Conference Call Transcription 2Q05 Earnings Results GOL August 2 nd, 2005

Transcription

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2 Good morning, ladies and gentlemen. At this time we would like to welcome everyone to s second quarter 2005 results conference call. Today with us we have Constantino de Oliveira Jr., President & CEO; and Richard F. Lark Jr., Vice President & CFO. We would like to inform you that this event is recorded, and all participants will be in a listen-only mode during the Company s presentation. After s remarks, there will be a question and answer session for industry analysts. At that time further instructions will be given. After the industry analyst questions, there will be a question and answer session for media. Should any participant need assistance during this call, please press *0 to reach the operator. Today s live webcast, both audio and slide show, may be accessed through s website at The slide show presented by management today is available on the website, in the investor relations section. Before proceeding, let me mention that forward-looking statements will be made under the Safe Harbor of the Securities litigation reform act of Forward-looking statements are based on the beliefs and assumptions of management and on information currently available to the Company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of and could cause results to differ materially from those expressed in such forward looking statements. Now, I will turn the conference over to President and CEO, Mr. Oliveira, who will begin the presentation. Mr. Oliveira, you may begin your conference. Thank you, good morning. First of all, I d like to welcome you to s second quarter 2005 results conference call. In this quarter, we reaffirmed our virtuous cycle, on slide #2, which created the necessary conditions for the popularization of air travel in Brazil and South America. Please move to slide #3, entitled Highlights. The second quarter of 05 represented another quarter of profitable growth for. Our net income in the second quarter was R$73.4 million in US GAAP. maintained its high operating margins, as indicated by our 20% pre-tax income margin - despite fuel cost increases - sustained by our focus in low costs, high productivity and intelligent yield management. Our position as the lowest cost provider in the Brazilian air travel market, and as the global leader in profitability, remains unchanged. remains committed to driving fares lower to further create and stimulate demand. 2

3 In the second quarter of 05, the addition of four new aircraft to the fleet and 50 new flight destinations, sorry, 52 new frequencies flight contributed to a 49% expansion in our capacity. Such higher capacity combined with a 3.7 point increase in load factor to 73% contributed to a 57% year-over-year growth in RPKs, resulting in a higher market share for of approximately 29% at the end of 2Q05. We are focused on continuing to reduce our costs, so we can lower fares and continue to increase our load factor. On slide number four, we show the additions to our fleet and network so far this year. We have added nine 737s since January, and we are now operating with a fleet of 36 aircraft. We also added four new markets, bringing our total number of airports served to 42. The EFFECT low fares stimulating demand - has been a key factor in growing passenger air transportation in Brazil by almost 15% this year. I will now turn the call over to our CFO, Richard Lark, who will discuss financial and operating performance for the quarter in more details. Please, Richard. Thanks Junior, and good morning everyone. Please move to slide #5 in the webcast presentation. On this slide, you can observe our capacity expansion over the first quarter of 2005, when compared to the same quarter of the previous year, our capacity expanded 49% in terms of ASK volume. When compared to 1Q05, four new aircraft were added to our fleet and 52 new flight frequencies were added to our network. We finished July with 36 aircraft in operation. The additional aircraft played a very important role in our 2005 second half revenue growth. Moving on to slide # 6, our net revenues in 2Q05 grew by 46% to R$562.2 million, when compared to the same period in the previous year, while revenue passenger kilometers increased 57% to 2.2 billion. increased its productivity as a result of higher load factors and higher aircraft utilization, which were 73% and 14 block hours per day, respectively. In March of this year, aggressively re-aligned its fare structure, and this has been a key factor in the industry s high growth rate for this year. The June quarter in the Brazilian passenger transportation market is seasonally the weakest quarter of the year, and, notably, the second quarter revenue environment was also influenced by aggressive fare promotions from s main competitors, after the end of a two-year code-sharing agreement between TAM and Varig in early May. These two companies are now managing their flights independently. As the lowest cost provider of passenger air transportation in South America, stimulates demand with low fares, and thereby increases the size of the overall market. 3

