Feb 17, 2017
Executives
Paulo Kakinoff - President and Chief Executive Officer Richard Lark - EVP and Chief Financial Officer
Analysts
Duane Pfennigwerth - Evercore ISI Victor Mizusaki - Bradesco BBI Savi Syth - Raymond James Matt Fallon - Deutsche Bank Lucas Barbosa - UBS Pablo Zaldivar - GBM Julia Bretz - BCP Securities Paul Lukaszewski - Aberdeen Felipe Vinagre - Credit Suisse Juliana Rocha - REDD Intelligence
Operator
Welcome to GOL Airlines Fourth Quarter 2016 Results Conference Call. Today’s presentation will be made by Paulo Kakinoff, GOL’s President and CEO; Richard Lark, GOL’s EVP and CFO.
This call is being recorded and all participants will be in a listen-only mode during the company’s presentation. After GOL’s remarks, there will be a question-and-answer session.
At that time further instructions will be given. [Operator Instructions] This event is also being broadcast live via webcast and maybe accessed through GOL website at www.voegol.com.br\ir and engage X platform where the presentation is also available.
Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded.
Those following the presentation via the webcast may post their questions on the platform and their questions will either be answered by the management during this call or by the GOL Investor Relations team after the conference has finished. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of GOL’s management and on information currently available to the company.
They involve risks and uncertainties because they relate to future events and therefore depend on circumstances that may or may not occur. Investors and analysts should understand that conditions related to macroeconomic conditions, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements.
At this time, I will hand your call over to Paulo Kakinoff. Sir, please go ahead.
Paulo Kakinoff
Good afternoon ladies and gentlemen. Welcome to the GOL Airlines’ fourth quarter ‘16 results conference call.
I am Paulo Kakinoff, the Chief Executive of GOL and I’m joined by Richard Lark, our Chief Financial Officer. Both the press release and live presentation are on the GOL website and I would urge everyone to make sure you have had a look at that.
Richard will take us through the quarterly results in a few minutes. And I will give you a couple of brief summary remarks.
In 2016, GOL achieved the number one position as the largest airline in Brazil, as measured by market share of RPKs and passengers transported. We are Brazil’s favorite airline having carried almost 400 million passengers since our first flight in 2001.
In 2016, over 32 million passengers chose to fly GOL. And our forward bookings and traffic are rising.
GOL is recognized by customers for having the most attractive flight network in Brazil, the leadership in punctuality and the best customer experience and service. Our fleet of 120 Boeing 737 Aircraft and an order for another 120 Boeing 737 MAX, will allow us to maintain the lowest operating cost of any airline in Brazil.
GOL has a team of more than 15,000 skill aviation professionals, delivering the region’s best on time performance and an industry-leading 16-year flight safety record. Please move to Slide 3, this morning you have seen the release, the fourth quarter numbers, showing that we recorded a net loss of BRL30 million for the quarter.
We achieved an operating margin of 7.4% in the quarter and 7.1% for the full-year 2016. Our pre-tax income margin was 1.3% in the quarter.
Our EPS was a loss of BRL0.9 in the quarter or $0.003 per ADS. Fuel cost fell 17% per ASK in Q4.
Long-view unit cost excluding growing expenses were down 7% as we agreed load factors advanced from the oil weakness on some parts of our cost base. Our low cost base continues to be the key differentiator with all other airlines.
Not only had we the lowest operating cost but as this gap widens, we will continue to deliver an even better value proposition to customers to ensure we grow safely and profitably. On-time performance in the quarter was solid at 94% and in 2016 GOL was recognized as most airline in Brazil by the OAG, Official Airline Guide.
Our load factors were at 78% in the quarter, up 2 points over 4Q ‘15. We returned five aircraft in the quarter and reduced our ASK capacity by 6% year-over-year and reduced our number of flights by 20% year-over-year, allowing us to match our supply with diverse economic conditions.
The balance sheet continues to improve. In December we moved to a net debt position of BRL5 billion.
GOL’s leverage pro forma for aircraft returns to fuel in the first quarter this year is now close to four times. Please switch to Page 4.
In the quarter, averages fares included 19% while traffic included 15% to BRL8.1 million. I also highlight the BRL6.6 million increase in our unit revenue quarter-over-quarter.
The RASK was almost BRL0.23. During the fourth quarter ‘16, we returned five aircrafts as we continued to match our capacity, route network and basis to our diverse difficult economic conditions, at a time, when some other airlines are growing capacity despite the Brazilian recession.
Accordingly, our pricing environment has improved but we still have economic and political uncertainty. Slide 5 please.
Here you see that the reduction in our fleet permitted at 6% cut in ASK and 20% reduction in the number of flights. ASKs included 2.6% in the fourth quarter 2016 compared to the third quarter of same year.
And on Page 6, we demonstrate how the new network launched in May 2016 was responsible for the major portion of our quarter operating margin increase. Our new network has refocused on the higher yielding portion.
This flexibility permits us to happily take advantage of an adjusted to market opportunities in accordance with seasonality. Increasing our supply in certain high season months is part of our plan.
However, challenging the recent environment, I would like to emphasize that it is due to this marked work of our dedicated aviation professionals that GOL was able to minimize the effects of the crises on our operations. Our single fleet type agile operations and fast turnaround times helped us to partially mitigate the diverse conditions.
The result of our operational excellence is reflected in our monthly punctuality data. Moving to Slide 7, we have maintained load factors near 80%.
In December we saw load factors and yields improve which have helped us exceed our guidance for the fourth quarter. Moving to Page 8, as you can see, even with a 15 reduction in the number of aircraft in the fleet, net revenues increased 0.5% quarter-over-quarter and reached BRL2.7 billion.
Q4 revenues increased by 11% over third quarter ‘16. Among the factors that drove fare higher in the quarter were 19% increase in average fare, a 16% higher stage length and a 4 higher yield combined with 7% higher RASK.
On Slide 9, you can see a key reason for our RASK improvement is our significant investment in the customer experience, which now includes on-board Wi-Fi that we launched in Q4. By the end of this year we can achieve 78 aircraft equipment with such features.
Moving to Page 10. Looking at the first quarter of 2017, while we expect the industry environment to remain difficult in the short-term, GOL is seeing a strong underlying demand for our service as daily ticket sales have increased around 30% in January as compared to December figures.
And we are experiencing load factors above 80%. Aircraft utilization is increasing 10%.
Moving to Slide 11, since the launch of our new flight network, we increased our load factors by a leverage of 2 percentage points in the second half of 2016. And our forward bookings are strong.
For the first six months of 2016 we expect loads to be in the high 70s. Moving to Page 12, represent the last six years of operating profits that represent the combination of our capacity reductions network reorganization, cost discipline and stronger Brazilian Real.
Our low cost are a key differentiator in our growth in ancillary revenues and Smiles has contributed to our improved RASKs. On Slide 13, in summary, I’d like to emphasize that GOL is working as moderate to strengthen our foundation so has delivered consistent and sustainable results for our shareholders through the business cycle.
