Gol Linhas Aereas Inteligentes SA (GOL) 2016 Q3 法說會逐字稿

Welcome to the Gol Airlines third-quarter 2016 results conference call. Today's presentation will be made by Paulo Kakinoff, President and CEO, and Richard Lark, Executive Vice President and CFO. This call is being recorded. (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, and their questions will be answered by the investor relations team after the conference is finished.

Before proceeding, let me mention that forward 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 result to differ materially from those expressed in such forward-looking statements.

At this time, I will now turn the presentation over to Mr. Paulo Kakinoff for opening remarks. Please go ahead, sir.

Thank you, and good morning, everyone, and thank you also for joining our fourth-quarter 2016 earnings call. The cover photo of this presentation was taken in the new Gol lounge. I want to invite everybody to visit the space, which is located in Terminal 2 of Guarulhos Airport in Sao Paulo.

Richard will take us through the quarter results, and I want to review a couple of highlights, so please turn to page 2 of today's presentation.

Today, we report a good performance in the third quarter, due to the lower industry capacity, the stronger Brazilian currency and fuel savings. The key milestones in the third quarter include traffic growth of 10% over second-quarter 2016 to 8 million passengers, a load factor increase of 1.2 percentage points to 8% (sic - see slide 2 "80%"), an average fare increase of 15.8% year over year and 6.1% versus second quarter 2016, and finally, a unit cost reduction of 6.4% versus third quarter 2015. Excluding fuel, they fell by 3.1%.

We had solid revenues of BRL2.4 billion on 6.7% reduction in capacity, and we drove industry-leading but modest unit revenue growth of 3.3%, and that was in line with our expectations. Ancillary revenues are approaching 13% of revenues.

Gol experienced operating margin expansion in the 3Q, posting the margin of 9.7%, accompanied by an operating result or EBIT of BRL232 million due to the rationalization of capacity, which reduced the number of seats available for sale by 20%, leading to a 1.5% increase in usage and a strict control over costs, which fell by 12.6% overall.

Our third Q consolidated profit reached to BRL66 million. We generated a net cash flow before financing activities of BRL390 million in the quarter, and we closed the quarter with just over BRL1.8 billion in total liquidity as represented by our cash resources and receivables.

We concluded our service to the Summer Games held in Rio de Janeiro in August and September with absolute success. All in all, we carried more than 7,200 athletes, 5,600 passengers with reduced mobility or special needs and 49 delegations. The launch of the new accessibility ramp, the improvements in our processes and procedures also combined with the external support service, as well as the high level of security in our operations, represent the medals we won in the Games, and which we wear with great pride.

During Q4, we will retire the remaining 13 aircraft in our fleet reduction plan, which will take our fleet to 122 aircraft by the end of the year. Our seat capacity reductions should be on the order of 17% in Q4, allowing us to achieve our full-year target of a 17 reduction --17% reduction.

In terms of outlook, I think this is a time to be cautious. The success of our efforts in driving forward bookings, higher load factors and is supporting improved use. Taking into account the upcoming holidays, we are seeing better fare trends in November, December and January, and notably with close-in bookings easing the overall industry revenue trends we have been monitoring.

It's a little too early to tell if we will maintain the improvement in yield, mainly from February 2017 on. A couple of encouraging signs are the increase in yields resulting from our decreasing capacity, as we have reduced our domestic capacity by 4.3% in the quarter. This bodes well for our unit revenue outlook.

The domestic industry is growing seat kilometers ahead of GDP growth. We have seen [signals] competitive capacity adds in market that we serve, and it's increasing competition that's diluting revenue on routes that we also serve.

As forward prices have softened in recent weeks, we expect that Q4 will be slightly up over last year. We do expect cost to fall in the full-year 2016 by 7%. This is an impressive performance, particularly given our capacity reduction. As a result, we are anticipating better fourth-quarter margins and profits and also better cash flows, but we need to factor these softer trends into our future plan.

So for now, our fourth-quarter 2016 plans are unchanged, but we will continue to look carefully and evaluate our 2017 plans. We should caution that this guidance is heavily dependent on the final outcome of Q4 fares and use, where we will continue to be active. We are planning for rising costs in 2017, and that's due to higher jet fuel prices and labor rates.

Our goal is to arrest the trend of declining unit revenues in 2017 and achieve positive unit revenue comparisons for the year as compared to 2016. We will rely on effective revenue management and route design techniques to achieve this, and we are learning heavily from our fleet modernization to help mitigate unit cost pressures.

We expect to better profit, cash flow and returns in 2017, despite the competitive environment. Our priorities for the balance sheet this year and next year are unchanged. We will continue to focus on the basics, running a reliable operation, offering our customers exceptional service and delivering results for our employees and our shareholders.

