you repeat? You asked about cash balance and dividends, but we could not understand the whole question.

Yes I'm just wondering, in terms of you've recently suspended your dividends and burned through R$300 million in cash in the quarter, is there a specific cash level where you might get concerned and have to go to the capital markets or do some type of financing transaction to get cash balance back up?

Okay well as we mentioned, the future CapEx is fully financed. The second point is that, when we manage the Company, we don't look only to the cash and the cash equivalents that we have on hand, we also look to the [satalee] receivables. So we have two [access] to this receivable that we have. In addition, we have our unused credit line.

So considering all of that, we ended the quarter with 1.5 billion in [drop] cash liquidity, which is what we are calling, okay? And the dividend in Brazil, Brazilian law requires a company to distribute up to 25% of its net income to its shareholders.

So what we did was a [pentive] approach in order to maintain stability. And if we are required, we will be distributing the difference and will be reaching 25% by the end of the year. But the main important point is that CapEx is fully financed for the next two, three years.

Okay. And the last question is a small point. I was wondering if you can clarify the impact of foreign currency gains on the interest income. You said there was R$87 million of positive impact from currency in the quarter, is that my understanding?

Yes it was R$87.4 million revenue, the exchange variation and the monetary exchange variation.

So is that to say if you held exchange rate constant that your interest income would have been R$87 million lower?

No. You know a large portion of our total debt is US dollar denominated, so therefore when we -- and we experienced a decline in the exchange rate during the quarter, so this benefited the income line of our income statement.

Right. I'm just trying to understand if the exchange rate, let's say it didn't change from the beginning of the quarter to the end, that entire R$87 million would be gone and you'd have R$15 million of interest income?

From now to the end of the year, if we do not see any movement, we will have no impact at all on our income statement, that's it.

Okay, thank you.

You're welcome.

Paula Kovarsky from Itau Securities.

Hi good morning, everyone. Could you please give us a little bit more color on how exactly the consolidation process between [GTA] and VRG is going to work? Things like will you be able to shift slots between the two companies? Will you be able to shift passengers between the two companies? And then how do you plan to handle passengers buying VRG tickets and ending up in fully booked GTA aircraft? And the last part of the question is does this consolidation imply any additional liability that could come from the old Varig's forwards goal to some extent? Or it makes no difference.

Okay thank you, Paula. For the first part of your question, we requested ANAC approval to integrate both companies. That means for us we are talking about benefits on the commercial side and also on the operational side. We expect to launch the same reservation system or the same booking systems at Varig as we are using at GOL today.

We expect to see that happen at Varig until the end of August. So we will integrate the commercial platforms. And also we will be able to work as just one airline, that means like a code share during the one period. And after that, as soon as ANAC gives us the approval, we will be able to sell tickets for -- or we will establish just one code for all the flights. Also for Varig and for GOL we'll have just one code, that means we'll sell tickets on both websites and we'll be able to sell tickets for all the flights on both websites.

And also on the operational side, we will operate as just one fleet and one crew, or one workforce. With that we'll gain a lot in terms of productivity and efficiency. And also, considering the other rules and laws that are working today, we will keep all the slots on this company. This company will take all the responsibilities and also all the assets from both ones, from VRG and from GTA.

That means we'll keep all the slots and we'll be able to offer a much more balanced network or much more balanced frequencies to our customers. That means we'll have flights on a [Baric or mark rebate] time during the day to our customers with a lower cost, as I said, gaining all the synergies. We have just one fleet and just one crew.

But how do you plan to manage the two different -- I mean these are two different branches with two different marketing approaches to customers. So how do you plan to manage both in the same network, if you like? I mean, this was one of the main criticisms that you guys had against your competitors' strategy, serving two different types of customers with the same network. So how do you plan to manage that?

Yes one thing is that we can't analyze if the flight will be operated by Varig or by GOL when the clients, when the customers decide to select one or another flight. The point is we are making all the analysis to segregate the Varig operations to the main markets where the business travelers are and where the Varig attributes are more valuated.

So we are working with possibilities and at an appropriate time we will announce to the market what will be our decision. And for that we are waiting for ANAC's approval. Before that it's too early, it's too premature for us to talk about that. But we have alternatives to work with this issue, if that is an issue.

