Gol Linhas Aereas Inteligentes SA (GOL) 2019 Q2 法說會逐字稿

Welcome to the GOL Airlines Second Quarter 2019 Results Conference Call. This call is being recorded and all participants will be in a listen-only mode. During the company's presentation. After GOL's remarks, there will be a question-and-answer session. (Operator Instructions). This event is also being broadcast live via webcast and may be accessed through the GOL website at www.voegol.com.br/ir and MZIQ platform at www.mziq.com. Those following the presentation, via the webcast may post their questions on the platform. And their questions will be either 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-statements are based on the beliefs and assumptions 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 Mr. Paulo Kakinoff, please begin.

Good morning, ladies and gentlemen, and welcome to GOL Airlines Conference Call. I am Paulo Kakinoff, Chief Executive Officer, and I'm joined by Richard Lark, our Chief Financial Officer.

Good morning. Good to be with you all today.

This morning, we released our second quarter figures. Also we made available on GOL's Investor Relations website 3 videos with the results presentation, financial review and brief Q&A. We are pleased to report earnings per diluted share of BRL0.22. Our quarter came in above expectations, and we further consolidated our leadership position in the Brazilian market. This was a 12th consecutive quarter in which the company reported operating profit, reflecting GOL's competitive positioning and financial discipline in the management of its businesses. As well as the efforts and commitment of the entire GOL team. The resilient and integrated work of our team has been the main driver of GOL's superior results.

Again, we improved our operating indicators. In the quarter, GOL's RPKs increased 12% from BRL8.3 billion in 2018 to BRL9.3 billion this quarter, driven by a 9% growth in the number of transported clients. The higher demand made it possible to recapture the increase in GOL's unit costs, optimizing yields through dynamic revenue and fare management. Average yield per passenger evolved 23% quarter-over-quarter, reaching BRL0.32. Supply was up 6.5%, driven by increases of [3%] in seats and 1% in departures. As well as average stage length growth. The average load factor was 82% up nearly 4 percentage points compared to same period in 2018. We continue to drive strong revenue growth. The combination of higher demand and optimized pricing resulted in a record net revenue of BRL3.1 billion. Increase of 33%, when compared to the second quarter of 2018.

A period that we had a reduction in demand due to the national strike of the truck drivers. Net RASK was BRL0.28, a 25% growth. The net RASK increased 30% to BRL0.26. We achieved an industry leading aircraft utilization of nearly 12 hours per day, which is a global benchmark. GOL's 2019 guidance is for net revenues of approximately BRL13.5 billion. GOL's network serves higher yield routes and is the leader in the domestic client preference with 38% market share. The company is also a leader in the corporate segment with the largest market share of business traffic in Brazil. We have made adjustments to our fleet plan to accommodate the increased demand for our service and the grounding of the MAX. In the second quarter, we added 5 leased Boeing 737-800s to our fleet and delayed the scheduled return of 3 of our NGs. This also offset the effect of the MAX 8 groundings.

As the guidance from Boeing includes an assumption of regulatory approval of the MAX returns to service during the fourth quarter of 2019, in an abundance of caution, we are executing a plan to cover our capacity needs for the remainder of 2019. We remain committed to the 737 MAX as a core element of our long-term fleet.

With that I'm going to hand you over to Rich, who is going to take us through some additional highlights.

Thanks, Kaki. I'd like to begin by adding my thanks to all of our terrific employees for their commitment and hard work. Now, we'd like to comment about GOL's cost environment. Total CASK ex non-recurring in the second quarter was BRL0.24, 14% higher quarter-over-quarter. CASK ex-fuel excluding non-recurring increased 12% mainly due to the 9% appreciation of the U.S. dollar against the Brazilian real, the end of the payroll tax relief program, the increase in depreciation due to higher capitalized maintenance on aircraft components including engines, the fleet expansion in 8 new aircraft, 5 net. The 10% rate growth for landing and navigation fees and provisions for the redelivery of aircraft.

GOL remains the cost leader in South America for the 18th consecutive year. Our fuel efficiency will be slightly impacted by the MAX grounding while second quarter ASKs per liter increased 0.8% year-over-year. Third quarter ASKs per liter are expected to decline year-over-year by 1%. This decline highlights the fuel efficiency of the MAX which is about 15% better than the 737 NG fleet. Once the MAX returns to service, we expect to get back on track with our desired fuel efficiency gains. We don't have an update to our contractual delivery schedule with Boeing at this point which shows 17 remaining deliveries for this year. But we are prepared in the event that the majority of these shift to 2020. We have been working through the delivery delays. Our margins remain solid. The combination of better pricing, higher demand and efficient capacity management permitted GOL's recurring operating income to reach BRL400 million with recurring EBIT margin of near 13% in this quarter.

Recurring EBITDA was BRL815 million and recurring EBITDA margin reached 26%. Despite the impacts in operational challenges from the MAX groundings, we still managed to produce strong margins and all-time high quarterly revenues.

