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Edited Transcript of GOLL4.SA earnings conference call or presentation 31-Oct-19 3:00pm GMT

Q3 2019 Gol Linhas Aereas Inteligentes SA Earnings Call

São Paulo Nov 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Gol Linhas Aereas Inteligentes SA earnings conference call or presentation Thursday, October 31, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Paulo Sérgio Kakinoff

Gol Linhas Aéreas Inteligentes S.A. - President & CEO

* Richard Freeman Lark

Gol Linhas Aéreas Inteligentes S.A. - Executive VP, CFO & IR Officer

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Conference Call Participants

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* Daniel J. McKenzie

The Buckingham Research Group Incorporated - Research Analyst

* Duane Thomas Pfennigwerth

Evercore ISI Institutional Equities, Research Division - Senior MD

* Lucas T. Barbosa

Morgan Stanley, Research Division - Research Associate

* Michael John Linenberg

Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst

* Petr Grishchenko

Barclays Bank PLC, Research Division - Fixed Income Analyst

* Rogério Araújo

UBS Investment Bank, Research Division - Director and Equity Research Analyst

* Savanthi Nipunika Syth

Raymond James & Associates, Inc., Research Division - Airlines Analyst

* Stephen Trent

Citigroup Inc, Research Division - Director

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Presentation

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Operator [1]

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Welcome to the GOL Airlines Third Quarter 2019 Results Conference Call. (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 the 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 has finished.

Before proceeding, let me mention that forward-looking 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.

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Paulo Sérgio Kakinoff, Gol Linhas Aéreas Inteligentes S.A. - President & CEO [2]

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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.

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Richard Freeman Lark, Gol Linhas Aéreas Inteligentes S.A. - Executive VP, CFO & IR Officer [3]

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Good morning. It is my pleasure to be with you all today.

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Paulo Sérgio Kakinoff, Gol Linhas Aéreas Inteligentes S.A. - President & CEO [4]

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This morning, we released our third quarter figures. Also, we made available on GOL's Investor Relations website 3 videos with the results presentation, financial review and the preliminary Q&A.

We are very pleased to report that this was the 13th consecutive quarter in which the company reported operating income as well which had record net revenue, reflecting GOL's competitive leadership and financial discipline in managing its business.

The passionate work of our team has been the main driver of our superior results. Once again, we improved our operating indicators. Revenue per passenger kilometer, RPK, increased 12.8%, totaling BRL 11.1 billion, driven by a 13% growth in the number of transported passengers, while available seat kilometer, ASK, growth was 7.6%.

The strong passenger demand and dynamic revenue management enabled GOL to offset the increase in operating unit cost. The company achieved average yield per passenger of BRL 0.315, an increase of 14.8% year-over-year; average load factor of 82.9%, an increase of 3.8 percentage points compared to the third quarter 2018; and on-time performance of 91.2% in this quarter according to Infraero and data from major airports.

We continued to drive the strong revenue growth. Net revenue was BRL 3.7 billion, the highest ever recorded by the company, and an increase of 28.3% year-over-year. GOL carried 9.8 million customers in the quarter, 13% growth over third quarter 2018, with 9.2 million in the domestic market, 11.4% growth, and 0.6 million in the international market, up 48.6% year-over-year.

Net revenue per available seat kilometer, RASK, was BRL 0.2767, an increase of 19.2% versus same period of last year. Net passenger revenue per available seat kilometer, PRASK, was BRL 0.2612, a 20.4% growth over third quarter 2018. The net revenue guidance for 2019 is approximately BRL 13.7 billion.

We have used our fleet plan flexibility to accommodate the increased demand for our passenger transportation services and to manage the MAX delays and recently unplanned maintenance requirements on some of our NGs

In the fourth quarter, we added 5 leased Boeing 737-800s to the fleet and rescheduled the redelivery of 4 of our NGs. We are working with the assumption of the MAX returns to service in our network in December 2019. And in parallel, we executed a plan to cover our capacity needs for the Brazilians summer high travel season of January and February and subleased 7 aircrafts.

To conclude, I would like to extend another thank you to all of our employees. I am very pleased with our company's results reached in this quarter and proud of our team who did an amazing job of minimizing the effects of MAX delays.

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

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Richard Freeman Lark, Gol Linhas Aéreas Inteligentes S.A. - Executive VP, CFO & IR Officer [5]

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Thanks, Kaki. I'd like to begin by also 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. Unit cost based on cost per available seat kilometer, CASK, excluding nonrecurring expenses increased by 5.8% from BRL 0.213 in the third quarter of 2018 to BRL 0.225 in the third of 2019 mainly due to higher personnel expenses, higher passenger costs and higher depreciation.

Fuel cost per ASK decreased 6.7%, consequence of a reduction of fuel taxes, partially offset by additional fuel consumption due to the MAX delays. CASK ex-fuel excluding nonrecurring expenses increased by 14.2% due to a number of factors: one, a 37.3% increase in depreciation due to the addition of 6 net aircraft in the fleet and a reduction in the depreciable life of capitalized engine maintenance and large components. Two, an 18.4% increase in personnel expenses mainly due to an increase in the federal payroll tax rate to 20%, a 3.6% cost of living adjustment, and the hiring and training of 723 new employees due to the expansion of operations, new routes and new bases. And finally, increases in passenger costs, service provided, sales and marketing and landing fees.

GOL has the lowest unit cost in its markets. GOL's 2019 non-fuel CASK guidance is approximately BRL 0.145. Our margins remain solid. Due to strong cost control and yield management, the company achieved a positive operating result for the 13th consecutive quarter. Third quarter 2019 demand enabled GOL to achieve an EBIT margin of 18.6% in the quarter, the highest since 2006.

Operating income, EBIT, was BRL 692 million in the quarter, BRL 451 million higher year-over-year. EBITDA margin was 30.7%, an increase of 11.8 percentage points. GOL's 2019 EBIT margin and EBITDA margin guidance is approximately 17% and 29% respectively.

Lastly, we would like to share the continued success of our balance sheet strengthening. GOL reported operating cash flow generation of BRL 1.1 billion in the quarter. Total liquidity was BRL 4 billion, BRL 370 million higher in comparison to June 30, 2019 and BRL 1 billion higher than a year ago.

GOL has affected BRL 998 million of debt repayments in 2019. The U.S. dollar appreciated 4% end of period against the Brazilian real, causing a net exchange rate and monetary variation losses of BRL 623 million. Net debt excluding perpetual bonds to LTM EBITDA was 2.9x as of September 30, 2019, slightly better versus June 30, 2019, which was 3.1x.

Now I would like to return to Kakinoff.

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Paulo Sérgio Kakinoff, Gol Linhas Aéreas Inteligentes S.A. - President & CEO [6]

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Thanks, Rich. In summary, our results this quarter reflects the new competitive levels achieved by our company. Our commitment to the continuous improvement in results has proven the strategic 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 customers on new and modern aircraft that connect our main markets with the most convenient schedules.

We are focusing on prudent management of the balance sheet and liquidity, maintaining cost leadership, and continuing as the preferred airline for our customers, while driving sustainable margins and returns for shareholders.