I would like to thank all the organizations and our team of eagles, who played a vital role in helping us get to this period of rapid economic change. We are convinced we will arrive from this arduous and complex process even stronger, more efficient and fully prepared for a new cycle in Brazil's economy.

In slide number 3, Gol has the best fares and the lowest cost of any airline in Brazil. We are number one when it comes to traffic. We have 24.5 million customers up to September this year. We are number one when it comes to coverage at main airports in Brazil, with 52 bases. Indeed, we are number one when it comes to customer service.

Not only do we offer our customers the lowest fares, the best on-time performance, the fewest numbers of lost bags or cancellations, but we also offer our customers miles in the Smiles program. As a result, our forward bookings and load factors are rising. We have ordered 120 aircraft, which will enable us to grow to 43 million customers by 2019, up from the 39 million customers in 2015. We have been doing this for a long time, over 15 years.

Gol offers the number-one customer experience in Brazil, and during the quarter, we will continue to lead. Aiming to ensure a better flight experience for our customers, in August 2016, we launched the Gol Premium Lounge at the Guarulhos International Airport in Sao Paulo. The new VIP lounge has modern and distinctive spaces specially designed to provide clients with increased ease and convenience. We will be inaugurating two more launches at the Galeao Airport in Rio de Janeiro in the [first] quarter next year. [Itself], Gol will be the only airline to offer VIP lounges in the domestic market.

On October 4, we undertook the first commercial flight in South America with Internet onboard on the Congonhas-Brasilia-Congonhas route. The Company's entire fleet will be equipped with this service by October 2018.

We also rolled out our new website at the end of October. The customer feedback on the recent additions to our customer experience has been very positive. Customers are enjoying the lounge onboard Wi-Fi and are finding it easier to find our lower fares.

The key element to our customer experience remains our commitment to delivering the lowest fares and delivering the number one in on-time performance. We expanded our codeshare agreements with Copa Alliance and Aeromexico and initiated a new partnership with Emirates. As a result, passengers served by these companies will only have to check in themselves and their baggage once and will be able to take advantage of an extensive route network. Customers will also benefit from being able to accumulate miles and redeem tickets to loyal [partners].

We increase our activities with Smiles in order to provide more benefits and amenities to customers, exemplified by the expansion of miles accumulation to promotional fares. In addition, customers entitled to a category upgrade during the year and who accumulated more qualified miles than necessary will be entitled to carry the surplus forward to the following year, helping them to maintain the category or possibly entitle them to a new upgrade.

So with that quick review, I ask Richard to take us through the results presentation and then we will take you through the question-and-answer for the quarter. Richard?

Kaki, thank you. On slide 5, you can see we have the lowest cost of any airline in Brazil, with an average cost ex-fuel of BRL0.13. The key point to take away is that the gap between us and the other airlines which we compete against is widening, so our competitive advantage is increasing.

Slide 6, our coverage continues to be quite wide, 63 bases with 52 airports served in Brazil and nine countries with 800 flights every single day. Slide 7, we enjoy strong market positions across Brazil. We're the number-one or number-two carrier in the key markets that represent approximately 80% of the Brazilian economy.

Now, you can see that Gol has the highest level of non-passenger revenues, as you can see on slide 8. Gol's Smiles subsidiary closed the third quarter of 2016 with net revenues of BRL398.3 million, an increase of 14% over the third quarter of 2015. Operating income was BRL163 million, representing an operating margin of 40.8%, which was 5.7 percentage points higher than the same period in 2015. Net income in the third quarter of 2016 was BRL145 million, representing a net margin of 36%.

The quarter's results at Smiles reflect 11 billion of redeemed miles, a 2.2% increase over the third quarter of 2015, 12.2 billion miles accrued, excluding Gol, a 5.7% increase over the third quarter of 2015, BRL305 million of billings excluding Gol, a 3.6% decrease over the third quarter of 2015 and a 1.5 percentage point in the burn-to-earn ratio to 79.6%.

In third quarter 2016, Gol's cargo revenues were BRL77 million and were BRL332 million in the last 12-month period, despite the reduction in ASKs. Other revenues were BRL225 million. 100% of our fleet is configured with Gol+ comfort seats, which are producing additional revenues. And in the third quarter of 2016, Gol sold 13,800 products onboard per day.

Flip to slide number 9. As you can see, we had a good quarter. We saw third quarter profits increase to BRL66 million, representing a net margin of 2.7%. Our third quarter EPS was BRL0.19. We were happy with the third-quarter earnings results. They were in line with consensus and in line with our expectations and the guidance we provided last quarter. I would like to commend also all of our hardworking employees on a very solid quarter, especially with the very challenging environment.

Net revenue in the quarter decreased BRL88.2 million to BRL2.4 billion, primarily due to a 20% decrease in seat availability. Total net revenue increased BRL77.2 million in the nine-month period of 2016, compared to the same period of 2015. Year-to-date revenues reached BRL7.2 billion, representing an improvement of 1.1% compared to the first nine months of 2015.