GOL's 2019 guidance is for EBITDA margin of approximately 28%. The second point to highlight is cash flow management, the combination of operating cash flow generation of

BRL873 million in the period and higher cash liquidity improves the company's financial flexibility. Total liquidity, including cash, financial investments, restricted cash and accounts receivable was BRL3.7 billion at June 30, 2019, already considering a debt repayment of BRL100 million in the quarter.

We estimate that our total 2019 CapEx will be in the range of BRL700 million for operational CapEx primarily engine overhauls. Lastly, we would like to share the continued success of GOL's liability management. The net debt excluding perpetual bonds to last 12 months EBITDA ratio was 3.1x at the end of June 2019.

The liability management reduced the company's cost of debt and improved its credit metrics. Currently, the average interest rate is 7.7% for local currency debt. For dollar-denominated debt, the average interest rate is 6.2%. GOL has maintained its commitment to financial discipline, managing the effects of the Brazilian currency through its efficient capacity management and dynamic yield management.

For 2019, we expect GOL's domestic capacity growth to be between 5% to 6% and international to be between 35% to 40%. Non-fuel CASK is expected to be around BRL0.14. We have projected the EBITDA and EBIT margins in 2019 at around 28% and 18%, respectively. Leverage measured as net debt excluding perpetual debt over EBITDA for 2019 should be 2.8x, reflecting our commitment to reduced leverage in the company's balance sheet.

Now, I would like to return to Kakinoff.

Thanks, Rich. In summary, our results this quarter reflect the new competitive levels achieved by our company. Our commitment to continuous improvement in results has proven the strategy of effectiveness of offering a differentiated, and high quality product while relentlessly focusing on cost efficiency.

We remain committed in offering the best experience in air transportation with exclusive services to client on new and modern aircraft, that connect our main markets with the most convenient schedules. We are focused on prudent management of the balance sheet and liquidity maintaining cost leadership and continuing as the preferred airline for our clients, while driving sustainable margins and returns for shareholders. And to conclude, we remain optimistic for 2019 with the scenario of demand recovery of the aviation industry in the country and our continuous capacity discipline. Now, I would like to initiate the Q&A session.

Thank you. The floor is now open for questions. (Operator Instructions) The first question will come from Michael Linenberg of Deutsche Bank.

I guess 2 questions, the first one as it relates to the Congonhas slots. I guess we did get a ruling out of [ANAC] and their definition of I guess a new entrant, as it relates to the 41 slots, do you have a sense how quickly they will actually allocate those 41 slots to the new entrants? Is that going to happen very soon? And can you talk about also presumably there will be -- In parallel, some sort of legal appeal process, since I believe the bankruptcy court basically approved the divestiture, the sale of those slots to you and both LATAM, so presumably that that will be parallel and ultimately there'll be some timeframe when that ultimately is determined. Can you just sort of talk about what's going on there?

Thank you for the question, it's Kakinoff here. Actually you have no information on any kind of legal request from any of the players. So I cannot speculate on it and I believe that those slots will be re-distributed and implemented if you want to -- saw in a very short period of time, so I cannot tell that decisively, but I would assume that by October, latest in November , those airlines would be able to deploy their capacity to fulfill the redistributed slots and start up the operation. So that's my -- I mean forecast for that subject.

Okay. Great. That's helpful and then just the second question, as it relates to distribution and your -- I guess the platform that you are on, I believe GOL has historically used the Navitaire system and yet, as you become a bigger airline and you fly more internationally, there is an argument to be made to move on to maybe a more comprehensive system, whether it's Sabre or Amadeus. What are your thoughts on that? Are you at the point where maybe you have outgrown the Navitaire system and may be considering an RFP to move on to say the Sabre system, Amadeus, et cetera. Anything that you can provide us on that front would be great.

Michael, now you surprised me because either you have very good information from the inside, how you are such a sensitive guy that you could read between the lines actually..

I guess a big smile on..

Actually, we are -- just things, I'd like to highlight, first of all, we are basically about to conclude a RFP of the PSS system or the passengers service system, and we have our back of the envelop -- the current provider, Navitaire, among the contenders, among the candidates and technically speaking, we are pretty confident that the current supplier would be able to fulfill our technical requirements.

I mean, the system itself has -- the Navitaire is in new skys has developed itself in a way that they are more, much more sophisticated than they were once the -- the software was firstly conceived. I mean they are somehow catching up on the airlines needs. And just to tell you that they came to this RFP process technically speaking at the same level of competitiveness, than the other contenders.

So it -- they have been -- could -- will be decided on 2 dimensions, how capable those softwares or those systems will be able to fulfill our future requirements. And we have hired an external consultancy company which is fully equipped to drive us through this RFP process, technically speaking. And then help us to understand who is going to be the best provider to our future needs.

Considering our strategic plans and -- and definitely the lowest possible cost. How much we care about our cost structure and mainly about our cost advantage in comparison to the other peers and that's the king of our -- of our decisions in [ERT] because we are not going to compromise on in our cost structure. Whenever you are talking on PSS system, you need to, to have the right balance between the cost and the revenue opportunities that a more sophisticated and complete system can provide to us. So I think that's along the following weeks, we will be able to communicate to the market. The result of such RFP and that -- you're right, we are ready for more than if I am not wrong 15 months developing this process, which is about to come to an end.