And related to the bankruptcy process, or related to the debt of old Varig, again VRG is a result of a bankruptcy process where all the creditors vote and vote in favor of the VRG sales. And all the obligations that the VRG assume to pay or even have some service related to the old Varig have been done. That means all the obligations were paid and will have nothing related to the old Varig.

So this movement doesn't change anything related to the old Varig with VRG or with GOL. That means we are still protected by the bankruptcy process and working to definitively finish this process as soon as possible.

Okay just with respect to the consolidation process, could you give you a little bit of color in terms of timing? When do you expect those things to be fully, fully operational up to a point where you're actually operating a single company?

It will depend when the market will answer our request. We expect to see that until middle of September. And we are doing our plans and probably will need another 45 to 60 days to implement everything. That means to have all the results fully implemented in an integrated network and companies, that will take another something like 90 days from now.

Okay, thank you very much.

You're welcome.

Bernardo Carneiro from Deutsche Bank.

Actually I'll try to do very short questions, they are two questions. The first one is I'd like to understand why you are [dancing] around [even] the distribution costs has been delayed. In the last year, in 2007, the Company was trying to reduce the distribution expenses, which were mostly in the GDS instead of Internet.

But today in the second quarter VRG is seeing sales a lot -- 85% of its tickets are using the GDS and only 15% in the Internet compared to 79% Internet [indicated] GOL. So I'd like to get more visibility on when the Company plans to lower the commission expenses in terms of VRG.

The second question is on the back of the sharp decline in fourth slide. I'd like to know if it was the controlling shareholders have come back with the plan to [delete] the shares buying back [threefold]. Thanks.

The first part of your question related to the VRG distribution costs, you are right, we are expecting to change the VRG or the consolidated reservation systems to the same system as GOL's using today with the New Skies and the old reservation systems from [Nagit Air].

The next generation of the reservation system at GOL, we started to work with the system during last Saturday. For example, we have a brand new website for our customers, much more friendly and with much more options. And we expect to run the same system at VRG on August 25.

That could delay a little bit one week during that event, but around August 25 is our plan. And with that we will be in a much better condition to sell to Internet against GDS with lower cost and with a much more friendly website to our customers.

With that we expect to run both companies on the same reservations systems and have almost the same level of reservations to Internet as we have at GOL today, or something around 80%. That's the first step to integrate the commercial operations for both companies, even before the ANAC's approval. We don't need ANAC's approval to do that, we are integrating the systems at this point and we'll be able to take advantage of that on the September sales.

For the second part, Anna, to you.

Well we have approved beginning of this year a share buy-back program. So far we have to take back 1.6 million shares. The outstanding [peak load] that we have as of end of June is approximately 26.7% of our outstanding capital.

But my question is related to last year's (inaudible), that the controlling shareholders would buy back (inaudible) the listing GOL from the capital markets from [bovesto]. Because of the significant stock price decline, has the controlling shareholder begun to think about that?

As far as we know nobody is asking anything about that. So nobody is considering this possibility any more.

Okay thank you.

Daniela Bretthauer from Goldman Sachs.

Hi. Good afternoon, everyone, actually two questions. You mentioned in your press release that you have increased your fares since the second quarter. So the question is, what has been the fair increase to give you confidence that you can get to the $0.26 yield, that's your updated guidance for I think the third quarter? That's a pretty substantial increase, 33% sequential increase in yield, from the second quarter level. So I just wanted to understand how yields are going to get to $0.26.

Well, Daniela, as of July and the first week of August, we already are practicing in the domestic market higher yields and we're already at that level that you mentioned, even higher.

And in fares, how much have fares increased (multiple speakers)?

Domestically they are already a bit higher than the guidance that we provided.

And has this strategy been specifically -- or at both Varig and GOL? Because my view is that the yields for Varig were especially weak in the second quarter. So can you comment a little bit on some of the initiatives that you have taken, especially to improve Varig's yield?

Daniela, okay it's important to say that also during second quarter, even during June, we looked at some increase in our yields. That means we finished June at a little bit higher yield than the average of the second quarter. For third quarter we are experimenting the yields online are a little bit higher than our initial guidance.

