As filed with the Securities and Exchange Commission on April 30, 2013

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington ,  D.C. 20549

_______________

FORM 20 - F 

_______________

 

¨             REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x            ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31 ,  2012

OR

¨             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

¨             SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-32221

Gol Linhas Aéreas Inteligentes S.A.

(Exact name of Registrant as specified in its charter)

Gol Intelligent Airlines Inc.

(Translation of Registrant’s name into English)

_________________

The Federative Republic of Brazil

(Jurisdiction of incorporation or organization)
Edmar Prado Lopes Neto
+55 11 5098-7872
Fax:  +55 11 5098-2341
E-mail:  ri@golnaweb.com.br
Praça Comandante Linneu Gomes, S/N Portaria 3,
Jardim Aeroporto
04626-020 São Paulo, São Paulo
Federative Republic of Brazil
(+55 11 2128-4700)


(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

___________________________________________

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class:

Name of each exchange on which registered:

Preferred Shares, without par value
American Depositary Shares (as evidenced by American Depositary Receipts), each representing one share of Preferred Stock

New York Stock Exchange*
New York Stock Exchange

 

* Not for trading purposes, but only in connection with the trading on the New York Stock Exchange of American Depositary Shares representing those preferred shares.

___________________________________________

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None

___________________________________________

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
7.50% Senior Notes Due 2017

___________________________________________

 
 

The number of outstanding shares of each class of stock of Gol Linhas Aéreas Inteligentes S.A. as of December 31, 2012:

143.858.204                                                          Shares of Common Stock

134.858.582                                                          Shares of Preferred Stock

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ¨  No x

If this is an annual or transition report, indicate by check mark if the registrant is not required to file pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  Yes ¨  No x 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨  No ¨ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated Filer ¨ 

Accelerated Filer x 

Non-accelerated Filer ¨ 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP ¨ 

International Financial Reporting Standards as issued by the International Accounting Standards Board x 

Other ¨   

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 ¨  Item 18 ¨ 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No x 

 

 
 
 

Table of Contents

 

Presentation of Financial and Other Data 1
Cautionary Statements about Forward-Looking Statements 2
ITEM 1. Identity of Directors, Senior Management and Advisors 3
ITEM 2. Offer Statistics and Expected Timetable 3
ITEM 3. Key Information 3
A. Selected Financial Data 3
B. Capitalization and Indebtedness 7
C. Reasons for the Offer and Use of Proceeds 7
D. Risk Factors 7
ITEM 4. Information on the Company 17
A. History and Development of the Company 17
B. Business Overview 18
C. Organizational Structure 43
D. Property, Plant and Equipment 43
ITEM 4A. Unresolved Staff Comments 43
ITEM 5. Operating and Financial Review and Prospects 44
A. Operating Results 44
B. Liquidity and Capital Resources 63
C. Research and Development, Patents and Licenses, etc 69
D. Trend Information 69
E. Off-Balance Sheet Arrangements 69
F. Tabular Disclosure of Contractual Obligations 69
ITEM 6. Directors, Senior Management and Employees 70
A. Directors and Senior Management 70
B. Compensation 73
C. Board Practices 74
D. Employees 76
E. Share Ownership 77
ITEM 7. Major Shareholders and Related Party Transactions 77
A. Major Shareholders 77
B. Related Party Transactions 78
C. Interests of Experts and Counsel 79
ITEM 8. Financial Information 79
A. Consolidated Statements and Other Financial Information 79
B. Significant Changes 84
ITEM 9. The Offer and Listing 84
A. Offer and Listing Details 84
B. Plan of Distribution 85
C. Markets 86
D. Selling Shareholders 90
E. Dilution 90
F. Expenses of the Issue 90
ITEM 10. Additional Information 90
A. Share Capital 90

 

  i

 
B. Memorandum and Articles of Association 91
C. Material Contracts 99
D. Exchange Controls 99
E. Taxation 100
F. Dividends and Paying Agents 108
G. Statement by Experts 108
H. Documents on Display 108
I. Subsidiary Information 109
ITEM 11. Quantitative and Qualitative Disclosures about Market Risk 109
ITEM 12. Description of Securities other than Equity Securities 110
A. American Depositary Shares 110
ITEM 13. Defaults, Dividend Arrearages and Delinquencies 112
ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 112
ITEM 15. Controls and Procedures 112
ITEM 16. [Reserved] 113
ITEM 16A. Audit Committee Financial Expert 113
ITEM 16B. Code of Ethics 113
ITEM 16C. Principal Accountant Fees and Services 113
ITEM 16D. Exemptions from the Listing Standards for Audit Committees 114
ITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 114
ITEM 16F. Change in Registrant’s Certifying Accountant 114
ITEM 16G. Corporate Governance 114
ITEM 17. Financial Statements 117
ITEM 18. Financial Statements 117
ITEM 19. Exhibits 117
Signature   122

 

 

ii

 

 

 

Presentation of Financial and Other Data

The consolidated financial statements included in this annual report have been prepared in accordance with International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB), in reais. 

We have translated some of the real  amounts contained in this annual report into U.S. dollars.  The rate used to translate such amounts in respect of the year ended December 31, 2012 was R$2.044 to US$1.00, which was the commercial rate for the purchase of U.S. dollars in effect on December 31, 2012, as reported by the Central Bank.  The U.S. dollar equivalent information presented in this annual report is provided solely for the convenience of investors and should not be construed as implying that the real  amounts represent, or could have been or could be converted into, U.S. dollars at the above rate.  See “Exchange Rates” for more detailed information regarding the Brazilian foreign exchange system and historical data on the exchange rate of the real  against the into U.S. dollars.

In this annual report, we use the terms “the Registrant” to refer to Gol Linhas Aéreas Inteligentes S.A., and “Gol”, “Company”, “we,” “us” and “our” to refer to the Registrant and its consolidated subsidiaries together, except where the context requires otherwise.  The term VRG refers to VRG Linhas Aéreas S.A., a wholly owned subsidiary of the Registrant.  References to “preferred shares” and “ADSs” refer to non-voting preferred shares of the Registrant and American depositary shares representing those preferred shares, respectively, except where the context requires otherwise.

The operating results of Webjet Linhas Aéreas S.A., or Webjet, are consolidated in our financial statements as from October 3, 2011. All information in this annual report reflects the acquisition of Webjet, unless otherwise indicated. On November 23, 2012, we began the process of winding up Webjet’s activities and the consequent discontinuation of its brand. See “Item 5. Operating and Financial Review and Prospects – A. Operating Results – Webjet.”

The phrase “Brazilian government” refers to the federal government of the Federative Republic of Brazil, and the term “Central Bank” refers to the Banco Central do Brasil, or the Central Bank.  The term “Brazil” refers to the Federative Republic of Brazil.  The terms “U.S. dollar” and “U.S. dollars” and the symbol “US$” refer to the legal currency of the United States.  The terms “ real ” and “ reais ” and the symbol “R$” refer to the legal currency of Brazil.  “IFRS” refers to the international financial reporting standards issued by the International Accounting Standards Board, or IASB. We make statements in this annual report about our competitive position and market share in, and the market size of, the Brazilian and international airline industry.  We have made these statements on the basis of statistics and other information from third party sources, governmental agencies or industry or general publications that we believe are reliable.  Although we have no reason to believe any of this information or these reports are inaccurate in any material respect, we have not verified the competitive position, market share and market size or market growth data provided by third parties or by industry or general publications.  All industry and market data contained in this annual report is based upon the latest publicly available information as of the date of this annual report.

Certain figures included in this annual report have been rounded.  Accordingly, figures shown as totals in certain tables may not be an arithmetic sum of the figures that precede them.

This annual report contains terms relating to operating performance in the airline industry that are defined as follows:

·          “Aircraft utilization” represents the average number of block-hours operated per day per aircraft for the total aircraft fleet.

·          “Available seat kilometers” or “ASK” represents the aircraft seating capacity multiplied by the number of kilometers flown.

·          “Average stage length” represents the average number of kilometers flown per flight.

·          “Block-hours” refers to the elapsed time between an aircraft’s leaving an airport gate and arriving at an airport gate.

 

1

 
 

·          “Breakeven load factor” is the passenger load factor that will result in passenger revenues being equal to operating expenses.

·          “Load factor” represents the percentage of aircraft seating capacity that is actually utilized (calculated by dividing revenue passenger kilometers by available seat kilometers).

·          “Operating expense per available seat kilometer” or “CASK” represents operating expenses divided by available seat kilometers.

·          “Operating expense excluding fuel expense per available seat kilometer” or “CASK - ex fuel” represents operating expenses less fuel expense divided by available seat kilometers.

·          “Operating revenue per available seat kilometer” or “RASK” represents operating revenues divided by available seat kilometers.

·          “Passenger revenue per available seat kilometer” represents passenger revenue divided by available seat kilometers.

·          “Revenue passengers” represents the total number of paying passengers flown on all flight segments.

·          “Revenue passenger kilometers” or “RPK” represents the numbers of kilometers flown by revenue passengers.

·          “Yield per passenger kilometer” or “yield” represents the average amount one passenger pays to fly one kilometer.

Cautionary Statements about Forward-Looking Statements

This annual report includes forward-looking statements, principally under the captions “Risk Factors,” “Operating and Financial Review and Prospects” and “Business Overview.”  We have based these forward-looking statements largely on our current beliefs, expectations and projections about future events and financial trends affecting our business.  Many important factors, in addition to those discussed elsewhere in this annual report, could cause our actual results to differ substantially from those anticipated in our forward-looking statements, including, among other things:

·          general economic, political and business conditions in Brazil and in other South American, U.S. and Caribbean markets we serve;

·          the effects of global financial markets and economic crises;

·          management’s expectations and estimates concerning our future financial performance and financing plans and programs;

·          our level of fixed obligations;

·          our capital expenditure plans;

·          our ability to obtain financing on acceptable terms;

·          inflation and fluctuations in the exchange rate of the real ; 

·          existing and future governmental regulations, including air traffic capacity controls;

·          increases in fuel costs, maintenance costs and insurance premiums;

·          changes in market prices, customer demand and preferences, and competitive conditions;

·          cyclical and seasonal fluctuations in our operating results;

·          defects or mechanical problems with our aircraft;

·          our ability to successfully implement our strategy;

·          developments in the Brazilian civil aviation infrastructure, including air traffic control, airspace and airport infrastructure, and

 

2

 

 

·          the risk factors discussed under “Risk Factors.”

The words “believe,” “may,” “will,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar words are intended to identify forward-looking statements.  Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, and the effects of future regulation and the effects of competition.  Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update publicly or to revise any forward-looking statements after we distribute this annual report because of new information, future events or other factors.  In light of the risks and uncertainties described above, the forward-looking events and circumstances discussed in this annual report might not occur and are not guarantees of future performance.

PART I

ITEM 1.        Identity of Directors, Senior Management and Advisors

Not applicable.

ITEM 2.        Offer Statistics and Expected Timetable

Not applicable.

ITEM 3.        Key Information

A.       Selected Financial Data

We present in this section the following summary financial data:

·          Summary financial information derived from our audited consolidated financial statements included herein as of and for the years ended December 31, 2012, 2011and 2010; and

·          Summary financial information derived from our audited consolidated financial statements not included herein as of and for the year ended December 31, 2009 and 2008.

The following tables present summary historical consolidated financial and operating data for us for each of the periods indicated.  Solely for the convenience of the reader, real  amounts as of and for the year ended December 31, 2012 have been translated into U.S. dollars at the commercial market rate in effect on December 31, 2012 as reported by the Central Bank of R$2.044 to US$1.00.

3

 
 
Summary Financial Information
 

 

Year Ended December 31,

 

2008

2009

2010

2011

2012

2012

Income Statement Data:

(in thousands)

Operating revenues:

 

 

 

 

 

 

Passenger

R$5,890,104

R$5,306,530

R$6,277,657

R$6,713,029

R$7,159,987

US$3,503,786

Cargo and other

516,089

718,852

701,790

826,279

943,572

461,743

Total operating revenues

6,406,193

6,025,382

6,979,447

7,539,308

8,103,559

3,965,529

Operating expenses:

 

 

 

 

 

 

Salaries

(983,783)

(1,100,953)

(1,252,402)

(1,560,436)

(1,569,670)

(768,128)

Aircraft fuel

(2,630,834)

(1,813,104)

(2,287,410)

(3,060,665)

(3,742,219)

(1,831,279)

Aircraft rent

(645,089)

(650,683)

(555,662)

(505,058)

(644,031)

(315,161)

Sales and marketing 

(588,735)

(364,551)

(367,757)

(402,568)

(426,582)

(208,751)

Landing fees

(338,370)

(312,637)

(331,882)

(395,249)

(559,421)

(273,756)

Aircraft and traffic servicing

(422,177)

(381,721)

(430,521)

(484,642)

(528,737)

(258,741)

Maintenance, materials and repairs

(388,030)

(417,212)

(422,950)

(434,181)

(417,990)

(204,546)

Depreciation and amortization

(125,127)

(142,853)

(281,604)

(395,807)

(519,631)

(254,285)

Other operating expenses

(372,696)

(428,376)

(351,464)

(633,634)

(600,891)

(294,050)

Gain on bargain purchase

-

-

-

88,428

-

-

Total operating expenses

(6,494,841)

(5,612,090)

(6,281,652)

(7,783,812)

(9,009,172)

(4,408,697)

Income (loss) from operations before income (expense)

(88,648)

413,292

697,795

(244,504)

(905,613)

(443,168)

Interest expense

(269,278)

(288,112)

(297,256)

(414,430)

(453,731)

(222,036)

Financial income (expense), net

(837,116)

630,956

(14,043)

(341,484)

(225,478)

(110,339)

Income (loss) before income taxes and social contribution

(1,195,042)

756,136

386,496

(1,000,418)

(1,584,822)

(775,543)

Income taxes

(44,305)

134,696

(172,299)

248,880

71,907

35,188

Net income (loss) 

(1,239,347)

890,832

214,197

(751,538)

(1,512,915)

(740,355)

Basic earnings (loss) per share (1):

(6.160)

3.916

0.798

(2.78)

(5.61)

(2.75)

Diluted earnings (loss) per share (1) :

(6.160)

3.914

0.796

(2.78)

(5.61)

(2.75)

Weighted average number of outstanding shares in relation to basic earnings (loss) per share (in thousands) (1)

201,193

227,472

268,564

270,376

269,869

269,869

Weighted average number of outstanding shares in relation to diluted earnings (loss) per share (in thousands) (1)

201,193

227,583

268,954

270,376

269,869

269,869

Basic earnings per ADS (1)

(6.160)

3.916

0.798

(2.78)

(5.61)

(2.75)

Diluted earnings per ADS (1)

(6.160)

3.914

0.796

(2.78)

(5.61)

(2.75)

Dividends declared per share (net of withheld income tax) (1)

0.18

0.70

0.19

-

-

 

Dividends declared per ADS (net of withheld income tax) (1)

0.18

0.70

0.19

-

-

 

 

4

 
 

As of December 31,

2008

2009

2010

2011

2012

2012

Balance Sheet Data :   

(in thousands)

Cash and cash equivalents

R$169,330

R$1,382,408

R$1,955,858

R$1,230,287

R$775,551

US$379,521

Short-term investments

245,585

40,444

22,606

1,009,068

585,028

286,287

Trade receivables (2)

344,927

519,308

303,054

354,134

325,665

159,366

Deposits

731,374

855,569

715,377

630,599

657,196

321,603

Total assets

7,131,865

8,720,120

9,063,847

10,655,141

9,027,098

4,417,469

Short-term debt

967,452

591,695

346,008

1,552,440

1,719,625

841,510

Shareholders’ equity

1,071,608

2,609,986

2,929,169

2,205,911

732,828

358,614

 

 

Year Ended December 31,

 

2008

2009

2010

2011

2012

2012

Other Financial Data:

(in thousands except percentages)

Operating margin (3)

(1.4)%

6.9%

10.00%

(3.2)%

-11.2%

-11.2%

Net cash provided by (used in) operating activities

R$151,700

R$457,259

R$723,897

R$ (602,520) 

R$133,293

US$65,228

Net cash provided by (used in) investing activities

40,650

5,422

(279,459)

(469,168)

(590,443)

(288,937)

Net cash provided by (used in) financing activities

(611,301)

769,238

139,900

354,547

(4,381)

(2,144)

             

 

Summary Operational Data

 

Year Ended December 31

 

2008

2009

2010 (7)

2011 (6)

2012

Operating Data (5) :  

 

 

 

 

 

Revenue passengers (in thousands)

25,664

28,410

32,915

36,220

39,164

Revenue passenger kilometers (in millions)

25,308

25,669

30,649

34,461

36,390

Available seat kilometers (in millions)

41,107

40,355

45,937

50,373

51,836

Load-factor 

61.6%

63.6%

66.7%

68.4%

70.2%

Break-even load-factor 

62.5%

59.2%

60.0%

70.6%

78.0%

Aircraft utilization (block hours per day)

12.1

11.6

12.9

13.0

12.1

Average fare 

262

191

191

185

183

Yield per passenger kilometer (cents)

23.3

20.7

20.5

19.5

19.7

Passenger revenue per available seat kilometer (cents)

14.3

13.1

13.7

13.4

13.8

Operating revenue per available seat kilometer (cents)

15.6

14.9

15.2

15.0

15.6

Operating expense per available seat kilometer (cents)

15.8

13.9

13.7

15.5

17.4

Operating expense less fuel expense per available seat kilometer (cents)

9.4

9.4

8.7

9.4

10.2

Departures 

268,540

273,602

295,160

314,190

348,578

Departures per day 

736

750

811

861

955

Destinations served 

59

59

59

63

65

Average stage length (kilometers)

933

890

907

908

877

Average number of operating aircraft during period 

106.4

108.7

112.3

133.6

130.8

Full-time equivalent employees at period end 

15,911

17,963

18,776

20,525

17,726

Fuel liters consumed (in thousands)

1,364,719

1,291,412

1,465,299

1,591,917

1,655,421

Percentage of sales through website during period (4)

92.4%

92.4%

88.1%

88.4%

88.8%

Percentage of sales through website and call center during period 

99.2%

98.7%

95.1%

94.5%

94.5%

 

5

 
_________

(1)   Our preferred shares are not entitled to any fixed dividend preferences, but are instead entitled to receive dividends per share in the same amount of dividends per share paid to holders of our common shares.  Consequently, our earnings (loss) per share are computed by dividing income by the weighted average number of all classes of shares outstanding during the year.

(2)   Trade and other receivables related to receivables from credit card administrators, travel agencies, installment sales from the Voe Fácil program, cargo agencies and others.  These receivables are stated at cost less allowances for doubtful receivables, which approximates their fair value given their short term nature.

(3)   Operating margin represents operating income (loss) before financial results divided by operating revenues.

(4)   Considering sales through our website and API ( application programming interface ) systems.

(5)   In October 2010, ANAC changed its calculation method for monthly traffic information and republished information for periods since January 2009. All operating data for 2009 and thereafter reflects the new methodology, whereas information for 2008 was calculated pursuant to the old methodology and may not be fully comparable. According to ANAC, the changes were designed to align data with the concepts adopted by the ICAO. The change was necessary because Brazil has joined the ICAO’s statistical program and supplies the latter’s database with several industry data. Changes in the methodology refer to the calculation of ASK (seat supply) and the classification of domestic legs in international flights, which are now considered to be part of the domestic market.

 (6)  Information regarding revenue passengers, aircraft utilization,  average fare, departures, departures per day,  average stage length, average number of operating aircraft, fuel liters consumed, percentage of sales through website and percentage of sales through website and call center include data for Webjet as of and including October 1, 2011.

(7)  ANAC has published revised available seat kilometers and revenue passenger kilometers data for 2009 and 2010. All operating data for 2009 and thereafter reflects the new DCA manual, whereas information for 2008 was calculated pursuant to the old manual and may not be fully comparable.

Exchange Rates

Brazil’s foreign exchange system allows the purchase and sale of currency and the international transfer of reais by any person or legal entity, regardless of amount, subject to certain regulatory procedures.

The Brazilian currency has during the last decades experienced frequent and substantial variations in relation to the U.S. dollar and other foreign currencies.  Most recently, the real  was R$1.566 per US$1.00 in August 2008.  Primarily as a result of the crisis in the global financial markets, the real  depreciated 31.9% against the U.S. dollar and reached R$2.337 per US$1.00, at year end 2008.  In 2009 and 2010, the real appreciated against the U.S. dollar and reached R$1.666 per US$1.00 at year end 2010. During 2011 the real depreciated and on December 31, 2011, the exchange rate was R$1.876   per US$1.00. During 2012, the real  continued to depreciate and on December 31, 2012, the exchange rate was R$2.044 per US$1.00.

The Central Bank has intervened occasionally to combat instability in foreign exchange rates.  We cannot predict whether the Central Bank or the Brazilian government will continue to allow the real  to float freely or will intervene in the exchange rate market through a currency band system or otherwise.

The following tables present the selling rate, expressed in reais to the U.S. dollar (R$/US$), for the periods indicated:

 

Period-End

Average for Period (1)

Low

High

 

( reais  per U.S. dollar)

Year

 

 

 

 

2008

2.337

1.836

1.559

2.500

2009

1.741

1.994

1.702

2.422

2010

1.666

1.759

1.655

1.881

2011

1.876

1.675

1.535

1.902

2012

2.044

1.955

1.702

2.112

2013 (through April 26 2013)

2.000

1.999

1.953

2.047

 

6

 
 

 

Month-End

Average for Month (2)

Low

High

 

( reais  per U.S. dollar)

Month

 

 

 

 

October 2012

2.031

2.030

2.022

2.038

November 2012

2.107

2.068

2.031

2.107

December 2012

2.044

2.078

2.044

2.112

January 2013

1.988

2.018

1.988

2.047

February 2013

1.975

1.975

1.975

1.975

March 2013

2.014

1.983

1.953

2.019

April 2013 (through April 26)

2.000

2.002

1.974

2.024

_________

Source:  Central Bank

(1) Represents the average of the exchange rates on the last day of each month during the period.

(2) Average of the lowest and highest rates in the month.

B.       Capitalization and Indebtedness

Not applicable.

C.       Reasons for the Offer and Use of Proceeds

Not applicable.

D.       Risk Factors

An investment in the ADSs or our preferred shares involves a high degree of risk.  You should carefully consider the risks described below before making an investment decision.  Our business ,  financial condition and results of operations could be materially and adversely affected by any of these risks.  The trading price of the ADSs could decline due to any of these risks or other factors ,  and you may lose all or part of your investment.  The risks described below are those that we currently believe may materially affect us.

Risks Relating to Brazil

The Brazilian government has exercised ,  and continues to exercise ,  significant influence over the Brazilian economy.  This involvement ,  as well as Brazilian political and economic conditions ,  could adversely affect our business and the trading price of our ADSs and our preferred shares.

The Brazilian government frequently has intervened in the Brazilian economy and occasionally makes significant changes in policy and regulations.  The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other measures, increases in interest rates, changes in tax policies, price controls, currency devaluations, capital controls and limits on imports.  Our business, financial condition and results of operations may be adversely affected by changes in policy or regulations at the federal, state or municipal levels involving or affecting factors such as:

·          interest rates;

·          currency fluctuations;

·          inflation; 

·          liquidity of capital and lending markets;

·          tax policies;

·          exchange rates and exchange controls and restrictions on remittances abroad, such as those that were briefly imposed in 1989 and early 1990; and

 

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·          other political, social and economic developments in or affecting Brazil.

Developments and the perception of risk in other countries ,  including the United States and emerging market countries ,  may adversely affect the market price of Brazilian securities ,  including the ADSs and our preferred shares.

The market value of securities of Brazilian issuers is affected by economic and market conditions in other countries, including the United States, the European Union and emerging market countries.  Although economic conditions in those countries may differ significantly from economic conditions in Brazil, investor’s reactions to developments in other countries may have an adverse effect on the market value of securities of Brazilian issuers.  Crises in the United States, the European Union or emerging market countries may diminish investor interest in securities of Brazilian issuers, including ours.  This could adversely affect the trading price of the ADSs or our preferred shares, and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms or at all.

Government efforts to combat inflation may hinder the growth of the Brazilian economy and could harm our business.

Brazil has in the past experienced extremely high rates of inflation and has therefore followed monetary policies that have resulted in one of the highest real interest rates in the world.  Between 2004 and 2012, the base interest rate (SELIC) in Brazil varied between 19.25% p.a. and 7.25% p.a. Inflation and the Brazilian government’s measures to fight it, principally through the Central Bank, have had and may have significant effects on the Brazilian economy and our business.  Tight monetary policies with high interest rates may restrict Brazil’s growth and the availability of credit.  Conversely, more lenient government and Central Bank policies and interest rate decreases may trigger increases in inflation, and, consequently, growth volatility and the need for sudden and significant interest rate increases, which could negatively affect our business.  In addition, we may not be able to adjust the fares we charge our customers to offset the effects of inflation on our cost structure.

Risks Relating to Us and the Brazilian Airline Industry

Substantial fluctuations in fuel costs or the unavailability of fuel would harm our business.

Historically, international and local fuel prices have been subject to wide price fluctuations based on geopolitical issues and supply and demand.  Fuel costs, which at times in 2007 and 2008 were at historically high levels, constitute a significant portion of our total operating expenses, accounting for 42% of our operating expenses for the year ended December 31, 2012.  Fuel availability is also subject to periods of market surplus and shortage and is affected by demand for both home heating oil and gasoline.  In the event of an international or local fuel supply shortage, our fuel prices may increase.  Although we enter into hedging arrangements to reduce our exposure to fuel price fluctuations and have historically passed on the majority of fuel price increases by adjusting our fare structure, the price and future availability of fuel cannot be predicted with any degree of certainty.  Our hedging activities or the extent of our ability to adjust our fares may not be sufficient to protect us from fuel price increases.

Substantially all of our fuel is supplied by one source, Petrobras Distribuidora S.A. If Petrobras Distribuidora is unable or unwilling to continue to supply fuel to us at the times and in the quantities that we require, our business and results of operations would be adversely affected.

Events resulting from prolonged instability in the Middle East or other oil-producing regions or the suspension of production by any significant producer, may result in substantial price increases, adverse exchange rates, or the unavailability of adequate supplies and adversely affect our profitability. In addition, the same effect may be caused by natural disasters or other large unexpected disrupting events in regions with significant consumption of other energy sources. No assurances can be given about trends in fuel prices, and average fuel prices for the 2013 fiscal year or for future years may be significantly higher than current prices.

 

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The airline industry is particularly sensitive to changes in economic conditions and continued negative economic conditions would likely continue to negatively impact our results of operations and our ability to obtain financing on acceptable terms.

Our operations and the airline industry in general are particularly sensitive to changes in economic conditions.  Unfavorable general economic conditions, such as higher unemployment rates, a constrained credit market and increased business operating costs, can reduce spending for both leisure and business travel.  Unfavorable economic conditions can also impact our ability to raise fares to counteract increased fuel, labor, and other costs.  Any of these factors may negatively impact our results of operations.

Unfavorable economic conditions, a significant decline in demand for air travel, or continued instability of the credit and capital markets could also result in pressure on our debt costs, operating results and financial condition and would affect our growth and investment plans.  These factors could also negatively affect our ability to obtain financing on acceptable terms and our liquidity generally.

Exchange rate instability may materially and adversely affect our financial condition and results of operations and the market price of the ADSs and our preferred shares.

The Brazilian currency has during the last decades experienced frequent and substantial variations in relation to the U.S. dollar and other foreign currencies.  Most recently, the real  was valued as high as R$1.566 per US$1.00 in August 2008.  Primarily as a result of the crisis in the global financial markets, the real  depreciated 31.9% against the U.S. dollar and reached R$2.337 per US$1.00, at year end 2008.  In 2009 and 2010, the real appreciated against the U.S. dollar and reached R$1.666 per US$1.00 at year end 2010. Driven principally by the European financial crisis, during 2011 the real depreciated and at year end 2011, the exchange rate was R$1.876   per US$1.00.  In 2012, the real  continued to depreciate, primarily due to a slowdown in the Brazilian economy and government efforts to keep the exchange rate at current levels.  At December 31, 2012, the exchange rate was R$2.044 per US$1.00.

Depreciation of the real  against the U.S. dollar could create inflationary pressures in Brazil and cause increases in interest rates, which could negatively affect the growth of the Brazilian economy as a whole and harm our financial condition and results of operations, may curtail access to foreign financial markets and may prompt government intervention, including recessionary governmental policies. Depreciation of the real  against the U.S. dollar can also, as in the context of an economic slowdown, lead to decreased consumer spending, deflationary pressures and reduced growth of the economy as a whole.  On the other hand, appreciation of the real  relative to the U.S. dollar and other foreign currencies could lead to a deterioration of the Brazilian foreign exchange current accounts, as well as dampen export-driven growth.  Depending on the circumstances, either depreciation or appreciation of the real  could materially and adversely affect our business, financial condition and results of operations.

Substantially all of our passenger revenue and cargo revenue and temporary investments are denominated in reais , and a significant part of our operating expenses, such as fuel, aircraft and engine maintenance services, aircraft rent payments and aircraft insurance, are denominated in, or linked to, U.S. dollars.  We maintain U.S. dollar-denominated deposits and maintenance reserve deposits under the terms of some of our aircraft operating leases.  For the year ended December 31, 2012, 54% of our operating expenses were either denominated in or linked to the U.S. dollar.  In addition, the purchase price of the Boeing 737 Next Generation aircraft for which we had 155 firm purchase orders outstanding as of December 31, 2012, is denominated in U.S. dollars.  At the end of 2012, 70% of our indebtedness was denominated in U.S. dollars.  While in the past we have generally adjusted our fares in response to, and to alleviate the effect of, depreciation of the real and increases in the price of jet fuel (which is priced in U.S. dollars) and have entered into hedging arrangements to protect us against the short-term effects of such developments, there can be no assurance we will be able to continue to do so. In addition, there is no effective hedging alternative for medium- and long-term depreciation of the real .  To the extent we are unable to adjust our fares or effectively hedge against any such developments, this may lead to a material decrease in our profit margins or to material operating losses caused by increases in U.S. dollar-denominated costs, increases in interest expense or exchange losses on unhedged fixed obligations and indebtedness denominated in foreign currency.  We had total U.S. dollar-denominated future operating lease payment obligations of R$3,033.7 million and R$3,637.4 million regarding other U.S. dollar-denominated liabilities and indebtedness at December 31, 2012.  We may incur substantial additional amounts of U.S. dollar-denominated operating lease or financial obligations and U.S. dollar-denominated indebtedness and be subject to fuel cost increases linked to the U.S. dollar.

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Depreciation of the real  also reduces the U.S. dollar value of distributions and dividends on the ADSs and the U.S. dollar equivalent of the market price of our preferred shares and, as a result, the ADSs.

Changes to Brazilian rules regarding slots distribution, fare restrictions and fees associated with civil aviation may adversely affect our business and results of operations.

In February 2013, ANAC announced a series of public hearings to discuss proposed changes to rules governing the allocation of slots at Brazilian airports, which would consider operational efficiency (punctuality and regularity data) as the main determinant for the allocation of slots.

Also in February 2013, the Civil Aviation Secretary, or SAC, announced a new proposal focused specifically on slot distribution rules at Congonhas airport. Current rules governing the allocation of slots at Congonhas Airport, which favor us, require that 80% of new slots are assigned to airlines already operating in that airport. SAC’s proposal alters current regulations by taking into account operational efficiency as a principal determinant for slot allocation at Congonhas airport, as well as domestic market (main cities) and regional market share as complementary factors.

The new proposals, which are under public hearing, may change the current slot allocation criteria and as a result reduce our number of slots at Brazil’s main airports.  As of the date of this document, no decision has been made regarding these proposals. If there is a change in the rule regarding slots redistribution we could be negatively affected by higher competition in this airport from new competitors.

In 2010, ANAC approved the deregulation of international airfares for flights departing from Brazil to the U.S. and Europe, gradually removing the prior minimum fares. In addition, in 2010 the National Civil Aviation Council ( Conselho de Aviação Civil ), or CONAC, approved the continuity of bilateral agreements providing for open skies policies with other South American countries and a new open skies policy with the United States.  In March, 2011 Brazil also signed an open skies agreement with Europe. The agreements with the United States and Europe are expected to be in operation by 2015 and 2014, respectively. These regulations increase competition in the market and may negatively affect our results of operations.

Until 2010, landing and navigation fees charged in Brazilian airports were similar in all airports independent of whether they were busy or not. In 2011, the Brazilian government increased landing and navigation fees at the busiest airports as compared to less busy airports and at peak hours. As a result, secondary hubs and off-peak flights may benefit in light of the differences in fees for the airlines that choose to operate in these airports or times. Changes in landing, navigation or other fees have in the past and may continue to increase our CASK, lower our efficiency and profitability and may provide other market players with a cost or operational advantage.

Changes to the Brazilian civil aviation regulatory framework may adversely affect our business and results of operations.

Brazilian aviation authorities monitor and influence the developments in Brazil’s airline market.  For example, the National Civil Aviation Agency ( Agência Nacional de Aviação Civil ), or ANAC, addressed overcapacity by establishing strict criteria that must be met before new routes or additional flight frequencies were awarded. ANAC has more recently set minimum turnaround times.  ANAC’s policies as well as those of other aviation supervisory authorities may negatively affect our operations.

The Brazilian congress is currently discussing a draft bill that would replace the current Brazilian Aeronautical Code ( Código Brasileiro de Aeronáutica ).  In general, this draft bill deals with matters related to civil aviation, including airport concessions, consumer protection, limitation of airlines’ civil liability, compulsory insurance, fines and the increase of limits to foreign ownership in voting stock of Brazilian airlines from 20% to 49%.  This draft bill is still under discussion in the House of Representatives and, if approved, must be submitted for approval to the Federal Senate, before being sent for presidential approval. If the Brazilian civil aviation framework changes in the future, or ANAC implements increased restrictions, our growth plans, our business and results of operations could be adversely affected. If the limits to foreign ownership in or influence on Brazilian airlines are increased, our current or new competitors may increase their financial strength and may have a competitive advantage over us, which would negatively affect our business and results of operations.

 

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In August 2011 the Brazilian government privatized the new Natal airport, which will have its construction completed and further operation by the winners of the privatization auction. In February 2012, the Brazilian government privatized the Guarulhos, Brasília and Campinas international airports, which will be operated by the winners of the privatization auction for periods of 20 to 30 years. In December 2012, the Brazilian government announced its intention to privatize the Galeão (in Rio de Janeiro) and Confins (Belo Horizonte) airports by September 2013, and other airports are also expected to be privatized in the near future. Although such measures may serve as a potential positive catalyst to accelerate investments in airport infrastructure, we are unable to foresee the effects of any such measures, especially regarding operational efficiencies and costs, as well as airport and other fees, on our business and results of operations. See “Item 4. Information on the Company – B. Business Overview - Regulation of the Brazilian Civil Aviation Market – Airport Infrastructure.”

Changes to the Brazilian civil aviation regulatory framework may change the competitive dynamics of our industry and may adversely affect our operations, see “−We operate in a highly competitive industry.”

As a result of significant losses in 2011 and 2012, our financial condition has been materially weakened.

We incurred significant losses in 2011 and 2012 which have materially weakened our financial condition. We had net losses of R$752 million in 2011 and $1,513 million in 2012. These losses were mainly a factor of increased operating expenses that we do not control, including: an increase of 45% in average aircraft fuel prices, an average depreciation of the real of 13%, which affects a significant part of our operating expenses, and an increase of 71% in average airport fees during the period.

Although we have taken a number of steps to reduce the effects of these increased operating expenses, such as reducing capacity and focusing on more profitable routes, we cannot assure you that such measures will be sufficient to offset the effects of these increased expenses, that these expenses will not continue to increase and, if they continue to increase, that we will be able to pass on these increases to our customers or otherwise compensate for the increases, which would materially and adversely affect our results of operations.

We are highly leveraged and may be unable to reduce our leverage ratios over time.

We are highly leveraged, which means we have a large amount of indebtedness in relation to our equity. As of December 31, 2012, we had approximately R$5,191 million of consolidated indebtedness as compared to a shareholders’ equity of R$733 million. This increased leverage is a result of our recent significant losses. See “—As a result of significant losses in 2011 and 2012, our financial condition has been materially weakened” above.

In addition, as a result of our increased leverage, our credit ratings were downgraded. Credit ratings affect the cost and other terms upon which we are able to obtain funding. Credit rating agencies regularly evaluate us and their ratings of our long-term debt are based on a number of factors, including our financial strength. We cannot assure you that credit rating agencies will not downgrade our credit ratings any further, even in the absence of new losses.

Our substantial indebtedness or any further downgrades to our credit ratings could adversely affect our ability to obtain new financings or refinance our existing indebtedness on terms that are favorable to us or at all and could also make us more vulnerable to the impact of unexpected events or to the deterioration of the operating environment (such as a significant increase in operating expenses).

Our increased leverage could also affect our ability to comply with the restrictive covenants contained in certain of our existing debt agreements, which, among other things, could result in an event of default that, if not cured or waived, could have a material adverse effect on our business or our prospects. See “—Certain of our debt agreements contain financial covenants and any default under such debt agreements may have a material adverse effect on our financial condition and cash flows” below.

In addition, our strategy to strengthen our cash position, and as a result reduce our leverage over time, may not be successful, which could further emphasize the risks described above.

 

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Technical and operational problems in the Brazilian civil aviation infrastructure ,  including air traffic control systems ,  airspace and airport infrastructure may have a material adverse effect on our business ,  our results of operations and our strategy.

We are dependent on improvements in the coordination and development of Brazilian airspace control and airport infrastructure, which, mainly due to the large growth in civil aviation in Brazil in recent years, require substantial improvements and government investments.  This is further emphasized by the need for additional infrastructure investments in the context of the Soccer Confederations Cup (2013) and World Cup (2014) and the Summer Olympics (2016) in Brazil. Infraero has announced a list of investments in major Brazilian airports of approximately R$7.0 billion to be implemented between 2011 and 2014.

If the measures taken and investments made by the Brazilian government and regulatory authorities do not prove sufficient or effective, air traffic control, airspace management and sector coordination-related difficulties might reoccur or worsen, which might have a material adverse effect on our business, our results of operations and our growth strategy.

Slots at Congonhas Airport in São Paulo, the most important airport for our operations, are fully utilized.  The Santos-Dumont airport in Rio de Janeiro, a highly utilized airport with half-hourly shuttle flights between São Paulo and Rio de Janeiro, has certain slot restrictions.  Several other Brazilian airports, for example the Brasília, Campinas, Salvador, Confins and São Paulo (Guarulhos) international airports, have limited the number of slots per day due to infrastructural limitations at these airports.  Any condition that would prevent or delay our access to airports or routes that are vital to our strategy, or our inability to maintain our existing slots, and obtain additional slots, could materially adversely affect our operations.  In addition, we cannot assure that any investments will be made by the Brazilian government in the Brazilian aviation infrastructure to permit a capacity increase at busy airports and consequently additional concessions for new slots to airlines.

We operate in a highly competitive industry.

We face intense competition on domestic routes in Brazil from existing scheduled airlines and charter airlines and potential new entrants in our market.  In addition to competition among scheduled airline companies and charter operators, the Brazilian airline industry faces competition from ground transportation alternatives, such as interstate buses.  We may also face competition from international airlines as they introduce and expand flights between Brazil, other South American and U.S. and Caribbean destinations.

Our existing competitors or potential new entrants into the markets in which we operate may be financially stronger than us. They have in the past and may again undercut our fares, increase capacity on their routes in an effort to increase their market share or attempt to conduct low-fare or low-cost airline operations of their own, emulating our strategy.  In any such event, we cannot assure you that our level of fares or passenger traffic would not be adversely affected and would not have an adverse impact on our business and results of operations or that our competitive advantage would not be reduced.

Further consolidation in the Brazilian and global airline industry framework may adversely affect our business and results of operations . 

As a result of the competitive environment there may be further consolidation in the Brazilian and global airline industry, whether by means of acquisitions, joint ventures, partnerships or strategic alliances.  We cannot predict the effects of further consolidation on the industry. To the extent we act as consolidators, we may not be able to successfully integrate the business and operations of companies acquired, governmental approvals may be delayed, costs of integration and fleet renovation may be greater than anticipated and synergies may not meet our expectations, our costs may increase and our operational efficiency may be reduced, all of which would negatively affect our business and results of operations and may distract our management.

In the event we do not act as a consolidator our competitors may increase their scale, diversity and financial strength and may have a competitive advantage over us, which would negatively affect our business and results of operations. Consolidation in the airline industry and changes in international alliances will continue to affect the competitive landscape in the industry and may result in the formation of airlines and alliances with increased financial resources, more extensive global networks and reduced cost structures.

 

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We have significant recurring aircraft lease costs ,  and we will incur significantly more fixed costs that could hinder our ability to meet our strategic goals.

We have significant costs, relating primarily to leases for our aircraft and engines.  As of December 31, 2012, we had commitments of R$32,462.5 million to purchase additional Boeing 737-800 Next Generation aircraft, based on aircraft list prices, although the actual price payable by us for the aircraft will be lower due to supplier discounts.  As of December 31, 2012, we had R$4,825.4 million in short- and long-term indebtedness, excluding our perpetual bonds in the amount of R$365.8 million.  We expect that we will incur additional fixed obligations and debt as we take delivery of the new aircraft and other equipment to implement our strategy.

Having significant fixed payment obligations could:

·          limit our ability to obtain additional financing to support expansion plans and for working capital and other purposes;

·          divert substantial cash flow from our operations to service our fixed obligations under aircraft operating leases and aircraft purchase commitments;

·          if interest rates increase, require us to incur significantly more lease or interest expense than we currently do; and

·          limit our ability to plan for or react to changes in our business and the airline industry and to general economic conditions.

Our ability to make scheduled payments on our fixed obligations, including indebtedness we will incur, will depend on our operating performance and cash flow, which will in turn depend on prevailing economic and political conditions and financial, competitive, regulatory, business and other factors, many of which are beyond our control.  In addition, our ability to raise our fares to compensate for an increase in our fixed costs may be adversely affected by any imposition of fare control mechanisms by the Brazilian civil aviation authorities.

We may have to use our cash resources to finance a portion of our firm purchase order aircraft.  We may not have sufficient cash resources to do so.

We currently finance our aircraft principally through operating leases.  As a result of our 155 firm purchase orders for Boeing 737-800 Next Generation aircraft outstanding as of December 31, 2012, we expect to own a larger portion of our fleet as well as continue to lease aircraft through principally long-term operating leases.  The firm purchase orders represent a significant financial commitment for us.  We have in recent years financed and intend to continue financing our new Boeing 737-800 NG aircraft with a commitment we received from the Export-Import Bank of the United States, or Ex-Im Bank, providing guarantees covering 85% of the aggregate purchase price for the firm purchase order aircraft.  While we expect that the guaranty from the Ex-Im Bank will help us in obtaining low-cost financing for the purchase of the firm purchase order aircraft, we may be required to use our own cash resources for the remaining 15% of the aggregate purchase price for the firm purchase order aircraft. 

In 2010, the Ex-Im Bank agreed on a common approach with European export-credit agencies on offering export credits for commercial aircraft.  Among other things, the new Sector Understanding on Export Credits for Civil Aircraft, or the ASU, sets forth minimum guarantee premium rates applicable to aircraft to be delivered on or after January 1, 2013, or under firm contracts entered into after December 31, 2010 and also changes the maximum amount that may be financed.

In light of our current credit ratings and the introduction of the ASU, we expect our minimum guaranty premium rate applicable to aircraft delivered on or after January 1, 2013 will increase substantially from a previous rate of 4%. In addition, the Ex-Im Bank may not guarantee this increased amount to be financed, which could cause us to have to seek other more expensive financing alternatives or use our own cash resources to finance the additional amount.

As of December 31, 2012, we had R$1,585.1 million of cash, cash equivalents, short and long term restricted cash, short-term investments in overnight deposits and deposit certificates of highly-rated Brazilian banks and marketable securities, mainly Brazilian government bonds and short- and long-term restricted cash.  If the value or liquidity of these investments were to decrease, or we do not have sufficient cash resources, we may be required to modify our aircraft acquisition plans or to incur higher than anticipated financing costs, which would have an adverse impact on the execution of our strategy and business and could have an adverse impact on our results.

 

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We rely on one supplier for our aircraft and engines.

One of the key elements of our current business strategy is to save costs by operating a standardized aircraft fleet.  After extensive research and analysis, we chose the Boeing 737-700/800 Next Generation aircraft and CFM 56-7B engines from CFM International.  We expect to continue to rely on Boeing and CFM International into the foreseeable future and have made a purchase order for 60 Boeing 737 Max-7/8 aircraft (the newest generation of our current aircraft and still under development), to be delivered starting 2018. If either Boeing or CFM International were unable to perform its contractual obligations, we would have to find another supplier for a similar type of aircraft or engines.

If we had to lease or purchase aircraft from another supplier, we could lose the benefits we derive from our current fleet composition.  We cannot assure you that any replacement aircraft, including the Boeing 737 Max-7/8 aircraft, would have the same operating advantages as the Boeing 737-700/800 Next Generation aircraft or that we could lease or purchase engines that would be as reliable and efficient as the CFM engines.  We may also incur substantial transition costs, including costs associated with retraining our employees, replacing our manuals and adapting our facilities, to the extent that such costs would not be covered by the alternate supplier.  Our operations could also be disrupted by the failure or inability of Boeing or CFM International to provide sufficient parts or related support services on a timely basis.

Our business would also be significantly harmed if a design defect or mechanical problem with the Boeing 737-700/800 Next Generation aircraft or the CFM engines used on our aircraft were discovered, causing our aircraft to be grounded while any such defect or problem is being corrected, assuming it could be corrected at all.  The use of our aircraft could be suspended or restricted by ANAC in the event of any actual or perceived mechanical, design or other problems while ANAC conducts an investigation.  Our business would also be significantly harmed if the public avoids flying on our aircraft due to an adverse perception of the Boeing 737-700/800 Next Generation aircraft or the CFM engines because of safety concerns or other problems, whether real or perceived, or in the event of an accident involving Boeing 737-700/800 Next Generation aircraft or the CFM engines.

In addition to Boeing, other manufacturers have also released new aircraft that when delivered and operational may be more appealing to the market or customers, in which case we may be forced to deviate from our one-aircraft fleet policy, thereby losing the benefits of operating only one type of aircraft, which could reduce the market value of aircraft and would adversely affect our operational costs and results of operation.

We have made purchase orders for new aircraft that is still being developed, any project delays or operational difficulties would adversely affect our operational costs and results of operation.

In 2012 Boeing and CFM released new aircraft and engines, the Boeing 737 Max-7/8 and LEAP-1B engines, to replace the Boeing 737-700/800 Next Generation aircraft engines used on these aircraft any project delays or operational difficulties would adversely affect our operational costs and results of operation.

In addition, when these aircraft and engines are delivered and operational it may cause the market value of our aircraft and engines to decrease, which would negatively affect the value of our assets and could result in us recording impairment charges.

We rely heavily on automated systems to operate our business ,  and any failure of these systems could harm our business.

We depend on automated systems to operate our business, including our computerized airline ticket sales system, our telecommunication systems, our scheduling system and our website.  Our website and ticket sales system must be able to accommodate a high volume of traffic and deliver important flight information.  Substantial or repeated website, ticket sales, scheduling or telecommunication systems failures could reduce the attractiveness of our services and could cause our customers to purchase tickets from another airline.  Any disruption in these systems could result in the loss of important data, increase our expenses and generally harm our business.

 

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We rely on maintaining a high daily aircraft utilization rate to increase our revenues and reduce our costs.

One of the key elements of our business strategy is to maintain a high daily aircraft utilization rate.  High daily aircraft utilization allows us to generate more revenue from our aircraft and dilute our fixed costs, and is achieved in part by operating with quick turnaround times at airports so we can fly more hours on average in a day.  Our rate of aircraft utilization could be adversely affected by a number of different factors that are beyond our control, including, among others, air traffic and airport congestion, adverse weather conditions and delays by third-party service providers relating to matters such as fueling and ground handling.

Certain of our debt agreements contain financial covenants and any default under such debt agreements may have a material adverse effect on our financial condition and cash flows.

Certain of our existing debt agreements contain restrictions and covenants and require the maintenance or satisfaction of specified financial ratios. Our ability to meet these financial ratios can be affected by events beyond our control and we cannot assure that we will meet those ratios, especially given the lower yield environment in which the industry currently operates. Failure to meet or satisfy any of these covenants, financial ratios could result in an event of default under these and other agreements, as a result of cross-default provisions. If we are unable to comply with our debt covenants, we could be forced to seek waivers. We cannot guarantee that we will be successful in obtaining any waivers or renewing existing waivers. As of December 31, 2012, we were not in compliance with certain financial covenants under our Debentures IV and V. Although on February 1, 2013 we obtained a waiver approval from the debenture holders for the December 31, 2012 and June 30, 2013 measurement dates, according to IFRS, because we did not receive the waiver by December 31, 2012, we reclassified our debentures in the amount of R$1,091.0 million from long-term debt to short-term debt as a result of this non-compliance. For our financial statements for the first quarter of 2013 we will again reclassify this amount as long-term. The first measurement after the waived periods will be based on our financial statements as of and for the year ended December 31, 2013.. See “Item 5. Operating and Financial Review and Prospects–B. Liquidity and Capital Resources–Indebtedness–Covenant Compliance” and note 19 to our financial statements for more information. If we are unable to renew these and/or receive other waivers, a large portion of our debt could be subject to acceleration.  While we believe such eventuality to be remote, should it come to pass, we may need to renegotiate, restructure or refinance our indebtedness, seek additional equity capital or sell assets, which may materially and adversely affect us.

Our reputation ,  financial results and the market price of our ADSs and preferred shares could be harmed by events out of our control

Accidents or incidents involving our aircraft could involve significant claims by injured passengers and others, as well as significant costs related to the repair or replacement of a damaged aircraft and its temporary or permanent loss from service.  We are required by ANAC and lessors of our aircraft under our operating lease agreements to carry liability insurance.  Although we believe we currently maintain liability insurance in amounts and of the type generally consistent with industry practice, the amount of such coverage may not be adequate and we may be forced to bear substantial losses in the event of an accident.  Substantial claims resulting from an accident in excess of our related insurance coverage would harm our business and financial results.  Moreover, any aircraft accident or incident involving our aircraft, even if fully insured, or an accident or incident involving Boeing 737 Next Generation aircraft or the aircraft of any major airline could cause negative public perceptions about us or the air transport system, which would harm our business and results of operations as well as the market price of our ADSs and preferred shares.

We may also be affected by other events that affect travel behavior, such as the potential of epidemics or acts of terrorism.  These events are out of our control and may affect us even if occurring in markets where we do not operate and/or in connection with other airlines.  For example, in the second quarter of 2009 an outbreak of the H1N1 virus had an adverse impact on global air travel and on our operations to and from Argentina.  In addition, in the past there have been concerns about outbreaks or potential outbreaks of other diseases, such as avian flu and Severe Acute Respiratory Syndrome, or SARS, which had an adverse impact on global air travel.  Any outbreak of a disease that affects travel behavior could have a material adverse impact on us and the trading price of shares of companies in the worldwide airline industry, including our ADRs and preferred shares.  Outbreaks of disease could also result in quarantines of our personnel or an inability to access facilities or our aircraft, which could adversely affect our operations.

 

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Natural disasters may affect and disrupt our operations. For example, in 2011, a volcanic eruption in Chile had a prolonged adverse effect on air travel, halting flights in, Argentina, Chile, Uruguay and the southern part of Brazil for several days. As a result, our operations to and from these regions were temporarily disrupted, including certain aircraft being grounded in the affected regions.  Any natural disaster that affects air travel in the regions in which we operate could have a material adverse impact on our business and results of operation.

Our ability to use tax loss carryforwards to offset future taxable income is subject to limitation.

As of December 31, 2012, we had reported approximately R$1,056.3 billion of tax loss carryforwards and negative basis of social contribution mainly as a result of the acquisition of VRG in 2007 and Webjet in 2011 and accumulated losses. Under Brazilian tax laws we may only use our tax loss carryforwards to offset taxes payable up to 30% of the taxable profit for each year. Thus, despite having a balance tax loss carryforwards we may have to pay higher taxes in case we reach the compensation limits for any given year that we are entitled to use under Brazilian tax laws.

Our controlling shareholder has the ability to direct our business and affairs and its interests could conflict with yours.

Our controlling shareholder has the power to, among other things, elect a majority of our directors and determine the outcome of any action requiring shareholder approval, including transactions with related parties, corporate reorganizations, dispositions, and the timing and payment of any future dividends, subject to minimum dividend payment requirements imposed under Law No. 6,404 of December 15, 1976, as amended, or the Brazilian corporation law.  Although you are entitled to tag-along rights in connection with a change of control of our company and you will have specific protections in connection with transactions between our controlling shareholder and related parties, our controlling shareholder may have an interest in pursuing acquisitions, dispositions, financings or similar transactions that could conflict with your interests as a holder of the ADSs or our preferred shares.

Risks Relating to the ADSs and Our Preferred Shares

The relative volatility and illiquidity of the Brazilian securities markets, and securities issued by airlines in particular, may substantially limit your ability to sell the preferred shares underlying the ADSs at the price and time you desire.

Investing in securities that trade in emerging markets, such as Brazil, often involves greater risk than investing in securities of issuers in the United States, and such investments are generally considered to be more speculative in nature.  The Brazilian securities market is substantially smaller, less liquid, more concentrated and can be more volatile than major securities markets in the United States.  Accordingly, although you are entitled to withdraw the preferred shares underlying the ADSs from the depositary at any time, your ability to sell the preferred shares underlying the ADSs at a price and time at which you wish to do so may be substantially limited.  There is also significantly greater concentration in the Brazilian securities market than in major securities markets in the United States.  The ten largest companies in terms of market capitalization represented 52% of the aggregate market capitalization of the BM&FBOVESPA S.A. Bolsa de Valores, Mercadorias & Futuros (“BM&FBOVESPA”) as of December 31, 2012.  The top ten stocks in terms of trading volume accounted for 49.7%, 53.6% and 47% of all shares traded on the BM&FBOVESPA in 2010, 2011 and 2012, respectively.

In addition, the trading price of shares of companies in the worldwide airline industry are relatively volatile and investors’ perception of the market value of these shares, including our ADSs and preferred shares, may also be negatively impacted with additional volatility and decreases in the price of our ADSs and preferred shares.

 

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Holders of the ADSs and our preferred shares may not receive any dividends.

According to our by-laws, we must pay our shareholders at least 25% of our annual net income as dividends, as determined and adjusted under Brazilian corporation law.  This adjusted income may be capitalized, used to absorb losses or otherwise appropriated as allowed under the Brazilian corporation law and may not be available to be paid as dividends.  We may not pay dividends to our shareholders in any particular fiscal year if our board of directors determines that such distributions would be inadvisable in view of our financial condition.

If you surrender your ADSs and withdraw preferred shares ,  you risk losing the ability to remit foreign currency abroad and certain Brazilian tax advantages.

As an ADS holder, you benefit from the electronic foreign capital registration obtained by the custodian for our preferred shares underlying the ADSs in Brazil, which permits the custodian to convert dividends and other distributions with respect to the preferred shares into non-Brazilian currency and remit the proceeds abroad.  If you surrender your ADSs and withdraw preferred shares, you will be entitled to continue to rely on the custodian’s electronic foreign capital registration for only five business days from the date of withdrawal.  Thereafter, upon the disposition of or distributions relating to the preferred shares, you will not be able to remit abroad non-Brazilian currency unless you obtain your own electronic foreign capital registration.

If you attempt to obtain your own electronic foreign capital registration, you may incur expenses or suffer delays in the application process, which could delay your ability to receive dividends or distributions relating to our preferred shares or the return of your capital in a timely manner.  The depositary’s electronic foreign capital registration may also be adversely affected by future legislative changes.

Holders of ADSs may be unable to exercise preemptive rights with respect to our preferred shares.

We may not be able to offer our preferred shares to U.S. holders of ADSs pursuant to preemptive rights granted to holders of our preferred shares in connection with any future issuance of our preferred shares unless a registration statement under the Securities Act is effective with respect to such preferred shares and preemptive rights, or an exemption from the registration requirements of the Securities Act is available.  We are not obligated to file a registration statement relating to preemptive rights with respect to our preferred shares, and we cannot assure you that we will file any such registration statement.  If such a registration statement is not filed and an exemption from registration does not exist, Citibank, N.A., as depositary, will attempt to sell the preemptive rights, and you will be entitled to receive the proceeds of such sale.  However, these preemptive rights will expire if the depositary does not sell them, and U.S. holders of ADSs will not realize any value from the granting of such preemptive rights.

ITEM 4.        Information on the Company

A.       History and Development of the Company

General

The Registrant was formed on March 12, 2004 as a sociedade por ações , a stock corporation duly incorporated under the laws of Brazil with unlimited duration.  The Registrant’s material assets consist of the shares of VRG, three offshore finance subsidiaries, cash and cash equivalents and short-term investments.  The Registrant owns all of VRG’s shares, except for shares held by members of VRG’s boards of directors for eligibility purposes.  Our principal executive offices are located at Praça Comandante Linneu Gomes, S/N, Portaria 3, Jardim Aeroporto, CEP:  04626-020, São Paulo, SP, Brazil, and our general telephone number is +55 11 2128-4000.  The telephone number of our investor relations department is +55 11 2128-4700.  Our website address is www.voegol.com.br.  Investor information can be found on our website www.voegol.com.br/ir. Information contained on our website is not incorporated by reference in, and shall not be considered a part of, this annual report.

Capital Expenditures

For a description of our capital expenditures, see below “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”

 

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B.       Business Overview

We are one of the largest low-cost carriers in the world, according to the International Air Transport Association, or IATA, in terms of passengers transported in 2012, and the largest low-cost carrier in Latin America. We provide frequent service on routes connecting all of Brazil’s major cities and from Brazil to major cities in South America and selected tourist destinations in the Caribbean and the U.S. With our young and standardized operating fleet of 125 Boeing 737-700/800s, or Boeing 737 aircraft, we serve the most comprehensive network of any airline in the Brazilian air passenger transportation market.

Since the beginning of our operations in 2001, our affordable, reliable and simple service, and our focus on markets that were either underserved or did not have a lower-fare alternative, have led to a strong awareness of our brand and a rapid increase in our market share.  We were the first company to successfully introduce low-cost carrier industry practices and technologies in Latin America.  We have a diversified revenue base, with customers ranging from business passengers to leisure passengers traveling throughout Brazil, other South American countries and select destinations in the Caribbean and the U.S.  Our strategy is to increase our market share by attracting new passengers and business travelers as well as to diversify our revenue portfolio through our consolidated flight network, a modern aircraft fleet, targeted marketing and our loyalty program Smiles  (one of the largest loyalty programs in Latin America with more than 9.0 million members and 150 partners, as of December 31, 2012), a variety of attractive ancillary businesses (cargo and other) such as our air cargo services ( Gollog ), and various payment mechanisms designed to make the purchase of our tickets easier for customers in lower income classes.  Passenger transportation revenues represented 88% and ancillary revenues represented 12% of our net revenues of R$8,103.6 million in 2012.

As of March 31, 2013, we offered approximately 970 daily flights to 65 destinations connecting the most important cities in Brazil as well as key destinations in Argentina, Bolivia, Paraguay, Uruguay, Venezuela, the U.S. and the Caribbean region.  We strategically focus on the Brazilian and South American markets, and will continue to carefully evaluate opportunities to continue growing by increasing the frequency of flights to our existing high-demand markets and adding new routes to new markets with high potential (for example, in the U.S. and Caribbean region), all of which can be reached with our Boeing 737 Next Generation (NG) aircraft.

Our Competitive Strengths

We Have a Strong Market Position Based on Slots at the Most Important Airports in Brazil.  Since 2007, we have been the carrier with the most flights connecting the busiest airports in Brazil:  Congonhas and Guarulhos (São Paulo), Santos Dumont and Galeão (Rio de Janeiro), Juscelino Kubitschek (Brasília), Confins (Belo Horizonte), Salvador (Bahia), Porto Alegre (Rio Grande do Sul), Recife (Pernambuco) and Curitiba (Paraná).  Routes between these airports are among the most profitable routes in our markets, with strong yields achieved mostly from business travelers. 

We Keep Our Operating Costs Low.  Our operating expense per available seat kilometer (CASK) ex-fuel for 2012 was R$10.2 cents.  We believe that our CASK for 2012, adjusted for the average number of kilometers flown per flight, or adjusted by stage length, was the lowest in the domestic market and among Latin American low-cost carriers, based upon our analysis of data collected from publicly available information.  Our business model is based on innovation and best practices adopted to improve our operating efficiency, including:

·          Operation of a young and standardized fleet.  At December 31, 2012, our operating fleet of 125 Boeing 737 aircraft was one of Latin America’s largest and youngest fleets, with an average age of 7.2 years.  Having a young fleet reduces fuel costs due to the more advanced technologies incorporated in newer aircraft. We plan to  keep our operating fleet exclusively comprised of Boeing 737 aircraft, until the arrival of our newly ordered Boeing 737 Max-7/8 aircraft (the newest generation of our current aircraft), which we expect will be delivered beginning in 2018.  Having a standardized fleet reduces inventory costs, as it requires fewer spare parts, and reduces the need to train our pilots to operate different types of aircraft.  It also simplifies our maintenance and operations processes.

·          State of the art maintenance.  We carry out heavy maintenance on our Boeing 737 aircraft internally at our IOSA (IATA Operational Safety Audit) certified Aircraft Maintenance Center at the Tancredo Neves International Airport located in Confins, in the State of Minas Gerais. Since April 2012, our Aircraft Maintenance Center has also been certified by ANAC to provide conventional and electrostatic painting, weighing and recalibration services for aircraft owned or operated by other airlines. With our system of phased maintenance for our Boeing 737 fleet, we are able to perform maintenance work every day without sacrificing aircraft revenue time, and schedule preventative maintenance with more regularity and without interrupting the utilization of our aircraft, which further dilutes fixed costs.

 

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·          We have one of the largest e-commerce platforms in Brazil .  Our effective use of technology helps to keep our costs low and our operations highly scalable and efficient.  We seek to keep our distribution channels streamlined and convenient so as to allow our customers to interact with us via the Internet.  In 2012, we booked 88.8% of our ticket sales through a combination of our website and application programming interface, or API, systems, 5.7% through our call center and 5.5% through Global Distribution System, or GDS. In addition, our customers can check in using kiosks, online and through mobile devices, which in December 2012 represented 55% of all check-ins, an increase of 12.0 p.p. versus December 2011.

We Have One of the Largest Loyalty Programs in Latin America .  Since the VRG acquisition in April 2007, we have had a loyalty program ( Smiles ), which is available to all our passengers and which we consider a strong relationship tool.  As of January 2013 our Smiles  program was effectively segregated into a separate entity and we are analyzing a potential initial public offering of Smiles . See “—Smiles Loyalty Program—Segregation of the Smiles Program.” The Smiles  loyalty program has partnerships with more than 150 partners, including hotel chains, car rental companies, restaurants, insurance companies, publishers and schools and also forms the basis for partnerships with some of Brazil and South America’s largest banks and credit card companies.  The Smiles  loyalty program had over 9.0 million members at December 31, 2012.

We Stimulate Demand for Our Service.  We believe that through our differentiated services we create demand for air travel services.  We identify and stimulate demand among both business and leisure passengers for air travel that is safe, convenient, simple and a reasonably priced alternative to traditional air, bus and car travel.  By combining low-fares with simple and reliable service, we have successfully improved our brand awareness, product quality, punctuality and regularity as well as strengthened customer loyalty. As a consequence, we have been able to attract new groups of air travelers in our markets.

We Have Strong Brand Recognition.  We believe that the Gol brand has become synonymous with innovation and value in the airline industry.  Our customers identify Gol as being safe, accessible, friendly, fair, intelligent and reliable and distinguish Gol in Brazil’s domestic airline industry on the basis of its modern and simplified approach to air travel services.  Our Smiles  and Gollog  brands and our website provide valuable customer recognition in various businesses and create a tool for brand diversification for us.

We Have High Corporate Governance Standards and Proven Management.  We have three independent board members and one board member who is nominated by Delta Air Lines Inc., or Delta, pursuant to our partnership agreement. Our top managers have broad experience in many sectors of the Brazilian economy, including air and ground transportation, telecommunications and consumer products.  This experience has helped us to develop the most effective elements of our low-cost model and we expect will help us further penetrate the Brazilian middle-class and generate ancillary revenues.

Our Strategies

Our strategy is to capitalize on our competitive advantages to achieve sustainable growth, based on four main strategic pillars:  increase passenger revenue, expand ancillary revenues, further reduce costs and improve our financial resilience.  In order to implement our strategies we intend to:

Capitalize on Our Strong Market Position in Brazil and Latin America .  We intend to capitalize on our strong market position, with our widespread brand recognition, the greatest number of routes and highest frequencies between the most important airports in Brazil, our consolidated flight network and our Smiles  loyalty program, to increase penetration across all segments of travelers.  We will focus on Brazilian operations and selected South American destinations. We will also consider new routes to foreign markets with high growth potential (for example, in the U.S. and Caribbean region), that are, or we expect to become, profitable and fit into our flight network and may be reached with our current Boeing 737 aircraft.  In addition, we believe that the airline industry may experience further consolidation in the future and therefore believe that establishing partnerships and alliances with other airlines will be a key factor to our success.  In this environment we intend to play a leading role in the Latin American airline industry and to strengthen our position as a long-term player in the face of potential consolidations of the industry.

 

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Improve Operating Efficiency.  Reducing our operating expense per available seat kilometer and adjusting capacity are key to improving our profitability.  We aim to maintain our position as one of the lowest cost airlines in the world.  We intend to adjust our strategy to focus on more profitable routes and to further reduce the average age of our fuel-efficient fleet, to ensure we are responsive to current market conditions while maintaining high utilization rates. Our aircraft utilization rate was 12.1 block-hours per day in 2012, as compared to 13.0 block-hours per day in 2011 and to 12.9 block-hours per day in 2010.

We seek to reduce our operating expense per available seat kilometer by using our aircraft efficiently, concentrating on minimizing our turnaround times at airports and maintaining a high number of daily flights per aircraft. We will continue to utilize technological innovations wherever possible to reduce our distribution costs and improve our operating efficiency.

Strengthen our Cash Position. We seek to strengthen our balance sheet and meet financial targets that will allow us to improve our financial resilience, which we believe will facilitate the implementation of our growth strategy and increase our capacity to establish partnerships, negotiate with suppliers and mitigate the impact of volatility in the financial markets on our results.  We currently seek to maintain an adequate cash position and to lengthen the maturity profile of our financial liabilities, avoiding the concentration of significant debt maturities over the next three years.

Expand Our Customer Base .  In planning the growth of our business, we will continue to select our routes and build the frequency of our service based on the extent and type of demand in the areas we serve in Brazil, South America, and the U.S. and Caribbean.  We are committed to providing air travel to a wide range of travelers.  We will continue to offer products across all traveler segments, offering convenient and flexible alternatives to business travelers while still making low-fare flights more accessible to a larger portion of the population, through the following measures:

·          Increased focus on business travelers. We intend to maintain our high punctuality, 87% and 94% in 2011 and 2012, respectively, and regularity, 95% in both 2011 and 2012, rates along with our network with the most flights connecting the busiest airports in Brazil, which are all key drivers in the purchase decision of business travelers. In addition, we offer higher-rate fares that allow flexibility to reschedule or cancel tickets with little advance notice and no additional costs, higher mileage multiplier in our Smiles program and, in São Paulo – Rio de Janeiro shuttle flights, comfort seats. In March 2013 we implemented a new route network designed to better meet the needs of business travelers by offering yet more convenient flight times and connections.

·          Stimulating demand.  Our widely available service is also designed to popularize air travel and stimulate demand, particularly from fare-conscious leisure travelers and small-to mid-size business travelers who might otherwise use alternative forms of transportation or not travel at all. The Brazilian middle class has grown significantly in the last few years, from 66 million in 2003 to 105 million in December 2011, according to Fundação Getúlio Vargas , or FGV, and the Brazilian Geographical and Statistical Institute ( Instituto Brasileiro de Geografia e Estatística ), or IBGE.

·          Overhubbing .  We estimate that between 40% and 50% of our passengers are connecting to other flights operated by us and, as a result, we may expand our network by adding capacity or creating new direct flights between two given cities, avoiding the need to connect through a third city. This may also help us to increase our flights and the number of passengers we transport despite current limitations on slot availability in Brazil’s busiest airports.

Strengthen our Smiles Program .  We intend to further strengthen our Smiles  program by increasing interaction with members and adding perceived value to its members through the following initiatives:

·          Separate entity . On December 21, 2012, we approved the segregation of the activities related to our Smiles  loyalty program, which began to be conducted by Smiles S.A., a recently incorporated subsidiary, as of  January 1, 2013. We believe that segregating the Smiles  program will allow us to have a fully dedicated management team to pursue all business opportunities from the growth of this market in Brazil.

 

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·          New Products . In 2012, we launched, among others: (i) an online platform allowing members to redeem tickets in partner airlines though our website; (ii) miles purchase program, creating an alternative for members to supplement their balance and adding to our revenues; and (iii) Smiles  Shopping, a platform through which clients can use miles to acquire not only air tickets, but also approximately 300,000 new product and service options distributed through several partners.

·          Partnerships . Fostering existing and new partnerships with large international airlines, in the form of code-share arrangements, financial institutions, retail chain-stores, car rental and insurance companies, among others, offer our Smiles  members more opportunities to earn and redeem miles.

·          Expand our airline partnerships .  We believe we have the best platform to expand our customer base in the markets in which we operate through partnerships. We intend to strengthen our existing airline partnerships and build new ones with large international airlines in the form of code-share arrangements to further increase our international feeder network, load factors and profitability. We have a strategic MRO (maintenance, repair and operations) partnership agreement with Delta TechOps, the maintenance division of Delta. Delta TechOps provides certain engine overhaul, aircraft maintenance and maintenance consulting services and is also assisting us with our efforts to secure FAA (Federal Aviation Administration) certification for our maintenance center. We assist Delta with certain line maintenance services for Delta aircraft with extended ground time in Brazil. As of December 31, 2012, we had 65 interline agreements and 6 code-share agreements, with: Delta Airlines, Iberia, KLM, Air France, Qatar Airways and Copa Airlines.

Further Innovate, Establish and Increase Our Ancillary Revenue Businesses.  Our ancillary revenues are derived from Gollog , ticket change fees, excess baggage charges and other services.  We expect further growth in these businesses, which will provide us with additional revenue at low incremental cost by:  

·          Focusing on express delivery services. Through Gollog , our cargo transportation service, we make efficient use of extra capacity in our aircraft by carrying cargo. With a comprehensive service portfolio, express delivery accounted for approximately 25% of our cargo revenue in 2012. 

·          Continuously innovating and introducing new businesses to the Brazilian market.  We have a strong track record of innovation and introduction of new business practices in Brazil. For example, in June 2009, we introduced the sale of beverages and food on board (buy on board) in Brazil, generating ancillary revenue without increasing our cost structure or fare price. As of December 31, 2012 we offered buy on board service on more than 50% of our flights. In addition, in 2012, we introduced the sale of comfort seats (rows in which the middle seat is blocked) in the Rio-São Paulo route, which are available at an additional fee.

Airline Business

Routes and Schedules

Our operating model is a highly integrated, multiple-hub route network that is different from the point-to-point model used by other low-cost carriers worldwide.  The high level of integration of flights at selected airports permits us to offer frequent, non-stop flights at low fares between Brazil’s most important economic centers and ample interconnections through our network linking city pairs through a combination of two or more flights with little connecting or stop-over time.  Our network also allows us to increase our load factors on our strongest city pair routes by using the airports in those cities to connect our customers to their final destinations.  This strategy increases our load factor by attracting customers traveling to secondary markets who prefer to pay lower fares even if this means making one or more stops before reaching their final destination.  Between 40% and 50% of our passengers connect or fly through one or more destinations before reaching their final travel destination.  Our operating model allows us to build our flight routes to add destinations to cities that would not, individually, be economically viable to serve in the traditional point-to-point model, but that are feasible to serve when simply added as additional points on our multiple-stop route network.  We do this by offering low-fare, off-peak, minimum stay or night (red-eye) flights to lower-traffic destinations, which can be the first or last stops on our routes, allowing us to increase our aircraft utilization and generate additional revenues.  By offering international flights to destinations in South America, the United States and the Caribbean (using our current Boeing 737 aircraft), with stops integrated in our network, we create opportunities for incremental traffic, feeding our network and increasing our overall load factor and our competitive advantage and supporting our strategy of expanding our network and stimulating demand for our services.

 

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We have been increasing the number of flights to and through the major Brazilian airports and prudently adding more routes to Caribbean and U.S. destinations, which we expect to give us additional growth opportunities in the Brazilian and international markets. In addition, we consider expanding to potential new destinations in Latin America in regions with medium density, represented by airports with a population of up to one million within a 200 km radius.

As of March 2013, we offered over 970 daily flights to 65  destinations connecting the most important cities in Brazil as well as the main destinations in Argentina, Bolivia, Paraguay, Uruguay, the United States, Venezuela and the Caribbean region.

On October 26, 2012 we began selling tickets for daily flights from São Paulo and Rio de Janeiro to Miami and Orlando, with stops in Santo Domingo, in the Dominican Republic. These flights commenced on December 15, 2012 and are operated by our standardized fleet of Boeing 737 aircraft.

Services

Passenger Transportation

We recognize that we must offer excellent services to our corporate and leisure customers.  We pay particular attention to the details that help to make for a pleasant, complication-free flying experience, including:

·          ticketless travel;

·          convenient online sales, check-in, seat assignment and flight change and cancellation services;

·          high frequency of flights between Brazil’s most important airports;

·          low cancellation and high on time performance rates of our flights;

·          online flight status service;

·          web-enabled cell phone ticket sales and check-in;

·          self check-in at kiosks at designated airports;

·          designated female lavatories;

·          friendly and efficient in-flight service;

·          modern aircraft interiors;

·          quick turnaround times at airport gates;

·          free or discounted shuttle services between airports and drop-off zones on certain routes;

·          buy on board services on certain flights;

·          mobile check-in and boarding pass (100% paperless boarding);

·          iPhone application for check-in, electronic boarding pass and Smiles account management; and

·          in-flight entertainment ( Gol in the air ) provided through passengers’ personal communications devices.

We seek to achieve punctual operations, which are of primary importance to our customers.  According to internal data, corrected for delays out of our control and pre-advised flight schedule changes, our average punctuality rate for 2012 was 87%, as compared to 94% in 2011. 

We experience greater passenger demand during the summer and winter vacation periods, in January and July, respectively, and during the last two weeks of December, during the holiday season.

 

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In general, flight revenues and profitability reach peak levels during the January (summer) and July (winter) vacation periods and in the final two weeks of December, during the Christmas holiday season.  Conversely, we often witness a decrease in load factors during the week in which annual Carnival celebrations take place in Brazil.  Given our high proportion of fixed costs, this seasonality is likely to cause our results of operations to vary from quarter to quarter.

Ancillary Revenues and Gollog Cargo Transportation

Ancillary revenues include revenues from our Gollog services as well as baggage excess and ticket change fees. Buy-on-board and travel insurance fees are also becoming an increasingly important part of this revenue. Further development and growth of our Gollog services is a key part of our strategy to increase ancillary revenue.

We are constantly evaluating opportunities to generate additional ancillary revenue such as sales of travel insurance, marketing activities and other services which may help us to better capitalize on the large number of passengers on our flights and the high volumes of customers using our website.

We plan to integrate the Smiles and Gollog platforms into our air travel portal to provide further convenience and simplicity to our customers.

We make efficient use of extra capacity in the stronghold of our aircraft by carrying cargo, through our cargo transport service – Gollog.  Gollog’s success is the result of the unique service we offer to the market:  the Electronic Air Waybill that can be completed online.  The Gollog system provides online access to air waybills and allows customers to track their shipment from any computer with Internet access.  Our  65 destinations throughout Brazil, South America, the United States and the Caribbean provide access to multiple locations in each region.  With our capacity of approximately  970 daily flights, operated by 125 Boeing 737-700/800 aircraft, in addition to a fleet of 147 vehicles, we can guarantee quick and reliable delivery. 

Our express delivery products – Gollog VOO CERTO, Gollog EXPRESS, Gollog DEZ HORAS and Gollog DOC – were developed to meet the growing demand for door-to-door deliveries, defined deadlines and additional optional services. We intend to intensify our efforts in the express delivery services by further strengthening our logistics capability, mainly by expanding our ground distribution network and further intensifying our commercial efforts.

Aircraft Fleet

On December 31, 2012, we had an operational fleet of 125 aircraft and a total fleet of 147.

The following table sets forth the composition of our fleet at the dates indicated:

 

At December 31,

Operating Fleet

Seats (1)

2011

2012

B737-300 (1)

141

24

-

B737-700 NG

144

42

37

B737-800 NG

177

20

16

B737-800 NG Short-Field Performance

187

61

72

Sub Total

–

147

125

 

 

At December 31,

Non-Operating Fleet

Seats (1)

2011

2012

B737-300 (1)

141

-

19

B767-300/200

218

3

3

Sub Total

–

3

22

Total

–

150

147

______________

(1) All B737-300 aircraft result from the acquisition of Webjet.  See “—Non-operating Fleet” below.

As of December 31, 2012, of our total 147 aircraft: 96 were under operating leases, 45 were under finance leases and six were owned by us.

 

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As of December 31, 2012, our operating leases had an average remaining term of 65 months and original total terms of up to 144 months from the date of delivery of the relevant aircraft.

As of December 31, 2012, our finance leases had an average remaining term of 96 months and we had purchase options for 39 of our aircraft under finance leases.

We believe that leasing our aircraft fleet under operating leases provides us with flexibility to adjust our fleet size.  We make monthly rental payments, some of which are based on floating rates,  but we are not required to make termination payments at the end of our leases.  Under our operating lease agreements, we do not have purchase options and for some of our lease agreements we are required to maintain maintenance reserve deposits and to return the aircraft and engine in the agreed condition at the end of the lease term.  Title to the aircraft remains with the lessor.  We are responsible for the maintenance, servicing, insurance, repair and overhaul of the aircraft during the term of the lease. 

In line with our strategy of combining the renovation of our fleet with disciplined growth in our seat supply, in 2012 we received seven aircraft based on operating lease contracts and also returned four aircraft under operating lease contracts.

Operating Fleet

The average age of our operating fleet of 125 Boeing 737-700/800 aircraft as of December 31, 2012, was 7.2 years.  The average daily utilization rate of our operating fleet in 2012 was 12.1 block hours as compared to 13.0 block hours in 2011.

Each Boeing 737 aircraft in our fleet is powered by two CFM International Model CFM 56-7B22 engines or two CFM International Model CFM 56-7B24 engines. All Boeing 737-800 NG Short-Field Performance are equipped with an upgrade thrust plug in each engine, which allows it to operate as a CFM 56-7B27/B3 engine with 27,000 lbs. 

The Boeing 737-700 Next Generation and Boeing 737-800 Next Generation aircraft currently comprising our fleet are fuel-efficient and very reliable.  They suit our cost efficient operations well for the following reasons:

·          they have comparatively standardized maintenance routines;

·          they require just one type of standardized training for our crews;

·          they use an average of 7% less fuel than other aircraft of comparable size, according to Boeing; and

·          they have one of the lowest operating costs in their class.

In addition to being cost-efficient, the Boeing 737-700/800 Next Generation aircraft are equipped with advanced technology that promotes flight stability, providing a more comfortable flying experience for our customers.  We use a single type of aircraft to preserve the simplicity of our operations and the introduction of any new aircraft type to our fleet will only be done if, after careful consideration, we determine that such a step will reduce our operating costs. As such, we plan to continue keeping our operating fleet exclusively comprised of Boeing 737-700/800 aircraft, until the arrival of our newly ordered Boeing 737 Max-7/8 aircraft (the newest generation of our current aircraft) which we expect will be delivered starting 2018.

Most of our Boeing 737-800 Next Generation aircraft are equipped with blended winglets and all Boeing 737-800 Next Generation aircraft from our purchase order will be equipped with winglets, which reduce our fuel and maintenance costs.  Our experience with the new winglets has shown operating fuel consumption reductions from 3% to 5%.  In addition, the winglets improve airplane performance during take-off and landing on short runways.  The new Boeing 737-800 NG aircraft will be delivered with short-field performance (SFP) with technical modifications that we expect to significantly improve flight performance, the ability to operate non-stop flights, reduce noise during take-off and to enable us to fly with our Boeing 737-800 Next Generation aircraft to the airport of Santos Dumont in Rio de Janeiro, an important link to the most important routes in Brazil.

In 2011, we announced the delivery of the first Next Generation 737-800 equipped with the new Sky Interior standard and since then all our new aircraft are equipped with this standard.

 

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Non-operating Fleet

As of December 31, 2012, we had a non-operating fleet composed of 19 B737-300 aircraft, resulting from the acquisition of Webjet, and three B767-300, all of which were grounded at the time.

Of the 19 B737-300, 13 aircraft are leased and in the process of being returned. As of March 31, 2013 we had already returned three such aircraft and expect to complete the return of the remaining aircraft by the end of 2013. In addition, six B737-300 aircraft are owned by Webjet and we plan to sell according to market conditions.

Two of the B767-300 aircraft were in the final process of being transferred to Delta Airlines, of which one was transferred in January 2013 and the other we expect will be transferred by May 2013, and the third B767-300 aircraft is grounded. The lease agreement for this aircraft expires in December 2014 and we do not expect to be able to transfer this aircraft prior to such date.

Fleet Plan

The following table sets forth our year-end projected operating fleet through 2017:

Projected Fleet Plan

2013

2014

2015

2016

2017

B737-700/800 NG*

136

137

140

140

140

B767-300**

1

-

-

-

-

Total

137

137

140

140

140

* Includes SFP aircraft (Short Field Performance)

**Non-operational aircraft (grounded). See “—Non-operational Fleet” above.

We will revise this fleet plan according to our expectations for the growth potential in the markets in which we operate.

In 2012, we announced a purchase order for 60 Boeing 737 Max-7/8 aircraft (the newest generation of our current aircraft and still under development), to be delivered starting 2018.

Sales and Distribution

Our customers can purchase tickets directly from us through a number of different channels, such as our website including our Booking Web Services (BWS), our call center, at airport ticket counters and, to a lesser extent, GDS.

Our low-cost low-fare business model utilizes website ticket sales as its main distribution channel, especially in the local market.  For the year ended December 31, 2012, 88.8% of our passenger revenues, whether directly from the customer or through travel agents, were booked online, making us a global leader in this area.  In the same period, 5.7% of our passenger revenues were booked through call centers, airport sales counters, and our BWS and 5.5% of our total sales were made through the GDS.

Our customers can purchase tickets indirectly through travel agents, who are a widely-used travel service resource in Brazil and South America, Europe, North America and other regions.  For the year ended December 31, 2012, travel agents provide us with more than 30.000 distribution outlets throughout these regions.

GDS allows us access to a large number of tourism professionals who are able to sell our tickets to customers throughout the globe, and enables us to enter into interline agreements with other airlines to offer more flights and connection options to our passengers and add incremental international passenger traffic, especially to our international network.

On October 21, 2009, we became an issuer of cards for Universal Air Travel Plan, or UATP, a payment network owned and operated by several foreign airlines.  UATP allows us access to a payment network with lower costs than those offered by credit cards and other means of payment.  In addition, as a UATP card issuer we are able to maintain a closer relationship with our corporate customers.

 

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Partnerships and Alliances

General

Our strong market positioning enables us to successfully negotiate a number of arranged partnerships with supplementary major carriers worldwide, mostly in the form of code-share agreements and interline agreements.  Additional passenger inflows generated by these strategic partnerships help improve revenues at low incremental costs.

At December 31, 2012, we had code-share agreements with Delta, Iberia, Air France, KLM, Copa Airlines and Qatar Airways. Our Smiles  program is linked to the various frequent flyer programs of our code-share partners, enabling travelers to accrue and redeem miles between the programs (however, the partnerships are not integrated among themselves).  In addition, passengers of our partner airlines are able to connect to Gol-operated flights within Brazil, marketed as a code-share partner flight.  We intend to enter into similar agreements with other long haul airlines serving or intending to serve Brazil.

At December 31, 2012, we had interline agreements with 65 airlines, including Korean Airlines, Emirates Airlines, Avianca, Continental Airlines, Japan Airlines, TAP Air Portugal, and others.  An interline agreement is a commercial agreement between individual airlines to handle passengers traveling on itineraries that require multiple airlines. This type of agreement allows passengers to utilize a single ticket and to check their baggage through to the passengers’ final destination.  Interline agreements differ from code-share agreements in that code-share agreements usually refer to numbering a flight with the airline’s code (abbreviation) even though the flight is operated by another airline.  These agreements provide for better marketing and customer recognition of the links between the airlines.

In February 2011, we entered into a strategic MRO (maintenance, repair and operations) partnership agreement with Delta TechOps, the maintenance division of Delta, which will provide overhaul service for approximately 50% of our CFM 56-7 engines, maintenance for parts and components on our fleet of Boeing 737NG aircraft and also, consulting services related to maintenance workflow planning, materials and facility optimization and tooling support. Delta TechOps will also assist us with our efforts to secure FAA (Federal Aviation Administration) Certification. In addition, we will assist Delta with certain line maintenance services for Delta aircraft with extended ground time in Brazil.

An important element of our business strategy is to cater to the corporate client.  To further develop our business relationship with our corporate customers, we have entered into partnerships with hotel chains, rental car agencies and insurance providers to offer our corporate customers the convenience of the combination of transportation and accommodation arrangements.

Delta Investment and Commercial Agreements

On December 7, 2011 our controlling shareholder and Delta entered into an investment agreement providing for the sale of 8,300,455 preferred shares in the form of ADSs owned by our controlling shareholder to Delta at a price per share equivalent to R$22.00, or the Delta Investment. Our controlling shareholder used the entire net proceeds from the sale of preferred shares to Delta to subscribe for new common and preferred shares in a rights offering issued by us at the same price per share paid by Delta.

Our controlling shareholder further agreed to elect a Delta representative to our board of directors as long as Delta holds at least 50% of the ADSs acquired in the investment, among other conditions. Delta agreed, for a period of 12 months, not to sell the acquired ADSs (lockup) and not to acquire any further Gol shares, including in the form of ADSs (standstill), without our consent.

In the context of the Delta Investment, we entered into a long-term commercial agreement with Delta that included exclusivity provisions designed to strengthen the operational cooperation and synergies between the two companies, including:

·          an increase in the scope of the code-share agreement (flight sharing), subject to the relevant approvals, allowing Delta to use its code for more Gol flights in Brazil, South America, the U.S. and the Caribbean, and Gol to add its code to Delta’s flights between Brazil and the United States, and from the U.S. to other destination, thereby increasing the number of flight options for passengers of both airlines and expanding our geographical reach;

 

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·          the optimization of connecting services in order to increase the attractiveness of the companies’ joint services, facilitating flight connections and cargo and passenger movement among the nearly 380 destinations in over 60 countries served by Gol and Delta;

·          the increase in passenger comfort by aligning services and benefits for members of both the Smiles  and SkyMiles mileage programs;

·          joint commercial and promotional activities, encouraging both airlines’ sales forces to cooperate in Brazil, the United States and, eventually, in other countries;

·          the exploration of synergies in passenger services, maintenance, VIP lounges and logistical support; and

·          the transfer of the lease of the two remaining Boeing 767 aircraft in our fleet and their spare parts to Delta.

Pricing

Brazilian airlines are permitted to establish their own domestic fares without previous government approval. Airlines are free to offer price discounts or follow other promotion activities.  Airlines must submit, 30 days after the end of each month, a file containing fares sold and quantity of passengers for each fare amount, for all markets. This file lists regular fares and excludes all contracted, corporate and private fares. The objective is to monitor the average market prices. The procedure same applies for international fares. The only difference is that all fares sold for interline itineraries are also excluded from the file sent to ANAC.

