Operator: Good day, and welcome to the GOL Airlines Third Quarter 2018 Results Conference Call. This call is being recorded and all participants will be in a listen-only mode during the company’s presentation. After GOL’s remarks, there will be a question-and-answer session. At that time further instructions will be given. [Operator Instructions].

This event is also being broadcast live via webcast and may be accessed through 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 either be answered by management during this call or by the GOL Investor Relations team after the conference is finished. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of GOL's management 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 you over to Paulo Kakinoff. Please begin.

Paulo Kakinoff: Good morning, ladies and gentlemen, and welcome to GOL Airlines third quarter conference call. I'm Paulo Kakinoff, Chief Executive Officer; and I'm joined by Richard Lark, our Chief Financial Officer.

Richard Lark: Good morning.

Good to be with you today.

Paulo Kakinoff: This morning we released our third quarter figures, also we made available on GOL's investor relations website three videos with our results presentation, financial review and brief Q&A. We improved our operating indicators in the quarter. GOL's RPK increased by 2.2% from BRL 9.6 billion in the third quarter 2017 to BRL 9.9 billion this quarter driven by 4.5% increase in the number of transported passengers. Strong demand allowed GOL to continue driving pricing through dynamic revenue management.

Average yield per passenger increased by 6.5% quarter-over-quarter, reaching BRL 0.274. Supply growth, ASK, increased 3.7% compared to third quarter 2017 driven by 0.2% increase in takeoffs and a 4.8% increase in seats. The average load factor was 79.1%, a decrease of 1.1 percentage point compared to same period in 2017. We continue to drive strong revenue growth. The combination of higher demand and optimized pricing resulted in net revenue for the quarter of BRL 2.9, an increase of 8.3% compared to the third quarter 2017.

Net RASK was BRL 0.232 in this quarter, an increase of 4.5% over same period 2017. Net PRASK increased 5% quarter-over-quarter, reaching BRL 0.217. Average fares increased by 4.2% from BRL 299 to BRL 312. GOL's 2018 guidance is for net revenues of approximately BRL 11.5 million. The GOL network serves high yielding routes and has the leading share in the corporate client segment.

We have the largest share of business traffic in the country. The recently received two 737 MAX 8s that are already operating in our fleet provide us reduced operating expenses and, in the near future, we will extend the range of our network allowing us to serve new markets in South America, the Caribbean and United States. With that, I'm going to hand you over to Rich, who is going to take us through some other highlights.

Richard Lark: Thanks, Kaki. First, we'd like to comment about our controlled cost environment.

Total CASK in the third quarter was BRL 0.218, 11.5% higher than in the same period in 2017 due to the increases in jet fuel prices. On an ex-fuel basis, CASK fell by 3.4%. GOL remains the cost leader in South America for the 17th consecutive year. While the average price of jet fuel increased by 3.7% in this quarter over the second quarter of 2018, the combination of stronger pricing, higher demand and operating result gains on fuel hedging permitted GOL's EBIT margin to reach 6.2% in the third quarter of 2018. Our operating income EBIT was BRL 185.5 million in this quarter and EBITDA margin was 12.3%.

EBITDAR was BRL 651 million, a 22.5% margin. GOL's 2018 guidance is for an EBIT margin of approximately 11%. Second, we want to highlight our cash flow management. The combination of operating cash flow generation of BRL 461 million in the quarter and stable cash liquidity improved the company's financial flexibility. Total liquidity, including cash financial investments, restricted cash and accounts receivable, was BRL 3 billion, an increase of BRL 872 million versus the third quarter of 2017.

Third, we would like to share the continued success of our liability management and refinancing. In spite of depreciation of the real against the dollar in the quarter, causing a net exchange and monetary variation of loss of BRL 187 million, our net debt, excluding perpetual bonds, to last 12-months EBITDA ratio was 3.2 times as of September of 2018, improving versus year-ago metrics of 3.4 times. Continuing our work with an aim to deleverage, in October, GOL successfully concluded a liability management and refinancing exercise on its debentures issued by its wholly owned subsidiary GOL Linhas Aereas, GLA. We fully amortized the total amount of BRL 1 billion and issued a new single series of non-convertible and unsecured debentures in the amount of BRL 888 million, resulting in a net indebtedness reduction of BRL 138 million. The new debentures were issued at a yield of 120% of the Brazilian CDI interbank rate, which is approximately 7.68% in reais, with quarterly interest payments of approximately BRL 17 million and semi-annual principal payments of approximately BRL 148 million, with final payment to be made on September 28, 2021.

It's worth mentioning that the yield on new debentures is substantially below that of the fully amortized debentures, which carried a rate of 132% of the CDI rate. We believe this is further evidence of the market's improved view of GOL's credit profile. 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 it’s credit metrics. Considering the debenture issuance, the average interest rate is 7.7% for local currency debt and for dollar dominated debt, the average interest rate for the company is 6.8%.