Okay, that's great. I think part of the genesis, just from my perspective is that you have now become so big and to the point that you are flying into international markets and wanting to more closely align yourselves with Air France-KLM and Delta, combined with the fact that as a much bigger company, you probably have better negotiating leverage, which will help you on the cost. So there are couple of things that were sort of driving the question. So it sounds like maybe I was reading your mind, but I'm glad to hear that we're going to, we're going to get some resolution on that front. And it sounds like it's going to improve your costs or at least allow you to maintain low costs going forward. So thank you for that.

Exactly right. Thank you very much.

The next question comes from Duane Pfennigwerth of Evercore ISI.

Just with respect to the revenue guidance for the remainder of the year, obviously very, very strong in the first half, how literally, should we be taking the implied second half RASM, is it a function of conservatism or do you actually see RASM rates declining to sort of low single-digit growth exiting the year?

We provided as you noted, we provided some -- little bit of look into how we're seeing the Q3 in terms of load factors and how that would play into both RASM as well as CASM. That number we provided there 11% to 13% that's what we're seeing, I mean that's what we're seeing and we just went through a industry consolidation, which had a big effect on the second quarter and things are adding to stabilize now over the next couple of months where things will settle back in to a more normal situation, we're still seeing expansion and a couple of points, Number 1, I would say that, if you want to go look at it glass half full that doesn't include the potential for the short end of the booking curve to increase, if demand hits at the back end of that, the -- there is already -- in the third quarter of last year, it was a significant multi-round fare increases, as you recall that we had the trucking strike in the second quarter and which was mid-May and it really wasn't until the end of June, that we were able to start to recompose. And we were re-composing from the end of June all the way until September, where they were literally around about 10 many rounds of adjustments to get back to that. And so with that, the comparison then for the third Q is, sorry, the third quarter of last year is a harder one and then also in terms of sequentially in the second quarter at a very neutral supply scenario where it is in the third quarter -- there is going to be a higher Increase in supply both with us as well as the competitive environment. Maybe I'll ask maybe Kaki to go onto couple of points there, but that's something that we're keeping an eye on and it really hits kind of an individual level. Our specific capacity plan increases for the Q3 domestic market which is obviously what drives, where your question is coming from -- are in the kind of the 3% level, although that's not the case for our competitors.

Yes, Duane, to be really straightforward here, we are pretty cautious when we are looking forward to the revenue units I think -- we have now noticed some kind of not rational behavior coming out one of our competitors and honestly we can't understand that whether this is just a kind of noise in the future inventory seating available and we might be misreading that or if it's really enough rational behavior coming as I said from one of our competitors. That made us be -- pretty cautious regarding our revenue outlook. And also quite defensive. I mean, our behavior on this will remain to be the same one that you have deployed already for almost seven years. We will be conscious of our role being the market leader and we will incentivize as much as we can, the capacity discipline in the market.

So we are giving that to our investor, a clear position on that. But at the same time, as I told you, we have been pretty cautious because we cannot understand some of the competitor's behavior regarding the capacity to be deployed, mainly from the fourth quarter this year on.

And maybe just if on the public available data, which obviously you have access to Duane, nobody else has access to. Right now within the system, like I said, for a whole, we are at about a 3% year-over-year capacity increase in the Q3, the overall industry is at around a 12% level and we don't have demand growing at that level, which is a slide at the end of the Q&A. That's on the website, where you can see the current expectation for domestic market demand this year is almost -- is in a range of 7% area, and we've been growing capacity below that to keep equilibrium stability and rationality. We've been a leader in that and so, and then there is this one competitor in the group that has Q3 domestic capacity expansion plans in excess of 30%. And so we took -- look at that as well. And that's obviously reflected in our RASM expectations for the Q3 of this year because we're -- a portion of the market, all three of us are competing head to head directly in the majority of the markets and net number sequentially is also not that much different. I mean, sequentially if you go Q2 to Q3 of this year. It's around a 10% ,if you take what's in the system and the system of all the companies in Brazil, domestic capacity it's around a 10% increase in domestic capacity sequentially. So that necessarily will have an impact on RASM, so there is no way to avoid that. But as Kaki said within that bucket, we -- our number is in the low single digits. And so we're trying to contribute to the rationality and maintaining the equilibrium, but that doesn't just depend on us.

Okay, that's helpful color. And then just for a quick follow-up, Rich, maybe for you ,just opportunities as you see them on the cost structure into 2020 ? Obviously lack of MAX availability is holding you back to some degree this year, that will be some benefit in 2020. But beyond just the return of the MAX. What are the high level opportunities you see on the cost structure into next year? And thanks for taking the questions.

That's good question, obviously as you mentioned, the main driver that is our fleet transformation from the NG to the MAX has an enormous impact on our cost structure, not just on the 15% reduction in fuel consumption but also on the higher revenue productivity of our aircraft given the up gauging and the increase in stage length from the longer range, which also has a huge cost dilution effect and some of that definitely indeed, as you mentioned, is going to get pushed from our second half into the first half of next year without a doubt, but we have initiatives across the supply chain, across the capital structure.

