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GOL Linhas Aéreas Inteligentes SA (NYSE:GOL)
Q2 2021 Earnings Call
Jul 29, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the GOL Airlines Second Quarter 2021 Results Conference Call. This call is being recorded and all participants are in a listen-only mode. After GOL's remarks, there will be a question-and-answer session. At the end of that time, further instructions will be given. [Operator Instructions]

This event is also being broadcast live via webcast and may be accessed through the GOL website at www.voegol.com.br/ir and MZiQ platform at www.mziq.com. Those following the presentation via the webcast may post their questions on the platform and their questions will be either answered by Management during the call or by the GOL Investor Relations team after the conference is finished.

Before proceeding, let me mention that forward-statements are based on the beliefs and assumptions of GOL's management and on information currently available to the company. They involve risks and uncertainties, because they relate to future events and therefore depend on circumstances that may or may not occur. Investors and analysts should understand that events related to macroeconomic conditions, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements.

At this time, I will hand the call over to you Mr. Paulo Kakinoff. Please, go ahead.

Paulo Kakinoff -- Chief Executive Officer

Good morning, ladies and gentlemen, and welcome to GOL Airlines Earnings Call. I'm Paulo Kakinoff, Chief Executive Officer, and I'm joined by Richard Lark, our Chief Financial Officer. This morning, we released our second quarter figures. Also, we made available on the company's Investor Relations website three videos with the results presentation, financial review and preliminary Q&A. We hope everyone has watched them as we will now only make a few brief considerations and then move to your questions.

The second quarter 2021 was marked by three relevant themes for GOL's sustainable growth going forward. First, the resilience of the Brazilian air travel market. Demand for travel in Brazil is recovering rapidly as a result of the consistent decline in COVID-19 cases and fatalities since June 24 with a reduction of more than 2% per day in new transmissions registered in the country, and with the reduction in all Brazilian states. Brazilian government has guaranteed that 173 million shots will be delivered in the fourth quarter, an increase over the 143 million doses made available in the first half of 2021 anyway. There will be enough vaccines to completely vaccinate approximately 90% of all Brazilians over 12 years-old.

Second, GOL's discipline yield management led the company in a continuous and very agile manner to preserve the equilibrium between capacity and demand in the second quarter, keeping its load factors and use high, and minimizing cash burn. In the second quarter 2021, GOL systematically presented a market efficiency superior to its competitors, which reinforces our commitment to balancing the size of the supply with the predictive demand forecast.

Third, goes back to continuing it sustained growth. Based on our expectations for the vaccination roll out in Brazil, we anticipate that business travel will show a sharp recovery as of the first quarter 2022. When that happens, we will increase the GOL network to enable high frequencies in the Sao Paulo, Rio de Janeiro and Brazilian markets, restoring those routes to pre-pandemic levels. GOL will also resume international flights to South American and U.S. destinations with discipline and following the restrictions and compliance rules of each country.

With that I'm going to hand you over to Richard who is going to take us through some financial highlights.

Richard Lark -- Chief Financial Officer

Thanks, Kaki. A comprehensive financial review for the quarter was shared with the video presentations this morning. We believe you all had a chance to access them. In summary, GOL's adjusted EBIT in the second quarter totaled BRL44 million corresponding to a margin of 14%, which shows the restoration of the operating margins necessary to support operational growth.

Adjusted EBITDA reached BRL222 million with a margin of 22%,reflecting GOL's successful sustainability efforts in balancing supply and demand. The net debt ratio excluding exchangeable notes and perpetual bonds to adjusted last 12 months EBITDA was approximately 10x on June 30, 2021, representing the lowest financial leverage among its peers.

Even in an atypical year, GOL stands out among few airlines for repaying approximately BRL6 billion in debt since the beginning of 2020 due to its disciplined liquidity management and its ability to extract value from current asset. This strategy enables GOL to focus on growing with profitability, leaving the crisis with a lighter and stronger balance sheet compared to its competitors.

The equity issued for the reintegration of the Smiles' loyalty program together with the capital increase, led by the controlling shareholders totaled approximately BRL1 billion in new equity capital during the quarter. The resumption of the market toward the normalization of demand already points to future margins of consolidation opportunities in the airline sector.