And to finalize, we present a preliminary quantitative analysis of certain indicators based on currently available information as of and for the last 12-months period ended September 30, 2018, considering the new standards of IFRS 16. The international accounting standards board, the IASB, has recently issued IFRS 16 as a new accounting standard, which will become mandatory on January 1, 2019. As a result of the mandatory adoption of IFRS 16 as of January 1, 2018, we have analyzed the impact of this accounting standard on us, and our preliminary valuation shows an estimate of a significant reduction in net debt as well as an improvement in the net adjusted debt to LTM EBITDA ratio. Our preliminary valuation showed that total adjusted debt will reduce by BRL 1.7 billion to BRL 2.7 billion, and that our annual EBIT margin will increase by four to five percentage points. Looking forward to the end of this year and 2019, we expect to confirm a scenario of continuous improvement for the Brazilian economy and the aviation industry in our country.

We have maintained a commitment to financial discipline, managing the effects of the Brazilian currency through efficient capacity management and dynamic yield management. EBITDA and EBIT margins in 2018 are expected to be around 16% and 11%, respectively. And our revised guidance indicates earnings per share before currency gains and losses is expected to be between BRL 0.05 and BRL 0.25. Leverage, measured as net debt excluding perpetual debt over EBITDA for 2018 should be slightly better than 2.6 times, reflecting our commitment to reduce leverage on our balance sheet. For 2019, we expect our domestic capacity growth to be between 1% and 3% and non-fuel CASK to be around BRL 0.14.

We also project an EBITDA margin of around 17% and expect to end the year 2019 with leverage of approximately 2.5 times. Now, I would like to return to Kakinoff.

Paulo Kakinoff: Thanks Rich. In summary, we worked hard to maximize our results this quarter. This quarter was particularly challenging due to the accelerated depreciation of the U.S.

dollar against the reais, a trend that has already begun to reverse, and due to the higher jet fuel prices. Our commitment to continuous improvement in our results has proven that our strategy of offering a differentiated high-quality product while relentlessly focusing on cost efficiency is bearing fruit. We remain focused on offering the best experience in air transportation, inclusive of services to our customers on new modern aircraft that connect our main markets with the most convenient [indiscernible]. We remain attentive to very disciplined capacity and prudent management of our balance sheet and liquidity, maintaining our cost leadership and continuing as a the preferred airline for our customers, while driving sustainable margins and the returns for our shareholders. To finalize, on October 14, as previously discussed, we announced that our intention to effect the corporate reorganization, including the merge of Smiles.

The reorganizations 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. It's also worth noting that in accordance with the company's commitment to the highest standards of corporate governance, the restructuring will further comply with all applicable rules, and in particular, opinion number 35 of the CVM. In this sense, and in the independent committee appointed by the Smiles board of directors, we will negotiate the terms of the transaction with GOL's management. GOL's management will not appoint the members to this committee, which will have complete discretion to analyze all the merits of the transaction. In addition, the committee will also issue a recommendation to Smiles' board of directors.

In this way, the terms of the reorganization depend directly on negotiations that will still occur, and which, as soon as they are signed, will be duly communicated to the market. Now I would like to initiate the Q&A Session.

Operator: Thank you. The floor is now open for questions. [Operator Instructions].

The first question comes from Michael Linenberg with Deutsche Bank.

Michael Linenberg: Good morning everybody. Two things, one, in your guidance for capacity growth next year, the 1% to 3% for domestic, is that – so that's ASKs, how does that compare to seats and maybe you can even throw in departures. I'm just trying to get a feel about whether or not you're going to be benefiting some upgauging or if it's more stage length? It is, nonetheless, a modest growth rate. Thanks.

Paulo Kakinoff: Hi Michael it’s Kakinoff here. Our 5% growth considers basically – it's 100% related to the seats too and it's targeted to reach, or to address, sorry, the 1% to 2% demand growth in domestic market and also it includes a combination of higher stage length in international markets. So if you talk on domestic only, it means 5% demand growth expectation, is what we have considered. And therefore, we are targeting 1% to 3% domestic ASK growth.

Richard Lark: And Mike, what we did – you probably saw that we reduced the guidance on the fleet by one aircraft.

We took it down by one aircraft, but we kept the same overall capacity growth and that's really two effects. One is the effect of the MAX coming in, which has a greater ASK productivity, produces more ASKs. It's got nine more seats and has a little bit longer stage length. In the domestic market, we're keeping the 1% to 3% domestic ASK growth for GOL, which is a little bit under domestic demand expectations that we have, which are around 5% based on this roughly two times elasticity of Brazilian GDP, which we expect to be about 2.5% this year. So as we expect demand to be going a little bit above that at around 5%, we're – this 1% to 3% capacity growth domestically is what's require to serve demand of the market and keep good rationality.

