Gol Linhas Aereas Inteligentes SA (GOL) 2017 Q3 法說會逐字稿

Welcome to the GOL Airlines Third Quarter 2017 Results Conference Call. This call is being recorded. (Operator Instructions) This event is also being broadcast live via webcast, and may be accessed through GOL website at www.voegol.com.br/ir, and the MZiQ platform 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 the platform, and their questions will either be answered by the management during this call or by the GOL Investor Relations Team after the conference is finished.

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumption of GOL's 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 events related to macroeconomic conditions, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements.

At this time, I will hand you over to Paulo Kakinoff. Please go ahead.

Good afternoon, ladies and gentlemen, and welcome to GOL Airlines Third Quarter 2017 Results Presentation. I am Paulo Kakinoff, Chief Executive Officer, and I'm joined by Richard Lark, our Chief Financial Officer.

Hi. Good afternoon, everyone.

This morning, as you saw we released quarterly numbers. If I take you through the highlights, I want to state how enthusiastic we are of our results. These figures show that the plan that we put in place nearly 2 years ago is bearing fruit. Thanks to the effort of our committed and high working GOL team. Coming to the slide #2, our net revenues continued to exhibit strong positive momentum reaching BRL 2.7 billion in the period. This represents an increase of 13% compared to the same period quarter last year. Of note, we achieved this revenue growth and consolidated our leadership position in the market with 36% of our share according to ANAC, while keeping our operating fleet at the same level as an year ago, at 116 aircraft and reducing our total fleet from 135 aircrafts to [220], these allowed us to drive margins significantly as you see shortly. Recurring operating income in the third quarter was BRL 227 million, an increase of 49% compared to the same period in 2016. Recurring operating margin was 12% in the period, an improvement of 2.9 percentage of points. Let me just take a moment to highlight here our continued solid performance. This is the fifth consecutive quarter of operating profit for growth. Quarterly recurring EBITDA totaled BRL 463 million, a margin of 17%. This represents an increase of nearly 45% as compared to the fourth quarter 2016, an improvement of over 3.5 percentage points in margin. I'd like to focus for a moment on net income, highlighting that net income in the period was a gain of BRL 328 million after the minority interest. These represents a net margin of 12.1%, such results obviously represents a significant improvement in comparison to our net loss of BRL 0.9 million in the fourth quarter '16. Net cash flow too was positive at BRL 348 million. Operationally, our load factor for the quarter increased by 0.4 percentage points to 8.2%, and our average yield per kilometer increased 8.6% to BRL 0.249, resulting a RASK of [BRL 0.226], an increase of 8.3% over third quarter '16. Excluding non-recurring expenses, which totaled BRL 4 million in the quarter, the total CASK was BRL 0.199, an increase of 5% when compared to the third quarter last year.

Turning to slide 3, our current network launched in May 2016 was designed to serve higher yielding routes and capture a bigger share of business traffic. Today, we have the largest share of business traffic in the country and thus feel good about our prospects in the segment as the economy and the business demand continued to strengthened. From the last just to reinforce that I mentioned earlier regarding fleet, as you can see after the CapEx right sizing we carried out in 2016 to adjust for Brazil's adverse macroeconomic conditions that have maintained our fleet flat at the targeted size for 2017. However, we have continued to drive aircraft utilization and extend our average days left, allowing us to grow the number of flights by 2% from the year ago period, an increase ASK's by 4.5%.

During 2018, we expect to continue to focus on optimizing the utilization of our fleet. We also expect to derive productivity gains from the already announced reconfiguration of the 737-800 fleet, which will increase the number of seats on those aircraft by 5%, from 177 to 186.

On slide 4, I repeat this every quarter, but I cannot highlighted enough, we are the only airline that operates in 2 low cost carrier model in Brazil. We have standardized single fleet, which allows us to retain lower crew costs, better spare parts management and higher utilization. GOL has the lowest unit cost in Brazil, a full 21% lower than our peers. This makes us our business uniquely resilient and with the highest differences (inaudible) in comparison to anybody else. As you can see, another [other] features ensure our position as the most competitive airline in Brazil, such as market share leadership in difficult to penetrate market, that's network for business travelers, and continued technology investments to enable best experience for GOL customers.

Turning to slide #5, we not only are the low cost carrier, but we are a low cost carrier that provides an extraordinary level of service. That our full year revised projections, we expect to close the year close to flat in ASK's versus 2016. We project an average load factor of close to 79%, CASK ex-fuel of [BRL 0.137] and an EBITDA margin 14%, together with an EBIT margin for the full year of 9%. Earnings per ADS, after minority interest are expected to be between $1.25 and $1.40. As you know, most of these figures are on the positive end of the ranges we have originally guided to.

