GOL Breaks Record in Demand and Registers

Adjusted Net Income of R$110.5mm in 1Q11

São Paulo, May 10, 2011 – GOL Linhas Aéreas Inteligentes S.A. (Bovespa: GOLL4 and NYSE: GOL), (S&P/Fitch: BB-/BB-, Moody`s: Ba3), the largest low-cost and low-fare airline in Latin America, announces today its results for the first quarter of 2011 (1Q11).

       First-quarter Adjusted EBITDAR stood at R$411.5million, with a margin of 21.7%,  being 1.6% above the latter’s R$405.0mm in nominal terms posted in 1Q10, but 1.7 p.p. down on the 23.4% margin for the same period, due to the 9,6% upturn in the 1Q11 net revenue. In comparison with the R$475.0mm and margin of 25.4% reported in 4Q10, EBITDAR fell by 13.4%  and the EBITDAR margin by 3.7 p.p. mainly due to the 26.3% decrease in operating result and 3.8 p.p. in EBIT margin between the periods.

GOL ended the quarter with a leverage ratio (adjusted gross debt / adjusted EBITDAR) of 4.8x, versus 5.8x in 1Q10 and 5.0x in 4Q10. The adjusted net debt / adjusted EBITDAR ratio was 3.6x, compared to 4.6x in 1Q10 and 3.7x in 4Q10, in line with the Company’s focus on reducing its financial leverage ratio.

  GOL continues to meet its target of maintaining a cash balance of at least 25% of LTM net revenue, closing the quarter with cash, cash equivalents and investments of R$1,847.1mm, 23.5% up on 1Q10 and 6.6% down on 4Q10, mainly due to the payment of pre-delivery deposits related to the acquisition of B737-800 NG aircraft from Boeing, as mentioned in the 3Q10 earnings release.

  In January 2011, GOL signed a new code-share agreement with Qatar Airways, the flag carrier of the state of Qatar, which operates direct flights between Doha (the country’s capital) and São Paulo, representing an additional sales channel for GOL and expanding its network. The agreement also will permit the accumulation of mileage on all flights operated by both airlines. As a result, the “GOL Alliance” now includes six major international players: American Airlines, AirFrance/KLM, Delta Air Lines, Iberia, AeroMexico and Qatar Airways.

  GOLLOG,  GOL’s cargo division, continued to do exceptionally well in 1Q11, completing 10 years of regular operations in January, with almost 100 units and coverage of more than 2,000 municipalities. Cargo revenue has been making an increasing contribution to ancillary revenues and climbed by 17.5% over 1Q10, while its share of net revenue stood at 4.0% in the quarter, versus 3.0% in 1Q10. GOLLOG’s end-of-2011 target is to reach 144 units and coverage of  up to 3,000 municipalities.

  In February 2011, GOL entered into a strategic MRO (maintenance, repairs and overhaul) agreement with Delta TechOps, the maintenance division of Delta Air Lines, which will provide overhaul services for around 50 percent of the Company’s CFM 56-7 engines, parts and component maintenance for the fleet of B737NGs, and consulting services related to maintenance workflow planning, materials and facility optimization and tooling support. Under the agreement, Delta TechOps will also assist GOL with its efforts to secure FAA (Federal Aviation Administration) certification. Additionally, GOL will assist Delta with certain line maintenance services for Delta aircraft with extended ground time in Brazil.

  In March 2011, GOL launched a new low cost sales channel as part of its strategy of encouraging the use of air transport by Brazil’s emerging middle class. The Company opened three new kiosks, christened “VOE GOL”, in the Itaquera, Sé and Luz subway stations, as well as a new store in the Shopping Mais mall in Santo Amaro, all in the city of São Paulo. Positioned in strategic locations in the stations, the new points of sale will be run by GOL employees who have been specially trained to meet the profile of the typical subway user. Members of the public will not only be able to buy tickets at the kiosks, they will also be able to alter or cancel their reservations and clear up any doubts they may have about air travel.

        At the end of the quarter, GOL consolidated its low-cost positioning by announcing two important initiatives aimed at reducing costs and generating administrative and operating synergies in 2011 as: (i) the conclusion of negotiations for the early return of two of the Company’s six remaining B767s, which  were used for long-haul charter flights until the end of March 2011. This will reduce operating expenses by around R$20mm p.a. as of the second half of the year; and (ii) the completion of a series of projects begun in 2010 to improve operations, that will reduce the Company’s annual costs and expenses by approximately R$45mm. 