Yield Management

Yield management involves the use of historical data and statistical forecasting models to produce knowledge about our markets and guidance on how to compete to maximize our operating revenues.  Yield management forms the backbone of our revenue generation strategy and is strongly linked to our route and schedule planning and our sales and distribution methods.  Our yield management practices enable us to react quickly in response to market changes.  For example, our yield management systems are instrumental in helping us to identify the flight times and routes for which we offer promotions.  By offering lower fares for seats that our yield management indicates would otherwise remain unsold, we capture additional revenue and also stimulate customer demand.

Maintenance

According to ANAC regulation, we are directly responsible for the execution and control of all maintenance services performed on our aircraft.  The maintenance performed on our aircraft can be divided into two general categories:  line and heavy maintenance.  Line maintenance consists of routine, scheduled maintenance checks on our aircraft, including pre-flight, daily and overnight checks and any diagnostics and routine repairs.  All of our line maintenance is performed by our own highly experienced technicians at our line maintenance service bases throughout Brazil and South America.  We believe that our practice of performing daily preventative maintenance helps to maintain a high aircraft utilization rate and reduces maintenance costs.  Heavy maintenance consists of more complex inspections and servicing of the aircraft that cannot be accomplished overnight.  Heavy maintenance checks are performed following a pre-scheduled agenda of major overhauls defined by the aircraft’s manufacturer, based on the number of hours and flights flown by the aircraft.  Our continued high aircraft utilization rate will result in shorter periods of time between heavy maintenance checks for our aircraft in comparison to carriers with lower aircraft utilization rates.  In addition, engine maintenance services are rendered in different MRO (Maintenance, Repair and Operations) facilities.  We do not believe that our high aircraft utilization rate will necessarily result in the need to make more frequent repairs to our aircraft, given the durability of the aircraft type in our fleet.  Our aircraft are covered by warranties that have an average term of 48 months for products and parts and 12 years for structural components.  The warranties on the aircraft we received in 2012 under our firm purchase order with Boeing will start expiring in 2016.

We internalized heavy maintenance on our Boeing 737 aircraft in our Aircraft Maintenance Center at the Tancredo Neves International Airport in Confins, in the State of Minas Gerais.  We use this facility for airframe heavy checks, line maintenance, aircraft painting and aircraft interior refurbishment.  We have three hangars in our Aircraft Maintenance Center, with a capacity to perform maintenance on 120 aircraft per year, and we have available space to build more hangars in the future if needed. With our system of phased maintenance for our Boeing Next Generation 737-700 and 737-800 aircraft fleet, we are able to perform maintenance work every day without sacrificing aircraft revenue time and to schedule preventive maintenance with more regularity and around the utilization of our aircraft, which helps to maintain high levels of block hours per day and reduces costs.  We are one of the few airlines in the world that takes full advantage of the Boeing 737 Next Generation phased maintenance philosophy, supported by extensive investments we made in human resources, material, tools and equipment.

 

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We have also entered into a strategic MRO (maintenance, repair and operations) partnership agreement with Delta TechOps, the maintenance division of Delta, in order to provide overhaul service for approximately 50 percent of our CFM 56-7 engines, maintenance for parts and components on our fleet of Boeing 737 NG aircraft and also, consulting services related to maintenance workflow planning, materials and facility optimization and tooling support. Delta TechOps will also assist us with our efforts to secure FAA (Federal Aviation Administration) Certification. In addition, we will assist Delta with certain line maintenance services for Delta aircraft with extended ground time in Brazil.

We have been certified by ANAC under Brazilian Aeronautical Certification Regulations to perform heavy maintenance services for third parties.  We expect to utilize this certification, a potential source for ancillary revenues, now that the construction of an additional maintenance facility has been completed.

Fuel and Hedge

Our fuel costs totaled R$3,742.2 million in 2012, representing 42% of our operating expenses for the year.  In 2012, we purchased substantially all of our fuel from Petrobras Distribuidora S.A., a retail subsidiary of Petrobras, principally under an into-plane contract under which the supplier supplies fuel and also fills our aircraft tanks.  In 2012, fuel prices under our contracts were re-set every 30 days and were composed of a variable and a fixed component.  The variable component is defined by the refinery and follows international crude oil price fluctuations and the real /U.S. dollar exchange rate.  The fixed component is a spread charged by the supplier and is usually a fixed cost per liter during the term of the contract.  We currently operate a tankering program under which we fill the fuel tanks of our aircraft in regions where fuel prices are lower.  We also provide our pilots with training in fuel management techniques, such as carefully selecting flight altitudes to optimize fuel efficiency.

Fuel costs are extremely volatile, as they are subject to many global economic and geopolitical factors that we can neither control nor accurately predict.  Because international prices for jet fuel are denominated in U.S. dollars, our fuel costs, though payable in reais , are subject not only to price fluctuations but also to exchange rate fluctuations.  We maintain a fuel hedging program, based upon policies which define volume, price targets and instruments, under which we enter into fuel and currency hedging agreements with various counterparties providing for price protection in connection with the purchase of fuel.  Our hedging positions cover short- and long-term periods, and are adjusted weekly or more frequently as conditions require.  Our hedging practices are executed by our internal risk management committee and overseen by the risk policies committee of our board of directors.  The risk policies committee of our board of directors meets monthly or more often, if called, and its main responsibilities are to assess the effectiveness of our hedging policies, recommend amendments when and where appropriate and establish its views regarding fuel price trends.  We use risk management instruments that have a high correlation with the underlying assets so as to reduce our exposure.  We require that all of our risk management instruments be liquid so as to allow us to make position adjustments and have prices that are widely disclosed.  We also avoid concentration of credit and product risk.  We have not otherwise entered into arrangements to guarantee our supply of fuel and we cannot provide assurance that our hedging program is sufficient to protect us against significant increases in the price of fuel.

As of December 31, 2012, we had hedged 11% on average for our projected fuel requirements for 2013. We also have an interest hedge program and we have hedged 44% of the leases for aircraft to be delivered in 2013 and 2014.  The fuel hedge is based on call options, swap and collar contracts, and the interest hedge is based on forward swap contracts.

The following chart summarizes our fuel consumption and costs for the periods indicated:

 

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Year Ended December 31,

 

2011

2012

Liters consumed (in thousands)

1,591,917

1,655,421

Total cost (in thousands)

R$3,060,665

R$3,742,219

Average price per liter

R$1.92

R$2.26

% change in price per liter

23.2%

18.0%

Percent of operating expenses

39.3%

41.5%

 

We continuously invest in initiatives to reduce fuel consumption. Between 2008 and 2012 we reduced our fuel consumption per flight hour from 2.91 to 2.85. For example, we started using Aircraft Communications Addressing and Reporting System, or ACARS, in 2010. ACARS is a system that permits real-time digital transmission, via satellite, of  important flight data between aircraft and our bases, allowing routes and flight times to be automatically updated. We had installed ACARS in 67 aircraft by the end of 2012. We decided to increase ACARS coverage and create the CCD (Digital Communications Center) within the Operational Control area, which started operating in May 2011. The Center is responsible for monitoring aircraft in real time, as well as streamlining operations and managing various flight data. We also started using GPS Landing System in January 2010 and we expect to have the system implemented in all our fleet by the end of 2014.  This system reduces fuel consumption during take-off and landing, increases precision and safety.

Safety and Security

Our most important priority is the safety of our passengers and employees.  We maintain our aircraft in strict accordance with manufacturer specifications and all applicable safety regulations, and perform routine line maintenance every day.  Our pilots have extensive experience, with flight captains having more than 10,000 hours of career flight time, and we conduct ongoing courses, extensive flight simulation training and seminars addressing the latest developments in safety and security issues.  We closely follow the standards established by ANAC’s Air Accident Prevention Program and we have installed the Flight Operations Quality Assurance System, which maximizes proactive prevention of incidents through the systematic analysis of the flight data recorder system.  All of our aircraft are also equipped with Maintenance Operations Quality Assurance, a troubleshooting program that monitors performance and aircraft engine trends.  The Brazilian civil aviation market follows the highest recognized safety standards in the world.  We are also an active member of the Flight Safety Foundation, a foundation for the exchange of information about flight safety.  In June 2009, we created the office of Safety Officer which reports directly to our board of directors and whose main goal is to oversee flight safety and report directly to our highest management level.

Environmental Sustainability

Since 2010, we have been preparing an Annual Sustainability Report based on Global Reporting Initiative (GRI) guidelines, an international standard for reporting economic, social and environmental performance. By adopting these parameters, we are reinforcing our accountability with various stakeholders through added transparency and credibility.

We also constantly invest in becoming more environmentally sustainable and have recently implemented the following actions:

·          Expansion of our Aircraft Maintenance Center at the Tancredo Neves International Airport located in Confins, in the State of Minas Gerais:  we have reduced costs by decreasing the necessity of flying our aircraft overseas to be serviced. We also treat all of the effluents generated in our facilities and are committed to the reuse of water.  The Maintenance Center was designed to comply with environmental responsibility requirements and all of the conditions imposed by the environmental licenses and current legislation.

·          We were the first Brazilian airline selected to join the Sustainable Aviation Fuel Users Group (SAFUG), an international aviation biofuel research group, and we participate in biofuel feasibility tests.

·          We have a partnership agreement with the Fuel and Carbon Services Division of GE Aviation, which envisages the creation of studies and systems to reduce fossil fuel consumption and green house gas emissions.

 

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Insurance

We maintain passenger liability insurance in an amount consistent with industry practice and we insure our aircraft against losses and damages on an “all risks” basis.  We are required by ANAC to maintain insurance coverage for general liability against terrorist acts or acts of war with a minimum amount of US$800 million.  We have obtained all insurance coverage required by the terms of our leasing agreements.  We believe our insurance coverage is consistent with airline industry standards in Brazil and is appropriate to protect us from material loss in light of the activities we conduct.  No assurance can be given, however, that the amount of insurance we carry will be sufficient to protect us from material loss.

Competition

Domestic

Airlines in Brazil compete primarily on the basis of routes, fare levels, frequency of flights, capacity, airport operating rights and presence, reliability of services, brand recognition, frequent flyer programs and customer service.

Our main competitor in Brazil is the recently-formed LATAM Airlines Group, or LATAM, the result of a June 2012 merger between TAM Airlines of Brazil and LAN Airlines of Chile. LATAM is a full-service scheduled carrier offering flights on domestic routes and international routes.  We also face domestic competition from other domestic scheduled carriers, regional airlines and charter airlines, which mainly have regional networks.

As the growth in the Brazilian airline sector evolves, we may face increased competition from our primary competitors and charter airlines as well as other entrants into the market that reduce their fares to attract new passengers in some of our markets.

The following table sets forth the historical market shares on domestic routes, based on revenue passenger kilometers, of the significant airlines in Brazil for each of the periods indicated:

Domestic Market Share (1) — Scheduled Airlines

2008

2009

2010

2011

2012

Gol

42.4%

41.9%

37.1%

35.6%

34.4%

Webjet (2)

3.6%

4.4%

5.0%

5.9%

-

LATAM (3)

50.4%

45.4%

44.1%

40.5%

43.7%

Azul

-

3.8%

7.6%

9.8%

10.5%

Trip

1.1%

1.8%

2.7%

4.2%

4.5%

Others

2.5%

2.7%

3.5%

4.0%

6.9%

_______________

Source:  December Advanced Comparative Data (Dados Comparativos Avançados), 2008—2012

(1)           In October 2010, ANAC changed its calculation method for monthly traffic information and republished information for periods since January 2009. All operating data for 2009 and thereafter reflects the new methodology, whereas information for 2008 was calculated pursuant to the old methodology and may not be fully comparable. According to ANAC, the changes were designed to align data with the concepts adopted by the ICAO. The change was necessary because Brazil has joined the ICAO’s statistical program and supplies the latter’s database with several industry data. Changes in the methodology refer to the calculation of ASK (seat supply) and the classification of domestic legs in international flights, which are now considered to be part of the domestic market.

(2)          On October 3, 2011, we acquired Webjet.

(3)          Known as TAM Airlines prior to its June 2012 merger with LAN Airlines of Chile.

(4)          In May 2012, Azul acquired TRIP.

 

Until 2010, landing and navigation fees charged in Brazilian airports were similar in all airports independent of whether they were busy or not. In 2011, the Brazilian government increased landing and navigation fees at the busiest airports as compared to less busy airports and at peak hours. As a result, secondary hubs and off-peak flights may benefit in light of the differences in fees for the airlines that choose to operate in these airports or times.

Domestically, we also face competition from ground transportation alternatives, primarily interstate bus companies. Given the absence of meaningful passenger rail services in Brazil, travel by bus has traditionally been the only low-cost option for long-distance travel for a significant portion of Brazil’s population.  We believe that our low-cost business model has given us flexibility in setting our fares to stimulate demand for air travel among passengers who in the past have traveled long distances primarily by bus.  In particular, the highly competitive fares we have offered for travel on our night flights, which have often been comparable to bus fares for the same destinations, have had the effect of providing direct competition for interstate bus companies on these routes.

 

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International

As we expand our international services in South America, the United States and the Caribbean, our pool of competitors will increase and we will face competition from Brazilian, U.S. and South American airlines that are already established in the international market and that participate in strategic alliances and code-share arrangements. In addition, non-Brazilian airlines may decide to enter or increase their schedules in the market for routes between Brazil and other South American, U.S. and Caribbean destinations.

Smiles Loyalty Program

Segregation of the Smiles Program

On December 21, 2012, we approved the segregation of the activities related to our Smiles loyalty program, or the Smiles program, previously managed by us, and which began to be conducted by Smiles S.A., or Smiles, a recently incorporated subsidiary, as of January 1, 2013. On April 25, 2013, Smiles priced an initial public offering (IPO) in which it issued a number of common shares equivalent to 40% of its total capital for R$1.0 billion. The proceeds of this IPO will be used entirely for the purchase by Smiles of advanced tickets from us at a discount rate equivalent to between 140% and 150% of the CDI. This IPO is subject to customary closing conditions and we expect it will close on May 2, 2013.

General Atlantic Investment Agreement

On April 5, 2013, we entered into an investment agreement with General Atlantic Service Company LLC., or General Atlantic, providing for an investment by General Atlantic in Smiles. Under this agreement, G.A. Smiles Participações S.A., or G.A. Smiles, an affiliate of General Atlantic, purchased in the IPO a number of Smiles common shares equivalent to R$400.0 million, equivalent to 15.8% of Smiles total capital. G.A. Smiles also agreed to not sell or otherwise transfer these Smiles common shares for a period of nine months following the closing of this offering.

In connection with G.A. Smiles’ investment, on April 23, 2013, we entered into a shareholders agreement granting G.A. Smiles the right to appoint one member of Smiles’ board of directors and certain veto rights regarding: amendments to the Operational Agreement or the Miles and Tickets Purchase Agreement (as defined below), certain related party transactions in excess of R$2.0 million, and certain advance ticket purchases. On April 24, 2013, we granted G.A. Smiles an option, exercisable within 12 months of the IPO, to purchase from us an additional number of Smiles common shares equivalent to 20% of G.A. Smiles’ initial investment, at the same price per share set in the IPO as adjusted by the CDI.

Overview

Smiles is one of the largest coalition loyalty programs in Brazil, with over 9 million members as of December 31, 2012.  Its business model is based on developing a coalition loyalty program consisting of a single platform for accumulating and redeeming miles through a broad network of commercial and financial partners.

The Smiles program was originally launched by Varig in 1994 as a frequent flyer program and was acquired by us in 2007, together with other assets of the Varig business.  Beginning in 2008, the Smiles program, which had been essentially inactive for years, underwent a complete restructuring and revitalization.  In 2010, we continued with the Smiles program restructuring and, since then, the program has gained significant market share.  The Smiles program has been transformed from a stand-alone program to a coalition loyalty program.

Currently, Smiles allows members to accumulate miles through: (1) flights with us and our international partners, (2) the main Brazilian commercial banks, including through co-branded credit cards issued by Bradesco and Banco do Brasil and (3) a broad network of more than 150 retail partners, including Petrobras Distribuidora, the largest fuel distributor in Brazil, among others.  We are Smiles’ primary redemption partner but members may also redeem miles to purchase products and services from commercial partners.

The agreements that govern our commercial relationship with Smiles allow unrestricted access to seats on our flights.

Products and Services

Smiles’ main business is the sale of miles.  Its commercial partners purchase miles to distribute to Smiles program members when members purchase products or services from these partners.  Members accumulate miles, which are redeemed in exchange for rewards, which in turn are acquired from commercial partners. 

Smiles earns revenue mainly by (1) selling miles to its commercial partners and (2) providing loyalty program management services to commercial partners, including our loyalty program.

To become eligible to earn miles, individuals enroll in the Smiles program through its website.  Members have a single account for accumulating and redeeming miles, and are not required to transfer miles or pay additional redemption fees. 

 

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A Smiles program account permits members to accumulate miles by purchasing products or using services offered by any of its commercial partners.  Members may redeem and convert their miles into travel or non-travel rewards. Current policy is to cancel all miles in member accounts when they expire, which varies from three to five years.

In addition to selling miles , Smiles manages our loyalty program and intends to expand its loyalty program management services to its other commercial partners.

Miles Redemption

Travel rewards rep r e s ented the majority of redemptions as of December 31, 2012 .  However, with the option of redeeming miles  through Smiles Shopping, a platform through which redemption commercial partners offer a variety of reward products, we expect that the proportion of reward redemptions for products other than airline travel will increase . 

Miles Sales to Members and Smiles and Money

Smiles was the first Brazilian loyalty program to sell miles to members to allow them to add  miles to their account balances in order to facilitate redemption of higher value rewards.  Currently, members may purchase miles through its website. Miles purchases are automatically credited to member accounts and can later be used for reward tickets or rewards through Smiles Shopping.

Smiles and Money allows members to redeem rewards using a combination of miles and money.  We believe that Smiles and Money and miles sales encourages member engagement, as it expands access to rewards.

Commercial Partners

As of the date of this offering memorandum, the Smiles network of commercial partners is composed of over 150 companies, including more than 120 partners from which members may earn miles and 30 partners from which members may redeem rewards. Its partners span various industries and include airlines, financial institutions, travel agencies, hotels, car rental companies, food and non-food retailers, gas stations, bookstores, car manufacturers, real estate developers, media companies, drugstores, restaurants and parking lot operators, among others. 

•                Airlines .  We are the single most important commercial partner in terms of miles and rewards volumes.  We purchase miles from Smiles to distribute to our passengers. Additionally, Smiles has agreements with our airline partners, which are currently Qatar  Airways, Delta, Air France, KLM, and in the near future will include Iberia.

•              Financial Institutions .  Smiles has commercial partnership agreements with 22 Brazilian and international financial institutions, including the five largest Brazilian commercial banks in terms of total assets as of September 2012, according to the Central Bank.  Smiles sells miles to these commercial partners, which distribute them proportionately to credit card spending by cardholders who are Smiles program members. Smiles also sells miles for co-branded credit cards issued by Bradesco and Banco do Brasil.

•               Travel Companies, Hotels and Car Rental Agencies .  Currently, Smiles has approximately 40 commercial partnership agreements with well known domestic and international travel companies, hotels and car rental companies. These partners include Unidas Locadora de Veículos Ltda. (a Brazilian car rental company), Hilton HHonors Worldwide LLC, Marriott International, Starwood Hotels and Resorts Worldwide, Inc, Atlântica Hotels International (Brasil) Ltda, and Sauípe S.A. (a tourism complex in Brazil), whose agreement with us is in the final stages of negotiation.  This network allows Smiles program members to accumulate miles at a variety of locations worldwide and throughout the course of their travels.

•               Brazilian Retailers and Distributors .  Smiles has commercial agreements with approximately 40 important Brazilian retailers, including Petrobras Distribuidora S.A. (a fuel distributor), Camisaria Colombo (a menswear retail chain), Polishop (a domestic electronics and merchandise retailer), Cybelar (an electronics and furniture store chain), NET Serviços de Comunicação S.A. (a telecommunications provider), the newspapers Jornal o Globo and Jornal Valor Econômico, JAC Motors, Kawasaki Motores do Brasil Ltda, B2W – Companhia Global do Varejo (Brazil’s largest e-commerce company), Sociedade Comercial e Importadora Hermes S.A. (a Brazilian retailer), Editora Abril S.A. (one of the largest Brazilian publishing companies) and Walmart.com.

 

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Competition

Smiles faces the following types of competition in Brazil: (i) frequent flyer programs, (ii) the loyalty programs of financial institutions and similar entities and (iii) other loyalty programs in general.  The first group includes Multiplus, the current market leader, and other players such as the Tudo Azul program.  The second group includes a variety of large financial institutions and similar entities that have their own loyalty programs, such as the SuperBônus Program of Banco Santander (Brasil) S.A., the Bradesco Loyalty Card Program of Banco Bradesco S.A., the Sempre Presente Program of Banco Itaú Unibanco S.A. and the American Express Membership Rewards Program.  The majority of these programs allow members to transfer accumulated reward points to programs like Smiles.  The third group of competitors includes companies such as Dotz and Netpoints, among others.

There is currently no publicly available data on the loyalty industry in Brazil.  However, information disclosed by Multiplus suggests that they have approximately a 74% market share and Smiles has a 26% market share, excluding other smaller industry players.

If foreign loyalty programs such as Aeroplan or Air Miles enter the Brazilian market, Smiles may face additional competition. However, entry of foreign loyalty programs would also present new opportunities for commercial partnerships.

Agreements with Smiles

Operating Agreement

On December 28, 2012, we entered into an operating agreement with Smiles, or the Operating Agreement, that establishes the terms and conditions of our relationship. This agreement went into effect on January 1, 2013, when Smiles began to manage and operate the Smiles program.

The Operating Agreement established the terms of the transfer of Smiles program management to Smiles.  In the context of the transfer, we divided reward costs as follows: the cost of rewards redeemed with legacy miles (i.e., those earned through December 31, 2012) is supported by us, while the cost of rewards redeemed with new miles (i.e., those earned beginning January 1, 2013) is supported by Smiles.

Pursuant to the Operating Agreement, the Smiles program will be our sole loyalty program.  We are currently Smiles’ sole partner in the air transportation industry, but Smiles is free to establish new partnerships in this industry with our prior authorization.  We may require Smiles to enter into a partnership agreement with new partners in the air transportation industry or with a global alliance of airlines in the event we become a party to one.

We have a preference to enter into partnerships in certain segments, such as travel agencies (including on-line travel agencies), rental cars and travel insurance.  However, Smiles may establish partnerships in these industries with our prior authorization.

Outside of the air transportation industry and certain segments in the travel industry, Smiles does not need to inform or request our authorization to establish partnerships.  We may establish partnerships outside the air transportation industry as long as such partnerships do not involve miles or benefits accumulation in a frequent flyer program other than the Smiles program.

The 20-year Operating Agreement will be automatically renewed for successive five-year periods if neither party objects at least two years prior to its expiration.  If a party is given notice of non-renewal, it may terminate the Operating Agreement early by providing written notification to the other party six months prior to the termination date.

We pay Smiles a monthly fee for managing our frequent flyer program. This fee will be adjusted on each anniversary of the Operating Agreement in accordance with our gross monthly miles purchases.  For 2013, the management fee will be 6.0% of gross miles sales.  After 2013, this fee will remain between 3.5% and 6.0%, depending on our gross miles purchases.

 

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Miles and Tickets Purchase Agreement

On December 28, 2012, we entered into a miles and tickets purchase agreement with Smiles, or the Miles and Tickets Purchase Agreement, that establishes the terms and conditions of our purchases of miles and our sales of tickets.

In order to govern pricing and availability of reward tickets and satisfy customer demand, the agreement establishes three seating classes: standard, commercial and promotional for ticketing purposes. 

The price that we pay for miles will be calculated based on the economic cost specified above, minus a portion of the breakage rate, which is the expected percentage of miles that will expire without being redeemed.

Pursuant to the Miles and Tickets Purchase Agreement, any material change to our miles accumulation policy must be discussed in advance by a loyalty committee whose members will be appointed by Smiles and us, proportionally. Smiles must notify us of material changes to miles redemption policy relating to reward tickets and hold discussions of such changes in the loyalty committee.  The loyalty committee will be an advisory committee with no decision-making power.

Smiles may sell miles directly to its clients, subject to certain limits on miles sold per client and per period, minimum prices and the length of redemption periods.

The 20-year Miles and Tickets Purchase Agreement will be automatically renewed for successive five-year periods if neither party objects at least two years prior to its expiration.  If a party is given notice of non-renewal, it may terminate the agreement early by providing written notification to the other party six months prior to the termination date.

The parties will annually review the contract’s compliance conditions according to certain parameters established in the agreement, and may amend these conditions in order to reestablish the originally agreed-upon economic balance.  In extraordinary circumstances, the parties may also amend the agreement in the event of significant changes to (i) the economic cost of flights (including changes in the average occupancy rate of our flights or ticket prices); (ii) our destinations; or (iii) applicable law or regulation.

Back Office Services Agreement

On December 28, 2012, we entered into a back office services agreement with Smiles, or the Back Office Services Agreement, that contains the terms, conditions and levels of certain services to be provided to Smiles by us. These services will be provided in connection with certain back office activities including controllership, accounting, internal controls and auditing, finance, information technology, call center, human resources, inventory and legal matters.

 

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The three-year Back Office Services Agreement will be automatically renewed for successive three-year periods if neither party objects 12 months prior to its expiration. Smiles may terminate portions of the Back Office Services Agreement at any time by providing prior written notice to us.

Corporate Governance

We will amend Smiles’ by-laws to provide that certain related party transactions will require the approval of an independent committee or all members of its board of directors. These related party transactions include: amendments to the Operational Agreement or the Miles and Tickets Purchase Agreement and certain advance ticket purchases, among other transactions.

Industry Overview

Since air transportation has historically been affordable only to the higher income segment of Brazil’s population, resulting in a comparatively low level of air travel, we believe that a low-cost low-fare business model has the potential to significantly increase the use of air transportation in Brazil.  According to ICAO, Brazil is the third largest domestic aviation market in the world and, according to ANAC, there were 92 million domestic enplanements and 9.1 million international enplanements on Brazilian carriers in Brazil in 2012, out of a total population of approximately 195 million, according to IBGE.  In contrast, according to the U.S. Department of Transportation, the United States had 650 million domestic enplanements and 99 million international enplanements in 2012, out of a total population of approximately 315 million, based on the latest U.S. census estimates.

The business travel segment is the largest component of Brazilian air transportation demand and the most profitable in the market. According to company data, business travel represented around 70% of the its total demand for domestic air travel in 2012, which we believe is significantly higher than the business travel portion of domestic air travel in the global aviation sector.  According to the latest data collected by ANAC, flights between Rio de Janeiro and São Paulo accounted for 6.2% of all domestic passengers in 2010.  The ten busiest routes accounted for 22.2% of all domestic air passengers in 2010, while the ten busiest airports accounted for 70% and 73% of all domestic passenger traffic through INFRAERO airports in terms of arrivals and departures in 2011 and 2010, respectively.

In light of economic growth, the consumer domestic market (A, B and C classes) has significantly increased in the last years, from 66 million in 2003 to more than 105 million in 2012, according to FGV and IBGE. Due to increased passenger volume, in addition to the upcoming Soccer Confederations Cup (2013), World Cup (2014) and Summer Olympic Games (2016) in Brazil, domestic airport infrastructure will require substantial improvements.

In 2009, CONAC proposed to the Brazilian government a change to the regulatory limit of foreign ownership in Brazilian airline companies from 20% to 49% or higher, however, we are unable to anticipate if and when there will be a final decision on the matter.

In August 2011, the Brazilian government privatized the new Natal airport, which will have its construction completed and further operation by the winners of the privatization auction. In February 2012, the Brazilian government privatized the Guarulhos, Brasília and Campinas international airports, which will be operated by the winners of the privatization auction for periods of 20 to 30 years In December 2012, the Brazilian government announced its intention to privatize the Galeão (in Rio de Janeiro) and Confins (Belo Horizonte) airports by September 2013, and other airports are also expected to be privatized in the near future.  See “−Regulation of the Brazilian Civil Aviation Market−Airport Infrastructure” below.

Brazilian Civil Aviation Market Evolution

Since 1970, Brazil has for the most part experienced stable growth in revenue passenger kilometers.  From 1970 to 2009, domestic revenue passenger kilometers grew at a compound annual rate of 8.9%. In the past 40 years, the domestic market generally experienced year-over-year growth in revenue passenger kilometers except in times of significant economic or political distress, such as the petroleum crisis in the 1970s, the Brazilian sovereign debt crisis in the early 1980s and the economic and political distress in Brazil in the early 1990s.

 

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From 2000 to 2012, the compound annual growth rate in industry passenger traffic, in terms of domestic revenue passenger kilometers, was 10.8%, versus a compound annual growth rate in available industry domestic capacity, in terms of available seat kilometers, of 8.8% . Domestic industry load factors, calculated as revenue passenger kilometers divided by available seat kilometers, averaged 65.4% over the same period.  The table below shows the figures of domestic industry passenger traffic and available capacity for the periods indicated:

 

2008

2009

2010

2011

2012

 

(in millions, except percentages)

Available Seat Kilometers

72,841

86,471

102,643

116,046

119,227

Available Seat Kilometers Growth

12.8%

18.7%

18.9%

13.7%

2.7%

Revenue Passenger Kilometers

47,838

56,864

70,306

81,426

86,953

Revenue Passenger Kilometers Growth

7.4%

18.9%

23.6%

16.0%

6.8%

Load Factor

65.5%

65.8%

68.8%

70.2%

72.9%

________________

Source:  ANAC, Dados Comparativos Avançados.

Note:        In October 2010, ANAC changed its calculation method for monthly traffic information and republished information for periods since January 2009. All operating data for 2009 and thereafter reflects the new methodology, whereas information for 2008 was calculated pursuant to the old methodology and may not be fully comparable. According to ANAC, the changes were designed to align data with the concepts adopted by the ICAO. The change was necessary because Brazil has joined the ICAO’s statistical program and supplies the latter’s database with several industry data. Changes in the methodology refer to the calculation of ASK (seat supply) and the classification of domestic legs in international flights, which are now considered to be part of the domestic market.

The 2012 traffic figures reflect the industry’s current trend of controlling domestic supply through the main airlines, in response to the new cost level, as well as the sluggish growth of Brazil’s economy.

In 2010, Brazil was the third largest market in domestic revenue passenger kilometers and according to ANAC, in 2011, the Brazilian aviation industry showed the strongest market growth in the world. According to IATA, global domestic air travel markets expanded 4% in 2012 in terms of RPK; China led global domestic markets growth, followed by Brazil in second place.

Regulation of the Brazilian Civil Aviation Market

The Brazilian Aviation Authorities and Regulation Overview

Air transportation services are considered a public service and are subject to extensive regulation and monitoring by CONAC and ANAC.  Air transportation services are also regulated by the Brazilian Federal Constitution and the Brazilian Aeronautical Code.  The Brazilian civil air transportation system is controlled by several authorities.  ANAC is responsible for the regulation of the airlines, whereas DECEA is responsible for airspace control and INFRAERO is responsible for airport administration.

 

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The following chart illustrates the main regulatory bodies, their responsibilities and reporting lines within the Brazilian governmental structure.

 


 

In March 2011, the SAC ( Secretaria de Aviação Civil ) was created to supervise civil aviation in Brazil. The Civil Aviation Secretary oversees ANAC and INFRAERO and reports directly to the Brazilian President. SAC is also responsible for implementation of the airport infrastructure concession plan and the development of strategic planning for civil aviation.

In August 2011, the National Commission of Airport Authorities ( Comissão Nacional de Autoridades Aeroportuárias ) or CONAERO, was created as a commission of SAC to coordinate the different entities and public agencies related to airports.  This commission shall have a normative role in the search for efficiency and security in airports operations.

CONAERO is composed by representatives of the following entities: (i) SAC, which chairs the commission; (ii) Department of Administration of the Presidency; (iii) Agriculture, Livestock and Supplies Ministry; (iv) Defense Ministry; (v) Finance Ministry; (vi) Justice Ministry; (vii) Planning, Budget and Administration Ministry; (viii) Health Ministry; and (ix) ANAC.

ANAC is currently responsible for guiding, planning, stimulating and supporting the activities of public and private civil aviation companies in Brazil, and also regulates flying operations generally and economic issues affecting air transportation, including matters relating to air safety, certification and fitness, insurance, consumer protection and competitive practices.

The Department of Air Space Control ( Departamento de Controle do Espaço Aéreo ), or DECEA, reports indirectly to the Brazilian Minister of Defense which is responsible for planning, administrating and controlling activities related to airspace, aeronautical telecommunications and technology.  This includes approving and overseeing the implementation of equipment as well as of navigation, meteorological and radar systems.  The DECEA also controls and supervises the Brazilian Airspace Control System.

INFRAERO, a state-controlled corporation reporting to the Civil Aviation Secretary, is in charge of managing, operating and controlling federal airports, including control towers and airport safety operations.  See “Airport Infrastructure” below.

CONAC is an advisory body of the President of Brazil and its upper level advisory board is composed of the Minister of Defense, the Minister of Foreign Affairs, the Minister of Treasury, the Minister of Development, Industry and International Trade, the Minister of Tourism, the Minister Chief of the Civil Cabinet, the Minister of Planning, Budget and Management, the Minister of Justice, the Minister of Transportation and the Commandant of the Air Force. CONAC has the authority to establish national civil aviation policies that may be adopted and enforced by the High Command of Aeronautics and by ANAC.  CONAC establishes guidelines relating to the proper representation of Brazil in conventions, treaties and other actions related to international air transportation, airport infrastructure, the granting of supplemental funds to be used for the benefit of airlines and airports based on strategic, economic or tourism-related aspects, the coordination of civil aviation, air safety, the granting of air routes and concessions, as well as permission for the provision of commercial air transportation services.

 

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The Brazilian Aeronautical Code sets forth the main rules and regulations relating to airport infrastructure and operation, flight safety and protection, airline certification, lease structuring, burdening, disposal, registration and licensing of aircraft; crew training; concessions, inspection and control of airlines; public and private air carrier services; civil liability of airlines; and penalties in case of infringements.

In February 2009, the Brazilian government approved the new Civil Aviation National Policy ( Política Nacional de Aviação Civil ), or PNAC.  Although the PNAC does not establish any immediate measure, it contains the main guidelines for the national civil aviation system.  It encourages the Ministry of Defense, CONAC and ANAC to issue regulations on strategic matters such as safety, competition, environmental, and consumer issues, as well as to inspect, review and evaluate the activities of all operating companies.

The Brazilian government recognized and ratified, and must comply with, the Warsaw Convention of 1929, the Chicago Convention of 1944, and the Geneva Convention of 1948, the three leading international conventions relating to worldwide commercial air transportation activities.

Route Rights

Domestic routes .  For the granting of new routes and changes to existing ones, ANAC evaluates the actual capacity of the airport infrastructure where such route is or would be operated.  In addition, route frequencies are granted subject to the condition that they are operated on a frequent basis.  Any airline’s route frequency rights may be terminated if the airline (a) fails to begin operation of a given route for a period exceeding 15 days, (b) fails to maintain at least 75% of flights provided for in its air transportation schedule ( Horário de Transporte Aéreo ), or HOTRAN, for any 90-day period or (c) suspends its operation for a period exceeding 30 days.  ANAC approval of new routes or changes to existing routes is given in the course of an administrative procedure and requires no changes to existing concession agreements.

Once routes are granted, they must be immediately reflected in the HOTRAN, which is the official schedule report of all routes that an airline can operate.  The HOTRAN provides not only for the routes but also the times of arrival at and departure from certain airports, none of which may be changed without the prior consent of ANAC.  According to Brazilian laws and regulations, an airline cannot sell, assign or transfer its routes to another airline.

International routes .  In general, requests for new international routes, or changes to existing routes, must be filed by each interested Brazilian airline that has been previously qualified by ANAC to provide international services, with the SRI (International Relations Superintendence of ANAC), which, based on the provisions of the applicable bilateral agreement and general policies of the Brazilian aviation authorities, will submit a non-binding recommendation to ANAC’s president, who will decide on approval of the request.  International route rights for all countries, as well as the corresponding transit rights, derive from bilateral air transport agreements negotiated between Brazil and foreign governments.  Under such agreements, each government grants to the other the right to designate one or more of its domestic airlines to operate scheduled service between certain destinations in each country.  Airlines are only entitled to apply for new international routes when they are made available under these agreements.  For the granting of new routes and changes to existing ones, ANAC has the authority to approve Brazilian airlines to operate new routes, subject to the airline having filed studies satisfactory to ANAC demonstrating the technical and financial viability of such routes and fulfilling certain conditions in respect of the concession for such routes.  Any airline’s international route frequency rights may be terminated if the airline fails to maintain at least 80% of flights provided for in its air transportation schedule HOTRAN for any 180-day period or suspends its operation for a period exceeding 180 days.

 

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In 2010, ANAC approved the deregulation of international airfares for flights departing from Brazil to the U.S. and Europe, gradually removing the prior minimum fares. Also in 2010, CONAC approved the continuity of bilateral agreements providing for open skies policies with other South American countries and a new open skies policy with the United States.  In March 2011, Brazil also signed an open skies agreement with Europe. The agreements with the United States and Europe are expected to be in operation by 2015 and 2014, respectively.

Slots Policy

Domestic .  Under Brazilian law, a domestic slot is a concession of ANAC, which is reflected in the airline’s HOTRAN.  Each HOTRAN represents the authorization for an airline to depart from and arrive at specific airports within a predetermined timeframe.  Such period of time is known as an “airport slot” and provides that an airline can operate at the specific airport at the times established in the HOTRAN.  An airline must request an additional slot from ANAC with a minimum of two months’ prior notice.

Congonhas airport in the city of São Paulo is a “coordinated” airport, where slots must be allocated to an airline company before it may begin operations there.  Although it is difficult to obtain a slot in Congonhas airport, on March 8, 2010, ANAC reallocated 202 idle Congonhas’ slots. When the capacity at the airport increases and more slots become available, 20% of those slots must be distributed to new entrants who will have a preference to their assignment.  The remaining slots will be allocated among other airline companies already in operation at Congonhas, including us.  The Santos-Dumont airport in Rio de Janeiro, a highly utilized airport with half-hourly shuttle flights between São Paulo and Rio de Janeiro, is also a coordinated airport, with certain slot restrictions.  Several other Brazilian airports, including Brasília’s International Airport and São Paulo’s International Airport in Guarulhos, have limited their number of slots per day due to airport infrastructure limitations.

ANAC has imposed schedule restrictions on several Brazilian airports from which we operate.  Operating restrictions, including the prohibition of international flights’ operations and the prohibition of civil aircraft’s operation after 11:00 p.m. and before 6:00 a.m., were imposed for Congonhas Airport, one of the busiest Brazilian airports and the most important airport for our operations.  No assurance can be given that these or other government measures will not have a material adverse effect on our business and results of operations.

CONAC has taken certain measures to minimize recent technical and operational problems at São Paulo’s airports, including the redistribution of air traffic from Congonhas Airport to the International Airport in Guarulhos. CONAC has also mentioned its intention to adjust tariffs for the use of busy airport hubs to encourage further redistribution of air traffic.

In the last quarter of 2008, ANAC proposed a new regulation for the allocation of slots to domestic airlines.  This regulation governs the manner of allocation of slots, by organizing rotations among the concessionaires, determining the procedures for registration, qualification, judgment and homologation of a request for slot concessions in coordinated airports.  Additionally, such regulation also establishes the rules permitting transfers of slots between concessionaires.  ANAC’s resolution has not yet been released.

Also, in 2008, ANAC enacted a regulation providing that the minimum ground time for aircraft between landing and take-off must be 40 minutes at São Paulo’s International Airport in Guarulhos, the international airport of Rio de Janeiro (Galeão) and at Brasília’s airports, and 30 minutes at all other Brazilian airports.  This regulation negatively affected our ability to increase aircraft utilization by minimizing turnaround times between flights.

In February 2013, ANAC announced a series of public hearings to discuss proposed changes to rules governing the allocation of slots at Brazilian airports, which would consider operational efficiency (punctuality and regularity data) as the main determinant for the allocation of slots.

Also in February 2013, the Civil Aviation Secretary, or SAC, announced a new proposal focused specifically on slot distribution rules at Congonhas airport. Current rules governing the allocation of slots at Congonhas Airport, which favor us, require that 80% of new slots are assigned to airlines already operating in that airport. SAC’s proposal alters current regulations by taking into account operational efficiency as a principal determinant for slot allocation at Congonhas airport, as well as domestic market (main cities) and regional market share as complementary factors. Neither ANAC’s nor SAC’s proposal had been approved as of the date of this document. See “Item 3. Key Information—D. Risk Factors—Changes to Brazilian rules regarding slots distribution, fare restrictions and fees associated with civil aviation may adversely affect our business and results of operations.”

 

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Airport Infrastructure

INFRAERO, a state-controlled corporation, is in charge of managing, operating and controlling federal airports, including control towers and airport safety operations.

Smaller, regional airports may belong to states or municipalities within Brazil and, in such cases, are often managed by local governmental entities.  At most important Brazilian airports, INFRAERO performs safety and security activities, including passenger and baggage screening, cargo security measures and airport security.

The use of areas within federal airports, such as hangars and check-in counters, is subject to a concession by INFRAERO.  If there is more than one applicant for the use of a specific airport area, INFRAERO may conduct a public bidding process for the granting of the concession.

We have renewable concessions with terms varying from one to five years from INFRAERO to use and operate all of our facilities at each of the major airports that we serve.  Our concession agreements for our terminals’ passenger service facilities, which include check-in counters and ticket offices, operations support areas and baggage service offices, contain provisions for periodic adjustments of the lease rates and the extension of the concession term.

Of the 63 Brazilian airports managed by INFRAERO at the end of 2012, approximately 30 were receiving infrastructure investments and upgrades.  The airport upgrade plan does not require contributions or investments by the Brazilian airlines and is not expected to be accompanied by increases in landing fees or passenger taxes on air travel.

Until 2010, landing and navigation fees charged in Brazilian airports were similar in all airports independent of whether they were busy or not. In 2011, the Brazilian government increased landing and navigation fees at the busiest airports as compared to less busy airports and at peak hours.

In August 2011, the Brazilian government privatized the new Natal airport, which will have its construction completed and further operation by the winners of the privatization auction. In February 2012, the Brazilian government privatized the Guarulhos, Brasília and Campinas international airports, which will be operated by the winners of the privatization auction for periods of 20 to 30 years;

The airports auctioned were:

 

Cumbica
(Guarulhos)

Viracopos
(Campinas)

Juscelino Kubitschek
(Brasília)

City

São Paulo

São Paulo

Brasília

Grant

R$ 16.2 billion

R$ 3.8 billion

R$ 4.5 billion

Concession term

20 Years

30 Years

25 Years

Minimum investment

R$ 4.7 billion

R$ 8.7 billion

R$ 4.7 billion

Additional fee

10% of Annual Gross Revenue - R$ 1.77 billion during the concession

5% of Annual Gross Revenue - R$ 649 Million during the concession

2% of Annual Gross Revenue - R$107 million during the concession

Estimated investment for the World Cup

R$ 1.38 billion

R$ 873.1 million

R$ 626.5 million

Mandatory improvements for the World Cup

Construction of:

- new terminal with capacity for at least 7 million additional passengers per year

- apron area for 32 aircraft

- 2,200 parking spaces

- Expansion of the runway for aircraft maneuvering

Construction of:

- new terminal with capacity for at least 5.5 million additional passengers per year

- apron area for 35 aircraft

- 4,500 parking spaces

- Expansion of the runway for aircraft maneuvering

Construction of:

- new terminal with capacity for at least 2 million additional passengers per year

- apron area for 24 aircraft

- 2,400 parking spaces

- Expansion of the runway for aircraft maneuvering

 

 

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Source: SAC

These airports represented approximately 30% of total Brazilian passengers transported in 2012, including domestic and international traffic, according to ANAC.

In December 2012, the Brazilian government announced its intention to privatize the Galeão (in Rio de Janeiro) and Confins (Belo Horizonte) airports by September 2013, and other airports are also expected to be privatized in the near future.

Concession for Air Transportation Services

According to the Brazilian Federal Constitution, the Brazilian government is responsible for public services related to airspace as well as airport infrastructure, and may provide these services directly or through third parties under concessions or authorizations.  According to the Brazilian Aeronautical Code and regulations issued by CONAC, the application for a concession to operate regular air transportation services is subject to a license granted by ANAC to operate an airline and to explore regular air transportation services.  The applicant is required by ANAC to have met certain economic, financial, technical, operational and administrative requirements in order to be granted such license.  Additionally, a concession applicant must be an entity incorporated in Brazil, duly registered with the Brazilian Aeronautical Registry ( Registro Aeronáutico Brasileiro ), or RAB, must have a valid airline operating certificate ( Certificado de Homologação de Empresa de Transporte Aéreo ), or CHETA, and must also comply with certain ownership restrictions.  See “—Restrictions to the Ownership of Shares Issued by Concessionaires of Air Transportation Services.”  The ANAC has the authority to revoke a concession for failure by the airline to comply with the terms of the Brazilian Aeronautical Code, the complementary laws and regulations and the terms of the concession agreement.

Our concession was granted on January 2, 2001 by the High Command of Aeronautics of the Ministry of Defense.  The concession agreement can be terminated if, among other things, we fail to meet specified service levels, cease operations or declare bankruptcy.

The Brazilian Aeronautical Code and the regulations issued by CONAC and ANAC do not expressly provide for public bidding processes and currently it is not necessary to conduct public bidding processes prior to granting of concessions for the operation of air transportation services.  Due to the intense growth of the civil aviation sector, this rule may be changed by the government, in order to allow more competition or to achieve other political purposes.

Import of Aircraft into Brazil

The import of civil or commercial aircraft into Brazil is subject to prior certification of the aircraft by ANAC.  Import authorizations usually follow the general procedures for import of goods into Brazil, after which the importer must request the registration of the aircraft with the RAB.

Registration of Aircraft

The registration of aircraft in Brazil is governed by the Brazilian Aeronautical Code, under which no aircraft is allowed to fly in Brazilian airspace, or land in or take off from Brazilian territory, without having been properly registered.  In order to be registered and continue to be registered in Brazil, an aircraft must have a certificate of registration ( certificado de matrícula ) and a certificate of airworthiness ( certificado de aeronavegabilidade ), both of which are issued by the RAB after technical inspection of the aircraft by ANAC.  A certificate of registration attributes Brazilian nationality to the aircraft and is evidence of its enrollment with the competent aviation authority.  A certificate of airworthiness is generally valid for six years from the date of ANAC’s inspection and authorizes the aircraft to fly in Brazilian airspace, subject to continuing compliance with certain technical requirements and conditions.  The registration of any aircraft may be cancelled if it is found that the aircraft is not in compliance with the requirements for registration and, in particular, if the aircraft has failed to comply with any applicable safety requirements specified by ANAC or the Brazilian Aeronautical Code.

 

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All information relating to the contractual status of an aircraft, including purchase and sale agreements, operating leases and mortgages, must be filed with the RAB in order to provide the public with an updated record of any amendments made to the aircraft certificate of registration.

Restrictions on the Ownership of Shares Issued by Concessionaires of Air Transportation Services

According to the Brazilian Aeronautical Code, in order to be eligible for a concession for operation of regular services, the entity operating the concession must have at least 80% of its voting stock held directly or indirectly by Brazilian citizens and must have certain management positions entrusted to Brazilian citizens.  The Brazilian Aeronautical Code also imposes certain restrictions on the transfer of capital stock of concessionaires of air transportation services, such as VRG, including the following:

·          the voting shares have to be nominative and non-voting shares cannot be converted into voting shares;

·          prior approval of the Brazilian aviation authorities is required for any transfer of shares, regardless of the nationality of the investor, which results in the change of the company’s corporate control, causes the assignee to hold more than 10% of the company’s capital stock or represents more than 2% of the company’s capital stock;

·          the airline must file with ANAC, in the first month of each semester, a detailed shareholder chart including a list of shareholders, as well as a list of all share transfers effected in the preceding semester; and

·          based on its review of the airline’s shareholder chart, ANAC has the authority to subject any further transfer of shares to its prior approval.

The Registrant holds substantially all of the shares of VRG, which are public concessionaires of air transportation services in Brazil.  Under the Brazilian Aeronautical Code, the restrictions on the transfer of shares described above apply only to companies that hold concessions to provide regular air transportation services.  Therefore, the restrictions do not apply to the Registrant.

Environmental Regulation

Brazilian airlines are subject to various federal, state and municipal laws and regulations relating to the protection of the environment, including the disposal of materials and chemical substances and aircraft noise.  These laws and regulations are enforced by various governmental authorities.  The non-compliance with such laws and regulations may subject the violator to administrative and criminal sanctions, in addition to the obligation to repair or to pay damages caused to the environment and third parties.  As far as civil liabilities are concerned, Brazilian environmental laws adopt the strict and joint liability regime.  In this regard we may be liable for violations by third parties hired to dispose of our waste. Moreover, pursuant to Brazilian environmental laws and regulations, the piercing of the corporate veil of a company may occur in order to ensure enough financial resources to the recovery of damages caused against the environment.

We adopted several Environmental Management System (EMS) procedures with our suppliers and use technical audits to enforce compliance.  We exercise caution, and may reject goods and services from companies that do not meet our environmental protection parameters unless confirmation of compliance is received.

We are monitoring and analyzing the developments regarding amendments to Kyoto protocol and emissions regulations in the United States and Europe and may in the future be obliged to acquire carbon credits for the operation of our business.  No legislation on this matter has yet been enacted in Brazil.

Pending Legislation

The Brazilian congress is currently discussing a draft bill that would replace the current Brazilian Aeronautical Code ( Código Brasileiro de Aeronáutica ).  In general, this draft bill deals with matters related to civil aviation, including airport concessions, consumer protection, limitation of airlines’ civil liability, compulsory insurance, fines and the increase of limits to foreign ownership in voting stock of Brazilian airlines from 20% to 49% or higher.  This draft bill is still under discussion in the House of Representatives and, if approved, must be submitted for approval to the Federal Senate, before being sent for presidential approval. If the Brazilian civil aviation framework changes in the future, or ANAC implements increased restrictions, our growth plans and our business and results of operations could be adversely affected.

 

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Aircraft Financing by Export Credit Agencies

In 2010, the Ex-Im Bank agreed on a common approach with European export-credit agencies on offering export credits for commercial aircraft.  Among other things, the new ASU sets forth minimum guarantee premium rates applicable to aircraft to be delivered on or after January 1, 2013, or under firm contracts entered into after December 31, 2010 and also changes the maximum amount that may be financed. 

In light of our current credit ratings and the introduction of the ASU, we expect our minimum guarantee premium rate applicable to aircraft delivered on or after January 1, 2013 will increase substantially from a previous rate of 4%. The Ex-Im Bank has not yet informed us if it will guarantee this increased amount to be financed, which could cause us to have to seek other more expensive financing alternatives or use our own cash resources to finance the additional amount.

Aircraft Repossession

The Cape Town treaty is an international treaty intended to standardize transactions involving movable property. The treaty creates international standards for registration of ownership, security interests (liens), leases and conditional sales contracts, and various legal remedies for default in financing agreements, including repossession and the effect of particular states’ bankruptcy laws. As of February 2012, the convention had been ratified by 50 countries, including Brazil.

C.       Organizational Structure

The Registrant is a holding company, which owns directly or indirectly shares of six subsidiaries:  (i) VRG, which also owns (ii) Webjet, (iii) Smiles, and three offshore finance subsidiaries, (iv) Gol Finance Cayman and (v) GAC Inc., which owns (iv) Sky Finance II.  VRG is the Registrant’s operating subsidiary, under which we conduct our business. Gol Finance, GAC Inc. and Sky Finance II are off-shore companies established for the purpose of facilitating cross-border general and aircraft financing transactions.

D.       Property, Plant and Equipment

Our primary corporate offices are located in two buildings in São Paulo.  Our commercial, operations, technology, finance and administrative staff is based primarily at our headquarters.  We have concessions to use other airport buildings and hangars throughout Brazil, including a part of a hangar at Congonhas airport where we perform aircraft maintenance.  As of December 31, 2012, we have 45 Boeing 737s classified as finance lease aircraft. We own a state-of-the-art Aircraft Maintenance Center in Confins, in the State of Minas Gerais.  The certification of our aircraft maintenance center authorizes airframe maintenance services for Boeing 737-300s and Boeing Next Generation 737-700 and 800s.  We have three hangars at our Aircraft Maintenance Center, with a capacity to perform maintenance on six aircraft simultaneously and painting services on one additional aircraft.  We also have room to build more hangars in the future if needed.  With our system of phased maintenance for our Boeing NG 737-700 and 737-800 aircraft fleet, we are able to perform maintenance work every day without sacrificing aircraft revenue time, and schedule preventive maintenance with more regularity and around the utilization of our aircraft, which further dilutes fixed costs.  We use the new facility for airframe heavy checks, line maintenance, aircraft painting and aircraft interior refurbishment.  See also “Item 4—Business Overview—Aircraft” and note 17 to our financial statements as of and for the year ended December 31, 2012.

ITEM 4A.     Unresolved Staff Comments

None.

 

 

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ITEM 5.        Operating and Financial Review and Prospects

You should read this discussion in conjunction with our consolidated financial statements and the related notes and the other financial information included elsewhere in this annual report.

A.       Operating Results

Revenues

We derive our revenues primarily from transporting passengers on our aircraft.  In 2012, 88% of our revenues were derived from passenger fares, and the remaining 12% of our revenues were derived from ancillary revenues principally from our cargo business, which utilizes available cargo space on our passenger flights.  Nearly all of our passenger revenue and cargo revenue is denominated in reais .  Passenger revenue, including revenue from our Smiles loyalty program, is recognized either when transportation is provided or when the ticket expires unused.  Cargo revenue is recognized when transportation is provided.  Other ancillary revenue consists primarily of ticket change fees, excess baggage charges, interest on installment sales and other services.  Passenger revenues are based upon our capacity, load factor and yield.  Our capacity is measured in terms of available seat kilometers, which represents the number of seats we make available on our aircraft multiplied by the number of kilometers the seats are flown.  Load factor, or the percentage of our capacity that is actually used by paying customers, is calculated by dividing revenue passenger kilometers by available seat kilometers.  Yield is the average amount that one passenger pays to fly one kilometer.

The following table demonstrates our main operating performance indicators in 2011 and 2012:

 

Year Ended December 31,

 

2011

2012

Operating Data:

 

 

Load-factor

68.4%

70.2%

Break-even load-factor

70.6%

78.0%

Aircraft utilization (block hours per day)

13.0

12.1

Yield per passenger kilometer (cents)

19.5

19.7

Passenger revenue per available seat kilometer (cents)

13.4

13.8

Operating revenue per available seat kilometer (cents)

15.0

15.6

Number of departures

314,190

348,578

Operating aircraft at period end

127

125

 

Our revenues are net of certain taxes, including state-value added taxes, Imposto sobre Circulação de Mercadorias e Serviços , or ICMS; federal social contribution taxes, including Programa de Integração Social , or PIS; and the Contribuição Social para o Financiamento da Seguridade Social , or COFINS.  ICMS does not apply to passenger revenues.  The average rate of ICMS on cargo revenues varies by state from 4% to 12%.  As a general rule, PIS and COFINS combined are imposed at rates of 3.65% of passenger revenues.

We generate most of our revenue from ticket sales through our website, and we have one of the largest e-commerce platforms in Brazil.

ANAC and the aviation authorities of the other countries in which we operate may influence our ability to generate revenues.  In Brazil, ANAC approves the concession of slots, entry of new companies, launch of new routes, increases in route frequencies and lease or acquisition of new aircraft.  Our ability to grow and increase revenues is dependent on receiving approval for new routes, increased frequencies and additional aircraft from ANAC.

 

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Operating Expenses

We seek to lower our operating expenses by operating a standardized fleet with a single-class of service, having one of the newest fleets in the industry, utilizing our aircraft efficiently, using and encouraging low-cost ticket sales and distribution processes. The main components of operating expenses include those related to aircraft fuel, aircraft rent, aircraft maintenance, sales and marketing, and salaries, wages and benefits provided to employees, including provisions for our profit sharing plan.

Our aircraft fuel expenses are higher than those of low-cost airlines in the United States and Europe because the Brazilian infrastructure to produce, transport and store fuel is expensive and underdeveloped, especially in the north and northeast regions of the country.  In addition, taxes applicable on the sale of jet fuel are high and are passed along to us.  Our aircraft fuel expenses are variable and fluctuate based on global oil prices.  Since global oil prices are U.S. dollar-based, our aircraft fuel costs are also linked to fluctuations in the exchange rate of the real  versus the U.S. dollar.  In 2012, fuel expenses represented 41.5% of our total operating expenses, as compared to 39.3% in 2011.  In 2008, the price of West Texas Intermediate crude oil, a benchmark widely used for crude oil prices that is measured in barrels and quoted in U.S. dollars, varied significantly, reaching an all-time high of US$145 in March 2008 and decreasing to US$44.60 per barrel at the end of 2008.  At year-end 2009, the price per barrel was US$79.36 and increased to US$91.40 at the end of 2010. At year end 2011 the price per barrel was US$98.83 and at year end 2012 the price per barrel was US$91.82.  We currently enter into short-term arrangements to hedge against increases in oil prices and foreign exchange fluctuations.

Our aircraft rent expenses are in U.S. dollars and have increased in line with the expansion of our operations.  We use short-term arrangements to hedge against exchange rate exposure related to our lease payment obligations.  In addition, leases for seven of our aircraft are subject to floating-rate payment obligations that are based on fluctuations in international interest rates.  We currently have hedging policies in place to manage our interest rate exposure.

Our maintenance, material and repair expenses consist of light (line) and scheduled heavy (structural) maintenance of our aircraft.  Line maintenance and repair expenses are charged to operating expenses as incurred.  Structural maintenance for aircraft leased under finance leases is capitalized and amortized over the life of the maintenance cycle.  Once the maintenance is performed, accrual does not commence again until the maintenance status is reduced below the return condition.  Since the average age of our operating fleet was 7.2 years for 125 Boeing 737-700/800 aircraft at December 31, 2012, and most of the parts on our aircraft are under multi-year warranties, our aircraft have required a low level of maintenance and therefore we have incurred low maintenance expenses.  Our aircraft are covered by warranties that have an average term of 48 months for products and parts and 12 years for structural components.  The warranties on the aircraft we received in 2012 under our firm purchase order with Boeing will start expiring in 2016.  Thus, with regard to the accounting for aircraft maintenance and repair costs, our current and past results of operations may not be indicative of future results.  Our Aircraft Maintenance Center in Confins, in the State of Minas Gerais is certificated for the maintenance services for Boeing 737-300s and Boeing Next Generation 737-700 and 800s.  We currently use the new facility for airframe heavy checks, line maintenance, aircraft painting and aircraft interior refurbishment.  We believe that we have an advantage compared to industry peers in maintenance, materials and repairs expenses due to the use of Boeing 737 Next Generation aircraft that allows for phased maintenance as described in this annual report, and due to the internalization of our maintenance.  We believe that this advantage will remain in the future.

Our sales and marketing expenses include commissions paid to travel agents, fees paid for our own and third-party reservation systems and agents, fees paid to credit card companies and advertising.  Our distribution costs are lower than those of other airlines in Brazil on a per available seat kilometer basis because a higher proportion of our customers purchase tickets from us directly through our website instead of through traditional distribution channels, such as ticket offices, and we have comparatively fewer sales made through higher cost global distribution systems.  We generated 88.8% of our consolidated sales through our website and API systems in the year ended December 31, 2012 and 88.5% in 2011, including internet sales through travel agents.  For these reasons, we believe that we have an advantage compared to industry peers in sales and marketing expenses and expect this advantage will remain in the future.

Salaries, wages and benefits paid to our employees include annual cost of living adjustments and provisions made for our profit sharing plan.  We have no seniority-related increases in these costs due to our salary structure.  We believe that we have an advantage compared to industry peers in salaries, wages and benefits expenses due to generally lower labor costs in Brazil as compared to other countries. In addition, recently, the government reduced the airlines payroll tax effective as of 2013. We believe that these advantages will continue to exist in the future.

 

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Aircraft and traffic servicing expenses include ground handling and the cost of airport facilities.  Other operating expenses consist of general and administrative expenses, purchased services, equipment rentals, passenger refreshments, communication costs, supplies and professional fees.

Webjet

On November 23, 2012, we began the process of winding up Webjet’s activities and the consequent discontinuation of its brand. The first step adopted was to cease all Webjet flights. Webjet’s passengers were absorbed by us and we became responsible for all air transport and associated services for these passengers. We estimate the return of all 13 Webjet’s Boeing 737-300 aircraft under operating lease agreements by the end of 2013. As a result, we recognized additional costs of approximately R$140 million in the fourth quarter of 2012 in connection with Webjet’s wind up. However, we expect that these measures will improve operational efficiency as of 2013.

Brazilian Economic Environment

As a company with most of its operations currently in Brazil, we are affected by general economic conditions in the country.  While our growth since 2001 has been primarily driven by our expansion into new markets and increased flight frequencies, we have also been affected by macroeconomic conditions in Brazil.  In 2012, we shrank 3.8% in terms of revenue passenger kilometers in the domestic market (considering Webjet pro-forma data for 2011).  This decrease was primarily due to a 5.4% domestic capacity reduction in the same period in response to Brazil’s economic slowdown in 2012 and to a new industry-wide cost structure in place since 2011, caused by higher fuel costs, new exchange rate levels and additional airport fees.  We believe the rate of growth in Brazil is important in determining our future growth capacity and our results of operations.

Our results of operations are materially affected by currency fluctuations.  The vast majority of our revenues are denominated in reais  (with a small portion of our revenues from our international flights being denominated in other currencies), but a significant part of our operating expenses are either payable in or affected by the U.S. dollar, such as our aircraft operating lease payments, related maintenance reserves and deposits, and jet fuel expenses.  Based on a statistical analysis of our first eight years of operations, we believe that our revenues are highly correlated with the real /U.S. dollar exchange rate and jet fuel prices because real  fluctuations and increases in jet fuel prices are generally incorporated into the fare structures of Brazilian airlines.  In 2012, 54% of our operating expenses (including aircraft fuel) are denominated in, or linked to, U.S. dollars and therefore vary with the real /U.S. dollar exchange rate.  We believe that our foreign exchange and fuel hedging programs partially protect us against short-term swings in the real /U.S. dollar exchange rate and jet fuel prices.  Overall, we believe that the combination of our revenue stream, with its correlation to movements in the real /U.S. dollar exchange rate, and short-term hedges on the U.S. dollar-linked portion of our expenses, will mitigate the adverse effect on our operating expenses of abrupt movements in the real / U.S. dollar exchange rate.

Inflation has also had, and may continue to have, effects on our financial condition and results of operations.  In 2012, 79% of our operating expenses (excluding aircraft fuel) were denominated in reais , and the suppliers and service providers of these expense items generally attempt to increase their prices to reflect Brazilian inflation.

 

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The following table shows data for real GDP growth, inflation, interest rates, the U.S. dollar exchange rate and crude oil prices for and as of the periods indicated.

 

December 31,

2010

2011

2012

Real growth in gross domestic product

7.5%

2.7%

0.9%

Inflation (IGP-M) (1)

11.3%

5.1%

7.8%

Inflation (IPCA) (2)

5.9%

6.5%

5.8%

CDI rate (3)

9.7%

11.6%

8.4%

LIBOR rate (4)

0.30%

0.58% 

0.84%

Depreciation (appreciation) of the real  vs. U.S. dollar

(4.3)%

12.6%

16.7%

Period-end exchange rate—US$1.00

R$1.666

R$1.876

R$2.044

Average exchange rate—US$1.00 (5)

R$1.759

R$1.675

R$1.955

Period-end West Texas intermediate crude (per barrel)

US$91.40

US$98.83

US$91.82

Period-end Increase (decrease) in West Texas intermediate crude (per barrel)

15.2%

8.1%

(7.1)%

Average period West Texas Intermediate crude (per barrel)

US$79.63

US$95.11

US$94.27

Average period increase (decrease) in West Texas Intermediate crude (per barrel)

28.2%

19.5%

(0.9)%

_________

Sources:  Fundação Getúlio Vargas, the Central Bank and Bloomberg

(1)   Inflation (IGP-M) is the general market price index measured by the Fundação Getúlio Vargas.

(2)   Inflation (IPCA) is a broad consumer price index measured by the Instituto Brasileiro de Geografia e Estatística.

(3)   The CDI rate is average of inter-bank overnight rates in Brazil (accumulated for period-end month, annualized).

(4)   Three-month U.S. dollar LIBOR rate as of the last date of the period.  The LIBOR rate is the London inter-bank offer rate.

(5)   Represents the average of the exchange rates on the last day of each month during the period.

Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with IFRS requires our management to adopt accounting policies and make estimates and judgments to develop amounts reported in our consolidated financial statements and related notes.  We strive to maintain a process to review the application of our accounting policies and to evaluate the appropriateness of the estimates that are required to prepare our consolidated financial statements.  We believe that our estimates and judgments are reasonable; however, actual results and the timing of recognition of such amounts could differ from those estimates.  In addition, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information.

Critical accounting policies and estimates are those that are reflective of significant judgments and uncertainties, and potentially result in materially different outcomes under different assumptions and conditions.  For a discussion of these and other accounting policies, see Note 2 to our consolidated financial statements.

Property ,  Plant and Equipment .  Property, plant and equipment, including rotable parts, are recorded at cost and are depreciated to estimated residual values over their estimated useful lives using the straight-line method.  Each component of property, plant and equipment that has a cost that is significant in relation to the overall cost of the item is depreciated separately.  Aircraft and engine spares acquired on the introduction or expansion of a fleet, as well as rotable spares purchased separately, are carried as fixed assets and generally depreciated in line with the fleet to which they relate.  Pre-delivery deposits refer to prepayments made based on the agreements entered into with Boeing Company for the purchase of Boeing 737-800 Next Generation aircraft and includes interest and finance charges incurred during the manufacture of aircraft and the leasehold improvements.

Under IAS 16 “Property, Plant and Equipment,” major engine overhauls including replacement spares and labor costs, are treated as a separate asset component with the cost capitalized and depreciated over the period to the next major overhaul.  All other replacement spares and costs relating to maintenance of fleet assets are charged to the income statement on consumption or as incurred.  Interest costs incurred and exchange variation on debts that fund progress payments on assets under construction, including pre-delivery deposits to acquire new aircraft, are capitalized and included as part of the cost of the assets through the earlier of the date of completion or aircraft delivery.  Exchange differences are capitalized to the extent that they are regarded as an adjustment to interest costs.

 

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In estimating the lives and expected residual values of our aircraft, we have primarily relied upon actual experience with the same or similar types of aircraft and recommendations from Boeing, the manufacturer of our aircraft.  Aircraft estimated useful lives are based on the number of “cycles” flown (one-take-off and landing).  We have made a conversion of cycles into years based on both our historical and anticipated future utilization of the aircraft.  Subsequent revisions to these estimates, which can be significant, could be caused by changes to our maintenance program, changes in utilization of the aircraft (actual cycles during a given period of time), governmental regulations related to aging aircraft, and changing market prices of new and used aircraft of the same or similar types.  We evaluate estimates and assumptions each reporting period and, when warranted, adjust these estimates and assumptions.  These adjustments are accounted for on a prospective basis through depreciation and amortization expense, as required by IFRS. 

We evaluate annually whether there is an indication that our property, plant and equipment may be impaired.  Factors that would indicate potential impairment may include, but are not limited to, significant decreases in the market value of the long-lived asset(s), a significant change in the long-lived asset’s physical condition, and operating or cash flow losses associated with the use of the long-lived assets.  As of December 31, 2010, no impairment on property, plant and equipment assets was recognized. As of December 31, 2011, we recognized an amount of R$50.7 million of impairment of fixed assets, for  more details see note 17 to our financial statements. As of December 31, 2012, no impairment on property, plant and equipment assets was recognized.

Lease accounting.  Aircraft lease agreements are accounted for as either operating or capital leases (finance leases).  When the risks and benefits of the lease are transferred to us, as lessee, the lease is classified as a capital lease.  Capital leases are accounted for as an acquisition of the asset through a financing, with the aircraft recorded as a fixed asset and a corresponding liability recorded as a debt.  Capital leases are recorded based on the lesser of the fair value of the aircraft or the present value of the minimum lease payments, discounted at an implicit interest rate, when it is clearly identified in the lease agreement, or market interest rate.  The aircraft is depreciated through the lesser of its useful life or the lease term.  Interest expense is recognized through the effective interest rate method, based on the implicit interest rate of the lease.  Lease agreements that do not transfer the risks and benefits to us are classified as operating leases.  Operating lease payments are accounted for as a rent, and the lease expense is recognized when incurred through the straight line method.

Sale-lease back transactions that result in a subsequent operating lease have different accounting treatments depending on the fair value of the asset , the price and the cost of the sale.  If the fair value of the asset  is less than its carrying amount, the difference is immediately recognized as a loss.  When the sale gives rise to a gain it is recognized up to the fair value, with the excess deferred and amortized throughout the term of the lease.  When the sale results in a loss and the carrying amount is not greater than fair value, the loss is deferred if compensated by future lease payments.  If the carrying amount is greater than fair value it is written down to fair value, and if there is still a loss it is deferred if compensated by future lease payments.

Lease accounting is critical for us because it requires an extensive analysis of the lease agreements in order to classify and measure the transactions in our financial statements and significantly impacts our financial position and results of operations.  Changes in the terms of our outstanding lease agreements and the terms of future lease agreements may impact the accounting for the lease transactions and our future financial position and results of operations.

Goodwill and Intangible Assets.  We have allocated goodwill and intangible assets with indefinite lives acquired through business combinations for the purposes of impairment testing to a single cash-generating unit, the operating subsidiary VRG.  Goodwill is tested for impairment annually by comparing the carrying amount to the recoverable amount of the cash-generating unit level that has been measured on the basis of its value-in-use, by applying cash flow projections in the functional currency based on our approved business plan covering a five-year period followed by the long-term growth rate of 3.5%.  The pre-tax discount rate applied to the cash flow projections is 11.63%. Considerable judgment is necessary to evaluate the impact of operating and macroeconomic changes to estimate future cash flows and to measure the recoverable amount.  Assumptions in our impairment evaluations are consistent with internal projections and operating plans.  Airport operating rights acquired as part of the acquisition of VRG and Webjet were capitalized at fair value at that date and are not amortized.  Those rights are considered to have indefinite useful lives due to several factors and considerations, including requirements for necessary permits to operate within Brazil and limited slot availability in the most important airports in terms of traffic volume.  VRG tradenames were acquired as part of the VRG acquisition and were capitalized at fair value at that date.  The tradenames are considered to have an indefinite useful life (and are not amortized) due to several factors and considerations.  The carrying values of the airport operating rights and tradenames are reviewed for impairment at each reporting date and are subject to impairment testing when events or changes in circumstances indicate that carrying values may not be recoverable.  Costs related to the purchase or development of computer software that is separable from an item of related hardware is capitalized separately and amortized over a period not exceeding five years on a straight-line basis.  The carrying value of these intangibles is reviewed for impairment if events or changes in circumstances indicate the carrying value may not be recoverable.  We assess at each balance sheet date whether intangibles with indefinite useful lives are impaired using discounted cash flow analyses, which considers the creditworthiness of the issuer of the security, as further described in Note 18 to our financial statements. As of December 31, 2011 and 2010 no impairment on goodwill and other intangible assets was recognized. As of December 31, 2012 we recognized an impairment of R$56.8 million on VARIG tradename, we evaluated it under the new perspectives of its use and, therefore, the future economic benefit generated by it, as further described in Note 18 to our financial statements.

 

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Business Combination . We have accounted for business combinations using the acquisition method. The cost of an acquisition is measured as the sum of the consideration transferred, based on the fair value on the acquisition date. Costs directly attributable to the acquisition are accounted for as expenses when incurred. The assets acquired and liabilities assumed were measured at fair value, classified and allocated according to the contractual terms, economic circumstances and relevant conditions on the acquisition date. Goodwill is measured as the excess of consideration transferred in relation to net assets acquired at fair value. If the consideration is lower than the fair value of net assets acquired, the difference should be recognized as a gain in the income statement. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. On October 3, 2011, we acquired the total capital of Webjet, through our subsidiary VRG, for an adjusted price of R$43.4 million. This acquisition was accounted by the acquisition method in accordance with IFRS 3R and the gain on bargain purchase of R$88.4 million was recorded in our income statement for the year ended December 31, 2011 under other operating revenues (expenses), not taxable as it is related to a permanent difference, according to the Brazilian transition tax regime ( Regime Tributário de Transição – RTT ). On October 2, 2012, we completed the valuation of assets and liabilities acquired, including intangible assets, as well as the effect of deferred taxes and concluded that no further adjustments to the provisional allocation held on October 3, 2011 were needed. The gain on bargain purchase generated by the acquisition of Webjet is related to the recognition of the value of intangible assets not recorded on Webjet’s financial statements, represented by rights of use of slots in the Guarulhos and Santos Dumont airports, which are two of the busiest airports in Brazil, and which value is a consequence of the significant demand growth anticipated in the next few years and our expectation for recovery of operation profitability in these airports. In the context of winding up of Webjet’s operations, we have retained all of Webjet’s capacity in these airports.

Derivative Financial Instruments .  We account for derivative financial instruments in accordance with IAS 39.  In executing our risk management program, management uses a variety of financial instruments to protect against sharp changes in market prices and to mitigate the volatility of its expenditures related to these prices.  We do not hold or issue derivative financial instruments for speculative purposes.

Derivative financial instruments are initially recognized at fair value and subsequently the change in fair value is recorded in profit or loss, unless the derivative meets the strict criteria for cash flow hedge accounting.

For hedge accounting purposes, according to IAS 39, the hedge instrument is classified as a: (i) cash flow hedge when it protects against exposure to fluctuations in cash flows that are attributable to a particular risk associated with an asset or liability recognized regarding an operation that is highly likely to occur or to an exchange rate risk for an unrecognized firm commitment, and (ii) fair value hedge when it protects from the results of a change in the fair value of a recognized liability, or a part thereof, that could be attributed to exchange risk.

At the beginning of a hedge transaction, we designate and formally document the item covered by the hedge, as well as the objective of the hedge and the risk policy strategy.  Documentation includes identification of the hedge instrument, the item or transaction to be protected, the nature of the risk to be hedged and how the entity will determine the effectiveness of the hedge instrument in offsetting exposure to variations in the fair value of the item covered or the cash flows attributable to the risk covered.  The purpose is that such hedge instruments will be effective in offsetting the changes in fair value or cash flows and they are constantly appraised to determine if they really have been effective throughout the entire period for which they have been designated.

 

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Amounts classified in equity are transferred to profit or loss each period in which the hedged transaction affects profit or loss.  If the hedged item is the cost of a non-financial asset, the amounts classified in equity are transferred to the initial carrying amount of the non-financial asset.

If the forecast transaction or the firm commitment is no longer expected to occur, amounts previously recognized in equity are transferred to profit or loss.  If the designation as a hedge is revoked, amounts previously recognized in equity are recognized in profit or loss.

We measure quarterly the effectiveness of the hedge instruments in offsetting changes in prices.  Derivative financial instruments are effective if they offset between 80% and 125% of the changes in price of the item for which the hedge has been contracted.  Any gain or loss resulting from changes in the fair value of the derivative financial instruments during the quarter in which they are not qualified for hedge accounting, as well as the ineffective portion of the instruments designated for hedge accounting are recognized as other finance income (expenses).

Aircraft maintenance and repair costs .  Our aircraft lease agreements specifically provide that we, as lessee, are responsible for maintenance of the leased aircraft and engines, and we must meet specified airframe and engine return conditions upon lease expiration.  Under certain of our existing lease agreements, we pay maintenance deposits to aircraft and engine lessors that are to be applied to future maintenance events.  These deposits are calculated based on a performance measure, such as flight hours or cycles, and are available for reimbursement to us upon the completion of the maintenance of the leased aircraft.  If there are sufficient funds on deposit to reimburse us for our maintenance costs, such funds are returned to us.  The maintenance deposits paid under our lease agreements do not transfer either the obligation to maintain the aircraft or the cost risk associated with the maintenance activities to the aircraft lessor.  In addition, we maintain the right to select any third-party maintenance provider or to perform such services in-house.  Therefore, we record these amounts as a deposit on our balance sheet and recognize maintenance expense when the underlying maintenance is performed, in accordance with our maintenance accounting policy.  Certain of our lease agreements provide that excess deposits at the end of the lease term are not refundable to us.  Such excess could occur if the amounts ultimately expended for the maintenance events were less than the amounts on deposit.  Any excess amounts held by the lessor or retained by the lessor upon the expiration of the lease, which are not expected to be significant, would be recognized as additional aircraft rental expense at the time it is no longer probable that such amounts will be used for maintenance for which they were deposited.  The amount of aircraft and engine maintenance deposits expected to be utilized in the next twelve months is classified in current assets.

We follow IAS 16 - "Property, Plant and Equipment", and perform the capitalization of the costs relating to engine overhauls. This practice establishes that costs on major maintenance (including replacement parts and labor) should be capitalized only when there is an extension of the estimated useful life of the engine. Such costs are capitalized and depreciated until the next stop for major maintenance. The expense recognized directly in the income statement refers to maintenance costs of other aircraft components or even maintenance of engines that do not extend their useful life.

During the quarter ended June 30, 2011 we changed the classification of maintenance deposits from a non-monetary to a monetary asset, as since 2011 transactions involving these assets occurred substantially through receipts of funds, according to renegotiations conducted with the lessors. These transactions are recognized as exchange variation expense.

In addition, we have agreements with some lessors to replace the deposits by letters of credit, enabling us to use these funds in other expenditures relating to our lease agreements.

At the inception of the leases, our initial estimates of the maintenance expenses are equal to or in excess of the amounts required to be deposited.  This demonstrates it is probable the amounts will be utilized for the maintenance for which they are to be deposited and the likelihood of an impairment of the balance is remote.  There has been no impairment of our maintenance deposits.

 

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A summary of activity in the Aircraft and Engine Maintenance Deposits is as follows:

 

2011

2012

 

(in thousands of reais ) 

Beginning of year

456,666

358,144

Addition of Webjet’s deposits

59,679

-

Amounts paid in

118,063

149,456

Reimbursement of expense incurred

(220,280)

(214,491)

Replacement by letters of credit

(45,854)

-

Exchange variation

(10,130)

33,958

End of year

358,144

327,067

 

Our fleet plan contemplates the replacement of some operating leases with finance lease agreements, in line with our plan to further standardize our fleet with Boeing Next Generation 737-700 and 737-800 aircraft.  Due to the performance advantages of Boeing Next Generation 737-700 and 737-800 aircraft, we believe these aircraft should sustain attractive market valuations over the next years.  We therefore intend to increase the number of finance leases.  In light of this trend, our maintenance deposit accounts should decrease in the near term, subject to significant potential variations, including the actual cost of maintenance, the timing of the maintenance, aircraft cycles and potential new maintenance requirements.

Revenue Recognition . Passenger revenue is recognized when transportation is provided.  Tickets sold but not yet used are recorded as advance ticket sales that represent primarily deferred revenue for tickets sold for future travel dates. We recognize a portion of advance ticket sales as revenue based on historical data relating to the percentage of tickets sold that are not going to be used prior to the expiration date (“breakage”). The balance of deferred revenue is then reviewed on a monthly basis based on actual tickets that have expired and adjusted when necessary.

Mileage Program. Since the acquisition of VRG, we operate a frequent flyer program ( Smiles ) that provides travel and other awards to members based on accumulated mileage credits.  The obligations assumed under the Smiles  program were valued at the acquisition date at estimated fair value that represents the estimated price the Company would pay to a third party to assume the obligation for miles expected to be redeemed under the Smiles  Program. The fair value of mileage credits, net of estimated non-use of miles (breakage) is determined by the weighted average according to (i) the average amount charged per seat by VRG to airlines that participate in the loyalty program divided by the average amount of miles required to issue a ticket using miles and (ii) the average sale price of miles sold to airlines that participate in the loyalty program Smiles . This fair value is updated every six months.

Share-Based Payments .  We measure the fair value of equity-settled transactions with employees at the grant date using the Black & Scholes valuation model.  The resulting amount, as adjusted for forfeitures is charged to income over the period in which the options vest.  At each balance sheet date before vesting, the cumulative expense is calculated; representing the extent to which the vesting period has expired and management’s best estimate of the number of equity instruments that will ultimately vest.  The change in cumulative expense since the previous balance sheet date is recognized in the income statement prospectively over the remaining vesting period of the instrument.

Provisions .  Provisions are recognized when we have a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.  Where we expect some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset when the reimbursement is virtually certain.  The expense relating to any provision is presented in profit or loss net of any reimbursement.  If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability.  Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost.

Aircraft and engines return provision: in aircraft operating leases, we are contractually required to return the equipment in a predefined level of operational capability, as a result we recognize a provision based on the aircraft return costs as set forth in the agreement. The aircraft’s return provisions costs are estimated based on expenditures incurred in aircraft reconfiguration (interior and exterior), license and technical certification, painting, and other costs, according to the return agreement. Engine return provisions are estimated based on an evaluation and minimum contractual conditions that the equipment should be returned to the lessor, considering not only the historical costs incurred, but also the equipment conditions at the time of the evaluation.

 

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Onerous contracts provision: present obligations resulting from onerous contracts are recognized and measured as provisions. An onerous contract is entered into when unavoidable costs to meet the obligations assumed under the contract exceed the economic benefits that are expected to be received over the contract term. The provision for onerous contracts refers to losses on operating lease agreements of out-of-service aircraft. The provision corresponds to the net amount between the present value of the installments of the respective leases and the expected revenue from the use of such aircraft through operation or subleases, where applicable. The assumptions used are estimates and the settlement of these transactions may result in amounts significantly different from those recorded.

Insurance provision: we maintain insurance coverage in amounts we consider adequate to cover potential claims, in light of the nature of business, and in accordance with contractual and regulatory requirements.

Others provisions: are substantially related to lawsuits and are provisioned for losses considered probable in our judgment, related to labor, civil and tax matters. Tax lawsuits are presented under tax obligations.

Deferred taxes .  Deferred taxes are calculated based on tax losses, temporary differences arising on differences between tax bases and carrying amounts for financial reporting purposes of our assets and liabilities.

Even though unused tax losses and temporary differences have no expiration date in Brazil, deferred tax assets are recorded when there is evidence that future taxable profit will be available to use such tax credits.  We record our deferred tax assets based on projections for future taxable profits, which considers a number of assumptions for revenue increases, for operating costs such as jet fuel prices, leasing expenses and etc. Our business plan is revised annually in order to reevaluate the amounts to be recorded as deferred tax assets.

Deferred taxes is a critical accounting policy for us because it requires a number of assumptions and is based on our best estimate of our projections related to future taxable profit.  In addition, because the preparation of our business plan is subject to a variety of market conditions, the results of our operations may vary significantly from our projections and as such, the amounts recorded as deferred tax assets may be impacted significantly in the future.

In December, 31, 2012, tax credits arising from tax losses carryforwards and negative social contribution basis were valued based on the reasoned expected generation of future taxable income of the parent company and its subsidiaries, subject to legal limitations.

Projected future taxable income on tax losses carryforwards and negative social contribution are prepared based on business plans reviewed annually and approved by our Board of Directors. Such projections reflect changes in the economic scenario, market changes and also decisions of the Administration, including the following assumptions: (i) in the long-term scenario we will keep the strategy adopted in 2012 of rationalization of domestic supply. Based on this strategy, we have observed an increase load factors in line with a flat yield ratio; (ii) we continue with our ancillary revenue growth plan, such as the sale of special seats and buy-on-board; (iii) concerning the costs, the main change was the new level of personnel expenditure reached in 2012. Layoffs that occurred during the year, became the basis of the projection for a more efficient operation, contributing to manage costs; and (iv) our plans include the arrival of new aircraft Boeing 737-MAX, announced in 2012. From 2018 the new aircraft will contribute to an even more efficient operation in terms of fuel consumption.

Results of Operations

Year 2012 Compared to Year 2011

In 2012, our total revenue passenger kilometers (RPK) increased by 5.6% as compared to 2011, mainly due to the consolidation of Webjet’s fleet and route network since the last quarter of 2011. On the other hand, Gol’s total RPK (including Webjet figures) decreased by 3.8% as compared to 2011, mainly due to the slowing of Brazil’s economy as measured by year-over-year GDP growth.

 

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Demand in Brazil, as measured in revenue passenger kilometers (RPK), increased by 2.7% in 2012 when compared to 2011. International demand in revenue passenger kilometers was stable in the same period and capacity in Brazil, as measured by available seat kilometers (ASK), increased by 2.7%. These modest growth figures reflect a reduction of flights in our route network, an industry-wide response to new cost levels, sluggish Brazilian GDP growth and a changing focus towards route profitability. In the fourth quarter of 2012, domestic supply fell by 5.1% as compared to the same period in 2011. The fourth quarter, traditionally a period of increased travel, experienced its first decrease in supply since 2003. 

During the course of 2012, we concentrated on adapting our operations to the current macroeconomic scenario, becoming a more efficient airline by adjusting domestic capacity and focusing on established, profitable routes. In the second half of 2012, this strategy began to yield results, such as a 4.0 percentage points increase in load factor and a 6.0% increase in passenger revenue per available seat kilometer (PRASK) over second half of 2011 figures. Also in the second half of 2012, our pro-forma domestic supply fell by 6.5% as compared to the same period in 2011 (including Webjet’s 2011 figures), contributing to a 4.0 percentage points increase in the domestic load factor.

In 2012, our domestic supply decreased by 5.4% as compared to 2011 (including Webjet’s 2011 pro-forma figures). Domestic demand (considering Webjet’s figures for 2011) decreased by 3.8%, due to our strategy of increased route efficiency implemented during 2012. In the international market, our demand and capacity decreased by 2.6% and 5.0%, respectively, primarily due to the discontinuation of flights to Bogotá, Colombia, and the winding down of international charter flights using Boeing 767 aircraft, partially offset by new international routes to Santo Domingo (Dominican Republic), Miami and Orlando.

In the same period, our total demand and capacity (considering Webjet’s figures for 2011) experienced decreases of 3.7% and 5.4%, respectively, primarily in response to new industry cost levels and sluggish Brazilian GDP growth.

The table below presents certain data from our results of operations for the periods indicated:

 

Year Ended December 31,

 

2011

2012

Income Statement Data

(in millions of reais ) 

Operating revenues

 

 

Passenger

6,713.0

7,160.0

Cargo and other

826.3

943.6

Total operating revenues

7,539.3

8,103.6

Operating expenses

 

 

Salaries, wages and benefits

(1,560.4)

(1,569.7)

Aircraft fuel

(3,060.7)

(3,742.2)

Aircraft rent

(505.1)

(644.0)

Sales and marketing

(402.6)

(426.6)

Landing fees

(395.2)

(559.4)

Aircraft and traffic servicing

(484.6)

(528.7)

Maintenance, materials and repairs

(434.2)

(418.0)

Depreciation and amortization

(395.8)

(519.6)

Other operating expenses

(633.6)

(600.9)

Gain on bargain purchase

88.4

-

Total operating expenses

(7,783.8)

(9,009.2)

Loss from operations before financial income (expense)

(244.5)

(905.6)

Interest expense

(414.4)

(453.7)

Financial income (expense), net

(341.5)

(225.5)

Loss before income taxes and social contribution

(1,000.4)

(1,584.8)

Income taxes

248.9

71.9

Net loss

(751.5)

(1,512.9)

 

Operating Revenue

 

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Operating revenue increased by 7.5%, from R$7,539.3 million in 2011 to R$8,103.6 million in 2012:

 

Year Ended December 31,

Operating Revenue

2011

2012

Chg.%

 

(in millions of reais , except percentages)

Operating revenue

7,539.3

8,103.6

7.5%

Passenger

6,713.0

7,160.0

6.7%

Cargo and other

826.3

943.6

14.2%

 

Passenger operating revenues increased by 6.7% from R$6,713.0 million in 2011 to R$7,160.0 million in 2012. This variation was primarily due to the consolidation of Webjet’s net revenue in 2012, 1.8 percentage points increase in load factors and 1.0% increase in yields between the periods. Consolidated passenger revenue per ASK increased by 3.6% year-over-year.