Leverage as measured as net debt over last 12 months EBITDA is expected to be close to 3x, 4x showing continued improvement in our balance sheet. Key risks to our guidance are external shocks as well as an expected growth in capacity by competitors, which would affect markets fares.

With that, I'm going to hand you over to Rich, who is going to take us through the quarterly financial presentation. Richard, over to you.

We had a solid September quarter as you can see on slide 7. We achieved an EBITDA margin of 17% and an operating margin of 12%. As Kakinoff already mentioned, this is the fifth consecutive quarter of operating profit for GOL. Our net debt at the end of September was BRL 4.3 billion, down BRL 523 million from June 17. In the quarter operations had 4.5% increase in capacity and an increase of 9.2% in passenger revenue per kilometer, or PRASK, generating a RASK growth of 8.3%.

Turning now to slide #8, we note that even with the industry environment still difficult in the short-term, strong demand continues for our services here at GOL. Since the launch of our new network in May 2016, we've increased our load factors by about 2 percentage points. For the fourth quarter 2017, we expect occupancy rates to be in the 80s. On slide 9, you can see that our profitability calculated by EBITDA was positively affected by the 8.3% growth in RASK, and a 5% increase in returning total CASK.

The ex-fuel CASK had an increase of 7.1% in the same comparison, mainly due to the annual profit sharing provision made in the third quarter of this year versus last year's provision that was made in the fourth quarter. Also, an increase in the purchases of miles from partners, the presence of sale leaseback transactions in the third quarter of 2016, and increased depreciation and amortization due to increased capitalization of engines. Excluding these effects, GOL's total CASK in the third quarter of 2017 was flat versus the third quarter of 2016. As a consequence, our recurring EBITDA increased to BRL 463 million in 3Q '17 with the margin of 17%, an improvement of BRL 143 million compared to the third quarter of 2016. The EBITDA per available seat kilometer increased to BRL 3.82 in this period 2017. Our net financial results for the quarter were positive by BRL 29 million, as can be seen on slide #10. We had BRL 297 million financial revenues in 3Q '17, of which BRL 242 million were non-cash exchange in monetary variations, offset by BRL 269 million of financial expenses.

In the same period of last year, we recorded [BRL 264] million in net financial result, and BRL 365 million financial expense, of which BRL 36 million were exchange rate and monetary variations also without cash effect. Therefore, netting this out, financial expenses were reduced by BRL 65 million in relation to the previous year, and as a result of better cash management, less factoring of receivables and savings in cash to pay off and reduce our debt. The significant increase in liquidity is discussed in more detail on slide #12.

On slide #11, we detailed the change in net income after minority interest between the third quarters. It is evident that most of the components of this variation were making positive contributions to improve net income, which is a consequence directly of the company's operational improvement. We therefore reported earnings per share of BRL 0.94 per share and US$1.49 per ADS for the third quarter of '17.

Operating cash flow generation was positive by BRL 589 million as can be seen on slide #12. The operating cash flow margin was 21.7% in this quarter. Total liquidity at the end of September increased BRL 340 million over the position at the end of June. Out of the operating cash flow, funds were used in investment activities at BRL 201 million and financial activities of BRL 40 million.

In summary, this slide shows that the surplus of operating cash flow is in excess of our investing cash flow, and it is being used to serve the financing cash flow i.e., our debt service and reduce the overall debt level of the company.

In the chart to the left on the slide 13, you can see the evolution of our total liquidity for the second quarter. We had BRL 2.1 billion in cash, cash equivalents, short-term investments, restricted cash and accounts receivable at the end of the September quarter. In the chart on the right, you can check the evolution of our net debt and the respective leverage over the last 12 months EBITDA, which excluding our perpetual bonds, which don't have a fixed maturity is at 3.4x LTM, EBITDA.

Slide #14 shows the history of some indicators of leverage coverage in liquidity for the past 5 quarters. General improvement of all credit indicators can be verified. And to conclude today's presentation, I would like to review our fleet plans on slide #15. We currently own a fleet of 120 Boeing 737 NG aircraft, of which we operate with 116 and the other 4 are on subleases outside of Brazil. In 2017, we will maintain the current fleet size, and in 2018, we will begin aircraft replacement with the delivery of our first 5 Boeing 737 MAX 8 aircraft.

In summary, we remain laser focused on disciplined capacity management, maintaining our absolute cost leadership, and being the airline of choice for our customers and also continuing to prudently manage our balance sheet and liquidity.

With that, back to Kakinoff for questions.