4 These factors, the combination of these factors resulted in a yield of R$ 0.23, 11% lower than 2Q04. Revenues per seat kilometer, or RASK, decreased 2% vs. 2Q04 to R$ 18.2 cents. A year-over-year comparison of our operating results is on slide #7. A 2% decrease in RASK and a 49% expansion of ASKs contributed to a 6% increase in EBITDAR, reaching R$156 million in 2Q05. EBITDAR is an indicator of operating results before accounting for aircraft ownership expenses, such as aircraft rent. CASK (at R$15.5 cents) increased 9%, or R$1.3 cents, with jet fuel expenses accounting for the increase. Jet Fuel per ASK increased 32% year-over-year. s non-fuel CASK (at R$ 9.2 cents) showed significant improvement. Non-fuel CASK decreased 3%, despite a 49% increase in employees related to our planned 65% capacity expansion in the second half of this year, a 5.8% inflation adjustment on salaries, which was effected in 4Q04, provisions for employee profit sharing, a 46% increase in fleet size, and a 26% increase in average landing fees. Increased productivity, reductions in sales expenses and a 19% Brazilian Real appreciation were key factors in the cost reductions. Also, maintenance cost per ASK reduced 22% in the year-over-year comparison, excluding the effect of extraordinary repairs on aircraft GOO in the first half of Moving to slide #8, we show the impact of our fuel prices on our operating expenses. The 32% increase in fuel CASK contributed to the 8% reduction in operating profits. Fuel-neutral operating income increased 38% in the year-over-year comparison. Using 2Q04 fuel costs, pro-forma operating income was R$128 million in 2Q05, representing a 23% operating margin, pro-forma. The Company has hedged approximately 55% of its short-term fuel price exposure for the 3Q05. In this extremely difficult fuel environment, we continue to be one of the most profitable airlines in the world. On the next slide, slide #9, we show our net financial results. Our financial income increased 81% to R$ 42 million, principally due to higher investment income on cash balances. Our financial expenses increased to R$ 17 million in 2Q05, reflecting a higher short-term financing of working capital, as well as a negative variation on US Dollar denominated deposits, which is a non-cash effect. Our net financial income for the quarter was R$ 25 million. On the next slide, which is slide #10 on the webcast presentation, we show our net income delta analysis. During the second quarter, net income was R$ 73.4 million, representing a 13% net income margin. Explaining the main differences, fuel costs increased by R$ 96 million, when compared to 2Q04. Our 2Q05 net income was also impacted by 4

5 R$ 25 million increase in commercial expenses, related to higher sales volumes, a R$ 27 million increase in labor expenses, due to a 49% increase in the number of employees and a R$ 4.5 million provision for our profit sharing program. Main expenses decreased 22% per ASK, excluding the effects of extraordinary repairs expenses on aircraft GOO in the first half of Cost increases were partially offset by a R$ 4.9 million increase in net financial income. These were the main impacts on our net income. A more comprehensive breakdown and explanation of our expenses can be found in our earnings release, that you have already received, and you also may access it on our website. In 2Q05, earnings per share was R$ 0.38, and US$ 0.31 per ADS, which was in line with Wall Street mean estimates. On slide #11 we show our cash flow evolution. At the end of 2Q05, our cash balance was 25% higher than in the first quarter of 2004, due to R$ 37 million of positive operating cash flow, and the net R$ 257 million raised in our successful Global Shares Offering, which was concluded on April 27 th, Principal investment uses were R$ 45 million in advances for aircraft acquisition and R$ 28 million of capital expenditures. We ended the second quarter with R$ 942 million of cash, cash equivalents and short-term investments, which is an amount 11% higher than 2Q04. Some of the details of our Global Share Offering completed during the second quarter are on slide #12. Through the offering, we increased the free float of shares over 26%, attracted new investors to our shareholder base, and broadened the types of funds holding stock. The US$ 250 million of the primary equity capital raised in our 2004 and 2005 equity offerings covers 100% of s equity finance needs for its current business plan. Moving on to slide #13, we have the relative performance of in the capital markets. During 2005 through last Friday, our ADS have outperformed the American Stock Exchange Airline Index by 10% and underperformed the Tier 1 Low Cost Carriers by 10%. Our local PN shares have underperformed the Bovespa Index by 20% during the same period. In 2005, our average daily trading volume has been US$ 8 million on the NYSE, US$ 8 million on the New York Stock Exchange, and R$ 3 million on the Bovespa. During the second quarter, s PN shares were included in the MSCI and IBrX indexes. On slide #14, we show that our industry-leading growth and profit margins continue to be a benchmark for the global airline industry. Our P/E multiple is at a significant discount to the other leading low-cost airlines, despite of our superior earnings growth rate and profit margins, which are among the highest in the industry worldwide. I think that slide #15 is a good indication of our bullish view on our 5

