Fitch Ratings has affirmed the 'BB+' foreign and local currency issuer default ratings (IDRs) of Gol Linhas Aereas Inteligentes S.A (GOL). Fitch has also affirmed the outstanding USD200 million perpetual bonds and USD200 million of senior notes due 2017 at 'BB+' as well as the company's 'AA-' (bra) national scale rating. The Rating Outlook is Stable.
The affirmations reflect GOL's low-cost structure, strong cash flow generation, business position and moderate leverage. The ratings also reflect the company's exposure to fuel cost volatility and other industry-related risks, such as revenue volatility and correlation with the domestic economy, high operating leverage and competitive threats. Recent fatal accidents will likely have a negative short term effect that could lead to a near term softening in demand and new' capacity restrictions at Congonhas and other Brazilian airports although medium to long term demand for domestic air transportation in Brazil continues to look quite robust.
GOL's strong competitive advantages and profitability are underpinned by its business model, which utilizes a single fleet type of Boeing 737s and a multi-stop route system. An integrated route network has helped the company maintain high asset utilization rates and achieve one of the lowest cost structures in the industry. GOL's low-cost structure has allowed it to offer discounted fares versus its competitors, which has stimulated domestic air travel demand and helped the company rapidly increase market share and load factors since it launched operations.
Over the past five years, GOL has been consolidating its position in the Brazilian airline market. In the first quarter of 2007, GOL acquired VRG Linhas Aereas S.A (VRG) for USD98 million in cash, 6.1 million of non voting GOL shares and the assumption of BRL45.0 million of VRG debentures. VRG was created to owned a majority of Viacao Aerea Rio-Grandense S.A's (VARIG) operations, airport slots and the VARIG brand name as part of Varig's emergence from bankruptcy. Although VRG was structured following bankruptcy to limit exposure to VARIG pre bankruptcy liabilities, several parties, primarily from former VARIG employees, are in litigation with GOL. Although the legal structure of the transactions are in theory free from liability, the recently implemented bankruptcy law in Brazil is still in its early stages and no precedent for jurisprudence on certain issues has been established.
Strategically, the acquisition of VRG is positive as it secured GOL access to Brazil's most valuable intangible assets in the domestic airline transportation sector, slots in Congonhas, and thereby reduced competitive threats. Revenues have grown dramatically to BRL 3.8 billion in 2006 from BRL 230 million in 2001, with market share increasing to 37% in December 2006 from 4.7% at the end of 2001. By the end of the June, the consolidated market-share reached 43%.
The domestic airlines profitability deteriorated during the last three quarters, mainly due to capacity constraints and an 'infrastructure bottleneck'. The lack of investment in Brazilian airports is evident as the scarcity of efficient infrastructure is insufficent to support accelerating growth. In addition, sector excess capacity has increased as supply seats grew approximately 15% while demand grew around 13%, negatively impacting load factor and profitability. Stronger competition resulted in higher discounted fares and lower yield. Over the short term, yields and load factors should continue to be moderately pressured.
GOL's margins have been pressured as lower load factors and yields together with an increase in average stage lenght resulted in a decreased in RASK around 25% in the first quarter of 2007. In contrast, the CASK showed a reduction of just 11%. GOL posted an EBITDAR margin of 24% versus 35% on the first three months of 2007. LTM ended on March 2007, EBITDAR reached 901.5 million, a decrease of 8.5% compare to the full 2006 year (BRL 985.4 million).
GOL's short term challenge will be to sustain its operational spread (RASK - CASK) during the next few quarters. The company has showed ability to implement cost reductions, but the sector conditions should continue to pressure the RASK. In a effort to offset possible short term market weakness, the company has recently announced a reduction on its fleet expansion plan to 103 from 108 in 2007 and to 112 from 124 aircrafts in 2008. GOL continues to manage its fleet to keep its capacity in line with demand conditions.
GOL's financial profile is solid for the category and strong compared to the industry standards. GOL maintains a strong liquidity position with BRL1.9 billion of cash and marketable securities at the end of March or nearly 50% of revenues. Significant cash balances should enable the company to mitigate short-term risks and volatility. At March 31, 2007 the company had a ratio of total adjusted debt to EBITDAR of 4.1 times (x) and a ratio of net adjusted debt to EBITDAR of 1.9x.
Over the next years, total adjusted debt should moderately increase as GOL completes its investment program (BRL 4.7 billion). The company plans to grow its consolidated fleet to 143 aircraft by 2012. At March 31, 2007, the company had total adjusted debt of BRL3.7 billion, including BRL 875,5 millions of perpetual bonds and senior notes, BRL 300 million in bank loans and BRL 176 in working-capital funding. GOL's debt maturity profile is well distributed with only 5% of the debt due in the next 12 months.
GOL is the holding company of the two low-cost airline Gol Transportes Aereos S.A (GTA) and VRG Linhas Aereas S.A. that operates in South America providing frequent service on routes between Brazil's major cities and to South American cities. At June 30, 2007, GTA operated 69 single-class Boeing 737 aircraft with an average age of 7,7 years and VRG, 19 aircrafts (18 B737 and 1 MD-11) with an average age of 15 years.
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