And then the difference on that, the second point is, what we're doing internationally, where we have a much larger relative expansion internationally because as we're doing additional service starting next week to Miami and Orlando. We're also adding Quito, which will be in there next year as well as Cancun in Mexico. And so that's giving us that additional growth relative and this is possible because of the MAX. And so the overall 5% to 10% capacity growth, the delta above that on the overall GOL integrated network is on the international side, which is also giving us sort of a little bit more diversification on the market side of the equation in terms of the markets that we're serving away from just pure Brazilian demand, which also has a dollar billing component as we've discussed.

Michael Linenberg: Okay, that's helpful.

Rich, my second just to you on the gain on the sale of aircraft we saw in this quarter. Presumably, we're going to see that in the fourth quarter as well. As I recall, I think you mentioned that you were able to take advantage of that probably for multiple quarters. Is the amount going to be similar to what it was in the third quarter? And I'm just – I'm trying to get to what – like the margin guide for the year. Is it a similar number? Or is it going to be a bit less or more? Can you just – any color around the size of that potential gain.

I understand or appreciate the fact that the transaction may not have yet closed but anything that can get us like roughly to what you think it could be based on aircraft that have been positioned…

Richard Lark: Yes, sure. We have 60 days left in the year. So we still have a lot of work to do here. But yes, it's – as you're saying, we're transforming the fleet. We've got NGs going out, combination of owned NGs and leased NGs going out and then new MAXs coming in.

So it's part of the fleet transformation, which will continue over the next 10 years, but as we're disposing of the NGs, there’s two components. One, it depends on the market, which we're seeing a very good market now for our types of NGs, which are these midlife NGs, really good demand and then also the other – that's a positive. The negative for us is that we can only do the fleet transformation to the extent that it matches with MAXs coming in. And as you know our fleet plan with that MAXs coming in, so we're tying the exit of the NGs with the entry of the MAXs and then where we have a gap there, we have to negotiate a short-term operating lease, if you will – short-term sale leaseback, if you will, on the NG that's going out, or we got to do some direct operating leases on MAXs – on MAX 8s. All those things are in the works, but to answer your – all those things are in the work for the fourth quarter as well as for next year.

We're working hard to try to accelerate the fleet transformation because it gives us huge gains on the productivity side of the equation as well as cost reduction and fuel savings. That being said, if we're successful in the next 60 days here, we should have a continuance of the fleet transformation, which would produce equity income similar to what we saw in the third quarter.

Michael Linenberg: Okay, great. Super helpful. Okay, thanks everybody.

Operator: Okay. The next question comes from Roberto Otero with Bank of America Merrill Lynch. Please go ahead.

Roberto Otero: Hi, Kaki, hi, Richard. Thanks for the call.

Just one question from our side. If you could walk us through the one-time effect in the operating income this quarter and what to expect for the next few quarters? That's it. Thank you.

Richard Lark: Yes, sure, Roberto. Not – part of the – in addition to the income we're generating from the business we have, which sells tickets and transport passengers, the GOL Linhas Aéreas business, the airline operating company, if you will.

In addition to that, what I just was talking with Michael was the aircraft asset business that we had – have, which is also part of our portfolio. And that we had around BRL 109 million of operating income on our fleet transformation disposal of our own 737 NGs. The other effect, so that was about BRL 109 million in third quarter operating income from our asset management business – the aircraft asset management business. In other business we have, which is the loyalty program business, we had around BRL60 million of one-time profits in income, which had about BRL39 million positive impact on EBIT on operating income, which was due to reversal of five years of the PIS/COFINS taxes on revenues, which was a reversal of the application of those PIS/COFINS taxes on the breakage at our Smiles subsidiary. That created a total net income increase one-time of BRL60 million and of that BRL39 million hit the operating income positive.

Roberto Otero: Okay, that’s clear. Thanks, Richard.

Richard Lark: Okay.

Operator: The next question comes from Duane Pfennigwerth with Evercore ISI. Please go ahead.

Duane Pfennigwerth: Hey, thanks. Just with respect to your 2019 guidance, Rich, can you talk about the underlying FX assumption that you expect in 2019. On the reduction in net financial expense from 2018 to 2019, is that already in the bag? Or is that based on refinancings that you expect. And then lastly, for the full year 2018 earnings per ADS guidance, what is the assumed FX gain if any in the fourth quarter? Thanks for taking the question.

Richard Lark: You mean, three questions.

Yes, let me go through the three questions here, and if you could just repeat number two and number three, I was – your first question I understood was what's our FX assumption for 2019 overall, correct?

Duane Pfennigwerth: Yes.