In 3Q 2016, EBITDAR profit was BRL600 million in the quarter, representing a 25% EBITDAR margin. EBITDA profit was BRL334 million, representing a 13.9% EBITDA margin.

Third-quarter 2016 EBIT was BRL232.6 million. Nine-months 2016 EBIT reached a profit of BRL498.3 million, representing a margin of 6.9%, which was an 8.1% -- percentage point improvement over the same period of the previous year.

On slide 10, you can see these results were driven by a 1.2 percentage point increase in load factor to 79.8% and strong passenger numbers at BRL8 million, while our average fare increased by 15.8% to BRL258 per passenger. In the third quarter of 2016, Gol's airline operations reduced capacity by 6.7% to 11.5 billion ASKs and increased passenger revenue per seat kilometer, or PRASK, by 3%, permitting a total RASK improvement of 3.3% in the quarter.

The 20-percentage-point reduction in available seats above the 6.7% ASK reduction is primarily due to the increase in stage length, which is part of the new route network that we implemented in May 2016. Gol's constant focus on improving management helped drive a yield increase of 1.5% over the third quarter of 2015. In the nine-month period ending September 30, 2016, yield was up 9.5% and PRASK increased 9%.

At BRL0.188, total operating cost per seat kilometer, or CASK, reduced 6.4% over the same quarter of 2015. The CASK excluding fuel decreased 3.3% -- 3.0% -- in the quarter-over-quarter comparison. Combined with the RASK increase, this permitted an increase in the gains from operation to the operating profit from operation to BRL0.203, representing a significant improvement when compared to the same period in 2015.

In the quarter, consolidated CASK was BRL0.13 ex-fuel, a decrease of 3% in the quarter-over-quarter comparison. This decrease in cost per seat kilometer was driven primarily by the following factors -- A, a [BRL0.0002] or 8% increase in aircraft lease expenses per ASK, driven by the increase in the number of aircraft under operating lease contract from 98 in the third quarter of 2015 to 101 in the third quarter of 2016, partially offset by an 8.3% Brazilian real appreciation.

B, a [BRL0.0001] or 8.7% decrease in maintenance expenses due to the Brazilian real depreciation and reversal of provisions related to aircraft returns. C, a [BRL0.0001] or 4.1% increase in salaries expenses due to an 11% increase in wages from the collective bargaining agreement, partially offset by a 9.4% reduction in headcount, result of natural turnover that was not replaced.

Fuel in the quarter was BRL1.96 per liter, representing an 8% decline when compared to the third quarter of 2015 and was the lowest level since the first quarter of 2011. It is worth noting that Gol decreased by 11.4% the number of liters consumed per RPK compared to the LTM period ending the third quarter of 2016 versus the LTM period three years ago as a result of constant initiatives to improve our fuel operating efficiency.

On slide 11, our balance sheet improved and we had a net total liquidity position, including accounts receivable in Smiles cash of BRL1.8 billion. Our total debt reduced by BRL3 billion during the year. Our net leverage including off-balance sheet leases is near seven times.

Moving to the next page, our forward bookings and load factors continued to rise, although we caution that this will have an impact on average sales and yields. In order to capture opportunities during the high season, we are adding 49 new routes in the fourth quarter of 2016 and first quarter of 2017.

I'd like to point out that we operate in nine countries around South America, and we see growth in a lot of these destinations and countries this summer, including Argentina and Chile. Our oil exposure for the next three months is 27% hedged at $49.25 in per barrel WTI.

On slide 13, last year, our load factor increased by 0.3 percentage points to 77.2%. In the current year, we see that figure increasing to 78%. Despite strong comparative numbers, you can see that we had strong load factors throughout three months. On a comparative basis, we are between 2% and 4% percentage points better booked now than we were on the same time last year for the remainder of the year.

Slide 14, since 2011, Gol has worked to lead the industry in rational and profitable capacity growth. In the adjustment of industry capacity to match demand, not all competitors have cut capacity and reduced frequencies on destinations and routes in Brazil. Some competitors have continued to cut capacity and reduce frequencies. Other competitors have continued to add capacity in spite of their higher operating costs, and this has had a big impact on sector profitability.

Slide 15, the outlook for the remaining of fiscal year 2016 is that we will see our load factors increasing by 1 percentage point to 78% and traffic is expected to reach BRL33 million in the year. Ex-fuel costs will be down and average fares will be slightly up in the fourth quarter.

We have very limited visibility into the first quarter of 2017, so as a result of all this, we are happy to increase our guidance to the upper end of the range. Our previous range was 4% to 6%. We will now be at the upper end of that range. This of course is highly predicated on closing bookings for the remainder of the fourth quarter.