Before moving the presentation to the Q&A, please let me update you on the recent improvement and developments regarding our products, services and operations. Due to our -- already mentioned single fleet type operation, which simplifies our daily business, we have achieved a superior level of schedule reliability at a level of 98% of flights being completed and over 95% of them departs on time. As we continue to capture the larger share of business customers, we remain focused and continue to scale reliability improvement. We also remain focused on offering the better travel experience overall. We design our route network to provide integration and interconnectivity and to offer frequent flight schedules in the main business markets. Our modern fleet has been reconfigured with eco leather seats and WiFi on board. We expect to finish the fleet wide WiFi retrofit by mid 2018. At the moment, we have already 66 aircraft equipped with such device. We have been a pioneering driving technological solution, such as a selfie check-in and (inaudible). We increasingly cater to the worst customer [taste] and demands, offering differentiated product, such as our GOL plus Comfort seats and expanding our on board service and menus.

Safety, as always remains our number one value. In addition to our historical FAA certification, our aircraft maintenance center in Confins, Minas Gerais, and now we are at GOL owned based in Rio De Janeiro, recently obtained EASA, European Aviation Safety Agency certification. These ratifies our standard of excellence in aircraft and component maintenance and services and underscores our commitment to ensuring that our processes, manuals and maintenance to any problems are in line with world's best practice. So before opening the session for our Q&A, I would like to address one, that we have already received by email this morning.

What is the expectation in terms of revenue increase and flight offering for the new hub in Fortaleza?

The Fortaleza hub is expected to generate BRL 160 million in additional revenue in year 1, 12 months after starting activities, which is supposed to begin in May next year and BRL 200 million when it reaches maturity in year 3, there will be 25 daily flights and this is even more important than expected revenue increase as the new markets created for GOL customers to travel abroad without any kind of need to travel to Sao Paulo or Rio De Janeiro both have Air France, KLM and Delta will benefit from this greater connectivity with GOL's passengers from the north and northwest of Brazil. This will generate new demand, which is in line with our 2004 to 2011 track record with the so called GOL Effect. And now I would like the operator to open the floor for further questions of today's call.

Thank you. The floor is now open for questions. (Operator Instructions) The first question comes from Duane Pfennigwerth with Evercore. Please go ahead.

Hi guys, this is actually [Rohan] for Duane. My first one is how much of your utilization is left over or recover from the 12.3 hours per day that you are at, and assuming that optimal utilization level into next year, where would that get us on capacity growth?

Hi, morning. I'm not sure if I totally understood the question, but the -- we're basically at a level of utilization that we want to be at going forward, roughly to 12 hours as we go forward, obviously that's reflected in the productivity we're starting to get going forward on a quarterly basis. As Kakinoff mentioned next year -- in the second half of next year we start the fleet replacement with the 737 MAX 8, which addition to the 15% lower cost on fuel will also have a slight increase in capacity of about 3% to 4%, and so that activity as it relates to the exchange on the MAX increases the (inaudible) activity by each aircraft by about 3% to 4%, at the same time we're also going to be reconfiguring the existing fleet of the NGs on something similar. So the sort of basically is that going forward with the event, which is significant for us, which is the MAX coming into the fleet in July of next year, it's roughly a 3% to 4% increase in a reduction in the costs, but -- we're keeping that utilization roughly 12 hours across the entire 7-hour flight a day network.

And how much the [bag fees] contribute per passenger in 3Q, and where do you see that ramping to?

It was started in July at GOL and as you probably know, we still has the heritage of the ticket sold based on the previous regulation. So the contribution was at the moment or before the quarter is still low, we do not give any kind of disclosure specifically on that line. We just say that it's a promising additional source of revenue. But we still do need another quarter to measure the full effect of that.

And one last one in here, ex-currency, how do you guys see the trajectory of non-fuel cost into 2018?