Richard Lark: We're assuming that we're going to be something close to 3.6 by the end of this year. That's in our planning and how we're working, and we assume it's kind of going to be bouncing around that level for next year, perhaps with a slight appreciation to a 3.5 level. That's based on our view on Brazilian economy and oil prices and how we do our risk management. I'm sorry, Duane.

I blanked on your second part of the question.

Duane Pfennigwerth: In 2019 you have, I think about BRL300 million of reduction in the net financial expense, basically net interest expense. Is that kind of the run rate you're at today? Or is that based on transactions that you expect to do in the future?

Richard Lark: Yes, sure. Let me walk you through that because this year, we have an enormous amount of exchange rate variations caused by the dollar appreciation. Of – if you – this year, 2018 full year, we're expecting to have around BRL800 million of net financial expense excluding the exchange rate variations – exchange variation should probably end up being around BRL600 million negative in the full year results of 2018, okay? And meaning so that total number there is going to be about BRL1.4 billion, BRL800 million is actual, net financial expense that actually paid and the other component is the variation effect, which has – it's basically, if you will, the exchange rate variation on our net spread of assets minus liabilities on the balance sheet given that our aircraft assets are not denominated in dollars, and therefore, they depreciate in an appreciating dollar environment.

So in 2019…

Duane Pfennigwerth: I don't – sorry, I don't mean to cut you off, but just the – understand that variation and how the assets don't get marked, but the debt does. But just for the, just the net interest expense portion of that, I believe, you're expecting a decline year-over-year, 2018 to 2019, and I was wondering…

Richard Lark: Yes, I was flipping to that. I was going to say that from that starting point, for next year, given what I just described on the exchange rate scenario, where we expect to finish the year and where it's expected to be throughout the year, we would expect minimal positive or negative exchange rate variations on the balance sheet for next year. So the rest of that roughly BRL500 million is that we're guiding for next year of net financial expense is pure actual net financial expense, which is the effect on the balance sheet. And yes, that is declining by about BRL300 million.

I just wanted to separate from you – there's none of these exchange rates effects on the balance sheet in that number, just to kind of set that aside, help you understand how that goes in 2018 also. But in 2019, that’s a combination of two factors. One, it is continuing deleveraging, where we expect to take about another – a slight deleveraging overall. As you saw, we just announced a – further amortization of one of our Brazilian real denominated debts, which we’re going to be amortizing next year, an additional BRL 300 million during the course of the year. We also reduced the interest expense on that significantly.

And so that’s one component. The other component is as we roll off, as we do these aircraft sales in our own portfolio, the financial leases roll off, and we’re negotiating good deals on the MAXs coming in that for next year we’ve all done – we’ve done in a sale leaseback mode and in operating leases. And of course, all of this is pre the IFRS 16 effects, which we can talk about separately, if you want. But that roughly BRL 300 million reduction is function of deleveraging in a couple of different categories on our balance sheet as well as the reduced interest rates that we’ve been able to negotiate on some of our debt instruments.

Duane Pfennigwerth: Okay, Rich.

And then maybe if I can just sneak one more in, I know it’s just a short amount of time, just a very few days, but could you compare bookings trends leading into the election versus bookings trends after the election. Are you seeing any acceleration or pickup in activity?

Richard Lark: Yes. Basically, among the business travelers, you see a slight improvement, which is mixed with the high season typical growth in our demands. So we believe that this is a kind of new trend. As I said, still, it’s early, but definitely growing.

We are quite positive on that.

Duane Pfennigwerth: Thank you, guys.

Richard Lark: Thank you.

Operator: Okay. The next question comes from Savi Syth with Raymond James.

Please go ahead.

Savi Syth: Hey, thanks for the call. Just a few quick follow-up questions from me. First is on the NG side, how many aircraft are left to you that you can sell over the next few years? And second on the sale leaseback of the MAXs, do you have any idea kind of what that can contribute next year? Because I’m guessing that we’ll be kind of a positive impact as well to non – is it going to be other operating income? And then just on the – sort of a third question, just on to follow up on the 4Q trends. It seems like your kind of guidance on revenue would imply RASK kind of really sequentially improving quite a bit, and I know the load factor is definitely helping in that direction.

Any additional kind of thoughts on that would be greatly appreciated.

Richard Lark: Sure, Savi, sure. I’d just take those three questions. On the NGs, we finished the quarter with 25 in – of owned NGs in the portfolio. And as we’ve guided, we’re in the process of disposing of those over the next two years to three years.

If we can find ways to accelerate the exchange to the MAX with – not increasing the fleet plan, but just – an increasing the participation of the MAXs in our overall fleet, we’ll do that. And we have the flexibility to dispose around 25 NGs faster, if we want to. But right now, I think you should expect that those should be kind of come out of the fleet over the next 24 months to 36 months. And it’s important to emphasize that, that is a regular component of our business model in that business. As we dispose the NGs, we’re also taking on MAX portfolio.