Moving to slide 16, for the full year 2016, we expect to achieve a capacity reduction of 8% in ASKs and 17% in both total seats and volume of departures. As mentioned, we expect to achieve the top end of our operating margin range at approximately 6% for the full year.

To finalize, I will turn to the fleet on slide 17 and quickly walk through that. We ended the quarter with 135 aircraft and will finish this year with 94 800s and 28 700s in our fleet. Next year, we will reduce by two 800s and reduce by three 700s for a total reduction in fleet next year of five aircraft. In 2018, we will reduce -- we will resume fleet growth and begin our fleet replacement with the delivery of our first MAX aircraft.

Okay, I guess we'll now move to the Q&A. Thank you very much.

(Operator Instructions). Our first question comes from Michael Linenberg of Deutsche Bank. Please go ahead.

Hey, Kakinoff. Hey, Richard. Just a question on the press release, where in the domestic market it talks about how capacity was -- domestic supply decreased 4.3% in the September quarter and it's down 5.7% from January to September of 2016, and it goes on to say in that same sentence, with the aim of reducing the supply by 8% for the year, and this is in the domestic section.

So that would imply that your fourth quarter domestic supply is going to be down 12% to 15%. Is that right, or is that 8% for the system rather than domestic? I'm just trying to get the right number there.

Hi, Michael. Good morning. This is the system, the whole, so the (inaudible) there is a real crisis market. Fortunately, we believe that the demand came to a sort of stability from July on this year, in comparison to last year. But it is still too early to assume that it is going to have a demand increase over the following weeks.

So the data you got is related to the system, and [happy] behind this there is no further deterioration. This is the posted time, but on the other hand we will not know exactly when we are going to find improved demand.

Okay, great. Just for 2017, I think -- so I think the view is that the Brazilian market is going to grow 3% to 4%. What -- go ahead.

This is not -- following on my speech, this is not any kind of guidance. I just would like to highlight on the statistics. So there is a factor of three times rather than two times when you compare the Brazilian GDP and the demand for the airline industry in Brazil. So the official forecast for the next year is 1.5% positive GDP. That was delivered by the government.

So following the history and historical figures, we could calculate a plus 4% to 5% additional demand, but this pretty much depends on how disciplined will the capacity be. This potential growth could be translated into better yields or additional demand. We don't know how the market is going to react, okay?

And you don't have an early view on what you think your capacity plan will be for next year as of now, right? I think you said that you were still going through all the numbers.

Richard is going to (multiple speakers)

As you say, we're reducing five aircraft in the fleet next year, so obviously there's a reduction there. So part of that will also depend on how we configure the network and the productivity in the aircraft. We're operating at this 11.4 block hours a day of utilization. In the context of our planning next year, we want to increase that. But that -- I think we'll give a better view on that when we do our -- present our -- more of the details for next year in the call we do in February, so you'll have to stay tuned for that.

And Michael, final message. Disciplined capacity is the name of the game [this] year, so please keep it in mind.

Absolutely. Okay, great. Thank you, gentlemen.

The next question comes from Duane Pfennigwerth of Evercore. Please go ahead.

Hey, thanks for the time. Just with respect to your BRL0.13 or BRL0.132 CASK in the third quarter, if we assume a stable currency, which obviously is a big assumption, is that a level that you feel like you can keep going forward? And specifically with respect to the fourth quarter, typically you see this big increase sequential from 3Q to 4Q. What are the reasons that we would see that BRL0.132 trend higher, because it feels like a level you could sustain?

Yes, Duane. Obviously, the key point is that exchange rate, which we're planning on stability. And the combination of the other initiatives that we kind of described indicate that, assuming exchange rate stability, which is related to the macro situation, we should be able to maintain it in that range.

So the year-over-year decline in the fourth quarter could be double digits?

Yes, on the ex-fuel, most of the effects -- we have some inefficiency in that number as it relates to the aircraft that we still have in return. At the end of the quarter, at the end of Q3, in the fleet reduction, we had 11 aircraft that are in the return channel. In other words, they're out of Brazil. They're out of our network. We're still paying the monthly rental costs on that, so there's a little bit of inefficiency on the cost side.

We think that the objective is to have all those returned by the end of December, and our current planning is probably we have two that will probably still be in the desert that haven't been picked up by their new operators yet. So there's a little bit of inefficiency on that CASK with respect to the aircraft component and how that relates to the -- how that will impact that overall CASK number.

On the other side, also kind of the one-time effects for the fleet restructuring have pretty much run through the system. The only inefficiency that we have left are these aircraft that we're paying rent on that are not producing revenues for us. So I think that's how you can approach it, as one of the key drivers of that non-fuel CASK is the aircraft component, which has both components, the dilution in terms of the productivity and then the exchange rate components. So I think that's consistent with what you're thinking of .

Okay, and just to clarify that, the 11 aircraft, were they parked in the cost structure in the third quarter, or is there some incremental inefficiency 3Q to 4Q?