And what I have always just mentioned in the previous question in terms of the reduction of our variable costs on the revenue system side of the equation. Also in terms of how we sell, but it's really a series of initiatives across the board, which represent for us and this is in addition to the MAX potentially and, this is, I would say, really more over the next 12 months, not necessarily all in this year, but about BRL500 million of potential cost -- positive cost impacts, but you know across our entire company. We continue to work on that incessantly independent of the fleet transformation process.

And here, I would like also to highlight for matter of comparison if you take 2019 as a basis and you pay special attention to the economic results that allowed us to, to have a quite positive outlook regarding cost for 2020 because we have basically none of the 737 MAX effect in reducing our costs happening this year. So you probably know that by right after ungrounding, we are going to be able to get in a -- in few weeks something around 20 737 MAX and that would create a kind of cost reduction shock in some important goods, which would be a quite considerable reduced level of costs in comparison to that one delivered or deployed by our fleet in 2019. So we had previously considered that we would have that effect happening already in 2019 due to the grounding that was not possible. So it's pretty positive that we are delivering as confirmed by the guidance delivering the previously expected 2019 EBIT margin without getting any kind of benefit created by the 737 MAX and right after their own grounding which is expected to happen by the fourth quarter this year, we are going to have at least 20 aircraft being delivered to our company in a short period of time. So we are quite positive in that.

And Duane, in addition to that, on the fleet side of the equation. On the asset side of the equation. I mean we provided some details this quarter, on what we're doing specifically to deal with the MAX situation, which was basically the delays of the MAX and the replacement of those with additional leased NGs that activity in itself on the NG side of the equation also allowed us to achieve through some pretty good negotiations, lower lease rates for that portion of the fleet as well. Across those new, those new operating leased aircraft that are coming into the fleet to bridge the gap here. In addition to that, one of the things that we had assumed at the beginning of this year, which we ended up postponing because of the MAX situation was the further modernization of our owned aircraft, which we have been doing since 2016. We still have 11 NGs in the fleet, which we're keeping until the resolution of the MAX situation, but they represent for us potentially BRL400 million of income, once we get back on that that won't be happening this year but we'll probably be back -- get back onto that horse next year. So it was kind of in a reorganization. A lot of pressure on us to kind of keep our current costs. But we do expect some significant positive catch up next year coming out of the aircraft side of the equation as well. So we tried to give you some visibility into that and the data we provided this quarter as well on the fleet side, but I think an important point there to say is that we've -- we were to negotiate some -- some let's say, lower than our current monthly lease rates on the additional operating lease NGs coming into the fleet and that was a positive for us on the CASM side of the equation for this year and that'll impact this year.

The next question will come from Dan McKenzie of Buckingham Research.

Another question on cost here. Rich, GOL is getting some new investors here in the U.S. that are not used to dealing with the foreign exchange movements. So I'm hoping, you just talk a little bit about this, if we strip out the 9% depreciation in the Brazilian reais in the second quarter. So looking at the quarter on a constant currency or like-for-like basis versus a year ago. I wonder, if you can talk about what the CASK ex-fuel and EBIT would have looked like. So core operating performance excluding the FX noise?

Sure, Dan. Hi thanks for the question. On the CASK-ex the recurring CASK-ex fuel without the FX effect would have shown quarter -- the second quarter of this year over second quarter of last year -- a 9% increase versus the 12% increase that we reported with the FX effect. And then on the operating margin side, the EBIT margin side, the recurring EBIT margin would have been 16% without the FX effect versus the 12.5% that we reported. And just in terms of EBITDA, the EBITDA would have been 29% without the FX effects -- effect versus the 26% that we reported.

Very good. Second question here, regarding the structural reorganization of SMILES and the move to discontinued talks. I wonder if you can elaborate a little bit on that. On the one hand, Air Canada taught us it can take a while and it seems like it would be, on the other hand, it seems like it'd be nice to get it done. But then I guess, there are some crosswinds here, you know, the longer you wait. I'm wondering if the cost to bring it in-house might fall just simply on a higher cost to redeem miles. And so I'm just wondering, if you can just help us reconcile some of the cross-currents here?

Sure. As we announced the special committee that was created by the SMILES Board in December last year went through a six-month process with that committee, which was not successful in reaching a deal. And so, we finalize that process. In the short term, when I say short term here in the next couple of months, we are not doing anything specific on that. We've been obviously extremely busy with what's been going on with fleet with the sector consolidation, with our growth, with our international expansion, with our regional expansion and we have one team here at GOL, it's one kind of consolidated team and we will be very focused on the opportunities and the priorities we've been focusing on that you're seeing now.

