737 MAX: Brazil's GOL maintains its long term bullishness

Summary

• GOL makes adjustments after the MAX grounding to ensure that it has ample fleet coverage for Brazil's high season, which starts in late 2019.
• Despite the challenges created by the removal of the MAX from service, GOL expects to hit its previously declared EBIT margin targets.
• Similarly to numerous MAX operators, GOL is working to manage its fleet as long as a definitive date for recertification of the aircraft remains unknown.

GOL has seven grounded MAX jets; it was initially aiming to fly 24 by YE2019

CAPA's fleet database shows that GOL has seven 737 MAX 8 jets in storage, 30 of the MAX 10 aircraft on order, and 113 additional MAX 8 narrowbodies in its order book.

GOL fleet summary as of late Aug-2019

Source: CAPA Fleet Database.

Originally, GOL was supposed to end 2019 with 24 MAX 8 narrowbodies, but the grounding has created fleet planning headaches for most MAX operators worldwide.

GOL's fleet projections for 2019 and 2020 pre and post grounding of the worldwide 737 MAX fleet

Source: GOL.

During 2Q2019 GOL added five leased Boeing 737-800s and delayed the return of three other current generation narrowbodies in its fleet.

Company CFO Richard Lark recently explained that GOL was able to negotiate lower monthly lease rates on the latest leased 737-800s than rates for other leased aircraft in the company's operating fleet. Those lower rates are one driver helping GOL to manage its costs in 2019, and its non-fuel unit cost guidance for the year remains unchanged at BRL 14 cents.

For GOL there is an upside in 2020 once the MAX re-enters service

As GOL works to manage the effects of the MAX grounding, the company is adopting a positive view for its cost and fuel efficiency for 2020 as Boeing and the US FAA continue their work to recertify the aircraft.

Mr Lark explained that the fleet transition from the current generation narrowbodies to the MAX has significant benefits for the airline beyond the 15% reduction in fuel consumption. Due to their larger gauge of 186 seats, GOL's MAX 8 narrowbodies produce more revenue and the longer range of the aircraft has a cost dilution effect, said Mr Lark.

"And some of that [the benefits], definitely…is going to get pushed from our second half [of 2019] into the first half of next year…", Mr Lark stated.

GOL works to ensure it maintains flexibility in reincorporating the MAX

GOL's executives have remarked that the company has not received an updated delivery schedule from Boeing regarding its remaining MAX aircraft, but the airline is forecasting 32 of the type in operation by the end of 2020, which is two shy of its original plan for 34 of the jets in service.

The airline has ensured that it has an adequate fleet to cover the high season in Brazil, which starts in late 2019 and runs through Feb-2020.

"We've covered those in terms of identified aircraft that we've already leased or we would lease or sublease, and so we're covered", said Mr Lark.

GOL's management believes that once the ungrounding of the MAX jets occurs the seven aircraft in storage could return to operations fairly quickly. For the aircraft remaining to be delivered: "We expect that there would be a one to two month process once the un-grounding happens for our aircraft to be accessed and operating in the fleet", Mr Lark explained.

The airline's work to secure additional leased aircraft to cover the gap created by the grounding of the MAX has provided some flexibility for GOL in determining "how gradual we intend to reintroduce those planes into our fleet without putting us under any kind of additional pressure which would be pretty much undesired", as GOL CEO Paulo Kakinoff has explained.

Mr Kakinoff stated that the guidance from Boeing assumes regulatory approval of the MAX and a return to service during 4Q2019. (But both Southwest Airlines and Air Canada have removed the MAX from their flight schedules through the beginning of 2020. Those airlines have 34 and 26 grounded MAX jets, respectively.)

See related report: Air Canada: global MAX grounding creates fleet flux

GOL plans to keep its smaller gauge fleet of Boeing 737-700s at 24 or so aircraft to support its regional expansion into smaller markets, and Mr Kakinoff stressed that the airline "remains committed to the MAX as a core element of our long-term fleet".

The MAX jets are key to GOL's international expansion both to North America and within South America. Since the grounding GOL has had to make a stopover in the Dominican Republic on its flights to Miami and Orlando International due to the range constraints on the 737-800.

GOL sticks to margin guidance, even with headwinds created by the MAX grounding

Despite the challenges associated with the grounding of its MAX jets and delays for deliveries of additional MAX narrowbodies, GOL has not altered its projections of achieving an EBIT margin of 18% in 2019 and a pretax margin of 10%.

Once the airline resumes deliveries of the MAX aircraft, its prospects for 2020 should improve. Currently, GOL expects an EBIT margin of 19% in 2020 and a pretax margin of 12%.

GOL maintains a bullish view of the MAX's long term potential

With more than 100 MAX aircraft in its order book, GOL is no doubt eager for a safe and smooth return of the aircraft to service, so that the airline can resume reaping all the benefits that the next generation narrowbody will bring to its operations.

GOL appears to be taking the long view of the MAX situation, working through the challenges created by the aircraft's grounding while maintaining its bullishness on the aircraft's ultimate potential.