6 business. Last month, increased the size of its purchase order with Boeing to aircraft. The order guarantees that our fleet will remain young and one of the lowest cost in the world. In a short time, will become one of the largest and most profitable low-cost airlines in the world. Transitioning on to slide #16, we show our revised fleet plan for the next five years. We recently increased our fleet plan, based on our increasing need for ASKs to meet demand for our passenger transportation services, in addition to a greater number of destinations that we plan on profitably serving. The addition of eight more Boeing aircraft into our fleet in the second half beyond, will allow a substantial 65% expansion in seat capacity. By the end of 2005 we expect to have s aircraft fullyoperational. By the end of 2010 we plan to have a fleet composed of 86 aircraft, mainly s, representing an 18% compound average growth rate in seats over the next five years. On slide #17 we show our guidance for Our 65% capacity expansion in the second half of this year is focused on the Brazilian market and South America. In the second half of this year, regular service will be provided to three new international destinations: Santa Cruz, in Bolivia; Montevideo, in Uruguay and Assunción, in Paraguay. Also, we recently announced our intentions to participate in the creation of a low-cost airline in the Mexican market, with the possibility of beginning service in We expect to finish fiscal 2005 in the upper half of our guidance range, representing annual EPS growth of over 40%, and earnings per ADS of over US$2.35 per share, based on current exchange rate forecasts. We anticipate solid third and forth quarters, thanks to our employees dedication to improve the Company s productivity, keep costs low, and provide high-quality service. Before finishing our presentation this morning, I d like to highlight some points on our IR team and program. In July of last year, after our IPO, 8 sell-side analysts initiated coverage on In April of this year, we completed our follow-on offer, we were covered by 16 analysts. And, at the end of this month, we will have 20 sell-side research analysts covering. As a function of the ever-increasing demand from the market, we recently reorganized and reinforced our IR team, to continue to be responsive to the analyst community as well as our over 350 institutional investors and thousands of retail investors. Our multilingual IR team that attends analysts and investors, who are all well trained in IR and the principals of fair disclosure, today consists of Roberto Pacheco, who has recently joined us as IR Manager, Caroline Lima, our Corporate Finance Manager, and Naia França, our Financial Planning Manager, and, of course, myself and Junior. We continue to welcome feedback on how we can improve our relations with investors 6

7 and analysts. Also, I d like to mention that we will be conducting our quarterly presentation to analysts and investors next Tuesday, August 9 th, at 9 a.m. at the Bovespa Auditorium. In addition to our discussion, our usual discussion of current results, our Technical VP, Captain David Barioni, will make a brief presentation on s flight safety program. So, having now concluded our presentation, I would like to thank you all for your attention and turn the floor over for Q&A, during which we will be glad to respond to any questions you may have. Thank you, the floor is now open for questions. If you have a question, please press *1 on your touchtone phone at this time. If at any point your question is answered, you may remove yourself from the queue by pressing #. Questions will be taken in the order that they are received, and we do ask that while you pose your question, that you pick up your handset to provide optimum sound quality. Once again, if you have a question, please press *1 on your telephone, at this time. Our first question comes from Sam Panella, with Raymond James. Sam Panella: Good morning everyone. How are your yields trending, looking into the third quarter and, if you could give us an update with respect to Varig, and all of that, how do you expect to make your guidance, given that, it seems, that there is some pressure on yields, at least from what we have seen on the second quarter. Hi, Sam. In terms of yields, we do have seasonality throughout the year in a quarterly basis. We are seeing yields higher in the third quarter of this year, substantially higher over what we saw in the second quarter, part of that related to the seasonality - July being the highest month of the year in terms of demand, it is the winter vacation month -, as well as competitive factors, so we see the yields probably improving in access of, you know, probably in the range of 20% to 25% over the second quarter of this year, over the last quarter. And considering Varig, you are asking about the Varig situation. As everybody knows, Varig is under the protection of, what we call here, Lei de Recuperação Judicial, something like chapter 11. But actually, they are facing or they are living with a lot of operational problems. I was reading in the newspaper that there are four aircraft on the ground without spares, out of their initial plans to have only five aircraft on the hangar and also they already have nine aircraft. That means they are really facing a lot of financial problems, also, under this protection, and they are facing a lot of difficulties, and that can mean we have the opportunity to keep our strategy with a very aggressive growth, and combined with profitable margins. 7

