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Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under
the Securities Exchange Act of 1934.

Yes ______ No ___X___

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(Free translation into English from original issued in Portuguese)

 

 

 

 

 

 

 

Individual and consolidated

Interim Financial Information for the quarter ended September 30, 2018

 

GOL Linhas Aéreas Inteligentes S.A.

September 30, 2018

with report on the review of quarterly information

 

 

 

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Gol Linhas Aéreas Inteligentes S.A.

 

Individual and consolidated interim financial information

September 30, 2018

 

 

 

Contents

 

 

 

 

 

 

 

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Management report

 

Our team was successful in their efforts to produce solid results this third quarter. The traditional July high season was impacted by the accelerated appreciation of the US Dollar against the Real, higher jet fuel prices and a booking curve impacted by the hangover from the nationwide trucking strike that occurred in May. However, despite this adverse scenario, we remain focused on delivering the best flight experience to our clients with a differentiated, high quality product through new, modern aircraft that connect our main markets with the most convenient schedules and frequencies, while relentlessly focusing on cost efficiency.

 

Through dynamic yield management and flexible capacity management, shifting aircraft from our international to our domestic network, GOL was able to maximize results, as the strong dollar increased the demand for domestic flights. GOL’s response was possible due to our unique and standardized fleet of 737 aircraft.

 

In August, GOL received its second 737 MAX 8 aircraft, which has better fuel efficiency and range of up to 6,500 km. Our new Boeing 737 MAX 8 aircraft, with next-gen technology, will offer customers all the convenience and comfort of GOL's flights, including in-flight internet and entertainment, eco-leather seats with ample leg room, and free on-board drinks and meals.

 

In September, GOL announced the expansion of international destinations, with four nonstop flights per week to Cancun Mexico, from its Brasilia hub. The initiation of flights to GOL’s new destination in Mexico is scheduled for June 2019. These flights will be operated with new Boeing 737 MAX 8 aircraft that allow GOL to offer nonstop flights from Brazil to any destination in Latin America.

 

On November 4, GOL will start operating nonstop flights from Brasilia and Fortaleza to the international airports of Miami and Orlando. At approximately 6,079 kilometers, the Brasilia to Orlando flight will be the world’s longest regular flight ever made with a 737. In December 2018, GOL will begin operating nonstop flights to Quito, Ecuador, with three weekly nonstop flights from Guarulhos International Airport to Mariscal Sucre International Airport. We will be the only airline operating between Brazil and Ecuador with no stops or connections.

 

GOL remains the lowest-cost airline in South America for the 17th consecutive year. With simplified and standardized fleet and the lean and productive operations GOL has a significant and sustainable competitive advantage over its peers. We remain committed to reduce our cost of debt and improve our liquidity and leverage profile. On September 30, 2018, the net debt (ex-perpetual bonds) to EBITDA LTM ratio was of 3.2x, and the total liquidity was of R$3.0 billion.

 

In October, GOL successfully concluded a liability management and refinancing exercise on debentures issued by its wholly-owned subsidiary, Gol Linhas Aéreas S.A. (”GLA”), fully-amortizing the total amount of R$1.0 billion and issuing a new single series of non-convertible and unsecured debentures in the amount of R$887.5 million, resulting in a net indebtedness reduction of R$137.5 million. The new debentures were issued at a yield of 120.0% of the Brazilian CDI interbank rate (approximately 7.68% in BRL; this represents a substantial reduction compared to the retired debt, whose cost was of 132.0% of the Brazilian CDI) with quarterly interest payments of approximately R$17.0 million and semi-annually principal payments of approximately R$148.0 million (final payment to be made on September 28, 2021). This transaction is additional deleveraging of GOL’s balance sheet and better matches GLA’s operating cash flow generation with the amortization of its liabilities. The issuance reduced the Company's cost of debt and improved its credit metrics.

 

 

 

 

 

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Also in October, the Company announced its intention to effect a corporate reorganization, including the merger of Smiles. The Reorganization seeks to ensure the long-term competitiveness of the Group, aligning the interests of all stakeholders, reinforcing capital structure, simplifying corporate governance, reducing operating, administrative and financing costs and expenses, and increasing the market liquidity for shareholders.

 

 

Operating and Financial Indicators

 

 

1. Source: Brazilian Central Bank; 2. Source: Bloomberg; 3. Fuel expenses excluding hedge results and PIS/COFINS credits/liters consumed; 4. Excluding results of sale and sale-leaseback transactions; 5. Average operating fleet excluding aircraft in sub-leasing and MRO. *3Q17 and 9M17 results have been restated based on IFRS 15. Certain calculations may not match with the information in the quarterly financials due to rounding.

 

 

Domestic market – GOL

GOL’s domestic supply increased by 5.2% and demand increased by 4.3% in 3Q18. As a result, the Company’s domestic load factor reached 80.2%, a decrease of 0.7 p.p. when compared to 3Q17. GOL transported 8.2 million domestic passengers in the quarter, an increase of 5.3% when compared with the same period in 2017. The Company is the leader in transported passengers in Brazil’s domestic aviation market.

 

 

 

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International market - GOL

GOL’s international supply decreased by 7.2% and international demand decreased 13.8% in 3Q18 compared to 3Q17.  The Company’s international load factor in 3Q18 was 70.0%, decreasing 5.3 p.p. over 3Q17. During the quarter, GOL transported 0.4 million passengers in the international market, a decrease of 12.6% when compared to the third quarter of 2017.

 

Volume of Departures and Total seats - GOL

The total volume of GOL departures was 63,918, an increase of 0.2% in 3Q18 over 3Q17. The total number of seats available to the market was 11.2 million in the third quarter of 2018, an increase of 4.8% over the same period in 2017.

 

PRASK, Yield and RASK

Net PRASK increased by 5.0% in the quarter when compared to 3Q17, reaching 21.70 cents (R$), driven by a growth in net passenger revenue of 8.9% in the quarter. GOL’s Net RASK was 23.22 cents in (R$) 3Q18, an increase of 4.5% over 3Q17. Net yield increased by 6.5% in 3Q18 over 3Q17, reaching 27.44 cents (R$), driven by a 4.2% increase in GOL’s average fare.

 

For reference, below is a comparison of passenger and ancillary (cargo and other) revenue for the quarterly periods in 2017 and 2018 in accordance with IFRS15.

 

* Value for 4Q17 was not reviewed by the independent auditors.

 

 

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Fleet

 

 

At the end of 3Q18, GOL’s total fleet was 120 Boeing 737 aircraft with 119 aircraft in operation and one aircraft subleased for another airline. Two aircraft MAX 8 were in operation on routes. At the end of September 2017, of total of 120 Boeing 737 aircraft, GOL was operating 116 aircraft on routes. The four remaining aircraft were sub-leased to another airline.

 

GOL has 95 aircraft under operating leasing arrangements and 25 aircraft under financial lease structures. 25 aircraft have a purchase option at the end of their lease contracts.

 

The average age of the fleet was 9.8 years at the end of 3Q18. On September 30, the Company had 133 firm Boeing 737 MAX orders, comprised of 103 737 MAX 8 orders and 30 737 MAX 10 orders, allowing complete fleet renewal by 2028. GOL expects to end the year with 6 MAX 8 aircraft in the fleet.

 

* Considers aircraft list price.

 

 

 

 

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Operating result

Operating income (EBIT) in the third quarter was R$180.5 million, a decrease of 44.5% compared to the same period in 2017. 3Q18 operating margin was 6.2%, a decrease of 6.0 p.p. in relation to 3Q17. On a per available seat-kilometer basis, EBIT was 1.45 cent (R$) in 3Q18, compared to 2.71 cents (R$) in 3Q17 (a decrease of 46.5%).

 

EBITDA in 3Q18 totaled R$354.7 million in the period, a decrease of 23.2% over 3Q17. The impact of the increase in RASK of 0.99 cent (R$) and the increase in CASK ex-depreciation of 1.99 cent (R$) resulted in an EBITDA per available seat-kilometer of 2.85 cents (R$) in 3Q18, a reduction of 0.99 cent (R$) compared to 3Q17.

 

EBITDAR in 3Q18 totaled R$651.3 million in the period, a decrease of 5.7% over 3Q17. On a per available seat-kilometer basis, EBITDAR was 5.23 cents (R$) in 3Q18, compared to 5.75 cents (R$) in 3Q17 (a decrease of 9.1%).

 

*3Q17 and 9M17 results have been restated based on IFRS 15. Certain calculations may not match with the information in the quarterly financials due to rounding.

 

 

*3Q17 and 9M17 results have been restated based on IFRS 15.  Certain calculations may not match with the information in the quarterly financials due to rounding.

 

*In accordance with CVM Instruction 527, the Company presents the reconciliation of EBIT and EBITDA, whereby: EBIT = net income (loss) plus income and social contribution taxes and net financial result; and EBITDA = net income (loss) plus income and social contribution taxes, net financial result, and depreciation and amortization. GOL also shows the reconciliation of EBITDAR, given its importance as a specific aviation industry indicator, whereby: EBITDAR = net income (loss) plus income and social contribution taxes, the net financial result, depreciation and amortization, and aircraft operating lease expenses;

*3Q17 and 9M17 results has been restated based on IFRS 15.  Certain calculations may not match with the information in the quarterly financials due to rounding.

¹ Net income (loss) before minority interest

 

 

 

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Glossary of industry terms

 

 

 

 

 

 

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About GOL Linhas Aéreas Inteligentes S.A. (“GOL”)

GOL serves more than 30 million passengers annually. With Brazil’s largest network, GOL offers customers more than 700 daily flights to 67 destinations in 10 countries in South America and the Caribbean. GOLLOG is a leading cargo transportation and logistics business serving more than 3,400 Brazilian municipalities and, through partners, more than 200 international destinations in 95 countries. SMILES is one of the largest coalition loyalty programs in Latin America, with over 14 million registered participants, allowing clients to accumulate miles and redeem tickets for more than 700 locations worldwide, Headquartered in São Paulo. GOL has a team of more than 15,000 highly skilled aviation professionals and operates a fleet of 120 Boeing 737 aircraft, with a further 133 Boeing 737 MAX on order, delivering Brazil's top on-time performance and an industry leading 17 year safety record. GOL has invested billions of Reais in facilities, products and services and technology to enhance the customer experience in the air and on the ground. GOL's shares are traded on the NYSE (GOL) and the B3 (GOLL4). For further information, visit www.voegol.com.br/ir.

 

Disclaimer

This release contains forward-looking statements relating to the prospects of the business, estimates for operating and financial results, and those related to growth prospects of GOL. These are merely estimates and projections and, as such, are based exclusively on the expectations of GOL’s management. Such forward-looking statements depend, substantially, on external factors, in addition to the risks disclosed in GOL’s filed disclosure documents and are, therefore, subject to change without prior notice. The Company's non-financial information and estimates regarding the impact of recently issued, but not yet adopted, accounting standard IFRS 16 were not reviewed by the independent auditors.

 

Non-GAAP Measures

To be consistent with industry practice. GOL discloses so-called non-GAAP financial measures which are not recognized under IFRS or U.S. GAAP. including “Net Debt”. “Adjusted Net Debt”. ”total liquidity”. "EBITDA" and EBITDAR”. The Company’s management believes that disclosure of non-GAAP measures provides useful information to investors. financial analysts and the public in their review of its operating performance and their comparison of its operating performance to the operating performance of other companies in the same industry and other industries. However. these non-GAAP items do not have standardized meanings and may not be directly comparable to similarly-titled items adopted by other companies. Potential investors should not rely on information not recognized under IFRS as a substitute for the GAAP measures of earnings or liquidity in making an investment decision.