And to conclude, we remain optimistic for the last quarter of 2019 with the scenario of demand recovery in the aviation industry in the country and our continuous capacity discipline.

Now I would like to initiate the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Today's first question comes from Duane Pfennigwerth of Evercore ISI.

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Duane Thomas Pfennigwerth, Evercore ISI Institutional Equities, Research Division - Senior MD [2]

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I was just curious. There were some media reports that the FAA was in Brazil this week. Did GOL have an opportunity to speak with them and did you get any insights into how they are thinking about return to service timing, not Boeing, but the FAA specifically?

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Richard Freeman Lark, Gol Linhas Aéreas Inteligentes S.A. - Executive VP, CFO & IR Officer [3]

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Yes, Duane. Yes, they -- we had -- I'll tell you we had the -- it was the annual ALTA conference in -- Latin American Airline Association conference in Brazil this week. A lot of conversations with a lot of the industry players. But nothing different than the guidance that we've also received -- similar to what we received from Boeing, which is an expectation that during the month of December the work there would be finalized. So we have no new information from that specifically.

As you know, GOL and the Brazilian ANAC participate in the various committees that are dealing with -- on behalf of the airlines and the regulators. Very, very actively involved in the process. And our understanding also is that the ANAC, since they're so very closely involved with the process and what the FAA is doing, that there would be a very short lead time between a decision by the FAA and what the ANAC is doing specifically.

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Duane Thomas Pfennigwerth, Evercore ISI Institutional Equities, Research Division - Senior MD [4]

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Okay. Appreciate that color. And then just following of the Delta announcement with LATAM, can you characterize the level of interest that you're getting from other global airlines and what are the attributes of an ideal partner for GOL from here?

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Paulo Sérgio Kakinoff, Gol Linhas Aéreas Inteligentes S.A. - President & CEO [5]

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Kakinoff here. We are now back on to our original strategy to us -- to not belong to any kind of alliance and make the most out of our own assets. That we are holding at the moment 30% of the Brazilian market. We have a huge capability to feed partners and also to transport the passengers arriving in Brazil at both international airports, mainly Guarulhos and Galeao. And therefore, our behavior from now on is to resume the traditional or the original strategy just to codeshare -- either codeshare or interline with the largest possible number of partners, which give us a sizeable opportunity which is ahead of us.

I mean, if you consider the North American carriers coming to Brazil and those potentially could codeshare with us, we could easily have double the number of seats available in both ways to the specific customers, North American and Brazilians, by either codesharing or interlining with them. And this kind of possibility is on the table at the moment and this is what we are analyzing.

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Duane Thomas Pfennigwerth, Evercore ISI Institutional Equities, Research Division - Senior MD [6]

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And then just for a follow up there. Looking back over the years, are there any product changes or onboard service changes that you pursued as a result of your prior relation -- I don't want to say forced into, but are there product attributes that you now have the flexibility to change going forward?

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Paulo Sérgio Kakinoff, Gol Linhas Aéreas Inteligentes S.A. - President & CEO [7]

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Actually, we had that flexibility before. I mean we were solely deciding on our products and services every time. I mean we are permanently refining our customers' proposition. And you could expect minor improvements, because the basic product seems to be the most effective and possibly the most successful.

If you analyze our market penetration in both larger segments, I mean the leisure and the business travelers, we are leading the market with a considerable advantage in comparison to the second competitor. And we have, in practical terms, 2 different airlines within the same airplane. I mean we are offering one of the best economy class experiences for domestic airline, even comparing ourselves to other international carriers, and at the same time that we have been able to last year, to give you an example, to sell around 20 million tickets at the average share of $50. So I mean the products and the services are now delivering the desired balance between low fares and high value customers' attractiveness.

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Operator [8]

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And our next question today comes from Michael Linenberg of Deutsche Bank.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [9]

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So I saw the release out that -- where you indicated that the Delta agreement was less than 1% of your revenue. But has that wind down? What are we going to see? Is it going to show up in revenue? Is there anything on the cost side? I know that the relationship went beyond revenue. Like should we -- as we think about over the next quarter or 2, how does that show up, if at all? Maybe it's de minimis, the impact.

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Paulo Sérgio Kakinoff, Gol Linhas Aéreas Inteligentes S.A. - President & CEO [10]

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Firstly, we -- this partnership I believe -- I strongly believe that both companies learn from each other. There were several interactions, and we could also contribute with Delta the same amount of knowledge that they had contributed with us. As I mentioned before, Delta had a really small penetration -- has a small penetration. And the Brazilian market is [divided] among the 3 main players.

And we were -- we had an exclusivity agreement with them. So their only one alternative, if not by exclusively operating with Delta, which is to have partners potentially that are bigger and larger. So considering the revenue aspect, it can only be more meaningful to our company's case that we would either interline or codeshare with these 2 potential partners.

At the cost side, there was no either negative or positive effect by the codesharing with them. The more we could increase our -- the number of passengers distributed by us in Brazil coming from the United States, naturally we are -- we would be enhancing our gain of scale, and therefore, as a derivative the cost -- and the cost dilution would be higher. So -- but direct costs or regarding structure, there is nothing specific. We have -- Richard would like to...

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Richard Freeman Lark, Gol Linhas Aéreas Inteligentes S.A. - Executive VP, CFO & IR Officer [11]

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I was going to say one of the -- as you know, one of our big cash flow items as we've been doing the overhauls of the engines has been engine overhauls and a majority of that business is done through a contract with ETL. And so we still have some more flexibility there. Pricing, payment terms, that's been -- we've had a lot of investment in that component and we've also seen that show up directly in our results through the depreciation component. And we still have another year to a year and a half phasing out a lot of the engine overhauls.

But another thing I would -- and maybe kind of complementing the last question. Over the last couple of years, GOL has made a lot of investment in the product and the service, which has been part of the key in becoming the leader in the corporate market. But that also applies to the product we're offering to our international codeshare and interline partners. And so that was developed to work with any airline that would value having the premium domestic service. And so if you're a business class passenger flying down from where you are in New York to Sao Paulo, and you want to connect on to Curitiba out of the Guarulhos Airport, you can travel in the GOL comfort class, you have a differentiated boarding.

And so that investment that we have made, that this company has made in the product was not only available for the -- as you're saying, the 0.3% of our passengers that were coming off of Delta aircraft, they were also applying to the almost 6% of the passengers on our network that are coming from these almost 90 codeshares and interlines. To the extent, that's relevant for a partner where they want to have the local premium -- kind of the last mile -- the average flight in Brazil, as you know, is an hour and 10 minutes. And so that product -- that's an attribute we have to the product, which makes us -- in addition to the network, which is the key attribute, what makes us very attractive to any partners that want to plug into our network in Brazil.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [12]

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That's helpful, Rich. And then just on a second -- I know Duane brought up the fact that there was a meeting in Brazil earlier in the week and we had a lot of announcements from some of the regulators and the aviation authority of Brazil, things like talking about the 100% foreign ownership and the reduction in the fuel tax, which is obviously helping you.

