Aug 4, 2018
Operator
Welcome to the GOL Airlines Second Quarter 2018 Results Conference Call. This call is being recorded.
All participants will be in listen-only mode, during the company’s presentation. After GOL remarks, there will be a question-and-answer session.
[Operator Instructions] This event is also being broadcast live via webcast, and may be accessed through GOL website at www.voegol.com.br/ir, and the MZiQ platform at www.mziq.com. Those following the presentation via webcast may post their questions on the platform and their questions will either be answered by the management during the call or by GOL Investor Relations team after the conference is 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 the future events and, therefore, depend on the circumstances that may or may not occur.
Investors and analysts should understand that events 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 you over to Paulo Kakinoff.
Please begin.
Paulo Kakinoff
Good morning, ladies and gentlemen, and welcome to GOL Airlines Second Quarter Conference call. I am Paulo Kakinoff, Chief Executive Officer, and I am joined by Richard Lark, our Chief Financial Officer.
Richard Lark
Good morning. Good to be with you today.
Paulo Kakinoff
This morning, we released our second quarter figures. Also, we made available on GOL’s Investor Relations website three videos with our results presentation, financial review, and a brief Q&A.
Once again, we significantly improved our key indicators. GOL’s RPK increased by 2.5% from BRL1.1 billion in second quarter 2017 to BRL8.3 billion this quarter, mainly due to a 4.1% increase in the number of transported passengers.
The strong demand allowed GOL to continue driving pricing to revenue management. Average yield per passenger increased by 7.6% quarter-over-quarter, reaching BRL0.257.
Supply growth, ASK, increased at 2.2% compared with second quarter 2017, driven by a 0.6% increase in takeoffs and a 2.4% increase in seats. As a result, the average quarter load cycle grew 0.2 percentage points compared to the same period in 2017, reaching 78.1%.
GOL’s on-time performance was 93.6% in the quarter according to Infraero. We continue to have strong revenue growth.
The combination of higher demand at optimized pricing resulted in net revenue for the quarter of BRL2.4 billion, an increase of 9% compared to the second quarter 2017. Net RASK was BRL0.221 in this quarter, an increase of 6.7% over same period 2017.
Net RASK increased 8% quarter-over-quarter reaching BRL0.201. Average fare increased by 6% from BRL268 to BRL284.
GOL’s 2018 guidance is for net revenue of approximately BRL11.5 billion. The GOL network serves higher yielding routes and has a leading share in the corporate client segment.
We have the largest share of business traffic in the country. We have recently received 737 MAX 8, already operating in our fleet, provides us reduced operating expenses and, in the future, we will extend the range of our network to allow us to serve South America, the Caribbean and new destinations in the United States.
With that, I am going to hand you over to Rich, who is going to take us through some other highlights.
Richard Lark
Thanks, Kaki. First I’d like to comment on about our controlled cost environment.
Total CASK in the second quarter was BRL0.217, 5.9% higher than the same period in 2017, due to the 31% increase in jet fuel prices. On an ex-fuel basis, CASK fell by 1.4%.
GOL remains the cost leader in South America for the 17th consecutive year. Second, our margins continued to expand.
While the average price of jet fuel on adjusted – a per kilometer [Technical Difficulty] increased 13% in this quarter-over-quarter of 2018, again, this is a quarter-to-quarter comparison, the combination of stronger [Technical Difficulty] higher demand at BRL40 million of results on our oil hedging program, permitted GOL’s EBIT margin to expand to 1.8% in the second quarter of 2018. This margin is the highest second quarter indicator since 2010, and a 0.8 percentage point improvement quarter-over-quarter.
Operating income, EBIT, was BRL43 million in the quarter, an increase of 93% or BRL20.6 million compared to the same period 2017. EBITDA margin was 9% in this quarter, a growth of 2.3 percentage points quarter-over-quarter.
EBITDAR margin was 20.3%, an increase of 2.6 percentage points in the quarter-over-quarter comparison. GOL’s 2018 guidance EBIT margin of approximately 11%.
And to finalize this brief review before moving to Q&A, we wanted to share the highlights of our balance sheet strengthening. While the Real depreciated 16% against the dollar in the quarter, causing a net exchange and monetary variation loss of BRL1 billion, our net debt, excluding perps, the last 12 months EBITDA ratio was 2.9 times as of June 2018, improving versus the year-ago metric of 4.2 times.
Total liquidity was BRL3 billion, an increase of BRL1.3 billion or 71% versus the second quarter of 2017. The combination of operating cash flow generation of BRL588 million in the quarter and improved cash liquidity improved our financial flexibility.
2018 will confirm the scenario of continuous improvement [Technical Difficulty] 2017. We’ve maintained our commitment to financial discipline, managing the effects of Brazilian currency through our efficient capacity management and dynamic yield management.
In GOL’s market in our Brazilian domestic market, since the industry fare deregulation in 2001, it has been the case that when airline industry capacity was disciplined, meaning ASK growth below RPK growth, Brazilian industry yields have shown a 71% correlation with the U.S. dollar.
When the industry produced excess supply, meaning ASK growth above RPK growth, the recapture fell to 11%. We are very cautious on the capacity discipline of the market nowadays.
In the second quarter, all the other domestic airlines combined grew capacity at rates higher than expected. On average, they grew their domestic ASKs by 8.3% compared to their domestic RPK growth of 5.6%, causing their load factors to fall by two percentage points to 78%.
Now, EBITDA and EBIT margins for GOL in 2018, are expected to be around 16% and 11%, respectively. We expect earnings per share before exchange variation gains and losses to be between BRL0.10 and BRL0.30; leverage, measured as net debt over EBITDA for 2018 should be close to 2.8 times, reflecting the deleveraging of our balance sheet.