But considering all the initiatives related to the [fit] network where we are reducing our offering, especially where we have [made announcements] into where we have GOL and Varig competing in the same market or in the same period of the day, that means on similar hours or with similar schedules. That will help both companies to achieve a better load factor and also to have better yields to cover all the costs that we have.

That's the main initiative for us today and we saw, as a seasonal period on the first half of this year, there were a lot of promotional initiatives that will have during the second quarter lower promotional initiatives. That means helping us to increase our yields. So combining the second lower capacity and lower promotional initiatives will allow us to have better yields for the second half of this year, for Varig and for GOL. And on a consolidated number, better yields for the Company.

Okay great. And then very quickly, last question, you also mentioned that you have also still some costs related to aircraft returns in the third quarter. Do you have a sense, or have you provisioned a number that you could give to us at this point?

Well in terms of CASK ex-fuel, we do not expect to see it declining compared to the second quarter. So it will remain (inaudible) on the second quarter 2008 level due to the lower [air traffic] utilization and also related to the return of the aircraft and now shutting down the long-haul operations, okay. So both will be impacting the CASK ex-fuel.

But have you provisioned a number that you could share with us or not?

No, not really. I mean, this is included in the ex-fuel guidance that we are giving you.

Okay, thanks.

[Jorje Mero] from Legg Mason.

Hi Junior, hi Anna Cecilia, I'm just following up on Daniela's question. First on the non-recurring expenses, we should expect the same level for the fourth quarter also?

Fourth quarter we did not provide yet guidance, but yes it would be in the high levels that we are presenting now. I mean it's more or less on the same level.

Okay. And for '09 you're not planning to actually have these kind of expenses? They will be over after '08?

For '09 you have to take into consideration the synergies that we will start to collect from the integration of both companies, synergy gains not only in revenues but there will be lots of synergies on the operating side and cost side. So these things will help us to bring down some of these CASK ex-fuel costs. But we're not providing guidance yet.

Okay. And then moving onto [RASK/CASK spread], if you could comment on, this day we saw on GTA an [ART] RASK/CASK spread. Is this related to you are actually switching routes from GOL to Varig on the domestic market? Is that what is happening?

Could you repeat please? The telephone was not okay.

Sure. The RASK/CASK spread and basically GTA reported an (inaudible) spread this quarter on also VRG, so I would like to know why is this [net] is spread in GTA. Is this related because you are switching some routes from GTA to VRG? Is this the case? And if not, if there is any color you could give us on why the drop in the RASK/CASK and GTA.

Well, the drop was mainly due to there were also some extraordinary items on the GTA results, we were returning the 737-300s. Also higher fuel costs and also some competition that was a lower RASK -- seasonal reasons that affected the RASK during the quarter.

It's also related to some transference from GOL to VRG [just across the] (inaudible).

Okay. And on these personal expenses, this 24% in headcount, where were these costs before? I mean was this included in the P&L of GOL under third-party services in other expenses?

It was under the administrative costs. A portion was on the selling expense costs because they were related to the call centers.

And that was working with a third party and we internalized that in the third or fourth quarter of '07.

Okay. And finally the last one, do you have any covenants on your debt?

Yes, we do have covenants on our debt. One was a renegotiation, as you will see in our finances, one was negotiated during the second quarter so it's okay. And the other one we've renegotiated and now we have a letter of credit covering the total debt of this lender.

So basically, you got away there?

We are fine with both covenants that we have.

And can we know what are these covenants? Is it related to net debt to EBITDAR, net debt to EBITDA?

It's related to cash EBITDA primary to expenses, a typical [stack of] our loan. Nothing really significant.

Okay. Thank you very much.

You're welcome.

This concludes the question-and-answer session. At this time I would like to turn the floor back to Mr. Constantino de Oliveira Junior for any closing remarks.

Once again, thank you very much for your interest in GOL. We remain committed to making air travel simple, more accessible option for everyone, to our innovative [credit] service, efficient operations, competitive low prices. If you have any additional questions feel free to contact our Investor Relations department. You can also visit the Investor Relations section on our website at www.voegol.com.br/ir. Thank you very much and have a nice day.

Thank you, everyone.

Thank you. This concludes today's GOL Airlines Q2 '08 results conference call. You may now disconnect your lines at this time.