Gol Linhas Aereas Inteligentes SA (GOL) 2015 Q1 法說會逐字稿

Good morning, everyone, and thank you for waiting. Welcome to GOL Airlines first quarter of 2015 results conference call. With us here today we have Mr. Paulo Kakinoff, CEO; Mr. Edmar Lopes, Chief Financial and IR Officer; and Mr. Eduardo Masson, Financial and Investor Relations Director.

This event is being recorded and all participants will be in a listen-only mode during the Company's presentation. After GOL's remarks, there will be a question-and-answer session. At that time, further instructions will be given. (Operator Instructions)

This event is also being broadcast live via webcast and may be accessed through GOL's website at www.voegol.com.br/ir, where the presentation is also available.

Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded. Those following the presentation via the webcast may post their questions on our website. They will be answered by the IR team after the conference is finished.

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of GOL management and on information currently available to the Company. They involve risks and uncertainties because they relate to future events, and therefore, depend on circumstances that may or may not occur.

Investors and analysts should understand that conditions related to macroeconomic conditions, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements.

Now, I will turn the conference over to Mr. Paulo Kakinoff. Mr. Paulo, you may begin your presentation.

Good morning, everyone, and thank you for participating in our conference call with the results for the first quarter of 2015. Beginning our presentation on slide number 2, the first months of the year were marked by the economic downturn and by a challenging competitive environment. On the left table, we highlighted the 41.8% exchange rate devaluation of the real compared to March 2014. In the quarterly average, the real devaluated by 21.4%.

The next item shows that the drop in the number of corporate travel is a result of Brazil's economic slowdown. In the first quarter of 2015, we continued to see the same scenario as we have seen since July 2014, basically after the Brazilian Soccer World Cup.

In Brazil, jet fuel prices were down 25.3% year over year. Oil prices in the international market dropped 50.1% in the same period. However, the above mentioned devaluation of the real substantially offset this benefit in fuel cost.

The capacity increase in the domestic market is the last item in the table on the left. The high season in the first quarter characterized by the higher demand from leisure passengers resulted in a 4% increase in the industry's total capacity. However, our capacity estimates remain stable for the year, as we will discuss later.

Based on the Company's strategy to maintain high liquidity, we were able to continue expanding and diversifying our revenue lines to navigate this difficult period. On the right band -- sorry, on the right hand side of the same slide, we present the result achieved by continuing to invest in our strategy.

GOL's highlights for the quarter include the maintenance of the leading position in the number of passengers transported in the domestic market. As an interesting point, in January of this year, GOL transported 157,000 passengers on a single day and 4 million customers in a month. These figures broke two records in the history of Brazilian aviation, the daily and monthly number of passengers served by a single airline.

Moving to the next item, for yet another quarter we increased our lead in the number of tickets issued for the corporate segment, with more than 31% of share, according to Abracorp, Brazilian Association of Corporate Travel Agencies.

The constant and steady revenue increase in foreign currency is also a key part of our strategy. We increased the connectivity and destinations of our network, announcing new flights to Tobago in the Caribbean and Mendoza in Argentina, in addition to opening a new route between Natal in the northeast of Brazil and Buenos Aires, Argentina.

Another important highlight of this quarter was the total revenue when even with all challenges faced by the industry and the economy, we were able to maintain the same level as the prior year. The drop in passenger revenues was mitigated by the 32.8% increase in ancillary revenue, especially from the sale of GOL+ Conforto seats and from cargo transportation.

Although the important achievements obtained on the revenue side were the results of our efforts over the last year, having the lowest costs industry -- I'm sorry, having the lowest cost in the industry is the core pillar of GOL's business model. We are continually working every single day with a special focus on controlling cost and maximizing improving efficiencies and cost reduction opportunities, despite of the pressure coming out the new exchange rate level.

Looking now to slide number 3, we present the increase in our results for the quarter and for the last 12 months. In the first quarter of 2015, our net revenue rose 0.5% to BRL2.5 billion. When compared to the last 12 months, we achieved a new historic high of BRL10.1 billion.