 

Contacts

E-mail: ri@voegol.com.br

Phone: +55 (11) 2128-4700

Website: www.voegol.com.br/ri

 

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Comments on business projection trends

 

(1) Cargo, loyalty, buy-on-board and other ancillary revenues; (2) Excluding currency gains and losses; (3) Average of analyst estimates (Source: Bloomberg); (4) Excluding perpetual bonds; (*) Not provided.

 

 

 

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Report of the Statutory Audit Committee (CAE)

 

 

The GOL LINHAS AÉREAS INTELIGENTES S.A. Statutory Audit Committee, in compliance with its legal and statutory obligations, has reviewed the quarterly information for the nine-month period ended September 30, 2018. On the basis of the procedures we have undertaken, and taking into account the independent auditors’ review report issued by Ernst & Young Auditores Independentes S.S. and the information and explanations we have received during the period, we consider that these documents are fit to be submitted to the consideration of the Board of Directors.

 

 

 

 

São Paulo, October 31, 2018.

 

 

 

André Jánszky

Member of the Statutory Audit Committee

 

 

Antônio Kandir

Member of the Statutory Audit Committee

 

 

James Meaney

Member of the Statutory Audit Committee

 

 

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Declaration of the officers on the interim financial information

 

 

In compliance with CVM Instruction No. 480/09, the Executive officers declare that they have discussed, reviewed and approved the interim financial information for the nine-month period ended September 30, 2018.

 

 

 

São Paulo, October 31, 2018.

 

 

 

Paulo S. Kakinoff

President and Chief Executive Officer

 

 

Richard F. Lark Jr.

Executive Vice President and Chief Financial Officer

 

 

 

 

 

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Declaration of the officers on the review report of independent auditors on the interim financial information

 

 

 

In compliance with CVM Instruction No. 480/09, the Executive officers declare that they have discussed, reviewed and approved the conclusions expressed in the review report of independent auditors on the interim financial information for the nine-month period ended September 30, 2018.

 

 

 

São Paulo, October 31, 2018.

 

 

 

Paulo S. Kakinoff

President and Chief Executive Officer

 

 

Richard F. Lark Jr.

Executive Vice President and Chief Financial Officer

 

 

 

 

 

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(A free translation from the original in Portuguese into English)

 

Report on the review of quarterly information

 

To

The Shareholders, Board of Directors and Officers

GOL Linhas Aéreas Inteligentes S.A.

São Paulo - SP

 

Introduction

 

We have reviewed the individual and consolidated interim financial information of Gol Linhas Aéreas Inteligentes S.A. (the “Company”), contained in the Quarterly Information (ITR) for the quarter ended September 30, 2018, which comprises the statement of financial position as at September 30, 2018 and the related statements of operations and comprehensive income for the three and nine-month periods then ended, and the statements of changes in equity and cash flows for the nine-month period then ended and explanatory notes.

 

The Company’s Management is responsible for the preparation of the individual and consolidated interim financial information in accordance with Accounting Pronouncement CPC 21 (R1) and IAS 34 – Interim Financial Reporting, issued by the International Accounting Standards Board (IASB), as well as for the presentation of this financial information in accordance with the rules issued by the Brazilian Securities Commission (“CVM”), applicable to the preparation of Quarterly Information (ITR). Our responsibility is to express a conclusion on this interim financial information based on our review.

 

Scope of review

 

We conducted our review in accordance with Brazilian and International Standards on Review Engagements (NBC TR 2410 and ISRE 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity). A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with auditing standards and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Conclusion

 

Based on our review, nothing has come to our attention that causes us to believe that the individual and consolidated interim financial information included in the Quarterly Information referred to above are not prepared, in all material respects, in accordance with CPC 21(R1) and IAS 34 applicable to the preparation of Quarterly Information (ITR), consistently with the rules issued by the Brazilian Securities Commission (CVM).

 

 

 

 

 

 

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Emphasis

 

Restatement of corresponding values

 

As mentioned in note 2.3, as a result of the adoption of the new accounting standards, CPC 47 and IFRS 15 – Revenue from Contracts with Customers, the individual and consolidated corresponding amounts related to the financial position as of December 31, 2017 and the interim information related to the statements of operations and comprehensive income (loss) for the three and nine-month periods ended September 30, 2017, and the statements of changes in equity, cash flows and value added for the nine-month period ended September 30, 2017 presented for comparison purposes have been adjusted and are being restated as provided for in CPC 23 - Accounting Policies, Change in Estimate and Correction of Error and CPC 26 (R1) - Presentation of Financial Statements. Our conclusion does not contain a modification in relation to this matter.

 

Other matters

 

Statements of value added

 

We have also reviewed the individual and consolidated statements of value added for the nine-month period ended September 30, 2018, prepared under the responsibility of the Company’s Management, the presentation of which in the interim financial information is required by the rules issued by the Brazilian Securities Commission (CVM) applicable to the preparation of Quarterly Information (ITR), and as supplementary information under IFRS, which does not require a presentation of a statement of value added. These statements have been subject to the same review procedures previously described and, based on our review, nothing has come to our attention that causes us to believe that they are not prepared, in all material respects, consistently with the overall interim financial information. 

 

 

 

São Paulo, October 31, 2018.

 

 

 

ERNST & YOUNG

Auditores Independentes S.S.

CRC-2SP034519/O-6

 

 

 

Luiz Carlos Passetti

Accountant CRC-1SP144343/O-3   

 

 

 

 

 

 

 

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The accompanying notes are an integral part of the interim financial information.

 

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The accompanying notes are an integral part of the interim financial information.

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Statements of operations Periods ended September 30, 2018 and 2017 (In thousands of Brazilian reais - R$, except basic and diluted earnings (loss) per share)

 

 

 

 

 

 

The accompanying notes are an integral part of the interim financial information.

 

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The accompanying notes are an integral part of the interim financial information.

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The accompanying notes are an integral part of the interim financial information.

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(*) On January 1, 2018, the Company adopted IFRS 9 – “Financial instruments”, resulting in an initial adjustment to estimated losses with doubtful accounts. For further information, see Note 2.3.

 

 

The accompanying notes are an integral part of the interim financial information.

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(*) On January 1, 2018, the Company adopted IFRS 9 – “Financial instruments”, resulting in an initial adjustment to estimated losses with doubtful accounts. For further information, see Note 2.3.

 

 

The accompanying notes are an integral part of the interim financial information.

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Statements of cash flows Periods ended September 30, 2018 and 2017 (In thousands of Brazilian reais - R$)

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1.    General information

 

Gol Linhas Aéreas Inteligentes S.A. (the “Company” or “GLAI”) is a publicly-listed company incorporated on March 12, 2004, under the Brazilian Corporate Law. The Company is a holding company of the following main subsidiaries: (i) Gol Linhas Aéreas S.A. (“GLA”), which is mainly engaged in (a) the regular and non-regular flight transportation services of passengers, cargo and mailbags, domestically or internationally, according to the concessions granted by the regulator; and (b) other activities in relation to flight transport services provided in its by-laws; and (ii) Smiles Fidelidade S.A. (“Smiles Fidelidade”, formerly Webjet Participações S.A. prior to the change in the corporate name on July 1, 2017), which mainly operates (a) the development and management of its own or third party’s customer loyalty program, and (b) sale of redemption rights of awards related to the loyalty program.

    

Additionally, the Company is the direct parent company of the wholly-owned subsidiaries GAC Inc. (“GAC”), Gol Finance Inc. and Gol Finance, formerly Gol LuxCo S.A. The Company was also the direct parent company of Gol Dominicana Lineas Aereas SAS (“Gol Dominicana”) until September 14, 2018.

 

On August 10, 2017, the subsidiary Smiles Fidelidade bought Smiles Viagens e Turismo S.A. (“Smiles Viagens”), whose main purpose is to provide travel arrangement services, including the booking or sale of airline tickets, accommodations and vacation packages, among others. Smiles Viagens began its operations in January 2018.

 

The Company’s corporate address is located at Praça Comandante Linneu Gomes, s/n, concierge 3, building 24, Jardim Aeroporto, São Paulo, Brazil.

 

The Company’s shares are traded on B3 S.A. - Brasil, Bolsa, Balcão (“B3”) and on the New York Stock Exchange (“NYSE”). The Company adopted Level 2 Differentiated Corporate Governance Practices from the B3 and is included in the Special Corporate Governance Stock Index (“IGC”) and the Special Tag Along Stock Index (“ITAG”), which were created for companies committed to apply differentiated corporate governance practices.

 

GLA’s business is highly sensitive to economic conditions, including fluctuations in the U.S. dollar, since approximately 50% of its costs are denominated in U.S. dollar. The Company has been improving in safe levels its liquidity, operating margin and ability to respond effectively to the adverse events caused by the instability of the Brazilian economic scenario. The diligent work performed to adjust the fleet size to the economy growth and match seat supply to demand are some of the ongoing initiatives implemented to maintain a high load factor and maximize revenue per available seat kilometer. The Company maintains its solid strategy of initiatives to improve the operating result, such as the adjustment of the route network and the increased productivity per fleet aircraft. It is also worth mentioning initiatives to reduce costs through the intensive use of technology, increase liquidity and adjust its capital structure.

 

Moving forward with its liquidity plan, at the end of December 2017, the Company began implementing several initiatives to restructure its debt, reducing the financial cost of its debt structure. The result of the issue carried out on December 11, 2017, which raised US$500 million, and of the additional issue carried out on February 2, 2018, which raised US$150 million, at more attractive rates, was partially used to amortize the Company’s most onerous debt and has significantly reduced the financial cost as of 2018. Other initiatives are scheduled for 2018, reinforcing the Company’s commitment to reducing the financial cost in order to solidify its high-liquidity strategy.

 

Even in a scenario with an outlook for improvement, the Company is subject to uncertainties in the Brazilian economy and political scenario that may directly impact the effectiveness of the expected results.

 

Management understands that the business plan prepared, presented and approved by the Board of Directors on January 11, 2018, shows strong elements to continue as going concern.

 

In 2016, the Company received inquiries from Brazilian tax authorities regarding certain payments to firms that turned out to be owned by politically exposed persons in Brazil. Following an internal investigation, the Company engaged U.S. and Brazilian external legal counsels to conduct an independent investigation to ascertain the facts with regard to these and any other payments identified as irregular and to analyze the adequacy and effectiveness of the Company’s internal control and compliance programs in light of the findings of the investigation.

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In December 2016, the Company entered into a leniency agreement with the Brazilian Federal Public Ministry (the “Leniency Agreement”), under which the Company agreed to pay R$12.0 million in fines and to make improvements to its compliance program. In turn, the Federal Public Ministry agreed not to raise any criminal or civil charges related to activities that are the subject to the Leniency Agreement and that may be characterized as (i) acts of administrative impropriety and related acts involving politically exposed persons or (ii) other possible actions, which at the date of the Leniency Agreement had not been identified by the ongoing investigation (any such actions possibly resulting in an increase in the fines under the Leniency Agreement). In addition, the Company paid R$4.2 million in fines to the Brazilian tax authorities related to the above-mentioned payments. The Company voluntarily informed the U.S. Department of Justice, the SEC and the Brazilian Securities and Exchange Commission (“CVM”) of the external independent investigation and the Leniency Agreement.