For 2019, we expect our domestic capacity growth to be between 1% to 3% and non-fuel CASK to be around BRL0.14. We also project an EBITDA margin of around 17% and expect to end next year with leverage of approximately 2.5 times.
Now I’d like to return to Kakinoff.
Paulo Kakinoff
Thanks, Rich. In summary and to finalize, we’re working hard to achieve our results this quarter.
This additional [indiscernible] Brazil travel was particularly challenging due to accelerated appreciation of the dollar against the Real and industry-wide supply disruption that affected demand for air travel. Our commitment to continuous improvement in our results has proven that our strategy of offering a differentiated high-quality product while relentlessly focusing on cost efficiency is bearing fruit.
We remain focused on offering the best experience in air transportation, exclusive services to our [Technical Difficulty] new, modern aircraft that connect our [Technical Difficulty] to the most convenient schedules. We remain [Technical Difficulty] to a very disciplined capacity and prudent management [Technical Difficulty] balance sheet and liquidity, maintaining our cost leadership and continuing as the preferred airline for our customers while driving sustainable margins and returns for our shareholders.
Now I would like to initiate the Q&A session.
Operator
[Operator Instructions] And our first question comes from Michael Linenberg from Deutsche Bank. Please go ahead.
Michael Linenberg
Hi. Can you hear me?
Hello?
Paulo Kakinoff
Hi, Michael.
Richard Lark
Hi, Michael. Yes, we can hear you okay.
You’re a little bit in a cave, but we can hear you okay.
Michael Linenberg
Okay. Sorry.
It’s not a great connection. Two things.
When we think about the higher fuel prices and the fact that they have been exacerbated by the currency moving the wrong way, at this point, how much of that do you think you’re recapturing through better revenue production? And you know what?
Maybe if you can give us a sense of what you think the potential lag is before you’re able to fully recapture, if you’re able to recapture, call it 100% of the adverse move in fuel and currency.
Richard Lark
Yes, sure. Your question on revenue management, I think can be best answered by describing how GOL does deal with management.
I mean, we work to maximize RASM versus actual demand and versus actual competitive behavior. As I mentioned, in our Brazilian market, which is highly business-related, in our traffic today, we’re the largest carrier of business travelers.
In the Brazilian market, since the 2001 fare deregulation, it’s sufficiently significant that when Brazilian capacity grows at rates below demand growth, yields in Brazil, yields in Brazilian domestic market are around 70% correlated with the U.S. dollar.
When capacity grows at rates higher than that or higher than demands, that what we sometimes call the recapture of currency effects, that correlation of Brazilian domestic yields is 11%. Now, we’re the largest domestic player for over three years now.
We’re leading the industry in capacity below demand growth. Now, that’s how the behavior has been in this last cycle.
That’s how it is this year and that’s how it is next year and the foreseeable future in our planning. This has allowed GOL to expand yield.
When compared to increases in GOL’s cost, caused by increasing jet fuel prices or aircraft rent, because those are the two line items that you’re referring to in our income statement, these are the main expenses affected by the U.S. dollar and international oil prices, jet fuel expenses and aircraft rent.
We planned on, we’re getting and we continue to plan on a 70% recapture, which in our terminology is how much of the impacts on our income statement on the cost variation either up or down, we are retaining on the revenue side. Now, the issue as of the velocity of that in the second quarter, we had very rapid ramp up in combination of factors, not just on oil prices, but also on [Technical Difficulty] based on what’s happening in EM in general and the U.S.
market and the U.S. fed and so on.
And so generally in our experience, the lag that you referred to for us to be able to work those effects through the forward-booking curve is roughly 90 days, okay. It’s roughly 90 days.
Of course, in the second quarter, we had some other extraordinary effects, for example, the trucking strike, which for a 7-week period really took the wind out of the sails of our yield management process. But that’s basically what we planned on.
That’s how we’re managing this, and that’s what we continue to plan on. And that’s [Technical Difficulty] our second quarter results.
I mean, when you look at – when you back these truly non-recurring effects, we could argue if oil price variation at that magnitude is recurring or not, if a currency variation of that magnitude is recurring or not. But clearly, the trucking strike is not a recurring event.
When you back that out from our results in the second quarter and net effects of both currency and oil prices in terms of what we’re doing on yield, we recapture pretty close to 70% on RASMs, on yields, however you want to look at it.
Michael Linenberg
Okay. And just a second one.
You had good performance. Demand looked good in the second quarter as well as the yield performance.
As we look into the third quarter, are the trends consistent with what you saw? Notwithstanding the impact of the trucker strike, are the trends consistent with what you were seeing in the June quarter?
And is there any sort of difference between if I look at domestic versus international? The international piece, just I’m highlighting that because of the move in the currency and seeing that that’s having a negative impact on demand.
Paulo Kakinoff
Hi, Michael. We are quite optimistic on that, because if you see through the timeline, the truck driver strike was like a bump but did not change the trend in the market as you recall, right.
The demand seems quite and I think that for the next quarter, we will see quite the same pattern that we were experiencing before.
Michael Linenberg
Okay. Thanks, Patty.
Thanks Rich.
Operator
And our next question comes from Duane Pfennigwerth from Evercore ISI.
Duane Pfennigwerth
Just a couple questions on the updated guidance, and thanks for that update. On the ancillary revenue of BRL1 billion, is that the same line item as cargo and other, which is BRL373 million year-to-date in the first half?
And if so, it implies a fair amount of acceleration in the back half. Could you just speak to what would be driving that?
Richard Lark
Yes. In the ancillaries now in the new presentation of the accounting, IFRS 15, that’s basically cargo and loyalty, primarily, and by onboard.