In the period, our operating income increased 6.5%, totaling BRL154 million. As a result, EBIT margin was 6.1%, 0.3 percentage points up year over year. Over the last 12 months, EBIT rose by more than 66% from BRL309 million to BRL514 million. In the first quarter, EBITDAR amount to BRL469 million and over the last 12 months it totaled BRL1.8 billion.

Regarding operation, as you can see on slide number 4, we increased our capacity in the domestic market by 2.1%, while demand grew 4.9%. As a result, load factors increased 2.1 percentage points year over year, reaching 79%. This load factor gain is part of the strategy of mitigating the impact of both the weaker economy and yield pressure. As a reminder, GOL has been working to manage its capacity to meet seasonal requirements.

So moving to slide number 5, we show how we have used these two over a longer period, the last 12 months. On the supply side, we reduced capacity by 1.5%, the largest decrease in the domestic market. In terms of RPK, on the demand side we captured 40% of the industry's growth.

Our strategy has been clearly rewarded with our load factor up by 5.4 percentage points, the industry's largest expansion rate. Our relative load factor shows our goal of capturing the maximum amount of demand in different market scenarios, always prioritizing the yields. Over the period, our market share increased slightly.

As a result, on slide number 6, we can see that GOL maintained its leading position in the Brazilian market in terms of passengers transported. According to the National Civil Aviation Agency, ANAC, we transported more than 9 million passengers in the quarter, equivalent to a 2.3% increase compared to 2014.

As we already mentioned, on slide number 7, we show that GOL expanded by 1 percentage point its relative share in the sales for the corporate segment year over year according to Abracorp. In addition, GOL had the industry's largest expansion in terms of ticket issued, with an increase of 14.2%.

Moving to slide 8, the maintenance of GOL's revenue level was driven by the almost 33% increase in ancillary revenue compared to the first quarter of 2014. This outcome is a result of our strategy of diversifying our revenue lines and was primarily due to the sale of GOL+ Conforto seats, onboard sales and Gollog cargo transportation services.

A highlight was the opening of the new cargo terminal at Congonhas Airport. With 2.1 thousand square meters, it expands our network, increasing offering and efficiency and convenience to our customers.

On slide number 9, we can see the increase from 9 to 24 countries that are ready to sell tickets through the GDS, the Global Distribution System. This initiative is in line with our goal of increasing international revenues year over year. This line amounted to BRL1.1 billion, equivalent to approximately 12% of total revenue.

On slide number 10, we show the result of our team effort in improving GOL's efficiency and productivity. Regarding personnel, the last 12-month net revenue per employee ratio has risen 57.6% since the first quarter of 2012. Year over year, we were 3.3% up. Seat demand per employee has increased 35.4% since the first quarter of 2012, while year over year this indicator rose 3.5%.

From an operational standpoint, GOL also presented constant growth, with net revenue generation per flight expanding almost 40% since 2012 and with the fuel consumption per RPK have improved by almost 15.6% over the last four years. Year over year, our revenue was 6.5% up and we optimized the consumption by 5.3%.

Now, I like to give the floor to Edmar, who will present the financial results for the period. Edmar, if you please?

Thank you, Kakinoff, and good morning, everyone. I will start with the fact that Kakinoff has already mentioned and this is the level of the revenues. We kept the BRL2.5 billion, just a little bit over that, in spite of the economic downturn here in Brazil. EBIT was up by 6.5%, roughly BRL10 million, which shows again the efforts that we have made in both the top and the bottom line.

As for net income, the net result was strongly affected by the currency. FX variation came at almost BRL800 million, therefore impacting our loss per share. In terms of supply, we grew 4% in the total capacity, as Kakinoff mentioned, 2% in the domestic market, meaning that we grew more than that in percentage terms. As for the international market, again very much correlated with our strategy.

Yields were down. We had already announced that back in our traffic call made a few days ago. And RASK was -- did not suffer as much because of the load factors going up roughly 2 percentage points, as well as the ancillary revenues. Total CASK was down primarily because of fuel.

In the next slide, we will discuss about the ex-fuel side. And very important here in Brazil is the fact that we were affected by the FX by 41% in terms of the balance sheet, and in terms of the expenses, roughly 20% in terms of the average of the FX for the quarter.