Having said that, I mean we -- our intention is to complete a reorganization of the capital structure of our Group to increase our sustainable growth rate, and for that and as well from to increase our competitivity long term and for that our intention remains to -- the fact that the take in of the minority interest of our loyalty program subsidiary. But the timing right now, I don't have anything specific on that. When we initiated this in October last year, our thinking was to have everything finalized in maximum over a two to three-year period. So definitely within the window that we specified to do that is -- will be -- we're focused on is really with that the long-term competitivity of the overall group in the context of Brazil, South America and globally is I think the other question highlighted I mean GOL today is a global airline in the sense that we are selling tickets all around the world and we have close to 100 interlines and code shares and so we are looking at the long-term growth rate of the Group, the long-term sustainable growth rate, the long-term competitivity and so we're well within our planning in terms of how we would approach that obviously the sooner the better in terms of tax inefficiencies and other cash uses, that could be better optimized there, but that's where we are right now on that.

Understood. And I guess, I'm just wondering, if I can squeeze one last one in here on just macro, there is a lot of moving pieces on the macro side, so leaving pension reform, Congress has taken up tax reform. And I know it's early here, it's just in the initial committee stages, but is there a sense that this would be a corporate tax reform, an individual tax reform or both. Is there and I am just wondering if there's any sort of consensus view about the momentum of this potentially in the months ahead.

We have almost no information there. They are just speculation that we -- as we monitor. What we have seen is that the -- the Brazilian states, they are more and more sensitive to the damage caused by such high tax burden on the jet fuel, the Brazilian ICMS and most of that has already implemented new state legislations that are gradually reducing that taxation, but that's the only thing you have material on this tax discussion in Brazil at the moment.

But I think also referring to previous administrations is I had always talked about sequentially once pension fund reform would be effected, the next, mount to climb after that would be tax reform, which is a big part of the overall Brazil cost if you will. But right now the focus is on pension fund reform which can alleviate significant amount of cash flow in the government over the next 10 years and also the privatization program as well, which is really important. But nothing in terms of specific executions happening in tax reform. Therefore, we continue to work very hard on everything we're doing on the tax side of the equation.

Now, for example, this project that we had in the State of Sao Paulo, which reduce the value added tax on jet fuel by half from 25% to 12% [ex-amount] that's been approved by the Sao Paulo state assembly. You saw the 9 regional destinations that we're doing this year, a part of that that agreement and that's significant. And we've also done a good job, not just in the State of Sao Paulo but around Brazil with similar types of activities designed to have lower taxes on in terms of how we're managing our business scenario.

That's what gives me the opportunity to also to highlight, one, additional resource that you have just deployed, which is pretty common to you guys in the United States. The so-called capacity purchase agreement, we have for the first time launch that that kind of structure in the Brazilian South State of Rio Grande do Sul that allowed us to add 6 new destinations to our domestic network and we are also supposed to announce new agreements like this in other Sao Paulo -- in other Brazilian states, pretty soon that give us the opportunity to simultaneously enhance our network and connectivity. At the same time that we are getting access to lower state tax index, which positively affects our performance. So this is a very promising way to further develop not only our network but the Brazilian airline industry, because we are bang offering to the customers access to the -- aviation industry while before they were completely out of that -- of that system just because they couldn't get access to the main routes due to the infrastructure constraint. So that would help us also to further reduce on average the tax burden coming Itau specifically the ICMS tax.

And as you know, well, Dan, the GOL level on the corporate tax side of the equation. We have over BRL4 billion of off-balance sheet net operating loss carry-forwards, tax credits, if you will. And so as we go back to being profitable. We have a significant tax asset that we're not using right now that -- that tax asset as we utilize it which could potentially be over the next 5 years or so. Represents about BRL1 billion of potential net-usage if you will, which is both cash effect as well as earnings effect and so we have a, we have a significant asset that we can use to also help mitigate the -- our corporate taxes.

The next question will come from Savi Syth of Raymond James.

This is Matt on for Savi. Richard, appreciate the additional color you gave in terms of the MAX and some of your expectations there. Just a minute ago, but I was wondering, could you maybe talk about your thinking in terms of the day that the return date, even though we don't know when that is maybe think about -- thinking about it in 2 parts. Maybe. Firstly in terms of your, your in-house fleet, how quickly can you get those brought back up, whether it's in terms of maintenance or training then, how long of a lag would you want to be able to sell tickets forward and then also in terms of the deliveries , what do you think of rate of aircraft that you are going to induct maybe per week or per month that you can handle based on the current production schedule?

Yes, that is -- that's obviously an issue that you have a large ecosystem that's dealing with that there. I mean, we're -- we're in the top 5 operators of MAXes in the world. You got Southwest, American, United and each one of us got different ways of dealing with it. But in our planning, as we mentioned, we covered all of our needs through the high season at the end of this year, which would be pretty much through February of next year. We've covered those in terms of identified aircraft that we've already leased or we would lease or sublease and so we're covered. So we have a lot of flexibility to deal with whatever comes out of Boeing in terms of when they actually get the ungrounding as well as the -- of the aircraft coming out of the factory as well as those that are in storage. And so we have flexibility to come at it in a bunch of different ways. But we expect that there would be one to two months process once the ungrounding happens for aircraft -- our aircraft to be accessed and operating in the fleet and that's, I'm referring specifically to the aircraft that are in the future delivery schedule, the future production schedule of Boeing.