And basically those are what we expect. I mean, our cargo business continues to grow in the low single digits, which is that non-priority bill of the aircraft.
And our loyalty program continues to grow in the high – sorry. The cargo business growing in the low double digits and the loyalty program growing in the high teens in there, and a little bit of additional revenue from the Buy on Board is what’s in those numbers.
Duane Pfennigwerth
Okay. And does that line up in your income statement in the cargo and other line?
Maybe some of that loyalty revenue you’re referring to is up in passenger? Or is it 1-for-1 with cargo and other?
Richard Lark
No. Again, what happens there is on the total RASK, those are not in PRASK, if I understand your question, those are not in the PRASK calculation.
Those are the revenues today which are not included in the passenger revenue per kilometer. They are included in the total revenue per kilometer.
Duane Pfennigwerth
Okay.
Richard Lark
What part of it was is, if you look at the restatement of the accounting this year, two things really happened. There was two movements.
And one of the movements was the fact that all the other ancillary revenues that were previously accounted for as ancillaries, with the exclusion of the loyalty program and the cargo and the Buy on Board are now in passenger revenue per kilometer. And this is on a global basis.
All airlines in the world are following this. The second movement is that the loyalty program revenues are now reported on a net basis, which basically means that the cost of goods sold, which was previously reported outside of net revenues is now inside of net revenues.
And that cost of goods sold for the loyalty program to acquire C Airlines. Now, of course, in our consolidation, the intercompany transaction between Smiles and GOL’s eliminated.
So it’s really there is in the net revenues today is the cost of goods sold. The revenues minus the cost of goods sold of non-GOL or, if you will, our partner airlines in the loyalty program.
For example, American Airlines or Emirates or the acquisition of tickets on airlines outside of GOL is what’s in that net revenue number. So some of the adjustments you see there, either up or down, are because [Technical Difficulty] included in the cost of goods sold into that net revenue number.
But they’re two separate components. One is the issues of [Technical Difficulty] auxiliaries, which I described.
And the second is the adjustments in the Smiles net revenues. And then third, the consolidation of that and the exclusion of the intercompany transactions.
But we can also provide some more information of that online in terms of helping folks with precise modeling of the PRASKs and RASKs. We provided in our release this quarter a opening on a quarterly basis of the ancillary revenues under IFRS 15, for all the quarters of last year, to facilitate the apples-to-apples comparison with the quarterly comparisons this year.
That data is in the quarterly release, if you want to reference that.
Duane Pfennigwerth
That’s helpful. And then just for my follow-up, Rich.
On the 2018 to 2019 guidance walk, you have the net financial expense going from BRL800 million to BRL500 million. Can you speak to why you expect lower net interest expense next year?
Is that just a currency assumption underlying that? Or are you effectively suggesting you’ll see some deleveraging?
Thanks for taking the questions.
Richard Lark
Yes. Thanks.
No, it’s both of those. From a policy perspective, from a capital structure perspective, we’ve been working now for a while to try to get to roughly a 5% level of net financial expense to revenues, which basically reflects the appropriate capital structure for our business.
But inside of that, what’s happening is there’s still a little bit of deleveraging in those numbers to the tune of about BRL1 billion over the next 12 months, which we are in the final phases on in our liability management work. Also, there’s a run rate issue there, because a lot of the liability management activities we did in this last cycle were in the last half of last year and the very beginning of this year in terms of our bond issuance and repurchases of other [Technical Difficulty] buybacks and so on.
And so in the year-over-years comparison 2018 is still carrying a little bit of that at the beginning of the year. So in addition to the deleveraging that I just described which is still coming out of the system, there was also a reduction in the overall borrowing cost, which we’re already running at this lower borrowing cost of, call it 8% to 9% in Reals, and 6% to 7% in U.S.
dollars. But that will be fully reflected in next year’s numbers.
So in those numbers there for 2019 is roughly BRL1 billion less of overall leverage and a better comparison of this more reflected borrowing cost that we’re at now, which is in this 7% to 8% overall range. Of course, what’s in that also are the underlying interest rates.
Brazilian interest rates have come down dramatically in this period. We’ve also, as our credit improved substantially, we’ve also been renegotiate a lot of those [Technical Difficulty] and we’ll continue to do so.
And so that’s really [Technical Difficulty] in that. But what’s driving that overall, really, kind of two drivers, as we’ve articulated.
I mean, we’re working to bring the company back to a low BB credit ratio. And of course, including currency effects on our business, currency is endogenous to how we manage our business.
And then also, as I mentioned, another way to think about it, which we guide on is from a – in terms of those numbers is think about net interest expense at roughly 5% of total revenues is a number which kind of reflects the appropriate capital structure for us. And in terms of currency, I would say currency is part of that equation.
It’s not a driver. I mean, currency is in the accounting conversions.
Currency is in a portion of our cost structure. But it’s also in our revenues.
And it’s also in the interest revenues also. It’s not just on the interest expense side.
It’s also in our interest revenues and in other things that are positively affected by the currency. So with all those rolled in there, that’s part of how we’re managing that.
And we do have to take views on currency in terms of how we’re managing our business and our capital structure. And those are in there.
And we’ll continue to break those out, those effects, and so people can understand that. And I guess just the final point I would make is that those numbers do not include gains or losses of the various [Technical Difficulty] exchange rate applied to our lower debt position on our balance sheet.
Those are not in those numbers. We’re breaking those out separately for you guys so you can understand how that works.
In the short term, it’s just pure accounting effects that come in there. But they do go in net earnings, as our functional currency is Brazilian Reals.
But we’re breaking that out as well so you can understand how we think about that accounting effect on our business. And we’re also [Technical Difficulty] what our earnings are with or without exchange rate effects, which will also happen if we get a currency appreciation we can also have massive gains on the dollar liability position on our balance sheet, which would also be excluded when you look at what the true economic underlying earnings are.