Cargo and other revenue or “ancillary revenue” (cargo, flight booking, excess baggage, on board sales, etc.) increased by 14.2% from R$826.3 million in 2011 to R$943.6 million in 2012, accounting for 11.6% of net revenue in 2012, primarily due to: (i) the consolidation of Webjet’s ancillary revenue; (ii) the 17.5% increase in revenue from fees for flight rebooking, no-show, passenger services and ticket cancellations; (iii) the 27% increase in excess baggage revenue; and (iv) an increase of approximately 2% in cargo revenue, which accounted for approximately 4% of the Company’s total gross revenue. Consolidated ancillary revenue per ASK increased by 11.0% year-over-year.

On a unit basis, revenue per available seat kilometer (RASK) increased by 4.5% from R$15.0 cents in 2011 to R$15.6 cents in 2012.

Operating Expenses

Operating expenses increased 15.7% from R$7,783.8 million in 2011 to R$9,009.2 million in 2012, primarily due to: (i) the consolidation of Webjet’s operating expenses; (ii) additional expenses of R$140 million related to the winding up of Webjet’s activities recorded in the fourth quarter of 2012; (iii) impairment of R$56.8 million on VARIG tradename.; (iv) consistently high jet fuel prices during the course of 2012 (in reais approximately 18% greater than 2011); (v) a 17% average depreciation of the real  against the U.S. dollar; and (iv) increased landing and navigation assistance fees resulting from new fee calculation methodologies introduced by Infraero.

 The following table sets forth our total operating expenses for the periods indicated:

 

Year Ended December 31,

Operating Expenses

2011

2012

Chg.%

 

(in millions of reais , except percentages)

Salaries

(1,560.4)

(1,569.7)

0.6%

Aircraft fuel

(3,060.7)

(3,742.2)

22.3%

Aircraft rent

(505.1)

(644.0)

27.5%

Sales and marketing

(402.6)

(426.6)

(5.9)%

Landing fees

(395.3)

(559.4)

41.5%

Aircraft and traffic servicing

(484.6)

(528.7)

9.1%

Maintenance, materials and repairs

(434.2)

(418.0)

(3.7)%

Depreciation and amortization

(395.8)

(519.6)

31.3%

Other operating expenses

(633.6)

(600.9)

(5.1)%

Gain on bargain purchase

88.4

-

(100.0)%

Total operating expenses

(7,783.8)

(9,009.2)

15.7%

 

On a per unit basis, our operating expense per available seat kilometer (CASK) increased by 12.5% from R$15.45 cents in 2011 to R$17.38 cents in 2012, mainly due to R$124 million of additional provisions (see note 11 to our financial statements included elsewhere herein) and other additional expenses related to logistics and passenger re-accommodation due to the end of Webjet’s Operations (for a total of R$140 million), impairment of R$56.8 million on VARIG tradename, higher CASK from fuel, aircraft rent, landing fees, and depreciation and amortization. The increase in CASK was partially offset by the 2.9% growth in supply (ASK). Operating expenses per available seat kilometer excluding fuel (CASK Ex-fuel) increased 8.4% from R$9.38 cents in 2011 to R$10.16 cents in 2012, mainly due to the extra costs related to the winding up of Webjet’s activities, impairment on VARIG tradename, higher expenses with aircraft rent, landing fees, and depreciation and amortization.

 

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The following table sets forth certain of our operating expenses per available seat kilometer as a percentage of total operating expenses, for the periods indicated.

 

Year Ended December 31,

Operating Expenses per Available Seat Kilometer Breakdown

2011

2012

Chg %

Fuel

39.3%

41.5%

2.2%

Personnel

20.0%

17.4%

(2.6)%

Rent

6.5%

7.1%

0.6%

Maintenance

5.6%

4.6%

(1.0)%

Other

28.6%

29.3%

(0.7)%

 

The following table sets forth certain of our operating expenses per available seat kilometer for the periods indicated:

 

Year Ended December 31,

Operating Expenses per Available Seat Kilometer

2011

2012

Chg %

 

(in cents of reais ,  except percentages)

Salaries

(3.10)

(3.03)

(2.2)%

Aircraft fuel

(6.08)

(7.22)

18.8%

Aircraft rent

(1.00)

(1.24)

23.9%

Sales and marketing

(0.84)

(0.82)

(1.9)%

Landing fees

(0.78)

(1.08)

37.5%

Aircraft and traffic servicing

(0.96)

(1.02)

6.0%

Maintenance, materials and repairs

(0.86)

(0.81)

(6.4)%

Depreciation and amortization

(0.79)

(1.00)

27.6%

Other operating expenses

(1.04)

(1.16)

11.2%

Operating expenses per available seat kilometer (CASK)

(15.45)

(17.38)

12.5%

CASK excluding fuel expenses

(9.38)

(10.16)

8.4%

 

Aircraft fuel expenses increased by 22.3% from R$3,060.7 million in 2011 to R$3,742.2 million in 2012, largely due to the 18% increase in the price of jet fuel in reais , as well as the 3.6% consolidated increase in fuel consumption due to the consolidation of Webjet’s fleet and the 17% average period depreciation of the real  against the U.S. dollar. In per-available seat kilometer terms, aircraft fuel costs increased by 18.8%, due to the same reasons, although diluted by the increase in available seat kilometers in the year-over-year comparison.

Salaries remained almost stable, increasing 0.6%, from R$1,560.4 million in 2011 to R$1,569.7 million in 2012, due to the addition of a full year of Webjet employees on our payroll, largely offset by a 13.6% year-over-year decrease in our workforce, in line with our strategy of reducing capacity in Brazil’s domestic market, partially compensated with the impact of a 6.0% salary increase for 2013 on payroll expenses. In per available seat-kilometer terms, salaries, wages and benefits decreased by 2.2%, due to these same reasons mentioned above in addition to the increase in available seat kilometers in the year-over-year comparison.

Aircraft rent increased by 27.5%, from R$505.1 million in 2011 to R$644.0 million in 2012, due to the greater  average number of aircraft under operational leasing contracts (99 in 2012 as compared to 86 in 2011), combined with the 17% average period depreciation of the real  against the U.S. dollar, given that most aircraft leasing costs are denominated in U.S. dollars. In per available seat kilometer terms, aircraft rent increased by 24.3%, due to the same reasons, although diluted by the increase in available seat kilometers in the year-over-year comparison.

 

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Sales and marketing expenses remained almost stable, decreasing 5.9%, from R$402.6 million in 2011 to R$426.6 million in 2012, due to the decrease in sales between the periods. The expense was partially offset by the increase by approximately 35% year-over-year in purchase of mileage points of international partners, mainly due to the establishment of more complex relationships with mileage partners and the implementation of an online platform to redeem partners’ air tickets through the Smiles  website. . In per available seat kilometer terms, sales and marketing expenses decrease 1.9%, due to the same reasons, although diluted by the increase in available seat kilometers in the year-over-year comparison.

Landing fees increased by 41.5% from R$395.2 million in 2011 to R$559.4 million in 2012, due to: (i) the negative impact of the new landing and navigation fee calculation methodology introduced by Infraero during the course of  2011; (ii) the 6.9% increase in the number of departures as a result of the consolidation of Webjet’s operations; and (iii) the 17% average period depreciation of the real  against the U.S. dollar, which had an adverse impact on international landing fees. In per-available seat-kilometer terms, these fees increased by 37.5%, due to the same reasons, although diluted by the increase in available seat kilometers in 2012.

Aircraft and traffic servicing expenses increased by 9.1% from R$484.6 million in 2011 to R$528.7 million in 2012, mainly due to: (i) the 6.9% increase in the number of arrivals and departures, mainly as a result of the consolidation of Webjet’s operations, as operational volume affects expenses from handling, collection and forwarding, among others; and (ii) the 17.0% average period depreciation of the real  against the U.S. dollar, which had an adverse impact on the Company’s international operations. In per available seat-kilometer terms, these costs increased by 6.0% in the same period, due to the same reasons, although diluted by the increase in available seat kilometers in the year-over-year comparison.

Maintenance, materials and repairs decreased by 3.7% from R$434.2 million in 2011 to R$418.0 million in 2012, due to: (i) a reduced number of engine removals; (ii) a decline in average unit engine maintenance cost as a result of the benefits from a complete year of the maintenance agreement entered into with Delta Tech Ops in 2011; and (iii) the effects of expenses related to the return of three Boeing 767s in the second quarter of 2011 that did not occur in 2012. The decrease was partially offset by the consolidation of Webjet’s maintenance expenses and the 17% average period depreciation of the real  against the U.S. dollar, given that most maintenance expenses are U.S. dollar-denominated. In per available seat-kilometer terms, maintenance, materials and repairs decreased by 6.4%, due to the same reasons, although emphasized by the increase in available seat kilometers in the year-over-year comparison.

Depreciation and amortization expenses increased by 31.3% from R$395.8 million in 2011 to R$519.6 million in 2012, mainly due to the: (i) higher average number of aircraft under finance leases (45 in 2012 versus 42 in 2011); (ii) addition of six Boeing 737-300 aircraft owned by Webjet; (iii) increase in the depreciation of estimated aircraft reconfiguration costs which will be incurred when the aircraft are returned; and (iv) costs from improvements related to major engine maintenance established in the contracts. In per available seat-kilometer terms, depreciation and amortization increased by 27.6%, due to the same reasons, although diluted by the increase in available seat kilometers in 2012.

Other operating expenses (mainly crew travel and accommodation, direct passenger expenses, equipment leasing and general and administrative expenses) increased 10.2% from R$545.2 million in 2011 (including gain on bargain purchase of R$88.4 million in 2011) to R$600.9 million in 2012 due to: (i) additional expenses related to the winding up of Webjet’s activities recorded in the fourth quarter of 2012; (ii) impairment of R$56.8 million on VARIG tradename; (iii) the 6.9% increase in take-offs; and (iv) the 17% average period depreciation of the real  against the U.S. dollar. This was  partially offset by: (i) R$90 million in additional expenses recorded in 2011 (contractual penalty of approximately R$25 million from the early return of three Boeing 767s, expense of R$10.0 million from the termination of an agreement with a baggage-handling provider, expenses of R$5.0 million due to flight cancellations and delays due to volcanic ash from an eruption in Chile and additional expenses of R$50.0 million associated with system improvements and developments and the optimization of the route network and a provision for an insurance reimbursement); (ii) impairment losses of R$51 million related to VRG and Webjet’s fixed assets and; (iii) an expense of $ 21.7 million related to the revision of the criteria used to calculate contributions for PIS and COFINS recorded in 2011; and (iv) the gain on bargain purchase of R$88.4 million recorded in 2011. In per available seat-kilometer terms, other operating expenses decreased by 25.2%, due to the same reasons, although emphasized by the increase in available seat kilometers in the year-over-year comparison.

 

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Net Financial Result

Our net financial expense decreased by 11.6% from R$755.9 million in 2011 to R$668.0 million in 2012 primarily as a result of the gain on derivative instruments and lower expenses related to exchange variation, partially offset by an increase in other financial expenses and interest on loans due to the average period depreciation of the real  against the U.S. dollar, given that most of our debt is denominated in foreign currency.

 

Year Ended December 31,

Financial Result

2011

2012

Chg. %

 

(in millions of reais ) 

Interest on short- and long-term debt

(414.4)

(453.7)

9.5%

Exchange rate changes, net

(398.9)

(284.6)

(28.7)%

Derivative net results

(52.4)

50.3

(196.0)%

Investment funds

147.5

99.3

(32.7)%

Other financial expenses

(37.7)

(90.5)

140.3%

Net financial results

(755.9)

(679.2)

(10.1)%

 

Interest on loans increased by 9.5% in 2012 as compared to the 2011, due to: (i) interest on approximately R$230 million in additional net funding; (ii) an 8.9% year-over-year increase in the period-end real to U.S. dollar exchange rate (which adversely affected our dollar-denominated debt (equivalent to 70% of our total debt as of December 31, 2012); and (iv) the greater average number of aircraft under finance leases (45 in 2012 as compared to 42 in 2011);

Exchange variation decreased by 28.7% in 2012 as compared to 2011, mainly due to lower exchange volatility in 2012 than in 2011, when the real  depreciated from R$1.56/US$ at the end of the second quarter to R$1.85/US$ at the end of the third quarter, adversely affecting our financial liabilities in the period. The exchange rate volatility has a direct impact on foreign-currency-denominated financial assets and liabilities.

Investment funds decreased by 32.7% in 2012 as compared to 2011, mainly due to a lower volume of cash invested between the periods and a reduction in the SELIC rate, given that most of our cash investments are pegged to the CDI interbank rate (directly correlated with the SELIC rate).

In 2012, we recognized derivative financial instruments net gain of R$50.3 million. As of December 31, 2012, we had derivative positions in place to hedge approximately 21%,9%,7%, 7% and 6% of our estimated jet fuel consumption for the first, second, third, and fourth quarters of 2013 and after that until the first quarter of 2015, respectively.

Other operating expenses increased by 140.3%, from R$37.7 million in 2011 to R$90.5 million in 2012, mainly due to: (i) the consolidation of Webjet’s other financial expenses; (ii) expense of R$8.1 million in connection with waiver fees paid to holders of our 4th and 5th debenture issues recorded in the first quarter of 2012; (iii) a loss of R$11.1 million in escrow deposits related to the acquisition of Webjet; and (iv) other financial expenses totaling approximately R$6.0 million related to adjustments to the present value of Webjet’s liabilities.

Income Tax

Income tax expenses decreased by 71.1%, from a credit of R$248.9 million in 2011 to a credit of R$71.9 million in 2012, mainly due to the recognition of a valuation allowance on carryforward tax losses.

Income (Loss) For The Period

As a result of the foregoing, we had net losses of R$ 1,512.9  million in 2012, versus net losses of R$751.5 million in 2011.

Year 2011 Compared to Year 2010  

In 2011, our revenue passenger kilometers (RPK) increased by 12.3% as compared to 2010, mainly due to the incorporation of Webjet’s  fleet and route network in the last quarter of 2011, increased load factors in light of reduced fares as a result of the fierce competition generated by the substantial increase in supply (ASK) in the Brazilian airline industry especially during the first half of 2011, and the growth of demand among the emerging Brazilian middle class in 2011.

 

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Demand in Brazil, as measured in revenue passenger kilometers (RPK) increased by 15.7%  in 2011 when compared to 2010. International demand in revenue passenger kilometers increased by 11.9% over the same period. The total increase in demand, which slowed during the second half of 2011 as compared to the first half of 2011, was mainly due to: (i) reduction in domestic yields; (ii) the stronger macroeconomic scenario in Brazil and Latin America; (iii) the average depreciation of the U.S. dollar against the real , which allowed us to increase international market performance; and (iv) the growth of demand among the emerging Brazilian middle class.

In 2011, we maintained our conservative approach to adding capacity (in ASK). The supply on our total route network increased by only 9.1% as compared to 2010, leading to a 4.8% decline in our yields when comparing these same periods. On the other hand, our total demand increased by 12.3%, 1.3 times greater than our supply growth. As a result, we recorded a load factor of 68.7% in our total network, 1.9 percentage points higher than 2010. We increased our fleet utilization from 12.9 block hours/day in 2010 to 13.0 block hours/day in 2011.

Our results of operations, especially in the second half of 2011, were negatively impacted by: (i) higher fuel expenses due to the increase of global oil prices; (ii) the depreciation of the end of period real  against the U.S. dollar, which negatively affected our operating expenses, our financial expenses in U.S. dollar-denominated debt and the amount of U.S. dollar-denominated debt as expressed in reais ; (iii) reduced yields due to competition during the first half of 2011; (iv) additional expenses in 2011, especially, related to return of 3 Boeing 767  and (v) the increase of landing fees due to the impact of new landing and navigation fees methodology established by Infraero at the leading airports under its concession during 2011.

The results of operations of Webjet, which we acquired in the last quarter of 2011are consolidated in our results of operations for the year ended December 31, 2011, as from October 3, 2011. See note 12 of our financial statement.

We present in the following table information regarding our results of operations in 2011 and 2010.

 

Year Ended December 31,

 

2010

2011

Income Statement Data:

(in thousands of reais ) 

Operating revenues:

 

 

Passenger

6,277,657

6,713,029

Cargo and other

701,790

826,279

Total operating revenues

6,979,447

7,539,308

Operating expenses:

 

 

Salaries, wages and benefits

(1,252,402)

(1,560,436)

Aircraft fuel

(2,287,410)

(3,060,665)

Aircraft rent

(555,662)

(505,058)

Sales and marketing

(367,757)

(402,568)

Landing fees

(331,882)

(395,249)

Aircraft and traffic servicing

(430,521)

(484,642)

Maintenance, materials and repairs

(422,950)

(434,181)

Depreciation and amortization

(281,604)

(395,807)

Other operating expenses

(351,464)

(633,634)

Gain on bargain purchase

-

88,428

Total operating expenses

(6,281,652)

(7,783,812)

Income (loss) from operations before financial income (expense)

697,795

(244,504)

Interest expense

(297,256)

(414,430)

Financial income (expense), net

(14,043)

(341,484)

Income (loss) before income taxes and social contribution

386,496

(1,000,418)

Income taxes

(172,299)

248,880

Net Income (loss)

214,197

(751,538)

 

 

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Operating Revenue

Operating revenue increased by 8.0%, from R$6,979.4 million in the year ended December 31, 2010 to R$7,539.3  million in the year ended December 31, 2011:

 

Year Ended December 31,

Operating Revenue

2010

2011

Chg.%

 

(in thousands of reais ) 

Operating Revenue

6,979,447

7,539,308

8.0%

Passenger

6,277,657

6,713,029

6.9%

Cargo and other

701,790

826,279

17.7%

Passenger operating revenues increased by 6.9% from R$6,277.7 million in 2010 to R$6,713.0 million in 2011. This variation was due to the 1.9 percentage point increase in our load factor, partially offset by a 4.8% decline in yields.

Ancillary revenue, composed by cargo and other revenues, increased by 17.7% from R$701.8 million in 2010 to R$826.3 million in 2011, accounting for 11.0% of our net revenue in the year ended December 31, 2011, primarily due to: (i) a 18.0% increase in cargo revenue, accounting for approximately 4.0% of total net revenue (versus approximately 3.5% in 2010); (ii) an increase of up to 35% in no-show and ticket change fees, fueled by higher passenger volume when comparing the two periods; and (iii) a 4.8% growth in revenue from the Smiles  mileage program. The ancillary revenue growth was partially offset by the decrease in volume of charter flights principally performed with Boeing 767 aircraft. 

On a unit basis (RASK), the 8.0% increase in operating net revenues was offset by a 9.1% increase in available seat kilometers, and, as a result, revenue per available seat kilometer decreased by 1.0% from R$15.2 cents in 2010 to R$15.0 cents in 2011.

Operating Expenses

Operating expenses increased 23.9% from R$6,281.7 million in 2010 to R$7,783.8 million in 2011, due to: (i) a 33.8% increase in aircraft fuel expenses; (ii) a 24.6% growth in salaries expenses; (iii) increased variable costs due to higher operational volume (airport fees, hotels, handling, aircraft cleaning, landing fees, navigational assistance and other expenses); (iv) expenses associated with the return of three Boeing 767 aircraft; (v) the new landing and navigation fee methodology established by Infraero at the leading airports under its concession during 2011; (vi) expenses from the international restrictions brought about as a result of the Puyehue volcanic eruption in Chile; (vii) additional expenses associated with system improvements and developments and the optimization of the route network and a provision for an insurance reimbursement; and  (viii) higher depreciation and amortization expenses as further explained below. The increase was partially offset by R$88.4 million from the gain bargain purchase on the acquisition of Webjet (for more details, see Note 12 to our financial statements included elsewhere herein). The following table sets forth our total operating expenses for the period indicated:

 

Year Ended December 31,

Operating Expenses (in thousands of reais ) 

2010

2011

Chg.%

Salaries

(1,252,402)

(1,560,436)

24.6%

Aircraft fuel

(2,287,410)

(3,060,665)

33.8%

Aircraft rent

(555,662)

(505,058)

(9.1)%

Sales and marketing

(367,757)

(402,568)

9.5%

Landing fees

(331,882)

(395,249)

19.1%

Aircraft and traffic servicing

(430,521)

(484,642)

12.6%

Maintenance, materials and repairs

(422,950)

(434,181)

2.7%

Depreciation and amortization

(281,604)

(395,807)

40.6%

Other operating expenses

(351,464)

(633,634)

80.3%

Gain on bargain purchase

-

88,428

100%

Total operating expenses

(6,281,652)

(7,783,812)

23.9%

 

 

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On a per unit basis, our operating expense per available seat kilometer (CASK) increased by 13.6% from R$13.7 cents in 2010 to R$15.5 cents in 2011, mainly due to higher CASK from fuel, personnel, landing fees, depreciation and amortization and other expenses. The increase in CASK was partially offset by the 9.1% growth in supply (ASK).

The following tables set forth certain of our operating expenses per available seat kilometer as a percentage of total operating expenses, each for the period indicated.

 

Year Ended December 31

Operating Expenses per Available Seat Kilometer Breakdown (%)

2010

2011

Chg bps

Fuel

36.4%

39.3%

2.9%

Personnel

19.9%

20.0%

0.1%

Rent

8.8%

6.5%

(2.4)%

Maintenance

6.7%

5.6%

(1.2)%

Other

28.1%

28.6%

0.5%

 

 

Year Ended December 31

Operating Expenses per Available Seat Kilometer (in cents of reais ) 

2010

2011

Chg %

Salaries

(2.73)

(3.11)

14.2%

Aircraft fuel

(4.98)

(6.11)

22.6%

Aircraft rent

(1.21)

(1.01)

(16.7)%

Sales and marketing

(0.80)

(0.84)

4.8%

Landing fees

(0.72)

(0.79)

9.1%

Aircraft and traffic servicing

(0.93)

(0.97)

3.8%

Maintenance, materials and repairs

(0.92)

(0.87)

(5.9)%

Depreciation and amortization

(0.61)

(0.79)

28.8%

Other operating expenses

(0.77)

(1.04)

35.2%

Operating Expenses per available seat kilometer (CASK)

(13.67)

(15.53)

13.6%

CASK excluding fuel expenses

(8.70)

(9.42)

8.4%

 

Aircraft fuel expenses increased by 33.8% from R$2,287.4  million in 2010 to R$3,060.7 million in 2011, largely due to: (i) a 19.5% increase in the average international WTI oil price; and (ii) the 8.6% growth in fuel consumption as a result of the 10.6% increase in the number of hours flown. Increased fuel expenses were partially offset by the average 4.8% period depreciation of the U.S. dollar against the real . In per-available seat kilometers terms, aircraft fuel costs increased by 22.6%, due to the same reasons but partially diluted by the increase in ASK.

Salaries increased by 24.6%, from R$1,252.4  million in 2010 to R$1,560.4  million in 2011, due to: (i) the impact of a 8.75% pay raise for our 2011 payroll; (ii)  the increase in flight crew bonuses due to the 10.6% increase in the numbers of hours flown; (iii) training expenses due to the hiring of approximately 400 co-pilots during 2011; (iv) 9.3% workforce increase due to the Webjet acquisition in October 2011. In per available seat-kilometer terms, salaries, wages and benefits increased by 14.2%, due to the same reasons but partially diluted by the increase in ASK.

Aircraft rent decreased by 9.1% from R$555.6 million in 2010 to R$505.1 million in 2011, due to: (i) the lower number of aircraft under operating leases (an average of 86 in 2011 versus an average of  89 in 2010); (ii) the return of three Boeing 767s which had a higher leasing cost; and (iii) the average 4.8% period depreciation of the U.S. dollar against the real . The expense was partially offset by the incorporation of 14 Boeing 737-300 from Webjet in our fleet since October 3, 2011. In per available seat-kilometer terms, aircraft rent decreased by 16.7%, due to the same reasons emphasized by the increase in ASK.

Sales and marketing expenses increased by 9.5% from R$367.8 million in 2010 to R$402.6  million in 2011, due to the higher expenses with sales incentives in light of the increase in sales volume, partially offset by the elimination of ticket sale commissions for travel agents as of February 2010. In per available seat-kilometer terms, sales and marketing expenses decreased 4.8%, due to the same reasons but partially diluted by the increase in ASK.

 

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Landing fees increased by 19.1% from R$331.9 million in 2010 to R$395.2 million in 2011, due to: (i) the increase in landings fees expenses due to the impact of new landing and navigation methodology established by Infraero at the leading airports under its concession during 2011; and (ii) the 6.4% increase in the number of landings. The landing fees expense was partially offset by the 4.8% period depreciation of the average U.S. dollar against the real  with an impact on international landing fees.  In per-available seat-kilometer terms, these fees increased by 9.1%, due to the same reasons but partially diluted by the increase in ASK.

Aircraft and traffic servicing expenses increased by 12.6% from R$430.5 million in 2010 to R$484.6  million in 2011, mainly due to: (i) the increase in handling expenses due to higher passenger volume (increase of 6.4% in number of departures) and the impact of pay raises on the cost of these services; (ii) additional IT expenses due to investments in technological improvements such as remote check-in and the new Smiles  system; and (iii) additional consulting services. In per available seat-kilometer terms, these costs increased by 3.8% in the same period, due to the same reasons but partially diluted by the increase in ASK.

Maintenance, materials and repairs increased by 2.7% from R$423.0 million in 2010 to R$434.2 million in 2011, due to expenses related with the return of  three Boeing 767s, partially offset by the average 4.8% period depreciation of the U.S. dollar against the real , given that most of these expenses are in foreign currency and the expenses related to the fleet renewal in 2010, not incurred in 2011. In per available seat-kilometer terms, the maintenance, materials and repairs decreased by 5.9%, due to the same reasons but magnified by the increase in ASK.

Depreciation and amortization expenses increased by 40.6% from R$281.6 million in 2010 to R$395.8 million in 2011, mainly due to: (i) the higher average number of aircraft under finance leases (an average of 42 in 2011 versus an average of 35 in 2010); and (ii) an increase in the depreciation of estimated reconfiguration costs for aircraft and an increase in contractually established costs associated with improvements in major engine overhauls. In per available seat-kilometer terms, depreciation and amortization increased by 28.8%, due to the same reasons but partially diluted by the increase in ASK.

Other operating expenses (mainly crew travel and accommodation, direct passenger expenses and general and administrative expenses) increased 55.1% from R$351.4 million in 2010 to R$545,2 million in 2011 due to: (i) a contractual penalty of approximately R$25 million from the early return of three Boeing 767s; (ii) increase of approximately R$20.0 million in variable expenses directly linked to passenger volume (crew travel, accommodation, meals, transportation and direct passenger expenses) due to the 6.4% growth in the number of landings; (iii) expenses of R$5.0 million due to flight cancellations and delays, mainly due to the restrictions on international flights in the Southern cone region for most of June due to volcanic ash from an eruption in Chile; (iv) expense of R$10.0 million from the termination of an agreement with a baggage-handling provider in order to obtain commercial benefits and future savings from the new provider, besides other penalties related to contracts termination during 2011; (v) additional expenses of R$50.0 million associated with system improvements and developments and the optimization of the route network and a provision for an insurance reimbursement; (vi) increase in expenses from the redemption of miles for use in international partner airlines; (vii) R$51.5 million for  impairment of the fleet and spare parts from  Gol and Webjet’s fleet; (viii) revision of the criteria used to calculate contributions for PIS and COFINS in the last quarter of 2011, which generated an expense of R$24.0 million; and (ix) provision of R$26.0 million for the anticipated return of 14 Boeing 737-300 aircraft from Webjet. The result was partially offset by R$88.0 million of bargain purchase gain in Webjet’s acquisition. In per available seat-kilometer terms, other operating expenses increased by 41.1%, due to the same reasons but partially diluted by the increase in ASK.

 

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Net Financial Result

Our net financial expense increased  by 142.8% from R$311.3 million in 2010 to R$755.9 million in 2011 primarily as a result of the negative impact of R$476.4 million due to an 18.8% depreciation of the real against the dollar in the third quarter as compared to the second quarter on the Company’s financial result, given that most of our debt is denominated in foreign currency.

 

Year Ended December 31

Financial Result (in thousands of reais ) 

2010

2011

Chg. %

Interest on short- and long-term debt

(297,256)

(414,430)

39.4%

Exchange rate changes, net

46,549

(398,897)

956.9%

Derivative net Results

(117,022)

(52,425)

-55.2%

Investments funds

103,906

147,508

42.0%

Other financial expenses

(47,476)

(37,670)

-20.7%

Net financial results

(311,299)

(755,914)

142.8%

Interest on short- and long-term debt increased by 39.4% in 2011 as compared to 2010, due to: (i) additional interest on loans from the senior notes issued in July 2010 maturing in 2020; (ii) additional interest on loans from the R$600 million debenture issue in September 2010; (iii) additional interest on loans from the R$500 million debenture issue in June 2011;  (iv) the larger number of aircraft classified under finance leases (an average of 42 in 2011 versus an average of 35 in 2010); and (v) the 12.6% depreciation of the real  against the dollar between the periods (exchange rate of the end of the period), which had a negative impact on interest payments on foreign-currency debt (70.0% of our total debt at December 31, 2011).

Exchange rate changes, net generated a loss of R$398.9 million in 2011 versus a gain of R$46.0  million in 2010 due to the depreciation of the real  versus the U.S. dollar, especially in the third quarter of 2011, which had a direct impact on foreign-currency-denominated financial assets and liabilities and by the recognition of an exchange variation expense of R$10.5 million due to the reclassification of maintenance deposits from “non-monetary assets” to “monetary assets” since the second quarter of 2011, partially offset by the reduced U.S. dollar exposure of our debt (70% in 2011, versus 76% in 2010).

In 2011, we recognized derivative financial instruments net loss of R$52.4 million. As of December 31, 2011, we had derivative positions in place to hedge approximately 48%, 41%, 27% and  20% of our estimated jet fuel consumption for the first, second, third, and fourth quarters of 2012, respectively.

Investments funds increased by 42.0% in 2011 as compared to 2010 due to financial gains from increased investments of our cash position composed by cash and cash equivalents, short investments and current and noncurrent restricted cash, which is already equivalent to 31.1% of our last 12-months operating revenue.

Other financial expenses decreased by 20.7% from R$47.5 million in 2010 to R$37.3 million in 2011, due to a R$38.0 million expense from the discounts granted to CVC in 2010. The expense was partially offset by a R$10.4 million expense from the recognition of the adjustment to present value of future obligations related to aircraft returns and higher expenses from banking commissions generated by the debenture issue in June 2011, senior notes issued in July 2010 and the debentures issued in September 2010 (recognized in the income statement along the debt’s maturity period).

Income Tax

Income tax generated a credit of R$248.9 million in 2011 compared to an a expense of R$172.3 million in 2010. The variations were mainly  due to credits taxes from VRG tax loss carryforwards and negative basis of social contribution, the depreciation of the real  against the U.S. dollar between the periods, which generated a temporary reduction difference on the exchange variation of financial leasings, contributing to the credit recorded in the deferred income tax line. In addition, there was an decrease in taxable income, generating an expense of R$5.8 million under current income tax.  

Income (Loss) For The Period

As a result of the foregoing, we had net losses of R$751.5 million in 2011, versus a net income of R$214.2 million in 2010.

 

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B.       Liquidity and Capital Resources

Cash Flow Analysis

Operating Activities .  Our strategy is to rely primarily on cash flows from operations to provide working capital for current and future operations.  In 2012, we generated R$133.3 million in cash from our operating activities reflecting the decrease in our operating profitability. In 2011 net cash used by operating activities was R$602.5 million and net cash provided in 2010 was R$723.9 million. Cash flows generated by operating activities for 2012 were driven by R$1,512.9 million in net loss, plus noncash depreciation and amortization expense of R$519.6 million, noncash interest on loans of R$268.4 million, noncash exchange variation loss of R$279.5 million, a R$22.8 million decrease in accounts receivable, R$424.0 million short-term investments used for trading, a R$18.2 million decrease in deposits, an interest payments of R$374.8 million and prepaid expenses and recoverable taxes of R$106.2 million. Cash flows associated with derivative financial instruments, which are also classified as operating cash flows, generated net outflows of R$37.8 million in 2012 and net outflows of R$42.3 million in 2011. In 2010, we generated R$723.9 million cash from our operating activities, mainly driven by our net income of R$214.2 million.

As of December 31, 2012, we had R$327.1 million of deposits under our aircraft operating leases for maintenance.  Funds will be drawn from the maintenance reserve accounts to reimburse for certain structural maintenance expenditures incurred.  We believe the amounts deposited and to be deposited plus our own cash resources will be sufficient to service our future aircraft and maintenance costs for the duration of the applicable operating leases.

Investing Activities .  In 2012, net cash used in investing activities was R$590.4 million. During 2012, acquisition of fixed assets were R$454.2 million, primarily improvements related to major engine maintenance established in lease agreements and pre-delivery deposits for the acquisition of Boeing 737 aircraft. During 2011, acquisition of fixed assets were R$279.8 million, especially due to pre-delivery deposits for the acquisition of Boeing 737 aircraft.  In 2010, acquisition of fixed assets were R$230.5 million, mainly related to pre-delivery deposits for the acquisition of Boeing 737 aircraft.

Financing Activities .  Net cash used in financing activities totaled R$4.4 million in 2012 and consisted primarily of R$312.4 in funding operations during the year and R$17.3 million of sale of stocks held in treasury. These proceeds were partially offset by R$334.7 million outflows of debts and aircraft lease payments. Net cash generated from financing activities totaled R$354.5 million in 2011 and consisted primarily of capital we raised from our issuance of our 5 th series of debentures in the amount of R$500 million maturing in 2017 that we used as working capital, to pay suppliers, and from the investment of R$182 million made by Delta Airlines in our capital. These proceeds were partially offset by the prepayment of working capital lines, other debt maturing in the next couple of years to reduce refinancing risk in the short term, and payments of aircraft finance leases.  Net cash generated from financing activities totaled R$139.9 million in 2010.

Liquidity

In managing our liquidity, we take into account our cash and cash equivalents, short-term investments and short- and long-term restricted cash as well as our accounts receivable balances.  Our accounts receivable balance is affected by the payment terms of our credit card receivables.  Our customers can purchase seats on our flights using a credit card and pay in installments, typically creating a one-or two-month lag between the time that we pay our suppliers and expenses and the time that we receive payment for our services.  When necessary, we obtain working capital loans, which can be secured by our receivables, to finance the sale-to-cash collection cycle.

We seek to have a strong balance sheet, and our cash position as of December 31, 2012 was equivalent to 20% of our trailing twelve months’ operating revenues, reaching our initial target of at least 20% of the trailing twelve months’ operating revenues. This position also covers 0.9 times our short-term debt, which we believe currently is an appropriate level of liquidity.  We are also committed to having no significant financial debt maturities (excluding finance leases) coming due within any three-year horizon.

 

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The following table sets forth certain key liquidity data at the dates indicated:

 

At December 31,

 

2011

2012

% Change

 

(in millions of reais ) 

Real Denominated

2,450.0

1,521.2

(37.9)%

Cash and Cash Equivalents

1,092.8

450.3

(58.8)%

Short-Term Investments and Short- and Long-Term Restricted Cash .

1,018.0

763.5

(25.0)%

Short-term Receivables

339.2

307.5

(9.3)%

Foreign Exchange Denominated

612.1

864.9

41.3%

Cash and Cash Equivalents

137.5

325.3

136.6%

Short-Term Investments

100.2

46.1

(54.0)%

Short-term Receivables

14.9

18.2

22.1%

Advances for acquisition of aircraft

359.5

475.3

32.2%

Total

3,062.1

2,386.2

(22.1)%

 

As of December 31, 2012, cash and cash equivalents, short-term investments and short- and long-term restricted cash were R$1,585.1 million, comprised by R$775.6 million in cash and cash equivalents balance, R$585.0 million in short-term investments representing immediate liquid financial assets and R$224.5 million in restricted cash.  The decrease in total cash deposits, as compared to 2011 is mostly due to the decrease in our operating profitability.

Short-term receivables include credit card sales, the Voe Fácil installment payment program, accounts receivables from travel agencies and cargo transportation.  At the end of 2012, we had decreased volume of short-term receivables as compared to 2011, due to a decline in sales volume between the periods as a result of the slowdown in the Brazilian economy.

As of December 31, 2012, we had R$475.3 million deposited with Boeing as advances for aircraft acquisitions, an increase of 32.2% as compared to December 31, 2011, mainly due to the higher number of aircraft delivered in 2012 with the deposit returned to us and the higher number of new aircraft deliveries scheduled to be delivered from Boeing under our fleet plan in the next 18 months as compared to the same period in 2011.

As a result, our total cash deposits were R$2,386.2 million as of December 31, 2012 as compared to R$3,062.1 million at December 31, 2011.

Indebtedness

The following table sets forth our loans and financings at December 31, 2012 and 2011:

 

At December 31,

 

2011

2012

% Change

 

(in millions of reais ) 

Loans and Financing

2,535.2

2,718.6

7.2%

Aircraft Finance Lease

2,056.3

2,052.5

(0.2)%

Interest

64.1

54.3

(15.3)%

Perpetual Bonds

335.8

365.8

8.9%

Total Loans and Financing

4,991.4

5,191.2

4.0%

 

As of December 31, 2012, our total debt was R$5,191.2 million, with an average term of 6.5 years (excluding perpetual notes) and an average interest rate of 10.2% for obligations in local currency and of 6.7% for U.S. dollar denominated obligations.  Excluding our perpetual bonds, which have no maturity date, total loans and financing totaled R$4,825.4 million at December 31, 2012, with a negative foreign exchange effect due to the depreciation of the real  against the U.S. dollar of 8.9% between 2011 and 2012. The increase compared to 2011 was also impacted by new net funding operations in 2012.

 

64

 
 

Loans and Financing

The following tables sets forth our short- term and long-term loans as of December 31, 2011 and 2012:

 

At December 31,

 

2011

2012

% Change

Short-Term Debt

(in millions of reais ) 

Local Currency

1,215.1

1,356.8

11.7%

Working Capital

-

191.8

(100.0)%

BNDES- loan

8.4

3.1

(63.0)%

BNDES-Safra loan (2)

30.0

29.9

(0.3)%

BDMG loan (3)

3.6

6.4

77.8%

Debentures IV **

595.1

596.4

0.2%

Debentures V**

493.3

494.5

0.2%

Santander

40.7

-

(100.0)%

Citibank

19.4

14.0

(27.8)%

Industrial CDB

1.2

-

(100.0)%

Banco IBM

-

6.7

100%

Interest

23.4

14.0

(40.2)%

Foreign Currency (U.S. Dollars)

337.3

362.8

7.6%

Working Capital

95.9

-

(100.0)%

JP Morgan

-

73.6

(100.0)%

Aeroturbine

4.6

-

100.0%

IFC loan (4)

31.2

17.0

(45.5)%

FINIMP (5)

3.1

24.2

680.6%

Finance Lease

161.8

207.7

28.4%

Interest

40.7

40.3

(1.0)%

Total Short-Term Debt

1,552.4

1,719.6

10.7%

 

 

 

 

Long-Term Debt  

 

 

 

Local Currency

264.7

196.8

(25.6)%

BNDES loan (1)

-

11.1

(100.0)%

BNDES-Safra loan (2)

42.8

13.9

(67.5)%

BDMG loan (3)

25.9

20.1

(22.4)%

Banco IBM

-

20.5

(100.0)%

Safra

196.0

131.2

(33.1)%

Debentures IV **

-

-

-

Foreign Currency (U.S. Dollars)

2,838.5

2,909.0

2.5%

JP Morgan

-

33.7

(100.0)%

Senior Notes

944.0

1,030.4

9.2%

Finance Lease

1,894.5

1,844.9

(2.6)%

Total Long-Term Debt

3,103.2

3,105.8

0.1%

Total Loans Ex-Perpetual Bonds

4,655.6

4,825.4

3.6%

Perpetual Bonds***

335.8

365.8

8.9%

Total Loans - including Perpetual Bonds

4,991.4

5,191.2

4.0%

_______________________

** We reclassified our 4 th and 5 th debenture issuances in the total amount of R$1,091.9 million from long term to short term debt due to covenant non-compliance as further described in “—Covenant Compliance” and “Item 3. Key Information—D. Risk Factors—Certain of our debt agreements contain financial covenants and any default under such debt agreements may have a material adverse effect on our financial condition and cash flows.”

*** No maturity term bonds

(1) Credit line with Banco Nacional de Desenvolvimento Econômico e Social (the Brazilian Development Bank), or BNDES, used to finance the development of our Confins maintenance center.

(2) Credit line with BNDES used to finance the modernization of engines.

(3) Credit line with Banco de Desenvolvimento de Minas Gerais (Minas Gerais State Development Bank) used to finance the development of our Confins maintenance center.

(4) Credit line with International Finance Corporation used to finance spare parts.

(5) Credit line with Banco do Brasil used to finance import of rotables parts.

 

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Aircraft Finance Leases

The following table sets forth our aircraft finance lease as of December 31, 2011 and 2012:

 

As of December 31,

 

2011

2012

% Change

Short-Term Debt (Foreign Currency - U.S. Dollars)

(in millions of reais ) 

Finance Lease

161.8

207.7

28.3%

Total Short-Term Debt (Foreign Currency - U.S. Dollars)

161.8

207.7

28.3%

Long-Term Debt (Foreign Currency - U.S. Dollars)

 

 

 

Finance Lease

1,894.5

1,844.9

-2.6%

Total Long-Term Debt (Foreign Currency - U.S. Dollars)

1,894.5

1,844.9

-2.6%

Total Aircraft Finance Lease

2,056.3

2,052.5

-0.2%

 

On December 31, 2012, aircraft finance lease debt totaled R$2,052.5 million, including aircraft finance lease paid in monthly installments with funds generated from our operations. Financial expenses related thereto are booked as financial expenses in the income statement.

Total short-term debt at December 31, 2012 totaled R$1,719.3 consisting of aircraft finance lease of R$207.7 million,  interest of R$54.3 million and loans of R$1,457.6 million due to reclassification of our debentures in the amount of R$1,091.9 million from long-term debt to short-term debt as a result of we were not in compliance with certain financial covenants related to our Debentures IV and V on December 31, 2012.

The following table sets forth the maturities and interest rates of our indebtedness: 

 

Maturity

Contractual
Interest

Effective
Interest p.a.

Currency

BNDES

jul/17

TJLP + 1.40%

10.72%

Real

BNDES-Safra

oct/14

TJLP + 5.5%

11.46%

Real

BDMG

mar/18

IPCA + 6.0%

10.71%

Real

Debentures IV

sep/15

118.0% of CDI

11.09%

Real

Debentures V

jun/17

120.0% of CDI

10.64%

Real

Citibank

jun/13

CDI + 4.75%

7.19%

Real

Safra

dec/15

125% of CDI

3.34%

U.S. dollar

Finimp – B. Brasil (I)

mar/13

Libor + 2.9%

3.66%

U.S. dollar

Finimp – B. Brasil (II)

jun/13

1.10% + 0.4%

3.66%

U.S. dollar

Finimp – Bic Banco

nov/13

4.2% p.y.

3.66%

U.S. dollar

Working capital

mar/12

3.417%

-

U.S. dollar

IFC Loan

jul/13

Libor + 3.750%

5.84%

U.S. dollar

Senior Notes 2017

apr/17

7.50%

7.70%

U.S. dollar

Senior Notes 2020

jul/20

9.25%

9.65%

U.S. dollar

Perpetual Bonds

n/a

8.75%

8.75%

U.S. dollar

 

 

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The following table sets forth our payment schedule for our loans and financings (excluding aircraft financings):

 

2013

2014

2015

2016

After 2016

Without Maturity

Total

 

 

 

 

 

 

 

 

Real Denominated

1,343.8

92.6

79.4

13.4

11.5

-

1,540.7

Working Capital

191.8

-

-

-

-

-

191.8

BDMG

6.4

5.0

4.7

4.7

5.8

-

26.6

BNDES

3.1

3.1

3.1

3.1

1.8

-

14.2

BNDES-Safra

29.9

13.9

-

-

-

-

43.8

IBM

6.7

5.5

5.5

5.6

3.9

-

27.2

Citibank

14.0

-

-

-

-

-

14.0

Safra

-

65.1

66.1

-

-

-

131.2

Debentures IV and V

1,091.9

-

-

-

-

-

1091.0

Foreign Currency Denominated

114.8

33.7

-

1,030.4

-

365.8

1,544.6

IFC

17.0

-

-

-

-

-

17.0

Finimp

24.2

-

-

-

-

-

24.2

J.P. Morgan

73.6

33.7

-

-

-

-

107.3

Senior Notes 2017

-

-

-

429.1

-

-

42 9.1 

Senior Notes 2020

-

-

-

601.2

-

-

601.2

Perpetual Bonds

-

-

-

-

-

365.8

365.8

Total*

1,458.6

126.3

79.4

1,043.7

11.5

365.8

3,085.3

___________________

*   excluding interest expenses and finance leases.

For further information on our financing activities, see note 19 to our consolidated financial statements as of December 31, 2012.

Covenant Compliance

Our long term financings (excluding the perpetual bonds and aircraft financing) in the aggregate amount of R$1,260.9 million at December 31, 2012 contain customary covenants and restrictions, including but not limited to those that require us to maintain defined debt liquidity and interest expense coverage ratios.

On December 31, 2012, our financings with IFC and Debentures IV and V had the following restrictive covenants: (i) net debt / EBITDAR below 4.0 times, (ii) current assets / current liabilities of at least 1.5 times, (iii) net debt/ EBITDA below 3.5 times and (iv) debt coverage ratio (ICD) of at least 1.3 times.

On the same date our measurements for each of the restrictive covenants were: (i) net debt / EBITDAR of 32.3 times, (ii) current assets / current liabilities of 0.5 times, (iii) net debt/ EBITDA of (10.2) times and (iv) debt coverage ratio (ICD) of (2.0) times, mainly due to the negative accumulated EBITDA.

As such, we did not meet the minimum levels for covenants involving EBITDA and EBITDAR. However, we have obtained waivers providing for the suspension of these covenants for all financings, as described below:

IFC : we received a waiver from IFC excusing covenant compliance through the end of 2012 in connection with an agreement to prepay this financing on January 15, 2013, six months prior to its originally scheduled maturity of July 2013. We repaid IFC on January 15, 2013 . 

Debentures IV and V : on February 1, 2013 we obtained a waiver approval from the debenture holders for the December 31, 2012 and June 30, 2013 measurements. However, according to IFRS and because we did not receive the waiver by December 31, 2012, we reclassified our debentures in the amount of R$1,091.0 million from long-term debt to short-term debt as a result of this non-compliance. For our financial statements for the first quarter of 2013 we will again reclassify this amount as long-term. The first measurement after the waived periods will be based on our financial statements as of and for the year ended December 31, 2013.

 

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Other Financing Sources and Measures

We did not declare dividends for the fiscal years 2012 and 2011. We declared dividends of R$50.9 million for the fiscal year 2010.

On December 21, 2011, in order to implement the Delta Investment, our board of directors approved a capital increase of up to R$295.8 million, equivalent to up to 6,825,470 common shares and 6,619,765 preferred shares at a subscription price of R$22.00 per share, with a minimum aggregate subscription amount of R$182.6 million. Our controlling shareholder subscribed for 6,825,469 common shares and 1,474,986 preferred shares, using the funds received from Delta to pay for those shares. On August 13, 2012, our board of directors approved this capital increase, with the cancellation of 5,118,453 shares that were left unsubscribed.

On December 21, 2012 our board of directors approved the sale of our preferred shares held in treasury, in light of the termination of our stock repurchase program commenced on September 8, 2011. The maximum term for the sale of these preferred shares was February 13, 2013 and 1,577,500 preferred shares held in treasury were sold at market prices.

Capital Resources

We typically finance our leased aircraft through operating and finance lease financings.  Although we believe that debt and/or operating lease financings should be available for our future aircraft deliveries, we cannot assure you that we will be able to secure financings on terms attractive to us, if at all.  To the extent we cannot secure financing, we may be required to modify our aircraft acquisition plans or incur higher than anticipated financing costs.  We expect to continue to require working capital investment due to the use of credit card installment payments by our customers.  We expect to meet our operating obligations as they become due through available cash and internally generated funds, supplemented as necessary by short-term credit lines.

Our growth plans contemplate operating 137 aircraft by the end of 2014.  As of December 31, 2012, we had 155 outstanding firm purchase orders with The Boeing Company for 737-800 Next Generation aircraft.  Committed expenditures for these aircraft, based on aircraft list price and including estimated amounts for contractual price escalations and pre-delivery deposits, are US$1,316.8 million in 2013 and US$1,341.0 million in 2014, US$1,332.1  million in 2015, US$1,380.8 million in 2016 and US$10,515.2  million beyond 2016.  We expect to meet our pre-delivery deposits by using long term loans from private financial institutions guaranteed by first tier financial institutions and capital markets financing such as long term and perpetual bonds.

The firm aircraft orders represent a significant financial commitment for us.  Pending the application of the proceeds from financing activities, we have invested these proceeds in overnight deposits and deposit certificates with highly-rated Brazilian banks and short-term investments, mainly highly-rated Brazilian government bonds.

We expect that the continuance of the commitment to us from the Ex-Im Bank to provide guarantees covering 85% of the aggregate purchase price for the firm order aircraft will assist us in obtaining low-cost financing for the purchase of the firm order aircraft.  The remaining 15% of the aggregate purchase price for the firm order aircraft is expected to be funded by our cash or other financing alternatives.  To the extent that we do not have sufficient cash resources to do so, we may be required to modify our aircraft acquisition plans or to incur higher than anticipated financing costs, which would have an adverse impact on the execution of our strategy and business.  The Company believes that it has and will in the future have appropriate funding resources available with the combination of Ex-Im Bank supported financing, local development bank funding and sale and leaseback transactions.

In 2010, the Ex-Im Bank agreed on a common approach with European export-credit agencies on offering export credits for commercial aircraft.  Among other things, the new ASU sets forth minimum guarantee premium rates applicable to aircraft to be delivered on or after January 1, 2013, or under firm contracts entered into after December 31, 2010 and also changes the maximum amount that may be financed. 

In light of our current credit ratings and the introduction of the ASU, we expect our minimum guaranty premium rate applicable to aircraft delivered on or after January 1, 2013 will increase substantially from a previous rate of 4%. The Ex-Im Bank has not yet informed us if it will guaranty this increased amount to be financed, which could cause us to have to seek other more expensive financing alternatives or use our own cash resources to finance the additional amount.

 

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Recent Accounting Pronouncements

As of the date of our consolidated financial statements included elsewhere in this annual report we had adopted all new and revised standards and interpretations without any material impact on us.

There are no new IFRS standards or amendments or IFRIC interpretations which are not yet effective that would be expected to have a material impact on us. See note 2.2(x) to our financial statements included elsewhere in this annual report.

C.       Research and Development, Patents and Licenses, etc.

We believe that the Gol brand has become synonymous with innovation and value in the Brazilian airline industry.  We have filed requests for registration of the trademarks “GOL” and “GOL LINHAS AÉREAS INTELIGENTES” with trademark offices in Brazil and in other countries, and have already been granted final registration of these trademarks, for example: in Argentina, Bolivia, Chile, Colombia, the European Union, the United States, Paraguay and Uruguay.  VRG holds trademark registrations for the “ Varig ” brand and trademark applications for the “ Smiles ” brand in various countries.

D.       Trend Information

We believe in a recovery in the Brazilian economy, especially in the growth of the Brazilian middle class in the next years.  We estimate, based on the forecast by financial institutions, growth between 2.5% and 3.0% in annual Brazilian GDP in 2013, which would be expected to have a direct and positive impact on the Brazilian aviation sector.  We plan to reduce our domestic seat supply for the first half of 2013 by between 8% and 10% as compared to the same period in 2012, and to end the year with a reduction of up to 7% in our domestic capacity when compared to 2012 . We expect the domestic industry to adopt a more rational approach to adding seat supply in 2013, resulting in yield recovery and a PRASK increase we estimate could be of 10% or more over 2012. We are also evaluating international potential markets to grow, especially in South America, and the U.S. and Caribbean region. The rationalization of domestic seat supply, which is an important initiative for the construction of a more sustainable environment, combined with our focus on maintaining our cost low should help in the recovery of operating margins.

E.       Off-Balance Sheet Arrangements

None of our 96 aircraft recognized as operating lease obligations are reflected on our balance sheet.  At December 31, 2012, we had  45 aircraft recognized as finance leases on our balance sheet.  We are responsible for all maintenance, insurance and other costs associated with operating these aircraft; however, we have not made any residual value or other guarantees to our lessors.

F.        Tabular Disclosure of Contractual Obligations

Our non-cancelable contractual obligations as of  December 31, 2012 included the following:

 

Total

2013

2014

2015

2016

2017

Without Maturity

Beyond
2017

 

 

(in millions of reais ) 

Non-derivative financial instruments

 

 

 

 

 

 

 

 

Operating leases

3,033.7

720.7

520.7

358.8

292.4

262.0

 

879.3

Finance leases

2,475.8

304.6

319.1

309.6

300.8

277.9

 

963.8

Short-term debt

1,511.9

1,511.9

 

 

 

 

 

 

Long-term debt

1,626.7

-

126.2

79.4

13.4

470.4

365.8

571.4

Total non-derivative financial instruments

8,648.1

2,537.2

966.0

747.8

606.6

1,010.2

365.8

2,414.5

Derivative financial instruments

 

 

 

 

 

 

 

 

Fuel derivative

12.9

5.8

7.1

 

 

 

 

 

Foreign exchange derivative

 

 

 

 

 

 

 

 

Interest rate swaps

(54.7)

(54.7)

 

 

 

 

 

 

Total derivative financial instruments

(41.8)

(48.9)

7.1

 

 

 

 

 

Aircraft commitments

 

 

 

 

 

 

 

 

Pre-delivery deposits

4,046.5

283.7

389.0

444.9

146.7

171.7

 

2,610.5

Aircraft purchase commitments

32,462.5

2,690.8

2,740.3

2,722.1

2,821.7

1,640.8

 

19,846.9

Total aircraft commitments

36,509.0

2,974.5

3,129.3

3,167.0

2,968.4

1,812.5

 

22,457.4

Total

45,115.3

5,462.8

4,102.4

3,914.8

3,574.9

2,822.8

365.8

24,871.9

                 

 

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ITEM 6.        Directors, Senior Management and Employees

A.       Directors and Senior Management

Under our by-laws, we are managed by our Conselho de Administração , or board of directors, which is composed of at least five members and at most eleven members, and a Diretoria , or board of executive officers, which is composed of at least two and at most seven members.  According to the Differentiated Corporate Governance Practices Level 2 introduced by BM&FBOVESPA, at least 20% of the members of our board of directors shall be “independent directors,” as defined by the BM&FBOVESPA.

Our management and board of directors is supported and advised by a number of committees which comprise highly specialized and qualified individuals.  These committees actively participate in the strategic and other key decisions of our management and we believe they add substantial value to our business.  We currently have audit, human resources and corporate governance, financial policies and risk committees, comprised of members of our board of directors and non-board members.  We also have an accounting, tax and financial statement policy subcommittee.

We are committed to achieving and maintaining high standards of corporate governance.  In working towards this goal, we have established a human resources and corporate governance committee to monitor and make recommendations with respect to corporate governance “best practices” to our board of directors.  In addition, in connection with listing as a Level 2 company on the BM&FBOVESPA, we have entered into an agreement with the BM&FBOVESPA to grant certain additional rights not required of Level 2 companies to our shareholders, such as tag-along rights offering our preferred shareholders 100% of the price paid per common share of controlling block shareholders.  We conduct our business with a view towards transparency and the equal treatment of all of our shareholders.  We have implemented policies to help to ensure that all material information that our shareholders require to make informed investment decisions is made available to the public promptly and that we at all times accurately reflect the state of our operations and financial position through press releases, filings with the SEC and Brazilian Securities Commission (“CVM”), and by keeping the investor relations section of our website current and complete.  We have also adopted formal policies that restrict trading in our preferred shares by company insiders.

In addition, according to the Level 2 practices, the company shall cause all new members of the board of directors, board of executive officers and fiscal committee must sign a statement of consent in which they undertake to comply with the regulations of the Differentiated Corporate Governance Practices Level 2. Their taking office is conditioned to signing of such document.  Also the members of the board of directors, board of executive officers and fiscal committee must sign a statement of consent, in which they undertake to refer to arbitration under the auspices of the BM&FBOVESPA Arbitration Chamber any disputes and/or controversies arising out of the application of the listing rules of the Differentiated Corporate Governance Practices Level 2, the listing agreement with BM&FBOVESPA, the regulations of the BM&FBOVESPA, the provisions of the Brazilian corporation law, guidelines issued by the Brazilian authorities and the other rules applicable to the capital markets in general, involving the company, the shareholders, the managers and the members of the fiscal committee.

Board of Directors

Our board of directors is dedicated to providing our overall strategic guidelines and, among other things, is responsible for establishing our general business policies and for electing our executive officers and supervising their management.  Currently, our board of directors is comprised of 8 members, 3 of whom qualify as independent based upon New York Stock Exchange criteria.  The board of directors meets an average of 5 times per year or whenever requested by the president or three members of our board of directors.

 

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Under the Brazilian corporation law, each director must hold at least one of our common or preferred shares and be a Brazilian resident, and is elected by the holders of our common shares at the Assembléia Geral Ordinária , or the annual general meeting of shareholders.  There are no provisions in our by-laws restricting (i) a director’s power to vote on a proposal, arrangement or contract in which such director is materially interested, or (ii) the borrowing powers exercisable by our directors from us.  However, under the Brazilian corporation law, a director is prohibited from voting on any matter in which such director has a conflict of interest with our company.

Additionally, under the Brazilian corporation law, shareholders of publicly traded companies, such as we are, who together hold non-voting or voting-right restricted preferred shares representing at least 10% of our total share capital for at least three months are entitled to appoint one member of our board of directors.

Under our by-laws, the members of the board of directors are elected by the holders of our common shares at the annual general meeting of shareholders.  Members of our board of directors serve simultaneous one-year terms and may be re-elected.  The terms of our current directors expires in April 2014.  Our by-laws do not provide for a mandatory retirement age for our directors.

The following table sets forth the name, age and position of each member of our board of directors.  A brief biographical description of each member of our board of directors follows the table.

Name

Age

Position

Constantino de Oliveira Junior

44

Chairman

Henrique Constantino

41

Vice-Chairman

Antonio Kandir*

59

Director

Joaquim Constantino Neto

48

Director

Luiz Kaufmann*

68

Director

Edward H. Bastian

55

Director

Ricardo Constantino

50

Director

Richard F. Lark*

46

Director

_____________

* Denotes an independent director

 

Constantino de Oliveira Junior has been a member of Gol’s board of directors since the Company was founded in 2001 and is currently the chairman of the board of directors. He was also Gol’s Chief Executive Officer from 2001 until 2012. Mr. de Oliveira introduced the “low-cost, low-fare” concept to the Brazilian airline industry and was named “Most Valuable Executive” by the Brazilian newspaper Valor Econômico in 2001 and 2002.  He was also elected the Leading Executive in the logistics sector by the readers of Gazeta Mercantil, a Brazilian financial newspaper, in 2003, and in 2008, was named a “Distinguished Executive” in the Air Transportation category at the GALA (Latin American Aeronautics Gallery) awards, sponsored by IATA.  Between 1994 and 2000 he served as director in passenger land transportation company.  Mr. de Oliveira studied Business Administration at the Universidade do Distrito Federal and attended the Executive Program on Corporate Management for Brazil conducted by the Association for Overseas Technical Scholarships. He is also member of our human resources and corporate governance committee, financial policy committee and risk committee.

Henrique Constantino has been a member of our board of directors since March 2004 and became our vice-chairman of the board in June 2010.  He participated in the creation of Gol and served as its chief financial officer from January 2001 to March 2003, when he became a member of the board.  Mr. Henrique Constantino is also a member of the board of directors of Providência S.A. and BR Vias S.A. Mr. Constantino has a law degree from CEUB—Centro de Ensino Unificado de Brasília and has a post-graduate degree in Business Administration from EAESP—FGV (Fundação Getúlio Vargas—São Paulo) .  Mr. Constantino is a member of our human resources and corporate governance committee.

Antonio Kandir has been a member of our board of directors since August 2004.  Mr. Kandir is an economic consultant. Mr. Kandir is also partner of Governança e Gestão and is a member of the board of directors of Providência S.A. Mr. Kandir served in the Brazilian government as a Federal Lower House Representative for two terms of office, and served as Planning and Budget Minister and Secretary of Economic Policy and President of the Privatization Council.  He has a bachelor degree in production engineering from the Escola Politécnica at USP and bachelors, masters and doctoral (PhD) degrees in Economics from Unicamp.  Mr. Kandir is an independent member of our board of directors under the requirements of the SEC and NYSE listing standards and is a member of our audit committee.

 

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Joaquim Constantino Neto  has been a member of our board of directors since March 2004.  He has been the chief operations officer of the Comporte group since 1994.  From 1984 to 1990, he was in charge of operations of Empresas Reunidas Paulista de Transportes Ltda.  Since 1990 to the present, he has been the President of Breda Serviços, a bus transportation company.

Luiz Kaufmann has been a member of our board of directors since December 2004.  Mr. Kaufmann is the Managing Partner of L. Kaufmann Consultores Associados. Mr. Kaufmann has presided over several companies such as Aracruz Celulose S.A., Medial Saúde, Kroton Educacional, Petropar, Grupo Multiplic, Arthur D. Little, and was a partner at GP Investimentos.  He was a member of several companies’ board of directors, including Pioneer Hi-Bred International, América Latina Logística and Lojas Americanas.  He was a member of the Global Corporate Governance Advisory Board, which was comprised of 20 internationally renowned business leaders from 16 different countries, created to advance knowledge on the roles and responsibilities of boards of directors of international companies.  Mr. Kaufmann is an independent member of our board of directors under the requirements of the SEC and NYSE listing standards.  He is a member of our risk committee, financial policy committee and audit committee and our audit committee financial expert as defined by the current SEC rules.

Edward H. Bastian has been a member of our board of directors since April 2012. Mr. Bastian was appointed pursuant to our partnership agreement with Delta Air Lines, Inc., or Delta. He has been President of Delta since 2007 and previously held the positions of Vice Chief Executive Officer and Controller in 1998 and Chief Financial Officer in 2005. Since February 2010, Mr. Bastian has been also a member of Delta’s board of directors. Between 2008 and 2009, Mr. Bastian was the Chief Executive Officer of Northwest Airlines. Mr. Bastian also worked for PepsiCo and Frito-Lay and was partner at PricewaterhouseCoopers in New York. Mr. Bastian is also a member of the board of directors of Habitat for Humanity and Woodtruff Arts Center, both based in Atlanta. Mr. Bastian holds bachelor’s degree in business administration from St. Bonaventure University, class of 1979

Ricardo Constantino has been a member of our board of directors since March 2004.  He has been the chief technical and maintenance officer of the Comporte group since 1994. Mr. Ricardo Constantino Neto is also a member of the board of directors of BRVias S.A. and Providência S.A.

Richard F. Lark , has been a member of our board of directors since June 2008.  Mr. Lark served as our executive vice president, chief financial and investor relations officer from April 2003 to June 2008.  He is the founder and managing partner of Endurance Capital Partners, a private equity management firm (member of Anbima and ABVCAP), and a member of the board of directors of Global Aviation S.A..  From 2000 to 2003, Mr. Lark served as chief financial officer of Americanas.com, one of the leading Brazilian e-commerce companies.  Prior to joining Americanas.com, Mr. Lark was an executive in the investment banking divisions of Morgan Stanley & Co., Citicorp and The First Boston Corporation.  Mr. Lark is a member of the board of the Kellogg Institute for International Studies and Associação Vida Jovem, and served as president of the American Society of São Paulo.  Mr. Lark holds a Master in Business Administration degree from the UCLA Anderson School of Management and bachelor degrees in finance and business economics and philosophy from the University of Notre Dame.  He is a Portfolio Manager authorized by the CVM and an associate of the Brazilian Institute of Corporate Governance (IBGC). Mr. Lark is a member of our financial policy committee, risk policies committee and accounting, tax and financial statement policies subcommittee .  Mr. Lark is an independent member of our board of directors under the requirements of the SEC and NYSE listing standards and is a member of our audit committee.

Constantino de Oliveira Junior, Henrique Constantino, Joaquim Constantino Neto and Ricardo Constantino are brothers.  Constantino de Oliveira Junior, Henrique Constantino, Joaquim Constantino Neto and Ricardo Constantino control our major shareholder, Fundo de Investimento em Participações Volluto, on an equal basis.

 

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Executive Officers

Our executive officers have significant experience in the domestic and international passenger transportation industries, and we have been able to draw upon this extensive experience to develop our low-cost operating structure.  The executive officers are responsible for our day-to-day management.  The executive officers have individual responsibilities established in our by-laws and by our board of directors.  The business address of each of our executive officers is the address of our principal executive office.

Under our by-laws, we must have at least two and at most seven executive officers that are elected by the board of directors for a one-year term.  Any executive officer may be removed by the board of directors before the expiration of his term.  The current term of all our executive officers ends in March 2014. 

The following table sets forth the name, age and position of each of our executive officers.  A brief biographical description of each of our executive officers follows the table.

Name

Age

Position

Paulo Kakinoff

38

President and Chief Executive Officer

Adalberto Cambaúva Bogsan

47

Vice President – Technical

Edmar Prado Lopes Neto

48

Investor Relations Officer

 

Paulo Kakinoff is currently our President and Chief Executive Officer and was a member of our Board of Directors from 2010 to 2012.  Mr. Kakinoff was until June 2012, the CEO of Audi Brasil and vice president of the Brazilian Automobile Importers Association ( Associação Brasileira de Importadores de Veículos Automotores – ABEIVA ). He was also a member of the board of directors of Volkswagen Participações Ltda. (Finance Services of Volkswagen Group in Brasil) from March 2011 until June 2012. Mr. Kakinoff has 18 years of experience in the auto industry, having served as Sales & Marketing Director at Volkswagen do Brasil and as Executive Director for South America at the Volkswagen Group’s head offices in Germany.  He holds a bachelor’s degree in Business Administration from Mackenzie University.  Mr. Kakinoff is a member of our human resources and corporate governance committee, financial policy committee and risk committee.

Adalberto Cambauva Bogsan has been an officer since October 2010. He joined us in April 2002 and served as the line captain of the Boeing 737-300 aircraft, assistant of head of Operations, head of Operations and Operational Control departments. He is also a well-experienced captain, with more than 13,000 flying hours, Mr. Bogsan is specifically qualified in airline management and holds an MBA from the Fundação Getúlio Vargas (FGV). Mr. Bogsan started his career at the Brazilian airline Rio-Sul from 1988 to 2002, where he served in as captain of several aircraft models, and also served as instructor for 8 years and was captain instructor and flight inspector of Boeing 737-300/500 Next Generation aircraft when he left that airline.

Edmar Prado Lopes Neto has been an officer since July 2012 and is also our finance director. Mr. Lopes Neto has been in the Company since 2011, when he joined as Capital Markets Officer. Mr. Lopes Neto worked at Organizações Globo for 13 years, having served as Net Serviços de Comunicação S.A.’s Treasury Officer from 1998 to 2005 and as the Roberto Marinho Foundation’s Planning Manager. Mr. Lopes Neto is a member of our financial policy committee and the accounting, tax and financial statements policy subcommittee. With more than 25 years’ experience in the financial area, Mr. Lopes Neto has worked for national and multinational companies and graduated in Civil Engineering from the Universidade Federal do Rio de Janeiro.

B.       Compensation  

Under our by-laws, our shareholders are responsible for establishing the aggregate amount we pay to the members of our board of directors and our executive officers.  Once our shareholders establish an aggregate amount of compensation for our board of directors and executive officers, the members of our board of directors are then responsible for setting individual compensation levels in compliance with our by-laws.

For the fiscal year ended December 31, 2012, the aggregate compensation, including cash and benefits-in-kind but excluding stock options, that we paid to the members of our board of directors and executive officers was R$18.8 million.

 

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Stock Option Plan and Restricted Share Plan

Our stock option plan was approved by our shareholders on December 9, 2004 and amended on April 30, 2010 and October 19, 2012. On October 19, 2012 our shareholders also approved a restricted share plan.  Both plans are valid for 10 years. The plans are aimed at promoting our interests by encouraging management employees to contribute substantially to our success, by motivating them with stock options and restricted shares.  The plans are managed by both our human resources and corporate governance committee and our board of directors.

Participants in the plans are selected by the human resources and corporate governance committee, provided that they have been either president or vice-president, for both plans, or other selected employees, for the restricted share plan.  The stock options to be granted under the stock option plan confer rights related only to our preferred shares and the restricted shares awarded are all preferred shares. The number of outstanding options granted and restricted shares combined may not, at any time, exceed 5% of our shares.  The human resources and corporate governance committee establishes each year the strike price of the options to be granted, which must be equal to the average price of the preferred shares recorded in the last 60 trading sessions prior to the granting date.

The vesting period of the stock options is five years for the options granted until 2009, vesting 20% each year, and three years for the options granted since 2010, vesting 20% in the first year, 30% in the second year and 50% in the third year. Restricted shares awarded vest after three years.

In case of termination of our legal relationship with the option holder, with or without cause (except in the case of permanent disability or death) all options that have been granted to the participant, and which were not yet exercisable, automatically expire. Options already vested on the termination date may be exercised within 90 days, in case of termination without cause, or on the termination date, in case of termination with cause or at the beneficiary’s request.

In case of termination of our legal relationship with the award beneficiary without cause (except in the case of permanent disability or death), restricted shares awarded and not yet unrestricted, vest proportionally to the number of months elapsed since the award date, and, in case of termination with cause or at the beneficiary’s request, all restricted shares awarded and not yet vested automatically expire.

In 2009, we issued 1,142,473 stock options, of which only 652,998 were outstanding on December 31, 2010 after the cancellation of 530,480 stock options due to the departure of their respective holders from the company, the exercise of 175,668 stock options and the complementary grant of 216,673 stock options in 2010 under the 2009 plan.  These stock options were issued at a weighted average exercised price of R$10.52 per share. In 2010, we issued 2,774,640 stock options, of which only 2,593,938 were outstanding on December 31, 2010, after the cancellation of 170,786 stock options due to the departure of their respective holders from the company and the exercise of 9,916 stock options.  These stock options were issued at a weighted average exercised price of R$20.65 per share.  On December 20, 2010, our board of directors approved the granting of 2,722,444 options at the price of R$27.83 per share for the year 2011. In 2011, we issued stock options of up to 49,836   at a weighted average exercise price of R$15.10 per share. The total number of options granted in the last three years, excluding the 2,366,605 options cancelled and the 235,420 options exercised, is 4,189,357, or 1.5% of our total shares and 3.1% of the total preferred shares.  On November 11, 2012 our board of directors approved the granting of 778,912 stock options and 589,304 restricted share awards.

C.       Board Practices

Currently, our board of directors is comprised of 8 members.  The terms of our current directors will expire on April 2014.  See “—Board of Directors.”

Fiscal Committee

Under the Brazilian corporation law, the Conselho Fiscal , or fiscal committee, is a corporate body independent of management and of our external auditors.  The fiscal committee may be either permanent or non-permanent, in which case it is appointed by the shareholders to act during a specific fiscal year.  A fiscal committee is not equivalent to, or comparable with, a U.S. audit committee.  The primary responsibility of the fiscal committee is to review management’s activities and a company’s financial statements, and to report its findings to the company’s shareholders.  The Brazilian corporation law requires fiscal committee members to receive as remuneration at least 10% of the average annual amount paid to a company’s executive officers.  The Brazilian corporation law requires a fiscal committee to be composed of a minimum of three and a maximum of five members and their respective alternates.

 

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Under the Brazilian corporation law, the fiscal committee may not contain members that (i) are on our board of directors, (ii) are on the board of executive officers, (iii) are employed by us or a controlled company, or (iv) are spouses or relatives of any member of our management, up to the third degree.  Our by-laws provide for a non-permanent fiscal committee to be elected only by our shareholders’ request at a general shareholders’ meeting.  The fiscal committee, when elected, will be comprised of a minimum of three and a maximum of five members and an equal number of alternate members.  In 2012, our shareholders did not request the election of a fiscal committee.

Committees of the Board of Directors and Board of Executive Officers

Our board of directors also has audit, human resources and corporate governance, financial policy and risk committees and an accounting, tax and financial statement policy subcommittee.  Our board of executive officers has management, executive policy, budget, investment, corporate governance and risk policies committees.  In most cases, members of the committees do not need to be members of our board of directors or board of executive officers.  The responsibilities and composition of these committees are described below.

Audit Committee .  Our audit committee, which is not equivalent to, or comparable with, a U.S. audit committee, provides assistance to our board of directors on matters involving accounting, internal controls, financial reporting and compliance.  The audit committee recommends the appointment of our independent auditors to our board of directors and reviews the compensation of our independent auditors and helps coordinate their activities.  It also evaluates the effectiveness of our internal financial and legal compliance controls.  The audit committee comprises three members elected by the board of directors for a one-year term with the right to re-election, all three of which are independent.  The current members of our audit committee are Richard F. Lark, Antônio Kandir and Luiz Kaufmann.  All members meet the independent membership requirements of the SEC and NYSE as well as other NYSE requirements.  Luiz Kaufmann is the committee’s “financial expert” within the scope of the SEC rules covering the disclosure of financial experts on audit committees in periodic filings pursuant to the U.S. Securities Exchange Act of 1934.

Financial Policies Committee. Our financial policies committee is responsible for: (i) reviewing and adopting actions for protection of our cash flow, balance sheet, profits and losses against volatility in fuel prices, exchange rates, domestic and international interest rates; (ii) assessing periodically the effectiveness of all the actions contemplated in item (i) and recommending changes, as necessary; (iii) preparing and approving our corporate finance policies, as well as monitoring and reviewing the effectiveness and implementation thereof; (iv) reviewing, from time to time, our investment plan and the financial plan, as well as recommending the necessary transactions to our board of directors; (v) reviewing, from time to time, the impact of our investment plan and of the financing plan on our capital structure and the consequences thereof on our income, as well as recommending the necessary changes to our board of directors; and (vi) setting out parameters with a view to keeping the desired capital structure and liquidity, besides monitoring the application thereof and approving the policies to be adopted in the subsequent quarter. The financial policies committee is comprised of five members, appointed by our board of directors which are our: chief executive officer, chief financial officer and three directors, for terms of office of one year, reelection being permitted. The financial policies committee currently consists of , Constantino de Oliveira Júnior, Edmar Prado Lopes Neto, Paulo Sergio Kakinoff, Richard F. Lark and Luiz Kaufmann.

Risk Committee . Our risk committee is responsible for: (i) reviewing and approving our risk policies, as well as monitoring and analyzing their implementation; (ii) reviewing, from time to time, the impacts on assets, especially regarding exposure to U.S. dollars and fuel, as well as recommending the necessary transactions to our board of directors; (iii) reviewing, from time to time, our revenues and expenses, focusing on the impact to our income, and recommending necessary actions to our board of directors; and (iv) preparing, approving and evaluating the risk policies used by us in the short- and long-term, and approving the policies to be used and to monitor their implementation. The risk committee is comprised of up to five members, appointed by our board of directors, whether they are directors or not, for terms-of-office of one year, reelection being permitted. The risk committee currently consists of Paulo Sergio Kakinoff, Constantino de Oliveira Júnior, Richard F. Lark and Luiz Kaufmann.

 

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Human Resources and Corporate Governance Committee .  The human resources and corporate governance committee is responsible for the coordination, implementation and periodic review of best corporate governance practices and for monitoring and keeping our board of directors informed of legislation and market recommendations addressing corporate governance.  It also reviews and recommends to our board of directors human resources policies, forms of compensation, including salary, bonus and stock options, to be paid to our employees, as well as analyzing management’s career and succession plans.  The committee consists of up to six members elected by our board of directors for a one-year term, with the right to re-election, comprising the chairman and the vice-chairman of the board of directors, three members of the board of directors, two outside specialists and the management and human resources officer.  The human resources and corporate governance committee currently consists of Constantino de Oliveira Júnior, Álvaro de Souza and Henrique Constantino, Paulo Sergio Kakinoff, Betânia Tanure de Barros and Paulo César Aragão.

Accounting ,  Tax and Financial Statement Policy Subcommittee .  The accounting, tax and financial statement policy subcommittee conducts periodic reviews of, and evaluates and monitors the company’s accounting policies and financial statements and makes observations and recommendations to the board of directors on these matters.  The subcommittee meets on a quarterly basis and consists of three members elected by the board of directors for a one-year term with the right to re-election, comprising the company’s chief financial officer, a member of the board of directors or a member of the audit committee, and an independent member.  The committee currently consists of Richard F. Lark, Edmar Prado Lopes Neto, Charles B. Holland and Marcos da Cunha Carneiro.

D.       Employees 

We believe that our growth potential and the achievement of our results-oriented corporate goals are directly linked to our ability to attract and maintain the best professionals available in the airline business.  We place great emphasis on the selection and training of enthusiastic employees with potential to add value to our business and who we believe fit in with and contribute to our business culture.

As of December 31, 2012, we had 17,676 active employees. We invest significant resources promoting the well being of our employees.  In 2012, we spent R$ 522.3 million on health and safety matters, training, social contributions, employee meals, transportation and profit sharing.

We train our own pilots.  We also provide extensive ongoing training for our pilots, flight attendants and customer service representatives.  In addition to the required technical training, which follows the strictest international standards, we also provide comprehensive managerial training to our pilots and flight attendants through Crew Resource Management and Line Oriented Flight Training programs, emphasizing the importance of resource management to provide the best service to our passengers. In February 2011, we launched the Gol Institute located  in our Confins Maintenance Center, in the state of Minas Gerais , aiming to provide technical training, promoting social inclusion and improving the learning of the professionals in the aviation sector. We expect to reduce the cost and average time of training for mechanics and co-pilots.

In order to help retain our employees, we encourage open communication channels between our employees and management and offer career development opportunities in the company and periodic evaluations.  We offer in-house post-graduate business school training in conjunction with the Fundação Getúlio Vargas , a leading Brazilian business school, to provide management training to selected employees.  Our compensation strategy reinforces our determination to retain talented and highly motivated employees and is designed to align the interests of our employees with our shareholders.  Our compensation packages include competitive salaries and participation in our profit sharing program.  We have agreements with medical and insurance companies to offer affordable health and pension plan options to our employees.

A national aviators’ union represents Brazil’s pilots and flight attendants, and other regional aviation unions represent ground employees of air transportation companies.  Approximately 13% of our employees are members of unions.  Negotiations in respect of cost of living wage and salary increases are conducted annually between the workers’ unions and a national association of airline companies.  There is no salary differential or seniority pay escalation among our pilots.  Work conditions and maximum work hours are regulated by government legislation and are not the subject of labor negotiations.  Since the commencement of our operations, we have not had a work stoppage by our employees and we believe that our relationship with our employees is good.

 

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To motivate our employees and align their interests with our results of operations, we provide an annual profit sharing program to all of our employees.  Under Brazilian law, companies may provide profit sharing programs that define mechanisms for distributing a portion of a company’s profits based upon the achievement of pre-defined targets established by the company.  Our annual profit sharing programs are negotiated with a commission formed by our employees and approved by labor unions for the benefit of all of our unionized and non-unionized employees.  For the purposes of our profit sharing program, a portion of profit sharing distributions are based upon the achievement of corporate profit targets and a portion of the distributions are based on the achievement of operational targets set for each of our departments.  We have established a stock option plan for our management and employees vesting over a 3 year period.  As of March 2013, a total of 778,912 stock options were granted to our management and employees under this plan. On November 11, 2012 our board of directors approved the granting of 778,912 stock options and 589,304 restricted share awards, granting the beneficiaries thereof the right to receive restricted shares, under the terms of the Restricted Shares Plan.

E.       Share Ownership

The members of our board of directors and our executive officers, on an individual basis and as a group, directly own approximately 1.5% of our preferred stock.  See “Item 7A.  Major Shareholdings and Related Party Transactions—Major Shareholders.”  Fundo de Investimento em Participações Volluto is a fund directly controlled by Messrs. Constantino de Oliveira Júnior, Henrique Constantino, Joaquim Constantino Neto and Ricardo Constantino, respectively.

For a description of stock options granted to our board of directors and our executive officers, see “—Compensation—Executive Stock Options” and “—Compensation—Stock Option Plan and Restricted Share Plan.”

ITEM 7.        Major Shareholders and Related Party Transactions

A.       Major Shareholders

The following table sets forth information relating to the beneficial ownership of our common shares and preferred shares as of December 31, 2012, by each person known by us to beneficially own 5% or more of our common shares or preferred shares and all our directors and officers as a group.

Each shareholder’s percentage ownership in the following table is based on the 143,858,204 common shares and 134,858,582 preferred shares outstanding as of December 31, 2012.

 

Common Shares

Preferred Shares

Total Shares

 

Shares

(%)

Shares

(%)

Shares

(%)

Fundo de Investimento em Participações Volluto (1)

143,858,188

100.0%

31,007,810

23.0%

174,865,998

62.7%

Executive officers and directors

16

0.0%

1,997,110

1.5%

1,997,126

0.7%

Treasury shares

–

–

2,396,725

1.8%

2,396,725

0.9%

Delta Air Lines Inc

–

–

8,300,455

6.2%

8,300,455

3.0%

Fidelity Investments

–

–

7,033,500

5.2%

7,033,500

2.5%

Wellington Management Company

–

–

14,160,618

10.5%

14,160,618

5.1%

Free Float

–

–

69,962,364

51.9%

69,962,364

25.1%

Total

143,858,204

100.0%

134,858,582

100.0%

278,716,786

100.0%

_________________

(1) Fundo de Investimento em Participações Volluto (formerly named Fundo de Investimento em Participações Asas)  is controlled equally by Constantino de Oliveira Junior, Henrique Constantino, Joaquim Constantino Neto and Ricardo Constantino.

According to our internal share record, which contains information regarding the ownership of our shares and the ADSs as filed by the holders of such shares and ADS, at December 31, 2012, 57.9% of our free float was traded in the United States.

During 2012, our executive officers did not exercise stock options.

 

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On December 21, 2011, in order to implement the Delta Investment, our board of directors approved a capital increase of up to R$295.8 million, equivalent to up to 6,825,470 common shares and 6,619,765 preferred shares at a subscription price of R$22.00 per share, with a minimum aggregate subscription amount of R$182.6 million. Our controlling shareholder subscribed for 6,825,469 common shares and 1,474,986 preferred shares, using the funds received from Delta to pay for those shares.  On August 13, 2012, our board of directors approved this capital increase, with the cancelation of 5,118,453 that were left unsubscribed.

Shareholders’ Agreement

No shareholders’ agreements have been filed with us.

B.       Related Party Transactions

According to the Level 2 regulations, the Company shall forward and disclose to BM&FBOVESPA the information regarding every and any agreement entered by and between Gol and its affiliates and associate companies, its administrators, its controlling shareholder, as the case may be, as well as other corporations that make a group with any such persons, whether factual or by law, whenever they reach, with a single agreement or with successive agreements, with or without the same purpose, at any period of one year, an amount of R$0.2 million or more, or a value of 1% or more over the net equity of the company, whichever is higher.

Such announced information shall describe the scope of the agreement, the term, the price, the termination or completion conditions and any possible influence of the agreement upon administration or company business conducting.

We have engaged in a number of transactions with related parties, none of which have involved the issuance of guarantees.

Transportation, Graphic and Consultancy Agreements with Comporte Participações S.A.

We have exclusive bus transportation agreements with Expresso União Ltda. and Breda Serviços for the transportation of our passengers, their luggage and our employees. The transportation agreement with Expresso União Ltda expired in September 2012 and the agreement with Breda Serviços expires in May 2013. We had operating agreements with Serviços Gráficos Ltda for graphic services, which expired in July 2012.  We also have a contract with related party Vaud Participações S.A to provide executive administration and management services, which expires in October 2014. We were, unitl August 2012, the tenant of a property located at Rua Tamoios, 246, in São Paulo, SP, owned by an affiliate, Patrimony Administradora de Bens.  The entities mentioned above belong to the same economic group and are all controlled by Comporte Participações S.A.

We also hold contracts for the operation of the Gollog franchise in Passos/MG through the related party União Transporte de Encomendas e Comércio de Veículos Ltda., expiring in December, 2015.

In 2011 and 2012, we made total payments of R$11.1 million and R$10.6 million, respectively, under these operating agreements.

Contracts Account Opening UATP (Universal Air Transportation Plan) to Grant Credit Limit

In September 2011, we signed contracts with Pássaro Azul Taxi Aéreo Ltda. and Viação Piracicabana Ltda. The purpose of these contracts was the opening of UATP (Universal Air Transportation Plan) accounts, where we grant credits of R$20,000 to Pássaro Azul Taxi Aéreo Ltda. and R$40,000 to Viação Piracicabana Ltda. for utilization in the UATP system. This system can be utilized to make payments for the contracting of domestic and international airline services with all participating members. We use the UATP system that is operated and maintained by the international airline industry and seek to simplify billing and facilitate the payment of air travel and other related services.

Engine Maintenance Agreement with Delta TechOps

In February 2011, we entered into a strategic MRO (maintenance, repair and operations) partnership agreement with Delta TechOps, the maintenance division of Delta, one of our shareholders, which provides overhaul service for approximately 50% of our CFM 56-7 engines, maintenance for parts and components on our fleet of Boeing 737 NG aircraft and also, consulting services related to maintenance workflow planning, materials and facility optimization and tooling support. In 2012, total expenses under this agreement was R$86.5 million.

 

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C.       Interests of Experts and Counsel

Not applicable.

ITEM 8.        Financial Information

A.       Consolidated Statements and Other Financial Information

See “Item 3. Key Information—Selected Financial Data” and “Item 18.  Financial Statements.”

Legal Proceedings

In the ordinary course of our business, we are party to various legal actions, which we believe are incidental to our operations, in the large part linked to the routine demands related to the rights of consumers.  As of December 31, 2012, we were parties in 18,667 judicial lawsuits and administrative proceedings, including 12,686 civil claims, and 5,981 labor claims.  We believe that the outcome of the proceedings to which we are currently a party will not have a material adverse effect on our financial position, results of operations and cash flows.  We have established provisions for all amounts in dispute that represent a probable loss in the view of our legal advisors and in relation to those disputes that are covered by laws, administrative decrees, decrees or court rulings that have proven to be unfavorable.

We are party to approximately 12,170 civil proceedings arising from the normal course of our business, which includes flight delays or cancellations and baggage loss or damage, and 516 civil proceedings against Varig S.A. in which plaintiffs claim we would be a successor in interest of Varig S.A. The vast majority of these proceedings involve minor cases relating to customer relations.  As of December 31, 2012, we had established provisions to address these risks in the total amount of R$38.5 million.

We are party to approximately 2,447 labor proceedings arising from the normal course of our business, which includes overtime, hazardous work premium, health exposure allowance and differences in salary, and 3,534 labor proceedings against Varig S.A. in which plaintiffs claim we would be a successor in interest of Varig S.A. At December 31, 2012, we have established provisions to address these risks in the total amount of R$54.5 million.