And the 7 aircraft that we have currently grounded, it would be pretty much immediate access because our pilots already trained on that and we have 100% fungibility on that. And we also have the ability, through these deals we've done with lessors, to also access additional orders that are coming out of other airlines out of the factory at Boeing, which might not necessarily be on our aware which we could then shift around. And I think your other question, in terms of the, on the operating side and in terms of pilots, mechanics and our capacity there. I would just say, the same thing. We think, there kind of be like a one to two-month process, where we'd have to work out, there is a major linear programming exercise that Boeing is going to have to do with the over 300 or so aircraft that they have in storage there and all their clients and the sequencing and I think we will be highly speculative at this point on exactly how that's going to work, but there are -- there is a lot of planning already on that in terms of how it would work, when the un-grounding happens.

Matt, actually since the grounding ,every single decision regarding our fleet capacity that we have taken is considering that in any scenario , we would put pressure on our pilots, mechanics and therefore after making possible to sublease 7 aircraft through the Brazilian high season, those other 5 that we have already added to our fleet this year. We gave ourselves the opportunity to decide how gradual, we intend to reintroduce those planes into our fleet without put us any kind of additional pressure, which would be pretty much undesired. GOL was the first airline in the Western world to ground the planes, less than 24 hours after the accident. And we took the decision at the time exactly to show to our customers, pilots, employees that we would compromise -- on neither on safety or the perception of safety that the company has always delivered to the stakeholders. Therefore, I believe that by taking the decision to gradually and carefully reintroduce the planes without any kind of rush, we would just highlight our assets being perceived by the customer like a safety first company, and therefore, once capacity need is addressed by all those alternatives that we have already built in there is no reason to rush on that.

Yes. And if you -- we gave you the data, if you go to the recording, we made available on the website this morning, we showed you the current plan in terms of NGs and MAXes for this year and next year. And that's already organized. That's already locked in, if you want to do it if you will, which is basically another 10 NGs in the second half of this year. And then next year basically, we would then be receiving 25 MAXes during the course of next year and next year to finish this year effectively with 7 MAXes and finish next year with 32 MAXes and finishing this year with 106 NGs and finishing next year with 88 -- 800 NGs is what I am saying. I mean we will be keeping the 700s at around this 24 level to keep our focus on our regional expansion where we're effectively using there -- those aircraft to compete in those smaller markets. And -- but that data -- that's basically our plan in terms of the numbers. How we get there could have a variety of alternatives depending on this linear programming exercise, it's going to have to be done within the Boeing ecosystem and all the other clients that they have there to deal with once the ungrounding happens.

That's great, thank you for all that additional color as well as that chart you referenced in the slide deck, really appreciate all that. And as a follow-up, if I can just quickly touch on, when you spoke of the 700s those regional markets, just a quick one in terms of those regional market. I know most of them are launching, both 3Q and 4Q and then a lot of them anti-competitive, I think one competitor might have some overlap on one or two of them that they announced. But could you talk about any early read you have on those in terms of forward load factors or how demand is filling up in those markets. Thanks for taking the question.

Okay. Let me highlight the two different dimensions. And they are, I mean complementing each other of our regional strategy. First and most important one is that our domestic network expansion being produced by our own fleet, I mean, new destinations to be operated with the 737. And we have just announced 6 new ones for this year only. There are more to come on the next year on and that work in combination with the regional -- state regional strategy through the CPA agreement that I had just mentioned that we have in Brazil. Three regional airlines and they are working with us in order to further expand this promising model already implemented and announced last week, in Rio Grande do Sul, the Brazilian South State. So in both directions along the following two years, we are supposed to announce new destinations, new regional destinations and two net strategy to further enhance our network destinations and consequently load factors because the sum of those new regional flight, all of them connecting to our main hubs, and then we will have even more powerful connecting structure, than we do have today.

Great, thank you.

Did I answer to your question or you would like to know personally some of the...

Yes. No, it's certainly good color. Just in terms of , if you have any early sales on the books, I guess, I know they haven't really started yet, but maybe how that is looking, if it's in line with expectations or still a ways to go there.

Well the -- actually the sales pattern is following exactly the current market dynamic, nothing higher or below the average partner in every route that whenever we are starting a new flight, there is a ramp-up curve and is exactly what's going on with all of those destinations being recently announced by the company.

The next question will come from Josh Milberg of Morgan Stanley.

My questions relate to the different adjustments that you made to EBIT to get to the adjusted figures this period and I think that this is clear but my first one is, if you could just confirm that you treated the BRL192 million provision for aircraft returns as a non-recurring expense.

And additionally, tell us what the exact impact of the credits from contractual lease term reductions were? And then actually just adding to that, I also wanted to ask what if any other adjustments you made to get to that adjusted EBIT -- EBIT number, and also whether you recognize losses related to the funding provided to Avianca Brasil and Elliott. Those are my main doubts.

Sure, Joshua. The BRL192 million for the provision was related to 4 aircraft as a result of this fleet reorganization that we did because of the MAX situation, that's why that event happened. And so, yes, that is in the non-recurring bucket there in the quarter and that also gets matched with a number of about BRL133 million, which effectively is a debt reduction.