        In April 2011, GOL announced dividend payments of R$50.9mm (R$0.19 per share) on 2010 net income of R$214.2mm, net of the legal reserve. The table below summarizes the main payment details,  which are also available on GOL's investor relations website, www.voegol.com.br/ir.   

Management Comments

On January 15, 2011, GOL completed 10 years of operations, surpassing the mark of 160 million passengers carried, popularizing Brazilian air transport, driving demand with low fares through its low-cost, low-fare model, while at the same time offering a series of new services and entering into several partnerships. As a result, it has become one of the world’s most profitable airlines.

In January 2011, demand on the Company’s total route network reached its highest level and in March it recorded its best operating performance since 2005. These achievements reflected Brazil’s favorable economic scenario, the continuous increase in demand and GOL’s own, competitive advantages, including the best domestic market positioning, increased flight frequency and regularity in the country’s leading airports, higher productivity, with an aircraft utilization rate of more than 13.0 block hours/day, innovation in new cost-reduction initiatives and dynamic fare management. GOL is positioned to maintain its competitive advantage and profitability, with another year of consistent growth.

These results and the challenges that lie ahead were and will be only achieved thanks to the dedication of the Company’s employees (the “Team of Eagles”), who will play a crucial role in ensuring that GOL remains competitive and fixed firmly on its sustainable growth trajectory.

Constantino de Oliveira Junior Founder and CEO of GOL Linhas Aéreas Inteligentes S.A.

Operating Performance

Data from the Brazilian Civil Aviation Authority (ANAC): adjusted in accordance with the new methodology adopted as of October 2010.

Advanced Comparative Data  – ANAC

In October 2010, ANAC altered its method for calculating monthly traffic information (Official Letter no. 11/2010/GEAC/SRE/ANAC) and republished the data for the periods subsequent to January 2009. All the 2010 operational data reflect the new methodology, and may not be entirely comparable to the figures disclosed at that time. According to ANAC, the changes were designed to align the data with the concepts adopted by the International Civil Aviation Organization (ICAO). The alteration was necessary because Brazil has joined the ICAO’s statistical program and supplies the latter’s database with several industry data. The changes in the methodology refer to the calculation of ASK (seat supply) and the classification of domestic legs of international flights, which are now considered to be part of the domestic market. ANAC announced that it will republish the 2008 information at a later date.

Demand and Load Factor

In the first quarter, demand on GOL’s total route network reached its highest ever level, moving up by 9.7% over 1Q10 and by 3.3% over 4Q10, once again due to the greater share of Brazil’s emerging middle class in the leisure segment of the air transport market. As a result, GOL recorded a load factor of 72.4% (2.1 p.p. up on 1Q10 and 1.3 p.p. more than 4Q10), the Company’s best period operating performance since 2005.

Domestic market

GOL’s domestic demand increased by 9.0% over 1Q10, chiefly due to: (i) Brazil’s positive economic scenario; (ii) dynamic fare management, which allowed the company to increase fares in January (peak of the 1Q11 high season), offsetting the low fares in February and March so as to maintain load factors above 70% for the quarter, keeping RASK at high levels; and (iii) higher regional market flight frequencies between the periods. In comparison with 4Q10, demand increased by 4.1% due to the same factors.

As a result, the domestic load factor stood at 73.5%, 2.6 p.p. above the 70.9% recorded in 1Q10 and 2.4 p.p. more than the 71.1% reported in 4Q10, GOL’s highest ever first-quarter figure.

International Market

Demand on GOL’s international route network grew by 16.0% over the first three months of 2010, chiefly due to: (i) the larger number of international destinations (Punta Cana, Barbados, St. Maarten and the Jorge Newbery Airport in Buenos Aires); (ii) the increase in international operations with partner companies through code-share agreements; (iii) partnerships with travel agencies to sell blocks of aircraft seats; and (iv) the 2.3% appreciation of the Real  against the Dollar, which helped boost tourism growth in the Southern Cone and Caribbean regions.

In comparison with 4Q10, international market demand fell by 3.7% due to adjustments to the route network involving flights to Bogota in January 2011 (as disclosed in the monthly traffic release) and the smaller share of international flights in the total route network due to Carnival, which pushed up domestic traffic.