So I just kind of give you that information there because, obviously, the second quarter was extraordinary in terms of the speed of the exchange rate effects, and that needs to be, I think contemplated as folks look at how to approach earnings estimates, which, as we’ve articulated, we’re encouraging that discussion in terms of what the underlying earnings are for these business. But needs to take into account and exclude the exchange rate gains and losses on the dollar position on the liabilities on the balance sheet.
Duane Pfennigwerth
Okay. Thanks.
Operator
And our next question comes from Stephen Trent from Citi. Please go ahead.
Stephen Trent
Good morning, guys. Sorry, good afternoon in your case and thanks taking my questions.
Just two from me. One is I seem to recall news that I believe it was Norwegian Air Shuttle is looking to do some regional expansions.
And I know they’re already operating in Argentina. Just curious do you know to what extent, if at all, you guys are coming up against them or any of the new discount carriers in the southern cone.
Paulo Kakinoff
Kakinoff here. Up to now, we didn’t see any major movement.
There are some new carriers in Argentina. But the flight requested by Norwegian is a long-haul flight from U.K.
to Brazil. It is not so far a local competitor.
It’s really hard when you compare our CASK level, which is the level of even below of Southwest, for example, to believe that a newcomer could come and be very sustainable CASK at a lower level than we are delivering today. So I think there are other markets much more exposed to this kind of threat where you see like Viracopos, for instance.
When you have less – basically only one player, and their fares are pretty high there. So I think this is a much more exposed market to kind of stretch than when you compare to our current position due to the low CASK level that we have been able to produce.
We are not underestimating that possibly having new players in the market, but I believe that they would hardly find some meaningful room for their operations in Brazil. They would rather take other markets such as Argentina and Chile, like they are doing at the moment.
This is how I see the market.
Richard Lark
Yes. Even Argentina, they had announced – they did some PR about going into Argentina.
But they seem to have packed up and gone home. They’ve even scuttled their plans for launching domestic service.
So they seem to have come and gone.
Stephen Trent
Okay. Appreciate that, guys.
And just one more for me. I think you may have already mentioned – and forgive me, I was a little late coming onto this call.
You may have mentioned it either on the call or at some time recently about the trucker strike in Brazil. If you could refresh my memory kind of what’s your best guess as to what the operational impact of that was in 2Q.
Richard Lark
Yes. There’s two ways to kind of speak to that.
One is the fact that in the specific area of those three weeks of the strike, we ended up with about BRL8 million additional expenses and about BRL29 million of additional – sorry – reduction in revenues in the month of May. But then in the month of June, the lack of confidence which was caused by the [Technical Difficulty].
On consumers, impacted forward booking reduced our June revenues by around BRL22. And so the whole net effect, if you want to look at it on kind of a combination of the actual impacts of the strike, but then it’s impact on the forward-looking curve, which kind of extended into June, something on the order of BRL50 million of reduction in revenues.
And so that you could kind of exclude that out of or you could add that back to revenues, if you kind of want to see what things would have looked like without those impacts. But the larger impact ended up being the impact on forward bookings, because it was, obviously, applied to June, which is a month which starts to pick up into the July period.
But I would say is that by July, we had recovered to kind of a normal booking rate. It happened during the month of June.
Another way I could say that is that we had been pretty successful in the month prior to the trucking strike, call it kind of April to the beginning of May on the fare side, in making those adjustments to compensate for the variations in jet fuel prices and currency. The wind was very much in the sails on the demand side, right up until the trucking strike knocked the wind out of the sails, the boat stopped in the water for about three weeks, and it took about another couple weeks to kind of ramp it back up again.
But by the time you get back into June – sorry – July, from a sales perspective, we were back to the kind of 35% to 40% year-over-year run rate in revenue generation that we had been experiencing prior to the trucking strike. And that’s kind of where we are right now here at the beginning of August.
And, but obviously took a hit there. On a positive side, the fact that it happened in May was less impactful because April, May are kind of our low months from a revenue perspective.
So the fact that it happened in a low seasonal month, overall generated much less impact than it, say would have had in a higher seasonal month.
Stephen Trent
Okay. Got it.
Well, I appreciate the color. Thanks.
Operator
And the next question comes from Petr Grishchenko from Barclays. Please go ahead.
Petr Grishchenko
Good afternoon, gentlemen. This is Petr Grishchenko with Barclays.
Thanks a lot for taking my question. Perhaps if you can just elaborate a little more on your fares.
Given the speed of BRL move in the middle of the quarter, how much do you think of the fares, higher fares in the second quarter 2018 were the result of, call it advanced bookings that took place early in the quarter? And I guess, what have you been seeing in June, July?
Was that uniform across the quarter? Or you saw, I guess some changes.
Paulo Kakinoff
The quarter was quite controversial regarding the revenue partner. Because as I mentioned, right after the truck drivers, the demand barely appeared, showed up.
And while the country itself started a process of re-accommodation regarding production, economy kind of activities and so forth. So it’s really hard to be precise in telling you how much the sales pattern were affected by the truck driver strike over the last two or three weeks.
But what we can tell you for sure is that the airline demand was less affected than other segments in the market, considering that 10 days after the strike, we [Technical Difficulty] the regular partner. What has affected the results most is the capability [Technical Difficulty] increasing the day used, considering the new cost level.
So we were pretty much ahead of that cost curve prior to the strike. And then once the revenues were affected for 10 days, the whole market lost the opportunity of immediately compensate the additional cost level.
I think that the trend might be neutralized during the July month, considering that is a high season month in Brazil and the demand are pretty strong. So volatility is there, but I don’t see any change in our view of having the growing demand, which give us more pricing power in order to compensate the cost that we are facing.