Well, as I said, the rents in those aircraft is in our 3Q numbers, and we hope to have nine of those totally returned by the end of the year, so some of that cost will be in the third quarter CASK, if you will.

Okay, and then just lastly, in the non-op, below the line, it looked like you had a BRL230 million gain related to a discount obtained on your senior notes. Is that likely to be a recurring gain, or is that just in the third quarter? Thanks for taking the questions.

No, so that was in the third quarter. As you know, we finished an exchange offer where on a net basis we obtained a reduction in debt, so that's a one-off in the Q3.

Thanks, Rich.

The next question comes from Savi Syth of Raymond James. Please go ahead.

Hey, good morning. I'm just wondering if you are able to quantify maybe the benefit you got in 3Q 2016 from the Olympics, and just along those lines, on the booking trends, the improvement that you're seeing on kind of this time last year and how much is booked, is that a change in strategy going forward or is that a strategy that was put in place already and the incremental improvement that you're seeing now is really demand coming back?

Hi, Savi. It's Kakinoff here. Good morning. Actually, the Summer Games didn't help that as much as the soccer games two years ago, so it was pretty much concentrated in Rio de Janeiro. Surely it was quite interesting in that specifically the shuttle service connecting Sao Paulo to Rio de Janeiro and vice versa, but for the remaining network I would say the Summer Games were somehow negative.

This is at the best a sort of neutral effect which could be considered good, because it could be negative, considering how much these games could impact the traffic. But there is -- I'd say it's more clear to say that's a neutral effect.

Got it.

In terms of your second question on the increase in load factors, demand versus network, it's really a combination of both. Obviously, we have -- we adjust the network as a function of the seasonality. We go onto our summer season here, which has a lot of traffic in December and January related to vacation destinations, and so we have around about 50 new frequencies added in there to capture that demand, number one. And that relates to the network changes also that were put into effect in May when we redid the network to adjust for our new fleet size.

We don't see anything significant on the demand side overall. There's been a little bit of uptick in the corporate demand versus what we had seen previously, but the VFR traffic still is suffering from the effects of the economic situation in Brazil. So in terms of the combination of demand versus network, it's really more based -- the increase in load factor is based on more our network combined with what we're doing for the summer season here in Brazil.

That's helpful, Rich. And maybe I can ask you, on the interest expense, I'm a little bit surprised by the level in 3Q, and I compare it to what we saw in 2Q and especially the debt restructuring that happened. Was there something in 3Q and that should come down, or is that a good level going forward?

That surprised in what sense?

It seemed high, so in 2Q, like BRL100 million, BRL180 million in interest expense, and in 3Q it was closer to BRL200 million. I expected that to be in line or lower.

No, there's nothing there other than there was nothing out of the ordinary. We have -- I think part of it probably relates to you might be seeing some exchange rate -- no, I guess you wouldn't be seeing exchange rate effects there.

We have a big chunk of our capital structure today is we have about BRL1 billion of debentures denominated in reals which are fairly high cost. Maybe in your analysis there, that is a larger part of the overall debt now, but there's nothing extraordinary there, no.

All right. Thank you.

The next question comes from Josh Milberg of Morgan Stanley. Please go ahead.

Thanks very much. Good morning, everyone, and thank you for the question. I just wanted to go back to the issue of the fourth quarter margin outlook. I think as was noted on the Portuguese call, your updated guidance for the year does imply a pretty low level for the fourth quarter, and I got that that responds in part to FX and fuel volatility but was just hoping you could elaborate further on other variables that are behind your expectations there, since I think you mentioned earlier on the call that you were seeing pretty good fare trends coming into the fourth quarter.

Hi, Justin. It's a combination of that -- obviously, we have our own assumptions on exchange rate and oil prices, as well as you guys have. We all use our own independent assumptions on that, and we have our assumptions on the demand environment, December, how that can impact yields, and based on our assumptions on the exchange rate to oil price dynamics, that's how we come up with those numbers. Having said that, I guess to some extent we'll see what happens after tomorrow.

But it seems as if we may have softer on oil, and so that could potentially help positively. We have a lag, so you have to be careful with the lag. If there was a reduction in oil, it can take up to 60 days for that to work itself into our costs. So it won't necessarily give us a big bump on Q4. It might help us in Q1 a bit.

But on the demand side, we're being very cautious, because we've taken a lot of capacity out of the system, and as you saw, we saw it in the third quarter. We saw that impact a little bit on the yields, very slightly. Obviously, there's the seasonality in there, so we did see a positive effect of all this capacity that we and some of the others have taken out of the system.

But it's not 100% clear to us if that's going to continue as some of the competitors have additional capacity to come on, and they're going to have to try to fill those aircraft with passengers, which come out of a market that is 15% to 20% lower than it was this time two years ago. So that for us is a big question mark, and we really need to be cautious with respect to that, because we -- the visibility we have on that is for increased capacity to be coming along in certain areas.