Supply

GOL’s is maintaining its strategy of responsible capacity additions and the 6.4% growth in supply is lower when compared to the industry’s 14.6% upturn year-over-year. This increase was due to: (i) the larger average number of aicraft in operation (operational fleet);  (ii) the higher fleet utilization rate (13.3 block hours/day in 1Q11 versus 13.0 block hours/day in 1Q10); (iii) the 3.9%  increase in the average stage length (930 km in 1Q11, versus 895 km in 1Q10); (iv) the change in fleet profile (replacement of B737-300s with B737-800s, with more seats); (v) the reactivation of B767 aircraft for use on international charter flights in order to meet growing demand in this segment; and (vi) GOL’s higher number of regional, national and international destinations (Bauru, Montes Claros, Punta Cana, Barbados, St. Maarten and the Jorge Newbery Airport in Buenos Aires).

GOL’s conservative strategy of capacity management, which allows to optimize load factors, maintain its competitive pricing policy, maximize aircraft utilization rates, reduce unit costs (CASK ex-fuel) and, consequently, generate higher operating margins.

Yields

Adjusted yields totaled 19.83 cents (R$) in 1Q11, 0.9% below the 20.01 cents (R$) recorded in 1Q10 and 2.9% less than the 20.42 cents (R$) reported in 4Q10, chiefly due to GOL’s strategy of: (i) focusing on PRASK growth; (ii) maximizing aircraft load factors in order to encourage Brazil’s new emerging middle class to use air transport; and (iii) to the fact that Carnival fell in March this year, extending the leisure travel season and driving demand for flights from the South to the Northeast of Brazil.

 Sources: (1) Brazilian Central Bank (2) FGV (3) IBGE (4) Bloomberg

 (*) The 1Q10 and 4Q10 operating data were recalculated in accordance with the new methodology of calculation of statistical manual introduced by DCA 2010 Manual (circular letter No. 11/2010/GEAC/SRE/ANAC), published and in force since October 2011 .

Adjusted Net Revenue

Net revenue totaled R$1,895.7mm in 1Q11, 9.6% up on the R$1,729.8mm recorded in 1Q10, and 1.4% more than the R$1,869.8mm reported in 4Q10, as shown below:

First-quarter passenger revenue came to R$1,703.8mm, 8.7% more than the R$1,567.9mm posted in the same period last year, fueled by the 9.7% increase in demand and the 2.1 p.p. growth in the load factor, partially offset by the 0.9% decline in yields. In comparison with 4Q10, passenger revenue edged up by 0.3%, also due to the 2.9% reduction in yields, which was offset by the 3.3% increase in demand and the 1.3 p.p. upturn in the load factor.

Ancillary revenue (cargo, flight rebooking, excess baggage, on-board sales, etc.) increased by 18.5% year-on-year, accounting for 10.1% of total first-quarter net revenue, versus 9.4% in 1Q10 and 9.2% in 4Q10. This result was mainly due to: (i) the hefty 94% increase in revenue from the Smiles mileage program (whose share of net revenue increased from 2%, in 1Q10, to 3% in 1Q11) thanks to the higher volume of mileage sales to partners and the higher number of code-share agreements entered into between the periods; (ii) the 17.5% upturn in cargo revenue (whose share of net revenue increased from 3%, in 1Q10, to 4% in 1Q11); (iii) the roughly 36% upturn in Buy-on-Board revenue year-over-year; and (iv) the approximately 44% increase in no-show and rebooking fee revenue due to the larger operating volume.

In comparison with 4Q10, ancillary revenue moved up by 11.6%, chiefly due to: (i) the increase in no-show and rebooking fee revenue also due to the 3.3% upturn in demand between the periods; and (ii) 37% increase in Buy-on-Board revenue.

RASK (revenue per available seat kilometer) grew by 3.0% year-on-year, from 15.50 cents (R$), in 1Q10, to 15.96 cents (R$) in 1Q11, due to the 9.7% increase in demand and the 18.5% upturn in ancillary revenues, which also pushed up net revenue by 9.6%, partially offset by the 6.4% capacity increase and the 3.4% decline in yields. Compared to 4Q10, RASK remained virtually flat, dipping by 0.1% given that the 2.9% decline in yields and the 1.5% capacity increase were offset by the 3.3% upturn in demand and the 11.6% growth in ancillary revenue.

Adjusted Operating Costs and Expenses

Operating costs totaled R$1,702.6mm in the quarter, 10.7% up on 1Q10, mainly due to: (i) the 19.9% increase in the WTI oil price and the 6.0% upturn in fuel consumption (as a result of the 4.3% period growth in the number of departures and the 2.1 p.p. upturn in the load factor); (ii) higher salaries, wages and benefits due to the 8.75% pay rise and the conclusion of projects to improve operations (as disclosed in a press release); (iii) variable costs directly related to the Company's operations (expenses from commissions on sales, handling, aircraft cleaning, landing fees, navigational assistance and other expenses); and (iv) the upturn in depreciation and amortization expenses due to the change in accounting practices at the end of 1Q10 (as disclosed in 1Q10 earnings release), as well as the larger number of aircraft under financial leasing.