On Page 14, we highlight our 2017 focus areas. We are working on maturing our new flight network to maintain its contribution to increasing margins, keeping our dominant position in the Rio de Janeiro market, enhancing our connectivity and capillarity in Galeão Virgules and Brazilia, developing new markets in the North and Northeast of Brazil, investing in international regional expansion in South America and the Caribbean increasing RASKs from investment in customer experience.
Moving to Slide 15, for 2017 we are expecting increased aircraft utilization from our Boeing 737 aircraft. We will make seasonal capacity adjustments in Brazilia in right season, derived from our single fleet type advantage.
Our Tesco capacity adjustments help us to meet demand in different market conditions. Our 2017 revenue metrics will be driven by the improved environment and deriving from the more stable Brazilian economy and currency.
Thus, we expect to push our load factors higher. The key will be our continued focus on improving our execution across the commercial function.
In terms of outlook, we remain very cautious. There are six weeks of the quarter left to go and Brazilian Carnival is in the last week of February.
We will carry over 8 million passengers in the first quarter this year. And the full year ex-fuel unit costs should increase by approximately 1%.
Looking out into 2017, it seems clear that pricing will continue to be challenging as [indiscernible] are adding capacity in the Brazilian domestic market. We intend to respond to those adverse market conditions with unlike other airlines, even lower unit cost.
We believe that we will result in the better outcome for our passengers, our employees and our shareholders. Before I hand the call over to Richard, I would like to review some of our competitive benchmarks.
On Page 16, you can see we are among the top airlines in revenue generation per aircraft, primarily due to our productivity and high-load factors. Also, if the Real maintains, its appreciation trend compared to the dollar, these figures could be even better next quarter.
The graph in the middle compares, stage left adjusted CASK. GOL is second to only Ryan-Air.
GOL has the lowest CASK in the Latin America region and in Brazil. We expect more in terms of CASK reduction for the near future.
We have already concluded in 2016 our investment in technology and product and we will begin to receive the first five Boeing 737 MAXs in July next year. This new equipment will enable and increase range combined with lower fuel consumption.
On the right graph, you can see a comparison for total operating cost over total net operating revenue ratio. The current 93% is too high and we are implementing a comprehensive cost reduction plan intended to contribute with higher and sustainable operating margin within the next two years.
Richard will also provide some extra color ahead. Moving to Slide 17, for the CASK ex-fuel adjusted by the average fares last, we can see GOL has one of the lowest fixed cost structures in the world among the leading low-cost carriers.
We have demonstrated our commitment to remain Brazil’s lowest cost carrier since our foundation in 2001. And it continues relentless efforts of the entire team of GOL which enable GOL a sustainable competitive advantage over the other airlines in the region.
Since we have a standardized single fleet, GOL obtains a smaller crew cost and value spare-parts management. Nevertheless, safety comes always first and we maintain our SAE certification as best in class maintenance.
We also have a lean and productive operations that position GOL as number one in the most important and efficient airports. As a result, we’re able to extract the best aircraft utilization.
We have reduced our exposure to fixed cost with an efficient and demonstrative structure working towards improving our client experience and strengthening GOL’s brand. In summary, through consistency, efficiency and service, we expect to deliver sustainability and profitable growth for our shareholders.
With that, I’m going to hand over now to Richard Lark, who will take us briefly through the MD&A of the quarter. Richard?
Richard Lark
Thank you very much. Moving to Slide 18, we had a solid December quarter.
We’re maintaining the lowest cost in Brazil and are number one position in traffic. On Page 18, we have the quarter highlights.
We attained a 7.4% operating margin. This figure included approximately $142 million in restructuring costs which were non-operating expenses.
From 144 aircraft in December of 2015, during the year 2016, we reduced our fleet to 121 aircrafts at the end of December 2016. And our plan contemplates an average fleet of 115 aircrafts in 2017.
The capacity rationalization required by the industry’s slowdown in recent years is finally paying off. Despite a 3% decrease in RPKs year-over-year, our load factor reached 78%, 2.2 percentage points higher than the fourth quarter 2015.
This is possible due to our concentration on capacity and yield management. In the fourth quarter, GOL’s airline operations reduced capacity by 5.7% and increased passenger revenues per seat kilometer or per RASKY by 6.8% permitting a total RASKY improvement of 6.6% in the quarter.
The 19 percentage point reduction available seats above the 6.9 ASK reduction in the year is primarily due to the increase in stage length which is part of our new route network fully implemented in May 2016. GOL’s continuous focus on improving revenue management helped drive the yield increase of 3.8% over the fourth quarter of 2015.
From January to December 2016, yield was up 8% and per RASKY increased 8.5%. The operating margin expansion in the quarter resulted in an EBIT of BRL198 million.
For the full-year operating margin reached 7.1% with an EBIT of BRL697 million. We remain the lowest cost provider in the region and we were able to obtain a significant reduction in leverage.
At the end of this quarter, leverage was 5.7 times while 12 months ago, it was 11 times. We had net losses of BRL30 million in the fourth quarter of 2016 and net income of BRL1.1 billion for the full year.
On Slide 19, you see that the increase in profitability was driven by a 7% increase in RASK and a 5% reduction in CASK. Cost pro forma was very good.
We had a 5% unit cost reduction in the quarter just ended and we strip out fuel that was up 1%. We’re targeting as Paulo said to keep unit costs ex-fuel stable for 2017.
At BRL0.21 total operating cost per seat kilometer or CASK reduced 5% over the same quarter of 2015. This CASK excluding fuel increased 1% in the quarter-over-quarter comparison.
Compared with the RASK increased, we captured an increase in the profit from operations of BRL0.014 of represent a significant improvement when compared to the same period in 2015. In the quarter, consolidated CASK ex-fuel was BRL0.152 of, an increase of 1.2% in the quarter-over-quarter comparison.
The decrease in CASK was primarily driven by fuel price reduction which in the quarter was BRL1.94 per liter representing a 12.7% decline when compared to the fourth quarter of 2015. It is worth mentioning that GOL increased by 11.4% - I’m sorry, GOL decreased by 11.4%, we had a reduction of over 12% and the number of fuel leaders consumers per RPK during 2016 versus three years ago, as a result of the ongoing initiatives over the last several years to improve operating efficiency and reduce fuel consumption.
As a consequence, higher RASK with lower CASK led GOL’s EBITDA margin to just, under 17% in the quarter. On Slide 20, you see our net financial results, the results, BRL31 million of financial income and BRL194 million of financial expenses in the quarter.
Moving on to Page 21, we’ve broken down our net income variation between the four quarters for you. Beginning from the left GOL had BRL89 million of additional revenues in the year, BRL606 million of savings in fuel, BRL61 million in lower commercial expenses and BRL197 million in other expenses savings, BRL76 million with solid increases to compensate for approximately 8% inflation in local currency.
Exchange rate gains were responsible in the quarter-over-quarter comparison for a delta of BRL3.7 billion in non-cash net financial results. This item explains the net income - primarily net income variation between the quarters.
And taxes explain the balance of BRL585 million, this is explained by compensation of accumulated losses in previous years. GOL reported a loss of BRL0.09 per share for the quarter and a profit of BRL3.17 per share for the full-year.