The agreement the GOL signed for the acquisition of MAP airlines is in-line with this trend and appears as a rational moves to strengthen our business model and increase the generation of value for our shareholders.

Now, I would like to return to Kakinoff.

Paulo Kakinoff -- Chief Executive Officer

Thanks, Rich. I would like to close by thanking for our employees, the team of Eagles, who are leading with care, clarity and confidence, resulting in successful management throughout the crisis and placing the company in a solid position in resuming its operations. We reiterate our confidence as we have done over the past months that the company will emerge as stronger and even more resilient as markets normalize. We remain salary-committed and optimistic through the diligent management of our balance sheet and our operations throughout the recovery.

Now, I would like to initiate the Q&A session.

Questions and Answers:

Operator

Thank you. The floor is now open for questions. [Operator Instructions] The first question comes from Mike Lindberg with Deutsche Bank. Please, go ahead.

Mike Linenberg -- Deutsche Bank -- Analyst

Hey, good morning, Paulo and Rich. Just a few questions. You've provided a lot of detail in the slides about the recovery in demand and the rise on vaccinations and the reduction in transmission rate. For the second half of the year though, you did scale back the redeployment of capacity. It's somewhat modest and maybe it's nothing more than a recalibration or even maybe acknowledgment that the business travel recovery will not really occur in earnest until the first part of 2022. Is that what's driving that moderation of supply for the second half of the year? Can you provide some color on that? Thank you.

Paulo Kakinoff -- Chief Executive Officer

Hi, Michael. Thank you very much for your question. Actually, I could summarize that decision like in flight toward profitability strategy because we are pretty confident on the demand recovery. This has been OK. Pretty explicit since the vaccination program in Brazil took off and gained traction which is happening right now. So, every day, we do see that there are more demand about to come.

Mike Linenberg -- Deutsche Bank -- Analyst

Okay.

Paulo Kakinoff -- Chief Executive Officer

But also, you need you to carefully read what are the current pressure on costs that we are facing. I mean the exchange rate, is it still playing against our cost structure? We have the jet fuel prices pretty high. So, we need not only demand to recover, but we need also a healthy fair level to be achieved. And we will not depart on any market share driven strategy just to prevail our position. I believe that we need to consider increasing our disciplined way to keep capacity balance with the demand. So, this is basically a clear measure to recover as soon as possible, our profitability. And therefore, we are cautious about how we will deploy our CapEx. And we have translated that into a more modest outlook regarding the number of flights that we are supposed to operate in the second half of this year and it has some impact in our revenue outlook. So, we are pretty bullish on the demand recovery. We believe that the Brazilian immunization program will be successfully developing as it has been today. But the industry as a whole needs to recover the margins and therefore, we are need to be more cautious about that movement and the competitors.

Richard Lark -- Chief Financial Officer

Mike, in addition to that. There's a yield component in there also because the slower return of the large corporates, which is a much higher yielding customer, the large corporates today are not really present in our booking curve. We expect for them to start coming back August-September and to be back more strongly in the Q4 and then fully in the Q1. But as a yield component in that revenue guidance also, that we initially went out and I think we're one of the few companies, airlines in the world who actually put guidance back on for the second half of this year. There was an assumption of a stronger return and faster return of the court large corporates, which goes into the yield and we have as, Kaki was saying, we have a quality focus on the revenue. It's not just about revenue, it's about high quality revenue and our yield growth in the Q2 that were just behind us now was because of this dynamic capacity management and so in the Q3 and the Q4, there is a dynamic happening there where the Q4 yields will be much more driven now by the returns of the large corporate and the Q3 yield is going to still be more in the VFR leisure category. And we are increasing in the Q3 leisure routes in the Northeast Brazil with more connections, but it has a lower yield.

And so, the adjustment on the volumes also is in function of this focus on a high quality yield, not just for revenue sake. And I think that shows up in how we've been managing our yields through this pandemic versus the market. We're more focused on the quality and preserving the future revenues and so we're not cannibalizing future revenues to create receivables. We're keeping the booking curve very short, which is where the demand is and when the large corporates come back, that booking curve will lengthen out. Another way I could say it as well, we're as much as possible trying to save our future inventory for higher profitability and keeping it managed close to our vest, if you will.