But if you will, on those contracts -- and those contracts are going out earlier that generates a reduction in debt -- in terms of the IFRS 16 finance lease calculation related to those aircraft return. So both of those numbers the BRL192 million provision for aircraft return as well as the BRL133 million number, which is in the other expense line there related to the cancellation of those leasing contracts. Those are the main items. There is some other tax effects in there, but those are the main items that are in that BRL80 million, net adjustment that we back out for you guys, there in terms of understanding the quarter-over-quarter cost adjustments. What's not in that number is we wrote off in the quarter around BRL22 million related to our 45,000 passengers that we transported for Oceanair, up until the end of June to help out with the disruption of that company -- were the company that most transported passengers there to help out that situation.

So there was about BRL22 million rise in the quarter Q2 that was written off or provisioned, if you will, on that. That's the only amount that has been dealt with at this point related to any exposure that's operational exposure that we have there. We're not going to recover that from that situation there. The other credits that are there are still -- still there, which is the DIP financing as well as -- as the participation in the credit that's pending the outcome. But we have to wait for the outcome ultimately of what happens there in the legal restructuring process of that company. The next milestone is at the end of August, where we would be making a decision or not. But we are following the rules there. The appropriate rules there, but going back to the BRL22 million, that we treat as operational. You could decide if you want to treat that as a recurring or non-recurring or not. That's not in the BRL80 million -- 20 -- BRL22 million is not in the BRL80 million. Also, I should say that the way that's treated in the accounting, that is a reduction to revenues. It's not an expense item. It's in the recurring revenues and so there is a BRL22 million reduction in revenues in the Q2 related to those -- that air traffic liability that we helped out with on the Oceanair situation.

Okay. Rich, that was a very helpful and clear response. One more related clarification. Just on your full year '19 EBIT margin guidance that, how are you -- are you considering that the big first -- that the big second quarter provision for the aircraft returns in those numbers or not?

Well, yes, I mean all of our numbers are fully loaded in terms of what we expect. When we talk about -- what we're thinking about full-year and I think, I don't know, I think , you would be hard-pressed to find a company that provides as much visibility into the future as we do officially. That reflects what we expect in terms of the business across the board. And if anything is excluded, we will footnote it there to show you about how we're thinking. And so that is -- that's fully loaded for what we expect for the year. The comings and goings as it relates to the aircraft portfolio that includes what we expect in terms of returns of aircraft as well as sales of aircraft and that's also adjusted for this suite reorganization that we've done over the last couple of months to deal with the MAX situation that's all reflected in those projections.

The next question will come from Rogerio Araujo of UBS.

Congratulation on the sterner results. I have a couple of questions. First is so there was a distribution of Avianca Brasil lastly in June, expect for Congonhas Airport, which was distributed yesterday. So my question is if you could provide a comparison of ticket fares sold in July versus those sold in June and May, so did this capacity expansion translated into huge normalization or partial normalization or not. This is the first question.

Actually that is not a -- that will be a fair comparison because July is the high season and the capacity is short caused by the Avianca Brasil operation termination made the fares to achieve -- they are fixed considering the way that we have managed the revenue management structure and the regular rules. That when suddenly Avianca stops its operation they were taking out of the market 50 planes that was not replaced by none of the competitors because until the end of July because there was not a time enough to do so. Once July was very -- if you will route sold by the end of May, the net capacity shock did not interfere that much in the July figures because there was not too many available seats able to be sold. We are going to see that more from August on. But I can tell that considering the current outlook by October, we are going to have basically all the capacity previously deployed by Avianca being replaced by the three current incumbents. I mean that was more a kind of short effect between August and September and then from October on a new equilibrium between capacity and demand, will be in place, and that equilibrium is pretty much comparable to the -- that one that the market saw in October last year. So that it was more. I mean a kind of short phenomenon happening pretty much concentrated in August and September was in July, the high season does not allow us to have any kind of -- to produce any kind of fair comparison between the two mentioned months June and July.

Very clear. So my second question is a follow-up on Josh's questions on the credit, that was recognized for BRL133 million. Is it related to a cancellation of lease contracts or is it related to a reduction in the length of some of the contracts. Thank you.

We have 4 aircraft that are being returned, and that different than original plan. And so the way that works is that when those aircraft, when you make a decision. You have a specific date where you're going to be a returning your aircraft, in those case, it's in the short term, you have to adjust whatever accounting effects versus what you originally planned to on the expected termination of the contract. And so those effects, both the provisions for the returns, it’s very expensive to return aircraft after the complete engine overhaul.

This is obviously future cash that would be spent, as well as the adjustments you make on the assets and liabilities on the balance sheet. So in this particular case that credit that is realized that BRL130 million is basically the excess of the asset over the liability, you do a net effect and then you run that through the income statement.

(Operator Instructions). The next question will come from [Roberta Versiani] of Citibank

This is Roberta, I am from (inaudible) team. I have a question regarding Avianca Brasil slots. Even though no foreign risk bid on ongoing, do you see potential for -- foreign interest in domestic operations in any other Brazilian airport. And also, is that correct to assume that GOL had the highest amount of route overlap with Avianca Brasil versus the other domestic airlines. Thanks.