On an ADS basis, with our ADR program, GOL reported approximately dual dollars per ADS for the quarter and earnings of $0.09 per ADS for the full-year. On Page 22, you can see the breakdown of GOL’s cash flow evolution from the third quarter of ‘16 to the fourth quarter of ‘16.
GOL increased by BRL79 million in cash and cash receivable primarily due to operating activities and also entirely offset by investing in financial activities. The balance sheet liquidity is shown on Slide 23.
We continue work on delivering GOL’s balance sheet with the objective of moving up to a B-credit rating. We have BRL1.9 billion in cash and cash equivalents.
On Page 24, you can see reduced our debt by total of BRL2.9 billion during 2016 and the breakdown you can see also of our financial debt maturities. Moving to Slide 25, two thirds of GOL’s debt is asset based and we’ve been successful lowering GOL’s cost of debt.
But as you can see on Slide 26, our net leverage including off balance sheet aircraft leases finished the quarter at 5.7 times, which was a significant improvement from 11 times at the end of 2015. On Slide 27, I want to take a few minutes to review the relative performance and liquidity of GOL’s shares in the market.
During the fourth quarter of 2016 and right up until February 15, 2017, GOL surpassed all, of the XLA index which is the airline index also the Tier 1 LCCs comprised the Ryan-Air, Southwest, Jet Blue, West Jet and Ibovespa, the Brazilian Stock Market index by 6 percentage points, 11 percentage points and 8 percentage points respectively as you can see on this page here. GOL’s average trading volume per day was $3.5 million on the NYSE and BRL19 million per day on the BM&FBOVESPA in the same period.
One of the challenges we’ve had recently in our public market trading values has been the relative lack of liquidity in the ADS. And for this reason, the board has agreed to alter the ADR ratio of PNs to ADRs, ADSs from 10 to 1 previously to 5 to 1 which will be affected over the next few months.
Now Page 28 shows a table with some KPIs of benchmarks using last 12 months ended December 31, 2016. From an operating margin point of view, we can see that despite GOL’s situation, we have significant improvements and opportunities in comparison with low-cost carriers.
But in spite of that we lead the pack in margin in the South American market. On Slide 29, you can see a comparison of the profitability and the returns from these same airlines on the previous slide.
Our fleet flank can be seen on Slide 30. We ended the fourth quarter 2016 with 121 aircrafts in operation.
And we are at 120 now. In 2017, we will maintain an average fleet size of 115 aircraft and in 2018 we will resume fleet growth and begin our aircraft for placement with the delivery of our first five Boeing 737 MAX 8 aircraft.
As you can see on Page 31, we have a significant flexibility to match our capacity growth with GDP growth. A key component of our fleet plan is the 737 MAX 8 as you can see on Page 32.
The MAX delivers more seats per aircraft, increase operating range and improves performance and significant cost reductions. As you can see on Page 33, we expect an approximate 10% reduction in operating cost.
Our outlook is on Slide 34. I hope there will be a favorable fare environment in the second quarter of ‘17 with only 2% decline or less in capacity.
But we don’t have clues to our competitors will do nor do we know what the outcome is going to be at this point for the second quarter. For 2017 full-year, we’re assuming a yield increase of 6% but that’s a guess.
We hope it will be more than that. While the environment can continue to be positive, if there is not capacity discipline, we could see pressure on yields.
We’re planning for rise in costs in 2017 due to higher jet fuel prices. Our goal is to improve the trend of rise in unit revenues in 2017 and achieve positive unit revenue comparisons for the year as compared to 2016.
For this we’ll rely on effective revenue management and our route design techniques to achieve this and we’re leaning heavily on our fleet monetization to help mitigate unit cost pressures. We expect better profits, cash flow and returns in 2017 despite the competitive environment.
Our priorities for the balance sheet this year are unchanged. We’ll continue to focus on the basics running a highly reliable operation offering our customers exceptional service and delivering results for employees and our shareholders.
The guidance for 2017 is a small decline in capacity of 2% or less, average load factor from 77% to 79%, cash ex-fuel of BRL0.14, EBITDA margin from 11% to 13% and EBIT margin of 6% to 8%. Downside risks are Q4 fares, external shocks and capacity growth.
With this, I thank you all for your attention. And we’re ready to move to the question-and-answer session for today’s call.
Please confirm your name and then ask the question.
Operator
[Operator Instructions]. And our first question comes from Duane Pfennigwerth from Evercore ISI.
Please go ahead with your question.
Duane Pfennigwerth
Hi, thanks. I wonder if you could just kind of review for us what you’re seeing in the corporate segment of your demand versus the leisure segment of your demand.
And where you saw more of a recovery in the fourth quarter and how those trends look here into the first part of 2017?
Paulo Kakinoff
Hi Duane, it’s Kakinoff here. Thank you very much for the question.
Actually what we have seen is that the total size of the corporate market has not increased, it’s not recovered yet. But certainly GOL has been able to achieve a higher market share last year.
For the first time ever we took the largest portion in revenues too. So we were leading the market in the number of tickets sold to the business travelers.
And in 2016 we achieved the market with leadership in revenue. So it means that it has been able to bring more customers to fly preferring the company.
This is probably the result of the investment that we have done changing the low-par, offering them more leg-room, special packages, conditions and the loyalty program, now the Wi-Fi. So I believe that the company will deliver continuously better results in that segment.
But this is because we have been able to bring customers to fly GOL. It’s not because the market size in that specific segment has increased, until this moment.
But see now, because we are at the end of the leisure, close to the end of the leisure season, and after the Carnival, normally we have an increase in that segment. But it’s quite soon to say that it’s going to happen this year.
Duane Pfennigwerth
Can you give us any sense high level, so it sounds like you’re seeing a stable corporate market and you’re maybe market share is increasing within that, but can you give us a sense for the recovery potential, how meaningful could a recovery in corporate be? How far below trend maybe a normalized trend do you think corporate activity is in Brazil?
Paulo Kakinoff
Considering the average fares in that specific segments are between three to five times higher than the usual length. It will improve as quite significant impact in the results.
Personally, I believe that following the market expectations, the second half of this year would deliver better economy dynamic in the country. And certainly getting that affect, we would see an improvement in the business travelers’ demand.
So this is what we have expected. That’s part of our plan.
So, it could not happen in the second quarter. And we are, I would say prepared considering our offer, our revenue management strategy and network design to only get access to a bigger business travelers’ market in the second half of this year.
Duane Pfennigwerth
That’s great. And then just my last one for Rich, the cost guidance that you’ve given us here, is there any sort of idle aircraft ownership embedded in that that might be kind of non-recurring into 2018 and beyond?
And thanks for taking the questions.
Richard Lark
Yes, thanks Duane. Yes, we have a couple of things.
We have a couple of aircrafts that are in maintenance and Wi-Fi upgrades while they’re in our fleet. And so, it’s five or six that are kind of going through that process on heavy maintenance and Wi-Fi through July/August.
And as we kind of articulated in our fleet plan, we can bring them in as demand, seasonality revs up kind of in the September/October period. We also have a couple of aircraft in sub-leasing in Europe which are obviously not incurring costs on your question but also given the flexibility on the capacity side.