In comparison with the previous quarter, operating costs rose by 5.9%, chiefly due to: (i) the 14.4% upturn in fuel expenses as a result of the 11.0% increase in the WTI oil price and the 1.2% growth in fuel consumption; (ii) higher salaries, wages and benefits due to payment of the diference between the partial 6.0% pay rise applied in 4Q10 and the 8.75% rise obtained through the collective bargaining agreement in January 2011 applied retroactively to December’s wages and the 13^th salary bonus; and (iii) higher expenses in the maintenance, materials and repairs and depreciation and amortization lines.

* CASK = operating costs and expenses divided by ASK, expressed in cents(R$)

Operating costs per ASK (CASK) totaled 14.34 cents (R$) in 1Q11, 4.0% up on the 13.79 cents (R$) reported in 1Q10 and 4.3% more than the 13.74 cents (R$) posted in 4Q10, mainly as a result of the higher CASK from wages, salaries and benefits, fuel, and depreciation and amortization.  However, there was again some dilution of unit costs when compared to the nominal variations due to the company’s increased productivity (3.0% upturn in the aircraft utilization rate), resulting in a 6.4% capacity increase over 1Q10 and a 1.5% upturn over 4Q10.

CASK excluding fuel expenses (CASK ex-fuel) amounted to 8.70 cents (R$), 1.6% down on the 8.85 cents (R$) reported in the same quarter last year, due to: (i) the 3.0% increase in the aircraft utilization rate to 13.3 block hours/day, which contributed to the 6.4% upturn in capacity, diluting nominal costs; and (ii) the 45.6% reduction in CASK from maintenance, materials and repairs and aircraft leasing, which fell by 45.6% and 19.6% respectively.  In comparison with 4Q10, CASK ex-fuel dipped by 0.5%, due to: (i) the 2.7% increase in aircraft utilization; (ii)  lower CASK from aircraft leasing, sales and marketing, landing fees, aircraft and traffic servicing and other operating expenses; and (iii) higher CASK from fuel, salaries, wages and benefits, maintenance, materials and repairs and depreciation and amortization.

Aircraft fuel costs accounted for 39.3% of total operating costs and expenses, totaling R$669.1mm in the quarter. In the year-on-year comparison, there was a 21.4% increase, due to: (i) the 19.9% growth in the average WTI oil price (partially offset by the average 7.4% period depreciation of the Dollar against the Real); and (ii) the 6.0% upturn in fuel consumption as a result of increased operations (exemplified by the higher number of arrivals and departures, increased load factors and more hours flown). Compared to 4Q10, fuel costs increased by 14.4%, due to: (i) the 11.0% average upturn in WTI prices; and (ii) the 1.2% growth in fuel consumption (also due to higher operational volume and the 1.3 p.p. increase in load factors). In per-ASK terms, these costs rose by 14.1% and 12.7% over 1Q10 and 4Q10, respectively. 

Salaries, wages and benefits came to R$359.4mm in 1Q11, 26.4% up on 1Q10, chiefly due to: (i) the impact of the 8.75% pay rise on the 2011 payroll; and (ii) the increase in flight crew bonuses due to the 5.0% upturn in the number of hours flown by the Company.

In comparison with 4Q10, salaries, wages and benefits grew by 4.5%, for the same reasons mentioned above and the payment of the 2.75% difference between the 6.0% partial provision for wages, salaries and benefits in 4Q10 and the final 8.75% agreement approved in January 2011 and applied retroactively to wages in December 2011 and the 13^th salary bonus. In per-ASK terms, there was a dilution of nominal costs, with 18.7% and 3.0% increases over 1Q10 and 4Q10, respectively.

Aircraft leasing costs totaled R$128.2mm, 14.4% down year on year, due to: (i) the average 7.4% period depreciation of the Dollar against the Real; (ii) the higher number of aircraft under financial leasing (39 in 1Q11 versus 35 in 1Q10); and (iii) the return of the five remaining B737-300s under operational leasing in the second quarter of 2010.