We’re also going to be adding some finance leases – using the finance lease mechanism within the MAX portfolio also, which will also create that income from – for us over the cycle. As you were mentioning in, for next year, our entire delivery schedule for next year on the MAXs was done in that sale leaseback format. And yes, we will have – we will also have some operating gains as we receive those aircraft in the fleet next year that would also impact positively operating income. As you know, we don’t disclose the prices on those deals, but it should be similar to what we’ve experienced historically. And finally on the fourth quarter, yes, I could – a couple of points.

Fourth quarter PRASK, if you will, year-over-year, I can also help you sequentially, year-over-year we expect that it should be up around 5% to 6%, on load factors as we’ve guided kind of in the low 80s, 80%, 81%, which will give us a RASK of kind of a 4% to 5% increase versus the fourth quarter of last year. And that’s a slight increase over the third quarter. Remember in Brazil, November, December, January and February will be kind of – it’s another high season for us because we’re now going to our, if you will, our summertime, which is the peak in January, high leisure traffic and then carnival is not in the month of February this year, so February should extend with that high VFR and leisure traveling. So we’re – we start to get a pickup in overall demand here over the next four months seasonality wise. Around the fare side and on the yield side, we do see some slight improvements in that even given the big increases that we’ve had in the last five or six months.

We’re being successful and keeping good pricing power, especially as we get into the high demand season now, which will run kind of until February.

Savi Syth: Just to follow on that – the sale leaseback, what’s kind of been the historical rate? I’m just kind of curious.

Richard Lark: No. As I was saying, we don’t disclose the numbers that we’re negotiating with on these deals. So you’d have to wait to see that in the – as we realize those gains going forward in the portfolio, obviously the positive based on our prices and our contracts and our – and the way we negotiate these deals.

We generally focus on, when we do a sale leaseback, minimizing the lease rate because our focus is on having the absolute lowest operating cost per ASK and then the difference on that ends up being the upfront cash that we realized on the sales.

Savi Syth: Very helpful, thank you.

Operator: The next question comes from Victor Mizusaki with Bradesco BBI. Please go ahead.

Victor Mizusaki: Thank you.

I have two questions here. The first one in the press release, you mentioned about the IFRS 16 that you’ll be implement next year, and your adjusted net debt could drop like BRL 1.7 billion to BRL 2.7 billion, so that’s a lot. So I don’t know if you can give any color around the potential implications for GOL, for example, if it’s possible to refinance our bonds in order to reduce the credit spread? And my second question, just follow up on forward looking for Q4, we can see load factor going up in your presentation. And now we have a scenario of falling FX rates, so can we assume that you have all these, let’s say, revenues at a much higher FX and then for Q4 will likely see a very strong EBIT margin?

Richard Lark: Hey, good morning, Victor. The first question, yes, we provided some preliminary valuations on the impacts of IFRS 16.

We’ve been getting this year a lot of questions on that issue. And we have finalized all the preliminary analysis, now that has to go into the full-year audit. These numbers will become official as of January 1, and we will present the 2018 numbers as well. But based on the initial results of that, which is – involve consultants as well as our own team, we estimate reduction in adjusted net debt of BRL 1.7 billion to BRL 2.7 billion. And then the counter party on the operating income side of plus 400 to 500 basis points on the EBIT margin.

And the numbers we provided in the release are the pro forma numbers on the last 12 months ended September 18, 2018, as if we – as if that was applied on the balance sheet today – on today’s balance sheet, you would then see – if converted to IFRS 16, you would see BRL 1.7 billion to BRL 2.7 billion net – adjusted net debt reduction. On your question on load of factor and the currency, if I understood it correctly, and if not, please repeat it. I think we should expect to see the high correlation of domestic market yields with currency with the U.S. dollar is historically when we have rational capacity management, in other words, capacity growing below demand. In our market we have a pretty good, very high correlation – 30% correlation of Brazilian yields with the U.S.

dollar, almost a dollarized revenue, if you will. But it’s very important there to have capacity growing below demand. And that’s why we’re very focused on that in our work. We expect domestic capacity next year to be growing on average at 5% year-over-year and our domestic – I’m sorry, domestic demand growing at 5%, and our domestic capacity plan is a 1% to 3% growth, which should allow us to ^pretty good recapture. Having said that, in the short term, given that we’re in the seasonality cycle of increasing demand in November, December, January.

January is only second to July in terms of demand. We should see some good buoyancy in fares and yields even if the Brazilian real is appreciating versus the U.S. dollar now that a fair amount of the political uncertainty is resolved. But if that wasn’t exactly your question please ask me.

Victor Mizusaki: Yes, no.

That’s it. And Richard, just a last question. Think about your guidance for next year. You do not have any of the impact related to the IFRS in your current guidance for next year, right?

Richard Lark: I think maybe we have a bad audio here, Victor. I’m sorry, I can’t – I couldn’t get the question.

