The Killing Yields: For Gol, ominous Brazilian revenue trends threaten a turnaround

Brazil's Airlines, GolThe alarm bells are ringing. Earlier this month, in a presentation to investors, Brazil’s largest domestic airline delivered some good news but also some bad news. Traffic, Gol said happily, continues to grow significantly faster than capacity. But yields tumbled a precipitous 10% y/y in the final quarter of 2014, reflecting a sharp slowdown in business and government traffic that began to take root after last summer’s World Cup.

Most of South America, as it happens, suffers from yield anemia at the moment, as chronicled by foreign carriers like American, Copa and others in their fourth quarter earnings reports. But the problem is naturally more acute for carriers based in South America, including those like Gol, which has close to 90% of its ASK capacity flown within the borders of Brazil. Yes, Gol’s Q4 traffic did grow faster than capacity, sending its load factor up four points y/y. But in a battle for influence against falling yields, the falling yields won, resulting in a passenger unit revenue (PRASK) decline of 5%.

This marks a sharp break from strong y/y PRASK growth earlier in the year. In Q3, for example, yields had already begun to decline. But a much higher load factor saved the day, leaving PRASK up 9%. In the quarter before that, yields and load factors were both up, driving a stunning 30% spike in PRASK. The point is, Gol’s revenue trends are now trending in the wrong direction, revealing the outcome of a battle between another two competing forces: the influence of Brazil’s slowing economy is proving more powerful than the influence of Gol’s disciplined capacity management.

Disciplined indeed. Last year, Gol cut domestic capacity 2% after shrinking 7% in 2013 and 5% the year before that. And it plans to hold domestic capacity flat again this year. Even better, Gol’s two largest rivals are taking a disciplined approach to domestic capacity too. TAM cut capacity 2% last year as well, according to data from Brazil’s National Civil Aviation Agency ANAC. More surprisingly, Azul’s domestic ASKs (including those from its merger partner TRIP the year prior) were up a mere 3% as it quietly closed numerous mostly smallish markets and re-focused attention to longhaul international widebody flying. Avianca Brazil, the country’s only other major domestic competitor, is the exception, sustaining 23% ASK growth last year. But it’s considerably smaller than…

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