But that already in the fourth quarter, Rich?

Which component?

No, the additional competitor capacity. You think that that's something that could be a source of --

We don't -- we can't predict what competitors are going to do with their pricing environment in December. Our forward bookings from a load factor perspective, we shared those with you, so you can kind of look at that. The yield component will be equilibrated by the competitive behavior of the other guys, everybody combined. So we're at the beginning of November now, so it's a bit too early to really predict what kind of behavior we're going to be seeing on that. So we'll have to see what happens.

To the extent that everybody's disciplined on capacity, we should see a solid yield environment, December, January, but it's a little bit too early to tell on that, so that's why we're being cautious. And we don't have a whole lot of visibility very far in the future on what's going to happen on the yield environment.

Okay, fair enough. And Rich, I was also hoping you could comment on where you think you'll need to be margin-wise to be breakeven from a cash flow to equity standpoint next year, taking into account your minority interests. I think that was something that was also raised on the Portuguese call, and one element of that I was hoping to get some color on was just what assumptions you have for maintenance CapEx over the next couple of years.

Well, the maintenance CapEx is minimal. We're not engaging in -- Gol has made an enormous investment in its platform over the last couple of years in technology, and so on. When you say maintenance, you talk about maintenance, other CapEx or spending on maintenance expenses on the aircraft?

No, I'm talking about the CapEx.

You could use something in the range of BRL150 million for the year in terms of what the maintenance CapEx is. In other words, for us to maintain our investments in hardware, software and people-ware -- again, we've already made -- Gol has already made an enormous investment over the last couple of years in technology and in terms that -- pretty much across the board, from the customer experience on apps and website and onboard activity and so on to our back end, which is our ERP system, our controls and all the systems that we use to do the performance management.

All that investment is behind us, and we're looking at roughly BRL150 million a year to maintain that. I'm sorry, the other part of your question was -- can you repeat that please?

Yes, it was just to get a sense of what you think you need to do margin-wise to be breakeven from a cash flow to equity standpoint.

Well, when you say cash flow to equity, you're saying what to -- what exactly does cash flow --

I'm saying EBIT, EBITDA less interest, less maintenance CapEx, less taxes, less minority interests. To be at a level where you're generating -- you're breakeven really from a cash flow standpoint.

Well, from an operating perspective, we are already at that level. We have seasonality in the business, so for example, in our business, we see -- generally between Carnival and end of May, we have a drop off in demand and margins reduce. But overall, this level that we're at right now is a breakeven level of cash flow, but obviously we have seasonality in the business.

When you look at the airline sector in general, you have the various levels, and it's not us specifically. It's really a structural thing for the airline business, and when you talk about cash to equity, it's only when you're above 15% operating margin that you can start to entertain paying dividends, meaning where you could actually be thinking about paying dividends, not that we would do that. And in the past, this Company has only paid dividends when it got above kind of an 18% operating margin, up in that range.

So like I say, when you talk about cash to equity, us paying dividends to shareholders is not something we foresee in the future here in the next couple of years. But going back on the other end, in terms of being able to meet operating expenses and interest expense and debt service, basically, with the results of the restructuring plan, as you've seen, we have about 18 months of runway before we get into some of the large amortization. Eighteenth months is a long way off.

Where we are right now, our operating cash flow, plus what you just highlighted in terms of the minimum maintenance CapEx, is sufficient for us to also cover the financial obligations on a kind of a run-rate basis for the next 18 months. And so one of the objectives of the restructuring plan as we've articulated was basically to guarantee that runway so that we could see the positive effects of the capacity management on the operating side of the equation. In other words, to be able to pay all of the obligations through cash flow generation and not counting on external resources or external capacity, and we basically achieved that.

As I said, we have a little bit of inefficiency with the return of aircraft that are still in the system, but when we get through that, this massive restructuring that's been done to put us at this level to better match the market with the -- both from a supply-demand perspective, that's pretty much done. So what we just need going forward is to maintain that. As I said, it doesn't entirely depend on us. We're just needing a rational capacity management going forward, and then we're okay.

But because of our cost advantage, which is derived from the Boeing 737 and because of the way we operate that on a highly integrated network, we also feel that we're very well protected to the extent there is any negative effects in the demand environment or any overcapacity effects next year that could negatively affect the yield environment and we reduce our margin and our cash flow, we feel like we're pretty well protected against that from a defensive perspective.

But I think we're only going to have good visibility on that kind of in April/May of next year, once we get through. We'll have a little bit of an uptick here in November, December, January because of the high season. We'll see that, and then we'll get the [down] post Carnival until call it April, May, and so I think in May we'll have good visibility on that.