Paulo Kakinoff -- Chief Executive Officer

And Michael, I really appreciate your question because it gives us the opportunity to better share our view on how the market is developing right now. From a more holistic point of view, I think that the company is taking the right decision in proceeding so while we are also protecting our liquidity and our balance sheet. I mean, translating had to predictable [Phonetic] actions. Once we are -- we have been able to achieve both important targets, keeping liquidity and protecting our balance sheet while we are amortizing our debt and fulfilling our financial obligations, it's important to notice that we are doing that having only 60% of the revenue that we used to get pre-pandemic. So, ahead of us, there are several fortress of our company. Those could unleash important potentials that we cannot utilize at the moment. We should give you an example. So, we are pretty strong on the corporate business, the corporate network and at the moment, that demand is pretty reduced.

And also, you know our business model to form the lowest cost in the industry basically because we have a standard fleet based upon a high utilization model. We cannot access those benefits considering the current market size. And even though we have been able to keep liquidity and protect the balance sheet. So, ahead of us we have a more than promising outlook considering that the demand is about recover and corporate levers will resume travels sometime in the near future. We are not considering the first quarter 2022. Meanwhile, we will keep ourselves disciplined in deploying exactly the same strategy. We will not increase our capacity over a healthy demand level. This is hopefully clear to you as an answer to your question.

Mike Linenberg -- Deutsche Bank -- Analyst

Kaki and Rich, that's great color. Thanks on that. It's obviously very refreshing to hear that you're focused on margin rather than market share. Just a quick second one here. Just news out that American has made a minority investment in JetSmart. Does that open up any sort of opportunities with GOL and a carrier that has a pretty good footprint in Spanish-speaking South America? Any thoughts on that? Thank you.

Paulo Kakinoff -- Chief Executive Officer

Michael, we know that it has a very strong partnership with American Airlines and we do believe that that movement is part of their strategy to enhance their already strong footprint in the region and that might be also promising to our partnership, considering that this stronger American will be in the region, also the more attractive we will be our offer. So, I wouldn't like to speculate on any possible further top in our partnership, but we do welcome that movement on American Airlines, in seeing further investing in our region.

Mike Linenberg -- Deutsche Bank -- Analyst

Thanks, Kaki, thanks, Rich.

Paulo Kakinoff -- Chief Executive Officer

Thank you very much.

Operator

The next question comes from Dan McKenzie with Seaport Global. Please, go ahead.

Dan McKenzie -- Seaport Global -- Analyst

Hey guys. Thanks for the time here. It's kind of a big-picture question here. GOL really does seem like it's going to be a different airline in this next cycle. So maybe you could just help us connect the dots on kind of before and after GOL -- GOL before versus GOL after. So, big picture. What's new in this next cycle? We've got the Smiles transaction, we've got MAP, we've got fleet modernization, we've got a relationship with American Airlines, a switch from Navitaire, pardon me. And then I think we've got positive GDP in Brazil for the second time in a decade. So, if investors were to collectively overlay these kind of the new GOL on your 2019 results, what kinds of pre-tax margin earnings or upside would it have potentially driven? I guess is really one question. You've unpacked some of these for us previously, but I guess really what I'm getting at is the potential here for better margins, better free cash flow as we look ahead, one to three years.

Paulo Kakinoff -- Chief Executive Officer

Hi, Dan. Definitely. We, too, are under a stressful situation given by the market circumstances. The COVID is still out there, the demand is too much below pre-pandemic levels. But we cannot disguise our I'd say satisfaction by testing our company through a very challenging period and getting out of that desk, noticing how robust and resilient our business model is. And that is pretty clear, when you take into consideration, the way chosen by our company to deal with the COVID-19. So, we took the path of negotiating with every single stakeholder. It was demanding to say the least, but we successfully came to well-balanced deals where basically every single stakeholder employees, suppliers, the lessors, even the customers considering that they were also affected by the network reduction that we were forced to implement. And now that clearly, the worst portion of this desert-crossing is already behind us, we see several promising prospective ahead of us, exactly those ones you have mentioned in your question. The company is like under the worst possible circumstance, the worst possible scenario and we are more than strong. We didn't lose the opportunity to further enhance our well-tested and proven successful model being refined already for more than 20 years.