I also believe there was something out about the government talking about doing away with this international passenger tax. I think maybe it's on flights within the region to Brazil in year 1. And as it plays out over the next few years, it will include longer haul flights like to the U.S. So curious about initial take -- that tax, how much does it help someone like GOL. And is that in your guidance for 2020? Do you have some of those tax benefits flowing through and driving that better P&L? So if you could just -- any commentary around that since a lot was said this week would be great.

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Paulo Sérgio Kakinoff, Gol Linhas Aéreas Inteligentes S.A. - President & CEO [13]

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Yes, that could be beneficial to our passenger flow considering that we are -- specifically for international travelers, our international network, we are caring more leisure travelers than business. So they are more price sensitive, and $18 tax reduction could be meaningful to them. So we are not considering that -- we were not considering that this year for sure. But when we are talking about 2020 in the guidance that we have already disclosed today, this effect is already built in.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [14]

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Okay. That's actually very helpful. But it does sound like it could even be more stimulative than we realize. So maybe there's potential upside?

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Paulo Sérgio Kakinoff, Gol Linhas Aéreas Inteligentes S.A. - President & CEO [15]

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Yes, yes.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [16]

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But that's good to know that.

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Paulo Sérgio Kakinoff, Gol Linhas Aéreas Inteligentes S.A. - President & CEO [17]

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Yes, definitely.

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Operator [18]

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And our next question today comes from Dan McKenzie of Buckingham Research.

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Daniel J. McKenzie, The Buckingham Research Group Incorporated - Research Analyst [19]

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A couple of house cleaning questions here. First, the fourth quarter CASK ex-fuel outlook up 4% to 6%. I'm just wondering what the exact basis that you're using from the fourth quarter of 2018.

And then the second one. The slightly reduced EBIT margin outlook for the full year. I'm just wondering if you can clarify that a little bit. Is that just simply a function of reduced ancillary revenue, higher margin ancillary revenue? Is it perhaps higher depreciation? Or is it less growth or something else? I'm just wondering if you can clarify sort of the bigger drivers behind that.

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Richard Freeman Lark, Gol Linhas Aéreas Inteligentes S.A. - Executive VP, CFO & IR Officer [20]

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Sure. Yes. The first question, Dan, the number -- because we're -- yes, because you have -- and maybe just even before that, we've been providing the -- where relevant, providing the quarter for the previous year, 2018, the IFRS 16 methodology. And so you'll see that there's a table in the release and also the comparisons in the quarter release versus a pro forma 2018 for IFRS 16. So that's a lot of work to do, but it's all apples-to-apples.

But the -- you're asking for the recurring ex-fuel CASK for -- if I understood the question, the recurring ex-fuel CASK in the comparison for fourth quarter 2018 would be 15.17. So for the reference there if you -- okay, so that's the number that that's referencing.

The other question on the -- as you saw, actually our EBITDA is -- our EBITDA guidance, if you will, is performing a little bit better than expected. And the -- we took the EBIT, so the operating margin guidance down a little bit. There's really 2 -- a couple of reasons there. One is that, as we highlighted, there is -- this year there was some changes in some of the estimates of the depreciable life on capitalized maintenance. And so those -- the depreciation numbers went up a bit. Obviously, no impact on the EBITDA and an impact on the depreciation number, which has gone up.

But within that, in addition to the accounting estimate change, there's 2 kinds of sub impacts. One is that a chunk of that depreciation is dollarized because they're dollarized assets. So the higher FX also has the indirect effect of increasing a little bit the depreciation.

And as you know, in the year, we recently -- right now, since the beginning of October, and it will kind of run into the beginning of December, we're doing unplanned maintenance on some of our older NGs due to the maintenance on the pickle fork, which has been widely disclosed. Those unplanned maintenances, a portion of that also goes into -- indirectly into some of the capitalized components of that maintenance. So there's also a little bit of pressure there because of that issue on depreciation.

But the main effect was the change in the depreciable life. And then there's this 2 sub effects of the dollar -- the weaker -- or the stronger dollar and then a little bit the unplanned maintenance on the pickle fork on some of the older 737s that, as you see, is happening now not just with us, with Southwest and Qantas and some other airlines.

And so those changed our -- increased our depreciation in the Q3, some of those effects, as well as are going to have a little bit higher weight in the Q4 of this year and also next year, because this is all kind of across the board, 2019 and 2020. We took the EBITDA guidance that we provide you guys up by a point. But in 2019, we took the EBIT guidance down by a point and we kept the 2020 flat. And that's -- the root of that is the effects that I just described to you.

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Daniel J. McKenzie, The Buckingham Research Group Incorporated - Research Analyst [21]

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Yes, understood. Okay. That's helpful. And with respect to the pickle fork -- I did see the higher cost called out in the release. I'm not sure if there's a revenue loss that you'd want to put with that as well. But just with respect to my second question here, I'm thinking the return of the MAX should drive a nice CASK ex-tailwind next year. Yet that doesn't seem to be embedded in the 2020 cost outlook. And so I'm just wondering from where you sit today, as you look at the -- kind of the guidance for next year, what the bigger cost pressures are that might be offsetting some of the goodness that you're getting from bringing the MAX back? Or if perhaps just there's some conservatism next year in that outlook just from where you sit today?

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Paulo Sérgio Kakinoff, Gol Linhas Aéreas Inteligentes S.A. - President & CEO [22]

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Yes. Regarding the pickle fork, the revenue impact is already considered into our 2019 guidance. Revenue-wise, it has been minimized by our capability to enhance block time, aircraft block time and also further increase the load factors. So we were more affected in October due to the short period of time to inform and reaccommodate our customers, which made our fare curves being affected mainly considering the short period prior to departure sales. That was the most affected portion of our revenue curve because we had to reaccommodate our passengers majorly in our own flight.

So from November on -- and this is basically November because we are considering to have the fleet, the NG fleet fully operational about the second week of December. In November, we had more time to properly reaccommodate the passengers and the booking curve was not so advanced as we had in the beginning of October.

So I would say that considering the potential hurt -- the potential hit, we were able to mitigate it to a very low level. It shows how resilient this business model is, because any other airline find itself from 1 week to another with 10% less planes in its fleet -- then it was planned and then it was predicted and basically go through that without no noise and not affecting significantly our results. It's possibly one of the best examples on how robust, resilient this business model is.

Regarding the 2020 CASK ex-fuel, you can imagine that we have been pretty conservative in almost everything with the MAX, I mean even assuming -- and this is our premise -- at this moment that the MAX might be ungrounded by the third week of December. We are also considering that we will -- mostly we reintroduce those planes in operation and then we can get some CASK upside on top of what has been already disclosed by speeding up the market reintroduction process. But this is something which cannot be considered as definitive because the MAX situation is still somehow unclear.

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Richard Freeman Lark, Gol Linhas Aéreas Inteligentes S.A. - Executive VP, CFO & IR Officer [23]

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Dan, let me complement what Kaki was saying because there's been a lot going on this year obviously. Last year, we had the trucking strike. You guys saw how we dealt with the trucking strike. We only had 12 canceled flights during that period of time, where our competitors each had over 500. And that's kind of -- a part of the GOL operating model for a variety of reasons gives it flexibility to deal with a lot of different types of disruptions.