 

The external independent investigation was concluded in April 2017. It revealed that certain additional irregular payments were made to politically exposed persons; however, none of the amounts paid was material (individually or in the aggregate) in terms of cash flow, and none of our current employees, representatives or members of our board or Management was knowledgeable of any illegal purpose behind any of the identified transactions or of any illicit benefit to the Company arising from the investigated transactions. The Company reported the conclusions of the investigation to the relevant authorities and is keeping them informed of the developments regarding this issue, as well as keep watch on the analyses initiated by these bodies. These authorities may impose fines and possibly other sanctions to the Company.

 

Since 2016, the Company has taken steps to strengthen its compliance program and internal control environment, such as monitoring its relations with politically exposed persons, enhancing its procurement procedures and monitoring services provided by third parties. Reinforcing its commitment to continue improving, the Company hired specialized companies to review and improve its compliance program and internal control environment, mainly focusing on assessing fraud and corruption risks at first. In addition, at the end of 2017, the Company created the Corporate Risk and Compliance executive area, which has seasoned experts and reports directly to the Chief Executive Officer and has independent access to the Board of Directors and the Statutory Audit Committee.

 

On July 1, 2017, in order to optimize and simplify GOL’s organizational structure, and to generate tax savings from the use of accumulated tax losses, the Company approved a corporate restructuring through the merger of Smiles S.A. and Smiles Fidelidade S.A. (“Merger”). As a result of the Merger, Smiles S.A. was dissolved and all its assets, rights and obligations were transferred to Smiles Fidelidade S.A., pursuant to articles 224, 225, 227 and 264 of Brazilian Corporation Law.

 

 

2.    Approval and summary of significant accounting policies applied in preparing the interim financial information

 

This interim financial information was authorized for issue by Management on October 31, 2018.

 

2.1.      Compliance Statement

 

The individual and consolidated interim information for the three- and nine-month periods ended September 30, 2018 and 2017, has been prepared in accordance with International Accounting Standards (“IAS”) No. 34, Accounting Pronouncement nº 21 (R1) (“CPC 21”), and the requirements issued by the CVM, applicable to the preparation of interim information.

 

When preparing the interim financial information, the Company uses the following disclosure criteria: (i) regulatory requirements; (ii) the relevance and specificity of the information on the Company’s operations provided to users; (iii) the information needs of the users of the interim information form; and (iv) information from other entities in the same sector, mainly in the international market. Accordingly, Management confirms that all the material information presented in this interim financial information is being demonstrated and corresponds to the information used by Management in the course of its duties and is in accordance with the requirements issued by the CVM, applicable to the preparation of interim information.

 

 

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2.2.      Basis of preparation

 

This interim financial information was prepared based on historical cost, except for certain financial assets and liabilities that are measured at fair value and investments measured using the equity method.

 

The functional currency of the Company and its subsidiaries is the Brazilian real. The presentation currency of the interim financial information is the Brazilian real.

 

In the nine-month period ended September 30, 2018, the Argentine peso significantly depreciated, resulting in an accumulated three-year inflation above 100% and a hyperinflationary economy. However, the functional currency of the Argentine operations, which are consolidated line by line in the Company’s statement of financial position, as presented in item 2.2.(c), is the Brazilian real and these operations are not characterized as a subsidiary. As a result, these operations are not within the scope of IAS 29 - Financial Reporting in Hyperinflationary Economies.

 

This interim information does not include all the information or disclosures required in the annual financial statements, and it should therefore be read in conjunction with the financial statements for the year ended December 31, 2017, which were prepared in accordance with the accounting practices adopted in Brazil and in the International Financial Reporting Standards (IFRS). The Company adopted CPC 48 - “Financial Instruments” (IFRS 9) and CPC 47 - “Revenue from Contracts with Customers” (IFRS 15) on January 1, 2018, the effective date, resulting in changes to the basis of preparation of this individual and consolidated interim financial information, as described in Note 2.3.

 

Basis of consolidation

 

The consolidated interim financial information comprises Gol Linhas Aéreas Inteligentes S.A., its subsidiaries, jointly controlled and associates, as follows:

 

 

(*) These entities were created solely to act as an extension of the Company’s operations or which represent rights and/or obligations established solely to meet the Company’s needs. In addition, they do not have an independent management structure and are unable to make independent decisions. The assets and liabilities of these companies are consolidated line by line in the Parent Company’s interim information.

 

 

 

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IFRIC 23 – Uncertainty over Income Tax Treatments

 

In June 2017, the IASB issued IFRIC 23, which clarifies the application of requirements in IAS 12 “Income Taxes” when there is uncertainty over the acceptance of income tax treatments by the tax authority. The interpretation clarifies that, if it is not probable that the tax authority will accept the income tax treatments, the amounts of tax assets and liabilities shall be adjusted to reflect the best resolution of the uncertainty. IFRIC 23 will be effective for annual periods beginning on or after January 1, 2019, and the Company does not expect significant impacts from the adoption of this standard.

 

b) Standards applicable to annual periods beginning on or after January 1, 2018:

 

IFRS 9 (CPC 48) – Financial Instruments

 

In July 2014, the International Accounting Standards Board (IASB) issued “IFRS 9 – Financial Instruments”, which replaces “IAS 39 – Financial Instruments: Recognition and Measurement”. The standard introduces new requirements for classification and measurement, impairment and hedge accounting. IFRS 9 will be effective for annual periods beginning on or after January 1, 2018. The Company adopted this standard on the effective date. This standard must be applied retrospectively; however, it is not mandatory to fully present comparative information. The adoption of IFRS 9 did not affect the classification and measurement of the Company’s financial assets.

 

Due to the adoption of this standard, the Company now measures the allowance for doubtful accounts based on expected losses instead of incurred losses. The Company used the practical expedient provided for in the standard and applied the simplified model to the measurement of the expected loss during the contract lifecycle, which considers historical data to determine the expected loss, through the segmentation of the receivables portfolio into groups that have the same behavior patterns, based on the maturity dates. IFRS 9 was applied retrospectively; however, it did not impact the comparative periods presented. Due to the adoption of expected losses for the allowance for doubtful accounts, the Company recognized the difference between the previous book balance and the book value at the beginning of the period, with an adjustment to the opening balance of accumulated losses in Consolidated in the amount of R$1,713 (of which R$1,675 is related to equity holders of the parent and R$38 is related to non-controlling interests), net of tax effects.

 

The IFRS 9 requirements for hedge accounting were applied prospectively. The main impact is related to the documentation of strategy policies, which now have more specific and detailed descriptions of the transactions and instruments designated as hedge accounting.

 

Trade receivables

 

Trade receivables are measured based on cost (net of estimated losses from doubtful accounts) and approximate their fair value, given their short-term nature. Due to the adoption of CPC 48 (IFRS 9) – Financial Instruments, the allowance for doubtful accounts is now measured using the simplified approach, which considers the adoption of a provision matrix based on historical data to measure the expected loss during the contract lifecycle, through the segmentation of the receivables portfolio into groups that have the same receipt patterns, based on the maturity dates. Additionally, the Company carries out a case-by-case analysis to assess risks of default in specific cases.

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Financial assets and liabilities

 

The Company adopts CPC 48 (IFRS 9) requirements for its financial assets and liabilities and operations designated as hedge accounting. The measurement of financial assets and liabilities is based on the categories below. The subsequent measurement of a specific item depends on the classification of the instrument, which is determined at initial recognition and annually reviewed, and considers the Company’s business model for the management of assets and the analysis of contracted cash flows. Instruments comprise short-term investments, investment in debt instruments, trade receivables and other receivables, short and long-term debt, other payables and debt and derivative contracts.

 

Amortized cost: financial assets from which the Company’s main purpose is to obtain contractual cash flows, which represent only the payment of principal and interest, and liabilities that are measured at amortized cost based on the effective interest rate method. Monetary restatement, interest and exchange variation, less impairment losses (where applicable), are recognized as financial income or expenses in profit or loss, when incurred. The Company’s main instruments in this category are trade receivables, deposits and other receivables, short and long-term debt (including finance leases) and suppliers.

 

Other items related to the measurement and designation of derivative financial instruments have not been affected by the adoption of the standard.

 

 

IFRS 15 (CPC 47) – Revenue from Contracts with Customers

 

This standard establishes a new constant five-step model to be applied to all contracts with customers, in accordance with the entity’s performance obligations. The Company adopted the new standard on the date it became effective, as of January 1, 2018, using the full retrospective method. The main impacts from the adoption of this standard are as follows:

 

Ancillary revenue: comprises all revenue related to flight transportation services. These revenues were assessed and classified as “related to the main service”, and will be recognized only when the flight transportation service is provided. These revenues are now recorded under “Passenger”, instead of under “Other revenue”.

 

Mileage program: the Company will now present in the statement of income revenue from mileage redemption under the Smiles Fidelidade Program as “agent”, and will recognize gross revenue from reward redemption net of the respective variable direct costs related to the availability of goods and services to its members.

 

Restatement of previous periods

 

The adoption of IFRS 15 - “Revenue from Contracts with Customers” impacted the figures for the three- and nine-month periods ended September 30, 2017 and year ended December 31, 2017, as previously disclosed by the Company.

 

On December 31, 2017, the adoption of this standard had an impact in the amount of R$19,575 on the consolidated statement of financial position in “Advance ticket sales”, against the “Accumulated losses” line under equity, related to ancillary revenues whose timing of recognition changed. In the parent company statement of financial position, the adoption of this standard increased the “Provision for loss on investment” by the same amount.

 

In the nine-month period ended September 30, 2017, the consolidated statement of income was impacted due to: (i) the reclassification of R$401,257 (R$130,602 in the three-month period ended September 30, 2017) in ancillary revenue from “Other revenue” to “Passenger” in the subsidiary GLA; and (ii) the increase of R$1,269 (R$2,246 in the three-month period ended September 30, 2017) in ancillary revenue, whose timing of recognition changed in the subsidiary GLA. The impact on the parent company statement of income led to a reduction by the same amount in the “Equity results” line.

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Due to the classification of Smiles Fidelidade as an agent, the consolidated statement of income, excluding transactions with GLA, was impacted by R$177,055 in the nine-month period ended September 30, 2017 (R$49,630 in the three-month period ended September 30, 2017), due to the reclassification of variable direct costs from “Cost of services provided” to “Mileage revenue”, with no impact on the parent company statement of income.

 

The tables below show the adjustments per item and for each restated line of the consolidated statement of financial position and statement of income, excluding the lines that remained unchanged. Consequently, the result, subtotals and totals show only the impacts of the changes made, as follows:

 

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The table below presents the restated consolidated statements of operations for the quarters ended March 31, June 30, September 30 and December 31, 2017, as well as the fiscal year ended 2017, considering the effects from the adoption of IFRS 15 - Revenue from Contracts with Customers:

 

 

 

IFRIC 22 – Foreign Currency Transactions and Advance Consideration

 

In December 2016, the IASB issued IFRIC 22, which deals with the exchange rate to be used in transactions that involve consideration paid or received in advance denominated in foreign currency. The interpretation clarifies that the date of transaction is the date on which the company recognizes the non-monetary asset or liability. IFRIC 22 became effective on January 1, 2018. The adoption of this standard did not impact the Company.