But we expect that the inefficiency on the cost side should kind of go out of the system more or less in July as we go back to having a couple of aircrafts in spare and maintenance capacity. And we’re moving along with the program on the Wi-Fi retrofit.
But for Q2 it’s about four to five average aircrafts that are in the lease expenses but are not producing revenues. We also did that as a specific strategy to deal with the lower seasonality in the second quarter that is natural in Brazil on the demand side.
Plus, trying to make sure that we keep our capacity and overall inter-capacity in check as we got a couple of competitors that are in Q2 thinking about bringing some aircraft into the market which concerns us, of its potential overall effect on fares. So, we’re trying to do our part to match demand with supply.
And so, long-answer to short, it’s about four or five average aircraft in Q2 that in July/August period will kind of comeback online in terms of producing revenues.
Duane Pfennigwerth
Thank you very much.
Operator
Our next question comes from Victor Mizusaki from Bradesco BBI. Please go ahead with your question.
Victor Mizusaki
Hi, good afternoon. I have two questions here.
The first one you reported adjusted net debt-to-EBITDA of 5.7 times. And you also mentioned that 4G-deal revenue for the first quarter will likely redelivery another seven aircrafts.
And I don’t know if you can give us guidance in terms of what do you expect in terms of financial leverage for this year? And the second question, just a follow-up about leisure and business travelers.
I don’t know if you can give us some color. I mean that you’re making a lot of changes in your network, if you can give us a kind of break down in terms of leisure and business passengers for these new routes?
Paulo Kakinoff
Yes, sure, Richard.
Richard Lark
Our overall target for this year 2017 is to get close to the four times range. I don’t think we’re going to get under that.
Pro forma for the aircraft that are being delivered - redelivered here in the first quarter, they’re already grounded or in the U.S. in the desert during their return process.
Pull-forward for that leverage which goes out of the system, we’re already with our EBITDA assumptions we’re already at a leverage of about 4.5 times. That’s because the market convention of taking seven times the operating leases inflates the overall leverage of those seven aircrafts that are still going out of the system.
So, we’ll be at some point between Q1 and Q2 will be at around 4.5 times on an accounting basis. But overall objective this year is to get to four times level.
As I mentioned as well that we’ll also be working to re-achieve single-B status. But now, on your question on the corporate I guess, I’ll let Kakinoff follow up to Duane’s question on that.
Paulo Kakinoff
Hi, Victor. Actually it has been hard to predict when as mentioned to Duane, who had predicted when the business travelers, the size of them specifically the segment, we will be bigger than it is today.
As I said, we expect to have more meaningful improvements by the second half of this year. But the most important thing is that after the redesign network GOL has further strengthened its strategic position among the top 8 airports in Brazil, those are standing for 75% of the Brazilian GDP.
So, I mean, those are the most important airports to the business travelers. Our market share among these airports is hanging from 35% to 52%.
I believe nobody can come even closer to the offer that we have this structure to this segment of customers in Brazil. I mean, we strongly believe that we have an evitable network and the time-table to get in further preference of the customers.
I mean, it’s promising but we do need to find a Brazilian better economic condition which is supposed to happen from July on.
Victor Mizusaki
Okay, thank you.
Operator
Our next question comes from Savi Syth from Raymond James. Please go ahead with your question.
Savi Syth
Hi, good afternoon guys. Just first off on the 2017 outlook, its right in line with what we were thinking, but if I look at the 1Q outlook, I’m a little bit confused about the components.
Your yield guidance of BRL0.24 is below 4Q ‘16 and below 1Q ‘16, which seems at odds with your comments on January trends. I was wondering if you could talk a little bit about that.
And then also just on the ex-fuel unit cost, it’s about 3% year-over-year, if you exclude the gain on sales, and you do you have a nice tailwind in FX. I’m wondering, is that because of the - Rich, what you mentioned about the aircraft that still are non-producing, and then maybe some of the cost related to that?
Richard Lark
Yes, sure. On the revenue side, yes, and we have - that will depend on the March as you mentioned the, we have the Carnival at the end of next week, the first week of March is the holiday week.
So, doing better than what I mentioned there would depend on March. January was very good, January was very strong.
So basically on January, if those trends continue through March, we’d do better than that. But we’re being conservative because of the capacity, the competitive capacity dynamic and as you know any change on yield cover extremely big impact on profitability.
On the cost side, yes, we are, in our planning for 2017, we were assuming October of last year based on our own economic, macroeconomic projections BRL3, but it was more in the third, at the end of the third quarter. We’re already getting close to that level.
So yes, and fuel or let’s say oil prices has not tracked at as it normally would with pretty close to minus one correlation. So, we do have year-over-year fuel cost increase but the exchange rate effect is more than overwhelming that at this point in time, kind of temporarily if you will in January.
So, it helps a bit in January, we expect to give a little bit of that back on the fuel side kind of going through March. But there is a potential for us to do slightly better than that on the non-fuel cost side because of the exchange rate effect.
And then kind of going back to the extent we can maintain discipline and rationality on yields in terms of all the competitors in the market. We could retain some of that in the operating margin.
But it’s still - we have good visibility on the bookings but not 100% visibility on the yields and much less so in Q2. But the trends are positive for us to have better than expected yields based on where we stand right now.
Savi Syth
Just to follow up on that Rich, what’s the pro forma rent going to be, once everything is returned, what’s kind of the new level of rent expense?
Richard Lark
Rent expense per ASK or…?
Savi Syth
Or just after you return all the aircraft?
Richard Lark
Yes, it’s - I mean, you’re saying like on a monthly basis or quarterly basis or annual basis or?
Savi Syth
Quarterly is fine.
Richard Lark
Yes, that goes down, it’s about another BRL7 million that comes out on a quarterly basis, BRL7 million to BRL8 million that you would take out of those numbers.
Savi Syth
Okay, that’s helpful. And then if I may, if you look up to kind of ‘17/’18, could you share a little bit more about what your CapEx expectations are and what you might want to do on the debt front?
Richard Lark
Yes, sure. I mean, ‘17/’18, ‘17 this year we have approximately little under BRL1 billion in CapEx, the majority over 60% to 70% is related to the engines and maintenance on those.
We have a small portion of that which is the Wi-Fi upgrades there in progress in that BRL1 billion. The majority of it is covered with financing sources.
So the cash portion of that CapEx is only around 20% of the total CapEx balance. And that comes from low-cost financing sources such as we have with facilities we do with, the extended bank guarantee facilities we deal with Delta and Air France, maintenance, I’d say credit facilities.
And so, the majority of that is covered through these mechanisms that we use. CapEx, 2018 is a little bit down from that.
And the PDP component this year and next year would be the first five deliveries are already covered by sale lease-backs. And it’s possible that we’ll have all of those 18 deliveries for the MAX also covered with sale lease-back.
You saw this week we announced sale lease-backs for the first five of those on the MAX order. So the PDP component of the CapEx is expected to be much less also.
So, we’re pretty comfortable with the investment cash flows in terms of what we’re doing there financially and financing wise. So, and then we started 2018, we would start to have most likely to have PDP as financing requirements as we start to take ownership of those portion of the MAX deliveries as they start to ramp up.