But for us in terms of our plan, from a -- like I say, from a cash to equity perspective, this range that we're operating right now is sufficient, but we're a whole other level away from thinking about returning capital to equity in the form of dividends or otherwise. We're a pretty long away of that.

You've seen it in this Company. So if you look back historically, you can really -- in the historical world data, you've got the numbers to see at what point -- what the trigger was to be able to pay dividends, and it's kind of close to 18% margin where you've got enough to be able to pay dividends and return that to shareholders. But we're a long way away from that.

Okay, thank you very much.

Thank you.

Your next question comes from Ravi Jain of HSBC. Please go ahead.

Hi, good morning. I have a quick question on the international capacity. The international ASKs have been coming down over the last few quarters. Do you see some potential to increase that over the next 12, 18 months? Where do you see this in the longer term, in terms of international versus domestic capacity? Thank you.

Yes, hi. So in other words, perspective, Gol alone, we do not think that we are going to add any capacity -- it could be marginally due to the seasonality, but we got information that some of our competitors, they are supposed to add at least eight aircraft each over the following 12 months, which would bring us a plus 4% additional capacity in the market. This is based on the information available in the market.

Thank you. That's helpful.

Thank you.

The next question comes from Stephen Trent of Citi. Please go ahead.

Good morning, gentlemen, and thanks very much for taking my questions. Just two for me quickly -- first, if you have any view on what we might or might not see in terms of Brazilian governmental policy initiatives, jet fuel, kerosene. Do you think there's the resistance that seems to be coming from the state of Sao Paulo could intensify with respect to current FX levels giving you guys more help than it did six months ago?

And B, second question, just wanted to get your take on some stuff we've seen on the corporate governance front and whether you guys are confident and comfortable that you're satisfied with your internal controls. Thank you.

Yes, we're 100% satisfied with our internal controls, and vis-a-vis what's happened, the Company has already put out a lot of information on the policies and procedures with respect to that.

So in terms of your second question on the government help and so on, Kakinoff can complement. We don't expect any specific help from the government. We're operating on the basis that we're operating now -- as you mentioned, there were some I guess press announcements on potential reductions on taxes on fuel. We don't expect anything there in the short term, probably not even in the medium term, so don't count on that. I think in terms of other issues --

We have engaged in those discussions with government via our association, the [RBR]. I'd say the conversations are always promising ones, but we do need to find the right environment to properly address this type of requests. Brazil is [experiencing] turmoil and we cannot give you any kind of forecast when we could finally get some tailwinds coming from better or improved taxation regarding -- or towards the factors for the airlines.

There are several discussions. I think they might be promising ones, but we cannot give you at the moment any kind of precise forecast on this.

Okay. Very helpful.

The next question comes from Pablo Zaldivar of GBM. Please go ahead.

Hello. Good morning. Thank you for taking my question. My first question is regarding your newest lease plan. You are looking at a reduction of around aircraft for the next year. Could you tell us how many of those aircraft are owned by you and how many are financial leases and what should we expect in terms of income from the return of aircraft, like lease on the product for the next year?

The five we want to be reduced next year, they are all operating leases, and we are going to then achieve 117 aircraft.

Just to -- I guess the financial leases are aircraft that we own, so as we've said, what we own and what's financial. The operating leases aircraft are what we don't own. For example, you take our -- the fleet numbers we had at the end of Q3, 34 are finance leases, which are aircraft that we own, and the other 101 are operating leases, which are aircraft that we don't own.

So regarding the income during the quarter, these are like BRL30 million in cost line as a positive effect from the return of these leased aircraft. What should we expect in the next year by returning these five aircraft?

Sorry, could you please repeat -- ?

I don't understand the question -- what -- we don't understand the question. You're asking -- because we're returning five aircraft next year, which we provided that. What's your question related to the return of the five aircraft?

Yes, during this quarter, we saw an income of around BRL30 million due to the return of aircraft, so I guess that during the next year, you should retain a similar -- some amounts due to the early return of these aircraft? Could you give us some guidance on what you expect?

I see. Obviously, how we finance our fleet expansion involves sale-leasebacks, and depending on what we negotiate, we may or may not generate some gains from the sale-leaseback. But it really depends, because sale-leaseback is a combination of a sale and a leaseback.

So depending on -- generally, we look for the lowest possible lease rate versus trying to maximize the gain. So the right assumption to use there would be zero gains, because we're looking to guarantee the lowest possible lease rate for our future cash flows. But it really depends. It also depends on the timing of the market.

You're right to assume that we should expect gains, because the Boeing 737NG is a highly sought-after aircraft on a global basis because of its very low operating costs, and we also have a very attractive price as we buy a large volume from the OEM, Boeing. But I think the right assumption to use the would be zero. We can't really predict the results of negotiations with lessors, but it's a good question, I think. It's an interesting question, but I think you should use zero for your assumption there.