This year we had the capacity shock of Avianca going out of the market, we had the significant delays on the deliveries of the MAXs, and then we've had the unplanned maintenance on some of the old NGs. It's been an enormous amount of aircraft that have had to be re-planned this year.

But let me just maybe -- I'll highlight a couple of effects for you which are in this. On the revenue side, it's pretty difficult to kind of estimate what the net effect of all these things have been because of the power of the capacity shock. But clearly, the MAX delays, which have much greater revenue productivity than our current fleet. And as we go into the high season here with the unplanned maintenance on the older NGs and what we've had to do to resupply those. And we kind of highlighted this. If you go to the video presentation which is on the website, we put a slide in there which kind of shows how we dealt with this resourcing issue.

100% we had less -- we weren't optimizing revenues given what we had to do there with all these issues. Having said that, we're delivering what we promised pretty much across the board in terms of revenues, costs and margins and profitability, and it's like even better, especially on the cash flow and deleveraging.

And so how we get there, there's a lot of complexity on that, number one, on the revenue side. So definitely there has been a revenue impact, but it would be highly complex to specifically specify it at this point in time. We also need to wait till we get on the other side of the MAX and the pickle fork, and then when the dust settles, we can provide some clear visibility on what we may or may not lost on that in terms of our revenues.

Now on the cost side, a couple of things, especially as it relates to the exact same issues. And as -- we can talk about 2020. This year we would have given our fleet plan on the MAX, what we expected to have in operation already in the second of this year. It was really the second half of this year starting in July where the bulk of our orders would start to come in. That would have already provided us a 3% to 5% lower -- set us probably at this lower unit cost. But we didn't get that this year. We're going to catch up next year. And so we -- the plan is to be back by the end of next year to at least 32 MAXs at the end of next year in the fleet. And so we're definitely going to have the benefit of that, which in our calculations would probably be a little bit in excess of that 5% potentially once we get back to the clarity on the MAX deliveries. So that's kind of one point overall.

Then there's some additional components as well just as you compare 2019 to 2020. One is that the significant reduction that we had in the ICMS jet-fuel tax. We'll have the full year effect of that next year. This year it was just a half year effect because it really kicked in, in the second half.

Another component that can affect this is that this year we've continued to have a very strong demand out of business, but -- and we've built up close to a 40% market share in that market during the second and third quarters of this year. And we'll get the full effect of that next year. And so that will also be something that is a slight difference from 2019 to 2020.

Another point. We still have 11 NG -- owned NG aircraft in our portfolio, which have around -- which have at least $100 million of balance sheet equity. If we didn't have the situation with the MAX and these other issues this year, we would have continued our monetization plan of those aircraft. And so we postponed that. We plan to reinitiate that at some point next year.

And then finally, as I was mentioning previously in the question on depreciation, we had some additional -- some higher, if you will, depreciation costs this year on NGs because of the MAX situation.

And so there's been a variety of effects this year, some of which we've highlighted as nonrecurring. But there's a bulk of these that they're not nonrecurring because they're part of the general operations of the business that we have today. But many of them will either reduce or be optimized next year as we get back on the track of transforming the fleet.

And so I just want to maybe highlight some of those points and cover kind of all the ground that can be impacting our revenues, not just this year, but also next year. And also the impact on the 2020 CASK overall, not just the CASK ex-fuel, but also on the fuel side of the equation. And also as we highlighted an additional point, right now we're consuming -- we are having a higher consumption of -- on the volume side of jet-fuel because we're operating NGs versus plan, in lieu of MAXs. And that will also come in next year. But I think we'll have better clarity on all these things probably in January of next year.

And so when we discuss Q4 -- most likely when we discuss Q4 at the end of February, we'll be able to give you guys better specificity on all of these things as it relates to 2020. We're providing a lot of guidance there, a lot of details to help people understand how we're thinking about managing the business. It's guidance. By definition it's guidance. It's what we're thinking about. It's not conservative. It's not aggressive. It's the guidance.

And so that's what we're working towards. And as we have better clarity on a variety of these uncertainties right now, we'll be able to maybe answer some -- give some more clarity, granularity on what's going on with both the unit revenues and the unit costs as we transition.

But as Kaki mentioned, right now there is still some uncertainty about when exactly we're going to have -- get back on track with the fleet transformation. And so as soon as we have that, that's going to be a trigger for us to assume some more definitive positions on a lot of these questions we're getting, not just today, but for a couple of months now, and we're going to keep getting them for another couple of months I suspect.

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Operator [24]

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Our next question today comes from Savi Syth of Raymond James.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [25]

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Kaki, you had mentioned on the kind of prepared recording the fleet flexibility and then the MAX not being in the high season is probably not much of an issue. But it sounded like you should be able to get the MAX that's grounded up in the air pretty quickly. I know some of the U.S. carriers have talked about kind of 1 to 2 months to get them ready and back up.

I was wondering if you could talk a little bit about once we do get the recertification, how quickly the MAX can -- that onsite can come back on. And how many kind of MAX can you get delivered from Boeing? How many can you end up in a given month if Boeing is willing to deliver?

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Paulo Sérgio Kakinoff, Gol Linhas Aéreas Inteligentes S.A. - President & CEO [26]

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Actually, we are in Brazil under the -- our own regulator rules, which is called ANAC. ANAC has already publicly positioned itself saying that they would act in accordance with the FAA. So we do expect a kind of simultaneous release of both agencies more or less at the same time. So I don't predict any kind of disturbance in that process once FAA say that the plane is allowed to be ungrounded.

Nevertheless, what we have done to guarantee our -- the capture of our revenue opportunities along the high season is to recompose our -- in fact, to rebooting our fleet availability by bringing more NGs to -- operational NGs to our fleet. So we are having now for the high season only 6 planes from Transavia; that traditionally we are sending them from 4 to 6 planes every year during the European summer. And now this year we are also having the benefit of this long-lasting partnership and bringing these planes at the same lease cost, the same lease rate that we were asking them to operate during the busy and high season.

Also, we have leased some other 5 short term leased aircraft. By short term I mean 1 to 2 years. And through these movements, we are now forecasting our high season without the need of the 737 MAX being operational again. If this would happen, we can further enhance our operational performance and also address some opportunities to -- like additional flights or new frequencies of the most demanding routes during the high season.

But the guidance that you have already in place for 2019 and 2020 does not depend on the MAX return along the Brazilian high season. We took that action in order to avoid that. Any postponement in this grounding process -- on this ungrounding process would jeopardize our predicted results.

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Richard Freeman Lark, Gol Linhas Aéreas Inteligentes S.A. - Executive VP, CFO & IR Officer [27]

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Yes, just to complement what Kaki said, Savi. If the MAXs are ungrounded prior to or during the high season, call it December, January or February, we can take -- we have ways of -- normally we -- during the high season, we have a lot of extra flights we put in to certain places in our network or extra frequencies to those flights especially from kind of mid-December until mid-February. And carnival is late this year. Carnival is at the end of February.