 

According to Management, there are no other standards and interpretations issued and not yet adopted that may have a significant impact on the result or equity disclosed by the Company.

 

3.     Seasonality

 

The Company expects revenues and operating results from its flights to be at their highest levels in the summer and winter months of January and July, respectively, and during the last weeks of December and in the year-end holiday period. Given the high proportion of fixed costs, this seasonality tends to drive variations in operating results across the fiscal-year quarters.

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4.     Cash and cash equivalents

 

 

From the total consolidated cash and cash equivalents balance, R$144,316 is related to cash, cash equivalents and bank deposits in foreign currency as of September 30, 2018 (R$462,776 as of December 31, 2017).

 

The breakdown of cash equivalents is as follows:

 

 

 

As of September 30, 2018, the private bonds were comprised by buy-back transactions, private bonds (Bank Deposit Certificates - “CDBs”) and time deposits, remunerated at a weighted average rate equivalent to 98.5% of the CDI rate (77.6% as of December 31, 2017) for domestic short-term investments and 1.8% p.a. for foreign securities denominated in U.S. dollar.

 

Government bonds were represented by Brazilian Financial Treasury Bills (“NTN”), accruing interest at a weighted average rate of 100.0% of the CDI rate (116.3% as of December 31, 2017).

 

The investment funds classified as cash equivalents have high liquidity and, according to the Company’s assessment, are readily convertible to a known amount of cash with insignificant risk of change in value. As of September 30, 2018, investment funds were remunerated at a weighted average rate equivalent to 98.9% of the CDI rate (99.8% as of December 31, 2017) for domestic short-term investments and 19.0% p.a. for short-term investments abroad.       

    

5.    Short-term investments

 

 

From the total consolidated amount of short-term investments, R$400,513 as of September 30, 2018 refers to short-term investments in foreign currency (R$730,846 as of December 31, 2017).

 

As of September 30, 2018, private bonds were represented by time deposits and debentures, with first-rate financial institutions, remunerated at a weighted average rate equivalent to 101.7% of the CDI rate (101.3% as of December 31, 2017) for domestic short-term investments and 1.8% p.a. for short-term investments abroad (1.7% p.a. as of December 31, 2017). 

 

Government bonds were primarily represented by LFT and LTN, accruing interest at a weighted average rate of 101.4% of the CDI rate (107.7% as of December 31, 2017).

 

Investment funds include private funds and bonds accruing interest at a weighted average rate of 105.7% of the CDI rate (98.9% as of December 31, 2017), and are exposed to the risk of significant changes in value.

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6.    Restricted cash

 

 

(a)     The amount of R$32,916 (parent company and consolidated) refers to a guarantee for GLAI’s legal proceedings. The other amounts relate to guarantees of GLA letters of credit.

(b)    Related to deposits made to obtain letters of credit for aircraft operating leases from GLA.

(c)     Refers mainly to bank guarantees.

 

As of September 30, 2018, the Company had no restricted cash in foreign currency (R$22,094 as of December 31, 2017).

 

7.    Trade receivables

 

 

 

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The aging list of trade receivables, net of allowance for doubtful accounts, is as follows:

 

 

The changes in allowance for doubtful accounts are as follows:

 

 

(a) Due to the change to the expected loss model used to calculate the allowance for doubtful accounts resulting from the initial adoption of CPC 48 - “Financial Instruments” (IFRS 9), the balance of December 31, 2017 was adjusted on January 1, 2018, with a corresponding entry of R$2,594 in equity. For further information, see Note 2.3.

(b) Recoveries in the period are reflected in the changes to the receivables portfolio balance and presented under “Additions/exclusions”.

 

 

8.    Inventories

 

 

The changes in provision for obsolescence are as follows:

 

 

 

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9.    Deferred and recoverable taxes

 

9.1.   Recoverable taxes

 

 

(*) The subsidiary Smiles Fidelidade recorded extemporaneous tax credits of income tax, social contribution, PIS and COFINS related to the last five fiscal years in the amount of R$259,405, which offset the amount of R$7,722 in the nine-month period ended September 30, 2018.

 

9.2.   Deferred tax assets (liabilities) – Noncurrent

 

 

(a)      Related to the tax benefit from the reverse merger of G.A. Smiles Participações S.A. by Smiles S.A. in 2013. Under the terms of the current tax legislation, goodwill arising from the transaction will be a deductible expense when calculating income and social contribution taxes.

(b)      The R$48,161 portion of taxes on unrealized profits from transactions between GLA and Smiles Fidelidade is recognized directly in Consolidated (R$36,818 as of December 31, 2017).

 

The Company, GLA and Smiles Fidelidade have net operating loss carryforwards, comprised of accumulated income tax losses and negative basis of social contribution. The net operating loss carryforwards do not expire; however, their use is limited to 30% of the annual taxable income. Net operating loss carryforwards are as follows:

 

 

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The Company’s Management considers that the deferred assets and liabilities recognized as of September 30, 2018 arising from temporary differences will be realized in proportion to realization of their bases and the expectation of future results.

 

The analysis of the realization of deferred tax assets was prepared on a company basis, as follows:

 

GLAI: the Company has tax credits of R$58,229, of which R$57,086 is related to net operating loss carryforwards and R$1,143 is related to temporary differences, with realization supported by the Company’s long-term plan. The Company reassessed its projections and did not recognize deferred tax assets for an amount of R$34,845 related to net operating loss carryforwards.

    

GLA: GLA has tax credits on net operating loss carryforwards of R$1,857,557. The Company’s Management reviewed the projections of tax loss carryforwards and recorded deferred taxes on tax loss carryforwards in the amount of R$7,438 in the nine-month period ended September 30, 2018. In view of instability of the political and economic environments, fluctuations in the U.S. dollar exchange rate and other variables that may affect the projections of future results, as well as the history of losses in recent years, the company did not recognize a deferred tax asset for an amount of R$1,850,119 related to net operating loss carryforwards. The Company expects to partially realize this amount over the next 10 years, according to the projections of future results in line with its business plan.

    

Smiles Fidelidade: As of July 1, 2017, Smiles Fidelidade S.A. incorporated Smiles S.A. and, based on the projections of future taxable income, recognized a deferred tax asset on income and social contribution tax on tax loss carryforward in the amount of R$193,020. The reported amount corresponds exclusively to the amounts expected to be realized, pursuant to internal assessments carried out by the Company’s Management.

 

The reconciliation of effective income taxes and social contribution rates for the three- and nine-month periods ended September 30, 2018 and 2017 is as follows:

 

 

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(*) On March 10, 2017, the subsidiary GLA adhered to the Tax Regularization Program (“PRT”), including tax debts that matured on November 30, 2016. The PRT program was consolidated on June 29, 2018, which resulted in reduced debt and lower use of tax credit.

 

On January 1, 2018, the Company recorded a tax effect of R$880 related to the initial adoption of IFRS 9 on the allowance for doubtful accounts under equity. For further information, see Note 2.3.

 

10. Deposits

 

 

(a)   Judicial deposits

 

Judicial deposits and escrow accounts represent guarantees of lawsuits related to tax, civil and labor claims deposited in escrow until the resolution of the related claims. Part of the amount in escrow accounts is related to civil and labor claims arising from the succession orders on claims against Varig S.A. and proceedings filed by employees that are not related to the Company or any related party (third-party claims). As the Company is not correctly classified as the defendant of these lawsuits, whenever such blockages occur, the exclusion of such is requested in order to release the resources. As of September 30, 2018, the blocked amounts regarding Varig S.A.’s succession lawsuits and third-party lawsuits were R$113,557 and R$75,325, respectively (R$108,860 and R$74,300 as of December 31, 2017, respectively).

 

(b)   Maintenance deposits

 

The Company made deposits in U.S. dollars for maintenance of aircraft and engines that will be used in future events as set forth in some lease contracts.

 

The maintenance deposits do not exempt the Company, as lessee, neither from the contractual obligations relating to maintenance nor from risk associated with operating activities. The Company holds the right to select any of the maintenance service providers or to perform such services internally.

 

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The Company has two categories of maintenance deposits:

 

 

 

(c)    Deposits in guarantee for lease agreements

 

As required by its lease agreements, the Company holds guarantee deposits in U.S. dollars on behalf of the leasing companies, whose full refund occurs upon the contract expiration date.

 

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11. Transactions with related parties

 

11.1.          Loan agreements - noncurrent assets and liabilities

 

Parent Company

 

       The Company maintains assets and liabilities from loan agreements with its subsidiary GLA without interest, as shown in the table below:

 

 

Additionally, the Parent Company has inter-company accounts among Gol Finance, Gol Finance Inc. and GAC, as shown below:

 

 

These transactions are eliminated in the Parent Company's accounts as the transactions were entered with foreign entities considered an extension of the Company’s operations.

 

11.2.   Transportation and consulting services

 

All agreements related to transportation and consulting services are held by GLA. The related parties for these services are listed below, together with the object of the agreements and their main contractual conditions:

 

Viação Piracicabana Ltda.: provides airport shuttle services for passengers, luggage and employees. As of July 1, 2017, an Assignment Agreement was entered into between Breda Transportes e Serviços S.A. (“Assignor”) and Viação Piracicabana Ltda. (“Assignee”), through which the Assignee will be responsible for the rights and obligations as of the execution of the Assignment Agreement. The agreement expires on November 6, 2018.

 

Expresso União: provides transportation to employees. This agreement was terminated in March 2017.

 

Pax Consultoria Empresarial e Participações Ltda.: provides consulting and advisory services, and the agreement has no expiration date.

 

Aller Participações: provides consulting and advisory services, and the agreement has no expiration date.

 

Limmat Participações S.A.: provides consulting and advisory services, and the agreement has no expiration date.

 

Expresso Caxiense S.A.: provides airport shuttle services for passengers, luggage and employees, and the agreement expires on September 26, 2019.

 

As of September 30, 2018, GLA recognized total expenses related to these services of R$9,358 (R$8,583 as of September 30, 2017). On the same date, the balance payable to the related companies was R$1,107 (R$769 as of December 31, 2017), and was mainly related to services provided by Viação Piracicabana Ltda. 

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11.3.   Contracts account opening UATP (“Universal Air Transportation Plan”) to grant credit limit

 

In September 2011, GLA entered into agreements with the related parties Empresa de Ônibus Pássaro Marron S.A., Viação Piracicabana Ltda., Thurgau Participações S.A., Comporte Participações S.A., Quality Bus Comércio De Veículos S.A., Empresa Princesa Do Norte S.A., Expresso União Ltda., Breda Transporte e Serviços S.A., Oeste Sul Empreendimentos Imobiliários S.A. SPE., Empresa Cruz De Transportes Ltda., Expresso Maringá do Vale S.A., Glarus Serviços Tecnologia e Participações S.A., Expresso Itamarati S.A., Transporte Coletivo Cidade Canção Ltda., Limmat Participações S.A., Turb Transporte Urbano S.A., Vaud Participações S.A., Aller Participações S.A. and BR Mobilidade Baixada Santista S.A. SPE, all with no expiration date, whose purpose is to issue credits to purchase airline tickets issued by the Company. The UATP account (virtual card) is accepted as a payment method on the purchase of airline tickets and related services, seeking to simplify billing and facilitate payment between the participating companies. 