And 2019 on our plan, which will, we expect will be matching PDP growth at that point in time.
Savi Syth
That’s helpful, all right. Thank you.
Operator
Our next question comes from Peter from Barclays. Please go ahead with your question.
And Peter has disconnected. Our next question comes from Matt Fallon from Deutsche Bank.
Please go ahead with your question.
Matt Fallon
Hi guys, thanks for taking my question. So, aircraft rent came down substantially in Q4.
Why is it down so much? What drove the decline and what’s the go forward number?
Richard Lark
Yes, well, as we described in the press release, it’s mainly due to the impact of contract renegotiations throughout 2016. GOL we did a major fleet restructuring in 2016.
I mean, when all said and done, over 25 aircrafts that are returned. In the context of that massive unprecedented fleet reduction we were able to renegotiate and have improved productivity on that.
There is also an exchange rate effect in there as well. If you look at the full-year, there is impact of the average depreciation of the Real against the U.S.
dollar, which is around 5%. And it’s also an affect which relates to the time-lag between removing an aircraft from operation until its actual term as we were mentioning, we have inefficiency there, where we’re still paying the rent on some of those aircrafts.
So, that was fully pro forma that number would have been much lower. But it’s primarily due to the work that our fleet team and the manager team did on restructuring the fleet, specifically on the aircraft rent side.
And to keep in mind also, the network restructuring that Kakinoff mentioned in his piece of the call was also very important for us in improving productivity. The allocation of those ASKs, improving productivity, so there is also a general component that across our base of management was able to do to better allocate the assets on the route network.
So it’s a combination of those factors. But the main factor was the impact of contract renegotiations that happened throughout the year as GOL affected this massive fleet restructuring.
Matt Fallon
All right, great. Thanks guys.
Operator
[Operator Instructions] Our next question comes from Lucas Barbosa from UBS. Please go ahead with your question.
Lucas Barbosa
Good afternoon Kakinoff and Richard, this is Lucas from UBS. Thanks for taking my question.
Congratulations for the results. My question is just a follow-up on the last question.
Is that BRL120 million aircraft rental costs seen this quarter, a recurring level going forward, or was there any one-off in this line? Thank you.
Richard Lark
Yes, as we described we have, in the quarter we had around little over BRL140 million in a variety of issues in there primarily in the non-operating expenses. So, when you look at the total CASK, it’s important to remember that we had around BRL140 million in the quarter that was related to the when we return aircraft adjustments and maintenance in a variety of costs that we have to be able to return to those aircrafts.
Within the actual leasing number, I’m just checking here for you Lucas, the actual leasing number we had and that number that you’re expecting there is about BRL8 million to BRL10 million of one-time cost that were reported in the aircraft rent line that’s specifically related to that. The others were, there was bit maintenance and then the rest is in the other operating expenses.
Lucas Barbosa
Okay. Thank you.
Operator
Our next question again comes from Peter from Barclays. Please go ahead with your question.
Peter
Hi, guys. Thanks a lot for taking my question.
I’m sorry, my phone dropped before. I’d also want to ask, but I was wondering if you can talk a little more about the nature of the sale-leaseback agreement you guys announced just recently in terms of capital for operating your lease and if you can give us some more color on kind of implied cost of financing and the timing of net proceeds?
Richard Lark
Those are time for our deliveries which start in the middle of next year. So the actual transactions happen according to the delivery schedule.
We can’t provide the specific details on the negotiations we do with the lessors. But we have a very attractive price, a very attractive asset, very attractive with Boeing.
And then, as you know with the sale lease-backs it’s a combination of the sale price plus the lease rate. And we negotiate the best terms for our shareholders.
We can’t provide details on that other than to say, generally the costs on these, if you want to look at it, kind of it’s like our financing costs, it’s kind of in the 4% range on the financing cost, in terms of kind of what the effective financing cost in dollars is for our. We generally on our dollar assets, which are the aircrafts, we’re generally kind of in the 3% to 4.5% range on our, on the effective financing cost to go on to the leasing which mostly we’ve been doing, or if we were to do an Exim type financing.
Peter
Got it, yes, this was helpful. Thank you.
Another question I had, assuming full year 2016 results, can you perhaps update on the EBITDA sensitivity to the move in BRL?
Richard Lark
I mean, yes. I mean, obviously we have an environment I think going forward where we’re looking at we’re working with kind of, our forecast for the year was about 3.16, the market thus far is kind of tracking ahead of that.
So, we don’t expect a lot of sensitivity on the exchange rate in terms of volatility. But trying to answer that question as we kind of look for, you have to tell me what your assumption was on oil prices.
Because for us to do homework together on our fuel cost and our business, because they indirectly affect the yields also. And so, we don’t really work with just on exchange rate in isolation on EBITDA because it has a very high correlation to what happens on yields.
And we also have to look at the - what’s going to be the assumption on fuel. Thus far we’re getting little bit better than expected on fuel, I think a little bit better than our budget.
But in terms of volatility for our business, it’s very large. I mean if you take the standard volatility for exchange rates and WTI or oil if you will and apply it on our cost structure, within the actual volatility that exists in those commodity prices today.
On the EBIT margin basis, you’re little over 10 points swing on the margin, kind of like plus or minus 5 points on either side of what our current situation is, assuming the current of volatilities that exist for exchange rate and oil. So, we got like two ways of looking at it.
What our expectation is which is - we’re working with a stable or slightly appreciating Real and increasing oil prices. We expect oil prices to increase substantially from now until the end of the year.
That’s kind of work with our budget. And that’s kind of what we’ve guided in our cost, kind of flat year-over-year ex-fuel cost and then a significant increase in the fuel cost is where we’re looking at our ‘17 guidance.
But generically if you would have kind of throw it on a matrix, you kind of go up 5 points and down 5 points around that using the current market volatilities. I don’t know if that’s helpful.
But you also have to have a view on the oil prices, because they work together with us. An isolated move in the exchange rate, while it can have a short-term effect over three or four months, you also have to look at what’s going to be happening with the oil prices and then see how that’s going to affect our fuel price and our cost structure and then how that flows into yields, because yields in the Brazilian market also are highly correlated with what happens with exchange rates in fuel.
So, that’s how we get to the overall margin, we start to look at as an isolated impact of what exchange rate would do on isolation and what fuel will do on isolation. We have to put kind of the overall package.
But I think what we can do is going forward we can think about how to help folks think about that, those volatility issues which are significant for our business as we think about how we provide guidance and talk to the market. I’ll take that to heart and think about it.
Peter
Great. Thanks a lot for the color.
And the last, if I may squeeze, do you have any maybe additional color on - from an investor’s perspective for the bill, to end the airline ownership could mean for the industry? And I don’t know if you talked about it before, but it is potentially going to encompass just the passenger transportation or also cargoes and logistics, maybe a discussion would be helpful.
Paulo Kakinoff
Hi Peter Kakinoff here. I need just to, I mean, repeat this statement that GOL has delivered to the market since the beginning.
The company is totally in favor of liberalization in every sense. So it doesn’t mean that we have detritions to get access to cut though, due to acquired ancient legislation.