We also bring here the price for jet fuel in reais for the term, which was below BRL2 per liter. But I highlighted in the Portuguese call and I'm doing that right now in the English call is that we will see the price in reais moving up by at least 10% for the next quarter, and this is related for both the fuel going up as well as for the FX moving against the Company.

In the next slide, this is slide 13, this is familiar to you. It shows how the yields and load factors have been doing here in Brazil and we show that we were below BRL0.22 for the first quarter. This is the lowest in the last two years, as you can see. And the likelihood of us having an even lower yield in the second quarter is almost for sure now. We are halfway through the second quarter and up to a few days ago we saw nothing but the yields coming down on -- let's say, since July-August last year.

Moving to slide 14, we highlight here the main topics. On the wages, there was an agreement in the collective pay of 7%, which hurt us in terms of reais. We also had a more variable crew compensation because we are flying more, as well as the opening of new stations also has increased our labor.

As for aircraft rent, I highlighted earlier today that this is the first quarter since Varig's acquisition that the Company has no aircraft but 737 NGs. We had -- we redelivered the last 767 from Varig only in December 2014. This is why we show very little increase. The line was almost flat on a year over year comparison because we have less seven operating aircraft under our leasing account.

Sales and marketing also down and this is primarily a result of the efforts that the Company made in terms of fraud and losses in credit cards. And I'm talking here roughly BRL30 million that was the difference between one quarter and the other.

As for third parties, the main item that affected this line is related to the number of tickets that we are purchasing from our partners. I'm quoting here; this is TAP, this is Air France-KLM, this is Alitalia, this is Delta. Those guys are in place now and this is what we call a good expense because it will translate into revenues and this is very much related to the work that Smiles has been doing in having a more international presence.

On the maintenance side, what differs from last year, we had a credit last year as for the redelivery adjustment. On the other line, the main difference here is the fact that we are doing this year less sale impact than we did last year. We are not only receiving less planes, but also doing less sale impacts. Last year we had BRL40 million credit -- BRL41 million to be very precise in terms of credit in this line. Exchange; the FX variation accounted for roughly 50% of the increase in the nominal terms of the CASK for us.

On the next page, we highlight what is a function -- what expense are a function of the FX. And the number went down from 55% -- computing here aircraft, fuel, maintenance and rent -- down to just to 50%. Next quarter, as I have mentioned, we will see on relative terms the fuel moving up, so we should be beyond 50% of our total cost as a function of the FX.

On page 16, this is a well know chart that we publish every quarter. This is to show that we are very competitive in terms of ex-fuel when you compare to our peers here in the region in terms of having the same business model or flying in the same places.

In the next page -- and this is page 17 -- we do explain what happened to our results. If it were not for the FX variation, we would have a positive result. I want to repeat that FX variation has no cash effect in the short term.

Page 18, again the cash level is very important for us because it shows our strength in terms of the financials, but it also makes us very positive in terms of keeping the improvement and the enhancements that we have made in the last few years not only for the products, but also for the services here at GOL. So we were able to deliver GOL mais Conforto. We were able to open new stations. And this is part of the strategy that we have been following, as mentioned before.

Leverage -- and I'm here at page 19 now -- leverage went up primarily as a function of the FX. The marginal decrease in EBITDAR does not explain all the variation.

And before I give the floor back to Kakinoff, I would like to mention that as for the debt profile, we are -- for the next five years we had an average of roughly BRL400 million in terms of amortization, which we think is affordable for us even in this tough scenario that we are living in. And more important than that is the fact that the debt is primary in reais. Therefore, although the real suffered a devaluation in the short-term, it will affect us in terms of debt on a marginal basis.

Okay, this is it and, Kakinoff, please have the floor back.

Thanks, Edmar. Now, moving to slide number 21, we maintain our commitment of not expanding the supply in the domestic market for the year. Actually, we do see even (technical difficulty). In the first quarter, we see a seasonal growth in supply to reach the high season demand, but the yearly guidance remains flat.

Average foreign exchange rate closed in the quarter at the BRL2.87, despite having reached the peak of BRL3.30, and till yesterday this average was approximately BRL2.92 per US dollar.

Average fuel price in the quarter was BRL1.96 per liter. For the second quarter, we are already considering a higher value due to a higher devaluation of the real and depreciation of oil prices in the international market. EBIT margin in the quarter was 6.1%, and although higher than our top guidance, it is still in line with full-year expectation. The second quarter has been even more challenging than last year, primarily due to the corporate segment demand.