You can imagine that we are now even leaner than we were before. We have even more efficient processes in places. We didn't stop to invest in further developing our digital platform, the data analytics structure, the fleet renewal. So, taking into consideration our recent past, this company went through a tough scenario, much earlier than COVID-19. We've got the MAX grounding, we got the PICO [Phonetic] constraints, we -- we've faced the Brazilian exchange rate devaluation. Things can always get worse considering the external factors, considering the circumstances, but it's reasonable to believe that the future periods are likely to be much better than the combination of those circumstances that I have just mentioned. And once the company is at the level that we are right now and we have a much better future ahead of us considering those external factors, it's just a matter of time to unleash that potential. The company is now in a much better shape. It's not actually shaped to be pre-affirmative in saying that we definitely are stronger than we were before, having this pandemic in place. And the company now didn't capture most of the benefits of having a significant number of new technology planes available in our operation.

We are just -- we have and 77 [Phonetic] MAX in our fleet at the moment, you know how fast we are about to renew our fleet and this is just one of the meaningful benefits that we are about to get. I think we are happy, due to the way we have managed this crisis, protecting everyone -- companies, jobs, employees, stakeholders, investors our liquidity paying our debt obligations. And what we have ahead of us? It can be everything but something not promising. This is exactly where we are right now, well-prepared and well-positioned to capture what's about to come.

Richard Lark -- Chief Financial Officer

And maybe just a complement a couple of things there. Maybe just from an asset liability perspective both pre-pandemic, post-pandemic. Pre-pandemic, as you know, we spent the better part of three years dealing with the MAX issues -- the MAX grounding, core loans; a lot of pain and suffering with the asset side of the equation. Just getting through some distractions here in the window outside of our conference room here. So, post-pandemic, that's all behind us. In fact, as you know we're pivoting here in the next couple of months, we're pivoting to an acceleration of the fleet transformation from the NGs to the MAXs and so as we kind of roll into 2022, we'll be kind of where we wanted to be three years ago from an asset perspective and back with our more normalized activities of transitioning in new aircraft and transitioning out the old aircraft. The average age of the GOL fleet has kind of creeped up over the last three or four years, to be about three or four years higher than we normally would want to have it. So, from an asset perspective, we'll be back reorganized in that perspective and there's a lot of equity value creation in that regard.

On the liability side, we will be better than we came into this pandemic. We emerged 2019 as far as 2020, basically steering few times leverage down the barrel for last year, then the pandemic happened. But we didn't postpone any of our work on the liability management side -- on the balance sheet side of the equation, in fact we intensified it. The second quarter was a line for us. We finalized the take in of the minority interest of Smiles. That liability was eliminated at very good economics for everybody involved and we also -- if you go just on the debt side of the equation since the beginning of 2020 up until now, our company has amortized BRL6 billion of debt. There is only one remaining piece in our capital structure which is pretty much our only short-term debt, which we'll finalize that into Q3. So, by the time we get to post-pandemic, we not only will have significantly reduced the debt of our company, we will also have reprofiled the entire network -- MAX-significant debt maturity is 2024. And all that work continues during the pandemic, so both from an asset perspective, we corrected the asset problem we had, which is you're kind of stuck for the next two to three years with the NG generation of the fleet, now we're going to go back to accelerating transition from the NG to the MAXs, which has significant cost reductions, significant equity value creation for our business in the way we do it.

And then, on the liability side of the equation; we're pretty much done. That work has been completed. There is a final piece to be completed here in the Q3, but everything pretty much there is according to plan. And so, there is a lot of significant -- there's not a late bit value creation. Going back to the first part of your question, that is going to necessarily transform into pre-tax earnings and even post-tax earnings. Obviously, you see the exchange rate variation swings in our net results. We've always recommended to kind of put on the side and if you remember conversations we were having back in 2019, we are focusing everybody on our earnings generation, earnings guidance. In fact there was one analyst. I think it was the first guy to publish this morning. He was all talking about earnings, which for me was a sign of relief to finally see sell-side analysts talking about earnings as opposed to the other issues. And that's the focus that we want. But in terms of how that would translate into the actual numbers, I would kind of point to what we were guiding you guys back in 2019 in terms of the parameters of our business, in terms of margins and growth.