This is nothing related to speculations regarding selling any stake of the company or having another strategic investors increasing dramatically it’s position. This is as I said, this is basically speculation.
What we have I’ve always mentioned that the cost, the capital structure of the company would be much slinkier and then highly appreciated by the investors, without having the structure of voting shares, non-voting shares, duration between them and which has been necessary at the moment exactly to get access to a bigger of the market. So, we are pretty much in favor of this liberalization.
I believe this can be only positive. And the other speculations regarding the possibility of having more competitors playing here in Brazil, I would say they are welcome.
If any brand does need the protection of this type of relationship to be feasible in the market, probably there is another prong. I believe that GOL is prepared to compete in Brazil with any kind of airlines even new company.
So, I think this is the right decision to be taken. I cannot speculate on the political environment to approve it or not.
But I think that the reasonable decision would be to have that thing approved. And this is I believe our expectation at the moment.
Peter
Got it. Yes, thanks a lot for your answers.
And best of luck in 2017.
Paulo Kakinoff
Thank you.
Richard Lark
Thanks Peter.
Operator
Our next question comes from Pablo Zaldivar [ph] from GBM. Please go ahead with your question.
Pablo Zaldivar
Good evening. We have witnessed during the quarter a drop in leases per aircraft.
I believe it should be because of your renegotiation of your contract. But I was wondering if this should be sustainable going forward?
Richard Lark
If you’re talking about the cost per ASK, yes, that’s a sustainable number going forward. We had this very large fleet reduction which removed all the excess capacity from our system.
We have a little bit of inefficiency in Q1 because we’re still returning aircraft from that negotiation. And then in Q2, in the seasonality we keep some aircraft in maintenance and upgrades on the Wi-Fi.
So we also could clearly show some lower productivity on that aircraft maintenance in Q2. Then in second half we should see improvements in that.
So, it’s sustainable we expect, and as Kakinoff mentioned as well, we’re also working to improve our aircraft utilization which means we’re producing more ASKs per aircraft so the denominator of that goes down. And our aircrafts are Boeing 737 aircraft have the ability to increase utilization above the current levels.
So thus far this year we’re kind of tracking with the 10% increase in utilization. So, in the first half, that compensates some of this inefficiency we mentioned on having aircraft out of service.
But we should see significant competitive gains for us on that in the second half as our Boeing 737s crank up the aircraft utilization, which is an important thing to understand about our business especially ours is the only 737 operator in Brazil. Last year, really kind of a maybe two years, we were not able to fully take advantage of the utilization capability of the Boeing, just given the economic stagnation in Brazil.
But here going forward, we are working on going back to using that capability which for this year somewhere between half hour to 50 minutes higher aircraft utilization, which is significant. But why we even think about that is effectively each aircraft is doing an additional flight per day on the existing asset.
So we’re having a much bigger dilution of fixed cost. And as Kakinoff mentioned as well on the chart he showed you, showing the fixed cost versus the variable cost.
In our business we have a very high operating leverage based on the low fixed cost component of our business which is the aircraft. So, we can squeeze another half hour to an hour a day out of those aircrafts, it’s significant in terms of the overall profitability.
So it’s not only sustainable we’re going to push that cost advantage further this year.
Pablo Zaldivar
Okay. Thank you.
Operator
Our next question comes from Julia Bretz from BCP Securities. Please go ahead with your question.
Julia Bretz
Hi, thank you for taking my questions. I know you mentioned a little bit about this leaseback agreement.
So if you could give us some numbers, I don’t know if you could, but for the market value of the 737s. And then if GOL has made any down payments for these?
Richard Lark
No, no we don’t. When we do the sale lease-backs, those are one of the confidential transactions we do with the lessors so we can’t provide information on that.
But in our particular case, we - in with the down payments that we would normally have on an acquired aircraft, the PDP payments, we then are not making those in the context of the sale lease-back transaction. They’re then put into the deal, basically the lessors picking that up so that goes out of our CapEx plan.
The Boeing 737 in general has a very, very high value in the market and so we monetize that in the negotiation with lessors and a combination of purchase price plus the lease rate. But it’s a combination of what we want on the cost side and on an ongoing basis.
And what we get in terms of cash. But those would, these deals are already done, but as these aircrafts that deliver next year we’ll probably be able to see some details on that next year as we, we’re about one year ahead of the curve on our deliveries.
So, we could probably provide some more information on that next year.
Julia Bretz
Okay, perfect. Thanks.
And if I could ask one more question, your taxes were also very high this quarter and if you could explain the reason for that and then give a little guidance for this year as well?
Richard Lark
GOL, on the airlines side we’re not paying any taxes because of our net operating loss carry-forwards. And we have a very large amount of tax credits, net-net operating losses which have an unlimited term which we advertise against any income we have.
The other effect we’re seeing there is the effect of the income tax on Smiles, which is a subsidiary of our holding company which we consolidate. And so what you’re seeing there is also the effect of the - and Smiles is a full tax-paying entity, very profitable, full tax-paying entity.
But the majority of the numbers on the income tax are coming from the income tax expenses from the Smiles subsidiary.
Julia Bretz
Right. So, will these expenses continue during this year for Smiles?
Richard Lark
Yes, they will because Smiles is growing there. You can find some information on that on their website.
But they’re growing at a very nice rate and continue to increase their margins and so they will be continuing to increase that tax amount. On a relative basis, in terms of the overall consolidated numbers on our side, it probably shows a slight increase just because our overall business is six to seven times the size of, the airline is six or seven times the size of the overall Smiles business in terms of revenue.
So it dwarfs that in our overall revenue and tax calculation. But I think the important thing about GOL going forward is as GOL as we go back to generating operating profitability and pre-tax profitability, we have a very efficient tax planning to minimize those as we grow earnings on the airlines side of the business.
On the loyalty side of the business they will basically continue to show those levels of taxes going forward growing more or less with their, with the size of their business, but it’s kind of growing in the 20% per year range.
Julia Bretz
Okay. Thank you very much.
Operator
Our next question comes from Paul Lukazewski from Aberdeen. Please go ahead with your question.
Paul Lukaszewski
Hi, maybe if I could just start with sort of cleaning up and clarifying a few things that you’ve gone through up till now. I believe you said you’re expecting CapEx of about BRL1 billion in 2017.
Did I hear that right?
Richard Lark
Correct, that’s right.
Paul Lukaszewski
Okay. So can I clarify, does that include PDP or PDPs on top of that BRL1 billion?
Richard Lark
No, we don’t have any PDPs this year as it relates to our MAX delivery because of the sale lease-back transactions we’ve done the first five incorporate those PDPs so that’s the PDP outlays this year. We might have some next year depending on what we do with the 2019 delivery.
Paul Lukaszewski
Okay, all right. So that actually addressed my second question, which was whether that schedule detailing the PDPs reflected the sale leaseback transaction from earlier this week, and it sounds like it did not, so those PDPs have gone away.
So then, I guess the follow-up to that, is there any sort of netback of any PDPs that you have recovered back as a result of the sale leaseback against the BRL1 billion or is that already factored in?
Richard Lark
That’s already factored in. It’s part of our restructuring plan last year we did a complete restructuring of our PDP deposits.