In comparison with 4Q10, leasing costs fell by 7.7%, due to the average 1.7% period appreciation of the Dollar against the Real  and R$11.0mm in non-recurring expenses from the accounting reconciliation of aircraft returned throughout 2010 recognized in 4Q10. In per-ASK terms, there was a higher dilution of leasing expenses, with respective reductions of 19.6% and 9.0% over 1Q10 and 4Q10.

Sales and marketing expenses came to R$91.9mm, 11.8% up on 1Q10 due to higher expenses with sales incentives thanks to the increase in sales volume, partially offset by the elimination of ticket sale commissions for travel agents as of February 2010.  

In comparison with the previous quarter, there was a reduction of 14.0%, chiefly due to expenses from GOL's new advertising campaign. In per-ASK terms, these expenses increased by 5.1% over 1Q10 and fell by 15.2% over 4Q10.

Landing fees totaled R$85.1mm in 1Q11, 9.0% more than the R$78.1mm recorded in 1Q10, due to: (i) the 4.3% upturn in the number of departures; (ii) the larger number of operations in international airports in South America with B767 aircraft (higher unit costs than domestic flights with B737s); and (iii) the impact of Infraero’s new landing fee charging methodology. This increase was partially offset by the average 7.4% depreciation of the Dollar against the Real between the periods (with an impact on international landing fees).

Compared to 4Q10, these fees fell by 8.4%, due to: (i) non-recurring landing fee payments in Congonhas airport of approximately R$6mm, due to the reconciliation of 2010 fees with Infraero; and (ii) the 34.2% reduction in the number of international arrivals and departures (whose fees are higher than domestic oones), due to the fact that Carnival fell in March, which increased domestic traffic and flights from the South to the Northeast of Brazil. In per-ASK terms, these fees moved up by 2.4% year-on-year and fell by 9.7% over 4Q10.

Aircraft and traffic servicing expenses totaled R$108.6mm, 9.6% up on 1Q10, due to: (i) the increase in operational volume (4.2% upturn in arrivals and departures); (ii) higher in-flight service expenses, due to the increase in on-board sales, and expenses from technological improvements (remote check-in and on-board entertainment, among others); and (iii) the 12.6% increase in handling expenses due to higher operational volume and the impact of the pay rise on the cost of these services.

In comparison with the previous quarter, these expenses fell by 6.7% due to: (i) the 34.3% decline in the number of international arrivals and departures, which are costlier than domestic ones; and (ii) the non-recurring reversal, in 4Q10, of R$5mm related to an operating control software (Optima), as disclosed in the 4Q10 release. In per-ASK terms, these expenses increased by 3.0% over 1Q10 and fell by 8.1% over 4Q10.

Maintenance, materials and repairs came to R$79.3mm, 42.1% down on the R$137.0mm recorded in 1Q10, due to: (i) non-recurring expenses in the previous year arising from the fleet renovation plan, with the return of six B737-300s and the reactivation of five B767s for charter operations; (ii) the lower number of engine removals for maintenance between the quarters; and (iii) the average 7.4% depreciation of the Dollar against the Real, given that most of these expenses are in foreign currency.

In comparison with 4Q10, these expenses increased by 45.3%, due to: (i) increased writeoffs of parts and accessories as a result of scheduled stoppages for engine and APU (auxiliary power unit) maintenance (six removals in 4Q10 versus nine in 1Q11); and (ii) R$5.0mm in expenses from the return of two B767-300s at the end of March 2011. In per-ASK terms, these expenses declined by 45.6% over 1Q10 and moved up by 43.2% over 4Q10.

Depreciation and amortization expenses totaled R$90.2mm in 1Q11, 41.4% up on the R$63.8mm reported in 1Q10, due to: (i) the higher number of aircraft under financial leasing (39 in 1Q11, versus 35 in 1Q10); and (ii) the quarterly effect of the change in the Company’s estimate for the depreciation of maintenance costs for engines (as discussed in the 1Q10 release), which only began in March 2010.

Compared to 4Q10, these expenses increased by 21.5%, due to: (i) the beginning, in January 2011, of the amortization of the Smiles mileage program’s new Siebel system, implemented at the end of 2010, in the amount of R$2.3mm; and (ii) the upturn in the depreciation of the estimated reconfiguration costs of aircraft without a purchase option that will be incurred on their return, as well as costs from improvements related to contractually-established major engine maintenance totaling around R$13mm. In per-ASK terms, these expenses rose by 32.9% and 19.7% over 1Q10 and 4Q10, respectively.