Richard Lark
Yes. We can’t see full out into the fourth quarter.
But at this point, we expect high demand with load factors averaging in the high 70s, low 80s from now until the rest of the year. It’s important to mention that on a – the key is really capacity.
Our current domestic capacity plan is calibrated for the current rate of demand growth here in Brazil. And we have the ability to flex that up or down.
And so we’re well prepared for alternative demand scenarios, because what matters is really going forward and our ability to generate economics out of that. The key for that is capacity, because Brazilian economy showing this moderate early cycles, low interest rates, low inflation, we have a very good, domestic demand environment for the second half of this year.
And in an election year, you know we just started election season here in Brazil, they generally prove to have positive impacts on air travel [Technical Difficulty] demand increases during election season, which has just started. But of course, all of this we’re saying is on the domestic side, which is a key driver for our business.
And the markets for flights on the international side, Brazil to South America, other countries, Caribbean, Florida, which are addressable international markets, we’re a little bit more cautious there. We’re just starting to expand there.
But we are a little bit more cautious on the international portion of our business.
Petr Grishchenko
So I guess a question based on capacity and the fleet management. You decided to convert around 30 MAX 8s order I think to MAX 10, right, as you disclosed.
And those are slightly bigger aircraft, maybe 20, 30 seats higher, more seats depending on the configuration. But correct me if I’m wrong.
I thought one of the reasons for MAX 8 was to have flexibility to fly to Florida as well as be able to use the aircraft domestically. But just given the range for MAX 10, maybe around 6.1 thousand kilometers, which barely covers the distance between Brazil and Orlando.
Like does this indicate you’re more confident in domestic market and less emphasis will be put on international expansion? Or I guess any color on what led to the decision will be very helpful.
Paulo Kakinoff
Sure. The MAX 10 has quite a specific mission.
We have some control there of airports in Brazil with high demand carrying people from our hubs, between our hubs and from the most congested hubs to the northeast part of the country. The MAX 10 delivered the lowest CASK among all the narrow body models available in the world and it will perfectly fit into our network given this commonality with the 77 MAX and NG.
I mean, the MAX 10 shares basically the same engine, the same cockpit. So we will just add bigger planes, bigger birds connecting our hubs, reducing our CASK and producing a considerable amount of additional revenue.
The MAX 8 has this hybrid function. We can equally reduce the cost per seat due to its significant lower fuel consumption, around 15%.
At the same time, it can reach longer ranges. So then I said, it were – continuously expand our network, wants to give us the opportunity to address more of the nations in South America, the Caribbean and also in the United States.
There are at least 10 additional destinations that we could add over the next [Technical Difficulty] international ones, those who would be incorporated with the MAX 8. But the MAX 10 has a different mission.
It’s more further [Technical Difficulty] our CASK in the domestic market than reaching new destinations.
Petr Grishchenko
Got it. That’s very helpful.
The last question for me, just on the fuel hedges, can you please remind us how much of your fuel consumption this quarter was hedged and how much of fuel consumption’s hedged for the rest of the year?
Richard Lark
Yes. We’re about 70% hedged for the rest of this year of our consumption at prices in the high 70s.
We were probably around 30% to 40% hedged or so effectively in the Q2 period, which generated, on the fuel side specifically, generated for us about BRL40 million of operating gains. It’s important to say.
I mean, I’ve seen some reports out there calling that nonrecurring. I mean, our policy decisions are recurring.
And so everything we’re doing on a policy side, those are recurring. The execution of that depends on what’s happening in the actual businesses, either on revenue management, competition as well as the actual commodity prices.
We continue to do that actively, and that’s a complement to what we’re doing on the revenue management side, and the revenue management side gains or losses being a function of what we’re doing on the capacity management side. And so it’s important to remember that the way that kind of works for us in terms of how GOL manages our business, it really starts with the disciplined and flexible capacity management that our – however capacity management within our business, obviously, which is specific.
Our network is specific. Our customer base is specific.
And then we complement that with a hedging policy which is always present, and then we’re executing that. How that has translated into execution recently had been a relatively higher level of hedging in the last couple of quarters.
I mean, we’ve been averaging between, we often feel to say Q2, we were averaging around 25% to 40% of our forward consumption hedged out on the curve at the beginning of – during the second quarter, we have increased those, given our specific views on oil as well as our business. And that means that that has resulted in and where we sit right now, we’re about 70% hedged through December of this year.
Petr Grishchenko
Great. Thank you very much for the answer.
Operator
[Operator Instructions] And our next question comes from Savanthi Syth from Raymond James. Please go ahead.
Savanthi Syth
Hey, good afternoon, everybody. Just on the comment that you mentioned on the recording and on the call again, that you’re a little bit more cautious on the international.
And I noticed that you haven’t changed international capacity guidance or – and I think more MAX expected to come in this year before. Wondering what’s the flexibility there as you met them – met a lots stronger to maybe kind of move some of those MAXs more to the domestic market versus international, or how you’re thinking about that.
Hello? Hello?
Operator
I believe the speaker line is having technical difficulties right now. Please hold on until I reconnect the speakers.
Operator
All right. I’ve reconnected the speaker line with the audience.
Paulo Kakinoff
Hello?
Savanthi Syth
Hey, guys. I don’t know how much of my question you…
Paulo Kakinoff
Could you please repeat it, because I think that we had some problems with the connection. If you can, could you repeat your question?
Savanthi Syth
Yes. Your commentary’s been a little bit more cautious on the international addressable market near term.