And so going forward we’ll only have outlays we actually are going to be financing and taking order share of the aircraft. Like I said, in 2018 we might have some PDP outlays based on that.
That’s tiers down the road we’re kind of working one year ahead at this point on MAX order.
Paul Lukaszewski
Okay, thanks for that. Moving on - sorry, and apologies for having to do this, but back to the rent expense line, just to make sure I’ve kind of got it completely, are your comments that the sort of BRL8 million to BRL10 million of noise in the quarterly run rate of what was 120, so assuming steady state dollar, we’re sort of talking about a sort of 110ish aircraft rental line per quarter going forward, is that a number we can work with?
Richard Lark
Yes, I mean, part of it, on an absolute dollars, on the absolute Reals, I’ll take a note and get back to you on that, provide you more on that. But more or less along those lines you have some against the number on the ASK basis.
We had a lot of - there was lot of noise throughout the year on a quarter-to-quarter basis. There is still little bit of noise in there in Q4 that it has a bit.
But it’s more or less what we were expecting on an ASK basis going forward. As I said, it probably improves a little bit on an ASK basis based on our lower - our plans on increasing productivity.
But the - it would be typical to put that on the scale.
Paul Lukaszewski
Okay. I guess so it’s a fair conclusion to draw that more of the fleet restructuring was concentrated in the operating leases than the financial leases, just kind of given the degree of magnitude in terms of the reduction of aircraft rent in the P&L?
Richard Lark
Yes, I guess, it’s fair. Across the board, today we have 31 aircrafts in a finance lease construct going forward.
And essentially come because fewer scenarios we’re going to have an accounting change which lease including operating leases would be treated as finance leases. So they got cleared up.
And it’s now going entirely out of the operating margin and move into the construct of interest expense and depreciation. But yes, that’s, I think it’s fair to comment.
Paul Lukaszewski
Okay. And one more on this aircraft front, I believe your prior guidance was that the fleet size would come down, the full operating fleet including the subleases in the aircraft waiting for return, adopt the target that was going to come down to 122 versus as finishing at 130.
Is that correct or I’m sort of mixed apples and oranges here?
Richard Lark
What period?
Paul Lukaszewski
I thought in the third quarter, you guys guided to expect the fleet, the year-end fleet number to be 122, either after second quarter or after third quarter. I thought that was the guidance, so finishing at 130 I thought was a bit high.
Richard Lark
We finished at 120 in total, for December ‘16 we finished at 121.
Paul Lukaszewski
Well, that’s sort of the net number, right?
Richard Lark
Net number.
Paul Lukaszewski
The gross number, including the aircraft to be returned and the growth aircraft on subleases, 130 now?
Richard Lark
No, no, the 121 includes the 7 aircraft that are being returned. That will take us down to, we’ll hit kind of like April/May would be at 115 aircraft.
And that’s obviously, that’s net of sub leases, that doesn’t include aircraft we have in sub-leasing. So that’s not included in that number.
Paul Lukaszewski
Okay, all right. Let me investigate where I got my number from then, and if anything, I’ll get back to you guys.
Richard Lark
The 130 I’m not, I mean, 121 was the actual. Today we have 120 and like I said, with the adjustments that’s going on, we plan this year to be at 115, average.
We’re actually kind of, we’ll hit that number kind of in April and then there is an average calculation for the year. But we also have the sub-lease aircraft we’ll be coming back in, in the Q3, at the end of Q3.
So they also come back into the second half that allows take advantage of the increase - seasonal demand in the Brazilian market. And we have the flexibility of not taking those aircrafts back in the system either if you want to leave them in sub-lease, those contracts expire in Q3.
So, that’s the important there is we have the ability to manage the capacity.
Paul Lukaszewski
Okay. And my last question is just where should we have our expectations for dividends going forward, are you guys going to pay sort of the statutory minimum or how you’re going to think about dividends in 2017?
Richard Lark
We won’t be in a dividend paying position for years. You have to have a minimum of reserve which is kind of like a minimum book value reserve.
And work, we’re working, we do this substantially in 2016 but we got about little under $1 billion of negative book value that has to be recovered before recapitalize if you will before shareholders could start to. GOL had eight dividends in the past when it got to a certain, but I think the key there is not; it’s more, 2017 no, 2018 no.
I think 2019/’20 perhaps is something who knows. But the policy would be driven more by what the operating profitability of the business is because we have to be paying our operating cost or capital expenditures or debt service before we can get into a dynamic on return of capital to shareholders via dividends or stock buybacks.
Paul Lukaszewski
Okay. So the dividend line we see in the cash flow statement, that’s another case of Smiles, is that sort of the net leakage of Smiles?
Richard Lark
Correct. Yes, the Smiles has dividend and they are a cash generating business, very high cash flow.
And so, what you see there are the affects of the dividends that Smiles pays to shareholders. And then you would have the leakage out for the minority.
Paul Lukaszewski
Okay. All right, thanks very much.
I appreciate it.
Operator
Our next question comes from Pablo [indiscernible] from Credit Suisse. Please go ahead with your question.
Felipe Vinagre
Hello, good afternoon. Actually, it’s Felipe Vinagre, just a quick question on the fleet restructuring.
Just want to know how much did you spend in non-recurring fleet restructuring expenses in 2016, and how much do you expect in additional non-recurring expenses in 2017 with additional reduction up until 115 aircraft? Thanks.
Richard Lark
Yes, the whole fleet restructuring costs around BRL220 million. And as you know, that was basically from a cash flow perspective that was financed with the operations we did in - old vintage, first vintage Boeing 737 aircraft.
We did aircraft sales and sales lease backs which generated more than that cash amount which basically financed - internally financed the return of those aircrafts. Going forward, we don’t have any more expenses relating to that restructuring.
That was all done with inside of 2016. And all the expenses are appropriately provisions.
Felipe Vinagre
Okay. So the additional aircraft that you will be delivering 2017, the costs are already in the past, right?
Richard Lark
Yes, when you return an aircraft you may have some additional cost at the end, or the inefficiency there relates more to the new owners or the new users of those aircraft picking up the aircraft. So, the delays pick-up, you may not be able to sure of rents in there which goes into the aircraft red line as a number there.
But it’s really represented more by lack of revenue productivity as opposed to the one-time costs on those returns. But the actual return, the one-time cost which is reflected structuring are already recorded in our costs.
And I highlighted those in the Q4, which was about a little over BRL140 million that was provisioned and expensed in the fourth quarter related to the entire fleet restructuring format. But we might have some, we could have some additional cost as to the extent that the aircraft deliveries delay which is possible or if there could be some additional costs, but nothing material.
But there could be some additional costs.
Felipe Vinagre
Okay, thanks. My last question, what’s your breakeven margin for cash flow generation when we include, let’s say, a more normalized level of CapEx to maintain the fleet - the average rate of the fleet, etcetera, and also including in the MAX the dividends page who is minority shareholders besides the income taxes, even when you don’t have profits.
So all included, what’s the breakeven margin for cash flow generation? Thanks.
Richard Lark
Free CapEx, we’re already above breakeven on operating cash flow. As we’ve highlighted for you in our CapEx in there, post CapEx you’d have to add another 6 to 7 points on top of the current operating margin.