Other operating expenses (mainly crew travel, accommodation and daily expenses, direct passenger expenses, equipment leasing, aircraft insurance and general and administrative expenses) totaled R$90.8mm in 1Q11, 2.4% and 5.0% down on 1Q10 and 4Q10, respectively, mainly due to: (i) lower crew travel, accomodation and attendance expenses, as a result of the decline in the number of international arrivals and departures by 33.0% and 34.2% over 1Q10 and 4Q10, respectively; and (ii) lower aircraft insurance expenses due to the appreciation of the Real against the Dollar. In per-ASK terms, these expenses fell by 8.3% and 6.4% compared to 1Q10 and 4Q10, respectively.

Adjusted Operating Result ^*

EBITDAR stood at R$411.5mm, with an EBITDAR margin of 21.7%, 1.7 p.p. below the 23.4% reported in 1Q10 (on EBITDAR of R$405.0mm) and 3.7 p.p. down on the 25.4% recorded in 4Q10 (on EBITDAR of R$475.0mm).

Hedge Result  

The Company records derivative financial instruments in accordance with IAS 39 ― Financial Instruments: Recognition and Measurement.

*OCI (other comprehensive income) differs from net income and generally comprises unrealized gains or losses from a variety of sources, including securities classified as available for sale, and derivative operations classified as cash flow hedges or net foreign investment hedges. 

In the first quarter of 2011, the Company recognized a net loss from effective hedge operations of R$30.6mm (dealt with in more detail in the Financial Result section), with a negative cash impact of R$23.3mm in the same period.

Fuel: fuel consumption hedge transactions, which are effected through crude oil (WTI) derivative contracts, generated losses of R$4.4mm in the quarter. Of this total, gains of R$0.8mm from contracts maturing in 1Q11 and losses of R$5.2mm from contracts maturing in the future, but which were booked in advance under the financial result, were considered ineffective for hedge accounting purposes.

Foreign exchange: foreign exchange hedge transactions generated a net loss of R$20.4mm, booked under the financial result. Of this total, losses of R$58,000 originated from contracts maturing in 1Q11 (accrual basis), losses of R$51,000 arose from contracts maturing in the future, but which were booked in advance, and losses of R$20.3mm referred to future Dollar contracts designated as a fair value hedge. The company also reported a R$5.8mm loss booked under financial expenses referring to Dollar x CDI swaps contracted to protect dollar-indexed debts against the exchange variation, which were not considered effective for hedge accounting purposes.

Interest: in 1Q11 the Company contracted future swaps as hedge against future aircraft leasing payments; these contracts were considered effective for cash flow hedge accounting purposes and their negative market value of R$7.3mm at the end of the quarter was recorded under OCI and will be booked in the income statement as the hedge events occur.

 * Weighted average of derivative strikes.  Average for cap prices only.

** On 03/31/2010, the exchange rate was R$1.6287 / US$1.00.

GOL adopts a hedging policy in order to protect the Company against market fluctuations in fuel prices, exchange rates and interest rates that can substantially harm its operational competitiveness. In order to perform this task, the Company has a Financial Risk Policy Committee, comprising certain members of the Board, an external consultant, and senior executives. The committee meets quarterly to monitor and set 24-month targets on a rolling basis. The committee can also meet extraordinarily if any of its members calls a meeting. Management builds its hedge position based on these decisions.

The vast majority of the financial instruments used for hedging purposes consist of WTI and Dollar call options, foreign exchange and CDI swaps, and fixed and floating interest rate swaps. GOL focuses on simplified derivative structures, aiming to reduce its operating risks and ensure as much compliance as possible with the targets established in its annual budget.

The tables below show the sensitivity analysis on March 31, 2011 and 2010, and the impacts of the price of financial instruments on the Company's annual result and on its shareholders' equity, based on the scenarios described below:

Fuel: 10 p.p. increase and reduction in the price of fuel, all other variables remaining constant;

Dollar exchange rate: 10 p.p. increase and reduction in the dollar exchange rate, all other variables remaining constant;

Interest rate - Libor: 10 p.p. increase and reduction in the Libor rate, all other variables remaining constant;

Adjusted Net Financial Result

The 1Q11 net financial result was an expense of R$21.3mm versus an expense of R$133.7mm in 1Q10 and an expense of R$44.2mm in 4Q10.

Interest expenses totaled  R$89.0mm, 12.2% up on 1Q10, chiefly due to: (i) higher interest expenses from the senior notes issued in July 2010 and maturing in 2020; (ii) interest expenses from the R$600mm debenture issue launched at the end of September 2010; and (iii) the larger number of aircraft classified under financial leasing (39 in 1Q11, versus 35 in 4Q10), partially offset by the average 7.4% appreciation of the Real against the Dollar.