And I notice that, one, the capacity guidance for international hasn’t changed and it looks like you’re getting one more MAX than previously planned. But what I was wondering is, if kind of domestic continues to be strong and you feel confident in it and you’re worried about international, what’s the flexibility this year to kind of change the international plans there and maybe focus a little bit more on domestic?
Paulo Kakinoff
Can you hear me now, Savi?
Savanthi Syth
Yes. Yes.
Thanks.
Paulo Kakinoff
So just as I was about to mention, that we are considering our international demand, the forward booking curve is pretty solid. We have just implemented some minor adjustments because of the MAX 8 delivery schedule.
We got two weeks delay in comparison to the original product. And that made necessary a minor adjustment in our schedule.
So you probably know that we have been much less affected than our competitors, way they talk on international demand, because we are not operating wide bodies. The beauty of having on certain of the fleet is that we are able to quickly adjust the capacity in every destination to reallocate whatever have better demand.
At the moment, in comparison to our original schedule, we do not see any major change which would make us reallocate capacity from the international market towards the domestic. It’s pretty much balanced, and I believe that we will reach our target.
The minor adjustments are much more related to the aircraft delivery than to the market.
Richard Lark
Also, in our particular case, in the GOL case, one of the things that we’re doing in this international expansion is together with our partners, Delta, Air France, Detroit to Orlando and Miami markets, we’re working with them on connecting traffic and that from a risk management perspective, puts us in a lower risk scenario in terms of demand generation. But yes, and to the extent we do get better performance on that as we kind of grow into next year, specifically Orlando, Miami, other destinations that we’re adding in the arc of the Caribbean over to the Andes, with the MAX aircraft coming in, which has this 1,100 kilometer longer stage length, these initial MAX that are coming in, the majority of them are being deployed on these international routes from south Florida arc all the way over to the Andes in the northwest part of South America, which includes Quito, Ecuador.
As you know, we’re going to be starting flights to Quito, Ecuador at the end of this year.
Paulo Kakinoff
Savi, it is also important to highlight is that in Orlando and Miami, we’ll be hubbing with Delta, which generated also I caution you about traffic. Therefore, I think that we are somehow hedged regarding the demand because of the strength of our partner network in the United States.
Okay?
Savanthi Syth
Yes, that makes sense. I appreciate the detail.
And maybe, Rich, a little bit on the aircraft asset sales. I know its kind of lumpy and then hard to project.
But does the current environment kind of accelerate your thinking of – accelerate your desire to do more aircraft sales? Or how should I think about like what the motivations might be on the timing of some of these aircraft sales in the…
Richard Lark
Yes, that’s a good question. I think it’s a fair question because it’s a relatively new execution in our business.
We tried to elucidate on that a little bit in our Q1 call, because really it was – the first quarter of this year, we really started on the regular dispositions of the NG portfolio. Part of that is we were waiting to have certainty on the MAX deliveries.
Because effectively what we’re doing is we’re replacing the NG 800s with the MAX. And just kind of maybe just stepping back a bit, our first order with Boeing was for 80-800 NGs.
We did 40 finance lease, 40 sale leasebacks. And those aircraft over the next couple years will be entirely transitioned out and replaced with the max.
And so the disposition of those aircraft is now regular. We can’t predict exactly how we would, let’s say negotiate those deals.
But as a rough assumption, you could assume one to two aircraft per quarter for the next 16 quarters until we have a full modernization of those aircraft. But obviously, those, like for example, what we’ve provided – the guidance we provided in the short term, meaning 2018, those are based on deals – we’ll say those numbers are based on deals we’ve actually already done.
And those are already negotiated. But there’s market.
There’s the market component. We want to get the best deal possible for our shareholders.
The NG has the interesting component that it’s one of the most liquid aircraft assets in the world. For example, last year, of the over – the NG has over 7,000 aircraft in operation.
Last year there were over 1,400 sales or sale and leaseback transactions. And that aircraft, especially mid-market or midlife aircraft, which are basically our NGs are 7, 8, 9 years old.
The first NG we received on the first Boeing order was 2006. There’s a lot of demand for those aircraft from buyers, the leasing community and so on, to reallocate those into other markets.
As you know, China is a huge consumer of aircraft. Probably consuming over the next cycle here about 25% of all aircraft that are being produced are going into that market.
So these aircraft aren’t going into our neighborhood or our neighbors’. They’re really going into other markets around the world.
So the NG is kind of benefiting from these trends. Obviously, the source of our operating profits on those aircraft and our aircraft business are one of the main sources of that is our scale, is one of the largest operators of 737s in the world.
We’re top eight now. We used to be top five, but there’s a couple of Chinese in there.
We’re a top eight operator of 737, which means that we have very solid deal terms in economics on those aircraft. And I guess the final point I would make on that, the reason why – I mean, I’ve seen some of the reports debate recurring, nonrecurring.
I don’t fully understand that. But meaning, because from a policy perspective, we have a very specific policy with how we do that part of our business.
And it is a recurring part of our business. I think the issue is, why you’re starting to see some of these operating results now, is that the very first aircraft – GOL’s a relatively young company in terms of being an asset owner and operator.
The first NG we took was in 2006. But now we’re basically a more mature company in terms of that program.
And so as we ramp up the MAX in our fleet, that will – as we replace the NGs with the MAX, that economic component of our business will be a regular component of our economics going forward. Now, there may be some variations on that in an individual part of the cycle based on the demand or pricing of the sales of those aircraft.
But for this year, there is – and I’d say this year, next year for sure, it’s about one to two aircraft per quarter of our NG portfolio are being disposed at the same time we’re ramping up on the NGs. And as I said, the broader assumption, I could, if you wanted to simply your projections, would be, over the next 16 quarters, assume kind of a linear disposition of our remaining 27 aircraft over those 16 quarters.