 

11.4.   Agreement to use the VIP lounge

 

On April 9, 2012, the Company entered into an agreement with Delta Air Lines Inc. (“Delta Air Lines”) for the mutual use of the VIP lounge, with expected payments of US$20 per passenger. On August 30, 2016, the companies signed a contractual amendment establishing a prepayment for the use of the VIP lounge in the amount of US$3,000. As of September 30, 2018, the outstanding balance was R$5,304 (R$6,779 as of December 31, 2017).

 

11.5.    Contract for maintenance of parts and financing engine maintenance

 

In 2010, GLA entered into an engine maintenance service agreement with Delta Air Lines. The maintenance agreement was renewed on December 22, 2016 and will expire on December 31, 2020.

 

On January 31, 2017, the subsidiary GLA entered into a Loan Agreement with Delta Air Lines in the amount of US$50 million, maturing on December 31, 2020, with a refund obligation to be performed by the Company, GLA and Gol Finance, pursuant to the refund agreement entered into on August 19, 2015, with personal guarantee granted by the Company to the subsidiary GAC. Under the terms of this agreement, the Company holds flexible payment maturities regarding engine maintenance services, through a credit limit available.

 

In the nine-month period ended September 30, 2018, expenses incurred for components maintenance services provided by Delta Air Lines amounted to R$242,964 (R$396,013 as of September 30, 2017). As of September 30, 2018, the outstanding balance with Delta Air Lines recorded under “Suppliers” totaled R$193,878 (R$372,511 as of December 31, 2017).

 

11.6.   Term loan guarantee

 

On August 31, 2015, through its subsidiary Gol Finance, the Company issued a term loan in the amount of US$300 million through Morgan Stanley, with a term of 5 years and effective interest rate of 6.7% p.a. The Term Loan has an additional guarantee provided by Delta Air Lines.  For additional information, see Note 17.

 

11.7.   Commercial partnership agreement

 

On February 19, 2014, the Company signed an exclusive strategic partnership agreement for long-term business cooperation with AirFrance-KLM with the purpose of sales activities improvements and codeshare expansion and mileage programs benefits between the companies for the customers in the Brazilian and European markets. The agreement provides for the incentive investment in the Company in the amount of R$112,152, already fully received by the Company. The agreement will mature within 5 years and the installments will be amortized on a monthly basis. As of September 30, 2018, the Company had deferred revenue in the amount of R$8,565 recorded as "Other liabilities" in current liabilities (R$20,557 and R$3,426 as of December 31, 2017, in current and noncurrent liabilities, respectively).

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On January 1, 2017, the Company entered into an agreement to expand its strategic partnership with Airfrance-KLM in order to include engine maintenance and repair services. In the nine-month period ended September 30, 2018, expenses incurred for components maintenance services provided by AirFrance-KLM amounted to R$128,569 (R$159,562 as of September 30, 2017). As of September 30, 2018, the Company had an outstanding balance with AirFrance-KLM recorded under suppliers in the amount of R$190,443 (R$157,264 as of December 31, 2018).

 

11.8.   Remuneration of key management personnel

 

 

(*) Includes the Board of Directors’ and Audit Committee’s compensation.

 

As of September 30, 2018 and 2017, the Company did not offer post-employment benefits, and there were no severance benefits or other long-term benefits for the management and other employees. Specific benefits can be provided to the Company’s key management personnel, limited to a short-term period.

 

12. Share-based payments

 

The Company has two share-based payment plans offered to its management personnel: the Stock option plan and the Restricted share plan. Both plans stimulate and promote the alignment of the Company’s goals with management and employees, and mitigate risks for the Company resulting from the loss of executives, strengthening the productivity and commitment of these executives to long-term results. 

 

12.1.   Stock option plan - GLAI

 

The beneficiaries of the Company’s stock option plan are allowed to purchase shares at the price agreed on the grant date after three years from the grant date, provided that they maintain their employment relationship up to the end of this period.

 

The stock options vest 20% as from the first year, an additional 30% as from the second year, and the remaining 50% as from the third year. All stock options may also be exercised within 10 years after the grant date. For stock options granted, the expected volatility of the options is based on the historical volatility of 252 working days of the Company’s shares traded on the B3.

 

 

(a)   In April 2010, an additional grant of 216,673 shares referring to the 2009 plan was approved.

 

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The movement of the stock options outstanding for the nine-month period ended September 30, 2018 is as follows:

 

 

12.2.   Restricted share plan - GLAI

 

The Company’s restricted share plan was approved at the Extraordinary Shareholders’ Meeting of October 19, 2012, and the first grants were approved at the Board of Directors’ Meeting of November 13, 2012.

 

 

The movement of restricted shares for the nine-month period ended September 30, 2018 is as follows:

 

 

 

(*) During the nine-month period ended September 30, 2018, the Company transferred 1,012,222 shares throught treasuty shares and 75,376 shares through cash payment. The restricted shares transferred totaled R$20,600.

 

 

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12.3.   Stock option plan – Smiles Fidelidade

 

The beneficiaries of the Company’s stock option plan are allowed to purchase shares at the price agreed on the grant date after three years from the grant date, provided that they maintain their employment relationship up to the end of this period.

 

The stock options vest 20% as from the first year, an additional 30% as from the second year, and the remaining 50% as from the third year. All stock options may also be exercised within 10 years after the grant date. For stock options granted, the expected volatility of the options is based on the historical volatility of 252 working days of the Company’s shares traded on the B3.

 

 

(a)         Average fair value in Brazilian reais calculated for the stock options was R$4.84 and R$4.20 for the vesting periods in 2013 and 2014, and R$3.73 for the vesting periods in 2015 and 2016.

(b)         Average fair value in Brazilian reais calculated for the stock options was R$4.35, R$4.63, R$4.90, R$5.15 and R$5.37 for the respective vesting periods from 2014 to 2018.

(c)         Average fair value in Brazilian reais calculated for the 2018 stock options was R$8.17, R$8.63, R$9.14, and R$9.77 for the respective vesting periods from 2019 to 2022.

 

The movement of the stock options outstanding for the nine-month period ended September 30, 2018 is as follows:

 

 

In the nine-month period ended September 30, 2018, the Company recorded in equity share-based payments in the amount of R$12,980 attributable to controlling shareholders and R$386 to non-controlling interests from Smiles (R$8,362 attributable to controlling shareholders and R$151 attributable to non-controlling interests from Smiles in the period ended September 30, 2017) for the above-mentioned plans, with a counter entry in profit or loss under “Salaries”.

 

In addition, management and employees are granted additional bonuses settled in cash referenced to Smiles Fidelidade shares in order to strengthen their commitment to results and productivity. As of September 30, 2018, the balance of this obligation totaled R$3,839 recorded under “Salaries”, referenced to 83,457 equivalent shares of Smiles Fidelidade. In the three- and nine-month periods ended September 30, 2018, Smiles Fidelidade recorded under “Salaries” the amounts of R$946 and R$4,390 related to these bonuses, recognized in profit or loss for the period.

 

 

 

13. Investments

 

Investments in the GAC, Gol Finance and Gol Finance Inc. offshore subsidiaries are essentially seen as an extension of the Company and summed line by line with the GLAI parent company. Therefore, only Smiles Fidelidade and GLA are investments in the GLAI parent company.

 

As of September 30, 2018, the consolidated investment balance comprised SCP Trip, held by GLA.

 

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As of September 30, 2018, our investee Netpoints Fidelidade recorded negative equity. As a result, Smiles Fidelidade (holder of 25.4% of Netpoints’ capital stock) did not recognize additional losses based on CPC 18 - “Investments in Associates and Joint Ventures”. The company will resume recording equity results when Netpoints’ equity fully recovers its accumulated losses.

 

In the nine-month period ended September 30, 2018, GLAI made an advance payment for future capital increase to the subsidiary GLA. In the same period, GLA returned said amount to GLAI, with no impact to the subsidiary’s capital stock.

 

The financial information of the Company’s investees and the changes in the investments balance for the nine-month period ended September 30, 2018 are as follows:

 

 

(a)   Corresponds to transactions involving revenue from mileage redemption for airline tickets by members in the Smiles Program which, for the purposes of consolidated financial statements, are only accrued when program members are actually transported by GLA.

(b)   Adjusted shareholders' equity corresponds to the percentage of total shareholders' equity net of unrealized profits.

 

 

 

(a)     On January 1, 2018, the Company adopted CPC 47 – “Revenue from Contracts with Customers” (IFRS 15), which resulted in the recording of R$19,575 directly in GLA’s equity. For further information, see Note 2.3.

(b)    On January 1, 2018, the Company adopted CPC 48 – “Financial Instruments” (IFRS 9). For further information, see Note 2.3.

(c)     The subsidiary GAC has a net balance of deferred losses and gains on sale-leaseback, whose deferral is subject to the payment of contractual installments made by the subsidiary GLA. Accordingly, the net balance to be deferred is essentially part of the net investment of the Parent Company in GLA. The net balance to be deferred in the nine-month period ended September 30, 2018 was R$389 (R$2,887 in the year ended December 31, 2017). For further information, see Note 27.2.

 

 

14. Earnings (loss) per share

 

Although there are differences between common and preferred shares in terms of voting rights and priority in case of liquidation, the Company’s preferred shares are not entitled to receive any fixed dividends. Preferred shares hold economic power and the right to 35 times more dividends than common shares. The Company believes that the economic power of preferred shares is more than that of common shares. As a result, income for the year attributable to equity holders of the parent is allocated in proportion to their interest in the total common and preferred shares.

 

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Notes to the interim financial information September 30, 2018 (In thousands of Brazilian reais - R$, except when otherwise indicated)

Earnings (loss) per share are calculated by dividing the net income or loss by the weighted average number of all classes of shares outstanding during the period.

 

Diluted earnings (loss) per share are calculated by adjusting the weighted average number of shares outstanding by instruments potentially convertible into shares. The Company has only the stock option plan in the category of potentially dilutive shares, see Note 12. However, due to losses recorded in the three- and nine-month periods ended September 30, 2018, these instruments issued by the parent company have no dilutive effect and therefore were not included in the total quantity of outstanding shares.

 

 

 

 

 

 

 

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15. Property, plant and equipment

 

Parent Company

 

As of September 30, 2018, the balance of advances for the acquisition of aircraft totaled R$70,462 corresponding to prepayments made based on the contract with Boeing, AWAS and GECAS to purchase eight 737-MAX aircraft, see Note 27. As of December 31, 2017, the Company did not have balances of advances for the acquisition of aircraft related to contract renegotiations carried out throughout 2016. In addition, the residual value of the ownership rights on the aircraft totaled R$254,206 as of September 30, 2018 (R$323,013 as of December 31, 2017), both recorded in the subsidiary GAC.

 

Changes in the property, plant and equipment balances are as follows:

 

 

Consolidated

 

(*) Refers to provisions for impairment losses for rotable items, classified under "Sets of replacement parts and spare engines", recorded by the Company in order to present its assets according to the actual capacity for the generation of economic benefits.

 

Changes in property, plant and equipment balances are as follows:

 

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16. Intangible assets

 

 

(*) The weighted average rate of amortizations is 25.30% p.a.