8 Sam Panella: Sam Panella: Sam Panella: Sam Panella: Sam Panella: Mike Linenberg: And are you seeing a pricing pressure from Varig, currently? Not at this time. As I said, now they are facing a lot of trouble, financial trouble, and probably they are looking for something that can help them to reestablish their operational healthy situation. So, for that they have to be more responsible, in terms of fare. That is our view. OK. And what is your ASK guidance for the third quarter and fourth quarter? Roughly, if you take the second half, it would be roughly 65% year-overyear increase. In each quarter? Yes, you have that broken out further. That should be a little bit higher in the fourth quarter. OK. And there is a big jump in your ancillary revenue, how do you see that trending as you go forward? I mean other revenue. The main part of that is cargo business, I think you should expect that to maintain similar to what has been historically, there was a larger-thanusual increase in the second quarter, I think you should just look at what is the trend historically over time, we expect to maintain roughly 6% to 7% of the total revenues. OK, thank you. Our next question comes from Mike Linenberg, with Merrill Lynch. Hi, good morning. I guess, to follow-up, just, you know, on the yield scene that you have discussed with Sam. You know, Richard, you said July looked like it was up 20% to 25%, which, you know, if we were to compare that to the June quarter, we could be looking at yields maybe down 6% for July, I believe in the June quarter they looked like they were closer to 11% year-over-year. Is that, you know, what we are seeing in July, is that indicative of maybe what you anticipate for the rest of the quarter? What I am getting at is, you know, your September quarter yield decline, potentially it is going to be the less than maybe what we saw in June. The first thing is, one is, in March of this year, we did a fare realignment, which was designed to stimulate demand, and that had, you know, a sort of current reduction in yields. The second point is that we had sort of peak out seasonally and competitively on yields in the May month, I would say. They started to recover in June, if you look at were we were, sort of, in June, end of July versus end of June, there is a, roughly, 25% recovery in yields. And we expect that to continue to recover in August. What I would say in terms of guidance that we have been giving to the market is, we have been working forward in terns of our revenue 8

9 management strategy this year to have a RASK through the rest of the year that is roughly flat, in the year-over-year comparison. We could see a slight improvement in RASK in the third quarter, and I would expect a flat year-over-year RASK in the fourth quarter. Mike Linenberg: OK, that is helpful. And then, just on my second question, I think you have touched a little bit on Varig and TAM. What are we seeing from some of the other competitors, maybe this is more directed to Junior, you know, with Webjet starting up, I realize it is just a few airplanes, BRA, and now there is talk of OceanAir, you know, purchasing, I think something like 30 Fokker-100 from american airlines, taking them out of the desert, putting them into Brazil, and I am not exactly sure where those airplanes would even go, you know, given that OceanAir, really, at this point, they are not really a jet operator, they are more a turbo prop operator. Any additional color on, sort of, the other competitors? Mike, the point is, for us, about the competition environment, is that, as you said, we don t know exactly where OceanAir would put their airplanes to fly, and when, and what kind of services they would provide to the clients, to the passengers. In any case, that will work for Webjet, for OceanAir, and BRA, that we have to understand what will be their attributes in the market, what will be the innovation, what they will bring to the market, what will be the difference. And, in this case, we are facing the competition with Webjet, for example right now, and we have some attention to that, to understand their project and how they will manage that. For sure, we are taking all of them in consideration (inaudible), and we will take them as competitors. In this case, specifically talking about BRA, they will be under our radar range, because right now they are flying, but under a charter brand, or something like that, so it is difficult for us to really compete with them in terms of trying to reach, or to capture their passengers, or something like that. So, we are not expecting to see another one, or another newcomer soon, so, no one is saying that on the market, and we are treating all of them, as Varig, Webjet, TAM and BRA, as competitors. Mike Linenberg: Daniela Bretthauer: OK, very good, thank you. Our next question comes from Daniela Bretthauer, with Santander Investment. Hi, good morning to everyone. I just wanted, Junior, if you could comment on your decision to increase the total order with Boeing. Did you already incorporate anything because of the possible outcome of Varig, or was it mostly the gains of scale of the higher order, and the financial savings that you achieved with the higher order? If you could give us a little bit of color on that, where all these new planes will be used, it just seems like a lot of planes for Brazil and South 9