I just gave you a long answer. The short answer to that question would be a normalized post-pandemic pre-tax margin of around 10%. That's the number that comes out of how we managed the structure, the operating structure and the financial structure of our business. That's kind of the spot that we'd look for and we're in a much better position. That's what we were kind of guiding you guys in 2019 pre-pandemic. We're in a much better position now. Just the Smiles taken on its own has the potential to increase those pre-tax earnings by BRL400 million a year. And that will be starting to get phased in here in the third quarter. That's done already. The MAX, the transition to the MAX is obviously phased in over three to five-year period, but on an aircraft-to-aircraft basis, that's roughly a 15% reduction in tasks that gets phased in. And that's structural. Both of those things that I just mentioned there, just to cite a very few, are structural. And so, the GOL after the pandemic as Kaki were saying will structurally be better than the GOL pre-pandemic.

And barring certain equation, you know, structurally in Brazil, we are a little bit waiting for the large -- we're not waiting method here for the large corporates to come back because they're the most affected by the dynamic related to the pandemic. But structurally, Brazil, given our raw material -- you mentioned this a little bit on the GDP side of the equation in Brazil -- we're not like U.S., high-end services economy or Europe high-end manufacturing economy. We are primarily a raw materials economy with a little bit of low-end manufacturing. And it's a very large country with those productive elements spread off, spread out across a geography, the size of the 48 states. And so, there is a huge necessity for air travel to make Brazilian GDP happen. And so, we'll go by the way of Brazilian GDP structurally, oil and gas sector, agribusiness sector, real estate sector, infrastructure sector, all those sectors are primary large corporate clients right now are traveling with us. So when that springs back, that immediately going to fixes the only kind of -- if you will balance sheet problem we have right now, which is we're missing about BRL0.5 billion of accounts receivables.

And those get back on the balance sheet immediately and eventually, probably by the Q1, would transform into an effective an additional BRL1 billion of receivables when we get back to kind of a run rate of, call it, BRL1 billion a month of sales, that will going to translate into an overall receivables balance of about BRL1.5 billion. That's the only kind of piece that's missing from the management of our business right now. Like you said, we kind of managed the business over the last almost now 18 months without that, using our current --other current assets and using the other tools that were available to us. And at the same time, operating with two pretty simple directors. One was to emerge after the pandemic with the unit cost lower than we entered, and we've achieved that. And number two, keep the financial equilibrium to get -- to get us through this pandemic.

And pre-pandemic, it was kind of matching, if you will, revenues with expenses, during pandemic it was matching cash inflows with cash outflows. This is same management we were doing pre-pandemic, and obviously we need a lot of support. We were also able to use the capital markets to provide some additional long-term capital. The controlling shareholder did a capital increase, I think we're the only airline, maybe with the exception of Aleris, that during this pandemic has done a capital increase. So, all those things already done are behind us, and so, we are a little bit waiting for the large corporates to come back now, which we've articulated about what our views on that, but the work on the balance sheet was pretty much done pre-pandemic. We kept the final phases of it during the pandemic. The work on the assets we had to wait for the -- the MAX situation to get resolved, that's resolved and our pivoting back to that kind of what you guys were used to seeing in the first cycle of goal with all this value and cost reduction we are created -- creating when we did our first order of -- of Boeing aircraft.

But thanks for that question because I think -- I think that's -- it's definitely where our focus is, I think we kind of started our pivot in the Q2, there was an effect of the second wave here as Kaki mentioned, the -- the vaccination in Brazil is gaining huge momentum. You're already seeing the Governor of the state's followers already pretty much signaled he is going to turn off all restrictions. And Sao Paulo is the economic engine of Brazil. The state of Sao Paulo is about one-third of Brazilian GDP. So that's going to have a huge ecosystem effect on the country. So we will have the jitters for elections that will start to pop up toward the end of the year. We still have a little bit excess volatility on the currency. A part of this will be affected by the currency. Many of the questions that we've been getting on the results, a lot of it is explained by currency and oil prices. Obviously, we manage those within yields and risk management. But those are obviously determined by this global scenario.