In 2001, we commenced proceedings against the Brazilian state revenue service, in which we claim an exemption from the payment of Brazilian value added tax (ICMS) due on imported aircraft, parts and engines.  On May 30, 2007, the Supremo Tribunal Federal (Federal Supreme Court) ruled in our favor in respect of one of these cases.  Various of the proceedings relating to this matter are still pending.  The estimated aggregated amount of the ongoing lawsuits related to the non-levy of ICMS tax on said imports is R$217.3 million as of December 31, 2012,  adjusted for inflation, not including later payment charges. Based on our legal counsel’s opinion and supported by similar lawsuits with favorable decisions to taxpayers by the Superior Court of Justice (STJ) and Supreme Federal Court (STF) in the second quarter of 2007, we understand that the likelihood of loss is remote, and thus did not recognize provisions for these amounts. Although the outcome of these lawsuits and proceedings cannot be anticipated, our  management, based on the opinion of its outside legal counsel, understand that the final decisions on these lawsuits will not have any material adverse impact on our financial position, operating results, and cash flows.

In 2007, we commenced an arbitration before the International Chamber of Commerce against the sellers of VRG and their controlling shareholders relating to a purchase price adjustment.  In January 2011, the arbitral tribunal ruled in our favor and granted us an award of R$93.0 million plus interest and costs against the sellers of VRG and their controlling shareholders. We have initiated enforcement proceedings to collect the award amount in U.S. federal courts.  The sellers of VRG and their controlling shareholders are contesting the enforcement proceedings.  We believe that the chance of success in the enforcement proceedings is possible.

 

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We are questioning the applicability of certain provisions regarding the calculation and rates of social contribution taxes (PIS and COFINS) in Brazil. As of December 31, 2012, we had no provisions constituted for these lawsuits and judicial deposits of R$37.8 million. As of December 31, 2011, we had provisions of R$105.2 million and judicial deposits of R$77.5 million related to these lawsuits.

On October 10, 2012, the Brazilian Antitrust Authority, or CADE, approved, without restrictions, the acquisition of Webjet Linhas Aéreas S.A., or Webjet, by VRG. The approval was subject to the execution of a term of undertaking ( Termo de Compromisso de Desempenho ) among VRG, Webjet and CADE whereby we have agreed to maintain a minimum regularity rate of 85% on scheduled flights from the Santos Dumont airport, in Rio de Janeiro. We retained all of the VRG and Webjet capacity in this airport.

On December 7, 2012, a Rio de Janeiro labor court issued an injunction requiring that we rehire all 850 Webjet employees we had laid off on November 23, 2012. On March 4, 2013, after several attempts to negotiate with the union, we laid off these employees for a second time and the labor court issued an injunction requiring us to rehire them again subject to a daily penalty for non-compliance. We are pursuing alternatives to reverse this injunction. If we are required to rehire all 850 Webjet’s employees, we will have to pay base salaries and benefits to these employees (which includes crew, pilots, co-pilots and maintenance employees).

For further information on our legal proceedings and contingencies, see note 24 to our consolidated financial statements.

Dividends and Dividend Policy

Amounts Available for Distribution

At each annual general shareholders’ meeting, our board of directors is required to propose how our earnings for the preceding fiscal year are to be allocated.  For purposes of Brazilian corporation law, a company’s non-consolidated net income after federal income tax and social contribution on net income for such fiscal year, net of any accumulated losses from prior fiscal years and amounts allocated to employees’ and management’s participation in earnings, represents its “income” for such fiscal year.  In accordance with the Brazilian corporation law, an amount equal to the company’s “income,” as adjusted (the “distributable amount”), will be available for distribution to shareholders in any particular year.  The distributable amount will be affected by the following:

·          reduced by amounts allocated to the legal reserve;

·          reduced by amounts allocated to the statutory reserve, if any;

·          reduced by amounts allocated to the contingency reserve, if any; reduced by amounts allocated to the unrealized profits reserve established by the company in compliance with applicable law (as discussed below);

·          reduced by amounts allocated to the reserve for investment projects (as discussed below); and

·          increased by reversals of reserves recorded in prior years.

Our by-laws do not provide for statutory or contingency reserves.  Under the Brazilian corporation law and according to our by-laws, we are required to maintain a “legal reserve” to which we must allocate 5% of our “income” for each fiscal year until the amount of the reserve equals 20% of paid-in capital.  We are not required to make any allocations to our legal reserve in respect of any fiscal year in which such reserve, when added to our capital reserves, exceeds 30% of our capital.  Accumulated losses, if any, may be charged against the legal reserve.  Other than that, the legal reserve can only be used to increase our capital.  The legal reserve is subject to approval by the shareholders voting at the annual shareholders’ meeting and may be transferred to capital but is not available for the payment of dividends in subsequent years.  Our calculation of net income and allocations to reserves for any fiscal year are determined on the basis of our non-consolidated financial statements prepared in accordance with the Brazilian corporation law.

Under the Brazilian corporation law, a portion of a corporation’s “income” may be allocated for discretionary appropriations for plant expansion and other fixed or working capital investment projects, the amount of which is based on a capital budget previously presented by management and approved by the shareholders in a general shareholders’ meeting.  After completion of the relevant capital projects, the company may retain the appropriation until shareholders vote to transfer all or a portion of the reserve to capital or retained earnings.  The Brazilian corporation law provides that, if a project to which the reserve for investment projects account is allocated has a term exceeding one year, the budget related to the project must be submitted to the shareholders’ meeting each fiscal year until the relevant investment is completed.

 

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Under the Brazilian corporation law, the amount by which the mandatory distribution exceeds the “realized” portion of net income for any particular year may be allocated to the unrealized profits reserve and the mandatory distribution may be limited to the “realized” portion of net income.  The “realized” portion of net income is the amount by which “income” exceeds the sum of (a) our net positive results, if any, from the equity method of accounting for earnings and losses of our subsidiaries and certain affiliates, and (b) the profits, gains or income obtained on transactions maturing after the end of the following fiscal year.  As amounts allocated to the unrealized income reserve are realized in subsequent years, such amounts must be added to the dividend payment relating to the year of realization.

Under Brazilian tax legislation, a portion of the income taxes payable may also be transferred to a general “fiscal incentive reserve” in amounts equivalent to the reduction in the company’s income tax liability which results from the option to deposit part of that liability into investment in approved projects in investment incentive regions established by government.

Under the Brazilian corporation law, any company may create a “statutory” reserve, which reserve must be described in the company’s by-laws.  Those by-laws which authorize the allocation of a percentage of a company’s net income to the statutory reserve must also indicate the purpose, the criteria for allocation and the maximum amount of the reserve.  The Brazilian corporation law provides that all discretionary allocations of “income,” including the unrealized profits reserve and the reserve for investment projects, are subject to approval by the shareholders voting at the general shareholders’ meeting and may be transferred to capital or used for the payment of dividends in subsequent years.  The fiscal incentive reserve and the legal reserve are also subject to approval by the shareholders voting at the general shareholders’ meeting and may be transferred to capital or used to absorb losses, but are not available for the payment of dividends in subsequent years.

The amounts available for distribution may be further increased by a reversion of the contingency reserve for anticipated losses constituted in prior years but not realized.  Allocations to the contingency reserve are also subject to approval by the shareholders voting at the general shareholders meeting.  The amounts available for distribution are determined on the basis of our non-consolidated financial statements prepared in accordance with IFRS.

The balance of the profit reserve accounts, except for the contingency reserve and unrealized profits reserve, may not exceed the share capital.  If this happens, a shareholders’ meeting must resolve whether the excess will be applied to pay in the subscribed and unpaid capital, to increase and pay in the subscribed stock capital or to distribute dividends.

Pursuant to Law No. 10,303, net income unallocated to the accounts mentioned above must be distributed as dividends.

Mandatory Distribution

The Brazilian corporation law generally requires that the by-laws of each Brazilian corporation specify a minimum percentage of the amounts available for distribution by such corporation for each fiscal year that must be distributed to shareholders as dividends, also known as the mandatory distribution.

The mandatory distribution is based on a percentage of adjusted non-consolidated net income, not lower than 25%, rather than a fixed monetary amount per share.  If the by-laws of a corporation are silent in this regard, the percentage is deemed to be 50%.  Under our by-laws, at least 25% of our adjusted non-consolidated net income for the preceding fiscal year must be distributed as a mandatory annual dividend.  Adjusted net income means the net income after any deductions for the legal reserve and contingency reserves and any reversals of the contingency reserves created in previous fiscal years.  The Brazilian corporation law, however, permits a publicly held company, such as we are, to suspend the mandatory distribution of dividends in any fiscal year in which the board of directors reports to the shareholders’ meeting that the distribution would be inadvisable in view of the company’s financial condition.  The suspension is subject to the approval at the shareholders’ meeting and review by members of the fiscal committee.  While the law does not establish the circumstances in which payment of the mandatory dividend would be “inadvisable” based on the company’s financial condition, it is generally agreed that a company need not pay the mandatory dividend if such payment threatens the existence of the company as a going concern or harms its normal course of operations.  In the case of publicly held corporations, the board of directors must file a justification for such suspension with the CVM within five days of the relevant general meeting.  If the mandatory dividend is not paid and funds are available, those funds shall be attributed to a special reserve account.  If not absorbed by subsequent losses, those funds shall be paid out as dividends as soon as the financial condition of the company permits.

 

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The board of directors can also decide to make the mandatory dividend distribution in the form of interest attributable to shareholders’ equity, which is deductible when calculating income and social contribution taxes.

Payment of Dividends

We are required by the Brazilian corporation law to hold an annual general shareholders’ meeting by no later than April 30 of each year, at which time, among other things, the shareholders have to decide on the payment of an annual dividend.  Additionally, interim dividends may be declared by the board of directors.  Any holder of record of shares at the time of a dividend declaration is entitled to receive dividends.  Dividends on shares held through depositaries are paid to the depositary for further distribution to the shareholders.

Under the Brazilian corporation law, dividends are generally required to be paid to the holder of record on a dividend declaration date within 60 days following the date the dividend was declared, unless a shareholders’ resolution sets forth another date of payment, which, in either case, must occur prior to the end of the fiscal year in which such dividend was declared.  Pursuant to our by-laws, unclaimed dividends do not bear interest, are not monetarily adjusted and revert to us three years after dividends were declared.  See “Item 10.B. Memorandum of Articles of Association—Description of Capital Stock.”

Our board of directors may declare interim dividends or interest attributable to shareholders’ equity based on income verified in semi-annual financial statements.  The board of directors may also declare dividends based on financial statements prepared for shorter periods, provided that the total dividends paid in each six-month period do not exceed the capital reserves amount required by Brazilian corporation law.  The board of directors may also pay interim dividends or interest attributable to shareholders’ equity out of retained earnings or income reserves recorded in the last annual balance sheet.  Any payment of interim dividends may be set off against the amount of mandatory dividends relating to the net income earned in the year in which the interim dividends were paid.

Our by-laws do not require that we adjust the amount of any dividend payment for inflation.

In general, shareholders who are not residents of Brazil must register their equity investment with the Central Bank to have dividends, sales proceeds or other amounts with respect to their shares eligible to be remitted outside Brazil.  The preferred shares underlying the ADSs are held in Brazil by Banco Itaú S.A., also known as the custodian, as agent for the depositary, that is the registered owner on the records of the registrar for our shares.  The current registrar is Banco Itaú.  The depositary registers the preferred shares underlying the ADSs with the Central Bank and, therefore, is able to have dividends, sales proceeds or other amounts with respect to registered preferred shares remitted outside Brazil.

Payments of cash dividends and distributions, if any, are made in reais  to the custodian on behalf of the depositary, which then converts such proceeds into U.S. dollars and causes such U.S. dollars to be delivered to the depositary for distribution to holders of ADSs.  In the event that the custodian is unable to convert immediately the Brazilian currency received as dividends into U.S. dollars, the amount of U.S. dollars payable to holders of ADSs may be adversely affected by depreciation of the Brazilian currency that occur before the dividends are converted.  Under the current Brazilian corporation law, dividends paid to persons who are not Brazilian residents, including holders of ADSs, will not be subject to Brazilian withholding tax, except for dividends declared based on profits generated prior to December 31, 1995, which will be subject to Brazilian withholding income tax at varying tax rates.  See “Item 10.  Taxation—Material Brazilian Tax Considerations.”

 

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Holders of ADSs have the benefit of the electronic registration obtained from the Central Bank, which permits the depositary and the custodian to convert dividends and other distributions or sales proceeds with respect to the preferred shares represented by ADSs into foreign currency and remits the proceeds outside Brazil.  In the event the holder exchanges the ADSs for preferred shares, the holder will be entitled to continue to rely on the depositary’s registration for five business days after the exchange.  Thereafter, in order to convert foreign currency and remit outside Brazil the sales proceeds or distributions with respect to the preferred shares, the holder must obtain a new registration in its own name that will permit the conversion and remittance of such payments.  See “Item 10.B. Memorandum of Articles of Association—Description of Capital Stock—Regulation of Foreign Investment and Exchange Controls.”

Under current Brazilian legislation, the federal government may impose temporary restrictions of foreign capital abroad in the event of a serious imbalance or an anticipated serious imbalance of Brazil’s balance of payments.

Interest Attributable to Shareholders’ Equity

Under Brazilian tax legislation effective January 1, 1996, Brazilian companies are permitted to pay “interest” to holders of equity securities and treat such payments as an expense for Brazilian income tax purposes and, beginning in 1997, for social contribution purposes.  The purpose of the tax law change is to encourage the use of equity investment, as opposed to debt, to finance corporate activities.  Payment of such interest may be made at the discretion of our board of directors, subject to the approval of the shareholders at a general shareholders’ meeting.  The amount of any such notional “interest” payment to holders of equity securities is limited in respect of any particular year to the daily pro rata variation of the Long-Term Interest Rate ( Taxa de Juros de Longo Prazo ), or TJLP, as determined by the Central Bank from time to time, and may not exceed the greater of:

·          50% of net income (after social contribution on net profits but before taking into account the provision for income tax and the interest attributable to shareholders’ equity) for the period in respect of which the payment is made; or

·          50% of the sum of retained earnings and profit reserves as of the beginning of the year in respect of which such payment is made.

Payment of interest to a holder that is not domiciled in Brazil for Brazilian tax and regulatory purposes (a “non-Brazilian holder”) is subject to withholding income tax at the rate of 15%, or 25% if the non-Brazilian holder is domiciled in a country or location that does not impose income tax or where the income tax rate is lower than 20% (“Low or Nil Tax Jurisdiction”) or where applicable local laws impose restrictions on the disclosure of the shareholding composition or the ownership of investments or the ultimate beneficiary of the income derived from transactions carried out and attributable to a non-Brazilian holder.  These payments may be included, at their net value, as part of any mandatory dividend.  To the extent payment of interest on net equity is so included, the corporation is required to distribute to shareholders an additional amount to ensure that the net amount received by them, after payment of the applicable withholding income tax, plus the amount of declared dividends is at least equal to the mandatory dividend.

Under current Brazilian legislation, the sum of the amount distributed as interest on shareholders’ equity and as dividends must be at least equal to the mandatory dividend.  For IFRS accounting purposes, although the interest charge must be reflected in the statement of operations to be tax deductible, the charge is reversed before calculating net income in the statutory financial statements and deducted from shareholders’ equity in a manner similar to a dividend.  Any payment of interest in respect of preferred shares (including the ADSs) is subject to Brazilian withholding income tax at the rate of 15%, or 25% in the case of a shareholder domiciled in a Low or Nil Tax Jurisdiction or where applicable local laws impose restrictions on the disclosure of the shareholding composition or the ownership of investments or the ultimate beneficiary of the income derived from transactions carried out and attributable to a non-Brazilian holder (see “Item 10.  Taxation—Material Brazilian Tax Considerations”).  If such payments are accounted for, at their net value, as part of any mandatory dividend, the tax is paid by the company on behalf of its shareholders, upon distribution of the interest.  In case we distribute interest attributed to shareholders’ equity in any year, and that distribution is not accounted for as part of mandatory distribution, Brazilian income tax would be borne by the shareholders.  For IFRS accounting purposes, interest attributable to shareholders’ equity is reflected as a dividend payment.

 

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Under our by-laws, interest attributable to shareholders’ equity may be treated as a dividend for purposes of the mandatory dividend. In 2009 we distributed R$185.8 million to our shareholders, equivalent to a payment of R$0.70 per share or ADS.  In 2010 we declared R$50.9 million to our shareholders, equivalent to a payment of R$0.19 per share or ADS.  In 2011 and 2012, we did not distribute dividends.

Dividend Policy

We intend to declare and pay dividends and/or interest attributed to shareholders’ equity, as required by the Brazilian corporation law and our by-laws.  The declaration of annual dividends, including dividends in excess of the mandatory distribution, requires approval by the vote of the majority of the holders of our common shares.  The amount of any distributions will depend on many factors, such as our results of operations, financial condition, cash requirements, prospects and other factors deemed relevant by our board of directors and shareholders.  Within the context of our tax planning, we may in the future continue determining that it is to our benefit to distribute interest attributed to shareholders’ equity.

B.       Significant Changes

None.

ITEM 9.        The Offer and Listing

A.       Offer and Listing Details

In the United States, our preferred shares trade in the form of ADS.  Since December 2005, each ADS represents one preferred share, issued by Citibank, N.A., as Depositary pursuant to a Deposit Agreement.  On December 13, 2005, we executed a 2:1 ADS split, changing to ratio of one ADS representing two preferred shares to one ADS representing one preferred share, as approved by a meeting of the Board of Directors of the Company on November 8, 2005.  The ADSs commenced trading on the NYSE on June 24, 2004.  As of December 31, 2012, the ADSs represented 38.6% of our preferred shares and 57.9% of our current global public float.

The following table sets forth the reported high and low closing sales prices for the ADSs on the NYSE for the periods indicated:

 

US$ per ADS

 

Low

High

Average (1)

2008

 

 

 

Annual

3.06

23.94

11.51

2009

 

 

 

Annual

2.88

15.59

7.44

2010

 

 

 

Annual

10.62

18.55

16.63

2011

 

 

 

Annual

5.18

16.17

10.67

First quarter

12.52

16.17

14.15

Second quarter

11.34

14.12

12.89

Third Quarter

5.56

13.18

8.27

Fourth Quarter

5.18

8.82

7.45

2012

 

 

 

Annual

3.87

9.04

5.66

First quarter

6.50

9.04

7.62

Second quarter

3.87

6.62

4.97

Third Quarter

4.01

5.94

4.85

Fourth Quarter

3.87

9.04

5.66

Last Six Months

 

 

 

October 2012

4.98

6.29

5.39

November 2012

4.53

5.32

4.86

December 2012

4.81

6.56

5.39

January  2013

6.36

7.61

6.97

February 2013

6.16

7.38

6.82

March 2013

5.95

7.47

6.79

April 2013 (through April 26)

5.32

6.90

5.99

_______________
Source:  Bloomberg
(1) Calculated as average of closing prices for the period.

 

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Our preferred shares began trading on the São Paulo Stock Exchange on June 24, 2004.  The following table sets forth the reported high and low closing sale prices for our preferred shares on the BM&FBOVESPA, for the periods indicated.

 

Reais per Preferred Share

 

Low

High

Average (1)

2008

 

 

 

Annual

6.90

42.40

20.02

2009

 

 

 

Annual

6.58

27.34

14.13

2010

 

 

 

Annual

19.70

30.40

24.34

2011

 

 

 

Annual

9.12

26.56

17.41

First quarter

20.54

26.56

23.19

Second quarter

17.65

22.1

20.22

Third Quarter

9.12

20.30

13.25

Fourth Quarter

9.67

15.70

13.19

2012

 

 

 

Annual

7.73

15.19

10.87

First quarter

11.93

15.19

13.36

Second quarter

7.73

12.04

9.71

Third Quarter

8.14

12.17

9.78

Fourth Quarter

9.42

13.05

10.66

Last Six Months

 

 

 

October 2012

10.10

12.80

10.87

November 2012

9.42

10.80

10.04

December 2012

9.96

13.05

11.08

January  2013

12.57

15.00

14.10

February 2013

12.13

14.66

13.44

March 2013

11.75

14.58

13.26

April 2013 (through April 26)

10.86

13.81

11.95

     

_________________

Source:  Bloomberg

(1) Calculated as average of closing prices for the period . 

B.       Plan of Distribution

Not applicable.

 

 

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C.       Markets 

Trading on the BM&FBOVESPA

In 2000, the São Paulo Stock Exchange was reorganized through the execution of memoranda of understanding by the Brazilian stock exchanges.  Under the memoranda, all securities are now traded only on the São Paulo Stock Exchange, with the exception of electronically traded public debt securities and privatization auctions, which are traded on the Rio de Janeiro Stock Exchange.

On May 8, 2008, the São Paulo Stock Exchange and the Brazilian Mercantile and Futures Exchange merged, creating BM&FBOVESPA.  Together, the companies have formed one of the largest exchanges worldwide in terms of market value, the second largest in the Americas, and the leading exchange in Latin America.

When shareholders trade in common and preferred shares on the BM&FBOVESPA, the trade is settled in three business days after the trade date without adjustment of the purchase price for inflation.  The seller is ordinarily required to deliver the shares to the exchange on the second business day following the trade date.  Delivery of and payment for shares are made through the facilities of the clearinghouse, Companhia Brasileira de Liquidação e Custódia , or CBLC.

The BM&FBOVESPA is a for-profit listed company that has regulatory authority over its trading markets.  Trading on the BM&FBOVESPA is limited to member brokerage firms and a limited number of authorized nonmembers.  The BM&FBOVESPA has two open outcry trading sessions each day from 10:00 a.m. to 5:00 p.m., São Paulo time, for all securities traded on all markets, except during daylight savings time in Brazil.  During daylight savings time in Brazil, usually the sessions are from 11:00 a.m. to 6:00 p.m., São Paulo time, to closely mirror the NYSE trading hours.  Trading is also conducted between 11:00 a.m. and 6:00 p.m., or between 10:00 a.m. and 5:00 p.m. during daylight savings time in the United States, on an automated system known as the Computer Assisted Trading System ( Sistema de Negociação Assistida por Computador ) on the BM&FBOVESPA and on the National Electronic Trading System ( Sistema Eletrônico de Negociação Nacional ).  This system is a computerized system that links electronically with the seven smaller regional exchanges.  The BM&FBOVESPA also permits trading from 5:45 p.m. to 7:00 p.m., São Paulo time, or from 6:45 p.m. to 7:30 p.m. during daylight savings time in Brazil, on an online system connected to traditional and Internet brokers called the “after market.”  Trading on the aftermarket is subject to regulatory limits on price volatility and on the volume of shares transacted through Internet brokers.  There are no specialists or officially recognized market makers for our shares in Brazil.

In order to better control volatility, the BM&FBOVESPA adopted a “circuit breaker” system pursuant to which trading sessions may be suspended for a period of 30 minutes or one hour whenever the indices of the BM&FBOVESPA falls below the limits of 10% or 15%, respectively, in relation to the index registered in the previous trading session.

The BM&FBOVESPA is significantly less liquid than the NYSE or other major exchanges in the world.  As of December 2012, the aggregate market capitalization of the BM&FBOVESPA was equivalent to R$2.5 trillion and the 10 largest companies listed on the BM&FBOVESPA represented 51.8% of the total market capitalization of all listed companies.  In contrast, as of December 2012, the aggregate market capitalization of the NYSE was US $ 14.1 trillion.  Although any of the outstanding shares of a listed company may trade on the BM&FBOVESPA, in most cases fewer than half of the listed shares are actually available for trading by the public, the remainder being held by small groups of controlling persons, by government entities or by one principal shareholder.  See “Item 3. Risk Factors—Risks Relating to the ADSs and Our Preferred Shares—The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell the preferred shares underlying the ADSs at the time and price you desire.”

Trading on the BM&FBOVESPA by a non-Brazilian holder, is subject to certain limitations under Brazilian foreign investment legislation.  With limited exceptions, non-Brazilian holders may only trade on Brazilian stock exchanges in accordance with the requirements of Resolution No. 2,689, of January 26, 2000, of the National Monetary Council ( Conselho Monetário Nacional ), or CMN, or Resolution No. 2,689.  Resolution No. 2,689 requires that securities held by non-Brazilian holders be maintained in the custody of, or in deposit accounts with, financial institutions and be registered with a clearinghouse.  Such financial institutions and clearinghouses must be duly authorized to act as such by the Central Bank and the CVM.  In addition, Resolution No. 2,689 requires non- Brazilian holders to restrict their securities trading to transactions on Brazilian stock exchanges or qualified over-the-counter markets.  With limited exceptions, non-Brazilian holders may not transfer the ownership of investments made under Resolution No. 2,689 to other non-Brazilian holders through a private transaction.  See “Item 10.  Taxation—Material Brazilian Tax Considerations—Taxation on Gains” for a description of certain tax benefits extended to non-Brazilian holders who qualify under Resolution No. 2,689.

 

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Corporate Governance Practices

In 2000, the São Paulo Stock Exchange introduced three special listing segments, known as Level 1 and 2 of Differentiated Corporate Governance Practices and New Market ( Novo Mercado ), aiming at fostering a secondary market for securities issued by Brazilian companies with securities listed on the BM&FBOVESPA, by prompting such companies to follow good practices of corporate governance.  The listing segments were designed for the trading of shares issued by companies voluntarily undertaking to abide by corporate governance practices and disclosure requirements in addition to those already imposed by Brazilian law.  These rules generally increase shareholders’ rights and enhance the quality of information provided to shareholders.

To become a Level 1 ( Nível 1 ) company, in addition to the obligations imposed by current Brazilian law, an issuer must agree to (a) ensure that shares of the issuer representing 25% of its total capital are effectively available for trading, (b) adopt offering procedures that favor widespread ownership of shares whenever making a public offering, (c) comply with minimum quarterly disclosure standards including cash flow statements, (d) follow stricter disclosure policies with respect to transactions made by controlling shareholders, directors and officers involving securities issued by the issuers; (e) submit any existing shareholders’ agreements and stock option plans to the BM&FBOVESPA and (f) make an annual calendar announcing scheduled corporate events, bringing information on the company, the event, date and time it is going to take place; any changes in the schedule shall be promptly forwarded to BM&FBOVESPA and published.

To become a Level 2 ( Nível 2 ) company, in addition to the obligations imposed by current Brazilian law, an issuer must agree to (a) comply with all of the listing requirements for Level 1 companies, (b) grant tag-along rights for all shareholders in connection with a transfer of control of the company, offering the same price paid per share for controlling block common shares and 80% of the price paid per share for controlling block preferred shares, (c) grant voting rights to holders of preferred shares in connection with certain corporate restructurings and related party transactions, such as:  (i) any transformation of the company into another corporate form, (ii) any merger, consolidation or spin-off of the company, (iii) approval of any transactions between the company and its controlling shareholder, including parties related to the controlling shareholder, (iv) approval of any valuation of assets to be delivered to the company in payment for shares issued in a capital increase, (v) appointment of an independent company, with renowned expertise, to ascertain the economic value of the company in connection with any deregistration and delisting tender offer, and (vi) any changes to these voting rights, (d) have a board of directors comprised of at least five members, of which at least 20% shall be “independent,” as defined by the BM&FBOVESPA, with a term limited to two years, (e) if it elects to delist from the Level 2 segment, hold a tender offer by the company’s controlling shareholder (the minimum price of the shares to be offered will be the economic value determined by an appraisal process), and, for the same purposes, in the case of companies with diffuse control (controlling power exercised by the shareholder holding less than 50% of the voting capital and per group of shareholders who are not signatories of voting agreements and which is not under a common control and does not act as a representative of a common interest) to comply with complementary rules to be issued by BM&FBOVESPA, (f) disclose:  (i) quarterly financial statements in English or prepared in accordance with U.S. GAAP or IFRS and (ii) annual financial statements in English, including cash flow statements, prepared in accordance with U.S. GAAP or IFRS, in U.S. dollars or reais  and (g) adhere exclusively to the rules of the BM&FBOVESPA Arbitration Chamber for resolution of disputes involving the controlling shareholders, the managers and the members of the fiscal committee.

To be listed in the Novo Mercado , an issuer must meet all of the requirements described above, in addition to (a) issuing only voting shares and ensure that all the shares will be composed exclusively of common shares, (b) granting tag-along rights for all shareholders in connection with a transfer of control of the company, offering the same price paid per share for controlling block common shares.

In May 2004, we entered into an agreement with the BM&FBOVESPA to comply with the requirements to become a Level 2 company.  In addition to complying with Level 2 requirements, we have granted tag-along rights that entitle our preferred shareholders to receive 100% of the price paid per common share of controlling block shareholders in connection with a transaction resulting in a transfer of control of our company.  Furthermore, we prepare quarterly financial statements in accordance with IFRS.  We were included in the following indexes (a) since 2005:  IbrX-100 ( Índice Brasil ,  Index Brazil ), IGC ( Índice de Ações com Governança Corporativa Diferenciada ,  Special Corporate Governance Index ), ITAG ( Índice de Ações com Tag Along Diferenciado ,  Special Tag Along Stock Index ) and MSCI ( Morgan Stanley Capital International Index ), (b) since 2006:  IbrX-50 ( Índice Brasil 50 ,  Index Brazil 50 ):  and (c) since 2007:  Índice BM&FBOVESPA , all of which reflect our increased market capitalization and liquidity of our preferred shares.

 

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Regulation of the Brazilian Securities Market

The Brazilian securities markets are regulated by the CVM, which has regulatory authority over the stock exchanges and securities markets, as well as by the Central Bank, which has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions.  The Brazilian securities markets are governed by Law No. 10,198 dated February 14, 2001, Law No. 10,303 dated October 31, 2001, known as Law No. 10,303 and Law No. 10,411 dated February 26, 2002, which introduced new concepts and several changes to Law No. 6,385 dated December 7, 1976, as amended and supplemented, the principal law governing the Brazilian securities markets, by Brazilian corporation law, and by regulations issued by the CVM, the CMN and the Central Bank.  These laws and regulations, among others, provide for disclosure requirements applicable to issuers of traded securities, criminal sanctions for insider trading and price manipulation, and protection of minority shareholders.  They also provide for licensing and oversight of brokerage firms and governance of Brazilian stock exchanges.  However, the Brazilian securities markets are not as highly regulated and supervised as U.S. securities markets.

Under the Brazilian corporation law, a company is either publicly held, a companhia aberta , or privately held, a companhia fechada .  All listed companies are registered with the CVM and are subject to reporting and regulatory requirements.  A company registered with the CVM may trade its securities either on the BM&FBOVESPA or in the Brazilian over-the-counter market.  Shares of companies listed on the BM&FBOVESPA may not simultaneously trade on the Brazilian over-the-counter market.  The shares of a listed company may also be traded privately, subject to several limitations.  To be listed on the BM&FBOVESPA, a company must apply for registration with the BM&FBOVESPA and the CVM.

The trading of securities on the BM&FBOVESPA may be halted at the request of a company in anticipation of a material announcement.  Trading may also be suspended on the initiative of the BM&FBOVESPA or the CVM, among other reasons, based on or due to a belief that a company has provided inadequate information regarding a significant event or has provided inadequate responses to inquiries by the CVM or the BM&FBOVESPA.

Trading on the BM&FBOVESPA by non-residents of Brazil is subject to limitations under Brazilian foreign investment and tax legislation.  The Brazilian custodian for the preferred shares underlying the ADSs must, on behalf of the depositary for the ADSs, obtain registration from the Central Bank to remit U.S. dollars abroad for payments of dividends, any other cash distributions, or upon the disposition of the shares and sales proceeds thereof.  If you exchange your ADSs for preferred shares, you will be entitled to continue to rely on the custodian’s electronic foreign capital registration for five business days after the exchange.  Thereafter, you may not be able to obtain and remit abroad non-Brazilian currency upon the disposition of or distributions relating to the preferred shares, and will be subject to a less favorable tax treatment on gains with respect to the preferred shares, unless you obtain a new electronic foreign capital registration on your own name.  See “Item 10.B. Memorandum of Articles of Association—Description of Capital Stock—Regulation of Foreign Investment.”

Disclosure Requirements

According to Law No 6,385, a publicly held company must submit to CVM and BM&FBOVESPA certain periodic information, including annual and quarterly reports prepared by management and independent auditors.  This legislation also requires us to file with CVM our shareholders’ agreements, notices of shareholders’ meetings and copies of the related minutes.

Pursuant to CVM Rule No. 358, of January 3, 2002, as amended, the CVM revised and consolidated the requirements regarding the disclosure and use of information related to material facts and acts of publicly held companies, including the disclosure of information in the trading and acquisition of securities issued by publicly held companies.

 

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Such requirements include provisions that:

·          establish the concept of a material fact that gives rise to reporting requirements.  Material facts include decisions made by the controlling shareholders, resolutions of the general meeting of shareholders and of management of the company, or any other facts related to the company’s business (whether occurring within the company or otherwise somehow related thereto) that may influence the price of its publicly traded securities, or the decision of investors to trade such securities or to exercise any of such securities’ underlying rights;

·          specify examples of facts that are considered to be material, which include, among others, the execution of agreements providing for the transfer of control, the entry or withdrawal of shareholders that maintain any managing, financial, technological or administrative function with or contribution to the company, and any corporate restructuring undertaken among related companies;

·          oblige the officer of investor relations, controlling shareholders, other officers, directors, members of the audit committee and other advisory boards to disclose material facts;

·          require simultaneous disclosure of material facts to all markets in which the corporation’s securities are admitted for trading;

·          require the acquirer of a controlling stake in a corporation to publish material facts, including its intentions as to whether or not to de-list the corporation’s shares, within one year;

·          establish rules regarding disclosure requirements in the acquisition and disposal of a material stockholding stake; and

·          forbid trading on the basis of insider information.

In addition to the disclosure requirements under the Brazilian corporation law and the CVM regulations, we must also observe the following disclosure requirements:

·          we must disclose our consolidated financial statements at the end of each quarter (except for the last quarter of each year) and at the end of each fiscal year, including a statement of cash flows, which must indicate, at least, the changes in cash and cash equivalents, separated into operating, financing and investing cash flows;

·          we must, no later than four months after the end of the fiscal year: disclose our financial statements and consolidated financial statements in accordance with IFRS, in reais  or U.S. dollars, which must be fully disclosed, in English, together with a management report, explanatory notes that shall include the net income and shareholders’ equity calculated at the end of such fiscal year, as well as the proposal for distribution or other use of net income, and the independent auditors’ report; and

·          within no longer than 15 days following the term established by the Brazilian corporation law for disclosure of our quarterly information, we must also: disclose our quarterly information translated into English.

CVM Rule No. 480 provides for periodical information that shall be submitted to the market. For instance the submission of the following documents: (i) financial statements, (ii) standard form and (iii) Formulário de Referência , a new annual report that replaces IAN.

The Formulário de Referência shall be annually presented until the fifth month following the termination of the fiscal year. Additionally whenever the company decides to make a public offering an updated Formulário de Referência shall be filed. In addition, category A issuers, which includes us, shall always update its Formulário de Referência within seven business days from the occurrence of one of the following events:

(i) change of any of company’s managers or member of the Audit Committee;

(ii) change of the corporate capital of the company;

 

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(iii) issuance of securities;

(iv) change of the rights and advantages of the issued securities;

(v) change of the majority shareholder or variation in its position equal or superior to five percent (5%);

(vi) whenever a shareholder achieves a participation equal or superior to five percent (5%) of shares of the same   class, considering that the issuer known it;

(vii) change or disclosure of  new projections or estimates;

(viii) consolidation, merger of shares, merger and spin-off involving the company;

(ix) execution, change or termination of shareholders agreement; or

(x) file for reorganization or petition for bankruptcy.

CVM Rule No. 481 which sets forth (i) the procedures relating to the public solicitation of proxies for the exercise of voting rights at shareholders’ meetings of public held companies; and (ii) disclosure requirements to be followed by public held companies before the shareholders meetings. It provides that:  (i) shareholders that own 0.5% or more of the company’s corporate capital may indicate members to the Board of Directors and to the Fiscal Council in public solicitation of proxies conducted by the company’s management, being thus required that the shareholders be able to vote on the referred candidates; (ii) the companies that accept digital proxies sent via world wide web must allow shareholders who hold 0.5% or more of the company’s corporate capital to make public solicitation of proxies through the company’s referred system; and (iii) the publicly held companies that do not accept digital proxies sent via world wide web must pay part of the costs of the public solicitation of proxies made by shareholders that own 0.5% or more of the company’s corporate capital.

In addition, all information that shall be disclosed jointly with the call notice for General Shareholders Meetings of public held companies must be made available to shareholders through the CVM website and that the following documents shall be disclosed at least with thirty (30) in advance of the Annual Shareholders Meeting:

(i) the management report on the corporation’s affair and major administrative events of the last fiscal year;

(ii) copies of the accounts and financial statements;

(iii) the opinion of the independent auditors, if any;

(iv) comments of the managers in the terms provided in the Section ten (10) of the Formulário de Referência ;  and

(v) the Audit Committee report, if any.

D.       Selling Shareholders

Not applicable.

E.       Dilution 

Not applicable.

F.        Expenses of the Issue

Not applicable.

ITEM 10.     Additional Information

A.       Share Capital

Not applicable.

 

 

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B.       Memorandum and Articles of Association

The Registrant was formed on March 12, 2004 as a sociedade por ações , a stock corporation duly incorporated under the laws of Brazil with unlimited duration.  The Registrant is registered with the São Paulo Commercial Registry ( Junta Comercial do Estado de São Paulo ) under number NIRE 35.300.314.441.

Description of Capital Stock

General

The Registrant became the parent company of Gol on March 29, 2004, when all of the common shares, Class A preferred shares and Class B preferred shares of Gol (except for five common shares of Gol that are held by members of Gol’s board of directors for eligibility purposes) were contributed to the Registrant by the shareholders of Gol in exchange for the applicable number of either common shares or preferred shares of the Registrant.  As a result of this reorganization, 41,499,995 common shares of Gol were exchanged for 109,448,497 common shares and 6,751,719 preferred shares of the Registrant, 10,375,000 Class A preferred shares of Gol were exchanged for 29,049,994 preferred shares and six common shares of the Registrant and 8,408,206 Class B preferred shares of Gol were exchanged for 23,542,977 preferred shares of the Registrant.  The reorganization did not affect our operations in any respect.  The aggregate number of our common and preferred shares outstanding was increased to 168,793,243 as the result of a 2.80 -for-one stock split on May 25, 2004 (which includes 224 common shares and 56 preferred shares of the Registrant that were issued in connection with its formation on March 12, 2004).  On June 24, 2004, the Registrant completed its initial public offering through the issuance of 18,750,000 preferred shares in the form of ADSs in the United States and other countries outside Brazil and in the form of preferred shares in Brazil.  On April 28, 2005, the Registrant completed a primary and secondary offering of 16,905,000 preferred shares in the form of ADSs in the United States and other countries outside Brazil and in the form of preferred shares in Brazil.  In addition, during 2005, our executive officers exercised stock options for an aggregate of 703,579 preferred shares.  During 2006, our executive officers exercised stock options for an aggregate of 233,833 preferred shares.  In 2007, we increased our capital and, as a result of 6.1 million shares issued for the VRG acquisition and 11,569 shares issued related to our stock option program.  On March 20, 2009, our board of directors approved a capital stock increase issuing 6,606,366 voting and 19,487,356 preferred shares.  On October 19, 2009, we concluded a global share offering of 19,002,500 common shares and 43,187,500 preferred shares. On May 5, 2010 our board of directors approved a capital increase, in the amount of R$119.0 million, with the issuance of 4,883,756 shares, of which 3,833,076 were common shares and 1,050,680 were preferred shares. During 2010 and 2011, our executive officers exercised stock options for an aggregate of 173,374, and 49,836 preferred shares, respectively. During 2012, our executive officers did not exercise any stock options. As of December 31, 2012, our capital structure consisted of 143,858,204 common shares and 134,858,582 preferred shares, each with no par value. We are a stock corporation ( sociedade anônima ) incorporated under the laws of Brazil.

On December 21, 2011, in order to implement the Delta Investment, our board of directors approved a capital increase of up to R$295.8 million, equivalent to up to 6,825,470 common shares and 6,619,765 preferred shares at a subscription price of R$22.00 per share, with a minimum aggregate subscription amount of R$182.6 million. Our controlling shareholder subscribed for 6,825,469 common shares and 1,474,986 preferred shares, using the funds received from Delta to pay for those shares.

Issued Share Capital

Under our by-laws, our authorized capital as of December 31, 2012 was R$4.0 billion, and can be increased by the issuance of preferred or common shares, after approval by our board of directors.  Our shareholders must approve any capital increase that exceeds our authorized capital.  Under our bylaws and the Brazilian corporation law, if we issue additional shares in a private transaction, the existing shareholders have preemptive rights to subscribe for shares on a pro rata basis according to their holdings.  See “—Preemptive Rights.”

Regulation of Foreign Investment

There are no general restrictions on ownership of our preferred shares or common shares by individuals or legal entities domiciled outside Brazil, except for those regarding airline companies (see “—Regulation of the Brazilian Civil Aviation Market”).  However, the right to convert dividend payments and proceeds from the sale of preferred shares or common shares into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation which generally requires, among other things, the registration of the relevant investment with the Central Bank.

 

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Foreign investors may register their investment under Law No. 4,131 of September 3, 1962, or Law No. 4,131, or Resolution No. 2,689 of January 26, 2000 of the CMN, or Resolution No. 2,689.  Registration under Law No. 4,131 or under Resolution No. 2,689 generally enables foreign investors to convert into foreign currency dividends, other distributions and sales proceeds received in connection with registered investments and to remit such amounts abroad. Resolution No. 2,689 affords favorable tax treatment to foreign investors who are not resident in a Low or Nil Tax Jurisdiction, which is defined under Brazilian tax laws as a country or location or other jurisdiction that does not impose tax or where the maximum income tax rate is lower than 20%.

Under Resolution No. 2,689, foreign investors may invest in almost all financial assets and engage in almost all transactions available in the Brazilian financial and capital markets, provided that certain requirements are fulfilled.  In accordance with Resolution No. 2,689, the definition of foreign investor includes individuals, legal entities, mutual funds and other collective investment entities that are domiciled or headquartered abroad.  Investors may not transfer the ownership of investments made under Resolution No. 2,689 to other non-Brazilian holders through private transactions.

Pursuant to Resolution No. 2,689, foreign investors must:

·          appoint at least one representative and a custodian in Brazil with powers to perform actions relating to the foreign investment;

·          complete the appropriate foreign investor registration form;

·          register as a foreign investor with the CVM;

·          register the foreign investment with the Central Bank;

·          appoint a tax representative in Brazil; and

·          obtain a taxpayer identification number from the Brazilian federal tax authorities.

Amounts invested in our preferred shares by a non-Brazilian holder who qualifies under Resolution 2,689 and obtains registration with the CVM, or by the depositary representing an ADS holder, are eligible for registration with the Central Bank.  This registration (the amount so registered is referred to as registered capital) allows the remittance outside Brazil of foreign currency, acquired with the proceeds of distributions on, and amounts realized through, dispositions of our preferred shares.  The registered capital per preferred share purchased in the form of an ADS, or purchased in Brazil and deposited with the depositary in exchange for an ADS, will be equal to its purchase price (stated in U.S. dollars).  The registered capital per preferred share withdrawn upon cancellation of an ADS will be the U.S. dollar equivalent of (i) the average price of a preferred share on the Brazilian stock exchange on which the most preferred shares were traded on the day of withdrawal or (ii) if no preferred shares were traded on that day, the average price on the Brazilian stock exchange on which the most preferred shares were traded in the fifteen trading sessions immediately preceding such withdrawal.  The U.S. dollar equivalent will be determined on the basis of the average rates quoted by the Central Bank on these dates.

A non-Brazilian holder of preferred shares may experience delays in effecting Central Bank registration, which may delay remittances abroad.  This delay may adversely affect the amount in U.S. dollars, received by the non-Brazilian holder.

A registration has been obtained in the name of the depositary with respect to the ADSs and is maintained by the custodian on behalf of the depositary.  Pursuant to the registration, the custodian and the depositary are able to convert dividends and other distributions with respect to the preferred shares represented by our ADSs into foreign currency and remit the proceeds outside Brazil.  In the event that a holder of ADSs exchanges such ADSs for preferred shares, such holder will be entitled to continue to rely on the depositary’s registration for five business days after such exchange, following which such holder must seek to obtain its own registration with the Central Bank.

 

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Thereafter, any holder of preferred shares may not be able to convert into foreign currency and remit outside Brazil the proceeds from the disposition of, or distributions with respect to, such preferred shares, unless the holder is a duly qualified investor under Resolution 2,689.

If the shareholder does not qualify under Resolution 2,689 by registering with the CVM and the Central Bank and appointing a representative and a custodian in Brazil, the holder will be subject to less favorable Brazilian tax treatment than a holder of ADSs.  Regardless of qualification under Resolution 2,689, residents in a Low or Nil Tax Jurisdiction are subject to less favorable tax treatment than other foreign investors.  See “—Taxation—Brazilian Tax Considerations.”

Under current Brazilian legislation, the federal government may impose temporary restrictions on remittances of foreign capital abroad in the event of a serious imbalance or an anticipated serious imbalance of Brazil’s balance of payments.  For approximately six months in 1989 and early 1990, the Brazilian government froze all dividend and capital repatriations held by the Central Bank that were owed to foreign equity investors, in order to conserve Brazil’s foreign currency reserves.  These amounts were subsequently released in accordance with federal government directives.  There can be no assurance that the Brazilian government will not impose similar restrictions on foreign repatriations in the future.  See “Item 3. Risk Factors—Risks Relating to Brazil.”

Description of Preferred Shares

According to our by-laws, our preferred shares are non-voting.  However, under certain limited circumstances provided for in the Brazilian corporation law and as described in this section, holders of our preferred shares may be entitled to vote.  Upon liquidation, holders of preferred shares are entitled to receive distributions prior to the holders of our common shares.

According to our by-laws, holders of our preferred shares are entitled to be included in a public tender offer in case our controlling shareholder sells its controlling stake in us, and the minimum price to be offered for each preferred share is 100% of the price paid per share of the controlling stake.

Under Brazilian law, the protections afforded to minority shareholders are different from those in the United States.  In particular, judicial guidance with respect to shareholder disputes is less established under Brazilian law than U.S. law and there are different procedural requirements for bringing shareholder lawsuits, such as shareholder derivative suits.  As a result, in practice it may be more difficult for our minority shareholders to enforce their rights against us or our directors or controlling shareholder than it would be for shareholders of a U.S. company.

Redemption and Rights of Withdrawal

Under the Brazilian corporation law, a dissenting or non-voting shareholder has the right to withdraw from a company and be reimbursed for the value of the preferred or common shares held whenever a decision is taken at a general shareholders’ meeting by a vote of shareholders representing at least 50% of the total outstanding voting capital to:

·          create a new class of preferred shares or increase disproportionately an existing class of preferred shares relative to the other classes of shares, unless such action is provided for or authorized by our by-laws (our by-laws allow us to do so);

·          modify a preference, privilege or condition of redemption or amortization conferred on one or more classes of preferred shares, or create a new class with greater privileges than the existing classes of preferred shares;

·          reduce the mandatory distribution of dividends;

·          merge or consolidate us with another company;

 

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·          participate in group of companies as defined in the Brazilian corporation law and subject to the conditions set forth therein;

·          change our corporate purpose, including a sale of the voting control to a third party;

·          transfer all of our shares to another company or receive shares of another company in order to make the company whose shares were transferred a wholly owned subsidiary of such company, known as incorporação de ações ; 

·          conduct a spin-off that results in (a) a change of our corporate purposes, except if the assets and liabilities of the spin-off company are contributed to a company that is engaged in substantially the same activities, (b) a reduction in the mandatory dividend or (c) any participation in a centralized group of companies, as defined under the Brazilian corporation law; or

·          dissolution of the company or terminating a state of liquidation.

In the event that the entity resulting from a merger, consolidation, or incorporação de ações , or spin-off of a listed company fails to become a listed company within 120 days of the shareholders meeting at which such decision was taken, the dissenting or non-voting shareholders may also exercise their withdrawal right.

If there is a resolution to (a) merge or consolidate us with another company; (b) conduct a incorporação de ações ; (c) participate in a group of companies, as defined under the Brazilian corporation law or (d) acquire control of another company, the withdrawal rights are exercisable only if our shares do not satisfy certain tests of liquidity and dispersal of the type or class of shares in the market at the time of the general meeting.

Only holders of shares adversely affected by the changes mentioned in the first and second items above may withdraw their shares.

The right of withdrawal lapses 30 days after publication of the minutes of the relevant general shareholders’ meeting that approved the corporate actions described above.  In the case of the changes mentioned in items (a) and (b) above, the resolution is subject to confirmation by the preferred shareholders, which must be obtained at a special meeting held within one year.  In those cases, the 30-day term is counted from the date of publication of the minutes of the special meeting.  We would be entitled to reconsider any action triggering appraisal rights within 10 days following the expiration of such rights if the redemption of shares of dissenting or non-voting shareholders would jeopardize our financial stability.  Shares to be purchased by us from the dissenting or non-voting shareholders exercising appraisal rights will be valued at an amount equal to the lesser of the ratable portion attributable to such shares of our shareholders’ equity as shown on the last balance sheet approved at a general shareholders’ meeting (book value) and the ratable portion attributable to such shares of the economic value of the company, pursuant to an appraisal report produced in accordance with the provisions of the Brazilian corporation law.  If more than 60 days have elapsed since the date of such balance sheet, dissenting shareholders may require that the book value of their shares be calculated on the basis of a new balance sheet.  As a general rule, shareholders who acquire their shares after the first notice convening the general shareholders’ meeting or after the relevant press release concerning the meeting is published will not be entitled to appraisal rights.

For purposes of the right of withdrawal, the concept of “dissenting shareholder,” under the Brazilian corporation law, includes not only those shareholders who vote against a specific resolution, but also those who abstain from voting, who fail to attend the shareholders meeting or who do not have voting rights.

Preemptive Rights

Each of our shareholders generally has a preemptive right to subscribe for shares or convertible securities in any capital increases, in proportion to its shareholdings.  A minimum period of 30 days, unless a shorter period is established by our board of directors, following the publication of notice of the capital increase is allowed for the exercise of the right and the right is negotiable.  In the event of a capital increase which would maintain or increase the proportion of capital represented by preferred shares, holders of ADSs or preferred shares would have preemptive rights to subscribe only to newly issued preferred shares.

 

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In the event of a capital increase which would reduce the proportion of capital represented by preferred shares, holders of ADSs or preferred shares would have preemptive rights to subscribe for preferred shares, in proportion to their shareholdings, and for common shares, only to the extent necessary to prevent dilution of their equity participation.  (See “Risks Relating to the ADSs and Our Preferred Shares—Holders of ADSs may be unable to exercise preemptive rights with respect to our preferred shares”).  Our by-laws provide that our board of directors may, within the limit of its authorized capital, withdraw preemptive rights to existing shareholders in connection with an increase in share capital through sale in stock exchanges, public offerings or public exchange offers.  In addition, Brazilian corporation law provides that the granting or exercise of stock options pursuant to certain stock option plans is not subject to preemptive rights.

Voting Rights

Each common share entitles its holder to one vote at our shareholders’ meetings.  Preferred shares have no voting rights, except that each preferred share entitles its holder to one vote at our shareholders’ meeting to decide on certain specific matters, such as:

·          any transformation of the company into another corporate type; any merger, consolidation or spin-off of the company;

·          approval of any transactions between the company and its controlling shareholder or parties related to the controlling shareholder;

·          approval of any evaluation of assets to be delivered to the company in payment for shares issued in a capital increase;

·          appointment of an expert to ascertain the fair value of the company in connection with any deregistration and delisting tender offer;

·          any changes to these voting rights; and

·          approval of a change of our corporate purpose.

Holders of preferred shares are entitled to attend shareholders’ meetings and to participate in the discussions.  The Brazilian corporation law provides that non-voting shares, such as preferred shares, may acquire voting rights if the company fails to distribute fixed or minimum dividends in connection with such shares for three consecutive fiscal years and will retain such voting rights until the distribution of such fixed or minimum dividends.  (See “Risks Relating to the ADSs and Our Preferred Shares—Holders of the preferred shares may not receive any dividends”).

According to the Brazilian corporation law, any change in the preferences or rights of our preferred shares, or the creation of a class of shares having priority over our preferred shares, unless such change is authorized by our by-laws, would require the approval of our preferred shareholders in a special shareholders’ meeting in addition to approval by a majority of the holders of our outstanding voting shares.  The holders of preferred shares would vote as a class at the special meeting.

The Brazilian corporation law grants (i) holders of preferred shares without voting rights (or with restricted voting rights) representing 10% of the total issued capital stock and (ii) holders of our common shares that are not part of the controlling group, and represent at least 15% of the voting capital stock, the right to appoint a member to the board of directors, by voting during the annual shareholders’ meeting.  If none of our non-controlling holders of common or preferred shares meets the respective thresholds described above, holders of preferred or common shares representing at least 10% of the share capital would be able to combine their holdings to appoint one member and an alternate to our board of directors.  Such rights may only be exercised by those shareholders who prove that they have held the required stake with no interruption during at least the three months directly preceding our annual shareholders meeting.

Holders of common shares are entitled to certain rights that cannot be amended by changes in the by-laws or at a general shareholders’ meeting, which include (i) the right to vote at general shareholders’ meetings; (ii) the right to participate in distributions of dividends and interest on capital and to share in the remaining assets of the company in the event of liquidation; (iii) preemptive rights in certain circumstances and (iv) the right to withdraw from the company in certain cases.  In addition to those rights, the by-laws or a majority of the voting shareholders may establish additional rights and, likewise, remove them.  Currently, our by-laws do not establish any rights in addition to those already set forth by the Brazilian corporation law.  The Level 2 of Differentiated Corporate Governance Practices, which we comply with, provides for the granting of voting rights to holders of preferred shares in connection with certain matters, including corporate restructurings, mergers and related party transactions.

 

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Controlling shareholders may nominate and elect a majority of the members of the board of directors of Brazilian companies.  In a Brazilian company, management is not entitled to nominate directors for election by the shareholders.  Non-controlling shareholders and holders of non-voting shares are entitled to elect representatives to the board, as described above.  Holders of a threshold percentage of the voting shares may also request, up to 48 hours prior to any general shareholders’ meeting, that the election of directors be subject to cumulative voting.  The threshold percentage required for cumulative voting for a corporation such as ours is currently 5% of the outstanding shares.  Shareholders who vote to elect a representative of the non-controlling shareholders may not cast cumulative votes to elect other members of the board.

Conversion Right

Our shareholders may, at any time, convert common shares into preferred shares, at the rate of one common share to one preferred share, to the extent such shares are duly paid and provided that the amount of preferred shares does not exceed 50% of the total amount of shares outstanding.  Any request for conversion must be delivered to our board of executive officers and, once accepted by the board of executive officers, must be confirmed by our board of directors at the first meeting after the date of the request for conversion.

Special and General Meetings

Unlike the laws governing corporations incorporated under the laws of the State of Delaware, the Brazilian corporation law does not allow shareholders to approve matters by written consent obtained as a response to a consent solicitation procedure.  All matters subject to approval by the shareholders must be approved in a general meeting, duly convened pursuant to the provisions of Brazilian corporation law.  Shareholders may be represented at a shareholders’ meeting by attorneys-in-fact who are (i) shareholders of the corporation, (ii) a Brazilian attorney, (iii) a member of management or (iv) a financial institution.

General and special shareholders’ meetings may be called by publication of a notice in the Diário Oficial do Estado de São Paulo and in a newspaper of general circulation in our principal place of business at least 15 days prior to the meeting.  Special meetings are convened in the same manner as general shareholders’ meetings and may occur immediately before or after a general meeting.

At duly called and convened meetings, our shareholders are empowered to take any action regarding our business.  Shareholders have the exclusive right, during our annual shareholders’ meetings required to be hold within 120 days of the end of our fiscal year, to approve our financial statements and to determine the allocation of our net income and the distribution of dividends related to the fiscal year immediately preceding the meeting.  The members of our board of directors are generally elected at annual shareholders’ meetings.  However, according to Brazilian corporation law, they can also be elected at extraordinary shareholders’ meetings.  At the request of shareholders holding a sufficient number of shares, a fiscal council can be established and its members elected at any shareholders’ meeting.

An extraordinary shareholders’ meeting may be held concurrently with the annual shareholders’ meeting and at other times during the year.  Our shareholders may take the following actions, among others, exclusively at shareholders’ meetings:

·          election and dismissal of the members of our board of directors and our fiscal council, if the shareholders have requested the set up of the latter;

·          approval of the aggregate compensation of the members of our board of directors and board of executive officers, as well as the compensation of the members of the fiscal council, if one has been established;

 

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·          amendment of our bylaws;

·          approval of our merger, consolidation or spin-off;

·          approval of our dissolution or liquidation, as well as the election and dismissal of liquidators and the approval of their accounts;

·          granting stock awards and approval of stock splits or reverse stock splits;

·          approval of stock option plans for our management and employees, as well as for the management and employees of other companies directly or indirectly controlled by us;

·          approval, in accordance with the proposal submitted by our board of directors, of the distribution of our net income and payment of dividends;

·          authorization to delist from the Level 2 of Differentiated Corporate Governance Practices and to become a private company, except if the cancellation is due to a breach of the Level 2 regulations by management, and to retain a specialized firm to prepare a valuation report with respect to the value of our shares, in any such events;

·          approval of our management accounts and our financial statements;

·          approval of any primary public offering of our shares or securities convertible into our shares; and

·          deliberate upon any matter submitted by the board of directors.

Anti - Takeover Provisions

Our by-laws require any party that acquires our control to extend a tender offer for common and preferred shares held by non-controlling shareholders at the same purchase price paid to the controlling shareholder.

Arbitration

In connection with our listing with Level 2 of Differentiated Corporate Governance Practices, we and our controlling shareholders, directors, officers and members of our fiscal committee have undertaken to refer to arbitration any and all disputes arising out of the Level 2 rules or any other corporate matters.  See “Market Information.”  Under our by-laws, any disputes among us, our shareholders and our management with respect to the application of Level 2 rules, the Brazilian Corporation law or the application of the rules and regulations regarding Brazilian capital markets, will be resolved by arbitration conducted pursuant to the BM&FBOVESPA Arbitration Chamber and rules.  Any disputes among shareholders, including holders of ADSs, and disputes between us and shareholders, including holders of ADSs, will be submitted to arbitration in accordance with the BM&FBOVESPA Arbitration Chamber and rules.

Going Private Process

Pursuant to our bylaws, we may become a privately-held company only if we, our controlling shareholders or our group of controlling shareholders make a public tender offer for all outstanding shares.

According to the Level 2 regulations and our bylaws, the minimum price of the shares in the public tender offer required to be made in case we go private shall be equivalent to the economic value determined in the appraisal report prepared by a specialized and independent company, with renowned expertise, to be selected at the annual shareholders’ meeting from among the three companies suggested by the board of directors.

In addition to the requirements set out in the Level 2 regulations and our bylaws, according to the Brazilian corporation law, our registration as a publicly held company with shares traded on stock exchanges will be canceled only if we or our direct or indirect controlling shareholders make a public tender offer for the total outstanding shares in the market (which may be the same tender offer required by Level 2 regulations and our bylaws), at a fair value, for a price at least equal to our evaluation, determined based on the following criteria, separately or jointly adopted:  stockholders’ equity book value, stockholders’ equity at market price, discounted cash flow, multiple comparisons, market price of our shares or any other criteria accepted by the CVM.  Shareholders holding at least 10% of our outstanding shares may require our management to review the price offered for the shares, and in this event our management shall call a special shareholders` meeting to determine whether to perform another valuation using the same or a different valuation method.  Such request must be made within 15 days following the disclosure of the price to be paid for the shares in the public tender offer, and shall be duly justified.  The shareholders who make such request, as well as those who vote in its favor, shall reimburse us for any costs involved in preparing the new valuation if the valuation price is lower than or equal to the original valuation price.  If the new valuation price is higher than the original valuation price, the public tender offer must be made at the new valuation price.

 

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Delisting from Differentiated Corporate Governance Practices Level 2

We may, at any time, delist our shares from the Level 2 segment, provided that this is approved by shareholders representing the majority of our voting share capital at an annual shareholders’ meeting and that we provide written notice to the BM&FBOVESPA at least 30 days in advance.  If we decide to delist from the Level 2 segment, in order to make our shares available to be traded outside the Level 2 segment, our controlling shareholders must conduct a public tender offer for the acquisition of our shares within the legal timeframe, based on the economic value calculated in the appraisal report prepared by a specialized and independent company, to be selected at an annual shareholders’ meeting from among three companies suggested by the board of directors.  The public tender offer notice must be communicated to the BM&FBOVESPA and immediately disclosed to the market after the shareholder’s meeting during which the delisting was approved.  If the delisting from the Level 2 segment is a result of the cancellation of our registration as a publicly held company, our controlling shareholders must follow the other requirements applicable to going private.

The delisting from the Level 2 segment does not imply the cancellation of the trading of our shares on the BM&FBOVESPA.

If our share control is transferred within the 12 months subsequent to the delisting from the Level 2, the selling controlling shareholder and the buyer shall offer to our other shareholders the acquisition of their shares at the price and conditions provided to the controlling shareholder selling the shares, adjusted for inflation.

After delisting from the Level 2 segment, we may not request the listing of our shares in the Level 2 segment for two years subsequent to the cancellation, except if there is a change of our share control after delisting from the Level 2 segment.

Form and Transfer

Because our preferred shares are in registered book-entry form, Banco Itaú S.A., as registrar, must effect any transfer of shares by an entry made in its books, in which it debits the share account of the transferor and credits the share account of the transferee.  When our shares are acquired or sold on a Brazilian stock exchange, the transfer is effected on the records of our registrar by a representative of a brokerage firm or the stock exchange’s clearing system.  Transfers of shares by a foreign investor are executed in the same way by that investor’s local agent on the investor’s behalf except that, if the original investment were registered with the Central Bank pursuant to Resolution No. 2,689, the foreign investor should also seek amendment through its local agent, if necessary, of the electronic registration to reflect the new ownership.  The BM&FBOVESPA operates a clearinghouse through CBLC.  The fact that such shares are subject to custody with the relevant stock exchange will be reflected in our registry of shareholders.  Each participating shareholder will, in turn, be registered in the register of our beneficial shareholders that is maintained by CBLC and will be treated in the same way as registered shareholders.

American Depositary Receipts

Citibank, N.A., as depositary, has executed and delivered the ADRs representing our preferred shares.  Each ADR is a certificate evidencing a specific number of American Depositary Shares, also referred to as ADSs.  After our 2:1 ADS ratio change in December 2005, each ADS represents one preferred share (or a right to receive one preferred share) deposited with the principal São Paulo office of Banco Itaú S.A., as custodian for the depositary in Brazil.  Each ADS also represents any other securities, cash or other property which may be held by the depositary.  The depositary’s office at which the ADRs are administered is located at 399 Park Avenue, New York, New York 10043.

 

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You may hold ADSs either directly (by having an ADR registered in your name) or indirectly through your broker or other financial institution.  If you hold ADSs directly, you are an ADR holder.  We do not treat ADR holders as our shareholders and ADR holders have no shareholder rights.  Brazilian law governs shareholder rights.  The depositary is the holder of the preferred shares underlying the ADSs.  Holders of ADRs have ADR holder rights.  A deposit agreement among us, the depositary and you, as an ADR holder, and the beneficial owners of ADRs sets out ADR holder rights as well as the rights and obligations of the depositary.  New York law governs the deposit agreement and the ADRs.

C.       Material Contracts

Our material contracts are directly related to our operating activities, such as contracts relating to aircraft leasing and fuel supply as well as contracts relating to our concession to operate as a commercial airline.  We do not have material contracts that are not related to our operating activities.

Aircraft General Terms Agreement between The Boeing Company and VRG Linhas Aéreas S.A.

In 2004, we entered into an agreement, as amended, with The Boeing Company for the purchase of aircraft, installation of buyer furnished equipment provided by us, customer support services and product assurance.  In addition to the aircraft supplied, The Boeing Company will provide maintenance training and flight training programs, as well as operations engineering support.

Commercial Sale Promise Agreement between Petrobras Distribuidora S.A. and VRG Linhas Aéreas S.A.

In 2001, we entered into a commercial sale promise agreement for the purchase of fuel from Petrobras, which was renewed July 7, 2006.  We agreed to purchase fuel exclusively from Petrobras in all of the airports where Petrobras maintains aircraft fueling facilities.  Petrobras, in turn, agreed to provide us with all of our fuel needs in the supplying airports.

Reservation Services and Software License Use Agreement between Navitaire Inc. and VRG Linhas Aéreas S.A

On May 1, 2004, we entered into an agreement, as amended and updated, with Navitaire Inc. for host reservation services and obtained a license to use the Navitaire software to provide reservation services to our customers.  Navitaire provides a number of ancillary services in addition to the host reservation services, including data center implementation services, network configuration and design services, system integration services, customer site installation services and initial training services.

D.       Exchange Controls

The right to convert dividend or interest payments and proceeds from the sale of shares into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation which generally requires, among other things, that the relevant investments have been registered with the Central Bank and the CVM.  Such restrictions on the remittance of foreign capital abroad may hinder or prevent the custodian for our preferred shares represented by our ADSs or the holders of our preferred shares from converting dividends, distributions or the proceeds from any sale of these preferred shares into U.S. dollars and remitting the U.S. dollars abroad.  Holders of our ADSs could be adversely affected by delays in, or refusal to grant any, required government approval to convert Brazilian currency payments on the preferred shares underlying our ADS and to remit the proceeds abroad.

Resolution No. 1,927 of the National Monetary Council provides for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers.  The ADS program was approved under the Annex V Regulations by the Central Bank and the CVM prior to the issuance of the ADSs.  Accordingly, the proceeds from the sale of ADSs by ADR holders outside Brazil are not subject to Brazilian foreign investment controls, and holders of the ADSs are entitled to favorable tax treatment under certain circumstances.  See “Taxation—Material Brazilian Tax Considerations.”

 

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E.       Taxation 

The following discussion addresses the material Brazilian and United States federal income tax consequences of acquiring, holding and disposing of our preferred shares or ADSs.

This discussion is not a comprehensive discussion of all the tax considerations that may be relevant to a decision to purchase our preferred shares or ADSs and is not applicable to all categories of investors, some of which may be subject to special rules, and does not specifically address all of the Brazilian and United States federal income tax considerations applicable to any particular holder.  It is based upon the tax laws of Brazil and the United States as in effect on the date of this annual report, which are subject to change, possibly with retroactive effect, and to differing interpretations.  Each prospective purchaser is urged to consult its own tax advisor about the particular Brazilian and United States federal income tax consequences to it of an investment in our preferred shares or ADSs.  This discussion is also based upon the representations of the depositary and on the assumption that each obligation in the deposit agreement among us, Citibank, N.A., as depositary, and the registered holders and beneficial owners of our ADSs, and any related documents, will be performed in accordance with its terms.

Although there presently is no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions that may culminate in such a treaty.  We cannot assure you, however, as to whether or when a treaty will enter into force or how it will affect holders of our preferred shares or ADSs.

Material Brazilian Tax Considerations

The following discussion, in the opinion of Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados addresses the material Brazilian tax consequences of the acquisition, ownership and disposition of our preferred shares or ADSs by a non-Brazilian holder.

This discussion is based on Brazilian law as currently in effect, which are subject to change, possibly with retroactive effect, and to differing interpretations. Any change in such law may change the consequences described below.  This discussion does not address all Brazilian tax considerations that may be applicable to any particular non-Brazilian holder and, therefore, each non-Brazilian holder should consult his or her own tax adviser concerning the Brazilian tax consequences of an investment in the preferred shares or ADSs.

Taxation of Dividends.  Dividends, including dividends in kind, paid by us to the depository in respect of the preferred shares underlying the ADSs or to a non-Brazilian holder of preferred shares will not be subject to Brazilian withholding income tax, provided that such amounts are related to profits earned after January 1, 1996.

Taxation of Gains.  According to Law No. 10,833, enacted on December 29, 2003, capital gains realized on the disposition of assets located in Brazil by a non-Brazilian holder are subject to taxation in Brazil, regardless of whether the sale or the disposition is made by a non-Brazilian holder to another non-Brazilian resident or to a Brazilian resident.

With respect to the disposition of preferred shares, as they are assets located in Brazil, the non-Brazilian holder will be subject to income tax on the gains assessed, following the rules described below, regardless of whether the disposition is conducted in Brazil or with a Brazilian resident.

With respect to the ADSs, arguably the gains realized by a non-Brazilian holder on the disposition of ADSs to another non-Brazilian resident are not taxed in Brazil, based on the argument that ADSs would not constitute assets located in Brazil for purposes of Law No. 10,833/03.  However, we cannot assure you how Brazilian courts would interpret the definition of assets located in Brazil in connection with the taxation of gains realized by a Non- Brazilian Holder on the disposition of ADSs to another non-Brazilian resident.  As a result, gains on a disposition of ADSs by a non-Brazilian holder to Brazilian resident, or even to non-Brazilian holder in the event that courts determine that ADSs would constitute assets located in Brazil, may be subject to income tax in Brazil according to the rules described ahead.  It is important to clarify that, for purposes of Brazilian taxation, the income tax rules on gains related to disposition of preferred shares or ADSs vary depending on the domicile of the non-Brazilian holder, the form by which such non-Brazilian holder has registered its investment with the Central Bank and/or how the disposition is carried out, as described below.

 

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The deposit of preferred shares in exchange for ADSs may be subject to Brazilian tax on capital gains at the rate of 15%, or 25% in the case of investors domiciled in a Low or Nil Tax Jurisdiction, if the acquisition cost of the preferred shares is lower than (a) the average price per preferred share on a Brazilian stock exchange on which the greatest number of such shares were sold on the day of deposit or (b) if no preferred shares were sold on that day, the average price on the Brazilian stock exchange on which the greatest number of preferred shares were sold in the 15 trading sessions immediately preceding such deposit.  In such case, the difference between the acquisition cost and the average price of the preferred shares calculated as described above, will be considered to be a capital gain subject to taxation.  In some circumstances, there may be arguments to sustain that such taxation is not applicable in the case of a non-Brazilian holder that is a 2,689 Holder (as defined below) and is not resident in a Low or Nil Tax Jurisdiction.

The withdrawal of ADSs in exchange for preferred shares should not be considered as giving rise to a capital gain subject to Brazilian income tax, provided that on the receipt of the underlying preferred shares, the non-Brazilian holder complies with the regulatory rules observed in respect to the registration of the investment before the Central Bank.

Gains assessed on the disposition of the preferred shares carried out on the Brazilian stock exchange (which includes the transactions carried out on the organized over-the-counter market) are:

·          exempt from income tax, when assessed by a non-Brazilian holder that (1) has registered its investment in Brazil with the Central Bank under the rules of Resolution No. 2,689/00 (“2,689 Holder”) and (2) is not resident in a Low or Nil Tax Jurisdiction; or

·          subject to income tax at a rate of 15% in any other case, including the gains assessed by a non-Brazilian holder that is not a 2,689 Holder and/or is a resident in a Low or Nil Tax Jurisdiction.  In these cases, a withholding income tax of 0.005% shall be applicable and can be offset with the eventual income tax due on the capital gain.

Any other gains assessed on the disposition of the preferred shares that are not carried out on the Brazilian stock exchange are subject to income tax at a rate of 15%, except for a resident of a Low or Nil Tax Jurisdiction, or yet where local regulations impose restrictions on disclosure of share ownership and identity of beneficiary holders which, in this case, is subject to income tax at a rate of 25%.  If these gains are related to transactions conducted on the Brazilian non-organized over-the-counter market with intermediation, the withholding income tax of 0.005% shall also be applicable and can be offset against the eventual income tax due on the capital gain.

In the case of a redemption of preferred shares or ADSs or a capital reduction by a Brazilian corporation, the positive difference between the amount received by the non-Brazilian holder and the acquisition cost of the preferred shares or ADSs redeemed is treated as capital gain derived from the sale or exchange of shares not carried out on a Brazilian stock exchange market and is therefore subject to income tax at the rate of 15%, or 25%, as the case may be.

As a general rule, the gains realized as a result of a disposition transaction of preferred shares or ADSs are determined by the difference between the amount realized on the sale or exchange of the shares or ADSs and their acquisition cost.

There can be no assurance that the current preferential treatment for non-Brazilian holder of ADSs and 2,689 Holder of preferred shares will continue or will not be changed in the future.

Any exercise of preemptive rights relating to the preferred shares or ADSs will not be subject to Brazilian income tax.  Any gain on the sale or assignment of preemptive rights relating to preferred shares or the ADSs by a non-Brazilian holder will be subject to Brazilian income taxation according to the same rules applicable to the sale or disposition of preferred shares.

 

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Distributions of Interest on Shareholders’ Equity.  In accordance with Law No. 9,249, dated December 26, 1995, as amended, Brazilian corporations may make payments to shareholders characterized as distributions of interest on the company’s shareholders’ equity as an alternative to making dividend distributions.  Such interest is calculated by reference to the TJLP as determined by the Central Bank from time to time and cannot exceed the greater of:

·          50% of net income (after social contribution on profits and before taking such distribution and the provision for corporate income tax into account) for the period in respect of which the payment is made; or

·          50% of the sum of retained profits and profits reserves, as of the date of the beginning of the period in respect of which the payment is made.

Distributions of interest on shareholders’ equity in respect of the preferred shares paid to shareholders who are either Brazilian residents or non-Brazilian holders, including non-Brazilian holders of ADSs, are subject to Brazilian withholding income tax at the rate of 15%, or 25% in case of a resident of a Low or Nil Tax Jurisdiction or where applicable local laws impose restrictions on the disclosure of the shareholding composition or the ownership of investments or the ultimate beneficiary of the income derived from transactions carried out and attributable to a non-Brazilian holder.  The distribution of interest on shareholders’ equity may be determined by our board of directors.  We cannot assure you that our board of directors will not determine that future distributions of profits may be made by means of interest on shareholders’ equity instead of by means of dividends.

The amounts paid as distribution of interest on shareholders’ equity are deductible for corporation income tax and social contribution on profit, both of which are taxes levied on our profits, as far as the limits and rules described above are observed by us.

Low or Nil Taxation Jurisdictions.

Law No. 9,779, dated as of January 1, 1999 states that, except for limited prescribed circumstances, income derived from transactions by a person resident or domiciled in a Low or Nil Tax Jurisdiction will be subject to withholding income tax at the rate of 25%. A Low or Nil Tax Jurisdiction is generally considered to be a country or other jurisdiction which does not impose any income tax or which imposes such tax at a maximum rate lower than 20%. Under certain circumstances, non-transparency rules are also taken into account for determining whether a country or other jurisdiction is a Low or Nil Tax Jurisdiction. In addition, on June 24, 2008, Law No. 11,727 introduced the concept of “privileged tax regime”, considered as such the tax regime that (i) does not tax income or taxes it at a maximum rate lower than 20%; (ii) grants tax benefits to non-resident entities or individuals (a) without the requirement to carry out a substantial economic activity in the country or dependency or (b) contingent to the non-exercise of a substantial economic activity in the country or dependency; or (iii) does not tax or that taxes the income generated abroad at a maximum rate lower than 20%; or (iv) does not provide access to information related to shareholding composition, ownership of assets and rights or economic transactions carried out.  We consider that the best interpretation of Law No. 11,727/08 that the new concept of “privileged tax regime” would be applicable solely for purposes of transfer pricing and thin capitalization rules.  However, due to the recent enactment of this Law, we are unable to ascertain whether or not the privileged tax regime concept will be extended to the concept of Low or Nil Taxation Jurisdiction although the Brazilian tax authorities appear to agree with our position, in view of the provisions of the recently introduced Normative Ruling No. 1,037, dated as of June 4, 2010, which presents two different lists (Low or Nil Tax Jurisdictions – taking into account the non-transparency rules – and privileged tax regimes). 

Notwithstanding the above, we recommend that you consult your own tax advisors regarding the consequences of the implementation of Law No. 11,727, Normative Ruling No. 1,037 and of any related Brazilian tax law or regulation concerning Low or Nil Tax Jurisdictions or  “privileged tax regimes.”

Other Relevant Brazilian Taxes

There are no Brazilian federal inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of preferred shares or ADSs by a non-Brazilian holder. Gift and inheritance taxes, however, may be levied by some states of Brazil on gifts made or inheritances bestowed by the non-Brazilian holder to individuals or entities resident or domiciled within such states in Brazil.  There are non-Brazilian stamp, issue, registration or similar taxes or duties payable by a non-Brazilian holder of preferred shares or ADSs.

 

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Tax on foreign exchange transactions

Pursuant to Decree No. 6,306/07, the conversion into foreign currency or the conversion into Brazilian currency of the proceeds received or remitted by a Brazilian entity from a foreign investment in the Brazilian securities market, including those in connection with the investment by a non-Brazilian holder in the preferred shares and ADSs may be subject to the Tax on Foreign Exchange Transactions, or IOF/Exchange.  Currently applicable rate for most foreign currency exchange transactions is 0.38%.  Effective as of December 1, 2011, currency exchange transactions carried out for the inflow of funds in Brazil for investment made by a foreign investor (including a non-Brazilian holder, as applicable) are subject to IOF/Exchange at (i) 0% rate in case of variable income transactions carried out on the Brazilian stock, futures and commodities exchanges, as well as in the acquisitions of shares of Brazilian publicly-held companies in public offerings or subscription of shares related to capital contributions, provided that the issuer company has registered its shares for trading in the stock exchange (ii) 0% for the outflow of resources from Brazil related to these type of investments, including payments of dividends and interest on shareholders’ equity and the repatriation of funds invested in the Brazilian market.  Furthermore, the IOF/Exchange is currently levied at a 0% rate on the withdrawal of ADSs into shares. In any case, the Brazilian government is permitted to increase at any time the rate to a maximum of 25%, but only in relation to future transactions.

Tax on Bonds and Securities Transactions

Pursuant to Decree 6,306/07, the Tax on Bonds and Securities Transactions (“IOF/Bonds”) may be imposed on any transactions involving bonds and securities even if the transactions are performed on a Brazilian stock exchange.  The rate of IOF/Bonds applicable to transactions involving preferred or common shares is currently zero.  In particular, the IOF/Bonds levies at a rate of 1.5% on the transfer of shares traded on the Brazilian stock exchange with the purpose of the issuance of depositary receipts to be traded outside Brazil. The Brazilian government may increase such rate up to 1.5% per day, but only with respect to future transactions.

Registered Capital

The amount of an investment in preferred shares held by a non-Brazilian holder who qualifies under Resolution No. 2,689 and obtains registration with the CVM, or by the depositary, as the depositary representing such holder must be registered with the Central Bank.  Such registration allows the remittance from Brazil of any proceeds of distributions on the shares, and amounts realized with respect to disposition of such shares.  The registered capital for preferred shares purchased in the form of ADSs or purchased in Brazil, and deposited with the depositary in exchange for ADSs will be equal to their purchase price (in U.S. dollars) to the purchaser.  The registered capital for preferred shares that are withdrawn upon surrender of ADSs, as applicable, will be the U.S. dollar equivalent of the average price of preferred shares, as applicable, on a Brazilian stock exchange on which the greatest number of such preferred shares, as applicable, was sold on the day of withdrawal.  If no preferred shares, as applicable, were sold on such day, the registered capital will refer to the average price on the Brazilian stock exchange on which the greatest number of preferred shares, as applicable, were sold in the 15 trading sessions immediately preceding such withdrawal.  The U.S. dollar value of the preferred shares, as applicable, is determined on the basis of the average rate quoted by the Central Bank on such date or, if the average price of preferred shares is determined under the last preceding sentence, the average of such average quoted rates on the same 15 dates used to determine the average price of the preferred shares.

A non-Brazilian holder of preferred shares may experience delays in effecting such Central Bank registration, which may delay remittances abroad.  Such a delay may adversely affect the amount, in U.S. dollars, received by the non-Brazilian holder.

Material United States Federal Income Tax Consequences

The following discussion describes the material U.S. federal income tax consequences of purchasing, holding and disposing of our preferred shares or ADSs.  This discussion applies only to beneficial owners of ADSs or preferred shares that are “U.S. Holders,” as defined below.  This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, or the Code, its legislative history, existing final, temporary and proposed Treasury Regulations, administrative pronouncements by the U.S. Internal Revenue Service, or IRS, and judicial decisions, all as currently in effect and all of which are subject to change (possibly on a retroactive basis) and to different interpretations. This summary does not describe any state, local or non-U.S. tax law considerations, or any aspect of U.S. federal tax law (such as the estate tax, gift tax or the Medicare tax on net investment income) other than income taxation. U.S. Holders should consult their own tax advisors regarding these matters.

 

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This discussion does not purport to address all U.S. federal income tax consequences that may be relevant to a particular U.S. Holder and you are urged to consult your own tax advisor regarding your specific tax situation.  The discussion applies only to U.S. Holders who hold preferred shares or ADSs as “capital assets” (generally, property held for investment) under the Code and does not address the tax consequences that may be relevant to U.S. Holders in special tax situations including, for example:

·          insurance companies;

·          tax-exempt organizations;

·          broker-dealers; 

·          traders in securities that elect to mark to market;

·          regulated investment companies;

·          real estate investment trusts;

·          banks or other financial institutions;

·          investors liable for alternative minimum tax;

·          partnerships and other passthru entities;

·          U.S. Holders whose functional currency is not the U.S. dollar;

·          U.S. expatriates;

·          U.S. Holders that hold our preferred shares or ADSs as part of a hedge, straddle, conversion or other integrated transaction; or

·          U.S. Holders that own, directly, indirectly, or constructively, 10% or more of the total combined voting power, if any, of our voting stock.

Except where specifically described below, this discussion assumes that we are not a passive foreign investment company, or PFIC, for U.S. federal income tax purposes.  Please see the discussion under —Passive foreign investment company rules” below.  Further, this discussion does not address the state, local and foreign tax consequences of holding our preferred shares or ADSs.  You should consult your own tax advisor regarding the U.S. federal, state, local and foreign income and other tax consequences of purchasing, owning and disposing of our preferred shares or ADSs in your particular circumstances.

You are a “U.S. Holder” if you are a beneficial owner of preferred shares or ADSs and , for U.S. federal income tax purposes, you are:

·          an individual who is a citizen or resident of the United States;

·          a corporation, or any other entity taxable as a corporation, created or organized in or under the laws of the United States, any state thereof or the District of Columbia;

·          an estate the income of which is subject to U.S. federal income tax regardless of its source; or

·          a trust if a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all substantial decisions of the trust (or otherwise if the trust has a valid election in effect under current Treasury regulations to be treated as a U.S. person).

If a partnership (or any other entity taxable as a partnership for U.S. federal income tax purposes) holds preferred shares or ADSs, the U.S. federal income tax treatment of a partner will generally depend upon the status of the partner and upon the activities of the partnership.  A partnership that holds our preferred shares or ADSs and partners in such partnerships should consult their own tax advisors regarding the U.S. federal income tax consequences of the purchase, ownership and disposition of our preferred shares or ADSs.

 

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For U.S. federal income tax purposes, a U.S. Holder of an ADS will generally be treated as the beneficial owner of the preferred shares represented by the ADS.  However, see the discussion below under –”Distribution on preferred shares or ADSs” regarding certain statements made by the U.S. Treasury concerning depository arrangements.

Distributions on preferred shares or ADSs

Cash distributions (including amounts withheld to pay Brazilian withholding taxes and distributions of notional interest payments on shareholders’ equity, but excluding distributions in redemption of the preferred shares treated as exchanges or sales under the Code) made by us to or for the account of a U.S. Holder with respect to preferred shares or ADSs generally will be taxable to such U.S. Holder as ordinary dividend income when such distribution is paid, actually or constructively, out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes).  Distributions in excess of our current or accumulated earnings and profits will be treated first as a non-taxable return of capital reducing such U.S. Holder’s adjusted tax basis in the preferred shares or ADSs.  Any distribution in excess of such U.S. Holder’s adjusted tax basis will be treated as capital gain and will be long-term capital gain if the U.S. Holder held the preferred shares or ADSs for more than one year.  As used below, the term “dividend” means a distribution that constitutes a dividend for U.S. federal income tax purposes.

A U.S. Holder will be entitled, subject to a number of complex limitations and conditions (including a minimum holding period requirement), to claim a U.S. foreign tax credit in respect of any Brazilian withholding taxes imposed on dividends received on preferred shares or ADSs.  U.S. Holders who do not elect to claim a foreign tax credit with regard to any foreign income taxes paid or accrued during the taxable year may instead claim a deduction in respect of such withholding taxes.  Dividends received with respect to the preferred shares or ADSs will be treated as foreign source income, which may be relevant in calculating such U.S. Holder’s U.S. foreign tax credit limitation.  For purposes of the U.S. foreign tax credit limitation, foreign source income is separated into different “baskets,” and the credit for foreign taxes on income in any basket is limited to the U.S. federal income tax allocable to such income.  Dividends paid with respect to our preferred shares or ADSs should generally constitute “passive category income” for most U.S. Holders.  Holders are urged to consult their tax advisors regarding the availability of the foreign tax credit in their particular circumstances.  The U.S. Treasury has expressed concern that intermediaries in connection with depository arrangements may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. persons who are holding depositary shares.  Accordingly, investors should be aware that the discussion above regarding the ability to credit Brazilian withholding tax on dividends and the availability of the reduced tax rate for dividends received by certain non-corporate holders described below could be affected by actions taken by parties to whom the ADSs are released and the IRS.

Dividends paid by us generally will not be eligible for the dividends received deduction available under the Code to certain U.S. corporate shareholders.  Subject to the above-mentioned concerns by the U.S. Treasury and certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by certain U.S. Holders (including individuals) after December 31, 2012 with respect to the ADSs will be subject to taxation at a maximum rate of 20% if the dividends represent “qualified dividend income.”  Dividends paid on the ADSs will be treated as qualified dividend income if (i) the ADSs are readily tradable on an established securities market in the United States, (ii) the U.S. Holder meets the holding period requirement for the ADSs (generally more than 60 days during the 121-day period that begins 60 days before the ex-dividend date), and (iii) we were not in the year prior to the year in which the dividend was paid, and are not in the year in which the dividend is paid, a PFIC.  Our ADSs are listed on the New York Stock Exchange, and therefore the ADSs will qualify as readily tradable on an established securities market in the United States so long as they are so listed.  However, no assurances can be given that the ADSs will be or will remain readily tradable.  Subject to the discussion of PFIC rules below, based upon the nature of our current and projected income, assets and activities, we do not believe the preferred shares or the ADSs have been (for our 2012 taxable year), nor do we expect them to be (for our 2013 taxable year), shares of a PFIC for U.S. federal income tax purposes.

Based on existing guidance, it is not entirely clear whether dividends received with respect to the preferred shares (to the extent not represented by ADSs) will be treated as qualified dividends, because the preferred shares are not themselves listed on a U.S. exchange.  In addition, the U.S. Treasury Department has announced its intention to promulgate rules pursuant to which holders of ADSs or preferred stock and intermediaries through whom such securities are held will be permitted to rely on certifications from issuers to establish that dividends are treated as qualified dividends.  Because such procedures have not yet been issued, we are not certain that we will be able to comply with them.  U.S. Holders of ADSs and preferred shares should consult their own tax advisors regarding the availability of the reduced dividend tax rate in the light of their own particular circumstances.

 

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The amount of any cash distribution paid in Brazilian currency will equal the U.S. dollar value of the distribution, calculated by reference to the exchange rate in effect at the time the distribution is received by the depositary (in the case of ADSs) or by the U.S. Holder (in the case of preferred shares held directly by such U.S. Holder), regardless of whether the payment is in fact converted to U.S. dollars at that time.  A U.S. Holder should not recognize any foreign currency gain or loss in respect of such distribution if such Brazilian currency is converted into U.S. dollars on the date received.  If the Brazilian currency is not converted into U.S. dollars on the date of receipt, however, gain or loss may be recognized upon a subsequent sale or other disposition of the Brazilian currency.  Such foreign currency gain or loss, if any, will be U.S.-source ordinary income or loss.