10 America, unless you really think that you are going to get a lot more frequencies, routes and destinations at the expense of Varig, that is my first question. Daniela Bretthauer: Daniela Bretthauer: Daniela Bretthauer: Daniela Bretthauer: OK. Daniela, in terms of our order, we really, we had the opportunity to get a better deal with Boeing, and also to explore our credit, or the financial benefits of the Exim Bank guarantee for this aircraft. We are considering only the plan, the growth plan of, we are not considering the outcome of Varig outside of the market, or something like that. Our fleet growth plan is to have already 76 airplanes in 2009, 78, sorry, 78 aircraft in 2009, we are more than able to confirm 60 aircraft, 60 orders with Boeing, and also this order will go until That means we have flexibility to put that aircraft flying in Brazil and South America, as we have our plan, so we are not considering another project or something like that when we did this order with Boeing. So that would be applied to the story, and that could be also needed to buy more aircraft? On the future? Yes. It can be, yes. It can be. OK, and the second question is if you could give us an update on where you are with your Mexican MOU, I mean, if you could give us an update on how you are doing with the Mexican strategy, that would be helpful. We are starting the MOU, the letter of intention; we are developing now the shareholders agreement, and all the studies that financial needs, and also doing a fine tuning in our business plan. We are working hard, but we have no news at this time, unless we have already signed the letter of intention. So, we are now finalizing all the studies, and also finalizing the discussion of the shareholders agreement to submit the rest for the license, to make the applications with the Mexican government that we are expected to do soon. OK, and finally, Richard, can you just clarify, maybe if you mentioned, I missed it, how much was the maintenance extraordinary recovery that distorted the comps? In the 2Q04 we had a recovery of a almost R$ 6 million related to reimbursement of expenses we had in fixing one of our aircraft during at the end of 2003, beginning of 2004, related to an incident we had in Navegantes, as you remember. And so, there was a R$ 6 million recovery over expenses in the 2Q04, so if you exclude that and compare regular on-going expenses 2Q05 vs. 2Q04, you would see roughly a 22% reduction, on a ASK basis, in maintenance cost, which is principally a large portion of that is explained by the strengthening Brazilian Real, you know, the 19% appreciation of the Brazilian Real, 10

11 plus, you know, higher productivity. Daniela Bretthauer: Douglas Runte: OK, thank you. Our next question comes from Douglas Runte, with Morgan Stanley. Yes, good morning. A couple of questions. A very impressive market share gain, I wonder if you could talk about your expectations for market share going forward, given the increased competition in Brazil, and also what do you see going forward as your organic growth in the Brazilian market? Hi, Doug. Well, actually, we are seeing the industry grow at around a 15% year-over-year growth rate, this year, which is one of the highest in a long time, part of that is because of what we call the Effect, you know, low fares stimulating demand, more people traveling in general, obviously part of that relates to the healthy GDP growth in Brazil. Historically, the industry has grown at a rate of a little over a 2x GDP, and it seems to be growing at a much higher multiple of that, apparently, but we think that relates a lot to low fares stimulating demand and increasing the size of the overall passenger traffic market. So, while overall demand is growing, we re also increasing our share in that growing environment; increasing our share - as we have the lowest prices and we now have a network which covers 42 airports -, in our particular case, it depends in us getting aircraft. So, finishing this year with 42 aircraft in the fleet, we think we ll be, you know, close to 35% domestic market share, around 5% of our ASKs right now are working and the international market on routes to Buenos Aires; we ll have a couple of percentage points more by the end of the year, as it relates to our expansion in the Southern Cone. But it s important to keep in mind, as well, that the overall, you know, this roughly 35% market share that we re expecting, as a function of the size of our fleet, is in context with a market that s growing a 15% year-overyear rate. Douglas Runte: Douglas Runte: And a question on utilization. At this point, it almost seems to be reaching a theoretical maximum without some pretty profound tighting difficulties; if you push it up further should we be assuming that utilization is basically where it s going to be? Yeah, yeah, Doug. Actually we can increase something, but nothing dramatically, we think that 14 or block-hours per day for 737s with almost eleven cycles per day; that means eleven flights per day, and eleven flights per day is really the maximum where the benefits of high productivity is already potentialized. And one last one, I guess. Richard, when you re talking about the goal of the 35% market share for yourself, can we talk about what assumptions you are putting in place, for what percentage share some of these new 11