As the world ramps back up there, Matt, I mean, everybody watched the Powell's comments yesterday, so I won't repeat those, but there's a lot of pieces that are missing in the economic system that has to get replenished here for things to get back to normal. And Brazil is going to benefit from that because we're a supplier in that dynamic including our oil prices benefits Brazil. Currency is always a bit of a question in terms of how we're going to appreciate a weekend, but it seems like all the signs there for a weakening dollar which would also benefit our business. But maybe that -- that's just kind of what I would wrap around that. Short answer was 10% pre-tax margin, the long answer is what I just -- so, thanks for that question.

Dan McKenzie -- Seaport Global -- Analyst

Understood. No, I appreciate the comprehensive answer. The second question here is far simpler, just sort of a housecleaning question. The number of MAXs that are on firm order coming in 2022, I guess is one housecleaning question. And then secondly, I know you said that the liability management is behind you. Is there the opportunity to optimize the cost of the liabilities? I guess as you think about the cap structure, the cost of your debt to optimize that as you become more profitable, is there the possibility to lower interest rates with refinancings and thus drive some non-operating earnings leverage as well over the coming one to three years?

Richard Lark -- Chief Financial Officer

Yes, on the right side of the balance sheet question that you asked, a couple of comments. One is that we have not deviated from our financial policy targets. We kind of know what our rate cost of debt is, our rate cost of equity and we picked our moments. Even though the stock goes up and down, the bond prices go up and down, if you look at the moments where we've raised the capital, they've been at moments that fit in our policy. So, we don't see a big benefit of doing any refinancing. I guess all the debts that we've gone out, we've got maturities 2024, 2025, 2026 [Phonetic]. Our convert is effectively a 3% coupon for us. Our 2025 maturity is effectively a 7% coupon for us. And the secured deal we did, which effectively came in around 8%, it's still a reasonable number in there that the 2026, which is an 8%. There has been moments, flashes in the pan where we've been kind of looking at, 'Gee, maybe we could do a 6% long-term financing for GOL but it's always at the peak of the market.

In terms of our structural long-term liabilities in the capital markets, that makes sense. Yes, we would always look at -- so activity, we've done bond buybacks over time, we got the perk out there, we gradually whittled away at that pre-pandemic. If you go back to January of last year, we were thinking about just the perk actually we're starting to look more like debt than equity at that point in time. Just given where Brazilian interest rates where and we are thinking about paying it off. But remember, the aircraft, the main chunk of our liabilities now going forward are going to be aircraft-related, secured aircraft financing. Our entire toolbox was available to us in terms of the export credit guaranteed facilities, which are effectively cost of borrowing for like 85% LTV on those assets and about 45% for year-end out. It's hard for us to do much better than that. Most of our activity on the financing side now and going forward is going to be on secured aircraft financing, which is in the very low-single digits. And on the Brazilian real side of the equation, there we just go with the local market rates.

The only significant local working capital liability we have today is the debenture. That generally said is a good low rate locally. The only thing I didn't mention there is kind of the medium-term stuff, which generally relates to engine overhauls and import financings, what you see in our balance sheet that generally kind of follows market rates and their kind of rollover working capital facilities. Again, just so you understand how we're thinking about it, we also have significant collateral available that we now have, given that we own 100% of our loyalty program, which if we wanted to tap into that, to raise some long-term money at the appropriate time, that could potentially be a source of anywhere from $300 million to $500 million of additional liquidity for us if we needed to do it. And the only question mark there and I purposely did not mention it because we don't have any plans to do it is using the equity instrument that we have.

GOL continues to be the most liquid stock in your Latin America universe. We have a strong controlling shareholder, you saw what we did in the Q2 with the capital increase. And so, we're very disciplined and limited on what we do on the equity side of the equation. I think that would be something we would only consider very much post-pandemic in terms of having a fair value for the equity of the company. As you know, also now, we're an independent in terms of not having a strategic equity partnership with any strategic partners. And so obviously, that possibility is also open for us as well as we would think about it. But those kinds of use of proceeds if it was an equity-related use of proceeds, if there is no liability management for us left to do.