Roberta, the second part of the question was understood. Yes, we had the highest overlap ratio with Avianca in comparison to the other peers. But I didn't understand your -- the first part of your question please, could you repeat?

Yes, sorry. I wanted to know if you see any potential -- foreign interest in other domestic operations in Brazil, in other Brazilian airports?

Maybe you could speak a little bit slower, because it kind of muffle the question, yes -- if you could speak a little bit slower.

If you see any kind of opportunity for what?

For foreign investors, foreign interest in domestic operations.

I'm sorry. Yes, we do -- sorry, possibly he is over loudspeaker here because it was not -- not so clear. Yes. We do see that opportunity. There are some airports where several interesting slots are available and they could be fulfilled by a new permit, and those are airports with facility -- potential mainly for a low cost, low fare company to get in.

I'm sorry, but like which ones could you give us more detail.

As I said, clearly you have Cancun as one of that airport.

Any airport where you don't have slot restrictions, anybody can go in. I mean you have top 6 airports in Brazil are pretty concentrated. So that includes Congonhas, [Peru, Sans De Mon] Brasilia, Salvador, I mean those very concentrated and there's really no additional capacity there. But a lot of these other -- let's say more regional or we don't have secondary airports in Brazil. Each city generally has an airport of some -- we have over 60 -- over 60 operational airports commercially in Brazil of the over 2000 air facilities we have in Brazil, you have about 60 to 70 that are operated today heavily for commercial aviation. Outside of the top 10, there is capacity if you will landing rights where anybody can go into those and then that's a function of demand as well. Brazil is very concentrated, where in these top 6 airports, you have more than 60% of passenger traffic going in those airports and so it's just so concentrated.

(Operator Instructions) The next question will come from Petr Grishchenko of Barclays.

Sorry I joined the call later. So I don't know if there was already answered, but can you provide more color on kind of your debt amortizations for 2020 and any thoughts on the financing options, local market bond, you did obviously convert this year. So any thoughts on the liability amount will be helpful.

Sure. Petr. Yes, I mean we -- as you know, we've been very clear in our plans there next year our plans are to pay the $300 million term loan, as well as the remaining amount on the 2022 bonds. Those bonds are callable at attractive levels in February of next year. And so sometime between February and August, we would be affecting those amortizations, which is significant.

Now in addition to that, we are also -- as you know, we transformed the Brazilian real debentures last year into a 3 year amortization schedule. When we started that we had BRL1.1 million that was transformed into a 3 year semester we pay out. Which is now the remaining outstanding on that BRL750 million, which basically be fully amortized over the next 2 years, the convertible bond that we issued in 2 phases where we -- you saw recently, we did another $96 million gross.

The total amount on that raised for us is around a $425 million that is cash -- that's now reserved to do these roughly $400 million of amortizations in the second and third quarters of next year, as it relates to the term loan, and the 2022 bonds. And I guess, the only other point I would make on that is that given your question is we have zero additional plans about raising any type of financing of any type of unsecured financing that or equity in the capital markets, all of our efforts now are focused on secured financing vis-a-vis the aircraft acquisition plan over the next 8 to 10 years, where by 2025. We expect to have around 60% of our overall fleet of this new Boeing order of 130 aircraft. About 60% of that would be done through ownership financing mechanisms, where we would be building equity on those aircraft like we did in our first order. We did 40 aircraft. In this second order we will do somewhere between 70 to 80 aircraft through finance lease mechanisms.

Just a final comment on, you mentioned the convert. I mean, the convert today is actually, it's in the money. So even though that is in the maturity schedule in 2024 because we have the net share settlement mechanism, where you can pay either in cash or stock if the convert is in the money at maturity. Having said that, the convert is already in the money and so we view that as equity on the balance sheet, meaning that that is a 0 amortization in 2024. So based on what I just described. Once we amortize the term loan and the '22 notes next year.

The only remaining fixed maturity in our amortization plan will be the 2025 bonds, where we have $650 million to be amortized in 2025. And so at this time next year, we will be basically looking at a maturity schedule, which has 0 unsecured U.S. dollar maturities until 2025. I think, it's important to highlight that because the end game on this liability management we have been doing the last couple of years is basically to get back to that situation. And that will be matched against that $650 million will be matched against the equity build up -- the off-balance sheet equity build-up on the aircraft, which by 2025 will be about $700 million. And so that's why we would like to say, we're perfectly matched in terms of currencies in assets and liabilities even though those aircraft liabilities -- those aircraft assets which are dollarized, traded in dollars and create significant equity value for GOL. You can't find those on our balance sheet, but how we manage them economically is to have the perfect matching in terms of currencies with assets and liabilities on and off balance sheet and that's we're basically back on track for that. So that's basically, how I would answer your question.

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 our presentation and the Q&A session helpful and our Investor Relations team as always is available to speak with you as needed. So have you all a nice day. Thank you very much.

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