How do we view the trajectory of non-fuel cost in 2018, well, what I would help you on that is that, kind of looking what I just said, the main impact for us, which is structural cost advantage relates to what we're doing with our fleet management. So as you highlighted correctly, so this is roughly 12 hours of aircraft utilization that we're at, is the best practice number, it's among one of the highest in the world and allow us to get an enormous fixed cost solution. The MAX coming into the fleet in the second half of next year, puts -- it's about a 15% cost reduction, but as we're phasing in the fleet gradually over a period of around 10 years, it works out to about a 3% to 4% annual cost reduction in the overall fleet. And so that combined with our very, very low fixed cost, we have some of the lowest fixed costs of any airline in the world, when you factor that into the business model that we have, which is a single fleet type having integrated network, it roughly offsets any expected increase we could expect on inflation. As you know the inflation is kind of running now in Brazil at record lows. So it's allowing us to retain a lot of value, inflation kind of the 3% to 4% range. And so this increase on the productivity side of the production of ASK, production of the aircraft is significant. It will more than offset any cost increases, we should get with respect to inflation. So with that said, the other -- that roughly equals out to a roughly a flat to slightly improving, slightly reducing overall ex-fuel CASK. Having said that in the ex-fuel CASK, you also have the productivity effects of the -- if you have the increased size of the number of seats on these aircraft, which also has an increase on the other side, allows us to produce more revenues, and so the right way to look at that is also on the margin side of equation. So we also have a potential margin expansion on the revenue side to the extent that we can use this productivity, maintaining similar ASK's, we can have a significant margin expansion, just because of the simple activity that we're doing on the fleet replacement combined with this very high utilization. So that's how we're trying to -- it will guide you on how to think about our costs next year. We don't anticipate any extraordinary effects other than the normal effects of the business, as you guys have been following our results for several quarters now, many quarters, you know that in the 2016 to the begin of '17 period, we had a lot of extra costs related to the transformation of the company, the reorganization of the network to make it more profitable, the elimination of 29 aircraft from the fleet over a long period of time and basically that -- those costs and transformation effects have already run through our company. And so it's a right sized network, right sized fleet. And you're starting to see some of that results. So we do expect to kind of get this study, structural cost reduction going forward, which we think is only going to increase our competitive advantage over the cost differential that we already have versus the competition, which is in excess of 20%.

The next question comes from Felipe Vinagre with Credit Suisse. Please go ahead.

Three quick questions, the first is on the capacity. If you have any expectations or preliminary expectations for next year in terms of ASK's and the parts et cetera. The second is on the other revenues, even though, I understood that we've got a ramping up still phase of the bags, of the checked in bags. But even so, the revenues, the other revenues this quarter, they were below the first half levels, which was not the case from a seasonality perspective in the previous 2 years. So want to see what drove that. And the third and final, on the fuel costs, so how to compare the marginal costs after the rising fuel prices versus the third quarter average, and what do you expect in terms of the ICMS the tax, what outcome do I expect from the Congress and from this regard. These are my 3 questions? Thank you.

Hi, Felipe, good afternoon. I'll start with the second question on that. But in terms of ASK's, we're basically keeping, as you know, as we've spoken, our capacity growth today is zero. So unless we get some clear signs on demand growth, on volume growth, that's our capacity growth plans going forward. And we don't expect to grow capacity more than GDP growth, we expect to track capacity at or below GDP growth. Secondarily, just your second question here, sorry, Felipe, I just got distracted for a second. Your second question?

Second question was on the other revenues, so it was below the first half levels. I know that there is the [baggage] issue ramping up, but what drove the third Q to be below the first half levels in the other revenues, which was not the case in the previous 2 years?

This is basically, this has a lot of change since fourth quarter, whether it have [July] with a higher rate regarding, rates on the results, we have more leisure travelers than business travelers and paying less additional revenues for that. So there's nothing surprising and it does not denote any kind of new trend.

Yes. I guess, I didn't understand the question, because all of our other revenues are increasing year-over-year, I mean the cargo business as we highlighted as well the other other revenues, they're growing ahead of GDP growth. The year-over-year comparison they grow around 7% and cargo also growing at 7%, which is a leading indicator of economic growth for us. They're tracking at 7% -- so I didn't totally follow your question about a decrease in other revenues.

The decrease versus first half, because the first half, this trend was already there, so they were growing also even more than you grew in the third Q, but I think Kakinoff address [multiple speakers].

Yes. You have the effects of seasonality. Also remember that, the full network restructuring in the company, if you had the rightsizing of the company from a network side was finished in May of 2016, and then the last aircraft kind of went out through the system in April of 2017. And so, it makes the apples-to-apples comparison more difficult. So really the Q3 of '17 is the first kind of pure comparison of quarter-to-quarter of the new goal, if you will, of our new goal. On the fuel side, I mean, on the (inaudible) if there is a voting on that, where they will reduce the maximum value added tax rate across all Brazilian states to approximately 12%, that would be in excess of BRL 100 million cost reduction for us, which should also gives additional cash flow to dedicate the increasing service and other types of market, which normally are not profitable to have those services. We don't know when that will effectively go for voting in the Congress, it's been delayed many times. We think that if it goes for [voted] would be approved, but we don't have any indication of when and if that would happen. And we're managing, your question on the fuel costs overall, obviously, there is the volatility, the normal volatility in oil prices up and down is not causing us to change our view in terms of what we're working with prices. But this year we expected around a 12% increase in the price per liter, we've had less than that. We're thinking about something probably in the range of the low-single digits on price per liter increase maybe on the range of 2% to 3%, like I said we originally started the year expecting at the end of last year, we had this conversation, we're thinking maybe [$63] for WTI at the end of 2017. That will substantially revised down. Now folks are talking about $63, again, but we ended up this year with a combination of our efficient management on the operating side, because this is not just about the price, it's also about what we're doing to reduce our fuel consumption. Next year, as I mentioned, when the MAX comes in, apples-to-apples on the MAX, it has a 15% lower fuel consumption. We've got 5 coming in next year. The MAX is already operating with other airlines around the world that are big operators of the 737 MAX 8, like Southwest, for example. They've been operating their MAX, since July, and they've already said, that it's been added to advertise the 15% fuel economy coming in there. So that's going to have a significant offsetting effect on our side versus any potential increases in fuel, but at this point we're not expecting anything more than perhaps 2% to maybe 3% increase over, with these effects on the operating side, over the roughly BRL 2 per liter that we've been managing thus far this year.