Because our preferred shares will not be treated as “preferred stock” for purposes of Section 305 of the Code, distributions to U.S. Holders of additional shares of our “non-preferred stock” or preemptive rights relating to such “non-preferred stock” with respect to their preferred shares or ADSs that are made as part of a pro rata distribution to all shareholders in most instances will not be subject to U.S. federal income tax.  However, if the holders of ADSs are restricted in their ability to participate in the exercise of preemptive rights, the preemptive rights may give rise to a deemed distribution to holders of the preferred shares under Section 305 of the Code.  Any deemed distribution will be taxable as a dividend to the extent of our earnings and profits as discussed above.

Sale or exchange or other taxable disposition of preferred shares or ADSs

Deposits and withdrawals of preferred shares by U.S. Holders in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes.

A U.S. Holder generally will recognize capital gain or loss upon the sale, exchange or other taxable disposition of preferred shares or ADSs measured by the difference between the amount realized and the U.S. Holder’s adjusted tax basis in the preferred shares or ADSs.  Any gain or loss will be long-term capital gain or loss if the preferred shares or ADSs have been held for more than one year.  Long-term capital gains of certain U.S. Holders (including individuals) are eligible for reduced rates of U.S. federal income taxation.  The deductibility of capital losses is subject to certain limitations under the Code.

If a Brazilian tax is withheld on the sale, exchange or other taxable disposition of a preferred share or ADS, the amount realized by a U.S. Holder will include the gross amount of the proceeds of that sale, exchange or other taxable disposition before deduction of the Brazilian tax.  Capital gain or loss, if any, realized by a U.S. Holder on the sale, exchange or other taxable disposition of a preferred share or ADS generally will be treated as U.S.-source income or loss for U.S. foreign tax credit purposes.  Consequently, in the case of a sale, exchange or other taxable disposition of a preferred share or ADS that is subject to Brazilian tax imposed on the gain (or, in the case of a deposit, in exchange for an ADS or preferred share, as the case may be, that is not registered pursuant to Resolution No. 2,689, on which a Brazilian capital gains tax is imposed (see above under “— Material Brazilian Tax Considerations — Taxation of Gains”), the U.S. Holder may not be able to benefit from the foreign tax credit for that Brazilian tax unless the U.S. Holder can apply the credit against U.S. federal income tax payable on other income from foreign sources in the appropriate income category.  Alternatively, the U.S. Holder may take a deduction for the Brazilian tax if it does not elect to claim a foreign tax credit for any foreign income taxes paid or accrued during the taxable year.

Passive foreign investment company rules

In general, a foreign corporation is a PFIC with respect to a U.S. Holder if, for any taxable year in which the U.S. Holder holds stock in the foreign corporation, at least 75% of its gross income is passive income or at least 50% of the value of its assets (determined on the basis of a quarterly average) produce passive income or are held for the production of passive income.  In determining whether a foreign corporation is a PFIC, a pro rata portion of the income and assets of each corporation in which it owns, directly or indirectly, at least 25% interest (by value) is taken into account.  For this purpose, passive income generally includes, among other things, dividends, interest, rents, royalties and gains from the disposition of investment assets (subject to various exceptions).  Based upon the nature of our current and projected income, assets and activities, we do not believe the preferred shares or ADSs are, nor do we expect them to be, shares of a PFIC for U.S. federal income tax purposes.  However, the determination of whether the preferred shares or ADSs constitute shares of a PFIC is a factual determination made annually and thus may be subject to change.  Because these determinations are based on the nature of our income and assets from time to time, and involve the application of complex tax rules, no assurances can be provided that we will not be considered a PFIC for the current or any past or future tax year.

 

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If, contrary to the discussion above, we are treated as a PFIC, a U.S. Holder would be subject to special rules (and may be subject to increased U.S. federal income tax liability and form filing requirements) with respect to (a) any gain realized on the sale, exchange or other disposition of preferred shares or ADSs and (b) any “excess distribution” made by us to the U.S. Holder (generally, any distribution during a taxable year in which distributions to the U.S. Holder on the preferred shares or ADSs exceed 125% of the average annual distributions the U.S. Holder received on the preferred shares or ADSs during the preceding three taxable years or, if shorter, the U.S. Holder’s holding period for the preferred shares or ADSs).  Under those rules, (a) the gain or excess distribution would be allocated ratably over the U.S. Holder’s holding period for the preferred shares or ADSs, (b) the amount allocated to the taxable year in which the gain or excess distribution is realized and to taxable years before the first day on which we became a PFIC would be taxable as ordinary income, (c) the amount allocated to each prior year in which we were a PFIC would be subject to U.S. federal income tax at the highest tax rate in effect for that year and (d) the interest charge generally applicable to underpayments of U.S. federal income tax would be imposed in respect of the tax attributable to each prior year in which we were a PFIC.  A U.S. Holder who owns preferred shares or ADSs during any taxable year that we are a PFIC generally must file IRS Form 8621.  U.S. Holders should also be aware that recently enacted legislation may broaden the current IRS Form 8621 filing requirements or impose an additional annual filing requirement for U.S. persons owning shares of a PFIC.  The legislation does not describe what information would be required to be included in either situation, but grants the Secretary of the U.S. Treasury power to make this determination.  U.S. Holders should consult their own tax advisors regarding the application of the PFIC rules to our preferred shares or ADSs and the application of the recently enacted legislation to their particular situation. 

In general, if we are treated as a PFIC, the rules described above can be avoided by a U.S. Holder that elects to be subject to a mark-to-market regime for stock in a PFIC.  A U.S. Holder may elect mark-to-market treatment for its preferred shares or ADSs, provided the preferred shares or ADSs, for purposes of the PFIC rules, constitute “marketable stock” as defined in U.S. Treasury regulations.  The ADSs will be “marketable stock” for this purpose if they are regularly traded on the New York Stock Exchange, other than in de minimis quantities on at least 15 days during each calendar quarter.  A U.S. Holder electing the mark-to-market regime generally would compute gain or loss at the end of each taxable year as if the preferred shares or ADSs had been sold at fair market value.  Any gain recognized by the U.S. Holder under mark-to-market treatment, or on an actual sale, would be treated as ordinary income, and the U.S. Holder would be allowed an ordinary deduction for any decrease in the value of preferred shares or ADSs as of the end of any taxable year, and for any loss recognized on an actual sale, but only to the extent, in each case, of previously included mark-to-market income not offset by previously deducted decreases in value.  Any loss on an actual sale of preferred shares or ADSs would be a capital loss to the extent in excess of previously included mark-to-market income not offset by previously deducted decreases in value.  A U.S. Holder’s adjusted tax basis in preferred shares or ADSs would increase or decrease by gain or loss taken into account under the mark-to-market regime.  A mark-to-market election is generally irrevocable.  If we are determined to be a PFIC, a U.S. Holder may be treated as indirectly holding any subsidiary of ours that is itself a PFIC (a lower-tier PFIC) and may be subject to the PFIC rules on indirect distributions or sales of the lower-tier PFIC, even if the U.S. Holder does not receive of the proceeds of such distribution or sales.  In addition, a mark-to-market election with respect to preferred shares or ADSs would not apply to any lower-tier PFIC, and a U.S. Holder would not be able to make such a mark-to-market election in respect of its indirect ownership interest in that lower-tier PFIC.  Consequently, the PFIC rules could apply with respect to income of a lower-tier PFIC, the value of which would already have been taken into account indirectly via mark-to-market adjustments in respect of preferred shares or ADSs.

If we are deemed to be a PFIC for a taxable year, dividends on our ADSs would not be “qualified dividend income” subject to preferential rates of Unites States federal income tax, as described above.  See “— Distributions on preferred shares or ADSs.”

 

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Backup withholding and information reporting

In general, dividends on preferred shares or ADSs, and payments of the proceeds of a sale, exchange or other disposition of preferred shares or ADSs, paid within the United States or through certain U.S.-related financial intermediaries to a U.S. Holder are subject to information reporting and may be subject to backup withholding of U.S. federal income tax at a current maximum rate of 28% unless the U.S. Holder (i) is a corporation or other exempt recipient or (ii) provides an accurate taxpayer identification number and certifies that it is a U.S. person and that no loss of exemption from backup withholding has occurred.

The amount of any backup withholding tax from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability, provided that the required information is timely furnished to the IRS.  You generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed your U.S. federal income tax liability by timely filing a refund claim with the IRS.

In addition, U.S. Holders should be aware that recently enacted legislation imposes new reporting requirements with respect to the holding of foreign financial assets, including stock of foreign issuers, if the aggregate value of all of such assets exceeds $50,000.  U.S. Holders should consult their own tax advisors regarding the application of the information reporting rules to our common shares and the application of the recently enacted legislation to their particular situation.

Other Brazilian taxes

You should note that any Brazilian IOF/Exchange Tax or IOF/Bonds tax may not be treated as a creditable foreign tax for U.S. federal income tax purposes, although you may be entitled to deduct such taxes, subject to applicable limitations under the Code.  You should consult your tax advisors regarding the U.S. federal income tax consequences of these taxes.

F.        Dividends and Paying Agents

Not applicable.

G.       Statement by Experts

Not applicable.

H.       Documents on Display

We are subject to the informational requirements of the U.S. Securities Exchange Act of 1934, which is also known as the Exchange Act.  Accordingly, we are required to file reports and other information with the Commission, including annual reports on Form 20-F and reports on Form 6-K.  You may inspect and copy reports and other information to be filed with the Commission at the public reference facilities maintained by the Commission at 100 F Street, N.W., Washington D.C. 20549 and at the Commission’s regional offices at 500 West Madison Street, Suite 1400, Chicago Illinois 60661, and 233 Broadway, New York, New York 10279.  Copies of the materials may be obtained from the Public Reference Room of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.  The public may obtain information on the operation of the Commission’s Public Reference Room by calling the Commission in the United States at 1-800-SEC-0330.  In addition, the Commission maintains an Internet website at http://www.sec.gov, from which you can electronically access the registration statement and its materials.

As a foreign private issuer, we are not subject to the same disclosure requirements as a domestic U.S. registrant under the Exchange Act.  For example, we are not required to prepare and issue quarterly reports.  However, we furnish our shareholders with annual reports containing financial statements audited by our independent auditors and make available to our shareholders quarterly reports containing unaudited financial data for the first three quarters of each fiscal year.  We file quarterly financial statements with the Commission within two months of the end of the first three quarters of our fiscal year, and we file annual reports on Form 20-F within the time period required by the Commission, which is currently four months from December 31, the end of our fiscal year.

 

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We will send the depositary a copy of all notices that we give relating to meetings of our shareholders or to distributions to shareholders or the offering of rights and a copy of any other report or communication that we make generally available to our shareholders.  The depositary will make all these notices, reports and communications that it receives from us available for inspection by registered holders of ADSs at its office.  The depositary will mail copies of those notices, reports and communications to you if we ask the depositary to do so and furnish sufficient copies of materials for that purpose.

We also file financial statements and other periodic reports with the CVM located at Rua Sete de Setembro, 111, Rio de Janeiro, Rio de Janeiro 20159-900, Brazil.

I.         Subsidiary Information

Not applicable.

ITEM 11.     Quantitative and Qualitative Disclosures about Market Risk

The risk inherent in our market risk sensitive instruments and positions is the potential loss arising from adverse changes to the price of fuel, the real /U.S. dollar exchange rate and interest rates.  The Company purchases jet fuel at prevailing market prices, but seeks to manage market risk through execution of a documented hedging program.  The Company incurs a portion of its costs and operating expenses in U.S. dollars.  The Company has interest rate risk in its floating rate leases and debt obligations.  We have a fleet of 149 aircraft, 98 of which were under operating leases, 45 were under finance leases and 6 were owned by us.  However, fixed rate leases are not considered market sensitive financial instruments and, therefore, are not included in the interest rate sensitivity analysis below.

Aircraft Fuel

Our results of operations are affected by changes in the price of aircraft fuel required to operate our aircraft fleet.  To manage the price risk, we utilize crude oil and heating oil derivative contracts.  All of our derivative instruments must be liquid so as to allow us to make position adjustments and have prices that are widely disclosed.  All existing contracts settle on a monthly basis and we do not purchase or hold derivative instruments for trading purposes.  At December 31, 2012, we had oil derivative contracts outstanding to hedge 11% of our expected fuel consumption in from January 2013 to January 2015 and the fair value of such contracts was R$13 million.  If the aircraft fuel price had increased by 10% in relation to the average 2012, the fuel expense would have increased R$368 million. If the price had decreased by 10%, the expense would have decreased R$368 million. We acquire substantially all of our fuel  from one supplier.

Foreign Currencies

A significant part of our costs and operating expenses, such as aircraft and engine maintenance services, aircraft lease payments and aircraft insurance, are denominated in U.S. dollars.  To manage exchange rate risk, we enter into derivative contracts to protect against a possible depreciation of the real  in relation to the U.S. dollar. At December 31, 2012, we had U.S. dollar currency derivative contracts outstanding to hedge 16% of our expected operational expenses linked to the U.S. dollar in 2013. As a measure of our market risk with respect to our foreign currency exposure, a hypothetical 10% depreciation of the real  against the U.S. dollar would have resulted in an increase in expenses of aircraft and engine maintenance, aircraft operating lease payments and aircraft insurance of R$479 million in 2012. A hypothetical 10% appreciation of the real  against the U.S. dollar would have resulted in a decrease of R$479 million in such expenses.

Interest Rates

Our earnings are affected by changes in interest rates due to the impact those changes have on interest expense from variable-rate leasing contracts. At December 31, 2012, leases for seven aircraft had floating-rate rent payments.  A hypothetical 10% increase in international market interest rates in 2012 would have resulted in an increase in our aircraft financial leasing expenses of approximately R$1.0 million. A hypothetical 10% decrease in market interest rates in 2012 would have resulted in a decrease in our aircraft financial leasing expenses of approximately R$1.0 million These amounts are determined considering the effects of the hypothetical international interest rates on our variable-rate leasing contracts at December 31, 2012.

 

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ITEM 12.     Description of Securities other than Equity Securities

A.       American Depositary Shares

In the United States, our preferred shares trade in the form of ADS.  Since December 2005 each ADS represents one preferred share, issued by Citibank, N.A., as Depositary pursuant to a Deposit Agreement.  On December 13, 2005, we executed a 2:1 ADS split, changing to ratio of one ADS representing two preferred shares to one ADS representing one preferred share, as approved by a meeting of the Board of Directors of the Company on November 8, 2005.  The ADSs commenced trading on the NYSE on June 24, 2004.

We do not treat ADR holders as our shareholders and ADR holders have no shareholder rights.  Brazilian law governs shareholder rights.  The depositary is the holder of the preferred shares underlying the ADSs.  Holders of ADRs have ADR holder rights.

 

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Fees and Expenses

The following table summarizes the fees and expenses payable by holders of ADRs:

Persons depositing preferred shares or ADR holders must pay:

For:

US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)

Issuance of ADSs, including issuances resulting from a distribution of preferred shares or rights or other property

 

Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates

US$0.02 (or less) per ADS (to the extent not prohibited by the rules of any stock exchange on which the ADSs are listed for trading)

Any cash distribution to you

A fee equivalent to the fee that would be payable if securities distributed to you had been preferred shares and the shares had been deposited for issuance of ADSs

Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADR holders

US$0.02 (or less) per ADS per calendar year (to the extent the depositary has not collected a cash distribution fee of $0.02 per ADS during the year)

Depositary services

Registration or transfer fees

Transfer and registration of preferred shares on our preferred share register to or from the name of the depositary or its agent when you deposit or withdraw preferred shares.

Expenses of the depositary in converting foreign currency to U.S. dollars

 

Expenses of the depositary

Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)

Taxes and other governmental charges the depositary or the custodian have to pay on any ADR or preferred share underlying an ADR, for example, stock transfer taxes, stamp duty or withholding taxes

As necessary

Any charges incurred by the depositary or its agents for servicing the deposited securities

No charges of this type are currently made in the Brazilian market

 

Payment of Taxes

The depositary may deduct the amount of any taxes owed from any payments to you.  It may also sell deposited securities, by public or private sale, to pay any taxes owed.  You will remain liable if the proceeds of the sale are not sufficient to pay the taxes.  If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to you any proceeds, or send to you any property, remaining after it has paid the taxes.

Reimbursement of Fees

Citibank, N.A., as depositary, has agreed to reimburse us for expenses we incur that are related to establishment and maintenance expenses of the ADS program.  The depositary has agreed to reimburse us for our continuing annual stock exchange listing fees.  The depositary has also agreed to pay the standard out-of-pocket maintenance costs for the ADRs, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of United States federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls.  It has also agreed to reimburse us annually for certain investor relationship programs or special investor relations promotional activities.  In certain instances, the depositary has agreed to provide additional payments to us based on any applicable performance indicators relating to the ADR facility.  There are limits on the amount of expenses for which the depositary will reimburse us, but the amount of reimbursement available to the Company is not necessarily tied to the amount of fees the depositary collects from investors.

 

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The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them.  The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees.  The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them.  The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.

Reimbursement of Fees Incurred in 2012

During 2012 we received US$413,900 from the depositary for standard out-of-pocket maintenance costs for the ADRs (consisting of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls), any applicable performance indicators relating to the ADR facility, underwriting fees and legal fees.

PART II

ITEM 13.     Defaults, Dividend Arrearages and Delinquencies

None.

ITEM 14.     Material Modifications to the Rights of Security Holders and Use of Proceeds

None.

ITEM 15.     Controls and Procedures

Disclosure Controls and Procedures .  The Registrant maintains controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC.  Based on an evaluation of the Registrant’s disclosure controls and procedures as of the end of the period covered by this report conducted by the Registrant’s management, with the participation of the chief executive and chief financial officers, after evaluating together with other members of management the effectiveness of our disclosure controls and procedures (as defined in the U.S. Securities Exchange Act of 1934 under Rule 13a-15(e)) have concluded that our disclosure controls and procedures are effective to ensure that the Registrant is able to collect, process and disclose the information it is required to disclose in the reports it files with the SEC within the required time periods.

Management’s Report on Internal Control over Financial Reporting .  Management of the Registrant is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934.  The Registrant’s internal control over financial reporting is designed to provide reasonable assurance to the Registrant’s management and board of directors regarding the preparation and fair presentation of published financial statements.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

 

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Management assessed the effectiveness of the Registrant’s internal control over financial reporting as of December 31, 2012.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.  Based on this assessment, management believes that, as of December 31, 2012, the Company’s internal control over financial reporting is effective based on those criteria.

Attestation Report of the Independent Registered Public Accounting Firm .  The effectiveness of internal controls over financial reporting as of December 31, 2012 has been audited by Deloitte Touche Tohmatsu Auditores Independentes, or Deloitte, the independent registered public accounting firm who also audited the Company’s consolidated financial statements for the year then ended.  Deloitte’s report on the Company’s internal controls over financial reporting is included herein.

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred in the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 16.        [Reserved]

ITEM 16A.   Audit Committee Financial Expert

Our board of directors has determined that Luiz Kaufmann, a member of our audit committee, is an “audit committee financial expert” as defined by current SEC rules and meets the independence requirements of the SEC and the NYSE listing standards.  For a discussion of the role of our audit committee, see “Item 6C.  Board Practices—Audit Committee.”

ITEM 16B.   Code of Ethics

Our board of directors has adopted a Code of Ethics applicable to our directors, officers and employees, including our principal executive officer and principal financial officer.  The Code of Ethics can be found at www.voegol.com.br under the heading “Investor Relations.”  Information found at this website is not incorporated by reference into this document.

ITEM 16C.   Principal Accountant Fees and Services

The following table sets forth by category of service the total fees for services performed by our principal accountants during the fiscal years ended December 31, 2012 and 2011. Deloitte has been our principal accountant during the fiscal years ended December 31, 2012 and 2011.

 

2011

2012

 

(in reais ) 

Audit Fees

          3,429,104

5,130,722

Audit-Related Fees

          1,094,516

1,618,509

Tax Fees

                       -  

 

All Other Fees

                       -  

 

Total

        4,523,620

6,749,231

 

Audit Fees

Audit fees include the audit of our consolidated annual financial statements and internal controls, the audit of our IFRS financial statements, review of our quarterly reports and required statutory audits and regulatory filings such as the formulário de referência . 

Audit-Related Fees

Audit-related fees include fees for the preparation and issuance of comfort letters in connection with our senior notes offering, due diligence and the audits regarding the segregation of the Smiles program as a separate entity in 2012 and assurance of our sustainability report.

 

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In 2011 and 2012, audit-related fees for services performed by our principal accountant amounted to R$1.1 million and R$1.6 million, respectively.

Tax Fees

There were no tax advisory services provided by our principal accountant in 2011 and 2012.

All Other Fees

There were no other fees.

Pre-Approval Policies and Procedures

Our audit committee approves all audit, audit-related services, tax services and other services provided by Deloitte.  Any services provided by our principal accountant that are not specifically included within the scope of the audit must be pre-approved by the audit committee in advance of any engagement.  Pursuant to Rule 2-01 of Regulation S-X, audit committees are permitted to approve certain fees for audit-related services, tax services and other services pursuant to a de minimis exception prior to the completion of an audit engagement.  In 2012 and 2011, none of the fees paid to Deloitte were approved pursuant to the de minimis exception.

ITEM 16D.   Exemptions from the Listing Standards for Audit Committees

None.

ITEM 16E.   Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None

ITEM 16F.   Change in Registrant’s Certifying Accountant

None

ITEM 16G.  Corporate Governance

Significant Differences between our Corporate Governance Practices and NYSE Corporate Governance Standards

We are subject to the NYSE corporate governance listing standards.  As a foreign private issuer, the standards applicable to us are considerably different than the standards applied to U.S. listed companies.  Under the NYSE rules, we are required only to:  (a) have an audit committee or audit board, pursuant to an applicable exemption available to foreign private issuers, that meets certain requirements, as discussed below, (b) provide prompt certification by our chief executive officer of any material non-compliance with any corporate governance rules, and (c) provide a brief description of the significant differences between our corporate governance practices and the NYSE corporate governance practice required to be followed by U.S. listed companies.  The discussion of the significant differences between our corporate governance practices and those required of U.S. listed companies follows below.

Majority of Independent Directors  

The NYSE rules require that a majority of the board must consist of independent directors.  Independence is defined by various criteria, including the absence of a material relationship between the director and the listed company.  Brazilian law does not have a similar requirement.  Under Brazilian law, neither our board of directors nor our management is required to test the independence of directors before their election to the board.  However, both the Brazilian Corporation law and the CVM have established rules that require directors to meet certain qualification requirements and that address the compensation and duties and responsibilities of, as well as the restrictions applicable to, a company’s executive officers and directors.  While our directors meet the qualification requirements of the Brazilian Corporation law and the CVM, we do not believe that a majority of our directors would be considered independent under the NYSE test for director independence.  The Brazilian Corporation law requires that our directors be elected by our shareholders at a general shareholders’ meeting.  All of our directors are elected by our controlling shareholder and five of our directors represent our controlling shareholder.

 

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Executive Sessions

NYSE rules require that the non-management directors must meet at regularly scheduled executive sessions without management present.  The Brazilian Corporation law does not have a similar provision.  According to the Brazilian Corporation law, up to one-third of the members of the board of directors can be elected from management.  There is no requirement that non-management directors meet regularly without management.  As a result, the non-management directors on our board do not typically meet in executive session.

Fiscal Committee

Under the Brazilian corporation law, the Conselho Fiscal , or fiscal committee, is a corporate body independent of management and external auditors.  The fiscal committee may be either permanent or non-permanent, in which case it is appointed by the shareholders to act during a specific fiscal year.  A fiscal committee is not equivalent to, or comparable with, a U.S. audit committee.  The primary responsibility of the fiscal committee is to review management’s activities and a company’s financial statements, and to report its findings to a company’s shareholders.  The Brazilian corporation law requires fiscal committee members to receive as remuneration at least 10% of the average annual amount paid to a company’s executive officers.  The Brazilian corporation law requires a fiscal committee to be composed of a minimum of three and a maximum of five members and their respective alternates.

Under the Brazilian corporation law, the fiscal committee may not contain members that (i) are on our board of directors, (ii) are on the board of executive officers, (iii) are employed by us or a controlled company, or (iv) are spouses or relatives of any member of our management, up to the third degree.  Our by-laws provide for a non-permanent fiscal committee to be elected only by our shareholders’ request at a general shareholders’ meeting.  The fiscal committee, when elected, will be comprised of a minimum of three and a maximum of five members and an equal number of alternate members.  In 2012, our shareholders did not request the election of a fiscal committee.

Audit Committee

NYSE rules require that listed companies have an audit committee that (i) is composed of a minimum of three independent directors who are all financially literate, (ii) meets the SEC rules regarding audit committees for listed companies, (iii) has at least one member who has accounting or financial management expertise and (iv) is governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities.  However, as a foreign private issuer, we need only to comply with the requirement that the audit committee meet the SEC rules regarding audit committees for listed companies to the extent compatible with Brazilian corporation law.  Our audit committee, which is not equivalent to, or comparable with, a U.S. audit committee, provides assistance to our board of directors on matters involving accounting, internal controls, financial reporting and compliance.  The audit committee recommends the appointment of our independent auditors to our board of directors and reviews the compensation of our independent auditors and helps coordinate their activities.  It also evaluates the effectiveness of our internal financial and legal compliance controls.  The audit committee comprises three members elected by the board of directors for a one-year term with the right to re-election, all three of which are independent.  The current members of our audit committee are Álvaro de Souza, Antônio Kandir and Luiz Kaufmann.  All members meet the independent membership requirements of the SEC and NYSE as well as other NYSE requirements.  Luiz Kaufmann is the committee’s “financial expert” within the scope of the SEC rules covering the disclosure of financial experts on audit committees in periodic filings pursuant to the U.S. Securities Exchange Act of 1934.

Nomination/Corporate Governance and Compensation Committees

NYSE rules require that listed companies have a nominating/corporate governance committee and a compensation committee composed entirely of independent directors and governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities.  Required responsibilities for the nominating/corporate governance committee include, among other things, identifying and selecting qualified board member nominees and developing a set of corporate governance principles applicable to the company.  Required responsibilities for the compensation committee include, among other things, reviewing corporate goals relevant to the chief executive officer’s compensation, evaluating the chief executive officer’s performance, approving the chief executive officer’s compensation levels and recommending to the board non-chief executive officer compensation, incentive-compensation and equity-based plans.

 

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We are not required under applicable Brazilian law to have a nomination/corporate governance committee or compensation committee.  Under the Brazilian Corporation law, the total amount available for compensation of our directors and executive officers and for profit-sharing payments to our executive officers is established by our shareholders at the annual general meeting.  The board of directors is then responsible for determining the individual compensation and profit-sharing of each executive officer, as well as the compensation of our board and committee members.  In making such determinations, the board reviews the performance of the executive officers, including the performance of our chief executive officer, who typically excuses himself from discussions regarding his performance and compensation.

Our human resources and corporate governance committee is responsible for the coordination, implementation and periodic review of best corporate governance practices and for monitoring and keeping our board of directors informed of legislation and market recommendations addressing corporate governance.  It also reviews and recommends to our board of directors human resources policies, forms of compensation, including salary, bonus and stock options, to be paid to our employees, as well as analyzing management’s career and succession plans.  The committee consists of up to five members elected by our board of directors for a one-year term, with the right to re-election, comprising the chairman of the board of directors, one member of the board of directors, two outside specialists and the management and human resources officer.  The human resources and corporate governance committee currently consists of Constantino de Oliveira Júnior , Álvaro de Souza and Henrique Constantino, Paulo Sergio Kakinoff, Betânia Tanure de Barros and Paulo César Aragão.

Shareholder Approval of Equity Compensation Plans

NYSE rules require that shareholders be given the opportunity to vote on all equity compensation plans and material revisions thereto, with limited exceptions.  Under the Brazilian Corporation law, shareholders must approve all stock option plans.  In addition, any issuance of new shares that exceeds our authorized share capital is subject to shareholder approval.

Corporate Governance Guidelines

NYSE rules require that listed companies adopt and disclose corporate governance guidelines.  We have not adopted any formal corporate governance guidelines beyond those required by applicable Brazilian law.  We have adopted and observe a disclosure policy, which requires the public disclosure of all relevant information pursuant to guidelines set forth by the CVM, as well as an insider trading policy, which, among other things, establishes black-out periods and requires insiders to inform management of all transactions involving our securities.

Code of Business Conduct and Ethics

NYSE rules require that listed companies adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers.  Applicable Brazilian law does not have a similar requirement.  We have adopted a Code of Ethics and Conduct applicable to our officers, directors and employees worldwide, including at the subsidiary level.  We believe this code addresses the matters required to be addressed pursuant to the NYSE rules.  For a further discussion of our Code of Ethics and Conduct, see “Item 16B.  Code of Ethics.”

Internal Audit Function

NYSE rules require that listed companies maintain an internal audit function to provide management and the audit committee with ongoing assessments of the company’s risk management processes and system of internal control.  Our internal audit and compliance department was created in 2004 under the supervision of our chief financial officer and our audit committee and is responsible for our compliance with the requirements of Section 404 of the U.S. Sarbanes Oxley Act of 2002 regarding internal control over financial reporting.  The internal audit and compliance department reports to our chief executive officer and the audit committee.

 

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ITEM 16H. Mine Safety Disclosure

Not applicable.

PART III

ITEM 17.     Financial Statements

See “Item 18.  Financial Statements.”

ITEM 18.     Financial Statements

See our consolidated financial statements beginning on Page F-1. 

ITEM 19.     Exhibits  

1.1

*

By-laws of the Registrant (English translation).

2.1

 

Form of Amended and Restated Deposit Agreement among the Registrant, Citibank, N.A., as depositary, and the Holders from time to time of American Depositary Shares issued thereunder, including the form of American Depositary Receipts, incorporated herein by reference from our Registration Statement on Form F-6, filed August 2, 2011.

8.1

*

List of Subsidiaries.

10.1

 

Agreement, dated as of April 12, 2007, between the Registrant and Petrobras Distribuidora S.A., including Amendments 1 and 2 thereto, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2010, as filed on April 8, 2011.

10.2

 

Amendment 3 to Agreement, dated as of December 8, 2011, between the Registrant and Petrobras Distribuidora S.A, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2011, as filed on April 11, 2012.

10.3

*

Amendment 4 to Agreement, dated as of April 25, 2012, between the Registrant and Petrobras Distribuidora S.A. Certain portions of this exhibit have been omitted from the public filing and were separately filed with the Commission with a request for confidential treatment.

10.4

*

Amendment 5 to Agreement, dated as of June 25, 2012, between the Registrant and Petrobras Distribuidora S.A. Certain portions of this exhibit have been omitted from the public filing and were separately filed with the Commission with a request for confidential treatment.

10.5

 

Navitaire Hosted Services Agreement, dated May 1, 2004, between Navitaire Inc. and Gol Transportes Aéreos S.A., including amendments 1 through 7 thereto, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2006, as filed on February 28, 2007.

10.6

 

Amendment No. 8 to Navitaire Hosted Services Agreement dated as of June 11, 2007, between Navitaire Inc. and Gol Transportes Aéreos S.A., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2007, as filed on April 22, 2008.

10.7

 

Amendment No. 9 to Navitaire Hosted Services Agreement dated as of August 20, 2007, between Navitaire Inc. and Gol Transportes Aéreos S.A., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2007, as filed on April 22, 2008.

10.8

 

Amendment No. 10 to Navitaire Hosted Services Agreement dated as of August 27, 2007, between Navitaire Inc. and Gol Transportes Aéreos S.A., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2007, as filed on April 22, 2008.

 

 

117

 

 

10.9

 

Amendment No. 11 to Navitaire Hosted Services Agreement dated as of April 24, 2008, between Navitaire Inc. and Gol Transportes Aéreos S.A., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2008, as filed on May 8, 2009.

10.10

 

Amendment No. 12 to Navitaire Hosted Services Agreement dated as of April 24, 2008, between Navitaire Inc. and Gol Transportes Aéreos S.A., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2008, as filed on May 8, 2009.

10.11

 

Amendment No. 13 to Navitaire Hosted Services Agreement dated as of May 5, 2008, between Navitaire Inc. and Gol Transportes Aéreos S.A., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2008, as filed on May 8, 2009.

10.12

 

Amendment No. 14 to Navitaire Hosted Services Agreement dated as of October 1, 2008, between Navitaire Inc. and VRG Linhas Aéreas S.A., as successor of Gol Transportes Aéreos S.A., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2008, as filed on May 8, 2009.

10.13

 

Amendment No. 15 to Navitaire Hosted Services Agreement dated as of October 1, 2008, between Navitaire Inc. and VRG Linhas Aéreas S.A., as successor of Gol Transportes Aéreos S.A., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2008, as filed on May 8, 2009.

10.14

 

Amendment No. 16 to Navitaire Hosted Services Agreement dated as of October 1, 2009, between Navitaire Inc. and VRG Linhas Aéreas S.A., as successor of Gol Transportes Aéreos S.A., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2009, as filed on March 31, 2010.

10.15

 

Amendment No. 17 to Navitaire Hosted Services Agreement dated as of February 1, 2010, between Navitaire Inc. and VRG Linhas Aéreas S.A., as successor of Gol Transportes Aéreos S.A., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2009, as filed on March 31, 2010.

10.16

 

Amendment No. 18 to Navitaire Hosted Services Agreement dated as of March 15, 2010, between Navitaire Inc. and VRG Linhas Aéreas S.A., as successor of Gol Transportes Aéreos S.A., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2010, as filed on April 8, 2011.

10.17

 

Amendment No. 19 to Navitaire Hosted Services Agreement dated as of June 25, 2010, between Navitaire Inc. and VRG Linhas Aéreas S.A., as successor of Gol Transportes Aéreos S.A., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2010, as filed on April 8, 2011.

10.18

 

Amendment No. 20 to Navitaire Hosted Services Agreement dated as of November 1, 2010, between Navitaire Inc. and VRG Linhas Aéreas S.A., as successor of Gol Transportes Aéreos S.A., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2010, as filed on April 8, 2011.

10.19

 

Amendment No. 21 to Navitaire Hosted Services Agreement dated as of March 1, 2011, between Navitaire Inc. and VRG Linhas Aéreas S.A., as successor of Gol Transportes Aéreos S.A, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2011, as filed on April 11, 2012.

10.20

*

Amendment No. 22 to Navitaire Hosted Services Agreement dated as of February 1, 2012, between Navitaire Inc. and VRG Linhas Aéreas S.A., as successor of Gol Transportes Aéreos S.A. Certain portions of this exhibit have been omitted from the public filing and were separately filed with the Commission with a request for confidential treatment.

 

 

118

 

 

10.21

*

Amendment No. 23 to Navitaire Hosted Services Agreement dated as of February 5, 2012, between Navitaire Inc. and VRG Linhas Aéreas S.A., as successor of Gol Transportes Aéreos S.A. Certain portions of this exhibit have been omitted from the public filing and were separately filed with the Commission with a request for confidential treatment.

10.22

*

Amendment No. 24 to Navitaire Hosted Services Agreement dated as of February 5, 2012, between Navitaire Inc. and VRG Linhas Aéreas S.A., as successor of Gol Transportes Aéreos S.A. Certain portions of this exhibit have been omitted from the public filing and were separately filed with the Commission with a request for confidential treatment.

10.23

*

Amendment No. 25 to Navitaire Hosted Services Agreement dated as of September 1, 2012, between Navitaire Inc. and VRG Linhas Aéreas S.A., as successor of Gol Transportes Aéreos S.A. Certain portions of this exhibit have been omitted from the public filing and were separately filed with the Commission with a request for confidential treatment.

10.24

*

Amendment No. 26 to Navitaire Hosted Services Agreement dated as of December 24, 2012, between Navitaire Inc. and VRG Linhas Aéreas S.A., as successor of Gol Transportes Aéreos S.A. Certain portions of this exhibit have been omitted from the public filing and were separately filed with the Commission with a request for confidential treatment.

10.25

 

Aircraft Purchase Agreement, dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Registration Statement on Form F-1, filed June 1, 2004, as amended on June 17, 2004 and June 23, 2004, File No. 333-116054.

10.26

 

Supplemental Aircraft Purchase Agreement No. 1 dated as of July 16, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Registration Statement on Form F-1, filed March 28, 2004, as amended on April 11, 2005 and April 26, 2005, File No. 333-123625.

10.27

 

Supplemental Aircraft Purchase Agreement No 2 dated as of January 20, 2005 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Registration Statement on Form F-1, filed March 28, 2004, as amended on April 11, 2005 and April 26, 2005, File No. 333-123625.

10.28

 

Supplemental Aircraft Purchase Agreement No. 3 dated as of January 7, 2005 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Registration Statement on Form F-1, filed March 28, 2004, as amended on April 11, 2005 and April 26, 2005, File No. 333-123625.

10.29

 

Supplemental Aircraft Purchase Agreement No. 4 dated as of March 24, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Registration Statement on Form F-1, filed March 28, 2004, as amended on April 11, 2005 and April 26, 2005, File No. 333-123625.

10.30

 

Supplemental Agreement No. 5 dated July 25, 2005 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2005, as filed on March 20, 2006 and as amended on May 2, 2006.

10.31

 

Supplemental Agreement No. 6 dated August 26, 2005 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2005, as filed on March 20, 2006 and as amended on May 2, 2006.

10.32

 

Supplemental Agreement No. 7 dated October 18, 2005 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2005, as filed on March 20, 2006 and as amended on May 2, 2006.

 

 

119

 

 

10.33

 

Supplemental Agreement No. 8 dated February 19, 2006 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2005, as filed on March 20, 2006 and as amended on May 2, 2006.

10.34

 

Supplemental Agreement No. 9 dated March 6, 2006 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2005, as filed on March 20, 2006 and as amended on May 2, 2006.

10.35

 

Supplemental Agreement No. 10 dated October 19, 2006 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company. Certain portions of this exhibit have been omitted from the public filing and were separately filed with the Commission with a request for confidential treatment.

10.36

 

Supplemental Agreement No. 11 dated October 24, 2006 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2006, as filed on February 28, 2007.

10.37

 

Supplemental Agreement No. 12 dated February 8, 2007 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2007, as filed on April 22, 2008.

10.38

 

Supplemental Agreement No. 13 dated December 17, 2007 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2007, as filed on April 22, 2008.

10.39

 

Supplemental Agreement No. 14 dated September 20, 2008 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2008, as filed on May 8, 2009.

10.40

 

Supplemental Agreement No. 15 dated April 30, 2008 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2009, as filed on March 31, 2010.

10.41

 

Supplemental Agreement No. 16 dated September 24, 2008 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2009, as filed on March 31, 2010.

10.42

 

Supplemental Agreement No. 17 dated October 28, 2009 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2009, as filed on March 31, 2010.

10.43

 

Supplemental Agreement No. 18 dated July 8, 2010 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2010, as filed on April 8, 2011.

 

 

120

 

 

10.44

 

Supplemental Agreement No. 19 dated September 17, 2010 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2010, as filed on April 8, 2011.

10.45

 

Supplemental Agreement No. 20 dated February 11, 2011 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2010, as filed on April 8, 2011.

10.46

*

Supplemental Agreement No. 21 dated October 1, 2012 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company. Certain portions of this exhibit have been omitted from the public filing and were separately filed with the Commission with a request for confidential treatment.

10.47

*

Aircraft Purchase Agreement, dated as of October 1, 2012 between GAC Incorporated and The Boeing Company. Certain portions of this exhibit have been omitted from the public filing and were separately filed with the Commission with a request for confidential treatment.

12.1

*

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

12.2

*

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

13.1

*

Section 1350 Certification of Chief Executive Officer.

13.2

*

Section 1350 Certification of Chief Financial Officer.

*

 

Filed herewith.

 

 

121

 

 

Signature

The Company hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on Form 20-F on its behalf.

GOL LINHAS AÉREAS INTELIGENTES S.A.

By:               /s/  Paulo Kakinoff
Name:          Paulo Kakinoff
Title:              Chief Executive Officer

GOL LINHAS AÉREAS INTELIGENTES S.A.

By:               /s/ Edmar Prado Lopes Neto
Name:          Edmar Prado Lopes Neto
Title:              Principal Financial Officer

Dated:  April 30, 2013

 

122

 

 

 

 

Gol Linhas Aéreas
Inteligentes S.A.

Consolidated Financial Statements for the Years Ended December 31, 2012 and 2011 and
Independent Auditor’s Report

 

 

 

 

 

 

Deloitte Touche Tohmatsu Auditores Independentes

 

 

 

 

 

 

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

Consolidated Financial Statements

December 31, 2012 and 2011

 (In thousands of Brazilian Reais)

 

Contents

 

Independent Auditor’s Report

F-4
 
 

Consolidated financial statements for the years ended December 31, 2012 and 2011

 
 

Consolidated statement of financial position

F-8

Consolidated statements of operations

F-10

Consolidated statements of comprehensive income (loss)

F-11

Consolidated statements of changes in equity

F-12

Consolidated statements of cash flows

F-13

Notes to the financial statements

F-14

 

 

 

 

 

 

 

 

 

 

Gol Linhas Aéreas
Inteligentes S.A.

Consolidated Financial Statements
for the Year Ended December 31, 2012 and 2011

and Report of Independent Registered Public Accounting Firm

 

Deloitte Touche Tohmatsu Auditores Independentes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

Gol Linhas Aéreas Inteligentes S.A.

São Paulo - SP, Brazil

We have audited the accompanying consolidated statement of financial position of Gol Linhas Aéreas Inteligentes S.A. and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s Management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) - PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Gol Linhas Aéreas Inteligentes S.A. and subsidiaries as of December 31, 2012 and 2011, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2012, in conformity with International Financial Reporting Standards - IFRS as issued by the International Accounting Standards Board - IASB.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) - PCAOB, the Company’s internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission - COSO, and our report, dated March 25, 2013, expressed an unqualified opinion on the Company’s internal control over financial reporting.

 

 

/s/ DELOITTE TOUCHE TOHMATSU

Auditores Independentes

São Paulo, Brazil

March 25, 2013

 

 

 

 

F-4

 

 

 

Gol Linhas Aéreas
Inteligentes S.A.

Internal Control over Financial Reporting
for the Year Ended December 31, 2012 and 2012

and Report of Independent Registered Public Accounting Firm

 

 

Deloitte Touche Tohmatsu Auditores Independentes

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

Gol Linhas Aéreas Inteligentes S.A.

São Paulo, Brazil

 

We have audited the internal control over financial reporting of Gol Linhas Aéreas Inteligentes S.A. and subsidiaries (the “Company”) as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission - COSO. The Company’s Management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States) - PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included: obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s Board of Directors, Management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards – IFRS as issued by the International Accounting Standards Board - IASB. A company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with International Financial Reporting Standards – IFRS as issued by the International Accounting Standards Board - IASB, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission - COSO.

 

F-6

 

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) - PCAOB, the consolidated statement of financial position of the Company as of December 31, 2012, and related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for the year then ended. Our report, dated March 25, 2013, expressed an unqualified opinion on those consolidated financial statements.

 

 

/s/ DELOITTE TOUCHE TOHMATSU

Auditores Independentes

São Paulo, Brazil

March 25, 2013

 

 

 

F-7

 

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS OF DECEMBER 31, 2012 AND 2011

(In thousands of Brazilian reais - R$)

 

 

  ASSETS 

Note

 

12/31/2012

 

12/31/2011

Current

 

 

     

Cash and cash equivalents

3

 

775,551

 

1,230,287

Short-term investments

4

 

585,028

 

1,009,068

Restricted cash

5

 

7

 

8,554

Trade receivables

6

 

325,665

 

354,134

Inventories

7

 

138,039

 

151,023

Recoverable taxes

8

 

110,999

 

212,998

Prepaid expenses

9

 

62,328

 

93,797

Deposits

10

 

2,575

 

35,082

Rights on derivative transactions

28

 

10,696

 

4,213

Other receivables

 

 

68,921

 

39,147

Assets held for sale

11

 

8,174

 

-

 

 

 

2,087,983

 

3,138,303

 

 

 

 

   

Noncurrent assets

 

 

 

   

Deposits

10

 

654,621

 

595,517

Restricted cash

5

 

224,517

 

100,541

Prepaid expenses

9

 

35,456

 

44,964

Deferred taxes

8

 

433,353

 

323,284

Other receivables

   

5,438

 

14,399

Property, plant and equipment

16

 

3,885,799

 

3,890,470

Intangible assets

17

 

1,699,931

 

1,783,957

 

 

 

6,939,115

 

6,753,132

 

 

 

 

 

 

Total assets

 

 

9,027,098

 

9,891,435

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

F-8

 

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS OF DECEMBER 31, 2012 AND 2011

(In thousands of Brazilian reais - R$)

 

 

LIABILITIES 

Note

 

12/31/2012

 

12/31/2011

Current liabilities

 

 

   

 

Short term debt

18

 

1,719,625

 

1,552,440

Trade payables

 

 

480,185

 

414,563

Salaries, wages and benefits

 

 

207,518

 

250,030

Tax obligations

22

 

73,299

 

76,736

Tax and landing fees

 

 

240,739

 

190,029

Advance ticket sales

19

 

823,190

 

744,743

Dividends payable

24

 

7

 

584

Mileage program

20

 

124,905

 

71,935

Advances from customers

21

 

93,595

 

30,252

Provisions

23

 

179,950

 

75,568

Liabilities from derivative transactions

28

 

56,752

 

115,432

Other payables

 

 

61,928

 

73,353

   

 

4,061,693

 

3,595,665

   

 

 

   

Noncurrent liabilities

 

 

 

   

Long term debt

18

 

3,471,550

 

3,439,008

Provisions

23

 

299,880

 

231,182

Mileage program

20

 

364,307

 

214,779

Tax obligations

22

 

47,597

 

112,935

Other payables

 

 

49,243

 

91,955

 

 

 

4,232,577

 

4,089,859

 

 

 

 

   

Shareholders' equity

24

 

 

   

Capital

 

 

2,499,689

 

2,316,500

Advance for future capital increase

 

 

-

 

182,610

Capital reserves

 

 

61,387

 

60,263

Share issuance costs

 

 

(145,279)

 

(145,279)

Share-based compensation

 

 

79,255

 

68,602

Treasury shares

 

 

(35,164)

 

(51,377)

Other comprehensive income

 

 

(68,582)

 

(79,268)

Accumulated losses

 

 

(1,658,478)

 

(146,140)

 

 

 

732,828

 

2,205,911

Total liabilities and shareholders' equity

 

 

9,027,098

 

9,891,435

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

F-9

 

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

INCOME STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010

(In thousands of Brazilian reais – R$, except basic / diluted loss per share)

 

 

 

 

 

Consolidated

Note

12/31/2012

 

12/31/2011

 

12/31/2010

Operating revenues

   

 

 

 

 

 

Passenger

   

7,159,987

 

6, 713,029 

 

6,277,657

Cargo and other

   

943,572

 

826,279

 

701,790

 

25

 

8,103,559

 

7,539,308

 

6,979,447

     

 

   

 

 

Operating expenses

 

 

 

 

 

 

 

Salaries

 

 

(1,569,670)

 

(1,560,436)

 

(1,252,402)

Aircraft fuel

 

 

(3,742,219)

 

(3,060,665)

 

(2,287,410)

Aircraft rent

 

 

(644,031)

 

(505,058)

 

(555,662)

Aircraft insurance

 

 

(26,875)

 

(31,921)

 

(47.757)

Sales and marketing

 

 

(423,682)

 

 

(402,568)

 

(367,757)

Landing fees

 

 

(559,421)

 

(395,249)

 

(331,882)

Aircraft and traffic servicing

 

 

(528,737)

 

(484,642)

 

(430,521)  

Maintenance materials and repairs

 

 

(417,990)

 

(434,181)

 

(422,950)

Depreciation and amortization

 

 

(519,631)

 

(395,807)

 

(281,604)

Other operating expenses

 

 

(576,916)

 

(601,713)

 

(303.707)

Gain on bargain purchase

 

 

-

 

88,428

 

-

Total operating expenses

 

 

(9,009,172)

 

(7,783,812)

 

(6,281,652)

     

 

   

 

 

Income (Loss) from operations before financial income (expenses)

   

(905,613)

 

(244,504)

 

697,795

 

 

 

 

   

 

 

Finance result

 

   

 

 

Financial income

26

 

370,214

 

477,524

 

183,907

Financial expenses

26

 

(764,852)

 

(834,541)

 

(541,755)

Exchange rate changes, net

26

 

(284,571)

 

(398,897)

 

46,549

     

(679,209)

 

(755,914)

 

(311,299)

     

 

   

 

 

Income (Loss) before income tax and social contribution

   

(1,584,822)

 

(1,000,418)

 

386,496

     

 

   

 

 

Current

   

(6,553)

 

(5,791)

 

(53,855)

Deferred

   

78,460

 

254,671

 

(118,444)

 

8

 

71,907

 

248,880

 

(172,299)

Net income (loss)

   

(1,512,915)

 

(751,538)

 

214,197

     

 

 

 

 

 

Weighted average number of outstanding shares in relation to basic earnings (loss) per share (in thousands)

15

 

269,869

 

270,376

 

268,564

     

 

   

 

 

Basic earnings (loss) per share

15

 

(5.606)

 

(2.780)

 

0.798

Diluted earnings (loss) per share

15

 

(5.606)

 

(2.780)

 

0.796

 

 

 

The accompanying notes are an integral part of these financial statements.


F-10

 

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010

(In thousands of Brazilian reais – R$, except basic / diluted loss per share)

 

 

 

Consolidated

 

12/31/2012

 

12/31/2011

 

12/31/2010

       

 

 

Net income (Loss) for the year

( 1,512,915 ) 

 

(751,538)

 

214,197

       

 

 

Other comprehensive income (loss)

     

 

 

Available for sale financial assets

-

 

362

 

(2,497)

Cash flow hedges

16,191

 

(136,992)

 

18,035

Income tax

(5,505)

 

46,289

 

(5,283)

 

10,686

 

(90,341)

 

10,255

 

 

 

 

 

 

Total comprehensive income (loss) for the year

(1,502,229)

 

(841,879)

 

224,452

 

Transactions shown in comprehensive income for the years ended on December 31, 2012, 2011 and 2010 are provided below:

 

 

Consolidated

 

Financial assets available for sale

 

Cash flow hedges

 

Income tax

 

Total comprehensive income (loss)

Balance on December 31, 2009

2,135

 

(1,995)

 

678

 

818

Realized losses (gains) from financial instruments transferred to the income

(1,648)

 

20,571

 

(6,694)

 

11,929

Fair value variation

-

 

(2,536)

 

862

 

(1,674)

Balance on December 31, 2010

487

 

16,040

 

(5,454)

 

11,073

Realized losses (gains) from financial instruments transferred to the income

(487)

 

19,464

 

(6,617)

 

12,360

Fair value variation

-

 

(155,607)

 

52,906

 

(102,701)

Balance on December 31, 2011

-

 

(120,103)

 

40,835

 

(79,268)

Realized losses (gains) from financial instruments transferred to the income

-  

 

(4,733)

 

1,609

 

(3,124)

Fair value variation

- 

 

20,924

 

(7,114)

 

13,810

Balance on December 31, 2012

- 

 

(103,912)

 

35,330

 

(68,582)

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

F-11

 

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS´ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010  

(In thousands of Brazilian reais)

 

 

 

 

 

Issued Capital

 

 

 

Earnings reserves

 

 

 

 

 

Valuation adjustments to equity

 

 

 

 

 

 

 

 

Capital

Advance for future capital increase

Goodwill on transfer of shares

 

Special goodwill reserve of subsidiary

 

Share issuance costs

 

Legal reserve

 

Reinvestment reserve

 

Share-based compensation

 

Treasury shares

 

Available-for-sale assets

 

Unrealized hedge profit (loss)

 

Accumulated losses

 

Total

Balances as of December 31, 2009

 

2,194,794

-

31,076

 

29,187

 

(132,522)

 

39,123

 

557,504

 

18,984

 

(11,887)

 

2,135

 

(1,317)

 

(117,091)

 

2,609,986

Net income

 

-

-

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

214,197

 

214,197

Recognition of legal reserve

 

-

-

-

 

-

 

-

 

10,710

 

-

 

-

 

-

 

-

 

-

 

(10,710)

 

-

Proposed mandatory minimum dividends

 

-

-

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(50,873)

 

(50,873)

Allocation of net income

 

-

-

-

 

-

 

-

 

-

 

35,523

 

-

 

-

 

-

 

-

 

(35,523)

 

-

Other comprehensive income (loss)

 

-

-

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(1,648)

 

11,903

 

-

 

10,255

Capital increase

 

120,861

-

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

120,861

Share-based payments

 

-

-

-

 

-

 

-

 

-

 

-

 

24,743

 

-

 

-

 

-

 

-

 

24,743

Balance as of December 31, 2010

 

2,315,655

-

31,076

 

29,187

 

(132,522)

 

49,833

 

593,027

 

43,727

 

(11,887)

 

487

 

10,586

 

-

 

2,929,169

Adjustment

 

-

-

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(37,462)

 

(37,462)

Adjusted balance on January 1, 2011

 

2,315,655

-

31,076

 

29,187

 

(132,522)

 

49,833

 

593,027

 

43,727

 

(11,887)

 

487

 

10,586

 

(37,462)

 

2,891,707

Other comprehensive income (loss), net

 

-

-

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(487)

 

(89,854)

 

-

 

(90,341)

Net loss

 

-

-

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(751,538)

 

(751,538)

Recognition of earnings reserve and legal reserve to absorb accumulated losses

24

-

-

-

 

-

 

-

 

(49,833)

 

(593,027)

 

-

 

-

 

-

 

-

 

642,860

 

-

Capital increase through the exercise of stock options

24

845

-

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

845

Advance for future capital increase

24

-

182,610

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

182,610

Share issuance costs

24

-

-

-

 

-

 

(12,757)

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(12,757)

Share-based payments

24

-

-

-

 

-

 

-

 

-

 

-

 

24,875

 

-

 

-

 

-

 

-

 

24,875

Share buyback

 

-

-

-

 

-

 

-

 

-

 

-

 

-

 

(39,490)

 

-

 

-

 

-

 

(39,490)

Balance as of December 31, 2011

 

2,316,500

182,610

31,076

 

29,187

 

(145,279)

 

-

 

-

 

68,602

 

(51,377)

 

-

 

(79,268)

 

(146,140)

 

2,205,911

Other comprehensive income (loss), net

 

-

-

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

10,686

 

-

 

10,686

Net loss

 

-

-

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(1,512,915)

 

(1, 512,915)

Advances for future capital increase

24

-

579

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

579

Capital increase on August 13, 2012

24

183,189

(183,189)

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Share-based payments

24

-

-

-

 

-

 

-

 

-

 

-

 

10,653

 

-

 

-

 

-

 

-

 

10,653

Treasury shares sale

24

-

-

1,124

 

-

 

-

 

-

 

-

 

-

 

16,213

 

-

 

-

 

-

 

17,337

Prescribed dividends and interest on capital

 

-

-

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

577

 

577

Balance as of December 31, 2012

 

2,499,689

-

32,200

 

29,187

 

(145,279)

 

-

 

-

 

79,255

 

(35,164)

 

-

 

(68,582)

 

(1,658,478)

 

732,828

 

The accompanying notes are an integral part of these financial statements.

 

 

F-12

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

Consolidated

 

 

12/31/2012

 

12/31/2011

 

12/31/2010

Net Income (loss) for the Period

(1,512,915)

 

(751,538)

 

214,197

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

Depreciation and Amortization

519,631

 

395,807

 

281,604

Allowance for doubtful accounts

5,662

 

23,483

 

7,728

Litigation

16,996

 

6,218

 

18,842

Provision for (reversal of provision for) onerous contracts

-

 

15,393

 

(445)

Provision for inventory obsolescence

(609)

 

1,196

 

8,402

Deferred Taxes

(78,460)

 

(254,671)

 

118,444

Shared-based Payments

10,652

 

24,875

 

24,743

Exchange and Monetary Variations, Net

279,541

 

400,095

 

(46,549)

Interests on Loans, Net

268,415

 

414,430

 

297,256

Unrealized Hedge income, Net of taxes

(4,733)

 

19,469

 

117,022

Provision for return of aircraft

-

 

96,136

 

108,106

Restructuring provision

36,978

 

-

 

-

Other provisions

-

 

(30,460)

 

-

Mileage Program

202,498

 

79,057

 

(106,299)

Write-of property, plant and equipment and intangible assets

56,825

 

10,173

 

3,037

Impairment losses

82,872

 

23,353

 

-

Negative goodwill on acquisition of subsidiary

-

 

(88,428)

 

-

Cash Flows from Operating Activities

 

 

 

 

 

Accounts receivable

22,807

 

84,840

 

208,526

Investments used for trading

424,039

 

(1,011,534)

 

-

Inventories

13,593

 

22,406

 

(41,433)

Deposits

18,198

 

144,456

 

78,369

Prepaid expenses and recoverable taxes

106,215

 

(12,406)

 

64,950

Others Assets

(27,295)

 

16,831

 

9,865

Accounts Payable

65,622

 

131,971

 

(146,590)

Traffic Air Liability

78,447

 

125,112

 

(44,341)

Liabilities from derivative transactions

(37,756)

 

(42,314)

 

-

Advances from customers

63,343

 

(27,591)

 

(162,150)

Salaries, Wages and Benefits

(42,512)

 

22,254

 

(27,168)

Sales Tax and Landing Fees

50,710

 

58,600

 

8,809

Tax Obligation

(64,717)

 

6,653

 

16,549

Provisions

12,565

 

(95,413)

 

(124,722)

Others Liabilities

(54,463)

 

22,841

 

(4,650)

Cash Flows from Operating Activities

512,149

 

(168,706)

 

882,102

Interest Paid

(374,798)

 

(428,023)

 

(123,019)

Income Tax Paid

(4,058)

 

(5,791)

 

(35,186)

Net Cash Provided by (used in) Operating Activities

133,293

 

(602,520)

 

723,897

Investments activities

 

 

 

 

 

Acquisition of subsidiary, net of cash

-

 

(33,885)

 

-

Short-term investments

-

 

-

 

17,938

Restricted Cash

(115,429)

 

(74,594)

 

(8,416)

Property, Plant and Equipment

(454,242)

 

(279,826)

 

(230,469)

Intangible assets

(20,772)

 

(80,863)

 

(58,512)

Net Cash Used in Investing Activities

(590,443)

 

(469,168)

 

(279,459)

Financing activities

 

 

 

 

 

Short and long term debt

312,401

 

628,187

 

638,638

Payments of loans and leases

(334,698)

 

(391,054)

 

(433,760)

Dividends

-

 

(50,866)

 

(185,839)

Treasury shares

17,337

 

-

 

-

Capital increase

579

 

183,455

 

120,861

Share issuance costs

-

 

(15,175)

 

-

Net Cash Generated by Financing Activities

(4,381)

 

354,547

 

139,900

Exchange rate changes in cash and cash equivalents of foreign subsidiaries

6,795

 

(8,430)

 

(10,888)

Net Decrease in Cash and Cash Equivalents

(454,736)

 

(725,571)

 

573,450

Cash and Cash Equivalents at Beginning of the Period

1,230,287

 

1,955,858

 

1,382,408

Cash and Cash Equivalents at End of the Period

775,551

 

1,230,287

 

1,955,858

F-13

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

1.    General Information

 

Gol Linhas Aéreas Inteligentes S.A. (“Company” or “GLAI”) is a publicly-listed company incorporated in accordance with Brazilian Corporate Laws, organized on March 12, 2004. The Company is engaged in, controlling of its wholly-owned subsidiary VRG Linhas Aéreas S.A. (“VRG”), and through its subsidiaries or affiliates, essentially exploring: (i) regular and non-regular air transportation services of passengers, cargo and mailbags, domestically or internationally, according to the concessions granted by the competent authorities; (ii) complementary activities of air transport service provided in its bylaws.

 

Additionally, GLAI is the direct parent company of the subsidiaries GAC Inc. (“GAC”), Gol Finance (“Finance”) and Smiles S.A (“Smiles”), and indirect parent company of the subsidiaries SKY Finance II (“SKY II”) and Webjet Linhas Aéreas S.A. ("Webjet").

 

GAC was established on March 23, 2006, according to the laws of the Cayman Islands, and its activities are related to the aircraft acquisition for its single shareholder GLAI, which provides financial support for its operating activities and settlement of obligations. The GAC is the parent company of SKY Finance II, established on November 30, 2009, located in the Cayman Islands, whose activity is related to obtaining funds on finance aircraft acquisition.

 

The Gol Finance was incorporated on March 16, 2006, in accordance with the laws of the Cayman Islands, and its activity is related to fundraising on finance aircraft acquisition.

 

On April 9, 2007, the Company acquired VRG, which operates domestic and international flights using VARIG trademark, and provides regular and non-regular air transportation services from/to the main destinations in Brazil, South America and the Caribbean.

 

On February 28, 2011, the subsidiary VRG constituted a Participation Account Company (“SCP BOB”) engaged in developing and operating on-board sales of food and beverages in domestic flights. VRG has 50% participation in the share capital of the company, which started to operate in September, 2011.

 

On August 1, 2011, the subsidiary VRG acquired the entire share of Webjet, an airline headquartered in Rio de Janeiro, which offers scheduled air transport services for national and international non-scheduled passenger, cargo and postal bags. The operation was approved by the ANAC on October 3, 2011 and by the Administrative Council for Economic Defense (“CADE”) on October 10, 2012. The approval occurred under the execution of a term of commitment to performance ("TCD") between VRG, Webjet and CADE to achieve  certain operating efficiencies, related specifically to maintenance, by VRG and Webjet, of an minimum index of (85%) regularlity of  the use of the operational schedules ( HOTRAN ) at Santos Dumont Airport.

 

On November 23, 2012, the Company started the process of discontinuance of the Webjet trademark, along with the ending of its operational activities, being GOL, from that date, responsible for all the flight transportation services, passengers and customers assistance for Webjet. For further details, see note 11.

 

On April 28, 2012, the subsidiary VRG constituted a participation account company ("SCP Trip") in order to develop, produce and explore the Gol magazine (“Revista Gol”), distributed free on the Company flights. The participation of VRG is equivalent to 60% of the SCP.

 

In December 2012, the Company announced the segregation of the activities related to the "Smiles" program, previously conducted by its subsidiary VRG, which will be conducted by Smiles S.A., a Company incorporated on June 10, 2012.

  

 

F-14

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

The Company’s shares are traded on the New York Stock Exchange (“NYSE”) and on the São Paulo Stock Exchange (“BOVESPA”). The Company entered into an agreement for adoption of Level 2 Differentiated Corporate Governance Practices with the São Paulo Stock Exchange (“BOVESPA”), and is included in the Special Corporate Governance Stock Index (“IGC”) and the Special Tag Along Stock Index (“ITAG”), which were created to identify companies committed to adopt differentiated corporate governance practices.

 

2.                        Summary of significant accounting policies applied in preparing the financial statements

 

These financial statements were authorized for issuance at the Board of Directors’ meeting held on March 25, 2013. The Company’s registered office is at Pça. Comandante Linneu Gomes, s/n, portaria 3, prédio 24, Jardim Aeroporto, São Paulo, Brazil.

 

2.1 Compliance Statement

 

The Consolidated Financial Statements were prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

 

2.2 Basis of preparation

 

These financial statements were prepared based on historical cost, except for certain financial assets and liabilities that are measured at fair value in accordance with accounting practices described below.

 

These Financial Statements were prepared using Brazilian Reais as the functional and reporting currency.

 

The summary of significant accounting policies adopted by the Company and its subsidiaries are as follows:

 

a)         Basis of consolidation

 

The consolidated financial statements comprises Gol Linhas Aéreas Inteligentes S.A. and its direct and indirect subsidiaries, as presented below:

 

 

Location

 

Type of control

 

% of capital stock

 

 

 

12/31/2012

 

12/31/2011

VRG

Brazil

 

Direct

 

100%

 

100%

GAC Inc.

Cayman Islands

 

Direct

 

100%

 

100%

Gol Finance

Cayman Islands

 

Direct

 

100%

 

100%

SKY Finance II

Cayman Islands

 

Indirect

 

100%

 

100%

Webjet

Brazil

 

Indirect

 

100%

 

100%

SCP BOB (*)

Brazil

 

Indirect

 

50%

 

50%

SCP Trip (*)

Brazil

 

Indirect

 

60%

 

-

Smiles S.A (**)

Brazil

 

Direct

 

100%

 

-

 

(*) Joint control companies consolidated proportionally.

(**) The company had no operating activity on December 31, 2012.

 

The accounting policies were applied consistently in all the consolidated entities and are consistent with those used in previous years. All the transactions, balances, income and expenses between the entities are fully eliminated in the consolidated financial statements.

 

The investments that its subsidiary VRG has in its off-shore subsidiaries (South America, Caribean and U.S.) are fully eliminated.

F-15

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

b)         Cash and cash equivalents

 

In this line are classified the bank deposits and short term investments with maturities of less than 90 days (or with no deadlines for redemption) which have high liquidity and are readily convertible into an amount of cash and have an insignificant risk of value changes, measured at fair value through income.

 

c)         Restricted cash

 

Consist of investments measured at fair value through profit and loss, deposited in guarantee and linked to securities, and short and long term debt.

 

d)         Financial assets and financial liabilities

 

Consist of non-derivate financial investments and include investments in debt and equity instruments, accounts receivable and other receivables, interest-bearing loans borrowings, other accounts payable and other debts.

 

The measurement of initial recognition of financial assets and liabilities is as follows:

 

Non-derivate Financial Instrument

 

Initial Recognition

Asset

 

Fair Value

Liability

 

Fair Value except direct costs from issue *

 

* Except financial instruments measured at fair value through the result, whose costs are recognized directly in profit or loss for the financial year .  

 

After initial recognition, are measured at each balance sheet with the pre-defined classification, based on the purposes for which they were acquired or issued, as described below:

 

i.          Financial assets measured at fair value through profit or loss: include financial assets held for trading (i.e., acquired primarily for the purpose of sale in the short term). Interest, inflation adjustment, foreign exchange changes and changes arising from the adjustment to fair value are recognized in profit or loss under financial income or financial expenses, when earned or incurred. The Company has short-term investments classified as cash equivalents under this category.

 

ii.    Held-to-maturity financial assets: financial assets with fixed or determinable payments and fixed maturity dates that the Company has the positive intention and ability to hold to maturity. These are measured at amortized cost after initial recognition under the effective interest method, less possible impairment losses, when applicable, and changes are recognized in profit or loss, as financial income or financial expenses, when earned or incurred. The Company does not have financial assets classified under this category.

 

iii. Loans and receivables: include financial assets with fixed or determinable payments that are not quoted in an active market which are measured at amortized cost after initial recognition under the effective interest method. Interest, inflation adjustment, foreign exchange changes, less impairment losses, when applicable, are recognized in profit or loss under financial income or financial expenses, when earned or incurred . The Company has mainly bank deposits and trade accounts receivable classified under this category.

 

iv. Available for sale: include financial assets not classified under the categories above, measured at fair value. After initial recognition, available-for-sale securities are measured at fair value, and the respective gains and losses are recognized in “Other Comprehensive Income” in shareholders' equity until the investment is sold, and any gains and losses previously accumulated are reclassified to profit or loss. “Short-term Investments” are comprised of assets available for sale related to foreign currency deposits (time deposits). These assets have a maturity period of more than 90 days after the investment date and their amounts are subject to significant changes. The Company does not hold financial assets under this category.

F-16

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

The Company writes off a financial asset only when the contractual rights to the cash flows from the asset expire, or transfers the asset and substantially all the risks and benefits of ownership to a third party. If the Company does not transfer nor retains substantially all the risks and benefits of ownership of the financial asset, but continues to control the transferred asset, the Company recognizes the participation retained and its liabilities on the values that will have to pay. If the Company retains substantially all the risks and benefits of ownership of the financial asset transferred, the Group continues recognizing this asset, in addition to a loan secured by the receivables.

 

·                      Financial Liabilities

 

i. Financial liabilities measured at fair value through profit or loss: include financial liabilities that are regularly traded before maturity and liabilities at fair value through profit or loss on initial recognition, except those designated as hedge instruments. They are remeasured at fair value at every balance sheet date. Interest, inflation adjustment, foreign exchange changes and changes arising from measurement at fair value, when applicable, are recognized in the profit or loss when incurred. The Company classifies under this category derivatives not designated as an effective hedge instrument.

 

ii. Financial liabilities measured at amortized cost: financial liabilities that are not regularly traded before maturity. After initial recognition, they are remeasured at amortized cost using the effective interest method. Interest, inflation adjustment and foreign exchange changes, if applicable, are recognized in profit or loss when incurred. The Company recognized under this category current and noncurrent short and long term debt (including finance leases) and trade accounts payable.

 

e)         Trade and other receivables

 

Trade receivables are measured based on cost, less allowances for doubtful accounts, which approximates its fair value, due to their short-term nature.

 

The allowance for doubtful accounts is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivable through risk analysis and taking into account the historical analysis of the recovery of arrears. The allowance for doubtful receivables is the difference between the book value and recoverable amount and the provision is made for all accounts overdue for more than 90 days for installment sales, travel and cargo agencies, and 180 days in respect of airline partners.

 

f)         Inventories

 

The inventories are composed primarily of maintenance and spare parts and materials, and are stated at the lower of cost and the net realizable value. The costs of inventories are determined under the average cost method and include expenses incurred in their acquisition and transportation to their current location. The provision for inventory obsolescence is recorded when losses are probable.

 

g)         Lease accounting

 

In accordance with the CPC 06 and IAS 17 "Leases", leases are classified as finance leases when the lease arrangement transfers substantially all the risks and rewards of ownership to the lessee, or meet the following conditions:

F-17

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

i. the lease transfers ownership of the asset to the lessee at the end of the lease term;

 

ii. the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than fair value at the date the option becomes exercisable such that, at the inception of the lease, is reasonably certain that the option will be exercised;

 

iii. the lease term is the most part of the economic asset life, even if the title is not transferred;

 

iv. at the beginning of the lease, the present value of minimum lease payments represents at least substantially all the fair value of the leased asset, and

 

v. the leased assets are of such a specialized nature such that only the lessee can use them without major modifications.

 

The amounts payable arising from finance lease installments are recognized and allocated between financial expenses and repayment of finance lease so as to achieve a stable interest rate.

 

The difference between the present value and the total amount of falling due installments is charged to profit or loss as financial expenses. The corresponding obligation to the lessor is accounted for as short and long term debt. The aircraft held under finance leases, which have a purchase option at the end of the contract, are depreciated on a straight-line basis over the useful life at rates calculated to write down the cost to the estimated residual value of 20% based on market price valuations. All other aircraft recorded in property, plant and equipment, when there is no reasonable certainty that the Company will obtain ownership of the property at the end of the contractual term, are depreciated over the shorter of the useful life of the assets and the lease term.

 

The other leases are classified as operating leases and are recognized as an expense in the income statement on a straight-line basis over the term of the lease contract.

 

·                      Sale-leaseback 

 

Gains or losses related to sale-leaseback transactions classified as an operating lease after the sale are accounted for as follows:

 

i. They are immediately recognized as other (expense) income when it is clear that the transaction is established at fair value;

 

ii. If the sale price is below fair value, any profit or loss is immediately recognized as other (expense) income, however, if the loss is compensated by future lease payments at below market price, it is deferred and amortized in proportion to the lease payments over the contractual lease term;

 

iii. In the event of the sale price being higher than the fair value of the asset, the value exceeding the fair value is deferred and amortized during the period when the asset is expected to be used. The amortization of the gain is recorded as a reduction in lease expenses.

 

If the sale-leaseback transactions results in financial lease, any excess proceeds over the carrying amount shall be deferred and amortized over the lease term. The Company did not have any sale-leaseback transaction that resulted in financial lease.

 

F-18

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

h)         Prepaid expenses

 

Represent advance payments whose benefits to the Company will occur after the balance sheet date, obeying the criteria of segregation between short and long term.

 

i)          Property, plant and equipment

 

Property, plant and equipment, including rotable parts, are recorded at acquisition or construction costs, including interest and other financial charges. Each component of property, plant and equipment that has a cost which is significant in relation to the overall cost of the item is depreciated separately. Aircraft and engine spares acquired on the introduction or expansion of the fleet, as well as rotable spares purchased separately, are carried as fixed assets and generally depreciated in line with the fleet to which they relate. Pre-delivery deposits refer to prepayments made based on the agreements entered into with Boeing Company for the purchase of Boeing 737-800 Next Generation aircraft.

 

Assets held through finance leases are depreciated over the shorter of the expected useful life or the contractual lease term, if there are no purchase options at the end of the agreement in question.

 

The estimated useful life for property and equipment is disclosed in Note 16.

 

The Company follows the CPC 27 and IAS 16 - "Property, Plant and Equipment", and performs the capitalization of the costs relating to engine overhauls. This practice establishes that costs for major maintenance (including replacement parts and labor) should be capitalized only when there is an extension of the estimated useful life of the engine. Such costs are capitalized and depreciated until the next major maintenance. We record as expense all other maintenance costs of aircraft components or engines, as these do not extend useful life.

 

Identifiable interest costs incurred on short and long term debt directly attributable to assets under construction, including pre-delivery deposits to acquire new aircraft, are capitalized and included as part of the cost of the assets through the earlier of the date of completion or aircraft delivery.

 

The accounted value of fixed assets is analyzed in order to verify losses in recoverable value when events or changes in circumstances indicate the book value is higher than the estimated recoverable amount.

 

A write off a fixed asset item occurs after disposal or when there is no future economic benefits resulting from continued use of the asset. Any gains or losses on fixed asset sale or write-off are determined by the difference between the values ​​received in the sale and the asset's book value, and are recognized in income.

 

j)         Intangible assets

 

There are non-monetary assets without physical property, whose book value is reviewed annually as to its recoverable amount, or when strong evidence of changes in circumstances indicates that the carrying amount may not be recoverable.

 

i.                     Goodwill 

 

The goodwill value is tested annually by comparing the balance value to fair value recoverable from the cash-generating unit that, in this case is the operating subsidiary VRG. Management exercises considerable judgment to assess the impact of operating and macroeconomic changes in order to estimate the future cash flows and measure the recoverable amount of that asset. The assumptions adopted by the Company on the impairment tests are consistent with internal projections and operating plans. No impairment losses have been recorded until the present date.

 

F-19

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

ii.         Airport operating rights

 

Airport operating rights were acquired as part of the acquisition of VRG and of WEBJET, and were capitalized at fair value at the acquisition date and are not amortized. Those rights are considered to have an indefinite useful life due to several factors and considerations, including requirements and necessary permits to operate within Brazil and limited slot availability in the most important airports in terms of traffic volume. The carrying value of these rights is evaluated annually as to its recoverable amount or in case of changes in circumstances indicates that carrying values may not be recoverable. No impairment has been recorded until the present date.

 

iii.        Trademark

 

VRG brand name was acquired as part of the VRG acquisition and was capitalized at fair value at the acquisition date. The brand name is considered to have an indefinite useful life and, therefore, it is not amortized. The carrying value of these rights is evaluated annually as to its recoverable amount or in case of changes in circumstances indicates that carrying values may not be recoverable.

iv.        Software

 

The costs related to the acquisition or development of computer software that is separable from an item of related hardware is capitalized separately and amortized over a period not exceeding five years on a straight-line basis.

 

The carrying value of these intangibles is reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable.

 

 

k)         Deposits

 

i. Aircraft and engine maintenance deposits

 

The Maintenance deposits refer to payments made in US Dollar by the Company to commercial lease companies to be used in future aircraft and engine maintenance work. The realization of these assets occurs substantially by the receipts of funds, according to the renegotiations with the lessors. The exchange rate from payments, net of uses for maintenance is recognized as an expense in the financial result. Management performs regular reviews of the recovery of maintenance deposits and believes that the values reflected in the consolidated balance sheet are recoverable.

Certain lease agreements establish that the existing deposits, in excess of maintenance costs are not refundable. Such excess occur when the amounts previously used in maintenance services are lower than the amounts deposited. Any excess amounts retained by the lessor upon the lease contract termination date, which are not considered material, are recognized as additional aircraft lease expense.

 

Additionally, the Company maintains agreements with some lessors to replace deposits with letters of credit, to enable the utilization of deposits to cover other disbursements related to lease agreements of its subsidiaries VRG and Webjet. Many of the aircraft lease agreements do not require maintenance deposits.

 

F-20

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

ii. Deposits in guarantee and collaterals for lease agreements

 

The deposits in guarantee and collaterals are represented by amounts deposited with lessors of the lease monthly payments, as required at the inception of the lease agreements. The deposits in guarantee and collaterals are denominated in U.S. Dollars, do not bear interest and are reimbursable to the Company upon termination of the agreements.

 

l)          Foreign currency transactions

 

Transactions in foreign currencies are recorded at the exchange rate prevailing at the time that the transaction occurs. Monetary assets and liabilities denominated in foreign currencies are subsequently recalculated based on the exchange rate at the balance sheet date and differences resulting from the conversion calculation are recognized in the statements of income.

 

m)        Hedge accounting

 

The Company and its subsidiaries contract certain financial derivatives to hedge its risks, related to the changes in oil prices (fuel), foreign exchange rate and interest rate. The derivatives may be designated as hedge accounting, and if they are designated, are classified as fair value hedges or cash flow hedges. 

 

For classification as hedge accounting, the derivative should protect against changes in the hedged fair value or cash flow. At the beginning of the hedge transaction, the Company and its subsidiaries document the relationship between the hedge instrument and the hedged item, including risk management goals, and if the transaction will be designated for hedge accounting.

 

The hedge accounting is prospectively discontinued when the Company and its subsidiaries revoke the hedge relationship, the hedging instrument either expires, is sold, terminated, exercised, or no longer is qualified for hedge accounting.

 

i. Fair value hedge

 

The changes in fair value of hedge instruments and hedge item attributable to the hedge risk are recognized in the income statement item related to the hedge item.

 

ii. Cash flow hedge

 

The effective part of changes in fair value of derivatives that are designated as a cash flow hedge is recognized in other comprehensive income and accumulated under the “Other Comprehensive Income” in shareholder’s equity. The gains or losses that are related to the ineffective portion are recognized immediately in financial result.

 

At the moment that the hedge item is recognized in the financial result, amounts previously recognized in other comprehensive income and accumulated in shareholder’s equity are reclassified to profit and loss under the same section of the income statement in which the item is recognized.

 

Hedge accounting is discontinued prospectively when the Company and its subsidiaries (i) cancel the protection relation, (ii) the derivative instrument expires or is settled, terminated or executed, or (iii) when it no longer qualifies for hedge accounting. If the hedge accounting is discontinued, any gains or losses recognized in other comprehensive income and previously accumulated in equity at that time remains in shareholder’s equity and are recognized when the forecasted transaction is finally recognized as financial result. When the forecasted transaction is not expected anymore, the gains or losses accumulated in equity and deferred are recognized in the financial result immediately.

F-21

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

n)         Share-based payments

 

The fair value of GLAI equity-settled transactions with employees of stock options and restricted shares plan were estimated on the date of grant of the options using the Black-Scholes pricing.

 

This fair value is recorded on a straight-line basis, according to IFRS 2 and CPC 10 (R1) – “Share-Based Payment”, as an expense in net income for the year over the vesting period, based on Management’s estimates on which options granted will become eventually vested, with a corresponding increase in shareholders’ equity. At the end of each reporting period, the Company revises its estimates of the amount of equity instruments that will be acquired. The impact of the review in relation to original estimates, if any, is prospectively recognized in the profit and loss of the remaining periods, so that the cumulative expense reflects the (revised) estimates with a corresponding adjustment to shareholder’s equity in the “Deferred Compensation” account reserve, which reported the benefits to employees.

 

o)         Provisions

 

Provisions are recognized when the Company has a present obligation (legal or presumed) as a result of past events and it is probable that an outflow of resources will be required to settle the obligation.

 

When the Company expects some or all of the provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset when the reimbursement is virtually certain.

 

The expense relating to any provision is presented in profit or loss net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost.

 

Provisions for aircraft and engines returns follow different criteria in relation to when such expenses are recognized in income.

i. Aircraft return provisions

 

For aircraft operating leases, the Company is contractually required to return the equipment with a predefined level of operational capability. In these cases, the Company accrues the cost of the return, since these are present obligations arising from past events that will generate future disbursements, whose measurement is made with reasonable assurance. These costs primarily related to expenses of aircraft reconfiguration (interior and exterior), obtaining licenses and certifications techniques, painting, etc. according to return agreement clauses. The estimated cost is initially recorded at present value and the consideration of the provision for aircraft return is made under "other flight equipment" in fixed assets (see note 16). After initial recognition, the asset is depreciated on a straight-line basis and liabilities updated according to the discount rate.

ii. Engine return provisions

 

Are estimated based on the minimum contractual conditions that the equipment must have when returned to the lessor, considering the historical costs incurred and the conditions of the equipment at the time of evaluation. These provisions are recorded in the income statement from the time that the minimum contract requirements are reached and the next maintenance is scheduled for a date later than the date set for the return of the engine.

 

F-22

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

iii. Onerous contracts

 

An onerous contract arises when unavoidable costs to meet the obligations assumed under the contract exceed the economic benefits that are expected to be received over the contract term. Present obligations resulting from onerous contracts are recognized and measured as provisions.

The provision for onerous contracts refers to losses on operating lease agreements of out-of-service aircraft. The provision corresponds to the net amount between the present value of the installments of the respective leases and the expected revenue from the use of such aircraft through operation or subleases, where applicable. The assumptions used are estimates and the settlement of these transactions may result in amounts significantly different from those recorded.

 

iv. Provision for Restructuring

 

The restructuring is a program planned and controlled by management and that materially changes the way the Company's activity is conducted. During this process, the costs necessary for the closure are measured and a provision is recognized for the amount sufficient to meet the obligations generated. For further details, see note 11.

 

v. Provision for Insurance

 

Management keeps insurance coverage in amounts considered necessary to cover any claims, in view of the nature of the Company’s assets and the risks inherent in its operating activities, with due heed being paid to the limits set out in the lease agreements, in compliance with provisions of the Law nº 10744/03. The provision for insurance is represented by the Company's obligation to pay for existing policies.

 

vi. Other provisions

Are substantially related to lawsuits and are provided in respect of losses considered probable in management's judgment, related to labor, civil and tax matters, the latter being presented under the tax obligations line, in the case of existence and legal obligation.

 

p)         Revenue recognition

             

The passenger revenue is recognized when air transportation services are actually provided to the passenger. Tickets sold but not yet used are recognized as advance ticket sales, correspond to deferred revenue from sold tickets to be honoured at a future date, net of tickets that will expire in accordance with the Company´s (breakage) expectations based on historical data.

 

Breakage consists of the statistical calculation, on a historical basis, of unused, expired tickets, i.e., tickets not booked (passengers to be transported) that have a high probability of not flying. The Company periodically records adjusted deferred revenues based on tickets actually expired.

 

The balance of deferred revenue also refers to tickets rescheduled by passengers.

 

Revenues from cargo shipments are recognized when transportation is provided. Other revenues includes charter services, miles sales, onboard sales services, tickets exchange rates, and other additional services, and are recognized when the service is provided.

 

 

F-23

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

q)         Assets held for sale

 

These are assets where their value can be recovered through highly probable sales transactions, and are available for immediate sale in their present condition. They are measured based on the lowest value when comparing the fair value and the book value less selling costs. Such are not depreciated or amortized and once classified in this category, the sale must be completed within one year. For more details, see note 11.

 

r)         Mileage program

 

The "Smiles Program" is designed to retain its customers through the granting of mileage credits to participants. The obligation created by the issuance of miles is measured at fair value, based on the estimated price that the Company would pay a third party to assume the obligations associated with the Smiles program. Revenue is essentially generated by the sale of miles to merchants, financial institutions or individual Smiles program members.

 

According to IFRIC 13-Customer Loyalty Programmes, the fair value of the consideration received in relation to all sales is allocated as deferred revenue in the frequent flyer program Smiles and the difference between fair value and sale price is recognized under "other revenue". The revenue allocated to the miles of Smiles program is recognized in the results when the products are delivered or when services are rendered.

 

The fair value of mileage credit, net of estimated non-use of miles (breakage) is determined by the weighted average according to:

 

i. the average amount charged per seat by VRG to airlines that participate in the loyalty program divided by the amount of miles required to issue a ticket using miles; and

ii. the average sale price of miles sold to airlines that participate in the loyalty program Smiles.

The Company’s policy is to cancel all miles contained in the accounts of customers after 3 years and 11 months. The associated value for mileage credits estimated to be cancelled is recognized as revenue. The Company calculates the expiration estimate and non-use estimates based on historical data. Future opportunities can significantly alter the customer profile and the historical patterns. Such changes may result in material changes to the deferred revenue balance, as well as revenues recognized from that program.

 

s)         Segment information

 

CPC 22 and IFRS 8 – “Operating Segments” require that operations by segment are identified based on internal reports which are regularly reviewed by decision makers in order to allocate resources to segments and assess their performance.

 

The Company’s operations are derived from its subsidiaries VRG and Webjet and consist of the providing of air transportation services within South America and the Caribbean. The Company’s Management performs the resources allocation in order to maximize the consolidated financial results. The major revenue earning assets of the Company are its aircraft, the leases of which are paid in Brazil. Other revenues primarily arise from cargo, Smiles mileage program, installment sales, excess baggage charges and cancellation fines, all directly attributable to air transportation services.

 

Based on the way the Company treats its business and the manner in which resource allocation decisions are made, the Company has only one operating segment for financial reporting purposes. The Company’s primary reporting segments comprise of net revenue by geographic segments as described in Note 25.

 

 

F-24

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

t)         Income taxes

 

i. Current income tax

 

The provision for income tax and social contribution is based on taxable profit for the year. Taxable income differs from earnings presented in the income statement because it excludes the effects of transition tax regime (RTT) revenues or expenses taxable or deductible in other years, and excludes items not taxable or not deductible permanently. The provision for income tax and social contribution is calculated for each company based on the rates prevailing at the end of the year.

 

Current income tax relating to items recognized directly in equity is recognized in equity and not in profit and loss.

 

ii. Deferred income tax

 

Deferred income tax and social contribution are recognized on temporary differences at the end of each reporting period between the balances of assets and liabilities recognized in financial statements and tax bases used in the calculation of taxable income, including net tax losses, when applicable. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized for all deductible temporary differences, only when it is probable that the company will present future taxable income in an amount sufficient to permit such deductible temporary differences to be used.

 

The value of deferred income tax is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow tax credits to be utilized. Unrecognized deferred income tax assets are reassessed at each balance sheet date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

 

Deferred income tax assets and liabilities are determined, considering tax rates and tax laws ratified or substantially ratified at the balance sheet date and which expects to be applied when the respective asset is realized or the liability is settled.

 

Deferred income tax and social contribution, assets and liabilities are compensated if there is a legal right and intention to offset them when calculating the current taxes, generally when related to the same taxable entity and the same taxation authority.

 

u)         Main accounting estimates and assumptions adopted

 

The process of preparing these Financial Statements often requires that the Management adopt assumptions, judgments and estimates that may affect the application of the policies and amounts of assets and liabilities, revenues and expenses. 

The actual results may differ from the adopted estimates, since such estimates are based on  historical experience and various assumptions that are believed to be appropriate under the circumstances. The adjustments to accounting estimates are recognized in the same period as the assumptions are reviewed and are recognized on a prospective basis.

The estimates and assumptions that have a significant risk of material adjustments on the accounted-for amounts of assets and liabilities are discussed below:

 

 

F-25

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

i.          Impairment of non-financial assets

 

The Company assesses if there are indications of impairment for all non-financial assets at every balance sheet date, or when there is evidence that the carrying amount may not be recoverable.  The recoverable values of the cash-generating unit were determined using its value-in-use. The value-in-use is determined based on the assumption of discounted cash flows set by Management.

 

Other non-financial assets are tested for impairment when there are indications that their carrying amounts might not be recoverable.