Victor Mizusaki: Your guidance for next year, do you incorporate the impact of the IFRS 16? Or it may change because of the IFRS 16 next year?

Richard Lark: Sorry, now I get it. No, are the – we have not yet shifted our reporting methodology to IFRS 16. We’ll only do that with – most with the first quarter of 2019. So probably what we’ll do – when we provide our fourth quarter numbers and whatever we talk about with next year, the historical will still be in the current format and then the first quarter will be the first quarter that we will present fully retroactively adjusted to the IFRS 16 methodology for this particular issue. But in February – on February 28 next year, when we disclose our full year results, we’ll also be providing what the actual 2018 audit confirms in terms of the IFRS 16 calculation.

So you have a – you have a pretty good view on how that would impact. But given that our overall growth in assets, and liabilities between where we are now and next year is minimal, the impacts will be similar, within the range that we’re providing for you guys.

Victor Mizusaki: Okay. Thank you.

Operator: The next question comes from Bruno Amorim with Goldman Sachs.

Please go ahead.

Bruno Amorim: Yes, sure. So a quick one from my side. So could you please just remind us to what extent, if any, GOL still benefits from payroll tax reductions? And what you expect for 2019? Thank you very much.

Richard Lark: Sorry, so you were asking about additional payroll tax reduction? We don’t – we currently don’t expect any changes from where we are right now in terms of that.

I think you’re talking about the potential loss of the current situation?

Bruno Amorim: Yes.

Richard Lark: We don’t have any updates on that now.

Paulo Kakinoff: That is no horizon on that yet. We need to wait until the next year’s, I mean, political environment to understand that whether this kind of point of view is going to stay or not.

Richard Lark: Yes, we’re in the process now of a change in the government, so in January the new administration will assume and then we maybe will have visibility on a lot of these tax issues and institutional issues across Brazil.

I think we'll have to wait until January to get more clarity on that. Anything that comes up between now and then would be speculative because with many issues, the government going out is not allowed to effect changes. And so we'll have to wait until the new government comes in and see what – if anything changes, the policy will be. And so I expect, we'll be talking about that in March when we talk about our fourth quarter results.

Bruno Amorim: Okay.

Thank you very much.

Operator: The next question comes from Stephen Trent with Citi. Please go ahead.

Stephen Trent: Good morning, and thanks for taking my questions. The couple of mine have been answered.

Just one or two follow-ups for you. I'm just curious, in terms of the domestic market, what you're seeing from your other competitors. There seems to be one relatively small competitor where the – its financial health is maybe a bit of a question mark. And then the second question, maybe very early at this stage, but if I'm not mistaken, Joao Doria is going to be the next Sao Paulo governor. And any early read from him with respect to whether Sao Paulo might take a second look at its jet fuel taxation?

Paulo Kakinoff: Actually, Kakinoff here, actually we have no reading on the new Sao Paulo governor policy on it.

Basically, we know that he is always trying to make the most out of the current assets and Sao Paulo has some airports, those could incentivized to host more flights, but honestly we didn’t see any kind of information or even any input, which could be understood as our capacity to read the new governor's policy. And regarding the competitors, we do see more rational behavior. We could have said that this rational as it should be, but I believe that the market will behave accordingly over the next month, mainly because some of the models, at least from our point of view, they are simply not sustainable. So I think that this is kind of likely landscape scenario for the next period.

Stephen Trent: Okay.

Let me leave it there. Thanks, Paulo.

Operator: [Operator Instructions]. The next question comes from Dan McKenzie with Buckingham Research. Please go ahead.

Dan McKenzie: Well. Thanks, good morning, guys. At the risk of kicking a dead horse here and going back to some of your – the prior question or commentary. But you've got a lot of U investor – U.S. investors that really don't track the local Brazilian news or economy.

Seems, as you point out, the country's on the cusp of a lot of change, it then implies a better operating environment, seems like your outlook factors in a tiny bit of this. So first, would you – it seems like – would you agree with respect to the outlook? And secondly, and I know you don't want to speculate on reforms getting passed, but is there a consensus view on if they're likely get passed at this point or is it just simply too tough to call? So again, just trying to get at this idea of perhaps the operating environment next year being more likely to surprise on the upside or if the outlook for 2019 is really just sort of factoring in steady state?

Paulo Kakinoff: In considering our outlook for 2019, we are not considering any kind of boost in the economy, okay? But if I may, I'd like to share with you some of my personal view on what could go positively regarding our economy. First of all, this kind of combination of having a low inflation rate, plus low prime rate considering Brazilian standards, okay? And even only a marginal GDP growth is something not only pretty powerful to sustain the demand, but also could be considered somehow new to – in relation to our history. I mean, if you go back in five decades, you're not going to find not even a single year where we were able to live with 6.5% prime rate in Brazil, 4-plus something inflation rate and then positive GDP. This is the situation this year.