The next question comes from Steve Trent with Citi. Please go ahead.

Actually, the first one is actually a follow-up on Felipe's question. I'm just trying to understand 2018, appreciate how you said you want to increase capacity in line with GDP, and maybe it's going to stay flattish, but I look at slide 15, and you're going from a 115 planes this year to 121 next. You're increasing the number of seats by 5% on some aircraft, and I'm just trying to understand that on the 737-800 MAX coming in. How you're going to maintain stable capacity if you're going to keep [block our] utilization at the current level?

That's a good question. Thanks for asking. I'll try to give you a legitimate answer. The incremental growth for us over our domestic market is all being focusing International, which is a new addressable market for us. One of the benefits of the MAX is that it has a range of about a 1,000 kilometers longer (inaudible) longer, that allows us to open up new markets that we're not able to serve today, markets in South America. On the West Coast of South America also open to Central America and Southern Mexico and also South Florida. As Kakinoff mentioned as well, we will be doing some additional activities on feeding traffic with Air France and KLM at the Fortaleza hub, which is going to be huge, and a lot of volumes coming in there. So all of this, the MAX opens up these new markets for us, which are new sources of revenues. We expect that the MAX to grow the international revenue portion of our overall mix from around the 14%, 15% today to around 20%. And so it's early for us, when I say the -- as I already said it before, primarily related to the domestic capacity growth, because that's what everybody is most focused on, that we keep demand growing slightly ahead of supply overall on the market, focused on stability in the cash flows in the business model for the whole sector to get this sector as healthy as possible so that we can get back on a growth path and start increasing service and start stimulating demand in the overall market over the long term, because Brazil still has a very low penetration of air traveler [2,400] per capita per year compared to developed markets that are 8x, 9x, 10x higher than Brazil, but basically it's all focused for us the MAX is a game changer for us, not just on the cost side as I was mentioning, but also on the revenue side. The increase in stage length and the range of this aircraft is going to allow us to open up some new revenue markets for us and taking this GOL product which has been transformed over the past couple of years into these markets, but obviously always focus on business customers out of Brazil, always focused on leisure Brazilians traveling to these markets and always focused on these primary markets where Brazilians are already traveling regularly, but thanks for that question.

Appreciate the color, Richard. In that regard then when I look at more planes next year, larger planes and throw in an increase in average stage length, therefore your system-wide capacity should be something north of flat even though you might keep domestic capacity flat and I'm wondering if that's a fair assessment?

No, we don't really kind of talk about 2 different businesses but now we will have an increase in the capacity growth on the international side, our market share on the international side will increase. We have not yet provided specific guidance numbers on 2018 and remember as well is that when MAX starts to come into our fleet in July of next year, the Fortaleza hub will start operating in the second quarter of next year. So [overall], we'll give people -- we'll give you folks visibility on that at the beginning of next year.

Okay, appreciate that and just curious on maintenance coming in so very low. Any color on whether or not you capitalize any maintenance expense like you did in 1Q and 2, how this was achieved when you're in the process of retrofitting some of your planes and putting WiFi on them and that kind of thing?