Thank you very much.

The next question is a follow up from Savi Syth of Raymond James. Please go ahead.

Okay, thanks for taking my follow up here. I just had a question with clearly the goal has been focusing a little bit more on getting more of it in premium product over the last few years, and I think that's reflected in your increasing corporate share, but I was wondering if you could talk a little bit about how your fares versus the industry have been trending, in that is there a -- are you starting to see more and more of a premium and then if we should expect that to continue?

Actually, we have attracted more business travelers and they are paying higher fares than the leisure ones, so that has happened and we can monitor these improvements via the [ABAR court] report or [the caucus], the Brazilian Association of the Corporate Agencies, or GMCs.

We have improved our market share there, and by doing so we have attracted more business channels. It is the best output we could get from the investments made over the last years. I think that we can improve those, so there is even more after getting our aircraft equipped with the Wi-Fi and the other improvements that we have already ongoing.

Yes, in part because -- you're right, part of the increase in Gol average fare is indeed from the benefits of a more premium service. Gol has the largest -- the best pitch offered in the market which is highly attractive to corporate travelers. The Gol Comfort Class service provides additional space between passengers. It's the first company with onboard Wi-Fi. The onboard service in terms of buy-onboard products goes into the premium component, and so some of the effects on the average fare increase is deriving out of the product, the additions to the product that have also happened over the last three years on a gradual basis.

Where today, Gol, as Kaki was saying -- Gol is the number one market share in transportation of corporate passengers, and that's a function of the onboard service and products and all the other facilities, the check-in, the apps and all that investments, massive investment that's been made in technology. So part of it is -- part of the average fare increase is coming out of premium, a fare premium versus what had existed previously.

Got it. It's helpful to know that it should maybe continue. And then maybe just a follow up to a question before. Rich, are you assuming maybe a very small -- greater moderation in kind of the RASK improvement? I'm having a hard time getting to your full-year margin guidance of ([wasn't for] even more slowing in the year-over-year RASK growth.

Well, we're being cautious with the yield component, as in December, it's more leisure travel, less corporate travel. We've also added frequencies to capture the volume, but it's a lower-yielding travel. We also -- we just talked about the more premium fares. That really applies to the corporate traveler.

The leisure traveler is the majority of our seats are still put in at very low fares to also have an interesting product for the leisure travel and in the bookings and so on that are happening now. The December holiday season, have that impact on yields, number one on our side.

Number two is what I mentioned is we don't have a good visibility on the competitive environment and how it's going to relate to pricing as we see in the last couple weeks here leading up to December. So that's really the caution that we're using and the information we're providing to you is really based on those factors.

That's fair. All right, thank you.

Thank you.

The next question comes from Victor Mizusaki of Bradesco BBI. Please go ahead.

Hi. Good morning. Just two questions. The first one, when we take a look on your fleet plan, the number of aircraft will likely drop to 117 -- I mean for 2017 from 122 this year. So can you give us any color on what do you expect in terms of ASK reduction for next year?

And my second question is thinking about consolidation. Do you think that there is room for further consolidation in Brazil, given what we are seeing in Latin America?

Hi, Victor. We are not delivering any guidance on 2017 yet, okay, but you probably got from our speech that we have no intention to increase capacity. It could happen, either increase or reduction marginally, depending on seasonality. Richard will give you --

You could say, we're reducing our fleets by five aircraft last year, but on the other side, we're working to increase our asset utilization, our aircraft utilization, our block hours of production per day on the aircraft. And so the ultimate amount of capacity reduction next year will depend on how efficient we are able to be, how productive we're able to be with those aircraft.

But for your purposes, if you assume we're staying at the 11.4 block hours, you can more or less use that five-aircraft reduction to see how the year-over-year capacity growth could be lower. I'm not saying it will be lower, because obviously we're working to squeeze more out of our assets, our aircraft assets, by increasing the aircraft utilization. That relates to how we configure the network, which is a very complicated activity. But we'll give you more visibility on that when we speak in February.

On the other question, it really doesn't depend on us, the second part of your question. There's the competitive environment is happening. There's the capacity dynamic, and I think it's hard for us to say whether or not that would happen or not, and if it happens, I think it depends on a variety of issues that aren't just within Brazil also. They also depend on the -- what's happening in the South American environment and to some extent how that links into North America. It's a complex equation.

I think for our purposes, our planning for next year is that would not happen, and so we're assuming that we have to work within the current competitive environment that we have today, but that's how I would approach that. As you're thinking about our performance for next year, that's -- I think that's the right way to think about it.

Okay, thank you.

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

Okay, ladies and gentlemen. I hope you found that our Q&A session was helpful. Our investor relations team is available to speak with you as needed, so please do not hesitate to call us. Have a very nice day.

This concludes the Gol Airlines conference call for today. Thank you very much for your participation, and have a nice day.