And it's going to be added by also a quite new additional factor, which is political stability. As this is the current outlook, for the first time in four years, we are supposed to get rid of pretty much full and final influences, such as impeachment, change of the congressman and all this kind of turbulence. So I believe that path should leave a better more dynamic economy, is there. But at the moment, nobody knows exactly what's going to be the economy – the policies for the economy at the beginning of the next government. And I – personally, I'm quite positive because there is this powerful combination and now it's added by more political stability.

I don't know whether Richard want to talk..

Richard Lark: Yes, I think in terms of – it's a good question because we're actually – we're actually beyond the inflection report – inflection point on demand before this recent kind of backup on the currency as it was related to the elections. What I mean by that is that last year was – 2017 was the first year of growth following about six years of slowdown and contraction and recession. And so when you think about the longer cycle, we're probably now – we're clawing our way on year two of what should be – this positive part of the growth cycle for the next three to four years until we get to the next turn, if you will. And so I think that's a good question to ask, because we're all feeling this out here in Brazil in a variety of sectors, feeling our way out on the other side of this election cycle and how we address the challenges of the demand cycle, as opposed to a contraction cycle.

We've spent the last – since 2004, we've been gradually downsizing GOL and then in 2015, 2016, the final part of that was a reduction in assets and return of – we eliminated 29 aircraft from the fleet, rightsized the fleet, rightsized the liabilities in kind of the 2016 period to prepare for this growth cycle with the right demand/supply scenario. And now we've just kind of eliminated uncertainty of – on the political side, and there's a lot of work that has to be done still, but next year, we're going to be dealing with those new components in terms of what if any policy changes would be, and as Kakinoff mentioned, we never had in modern Brazilian economic history, this combination of inflation and interest rates at 4-plus-7%. We never had it ever. And – but on the negative side, we still do have extremely high unemployment in Brazil, which has a big impact on demand of a variety of sectors including ours. This is something that has been building for the last six years now.

It's somewhere between – the official numbers are 12%, real numbers are probably higher than that. And so that portion of the economy, if you will, which for us is the more VFR client, visitors, friends and relatives, is still lagging for sure. And they're still, if you will, trying to recompose their coffers, fill up their coffers again with some income and savings. But the Brazilian piece, as Kaki was mentioning, sorry – the corporate piece, the Brazilian business piece is really the key driver of our business. And that's our main customer.

It's over 70% of our revenues, and over 50% of our customers and 70% of our revenues are coming out of people traveling for business purposes, which are driven by what's going on in the core economy. In Brazil, also very commodity, natural resources driven, and so all these kind of components will play into what happens with demand next year. And this 5% demand growth will be tied to whatever GDP ends up being. We're working with roughly 2.5%, and you can work with two times elasticity on that. So I'd keep your eye on that.

I would – I would keep your eye on how GDP growth, which is the best leading indicator that we use here on what can happen with demand. So if GDP growth picks up to 3%, I think you could expect 6% or maybe more demand growth. So that would I would – for folks not sitting with us here inside of Congonhas Airport in a hangar, seeing the flows and the massive traffic jam that's coming in here to Congonhas Airport. Tomorrow is a holiday here in Brazil, and so we've got a lot of people traveling. And so if you want to get into Congonhas Airport, you got a bit of a traffic jam to get in here today, but for those who aren't kind of seeing that here locally, that's how I would approach it then.

I would try to keep your eye on what happens with the GDP estimates, as the best estimate that the social science can predict on what's going to be happening with the animal spirits here in Brazil next year. That's how I would answer that question.

Dan McKenzie: Yes, it’s going to be fun to watch that’s for sure. Just kind of an airline specific question, where you're at with respect to discussions with Delta regarding a potential JV here? And at some point, what's the potential or not to include Aeromexico?

Paulo Kakinoff: Actually, this JV is something is considered just – or got treated by us in a speculative way, so we are having some ideas, thoughts on it. Clearly, there is a potential to have that be implemented.

But there are still some regulatory issues to be solved. I don't believe that is something to be deployed anytime soon. But Delta and GOL, they have a long history of very positive and rich partnership. And I think that's a natural development to have, I'd use an even tighter relationship with them. But there are too many obstacles to be removed, starting by the regulatory environment and also the network of both airlines in South America, Latin America, should be addressed before we could go on a more substantial discussion on JVs.

Dan McKenzie: Interesting, just got a curiosity, what's the potential for doing something similar with Aeromexico or…

Paulo Kakinoff: Yes, Aeromexico is one of our partners. We are codesharing with them already for some years. We don't even start any kind of discussion related potential JVs. Theoretically yes, but at the moment it's just merely speculation.

Richard Lark: Yes, a complement to that, Dan.