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17. Short and long-term debt

 

 

 

(a)   Issuance of 3 series of Guaranteed Notes to finance engine maintenance, as described in Note 11.5.

(b)   Credit line with Banco do Brasil, Santander and Safra of import financing for purchase of spare parts and aircraft equipment. The maturities are from October to December, 2018.

(c)   Credit line raised on September 30, 2014 with Credit Agricole.

(d)   Credit line raised on June 29, 2018 with Credit Agricole.

(e)   Issuance of 105,000 debentures by GLA on September 30, 2015 for early settlement of the Debentures IV and V.

(f)    Issuance of Senior Notes II by Gol Finance Inc. on July 13, 2010 in order to repay debts held by the Company. In the nine-month period ended September 30, 2018, the financing was prepaid (for further information, see Note 17.3).

(g)   Issuance of Senior Notes III by GLA on February 7, 2013 in order to finance the prepayment of debts due within the next 3 years. The total amount of Senior Notes was transferred to Gol Finance along with the financial investments acquired on the date of issuance, and the financing was prepaid (for further information, see Note 17.3).

(h)   Issuance of Senior Notes IV by Gol Finance on September 24, 2014 in order to finance partial repurchase of Senior Notes I, II and III.

(i)    Issuance of Senior Notes series V by Gol Finance on July 7, 2016, as a result of the private Exchange Offer of Senior Notes I, II, III, IV and Perpetual Notes. In the nine-month period ended September 30, 2018, the financing was prepaid (for further information, see Note 17.3).

(j)    Issuance of Senior Notes series VI by Gol Finance on July 7, 2016, as a result of the private Exchange Offer of Senior Notes I, II, III, IV and Perpetual Notes. In the nine-month period ended September 30, 2018, the financing was prepaid (for further information, see Note 17.3).

(k)   Issuance of Senior Notes series VII by Gol Finance on July 7, 2016, as a result of the private Exchange Offer of Senior Notes I, II, III, IV and Perpetual Notes. In the nine-month period ended September 30, 2018, the financing was prepaid (for further information, see Note 17.3).

(l)    Issuances of Senior Notes series VIII by Gol Finance on December 11, 2017 and February 2, 2018 to repurchase Senior Notes and for other general purposes.

(m)  Issuance of Perpetual Notes by Gol Finance on April 5, 2006 to finance aircraft purchase and repayment of loans.

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Total debt includes issuance costs of R$75,253 as of September 30, 2018 (R$101,795 as of December 31, 2017), which are amortized over the term of the related debt.

 

As of September 30, 2018, the maturities of long-term debt, except financial lease agreements, were as follows:

 

 

 

 

The fair value of debt as of September 30, 2018 is as follows:

 

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17.2.     Restructuring and new issuances of loans and financing obtained in the nine-month period ended September 30, 2018

 

Import financing (Finimp): The Company, through its subsidiary GLA, obtained funding in the period and renegotiated the maturities of the agreements, with the issue of promissory notes as collateral for these transactions, which are part of a credit line maintained by the Company for import financing in order to carry out engine maintenance, purchase spare parts and aircraft equipment.  The funding operations are as follows:

 

 

 

Engine maintenance financing (Cacib): On March 27, 2018, the subsidiary GLA obtained a credit line drawn by issuing Guaranteed Notes for engine maintenance services with Delta Air Lines. The amount of the credit line was R$34,928 (US$10,503 on the transaction date), with issuance costs amounting to R$2,005 (US$603 on the transaction date).

 

On May 4, 2018, the subsidiary GLA obtained a credit line drawn by issuing Guaranteed Notes for engine maintenance services with Delta Air Lines. The amount of the credit line was R$34,928 (US$10,467 on the transaction date), with issuance costs amounting to R$2,001 (US$567 on the transaction date).

 

On June 29, 2018, the subsidiary GLA obtained a credit line drawn by issuing Guaranteed Notes for engine maintenance services with Delta Air Lines. The amount of the credit line was R$39,710 (US$10,299 on the transaction date), with issuance costs amounting to R$1,538 (US$399 on the transaction date).

 

On August 29, 2018, the subsidiary GLA obtained a credit line drawn by issuing Guaranteed Notes for engine maintenance services with Delta Air Lines. The amount of the credit line was R$42,597 (US$10,301 on the transaction date), with issuance costs amounting to R$1,658 (US$401 on the transaction date).

 

Additional issue of Senior Notes 2025: On February 2, 2018, the Company, through its subsidiary Gol Finance, carried out an additional issue of Senior Notes VIII due in 2025, in the amount of R$480,900 (US$150 million on the transaction date), with issuance costs totaling R$45,172 (US$9,212 on the transaction date). Senior Notes are guaranteed by Company sureties, with half-yearly interest payments of 7.00% p.a. The proceeds were used to fully redeem Senior Notes II, III, V, VI and VII, and pay related costs and expenses.

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PK Finance: On June 28, 2018, the Company, through its subsidiary GLA, obtained funding with a guarantee of one own engine in the amount of R$43,913 (US$11,400 on the transaction date), with issuance costs amounting to R$578 (US$150 on the transaction date). This type of financing has monthly interest amortization and payment.

 

The other existing loans and financing of the Company have not been affected by contractual alterations during the nine-month period ended September 30, 2018.

 

17.3.    Early termination of debt during the nine-month period ended September 30, 2018

 

As part of the debt restructuring process (as per Note 1), the Company used the proceeds from the additional issue of Senior Notes VIII totaling US$150 million on February 2, 2018 to fully redeem Senior Notes, as shown below:

 

 

(*) Amounts recorded under “Exchange offer costs” in the financial result.

 

17.4.     Finance leases

 

The future payments of finance agreements indexed to U.S. dollars are detailed as follows:

 

 

The discount rate used to calculate present value of the minimum lease payments was 3.95% as of September 30, 2018 (4.04% as of December 31, 2017). There are no significant differences between the present value of minimum lease payments and the fair value of these financial liabilities.

 

The Company extended the maturity date of the financing for some of its aircraft leased for 15 years using the SOAR framework (mechanism for extending financing amortization and repayment), which enables the performance of calculated withdrawals to be settled by payment in full at the end of the lease agreement. As of September 30, 2018, amounts of withdrawals for the repayment at maturity date of the lease agreements totaled R$173,125 (R$255,644 as of December 31, 2017) and are recorded in non-current debt.

 

18. Suppliers - Forfaiting

 

The Company has operations with Banco Safra, Santander and Rendimento that allow suppliers to receive their rights in advance. This type of operation does not change the existing commercial conditions between the Company and its suppliers. Obligations to suppliers have a longer payment term and a discount rate of 1.05% p.m. As of September 30, 2018, the amount recorded under current liabilities totaled R$352,793 (R$78,416 as of December 31, 2017).

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19.  Taxes payable

 

20. Advance ticket sales

 

As of September 30, 2018, the balance of Advance ticket sales classified in current liabilities was R$1,532,456 (R$1,476,514 as of December 31, 2017) and is represented by 5,565,359 tickets sold and not yet used (4,964,925 as of December 31, 2017) with an average use of 60 days (48 days as of December 31, 2017).

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21. Provisions

 

 

(a) The additions of provisions for aircraft and engine return also include present value adjustment effects.

(b) The provisions recorded include write-offs due to the revision of estimates and processes settled.

 

(a)     Provision for aircraft and engine return

 

This provision considers the costs that meet the contractual conditions for the return of engines maintained under operating leases, as well as the costs to reconfigure aircraft without purchase option as described in the return conditions of the lease contracts, and which is capitalized in property, plant and equipment, under “aircraft reconfigurations/overhauling”.

 

(b)   Provision for legal proceedings

 

As of September 30, 2018, the Company and its subsidiaries are parties to lawsuits and administrative proceedings, which are classified into Operational (those arising from the Company’s normal course of operations), and Succession (those arising from the succession of former Varig S.A. obligations). 

 

The civil lawsuits are primarily related to compensation claims generally related to flight delays and cancellations, baggage loss and damage. The labor claims primarily consist of issues related to overtime, hazard pay, risk premium and wage differences.

 

The provisions for proceedings whose likelihood of loss is assessed as probable are broken down by type of claim as follows:

 

 

Provisions are reviewed based on the progress of the proceedings and history of losses based on the best current estimate for labor and civil lawsuits.

 

There are other civil and labor lawsuits assessed by management and its legal counsel as possible risk of loss, in the estimated amount of R$29,352 for civil claims and R$167,655 for labor claims as of September 30, 2018 (R$30,945 and R$124,062 as of December 31, 2017, respectively), for which no provisions are recognized.

 

The tax lawsuits below were evaluated by the Company’s management and its legal counsels as being relevant and with possible risk of loss as of September 30, 2018:

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·         GLA is discussing the non-incidence of the additional 1% COFINS rate on the imports of aircraft and parts, amounting R$59,764 (R$48,596 as of December 31, 2017). The Company’s legal counsel believes that the classification of possible risk was due to the fact that there was no express revocation of the tax relief (zero rate) granted to regular flight transportation companies.

·         Tax on Services (ISS) in the amount of R$22,422 (R$21,222 as of December 31, 2017) arising from assessment notices issued by the Municipality of São Paulo against the Company, in the period from January 2007 to December 2010 regarding a possible ISS taxation on partnerships. The classification of possible risk of loss is a result from the matters under discussion being interpretative, and involves discussions of factual and evidential materials, and has no final positioning of the Superior Courts.

·         Customs Penalty in the amount of R$48,124 (R$57,823 as of December 31, 2017) relating to assessment notices issued against the Company for alleged breach of customs rules regarding procedures for temporary import of aircraft. The classification of possible risk is a result of the absence of a final positioning of the Superior Courts.

·         BSSF goodwill (BSSF Air Holdings) in the amount of R$106,776 (R$104,213 as of December 31, 2017) related to an infraction notice due to the deductibility of the goodwill allocated to future profitability. The classification of possible risk is a result of the absence of a final opinion from the Superior Courts.

·         GLA’s goodwill in the amount of R$82,868 (R$80,198 as of December 31, 2017) resulted from assessment notice related to the deductibility of the goodwill classified as future profitability. The classification of possible risk is a result of the absence of a final opinion from the Superior Courts.

 

·         In May 2018, the subsidiary Smiles received an infraction notice related to the years of 2014 and 2015, due to: (i) the deductibility of the goodwill allocated to future profitability after the merger of GA Smiles by Smiles S.A. on December 31, 2013, and (ii) the deductibility of financial expenses from the debentures issued in June 2014. The amount of R$116,123 on September 30, 2018 was assessed by Management and its legal counsel as a possible loss, as there are grounds for appeal.

 

There are other lawsuits that the Company’s Management and its legal counsels assess as possible risk of loss, in the estimated amount of R$213,394 (R$70,762 as of December 31, 2017) which added to the lawsuits mentioned above, totaled R$649,471 as of September 30, 2018 (R$382,814 as of December 31, 2017).

 

22. Equity

 

22.1.     Capital stock

 

As of September 30, 2018, the Company’s capital stock was R$3,092,572 and represented by 3,130,573,263 shares, comprised by 2,863,682,710 common shares and 266,890,553 preferred shares. The Fundo de Investimento em Participações Volluto is the Company’s controlling shareholder, which is equally controlled by Constantino de Oliveira Junior, Henrique Constantino, Joaquim Constantino Neto and Ricardo Constantino.