In comparison to 4Q10, these expenses fell by 4.7%, chiefly due to: (i) the 6.7% reduction in local currency debt (BNDES, BNDES-Safra and BDMG) due to period amortizations; and (ii) the 2.3% appreciation of the Real (end of period), affecting interest payments on the foreign-currency debt, which closed 1Q11 at R$2,866.3mm.

The foreign exchange and monetary variation generated revenue of R$65.1mm in 1Q11, versus a R$59.0mm expense in 1Q10, mainly due to the impact of the 2.3% appreciation of the Dollar on the Company’s foreign-currency debt (79.5% of its total debt). The increase compared to 4Q10, when the exchange and monetary variation generated revenue of R$44.3mm, is due to the higher appreciation of the Real against the Dollar at the end of that period (2.3% in 1Q11 versus 1.7% in the previous quarter).

Interest and investment income came to R$36.6mm in 1Q11, 63.3% up on the R$22.4mm recorded in 1Q10, due to: (i) the upturn in the CDI interbank rate on fixed-income investments; and (ii) financial gains from increased investments of the Company’s cash position, which is already equivalent to 25.9% of LTM net revenue. Interest and investment income increased by 6.3% over the R$34.4mm recorded in 4Q10, also due to the upturn in the CDI rate, which generated higher yields from financial investments.

Other financial expenses totaled R$3.4mm in 1Q11, versus R$0.1mm in 1Q10, due to higher expenses from banking commissions related to the senior notes issued in July 2010 and maturing in 2020 and the 4^th debenture issue, which are recognized along the debt’s validity period. Compared to the R$3,0mm reported n 4Q10, this line remained flat.

Adjusted Income Tax

Total 1Q11 income tax was an expense of R$61.3mm, versus an expense of R$33.8mm in 1Q10. This 81.5% increase was mainly due to the combined effect of the realization of tax losses and negative basis of social contribution on net income. Additionaly, there is the addition of four aircraft under financial leasing (39 in 1Q11 versus 35 in 1Q10) and the appreciation of the Real against the Dollar in the quarter, generating temporary differences on the exchange variation of these financial leasing operations. This increase was offset by the 87.4% decline in the current income tax line due to the reduction in taxable income calculated in accordance with Law 6404/76.    

In comparison with the previous quarter, the 88.1% decline in the current income tax line was also caused by the decrease in taxable income, while the increase in the deferred income tax line was also associated with the appreciation of the Real against the Dollar and its effect on the exchange variation in financial leasing operations.

Adjusted Net Result

GOL posted net income of R$110.5mm in 1Q11, versus R$23.9mm in 1Q10, the increase being chiefly due to: (i) the 9.7% upturn in demand, with a 2.1 p.p. rise in load factors, offset by the 0.9% decline in yields; (ii) higher exchange variation gains as a result of the average 7.4% appreciation of the Real against the Dollar in the quarter; and (iii) lower costs from aircraft leasing and maintenance, materials and repairs, offset by higher costs with salaries, wages and benefits, fuel and depreciation, and increased income tax expenses. In comparison with 4Q10, the reduction in net income was mainly due to: (i) higher costs associated with salaries, wages and benefits, fuel, maintenance materials and repairs, and depreciation; (ii) the 2.9% decline in yields, offset by the 3.3% upturn in demand and lower expenses from aircraft leasing and income tax.

Liquidity and Indebtedness

GOL continues to pursue its disciplined strategy of maintaining a cash balance of at least 25% of LTM net revenue and improving its liquidity ratios. Despite the decline in total cash, cash equivalents and investments compared to 4Q10, they are already equivalent to 5.9 times obligations due in the next 12 months (versus 2.7x in 1Q10 and 5.7x in 4Q10), and are composed as follows: (i) cash balance of R$1,825.2mm; and (ii) R$21.9mm in immediate liquidity financial assets. The current liquidity ratio (cash, cash equivalents and investments plus receivables divided by current liabilities) remained flat in relation to 4Q10 at 1.4x (however is higher than the 0.8x in 1Q10).

Short-term receivables include flight sales via credit card, receivables from the VoeFácil installment payment program, and accounts receivable from travel agencies and cargo transportation. At the end of 1Q11, these receivables totaled R$260.5mm, 18.1% down on the R$318.0mm recorded in 1Q10 and 14.1% less than the R$303.1mm reported in 4Q10, chiefly due to the larger number of discounted trade notes.