The final message on slide 22 shows that we will keep our flight plan according to our strategy, which has been carried out with full discipline and commitment, as presented in this conference call.

Now, I would like to thank you all, close this presentation and move to the Q&A session.

(Operator Instructions). Richa Talwar, Deutsche Bank.

It's actually Richa Talwar filling in for Mike. So just a couple of questions from us. First, looking forward -- you know, the June quarter is a seasonally difficult one for you, so we found it encouraging that you were able to maintain your 2015 margin guidance in the context of the current trends you are seeing. And I know, Edmar, you commented on this, but I was hoping that you could elaborate on those trends. Should we expect PRASK to be done in the June quarter year over year as much as it was in the March quarter? Are you seeing anything encouraging in terms of forward bookings or pricing or you are growing market share in the corporate segment that may lead to better PRASK performance?

This is Edmar here. I will start with some of the topics. Then I will hand over to Kakinoff, okay. So generally speaking, what we have seen in 2015 was that the trend of the prices going down stayed until a few days ago, okay. So starting back in the second half of 2014 we saw nothing but the prices coming down until, as I mentioned, a few days ago. There is -- the yields, the pricing on the early June quarter was down in a comparison basis with what we had in the first quarter, okay.

The news -- and this is very recent and still to be consolidated -- is that that drop is not happening anymore. It's still to be seen if there will be a recovery or if there will be, let's say, a second wave of the prices really moving down again. So this is overall what we have seen.

Kakinoff will go over a little bit over the corporate side so you have -- you will have [advance] of what is happening here in Brazil.

Just giving you more colors on the corporate travelers' behavior since the end of Brazilian soccer games, the World Cup basically in August last year. Since then and due to the economic slowdown, the sales to the corporate travelers has come down. And in Brazil we have a specific crisis related to the building companies, oil and gas segment under this (inaudible) umbrella. Those segments were pretty important. They are very important among the corporate travelers and they have dropped the purchase of tickets by the level of 30% -- in some cases 40% -- in comparison to the same period of last year.

This second quarter of this year, must be even worse than normally the second quarters are. As you probably know, the second quarter is the weakest for the Brazilian airlines and last year we had a positive result mainly due to the World Cup sales. On top of that -- I mean this one is even more challenging because we have the economic scenario much worse than it was predicted to be when we have discussed the 2015 budget by the end of last year.

The positive side is that, as Edmar said, this week and the last were the first two when this trend stopped and we do not see further price reduction in the corporate sales. I cannot say -- we cannot say this is a turning point. But it might be and this is what we are looking for, okay.

Okay, that was very helpful. Thank you. And then switching gears a little bit, the strong 33% growth in cargo and other revenue, do you think that kind of growth rate is sustainable through the year? I would think so given the Gollog terminal at Congonhas Airport, which I would suspect will produce an additional boost to cargo, but wanted to hear your thoughts on that too?

This result is primarily driven by the additional sales of the GOL+ Conforto seats. You probably remember only after November last year we have been able to offer this new seat configuration in every aircraft. So we took almost a year to redesign, to configure the 140 aircrafts we had in our fleet, and therefore, this year is going to be the first one with the full-year being sold with this -- or through this new aircraft configuration. Therefore, this new ancillary revenue level is more than sustainable. It's likely to even increase due to the investment in the cargo side and the full-year effect of GOL+ Conforto seats.

Okay, thanks. Are you able to parse out maybe what that GOL+ Conforto seats revenue was versus cargo and other?

This is a quite sensitive information, which I -- therefore, I really don't like to give any disclosure on that.

Richa, we saw there were -- there is a lot of people from our competitors in the call. They would be eager to have this answer. I'm sorry we cannot do that.

No problem. I understand. Thank you for everything today.

Thank you.

Savanthi Syth, Raymond James.

Just on the corporate sales decline that you mentioned, Paulo, is the -- there were declines last year as well, if I recall correctly, or at least corporate sales were sluggish. So do we get to a point that -- where we start to lap some of the declines or is this kind of a new kind of leg down, and if it stabilizes, you will still see year-over-year decline?