12 start-ups might have and aggregate at the end the year and perhaps even beyond? I know you spoke generally about the Douglas Runte: You should talk about one company. That one company has one aircraft Leased by Morgan Stanley subsidy, I should mention. [laughter] OK, so you know. But that one aircraft is probably not even going to show up on the (inaudible) 2% market share, a little over 2% the market share, maybe that goes up to 3% and if BRA, which is a charter airline, becomes classified as a regular airline, its RPKs would then be classified in the regular pie, and that could be, you know, that could be something on the order of 5%, maybe. So, with all those effects, but I would say the overall market, the overall pie for RPKs for the domestic regular market would go up by the total of those RPKs which are already being transported. So it s possible that those companies could have those, you know, outside of the three major companies, it s possible that you could have, say, 7 or 8% market share represented by those other 15 or 16 companies. Douglas Runte: Douglas Runte: Rodrigo Goes: Rodrigo Goes: Or less. Or less. Thanks very much. Our next question comes from Rodrigo Goes, with UBS. Hi, guys. Actually, most of my questions have already been answered, just a quick one: you mentioned that about 55% of your fuel needs for the 3Q are hedged. Can you tell us what percentage you hedged during the 2Q? That s one. The other one, just wondering on the Ocean Air issue, have they already gotten the have they already been able to get the license from the DAC to import these aircraft from Americans? I will answer the second question. About the Ocean Air, the last news they had from DAC is that they didn t ask for the license or the certification for this aircraft yet. So, I cannot answer you. About the We are roughly 75% exposed. We are roughly 75% hedged on 2Q of fuel consumption, if you calculate on ex-post basis. I don t know if I remember the other part of your question, we were 100% hedged on our dollar exposure during the 2Q, did that answer your question? Sorry. Yes, so about 75% of your fuel needs were hedged during the 2Q. We have roughly 75% hedged in fuel, and 100% on dollar for the Q2 12

13 exposure. Rodrigo Goes: Dan McGoey: OK, that s all. Thank you. Our next question comes from Dan McGoey, with Deutsche Ixe. Good morning, I want to follow-up on just two questions you addressed. First on the RASKs, Richard, I think you mentioned you re targeting into a flat year-on-year, I just wanted to confirm what you are talking about in Reais, which would obviously be a substantial increase in dollar terms. Which strikes me as a little bit aggressive given the tone of the market campaigns, if you follow the articles you see in the paper. I m wondering whether the discounting we are seeing in Brazil is highly selective, be it on routes, be it on the number of seats, or times, while there is a primary mechanism that you re using on the discounting that you do? And then also, if you could comment a little bit on the price sensitivity that may or may not be developing to fly to alternative airports, for instance, perhaps flying to Guarulhos instead of Congonhas, more than that, how are you seeing price sensitivity? Hi, Dan. On your first question, the yes, all the numbers were given here on the call always in Reais, in nominal Reais. And the To your question, you have to remember that we use new managing techniques; when we re managing, you know, the fare classes, basically, you know, balancing, load factor and yields to try to maximize RASKs and So, you know, while you do see things in the paper regarding fare promotion, these are not an indicative of what s going on with RASKs. There is also a correlation, a strong historical correlation between dollar exchange rates and yields that should be pointed out, which is affected by seasonality and competitive factors, but, you know, our guidance for RASKs, for the second half of this year, is roughly flat in number of Reais in the year-over-year comparison. On your question of the to fly to alternative airports, I guess what you are saying is in the context of São Paulo. You have Guarulhos airport, which would be an alternative airport to the downtown city airport, and Congonhas, because we don t really have alternative airports in that context in Brazil. But, you know, obviously there is different pricing for different markets, Guarulhos is also a different area, which does also serve a different area in, you know, the São Paulo market, which is the greater metropolitan area of São Paulo that has 20 million people. So, there is a very different pricing, you know, fares and so that apply to a busy downtown airport such as Congonhas, in São Paulo, versus an alternative airport, Guarulhos, which also connects with international traffic. Guarulhos is much more leisure focused and Congonhas is much more 13