So to take advantage of the Brazilian summer season, where you've got a lot of traffic, especially intensively on Friday through Monday, going to the beaches and other places on the weekends. So we can easily put those into the network and generate some additional revenues, taking advantage of the Brazilian high season. If for some reason that would go beyond the Brazilian high season, in other words where it to go beyond February -- as you know, during the March, April, May low season, we -- the way we do our network management during the course of the year, intra year, we vary our capacity down around 10%. And so we'll put 12 to 14 aircraft on the ground in maintenance roughly in the second quarter anyway. And so if that extends, we would then be putting the MAXs flying during the low season and then taking another 12 to 14 aircraft out of service anyway for activity in maintenance.

And so as Kaki was saying, we've covered that gap to bridge us through our high season and there would be some upside there if the MAX is freed up to be producing revenues sooner. But through the tools we use, for example, as Kaki mentioned the subleasing tool we have, summer lease, winter lease tools we have, we've covered our risks on that to be able to satisfy demand, which, as you've been following, across the board in Brazil, not just in our sector now, but in other sectors as well, is starting to pick up from an economic perspective. And that will provide some pretty buoyant demand for air travel here over the next couple of months.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [28]

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That's helpful. And during kind of the 2020 outlook it was kind of mentioned of loyalty revenues that are being a bit softer. What's driving that?

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Richard Freeman Lark, Gol Linhas Aéreas Inteligentes S.A. - Executive VP, CFO & IR Officer [29]

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There's a couple of things. I mean one is -- I think we -- this shouldn't be news. And I think it was probably a year ago that as demand for air travel has been picking up and given the good rational capacity management, there is a counter cyclical component in different components of the businesses just because of how it works. I mean, one is a derivative of the other. And so that's one.

And then the other component that we highlighted as well a couple of quarters ago was the expectation of increasing competition -- I would say increasing non-price competition resulting from the reintegration and merger of the various loyalty program activities that LATAM has as they finalize their process. I think it was in -- sometime in the second quarter. And that's basically happening now in terms of higher competition in that space. As well as higher demand from -- you can see it reflected in the load factors on not just GOL, but the sector as a whole.

So a combination of those factors creates a little bit that trade off. But that's a normal part of that business. I mean we've -- Smiles just celebrated its 25th year anniversary. We've been with that business since 2007, so 12 years now. And that business also has competitive and cyclical aspects, which is the symbiotic nature of those different businesses that we have.

But on a separated, carved out standalone basis, you see the effects of that, which effectively is the cost of goods sold of our loyalty program increases in this part of the cycle and on the cost side of that business, if you will, which is consolidated out in our results because what's cost for one is revenue for the other. But then on the revenue side, there's higher competition in the point space. And so then that has -- had a -- already started to have an impact in the margin.

But this is something I think that we highlighted over a year ago in terms of what we expected from a group perspective. And it seems to be more or less happening along the lines and timing that we expected. And so -- and that -- so in our business, our consolidated results, we're seeing those effects as well in our consolidated results versus previous expectations. So there's a slight adjustment there in the expectations of the revenues that are generated from that, ancillary revenue, non-passenger revenue. And then also some adjustments on the minority interest as well in the expectations over the next couple of quarters.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [30]

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Thanks for the reminder. Sorry, I had forgotten about that. Just on -- just a housekeeping question is the last one I have. On the nonrecurring that you called out on the -- in the operating income, the BRL 78.9 million, could you provide a little clarity on what's included in that?

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Richard Freeman Lark, Gol Linhas Aéreas Inteligentes S.A. - Executive VP, CFO & IR Officer [31]

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Yes. I mean there's a variety of items in there. And we're not -- we're just separating things out there that are really onetime effects, not related to disruptions, right, specifically. But there is -- there's some effects there related to the MAX. There's also some effects there related to some investments, short-term investments we've made in consulting and other projects to deal with things that are really not at the airline operating level. They are more at the holding company level.

And then there is a chunk there that relates to the return of aircraft, which generally ends up being provisions when we make decisions on returning aircraft, specific dates and so on. We're maintaining provisions on those. But as we've been changing around a lot the actual return dates because of the MAX situation and because of the unplanned maintenance on the NGs, that has created a little bit more, let's say, volatility on our ability to get accurate provisions on what we expect on the aircraft return cost.

And so all those are in there. It's kind of divided among all of those. As I was saying before, in terms of what's specifically related to the MAX and some of these other -- and the NG issues, I think that's something that when we get on the other side of the delays on the MAX we can provide some more clarity on what that ended up costing us from a expense as well as cash flow perspective.

But there is -- obviously, there is a little bit of an effect there in the system on additional types of expenses that we have on us because of having to reschedule the network and re-plan, reschedule flights, take flights out of the network, reorganize, have to pay -- there's certain costs there that we have to do with reimbursing passengers and things like that. A variety of costs there that come in as it relates to the overall business that would not have happened if we were not reorganizing the maintenance schedule and the aircraft return schedule and dealing with the re-planning of the fleet.

This year -- and you can kind of see this in the chart in the presentation that's in the video. If you were to do a -- by the end of this year when all the dust settles, this company will effectively have rescheduled intra year over 40 aircraft to deal with the various types of assets or disruptions that we've had to deal with that.

And so that's equivalent about 1/3 of our fleet. And so that creates a lot of attrition in all the components of the business and has impacts -- secondary and tertiary impacts on a lot of different components, where we've also had to spend additional money to keep chugging along in terms of producing our revenues and profitability.

So as I was saying, like there is a weight in there that's weighing on that -- those results. We've tried to separate out some of that which is clearly identifiable, but there's other effects that are in the recurring CASK which are also related to that.

And so that's what I would say at this point in time. But I think when we talk about Q4 at the end of February, I think we'll be able to provide some more clarity on that in terms of what our 2020 unit costs are excluding these effects, which, some of which have been excluded as nonrecurring and then others which are creating the attrition on the overall unit cost.

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Operator [32]

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Our next question comes from Stephen Trent of Citi.

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Stephen Trent, Citigroup Inc, Research Division - Director [33]

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You've already provided some very comprehensive detail on top line and what have you, and really appreciate that. So you've largely already answered my inquiry. But just a tiny follow up if I may on Dan McKenzie's question from earlier. When I think about 4Q -- at least heading into 4Q year-on-year, thinking about unit revenue, clearly you guys mentioned the MAX and having to rebook passengers. When I think about sort of the year-on-year -- the normalized year-on-year trend, is there any stage length related inputs I should factor in there?

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Richard Freeman Lark, Gol Linhas Aéreas Inteligentes S.A. - Executive VP, CFO & IR Officer [34]

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You're saying just in general on Q4 or specific item?

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Stephen Trent, Citigroup Inc, Research Division - Director [35]

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Yes, just broadly speaking on Q4 when I think about -- recognizing that there's a great deal of noise with the MAX, as you guys have highlighted, how should I think about -- to the extent you're allowed to tell me, what I should consider from a stage length adjusted -- excuse me, average stage length adjustments kind of year-on-year? And I saw you were launching a third international flight, for example, to the U.S.