What I’d like to say, if you want to be net cash flow Euro on a margin basis in our business, you need to be kind of around 12% operating margin, which is twice what the current level is. All of our competitors have lower operating margins than us.
So you have the usual point, in terms of and we look to be as a business net cash flow positive with what we’re doing this year and next year in terms of revenue management, cost savings reductions what we’re doing with the Smiles subsidiary in terms of the increase in their operating profits. And then hopefully improving on the economic side which gives us some upside there, all of which kind of result in kind of a 5 to 8 percentage point over two to three year period increase in our operating margin, assuming rationality on the competitive side.
But from an operating cash flow perspective we’re generating positive cash now. But we’re not covering the cash back, as are covered with financing mechanisms.
But if your answer is what would you to be zero net cash flow? It’s 6 or 7 point increase in the operating margin.
But of course all this is highly sensitive to exchange rate; and your exchange rate and oil assumptions as well which can go one way or the other depending on how you’re going work those two together but assuming, steady state with the numbers I just described to you.
Felipe Vinagre
Thanks, last question on the business demand potential. So, in the last two years related to the crisis, we’ve seen some big reductions on the demand for the business side, also from the government, we’ve already seen some recover on that side and how do you expect this to evolve in the next few months?
Richard Lark
In the first half of this year we still have, Brazil economically has been recovered. We expect in the second half, depending what happens with these massive reduction interest rates that’s happening in the first half of the year as that could relate to economic stimulation.
We could see better demand as Brazil’s business activity picks up. You also have the U.S.
dynamic which is a big question mark to the extent that the U.S. in the past are reindustrializing and improving its competitiveness.
Brazil is a big important factor in the supply chain for other industrialized economies. And our big corporate clients are the extractors, the natural resource companies, the construction companies, the real-estate companies that have to send large amounts of employees around Brazil to develop Brazil.
The large chunk of our business, more than half of our clients are corporate clients engaged in industrial projects and so on around Brazil. That could have a big benefit in our network, we have are the most corporate travel airline in Brazil with our network and so on.
And you know how Brazil works with the large concentration of population centers along the coast and then the large location of natural resources and development is an interior in the North and Northeast. And so, we have to use the airline transportation to transport your workers and employees around the country to the extent that the development - the biggest developed country of the world, the U.S.
is reindustrializing around this year and next. And we expect that that will have like a third and fourth derivative effect on our business, on the corporate travel side.
But still, there is - where we sit right now we don’t have visibility on that. We have a partial visibility into the second quarter and that’s it.
So, we’re just speculating at this point on what might happen as a result of the reduction, the 300 to 400 basis points reduction in Brazil interest rates and how that might get things going here in Brazil in the second half. And so, I think everybody is in that same boat in terms of what the second half of this year is going to look like macro-economically, when I say, different than zero percent growth, we still don’t know yet, we don’t have that crystal ball.
Felipe Vinagre
So no rebound at this point, right? So just expectations on the benefits that Brazil could serve?
Richard Lark
Yes, we don’t have visibility on that when and how much of Brazilian economic recovery is going to happen. We don’t have visibility on that.
Felipe Vinagre
Okay. Thank you.
Operator
Our next question comes from Juliana Rocha from REDD Intelligence. Please go ahead with your question.
Juliana Rocha
Hi, good evening. Thank you for taking my question.
Richard or Kakinoff, I’d like to know if you’re comfortable with your cash position, the liquidity to start off peak season. And if you are working somehow on the short-term debt, if you’re trying to refinance, talking with the banks, or if you are good with the level that you have right now?
Richard Lark
Hi, we don’t have any significant short-term debt maturities this year, within our construct on working capital, we’re working hard there. Based on the constructs that we have with financing receivables and inventories we have a small amortization payment on our 2007 issued bonds which will be the first - full amortization of our capital markets bonds issued by GOL on April.
That’s a small outflow there. But obviously, the cash position in general with Airlines, you never have enough cash.
And so, we’re very careful with our cash position, working hard to, try to increase that. A lot of that will depend on stability and improvement and rationality in the capacity environment in Brazil.
And also to some extent on the exchange rate. And so, no, we’re not comfortable with our cash balance.
We need to improve it and work very hard especially through the second quarter here in Brazil where we have downturn in terms of seasonality and puts a very high level of pressure on cash on oil companies but especially on airlines.
Juliana Rocha
Okay, yes. But do you have - can you give us a forecast for the end of the year, what do you expect to have as it has cash position?
Richard Lark
No, we’re not providing that kind of information.
Juliana Rocha
And I just want to check a few numbers. You expect MAX leverage to be at four times at the end of the year?
Richard Lark
As I said, we’re working, we’re working to achieve four times. I don’t think we’re going to achieve that this year.
I think we’ll achieve that in 2018. But I do think that once we’ve finished the return on all the aircrafts that are going out through the system, we’ll be at around 4.5 times on the leverage.
Juliana Rocha
And your forecast for the exchange rate is BRL3.16 for dollar?
Richard Lark
Well, we’re working this year in our planning in that range, BRL3.16 to BRL3.20 as an average for the year. I think we’re, thus far we’re if we were to stay at the current levels, we’ll be a little bit ahead of that.
But we have a lot of volatility in the currency. But that was our forecast back in October when we worked on our 2017 budget with that level.
And so I think we’re more or less tracking on that but we’re very cognizant of the very high volatility so we have to be careful.
Juliana Rocha
Yes, just one last question to clarify on the debt. You said you don’t have significant cash that’s maturing on short-term, but are you working somehow with the banks?
You have financing maturing this year and are you trying maybe with - to postpone this or roll over or for the 2018 that are you already working with the banks or there is no need for that?
Richard Lark
Well, 2018 on the thing you mentioned, mostly likely we’ll roll-over some of those things or refinance with other small activities we have facilities with financing with maintenance and our Wi-Fi with Exim guarantee and other things. I’d say there are no significant, I mean, they are small relative to our overall capital structure.
But we do have to work hard to manage them. And we’re not insignificant in that respect.
But overall, our big debt maturities are out in kind of 2020, 2022 on our dollar liabilities. And then in ‘18 and ‘19 we have some larger maturities as it relates to our debentures.
But yes, we’ll probably do some rollovers of some of these small debts of refinancing with some of the small facilities we have inside of 2017.
Juliana Rocha
Okay. Thank you.
Operator
Ladies and gentlemen, this will conclude today’s question-and-answer session. I would like to invite Mr.
Kakinoff to proceed with his closing remarks. Please go ahead sir.
Paulo Kakinoff
Okay. Ladies and gentlemen, I hope you followed our presentation and the Q&A session.
And have our investor relations and corporation team is available to speak with you as needed. To finalize today’s presentation, we’d like to leave you with GOL’s competitive trend on Page 35.
We see clearly sustainable advantages over our competitors. We have the best cost benefit ratio for the passenger with a high rate of one-time performance and we are leader in the offering with a young and modern fleet.
So thank you very much.
Operator
Ladies and gentlemen, now we’ll conclude today’s conference call. We do thank you for attending.
You may now disconnect your lines.