But by the end of four years, we will have fully disposed of the NG portfolio and will be on year five of our ramp-up on the MAX portfolio. And in the case with the MAX portfolio, we’ll be doing around 60% of the MAX order will be done in a finance lease format and 40% will be done in an operating lease format.
And so we’ll be increasing the ownership of those aircraft going forward. And this is something that’s important for both shareholders, but also our bond holders, because we build up a significant equity tap in that process, which acts as a cushion.
And it’s not on our balance sheet. This is kind of an off-balance sheet asset that we have.
Today we have in excess of BRL300 million of cap available in the current fleet and just based on the accounting, that’s an off-balance sheet dollarized asset. And the other thing you’re also seeing and why those results have been, perhaps, a little bit higher than expected is because they’re dollarized.
And so as the Brazilian Real has appreciated, that has increased the operating results on our dispositions of those aircraft. But if you need some additional information, we can speak offline to help with modeling and so on.
Savanthi Syth
That was comprehensive. I appreciate it.
Thank you both.
Operator
And our next question comes from Gavin McKeown from Amundi. Please go ahead.
Gavin McKeown
Hi, folks. Rich, can I just ask you to go back on hedging, if you don’t mind.
Just now I know, you already spoken about the fact that you had this kind of dynamic proprietary hedging policy. But just in terms of actual balance sheet, can you remind me exactly, if you can, is any hedging in place at all for your dollar debt?
I know that’s roughly 15% of your OpEx space is roughly dollar-based or dollar-linked. And can you remind me what percentage of your revenue is Real versus dollar today?
And also, just to understand – and I wasn’t sure I quite followed what you said. I just wanted to make sure I follow it.
Did you mention in your earlier comments that you think that fuel hedging gains are repeatable? I wasn’t sure if I understood that properly.
Thanks.
Richard Lark
Yes, sure. A couple of points on a balance sheet perspective, meaning our balance sheet, the roughly, call it BRL2 billion of debt we have on our balance sheet today, we don’t hedge that from a policy perspective, because over the course of the cycle, it’s not necessary to hedge that in terms of how we do the matching of our assets and liabilities.
The dollar debts that we have on our balance sheet are – majority of those are secured against aircraft assets and the unsecured portion is basically matched to this equity tap that I just mentioned. And so the way we manage that over the cycle is matching of assets and liabilities on a currency basis.
Now, you don’t see that in our accounting, because as our functional currency is Brazilian Reals, when we buy an aircraft from Boeing, it gets recorded in our accounting on a cost basis and depreciated in Reals. And so you don’t have the benefit of the U.S.
dollar accounting for that asset, nor do we have the benefit of the market value of those assets. But those, when we actually have to pay off those debts, those are matched with the market value of those assets, not the accounting depreciated value.
And so that’s why we don’t hedge the balance sheet, because it’s not necessary and this is a policy. But on your other question, which there are really two components, from an operating perspective, what we do in our business is we do have active programs that will protect us against short-term variations in the impacts of both currency and oil prices on our short-term cash flows.
And we generally will do a higher level of hedging in 6 to 12 months and a little bit lower level of hedging 24 months out. And we generally won’t go much more than 24 months out.
The reason why we go out to kind of a year two is really just to take advantage of things like backwardation and relative value to build hedge positions, taking advantage of the volatility of the market. But the philosophy there in terms of why we do that is basically to complement what we expect we’re going to be able to get on the yield management side of the equation.
And what I was trying to describe was that – and it depends on the capacity dynamic that we’ll see competitively. But at any given moment in time, we will be dealing with a certain capacity and competitive set, which we project out and have to – it depends, obviously, on what competitors are doing and so on, and we will then estimate the supply/demand effects on the quote/unquote pricing power, if you will, our ability to pass on to revenues the variations in exchange rates and oil prices that will affect our operating expenses.
Now, our operating expenses are roughly 45% to 50% affected by the currency. Within that 50% number is oil, the jet fuel.
Now, oil, jet fuel is, call it 30% of our total cost structure, or 30% to 35%. That is in that 50% bucket.
And so that component of our cost structure is impacted by these variations in exchange rate and oil prices. And so that’s the dollar-linked or dollarized component of our cost structure.
On the revenue side, it’s a function of yield management. But generally in our experience, when we have a healthy supply/demand balance, we generally plan on roughly a 70% ability on the yield side to work through impacts on the cost side to yields through fares, which can generally happen over a 90- to 120-day period.
But it only works if we have a good supply/demand balance. And the numbers I was mentioning on the call are actually statically significant numbers.
If you kind of look at the modern Brazilian airlines sector since we’ve been working in it since 2001, when you have ASKs growing lower than RPKs, the Brazilian industry yield is 71% correlated with the U.S. dollar.
When you have Brazilian ASKs growing at a higher rate than Brazilian RPKs, that number goes down to 11%. So it’s highly sensitive to that component of supply and demand.
We have to work with that. That guides us on what we think we can get on what we call recapture or our ability to pass on cost increases.
In the current environment that we’re dealing with this year, our experience has been that we’re working in this kind of 70% level. In our Q1 numbers, as Kaki was mentioning, we built up a little bit of a cushion.
I mean, in Q1, we were successful in pretty much getting 100% recapture of the effects on currency and oil prices. In Q2, when you discount out the effects of the trucking strike, which took the wind out of the sails, S-A-I-L-S, impacted sales, S-A-L-E-S, for about three to four weeks.
And so we lost a little bit of the momentum there. But when you back that out, we got around a 70% recapture in the Q2, based on a supply/demand dynamic.
Obviously, we have to do the proactive deal management. It’s a lot of work to do that.
We think we have an advantage today on that as the largest domestic in leading on that. But it is a function, it really comes out of what everybody’s doing competitively on the supply side, which all of us airline guys know very well.