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Richard Freeman Lark, Gol Linhas Aéreas Inteligentes S.A. - Executive VP, CFO & IR Officer [36]

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Oh, sorry. You're asking specifically on stage length? Is that what you said? Okay.

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Stephen Trent, Citigroup Inc, Research Division - Director [37]

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Yes. Yes, that's right.

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Richard Freeman Lark, Gol Linhas Aéreas Inteligentes S.A. - Executive VP, CFO & IR Officer [38]

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That would be around 1,100 kilometers for the Q4. That would be the expected stage length. Not a whole lot of change on that versus expectation because we're -- we've slowed down significantly the roll out of the international destinations because of the delays on the MAX delivers, and so -- especially in the routes where it was specifically required the MAX for that mission such as Miami, Orlando.

We are rolling out still, as you saw, shorter haul destinations such as Lima from Brazil and Orlando from Manaus. And we're doing our Cancun flight, but -- so that -- yes, that expansion there, which will have an impact on the cost. As I was saying, that will get caught up as soon as we have the MAXs working again.

So the 7 MAXs we have grounded, the mission is that they can be deployed on specifically related to these longer haul markets, which, as we said in our planning, can happen as early as the Q1 of next year, but not before. So that's not going to be expanding until that point in time.

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Stephen Trent, Citigroup Inc, Research Division - Director [39]

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And it's very helpful, Rich. And just one other final very quick question. It seems kind of once again, at least in news flow, that elements of the government seem to continue trying to entice foreign carriers to launch a service, but it really seems like nobody is butting with -- I mean aside from competition -- consumer and other laws that a foreigner could find onerous. Is my view on that reasonable or are you hearing anything differently in terms of what the competition landscape is -- how it's evolving?

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Paulo Sérgio Kakinoff, Gol Linhas Aéreas Inteligentes S.A. - President & CEO [40]

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Stephen, Kakinoff here. The market is now open. I mean there are several news, rumors, things like this. And you probably know -- you should remember that GOL always support the foreign capital lift in the market, which was finally approved, showing that we have appreciation for the competition and no fear to compete. I can't tell at the moment whether some of these rumors will be translated into a concrete movement. They might be. But I think that we are well prepared for any kind of competition.

They have mentioned too many times the low cost carriers. And when you compare our equivalent CASK -- you have this data available in our pack. If you compare our equivalent CASK with the international benchmarks, there is a small room to have somebody else coming to Brazil and operate at a lower level, which is somehow protecting our business model.

So they could come. There's a lot of marketing on this kind of subject. But competing exactly in the same scenario, in the same environment, I don't think that sustainably not a competitor could create or produce a much lower CASK than ours. If so -- so I mean that might be more harmful to some of our competitors than to ourselves.

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Operator [41]

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And our next question today comes from Rogerio Araujo of UBS.

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [42]

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A couple of questions here. First, if you could provide an update on the industry deployment from GOL and also the other players in upcoming months? What does you -- what does GOL expect in terms of competitive environment in upcoming quarters?

And also a second question, a follow up on Delta, kind of relationship -- if I'm not mistaken, there was also some relationship on the maintenance front. And could you give some color on how that agreement worked? I think it was also -- it also had some working capital related, especially payables on that maintenance, if I not mistake. If you could provide more color on how the agreement worked and how could this change now? And that's my questions.

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Paulo Sérgio Kakinoff, Gol Linhas Aéreas Inteligentes S.A. - President & CEO [43]

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Regarding capacity, I believe that the industry will continue to behave rational. We have to -- that something unclear coming from one specific player, which is Azul. We know that they are up-gauging some of the fleet. But also there are a portion of this capacity being added by them, which is not so clear the motivation behind it. But in an overall perspective and considering -- assuming that the Brazilian economy next year could produce a GDP between 2% to 3% growth, I think that all the capacity projections that we have got access based on the press or also the competitor saying, plus our own, I think that the industry will have another healthy year with regards to the capacity rationality.

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Richard Freeman Lark, Gol Linhas Aéreas Inteligentes S.A. - Executive VP, CFO & IR Officer [44]

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And we're -- I mean we're -- our -- we manage our business to try to grow at or below our sustainable growth rate. And I think that's the key to create value for our shareholders and that's what our shareholders want. And we're growing at that rate, which is right around -- it's probably a little bit higher than the historical elasticity. But we have a little bit of repressed demand and it's catching up. So if you look at our kind of our normalized capacity growth rate, we're kind of around the 3x GDP run rate, GDP growth rate here -- let's say, normalized throughout the year from a seasonal perspective, which for us is around -- call it 7% in a domestic market. And I think it's important to separate domestic from international because they have different impacts.

And so the growth rate of Brazil over this next part of the cycle should be around that 7%, which is around the 2.5 -- roughly 2.5x GDP elasticity. You could have a little bit more than that in the short term, maybe as much as 8%. And I'm saying kind of throughout the year. In the next couple of months because of seasonality, we're probably going to see low teens growth.

Those are the demand numbers that are given to us and our job is to match capacity with that. I think domestically -- if you look at networks and model networks on Brazil as a whole, you see similar capacity expansion out of LATAM Brasil and Azul is about 3x that.

And so the law of supply-demand applies to all of us. And so -- then you'd have to ask if on the demand side you're a glass half full guy, which I know you are, Rogerio, or you're a glass half empty guy. I mean if you're a glass half full guy, the incremental inventory that's coming into the market dovetailing with better economic growth -- I've been hearing some people talk about potentially 4% GDP growth in Brazil next year. So it is possible that we could have a very nice demand uptick to match that capacity growth with no impact on the yield environment. And if that doesn't happen, there would have to be something that would pay for that, pay for that excess capacity, or the capacity growth would have to slow down.

I think we're only going to see that in the second quarter of next year as we're going to the high season now, which kind of goes through February. And so I think second quarter of next year will be a test of that in terms of how each company and the industry and how we all manage through that. And that will be a function of what the demand environment is in the second quarter of next year.

But recently -- when I say recently, the last couple of weeks, last -- maybe as much as 2 months, there has been a lot of leading indicators that are showing a pickup in domestic market demand in Brazil in a lot of sectors, retail, real estate, retail banking, things like that, which you guys also look at. And obviously, it's early days on that. Brazil is also making a lot of progress on, say -- the Brazilian government is making a lot of progress on what they've been promising in terms of reforms. And so there's more positive indicators currently than have been maybe in the first half of this year.

But our perspective on that is -- especially, 6 months out -- I mean we're matching our capacity growth with what's going on in demand. It's the largest airline in Brazil. We're the biggest determinant of that. We don't manage our business based on market share. We manage it based on sustainable growth, self-financed growth, earnings growth, things like that. And that's how we're thinking about it at this company. And that's what I say on that.