 

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The Company’s shares are held as follows:

 

 

The authorized capital stock as of September 30, 2018 was R$4.0 billion. Within the authorized limit, the Company can, once approved by the Board of Directors, increase its capital regardless of any amendment to its by-laws, by issuing shares, without necessarily maintaining the proportion between the different types of shares. Under the law terms, in case of capital increase within the authorized limit, the Board of Directors will define the issuance conditions, including pricing and payment terms.

 

In the nine-month period ended September 30, 2018, the Company’s Board of Directors approved capital increases through the subscription of shares as a result of the exercise of stock options: (i) on January 11, 2018, in the amount of R$1,500, from the subscription of 161,029 preferred shares; (ii) on May 8, 2018, in the amount of R$5,798, from the subscription of 498,674 preferred shares; and (iii) on August 1, 2018, in the amount of R$2,472, due to the subscription of 331,418 preferred shares.

 

As of September 30, 2018, the Company’s balance of “Shares to be issued” totaled R$167, due to the subscription of 63,601 preferred shares as a result of the exercise of stock options.

 

22.2.    Treasury shares

 

In the nine-month period ended September 30, 2018, the Company repurchased 740,000 shares and transferred 1,012,222 shares to the beneficiaries of the restricted share plan granted on August 11, 2015. As of September 30, 2018, the Company had 6,390 treasury shares, totaling R$126 (278,612 shares in the amount of R$4,168 as of December 31, 2017). As of September 30, 2018, the market value of the treasury shares was R$71 (R$4,068 as of December 31, 2017).

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23. Revenue

 

 

(*) Of the total amount, R$110,670 and R$343,645 in the three- and nine-month periods ended September 30, 2018, respectively (R$100,593 and R$317,476 in the three- and nine-month periods ended September 30, 2017, respectively), consist of revenues from unused passenger tickets, reissued tickets and cancellation of flight tickets.

 

Revenues are net of federal, state and municipal taxes, which are paid and transferred to the appropriate government entities.

 

Revenue by geographical location is as follows:

 

 

24. Operating costs, selling and administrative expenses

 

24.1.    Parent Company

 

 

(a)         The Company recognizes compensation paid to members of the Audit Committee and the Board of Directors in the "Salaries" line item.

(b)         Includes net gains with sale-leaseback transactions.

 

 

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24.2.    Consolidated

 

 

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(a)     The Company recognizes compensation paid to members of the Audit Committee and the Board of Directors in the "Salaries" line item.

(b)    In the three- and nine-month periods ended September 30, 2018, the Company recorded net gains of R$103,395 and R$279,481, respectively arising from sale-leaseback transactions of eight aircraft traded in the period, together with deferred gains and losses arising from these transactions and transactions of aircraft traded between 2006 and 2009 (R$1,989 and R$5,966 related to deferred net losses with aircraft traded between 2006 and 2009 in the three- and nine-month periods ended September 30, 2017).

 

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25. Financial income (expenses)

 

 

 

 

(a) Relative to taxes on financial income (PIS and COFINS), according to Decree 8,426 of April 1, 2015.

(b) Refers to the total amount of the prepayment of Senior Notes II, III, V, VI and VII (for further information, see Note 17.3). Includes the write-off of costs from this debt totaling R$35,722.

 

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26. Segments

 

Operating segments are defined based on business activities from which it may earn revenues and incur expenses, the operating results of which are regularly reviewed by the Company’s relevant decision makers to evaluate performance and allocate resources to the respective segments. The Company holds two operating segments: flight transportation and the Smiles loyalty program.

 

The accounting policies of the operating segments are the same as those applied to the consolidated financial statements. Additionally, the Company has distinct natures between its two operating segments, so there are no common costs and revenues between operating segments.

 

The Company is the controlling shareholder of Smiles Fidelidade, and the non-controlling interests of Smiles Fidelidade was 47.3% as of September 30, 2018 and December 31, 2017.

 

The information below presents the summarized financial position of the reportable operating segments as of September 30, 2018 and December 31, 2017:

 

 

26.1.    Assets and liabilities of the operating segments

 

 

 

 

 

 

 

 

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26.2.    Results of the operating segments

 

 

 

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(a)   Eliminations are related to transactions between GLA and Smiles Fidelidade.

(b)   Includes depreciation and amortization expenses of R$472,424 in the nine-month period ended September 30, 2018, comprised by R$461,740 in flight transportation and R$10,684 in the Smiles loyalty program (R$342,772 and R$9,688 in the nine-month period ended September 30, 2017, respectively).

(c)   Includes depreciation and amortization expenses of R$17,424 in the nine-month period ended September 30, 2018, comprised by R$15,384 in flight transportation and R$2,040 in the Smiles loyalty program (R$9,059 and R$352 in the nine-month period ended September 30, 2017, respectively).

 

In the stand alone interim information forms of the subsidiary Smiles Fidelidade, which represents the segment Smiles Loyalty Program, and in the information provided to the relevant decision makers, the revenue recognition occurs upon redemption of the miles by the participants. Under the perspective of Smiles Fidelidade, this measurement is appropriate given that this is when the revenue recognition cycle is complete. At this point, Smiles has transferred to its suppliers the obligation to provide services or deliver products to its customers.

 

However, from a consolidated perspective, the revenue recognition cycle related to miles exchanged for flight tickets is only complete when the passengers are effectively transported. Therefore, for purposes of reconciliation with the consolidated assets, liabilities and income and expenses, as well as for purposes of equity method of accounting and for consolidation purposes, the Company performed, in addition to elimination entries, consolidating adjustments to adjust the accounting practices related to Smiles’ revenues. In this case, under the perspective of the consolidated financial statements, the mileages that were used to redeem airline tickets are only recognized as revenue when passengers are transported, in accordance with accounting practices and policies adopted by the Company.

 

 

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27. Commitments

 

As of September 30, 2018, the Company had 133 firm orders for aircraft acquisitions with Boeing. These aircraft acquisition commitments include estimates for contractual price increases during the construction phase. The approximate amount of firm orders, not including contractual discounts, was R$66,814,669 (US$16,687,397), and are segregated as follows:

 

 

As of September 30, 2018, from the total orders mentioned above, the Company had the amount of R$11,004,215 (US$2,748,374) related to advances for aircraft acquisition to be disbursed, in accordance with the following schedule:

 

 

The installment financed by long-term debt with aircraft guarantee through the U.S. Ex-Im Bank corresponds approximately to 85% of the aircraft total cost. Other establishments finance the acquisitions with equal or higher percentages, reaching up to 100%. 

 

The Company performs payments related to aircraft acquisition through its own funds, short and long-term debt, cash provided by operating activities, short and medium-term lines of credit and supplier financing.

 

The Company leases its entire aircraft fleet through a combination of operating and finance leases. As of September 30, 2018, the total fleet leased was comprised of 120 aircraft, of which 95 were under operating leases and 25 were recorded as finance leases. During the nine-month period ended September 30, 2018, the Company returned 1 aircraft under operating lease contract. In addition, during the nine-month period ended September 30, 2018, the Company changed the classification of six finance lease agreements.

 

As of September 30, 2018, the Company recorded under current liabilities operating lease installments in the amount of R$152,037 and R$129,631 under noncurrent liabilities (R$28,387 under current liabilities and R$110,723 under noncurrent liabilities as of December 31, 2017).

 

On February 14 and November 27, 2017, the Company entered in sale-leaseback transactions for 10 aircraft with AWAS and GECAS. In the period ended September 30, 2018, the Company received two aircraft in relation to this operation and, pursuant to the agreement, the leases will have a 12-year term as of the arrival date of each aircraft. The remaining aircraft are expected to be delivered by August 2019. Under this agreement, AWAS and GECAS undertake to carry out all necessary disbursements to pay for advances based on the disbursement schedule of the aircraft acquisition agreement. Under the same agreement, the Company shall act as a guarantor for the transaction if AWAS and GECAS fail to comply with the commitments established in such agreements.

 

 

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The future payments of non-cancelable operating lease contracts are denominated in U.S. dollars, and are as follows:

 

 

 

27.2.             Sale-leaseback transactions

 

In the nine-month period ended September 30, 2018, the Company recorded a net gain of R$279,024 arising from 8 aircraft sale-leaseback transactions and recognized R$457 related to net deferred gains from transactions carried out from 2006 to 2018.

 

 

28. Financial instruments and risk management

 

Operational activities expose the Company and its subsidiaries to market risk (fuel prices, foreign currency and interest rate), credit risk and liquidity risk. These risks can be mitigated by using exchange swap derivatives, futures and options contracts based on oil, U.S. dollar and interest markets.

 

Financial instruments are managed by the Risk Committee in line with the Risk Management Policy approved by the Risk Policy Committee and submitted to the Board of Directors. The Risk Policy Committee sets guidelines and limits, monitors controls, including mathematical models used to continuously monitor exposures and possible financial effects, and also prevents the execution of speculative financial instruments transactions.

 

The Company does not hedge its total risk exposure, and is, therefore, subject to market fluctuations for a significant portion of its exposed assets and liabilities. Decisions on the portion to be protected consider the financial risks and the costs for such protection and are determined and reviewed at least quarterly in line with Risk Policy Committee strategies. The results from operations and the application of risk management controls are part of the monitoring process by the Risk Policy Committee and have been satisfactory to the proposed objectives.

 

The description of the consolidated account balances and the categories of financial instruments included in the statements of financial position as of September 30, 2018 and December 31, 2017 is as follows:

 

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(a)     The Company manages its financial investments to pay its short-term operational expenses.

(b)    Excludes judicial deposits, as described in Note 10.

(c)     Items classified as amortized cost refer to credits, debt with private institutions which, in any early settlement, there are no substantial alterations in relation to the values recorded, except the amounts related to Perpetual Notes and Senior Notes, as disclosed in Note 17. The fair values approximate the book values, according to the short-term maturity period of these assets and liabilities. During the nine-month period ended September 30, 2018, there was no change on the classification between categories of the financial instruments.

 

As of September 30, 2018 and December 31, 2017, the Company did not have financial assets measured at fair value through profit or loss under “Other comprehensive income (loss)”.

 

The Company's derivative financial instruments were recognized as follows:

 

 

(*)  Classified as "Derivatives" rights or obligations, if assets or liabilities.

 

The Company may adopt hedge accounting for derivatives contracted to hedge cash flow and that qualify for this classification as per CPC 48 - “Financial Instruments” (IFRS 9). As of September 30, 2018, the Company adopts cash flow hedge for the interest rate (mainly the Libor interest rates) and jet fuel.

 

28.1.    Market risks

 

a)    Fuel risk

 

The aircraft fuel prices fluctuate due to the volatility of the price of crude oil by product price fluctuations. To mitigate the risk of fuel price, as of September 30, 2018, the Company held call options and WTI, Brent and Collar derivatives. In the nine-month period ended September 30, 2018, the Company recognized total gains of R$53,417 related to derivatives operations in the statement of income.

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The Company uses different instruments to hedge its exposure to fuel prices, which are chosen based on factors such as market liquidity, market value of the items, levels of volatility, availability and margin deposit.  The main hedging instruments are futures, collars, swaps and options.