You're going to make my life more difficult with the maintenance guys, because we think our maintenance costs are pretty high. We've been -- the last -- we're kind of in the let's call it year 3 to 4 of an extraordinary maintenance cycle at GOL where our maintenance expenses have gone up because we've been doing a lot of refurbishment of engines and as we got into the fleet returns which was this massive reduction in the size of the fleet in 2017, we had a lot of additional costs that needed to be incurred to be able to return those aircraft and so we've obviously provisioned and paid for all those costs, but we're still running them through the system especially on the engine. And so 2020 is probably the last year that we have these above average maintenance expenses and then probably in the second half of 2020, we reduce down to a more normalized level of maintenance expenses, but that number there is very stretched both on the operating side as well as the -- as you said the CapEx side, which relates to a portion of the maintenance expenses that were capitalized because the benefit is realized over a 5-year period. This kind of started in 2015 and 2020 will probably be the last year that we have these higher than normal maintenance expenses, but thanks for pointing that out, it's not always clear because we're in kind of in an abnormal cycle now in the maintenance where they have probably gone -- if you look at on an operating expense basis where they have picked up is high as kind of 5% of total revenues. That's probably about a [1.5] higher on a margin basis than they would normally be in a normalized situation. So in 2020 [nice theme] we're still going to have probably a part of the year will be affected by these extraordinarily high maintenance expenses on the engine refurbishment but in 2020, we'll get that 1.5 margin back to us.

Appreciate it, it looks a little low versus other guys that are running just [73s]. And just one last question from me, on Slide 19 your --

(inaudible) can you give us -- maybe you can give me a benchmark that I can use and we can even push our maintenance guys even further/ What company are you using there?

Perhaps we could take that offline, Richard, if you wouldn't mind just Slide 19, just curious about what you guys were trying to convey in that slide, it looks like the way you're presenting ASKs over operating aircraft is going to create a positive bias for carriers that use larger planes and just curious if that's reasonable?

Well thanks for directing people to a slide in the appendix that we provide here, he's talking about a slide, it's in the appendix that we didn't present. This slide here shows a competitive advantage for our airline. So on Page 19 in the webcast presentation, so going back to that. This information here shows GOL benchmark versus what we consider to be other best practice LCCs and then also the Latin American companies in our universe and this is Q2 data. This has been improved -- this is the ASK production per aircraft. So basically how many ASKs, which is your revenue generating units in our business, this is what produce revenues for us and one of our big benchmarks is Southwest Airlines, which is we benchmark a lot against. They are a very similar business model in the U.S. market, which operates 737, they are also moving to the MAX and a lot of similarities there. So we have a very similar utilization versus Southwest. Obviously some of the other companies like us LATAM has long-haul businesses which changes a little bit the calculation as does Copa has a long-haul business and obviously Ryanair is kind of the extreme case with very, very high productivity per aircraft, but this is the key fact in our business. When you look at things like returns, what really drives this is how efficient and productive our aircraft can be and of course the challenge in Brazil is to allocate those aircraft on a nationwide network, which is a challenge in a continental country like Brazil such that you get that sweet spot where you can operate with that single aircraft type, where you can operate the same pilots, the same flight crews and keep your costs as streamlined as possible. So I think we like -- we use this a lot internally and we like going to share with people how we're thinking about our business in terms of driving improved productivity and operational efficiency and we obviously compare very favorably versus the universe, but as we've been pointing out, we are working on increasing that especially as we transition to the MAX.

The next question comes from Savi Syth with Raymond James.

Just a question on the profit sharing adjustment, like how much of the 7 points was related to profit sharing, because I know based on your guidance, fourth quarter has to come down quite a bit, might be 8% non-fuel CASM to come down and my guess is that a lot of that is driven by the timing of the profit sharing. So I was just wondering how much of the 7 points was related to profit sharing and how much of the tailwind it's going to be for the fourth quarter?

Yes, sure, that's a good question. We are trying to simplify some of the points there but we can get the detail as needed. We had about BRL 65 million of profit sharing in the quarter. It's normal for the year, but this year -- last year it was done in the fourth quarter, this year it was in the third quarter. This relates to visibility on targets. We use a balance scorecard system here at GOL and so that basically tells us and so based on our results, we then start to create the provision as it relates to -- this is profit sharing across the company for all employees and so that's obviously not comparable but that -- in the full year it's already incorporated in our guidance and that is the guidance we're providing for the full year already incorporates that. The other effects were -- in the third quarter of 2016 we had BRL 25 million of gains on sale leaseback transactions which were in the operating line and as we're simplifying it, you kind of have to back that out of the Q3 to do direct comparison. We also had about BRL 15 million of expenses on the launch of the new GOL hash tag NOVAGOL which was launched in Q3 and that campaign was designed to advertise to customers the new GOL product, which is now the leading product in Brazil in terms of the best service and (inaudible) this is the first time we've been advertising it and so that is an investment in the brand, obviously. And finally, we had about BRL 20 million of expenses from passengers traveling on GOL that were using mileage programs of other companies which will be partnerships which obliges us to then go buy, basically there's cost there between us and these partners, it's not smiles. These are non-smiles programs and other airlines. And so when you roll all those out, those 4 line items, the profit sharing, the sale leaseback, the advertising campaign for the new GOL, and the miles bought from partners, if we -- both the ex-fuel CASK and the total CASK, we're roughly flat in the quarter-over-quarter comparison.