We have a unique component here among global low-cost carriers. In our business model, the GOL business model, we have over 90 codeshares and interlines that are taking advantage of our network here in Brazil, which is the largest network in terms of capillarity. And so when you look at how we're working today globally, we sell tickets in 140 countries around the world, and we're working with over 90 different airlines in a variety of formats, codeshared, interlined on our network. We're – today, we're generating over 6% of our total revenues are coming out of revenues generated from these partnerships onto the GOL network. And so it's a – there's a very global aspect to our business in terms of people – airlines around the world.

And people that want to travel to Brazil accessing our network and traveling, of which Delta and Aeromexico are already part of that. And as Kaki said, we want to keep developing that business of – in terms of monetizing the value of our network and our position as the largest domestic carrier and the attractiveness of that also from the product side, we don't see any restrictions today all with how global international airlines look at the attractiveness of our product in terms of doing the last mile distribution here on our domestic network, and then also from our local customers, they're able to access what ends up being a very global network through the GOL website, through these very large, almost massive numbers of codeshares and interlines that we've developed here over the last 15 years. That's a slight deviation from the pure low-cost carrier model, but it's something for our model – it's like I said, it's generating over BRL 600 million with incremental revenues for us, which have a very, very high contribution margin.

Dan McKenzie: Yes, very good. Thanks for the time guys.

Operator: [Operator Instructions]. The next question comes from Josh Milberg with Morgan Stanley. Please go ahead.

Josh Milberg: Richard, thank you very much for the question. This is far afield of the results, but I was hoping you could give a little bit of your perspective on the issue of IMO 2020? And just whether that's something that you think could lead to a meaningful shift in your fuel hedging strategy?

Richard Lark: Yes.

The short answer is no, we don’t see any impact of that in terms of what we're doing. Keeping in mind that in Brazil – that basically all gets filtered through what we get through the Brazilian supply chain with basically – fuel prices – jet fuel prices in Brazil being basically determined by the Petrobras mechanism, which is basically international prices on the cost side. And so we basically are paying international prices with a bit of a little lag. So in there is, what's going on with WTI, Brent, the crack spread and then the U.S. dollar to Brazilian Rial exchange rate and so to the extent that, that increase is international prices, we would see that impact all airlines here in Brazil.

And then that just goes into how we normally do the risk management, which is just kind of remembering. The first component for us on the risk management is, it starts with the capacity decision in terms of keeping that in a position where we can keep a very high degree of pricing power, so to get extent that over a period of time, and we need to deal with increasing cost from oil prices, we have a high degree to pass those on the customers. And so with normal volatilities that kind of get absorbed into the regular revenue management. And so what we do on the hedging side of the equation, we get – we basically try to protect against the shorter-term volatility. For example, we're about 80% hedged here for the fourth quarter in the high 70s, and we're about hedged for the first half of next year in the high 70s.

So that's to protect us against if we get a big run-up in oil prices that we can kind of work them through the system on the revenue management side and remembering that revenue management ability is only possible if we've got a rational capacity management. Now the other point I would add is that one of the reasons why we're investing billions of dollars in our fleet renewal with the 737 MAX is overall related to this – the fuel component. The MAX – that we've already got two operating in our fleet today is delivering as advertised the 15% fuel economy. And so as we transform from the NGs to the MAXs, we're getting kind of an operational hedge, if you will, on – relative also to competitors. On absolute basis, it's the 15% cost reduction versus our current NGs.

And when I say the 15% cost reduction what I mean is, when we phase out a MAX – when we phase out an NG and put in a MAX, that's a 15% fuel economy on day one. That being said that, our competitors have a different productivity there. And so this also opens up a further gap for us on the competitive side, which is our key tenant here at all to maintain substantial gap, if you will, on the CASK – on the CASK side of the equation. So they always kind of roll in. No, we're not kind of taking any specific directions to deal with the additional costs or charges or taxes that are going to be applied based on the shipping element, if you will of fuel, but we think we'll be able to manage that through the combination rational capacity management, dynamic yield management and then complementing that with what we do on the hedging side.

And the real victory for us is this all happening at a time when we are transforming our fleet from the NGs to the MAXs. And so we're pretty excited about that. And so that's all going to kind of get caught up in that. So I think that IMO component,, it obviously will be in our cost structure, but it won't have any impact at all on the economics of our business.

Josh Milberg: Okay, very clear thank you.

Operator: Okay, this concludes today’s question and answer session, I would like to invite Mr. Kakinoff to proceed with his closing remarks, please go ahead sir.

Paulo Kakinoff: Okay. Ladies and gentlemen, I hope you found our presentation and the Q&A session helpful. Our Investor Relations team is available to speak with you if needed.

Thank you very much.

Operator: This concludes the GOL Airlines conference call for today. Thank you very much for your participation, and have a nice day.