So, those would be focused more on growth and investment -- and for us, growth in investment is 95% is going to be aircraft-related, which is going to be demand-related and what we're doing at point there. But with that, I kind of wanted to shift it back to your question on the MAXs. Because whatever we're going to be doing there is going to be linked in to what we're doing in asset acquisition, which is effectively MAXs.

Paulo Kakinoff -- Chief Executive Officer

Yes. And then, we are considering to get over the next 18 months, something between 20 to 30 aircraft. I mean, it's likely that we will be more to the top of the range, maybe even as valuable, but just to give you something, ballpark numbers.

Dan McKenzie -- Seaport Global -- Analyst

That's helpful. Thanks for all the time you guys.

Paulo Kakinoff -- Chief Executive Officer

Thank you.

Operator

[Operator Instructions] The next question comes from Savi Syth with Raymond James. Please go ahead.

Savi Syth -- Raymond James -- Analyst

Hey, good afternoon. If I might as a follow-up to going to Dan's question on MAX delivery, how are you thinking about the NG returns? And what's the typical kind of return cost for an NG?

Paulo Kakinoff -- Chief Executive Officer

Hi, Savi. Actually, we have been pretty successful in negotiating -- dealing with the lessors in order to get new planes replacing old contracts. So, that's one of the advantages of renewing the fleet at this moment. So, we didn't utilize that resource pre-pandemic and now we have the opportunity to address the necessity to return some NGs through new contracts being dealt with the same glasses. They have been pretty supportive and also interested in doing in so. The NG has proven again its liquidity in the market, so we have demand for our old aircraft and the deals that have been discussed or already negotiated with some lessors are showing that we do not face additional difficulties in renewing the fleet, replacing the current energies is by the new MAX [Phonetic]. Those aircraft both actually are great planes. They are demanded by the markets and we are also making the most out of the effective prices that we do have in our contract that's why [Phonetic]. At the same time, that -- the long lasting relationship with most of the lessors are bringing to us effective deals to replace those.

Richard Lark -- Chief Financial Officer

All of our aircraft return, future aircraft return costs are already provisioned in the balance sheet. The accounting rules require you fully provision all aircraft redelivery costs in your balance sheet. So, they're already, if you will, they're already expenses.

Paulo Kakinoff -- Chief Executive Officer

Right. That's a very important topic. There are no surprises on the road with regards to the returning class [Phonetic].

Savi Syth -- Raymond James -- Analyst

That's helpful. I appreciate that. As you think about the 20 to 30 MAXs coming over the next 18 months, are we assuming half the replacement, half the growth? Or how should we think about the net suite view here?

Paulo Kakinoff -- Chief Executive Officer

This is difficult. We are replacing, but you know the other contract, it gives the flexibility to rapidly adjust the number of aircraft in operation following the demand. So, we have protected our capability to either increase or reduce within the months period the size of our fleet. And is those are the tools we will definitely utilize whenever needed either to increase in a very fast way the number of aircraft we are operating or further reduce in case that we would be facing any kind of possible crisis -- political, economic or whatever could come. This is important to you to highlight our ambience [Phonetic]. We got to use along the last 20 years to make this is in Brazil; this is possibly one of the most volatile markets in the world considering the different scenarios we are facing from time to time due to political or economical circumstances. So, one of the most important assets of our business model is that how fast we can adapt ourselves following the circumstances.

Savi Syth -- Raymond James -- Analyst

I appreciate that. And if I might -- if this is a long response, we can catch it offline, but since these power-by-the-hour set ups are somewhat new, I was just wondering what's the economic consideration of flying an aircraft? How do they differ when you have a power-by-the-hour versus a kind of a regular lease? I understand with the power-by-the-hour. You don't have to pay unless you're flying it. But does that give it a hurdle to actually fly? I was just kind of curious with the differences in economic incentives are between the two types of leases.

Richard Lark -- Chief Financial Officer

Overall, we just focus on CASK. And so, we either do a finance lease or a sale leaseback or direct operating lease. It's all how that's going to impact our unit cost. In our particular case at GOL Airlines, we use that tool as a way of managing our fleet during this pandemic. As I mentioned before, pre-pandemic, we spent about almost all three years with the issue with the MAXs. To meet demand, we had accumulated around 34 aircrafts that are on the short-term leases, were basically buying us time to get to the resolution of the MAX problems. Pandemic hit, that became and asset because of the short-term nature of those contracts and that allowed GOL to negotiate very favorable terms with leasing companies, which involved mark-to-markets, power-by-the-hour and deferrals. In the power-by-the-hour calculation, in the power-by-the-hour construct in our case, and it is a goal, we calculated on average, how many aircraft we are going to need at the end of the pandemic, which was minus -- we returned around 15 aircrafts during this pandemic. So, we did do a downsizing.