We don't believe that it's going to be stabilized at this level. It will be low. I mean most of those companies I have just mentioned and even the government, they cannot run their business at so low level of passenger -- I'm sorry, the airline tickets purchased. I mean they are going through a clear crisis period which might last longer than everyone expected. But this low level is not sustainable over the following period.

So I do believe that this stabilization will be followed by some slow recover over the following months. I do not know -- I cannot tell you when we will be back at the prior levels. But I personally believe we cannot go worse than we were right now. It might be the beginning of the turning point.

That makes sense. Got it. And then just on the liquidity side, you definitely have a good cash reserve there to kind of withstand headwinds. I was wondering if you can talk about some of the other liquidity avenues that you have if you need to raise funds.

This is Edmar here. We have been very conservative in terms of our liquidity levels. We have pointed out that this year we will be floating around 20% and 25%. This is primarily part of the plan. But down the road, if needed, we will see what can be done. But at this point there is nothing on our radar, okay. So we think that we have enough cash. But then again it depends also on the market. Right now the markets are closed for Brazilian companies.

Understood. Okay. And then just if I can ask a maintenance question just -- on the hedging, I know you provided what percentages of hedges -- fuel hedges there are kind of over here in the next three and six months. I wonder if you could provide kind of the level of what those hedges or the fixed contracts are at.

Okay. So first -- okay, first remember that we took a hit in the fourth quarter, okay. The positions we had by the end of last year, the positions were out of the money, okay. So the position that we have nowadays, they were built primarily during the first quarter, okay. So they are at market levels nowadays. We have no, let's say, sound position completely out of the money, okay. And we have some coverage with derivatives, which roughly is 5% for the next few months -- the next six months, which are primarily zero cost collars. And also we have some positions with fixed price with Petrobras, okay. I would say almost it's a double-digit number for the next three months.

Is it possible, Edmar, to give kind of what the average level of that pricing is just so we have an idea?

So, Savi, to be very honest, the message is we don't have a major gain or loss year. As I mentioned, the positions were built during the first quarter because we have decided to get away, to dismantle the positions that we had, that we are out them. So do not expect any big number for our FX or oil positions from now on, okay.

Got it. All right, thank you.

Jeff Reisenberg, Evercore ISI.

This is Jeff Reisenberg in for Duane. I was wondering if you could help us think about the shape of margins going forward. I think guidance suggests that the margins are going to decline year on year and you have called out 2Q as a particularly weak spot. But do you expect to achieve the level of margin recovery sometime in the year in the second half, third or fourth quarter or is that more like a 2016 type time frame, if you could just sort of comment on how you view that?

We do not give guidance for quarter's margins, okay. What happens here in Brazil is that regularly most of the time we have a negative margin in the second quarter -- last year was an exception -- and the margins build up for third and fourth quarter, okay. We do expect the same kind of behavior from now on. This is what we can say about quarter margins.

Okay, thanks for that. And then I guess as you are thinking towards 2016 -- I'm not looking for a specific guidance, but how is your bias in planning? I mean I know that you are going to go down one unit, one [shell] relative to 2015. But are you -- is your bias to hold domestic capacity flat going to 2016, to grow a little bit or to shrink? How are you thinking around that and what kind of fuel prices and FX assumptions go into that thinking?

It's Kakinoff here. Actually, considering any kind of growth is completely out of question right now. We sustain our stable process, but I would say -- I could give you today an uplift even for that. There is no this season there yet, but considering that the economic scenario we will either continue to deteriorate or being kept at this low level. We could decide to even cut further capacity.

As for the main macro drivers, the FX and fuel still very early -- very, very early to say anything about. And for international --

But you have I believe this ability to adjust around that, right?

Sure, yes, yes. But it is also important to mention how we could steer this -- creating capacity. As you can observe, last year we flew in December 34% more in number of ASKs than we flew in March. So the Company has been able to even increase or reduce its size by one-third from month to month. And we can do that through the sub leasing alternative with Transavia, the European low cost air -- fleet carrier actually -- flight carrier, sorry. And we can also reduce the aircraft utilization per day. So the Company would be able to cut capacity without increasing cost to redeliveries or something.