On your second question on the company, what was said previously on the -- on our maintenance work. A large portion of what we do on the maintenance side is done with Delta TechOps. And one of the effects of the unwinding of our partnership there will give us much more flexibility to bid out those -- that business to other maintenance providers and give us a little bit more flexibility to negotiate better terms. And -- but obviously, Delta TechOps has been an important partner for us on the maintenance of our CFM engines.

If I'm not mistaken -- the last numbers that I looked at on Delta TechOps, we were the largest customer of Delta TechOps in terms of the amount of annual revenues we generate for that business. And so I think I expect that they would continue to be a supplier of ours, but we wouldn't necessarily have the same constraints on us vis-a-vis seeking other deals given the large volume of business that we have every year out in the market, which is going to continue for the next couple of years.

We've also -- I mean we're not in the engine maintenance business, but we are also continuing to invest in our own maintenance business, which today is focused mostly on airframes and is also now providing services to third parties. We have clients in our portfolio now including leasing companies that are doing maintenance with us in our 1.6 million square foot maintenance center in the AITN, Confins airport in Minas Gerais. Not engines. We still have to a third-party our engine maintenance. But at the same time, we're also advancing in terms of developing our own standalone MRO facility, which is already generating revenues. We're certified by the FAA to maintain a variety of aircrafts, and we're also pursuing that.

But I think the way to think about that as you think about GOL is that we're going to have more flexibility to maximize the economics we have on what is still our largest CapEx item for a year. And so -- and that will not be present this year, but could be present in our numbers next year as we'll define what we're doing regarding the unwinding of that partnership in the coming period.

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Operator [45]

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(Operator Instructions) Today's next question comes from Petr Grishchenko of Barclays.

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Petr Grishchenko, Barclays Bank PLC, Research Division - Fixed Income Analyst [46]

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I mean obviously a lot of them were already answered. So I guess I would just follow up Delta-LATAM partnership. So the way it seems you evaluated the partnership from revenue standpoint, obviously it was not very significant. But I guess one would argue that Delta played a much more important role particularly during downturn, and I guess the loan maturing next August I believe is a good example for that.

So from a creditor standpoint, I think there's much bigger significance of a partnership beyond just the percentage of revenue. So with that, I just wanted to understand is it fair to say that you're looking for a partner or at least considering entering a new partnership? And if so, if you can give us any time and expectations, it will be greatly helpful?

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Richard Freeman Lark, Gol Linhas Aéreas Inteligentes S.A. - Executive VP, CFO & IR Officer [47]

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Sure, Petr. But just to just understand, what do you mean from a creditor perspective? What -- maybe a little bit more -- just so I understand and answer the question, what do you mean from a creditor perspective?

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Petr Grishchenko, Barclays Bank PLC, Research Division - Fixed Income Analyst [48]

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Well, during the last recession, clearly Delta provided some support for the company. And as I mentioned, the 200 million loan that they guaranteed a while back is example for that. So...

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Richard Freeman Lark, Gol Linhas Aéreas Inteligentes S.A. - Executive VP, CFO & IR Officer [49]

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Oh, you mean -- yes, I see what you asked. You're specifically talking about the term loan, where we raised money from U.S. high yield investors at a cost of 6.5% per year with Delta co-signing, where Delta got the guarantee of Smile shares and counter guarantee. That's what you're referring to?

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Petr Grishchenko, Barclays Bank PLC, Research Division - Fixed Income Analyst [50]

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Precisely.

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Richard Freeman Lark, Gol Linhas Aéreas Inteligentes S.A. - Executive VP, CFO & IR Officer [51]

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Okay. If you see -- you see, our bonds today are trading at near 6.5%, GOLs unsecured bonds. And on those we're paying probably about 325 basis points over Delta risk. And those investors, they are not co-investors. I mean we don't even -- those are Delta -- those are, if you will, high-grade -- investment grade U.S. investors who don't invest in GOL, don't invest in high yield bonds. They're not really part of our capital structure. And we paid a significant commitment fee to Delta on that.

And so that's why -- our plan is to -- it amortizes next year in August, that's the maturity. It's callable part of February and we've already worked to reserve the cash to get rid of that, because that has a significant negative impact on our earnings. And I don't see why you would view that as a negative.

But I think what your question is if we would be -- because that kind of -- that's not -- let's say, that's not the -- that's not what we will be looking at in a commercial partner, credit support. That's not what we'll be looking for.

I think what -- as Kaki was saying as well, we're focused on maximizing our revenues and profitability and we've got the largest network in Brazil with a lot of complementarity, connectivity and synergies with a variety of partners. You see, we continue to announce codeshares and interlines almost every month. We've got close to 90 now. So that's -- it's a commercial issue.

In terms of strategic partners, no. I mean we have nothing planned in that respect. Nor is it -- does it really play into our strengths in terms of what we can offer to potential partners at this point. And so -- and I don't think from a creditor perspective, as you're saying, that would come into the box as a positive in name only in that respect. I think from our perspective, it would have to be based on specific strategic reasons to do that, which can take a while to develop and take a long term. It would not be necessarily a short term component.

As you know, our space -- our larger space, which is South America, is also going through a bit of a reorganization in terms of how the alliances are communicating with South America, and that's kind of work-in-progress. And I don't know if you want to comment, talk about anything on that. I mean yes.

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Paulo Sérgio Kakinoff, Gol Linhas Aéreas Inteligentes S.A. - President & CEO [52]

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(inaudible)

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Richard Freeman Lark, Gol Linhas Aéreas Inteligentes S.A. - Executive VP, CFO & IR Officer [53]

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I mean they are very separate issue. The commercial, the maintenance and what we might do strategically are really separate issues. As we were saying, we have a network today which is generating over 6% of our revenues from close to 90 codeshares and interlines. And in the case of American United, we're already working with them on an interline basis for a while, and I think we're going to continue to pursue that.

I think specifically you're referring to when -- there were a lot of ways back in 2015 that -- when GOL very responsibly -- when the economy retracted -- contracted 3.5% in 2015 and then ended up contracting another 3.5% in 2016, in the third quarter of 2015, GOL developed a plan to reduce the size of its assets in balance sheet and sold 9 aircraft, returned another 20, took 29 aircraft out of the fleet in a 6 month period. And it needed some short-term liquidity to do that. A majority of it came from our controlling shareholder family and then a small portion of that came out of that -- from Delta in terms of the equity capital that was put in the company back in October of last year. But the main support came out of the controlling shareholder, and Delta, as a partner, teamed up with the Constantino family and helped out with that and definitely provided a lot of support and their experience of having gone through a rightsizing a while ago.

And that had huge value in what GOL was doing in terms of navigating that really tough environment. And they provided the co-signing along with our holding company on the term loan. And so that was an enormous help to get liquidity into the company at that time.

And all that liquidity, the equity that came in, about 150 million bucks, as well as the $300 million term loan and some other things, that was used to kind of get the wheel going to -- in addition to the 9 aircraft that GOL sold out of its own equity. That whole pot was used to downsize the company, if you will, very early on in the cycle. I mean, really, if you think of it, it was at very -- at the beginning of that trough. And we had some other companies that we know of that didn't do it, that are doing it now, arguably 3 years late, and some didn't make it.

