Fuel costs put Brazilian airlines at competitive disadvantage

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High fuel cost in Brazil

Airlines in Brazil are at a competitive disadvantage with regard to their cost structure due to high fuel tax and poor infrastructure. According to the International Air Transport Association (or IATA), the fuel pricing used in Brazil is linked to the cost of importing jet fuel from the US Gulf Coast. However, 75% of the fuel that is supplied to Brazilian airlines is produced domestically. The impact of this is estimated at $400 million of additional annual cost.

Fuel costs for Brazilian airlines comprise 40% of total operating costs, which is higher compared to US airlines. Fuel costs comprised around 27% to 35% of total operating expenses for major US airlines, including Delta (DAL), American (AAL), United (UAL), Alaska (ALK), and Southwest (LUV).

Part8_Fuel efficiency and cost

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Gol’s increasing fuel costs

Gol’s fuel costs increased at a CAGR of ~19%, due to increasing crude oil prices and fuel costs as a percentage of revenue, increased from 30% in FY09 to 40% in FY13. On a per available seat kilometer (or ASK) basis, fuel costs increased at a CAGR of ~13%, from 4.49 centavos in FY09 to 7.28 centavos in FY13, as the fuel price per liter consumed increased from 1.4 million real to 2.39 million real.

As of December 2013, Gol had hedged ~12% of its projected fuel requirements for 2014. However, there was an improvement in fuel efficiency. Gol’s fuel consumption per 1,000 available seat kilometers, reduced from 32 million liters in FY09 to 30.46 million liters in FY13.

ETFs such as the Brazil Small-Cap ETF (BRF) and the Brazil Consumer ETF (BRAQ) hold 1.57% and 1.2% of their holdings, respectively, in GOL.

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