And so going back to your question, I mean, so what that has done, that has guided us on what we think we’re going to be getting on a yield management side, and then we complement that with our hedging activities, which are then based on views on both oil prices and the currency. And the result of that has been – now, what you’re asking me, the recurring nature on the – in any given quarter – I mean, for the last couple of quarters, we have had – the last, say three to four quarters, we’ve had gains on our oil hedging program, obviously, a function of how much we’re hedging.
But the gains have been a result because of the increases in oil prices over this last period. And so the way that works with us is that we’ll have gains on the hedges if we had an appreciation in oil prices.
If we didn’t have an appreciation in oil prices, we’re not going to show those gains on the hedging. But how we look at that is basically we’re calculating if we’re not having gains on the hedging in a particular quarter or if oil prices fell down, we’re having gains on the operating side in terms of reduced expenses.
Net-net how we manage those is based on EBIT operating margin targets. And so a combination of all those factors that I was trying to describe is in our actual EBIT margin and then, of course, our EBIT margin guidance.
And that’s in there, and that’s how we’re managing the business. That’s how variable compensation is designed.
And so that’s basically what I would say in terms of how that rolls in. So if we’re having a gain on a hedging position in a particular quarter, that’s complementing what we’re getting on the revenue management side.
If we’re not having a gain, it’s either because the commodity prices were flat or they declined, and then we’re having a gain in a different way, which would be a reduction of operating expenses. But I like to say is like think about our business, roughly 50% dollar-linked or dollar-denominated with the oil prices in there.
And then if we’ve got a good supply/demand balance, in Brazil domestic, the yields are roughly 70% correlated with the U.S. dollar, with around a 90-day lag.
Obviously, I’m super simplifying it to try to give a simple an answer as possible. Sorry.
You had another question?
Gavin McKeown
Thanks for the very comprehensive answer. I just wanted to make sure part of your base case not to have this kind of continual gain from hedging.
But that’s a good explanation. Thanks.
Just to be clear, though, part of my question in terms of the FX breakdown of revenue. So 70% is Real?
Richard Lark
No. What I was trying to say there is, this is – obviously, we always have to be careful with…
Gavin McKeown
Divided by days?
Richard Lark
Statistics. I mean, for examples, these numbers that we’re giving you, the key statistic on those correlations that we’re giving you is above seven.
So it’s highly statistically significant.
Gavin McKeown
True.
Richard Lark
But the way I would try to describe it is think about that what I said there, that 70% is a correlation; the correlation of 70%, if we have a good supply and demand balance. It’s not that they’re linked…
Gavin McKeown
Just – sorry, Rich.
Richard Lark
Go ahead.
Gavin McKeown
Just what component of your revenue is earned in Real on a kind of trailing…
Richard Lark
Yes. No, I was getting to that.
I knew you were getting at that. It’s also, I’ll give a caveat there.
The answer to that, today it’s about 15% of our revenues are billed in U.S. dollars, okay.
That doesn’t mean that they’re dollarized revenues. I mean, they’re billed in U.S.
dollars. And so I just I always be careful with that, because even if I had 50% of my revenues billed in U.S.
dollars, it doesn’t mean that they are correlated with the U.S. dollar.
It’s a function of what markets I’m working in and the composition of the customer, be he a business traveler or a leisure traveler. The reason why we have such high correlation in our business in Brazil is because around 70% of our customers are business consumers in Brazil which are traveling for business purposes, and they tend to be price sensitive, but they’re pricing elastic.
They’re not going to stop traveling if fares go up, where the leisure component or the VFR component is highly, highly price sensitive. And so for example, you take our business going into an Argentina, for example, which is a large chunk of our international revenues, those revenues are billed in dollars.
And for us, it is a business traveler. So they’re relatively pricing elastic.
But for me to look you in the face and say, I have 15% of my revenues in dollars and they’re on flights between Brazil and Argentina, that wouldn’t be intellectually honest. And so just you have to peel that back a bit.
Our international revenues will tend to be South America and more business. And so they will be pretty resilient from a currency perspective.
Our flights to Florida which we’re launching, are going to be initially more leisure, VFR-based. And so even though they’re going to be billed in dollars, when we have a currency appreciation of the U.S.
dollar in Brazil, meaning that it’s more expensive for Brazilians to buy tickets to go to Disneyworld, we’ll generally see demand fall. And even though those revenues are billed in dollars, they’re not necessarily providing us something that’s highly correlated to the U.S.
dollar, simply because the billing currency is dollar. So I just give you that information there.
Obviously each airline will have a different portfolio. But I just don’t want to generalize.
Gavin McKeown
Got you. That’s really helpful.
And sorry, just clarify one other quick point. I thought you mentioned in your introductory prepared remarks that the target leverage at the end of the year was 2.5 times.
But you still have 3 times on the slides. Did I mishear the 2.5 times?
Richard Lark
You’re asking leverage target?
Gavin McKeown
Yes. So effectively 3 times on the slides, but I thought you mentioned 2.5 times in your prepared remarks.
Richard Lark
No. What the 2.5 times was referring to 2019.
Gavin McKeown
2019, great. Okay.
Richard Lark
This year our official target is –
Gavin McKeown
3 times.
Richard Lark
2.8 times for the full year, and we are at 2.9 times based on the quarter. So we’re also providing some initial thoughts about 2019, and that’s the 2.5 times.
Gavin McKeown
Great. Thank you.
Operator
And this concludes our 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 found our presentation and the Q&A session helpful.
Our Investor Relations team is available to speak with you if needed. Thank you very much.
Operator
This concludes the GOL Airlines conference call for today. Thank you very much for your participation, and have a nice day.