Got it. And I think one more if I can throw it in there. Your Venezuela cash increased by about $51 million and I think you called out some FX variation as the driver. But can you confirm that you are selling tickets all in USD or how much are in USD and bolivar?

We are not selling in Venezuela anymore, okay. This was the decision taken last year. Since second half we are not selling any ticket out there. And what is happening now is that we do have some FX variation in the money we have out there. And because we have less expenses the (technical difficulty). As mentioned, we are working on a way, as the other airlines, to have the cash out of Venezuela.

Okay, thank you for taking the questions.

Thank you.

Tom Kim, Goldman Sachs.

I wanted to just ask on the international side. Can you just tell us -- give us a little bit of color in terms of how your growth is shaping up relative to the expectations and to what extent can you comment on the mix of corporate versus business versus leisure? Thank you.

I cannot give you too much disclosure on our future strategy related to specific routes. But you probably remember that we have announced by the beginning of the last year that we will aim to achieve an international revenue at the level of 17% and 18% by the end of 2016. So we have built this growth starting from the 2012 8% in foreign currency revenue, trying to achieve this 17%. And we have built that through three different pillars; expansion of our own international network, building new code share agreements -- and it's important to mention that the two-way code share with Air France-KLM is fully operated since April this year, so it's going to be the first -- next quarter is going to be the first one getting the advantages of this two-way code share -- and furtherly through the new sales channels like the GDS.

And we have improved our own network, getting all available opportunities to operate with the 727s, a new destination which perfectly fits our domestic network to have -- take the benefit of the feeding effect. The northwest region of the country has shown us a lot of interesting opportunities and it has captured them after local negotiations with the authorities, airport structure and so and so forth. We do believe that we will continue to announce new international destinations over the following quarters. This is the maximum disclosure we can give you on our international strategy. I hope you can understand.

No, no, that's great. Thank you very much. Can you give us some sense of the pricing breakdown if you strip out the currency impact? And then to what extent does your CASK benefit or not from FX translation as well?

Tom, this is Edmar here. Roughly 50% of the increase in reais terms of the ex-fuel CASK is related to the FX. We are talking about maintenance and rent here, okay. This is the first number that I can give you.

And the other question was I'm sorry?

How much does your PRASK get sort of skewed by currency at all with regard to the international side?

On the revenue side, we do not give any color on that, okay. Please forgive us.

Okay. All right, well, thank you.

Thank you.

Thank you.

Stephen Trent, Citi.

Two questions from me. The first is, I was wondering if you could just give us a little color on what's going on in Brazil from an aviation regulatory standpoint. It seems like this regional aviation stimulus was pushed and then stopped and now there seem to be hints that they want to modify it. Can you just maybe share with us your latest view?

Following the current deterioration in the Brazilian economic scenario, the official treasurer has worked on any kind of possible contingency and cash conversation. So from a government's point of view, I do believe that the willingness to develop and deliver the regional plan as it was designed by the end of 2012 has changed. We do not know exactly how much, but we got last week the Brazilian civil aviation minister saying that a certain amount of contingency is unavoidable. So it's likely that the regional plan will be smaller to start with than it was predicted.

Okay, very helpful, Kakinoff. And just one other -- second question with respect to the current competitive environment in Brazil. What you can say with respect to whether you are seeing any of your local competitors creeping more on to the trunk routes and what can you tell us there would be great?

Clearly, at the moment there is another capacity, as you know, because some of our competitors have increased their capacity over the last period while the demand came down, mainly the corporate demand. I believe that this behavior is about to change when we look at the future sales and the inventory, which has been further available to the market. I would say all the competitors have changed the number of seats being first available for sales along the following months and this is a quite good signal that this capacity discipline will be over -- no, not over, it will be considered more seriously by everyone else. I take it as quite good news.

Great. Thanks very much, Kakinoff. I will let someone else ask a question.

Thank you.

Bob McAdoo, Imperial Capital.

A couple of questions. In this one paragraph -- one statement that you make in your description of cost, it says the increase in number of tickets purchased for your airlines that will be reversed in revenue in the future. What kind of tickets are those? What kinds of passengers are those? What kind of itinerary? I don't understand what that could be.