 

ii.         Income taxes

 

The Company believes that the tax positions taken are reasonable. However, it recognizes that the authorities may question the positions taken which may result in additional liabilities for taxes and interest. The Company recognizes provisions that involve considerable judgment of the management. The provisions are reviewed and adjusted to account for changes in circumstances, such as lapsing of applicable statutes of limitations, conclusions of tax authorities, additional exposures based on identification of new issues or court decisions affecting a particular tax issue. Actual results can differ from estimates.

 

iii.        Property, plant and equipment and intangibles

 

At the end of the reporting period, the Company reviews the carrying amounts of its property, plant and equipment items to determine if there is any indication that they might be impaired. If such indication exists, the recoverable amount of the asset is estimated to measure the impairment loss. 

 

iv.        Breakage

 

As part of the process of revenue recognition, the flight tickets issued that will not be used and the miles issued that will not be redeemed are estimated and recognized as revenue at the moment of the sale and issuance, respectively. These estimates, referred to as breakage, are reviewed annually and are based on historical data of expired flight tickets and expired miles.

 

v)         Business combinations

 

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the sum of the consideration transferred, based on the fair value on acquisition date. Costs directly attributable to the acquisition are accounted for as an expense when incurred.

 

The assets acquired and liabilities assumed were measured at fair value, classified and allocated according to the contractual terms, economic circumstances and relevant conditions on the acquisition date. If the consideration is lower than the fair value of net assets acquired, the difference is recognized as a gain in the income statement.

 

Goodwill is measured as the excess of consideration transferred in relation to net assets acquired at fair value.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses.

 

x)    New standards and interpretations issued and revised in 2012

 

i.                     New standards, interpretations and revisions issued and adopted in 2012:

 

Pronouncement

 

D escription 

 

Issue

 

Applicable

Amendment to IAS 12, Income taxes

 

Taxes on profit

 

Dec/2010

 

Jan/2012

 

F-26

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

ii. New standards, amendments and interpretations issued and not yet effective:

 

Pronouncement

 

D escription 

 

Applicable

Amendment to IFRS 7

 

Disclosures-netting of assets and liabilities

 

January 1st, 2013

IFRS 9

 

Financial Instruments

 

January 1st, 2015

IFRS 10

 

Consolidated Financial Statements

 

January 1st, 2013

IFRS 11

 

Participation Agreements

 

January 1st, 2013

IFRS 12

 

Disclosures of interests in other entities

 

January 1st, 2013

IFRS 13

 

Fair value measurement

 

January 1st, 2013

Amendment to IAS 1

 

Presentation of Items of Other Comprehensive Income

 

July 1st, 2012

Amendment to IFRS 9 and 7

 

Disclosures-Mandatory Application date of IFRS 9 and interim Disclosures

 

January 1st, 2015

Amendment to IFRS’s 10, 11 and 12

 

Additional information and Disclosures of interests in other entities: Transition Guide

 

January 1st, 2015

IAS 19 (reviewed in 2011)

 

Employee Benefits

 

January 1st, 2013

IAS 27 (reviewed in 2011)

 

Separate Financial Statements

 

January 1st, 2013

IAS 28 (reviewed in 2011)

 

Investments in affiliated companies and Joint Ventures "

 

January 1st, 2013

Amendment to IAS 32

 

Offsetting Financial assets and liabilities

 

January 1st, 2014

IFRIC 20

 

Removal costs in the production phase of a surface Mine

 

January 1st, 2013

 

 

·          The amendments to IFRS 7 increase the requirements of disclosure of transactions involving financial assets. These changes are intended to provide greater transparency to risk exposures when a financial asset is transferred, but the transferor still retains some level of exposure from the asset. The amendments also require the disclosure of the transfer of financial assets when they are not equally distributed in the period.

The Company's management does not expect these changes to IFRS 7 to have a significant effect on the disclosures in its financial statements.

·          IFRS 9, issued in November 2009 and amended in October 2010, introduces new requirements for the classification, and measurement of financial assets and liabilities. Such provides that all recognized financial assets that are included in the scope of IAS 39 (equivalent to CPC technical pronouncement nº 38) are subsequently measured at amortised cost or fair value.

The company's management does not expect that IFRS 9 will have a significant effect on the balances reported in relation to financial assets and liabilities.

·          In May 2011, a package of five rules for consolidation, participation agreement, affiliated companies and disclosures was issued, including IFRS 10, 11, 12, IAS 27 (revised in 2011) and IAS 28 (revised in 2011).

The main requirements of these five standards are described below:

i.           The IFRS 10 substitutes that part of IAS 27 which covered consolidated financial statements. SIC-12 Consolidation - special purpose entities was withdrawn with the issuance of IFRS 10. In accordance with IFRS 10, there is only one basis of consolidation, that is, the control.

ii.           The IFRS 11 substitutes IAS 31-interests in Joint Ventures ". IFRS 11 discusses how a participation agreement in which two or more parties have divided control must be accounted for. SIC-13 "Joint Ventures"-non-monetary Contributions from investors was withdrawn with the issuance of IFRS 11. In accordance with IFRS 11 participation agreements are classified as joint operations or joint ventures ", as the rights and obligations of the parties to the agreements.

F-27

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

iii.     The IFRS 12 is a standard of disclosure applicable to entities that own participations in subsidiaries, participation agreements, affiliates and/or unconsolidated structured entities. Generally, the disclosure requirements in accordance with IFRS 12 are more comprehensive than the current rules.

These five standards are applicable to annual periods beginning on or after January 1, 2013. The Administration does not expect IFRS 10, 11, 12, IAS 27 (revised in 2011) and IAS 28 (revised 2011) to have a relevant effect on its financial statements of future periods.

·       IFRS 13 offers a single source of guidance for fair value measurements and disclosures about fair value measurements. The standard defines fair value, provides a framework for measuring fair value and requires disclosure of fair value measurements. The scope of the IFRS 13 is comprehensive, applying to items of financial and non-financial instruments, for which other IFRSs require or permit fair value measurements and disclosures of fair value measurements, except in certain cases. IFRS 13 is applicable to annual periods beginning on or after January 1, 2013.

The Company's management expects that IFRS 13 will result in more comprehensive disclosures in its financial statements.

·       Amendments to IAS 1 allow a company to present the result and another comprehensive result in one statement or in two separate statements. However, the change to IAS 1 requires additional disclosures in other comprehensive income so that the items of other comprehensive income are grouped into two categories: (1) items that will not be reclassified later in the results; and (2) items that will be reclassified later in the results according to certain conditions. The income tax on the items of other comprehensive income will be designed in the same way. The amendments to IAS 1 are applicable to annual periods beginning on or after July 1, 2012.

The presentation of items of other comprehensive income will be modified appropriately as the modifications are adopted in future accounting periods.

·       Amendments to IAS 19 change the accounting for defined benefit plans and termination benefits. The most significant modification refers to accounting for changes in defined benefit obligations and plan assets. The modifications require the recognition of changes in defined benefit obligations and the fair value of plan assets as they occur, and therefore the elimination of the "corridor approach" allowed in the previous version of IAS 19 of the early recognition of past service costs. The amendments to IAS 19 are applicable to annual periods beginning on or after January 1, 2013 and demands retroactive application, except in certain circumstances.

The Company has no operations that may be impacted by the changes to IAS 19.

·       IFRIC 20 clarifies the requirements for accounting for costs of waste removal in surface mining, including the time when such costs should be recognized as active and how this asset must be initially recognized and subsequently evaluated. The Company has no operations that may be impacted by the IFRIC 20.

There are no other IFRS standards or IFRIC interpretations that have not yet entered into force which could have significant impact on the Company.

The CFC and the CPC have committed themselves to issue new standards as issued by the IASB and to review and update all documents issued in order to keep Brazilian accounting practices fully complying with international standards for the preparation and presentation of the separate financial statements of Brazilian companies (with the forementioned exception that until is legally possible the complete convergence or until there is change on the part of the IASB).

F-28

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

The Company can apply a new IFRS, although not mandatory, only when this IFRS allows application however, subject to the approval of correlated pronouncement by the CPC and, where applicable, subject to prior approval by the regulatory body to which the company is subject, when it requires the adoption of IFRSs for regulated entities.

 

 

3.    Cash and cash equivalents

 

 

Consolidated

 

12/31/2012

 

12/31/2011

       

Cash and bank deposits

408,387

 

157,452

Cash equivalents

367,164

 

1,072,835

 

775,551

 

1,230,287

 

As of December 31, 2012, cash equivalents were represented by private bonds (CDBs - Bank Deposit Certificates), Government bonds and fixed-income funds, paid at post fixed rates ranging between 90.0% and 102.7% of the Interbank Deposit Certificate Rate (CDI).

The composition of cash equivalents balance is as follows:

 

 

Consolidated

 

12/31/2012

 

12/31/2011

       

Private bonds

115,891

 

284,911

Government bonds

166,760

 

787,605

Investment funds

84,513

 

319

 

367,164

 

1,072,835

 

 

4.    Short-term investments

 

 

Consolidated

 

12/31/2012

 

12/31/2011

Private bonds

178,184

 

12,071

Government bonds

220,778

 

124,400

Investment funds

186,066

 

872,597

 

585,028

 

1,009,068

 

Private bonds comprise of CDBs (“Bank Deposit Certificates”), with maturity until September 2013 and which are highly liquid, paid at a weighted average rate of 99.47% of the CDI rate.

 

Public bonds comprise of LTN (National Treasury Bills), NTN (National Treasury Bills), paid at a variable average for the last twelve months of 8.47% p.y.

F-29

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

Investment funds are represented primarily by government bonds LTN and CDBs.

 

5.    Restricted Cash

 

 

 Consolidated

 

12/31/2012

 

12/31/2011

Margin deposits for hedge transactions (a)

50,749

 

82,996

Guarantee margin deposits associated with loans from BNDES (b)

-

 

8,591

Deposits in guarantee with letter of credit (Safra) (c)

72,092

 

8,471

Escrow – Webjet’s acquisition

-

 

8,554 - 

Escrow - Bic Banco

10,040

 

-

Deposits in guarantee of forward future operations (d)

89,038

 

-

Other deposits  

2,605

 

483

 

224,524

 

109,095

 

Current

7

 

8,554

Noncurrent

224,517

 

100,541

 

(a)       Deposits in US Dollar, subject to the libor rate (average yield of 0.75% p.y.).

(b)      Guarantee margin, invested in DI investment funds and yielding at a weighted average rate of 101.5% of CDI.

(c)       The value of the guarantee is related to the Webjet loan.

(d)      Escrow future operations applied on LTN (average compensation 10.35%).

 

 

6.    Trade and other receivables

 

 

Consolidated

 

12/31/2012

 

12/31/2011

Local currency:

 

 

 

Credit card administrators

92,621

 

100,214

Travel agencies

171,314

 

185,544

Installment sales

37,882

 

47,189

Cargo agencies

35,897

 

37,460

Airline partners companies

17,443

 

17,031

Other

33,396

35,077

 

338,553

 

422,515

Foreign currency:

 

 

 

Credit card administrators

12,269

 

9,228

Travel agencies

5,695

 

6,833

Cargo agencies

393

 

301

 

18,347

 

16,362

 

406,900

 

438,877

 

 

 

 

Allowance for doubtful accounts

(80,712)

 

(83,610)

 

326,188

 

355,267

Current

325,665

 

354,134

Noncurrent (*)

523

 

1,133

       

 

(*) The portion of noncurrent trade receivables is recorded in other receivables, in noncurrent assets, and corresponds to installment sales made under the Voe Fácil program, with maturity over 360 days. 

The aging list of accounts receivable is as follows:

F-30

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

Consolidated

 

12/31/2012

 

12/31/2011

Falling due

288,327

 

317,016

Overdue until 30 days

12,077

 

20,618

Overdue 31 to 60 days

7,659

 

7,507

Overdue 61 to 90 days

5,707

 

4,954

Overdue 91 to 180 days

9,176

 

11,754

Overdue 181 to 360 days

15,087

 

15,307

Overdue above 360 days

68,867

 

61,721

 

406,900

 

438,877

 

The average collection period of installment sales is eight months and a 5.99% monthly interest is charged on the receivable balance, which is recognized as financial income. The average collection period of other receivables is 102 days (108 days as of December 31, 2011.)

Changes in the allowance for doubtful accounts are as follows:

 

Consolidated

 

12/31/2012

 

12/31/2011

Balance at beginning of the year

(83,610)

 

(60,127)

Additions

(25,193)

 

(35,849)

Additions arising from acquisition of Webjet

-

 

(3,376)

Unrecoverable amounts

8,560

 

3,304

Recoveries

19,531

 

12,438

Balance at the end of the year

(80,712)

 

(83,610)

 

7.         Inventories 

 

 

Consolidated

 

12/31/2012

 

12/31/2011

 

 

 

 

Consumables

19,882

 

20,148

Parts and maintenance materials

112,970

 

127,080

Advances to suppliers

15,861

 

12,725

Others

6,917

 

9,270

Provision for obsolescence

(17,591)

 

(18,200)

 

138,039

 

151,023

 

Changes in the allowance for inventory obsolescence are as follows:

 

Consolidated

 

12/31/2012

 

12/31/2011

Balance at the beginning of the period

(18,200)

 

(17,004)

Additions

(325)

 

(52,233)

Aditions arising from acquisition of Webjet

-

 

(13)

Write-offs 

934

 

51,050

Balance at the end of the period

(17,591)

 

(18,200)

 

 

8.    Deferred and recoverable taxes

 

F-31

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

Consolidated

 

12/31/2012

 

12/31/2011

Recoverable taxes:

 

 

 

Assets

 

 

 

ICMS (1)

24,147

 

13,222

Prepaid IRPJ and CSSL (2)

67,070

 

77,679

IRRF (3)

30,361

 

16,584

PIS and COFINS (4)

1,250

 

54,085

Withholding tax of public institutions

6,182

 

26,791

Value added tax – IVA (5)

4,744

 

4,242

Income tax on imports

13,579

 

17,740

Others

428

 

2,655

Total recoverable taxes - current

147,761

 

212,998

 

 

 

 

Current Assets

110,999

 

212,998

Non current Assets

36,762

 

-

 

(1) ICMS: State tax on sales of goods and services.

(2) IRPJ: Brazilian federal income tax on taxable income.

     CSLL: social contribution on taxable income, created to sponsor social programs and funds.

(3) IRRF: withholding income tax levied on certain domestic transactions, such as payment of fees to some service providers, payment of salaries, and financial income from bank investments.

(4) PIS/COFINS: Contributions to Social Integration Program (PIS) and Contribution for the Financing of Social Security (COFINS)

(5) IVA: Value added tax on sales of goods and services abroad.

 

 

Consolidated

 

12/31/2012

 

12/31/2011

 

 

 

 

Deferred taxes:

 

 

 

 

 

 

 

Tax losses

426,804

 

427,167

Negative basis of social contribution

153,650

 

153,780

 

 

 

 

Temporary differences:

 

 

 

Mileage program:

166,332

 

97,483

Allowance for doubtful accounts and other credits

69,784

 

62,317

Provision for loss on acquisition of VRG

143,350

 

143,350

Provision for legal and tax liabilities

36,765

 

57,151

Return of aircraft

46,812

 

22,089

Derivative transactions not settled

42,007

 

36,852

Effects from Webjet’s acquisition

-

 

7,086

Brands

(2,158)

 

(21,457)

Flight rights

(353,226)

 

(353,226)

Maintenance deposits

(110,327)

 

(101,630)

Depreciation of engines and parts for aircraft maintenance

(159,697)

 

(140,677)

Reversal of goodwill amortization

(102,128)

 

(76,596)

Aircraft leasing

(12,876)

 

(26,902)

Other

51,499

 

36,497

Total deferred tax and social contribution

396,591

 

323,284

 

 

 

 

 

The Company and its direct subsidiary VRG and indirect subsidiary Webjet have tax losses and negative basis of social contribution in the calculation of taxable income, to compensate with 30% of annual taxable profits, without time limit for expiry, in the following amounts:

 

 

Direct (VRG) and indirect subsidiary (Webjet)

 

12/31/2012

 

12/31/2011

Tax losses

2,854,316

 

1,887,267

Negative basis of social contribution

2,854,316

 

1,887,267

F-32

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

As of December, 31, 2012, tax credits arising from tax loss carryforwards and negative social contribution basis were valued based on the reasonably expected generation of future taxable income of the parent company and its subsidiaries, subject to legal limitations.

Projected future taxable income on tax loss carryforwards and negative social contribution are prepared based on business plans reviewed annually and approved by the Board of Directors. Such projections reflect changes in the economic scenario, market changes and also results from decisions of the Administration, including the following assumptions:

        i.             The long-term scenario keeps the strategy adopted in 2012 of rationalization of domestic supply. Based on this strategy, it is possible to observe an increase in the occupancy rate of the aircraft in line with a flat yield ratio.

      ii.             Gol continues with the ancillary revenue growth plan, which can be verified during the year ended 2012, such as the special seat sales and the buy-on-board increase.

    iii.             Concerning the costs, the main change was the new level of personnel expenditure reached in 2012. Layoffs that occurred during the year made the basis of the projection more efficient, bringing an important effect in management costs.

    iv.             The projections include the arrival of new aircraft Boeing 737-MAX, announced in 2012. From 2018 the new aircraft will contribute to the Company to be even more efficient in fuel consumption.

 

Estimates of deferred tax asset recovery were based on projections of taxable profits when taking into consideration the above assumptions, in addition to several financial, business assumptions and internal and external factors,all based on considerations at the end of the financial year. Consequently, the estimates may not materialize in the future due to the uncertainties inherent in these predictions.

The Company and its subsidiaries have the total amount of tax credits of R$ 1,056,263, of which US$ 85,796 are from the parent company GLAI and R$ 970,467 are from the operating subsidiaries VRG and Webjet.

The projections for GLAI and its indirect subsidiary Webjet do not result in sufficient taxable profits to compensate all available tax credits over the next 10 years and, as a result, there has been recorded a provision for tax credit losses of R$41,244 for GLAI and R$173,508 for Webjet. For the direct subsidiary VRG, such projections indicate the existence of sufficient taxable profits for realization of all deferred tax credits recognized in up to 10 years. However, due to tax losses reported in the last years, the Administration conducted a sensitivity analysis on the results and projections and significant changes in the macro-economic scenario, which resulted in a recognition of deferred assets on the tax losses and the negative basis at the lowest value derived from this analysis. As a result, the Company and its subsidiaries recognized a provision for loss of R$261,056 related to the subsidiary VRG.

The expected utilization of tax credits per year is as follows:

   

Direct subsidiary (VRG)

2013

 

-

2014

 

123,642

2015

 

133,493

2016

 

144,930

2017 onwards

 

394,894

   

796,959

F-33

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

Additionally, the Company's management keeps focused on more effective actions to reduce operating costs and increase revenue levels, in addition to seeking improvements in the quality of services provided with the implementation of actions directed to improving customer service, achieving high levels of punctuality, simplification and the search for synergy in their operational processes. All these actions reinforce the Company's commitment to achieve sustainable levels of future profits and ratify the realization of deferred tax assets.

 

 

Consolidated

 

2012

 

2011

 

2010

Loss before income tax and social contribution

(1,584,822)

 

(1,000,418)

 

386,496

Combined tax rate

34%

 

34%

 

34%

Income tax credits at the combined tax rate

538,839

 

340,141

 

(131,409)

Adjustments to calculate the effective tax rate:

 

 

 

 

 

Equity in subsidiaries

-

 

-

 

-

Nondeductible income from subsidiaries

(27,325)

 

(37.972)

 

(26,283)

Income tax on permanent differences

(14,093)

 

20,117

 

(6,673)

Nondeductible expenses (nontaxable income)

(50,922)

 

(39,878)

 

(19,484)

Exchange differences on foreign investments

(47,252)

 

(48,396)

 

(61)

Benefit constituted (not recorded) on tax losses and temporary differences

(327,340)

 

14.868

 

11,611

Credit for income tax and social contribution

71,907

 

248,880

 

(172,299)

 

 

 

 

 

 

Current income tax and social contribution

(6,553)

 

(5,791)

 

(53,855)

Deferred income tax and social contribution

78,460

 

254,671

 

(118,444)

 

71,907

 

248,880

 

(172,299)

 

 

9.                       Prepaid Expenses

 

 

Consolidated

 

12/31/2012

 

12/31/2011

Deferred losses from sale-leaseback transactions

44,829

 

54,201

Prepayments of hedge premium

-

 

11,572

Lease prepayments

15,291

 

30,382

Insurance prepayments

17,705

 

22,775

Prepaid commissions

14,605

 

13,020

Others

5,354

 

6,811

 

97,784

 

138,761

 

 

 

 

Current

62,328

 

93,797

Noncurrent

35,456

 

44,964

 

During the reporting periods of 2007, 2008, and 2009, the Company recorded losses on sale-leaseback transactions performed by its subsidiary GAC Inc. relating to nine aircraft in the amount of R$89,337. These losses were deferred and are being amortized proportionally to the payments of the respective lease contracts during the contractual term of 120 months. Further information related to the sale-leaseback transactions are described in note 27b.

 

F-34

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

10.                   Deposits 

 

Maintenance deposits

The Company and its subsidiaries VRG and Webjet made deposits in US dollars for maintenance of aircraft and engines that will be used in future events as set forth in some finance lease contracts.

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

As of December 31, 2012, maintenance deposits are presented based on the net recoverable amount, whose balance classified in current assets and non-current liabilities was R$2.575 and R$324,492, respectively (R$35,082 and R$323,062 in current assets and noncurrent assets in December 31, 2011, respectively).

Deposits in guarantee for lease agreements

As required by the lease agreements, the Company and its subsidiaries hold guarantee deposits in US dollars on behalf of the leasing companies, whose full refund occurs upon the contract expiration date. As of December 31, 2012, the balance of guarantee deposits for lease agreements, classified in noncurrent assets, is R$173,313 (R$96,983 as of December 31, 2011).

Escrow deposits

Escrow deposits represent guarantees in legal proceedings related to tax, civil and labor claims, deposited in escrow until the resolution of the related claims, paid at SELIC  rate. The balances of escrow deposits as of December 31, 2012, recorded in noncurrent assets and presented at its net realisable value totalled R$156,816 (R$175,472 as of December 31, 2011).

11.   Webjet’s Operation Restructuring

 

On November 23, 2012, the Company initiated the winding up of Webjet’s activities and the consequent descontinuation of its brand. The winding up of Webjet´s activities aims at the optimization of the organizational structure of the companies and unification of their operations, reducing costs and bringing new synergies. The effects of these actions are described below.

 

The first measure taken for the winding up of activities was to cease all flight operations. Webjet had an operating model based on a fleet which mostly consists of aging Boeing 737-300 aircraft, that are older, technologically out-of-date and consume large amounts of fuel. Regarding this fleet, it is estimated that the return of all 18 aircraft will occur by the end of the first semester of 2013.

 

As a result of the winding up of activities, Webjet presented restructuring costs that were registered on the basis of an estimate by the company. This estimate involves employees lay-off costs, decrease in the recoverable value of the assets, provisions for return of aircraft and engines and contractual penalties.

 

Assets held for sale

 

Due to not representing a component according to IFRS 5 “Non-current assets held for sale and discontinued operation”, with operations and cash flows that could be clearly distinguished, operationally and for  disclosure purposes in the financial statements of the company, Webjet was not considered a "discontinued Operation". This understanding is supported by the fact that the routes previously operated by Webjet will continue to be operated by the Company.  Given that the Webjet fleet is available for immediate sale and their sale is considered to be highly probable, the accounting balance of aircraft was reclassified in accordance with IFRS 5, to the Group of "assets held for sale" and are recorded at the recoverable amount estimated by the Company as detailed below:

F-35

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

 

31/12/2012

Aircrafts

12,253

Engines

11,473

Impairment of assets

(15,552)

 

8,174

 

The total impairment of assets and recognition of obligations caused by the winding up of activities is as follows:

 

 

12/31/2012

Impairment of inventories (i)

5,348

Property, plant and equipment flight (ii)

25,766

Maintanence and security deposits for aircraft and engines (ii)

56,202

Provision for return of aircraft and engines (iii)

11,235

Contractual penalties (iv)

8,826

Employees lay-off (v)

16,917

Total Cost of Restructuring

124,294

 

        i.             Impairment of inventories and property, plant and flight equipment: represented by specific parts and components for the Boeing 737-300 fleet.

 

      ii.             Maintenance and security deposits for aircraft and engines: represents the estimate of losses due to the advanced termination of lease agreements, which amounts may not be reimbursed to the company.

 

    iii.             Return of aircraft and engines: represented by the additional cost that will be incurred due to the anticipated return of aircraft and engines;

 

    iv.             Contractual penalties: represented by the estimated value of the payments that the company will make to lessors due to the advanced termination of leasing contracts;

 

      v.             Employees lay-off: shutdown represents the estimated costs which the Company shall have due to the termination of flights using Boeing 737-300 and subsequent lay-off of the technical crew that operates this kind of fleet.

 

 

12. Transactions with related parties

 

Graphic, consulting and transportation services

The subsidiary VRG holds a contract with the related party Breda  Transporte s e Serviços  S.A. for passenger and luggage transportation services between airports, and transportation of employees, expiring on May 31, 2013, renewable every 12 months for additional equal terms through an amendment instrument signed by the parties, annually adjusted based on the IGP-M fluctuation (General Market Price Index) .

F-36

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

The subsidiary VRG also holds contracts with the related parties Expresso União Ltda . and Serviços Gráficos Ltda. , for employee transportation and graphic services, which expired on September 16, 2012 and July 18, 2012, respectively. After the end of the term, these contracts were not renewed.

The subsidiary VRG also holds contracts for the operation of the Gollog franchise in Passos/MG through the related party União Transporte de Encomendas e Comércio de Veículos Ltda. , expiring on December 29, 2015.

The subsidiary VRG also holds contracts with the related party Vaud Participações S.A. to provide executive administration and management services, expiring on October 01, 2014.

During the period ended December 31, 2012, VRG recognized total expenses related to these services of R$10,636 (R$11,101 as of December 31, 2011). All the entities referred above belong to the same economic group of the Company.

Leasing of property

VRG was lessee of the property located at Rua Tamoios, 246, São Paulo - SP, belonging to the Patrimony Asset Management controlled by Comporte Participações SA, a company that belongs to the same shareholder of the Company. The contract ended in August 2012, and currently such has not been renewed.

Contracts Account Opening UATP (Universal Air Transportation Plan) to Grant Credit Limit

In September 2011, the subsidiary VRG entered into agreements with related parties Pássaro Azul Taxi Aéreo Ltda. e Viação Piracicabana Ltda, both with no expiration date, with the purpose of the issuance of credits in the amounts of R$20 and R$40, respectively, to be used in the UATP (Universal Air Transportation Plan) system. The UATP account (virtual card) is accepted as a payment method on the purchase of airline tickets and related services, seeking to simplify the billing and facilitate the payment between participating companies.

Financing contract for engine maintenance

VRG has a line of funding for maintenance of engines whose disbursement occurs through the issuance of Guaranteed Notes. The series, issued on 29 June 2012 and 27 September 2012 respectively, will mature on June 29, 2014 and 27 September 2014 and aims to support the maintenance of engines, (see details in note 16). In the year ended on December 31, 2012 spending on engine maintenance conducted by Delta Air Lines was R$86,577.

Trade payables – current liabilities

As of December 31, 2012, balances payable to related companies amounting to R$1,019 (R$1,198 as of December 31, 2011) are included in the balance of accounts payables and substantially refers to the payment to Breda Transportes e Serviços S.A. for passenger transportation services.

Key management personnel payments

 

12/31/2012

 

12/31/2011

 

12/31/2010

Salaries and benefits

13,534

 

15,260

 

22,516

Related taxes

5,234

 

5,569

 

6,833

Share-based payments

8,306

 

17,760

 

24,743

Total

27,074

 

38,589

 

54,092

 

F-37

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

As of December 31, 2012, the Company did not offer postemployment benefits, and there are no severance benefits or other long-term benefits for the Management or other employees.

13.         Share-based Payments

 

The Company has two kinds of share-based payments plans offered to the key management personnel: the Stock Option Plan and the Restricted Shares. Both plans stimulate and promote the alignment of the Company’s goals, the administrators and employees, mitigate risks in value creation of the company for the loss of their executives and strengthen the commitment and productivity of these executives to long-term results. The plans were developed to attract and retain key managers and strategic talents, linking a significant part of their equity to the value of the Company.

  

The Stock Option Plan

 

The Company’s Board of Directors, within the scope of their functions and in conformity with the Company’s stock options plan, approved the grant of preferred stock options plan to the Company’s management and executives. For grants through 2009, the options vest at a rate of 20% per year, and can be exercised within up to 10 years after the grant date.Due to changes in the Company’s Stock Options Plan approved by the Company’s Annual Shareholders’ Meeting held on April 30, 2010, for plans granted beginning 2010, 20% of the options become vested as from the first year, an additional 30% as from the second, and the remaining 50% as from the third year. The options under these plans may also be exercised within 10 years after the grant date.

 

The fair value of stock options was estimated on the grant date using the Black-Scholes option pricing model.The expected volatility of the options is based on the historical volatility of 252 working days of the Company’s shares traded on the stock exchange.

 

The date of the Board of Directors’ meetings and the assumptions utilized in the Black-Scholes option pricing model are as follows:

 

Stock Options Plan

Year of the Option

 

Date of the Board Meeting

 

Total options granted

 

Exercise price of the option

 

The fair value of the option at grant date

 

Estimate volatility of share price

 

Expected dividend

 

Risk-free rate return

 

Length of the option (in years)

2005

 

12/09/2004

 

87,418

 

33.06

 

29.22

 

32.52%

 

0.84%

 

17.23%

 

10

2006

 

01/02/2006

 

99,816

 

47.30

 

51.68

 

39.87%

 

0.93%

 

18.00%

 

10

2007

 

12/31/2006

 

113,379

 

65.85

 

46.61

 

46.54%

 

0.98%

 

13.19%

 

10

2008

 

12/20/2007

 

190,296

 

45.46

 

29.27

 

40.95%

 

0.86%

 

11.18%

 

10

2009 (a)

 

02/04/2009

 

1,142,473

 

10.52

 

8.53

 

76.91%

 

-

 

12.66%

 

10

2010 (b)

 

02/02/2010

 

2,774,640

 

20.65

 

16.81

 

77.95%

 

2.73%

 

8.65%

 

10

2011

 

12/20/2010

 

2,722,444

 

27.83

 

16.11(c)

 

44.55%

 

0.47%

 

10.25%

 

10

2012

 

10/19/2012

 

778,912

 

12.81

 

5.35 (d)

 

52.25%

 

2. 26%

 

9.00%

 

10

             

(a)        In April 2010 216,673 shares were granted in addition to the 2009 plan..

(b)        In April 2010 additional options were approved totaling 101,894, referring to the 2010 plan.

(c)        The fair value calculated for the 2011 plan was R$16,92, R$16,11 and R$15,17 for the respective periods of vesting (2011, 2012 and 2013)..

(d)        The fair value calculated for the stock option plan for 2012 was R$6,04, R$5,35 and R$4,56, respectively.

 

The movement of existing stock options during the year to December 31, 2012 is as follows:

 

F-38

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

Total of Stock Options

 

Weighted average exercise price

Options outstanding at December 31, 2011

4,621,192

 

24.34

Options granted

778,912

 

12.81

Options cancelled and adjustments in estimated lost rights

(1,400,934)

 

23.48

Options outstanding at December 31, 2012

3,999,170

 

22.40

 

 

 

 

Number of options exercisable at December 31, 2011

1,784,759

 

23.89

Number of options exercisable at December 31, 2012

1,885,116

 

23.05

 

The range of exercise prices and the average maturity of outstanding options, as well as the intervals of exercise prices for options exercisable at December 31, 2012 are summarized below:

 

Outstanding options

 

Options exercisable

Range of exercise prices

 

Outstanding options

 

Average remaining maturity

(in years)

 

Average exercise price

 

Options exercisable

 

Average exercise price

33.06

 

4,965

 

3

 

33.06

 

4,965

 

33.06

47.3

 

13,220

 

4

 

47.30

 

13,220

 

47.3

65.85

 

14,962

 

5

 

65.85

 

14,962

 

65.85

45.46

 

41,749

 

6

 

45.46

 

37,574

 

45.46

10.52

 

237,087

 

7

 

10.52

 

165,961

 

10.52

20.65

 

1,419,751

 

8

 

20.65

 

1,064,814

 

20.65

27.83

 

1,667,489

 

9

 

27.83

 

583,620

 

27.83

12.81

 

599,947

 

10

 

12.81

 

-

 

12.81

10.52-65.85

 

3,999,170

 

7.40

 

22.40

 

1,885,116

 

23.05

 

Restricted Shares

 

During the Extraordinary General Meeting held on October 19, 2012, the Company approved the Restricted Shares Plan. The first grants were approved at the Board of Directors´s meeting on November 13, 2012. The transfer of restricted shares will be held at the end of third year from the date of grant, assuming as an acquisition condition the employee relationship up to the end of this period. The fair value of the restricted shares granted was estimated on the grant date using the Black-Scholes pricing model, and the assumptions are listed below:

 

Restricted Stock Plan

Year of the option

 

Date of the Board Meeting

 

Total options granted

 

The fair value of the option at grant date

 

Estimate volatility of share price

 

Risk-free rate of return

 

Duration of option (in years)

 

2012

 

11/13/2012

 

589,304

 

9.70

 

52.25%

 

9.0%

 

10

 

 

For the year ended December 31, 2012, the Company recorded in shareholders ' equity a result with share-based payments in the amount of R$10,652 (R$24,875 for the year ended December 31, 2011), being the counterpart in the income statement result classified as staff costs.

Until December 31, 2012 there were no restricted shares transferred to participants of the plan.

14. Business combinations

      

On October 3, 2011 the Company acquired 100% of the share capital of Webjet, an airline headquartered in the city of Rio de Janeiro, engaged in passenger air transportation.

 

F-39

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

Webjet’s acquisition aims to strengthen the Company's performance in the domestic market, increasing its presence in the main Brazilian airports, including Guarulhos and Santos Dumont airport to provide services to the growing middle class, continuing its mission of making air transportation more affordable and operating as one of the leading companies in the low-cost aviation sector.

 

On October 2, 2012, the Administration concluded the fair value assessment of acquired assets and liabilities, including intangible assets, as well as the effect of deferred taxes and there was no subsequent change to the initial purchase price allocation recorded on October 3, 2011.

 

Additionally, due to the termination of Webjet´s assets utilization, the values allocated to inventory, fixed assets and the adjustment to market value of operating leases relating to the business combination were entirely reversed in 2012.

 

 

15.    Earnings or Loss per Share

 

Although there are differences between common and preferred shares in terms of voting rights and priority in case of liquidation, the Company’s preferred shares are not entitled to receive any fixed dividends. Rather, preferred shareholders are entitled to receive dividends per share in the same amount of the dividends per share paid to common shareholders. Therefore, the Company understands that, substantially, there is no difference between preferred shares and common shares, and, accordingly, basic and diluted earnings or loss per share are calculated equally for both shares.

Consequently, basic earnings or loss per share are computed by dividing income or losses by the weighted average number of all classes of shares outstanding during the period. Diluted earnings or loss per share are computed including stock options granted to key management and employees using the treasury stock method when the effect is dilutive. The antidilutive effect of all potential shares is disregarded in calculating diluted earnings or loss per share.

 

 

Consolidated  

 

12/31/2012

 

12/31/2011

 

12/31/2010

Numerator

     

 

 

Income (loss) for the year

(1,512,915)

 

(751,538)

 

214,197

 

 

   

 

 

Denominator

 

   

 

 

Weighted average number of outstanding shares (in thousands)

269,869

 

270,376

 

268,564

 

 

 

 

 

 

Effect of dilutive securities

 

 

 

 

 

Stock Option Plan (in thousands)

-

 

-

 

390

 

 

   

 

 

Adjusted weighted average number of outstanding shares and diluted presumed conversions (in thousands)

269,869

 

270,376

 

268,954

 

 

   

 

 

Basic earnings (loss) per share

(5.606)

 

(2.780)

 

0.798

Diluted earnings (loss) per share

(5.606)

 

(2.780)

 

0.796

 

Diluted earnings or loss per share are calculated by considering the instruments that may have a potential dilutive effect in the future, such as share-based payment transactions, discussed in note 13. However, due to the losses reported for the periods ended on December 31, 2012 and 2011, these instruments have anti-dilutive effect and, therefore, are not considered in the total number of outstanding shares.

F-40

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

16.    Property, Plant and Equipment

 

 

12/31/2012

 

12/31/2011

 

Weighted anual

depreciation rate

 

Cost

 

Accumulated

depreciation

 

Net

amount

 

Net

amount

Flight e quipment 

 

 

 

 

 

 

 

 

 

Aircraft under finance leases

4%

 

2,955,671

 

(731.635)

 

2,224,036

 

2,377,234

Sets of replacement parts and spares engines

4%

 

907,908

 

(214.873)

 

693,035

 

733,095

Aircraft reconfigurations / overhauling

30%

 

695,820

 

(350.321)

 

345,499

 

253,655

Aircraft and safety equipment

20%

 

2,162

 

(1.289)

 

873

 

822

Tools

10%

 

27,363

 

(10.072)

 

17,291

 

18,387

 

 

 

4,588,924

 

(1.308.190)

 

3,280,734

 

3,383,193

 

 

 

 

 

 

 

 

 

 

Impairment losses

-

 

(47,726)

 

-

 

(47,726)

 

(50,653)

 

 

 

4,541,198

 

(1.308.190)

 

3,233,008

 

3,332,540

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment in use

 

 

 

 

 

 

 

 

 

Vehicles

20%

 

10,568

 

(7.891)

 

2,677

 

2,969

Machinery and equipment

10%

 

50,540

 

(17.385)

 

33,155

 

31,573

Furniture and fixtures

10%

 

20,725

 

(11.288)

 

9,437

 

10,323

Computers and peripherals

20%

 

46,117

 

(32.234)

 

13,883

 

15,712

Communication equipment

10%

 

3,066

 

(1.713)

 

1,353

 

1,334

Facilities

10%

 

4,281

 

(2.929)

 

1,352

 

1,854

Maintenance Center Confins

10%

 

105,971

 

(25.413)

 

80,558

 

92,047

Leasehold improvements

20%

 

50,375

 

(27.153)

 

23,222

 

15,115

Construction in progress

-

 

5,865

 

-

 

5,865

 

21,936

 

 

 

297,508

 

(126.006)

 

171,502

 

192,863

 

 

 

4,838,706

 

(1.434.196)

 

3,404,510

 

3,525,403

 

 

 

 

 

 

 

 

 

 

Advances for aircraft acquisition

-

 

481,289

 

-

 

481,289

 

365,067

 

 

 

 

 

 

 

 

 

 

 

 

 

5,319,995

 

(1.434.196)

 

3,885,799

 

3,890,470

 

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

 

Property, plant and equipment under finance lease

 

Other flight equipment (a)

 

Advances for acquisition of property, plant and equipment

 

Others

 

Total

As of December 31, 2010

2,210,433

 

751,816

 

323,661

 

175,058

 

3,460,968

Additions from Webjet’s acquisition

-

 

65,328

 

-

 

6,264

 

71,592

Additions

371,262

 

300,915

 

273,984

 

38,576

 

984,737

Disposals

-

 

(3,383)

 

(232,578)

 

(5,132)

 

(241,093)

Depreciation

(204,461)

 

(136,120)

 

-

 

(21,903)

 

(362,484)

Impairment losses

-

 

(23,250)

 

-

 

-

 

(23,250)

As of December 31, 2011

2,377,234

 

955,306

 

365,067

 

192,863

 

3,890,470

Additions

31,265

 

395,661

 

256,887

 

14,883

 

698,696

Disposals (b)

-

 

(81,155)

 

(140,664)

 

(1,237)

 

(223,056)

Assets held for Sale

-

 

(8,174)

 

-

 

-

 

(8,174)

Depreciation

(184,462)

 

(252,667)

 

-

 

(35,008)

 

(472,137)

As of December 31, 2012

2,224,037

 

1,008,971

 

481,290

 

171,501

 

3,885,799

 

(a)      Additions primarily represent (i) total estimated costs to be incurred relating to the reconfiguration of the aircraft when returned and, (ii) capitalized costs related to major engine overhaul.

(b)      Includes impairment of assets related to the winding up of Webjet’s activities amounting to R$25,766. For more details, see note 11.

 

F-41

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

17.    Intangible assets

 

 

Goodwill  

 

Trademarks

 

Airport operating licenses

 

Software

 

Total

Balance as of December 31, 2010

542,302

 

63,109

 

560,842

 

100,924

 

1,267,177

Additions from Webjet’s acquisition

 

 

 

 

 

 

209

 

209

Additions

-

 

-

 

-

 

73,598

 

73,598

Disposals

-

 

-

 

-

 

(8,936)

 

(8,936)

Amortization

-

 

-

 

-

 

(26,149)

 

(26,149)

Provisional fair value from Webjet’s acquisition

-

 

-

 

478,058

 

-

 

478,058

Balance at December 31, 2011

542,302

 

63,109

 

1,038,900

 

139,646

 

1,783,957

Additions

-

 

-

 

-

 

20,772

 

20,772

Disposals

-

 

-

 

-

 

(544)

 

(544)

Amortization

-

 

-

 

-

 

(47,494)

 

(47,494)

Impairment of trademark

-

 

(56,761)

 

-

 

-

 

(56,761)

Balance as of December 31, 2012

542,302

 

6,348

 

1,038,900

 

112,380

 

1. 699 .930 

 

As of December 31, 2012, the Company evaluated the Varig trademark under the new perspectives of its use and, therefore, the future economic benefit generated by it. As a result, an impairment loss was recognized in the amount of R$56,761.  

 

18.    Short and Long-term Debt

 

 

Maturity of the contract

 

Effective rate (p.y.)

 

Consolidated

     

12/31/2012

 

12/31/2012

 

12/31/2011

Short-term debt:

 

   

 

     

Local currency:

 

   

 

 

   

Debentures IV

Sept, 2015

 

11.09%

 

596,451

 

595,160

Debentures V

Jun, 2017

 

10.64%

 

494,505

 

493,284

BNDES loan Safra

Oct, 2014

 

11.46%

 

29,888

 

29,956

Santander

-

 

-

 

-

 

40,676

Citibank

Jun,2013

 

7.19%

 

14,013

 

19,401

BNDES (direct)

Jul, 2017

 

10.72%

 

3,140

 

8,372

BDMG

Mar, 2018

 

10.71%

 

6,401

 

3,600

Industrial CDB

-

 

-

 

-

 

1,250

Banco IBM

Sept, 2017

 

12.94%

 

6,663

 

-

Working Capital/ Banco Itaú

Mar, 2013

 

16.08%

 

191,841

 

-

Interest

 

 

 

 

13,991

 

23,421

 

 

 

 

 

1,356,893

 

1,215,120

Foreign currency

 

 

 

 

 

 

 

(in U.S. Dollars):

 

 

 

 

 

 

 

J.P.Morgan

Sept, 2014

 

1.09%

 

73,609

 

-

Working Capital

-

 

-

 

-

 

95,894

IFC

Jan, 2013

 

5.84%

 

17,007

 

31,264

FINIMP

Nov,2013

 

3.66%

 

24,179

 

3,127

Aeroturbine

-

 

-

 

-

 

4,579

Interest

 

 

 

 

40,285

 

40,701

 

 

 

 

 

155,080

 

175,565

 

 

 

 

 

1,511,973

 

1,390,685

 

 

 

 

 

 

 

 

Finance lease

Oct, 2013

 

  5.55%

 

207,652

 

161,755

Total short-term debt

 

 

 

 

1,719,625

 

1,552,440

 

 

 

 

 

 

 

 

Long-term debt:

 

 

 

 

 

 

 

Local currency:

 

 

 

 

 

 

 

Debentures IV

Sept, 2015

 

11.09%

 

-

 

-

Debentures V

Jun,2017

 

10.64%

 

-

 

-

Safra

Dez, 2015

 

3.34%

 

131,188

 

196,000

BNDES – Loan Safra

Oct, 2014

 

11.46%

 

13,938

 

42,837

BDMG

Mar, 2018

 

10.71%

 

20,134

 

25,851

BNDES – (direct)

Jul,2017

 

10.72%

 

11,098

 

-

IBM bank

Mar, 2017

 

12.94%

 

20,484

 

-

 

 

 

 

 

196,842

 

264,688

Foreign Currency

 

 

 

 

 

 

 

(in U.S. Dollars):

 

 

 

 

 

 

 

J.P.Morgan

Sept, 2014

 

1.09%

 

33,656

 

-

Senior bond I

Apr, 2017

 

7.70%

 

429,135

 

393,532

Senior bond II

Jul, 2020

 

9.65%

 

601,242

 

550,471

Perpetual bond

-

 

8.75%

 

365,787

 

335,768

 

     

 

1,429,820

 

1,279,771

 

 

 

 

 

1,626,662

 

1,544,459

 

 

 

 

 

 

 

 

Finance lease

Oct, 2023

 

5.55%

 

1,844,888

 

1,894,549

Total long-term debt

 

 

 

 

3,471,550

 

3,439,008

 

 

 

 

 

5,191,175

 

4,991,448

F-42

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

The maturities of long-term debt as of December 31, 2012, are as follows:

 

2014

 

2015

 

2016

 

After 2016

 

Without maturity date

Total

Local currency:

 

 

 

 

 

 

 

 

 

 

BNDES Loan

3,097

 

3,097

 

3,097

 

1,807

 

-

11,098

BNDES – Loan Safra

13,938

 

-

 

-

 

-

 

-

13,938

Safra

65,114

 

66,074

 

-

 

-

 

-

131,188

BDMG

4,964

 

4,710

 

4,710

 

5,751

 

-

20,135

IBM

5,459

 

5,530

 

5,604

 

3,890

 

-

20,483

Debêntures

-

 

-

 

-

 

-

 

-

-

 

92,572

 

79,411

 

13,411

 

11,448

 

-

196,842

Foreign currency

 

 

 

 

 

 

 

 

 

 

 

(Dollars):

 

 

 

 

 

 

 

 

 

 

JP Morgan

33,656

 

-

 

-

 

 

 

-

33,656

Senior bond I

-

 

-

 

-

 

429,135

 

-

429,135

Senior bond II

-

 

-

 

-

 

601,242

 

-

601,242

Perpetual bond

-

 

-

 

-

 

-

 

365,787

365,787

 

33,656

 

-

 

-

 

1,030,377

 

365,787

1,429,820

Total

126,228

 

79,411

 

13,411

 

1,041,825

 

365,787

1,626,662

                     

 

The fair values of senior and perpetual bonds, as of December 31, 2012, are as follows:

 

 

Consolidated

 

Book

 

Market (a)

Senior bonds (I and II)

1,030,377

 

944,555

Perpetual bonds

365,787

 

213,713

(a)                        Senior and perpetual bonds market prices are obtained through market quotations.

F-43

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

a)                   Covenants 

 

VRG has restrictive covenants ("covenants") in its financing agreements with the following financial institutions: IFC, BNDES, Bradesco  (Debenture V) and Banco do Brasil (Debentures IV e V).

Long-term financing (excluding perpetual bonds and financing of aircraft) in the total amount of R$4,196 in December 31, 2012 have clauses and the usual restrictions, including but not limited to those that require the company to maintain the liquidity requirements defined  and the cover of expenses with interest.

 

As of December 31, 2012, the funding by the IFC and the debentures IV and V have the following restrictive clauses: (i) net debt/EBITDAR below 4.0, (ii) the current assets/current liabilities of at least 1.5, (iii) net debt/EBITDA below 3.5 and (iv) coverage of debt (CID) of at least 1.3.

 

According to the company's measurements, the restrictive clauses have been: (i) net debt/EBITDAR of 32.3, (ii) current assets/current liabilities of 0.5, (iii) net debt/EBITDA (10.2) and (iv) coverage of debt (CID) (2.0), mainly due to the accumulated negative EBITDA.

 

As a result, the company has not met the minimum levels for EBITDA and EBITDAR clauses. However, the company obtained waivers, as described below:

 

·          Debentures IV and V: due to the operating loss also received during the period, the Company did not achieve the minimum established parameters of the debentures IV and V the financial institutions Bradesco and Banco do Brazil as of December 31, 2012. On February 1, 2013, the company obtained a waiver for December 31, 2012 and June 30, 2013. The company reclassified the long-term balance of the debentures IV and V to current liabilities amounting to R$1,091 in accordance with Brazilian and international accounting standards established in CPC 26 (R1)-"Presentation of financial statements" and IAS 1 – “Presentation of Financial Statements ";

 

·          IFC: besides the operating loss of the period, the Company received a specific consent (waiver) which relieves the company the prepayment of this funding during the financial year 2012. Consequently, VRG set a new due date of January 15, 2013, six months before its initial expiration scheduled for July 2013.

 

b)                  Existing Loans as of December 31, 2012

 

BNDES Transfer – Banco SAFRA

On March 31, 2010, the VRG contracted with Banco Safra a credit line for a total value of R$44,436 with funds from the Banco Nacional de Desenvolvimento Econômico e Social (BNDES), indirect lending program "Finame Modernizes BK". The funds will be earmarked for modernization of turbines in national workshops. The loan has a term of 48 months with six months grace period and the principal is to be repaid on a monthly basis. The monthly interest payment is calculated based on the TJLP plus 5.50% p.y.

 

On May 26, 2010, Banco Safra released to VRG R$ 23,000 whose value is related to the second part of the line of credit with funds from the National Bank for economic and Social development of their indirect program transfer "Finame modernizes BK". The loan has a period of 48 months becoming due in May 2014, the contract stipulates a 6 months grace period and principal repaid monthly. The monthly interest payment is calculated based on the TJLP plus 5.5% per year.

F-44

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

On September 27, 2010, Banco Safra released to VRG R$33,705 whose value is related to the third part of the line of credit with funds from the National Bank for economic and Social development from their indirect program transfer "Finame modernizes BK". The loan has a period of 48 months becoming due in October 2014, with a 6 months grace period and principal repaid on a monthly basis based on 1% of the composition of receivables. The monthly interest is calculated based on the TJLP plus 5.5% per year. As of December 31, 2012 the amount recorded under current liabilities and non-current liabilities was R$29,888, and R$13,938, respectively (R$29,956 and R$42,837 as of December 31, 2011).

 

Citibank

In December 2009, Webjet borrowed the amount of R$33,630 with transaction costs included of R$2,080, from Citibank. The term is of 36 months with the principal objective to repay Dollar funding that the company obtained with the "Tribeca Aviation Partners" in respect of the acquisition of aircraft. The contract has  interest of 11.33% per year. The loan has as a guarantee a bank guarantee in the amount of R$ 26,550. As of December 31, 2012 the balance recorded under current liabilities was R$14,013 (R$ 19,401 as of December 31, 2011).

 

BNDES (Direct)

 

On June 27, 2012, through its subsidiary Company, VRG obtained a new credit line from the Brazilian Development Bank (BNDES) in the amount of R$18,570. On the same date the amount received was R$15,486. The resources are intended to finance the expansion of the aircraft maintenance Center ("CMA") completed in 2010. The loan has a term of 60 months coming due on July 15, 2017, with monthly interest and principal payments. The interest rate is calculated based on the TJLP plus 1.40% p.y. As collateral for this operation there was given a bank guarantee in the amount of R$18,570. As of December 31, 2012, the amount recorded under current liabilities and non-current liabilities was R$3,140 and R$11,098, respectively.

 

BDMG

 

On March 29, 2010,  VRG borrowed from BDMG (Banco de Desenvolvimento de Minas Gerais) an amount of R$20,000 for financing the expansion of the service center in Lagoa Santa. The loan has a term of 8 years, a grace period of 36 months and interest calculated on the basis of the IPCA plus 6% per year. The loan is to be repaid on a monthly basis over the period of 60 months from April 2013. The loan has a guarantee based on engines. As of December 31, 2012, the amount recorded under current liabilities and non-current liabilities was R$6,401 and R$20,134, respectively (R$3,600 and R$25,851 registered in current liabilities and non-current liabilities as of December 31, 2011).

 

Banco IBM

 

The company, through its subsidiary VRG, signed in 2012 two loans with Banco IBM S.A in order to finance the purchase of machinery and the provision of information technology services. The first borrowing occurred on March 23, in the amount of R$15,031 and was in local currency free of costs, with a maturity of 60 months and due in March 26, 2017. The interest rate is calculated based on the CDI plus 2.42% p.y., and the effective rate is 12.17% per year. The second borrowing occurred on September 10, amounting to R$12,482 and was in local currency and net of costs. The loan has term of 60 months, maturing on September 10, 2017. The interest rate is calculated based on the CDI plus 2.85% p.y., the effective rate is 13.31% per year. Both will have bi-annual amortization of principal and interest. As of December 31, 2012, the balance recorded in current liabilities and non-current liabilities was R$6,663 and R$20,484, respectively.

F-45

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

Working Capital

 

On March 15, 2012, the company liquidated the working capital loan in foreign currency, captured on March 21, 2011, amounting to R$85,000 (US$51,121), with an effective rate of 3.42%, and obtained a new line of working capital loans with the Bank Itaú in local currency in the amount of R$85,000, with no fundraising costs and the effective rate of 12.34% p.y. and maturing in March 2013. The balance recorded under current liabilities related to this operation as of December 31, 2012 was R$96,136.

 

On September 28, 2012, Webjet obtained a new line of working capital loans with Banco Industrial e Comercial S.A. (Bicbanco) in the amount of R$30,000, net of costs, with an effective rate of 15.15% per year and with maturity in January 2013.

 

In December 2011, the indirect subsidiary Webjet had lines of R$200,000 for working capital in the national currency. The loan with Banco Safra has a 18 months grace period and the payment of the total amount of R$200,000 will occur in six semi-annual installments, based on 125% of the daily average of CDI rate with the maturity of the last tranche in December 2015, with guarantees of a letter of credit as described in note 5. The transaction costs to amortize total R$4,000. As of December 31, 2012 the balance recorded under current liabilities and non-current liabilities was R$66,667 and R$131,188, respectively (R$196,000 in noncurrent liabilities as of December 31, 2011).

 

Financing of maintenance of engines (J.P.Morgan)

 

During the year of 2012, the company, through its subsidiary VRG, issued two series of Guarantee Notes ("Guaranteed Notes") for engine maintenance funding totaling US$84,8 million with financial guarantees from the Export-Import Bank of the United States ("Ex-Im Bank"). The first series was issued on June 29, and priced through the capital market operations with an interest rate of 1.00% p.y. in the amount of R$79,050 (US$39,108 on the date of the loan), with quarterly amortization of the principal and interest and the issuance costs of US$1,707 (R$3,488 in December 31, 2012). The second series was issued on 27 September, priced through the capital market operations with an interest rate of 0.85% per year in the amount of R$46,007 (US$22,667 on the date of the loan), with quarterly amortization of the principal and interest and costs of issue  of US$682 (R$1,393 in December 31, 2012). Both have a term of 2 years, maturing on June 29 and September 27, 2014, respectively. The balances recorded under current liabilities and non-current liabilities as of December 31, 2012 were R$73,609 and R$33,656, respectively.

 

IFC

 

In July 2006, the company through its subsidiary VRG, signed a loan agreement with a variable rate guaranteed by the IFC (International Finance Corporation ") in the amount of R$108,000 (US$50,000). The financing had as its objective the acquisition of spare parts and working capital, maturing in July 2013 (term of 6 years with a grace period of the contract of 12 months) interest calculated based on Libor plus 1.875% p.y. and the guarantee of parts and equipment of R$7,256 (US$4,167). In July 2009, the company renegotiated the debt agreement modifying the rate to Libor plus 3.75% p.y., generating an effective rate in 2011 of 4.54% per year. As of December 31, 2012, the amount recorded under current liabilities was R$17,007 (R$31,264 recorded under current liabilities as of December 31, 2011).

 

Finimp

 

On October 4, 2011, the company, through its subsidiary VRG, borrowed the amount of US$1,667, equivalent to R$3,091 with Banco do Brazil. The purpose of this loan was the purchase of aircraft parts. This funding has as a guarantee a promissory note in the amount of US$2,384 (R$4,472). On March 21, 2012 the amount of  US$ 3,985 was borrowed, (R$7,261 on the loan date), in order to finance the purchase of aircraft parts. On June 8, 2012, the amount of US$1,825 was borrowed (R$3,726 on the loan date) in order to acquire spare parts and aircraft equipment with the guarantee of a promissory note for the total value of US$2,610 (R$ 5,328 on the loan date). On 22 June 2012, the amount of US$4,308 was borrowed (R$8,806 on the loan date) in order to acquire spare parts and aircraft equipment, with a warranty of two promissory notes totaling US$6,160 (R$12,593 on the loan date). All were loaned from the Bank of Brazil. As of December 31, 2012, the total amount for these loans registered in current liabilities and non-current liabilities was R$24,179 (R$3,127 recorded under current liabilities as of December 31, 2011).

F-46

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

On December 4, 2012, through its subsidiary Company, VRG, borrowed US$1,253, corresponding to R$2,641 (loan date) from Bicbanco, part of a line of credit for import financing (Finimp) with the purpose of the purchase of spare parts and equipment for aircraft. As a collateral for this funding, there was the placing of two promissory notes totaling US$ 1,305 (R$2,752). As of December 31, 2012, the amount recorded under current liabilities was R$2,561.

 

Debentures IV

 

On September 30, 2010, the company approved the fourth public issue of 600 simple debentures, non-convertible into shares, being a single series issued by VRG with the Company's warranty, without additional collateral, with a unit nominal value of R$1,000 (total R$600,000), in order to meet the needs of working capital of VRG. Issuance costs were R$6,453, and resulted in the net amount received of R$593,547. The total of R$1,613 has already been amortized and recognized in profit and loss for the financial year. The maturity is 5 years from the date of issue, and repayment will be on September 30, 2015. The debentures are remunerated based on an interest rate of 118% of CDI. As of December 31, 2012, the amount recorded under current liabilities was R$596,451 (R$ 595,160 as of December 31, 2011 registered under current liabilities).

 

Debentures V

 

On June 10, 2011, the company approved the issuance of 500 simple debentures, non-convertible into shares, with a single series issued by VRG, without collateral, with a unit nominal value of R$1,000, totaling R$500,000, with the purpose to meet the needs of working capital of VRG. Issuance costs were R$7,264 and resulted in the net amount received of R$492,736 and the total of R$610 has already been amortized and recognized in profit and loss for the financial year. The maturity of the debentures is 6 years from the date of issue, and repayment will be on June 10, 2017. The debentures are remunerated at a rate of 120% of CDI interest. As of December 31, 2012, the amount recorded under current liabilities was R$494,505 (R$493,284 in current liabilities as of December 31, 2011).

 

 

c)                   Financial Leases

 

The future of payments of financial leasing contracts are indexed by American Dollars and are detailed below:

 

 

Consolidated

 

12/31/2012

 

12/31/2011

2012

-

 

281,165

2013

304,561

 

292,835

2014

319,149

 

292,819

2015

309,586

 

284,205

2016

300,782

 

276,098

After 2016

1,241,672

 

1,118,240

Total minimum lease payments

2,475,750

 

2,545,362

Less total interest

(423,210)

 

(489,058)

Present value of minimum lease payments

2,052,540

 

2,056,304

Less current portion

(207,652)

 

(161,755)

Non- current portion

1,844,888

 

1,894,549

F-47

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

The discount rate used to calculate the present value of the minimum lease payments is 6.10% as of December 31, 2012 (6.10% as of December 31, 2011). There are no significant differences between the present value of minimum lease payments and the fair value of these financial liabilities.

The Company extended the maturity date of the financing for some of its aircraft leased for 15 years using the SOAR framework (mechanism for extending financing amortization and repayment), which enables the performance of calculated withdrawals to be settled at the end of the lease agreement. As of December 31, 2012, the withdrawals made for the repayment at maturity date of the lease agreements amount to R$88,334 (R$59,552 as of December 31, 2011), and are recorded in long-term debt.

 

19.         Advance Ticket Sales

 

As of December 31, 2012, the balance of transport to perform  classified in current liabilities was R$823,190 (R$744,743 as of December 31, 2011) and is represented by 3,640,935 coupons tickets sold and not yet used (4,245,181 as of December 31, 2011) with an average use of 92 days (75 days as of December 31, 2011).

20.    Mileage program

 

As of December 31, 2012, the balance of Smiles deferred revenue is R$124,905 and R$364,307 classified in the current and non-current liabilities, respectively (R$71,935 and R$214,779 as of December 31, 2011). The number of outstanding miles as of December 31, 2012 amounted to 34,748,660,443 (23,004,285,890 as of December 31, 2011).

21.    Advances from Customers

 

As of December 31, 2012, the Company recognized the amount of R$93,595 (R$30,252 as of December 31, 2011), as detailed below:

Operating Agreement- Co-Branded 

The subsidiary VRG, signed with Banco Bradesco S.A. and Banco do Brasil S.A., in September 2009, an Operating Agreement for the sale of miles and right to use the database of the Smiles mileage program, and the right of use of the Smiles brand related to the credit card issues in Co-Branded format. The agreement is effective for five years.

The mileage sales was recognized as advances from customers and as of December 31, 2012 the balance of R$1,200 (R$9,620 as of December 31, 2011) represents the remaining miles which were not transferred to the customers’ mileage account. The right of the data bank’s use of the Smiles mileage program was recognized in other current and noncurrent liabilities and is recognized in other revenue on a straight line basis according to the agreement’s period. The right of use of the Smiles brand on credit cards was recognized in other revenue in July, 2009.

Banco Patagônia S.A. Advances

The subsidiary VRG signed with Banco Patagônia S.A, on April 7, 2011, a contract of sale and granting of miles, in order to encourage the use of credit cards from Banco Patagônia by its customers for the accrual of points in its Incentive Program called Club Patagonia. The term of the contract is one year, renewable for the same period through an amendment to be signed between the parties. As of December 31, 2012 the Company holds the amount of R$588 as an advance related to this agreement.

F-48

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

Itaucard S.A. Advances

 

On December 1, 2012, VRG transferred to Smiles S.A the Smiles partnership contract signed on December 1, 2009 with the financial institution Banco Itaú S.A. The contract has as its main objective to regulate the conversion of points accumulated for the rewards of Banco Itaú S.A. with the miles of Smiles for the Smiles Program S.A. from January 1, 2013. As of December 31, 2012, the open balance for the early sale of miles to Banco Itaú is registered under the heading "Advances to customers" in the amount of R$91,807.

 

22. Taxes Payable

 

 

Consolidated

 

12/31/2012

 

12/31/2011

PIS and COFINS

25,973

 

107,987

REFIS

29,134

 

24,249

IRRF on payroll

20,492

 

26,372

ICMS

22,902

 

12,602

Import tax

3,355

 

3,410

CIDE

1,739

 

1,274

IOF

63

 

670

IRPJ and CSLL to collect

12,138

 

8,573

Others

5,100

 

4,534

 

120,896

 

189,671

 

 

 

 

Current

73,299

 

76,736

Noncurrent

47,597

 

112,935

 

PIS and COFINS

 

With the beginning of the non-cumulative regime of PIS (Law 10637/02) and COFINS calculation (Law 10833/03), the subsidiary VRG implemented such rules and challenged in the courts in respect of the rate used to calculate these taxes until December 31, 2011. To this end, the Company had judicial deposits in an amount sufficient to ensure the suspension of the tax credit in the amount of R$81,010 (R$77,539 at December 31, 2011). However, on January 9, 2012, the Company filed a waiver of the lawsuit, which was approved in March 2012. On September 20, 2012 the judicial deposits were converted into the final payment to the Federal Government.

 

23.     Provisions  

 

 

Insurance provision

 

Provision for anticipated return of aircraft Webjet

 

Provision for return of aircraft and engine VRG

 

Restructuring provision

L itigation 

 

Total

Balance as of December 31, 2011

23,499

 

26,262

 

181,045

 

-

75,944

 

306,750

Additional provisions recognized

10,738

 

-

 

228,667

 

36,978

26,883

 

303,266

Utilized provisions

(15,620)

 

(8,373)

 

(103,940)

 

-

(9,887)

 

(137,820)

Foreign exchange

994

 

-

 

6,640

 

-

-

 

7,634

Balance as of December 310, 2012

19,611

 

17,889

 

312,412

 

36,978

92,940

 

479,830

             

 

   

 

Balance as of December 31, 2011

           

 

     

Current

23,499

 

16,252

 

35,817

 

-

-

 

75,568

Noncurrent

-

 

10,011

 

145,227

 

-

75,944

 

231,182

 

23,499

 

26,263

 

181,044

 

-

75,944

 

306,750

             

 

   

 

Balance as of December 31, 2012

 

 

 

 

 

 

 

 

 

 

Current

19,611

 

17,889

 

105,471

 

36,978

-

 

179,950

Noncurrent

-

 

-

 

206,941

 

-

92,940

 

299,880

 

19,611

 

17,889

 

312,412

 

36,978

92,940

 

479,830

F-49

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

Provision for anticipated return of Webjet’s aircraft

 

In 2011, according to the strategic planning of Webjet, a provision for the anticipated return of aircraft was recorded. This provision was calculated based on the expected return of 14 aircraft Boeing 737-300 with operating leases contracts, as part of the Company's fleet renewal. The anticipated returns of aircraft are scheduled to occur between 2012 and 2013 and the original termination of leases was between 2012 and 2014. For the year ended December 31, 2012, the Company completed five aircraft returns with prefixes WJC, WJX, WJG, WJP and WJW.

 

Return of aircraft and engines

 

The return provision considers the costs that meet the contractual conditions for the return of engines maintained under operating leases, as well as the costs to reconfigure the aircraft without purchase option, as prescribed in the return conditions of the lease contracts, and which is capitalized in fixed assets (aircraft reconfigurations/overhauling), as described in note 16.

 

Provision for restructuring

 

In December 2012, Webjet recognized a provision for restructuring costs due to the closure of the activities and the discontinuation of its brand. The first step of the restructuring plan was the extinction of flight operations and discontinuity of the Boeing 737-300 fleet. As a result, the Company estimated the obligations necessary for completion of the process, which comprise direct costs incurred as a result of the discontinuation of certain assets of Webjet. (See note 11).

 

Lawsuits

 

As of December 31, 2012, the Company and its subsidiaries are parties to 18,667 lawsuits and administrative proceedings. The lawsuits and administrative proceedings are classified into Operation (those arising from the Company’s normal course of operations), and Succession (those arising from the succession of former Varig S.A. obligations). Under this classification, the number of proceedings is as follows:

 

 

Operation

 

Succession

 

Total

Civil lawsuits

10,254

 

501

 

10,755

Civil proceedings

1,916

 

15

 

1,931

Labor lawsuits

2,313

 

3,532

 

5,845

Labor proceedings

134

 

2

 

1136

Total

14,617

 

4,050

 

18,667

                                                            

F-50

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

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

The provisions related to civil and labor suits, whose likelihood of loss is assessed as probable are as follows:

 

12/31/2012

 

12/31/2011

Civil

38,484

 

34,101

Labor

54,456

 

41,843

 

92.940

 

75,944

 

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

There are other lawsuits assessed by management and its legal counsel as possible risks, in the estimated amount as of December 31, 2012 of R$37,250 for civil claims and R$16,354 for labor claims (R$33,221 and R$16,019 as of December 31, 2011 respectively), for which no provisions are recognized.

GLAI has been challenging in the courts the taxation  of PIS and COFINS in respect of  revenue associated with  interest on capital in the amount of R$ 20,140, received in the period between 2006 and 2008 from its subsidiary GTA Transportes Aéreos S.A., succeeded by VRG on September 25, 2008. According to the opinion of the legal counsel and based on the recent precedents, the Company classified this process as possible loss, with no provision for the amount involved.

The Company and its subsidiaries are challenging in the court the ICMS levied on aircraft and engines imported under aircraft lease transactions without purchase options in transactions carried out with lessors headquartered in foreign countries. The Company and its subsidiaries’ management understand that these transactions represent simple leases in view of the contractual obligation to return the assets that are the subject matter of the contract.

Management believes there is no evidence of goods circulation and so, there are no legal events to generate the ICMS taxation. Based on the legal counsel opinion and supported by similar lawsuits with favorable decisions to taxpayers by the Superior Court of Justice (STJ) and Supreme Federal Court (STF) in the second quarter of 2007, the Company understands that the likelihood of loss is remote, and thus did not recognize provisions for these amounts. As of December 31,2012 the estimated aggregated amount of the ongoing lawsuits related to the non-levy of ICMS tax on said imports is R$217,279 (R$205,102 as of December 31, 2011) adjusted for inflation, not including late payment charges.

  

24. Shareholders’ Equity

 

a)    Issued capital

 

As of December 31, 2012 and December 31, 2011, the Company’s capital is represented by 278,716,786 shares, of which 143,858,204 are common and 134,858,582 are preferred shares. The Fundo de Investimento em Participações Volluto is the Company’s controlling fund, which is equally controlled by Constantino de Oliveira Júnior, Henrique Constantino, Joaquim Constantino Neto, and Ricardo Constantino.

Shares are held as follows:

F-51

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

12/31/2012

 

12/31/2011

 

Common

 

Preferred

 

Total

 

Common

 

Preferred

 

Total

Fundo Volluto

100.00%

 

22.99%

 

62.74%

 

100.00%

 

22.21%

 

61.63%

Wellington Management Company

-

 

10.50%

 

5.08%

 

-

 

5.04%

 

2.49%

Delta Airlines. Inc.

-

 

6.15%

 

2.98%

 

-

 

6.22%

 

3.07%

Fidelity Investments

-

 

5.22%

 

2.52%

 

-

 

5.27%

 

2.60%

Treasury shares

-

 

1.78%

 

0.86%

 

-

 

2.79%

 

1.38%

Other

-

 

1.48%

 

0.72%

 

-

 

1.50%

 

0.74%

Free float

-

 

51.88%

 

25.10%

 

-

 

56.97%

 

28.09%

 

100.00%

 

100.00%

 

100.00%

 

100.00%

 

100.00%

 

100.00%

 

The authorized share capital as of December 31, 2012 was R$4.0 billion (R$4.0 billion as of December 31, 2011). Within the authorized limit, the Company can, once approved by the Board of Directors, increase its capital regardless of any amendment to its bylaws, by issuing shares, without necessarily maintaining the proportion between the different types of shares. The Board of Directors will define the issuance conditions, including pricing and payment terms.

On August 13, 2012, the Board of Directors approved the capital subscription in the amount of R$183,189 million, represented by 6,825,470 common shares and 1,501,312 preferred shares, totaling 8,326,782 shares. Of this total, 8,300,455 shares were subscribed by the controlling shareholder and 26,327 shares subscribed by minority shareholders. At the end of the period for the exercise of the Right of First Refusal, there were 5,118,453 still left unsubscribed shares which were canceled on August 13, 2012, through the partial approval of the capital increase.

The Company shares as of December 31, 2012 are quoted, on the São Paulo Stock Exchange – BOVESPA, in the amount of R$12.90 each and US$6.56 each (R$12.44 and US$6.63 on December 31,2011) in New York Stock Exchange – NYSE. The book value per share as of December 31, 2012 is R$2.79 (R$8.24 as of December 31, 2011).

b)  Accumulated loss

i. Legal reserve

It is recognized by allocating 5% of the profit for the year after the absorption of accumulated losses in accordance with Article 193 of Law 11,638/07, limited to 20% of the capital, according to the Brazilian Corporate Law and the Company’s bylaws. On December 31, 2011, the balance was used in its entirety to absorb losses.

ii. Reinvestment reserve

The reserve of retained earnings was constituted under Article 196 of Law 6.404/76, and is designated to be used to cover investments included in the capital budget, approved by the Board of Directors. As of December 31, 2011, such reserve was used in its entirety to absorb losses.

c)  Dividends

The Company’s bylaws provide for a mandatory minimum dividend to be paid to common and preferred shareholders, in the aggregate of at least 25% of annual adjusted profit. The Brazilian corporate law, permits the payment of cash dividends only from retained earnings, and certain reserves recognized in the Company’s statutory accounting records.

d)  Treasury shares

F-52

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

On December 26, 2012, 1,327,500 preferred shares issued by the company and held in Treasury were sold, amounting to R$16,213 with a positive result of R$1,124. As of December 31, 2012, the Company owns 2,396,725 Treasury shares, totaling R$35,164, with a market value of R$30,918 (R$51,377 in shares with a market value of R$46,329 as of December 31, 2011).

e)  Share-based payments

As of December 31, 2012, the balance of share-based payments reserve was R$79,255. The Company recorded a share-based payment expense amounting to R$10,653 in the year ended December 31, 2012, with a corresponding expense in the income statement classified as personnel costs (R$24,875 as of December 31, 2011).

f)    Other comprehensive income

The fair value measurement of financial instruments designated as cash flow hedges is recognized under Other comprehensive income, net of tax effects, until the expiration  of the contracts. The balance as of December 31, 2012 corresponds to a net loss of R$68,582 (loss of R$79,268 as of December 31, 2011).

 

25.    Sales Revenue

 

The net sales revenue has the following composition:

 

 

Consolidated

 

12/31/2012

 

12/31/2011

 

12/31/10

Passenger transportation

7,409,984

 

6,947,195

 

6,500,784

Cargo transportation and other revenue

1,106,508

 

925,492

 

802,632

Gross revenue

8,516,492

 

7,872,687

 

7,303,416

Related taxes

(412,933)

 

(333,379)

 

(323,969)

Net revenue

8,103,559

 

7,539,308

 

6,979,447

           

 

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

Revenue by geographical segment is as follows:

 

12/31/12

%

 

12/31/11

%

 

12/31/10

%

Domestic

7,535,068

93.0

 

7,000,001

92.8

 

6,548,069

93.8

International

568,491

7.0

 

539,307

7.2

 

431,378

6.2

Net revenue

8,103,559

100.0

 

7,539,308

100.0

 

6,979,447

100,0

 

 

26. Financial result

 

 

Consolidated

Financial income

12/31/2012

12/31/2011

Income from derivatives

227,980

264,143

Income from short-term investments and Investment funds

99,287

147,508

Monetary variation

13,231

15,919

Interest

8,871

36,257

Other

20,845

13,697

 

370,214

477,524

Financial expenses

 

 

Loss from derivatives

(177,644)

(316,568)

Interest on short and long term debt

(453,731)

(414,430)

Bank interest and expenses

(37,665)

(24,648)

Monetary variation

(9,085)

(8,687)

Other

(86,727)

(70,208)

 

(764,852)

(834,541)

 

 

 

Foreign exchange changes, net

(284,571)

(398,897)

 

 

 

TOTAL

(679,209)

(755,914)

F-53

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

27.    Commitments 

 

As of December 31, 2012 the Company had 155 firm orders with Boeing . These aircraft purchase commitments include estimates for the contractual price increase during the construction phase. The approximate amount of firm orders, not including the contractual discount is R$32,462,490 (corresponding to US$15,885,730 at the reporting date) and are segregated according to the following periods:

12/31/2012

2013

2,690,803

2014

2,740,256

2015

2,722,067

2016

2,821,653

2017

1,640,785

2018

448,242

2019

3,429,708

2020

3,508,638

2021

3,591,247

2022

3,681,212

After 2023

5,187,879

 

32,462,490

 

As of December 31, 2012, in addition to the firm orders mentioned above, the Company has commitments in the amount of R$4,046,547 (corresponding to US$1,980,205 at the reporting date), related to advances for aircraft purchases  to be disbursed in accordance with the following schedule :

 

12/31/2012

2013

283,693

2014

389,047

2015

444,920

2016

146,706

2017

171,725

2018

455,171

2019

493,121

2020

504,892

2021

442,023

2022

236,804

After 2023

478,445

 

4,046,547

 

F-54

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

The installments financed by Long-term debt, collateralized by the aircraft through the U.S. Ex-Im Bank (“Exim”) corresponds approximately to 85% of total cost of the aircraft. Other agents finance the acquisitions with equal or higher percentages, reaching up to the limit of 100%.

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

The Company leases its entire aircraft fleet using a combination of finance and operating leases, except for 6 aircraft owned by its indirect subsidiary Webjet.

 

As of December 31, 2012, the total leased fleet was comprised of 141 aircraft  (128 from VRG and 13 from Webjet), of which 96 were operating leases and 45 were recorded as finance leases. The Company has 39 financial aircraft with purchase options. During the year ended on December 31, 2012, the Company received four aircraft based on operating lease contracts. In the year ended December 31, 2012, the Company returned four aircraft.

 

a)         Operating leases

 

Future payments of non-cancelable operating lease contracts are denominated in U.S. Dollars, and are as follows:

 

 

12/31/2012

 

12/31/2011

2012

-

 

594,976

2013

720,708

 

517,326

2014

520,677

 

341,486

2015

358,766

 

205,631

2016

292,357

 

157,231

After 2016

1,141,234

 

452,831

Total minimum lease payments

3,033,742

 

2,269,481

       

 

                                         

b)    Sale-leaseback transactions

As of December 31, 2012, the Company recognized R$7,564 and R$8,367, as ‘Other payables’ in current and non-current liabilities, respectively (R$7,564 and R$15,931 as of December 31, 2011), related to gains on sale-leaseback transactions performed by its subsidiary GAC Inc in 2006, related to eight 737-800 Next Generation aircraft. These gains were deferred and are being amortized proportionally to the monthly payments of the related lease agreements over the contractual term of 124 months.

On the same date, the Company recorded R$9,373 and R$35,456, as ‘Prepaid expenses’, in current and non-current assets, respectively (R$9,373 and R$44,828 as of December 31, 2011), related to losses on sale-leaseback transactions performed by its subsidiary GAC Inc of nine aircraft. During the years 2007, 2008 and 2009, these losses were deferred and are being amortized proportionally to the payments of the operational lease agreements over the contractual term of 120 months.

Additionally, in the period ended December 31, 2012, the Company recorded a gain of R$36,802, recognized directly in profit and loss, since gains and losses on sale-leaseback transactions would not be compensated over the lease terms.

 

 

F-55

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

28. Financial instruments

 

The Company and its subsidiaries have financial asset and financial liability transactions, which consist in part of derivative financial instruments.

The financial derivative instruments are used to hedge against the inherent risks relating to the operation. The Company and its subsidiaries consider as most relevant risks: fuel price, exchange rate and interest rate. These risks are mitigated by using exchange swap derivatives, futures and options contracts in the oil, U.S. Dollar and interest markets.

Management follows a documented guideline when managing its financial instruments, set out in its Risk Management Policy, which is periodically revised by the Risk Committee (CPR), after approved by the Board of Directors. The Committee sets the guidelines and limits, monitors controls, including the mathematical models adopted for a continuous monitoring of exposures and possible financial effects and also prevents the execution of speculative financial instruments transactions.

The gains or losses on these transactions and the application of risk management controls are part of the Committee’s monitoring and have been satisfactory when considering the objectives proposed.

The fair values of financial assets and liabilities of the Company and its subsidiaries are established through information available on the market and according to valuation methodologies.

Most of the derivative financial instruments are contracted with the purpose of hedging against fuel and exchange rates risks based on scenarios with low probability of occurrence, and thus have lower costs compared to other instruments with higher probability of occurrence. Consequently, despite the high correlation between the hedged item and the derivative financial instruments contracted, a significant portion of the transactions presents ineffective positions for hedge accounting purposes upon settlement, which are presented in the tables below.

The description of the consolidated account balances and the categories of financial instruments included in the balance sheet as of December 31, 2012 and December 31, 2011 is as follows:

 

Measured at fair value
through profit and loss

 

Measured at amortized cost (a)

 

12/31/2012

 

12/31/2011

 

12/31/2012

 

12/31/2011

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

775,551

 

1,230,287

 

-

 

-

Short-term investments (c) 

585,028

 

1,009,068

 

-

 

-

Restricted cash

224,524

 

109,095

 

-

 

-

Derivatives operation assets (b) 

10,696

 

4,213

 

-

 

-

Accounts receivable

-

 

-

 

325,665

 

354,134

Deposits

-

 

-

 

500,379

 

455,127

Other credits

-

 

-

 

74,360

 

53,546

Prepayment of hedge premium

-

 

11,572

 

-

 

-

 

 

 

 

 

-

 

 

Liabilities

 

 

 

 

-

 

 

Loans and financing

-

 

-

 

5,191,175

 

4,991,448

Suppliers

-

 

-

 

480,185

 

414,563

Derivatives Obligation (b) 

56,752

 

115,432

 

-

 

-

 

 

 

 

 

 

 

 

(a)       The fair value are approximately the book values, according to the short term maturity period of these assets and liabilities, except the amounts related to Perpetual Bonds  and Senior Notes, as disclosed on Note 18.

(b)      The company has registered in December 31, 2012 the amount net of tax of $ 68,582 (R$79,268 in December 31, 2011) in equity as equity valuation in return of these assets and liabilities.

(c)       The Company manages its investments as held for trading to pay its operational expenses.

 

F-56

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

On December 31, 2012 and December 31, 2011 the Company had no assets available for sale.

Risks

The operating activities expose the Company and its subsidiaries to the following financial risks: market (especially currency risk, interest rate risk, and fuel price risk), credit and liquidity risks.

The Company’s risk management policy aims at mitigating potential adverse effects from transactions that could affect its financial performance.

The Company’s and its subsidiaries’ decisions on the exposure portion to be hedged against financial risk, both for fuel consumption and currency and interest rate exposures, consider the risks and hedge costs.

The Company and its subsidiaries do not usually contract hedging instruments for its total exposure, and thus they are subject to the portion of risks resulting from market fluctuations. The portion of exposure to be hedged is determined and reviewed at least quarterly in compliance with the strategies determined in the Risk Policies Committees.

The relevant information on the main risks affecting the Company’s and its subsidiaries’ operation is as follows:

a)  Fuel price risk

As of December 31, 2012, fuel expenses accounted for 42% of the costs and operating expenses of the Company and its subsidiaries. The aircraft fuel price fluctuates both in the short and in the long term, in line with crude oil and oil byproduct price fluctuations.

To mitigate the risk of fuel price, the company and its subsidiaries employ derivative financial instruments referenced mainly to crude oil and/or to their derivatives; are also contracted, directly with the local supplier, future fuel deliveries of aircraft based on predetermined prices.

b)  Exchange rate risk

The exchange rate risk derives from the possibility of unfavorable fluctuation of foreign currencies to which the Company’s liabilities or cash flows are exposed. The exposure of the Company’s and its subsidiaries’ assets and liabilities to the foreign currency risk mainly derives from foreign currency-denominated leases and financing.

The Company’s and its subsidiaries’ revenues are mainly denominated in Reais , except for a small portion in U.S. Dollars, Argentinean pesos, Bolivian bolivianos, Chilean peso, Colombian peso, Paraguay Guarani, Uruguayan peso, Venezuela bolivar, etc.

To mitigate the risk of exchange rate, the company and its subsidiaries employ derivative financial instruments that are referenced to the U.S Dollar.

The currency exposure of the company as of December 31, 2012 and 2011 is shown below:

 

 

F-57

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

 

 

Consolidated

 

12/31/2012

 

12/31/2011

Assets

     

Cash and short-term investments

371,360

 

237,668

Deposits

556,582

 

455,127

Hedge premium

-

 

11,572

Prepaid Expenses with leases

15,291

 

30,382

Related parties transaction

-

 

-

Others

4,384

 

6,588

Total assets

947,617

 

741,337

Liabilities

 

   

Foreign suppliers

23,876

 

32,270

Short- and long-term debt

1,584,897

 

1,455,336

Finance leases payable

2,052,540

 

1,996,752

Other leases payable

35,845

 

59,552

Provision for aircraft return

312,411

 

181,044

Related Parties

-

 

-

Other U.S. Dollar-denominated liabilities

-

 

7,616

Total liabilities

4,009,569

 

3,732,570

Exchange exposure in R$

3,061,952

 

2,991,233

 

 

   

Obligations not recognized in balance sheet

 

   

Future obligations resulting from operating leases

4,046,547

 

1,991,402

Future obligations resulting from firm aircraft orders

32,462,490

 

15,780,007

Total

36,509,037

 

17,771,409

 

 

 

 

Total exchange exposure R$

39,570,989

 

20,762,642

Total exchange exposure US$

19,361,478

 

11,068,686

Exchange Rate (R$/US$)

2.0435

 

1.8758

 

c) Interest rate risk

The Company and its subsidiaries are exposed to fluctuations in domestic and foreign interest rates, substantially the CDI and Libor, respectively. The highest exposure is in lease transactions, indexed to the Libor, and local debt.

To mitigate the interest rate risk, the Company and its subsidiaries held swap transactions with counterparties rated as investment grade.

d)   Credit risk

The credit risk is inherent in the Company’s and its subsidiaries’ operating and financing activities, mainly represented by trade receivables, cash and cash equivalents, including bank deposits.

The trade receivable credit risk consists of amounts falling due of the largest credit card companies, with credit risk better than or equal to those of the Company and its subsidiaries, and receivables from travel agencies, installment sales, and government sales, with a small portion exposed to risks from individuals or other entities.

As defined in the Risk Management Policy, the Company and its subsidiaries are required to evaluate the counterparty risks in financial instruments and diversify the exposure. Financial instruments are performed with counterparties rated at least as investment grade by S&P and Moody’s. The financial instruments are mostly contracted on commodities and futures exchanges (BM&FBOVESPA and NYMEX), which substantially mitigates the credit risk. The Company’s and its subsidiaries’ Risk Management Policy establishes a maximum limit of 20% per counterparty for short-term investments.

 

F-58

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

e)  Liquidity risk

Liquidity risk takes on two distinct forms: market liquidity risk and cash flow liquidity risk. The first is related to current market prices and varies in accordance with the types of assets and the markets where they are traded. Cash flow liquidity risk, however, is related to difficulties in meeting the contracted operating obligations at the agreed dates.            

As a way of managing the liquidity risk, the Company and its subsidiaries invest its funds in liquid assets (governmental bonds, CDBs, and investment funds with daily liquidity), and the Cash Management Policy establishes that the Company’s and its subsidiaries’ weighted average debt maturity should be higher than the weighted average maturity of the investment portfolio. As of December 31, 2012, the weighted average maturity of the Company’s and its subsidiaries’ financial assets was 15 days and of financial debt, excluding perpetual bonds, was 4.1 years.

f)  Capital management

The table below shows the financial leverage rate as of December 31, 2012 and December 31, 2011:

 

Consolidated

 

12/31/2012

 

12/31/2011

Shareholder’s equity

732,828

 

2,205,911

Cash and cash equivalents

(775,551)

 

(1,230,287)

Restricted cash

(224,524)

 

(109,095)

Short-term investments

(585,028)

 

(1,009,068)

Short- and long-term debts

5,191,175

 

4,991,448

Net debt (a)

3,606,072

 

2,642,998

Total capital (b)

4,338,900

 

4,848,909

Leverage ratio (a) / (b)

83%

 

55%

    

The Company and its subsidiaries remain committed to maintaining high liquidity and an amortization profile without pressure in the short-term refinancing.

Derivative financial instruments

The derivative financial instruments were recognized in the following balance sheet line items:

Movement of Assets and Liabilities

Fuel

Foreign currency

Interest rate

 

 

 

 

 

 

 

 

Asset (Liability) as of December 31, 2011

(9,217)

-

(88,440)

 

 

Fair Value Variations:

 

 

 

 

 

Gains (Losses) recognized on results

-

46.978

1.879

 

 

Gains (Losses) recognized in other comprehensive results

45.565

-

(24.641)

 

 

Payments (cash receipts) during the year

-

46.978

1.879

 

 

Asset (Liability) as of December 31, 2012 (*)

12,863

-

(54,749)

 

 

 

 

 

 

 

 

Movement of other comprehensive results

Fuel

Foreign

currency

Interest Rate

 

Total

 

 

 

 

 

 

Balance as of December 31, 2011

(20.898)

-

(58.370)

 

(79.268)

Fair value adjustments during the year

45.565

-

(24.641)

 

20.924

Recycled to profit or loss (b)

(11.798)

-

7.064

 

(4.733)

Tax effect

(11.481)

-

5.976

 

(5.505)

Balance as of December 31, 2012

1.389

-

(69.971)

 

(68.582)

 

 

 

 

 

 

Effects on Result (a+b)

11.798

46.978

(5.186)

 

53.590

 

 

 

 

 

 

* Classified as "Rights with derivative operations" if the amount results in an asset or "Obligation with derivative operations " if the amount results in a liability.