One of the few airlines in our market that returned aircraft number one; number two, then we calculated, how many aircraft on average we were going to have to keep on the ground until things normalize post pandemic? Those are the aircraft that we then negotiated to convert into power-by-the-hour. Probationally, we're paying a very low fixed monthly cost and we only pay if we fly the aircraft. Because we also have a very high degree of seasonality here in Brazil, where in a normal year, we would do over 1,000 flight in the peak months of January and July, as well as 600 flights in the low-months. So, we have a huge seasonality. So, in our case, we use the power-by-the-hour tool to be able to keep aircraft on the ground without burning cash as opposed to having to return those aircraft and then resource them on the other side of the pandemic. And so, we preserved our ability to rapidly ramp up and follow demand here over the next couple of months as corporate demand comes back. And what I'm saying also applies to flight crews. We did not fire any technical people -- pilots and flight crews. We did a deal with the unions that transform about half of those fixed costs into variable costs as well.

The same thing with our fleet, effectively what we did with our fleet is we -- we transformed about 50% of it into variable cost. Same thing with the labor, so that when we ramp up, we can call back that labor and we don't have to go on and hire pilots or hire aircraft. So, for us it was a way of avoiding aircraft returns and extra aircraft returns, which also has cash outflow as it relates to the returns, stagnating that. And also, disconnecting employees that we would need back on the other side of it. So for us, both of those tools were just a way for us to kind of manage this valley of the pandemic. It's not something that we normally were doing in our company. We did have over the 20 years, we did sometimes have power-by-the-hour contracts, but it was just at special situation. It's generally not where it's flying to. Everything we're doing is always focused on minimizing the CASK without much consideration for the cash component.

During the pandemic, we had to prioritize the cash component in the short-term. So that's why we, in our particular case, I think be careful. Different airlines use different constructs on that. For us, it was a way of managing our assets so we wouldn't have to cut the assets during the pandemic and then pay expensive rates to rehire those assets post-pandemic. That was like one of the tools that we use. Okay?

Savi Syth -- Raymond James -- Analyst

That's super helpful. Thank you, both.

Richard Lark -- Chief Financial Officer

What I would do is we have confidence with the switch to our Portuguese language. We have one question on the webcast platform which I'll just read here and answer it. It's from [Indecipherable] which is one of our equity partners; can you comment on the increase in and CASK and CASK ex-Fuel in the Q2 in comparison with the Q1? What are the reasons? Basically on the operating side of the equation, Q1 to Q2, we had a 5% reduction in stage length which is a function of how we are managing the network and so that obviously, a 5% reduction in the stage lengths has a corresponding lower dilution of the overall costs. And then there was a slight increase in NIM's expenses as it relates to some of the things that we're talking about preparing aircraft for the ramp up. We've been spending money, having expenses to get aircraft ready for growth in Q3 and Q4, as well as the transition from the NGs to the MAXs. That's on the ex-Fuel side of the equation. On the fuel side of the equation, from Q1 to Q2 we had about a 20% increase in the average price for jet fuel based on what's going on with international oil prices. So those are the main reasons for that.

With that, I think we will finalize the questions. And in fact we will just give the closing remarks.

Paulo Kakinoff -- Chief Executive Officer

Yes. I just would like to thank you again for your attention and mainly for the great support along this crossing because you all have paid a huge attention, to every single staff that we have taken and always giving us your calls to clarify our strategy. So, I just would like to thank you very much for your support and attention so far. Thank you. Have a nice day.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Paulo Kakinoff -- Chief Executive Officer

Richard Lark -- Chief Financial Officer

Mike Linenberg -- Deutsche Bank -- Analyst

Dan McKenzie -- Seaport Global -- Analyst

Savi Syth -- Raymond James -- Analyst

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