Bob, this is Edmar here. This are the purchase of tickets made through Smiles, okay. So we understand this is a good cost between inverted commas, because it shows that our loyalty program is increasingly reaching the international markets.

So this is a customer who bought something on a credit card, used those miles to buy a ticket that is partially on GOL, partially on someone else?

No, please remember that --

And he will buy the ticket on someone else?

Okay, please remember that we do consolidate Smiles in our numbers. So it means that we are buying tickets from those airlines two ways. One, through the redemption of points -- we do exchange cash between the airlines because there is a value by using the points -- and also if we do have, for instance, code shares, then also it happens. But primarily the expense is related to Smiles; Smiles customers buying tickets through redemptions in foreign airlines.

Okay. I guess maybe I have forgotten. The financial statements of Smiles, is it accounted for on an equity basis or is it consolidated so that all of their expenses are folded in with your expenses?

Bob, it's a 100% consolidated.

It is consolidated? Okay, so that's what

Yes.

-- that's what -- it's consolidated --

And we do --

-- [versus] equity. Okay, that's fine.

And sorry. And we do report the segments, that is the Smiles and the airline itself on a separate basis. Looking at our financial statements, the (inaudible) you will see that, okay.

I understand. Thank you. One other thing, you obviously -- if you are going to have capacity flat for the year, you are going to have to reduce capacity somewhere soon. Can you give us a clue as to when you expect to pull capacity down for the balance of the year so that you are flat for the full year?

Actually, second quarter is normally smaller than the other ones, and therefore, in the second quarter already we are going to see this. And we are taking capacity out through the said leasing format, sending some of our aircrafts to Europe where they are going to be operated by Transavia. This is low cost flight carrier which has been our partner already for five to six years.

Okay, fine. And then what is your estimate or could you give us any clue as to what your fuel price is now or what you think it will be for the second quarter?

Bob, the fuel price in Brazil depends on the FX as well. What we are seeing for the second quarter is that the fuel price should be at least 10% up. That is somewhere beyond BRL2.15, BRL2.20 and beyond that. But we are still 40 days before the end of the June quarter, so there should be some change. There has been a lot of volatility not only on the oil side, but also on the FX side which affects us, okay.

So again --

But the price is definitely up by at least 10%.

Up versus first quarter?

Up versus first quarter.

Okay, very good. Thank you very much.

You're welcome.

Pablo Zaldivar, GBM.

I have a couple of questions. The first one, we saw some important cost increases during the quarter in payroll, maintenance and other operating expenses. Do you think this trend will continue throughout the year like important increases on those segments or in other cost segments?

There won't be increases if you are talking about the following year -- the remaining part of the year. But for certain lines, as I mentioned, there were one-offs that affected the behavior of the line in a year-over-year comparison. This should be more stable now looking for the next few quarters.

Okay, thank you very much. And the next one, I don't know if you could give us some color, are you planning on giving any other additional ancillary revenue options, I don't know any new products or there's nothing yet planned?

Yes, but we cannot -- this is something we would like to announce to the market probably or likely by the beginning of the fourth quarter. And I wouldn't like to give any color on that prior to the right day.

Okay, thank you very much.

Thank you.

[Ignacio Torelo, Lorraine Vial].

So I have a couple of questions. The first one is regarding your debt maturities schedule. I understand that about BRL781 million will have to be paid in this year and there's also the fleet plan. So I was wondering if you could tell us a little bit about how you plan to fund that since you want to have a good liquidity position.

This is Edmar here. So on the debt side what we have as of the end of the quarter as this is the BRL200 million due by Smiles, which is very much on the plan. No issues about it, okay. So right now the number is more because Smiles pays that on a monthly basis, okay.

On the FX side, which is the grey part on the chart -- this is table -- this is slide number 20, we have some revolving facilities on the local Brazilian banks. This is [Finiti], okay. We think that we won't have an issue here. And we also have Exim Bank bonds that were reissued because of the facility we have for maintenance. We should -- this is more a revolving. We don't see any problem over that as well.

As for the real debt with the orange part, we are very comfortable with what we have. As for the CapEx, we do not -- we cannot disclose all the cash arrangements that we have with [bank], okay. But it's very good for us and we have a lower number of planes coming not only this year, but also next year.