And so that was an enormous help, and it came from a shareholder perspective very much in a partnership way at that time that helped effect that downsizing. But GOL today is generating positive not just operating cash flow, net cash flow, but also there's some cash to equity there. As you saw this year, up until September, we've amortized close to BRL 1 billion of debt. We've got about BRL 4 billion of cash on the balance sheet.

And so all this is kind of within this plan to get us to the appropriate capital structure, which we are at right now, which should improve over the next couple of years given the cycle. But in the bigger picture, I think the company today is very well prepared for the next part of the cycle, which is more of a secular growth cycle.

And then I think 3, 4 years from now -- I think that question you're asking is perhaps a more relevant question in terms of how prepared we are in terms of balance sheet and competitivity to deal with what will be the next down cycle at some point, 4 or 5, 6 years from now and so on.

But at this point in time, we have more reasons to just focus more on operations and on the other side of our fleet transformation and then potentially see what we may or may not want to do in terms of participating in any strategic work in Brazil or a larger work in the South American region.

But that's how I would kind of contextualize that to you in terms of how we're thinking. That's kind of how we're thinking about it today. But I think there still are some other pieces to -- of the puzzle to kind of evolve over the course of next year I think before it becomes clearer on things like industry structure and competition and things like that.

So we're not running in any external direction at this point in time. We're just focused on operations, on balance sheet, on everything that we've been talking about in trying to prepare the company the best we can right now for next -- to take advantage of next year in terms of growth, fleet transformation, international expansion and things along those lines.

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Petr Grishchenko, Barclays Bank PLC, Research Division - Fixed Income Analyst [54]

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Great. And just to follow up on one thing you mentioned, the maturity -- that will mature the next year. Did I get it right, are you basically ruling out like tapping the bond market either local or international to refinance that? Or are you just -- what you're saying is you're just not going to raise debt in basically first half of next year. I'm just wanting to a little bit better understand your...

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Richard Freeman Lark, Gol Linhas Aéreas Inteligentes S.A. - Executive VP, CFO & IR Officer [55]

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Well, we have -- yes, that's a good question. No, that's a question. We have the cash resources. If we wanted to exercise the call in February next year and do that with cash and affect a -- not just a gross debt, but a net debt reduction, we can do that if we want. And so specifically as it relates to the term loan, no, we would not be raising any -- we'll not be refinancing that, no.

Currently, as we said today, we have no plans to be doing anything in the fixed income markets next year either in dollars, in yen, in euros or in reais. No plans to do that because we have to have use of proceeds to do that. It's not just about raising cash. If we're going to raise cash, increase cash on the balance sheet, it would be through non-fixed income mechanisms such as internal cash generation or equity. And we don't have any plans to raise equity. And so most of our cash building up is going to be coming from internal operations.

Having said that, I mean as an airline you're always -- and as a CFO of an airline, part of my job is always to be looking at ways to reduce the cost of capital, improve the balance sheet. And so we're always monitoring opportunities.

I think the convertible bond we issued this year was an example of that. For us, it was an equity transaction to put some additional cash on the balance sheet. It was a way of monetizing the volatility in our stock and creating a new source of capital for the company. So those kinds of things we're always looking at. But right now, we have no plans specifically. But we have to be always kind of looking at ways to improve our balance sheet strength and financial flexibility, and so we're always looking at things along those lines.

But right now, no, we have no plans. And so the plan of the term loan would be within our policies, which is in terms of what we want to have in terms of maximum leverage, WAC minimization and liquidity measures. Everything is going to be done in the context of that. And so whatever we do -- of course, it's not going to put the company in a constrained liquidity situation. And so based on our plans and so on, you can expect that we're going to continue to maintain or improve our credit ratios, because as you know we have an objective from a WAC optimization perspective getting the company back to a BB minus in the near term.

And so that's going to guide us on how we approach capital structure and how we do what will effectively end up being the last major piece of liability management that we've been doing over the last 3 years.

Once we get on the other side of the term loan, now the next fixed maturity in U.S dollars is 2025, which is the bonds we have trading outstanding, which are trading a little over 6.5% in the market.

And as you know, also we've been -- we're almost finalized with -- within the next year, we'll be finalized with amortizing our Brazilian real debentures. Just a comment on that. Brazilian interest rates also are at record lows. There really doesn't exist a true high yield fixed income capital market unsecured -- for unsecured issues in Brazil. And so it doesn't exist for us the opportunity to lengthen out our maturities in the local markets, capital markets. For us and for companies like us in Brazil, non-investment grade, it really only exists the bank market, which are short term maturities for us, maximum 3 years.

So even though -- our Brazilian real borrowing cost today is around 6.5% in reais versus around 6% in dollars overall. There's not a viable market for us to be buying long-term U.S. dollar-denominated aircraft assets financed in a long-term market in Brazil. That market doesn't exist. If it were to develop, if the Brazilian fixed income capital market were to develop over the next year or 2, that is something we could potentially look at. But right now, it doesn't exist, so we're not looking at it.

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Operator [56]

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And our next question today comes from Lucas Barbosa of Morgan Stanley.

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Lucas T. Barbosa, Morgan Stanley, Research Division - Research Associate [57]

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I just wanted to check in if there's any developments on a potential incorporation of Smiles and overall corporate restructuring. If you have any color on timing and potential structures, that will be great.

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Richard Freeman Lark, Gol Linhas Aéreas Inteligentes S.A. - Executive VP, CFO & IR Officer [58]

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Sure. What was the second part of the question? Sorry, what structures?

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Lucas T. Barbosa, Morgan Stanley, Research Division - Research Associate [59]

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If you have any color on timing or any potential structures that you will be thinking on incorporating Smiles.

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Richard Freeman Lark, Gol Linhas Aéreas Inteligentes S.A. - Executive VP, CFO & IR Officer [60]

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Yes. Okay. It's relates to that, okay. Well, yes. I mean our attention is to affect the take-in of that. We're in the process of that. The Smiles board and their governance there has been working on a variety of issues over the last couple of months. And so really I have no news on that today. As soon as we have news, we would communicate that. But we're basically at this point kind of in a holding pattern here awaiting discussions that are happening at the Smiles' board level.

We would like to move forward on that. But we have to wait for now for some of the discussions that are happening at that level. And so I have no -- nothing to say on that at this point in time, but our intentions continue the same for the same reasons. It's very important for the -- for -- it's not just a question of cash flow and results optimization, but it's really a question of long-terms competitivity and the maintenance and improvement of not just the value of the GOL product, but also the Smiles product. It's very important that we move forward on that.

But as soon as we have any news on that, we would communicate that. But I don't expect it's going to be in the short term here given what we're waiting on from the -- that Smiles has to finalize before we can move forward on what we want to do.

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Operator [61]

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

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Paulo Sérgio Kakinoff, Gol Linhas Aéreas Inteligentes S.A. - President & CEO [62]

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Okay. Ladies and gentlemen, I hope you found our presentation and the Q&A session helpful. Our Investor Relations team is available to speak with you as needed. So thank you all very much. Have a nice day. Bye-bye.

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Operator [63]

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