GOL downgraded to B from B+ by S&P

Victoria
By Victoria September 5, 2012 14:28

GOL downgraded to B from B+ by S&P

Brazilian airline Gol Linhas Aereas has had its corporate credit rating downgraded by Standard & Poor’s Ratings Services to ‘B’ from ‘B+’ and the airline has been removed from CreditWatch negative.

S&P predicts that “cash flows at Brazilian airline Gol Linhas Aereas Inteligentes S.A. (GOL) will remain weak in 2012 due to higher fuel and leasing costs, and that recovery in 2013 will come gradually, at an uncertain pace”.

The stable outlook now assigned to the B rating, S&P says, “reflects our assumption that the company’s efforts to improve operations, mostly by reducing capacity, will result in operating profitability by the end of 2013.”

The delay in the recovery of GOL’s creditworthiness is mainly because of lower demand growth and on-going overcapacity in the domestic passenger transportation sector, according to the credit rating agency, which is preventing the airline from making any significant increase in fare prices. At the same time, S&P states, costs have increased further following a devaluation in the Brazilian real (R$) of about 15% this year, affecting US dollar-denominated expenses such as leasing, maintenance, and fuel (collectively about 50% of the company’s total costs).

“The ratings reflect our assessment of GOL’s business risk profile as “weak” and financial risk profile as “highly-leveraged.” We consider the main constraint on the ratings to be exposure to the airline industry’s cyclicality and capital intensity, which leads to volatile financial results. Offsetting this risk to some degree are GOL’s prudent liquidity strategy, which includes sound cash reserves and low debt maturities in the next two years; and its solid market position in the Brazilian airline industry.

“We believe domestic demand fundamentals remain positive over the longer term, including favorable demographics and improving income and employment levels in
Brazil. However, excess capacity and the economic slowdown in the country have kept domestic fares low (in order to sustain at least break-even load factors), while high fuel prices have hurt GOL’s profitability and cash generation to a greater extent than we previously anticipated. GOL is particularly affected by the slowdown in demand because its revenues are primarily generated from domestic flights. We believe actions to reduce capacity, which are crucial to improve performance, will take time to implement and so financial results will take longer to consolidate.

“In our opinion, profitability should improve with GOL’s recently implemented strategy to reduce capacity, including route reductions and labor force cuts.
We assume that the total fleet should fall from 150 to 138 aircraft by the end of 2012, including a reduction of 15 of the less-efficient Boeing 737-300 aircraft. Nevertheless, we understand it might take more than a few quarters to turn around the negative EBIT and we anticipate that a positive margin of around 3% will only be achieved by the end of 2013. On the positive side, we consider GOL’s competitive position is still supported by its low-cost business model, noticeably with a CASK (cost per available seat per kilometer) ex-fuel of about R$9.3–the lowest in the industry in Brazil–and a market share of 35%-40% in the domestic market.”

Victoria
By Victoria September 5, 2012 14:28
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