F-59

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

The Company and its subsidiaries adopt hedge accounting. On December 31, 2012, the derivatives contracted to hedge interest rate risk and fuel price risk were classified as "cash flow hedge", according to the parameters described in the Brazilian accounting standard CPC 38, and 40, technical guidance OCPC03 and International Accounting Standard IAS 39.

Classification of derivatives financial instruments

i) Cash flow hedges

The Company and its subsidiaries use cash flow hedges to hedge against future revenue or expense fluctuations resulting from changes in the exchange rates, interest rates or fuel price, and accounts for actual fluctuations of the fair value of derivative financial instruments in shareholders’ equity until the hedged revenue or expense is recognized.

The Company and its subsidiaries estimates the effectiveness based on statistical correlation methods and the ratio between gains and losses on the financial instruments used as hedge, and the cost and expense fluctuation of the hedged items.

The instruments are considered as effective when the fluctuation in the value of derivatives offsets between 80 % to 125% the impact of the price fluctuation on the cost or expense of the hedged item.

The balance of the actual fluctuations in the fair values of the derivatives designated as cash flow hedges is transferred from shareholders’ equity to profit or loss for the period in which the hedged costs or expenses impacts profit or loss. Gains or losses on effective cash flow hedges are recorded in balancing accounts of the hedged expenses, by reducing or increasing the operating cost, and the ineffective gains or losses are recognized as financial income or financial expenses for the period.

ii) Derivative financial instruments not designated as hedges

The Company and its subsidiaries contracts derivative financial instruments that are not formally designated for hedge accounting. This occurs when transactions are in the short term and the control and disclosure complexity make them unfeasible, or when the change in a derivative’s fair value must be recognized in profit or loss for the same period of the effects of the hedged risk.

Designation of hedged item

a)     Fuel hedge  

Due to the low liquidity of jet fuel derivatives traded in commodities exchanges, the Company and its subsidiaries contracts crude oil derivatives (WTI, Brent) and its byproducts (Heating Oil) to hedge against fluctuations in jet fuel prices. Historically, oil prices are highly correlated with jet fuel prices. 

As of December 31, 2012, the company and its subsidiaries have contracts of options and collar, Brent and WTI, designated as cash flow hedge accounting of fuel.

Oil derivative contracts, designated as fuel hedges of the Company and its subsidiaries, are summarized below:

Closing balance at : 

12/31/2012

 

12/31/2011

Fair value at end of the period (R$)

12,863

 

(9,217)

Volume hedged for future periods (thousand barrels)

1,849

 

3,631

Volume engaged for future periods (thousand barrels)

2,958

 

5,810

Gains (losses) with hedge effectiveness recognized in shareholders’ equity, net of taxes (R$)

1,389

 

(20,898)

 

 

F-60

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

Period ended:

2012

 

2011

Hedge gains (losses) recognized in operating costs (R$)

3,255

 

-

Hedge gains (losses) recognized in financial income (expenses)(R$)

8,543

 

777

Total earnings (loss) (R$)

11,798

 

777

 

 

1T13

 

2T13

 

3T13

 

4T13

 

Total 12M

 

1T13 - 2T15

Percentage of fuel exposure hedged

21%

 

9%

 

7%

 

7%

 

11%

 

6%

Notional amount in barrels (thousands)

825

 

339

 

270

 

280

 

1,714

 

1,244

Future rate agreed per barrel (US$) *

112.90

 

105.55

 

106.63

 

105.63

 

109.27

 

103.93

Total in reais **

190,340

 

73,118

 

58,834

 

60,441

 

382,734

 

264,206

 

* Weighted average between call strikes,

** The exchange rate as of 12/31/12 was R$2.0435/ US$1.00.

 

 

b)         Foreign Exchange Hedge  

 

As of December 31, 2012, the company and its subsidiaries have future derivative contracts of US Dollar to foreign exchange cash flow protection, not designated as hedge accounting. The losses and gains of the derivatives, for the year ended December 31, 2012 and 2011, are presented below:

 

Period ended:

12/31/2012

 

12/31/2011

Fair value at the end of period (R$)

-

 

-

Volume hedged for future periods (R$)

368,250

 

-

 

Period ended:

2012

 

2011

Gains (losses) recognized in financial income (expenses) (R$)

51,189

 

1,022

 

 

1T13

 

2T13

 

3T13

 

4T13

 

Total 12M

Percentage of cash flow exposure

28%

 

17%

 

10%

 

10%

 

16%

Notional amount (US$)

150,500

 

99,000

 

59,500

 

59,250

 

368,250

Future rate agreed (R$)

2.084

 

2.073

 

2.061

 

2.056

 

2.073

Total in reais

313,709

 

205,246

 

122,614

 

121,797

 

763,367

 

Since July, 2011 the Company and its subsidiaries do not have foreign exchange derivative contracts designated as fair value hedges of U.S. Dollar. The table below shows the amounts recognized in financial income related to these transactions:

 

 

Period ended:

2012

 

2011

Hedge effectiveness gains (losses) recognized in financial expenses (R$)

-

 

(34,130)

 

F-61

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

In March 2012 the currency swaps (USD x CDI) to hedge a credit facility (working capital) indexed to US Dollar were settled. The Company and its subsidiaries did not enter into new contracts of this type.The table below shows the amounts recognized in financial income (expenses) related to these transactions:

Period ended : 

2012

 

2011

Gains (losses) recognized in financial income (expenses)

(4,211)

 

2,618

 

 

c)         Interest rate hedges

 

As of December 31, 2012, the Company and its subsidiaries have swap derivatives designated as cash flow hedges for Libor interest rate. The following is a summary of interest rate derivative contracts designated as Libor cash flow hedges:

Closing balance at:

12/31/2012

 

12/31/2011

Fair value at the end of the period (R$)

(56,752)

 

(88,440)

Face value at the end of the period (US$)

278,058

 

505,181

Hedge losses recognized in shareholders’ equity, net of taxes (R$)

(69,971)

 

(58,370)

 

Period ended:

2012

 

2011

Losses recognized in financial expenses (R$)

(7,065)

 

(279)

 

As of December 31, 2012 the Company and its subsidiaries did not hold positions in Libor interest derivative contracts not designated for hedge accounting. The table below shows the amounts recognized in financial income and expenses related to these transactions:

Closing balance at:

12/31/2012

 

12/31/2011

Fair value at the end of the period (R$)

2,003

 

(7,789)

Face value at the end of the period (US$)

82,100

 

31,417

 

Period ended : 

2012

 

2011

Gain (Losses) recognized in financial expenses

1,879

 

(21,704)


 

Sensitivity analysis of derivative financial instruments

The Company and its subsidiaries analyze the impact of the financial instrument quotation fluctuation on the  Company’s and its subsidiaries’ profit or loss and shareholders’ equity considering:

·                 Increase and decrease by 10 percentage points in fuel prices, by keeping all the other variables constant;

·                 Increase and decrease by 10 percentage points in Dollar exchange rate, by keeping all the other variables constant;

·                 Increase and decrease by 10 percentage points in Libor interest rate, by keeping all the other variables constant;

The sensitivity analysis includes only relevant monetary items that are material for the risks above mentioned. A positive number indicates an increase in income and equity when the risk appreciates by 10%.

The table below shows the sensitivity analysis made by the Company’s management, at December 31, 2012 and 2011, based on the scenarios described above:

F-62

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

Fuel:

 

 

 

 

 

 

 

 

 

 

Position as of December 31, 2012

 

Position as of December 31, 2011

Increase / (decrease) in fuel prices (percentage)

 

Effect on income before tax (R$ million)

 

Effect on equity (R$ million)

 

Effect on income before tax (R$ million)

 

Effect on equity (R$ million)

10

 

(368)

 

(217)

 

(295)

 

(186)

(10)

 

368

 

240

 

295

 

181

 

 

 

 

 

 

 

 

 

Foreign exchange - USD:

 

 

 

 

 

 

 

 

 

 

Position as of December 31, 2012

 

Position as of December 31, 2011

Appreciation / (devaluation) of USD / R$
(percentage)

 

Effect on income before tax (R$ million)

 

Effect on equity (R$ million)

 

Effect on income before tax (R$ million)

 

Effect on equity (R$ million)

10

 

(479)

 

(316)

 

(386)

 

(255)

(10)

 

479

 

316

 

386

 

255

 

 

 

 

 

 

 

 

 

Interest rate - Libor:

 

 

 

 

 

 

 

 

 

Position as of December 30, 2012

 

Position as of December 31, 2011

Increase/(decrease) in Libor (percentage)

 

Effect on income before tax (R$ million)

 

Effect on equity (R$ million)

 

Effect on income before tax (R$ million)

 

Effect on equity (R$ million)

10

 

(1)

 

5

 

(0.5)

 

9

(10)

 

1

 

(5)

 

0.5

 

(9)

 

      Measurement of the fair value of financial instruments

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

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

 

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

 

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

F-63

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

The following table states a summary of the Company’s and its subsidiaries’ financial instruments measured at fair value, including their related classifications of the valuation method, as of December 31, 2012:

Financial Instrument

 

Book Value 12/31/2012

 

Other Significant Observable Factors (Level 2)

 

 

 

 

 

Cash equivalents

 

775,551

 

775,551

Short-term investments

 

585,028

 

585,028

Restricted cash

 

224,524

 

224,524

Liabilities from derivative transactions

 

56,752

 

56,752

Rights on derivative transactions

 

10,696

 

10,696

 

29.    Non-cash transactions

 

As of December 31, 2012, the Company and its subsidiaries increased their property, plant and equipment in the amount of R$104,679 and accounted for as prescribed dividends of R$577, these transactions did not affect its cash in the period.

 

30. Insurance  

 

As of December 31, 2012, the insurance coverage by nature, considering the aircraft fleet, and related to the maximum reimbursable amounts indicated in U.S. Dollars, is as follows:

 

Aeronautical type

In Brazilian reais

 

In US Dollar

Guarantee – Hull/war

173,647

 

85,000

Civil liability per event/aircraft

1,532,175

 

750,000

Inventories (base and transit)

286,006

 

140,000

 

Pursuant to Law 10,744, of October 9, 2003, the Brazilian government assumed the commitment to complement any civil liability expenses related to third parties caused by war or terrorist events, in Brazil or abroad, which VRG may be required to pay, for amounts exceeding the limit of the insurance policies effective beginning September 10, 2001, limited to the amount in Brazilian Reais equivalent to one billion U.S. Dollars.

 

31.    Subsequent event

 

a.        From January 1, 2013, our subsidiary Smiles S.A. started operating activities related to relationship program "Smiles", which until December 31, 2012 were conducted by our subsidiary VRG Linhas Aéreas S.A. ("VRG"). The objective of the customer loyalty program (“program”) is to perform essentially: (i) the development and management of the program; and (ii) the marketing rights of redemption of rewards. This change in the group’ structure will modify the reportable segments, which will be separated into “Passengers Transportation” and Relationship Program - Smiles”  from the  first quarter of 2013.

 

b.       On February 1, 2013, the Company obtained approval of the non-declaration of acceleration and / or application of any penalty on breach of its contractual restrictive clauses. This release was deliberated by the General Meeting of Debenture Holders of the fourth and fifth debentures. As a result of this authorization, on March 25, 2013 (date of release of these Financial Statement), the Company is compliant with its obligations agreed in the indenture.

 

F-64

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of Brazilian Reais – R$, except when indicated otherwise)

 

 

 

c.        On February 07, 2013, the Company’s subsidiary VRG issued US$200 million of 10.75% p.a. in Senior Notes (“Senior Bonds Notes”) with maturity in 2023, in a transaction that is exempt from registration under the Securities Act of the USA, dated 1933, as amended ("Securities Act"). GLAI is the guarantor of the Senior Notes issued by its subsidiary VRG. The Notes are unsecured senior obligations and may be redeemed after five years. The Company intends to use the proceeds of the offering for the repayment of debts for the next three years and working capital.

 

d.       In February 27, 2013, in compliance with the provisions of article 157, paragraph 4, of law 6,404, of December 15, 1976, and within the meaning of article 2 of the statement of the Securities and Exchange Commission ("CVM") No. 358, of January 3, 2002, the company announced that its subsidiary, the Smiles S.A. ("Smiles"), filed an application for registration as a publicly-traded company and the distribution of initial public offering shares to the CVM ("IPO"), to be held in Brazil, in a non-organized over-the-counter market, pursuant to CVM Instruction nº 400 dated December 29, 2003 and CVM Instruction No. 480, of April 4, 2000, with stock placement efforts abroad. It is expected that the common shares will be admitted to trading on the “Novo Mercado” of BM & FBOVESPA's corporate governance. The offer is subject to the approval by the CVM and market conditions.

 

32. Condensed consolidating financial information of guarantors subsidiaries

 

The following condensed consolidating financial information, prepared in accordance with IFRS, is presented in lieu of providing separate audited financial statements for the guarantor subsidiary VRG, which is 100% owned by the Company, in connection with its full and unconditional guarantee, on a joint and several basis, of the obligation to pay principal and interest under the 8.75% perpetual notes, 7.50% (senior notes I) and 9.25% (senior bonds II) issued by the Company’s wholly owned subsidiary Finance.

 

 

 

F-65

 

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

NOTES TO THE CONDENSED CONSOLIDATING  FINANCIAL STATEMENTS

(In thousands of Brazilian Reais, except when indicated otherwise)

Condensed consolidating statement of financial position as of December 31, 2012

 

 

 

Parent

 

Issuer

 

Subsidiary

 

Subsidiary

 

Consolidating

   
 

Company

 

Subsidiary

 

Guarantor

 

Non guarantor

 

Adjustments

 

Consolidated

 

(GLAI)

 

(FINANCE)

 

(VRG)

 

(GAC + SMILES)

       
                       

Assets

                     

Current assets

                     

Cash and cash equivalents

65,204

 

3,295

 

528,406

 

178,646

 

-

 

775,551

Short-term investments

176,413

 

-

 

410,057

 

-

 

(1,442)

 

585,028

Trade and other receivables

-

 

-

 

325,665

 

-

 

-

 

325,665

Inventories of parts and supplies

-  

 

-

 

138,039

 

-

 

-

 

138,039

Other current assets

23,875

 

-

 

230,504

 

101,251

 

(91,930)

 

263,700

 

265,492

 

3,295

 

1,632,671

 

279,897

 

( 93,372)

 

2,087,983

                       

Non-current assets

                     

Other non-current assets

                     

Credits with related parties

128,197

 

1,391,467

 

493,918

 

-

 

(2,013,582)

 

-

Other non-current assets

100,208

 

-

 

1,291,334

 

35,456

 

(73,613)

 

1,353,385

Total other non-current assets

228,405  

 

1,391,467

 

1,785,252

 

35,456

 

(2,087,195)

 

1,353,385

Investments

254,114

 

-

 

-

 

-

 

(254,114)

 

-

Property, plant and equipment

-

 

-

 

2,993,301

 

892,498

 

-

 

3,885,799

Intangible assets

-

 

-

 

1,699,931

 

-

 

-

 

1,699,931

 

482,519

 

1,391,467

 

6,478,484

 

927,954

 

(2,341,309)

 

6,939,115

                       
 

 

 

 

 

 

 

 

 

 

 

 

Total assets

748,011

 

1,394,762

 

8,111,155

 

1,207,851

 

(2,434,681)

 

9,027,098

 

 

 

F-66

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

NOTES TO THE CONDENSED CONSOLIDATING  FINANCIAL STATEMENTS

(In thousands of Brazilian Reais, except when indicated otherwise)

Condensed consolidating statement of financial position as of December 31, 2012

 

 

Parent

 

Issuer

 

Subsidiary

 

Subsidiary

 

Consolidating

   
 

Company

 

Subsidiary

 

Guarantor

 

Non guarantor

 

Adjustments

 

Consolidated

 

(GLAI)

 

(FINANCE)

 

(VRG)

 

(GAC + SMILES)

       
                       

Current liabilities

                     

Short-term debt

-

 

41,980

 

1,679,087

 

70

 

(1,512)

 

1,719,625

Accounts payable

46

 

-

 

480,139

 

-

 

-

 

480,185

Advance ticket sales

-

 

-

 

823,190

 

-

 

-

 

823,190

Dividends payable

7

 

-

 

-

 

-

 

-

 

7

Provisions

-

 

-

 

179,950

 

-

 

-

 

179,950

Other current liabilities

6,664

 

-

 

845,119

 

99,326

 

(92,373)

 

858,736

Total current liabilities

6,717

 

41,980

 

4,007,485

 

99,396

 

(93,885)

 

4,061,693

                       
                       

Non-current liabilities

                     

Long-term debt

-

 

1,469,729

 

2,075,386

 

-

 

(73,565)

 

3,471,550

Deferred taxes

-

 

-

 

-

 

-

     

-

Debt with related parties

-

 

-

 

534,262

 

1,479,320

 

(2,013,582)

 

-

Other non-current liabilities

8,995

 

-

 

743,729

 

8,367

 

(64)

 

761,027

Total non-current liabilities

8,995

 

1,469,729

 

3,353,377

 

1,487,687

 

(2,087,211)

 

4,232,577

                       

Total shareholders' equity

732,299

 

(116,947)

 

750,293

 

(379,232)

 

(253,585)

 

732,828

                       
 

 

 

 

 

 

 

 

 

 

 

 

Total shareholders' equity and liabilities

748,011  

 

1,394,762

 

8,111,155

 

1,207,851

 

(2,434,681)

 

9,027,098

 

F-67

 

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

NOTES TO THE CONDENSED CONSOLIDATING  FINANCIAL STATEMENTS

(In thousands of Brazilian Reais, except when indicated otherwise)

Condensed consolidating statement of financial position as of December 31, 2012

 

Parent  

 

Issuer

 

Subsidiary

 

Subsidiary

 

Consolidating

   
 

Company

 

Subsidiary

 

Guarantor

 

Non guarantor

 

Adjustments

 

Consolidated

 

(GLAI)

 

(FINANCE)

 

(VRG)

 

(GAC + SMILES)

 

 

 

 

                       

Total operating revenues

-

 

-

 

8,102,970

 

-

 

589

 

8,103,559

                       

Operating expenses

                     

Salaries

(12,816)

 

-

 

(1,556,854)

 

-

 

-

 

(1,569,670)

Aircraft fuel

-

 

-

 

(3,742,219)

 

-

 

-

 

(3,742,219)

Aircraft rent

-

 

-

 

(644,031)

 

-

 

-

 

(644,031)

Aircraft insurance

-

 

-

 

(26,875)

 

-

 

-

 

(26,875)

Sales and marketing

(395)

 

-

 

(426,582)

 

-

 

395

 

(426,582)

Landing fees

-

 

-

 

(559,421)

 

-

 

-

 

(559,421)

Aircraft and traffic servicing

(893)

 

-

 

(527,198)

 

-

 

(646)

 

(528,737)

Maintenance materials and repairs

-

 

-

 

(417,990)

 

(251)

 

251

 

(417,990)

Depreciation

(89)

 

-

 

(519,542)

 

-

 

-

 

(519,631)

Gain on bargain purchase

-

 

-

 

-

 

-

 

-

 

-

Other operating expenses

(949)

 

-

 

(609,867)

 

36,861

 

(61)

 

(574,016)

Total operating expenses

(15,142)

 

-

 

(9,030,579)

 

36,610

 

(61)

 

(9,009,172)

                       

Income(loss) before finance income and expenses

(15,142)

 

-

 

(927,609)

 

36,610

 

528

 

(905,613)

                       

Total finance costs and other income (expense)

(80,984)

 

(33,253)

 

(482,504)

 

(82,468)

 

-

 

(679,209)

                       

Equity in income (loss) of subsidiary

(1,412,144)

 

-

 

-

 

-

 

1,412,144

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

(1,508,270)

 

(33,253)

 

(1,410,113)

 

(45,858)

 

1,412,672

 

(1,584,822)

                       

Income taxes

(5,173)

 

-

 

77,080

 

-

 

-

 

71,907

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) for the year

(1,513,443)

 

(33,253)

 

(1,333,033)

 

(45,858)

 

1,412,672

 

(1,512,915)

                       

 

F-68

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

NOTES TO THE CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

(In thousands of Brazilian Reais, except when indicated otherwise)

Condensed consolidating statement of cash flows for the year ended December 31, 2012

                       
 

Parent

 

Issuer

 

Subsidiary

 

Subsidiary

 

Consolidating

   
 

Company

 

Subsidiary

 

Guarantor

 

Non guarantor

 

Adjustments

 

Consolidated

 

(GLAI)

 

(FINANCE)

 

(VRG)

 

(GAC + SMILES)

 

 

 

 

Cash flows from operating activities:

                     

Net cash provided by (used in) operating activities

(141,644)

 

(41,578)

 

307,679

 

(148,006)

 

156,842

 

133,293

                       

Cash flows from investing activities:

                     

Acquisition of property, plant and equipment, net

-

 

-

 

(339,284)

 

(115,820)

 

862

 

( 454,242) 

Intangibles

89

 

-

 

(20,772)

 

-

 

(89)

 

( 20,772) 

Net investments in restricted cash

-

 

-

 

(115,167)

 

-

 

(262)

 

( 115,429) 

Net investments in financial assets

107,092

 

-

 

-

 

-

 

(107,092)

 

-

Other

-

 

-

 

-

 

-

 

-

 

-

Net cash used (used in) investing activities

107,181

 

-

 

(475,223)

 

( 115,820)  

 

(106,581)

 

( 590,443) 

                       

Cash flows from financing activities:

                     

Net proceeds from debt

(40,677)

 

125,609

 

21,955

 

70

 

(129,254)

 

( 22,297)  

Related parties transactions

(96,552)

 

(83,191)

 

(330,702)

 

432,028

 

78,417

 

-

Addition of treasury shares

17,337

 

-

 

-

 

-

 

-

 

17,337

Others

3

 

-

 

 -

 

-

 

576

 

579

Net cash provided by (used in) financing activities

(119,889)

 

42,418

 

(308,747)

 

432,098

 

(50,261)

 

( 4,381) 

                       

Effects of exchange rate changes on the balance of cash held in foreign currencies

-  

 

-

 

6,795

 

-

 

-

 

6,795

                       

Net increase (decrease) in cash and cash equivalents

(154.352)

 

840

 

(469,496)

 

168,272

 

-

 

( 454,736) 

                       

Cash and cash equivalents at beginning of the year

219,556  

 

2,455

 

997,902

 

10,374

 

-

 

1.230,287

Cash and cash equivalents at end of the year

65,204  

 

3,295

 

528,406

 

178,646

 

-

 

775,551

F-69

 

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

NOTES TO THE CONDENSED CONSOLIDATING  FINANCIAL STATEMENTS

(In thousands of Brazilian Reais, except when indicated otherwise)

Condensed consolidating statement of financial position as of December 31, 2011

 

 

Parent

 

Issuer

 

Subsidiary

 

Subsidiary

 

Consolidating

 

 

 

Company

 

Subsidiary

 

Guarantor

 

Non guarantor

 

Adjustments

 

Consolidated

 

(GLAI)

 

(FINANCE)

 

(VRG)

 

(GAC)

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

219,556

 

2,455

 

997,902

 

10,374

 

 

 

1,230,287

Short-term investments

69,885

 

-

 

1,008,036

 

-

 

(68,853)

 

1,009,068

Trade and other receivables

-

 

-

 

354,134

 

-

 

 

 

354,134

Inventories of parts and supplies

-

 

-

 

151,023

 

-

 

-

 

151,023

Other current assets

(32,939)

 

5,101

 

344,322

 

67,956

 

9,352

 

393,791

 

256,502

 

7,556

 

2,855,417

 

78,330

 

(59,501)

 

3,138,303

 

 

 

 

 

 

 

 

 

 

 

 

Non-current assets

 

 

 

 

 

 

 

 

 

 

 

Other non-current assets

 

 

 

 

 

 

 

 

 

 

 

Credits with related parties

342,204

 

1,308,276

 

222,725

 

(1,056,663)

 

(816,542)

 

-

Other non-current assets

12,374

 

-

 

976,676

 

44,827

 

44,828

 

1,078,705

Total other non-current assets

354,578

 

1,308,276

 

1,999,401

 

(1,011,836)

 

(771,714)

 

1,078,705

Investments

2,103,325

 

-

 

-

 

-

 

(2,103,325)

 

-

Property, plant and equipment

-

 

-

 

3,113,792

 

776,678

 

 

 

3,890,470

Intangible assets

89

 

-

 

1,783,868

 

-

 

-

 

1,783,957

 

2,457,992

 

1,308,276

 

6,097,061

 

(235,158)

 

(2,875,040)

 

6,753,132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

2,714,494

 

1,315,832

 

8,952,478

 

(156,828)

 

(2,934,539)

 

9,891,435

 

F-70

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

NOTES TO THE CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

(In thousands of Brazilian Reais, except when indicated otherwise)

Condensed consolidating statement of financial position as of December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Parent

 

Issuer

 

Subsidiary

 

Subsidiary

 

Consolidating

 

 

 

Company

 

Subsidiary

 

Guarantor

 

Non guarantor

 

Adjustments

 

Consolidated

 

(GLAI)

 

(FINANCE)

 

(VRG)

 

(GAC)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Short-term debt

40,676

 

38,799

 

1,474,289

 

-

 

(1,324)

 

1,552,440

Accounts payable

6,353

 

-

 

408,210

 

-

 

-

 

414,563

Advance ticket sales

-

 

-

 

744,743

 

-

 

-

 

744,743

Dividends payable

584

 

-

 

-

 

-

 

-

 

584

Provisions

-

 

-

 

75,568

 

-

 

-

 

75,568

Other current liabilities

(4,306)

 

-

 

796,945

 

7,564

 

7,564

 

807,767

Total current liabilities

43,307

 

38,799

 

3,499,755

 

7,564

 

6,240

 

4,089,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

-

 

1,347,300

 

2,159,237

 

-

 

(67,529)

 

3,439,008

Debt with related parties

222,725

 

-

 

593,817

 

-

 

(816,542)

 

-

Other non-current liabilities

(8,039)

 

-

 

627,028

 

15,931

 

15,931

 

650,851

Total non-current liabilities

214,686

 

1,347,300

 

3,380,082

 

15,931

 

(868,140)

 

4,853,565

 

 

 

 

 

 

 

 

 

 

 

 

Total shareholders' equity

2,456,502

 

(70,268)

 

2,072,640

 

(180,323)

 

(2,072,640)

 

2,205,911

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shareholders' equity and liabilities

2,714,494

 

1,315,832

 

8,952,478

 

(156,828)

 

(2,934,540)

 

9,891,435

 

 

F-71

 

 

GOL LINHAS AÉREAS INTELIGENTES S.A.

NOTES TO THE CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

(In thousands of Brazilian Reais, except when indicated otherwise)

Condensed consolidating statement of operations for the year ended December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Parent

 

Issuer

 

Subsidiary

 

Subsidiary

 

Consolidating

 

 

 

Company

 

Subsidiary

 

Guarantor

 

Non guarantor

 

Adjustments

 

Consolidated

 

(GLAI)

 

(FINANCE)

 

(VRG)

 

(GAC)

 

 

 

 

Total operating revenues

-

 

-

 

7,539,308

 

8

 

(8)

 

7,539,308

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

Salaries

(27,137)

 

-

 

(1,533,299)

 

-

 

-

 

(1,560,436)

Aircraft fuel

-

 

-

 

(3,060,665)

 

-

 

-

 

(3,060,665)

Aircraft rent

(1,808)

 

-

 

(505,058)

 

(1,808)

 

3,617

 

(505,058)

Aircraft insurance

-

 

-

 

(31,921)

 

-

 

-

 

(31,921)

Sales and marketing

(590)

 

-

 

(402,568)

 

-

 

589

 

(402,568)

Landing fees

-

 

-

 

(395,249)

 

-

 

-

 

(395,249)

Aircraft and traffic servicing

(7,217)

 

-

 

(476,834)

 

(1,614)

 

1,023

 

(484,642)

Maintenance materials and repairs

-

 

-

 

(434,181)

 

-

 

-

 

(434,181)

Depreciation

(89)

 

-

 

(388,544)

 

-

 

(7,174)

 

(395,807)

Gain on bargain purchase

-

 

-

 

88,428

 

-

 

-

 

88,428

Other operating expenses

19,619

 

-

 

(626,698)

 

21,424

 

(16,058)

 

(601,713)

Total operating expenses

(17,222)

 

-

 

(7,766,590)

 

18,002

 

(18,003)

 

(7,783,812)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before finance income and expenses

(17,222)

 

-

 

(227,282)

 

18,009

 

(18,011)

 

(244,504)

 

 

 

 

 

 

 

 

 

 

 

 

Total finance costs and other income (expense)

(236,609)

 

(31,909)

 

(519,305)

 

(97,771)

 

129,680

 

(755,914)

 

 

 

 

 

 

 

 

 

 

 

 

Equity in income (loss) of subsidiary

(518,274)

 

-

 

-

 

-

 

518,274

 

-

Income (loss) before income taxes

(772,105)

 

(31,909)

 

(746,587)

 

(79,762)

 

629,943

 

(1,000,418)

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes

20,567

 

-

 

228,313

 

-

 

-

 

248,880

Net income (loss) for the year

(751,538)

 

(31,909)

 

(518,274)

 

(79,762)

 

629,943

 

(751,538)

 

 

F-72

 
 

GOL LINHAS AÉREAS INTELIGENTES S.A.

NOTES TO THE CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

(In thousands of Brazilian Reais, except when indicated otherwise)

Condensed consolidating statement of cash flows for the year ended December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Parent

 

Issuer

 

Subsidiary

 

Subsidiary

 

Consolidating

 

 

 

Company

 

Subsidiary

 

Guarantor

 

Non guarantor

 

Adjustments

 

Consolidated

 

(GLAI)

 

(FINANCE)

 

(VRG)

 

(GAC)

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

(39,925)

 

(158,006)

 

56,784

 

(409,246)

 

(52,127)

 

(602,520)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Acquisition of property, plant and equipment, net

-

 

 

 

(110,427)

 

(221,526)

 

52,127

 

(279,826)

Intangibles

-

 

 

 

 

 

(80,863)

 

-

 

(80,863)

Net investments in restricted cash

-

 

 

 

 

 

(74,594)

 

-

 

(74,594)

Net investments in financial assets

-

 

 

 

 

 

(33,885)

 

-

 

(33,885)

Other

-

 

 

 

 

 

-

 

-

 

-

Net cash used (used in) investing activities

-

 

-

 

(110,427)

 

(410,868)

 

52,127

 

(469,168)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Net proceeds from long-term debt

-

 

-

 

-

 

237,133

 

 

 

237,133

Credit with related parties

36,272

 

135,473

 

(34,636)

 

(137,109)

 

 

 

-

Addition of treasury shares

-

 

-

 

-

 

 

 

-

 

-

Others

97,624

 

-

 

19,790

 

 

 

-

 

117,414

Net cash provided by (used in) financing activities

133,896

 

135,473

 

(14,846)

 

100,024

 

-

 

354,547

 

 

 

 

 

 

 

 

 

 

 

 

Effects of exchange rate changes on the balance of cash held in foreign currencies

-

 

-

 

-

 

(8,430)

 

-

 

(8,430)

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

93,970

 

(22,533)

 

(68,488)

 

(728,520)

 

-

 

(725,571)

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of the year

125,586

 

24,988

 

78,862

 

1,726,422

 

-

 

1,955,858

Cash and cash equivalents at end of the year

219,556

 

2,455

 

10,374

 

997,902

 

-

 

1,230,287

 

F-73

 
 
 

GOL LINHAS AÉREAS INTELIGENTES S.A.

NOTES TO THE CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

(In thousands of Brazilian Reais, except when indicated otherwise)

Condensed consolidating statement of operations for the year ended December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Parent

 

Issuer

 

Subsidiary

 

Subsidiary

 

Consolidating

 

 

 

Company

 

Subsidiary

 

Guarantor

 

Non guarantor

 

Adjustments

 

Consolidated

 

(GLAI)

 

(FINANCE)

 

(VRG)

 

(GAC)

 

 

 

 

Total operating revenues

-

 

-

 

6,979,447

 

-

 

-

 

6,979,447

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

Salaries

(26,373)

 

-

 

(1,226,029)

 

-

 

-

 

(1,252,402)

Aircraft fuel

-

 

-

 

(2,287,410)

 

-

 

-

 

(2,287,410)

Aircraft rent

3,607

 

-

 

(552,038)

 

(3,607)

 

-

 

(555,645)

Sales and marketing

(246)

 

-

 

(367,511)

 

-

 

-

 

(367,757)

Landing fees

-

 

-

 

(331,883)

 

-

 

-

 

(331,883)

Aircraft and traffic servicing

(6,414)

 

-

 

(418,640)

 

(2,799)

 

-

 

(427,853)

Maintenance materials and repairs

-

 

-

 

(422,950)

 

-

 

-

 

(422,950)

Depreciation and amortization

(89)

 

-

 

(281,515)

 

-

 

-

 

(281,604)

Other operating expenses

11,134

 

-

 

(375,295)

 

17,765

 

(11,359)

 

(354,148)

Total operating expenses

(18,381)

 

-

 

(6,263,271)

 

11,359

 

(11,359)

 

(6,281,652)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before finance income and expenses

(18,381)

 

-

 

716,176

 

11,359

 

(11,359)

 

697,795

 

 

 

 

 

 

 

 

 

 

 

 

Total finance income (expense)

(70,464)

 

(23,390)

 

(240,835)

 

(66,673)

 

90,063

 

(311,299)

 

 

 

 

 

 

 

 

 

 

 

 

Equity in income of subsidiary

292,463

 

-

 

-

 

-

 

(292,463)

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

203,618

 

(23,390)

 

475,341

 

(55,314)

 

(213,759)

 

386,496

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes

10,579

 

-

 

(182,878)

 

-

 

-

 

(172,299)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) for the year

214,197

 

(23,390)

 

292,463

 

(55,314)

 

(213,759)

 

214,197

F-74

 
 

GOL LINHAS AÉREAS INTELIGENTES S.A.

NOTES TO THE CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

(In thousands of Brazilian Reais, except when indicated otherwise)

Condensed consolidating statement of cash flows for the year ended December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Parent

 

Issuer

 

Subsidiary

 

Subsidiary

 

Consolidating

 

 

 

Company

 

Subsidiary

 

Guarantor

 

Non guarantor

 

Adjustments

 

Consolidated

 

(GLAI)

 

(FINANCE)

 

(VRG)

 

(GAC)

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

7,662

 

(434,589)

 

739,846

 

55,267

 

355,711

 

723,897

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Payment for property, plant and equipment

138,380

 

-

 

(368,849)

 

-

 

-

 

(230,469)

Investments in restricted cash, net

3,180

 

-

 

(11,596)

 

-

 

-

 

(8,416)

Short term investments

5,442

 

-

 

12,496

 

-

 

-

 

17,938

Other

-

 

-

 

(58,512)

 

-

 

-

 

(58,512)

Net cash used (provided by) investing activities

147,002

 

-

 

(426,461)

 

-

 

-

 

(279,459)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Net proceeds

219,996

 

459,561

 

(15,118)

 

-

 

(459,561)

 

204,878

Credit with related parties

(283,622)

 

-

 

283,622

 

-

 

-

 

-

Dividends paid

(185,839)

 

-

 

-

 

-

 

-

 

(185,839)

Capital increase

120,861

 

-

 

-

 

-

 

-

 

120,861

Net cash provided by (used in) financing activities

(128,604)

 

459,561

 

268,504

 

-

 

(459,561)

 

139,900

 

 

 

 

 

 

 

 

 

 

 

 

Effects of exchange rate changes on the balance of cash held in foreign currencies

-

 

-

 

(10,888)

 

-

 

-

 

(10,888)

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

26,060

 

24,972

 

571,001

 

55,267

 

(103,850)

 

573,450

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of the year

203,376

 

16

 

1,155,421

 

23,595

 

-

 

1,382,408

Cash and cash equivalents at end of the year

229,436

 

24,988

 

1,726,422

 

78,862

 

(103,850)

 

1,955,858

 

F-75

 

 

 

 

 

 

EXHIBIT 1.1

GOL LINHAS AÉREAS INTELIGENTES S.A.

BYLAWS

CHAPTER I

NAME, HEADQUARTERS, JURISDICTION, DURATION AND PURPOSE

ARTICLE 1 – Gol Linhas Aéreas Inteligentes S.A. (“Company”) is a joint stock company governed by the laws and use of commerce, by these By- Laws (“Bylaws”) and applicable legislation.

1st paragraph – Upon admission of the Company in the special listing segment called Level 2 of Corporate Governan ce (“Nível 2 de Governança Corporativa”) of the BM&FBOVESPA S.A. –Bolsa de Valores, Mercadorias e Futuros (“BM&FBOVESPA”) (Stock, Commodities and Futures

Exchange), the Company, its shareholders, executive officers and members of the Board of Directors and of the Fiscal Board, when installed, are bound by the provisions set forth in the

Regulation of Level 2 Corporate Governance of BM&FBOVESPA (“Regulation”).

2nd paragraph – The provisions in the Regulation shall prevail over the provisions in the Bylaws, in the event of loss to the rights of the investors in public offerings provided for in these Bylaws.

ARTICLE 2 - The objective of the Company is to exercise corporate control of VRG Linhas Aéreas S.A. or of its successor at any title, and by means of controlled or affiliate companies, to exploit: (a) regular and non-regular air transportation services of passengers, cargo and mail bags, nationally or internationally, according to the concessions granted by the competent authorities; (b) complementary activities of chartering air transportation of passengers, cargo and mail bags; (c) the rendering of maintenance services, repair of aircrafts, own or third parties, motors, items and parts; (d) the rendering of services of aircraft hangar; (e) the rendering of services of attendance of patio and road, supplying of flight attendance and aircrafts cleaning; (f) the development of other activities related, connected or auxiliary to air transportation and to the other activities above described; and (g) participation in other companies, as a partner, quotaholder or shareholder. 2

Sole Paragraph - The transfer of the corporate control of VRG Linhas Aéreas S.A. shall be considered a change in corporate objective for purposes of exercise of the withdrawal right by the shareholders of the Company.

ARTICLE 3 - The Company's head office is located in the City of São Paulo, State of São Paulo, at Pça. Comandante Linneu Gomes, s/n, portaria 3, prédio 24, parte, Jardim Aeroporto, and it may open and close branches, agencies, warehouses or representation offices in any part of the Brazilian territory or abroad, by resolution of the Board of Directors.

ARTICLE 4 - The Company's term is indefinite.

CHAPTER II
CAPITAL STOCK AND SHARES

ARTICLE 5 – The Capital Stock, fully subscribed and paid-up, is two billion, three hundred and si xteen million, four hundred and sixty-one thousand, seven hundred and forty reais and twenty-three cents (R$ 2.316.461.740,23), represented by two hundred and seventy million, three hundred and eighty-six thousand, eight hundred and sixty-six (270.386.866) shares, of which one hundred and thirty-seven million, thirty two thousand and seven hundred and thirty-four (137.032.734) are common shares and one hundred thirty-three million, three hundred and fifty-four thousand and one hundred and thirty-two (133.354.132) are preferred shares, all of them registered, with no face value.

1

 

1st paragraph – The Company’s shares shall be registered, with the adoption of book -entry shares being permitted, in which case they will be held in deposit accounts opened in the name of their respective holders, with a financial institution duly authorized by the Brazilian Securities and Exchange Commission (“CVM”), it being permitted that the fee mentioned in paragraph 3, article 35, of Law nº 6.404/76, as amended, be charged to the shareholders.

2nd Paragraph - Each common share shall be entitled to one vote in the Shareholders Meetings.

3rd Paragraph - Preferred shares shall not be entitled to voting rights, except in the case of the subjects specified in the 4th Paragraph below, the preferences consisting on the following:

(a) priority in the reimbursement of capital, without premium; and

(b) the right to be included in the public offering arising from the sale of corporate control, for

the same condition and the same price paid per share of the block of control, being guaranteed the right to dividends at least equal to that of the common shares.

4th Paragraph - Preferred shares shall be entitled the right to vote in any deliberations of the General Shareholders' Meeting about (a) transformation, incorporation, spin-off and merger of the Company; (b) approval of agreement between the Company and the Controlling Shareholder (as defined in the Regulation), directly or through third parties, as well as any other companies in which the Controlling Shareholder has interest, always when by operation of law or the Bylaws are deliberated in a general meeting; (c) evaluation of goods destined to the paying up of increase of the Company's corporate capital; (d) choice of specialized institution or company for the determination of the Economic Value of the Company according to the definition and terms of item 10.1.1. of the Regulation; (e) change of the Company's corporate purpose; (f) amendment or revocation of statutory provisions that amend or modify any of the requirements provided for in item 4.1. of the Regulation, being agreed that such voting right shall prevail while the Level 2 Corporate Governance Listing Agreement (as defined in the Regulation) is effective; and (g) any change in the voting rights determined in this paragraph.

5th Paragraph - If there is a shareholder withdrawal, the amount to be paid by the Company as reimbursement for the shares held by the shareholder that has exerted this withdrawal right, when authorized by law, shall correspond to the economic value of such shares, to be calculated according to the procedure of evaluation accepted by Law nº 6.404/76, as amended, whenever such value is lower than the equity value calculated according to article 45 of Law nº 6.404/76.

6th Paragraph - The shareholders may, at any time, convert common shares into preferred shares, in the proportion of 1 (one) common share to 1 (one) preferred share, provided that such shares are paid-up and with due regard to the legal limit. The conversion requests shall be sent to the Board of Officers in writing. The conversion requests received and accepted by the Board of Officers shall be ratified in the first meeting of the Board of Directors to be held.

ARTICLE 6 - Observing the legal limitations applicable, the Company is authorized to increase its corporate capital up to four billion Reais (R$4,000,000,000.00).

1st Paragraph - Within the limit authorized by this Section, the Company may, by resolution of the Board of Directors, increase the corporate capital, regardless of amendment to the By-Laws, either upon issuance of shares, or upon issuance of debentures convertible into stock, without respecting the proportionality between the different types of shares. The Board of Directors shall determine the conditions for the issuance, including the price and pay-up term.

2nd Paragraph - At the Board of Directors' discretion, the right of first refusal may be excluded or have its term for exercise reduced concerning the issuance of shares in which placement is held in the stock market or by public subscription, or even by exchange per shares, in a public offering for acquisition of corporate control, according to the provisions of law.

2

 

 

3rd Paragraph - The Company may, within the limit of the authorized capital established herein and according to a plan approved by the shareholders' meeting, grant stock options to its officers or employees or to individuals that render services to the Company or to a company under its control.

ARTICLE 7 - The issuance of participation certificates by the Company is forbidden.

CHAPTER III
SHAREHOLDERS' MEETINGS

ARTICLE 8 - The Shareholders' Meetings have authority to decide on all matters related to the purpose of the Company and take any resolutions deemed convenient to its protection and development. Shareholder Meetings shall be called, installed and held for the purposes of and as provided for by law, and resolutions shall be taken according to the quorum established by law.

1st Paragraph - The Shareholders' Meeting shall be called by means of a call notice published at least fifteen (15) days prior to the first call and eight (8) days prior to the second call.

2nd Paragraph - All documents to be analyzed or discussed in the Shareholders' Meeting shall be made available to the shareholders in the BM&FBOVESPA, as well as in the Company's headquarters, as from the date of publication of the first call notice mentioned in the previous paragraph.

ARTICLE 9 - The Shareholders' Meeting shall be installed and presided by the Chairman of the Board of Directors and, upon his absence or impediment, by another member of the Board of Directors or, in the absence of either of these, by any of the Company's officers present.

Sole Paragraph - The President of the Shareholders' Meeting shall choose one or more secretaries.

ARTICLE 10 - The shareholders shall meet annually during the four (4) months immediately following the end of the fiscal year and they shall decide on the matters for which they are responsible as provided for by law.

ARTICLE 11 - The shareholders shall meet on an extraordinary basis whenever the Company's interests require a decision by the shareholders and in the cases provided by Law and under these Bylaws.

CHAPTER IV
MANAGEMENT

ARTICLE 12 - The Company shall be managed by a Board of Directors and a Board of Officers.

1st Paragraph - The Shareholders' Meeting shall establish the global amount of compensation for the Administrators (as defined in the Regulation), and the Board of Directors shall be responsible to decide, in a meeting, the individual compensation of each of the members of the Board of Directors and of the Board of Officers.

2nd Paragraph - The alternates for the members of the Board of Directors shall be compensated with a fixed amount for each meeting to which they attend, except when they take office, in case of vacancy.

BOARD OF DIRECTORS

ARTICLE 13 - The Board of Directors shall be comprised of at least 5 (five) and at most 11 (eleven) members, resident or not in Brazil, appointed by the General Shareholders' Meeting and subject to dismissal by the General Shareholders' Meeting at any time, for a unified term of office of 1 (one) year, reelection being permitted. The General Shareholders' Meeting shall also designate the Chairman of the Board, who may not be simultaneously the Chief Executive Officer of the Company.

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1st Paragraph - At least 20% (twenty per cent) of the Directors shall be Independent Directors (as defined in the Regulation) and expressly declared as such in the minutes of the General

Shareholders’ Meeting at which they are elected. A Director will be also deemed as independent if elected in accordance with the provisions set forth in article 141, §§ 4 and 5 and article 239 of Law nº 6404/76. In case, as a result of compliance with the above mentioned percentage, there shall be a fraction number of directors, such number will be rounded up pursuant to the terms of the Regulation.

2nd Paragraph - The General Shareholders' Meeting may appoint one or more deputies for the members of the Board of Directors.

3rd Paragraph - On the election of the members of the Board of Directors, the General Meeting shall first determine, upon vote of the majority of its members, the number of members of the Board of Directors to be appointed.

4th Paragraph - The members of the Board of Directors shall be vested in office upon signature of the respective term, drawn up in the proper book, being the vesting in office conditioned to the signature of the Statement of Consent from Senior Managers (as defined in the Regulation). The Directors shall, immediately after vested in office, inform the BM&FBOVESPA the amount and the characteristics of the securities issued by the Company that they hold, directly or indirectly, including its derivatives.

5th Paragraph - The members of the Board of Directors not reelected shall remain in office until their substitutes are vested in office.

6th Paragraph - The places of the members of the Board of Directors, if there is no deputy, may be filled by the Board of Directors its own, until the first General Shareholders Meeting that deliberates on the filling of the place, whose substitute shall complete the office of the substituted Director.

ARTICLE 14 - The Board of Directors shall meet whenever called by its Chairman or by 3 (three) of its members. The Directors may participate in the Board of Directors' meetings through conference call or video conference.

1st Paragraph - The meeting shall be called at least seven (7) days in advance, by registered mail or other written means, with a brief description of the agenda, and the attending members shall be deemed regularly called. 7

2nd Paragraph - Minutes of the meeting shall be recorded.

3rd Paragraph - The meetings shall be installed in the presence of at least the relative majority of the members of the Board of Directors, in the two (2) first calls, and with the presence of at any number of members in the third call. The decisions shall be taken by a majority of votes among the attending members. The Chairman is not entitled to casting a vote.

4th Paragraph - Regardless of the formalities related to its call, a meeting shall be deemed regularly called if all members attend.

5th Paragraph - The members of the Board of Officers and of the Fiscal Board (Conselho Fiscal) may attend the Board of Directors' meetings and shall have the right to speak but not the right to vote.

ARTICLE 15 - The Board of Directors shall decide on the matters described in Section 142 of Law No. 6.404/76 as well as in these Bylaws (and, if applicable, shall speak favorably with respect to the matters of exclusive responsibility of the Shareholders' Meeting), by the favorable vote of the majority of the members present at the meeting.

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ARTICLE 16 - The Board of Directors, according to the provisions of article 29, is responsible for the following decisions:

a) Determine of the general orientation of the business of the Company; b) Elect and dismiss the Company's Officers; c) Arrogate to itself and decide about any subject which is not of exclusive responsibility of the

Shareholders' Meeting or of the Board of Officers;

d) Decide about the call of a Shareholders' Meeting, whenever it deems necessary, or in the case of article 132 of Law nº 6.404/76;

e) Audit the administration of the Officers, by examining, at any time, books and papers of the Company, and requesting information on agreements executed or under execution and any other acts;

f) Elect and dismiss the independent auditors; g) Call the independent auditors to render the explanations deemed necessary; h) Analyze the Management Report and the Board of Officers' accounts and decide about their

submission to a Shareholders' Meeting;

i) Approve the annual and pluriannual budgets, the strategic plans, the expansion projects, and monitor their execution;

j) Approve the incorporation of a subsidiary and the participation of the Company in the corporate capital of other companies in the country and abroad;

k) Determine the powers of the Board of Officers for the secured fiduciary sale or encumbrance of the Company´s permanent assets, including mortgaging, pledging, granting of lien, antichresis, surety or guarantee, confessing, waiving rights, discharging third parties´ obligations to the company, compromising and otherwise determining, as deemed convenient, which members of the Board of Officers shall perform the authorized act, and being entitled to define cases in which the previous authorization of the Board of Directors is a necessary condition;

l) Authorize the Company to render guarantees on behalf of third parties;

m) Assessing and Overseeing the implementation of the related party transactions policy for the

Company;

n) Authorize the opening, transfer or closing of offices, branches, facilities or other establishments of the Company;

o) Decide about the acquisition by the Company of shares of its own issuance, to be held in treasury and/or later canceled or disposed;

p) Grant stock options to its administrators and employees, without right of preference to the shareholders;

q) Pass a resolution approving the issuance of secured or unsecured simple debentures, whether convertible into stock or not;

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r) Authorize the issuance of any credit instruments for the raising of funds, either "bonds", "notes", "commercial papers", or others usual in the market, deciding about its conditions of issuance and retrieval;

s) From time to time, set out criteria for: amount, time/term, extension of effects and others, under which certain corporate and/or financial acts, including loans of assets and liabilities, may be performed by the Board of Officers;

t) Authorize, as long as the criteria referred to in subclaus e “s” have not been set out, borrowing of money or granting of loans or other credit facilities, by the Company;

u) State its favorable or dissenting opinion with respect to any public offering for shares issued by the Company, by means of a duly substantiated opinion, disclosed within fifteen (15) days prior to the publication of the invitation to the public offering, which shall address, at least (i) the convenience and opportunity of the public offering of shares as for the interests of all the shareholders and in relation to the liquidity of the securities owned by it; (ii) the consequences of the public offering of shares on the Company’s interest; (iii) the strategic plans disclosed by the offeror in relation to the Company; (iv) other issues the Board of Directors may deem to be pertinent, as well as the information required by the applicable rules set forth by the CVM; and

v) Define a list with the names of three firms specialized in economic evaluation of companies for preparing an appraisal repo rt of the Company’s shares, in the cases of public offering of shares for cancellation of registration of the company as a publicly-held company or for delisting from the Level 2 Corporate Governance segment of the BM&FBOVESPA.

1st Paragraph - The Company and the managers shall, at least once a year, call a public meeting with analysts and any other interested parties, to divulge information regarding its respective economic-financial situation, projects and perspectives.

2nd Paragraph - The Board of Directors is responsible for the institution of Committees and the definition of their regulations and responsibilities. The following Committees shall be permanent: Audit and People Management and Corporate Governance Committees.

BOARD OF OFFICERS

ARTICLE 17 - The Board of Officers shall be comprised of at least two (2) and up to seven (7) Officers, being one Chief Executive Officer, one Chief Financial Officer, one Investor Relations Officer and four (4) Officers, all resident in the Country, appointed by the Board of Directors and being its dismissal possible at any time, with a term of office of one (1) year, reelection permissible.

1st Paragraph - The responsibilities of the officers shall be defined by the Board of Directors, which shall also establish the fixed compensation of each member of the Board of Officers, and shall distribute, whenever applicable, the participation in the profits established by the Shareholders' Meeting. 10

2nd Paragraph - The officers shall ensure the compliance of the law and the Bylaws.

3rd Paragraph - The Chief Executive Officer shall be responsible, in particular, for coordinating the regular activities of the Company, including the following activities:

(a)       To cause the compliance with these Bylaws and the guidelines and resolutions passed at the Shareholders' Meetings, the Board of Directors' Meetings and the Board of Officers' Meetings;
(b)      

To administer, manage and superintend the corporate business, and to issue and approve internal instructions and regulations deemed by him to be useful or necessary for causing the compliance with the general guidelines of the Board of Directors relating t o the Company´s business, under the terms of art. 16, “a” of these Bylaws.

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(c)       To keep the members of the Board of Directors informed about the activities of the Company and the progress of its operations;
(d)      

To annually submit to the Board of Directors, for their approval, the Management Report and the Board of Officers´ accounts, accompanied with the independent auditors´ report, as well as the proposal for allocation of the profit for the previous fiscal year;

(e)       To prepare and propose, to the Board of Directors, the annual and multiannual budgets, the strategic plans, the expansion projects and the investment projects; and
(f)       To exercise other duties as may be assigned to him by the Board of Directors.

4 th Paragraph - The Chief Executive Officer shall be the Company´s representative before public authorities and, in the exercise of his duties regarding relationship and institutional policies, he shall be supported by the Chairman of the Board of Directors.

5th Paragraph - In case of vacancy or impediment of any officer, the Board of Directors shall designate a new officer or a substitute and shall set forth, in either case, the respective term-of-office and compensation.

6th Paragraph - The Board of Officers shall meet whenever necessary, and the meeting shall be called by the Chief Executive Officer, who shall also be the chairman of the meeting.

7th Paragraph - The meeting shall be installed with the presence of the officers representing the majority of the members of the Board of Officers.

8th Paragraph - Minutes of the meetings and the decisions of the Board shall be registered in the proper book.

9th Paragraph - The members of the Board of Officers shall be vested in office upon signature of the respective term, drawn up in the proper book, and the vesting in office shall be conditioned to the signature of the Statement of Consent of Senior Managers (as defined in the Regulation). The Officers shall, immediately after vested in office, inform the BM&FBOVESPA the amount and the characteristics of the securities issued by the Company that they hold, directly or indirectly, including its derivatives.

ARTICLE 18 - The Board of Officers shall have all the powers and attributions that the law, the Bylaws and the Board of Directors of the Company confer upon it for the performance of the necessary acts to the regular operation of the Company, being entitled to decide on the performance of all actions and transactions related to the purpose of the Company which are not within the responsibilities of the Shareholders' Meeting or the Board of Directors, as well as all actions and transactions which do not require previous authorization from the Board of Directors.

1st Paragraph - With due regard to the provisions above, the Board of Officers shall: 11

a) Represent the Company in accordance with its Bylaws, whether in court or out-of-court, with due regard to the attributions set forth in law, and appoint ad negotia or adjudicia attorneys-in-fact;

b) Prepare and perform the plans and investment and development policies, as well as the respective budgets, with due regard to the deliberative capacity of the Board of Directors; and

c) Control and analyze the behavior of the controlled, affiliate and subsidiary companies in view of the expected results.

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2nd Paragraph - The Board of Officers may designate one of its members to represent the Company in acts or transactions in the country or abroad, or designate an attorney-in-fact to perform a specific act, provided that the minutes that contain the decision of the Board of Officers are registered before the Commercial Registry, if necessary.

ARTICLE 19 - In addition to the provisions listed in the 3rd Paragraph of article 15 above, the Company's Chief Executive Officer shall have powers to preside over the meetings of the Board of Officers and supervise the compliance of general decisions.

ARTICLE 20 - All acts that create responsibility for the Company, or discharge third parties obligations to the company, including the representation of the Company in court, actively or passively, shall only be deemed valid if approved according to the Bylaws and if they have:

a)       the joint signature of the Chief Executive Officer and another Officer; or
b)       the joint signature of two Officers; or
c)       the signature of one Officer together with an attorney-in-fact; or
d)       the joint signature of two attorneys-in-fact of the Company.

1st Paragraph - The powers-of-attorney shall always be executed by two members of the Board of Officers, and shall be granted for specific purposes and for a determined term, except for those with the powers of the ad judicia clause. 12

2nd Paragraph - The Company shall be represented solely by any of the Officers, without regard to the formalities set forth in this Section in the cases of personal testimony and in their condition of representatives of the Company on judicial hearings.

CHAPTER V
FISCAL BOARD (CONSELHO FISCAL)

ARTICLE 21 - The Company shall have a Fiscal Board composed of three (3) to five (5) members and alternates in equal number. The Fiscal Board shall not be permanent. It shall only be elected and installed by the Shareholders' Meeting upon the request of the shareholders, in the cases provided by law.

Sole Paragraph - The members of the Fiscal Board shall be vested in office upon signature of the respective term, drawn up in the proper book, being the vesting in office conditioned to the signature of the Statement of Consent from Fiscal Board Members (as defined in the Regulation). The members of the Fiscal Board shall, immediately after vested in office, inform the BM&FBOVESPA the amount and the characteristics of the securities issued by the Company that they hold, directly or indirectly, including its derivatives.

ARTICLE 22 - The Fiscal Board shall meet whenever called by any of its members, at least once every three months. The operation of the Fiscal Board shall end on the Annual Shareholders' Meeting subsequent to its installation, and reelection of its members is permitted.

ARTICLE 23 - The compensation of the members of the Fiscal Board shall be determined at the Shareholders' Meeting during which they are elected.

CHAPTER VI

CORPORATE YEAR, FINANCIAL STATEMENT AND PROFIT ALLOCATION

ARTICLE 24 - The Company's fiscal year shall have a term of one year and shall end on the last day of December of each year.

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ARTICLE 25 - At the end of each fiscal year the financial statements required by law shall be drawn up based on the Company's accountancy: 13

a)       Balance sheet;
b)       Statement of changes in net worth position;
c)       Statement of results of the fiscal year; and
d)       Statement of origin and application of resources.

1st Paragraph - Jointly with the financial statements of the fiscal year, the Board of Directors shall present during the Annual Shareholders' Meeting a proposal on the destination to be given to the net profit, observing the provisions of law and the Bylaws.

2nd Paragraph - The Board of Directors may determine the preparation of balance sheets at any time, respecting provisions of law, and approve the distribution of intercalary dividends based on the profits verified.

3rd Paragraph - At any time, the Board of Directors may also deliberate the distribution of intermediary dividends, to the account of accumulated profits or reserve of existing profits.

4th Paragraph - The amount paid or credited as interest on equity capital under the terms of article 9, Paragraph 7 of Law nº 9.249/95, and the applicable laws and regulations, may be regarded as obligatory dividend and integrate the total value of the dividends distributed by the Company for all legal purposes.

5th Paragraph - Intermediate and intercalary dividends shall always be credited and considered as anticipation of the mandatory dividend.

ARTICLE 26 - From the results of the fiscal year, occasional accumulated losses and income tax provision shall be deducted from the results of the fiscal year prior to any participation.

1st Paragraph - Over the remaining profit calculated as described in this Section's mainline, the statutory participation of the Managers shall be calculated to the maximum extent permitted by law.

2nd Paragraph - The net profit of the fiscal year after the deduction referred to in the previous paragraph, shall be applied as follows:

a) five per cent (5%) for the legal reserve until it reaches twenty per cent (20%) of the Company's paid up capital;

b) twenty-five per cent (25%) of the balance of the net profit of the fiscal year, after the deduction referred to in the previous paragraph and adjusted pursuant to article 202 of Law nº 6.404/76, shall be used to pay mandatory dividend to all of its shareholders;

c) every time the amount of the minimum dividend is greater than the amount of the realized part of the fiscal year, the administration may suggest, and a Shareholders' Meeting approve, the destination of the excess to the constitution of profit reserve to be realized, pursuant to article 197 of Law nº 6.404/76; and

d) the remaining balance shall have the destination attributed to it by the Board of Directors, provided it has been approved during the Shareholders' Meeting, or it has not been decided otherwise, pursuant to article 196 of Law nº 6.404/76.

CHAPTER VII
LIQUIDATION

ARTICLE 27 - The Company shall be liquidated in the cases established by law or by virtue of a decision of the Shareholders' Meeting, and shall be extinguished at the end of the liquidation process.

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Sole Paragraph - The Board of Directors shall appoint the liquidator and determine the process and the directives to be observed and shall establish its compensation.

CHAPTER VIII
GENERAL PROVISIONS

ARTICLE 28 - The dividends that are not received or requested shall expire in a three (3) year period as of the date in which they are made available to the shareholder, and shall revert in favor of the Company.

ARTICLE 29 - The Company shall observe the shareholders' agreements registered according to article 118 of Law No. 6.404/76, and the administration shall refrain from making the registry of the transfer of shares contrary to the respective terms, and the Chairman of the Shareholders' Meeting and the Chairman of the Board of Directors Meeting, and refraining from computing the votes against such agreements.

CHAPTER IX

TRANSFER OF THE CORPORATE CONTROL, CANCELLATION OF THE REGISTRATION OF PUBLICLY HELD COMPANY AND THE DISCONTINUANCE OF THE

DIFFERENTIATED CORPORATE GOVERNANCE PRACTICES

ARTICLE 30 - The disposal of control of the company, whether by one single transaction or in a series of successive transactions shall be carried out on precedent or resolutive condition, namely, that the Buyer (as defined in the Regulation) undertakes to tender a public offer for the acquisition of further shares held by the other shareholders in the Company, observing the conditions and terms provided for in applicable law and the Regulation, so that they may be accorded the same treatment as the Selling Controlling Shareholder (as defined in the Regulation).

Sole Paragraph - The price of the public offer referred in the caput of the present article shall be the same price paid per share of the block of control, for the holders of preferred and common shares with voting rights, without voting rights or with restricted voting rights issued by the Company.

ARTICLE 31 - The public offer referred in the previous article will also be mandatory:

a) when there has been a paid assignment of subscription rights for shares and other securities or rights related to share convertibles, that may result in Disposal of the Company's Share Control (as defined in the Regulation); and

b) whenever there has been disposal of controlling interest in a company that holds the Company's Share Control (as defined in the Regulation); in such case, the Selling Controlling Shareholder shall be obliged to inform the BM&FBOVESPA, the value ascribed to the company in under the aforesaid disposal transaction and attach supporting documents of such value.

ARTICLE 32 - Whoever acquires the Share Control of the Company, by means of a private share purchase agreement entered into with the Controlling Shareholder, whatever the amount of shares involved, shall be required to:

a)       tender the public offer referred in article 30 of these Bylaws; and
b)       pay, in the terms described below, amount equal to the difference between the price of the public offer and the value paid for share bought on the stock exchanges over the period of six

(6) months prior to the date of the acquisition of Company’s Control, duly updated until the payment date. Said amount shall be distributed among all the persons selling the Company’s shares in the floor sessions in which the Purchaser (as defined in the Regulation) effected the acquisitions, proportionally to the net daily selling balance of each person, it being the duty of the BM&FBOVESPA to carry out the distribution, under the terms of its regulations.

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ARTICLE 33 - The Company shall not register any transfer of shares for the Buyer (as defined in the Regulation) or to those who come to hold the Share Control (as defined in the Regulation) while they do not execute the Statement of Consent from Controlling Shareholders (as defined in the Regulation).

ARTICLE 34 - The Company shall not register shareholders' agreements that include provisions on the exercise of Share Control while its signatories do not sign the Statement of Consent from Controlling Shareholders.

ARTICLE 35 - It is hereby established the obligation of the Controlling Shareholder or the Company to tender a public offer for acquisition of shares for cancellation of registration as a publicly-held company. The minimum price to be offered shall correspond to the Economic Value verified in the appraisal report referred in item 10.1 of the Regulation, respecting the legal and regulatory applicable rules.

ARTICLE 36 - It is hereby established the obligation:

a) of the Controlling Party to tender a public offer of acquisition of shares pertaining to the other shareholders of the Company, in case of exit of the Company of the Level 2, so that the shares of the Company are registered for negotiation outside of Level 2; and

b) of the Controlling Party to effect a public offer for acquisition of shares pertaining to the other shareholders of the Company, in case of a corporate restructuring after which the resulting company does not have its securities admitted for trading in the Level 2, within one hundred and twenty (120) days counted from the date of the general shareholders’ meeting at which the transaction was approved.

1st Paragraph - In both cases, the price to be offered shall correspond, at least, to the Economic Value to be calculated as according to the provisions of Section X of the Regulation, observing legal and regulatory applicable rules. 17

2nd Paragraph – The Controlling Shareholder is discharged from proceeding to the public offering of the shares referred to in the head paragraph of this article if the Company exits Level 2 of Corporate Governance by reason of the entry into an Agreement for listing of the

Company’s shares in the special segment of the BM&FBOVESPA called Novo Mercado (“Novo Mercado”) or if the company surviving from a corporate reorganization obtains authorization for trading securities in the Novo Mercado within one hundred and twenty (120) days counted from the date of the general meeting at which the referred transaction was approved.

ARTICLE 37 - The appraisal report referred in the preceding articles 35 and 36 above shall be prepared by a specialized company or institution, with proven experience and independent from the decision-making body of the company, its senior managers and/or controlling shareholders, provided that such report shall also comprise with provisions of paragraph 1 of article 8º of Law nº 6.404/76 without prejudice of the liability set out in paragraph 6 of the same article of the Law.

1st Paragraph - The choice of the institution or specialized company responsible for the determination of the Economic Value of the Company is of exclusive competence of the General Shareholders' Meeting, as of the presentation, by the Board of Officers, of a triple list, and such deliberation shall, blank votes not being computed to that end, and being each share, irrespective of kind or class, shall carry one vote, be taken by the majority of votes, of the shareholders representative of the Shares on the Market (as defined in the Regulation) present in such shareholders' meeting, which, if installed in the first call, shall count with the presence of shareholders that represent, at least, 20% (twenty per cent) of the total Shares on the Market or, if installed on the second call, may count with the presence of any number of shareholders representative of the Shares on the Market.

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2nd Paragraph - The costs for preparation of the appraisal report shall be undertaken in whole by the offering shareholder.

ARTICLE 38 – In the event there is no Controlling Shareholder, in case it is approved the exit of the Company of Level 2 of Corporate Governance segment, in order that the securities issued thereby may be listed for trading outside the Level 2 of Corporate Governance segment, or by reason of a corporate reorganization in which the company surviving from such corporate reorganization does not have its securities admitted for trading in the Level 2 of Corporate

Governance segment or it the “Novo Mercado” segme nt within one hundred and twenty (120) days counted from the date of the general meeting at which the referred transaction was approved, said existing will be conditioned on a public offering of the shares being carried out under the same conditions provided for in article 36 above.

1st Paragraph – The general meeting at which the referred transaction was approved shall define the party(ies) responsible for carrying out the public offering of shares, which, being present at the meeting, shall expressly undertake the obligation to carry out the offering.

2nd Paragraph – In the absence of definition of the party(ies) responsible for carrying out the public offering of shares, in case of corporate reorganization, pursuant to the terms of the 1st Paragraph above, it shall be the duty of the shareholders having voted favorably for the corporate reorganization to carry out the public offering.

ARTICLE 39 – The exit of the Company from the Level 2 of Corporate Governance segment by reason of failure to comply with the obligations provided for in the Regulation shall be conditioned on the public offering of the shares being effected, at least, for the Economic Value of the shares, to be determined in an appraisal report as mentioned in article 37 above, with due regard to the applicable legal and regulatory rules.

1st Paragraph – The Controlling Shareholder shall conduct the public offering of the shares provided for in the head paragraph of this article.

2nd Paragraph – In the event there is no Controlling Shareholder and the exit from Level 2 of Corporate Governance segment referred to in the head paragraph of this article arises out of a decision made at the general meeting, the shareholders having voted favorably to the adoption of the resolution that gave rise to the respective noncompliance will conduct the public offering of the share as set forth in the head paragraph of this article.

3rd Paragraph – In the event there is no Controlling Shareholder and the exit from Level 2 of Corporate Governance segment referred to in the head paragraph of this article is due to a management’s act or fact, the directors of the Company shall call a general shareholders’ meeting whose agenda shall be to adopt a resolution on how to remedy the noncompliance with the obligations provided for in the Regulation or, if the case may be, to decide that the Company shall exit from the Level 2 of Corporate Governance segment. 19

4th Paragraph – In case the general meeting mentioned in the 2nd paragraph above shall decide that the Company shall exit from Level 2 of Corporate Governance segment, the referred general meeting shall define the party(ies) responsible for conducting the public offering of shares provided for in the head paragraph of this article, which, being present at the meeting, shall expressly undertake the obligation to conduct the public offering.

ARTICLE 40 - The situations not provided for in these bylaws shall be resolved by the Shareholders' Meeting and regulated according to the provisions of Law nº 6.404/76.

ARTICLE 41 - The Company, its Shareholders, its Senior Managers and the members of the Fiscal Board undertake to resolve, by means of arbitration, before the Market Arbitration Chamber, any and all dispute or controversy that may arise between them, related to or arising from, specially, the application, validity, effectiveness, interpretation, violation and its effects, of the provisions contained in the Brazilian Corporations' Law, Company's Bylaws, in the rules issued by the National Monetary Council, the Brazilian Central Bank and the Securities Commission, as well in the other rules applicable to functioning of the securities market in general, as well as those of the Regulation, of the Sanctions Regulation (as defined in the Regulation), of the Agreement for Listing in the Level 2 of Corporate Governance of the BM&FBOVESPA, and of the Arbitration Regulation (as defined in the Regulation).

(Bylaws of the Gol Linhas Aéreas Inteligentes S.A. changed according to the Minutes Of The Special Shareholders´ Meeting held on July 6, 2012)

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EXHIBIT 8.1

LIST OF SUBSIDIARIES OF GOL LINHAS AÉREAS INTELIGENTES S.A.

Name

Jurisdiction of Incorporation   

VRG Linhas Aéreas S.A.

Brazil

Webjet Linhas Aéreas S.A.

Brazil

Smiles S.A.

Brazil

Gol Finance Cayman

Cayman Islands

GAC Inc.

Cayman Islands

 

 

 

Exhibit 10.3

 

FOURTH AMENDMENT TO THE PROMISE AGREEMENT OF PURCHASE AND SALE AND OTHER PACTS, entered by and between:

 

PETROBRAS DISTRIBUIDORA S.A., with principal place of business at Rua General Canabarro, n.º 500, térreo, 6º e 11º (partes), 12º ao 16º andares, in the city of Rio de Janeiro, with Taxpayer Identification Number CNPJ 4.274.233/0001-02, represented herein under its Articles of Incorporation, by its Executive Manager of Aviaiton Products, Mr. Francelino da Silva Paes and by its Airline Company Marketing Manager, Mr. Cláudio Dissenha Portes, hereinafter referred to as “BR” , and on the other side:

 

VRG LINHAS AÉREAS S.A. , Brazilian Corporation, with Taxpayer Identification Number CNPJ/MF 07.575.651/0004-00, with offices located at Praça Comandante Lineu Gomes, s/n, Portaria 3, Prédio 15, Piso Superior, Aeroporto, São Paulo, SP, CEP 04626-020, represented herein by its legal representatives, hereinafter referred to as “ BUYER-PROMISSOR” , have mutually agreed with the Amendment, which shall be governed according to the following terms and conditions:

Whereas BR  and the BUYER-PROMISSOR  on April 12, 2007 entered into by and between a Promise Agreement of Purchase and Sale and Other Covenants for the supply, by BR, of aviation kerosene - JET A-1, during the term of 39 (thirty-nine) months, from 4/11/2007 to 7/10/2010;

Whereas on 4/7/2009 the Parties entered the First Amendment to Agreement amended herein, modifying its validity term to 7/1/2011;

Whereas on 1/19/2011, with retroactive effect to 10/21/2010, the Parties executed the Second Amendment to the Agreement amended herein, modifying its validity term to 7/31/2014 and the clause regulating the part referred to as “Fixed Differential”, which composes the final price of the aviation kerosene - JET A-1 supplied by BR;

Whereas on 12/8/2011 the Parts executed the Third Amendment , extending the term of the Contract up to 12/31/2014 and, also, modifying item 2.4.2.1 of the Second Amendment to the Agreement.

The Parties decide to celebrate this AMENDMENT , which shall be governed by the clauses and conditions below:

CLAUSE ONE

1.1   The purpose of this amendment is to add Clause Seventeen to the Agreement, with the following language:

CLAUSE SEVENTEEN - SPECIAL PRICE

17.1 The establishment of a “fixed price” is optional, and shall consider for the price establishment the market conditions for the period in which it shall be applied, in accordance with the process described in item 17.5 and subitens. The application period is of free choice of the BUYER-PROMISSOR , being of, at least, [ CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] and in the maximum [ CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]. If the BUYER-PROMISSOR wants to qualify itself for this price option, it shall request BR evaluation rounds, on any business day prior to the last business day of the month (n-2).

 

 

 

17.2 For BUYER-PROMISSOR    evaluation of the feasibility to opt for the special price in item 17.1, of “fixed price”, to be applied to the supply points of [ CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], the procedures below shall be observed in the evaluation rounds. Other airports may be included, provided that there are logistics and management conditions for this price modality.

17.3 In the request of fixed price offers the BUYER-PROMISSOR    shall opt to receive the fixed price offer which shall be in force in the month (n) in [ CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] or [ CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], with all taxes included.

17.4 In case of option for [ CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], the conversion of the value to Reais per liter shall be made through the average sales quotation of [ CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] in the period between days 19th (nineteenth) and 23 (twenty-third) of the month (n-1), as disclosed by Banco Central do Brasil.

17.5 Pricing Process:

 17.5.1 - Day D: BUYER-PROMISSOR requests BR, in writing, the following parameters, monthly volume and the interest period, per supply point.

 17.5.2 - Day D+1: Until 12:00 a.m.– Brasília local time – of the business day subsequent to the day indicated in item 17.5.1, BR shall inform in writing, the following parameters: monthly price and volume which may be sold for the “fixed price”, in the period requested, per supply point, and the  BUYER-PROMISSOR  shall confirm, in writting, up to 2:00 p.m. – Brasília local time – of this very day, its contract intention per suplpy point, under special prices; and  

 17.5.3 - Day D+2: BR shall confirm, in writing, until 12:00 a.m. - Brasilia local time of the business day next to the day indicated in item 17.5.2, the monthly volume effectively accepted with the special price per supply point, in the period requested.

17.6 - In case of more than one round, where such pricing is effectively accepted by the BUYER-PROMISSOR, the fixed price in force in the period of application agreed shall be calculated by the weighed average of the monthly prices and volumes closed in the n-rounds, as the formula below, with rounding to 4 (four) decimal places:

 Weighed Average Fixed price = [ CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

 

 Where: 

                                   [ CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

 

 

 

17.7 - The monthly volume effectively accepted by the BUYER-PROMISSOR with special price “fixed price” must be removed with priority and completely, in the contracted month, at each supply point. In case the volume contracted, by exclusive responsibility of the BUYER-PROMISSOR, fails to be removed in the contracted month, it shall repay the BR for the cost of the product storage, which shall be of [ CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]. The balance of the volume not removed shall be placed to the following month, prioritizing the removal of the volume at “fixed price” of the month in question, if any.

17.8 - If BUYER-PROMISSOR    does not opt for the special price of this clause, CLAUSE TWO of the contract shall be applied.

 

          

CLAUSE THREE - GENERAL PROVISIONS

3.1 The Parties  expressly ratify all clauses and conditions of the Agreement and later amendments, that had not been modified by this Instrument.

And, in witness whereof, the parties have executed this instrument in three (3) counterparts of identical content and form, in the presence of the witnesses below.

Rio de Janeiro,   2012.

 

 

PETROBRAS DISTRIBUIDORA S/A

PETROBRAS DISTRIBUIDORA S/A

Francelino da Silva Paes

Cláudio Dissenha Portes

 

 

 

 

VRG LINHAS AEREAS S.A.

VRG LINHAS AEREAS S.A.

 

 

 

 

WITNESS:

WITNESS:

 

 

 

 

 

 

 

                              

 

Exhibit 10.4

 

FIFTH AMENDMENT TO THE PROMISE AGREEMENT OF PURCHASE AND SALE AND OTHER PACTS, entered by and between:

 

PETROBRAS DISTRIBUIDORA S.A., with principal place of business at Rua General Canabarro, n.º 500, térreo, 6º e 11º (partes), 12º ao 16º andares, in the city of Rio de Janeiro, with Taxpayer Identification Number CNPJ 4.274.233/0001-02, represented herein under its Articles of Incorporation, by its Executive Manager of Aviation Products, Mr. Francelino da Silva Paes and by its Airline Company Marketing Manager, Mr. Cláudio Dissenha Portes, hereinafter referred to as “BR” , and on the other side:

 

VRG LINHAS AÉREAS S.A. , a Brazilian Corporation, with Taxpayer Identification Number CNPJ/MF 07.575.651/0004-00, at Praça Comandante Lineu Gomes, s/n, Portaria 3, Prédio 15, Piso Superior, Aeroporto, São Paulo, SP, CEP 04626-020, represented herein by its legal representatives, hereinafter referred to as “ BUYER-PROMISSOR” , have mutually agreed with the Amendment, which shall be governed according to the following terms and conditions:

Whereas BR  and the BUYER-PROMISSOR  on April 12, 2007 entered into by and between a Promise Agreement of Purchase and Sale and Other Covenants to supply, by the first, aviation kerosene - JET A-1, during the term of 39 (thirty-nine) months, from 4/11/2007 to 7/10/2010;

Whereas on 4/7/2009 the Parties entered the First Amendment to the Agreement amended herein, modifying its validity term to 7/1/2011;

Whereas on 1/19/2011, with retroactive effect to 10/21/2010, the Parties executed the Second Amendment to the Agreement amended herein, modifying its validity term to 7/31/2014 and the clause regulating the part referred to as “Fixed Differential”, which composes the final price of the aviation kerosene - JET A-1 supplied by BR;

Whereas on 12/8/2011 the Parts executed the Third Amendment , extending the term of the Contract up to 12/31/2014 and, also, modifying item 2.4.2.1 of the Second Amendment of the contract.

Whereas on 4/25/12 the Parties executed a Fourth Amendment, including clause Seventeen - Fixed price;

The Parties decide to celebrate this AMENDMENT , which shall be governed by the clauses and conditions below, which shall be effective from May 1, 2012.

CLAUSE ONE

1.1 The purpose of this Amendment is to modify the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], and clause CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of the Amendment, which shall be in force from now on with the following language:

 2.7 - The product sold by BR shall be measured at the time of delivery and billed for payment under the following conditions:

 [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT];

 

 

 

 * Supplies from the 21st day until the 31st day shall be paid on the 15th day of the subsequent month;

 

1.2 To Amend also the [ CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], and item [ CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of the original Agreement, which shall be in force from now on with the following language:

 2.4.9 - The parcel of [ CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], disclosed by Banco Central do Brasil, related to the [ CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] granted to the BUYER-PROMISSOR.

1.3 The Parties agree that the effects of the amendments above (items [ CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]) shall retroact from  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], regardless of the date of signature of this contractual instrument, and the Parties shall comply with it from then on.

CLAUSE THREE - GENERAL PROVISIONS

3.1 The Parties expressly ratify all clauses and conditions of the Agreement and later amendments, that had not been modified by this instrument.

And, in witness whereof, the parties have executed this instrument in three (3) counterparts of identical content and form, in the presence of the witnesses below.

Rio de Janeiro, June 2012.

 

 

PETROBRAS DISTRIBUIDORA S/A

PETROBRAS DISTRIBUIDORA S/A

Francelino da Silva Paes

Cláudio Dissenha Portes

 

 

 

 

VRG LINHAS AEREAS S.A.

VRG LINHAS AEREAS S.A.

 

 

 

 

WITNESS:

WITNESS:

 

 

 

 

 

 

 

 

Hosted Services Agreement 

EXHIBIT 10.20

AMENDMENT NO. 22 TO

NAVITAIRE HOSTED SERVICES AGREEMENT

This Amendment No. 22 to the NAVITAIRE Hosted Services Agreement (this “Amendment”), effective as of February 1, 2012, is entered into by and between Navitaire LLC, a Delaware limited liability company (“NAVITAIRE”), and VRG Linhas Aereas S.A, a Brazilian corporation (“Customer”). Initially capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Agreement (as defined below).  

 
A.

NAVITAIRE and Customer are parties to that certain NAVITAIRE Hosted Services Agreement dated as of May 1, 2004 and amended by: (i) Amendment No. 1 dated as of January 1, 2005, (ii) Amendment No. 2 dated as of June 13, 2005, (iii) Amendment No. 3 dated as of October 1, 2005, (iv) Amendment No. 4 dated as of November 14, 2005, (v) Amendment No. 6 dated as of April 5, 2006, (vi) Amendment No. 7 dated as of June 1, 2006, (vii) Amendment No. 8 dated as of June 11, 2007 (viii) Amendment No. 9 dated as of August 20, 2007; (ix) Amendment No. 10 dated as of August 27, 2007; (x) Amendment No. 11 dated as of April 24, 2008; (xi) Amendment No. 12 dated as of April 24, 2008; (xii) Amendment No. 13 dated as of July 31, 2008; (xiii) Amendment No. 14 dated as of October 31, 2008; (xiv) Amendment No. 15 dated as of October 1, 2008; (xv) Amendment No. 16 dated as of October 1, 2009; (xvi) Amendment No. 17 dated as of February 1, 2010; (xvii) Amendment No. 18 dated as of March 15, 2010; (xviii) Amendment No. 19 dated as of June 25, 2010; (xix) Amendment No. 20 dated as of November 1, 2010; and (xx) Amendment No. 21 dated as of March 1, 2011 (the “Agreement”), pursuant to which NAVITAIRE performs Hosted Services for Customer.  

 
B.

Section 18.1 of the Agreement permits the parties to amend the terms and conditions of the Agreement provided such amendment is made in writing signed by the parties.  

 
C.  

NAVITAIRE and Customer desire to amend the terms of the Agreement as provided below.  

 

Accordingly, and in consideration of the foregoing, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows:  

 
1  

Amendment to add Data Transmission as Section 18.10 of the Agreement, as follows:  

 
  18.10 

Data Transmission. Customer authorizes NAVITAIRE to electronically transmit certain   Customer data, which may include Personally Identifiable Information (“PII”) of passengers of Customer, to third parties as directed by Customer, in order to facilitate the provision of Hosted Services. For the purposes of this Agreement, PII means data and/or information which is provided by or on behalf of Customer and which consists of information or data naming or identifying a natural person such as: (a) personally identifying information that is explicitly defined as a regulated category of data under any data privacy or data protection laws applicable to Customer; (b) non-public information, such as a national identification number, passport number, social security number, or driver’s license number; (c) health or medical information, such as insurance information, medical prognosis, diagnosis information or genetic information; (d) financial information, such as a policy number, credit card number and/or bank account number; and/or (e) sensitive personal data, such as mother’s maiden name, race, marital status, gender, sexuality, or account login information / authentication details. The term “Personally Identifiable Information” shall not include information or data that is anonymized, aggregated, de-identified and/or compiled on a generic basis and which does not name or identify a specific individual or person.   

 

1

NAVITAIRE Proprietary and Confidential

 

Hosted Services Agreement

2 Amendment to add Outbound Interline E-Ticket Functionality to the Agreement, as follows:
  a.  Scope of Services. The following is added to Exhibit A, Section 2, Scope of Services:

 
‘X’ or
‘N/A’   		Hosted Reservation Services – New Skies
Add-On Functionality  
X   Outbound Interline E-Ticket Functionality  

 

b.      

Monthly Recurring Service Fees. The Monthly Recurring Service Fees located in Section 1.1.24 of Exhibit H of the Agreement will be invoiced per the standard payment terms of the Agreement, upon first production use.

c.    Implementation Fees. The following Implementation Fees are added to Exhibit H, Section 1.2:
1.2
1.2      Implementation Fees
 
X Product/Service Description Implementation Fees
X Outbound Interline E-Ticket Functionality $ [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Implementation Fee*
 
* Implementation Fee for Outbound Interline E-Ticket Functionality with the first E-Ticket partner up to [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] hours of implementation support including project management, operations, NAVITAIRE system training, and support personnel, in addition to:  

 
 
    		• Assistance completing the Data Collector;
     
    		• Validating the Production link with [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] ;
     
    		• Configuration and Set-up, which includes:
        o      Ticket Services;
        o      Utilities; and
        o      ESC work.
     
    		• Product resource time;
     
    		• Training;
     
    		• Testing; and
     
    		• Cut-Over support.

    Additional implementation hours are  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] . The Implementation Fee is due upon signature of this Amendment, with any remaining balance due in full upon completion of the implementation project.

    After Customer has completed the implementation with [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] as the E-Ticketing Interchange and Database Provider, subsequent activations with airliner partners, where  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] is the E-Ticketing Interchange and Database Provider, will be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    All costs associated with establishing data circuits pertaining to the CRS/GDS/ARS and/or SITA/ARINC in connection with, or as a result of E-Ticket Functionality are the responsibility of Customer.

     
    3       Amendment to add Inter Airline Through Check-in (IATCI) to the Agreement, as follows:
    a.      Scope of Services. The following is added to Exhibit A, Section 2, Scope of Services:
     
    ‘X’ or   Hosted Reservation Services – New Skies  
    ‘N/A’   Add-On Functionality  
    X

    Inter Airline Through Check-in (IATCI) – via the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR  CONFIDENTIAL TREATMENT] IATCI hub  

     

    2

    NAVITAIRE Proprietary and Confidential

     

    Hosted Services Agreement

    b.       Functionality. The following is added to Exhibit A, Section 6, New Skies by NAVITAIRE Functionality Included in Hosted Reservation Services:
     
    Inter Airline Through Check-in (IATCI)
    General Features – Inter Airline Through Check-in (IATCI)  
     

    The IATCI functionality selected by Customer is dependent upon Customer’s use of an IATCI hub provided by  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] or another third-party provider. Customer is responsible for contracting for IATCI hub services separate from the NAVITAIRE Agreement. NAVITAIRE shall be not liable for the IATCI hub provider’s performance or failure to perform.

    n

    		Ability to generate through check-in messages to an IATCI hub provider for delivery to another airline’s departure control system.

    n

    		Ability to generate through check-in update messages to an IATCI hub provider for delivery to another airline’s departure control system.

    n

    		Ability to generate through check-in cancel messages to an IATCI hub provider for delivery to another airline’s departure control system.

    n

    		Ability to print boarding passes with seat assignments for flights operated by another airline.  

    n

    		Ability to exchange baggage details and limited APIS information via through check-in messages via the third-party IATCI hub.

    n

    		Ability to check-in host carrier passengers when through check-in queries are received from another airline via the IATCI hub provider.

    n

    		Ability to update host carrier passenger data when through check-in update messages are received from another airline via the IATCI hub provider.  

    n

    		Ability to ‘uncheck’ host carrier passengers when through check-in cancel messages are received from another airline via the IATCI hub provider.  

    n

    		Ability to respond to boarding pass reprint queries received from another airline via the IATCI hub provider.

    n

    		Ability to support IATA EDIFACT version 94:1 for through check-in messages.  

     

    c. Monthly Recurring Service Fees. The following Monthly Recurring Service Fees for Inter Airline Through Check-in (IATCI) are added to Exhibit H as Section 1.1.33:  
     
    1.1.33 Monthly Recurring Service Fees – Connectivity Services/Products – Inter Airline Through Check-in (IATCI). (Applicable only if selected in Section 2 of Exhibit A):  

     

    Description Inter Airline Through Check-in  
    (IATCI)  
    Price per Physical Connection  
    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Partner Monthly Infrastructure and   Support Fee $ [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] minimum fee per month  
    (includes  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] IATCI Messages)  
      Per Message Transaction Fee* $ [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per IATCI Message  
      above  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] included IATCI Messages
    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]
    Partners       		Monthly Infrastructure and Support Fee   $ [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] minimum fee per month  
    (includes  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] IATCI Messages)  
    Per Message Transaction Fee*   $ [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per IATCI Message  
      above  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] included IATCI Messages
    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]
    Partners     		Monthly Infrastructure and Support Fee   $ [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] minimum fee per month  
    (includes [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] IATCI Messages)  

    Per Message Transaction Fee*       		$ [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per IATCI Message  
      above [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] included IATCI Messages

     

    *
    		Any Inter Airline Through Check-in Message volumes collectively for all transactions above the included IATCI Messages, per physical connection, will incur the additional Monthly Recurring Service Fees outlined in Section 1.1.33 above.  
    Monthly Infrastructure and Support Fee for each partner becomes effective upon completion of the implementation project.  