That's very helpful, thanks. And just I want to understand, bag fees does that show up in passenger revenue or in other revenue?

Say that again, sorry.

The bag fees that you'll be getting as a result of kind of charge for bags, does that show up in passenger revenue or in other revenue?

It's there in other revenues. actually in that case, regarding the bag fees, it is Kakinoff speaking, you have 2 effects. You have the fees paid by the customer that firstly option for a light fare, which has no rights for carrying luggage and then later inside this, inside this to pay for it. And it have also the upselling of the flexible fares, those are giving the customer the rights to carry and to dispatch one luggage. So in both cases, we expect to have positive effects. The second one is included in the passenger -- in the regular passenger or the PRASK. I mean, the revenue coming purely from other side.

And Savi, this is important, next year there's going to be a change in, I think accounting for most airlines, no IFRS where these revenues will then be accounted for as passenger revenue. In other words, they'll be transferred over to PRASK or PRASM. I believe this is happening globally with all the airlines and so in our December -- if we see our December 7 public meeting here at GOL, we're going to basically present how those impacts -- how our results would look by including these non-passenger revenues. Basically, almost all of non-passenger revenues are going to be included in passenger revenues. And so there will be a real apples-to-apples comparison among all the airlines, very clear and transparent. I know you're probably looking at it, a lot of the other airlines already in the U.S., but we're also preparing for that change. We're going to present that in our meeting December 7 here at GOL, our public with the investor community.

And then just one last question on the sale leasebacks that you've done, you expect to next year when those go into affect, are there going to be gains or losses related to that?

In our fleet management, we always manage a portion of our fleet in sale leasebacks to take advantage of market conditions. Our purchase price with Boeing -- as an operator, we buy at a lower cost than lessors and so a portion of our fleet manage in that modality. What we do in our sale leaseback, we try to get the absolute -- negotiate the absolute lowest possible lease rate because it's important for us to have the long-term cost as low as possible, but that as a result of the calculations producing some gains in some cash back up. So we will have, as we manage regularly our fleet overall, we will, yes, we will have cash flow and gains economic gains related to sale leaseback. It's a permanent part of our business model. One of the reasons why it was explained extraordinarily in 2016 is there was an excess, there was abnormal amount of fleet returns. We also sold 9 aircraft and so that was a very heavy amount, and so part of that was explained separately, but one way of looking at that is that it really is a permanent part of the business although it can make difficult quarter-to-quarter comparison in the quarters that it is happening. And so we will have that going forward, yes and we'll explain that and highlight that as we going forward, so you can have a correct overall competitive cost comparisons.

(Operator Instructions) The next question comes from Mike Linenberg with Deutsche Bank.

Kakinoff, you talked about with the new branded fares, it was very early, but do you have a sense on what percent of your [purse] who are buying (technical difficulty).

With the new first bag fees, what portion of the customers as opposed to buying the fare, because the lowest fare we have now is without the bag fee and the next fare we have has the bag fee and how many are actually upgrading to the fare with the first bag included?

Considering the current trend, we do expect something around 25% [outlook selling].

Okay, very good then and then Kakinoff, you had also when you were talking about GOL's share of business traffic, it being the largest in the country. You did indicate that you felt pretty good about the prospects for business travel looking forward and I know that things have started to improve. Can you provide some additional color on what you are seeing that may be indicates -- we're seeing not just anecdotes here but maybe the makings of a good trend as it relates to business travel demand?

By answering to you, I'm just sharing our view regarding the statistics. I mean, considering the statistics are not delivering any kind of new guidance, but just to give you an idea, traditionally, the elasticity factor is 2x. So considering a GDP growth of 2.5% next year, we could easily consider a range between 5% to 6% of additional business travel demand next year.

(technical difficulty) add is that I think this year currently, we're kind of seeing on a volume basis, you're seeing kind of flat to slightly positive volume growth on the corporate side, but we have achieved much better pricing in that segment, which is reflected in the profitability overall. So I think that reflects the economic conditions being more positive, but we have not yet seen, it's not in these numbers today in other words in the recent quarters any significant increase in purchase volume, but we have seen improvement in the pricing power and the activity and business demand indirectly from that perspective.

This is basically the outcome of having a better restructured network towards the business. I mean once we changed the network, we are more present in high yield routes.