14 business focused, and that is reflected in pricing. There is room for us to grow in Guarulhos, in terms of occupying more space, and we plan to do that vis-à-vis serving more international destinations as well, and as well feeding in traffic from our network to potentially connect with international partners who want less mal-distribution inside the Brazilian market. Dan McGoey: Dan McGoey: Stephen Trent: Stephen Trent: OK, so just one more question, for the competition that you are seeing at least from newer competitors that probably don t have slots in some of the more well-located domestic airports, is there exposure or service to the international airports, in this case Guarulhos, really kind of insulating you from a more aggressive degree of price competition? I guess it is the question. You know, if you are in a Galeão-Guarulhos flight, it is not a, necessarily, direct competitor to Santos Dumont-Congonhas flights. They re different products, if you will. OK, thank you. You re welcome. Our next question comes from Stephen Trent, with Citigroup. Good morning you all. Most of my questions have been answered as well, just one quick one for you. On the fuel cost for ASK side of the fence, it looks like, you know, a little higher than I expected, given what we ve been seeing in terms of jet fuel spot prices. Any color as to whether a crack spread on jet fuel carriers seen in Brazil might be higher than they are in other markets in the Americas? Thank you. Sure, Stephen. First of all, our jet fuel generally is more expensive than you see in the spot market internationally. Jet fuel prices are determined by Petrobras, which is, for the most part, our sole supplier of jet fuel in Brazil. The Petrobras pricing formula incorporates what goes on with WTI, as well as dollar adjusted for transportation costs, and otherwise has a very high correlation as a correlation in excess of 80% with WTI, but it is not a one-to-one relationship, so it s also, you know, our fuel prices, well, they re highly correlated with WTI, what s going on the international market; you can t necessarily go one-to-one versus what s going on the international market, and plus, because of taxes and other issues, our jet fuel - if you want a barrel-to-barrel basis compared to what U.S. companies might be looking at - is generally, you know, it varies, but it can be between, say, 20% to 35% more expensive. So, at some extent as well, Petrobras is making itself whole considering that it is selling a dollar index product to AI space companies. Yeah, on the long-term that probably works out, but sometimes on a quarter-to-quarter comparison, you might not there might be some timelines in there. 14

15 Stephen Trent: Travis Anderson: Travis Anderson: Travis Anderson: Thomas Awad: Oh, OK. That s great, thanks, Richard. Our next question comes from Travis Anderson, with Gilder Gagnon & Howe. I just wanted to ask if the political crisis down there is having any effect on your business either in traffic or in terms of things you want to get done with the regulators, or that other people want to get done with the regulators. Hello, Travis. Actually, the political crisis didn t affect the traffic in Brazil. Actually, the Effect is working in a stronger basis than the political crisis, and, at this time, we are not looking for any reduction in terms of sales or projects in our load factors, or something like that. So, the answer is not, the political crisis didn t affect us yet. That s true the various bureaucracies in the country have avoided people to hand up new routes? No, actually not other things are going on a cruise speed, I can say, didn t change the politicians for the industry for the airline factor in Brazil keep the same, we are working on the same regulatory environment, and nothing changed at this moment. OK, thanks. Our next question comes from Thomas Awad, with Itau. Hi, Richard, just one last question regarding your fleet to the end of this year. You changed to 42 your aircraft capacity to the end of this year. What is it, do you have any specific reason and that you want to dedicate this new aircraft, is the South America growth taking place faster than you were thinking before, just if you had any change in terms of market growth or any specific niche that you want to attack. Well, one of the reasons is that we re seeing load factors increase about the expectations, you know, for example, we re running, for example, the month of July, near 80%, which is nearly a physical maximum for us on load factor, you know, beyond which we start to need new aircraft to satisfy demands. So, that, also as a function of the industry demand growth, is creating the need for more aircraft to meet demand for air travel in our business, I mean, that s truly the main factor that s really, you know, better than expected loads, better than expected demand for this year. The specific route, routes that we re planning on launching, the specific international destinations we are planning on launching, are more or less on plan with respect to the new destinations we are adding. Primarily, new frequencies in existing markets, we do plan [ ] add, and 15