* the sum of loans and financings and the estimated total value of operational leasing contracts payable, pursuant to the financial statements. 

GOL maintained its focus on deleveraging its balance sheet and eliminating the risk of having to refinance debt maturing within the next three years. On March 31, 2011, total loans and financings came to R$3,605.3mm. Long-term debt, excluding perpetual bonds that have no maturity date, had an average term of 8.1 years and an average rate of 12.2% for local-currency debt and 6.5% for dollar-denominated debt. Excluding the perpetual bonds, debt stood at R$3,313.8mm, 13.5% up on 1Q10, due to: (i) the 4^th debenture issue; and (ii) the US$300mm senior notes issue in July 2010. In comparison with the previous quarter, total debt, excluding the perpetual bonds, fell by 3.8%, chiefly due to the 2.3% appreciation of the Real against the Dollar (end-of-period).

Total financial obligations, comprising the gross debt recorded in the balance sheet and projected operational leasing payments between 2011 and 2021, came to R$5,572.5mm, 4.3% down on 1Q10 mainly as a result of the 8.6% appreciation of the Dollar against the Real between the periods and the higher share of aircraft under operational leasing.  In comparison with 4Q10, total financial obligations decreased by 4.7%, due to the above-mentioned end-of-period appreciation of the Real against the Dollar.

At the end of 1Q11, aircraft acquisition financing totaled R$1,609.6mm, composed of financial leasing operations, which correspond to financial expenses paid periodically to the aircraft lessors with the Company’s own operating cash flow or through long-term loans, backed by the U.S. Ex-Im Bank. In comparison with 1Q10, there was a 10.7% decline, due to: (i) the settlement of the PDP facility; (ii) period amortizations; and (iii) the 8.6% decrease in the end-of-period Dollar exchange rate, partially offset by the addition of four aircraft under financial leasing. In comparison with 4Q10, aircraft acquisition financing fell by 4.2%, due to the exchange rate.

¹Financial commitments (gross debt + operational leasing contracts, in accordance with note 25 of the consolidated financial statements) less cash and cash equivalents and financial investments

²Gross Debt + LTM operational leasing expenses x 7

³Adjusted gross debt less and cash equivalents and financial investments

³Price of R$21.84 per share.

* Some calculations may not match due to rounding up or down.

Fleet and Fleet Plan

The Company closed 1Q11 with a standardized operational fleet of 111 B737-700 and 800 NG  aircraft, with an average age of 6.1 years, and a total fleet of 125 aircraft, identical to the previous quarter.

(1) Total number of seats in 1Q11. (2) Includes regular route network aircraft (B737s) and charter flight aircraft (B767s).   (3) The three B737-300s excluded from the operational fleet but still part of the total fleet are grounded and in the final stages of return. These aircraft are no longer a part of the Company’s total fleet in 2011. (4) Of the six B767-300/200 aircraft, one is sub-leased to an American airline, the remaining five are operating long-haul charter flights, and two aircraft have already been negotiated for early return, as disclosed in a press release.

The Company leases its entire fleet through a combination of financial and operational leases. Out of the total of 125 aircraft, 86 were under operational leases and 39 under finance leases. GOL also has purchase options on 33 aircraft when their leasing contracts terminate.

* includes SFP (Short Field Performance) aircraft

* List prices

Capex

GOL invested R$110.7mm in 1Q11, 51% of which in the acquisition of aircraft for delivery between 2011 and 2013 (pre-delivery deposits); 43% in the purchase of parts; and 6% in bases, IT and the expansion of the maintenance center in Confins, Minas Gerais (construction of the Workshop of Wheels and Brakes). Annual capex in 2011 is estimated at between R$500mm and R$550mm.

Ownership Breakdown

1Q11 One-Off Entries

As disclosed in the press release published on May 2, 2011, in 1Q11 GOL recorded one-off entries of approximately R$120mm in its consolidated financial statements with no cash effect. These entries are substantially due to the implantation of the new revenue accounting and control of tickets issued that generated changes in the Company’s advance tickets sales balance, as well as the expenses related to the new system and the deactivation of the previous systems. Due to the nature of these changes, the effects of their incorporation are detailed below:

(a) Changes in advance tickets sales balance after the implantation of a new revenue accounting system;

(b) Expenses related primarily to the implantation and the deactivation of the previous revenue accounting and Smiles mileage control systems;

(c) Monetary and foreign exchange rate variation on systems reconciliations;

(d) The tax effect of one-off entries.