Great, helpful. And Rich to you, when I go back and look at guidance in early October, I think you were guiding for RASK up about 6% and it looks like the number was above 8% and then there was also -- it seems like the CASK guidance I think was plus 3% then and you came in a bit higher and I know you saw these question and answer a lot of different things and you had that profit sharing in the third quarter. Is that what drove the big differential, it seems like there was a sizable differential from where cost guide was and where it came out and you listed a whole bunch of things that you had to adjust year-over-year and maybe it wasn't in the original guidance and I'm just trying to reconcile the differences between, and by the way, your results are good, I'm not trying to be critical here, I'm just trying to figure out how we were off.

Yes, I'm trying to, the connection we have here I think is muffled. I don't know if it's your phone or our phone. I think it's your phone, but --

I think it's my phone.

I think you were asking about, well I'm not sure if I got the question, but we're basically tracking where we expected to be on the cost side overall. I mean there's nothing additional including on that -- basically exchange rate and oil prices also kind of working in normal offset fashion and so we have nothing that's extraordinarily happening on the cost side that -- in fact we're doing a little bit better than our overall guidance for the year. That's why we updated it a little bit there, but it's a pretty tight management of that year and I'm not sure if, I didn't get all the details of your question, but if it was in terms of where we're going with cost, we expect to gradually improve with these levels as it relates to what I described based on the fleet dynamic. That's the main source of our cost reductions going forward, but we also are doing a lot of blocking and tackling on a whole variety of issues in the supply chain and so on and we're also doing a lot of work with suppliers on payment terms. One of the big sources of operating cash flow, nobody really asked a question on today, has been us having better payment terms in the supply chain, which has allowed us to some extent replace very expensive bank financing with more operational finance. The operating profitability plus the combination of what we do with our working capital is a 100% of the sources of the increasing operating cash flow and as we said that is basically as CapEx is matched with low-cost financing, all that's going towards increasing cash cushion and that's [sort] is effectively is cash to equity. I know I didn't exactly answer your question, but if you want to go back, you can repeat it, I just didn't get a portion of it in there.

A follow-up question from Savi Syth with Raymond James.

Just one question on unit revenue, I mean unit revenue growth has been really strong now for several quarters and I know this is a little tough question to answer, but how should we think about it kind of going forward, is there at a point in time where (technical difficulty) comps get softer and I'm also thinking while it's margin accretive but maybe kind of the international growth that you're thinking of next year especially stage length increasing that starts to pressure unit, the amount of unit revenue growth that you can have. Any help you can give on kind of thinking through the kind of unit revenue expansion here?

A couple of points. I think one of things important I mentioned is that GOL over the last 4 or 5 years has invested heavily in a most attractive product for business passengers, which is a higher yielding traffic and then as the network was restructured, it was refocused on our more profitable route slots. We have a leading share in all of the airports that matter in terms of where the business traffic is and it's a significant hidden asset if you will. And so the profitability is really being driven out of that, it's not a question of increasing prices or anything like that, it's just a question of where the high value customers are and we have the combination of the product and with that is the network and the punctuality and the service that all goes with that. So we're capturing increasing share of that passenger and we still have a way to go on that in terms of growing that. The international fees, yes it does have the effect of the increased stage length, but within Brazil and the markets in South America, Central America, a big portion of that is also focused on business traffic. So we don't see any -- on a unit revenue basis, we don't see a negative impact because of that. And so we expect to continue to be growing the unit revenues above inflation at the same time that we're going to be growing our cost below inflation. So that's how the math is going to roll out going forward and it's structural because the network is our network, that we're operating and these aircraft's we're bringing, we are about to embark on this massive fleet renewal, which is significant. And so the end being structural. So the short answer to your question will be we expect these improvements to continue as we expand over the next couple of years in the sphere of the network and expanding internationally and the MAX. That's how I would answer that question.

We like just to emphasize -- it has been just said by Richard, repeating the code on the (inaudible). I believe that we have very good reasons to believe in a further positive trend regarding revenues considering that we have deployed only 55% of our flights with the so-called NOVAGOL experience, I mean (inaudible) the WiFi mainly and some other attractive products that we are about to implement in the near future. So initially we would have good reasons to believe that the company can become even more attractive to the high-end customers and to everybody else once those features, not only desired by the markets, but even our competitors, they have decided to adopt some of these initiatives probably noticing that they are bringing us additional value and consequently [higher] customers.

(Operator Instructions)

So guys, I just would like to thank you very much for joining us in our conference call, highly appreciate the attention that you have given to us along this years and you have -- most of you have followed the decisions taken that are now giving us a [future period] of better results, better margins. We hope that you followed our presentation and the Q&A session was helpful. Our Investor Relations team is available to speak with you as needed. So thank you very much.

This concludes the GOL Airlines conference call for today. Thank you very much for your participation and have a nice afternoon.