16 we will be adding some service to some more markets inside of Brazil, for example, we expect to be adding a new destination to Boa Vista, in Northern Brazil, by the end of the year. But the majority of the growth, in terms of reallocating these seats, is going to be on existing routes, where are seeing very high demand. Thomas Awad: OK, thank you. Once again, ladies and gentlemen, if there are any final questions, please press *1 on your telephone at this time. Once again, this is the final opportunity to ask questions, please press *1 at this time. Our next question comes form Carlos Albano, from Unibanco. Carlos Albano: Hi Richard, hi Junior. I m just in front of your projections here, mainly EBITDAR margin between 38% to 40%, and revenues around R$ 3 billion for 2005, and I did some calculations here, and it seems to me that, I mean, for getting to these numbers, you should have like 42% to 43% EBITDAR margin in the third and fourth quarters, and we should have an environment with high fuel prices and also a difficult environment for yields, so how did you guys, I mean, are confident to get to these numbers? Thanks. Yeah, I am not sure if I understand your calculations. I also encourage you not to sort of base that on EBITDAR, because the R on EBITDAR is highly affected by what happens on the exchange rate, in other words, for example, you know, a stronger Real, which reduces the R, therefore reducing the EBITDAR, actually increases the net income, because we got lower dollar denominated expenses. So, be very careful on how you do that or the, you know, the RASKs that we are targeting and the capacity expansion that we re targeting, that is more or less like those revenue targets. You know, dollar and jet fuel assumptions are also very important to those projections, you know, we are expecting jet fuel to continue to be very expensive, at the levels that they are right now, we are also assuming, you know, relative stability, and if you use projections in the market on what is going to happen with the dollar. So, that would imply, you know, fairly stable environment in terms of fuel operating expenses; and we are seeing, you know, increase in productivity gains when we add capacity, and we are talking roughly 65% year-over-year capacity expansion in the second half of 2005, which will allow us to squeeze out some additional pro-activity gains to the bottom line. So, what I would say is that we are expecting, from EPS basis, to be sort of in that upper half of the guidance range that we articulated for the market. Carlos Albano: OK, thanks. Our next question comes from Kitty Wong, with Fiduciary Trust. 16

17 Kitty Wong: Good morning. I just have a question regarding the Mexican market. I think there are a couple of other low cost carriers planning to launch in that market also, so would that affect the attractiveness of the market to you? And what do (inaudible) feel in it? We have, you know, we are studying entering that market with a partner, ITA. There are some other projects that are studying entering that market, the Mexico government is very intended on developing the air travel market in Mexico it has a lot of characteristics very similar to Brazil, as a couple of years ago being a market that is very underserved, large market geographically, a lot of organized cities, you know, numerous city pairs with high volume traffic, mostly business; today there are a lot of very similar characteristics to Brazil. But in terms of the specific plans and timing, what these other projects might or may not be doing, you know what we read, which is what you read as well in the press, but the Mexican market is large, and is also, you know, under a focus right now with the government to increase passenger services there. And from our perspective, I think we don t have any specific details to articulate to the market on what we specifically will be doing in Mexico, at this point, because it is a little bit early to be asking for them, because we don t have them. But the concept of the project is to and our involvement on it is to have s low cost low fare strategy applied into the Mexican market, and I m not sure if these companies planning on entering the market have that specific type of know-how that would bring to them on that situation. Kitty Wong: Thank you. At this time it appears to have no further questions, I d like to turn it back to the management team for any closing remarks. Once again, thank you very much for your interest in, we will remain committed to our goal of making air travel as simpler, more convenient and accessible experience for everyone, while creating value for our shareholders and employees. is popularizing air traveling in South America through the expansion of our business, innovation in our service, operating efficiency, cost management and competitive low prices. At, our slogan is: Here, everyone can fly and invest. If you have any additional questions, please, feel free to contact our investor relation department. You can also visit the investor relations section in our website, at Thank you, and have a nice day. Thank you. This thus concludes this morning s teleconference. Please disconnect your lines at this time, and have a great day. 17