Gol’s War Plan to Deal with 90 Days of Coronavirus Crisis

RIO DE JANEIRO, BRAZIL – Gol airline has prepared its business for what it considers the extreme scenario: full stop for up to three months, if required. The rule, however, is to act and be flexible according to demand.

Meet as much as possible, at the lowest cost. In ten days, a team of 30 people on the board planned and executed measures ranging from cost cutting, cash management with suppliers to organizing the flow of aircraft maintenance for resumption.

With revenue at a standstill and heavy debt, the company expects a clearer scenario to guide its next steps. Virtually all economic sectors will suffer from the new coronavirus crisis, which has shut down the world for an as yet unknown period, but airlines are among the hardest hit.

On Monday, March 23rd, the clock read almost 5 PM, and the giant screen of the Gol control room at the headquarters of Congonhas airport displayed 98 flights operated by the company up to that time. According to Richard Lark’s projections, the company’s vice president of finance and investor relations, the day should end with just under 150 take-offs.

Bull’s eye: it was 134. The previous day, a Sunday, the total reached 305. before the coronavirus, it was 750 daily flights from the company.

Nevertheless, Gol was the company with the most traffic, compared to less than 80 take-offs from Azul and less than 50 from Latam. Despite the dramatic scenario, Lark seems at ease.

“Airlines are different from all others. They’re always ready for a crisis. So we can move quickly. Our work, at this point, is practically gone. Now we have to wait to understand the length of this scenario, to see what next steps will be required,” said the executive.

Lark said that March 9th marked a turning point within the company. It became clearer there that the crisis had reached Brazil. Between March 10th and 20th, Gol designed and implemented plans. “Kaki [Paulo Kakinoff, the company’s president] already knew he would prepare the company for a complete shutdown, if that was the case,” he said.

Today, he said, the company is ready for a complete operational shutdown of up to 90 days. But Lark said that’s not the prospect. “We’re ready for the worst. It’s our obligation.”

In the office in Congonhas where typically some 1,000 employees work, there were 50 – only those who needed to be there. The remainder were already working remotely.

Monday, March 23rd, marked the day with the least traffic since the onset of the crisis. But the reduction will be even greater. As of Saturday, there will only be 50 takeoffs, centered at Guarulhos airport. Nevertheless, the company will continue to fly to all the country’s state capitals.

This scenario is expected to last until early May. If there is demand and the flow of people increases, the company may restart regional flights. “We will be alert to the needs of the population and to the guidelines of the authorities,” Lark said.

Before the crisis, there were 400 commercial aircrafts flying over Brazil, for domestic flights alone, and this total is expected to be cut to 40, given the current flow of travel. Azul has also sharply reduced its activity.

In Gol’s room, the world air traffic map showed the whole of Brazil exposed, uncovered, with minimal aircraft activity, looking like the photos of an empty 23 de Maio Avenue, in São Paulo capital, after the quarantine decree. As for the United States, one could not find the limits of the American territory, with the skies entirely covered by the aircraft traffic.

In the second week of March, Gol’s revenues had already halved compared to the same period in 2019. This week, the revenue should be 30 percent of what it was and next week it is expected to drop to ten percent. The scenario worries analysts and investors. According to experts, if the situation is lasting and continues into the third quarter, the sector will be endangered.

In its first cut earlier this month, Gol reduced its international operations by 90 percent and its national operations by 50 percent. By the end of this week, there will be a 92 percent reduction in domestic activity, with the international flights entirely paralyzed. The picture is the same for competitors.

The airlines are holding talks with the National Civil Aviation Agency (ANAC) to find the most efficient way to operate. Discussions are ongoing at this moment.

In 2019, Gol exceeded the projected net revenue for the year. It expected R$13.5 billion and managed to record R$13.8 billion, an increase of 21.5 percent. “In February, we were starting to consider the lease of five new aircraft for the July holidays,” Lark says. But in three weeks, the world changed.

Since January 31st, Gol’s shares have dropped nearly 79 percent, pushing the company’s market value to less than R$2 billion.

Smiles

On March 10th, when preparations for the shutdown began, a board member was wondering: “Shouldn’t we cancel the operation with Smiles?”, referring to the incorporation of the controlled mileage program listed on B3. Since 2018, Gol had been trying to carry out the operation, which had generated dissatisfaction among Smiles’ minority shareholders.

On March 5th, the companies were unable to set up the general meetings that would approve the incorporation of Smiles by Gol in the first call, due to lack of quorum – a situation that is not uncommon in the corporate life of companies. The meeting was scheduled to continue, on a second call (when the issues can be approved with any quorum), on March 18th.

On Friday, March 13th, even before the government decided to close the Brazilian airspace for international flights, Gol had already announced the abandonment of the transaction, in view of the “structuring impacts” for the sector that the crisis indicated.

The measure, explained Lark, allowed the group to save R$1.5 billion in cash, which would have been paid to the mileage company’s shareholders as part of the transaction. “Now the money stayed with Smiles, it didn’t come to Gol. But it’s there, preserved. Imagine if we were to have that liability now?”

Although concerned about the length of the situation, Lark tried to demonstrate that the work that needs to be done is now ready. “Now we’re only waiting for the tsunami,” he said, on the reflexes of the near-global confinement period.

Cash

Cash preservation initiatives are underway. Of the total costs, 60 percent are variable. Hence, no operation, no cost. Out of the remaining 40 percent, the company has managed to halve over the next three months, with the announcement of a 35 percent reduction in employee salaries and a 40 percent reduction in management salaries. “It was all very fast and pragmatic. We brought the request to the government to be able to reduce payment and working hours, which was granted to several sectors”.

On the financial and supplier front, Gol has already arranged with Petrobras the disbursement for fuels. “We matched receipts and payments,” explained Lark. In addition, it also started talks to defer aircraft lease payments by three months.

Lastly, in the next few weeks, there would be part of the R$500 million amortization in debentures, held by Banco do Brasil and Bradesco, but the company has already started a renegotiation. There are R$150 million expected every six months until March 2022. “We have bought security until June”, said the executive.

The 2019 balance showed a cash position of R$2.8 billion by late December, against R$8.5 billion in loans and financing and R$6 billion in commitments with aircraft leases. The extent of Gol’s debt is what worries investors the most, particularly since most of it is in dollars.