So what we have been telling the market is that CapEx for the year should be just over BRL200, BRL250 million on a net basis, okay. Therefore, the liquidity that we have for us at this point seems more than enough, especially because although I have mentioned that some of the markets are closed, the bond market in the US, for instance -- and some of the markets are closed for our Brazilian corporates, we still have access to credit in Brazil because of our profile and because of us being very conservative in terms of finance in the last few years. So we think of the current profile as, let's say, this is what we have planned for.

Great, great. Understood. Thank you for that. And my second question is regarding debentures one, five. I understand that you have about two covenants. One of them is the coverage of debt, which has to be about more than one. The next [one] will be on June. So due to the devaluation that the real is going through, I was wondering what would happen if those covenants or the coverage of that covenant would be -- were breached and what options would you have?

This is a very good question. The leverage ratio depends very much on the FX, so it's very hard to tell now which level we will have by the end of the quarter. And from the past I can tell you that if there is any, let's say, issue over debt, as before we don't see a big question here because we got waivers in the past. We had to pay for that. But Banco do Brasil and Bradesco (inaudible), the holders of the debt, was very much supportive of us and we have reasons to believe that they would be along us if needed, okay.

Right. And in the past, could you tell us how much did they charge because of that waiver?

Yes, sure. It was between BRL15 million and BRL20 million for the three years. So this is a very specific situation when you compare to the markets abroad. There was a lot of noise about it two years ago, but what happened is that at the end of the day the Company is here, the banks are with us, very supportive. So it's a situation that if needed we would be willing to tackle, okay.

Okay, great. Thank you very much and thanks for the call.

Savanthi Syth, Raymond James.

Just why the load factor isn't showing good improvement there. It shows that you guys are still below your competitors on load factors. And is that a function of -- I know some of your aircraft has a middle seat open. So is there kind of a structural impact there or do you expect to get load factors up to kind of the 80% type level over the next year or two?

Savi, this is an effect of our strategy and it's continuation since we presented it to the market in September 2012. At that time we said that our first priority would be yield and this is exactly what we have done. So since then the Company as late as -- fixed the load factor level at a lower level than our competitors because we are always optimizing the yields, attracting more corporate players and the passenger is able to buy tickets in short advance prior to the departure.

And we would tap the load factor too to be utilized whenever the market would present itself more challenging in terms of yields than we predicted and then we could increase the load factors in order to achieve the highest possible [factor] that we could. And this is exactly what we have done.

Since the yields came down, we have been pretty comfortable in fact until this alternative. We have avoided the PRASK to go down as it should (technical difficulty). So we will not prioritize load factors. I know this is a part of the strategy of some of our competitors. But GOL will keep to its (inaudible) maximize yields and sliding load factors when we cannot get the desired good level.

Okay. And that makes sense. And this is going -- my last question was on just on the corporate share. I know there was a lot of kind of improvement to the product, improvement to the on-plan performance and so that really drove a lot of the corporate share gains in the last couple of years. So what I'm wondering is what drives those gains going forward outside of pricing? What else can be done to -- could you increase corporate share or have you kind of reached a level that's kind of a normalized breakout of kind of corporate share?

Additionally, to those items already mentioned to you -- and I would like to kindly invite you to (inaudible). I mean the power of being the most punctual airlines, offering the GOL plus configuration for each and every aircraft we are operating and our naturally attractive to the corporate shares that's covered passengers' network.

We have the international contracts with Delta and Air France. Those contracts are established directly with the Company to be offered to their executives, connecting them to more than 500 destinations in the world, being operated by GOL and its partners like Air France and Delta. It's a quite attractive product. Some of those contracts are global contracts and we had approached the customers -- the three companies together, Delta, Air France-KLM and GOL. So there is another important opportunity to further increase our coverage share among the Brazilian airlines.

Okay, got it. All right, thank you.

Thank you all.

This concludes today's question-and-answer session. I would like to invite Mr. Paulo Kakinoff to proceed with his closing remarks. Please go ahead, sir.

I just would like to thank you guys and I wish you a very good day and a very good rest of the week. Thank you very much. Bye, bye.

This concludes GOL Airlines conference call for today. Thank you very much for your participation and have a nice day. You may now disconnect.