 

The Company’s Fuel Risk Management strategy is based on statistical models. Through the models developed, the Company is able to (i) measure the economic relationship between the hedging instrument and the hedged item, in order to assess whether the ratio between the jet fuel price and the international fuel price is behaving as expected; and (ii) properly define the hedge ratio in order to determine the appropriate volume to be contracted to hedge the fuel volume to be consumed in a given period.

 

The Company’s models take into consideration possible ineffectiveness factors that may impact its Risk Management strategies, such as a change in the way suppliers calculate jet fuel prices and a mismatch between the term of the hedging instrument and the hedged item.

 

In the nine-month period ended September 30, 2018, the Company held derivatives operations designated as “hedge accounting”.

 

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b)    Foreign currency risk

 

Foreign currency risk derives from the possibility of unfavorable fluctuation of foreign currencies to which the Company’s liabilities or cash flows are exposed.

 

The Company’s foreign currency exposure is summarized below:

 

 

The Company is mainly indexed to the U.S. dollar.

 

c)     Interest rate risk

 

The Company’s strategy to manage interest rate risk combines fixed and floating interest rates to determine whether it is necessary to increase or reduce its exposure to interest rates. The Company manages its exposure by determining the basis point value (“BPV”) of each agreement and uses volumes equivalent to the amount of BPVs necessary to achieve the goals proposed in the Risk Management for contracting derivatives.

 

Through statistical models, the Company measures the economic relationship between the hedging instrument and the hedged item, taking into consideration possible ineffectiveness factors, such as a mismatch between the term of the hedging instrument and the hedged item.

 

The Company is mainly exposed to lease transactions indexed to variations in the Libor rate until the aircraft is received. To mitigate such risks, the Company has derivative financial instruments of interest rate (Libor) swaps. During the nine-month period ended September 30, 2018, the Company recognized a total loss with interest hedging transactions in the amount of R$11,014 (loss of R$30,185 in the nine-month period ended September 30, 2017).

 

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As of September 30, 2018 and December 31, 2017, the Company and its subsidiaries had interest rate swap derivatives recorded as hedge accounting.

 

28.2.    Credit risk

 

The credit risk is inherent in the Company’s operating and financing activities, mainly represented by cash and cash equivalents, short-term investments and trade receivables. Financial assets classified as cash, cash equivalents and short-term investments are deposited with counterparties rated investment grade or higher by S&P or Moody's (between AAA and AA-), pursuant to risk management policies. The financial institutions in which the Company concentrates more than 10% of its total financial assets are Itaú and Banco do Brasil. Other assets are diluted among other financial institutions, pursuant to the Company’s risk policy.  Trade receivables consists of amounts falling due from credit card operators, travel agencies, installment sales and government entities, which leaves the Company exposed to a small portion of the credit risk of individuals and other entities. The Company uses a provision matrix to calculate the provision for expected loss during the asset lifecycle, which considers historical data to determine the expected loss, through the segmentation of the receivables portfolio into groups that have the same behavior patterns, based on maturity dates. Credit limits are set for all customers based on internal credit rating criteria and carrying amounts represent the maximum credit risk exposure. Customer creditworthiness is assessed based on an internal system of extensive credit rating. Outstanding trade receivables are frequently monitored by the Company.  

 

Derivative financial instruments are contracted in the over-the-counter market (OTC) with counterparties rated investment grade or higher, or in a commodities and futures exchange (B3 or NYMEX), thus substantially mitigating credit risk. The Company's obligation is to evaluate counterparty risk involved in financial instruments and periodically diversify its exposure.

 

a)     Liquidity risk

 

The Company is exposed to two distinct forms of liquidity risk: (i) market prices, which vary in accordance with the types of assets and markets where they are traded, and (ii) cash flow liquidity risk related to difficulties in meeting the contracted operating obligations at the maturity dates. In order to manage liquidity risk, the Company invests its funds in liquid assets (government bonds, CDBs and investment funds with daily liquidity) and its Cash Management Policy requires the weighted average maturity of its debt to be longer than the weighted average term of its investment portfolio term.

 

The schedules of financial liabilities held by the Company's consolidated financial liabilities on September 30, 2018 and December 31, 2017 are as follows:

 

 

 

28.3.    Capital management

 

The Company seeks alternatives to capital in order to meet its operational needs, aiming a capital structure that takes into account suitable parameters for the financial costs, the maturities of funding and its guarantees. The Company monitors its financial leverage ratio, which corresponds to net debt, including short and long-term debt. The table below shows the Company’s financial leverage as of September 30, 2018 and December 31, 2017:

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28.4.    Sensitivity analysis of financial instruments

 

The sensitivity analysis of financial instruments has been prepared in accordance with CVM Instruction 475/08 in order to estimate the impact on fair value of financial instruments entered by the Company in three scenarios for each risk variable: the most likely scenario in the Company's assessment (which is levels of demand remaining unchanged); a 25% deterioration (possible adverse scenario) in the risk variable; a 50% deterioration (remote adverse scenario).

 

The estimates presented do not necessarily reflect the amounts to be reported in future financial statements. The use of different methodologies and/or assumptions may have a material effect on the estimates presented.

 

The tables below show the sensitivity analysis of foreign currency exposure, derivatives positions and interest rates on September 30, 2018 to market risks considered relevant by Management. In the tables, positive values are displayed as net asset exposures (assets higher than liabilities) and negative values are exposed liabilities (liabilities greater than assets).

 

Parent Company

 

a)    Foreign currency risk

 

As of September 30, 2018, the Company adopted the closing exchange rate of R$4.0039/US$1.00 as likely scenario. The table below shows the sensitivity analysis and the effect on profit or loss of exchange rate fluctuations in the exposure amount of the period as of September 30, 2018:

 

 

 

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Notes to the interim financial information September 30, 2018 (In thousands of Brazilian reais - R$, except when otherwise indicated)

Consolidated

 

a)    Fuel risk

 

As of September 30, 2018, the Company had oil derivative agreements to hedge 70% of 12-month consumption. The probable scenarios used by the Company are the market curves at the close of September 28, 2018, both for derivatives that hedge against fuel price risk and derivatives that hedge against Libor interest rate risk. The table below shows the sensitivity analysis in U.S. dollars of the fluctuations in jet fuel barrel prices:

 

 

b)    Foreign currency risk

 

As of September 30, 2018, the Company adopted the closing exchange rate of R$4.0039/US$1.00 as likely scenario. The table below shows the sensitivity analysis and the effect on profit or loss of exchange rate fluctuations in the exposure amount of the period as of September 30, 2018:

 

 

c)     Interest rate risk

 

As of September 30, 2018, the Company holds financial investments and financial liabilities indexed to several rates, and position in Libor derivatives. In its sensitivity analysis of non-derivative financial instruments, it was considered the impacts on yearly interest of the exposed values as of September 30, 2018 (see Note 17) that were exposed to fluctuations in interest rates, as the scenarios below show. The amounts show the impacts on profit or loss according to the scenarios presented below:

 

 

(a)     Total invested and raised in the financial market at the CDI rate. A negative amount means more funding than investment.

(b)    Balances recorded on September 30, 2018.

(c)     Derivatives contracted to hedge the Libor rate variation embedded in the agreements for future delivery of aircraft.

 

The Company’s interest-rate hedging is presented below:

 

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Measurement of the fair value of financial instruments

 

In order to comply with the disclosure requirements for financial instruments measured at fair value, the Company and its subsidiaries must classify its instruments in Levels 1 to 3, based on observable fair value levels:

 

·       Level 1: Fair value measurements are calculated based on quoted prices (without adjustment) in active market or identical liabilities;

·       Level 2: Fair value measurements are calculated based on other variables besides quoted prices included in Level 1, that are observable for the asset or liability directly (such as prices) or indirectly (derived from prices); and

·       Level 3: Fair value measurements are calculated based on valuation methods that include the asset or liability but that are not based on observable market variables (unobservable inputs).

 

The following table shows a summary of the Company’s and its subsidiaries’ financial instruments measured at fair value, including their related classifications of the valuation method, as of September 30, 2018 and December 31, 2017:

 

 

 

29. Liabilities from financing activities

 

The changes in liabilities from the Company’s financing activities in the nine-month periods ended September 30, 2018 and 2017 are as follows:

 

Parent Company

 

 

 

 

 

 

 

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Consolidated

 

 

 

 

30. Insurance

 

As of September 30, 2018, insurance coverage by nature, considering the aircraft fleet in relation to the maximum reimbursable amounts indicated in U.S. dollars, along with Smiles’ insurance coverage, is as follows:

 

 

(a)   In accordance with the agreed amount for each aircraft up to the maximum limit indicated.

(b)   Values per incident and annual aggregate.

 

Pursuant to Law No. 10,744 of October 9, 2003, the Brazilian government assumed the commitment to complement any civil-liability expenses related to third parties caused by war or terrorist events, in Brazil or abroad, which GLA may be required to pay, for amounts exceeding the limit of the insurance policies effective since September 10, 2001, limited to the amount in Brazilian Reais equivalent to US$1.0 billion.

 

 

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31. Subsequent events

 

As of October 1, 2018, through its subsidiary GLA, the Company carried out a partial early redemption of 14,086 debentures, totaling R$137,500 on the redemption date.

 

As of October 14, 2018, the Company announced the beginning of proceedings aimed at a corporate reorganization of the Group, with the purpose of not renewing the operating and backoffice services agreements with Smiles Fidelidade. This reorganization includes: (i) the creation, by GLA, of preferred shares, with increased economic rights in relation to its common shares; (ii) the sale of common shares issued by GLA to GLAI’s controlling shareholder, Fundo de Investimento em Participações Volluto; (iii) the merger of Smiles Fidelidade into GLAI, with the issue, to the shareholders of Smiles Fidelidade, of GLAI preferred shares of the class currently existing and a new class of redeemable preferred shares; (iv) the redemption of GLAI redeemable preferred shares, with payment in cash over a period of time to be determined; (v) the capital increase of GLA, through contribution, by GLAI, of assets and liabilities related to Smiles Fidelidade’s activities; and (vi) as a second step, GLAI’s migration to the Novo Mercado segment. The terms of the reorganization will be negotiated with the Company and an Independent Special Committee of Smiles Fidelidade, to be installed, and, when applicable, submitted for approval by the Company’s and Smiles Fidelidade’s shareholders.

 

According to the relevant fact of October 28, 2018, through its subsidiary GLA, the Company carried out its 7^th issue of simple non-convertible debentures in a single series, with an additional backstop guarantee. A total of 88,750 debentures were issued, at the nominal unit value of R$10,000, totaling R$887,500 on the issue date. The debentures will have a maturity of three years as of the issue date, with interest of 120% of the CDI rate. The debentures will be amortized every six months in six equal installments as from March 28, 2019 and with quarterly interest payment. The proceeds from this 7^th issue will be used to fully pay the remaining debt from GLA’s 6^th issue of debentures in 2015.

 

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This press release may contain forward-looking statements. These statements are statements that are not historical facts, and are based on management's current view and estimates offuture economic circumstances, industry conditions, company performance and financial results. The words "anticipates", "believes", "estimates", "expects", "plans" and similar expressions, as they relate to the company, are intended to identify forward-looking statements. Statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans, the direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are examples of forward-looking statements. Such statements reflect the current views of management and are subject to a number of risks and uncertainties. There is no guarantee that the expected events, trends or results will a ctually occur. The statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations.

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