     

    3

    NAVITAIRE Proprietary and Confidential

     

    Hosted Services Agreement

    Note:

    Any applicable message fees, segment fees, or data circuits pertaining to the CRS/GDS/ARS and/or SITA/ARINC in connection with, or as a result of an Inter Airline Through Check-in (IATCtheir services. I), are the responsibility of Customer. Pricing is based upon Customer’s use of the IATCI hub provided by [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] . Customer will secure pricing from  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] for their services.

     

    d.       Implementation Fees. The following Implementation Fees are added to Exhibit H, Section
      1.2:      
      1.2       Implementation Fees
     
    X   Product/Service Description   Implementation Fees  
    X Inter Airline Through Check-in (IATCI)
    		$ [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Implementation Fee (for the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] IATCI partner*)  
    Time and Materials
    (for the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] IATCI partners**)  
    Time and Materials
    (for the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] IATCI
    partners***)  

     

    *

    Implementation Fee for Inter Airline Through Check-in (IATCI) for  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] IATCI connection includes up to  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] hours of implementation support including project management, operations, NAVITAIRE system training, and support personnel. Additional implementation hours are [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] .  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of the Implementation Fee is due upon signature of this Amendment, with the remaining  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] due in full upon completion of the implementation project.

     
    **

    Implementation of Inter Airline Through Check-in (IATCI) for the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] IATCI connections is estimated to require  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] implementation support including project management, operations, NAVITAIRE system training, and support personnel, per connection.

     
    ***

    Implementation of Inter Airline Through Check-in (IATCI) for the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] IATCI connections is estimated to require up to  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of implementation support including project management, operations, NAVITAIRE system training, and support personnel, per connection.

     


    All costs associated with establishing data circuits pertaining to the CRS/GDS/ARS and/or SITA/ARINC in connection with, or as a result of an Inter Airline Through Check-in (IATCI), are the responsibility of Customer. 

     

    Pricing is based upon Customer’s use of the IATCI hub provided by [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] . Customer will secure pricing from [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] for their services. Implementation to connections other than  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] requires additional data links and will require additional implementation fees, such fees to be quoted upon request. NOTE: IATCI functionality will be available once Customer upgrades to the New   Skies [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] release.

     

    4 Amendment to remove the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Code-Share from the Agreement, as follows:  
     
      a. Scope of Services. The  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] is hereby unselected in Exhibit A, Section 2, Scope of Services, as follows:  
     

     

    ‘X’ or
    ‘N/A’       		Hosted Reservation Services – New Skies
    Add-On Functionality  
    N/A   Code-Share Connectivity – with  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] as the Marketing and Customer as Operating Carrier*  

     

    *

     Customer’s inactive code-share with  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] is hereby removed in its entirety from the Agreement. Should Customer and  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] agree at some future date to

     

    4

    NAVITAIRE Proprietary and Confidential

     

    Hosted Services Agreement


        enter into an active code-share partnership, Customer and NAVITAIRE will mutually agree upon   commercial terms and conditions prior to initiating a new implementation project.
     
    b.

    Monthly Recurring Service Fees. The Monthly Recurring Service Fees – Connectivity Services/Products – Code-Share Distribution with Customer as Code-Share Operating and/or Marketing Carrier, located in Section 1.1.3 of Exhibit H of the Agreement, will no longer be invoiced for the inactive  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] code-share arrangement, as of the effective date of this Amendment.

     
    5 Amendment to modify Block Space Code-Share (non-automated booking inventory) of the Agreement, as follows:  
     
    a. Scope of Services. Block Space Code-Share (non-automated booking inventory) found in Exhibit A, Section 2, Scope of Services, is hereby deleted and replaced in its entirety as follows:  

     

    ‘X’ or
    ‘N/A’       		Hosted Reservation Services – New Skies
    Add-on Functionality  
    X   Block Space Arrangements (non-automated booking inventory)*  

     

      *      

    The sum of the combined block space booking volumes for all partner carriers will not exceed  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of the total booking volume for Customer in any given month. Should this limit be exceeded, Customer and NAVITAIRE mutually agree to reengage in discussions regarding block space usage and costs.

    b.

    Functionality. Block Space Code-Share (non-automated booking inventory) functionality found in Exhibit A, Section 6, New Skies – Hosted Reservation Services Add-On Functionality, is hereby deleted and replaced in its entirety as follows:

     
    Block Space Arrangements (non-automated booking inventory)
    Add-on Functionality
    General Features – Block Space Arrangements  
      n Product support for block space distribution, Customer as operating or marketing carrier.  
      n Ability to sell inventory from availability display.  

    Note: Contact NAVITAIRE for additional functionality available for related support processes and configuration available for non-automated booking inventory process for block space arrangements.  

     

    c.

    Monthly Recurring Service Fees. Monthly Recurring Service Fees – Connectivity Services/Products Block Space Code-Share found in Section 1.1.4 of Exhibit H, of the Agreement are hereby deleted and replaced in their entirety as follows:  

     
    1.1.4 Monthly Recurring Service Fees – Connectivity Services/Products – Block Space Arrangements. (Applicable only if selected in Section 2 of Exhibit A):  
     
        [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]
     

    Note:

    Any applicable message fees, segment fees or data circuits pertaining to the CRS/GDS and/or SITA/ARINC are the responsibility of Customer, including:  

     

      (a)

    		CRS/GDS/ARS Imposed Message Fees (applicable to CRS/GDS/ARS messages only):  
     

    Per CRS/GDS/ARS agreement with NAVITAIRE, additional CRS/GDS/ARS fees may be billed to NAVITAIRE. Any and all such fees and/or charges attributable to Customer’s Hosted Reservations Services, will be payable by Customer to NAVITAIRE, on a monthly basis. Upon request and on a time and materials basis, NAVITAIRE  

     

    5

    NAVITAIRE Proprietary and Confidential

     

    Hosted Services Agreement


      will provide Customer with a copy of the CRS/GDS invoice for Type A/EDIFACT, Type B/Teletype, or other related charges with each monthly invoice.
     

    These fees are in addition to the standard Host Reservation Services charges and are subject to any increases imposed upon NAVITAIRE by CRS/GDS/ARS. If CRS/GDS/ARS begins to assess message fees for test messages, these will also be billed cost to Customer at cost.

      (b)       SITA/ARINC or other Connectivity Provider Fees:
       

    All fees from SITA/ARINC and/or other Connectivity Providers for routing of traffic need to be billed directly to Customer. Customer should pursue an arrangement with one or both of these providers independent of NAVITAIRE.

    6       No Other Changes. Except as specifically amended by this Amendment, all other provisions of the Agreement remain in full force and effect. This Amendment shall not constitute or operate as a waiver of, or estoppel with respect to, any provisions of the Agreement by any party hereto.
    7      

    Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement.

    8       Successors and Assigns. This Amendment shall inure to the benefit of and be binding upon NAVITAIRE and the Customer and their respective successors, heirs and assigns.
    9      

    Conflict of Provisions. In the event that there exists a conflict between any term, condition, or provision contained within this Amendment, and in any term, condition, or provision contained within the Agreement, the term, condition, or provision contained within this Amendment shall control.

    < Signature Page Follows >

    6

    NAVITAIRE Proprietary and Confidential

     

    Hosted Services Agreement


    IN WITNESS WHEREOF , the parties hereto have executed this Amendment as of the day and year written below.

      Navitaire LLC  
      Signature:  
      Printed Name:  
      Title:  
      Date:  
      VRG Linhas Aereas S.A  
      Signature:  
      Printed Name:  
      Title:  
      Date:  
       
      Witness Name:  
      Witness ID:  
       
      Witness Name:  
      Witness ID:  

     

    7

    NAVITAIRE Proprietary and Confidential


    Hosted Services Agreement 

     

    EXHIBIT 10.21

    AMENDMENT NO. 23 TO

    NAVITAIRE HOSTED SERVICES AGREEMENT

    This Amendment No. 23 to the NAVITAIRE Hosted Services Agreement (this “Amendment”), effective as of February 5, 2012, is entered into by and between Navitaire LLC, a Delaware limited liability company (“NAVITAIRE”), and VRG Linhas Aereas S.A., as successor of GOL – Transportes Aereos S/A, a Brazilian corporation (“Customer”). Initially capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Agreement (as defined below).

    A.

    NAVITAIRE and Customer are parties to that certain NAVITAIRE Hosted Services Agreement dated as of May 1, 2004 and amended by: (i) Amendment No. 1 dated as of January 1, 2005, (ii) Amendment No. 2 dated as of June 13, 2005, (iii) Amendment No. 3 dated as of October 1, 2005, (iv) Amendment No. 4 dated as of November 14, 2005, (v) Amendment No. 6 dated as of April 5, 2006, (vi) Amendment No. 7 dated as of June 1, 2006, (vii) Amendment No. 8 dated as of June 11, 2007 (viii) Amendment No. 9 dated as of August 20, 2007; (ix) Amendment No. 10 dated as of August 27, 2007; (x) Amendment No. 11 dated as of April 24, 2008; (xi) Amendment No. 12 dated as of April 24, 2008; (xii) Amendment No. 13 dated as of July 31, 2008; (xiii) Amendment No. 14 dated as of October 31, 2008; (xiv) Amendment No. 15 dated as of October 1, 2008; (xv) Amendment No. 16 dated as of October 1, 2009; (xvi) Amendment No. 17 dated as of February 1, 2010; (xvii) Amendment No. 18 dated as of March 15, 2010; (xviii) Amendment No. 19 dated as of June 25, 2010; (xix) Amendment No. 20 dated as of November 1, 2010; (xx) Amendment No. 21 dated as of March 1, 2011; and (xxi) Amendment No. 22 dated as of February 1, 2012 (the “Agreement”), pursuant to which NAVITAIRE performs Hosted Services for Customer.

    B. Section 18.1 of the Agreement permits the parties to amend the terms and conditions of the Agreement provided such amendment is made in writing signed by the parties.
    C.       NAVITAIRE and Customer desire to amend the terms of the Agreement as provided below.

    Accordingly, and in consideration of the foregoing, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows:

    1 Definitions. The following definitions shall be added, in alphabetical order, to Section 1 of Agreement, Definitions.
     

    • [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  means the value calculated using a [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] sum of  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] , from the NAVITAIRE Transaction by Channel Report, grossed up by the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], then divided by the actual number of days in that  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] period, divided by the number of hours [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] ). For example, if the Transaction by Channel Reports for January-June for our sample year summed to a total of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] transactions, the calculation would be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    • [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] is equal to [ CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    • [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] is equal to [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] .

    • [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]    is equal to [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    • Personally Identifiable Information (“PII”) means data and/or information which is provided by or on behalf of Customer and which consists of information or data naming or identifying a natural person such as: (a) personally identifying information that is explicitly defined as a regulated category of data under any data privacy or data protection laws applicable to Customer; (b) non-public information, such as a national identification number, passport number, social security number, or driver’s license number; (c) health or medical information, such as insurance information, medical prognosis, diagnosis information or genetic information; (d) financial information, such as a policy number, credit card number and/or bank account number; and/or (e) sensitive personal data, such as mother’s maiden name, race, marital status, gender, sexuality, or account login information / authentication details. The term

     
     

    1

    NAVITAIRE Proprietary and Confidential

     

    Hosted Services Agreement



    “Personally Identifiable Information” shall not include information or data that is anonymized, aggregated, de-identified and/or compiled on a generic basis and which does not name or identify a specific individual or person.  

     

    		•

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  means the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of the calculated [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] by Channel for all channels. Channels are Web, API, and Other (where Other is inclusive of all remaining booking channels, such as direct, GDS, codeshare, interline).

     

    2 Amendment to Section 4.3 – Notice of Increased Usage. Section 4.3 – Notice of Increased Usage and Hosted Services Processing Capacity is replaced in its entirety as follows:
    4.3

    Notice of Increased Usage and Hosted Services Processing Capacity. NAVITAIRE’s Hosted Services processing capacity will be reviewed and calculated on a [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] . Calculations shall be conducted in [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] , based upon data for the prior [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] . NAVITAIRE and Customer agree to review the capacity calculations every [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] , during which either party can raise concerns and both parties agree to discuss with the intention to resolve these concerns in good faith.

    The Hosted Services processing capacity is calculated by multiplying the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  from the preceding  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  by the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] . The result constitutes the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] . For the purposes of illustration, if the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  is  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  and that value is  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  by [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] , the resulting  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] constitute the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    For the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  calculation for the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] , the parties have agreed to include a  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  growth factor of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] . Therefore, the calculation for capacity to be used for  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  will be as follows: [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    The  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  by Channel is calculated by multiplying the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  by the percentage for the specific booking channel (as shown on the NAVITAIRE Transaction by Channel report)  by the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  ratio (the ratio values as outlined in Exhibit H, Sections 1.1.1 (c),(d), and (f)) by the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] . The  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  is the sum of the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  by Channel for all channels.  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  is defined in Exhibit A, S ec tion 1. For the purposes of illustration, using Web Services/Booking API as the channel, i f the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  is [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] , that number is multiplied by the percentage of b ookings for Web Services/Booking API (as of the Effective Date of this Amendment – most r ecent value of which is [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  ), multiplied by the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  ratio of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] , and m ultiplied by the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] , for a  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  by Web S ervices/Booking API  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  result of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] . For the purposes of these capacity calculations, NAVITAIRE has utilized an average of  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] , based upon Customer’s historical data.

    NAVITAIRE will not be obligated to fulfill service level parameters, as outlined in Exhibit A, Section 8 and Exhibit F, Section 9, when Customer’s volume exceeds the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] r .

    Customer agrees to provide NAVITAIRE, on a confidential basis and according to a NAVITAIRE pre-defined process, at least  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  days advance written notice of any marketing initiatives, acquisitions, alliances, schedule changes, or promotions that may materially increase Customer’s usage of the Hosted Services or otherwise adversely impact the Hosted Services System performance. Examples of this are: free ticket/$0 fare promotions, new hub announcements, significant additional aircraft purchases, etc. For the purposes of this Section, increases that may adversely impact the Hosted Services are defined as increases that generate a response greater than the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  as defined in this paragraph. NAVITAIRE will work with Customer to attempt to reasonably provide additional capacity. If Customer requires additional capacity above the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] , NAVITAIRE will provide a quote to Customer based on the requirements and scope desired, and the timeline on which such additional capacity can be made available to Customer.

    2

    NAVITAIRE Proprietary and Confidential

     

    Hosted Services Agreement

     
    3

    Addition of Section 4.15 – Notice of SkySales Skin Size. NAVITAIRE will publish guidelines for SkySales web skins (e.g., parameters for skin size) for each release. Customer shall review these guidelines and request a performance test via an INC for Customer’s desired use of any web skins which are not in compliance with the NAVITAIRE published guidelines. In the case where Customer has requested a performance test for non-compliant SkySales web skins and the system is unable to achieve the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] , the following will occur:  

     
      (i)

    NAVITAIRE and Customer shall negotiate in good faith a decreased [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] . The agreed decreased value for the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] shall apply until Customer’s web skins achieve a performance test with a successful [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] . The [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]shall never be agreed as lower than [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]or greater than [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    (ii) Customer shall engage in optimization activities to achieve a  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR  CONFIDENTIAL TREATMENT] of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] .

     

    If Customer implements web skins not within the published guidelines without conducting a successful performance test in advance or if Customer’s web skins cause an outage or protracted response times, NAVITAIRE will not be obligated to fulfill service level parameters, as outlined in Exhibit A, Section 8 and Exhibit F, Section 9. Any non-functioning web skins deployed in production are considered a third party outage.  

     

    As of the Effective Date of this Amendment, the parties have agreed that with the implementation of New Skies version  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] and corresponding performance test, the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] has a value of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] . This  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] value of  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] shall apply unless and until the parties agree in writing that Customer’s web skins have achieved a performance test with a higher [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] .

     
    4

    Addition of Section 4.16 – Data Transmission. Customer is directing NAVITAIRE to transmit data to Customer approved third parties, which may include Confidential Information of Customer and/or Personally Identifiable Information of the passengers of Customer, in order to facilitate the provision of Hosted Services.  

     
    5 Amendment to modify Privacy of Information. Section 9.5, Privacy of Information, of the Agreement is hereby deleted and replaced in its entirety as follows:  
     
    9.5

    Privacy of Information. NAVITAIRE agrees to comply with all applicable member state laws (implementing EU Directive 95/46/EC) and all applicable United States laws regarding the privacy and confidentiality of information it receives under this Agreement. If the Customer requests that NAVITAIRE comply with other data protection acts, Customer must supply a copy of such act for NAVITAIRE review prior to signature of this Agreement, and, if accepted by NAVITAIRE, the parties shall enter into a data protection addendum to this Agreement in relation to it.  

     

    Customer understands that its hardware compression of API traffic is a non-standard solution outside of general NAVITAIRE parameters. Customer acknowledges and agrees that it assumes the risk of any loss of data as a result of its use of this technology. NAVITAIRE and Customer agree to work together to migrate Customer to an agreed common architecture solution no later than [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] .

     
    6   Amendment to clarify Third Party Connectivity Requirements of the Agreement.  

     

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    a) Use by Customer. Section 4.7, Use by Customer, of the Agreement is hereby deleted and replaced in its entirety as follows:  
     
    4.7

    Use by Customer. Hosted Services and Confidential Information of NAVITAIRE are for the sole and exclusive use of Customer. Customer may, however, permit agents hired by Customer or Customer’s subcontractors to access the Hosted Services solely for the purpose of procuring Hosted Services for and on behalf of Customer; provided that: (a) Customer promptly provides NAVITAIRE with the names of each such agent; and (b) each such agent agrees to be bound by this Agreement including, but not limited to, the confidentiality provisions of Section 9.1. Customer may not transfer any Confidential Information of NAVITAIRE, in any form whatsoever, to any other third party or allow any third party to access or use the Hosted Services or Confidential Information of NAVITAIRE without the prior written consent of NAVITAIRE. NAVITAIRE’s written consent for third party access to the Hosted Services or Confidential Information shall be provided through execution of an API NDA between NAVITAIRE and the third party as described in Section 7.
    Any transfer of or access to the Hosted Services or Confidential Information of NAVITAIRE in violation of this Section shall constitute a material breach of this Agreement. For purposes of reference, Section 7 contains further terms and conditions regarding Customer’s use of the Hosted Services System.  

     
    b) Customer Covenants. The following are added to Section 7.4, Customer Covenants, of the Agreement as follows:  
    (d)

    an approved API NDA will be fully executed between NAVITAIRE and any third party seeking access to the Hosted Services or Hosted Services System, by either a direct internet connection or via the private circuit in the Minneapolis data center;  

     
    (e)

    updated API NDAs will be executed between NAVITAIRE and any third party accessing the Hosted Services or Hosted Services System in conjunction with each major release upgrade project, annually, or upon material change in the relationship or services provided by the third party. End users who access the Hosted Services or Hosted Services System through said third party are not required to execute an API NDA; and  

     
    (f) Customer has executed agreements with each of the third parties for which Customer directs NAVITAIRE to transmit Customer data in order to facilitate the provision of Hosted Services.  
     
    7  

    Replacement of Look to Book by [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] .  

     
    a) Definitions. The definitions of Look to Book Ratios in Section 1 of Exhibit A is deleted in their entirety and replaced with the following definitions:  
     

    •

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Ratio means the numeric result of the number  of  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  divided by the number of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]   and/or Ancillary Components where the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].  If this result exceeds the ratio defined in Exhibit H for the corresponding booking channel, each [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] in excess of the number of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] multiplied by the ratio threshold will be charged the excess usage fees outlined in Exhibit H. For example, for one month if there are 10,000 [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] , and 250 [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]   this would result in a ratio of 40:1 (10,000/250). For illustration purposes, if the agreed ratio was 30:1 and the excess availability fee was USD [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], the included [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] would be 250 multiplied by 30 or 7,500. This [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]   Ratio would result in 2,500 (10,000 less 7,500) requests being charged the monthly excess usage fees (e.g., 2,500 times USD$ [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] = USD $ [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] ).

     

    4

    NAVITAIRE Proprietary and Confidential

     

    Hosted Services Agreement

    •  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Ratio for CRS/GDS/ARS Type A/EDIFACT Bookings means the numeric result of the number of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] divided by the number of CRS/GDS/ARS Type A/EDIFACT PNRs [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] . If this result exceeds the ratio defined in Section 1.1.1 (d) of Exhibit H, each  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  in excess of the number of CRS/GDS/ARS Type A/EDIFACT PNRs [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] multiplied by the ratio threshold will be charged the excess usage fees outlined in Exhibit H, Section 1.1.

    The following definition is added as a result of the new definition for [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Ratio. This definition is added, in alphabetical order, to Section 1 of Exhibit A.

    • Ancillary Component means a product or service other than Customer-originating flights sold by Customer using the Hosted Reservation Services. Examples include: an insurance policy purchase, a car hire/rental, a hotel reservation/purchase, an add-on activity such as a 1-hour helicopter tour, souvenir t-shirt, etc. For clarification purposes, Ancillary Components (i) are usually non-flight products or services but can also include flights not provided by Customer, but sold through the Travel Commerce functionality; and (ii) exclude any Segment under this Agreement

    b) Look to Book Ratios defined in Section 1.1.1 of Exhibit H are replaced in their entirety, as follows:

    (c)  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Ratio – Internet Booking Engine (SkySales). A  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Ratio of  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] will apply to all SkySales bookings as described in Section 1 of Exhibit A. If the established [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Ratio is exceeded, each additional [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]   will be charged the excess usage fee of USD [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  per [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] . If the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Ratio for Internet Booking Engine (SkySales) is exceeded in any  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] consecutive months, Customer may request a meeting with NAVITAIRE to review options and work together in good faith.

    (d) [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] R atio – Booking API/Web Services. A  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]    Ratio of  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] will apply to all Booking API/Web Services bookings as described in Section 1 of Exhibit A. If the established  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Ratio is exceeded, each additional  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] request will be charged the excess API usage fee of USD  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] .  If the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Ratio for Booking API/Web Services is exceeded in any [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] consecutive months, Customer may request a meeting with NAVITAIRE to review options and work together in good faith.

    (e)  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Ratio – CRS/GDS/ARS Type A/EDIFACT Bookings. For the purposes of capacity planning, as described in Section 4.3 of the Agreement, the CRS/GDS/ARS Type A/EDIFACT Bookings are included in the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Ratio - All Other Bookings. For the purposes of calculating excess usage fees, a  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] ratio of  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] will apply to all CRS/GDS/ARS Type A/EDIFACT bookings. If a  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Ratio of  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] is exceeded, the excess usage fees will be USD  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] .   If the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]    Ratio for CRS/GDS/ARS Type A/EDIFACT bookings is exceeded in any  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] consecutive months, Customer may request a meeting with NAVITAIRE to review options and work together in good faith.

    (f) [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Ratio – All Other Bookings. A  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Ratio of  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]    will apply to all other bookings as described in Section 1 of Exhibit A. If the established  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]    Ratio is exceeded, the excess usage fees will be USD  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  per  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] .   If the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Ratio for all other bookings is exceeded in any  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] consecutive months, Customer may request a meeting with NAVITAIRE to review options and work together in good faith.

    5

    NAVITAIRE Proprietary and Confidential

     

    Hosted Services Agreement

    c) Look to Look Monthly Recurring Service Fees replaced with  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  Monthly Recurring Service fees. Section 1.1.25 of Exhibit H, Monthly Recurring Service Fees – Look to Book Monthly Fees, is hereby deleted and replaced in its entirety, as follows:

    1.1.25 Monthly Recurring Service Fees –  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] M onthly Fees.

    Description [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  Monthly Fees  
    Price per Service  
    Monthly Infrastructure and Support
    Fee – Internet Booking Engine
    (SkySales)       		$ [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per month*
    (includes  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Ratio of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] , as outlined in Section 1.1.1(c) of this Exhibit H)  

    Monthly Infrastructure and Support
    Fee – Booking API/Web Services
    		$ [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] , per month*
    (includes  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Ratio of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] , as outlined in Section 1.1.1(d) of this Exhibit H)  
    Monthly Infrastructure and Support
    Fee – CRS/GDS/ARS Type
    A/EDIFACT Bookings       		Included in CRS/GDS/ARS Infrastructure and Support Fees*
    (includes [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Ratio of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] , as outlined in Section 1.1.1(e) of this Exhibit H)  

    Monthly Infrastructure and Support
    Fee – All Other bookings

    Included in Monthly Infrastructure and Support Fee – Internet
    Booking Engine (SkySales)*
      (includes  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Ratio of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] , as outlined in Section 1.1.1(f) of this Exhibit H)  

     

      *       If the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Ratio for any service is exceeded, the excess usage fees are USD  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] , as described in Section 1.1 of Exhibit H.
    8      

    No Other Changes. Except as specifically amended by this Amendment, all other provisions of the Agreement remain in full force and effect. This Amendment shall not constitute or operate as a waiver of, or estoppel with respect to, any provisions of the Agreement by any party hereto.

    9      

    Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement.

    10       Successors and Assigns. This Amendment shall inure to the benefit of and be binding upon NAVITAIRE and the Customer and their respective successors, heirs and assigns.
    11      

    Conflict of Provisions. In the event that there exists a conflict between any term, condition, or provision contained within this Amendment, and in any term, condition, or provision contained within the Agreement, the term, condition, or provision contained within this Amendment shall control.

    < Signature Page Follows >

    IN WITNESS WHEREOF , the parties hereto have executed this Amendment as of the day and year written below.

     

    6

    NAVITAIRE Proprietary and Confidential

     

    Hosted Services Agreement

      Navitaire LLC
      Signature:
      Printed Name:  
      Title:  
      Date:  
      VRG Linhas Aereas S.A  
      Signature:  
      Printed Name:  
      Title:  
      Date:  
       
      Witness Name:  
      Witness ID:  
       
      Witness Name:  
      Witness ID:  

     

    7

    NAVITAIRE Proprietary and Confidential


    Hosted Services Agreement 

     

    EXHIBIT 10.22

    AMENDMENT NO. 24 TO

    NAVITAIRE HOSTED SERVICES AGREEMENT

    This Amendment No. 24 to the NAVITAIRE Hosted Services Agreement (this “Amendment”), effective as of February 5, 2012, is entered into by and between Navitaire LLC, a Delaware limited liability company (“NAVITAIRE”), and VRG Linhas Aereas S.A., as successor of GOL – Transportes Aereos S/A, a Brazilian corporation (“Customer”). Initially capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Agreement (as defined below).  

     
    A.

    NAVITAIRE and Customer are parties to that certain NAVITAIRE Hosted Services Agreement dated as of May 1, 2004 and amended by: (i) Amendment No. 1 dated as of January 1, 2005, (ii) Amendment No. 2 dated as of June 13, 2005, (iii) Amendment No. 3 dated as of October 1, 2005, (iv) Amendment No. 4 dated as of November 14, 2005, (v) Amendment No. 6 dated as of April 5, 2006, (vi) Amendment No. 7 dated as of June 1, 2006, (vii) Amendment No. 8 dated as of June 11, 2007 (viii) Amendment No. 9 dated as of August 20, 2007; (ix) Amendment No. 10 dated as of August 27, 2007; (x) Amendment No. 11 dated as of April 24, 2008; (xi) Amendment No. 12 dated as of April 24, 2008; (xii) Amendment No. 13 dated as of July 31, 2008; (xiii) Amendment No. 14 dated as of October 31, 2008; (xiv) Amendment No. 15 dated as of October 1, 2008; (xv) Amendment No. 16 dated as of October 1, 2009; (xvi) Amendment No. 17 dated as of February 1, 2010; (xvii) Amendment No. 18 dated as of March 15, 2010; (xviii) Amendment No. 19 dated as of June 25, 2010; (xix) Amendment No. 20 dated as of November 1, 2010; (xx) Amendment No. 21 dated as of March 1, 2011; (xxi) Amendment No. 22 dated as of February 1, 2012; and (xxii) Amendment No. 23 dated as of February 5, 2012 (the “Agreement”), pursuant to which NAVITAIRE performs Hosted Services for Customer.  

     
    B. Section 18.1 of the Agreement permits the parties to amend the terms and conditions of the Agreement provided such amendment is made in writing signed by the parties.  
     
    C.   NAVITAIRE and Customer desire to amend the terms of the Agreement as provided below.  
     
    Accordingly, and in consideration of the foregoing, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows:  
     
    1 Amendment to replace Section 4.16 – Data Transmission. Section 4.16, Data Transmission, of the Agreement is hereby deleted and replaced in its entirety as follows:  
     
    4.16

    Customer is directing NAVITAIRE to transmit data to Customer approved third parties, which may include Confidential Information of Customer and/or Personally Identifiable Information of the passengers of Customer, in order to facilitate the provision of Hosted Services.  

     
    2

    No Other Changes. Except as specifically amended by this Amendment, all other provisions of the Agreement remain in full force and effect. This Amendment shall not constitute or operate as a waiver of, or estoppel with respect to, any provisions of the Agreement by any party hereto.  

     
    3 Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement.  
     
    4 Successors and Assigns. This Amendment shall inure to the benefit of and be binding upon NAVITAIRE and the Customer and their respective successors, heirs and assigns.  
     
    5

    Conflict of Provisions. In the event that there exists a conflict between any term, condition, or provision contained within this Amendment, and in any term, condition, or provision contained within the Agreement, the term, condition, or provision contained within this Amendment shall control.  

     

    1

    NAVITAIRE Proprietary and Confidential

     

    Hosted Services Agreement

    IN WITNESS WHEREOF , the parties hereto have executed this Amendment as of the day and year written below.

      Navitaire LLC  
       Signature:  
       Printed Name:  
      Title:  
       Date:  
       VRG Linhas Aereas S.A  
      Signature:  
      Printed Name:  
      Title:  
      Date:  
       
      Witness Name:  
      Witness ID:  
       
      Witness Name:  
      Witness ID:  
     

    2

    NAVITAIRE Proprietary and Confidential


    HostedServicesAgreement 

    EXHIBIT 10.23

    AMENDMENT NO. 25 TO

    NAVITAIRE HOSTED SERVICES AGREEMENT

    This Amendment No. 25 to the NAVITAIRE Hosted Services Agreement (this “Amendment”), effective as of September 1, 2012 (“Amendment Effective Date”), is entered into by and between Navitaire LLC, a Delaware limited liability company (“NAVITAIRE”), and VRG Linhas Aereas S.A., as successor of GOL –Transportes Aereos S/A, a Brazilian corporation (“Customer”). Initially capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Agreement (as defined below).

    A.

    NAVITAIRE and Customer are parties to that certain NAVITAIRE Hosted Services Agreement dated as of May 1, 2004 and amended by: (i) Amendment No. 1 dated as of January 1, 2005, (ii) Amendment No. 2 dated as of June 13, 2005, (iii) Amendment No. 3 dated as of October 1, 2005, (iv) Amendment No. 4 dated as of November 14, 2005, (v) for the avoidance of doubt, there is no Amendment No. 5, (vi) Amendment No. 6 dated as of April 5, 2006, (vii) Amendment No. 7 dated as of June 1, 2006, (viii) Amendment No. 8 dated as of June 11, 2007 (ix) Amendment No. 9 dated as of August 20, 2007; (x) Amendment No. 10 dated as of August 27, 2007; (xi) Amendment No. 11 dated as of April 24, 2008; (xii) Amendment No. 12 dated as of April 24, 2008; (xiii) Amendment No. 13 dated as of July 31, 2008; (xiv) Amendment No. 14 dated as of October 31, 2008; (xv) Amendment No. 15 dated as of October 1, 2008; (xvi) Amendment No. 16 dated as of October 1, 2009; (xvii) Amendment No. 17 dated as of February 1, 2010; (xviii) Amendment No. 18 dated as of March 15, 2010; (xix) Amendment No. 19 dated as of June 25, 2010; (xx) Amendment No. 20 dated as of November 1, 2010; (xxi) Amendment No. 21 dated as of March 1, 2011; (xxii) Amendment No. 22 dated as of February 1, 2012; (xxiii) Amendment No. 23 dated as of February 5, 2012; and (xxiv) Amendment No. 24 dated as of February 5, 2012 (the “Agreement”), pursuant to which NAVITAIRE performs Hosted Services for Customer.

    B. Section 18.1 of the Agreement permits the parties to amend the terms and conditions of the Agreement provided such amendment is made in writing signed by the parties.
    C.       NAVITAIRE and Customer desire to amend the terms of the Agreement as provided below.

    Accordingly, and in consideration of the foregoing, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows:

    1 Amendment to add CRS/GDS/ARS Type A/EDIFACT Availability Connectivity to the Agreement, as follows:
      a.      

    Functionality. The following functionality is hereby added immediately following the table entry titled “General Features - CRS/GDS/ARS Type A/EDIFACT Connectivity” found in Section 6, New Skies by NAVITAIRE Functionality included in Hosted Reservation Services, of Exhibit A of the Agreement:

     

    General Features – CRS/GDS/ARS Type A/EDIFACT Availability Connectivity  
    • Type A/EDIFACT Availability includes the ability to receive and reply to the following inbound Product   Availability Offering messages:
    • Support for interactive availability via EDIFACT PAOREQ/RES messages.  
    • Support for market-based availability EDIFACT Message Types 44 and 45.  
    • Support for flight (Segment)-specific availability EDIFACT Message Types 46 and 47.  
    • Return real-time availability for Segments (flights) marketed by Customer under their own carrier code.  
    • Return a numeric inventory value for each class of service configured for use with the external system.  
    • Support for segment type indicators in a market request, including non-stop, direct/through, and connections.  
    • Support multiple-airport (station) code (MAC) requests.  
    • Accept and reply to market availability requests that contain a specific class of service.  
    • Support for IATA/AIRIMP Type A/EDIFACT Availability messages. The product has not been certified for use   with any CRS/GDS/ARS provider at this time.

     

    1

    NAVITAIRE Proprietary and Confidential

     

    HostedServicesAgreement

    Note: Customer is responsible for negotiating and maintaining the appropriate agreements related to the services herein included and any costs associated with the other host provider(s) for this connectivity (typically higher GDS participation levels) and for travel agency settlement and/or other carrier settlement.  

     

    b.

    Monthly Recurring Services Fees . The following is hereby added as Note 4 of Section 1.1.3 Monthly Recurring Services Fees – Connectivity Services/Products – CRS/GDS/ARS Type A/EDIFACT  Connectivity, of Exhibit H of the Agreement:

    Note 4: The Look to Booked Segment Ratio – CRS/GDS/ARS Type A/EDIFACT Bookings, found in sub-paragraph (e) of Section 1.1.1 Monthly Recurring Services Fees – Core Services/Optional Products, of Exhibit H of the Agreement, is applicable for all Type A/EDIFACT Availability and Sell transactions.

    c. Implementation Fees. The following is hereby added to Exhibit H, Section 1.2, Implementation Fees:
      1.2       Implementation Fees
     
    X   Product/Service Description   Implementation Fees  
      Hosted Reservation Services - New Skies®  



    X

    		  CRS/GDS/ARS Type A/EDIFACT Availability Connectivity*
    		$ [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  for the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Type A/EDIFACT
    Availability partner implementation**
    $ [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] for  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Type
    A/EDIFACT Availability partner
    implementation***  

     

    *      

    The prices listed above are valid for [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] following the Amendment Effective Date. Following this time period, the pricing in this Section is subject to change and will be quoted upon Customer request.

    **      

    Implementation Fees for the    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT ] Type A/EDIFACT Availability partner implementation project include up to  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT ] ho urs of implementation support including project management, operations, NAVITAIRE system training, and support personnel.  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT ] of the implementation fee will be billed upon Customer’s logging of the INC to implement the service and the remainder, including any additional hours to be  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] upon NAVITAIRE’s completion of the project. By logging an INC with the request to implement the service, Customer provides prior approval of additional implementation hours, which are  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]   at the rates outlined in Section 1.3, Support Fees, of Exhibit H and per the terms and conditions of the Agreement.

    ***      

    Implementation Fees for subsequent Type A/EDIFACT Availability partner implementation projects include up to  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] hours each of implementation support including project management, operations, NAVITAIRE system training, and support personnel.  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]    of the implementation fee will be billed upon Customer’s logging of the INC to implement the service and the remainder, including any additional hours to be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] upon NAVITAIRE’s completion of the project. By logging an INC with the request to implement the service, Customer provides prior approval of additional implementation hours, which are [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] at the rates outlined in Section 1.3, Support Fees, of Exhibit H and per the terms and conditions of the Agreement.

    Note: [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of the Implementation Fee is due and payable in full upon initiation of each implementation project with the remaining balance due and payable in full upon completion of the respective implementation project.

    2       Amendment to update Code-Share carriers in the Agreement, as follows:
      a.      

    Scope of Services - Marketing. The sub-section “Code-Share Distribution with Customer as Code-Share Marketing Carrier, which includes:” found in Section 2, Scope of Services, of Exhibit A of the Agreement is hereby deleted in its entirety and replaced, as follows:

     
    ‘X’ or
    ‘N/A’       		Hosted Reservation Services – New Skies
    Add-On Functionality  
    X  

    Code-Share Distribution with Customer as Code-Share Marketing Carrier, with the following airline  partner(s) as Code-Share Operating carriers:
    • [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

    2

          NAVITAIRE Proprietary and Confidential

     

    HostedServicesAgreement

    b.      

    Scope of Services - Operating. The sub-section “Code-Share Distribution with Customer as Code-Share Operating Carrier, which includes:” found in Section 2, Scope of Services, of Exhibit A of the Agreement is hereby deleted in its entirety and replaced, as follows:

     
    ‘X’ or
    ‘N/A’       		Hosted Reservation Services – New Skies
    Add-On Functionality  
    X Code-Share Distribution with Customer as Code-Share Operating Carrier, with the following airline partner(s) as Code-Share Marketing carriers:  
    • [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

    3       Amendment to remove Hosted Custom Application Messaging Services from the Agreement, as follows:
      a.      

    Termination and Termination for Convenience. The unnumbered Section, Termination, referring to Individual Hosted Custom Application Messaging Services added to the Agreement via Amendment No. 10 dated August 27, 2008, and Section 5.3.2, Exception for Hosted Custom Application Messaging Services, are hereby deleted and removed in their entirety from the Agreement.

      b.      

    Scope of Services. The reference to “Hosted Custom Application Messaging Services” found in Section 2, Scope of Services, of Exhibit A of the Agreement, is hereby deleted in its entirety and removed from the Agreement.

      c.      

    Functionality. The sub-sections identified by and related to Hosted Custom Application Messaging Services, found in Exhibit A, Section 6, New Skies – Hosted Reservation Services Add-On Functionality, are hereby deleted in their entirety and removed from the Agreement.

      d.      

    Service Level Targets. The sentence which reads “Additionally, as Messages provided in the Hosted Custom Application Messaging Services are not critical to the majority of Customer’s booking process, they will be excluded from SLA measurement and associated rebates.” found in Sub-section (c) Exceptions, of Exhibit A of the Agreement, is hereby deleted in its entirety and removed from the Agreement.

      e.      

    Monthly Recurring Service Fees. Section 1.1.16, Monthly Recurring Service Fees – Hosted Custom Application Messaging Services of Exhibit H of the Agreement, is hereby deleted in its entirety and removed from the Agreement.

    4       Amendment to add [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Interline Gateway  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  Connectivity to the Agreement, as follows:
      a.       Scope of Services. The following is added to Exhibit A, Section 2, Scope of Services:
     
    ‘X’ or
    ‘N/A’       		Hosted Reservation Services – New Skies
    Add-On Functionality  
    X  

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]   Interline Gateway ( [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] ) Connectivity  

     

    b.       Functionality. The following is added to Exhibit A, Section 6, New Skies by NAVITAIRE Functionality Included in Hosted Reservation Services:
     
    New Skies – Hosted Reservation Services Add-On Functionality  

     

    3

    NAVITAIRE Proprietary and Confidential

     

    HostedServicesAgreement

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]   Interline Gateway [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  Connectivity
    General Features – [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Interline Gateway [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  Connectivity  

    The  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Interline Gateway  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]    is an Internet-based booking engine hosted by [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] . The  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] processes requests through the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  Global Distribution System ([CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] GDS) and provides Customer with the ability to:

    • Book on-line itineraries;  
    • Create interline itineraries; and  
    • Issue E-Tickets validated on Customer’s ticket stock.  

    Customer controls and manages their operation of the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  through a web-based administration tool, provided by [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] .

    Note 1: Customer is responsible for negotiating and maintaining the appropriate agreements and any costs associated with  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] for this connectivity for the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] services contemplated herein. Requests from Customer for NAVITAIRE support or from  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] related to Customer data will incur the Support Fees at the rate specified in Section 1.3 of Exhibit H of the Agreement.

     

    Note 2: NAVITAIRE shall not be liable for  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  performance or failure to perform, provided that NAVITAIRE has performed its obligations hereunder.  

     

    c.

    Monthly Recurring Service Fees. The Monthly Recurring Service Fees for  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  Interline Gateway  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  Connectivity are added as Section 1.1.34 to Exhibit H of the Agreement, as follows:

    1.1.34       Monthly Recurring Service Fees – Connectivity Services/Products –  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  Interline Gateway  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  Connectivity. (Applicable only if selected in Section 2 of Exhibit A):
     
    Description [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]   Interline Gateway [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]
    Connectivity
    Price per Service  
    Monthly Infrastructure and Support Fee   Included  

     

    Note:

    Any applicable message fees, segment fees, or data circuits pertaining to the CRS/GDS/ARS and/or SITA/ARINC in connection with, or as a result of the  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  Interline Gateway  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  Connectivity, are the responsibility of Customer.

     

    d.       Implementation Fees. The following Implementation Fees are added to Exhibit H, Section
      1.2:      
      1.2       Implementation Fees
     
    X   Product/Service Description   Implementation Fees  
    X [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]   Interline Gateway  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]  Connectivity   Time and Materials*

     

    *      

    The  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Interline Gateway  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Connectivity implementation effort is expected to require approximately  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] hours of implementation support including NAVITAIRE operations and support personnel. Customer acknowledges that the actual implementation effort may involve more or less than the hours estimated, and agrees to pay for the actual hours billed. A project manager is not required. By logging an INC with the request to implement the service, Customer provides prior approval of the implementation hours, which will be  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] at the rates outlined in Section 1.3, Support Fees, of Exhibit H and per the standard billing terms of the Agreement.

    4

    NAVITAIRE Proprietary and Confidential

     

    HostedServicesAgreement

    5

    No Other Changes. Except as specifically amended by this Amendment, all other provisions of the Agreement remain in full force and effect. This Amendment shall not constitute or operate as a waiver of, or estoppel with respect to, any provisions of the Agreement by any party hereto.  

     
    6

    Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement.  

     
    7

    Successors and Assigns. This Amendment shall inure to the benefit of and be binding upon NAVITAIRE and the Customer and their respective successors, heirs and assigns.  

     
    8

    Conflict of Provisions. In the event that there exists a conflict between any term, condition, or provision contained within this Amendment, and in any term, condition, or provision contained within the Agreement, the term, condition, or provision contained within this Amendment shall control.  

     

    IN WITNESS WHEREOF , the parties hereto have executed this Amendment as of the day and year written below.

      Navitaire LLC  
      Signature:  
      Printed Name:  
      Title:  
      Date:  
      VRG Linhas Aereas S.A  
      Signature:  
      Printed Name:  
      Title:  
      Date:  
       
      Witness Name:  
       Witness ID:  
       
      Witness Name:  
      Witness ID:  

     

    5

     

    NAVITAIRE Proprietary and Confidential


    Hosted Services Agreement  

    EXHIBIT 10.24

    AMENDMENT NO. 26 TO

    NAVITAIRE HOSTED SERVICES AGREEMENT

    This Amendment No. 26 to the NAVITAIRE Hosted Services Agreement (this “Amendment”), effective as  of December 24, 2012, is entered into by and between Navitaire LLC, a Delaware limited liability company (“NAVITAIRE”), and VRG Linhas Aereas S.A., as successor of GOL – Transportes Aereos S/A, a Brazilian corporation (“Customer”). Initially capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Agreement (as defined below).  

     
    A.

    NAVITAIRE and Customer are parties to that certain NAVITAIRE Hosted Services Agreement dated as of May 1, 2004 and amended by: (i) Amendment No. 1 dated as of January 1, 2005, (ii) Amendment No. 2 dated as of June 13, 2005, (iii) Amendment No. 3 dated as of October 1, 2005, (iv) Amendment No. 4 dated as of November 14, 2005, (v) for the avoidance of doubt, there is no Amendment No. 5, (vi) Amendment No. 6 dated as of April 5, 2006, (vii) Amendment No. 7 dated as of June 1, 2006, (viii) Amendment No. 8 dated as of June 11, 2007 (ix) Amendment No. 9 dated as of August 20, 2007; (x) Amendment No. 10 dated as of August 27, 2007; (xi) Amendment No. 11 dated as of April 24, 2008; (xii) Amendment No. 12 dated as of April 24, 2008; (xiii) Amendment No. 13 dated as of July 31, 2008; (xiv) Amendment No. 14 dated as of October 31, 2008; (xv) Amendment No. 15 dated as of October 1, 2008; (xvi) Amendment No. 16 dated as of October 1, 2009; (xvii) Amendment No. 17 dated as of February 1, 2010; (xviii) Amendment No. 18 dated as of March 15, 2010; (xix) Amendment No. 19 dated as of June 25, 2010; (xx) Amendment No. 20 dated as of November 1, 2010; (xxi) Amendment No. 21 dated as of March 1, 2011; (xxii) Amendment No. 22 dated as of February 1, 2012; (xxiii) Amendment No. 23 dated as of February 5, 2012; (xxiv) Amendment No. 24 dated as of February 5, 2012; and (xxv) Amendment No. 25 dated as of September 1, 2012 (the “Agreement”), pursuant to which NAVITAIRE performs Hosted Services for Customer.

     
    B. Section 18.1 of the Agreement permits the parties to amend the terms and conditions of the Agreement provided such amendment is made in writing signed by the parties.  
     
    C.   NAVITAIRE and Customer desire to amend the terms of the Agreement as provided below.  
     

    Accordingly, and in consideration of the foregoing, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows:  

     
    1   Amendment to add Smiles Access , as follows:  
     
      a.   Definitions. The following definition is hereby added to Exhibit A, Section 1, Definitions:  
     
      •

    Smiles means the entity named Smiles S.A., which is an associated company of Customer where Gol Linhas Aereas Inteligentes S.A. is the holding company controlling Customer and Smiles S.A. with  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of the share capital.

     
      b.   Smiles Access. The following is hereby added as Section 20 to the Agreement:  
     
        20        Smiles Access  
     

    Customer wishes to grant Smiles access to Customer’s Hosted Services System as well as Support Services. NAVITAIRE will grant such access to Smiles subject to the following terms:  

     

     a.

    		Customer remains responsible for access by Smiles as if accessed directly by Customer.  
     b.

    Smiles is bound by written confidentiality terms protecting NAVITAIRE’s Confidential Information that are no less restrictive than those in Section 9 of the Agreement.  

     

    1

    NAVITAIRE Proprietary and Confidential

     

    Hosted Services Agreement

    c.

    Customer acknowledges that Smiles will have access to Customer’s partition and that NAVITAIRE has no ability to restrict Smile’s access to particular Customer data or Confidential Information.  

    d.

    NAVITAIRE may disable access, at NAVITAIRE’s discretion, if any Smiles user or Smiles application is causing performance issues within the Hosted Services System. Where any such performance issue contributes to NAVITAIRE’s inability to meet its Service Level or other obligations in the Agreement, NAVITAIRE shall be excused from performance of such Service Levels or other obligations, regardless as to whether NAVITAIRE disabled user or application access. For any Smiles user for which NAVITAIRE has disabled access, NAVITAIRE will reinstate access after Customer has taken the corrective action defined by NAVITAIRE for the offending user activity.  

    e.

    Customer shall pay NAVITAIRE for Smiles’ access to the Support Services as if accessed directly by Customer.  

    f.

    Customer agrees that NAVITAIRE shall not be liable for any damage or loss of either party related to or arising out of this unrestricted access.  

    g.

    Customer also agrees to defend NAVITAIRE for any claims related to the access to the Hosted Services System and Support Services by Smiles including, without limitation, a breach of any obligation under this Agreement by Smiles; and indemnify and hold harmless NAVITAIRE for any damages awarded in relation to such claim or claims to the extent that these claims are not caused or created by the negligence or default of NAVITAIRE. Customer and NAVITAIRE agree that the limitations and disclaimers set forth in Section 10 shall not apply to Customer’s obligations herein.  

     
    2

    No Other Changes. Except as specifically amended by this Amendment, all other provisions of the  Agreement remain in full force and effect. This Amendment shall not constitute or operate as a waiver of, or estoppel with respect to, any provisions of the Agreement by any party hereto.  

     
    3 Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement.  
     
    4 Successors and Assigns. This Amendment shall inure to the benefit of and be binding upon NAVITAIRE and the Customer and their respective successors, heirs and assigns.  
     
    5

    Conflict of Provisions. In the event that there exists a conflict between any term, condition, or provision contained within this Amendment, and in any term, condition, or provision contained within the Agreement, the term, condition, or provision contained within this Amendment shall control.

     

    <Signature Page Follows>

    2

    NAVITAIRE Proprietary and Confidential

     

    Hosted Services Agreement

    IN WITNESS WHEREOF , the parties hereto have executed this Amendment as of the day and year written below.

      NAVITAIRE LLC  
      Signature:  
      Printed Name:  
      Title:  
      Date:  
      VRG LINHAS AEREAS S.A  
      Signature:  
      Printed Name:  
      Title:  
      Date:  
       
      Witness Name:  
      Witness ID:  
       
      Witness Name:  
      Witness ID:  

     

    3

    NAVITAIRE Proprietary and Confidential

     

    Exhibit 10.46

     

    Supplemental Agreement No. 21

     

    to

     

    Purchase Agreement No. 2910

     

    between

     

    THE BOEING COMPANY

     

    and

     

    GAC Inc.

     

    Relating to Boeing Model 737-8EH Aircraft

     

     

     

                THIS SUPPLEMENTAL AGREEMENT, entered into as of the _________ day of ____________________ 2012, by and between THE BOEING COMPANY, a Delaware corporation with its principal offices in the City of Seattle, State of Washington, USA (Boeing), and GAC Inc. , a company organized under the laws of the Cayman Islands (Buyer);

     

    W I  T  N  E  S  S  E  T  H : 

     

                WHEREAS, Boeing and Buyer entered into Purchase Agreement No. 2910, dated 17 May 2004, as amended and supplemented (the Agreement) relating to the purchase and sale of fifteen (15) Boeing Model 737-8EH aircraft; and

     

    Whereas, Buyer and Boeing now wish to amend certain terms and conditions associated with the Agreement, and

     

                WHEREAS, Boeing and Buyer have agreed to amend the Agreement to incorporate Buyer’s decision to move [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] firmly contracted Aircraft delivery positions from [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] to now be delivered in [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], and to exercise [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] existing Option Aircraft delivery positions in [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], all to be incorporated in the new Table 14 and;

     

    PA2910                                                                                1                                                                                       GOT
    SA-21

     

     

    WHEREAS, Boeing and Buyer have agreed to amend the Agreement to incorporate Buyer’s decision to exercise [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Option Aircraft from [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], further [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Aircraft from [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] will also be moved from [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT];

     

     

    WHEREAS, Boeing and Buyer have also agreed to amend the Agreement to incorporate certain other changes as may be described herein;

     

                NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties agree to amend the Agreement as follows:

     

     

    1.         Table of Contents . 

     

    Remove and replace, in its entirety, the Table of Contents with a new Table of Contents (attached hereto) to reflect the incorporation of this Supplemental Agreement No. 21 (SA-21) into the Purchase Agreement.

     

     

    2.         Tables. 

     

                2.1       Remove and replace Table 5 to Purchase Agreement No. 2910, Aircraft Delivery, Description, Price and Advance Payments , with the new Table 5 (attached hereto) in order to incorporate Customer and Boeing agreement to move [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Aircraft from [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] and [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]Aircraft from [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] to a new Table 14 (attached hereto).

     

    2.2       Remove Table 8 from Purchase Agreement No. 2910, Aircraft Delivery, Description, Price and Advance Payments , in order to incorporate Customer and Boeing agreement to move [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Aircraft from [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] to [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    PA2910                                                                                 2                                                                                       GOT
    SA-21
     

     

     

                2.3       Remove Table 9 from Purchase Agreement No. 2910, Aircraft Delivery, Description, Price and Advance Payments , in order to incorporate Customer and Boeing agreement to move [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Aircraft from [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] to [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

                2.4       Add the new Table 14 to Purchase Agreement No. 2910, Aircraft Delivery, Description, Price and Advance Payments , (attached hereto) in order to incorporate Customer and Boeing agreement to move the delivery positions of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Aircraft from Table 5 to this new Table 14, and the inclusion of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Option Aircraft from [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] to now become firmly contracted Aircraft.

     

     

    3.         Exhibits. 

     

    3.1       Add the new Exhibit A-7, Model 737-800 Aircraft Configuration – Table 14 Aircraft , (attached hereto) in order to incorporate the configuration detail elements in July 2011 prices that are applicable to the Aircraft in the new Table 14.

     

    3.2       Remove and replace the Supplemental Exhibit No. BFE1, Buyer Furnished Equipment Variables , with a new Supplemental Exhibit No. BFE1 (attached hereto) in order to incorporate the delivery position deletions from Table 5, Table 8, and Table 9 also to add the new aircraft delivery positions described in the new Table 14.

     

     

    4.         Letter Agreements.

     

                4.1       Remove and replace the Letter Agreement No. 6-1162-DME-0707R1, Advance Payment Matters , with the new Letter Agreement No. 6-1162-DME-0707R2 (attached hereto) in order to include (i) the new Reference (b) Purchase Agreement No. PA-3780 under Article 4 [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], (ii) [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], and (iii) to add the new article 6 regarding payment terms and conditions. 

    PA2910                                                                                3                                                                                       GOT
    SA-21
     

     

                4.2       Remove and replace page 1 and page 2 of the Letter Agreement No.
    6-1162-DME-1104, [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]     Escalation Program , with a new page 1 and page 2 (attached hereto) in order to include the Table 14 aircraft within the terms and conditions of this letter agreement.

     

                4.3       Remove and replace page 1 and page 2 of the Letter Agreement No.
    6-1162-DME-1106R1,     Aircraft Model Substitution , with a new page 1 and page 2 (attached hereto) in order to include the Table 14 aircraft within the terms and conditions of this letter agreement and to reformat paragraph headings.

     

                4.4       Incorporate by reference the previously agreed by Boeing and Customer Letter Agreement No. 6-1162-DME-1274, Option Aircraft , the terms and conditions of which have hereby been superseded with the effect of this SA-21 such that the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Option Aircraft now have become firmly contracted Table 14 Aircraft and [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Option Aircraft have been moved to [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Aircraft.

     

                4.5       Add the new Letter Agreement No. 6-1167-DME-1339, Special Matters – Table 14 Aircraft , (attached hereto) in order to incorporate Buyer and Boeing’s understanding and agreement concerning certain special business terms and conditions concerning the movement of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Aircraft from Table 5, into the new Table 14, and the inclusion of the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]Option Aircraft from Letter Agreement No. 6-1162-DME-1274, Option Aircraft , which have now become firmly contracted Aircraft under Table 14.

     

    4.6       Add the new Letter Agreement No. GOT-PA-02910-LA-1209208, Special Considerations Addressing Current Fleet [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], (attached hereto) in order to incorporate Buyer and Boeing’s understanding and agreement concerning certain special business terms and conditions concerning [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of the 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Aircraft.

    PA2910                                                                                 4                                                                                       GOT
    SA-21
     

     

     

    5.         Definitive Agreement Payment

     

    With the creation of Table 14, a Definitive Agreement top up payment of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] is due within [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] business days of signing of this Supplemental Agreement 21.

     

    PA2910                                                                                 5                                                                                       GOT
    SA-21
     

    6.         Confidential Treatment.

     

    Customer and Boeing each understands that certain commercial and financial information contained in this Supplemental Agreement are considered by both Customer and Boeing as confidential.  Customer and Boeing agree that each will treat this Supplemental Agreement and the information contained herein as confidential and, except as otherwise required by law, will not, without the prior written consent of the other party, disclose this Supplemental Agreement or any information contained herein to any other person or entity.

     

     

                            ________________________________________

     

     

    The Purchase Agreement, Exhibits and Letter Agreements shall be deemed amended to the extent herein provided and as so amended shall continue in full force and effect.  In the event of any inconsistency between the above provisions and those provisions contained in the Purchase Agreement, the terms of this Supplemental Agreement will govern and control.

     

     

    EXECUTED IN DUPLICATE as of the day and year first above written.

     

     

    THE BOEING COMPANY

     

     

    By _________________________

     

    Its                 Attorney‑In‑Fact      

     

     

    GAC INC.

     

     

    By _________________________      By _________________________   

     

    Its                                                          Its                                                           

     

     

    Witness                                                  Witness                                                   

     

     

     

    PA2910                                                                                 6                                                                                       GOT
    SA-21

     

     

     

    TABLE OF CONTENTS

     

     

     

     

    Supplemental

    Agreement

    NUMBER

    ARTICLES

     

     

     

     

     

     

     

    1.

    Quantity, Model and Description

     

     

    2.

    Delivery Schedule

     

     

    3.

    Price

     

     

    4.

    Payment

     

     

    5.

    Miscellaneous

     

     

     

     

     

    TABLE

     

     

     

     

     

     

     

     

    Aircraft Information Table 1 (Block 1 aircraft)

    Aircraft Information Table 2 (Block 2 aircraft)

    Aircraft Information Table 2-A (Block 2-A aircraft)

    Aircraft Information Table 3 (Block 3 aircraft)

    Aircraft Information Table 4 (Block 4 aircraft)

    Aircraft Information Table 5 (Block 5 aircraft)

    Aircraft Information Table 6 (Block 6 aircraft)

    Aircraft Information Table 7 (Block 7 aircraft)

    Aircraft Information Table 8 (Block 8 aircraft) Deleted

    Aircraft Information Table 9 (Block 9 aircraft ) Deleted

    Aircraft Information Table 10 (Block 10 aircraft)

    Aircraft Information Table 11 (Block 11 aircraft)

    Aircraft Information Table 12 (Block 12 aircraft)

    Aircraft Information Table 13 (Block 13 aircraft)

    Aircraft Information Table 14 (Block 14 aircraft)

    SA-13

    SA-19

    SA-19

    SA-11

    SA-19

    SA-21

    SA-19

    SA-14

    SA-21

    SA-21

    SA-19

    SA-19

    SA-18

    SA-19

    SA-21

     

     

     

     

    EXHIBIT

     

     

     

     

     

     

    A.

    A.

    A-1.

    A-2.

    A-3.

    A-4.

    A-5.

    A-6.

    A-7.

    Aircraft Configuration – Block 1 & 2

    Aircraft Configuration – Block 2-A

    Aircraft Configuration – Block 3 & 4

    Aircraft Configuration – Table 7 (737-700)

    Aircraft Configuration – Block 5 & 6

    Aircraft Configuration – Block 8 – 11 & Block 13

    Baseline 737-700 Aircraft Configuration – Table 12

    Baseline 737-800 Aircraft Configuration – Table 14

    SA-19

    SA-19

    SA-19

    SA-14

    SA-19

    SA-19

    SA-18

    SA-21

     

     

     

     

    B.

    Aircraft Delivery Requirements and Responsibilities

     

     

     

     

     

    SUPPLEMENTAL EXHIBITS

     

     

     

     

     

     

    AE1.

    BFE1.

    CS1.

    Escalation Adjustment/Airframe and Optional Features

    BFE Variables

    Customer Support Variables

    SA-5

    SA-21

     

    EE1.

    Engine Escalation/Engine Warranty and Patent Indemnity

     

    SLP1.

    Service Life Policy Components

     

              

     

    PA2910

    SA-21

    i

    GOT

     

     

     

     

     

     

     

     

    Supplemental

    LETTER AGREEMENTS

     

    Agreement

     

     

    NUMBER

     

     

     

     

     

     

    2910-01

    Customer Software

     

    2910-02

    Spares – Flight Crew Training Spare Parts Support

     

    2910-03

    Spares – Initial Provisioning

     

    6-1162-DME-0706R4

    6-1162-DME-0707R1

    6-1162-DME-0708

    6-1162-DME-0710

    6-1162-DME-0711

    6-1162-DME-0712

    6-1162-DME-0713

    6-1162-DME-0714

    6-1162-DME-0824R2

    6-1162-DME-0825

    6-1162-DME-0841

    Purchase Rights

    Advance Payment Matters

    Technical Matters

    Performance Guarantees (YK721-YK769)

    Promotional Support

    Special Matters (canceled & superseded)

    Tailored Weight Program

    Demonstration Flight Waiver

    Special Matters - Table 1-7 Aircraft

    Market Risk - Escalation

    Certain 2006 Aircraft Deliveries –

    SA-19

    SA-21

    SA-10

    SA-5

    SA-18

    SA-18

     

    Advance Payment Matters

    SA-7

    6-1162-DME-0867

    Short-Term Payment Deferral - Signing of SA-7

    SA-7

    6-1162- DME-1104

    [CONFIDENTIAL PORTION OMITTED AND FILED

     

    SEPARATELY WITH THE COMMISSION PURSUANT TO

     

    A REQUEST FOR CONFIDENTIAL

    TREATMENT]Escalation Program

    SA-21

    6-1162- DME-1106R1

    Substitution of Model 737-800 Aircraft into

     

     

    Model 737-700 Aircraft

    SA-21

    6-1162- DME-1107

    6-1162-DME-1111R1

    Promotional Support Agreement - Varig

    SA-13 - Delayed Advance Payment

    SA-18

     

    Due upon Execution

    SA-14

    6-1162- DME-1152

    Aircraft Performance Guarantees – Model 737-700

    SA-15

     

    (YN261 and follow-on model 737-700 aircraft)

     

    6-1162- DME-1153

    Aircraft Performance Guarantees – Model 737-800

    SA-15

     

    (YK770 and follow-on model 737-800 aircraft)

     

    6-1162- DME-1162

    Special Matters – Table 8-11 & Table 13 Aircraft

    SA-19

    6-1162- DME-1164

    [CONFIDENTIAL PORTION OMITTED AND FILED

     

    SEPARATELY WITH THE COMMISSION

     

     

    PURSUANT TO A REQUEST FOR CONFIDENTIAL

     

    TREATMENT]

    SA-15

    6-1162- DME-1185

    6-1162- DME-1213

    6-1162- DME-1250

    Delayed Delivery of 2010 Aircraft to 2016

    Special Matters – Table 12 Aircraft

    Certain Special Matters – Table 13 Aircraft

    SA-16

    SA-18

    SA-19

    6-1162- DME-1271

    Substitution of Model 737-[CONFIDENTIAL PORTION

     

    OMITTED AND FILED SEPARATELY WITH THE

    COMMISSION PURSUANT TO A REQUEST FOR

    CONFIDENTIAL TREATMENT] Aircraft into

     

     

    Model 737-[CONFIDENTIAL PORTION OMITTED AND

     

    FILED SEPARATELY WITH THE COMMISSION

     

     

    PURSUANT TO A REQUEST FOR CONFIDENTIAL

     

    TREATMENT] Aircraft

    SA-20

    6-1162- DME-1272

    6-1162-DME-1274

    Special Matters – Table 5 Aircraft Substitution

    Option Aircraft

    SA-20

    SA-21

     

    PA2910

    SA-21

    ii

    GOT

     

     

     

    6-1167- DME-1339

    GOT-PA-02910-LA-1209208

    Special Matters – Table 14 Aircraft

    Special Considerations Addressing Current Fleet

    SA-21

     

    [CONFIDENTIAL PORTION OMITTED AND FILED

    SEPARATELY WITH THE COMMISSION PURSUANT TO

     

    A REQUEST FOR CONFIDENTIAL TREATMENT]

    SA-21

                                                                                                                                                                                                                     

     

     

     

     

    PA2910

    SA-21

    iii

    GOT

     

     

     

    RECORD OF SUPPLEMENTAL AGREEMENTS

     

     

     

     

     

     

     

     

    SA-1

    16

    July

    2004

    SA-2

    20

    January

    2005

    SA-3

    07

    March

    2005

    SA-4

    24

    March

    2005

    SA-5

    25

    July

    2005

    SA-6

    26

    August

    2005

    SA-7

    18

    November

    2005

    SA-8

    17

    February

    2006

    SA-9

    13

    March

    2006

    SA-10

    19

    October

    2006

    SA-11

    24

    October

    2006

    SA-12

    28

    February

    2007

    SA-13

    17

    December

    2007

    SA-14

    29

    September

    2008

    SA-15

    30

    April

    2009

    SA-16

    24

    September

    2009

    SA-17

    28

    October

    2009

    SA-18

    08

    July

    2010

    SA-19

    17

    September

    2010

    SA-20

    11

    February

    2011

    SA-21

    __

    ________

    2012

     

    PA2910

    SA-21

    iv

    GOT

     

    6-1162-DME-0707R2

     

     

     

     

    GAC Inc.

    Rua Gomes de Carvalho 1629

    Sao Paulo SP Brazil

    04547-006

     

     

     

    Subject:           Advance Payment Matters

     

    Reference:       (a)        Purchase Agreement No. 2910 (the Purchase Agreement) between The Boeing Company (Boeing) and GAC Inc. (Customer) relating to Model 737-8EH aircraft (the 737-800 Aircraft)

     

                            (b)       Purchase Agreement No. PA-3780 (Purchase Agreement) between The Boeing Company (Boeing) and GAC Inc. (Customer) relating to Model 737-8 aircraft (Aircraft)

     

     

    This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement.  All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement.

     

    Customer and Boeing have reached agreement regarding certain modifications to the Agreement as set forth below:

     

     

    1.         Advance Payment Schedule:

     

    Notwithstanding the advance payment schedule set forth in Table 1 of the Purchase Agreement, Boeing agrees that Customer may make Advance Payments for the Aircraft, in accordance with the schedule below described, subject to the terms and conditions further described herein:

     

                 [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

     

    2.         Deferral Charges on Deferred Advance Payments:

     

                The foregoing advance payment schedule constitutes a deferral of certain amounts due Boeing pursuant to the advance payment schedule as set forth in Table 1 of the Purchase Agreement.  Accordingly, Customer shall pay deferral charges to Boeing on all such deferred amounts of the advance payments for the Aircraft, as described herein.

     

     

    P.A. No. 2910

    SA-21

    GOT

     

     

    Letter Agreement No. 6-1162-DME-0707R2
    GAC Inc.                                                                                             Page   2

     

    Interest will be calculated and paid on the deferred advance payments.  Interest on the deferred advance payments will accrue at an annual rate equal to [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].  This deferral charge will be calculated on a 365/366 day year.

     

    Deferral charge payments will be due on [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] and will be computed on the basis of the actual number of elapsed days for the period commencing on the date such deferred amounts would have been due and terminating on the date of delivery of the designated Aircraft.

     

    Further to the above, following the calculation method stated above, all such [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] deferral charge payments shall be further deferred such that all deferral charge payments for all of the designated Aircraft will be made at the time of each such designated Aircraft delivery.  Any remaining unpaid deferral charge payments for such Aircraft are due and payable at the delivery of the designated Aircraft.

     

     

    3.          Re-Scheduling of Aircraft:

     

    In the event of a re-schedule, to a later delivery position, of any of the Aircraft under the terms of the Agreement, Boeing will recalculate the amount of advance payments and deferral charges due from Customer under the above described deferred Advance Payment Schedule after giving effect to such re-scheduling and, without interest, refund to Customer within 5 business days any amounts held by Boeing in excess of such recalculated amounts.

     

    In the event of a re-schedule, except as provided for in Article 2 of the Purchase Agreement, to an earlier delivery position, of any of the Aircraft under the terms of the Agreement, Boeing will recalculate the amount of advance payments due from Customer under the above described deferred Advance Payment Schedule after giving effect to such re-scheduling and Customer will make immediate payment to Boeing of any amounts due within 5 business days, without any additional interest or other charges, as a result of such recalculated amounts applicable to such accelerated delivery position.

     

    P.A. No. 2910

    SA-21

    GOT

     

     

    Letter Agreement No. 6-1162-DME-0707R2
    GAC Inc.                                                                                             Page   3

    In the event that previously paid advance payments are to be returned to Customer pursuant to the contract termination terms and conditions of the Aircraft General Terms Agreement or Purchase Agreement, any accrued but unpaid advance payment deferral charges will be removed and cancelled.

     

     

    4.         [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

     

    5.         Set-Off Rights

     

    Customer agrees that in the event of a default of its obligations under any purchase agreement with Boeing or any agreement with any Boeing subsidiary or affiliate, Boeing may apply any or all advance payments, or other payments made by Customer with respect to an aircraft or any other Boeing product to cure, in part or in whole, any default with respect to any other aircraft or Boeing product or with respect to any other obligation under any such Boeing purchase agreement or any such agreement with another Boeing subsidiary or affiliate. In the event that Boeing sets off against, or otherwise exercises rights against any such payments made by Customer, and applies any such amounts to any obligations owed by Customer to Boeing, its subsidiaries or affiliates, Boeing will be entitled, after such application, to require Customer to replace within ten days the amount so applied such that the total amount of advance payments would be restored to the aggregate total amount of advance payments due and owing under the Purchase Agreement as of the date of application of such amounts.

     

     

    6.          Payments 

     

    Payments due upon reaching a Definitive Agreement are to be received by Boeing within [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] business days of the signing of such agreement, or supplemental agreement.  All of the other periodic advance payments described in the payment schedule(s) as set forth above are each due on [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].  Any payments received later than [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] business days after its due date will be subject to a late payment interest charge calculated on the basis of a [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] annual rate.  Late payment interest charges will accrue further interest charges until paid, with any unpaid such late payment interest charges to be included in the final delivery invoice for the respective aircraft.

     

     

    P.A. No. 2910

    SA-21

    GOT

     

     

    Letter Agreement No. 6-1162-DME-0707R2
    GAC Inc.                                                                                             Page   4

     

     

    7.          Confidential Treatment:

     

    The Parties understand that certain commercial and financial information contained in this Letter Agreement and attachments hereto are considered by Boeing as confidential.  The Parties agree that it will treat this Letter Agreement and the information contained herein as confidential and, except as otherwise required by law, will not, without the prior written consent of the other party, disclose this Letter Agreement or any information contained herein to any other person or entity.

     

     

                            _____________________________________

     

     

     

    P.A. No. 2910

    SA-21

    GOT

     

    Letter Agreement No. 6-1162-DME-0707R2
    GAC Inc.                                                                                             Page   5

    If the foregoing correctly sets forth your understanding of our agreement with respect to the matters treated above, please indicate your acceptance and approval below.

     

     

    Very truly yours,

     

    THE BOEING COMPANY

     

     

    By _________________________

     

    Its                 Attorney‑In‑Fact      

     

     

     

    ACCEPTED AND AGREED TO this

     

    Date:                                       2012­­­­­­­­­ 

     

     

    GAC INC.

     

     

    By _________________________    By _________________________   

     

    Its                                                          Its                                                           

     

     

    Witness                                                  Witness                                                   

     

    P.A. No. 2910

    SA-21

    GOT

     

     

    6-1162-DME-1104

     

     

     

     

     

    GAC, Inc.

    Praça Comandante Linneu Gomes s/n

    Portaria 3,

    Prédio 7 Jardim Aeroporto

    04626-020 São Paulo – SP Brazil

     

     

     

     

    Subject:           [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Escalation Program

     

    Reference:       Purchase Agreement No2910 (the Purchase Agreement) between The Boeing Company (Boeing) and GAC Inc. (Customer) relating to Model 737-800 aircraft (the Aircraft)

     

     

     

    This letter agreement ( Letter Agreement ) amends and supplements the Purchase Agreement.  All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement.

     

     

    1.         Definitions . 

     

    “ Escalation Notice ” means the written communication provided by Boeing to Customer in accordance with the requirements of Article 4.1, below.

     

     

    “ Program Aircraft ” means each Aircraft specified in Article 2 of this Letter Agreement.

     

     

    2.         Applicability . 

     

    Notwithstanding any other provision of the Purchase Agreement to the contrary, the parties agree that the model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Aircraft in Table 5, Table 6, Table 8 through Table 11,  Table 13 and Table 14 of the Purchase Agreement are Program Aircraft under the terms of this Letter Agreement.  Should Customer exercise its right of substitution such that a Program Aircraft shall become a model 737- [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft, such model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft will become Program Aircraft under the terms of this Letter Agreement.

     

    6-1162-DME-1104                                                                                                                                                 Page 2

    GAC Inc.

    PA2910                                                                                                                                                                      SA-21

     

     

    6-1162-DME-1104                                                                                                                                                 Page 3

    GAC Inc.

     

    3.         Escalation Forecast . 

     

    Boeing will release an escalation forecast in [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] and [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of each year based on Boeing’s [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] escalation formula.  Only one escalation forecast shall be used to conduct the escalation analysis performed in accordance with Article 4.1, below, for a given Program Aircraft.  The escalation forecast applicable to a given Program Aircraft is set forth in Attachment A.

     

     

    4.         Greater than [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Cumulative Annual Escalation . 

     

    4.1       If the escalation forecast, as set forth in Article 3, above, projects a cumulative annual escalation factor that [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] escalation factor, as set forth in Attachment B for Table 5 and Table 6 aircraft or Attachment C for Table 8 through Table 11, Table 13 and Table 14 aircraft, for the scheduled delivery month of any Program Aircraft that is scheduled to deliver within the time period applicable to such escalation forecast, as set forth in Attachment A, then Boeing shall issue an Escalation Notice to the Customer by the date set forth in Attachment A.  Such Escalation Notice shall, in Boeing's sole discretion, either:

     

    4.1.1    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] applicable to the Airframe Price and Optional Features Prices for such affected Program Aircraft to [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] as set forth in the Attachment B or C as applicable; or

     

    4.1.2    provide Customer with the option of either: [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    4.2       Customer shall notify Boeing in writing of its election to exercise the option contained in Article 4.1.2(i) or 4.1.2(ii) above within [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]of its receipt of the Escalation Notice from Boeing.  In the event Customer exercises its option in accordance with Article 4.1.2(ii) above, then: (i) [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    PA2910                                                                                                                                                                      SA-21

     

     

    6-1162-DME-1104                                                                                                                                                 Page 4

    GAC Inc.

     

    4.3       [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    4.4       Should Customer fail to issue any notice to Boeing in accordance with Article 4.2 above, then the Escalation Adjustment for the Airframe Price and Optional Features Prices for such Program Aircraft shall be calculated in accordance with Supplemental Exhibit AE1.

     

     

    PA2910                                                                                                                                                                      SA-21

     

    6-1162-DME-1106R1

     

     

     

     

    GAC, Inc.

    Praça Comandante Linneu Gomes s/n

    Portaria 3

    Prédio 7 Jardim Aeroporto

    04626-020 São Paulo - SP Brazil

     

     

     

    Subject:           Aircraft Model Substitution

     

    Reference:       Purchase Agreement No. 2910 (the Purchase Agreement) between The Boeing Company (Boeing) and GAC Inc. (Customer) relating to Model 737-800 aircraft (the Aircraft)

     

     

    This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement.  All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement.

    Customer anticipates that it will, in the future, have necessity to operate both model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] and model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft, with each of the aircraft to be discretely defined per the below described categories (collectively, the Substitute Aircraft).

     

     

    1.         Specific Model and Configuration.

     

    Customer may, subject to the terms and conditions further described in this letter agreement, substitute for an earlier firm contracted Model 737-800 Aircraft, any one of the following:

     

    (i)         the purchase of Boeing Model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft in a [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] configuration ([CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Substitution Aircraft), for any Aircraft delivering in [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] or later,

    P.A. No. 2910                                                                                                                                                              GOT

    SA-21

     

     

    (ii)        the purchase of Boeing Model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft in a [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] configuration ([CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Substitute Aircraft) in place of any of the Table 4 and Table 9 through Table 11, Table 13 and Table 14 , Model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Aircraft,

     

    (iii)       the purchase of Boeing Model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft in a [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] configuration ([CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Substitute Aircraft) in place of any of the Table 4 and Table 9 through Table 11, Table 13 and Table 14 , Model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Aircraft.

     

    P.A. No. 2910                                                                                                                                                              GOT

    SA-21

     

    6-1162-DME-1106R1                                                                                                                     Page 2

     

    2.         Customer’s Written Notice . 

     

    Customer will provide written notice of its intention to substitute the purchase of an Aircraft, delivering in [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] or later, with the purchase of one of the three (3) above described Substitute Aircraft;

     

                (a)        no later than the first day of the month that is [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] months prior to the scheduled month of delivery of the Aircraft for which it will be substituted, provided that such Substitute Aircraft has a defined configuration that has been previously approved by Boeing and Customer or,

     

                (b)        no later than the first day of the month that is [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] months prior to the scheduled month of delivery of the Aircraft for which it will be substituted, if a Substitute Aircraft does not have a defined configuration that has been previously approved by Boeing and Customer.

     

    3.         Boeing’s Production Capability . 

     

    Customer’s substitution right is conditioned upon Boeing’s having production capability for the Substitute Aircraft in the scheduled delivery month of the Aircraft for which it will be substituted.

     

    Boeing will tentatively quote delivery positions for Substitute Aircraft to allow Customer to secure quotes from Buyer Furnished Equipment vendors, and Boeing to secure quotes from Seller Furnished Equipment vendors which supports the required on-dock dates.  If Boeing is unable to manufacture the Substitute Aircraft in the scheduled delivery month of the Aircraft for which it will be substituted, then Boeing shall promptly make a written offer of an alternate delivery month for Customer’s consideration and written acceptance within thirty days of such offer.

     

    4.         Definitive Agreement . 

     

    Customer’s substitution right and Boeing’s obligation in this Letter Agreement are further conditioned upon Customer’s and Boeing’s executing a definitive agreement for the purchase of the Substitute Aircraft within thirty (30) days of Customer’s substitution notice to Boeing or of Customer’s acceptance of an alternate delivery month in accordance with paragraph 2 above.

     

    5.         Price and Advance Payments . 

     

    The Airframe Base Price, Optional Features Prices, Engine Prices and Aircraft Basic Price will be adjusted to Boeing’s and the engine manufacturer’s [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] for such elements as of the date of execution of the definitive purchase agreement for the Substitute Aircraft.  The escalation indices and methodology used to estimate the Advance Payment Base Prices will be adjusted to Boeing’s and the engine manufacturer’s [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] provisions for such elements as of the date of execution of the definitive purchase agreement for the Substitute Aircraft.

    P.A. No. 2910                                                                                                                                                              GOT

    SA-21

     

    6-1162-DME-1106R1                                                                                                                     Page 2

     

     

     

    P.A. No. 2910                                                                                                                                                              GOT

    SA-21

     

    6-1162-DME-1274

    The Boeing Company
    P.O. Box 3707
    Seattle, WA     98124-2207
       

     

     

     

     

    GAC, Inc.

    Praça Comandante Linneu Gomes s/n

    Portaria 3

    Prédio 7 Jardim Aeroporto

    04626-020 São Paulo - SP Brazil

     

     

     

    Subject:          Option Aircraft

     

    Reference:    Purchase Agreement No. 2910 (the Purchase Agreement) between The Boeing Company (Boeing) and GAC Inc. (Customer) relating to Model 737-8EH aircraft (Aircraft)

     

     

    This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement.  All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.

    1.             Right to Purchase Option Aircraft . 

    Subject to the terms and conditions contained in this Letter Agreement, in addition to the Aircraft described in Table 1 through Table 13 to the Purchase Agreement as of the date of execution of this Letter Agreement, Customer will have the option to purchase additional Model 737-8EH aircraft as option aircraft (Option Aircraft).

    2.             Delivery . 

    The [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Option Aircraft delivery positions, by calendar quarter, are as described below:

     

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

    3.             Configuration . 

     

    PA 2910                                                                                                                               

    Page 1

    BOEING PROPRIETARY

     

    6-1162-DME-1274

    3.1       Subject to the provisions of Article 3.2, below, the configuration for the Option Aircraft will be the Detail Specification for model 737-8EH  aircraft at the revision level in effect at the time of Definitive Agreement (as defined below).  Such Detail Specification will be revised to include (i) changes applicable to the Detail Specification that are developed by Boeing between the Option Exercise Date (as defined below) and the signing of the Definitive Agreement, (ii) changes required to obtain required regulatory certificates, and (iii) other changes as mutually agreed.

    3.2       Boeing reserves the right to configure the Option Aircraft starting from a different configuration specification, provided that it can achieve the same configuration which would result pursuant to the provisions of Article 3.1.

    4.             Price . 

    4.1       For informational purposes, the Airframe Price, Optional Features Prices, and Aircraft Basic Price for each of the Option Aircraft is illustrated in the Attachment to this letter agreement using [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].  The Airframe Price identified in the Attachment may be adjusted by Boeing for the prices associated with any changes incorporated by Boeing into the configuration specification for the basic 737-800 aircraft between the date of execution of this letter agreement and the date of execution of the definitive purchase agreement for the Option Aircraft.  The Optional Features Prices for the Option Aircraft will be priced in [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] as of the date of execution of the definitive purchase agreement for the Option Aircraft and then adjusted to [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] as the Airframe Price, in accordance with the escalation indices Boeing uses to establish the base year Airframe Price for its aircraft.  The resulting Airframe Price and Optional Features Prices and Aircraft Basic Price, after execution of the definitive purchase agreement for the Option Aircraft, for each of the Option Aircraft will escalate in accordance with Letter Agreement No.
    6-1162-DME-1104.

    4.2       The Advance Payment Base Price shall be developed in accordance with the terms of the Purchase Agreement and determined at the time of Definitive Agreement for the Option Aircraft.

    5.             Payment . 

     

    PA 2910                                                                                                                               

    Page 2

    BOEING PROPRIETARY

     

    6-1162-DME-1274

     

    5.1       Customer will pay a non-refundable option deposit to Boeing in the amount shown in the Attachment for each Option Aircraft (Option Deposit), on the date of execution of this Letter Agreement.  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    5.2       At Definitive Agreement for the Option Aircraft, advance payments will be payable as specified in the Purchase Agreement.  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    6.             Option Exercise . 

    Customer may exercise an option by giving written notice to Boeing on or before the date [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] months prior to the first day of the quarter listed in the Attachment (Option Exercise Date).  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    7.             Boeing Call Rights . 

    The Option Aircraft delivery dates identified in the Attachment are subject to a call notice by Boeing (Call Options).  Prior to the Option Exercise Date, Boeing may exercise its Call Options during the following specified time periods, for the respective indicated Option Aircraft, during which Boeing may provide to Customer written notice that such Call Option(s) must be exercised by Customer within thirty (30) days of Boeing’s written notice:

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    8.             Definitive Agreement . 

    Following Customer’s exercise of an option and Boeing’s confirmation of delivery position(s) , the parties will sign a definitive agreement for the purchase of such Option Aircraft (Definitive Agreement) within thirty (30) calendar days of such exercise.   The Definitive Agreement will include the provisions of the Purchase Agreement as modified to reflect the provisions of this Letter Agreement.  In the event the parties have not entered into a Definitive Agreement within thirty (30) days following option exercise, either party may terminate the option to purchase such Option Aircraft by giving written notice to the other within five (5) days.  If Customer and Boeing fail to enter into the Definitive Agreement, Boeing will retain the Option Deposit for that Option Aircraft and shall have no further obligation with respect to that Option Aircraft.

    PA 2910                                                                                                                               

    Page 3

    BOEING PROPRIETARY

     

    6-1162-DME-1274

     

    9.             Assignment . 

    Notwithstanding any other provisions of the Purchase Agreement, the rights and obligations described in this Letter Agreement are provided to Customer in consideration of Customer’s becoming the operator of the Aircraft and cannot be assigned in whole or, in part.

    10.          Confidential Treatment . 

    The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties.  Customer will limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.

     

    Very truly yours,

     

     

    THE BOEING COMPANY

     

     

    By

     

     

    Its

    Attorney-In-Fact

     

     

    ACCEPTED AND AGREED TO this

     

    Date:

    January, 2011

     

     

    GAC, Inc.

     

     

    By

     

     

    Its

     

         

    PA 2910                                                                                                                               

    Page 4

    BOEING PROPRIETARY

     

     

    The Boeing Company
    P.O. Box 3707
    Seattle, WA     98124-2207
       

     

    6-1167-DME-1339

     

     

    GAC, Inc.

    PO Box 309, Ugland House

    Grand Cayman

    KY1-1104

    Cayman Islands

     

     

    Subject:           Special Matters – Table 14 Aircraft

     

    Reference:       Purchase Agreement No. 2910 (the Purchase Agreement) between The Boeing Company (Boeing) and GAC Inc. (Customer) relating to Model 737-8EH aircraft (Aircraft)

     

     

    This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement, and reflects the mutual agreement of the parties concerning certain business considerations pertaining to the Table 14 Aircraft.  All below described business considerations that are in US Dollars and are each limited to the terms and conditions described in Letter Agreement No. 6-1162-DME-1104 [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Escalation Program , as it may or may not apply to specific aircraft.  All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement.

     

    1.  Basic Credit Memorandum

     

    (a)  The Basic Credit Memoranda associated with the purchase of the Table 14 model 737-800 Aircraft will be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per aircraft, subject to escalation to the time of Aircraft delivery.

     

    (b)  Should Customer choose to exercise its substitution rights for a Table 14, model 737-800 Aircraft to become a model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft, the associated Basic Credit Memorandum applicable to each such substitution aircraft will be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per aircraft, subject to escalation to the time of aircraft delivery.

    PA 2910                                                                                                                                             

    Special Matters                                                                                                                    

    LA Page 1

                                                     BOEING PROPRIETARY

     

      

       6-1167-DME-1339                                                  


     

    Such Basic Credit Memoranda will be issued concurrently with the delivery of each Aircraft, may not be assigned without Boeing’s expressed consent, [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    2.  Promotional & Communication Support

     

    (a)  Boeing will provide Customer promotional and communication support as a credit memoranda in the amount of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Table 14 model 737-800 Aircraft, subject to escalation to the time of each Aircraft delivery.

     

    (b)  Should Customer choose to exercise its substitution rights for a Table 14 model 737-800 Aircraft to become a model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft, the promotional and communication support credit memorandum applicable to each such substitution aircraft will be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per aircraft, subject to escalation to the time of aircraft delivery.

     

    All such credit memoranda will be issued concurrently with the delivery of each of the Aircraft, may not be assigned without Boeing’s expressed consent, [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    3.  Customer Support – Training

     

    (a)  Boeing will provide Customer with a special customer support credit memoranda [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Table 14 model 737-800 Aircraft, subject to escalation to the time of each Aircraft delivery.

     

    (b)  Should Customer choose to exercise its substitution rights for a Table 14, model 737-800 Aircraft to become a model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft, the special customer support credit memorandum applicable to each such substitution aircraft will be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per aircraft, subject to escalation to the time of aircraft delivery.

    PA 2910                                                                                                                                             

    Special Matters                                                                                                    

    SA-21     

    LA Page 2

    BOEING PROPRIETARY

     

      

       6-1167-DME-1339                                                  


     

    All such credit memoranda will be issued concurrently with the delivery of each Aircraft, may not be assigned without Boeing’s expressed consent, [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    4.  Model 737-800 Performance Improvements

     

    Boeing will provide Customer a special model 737-800 Performance Improvement credit memoranda, to [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], in the amount of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Table 14, model 737-800 Aircraft, subject to escalation to the time of Aircraft delivery.

     

    Such model 737-800 Performance Improvement credit memoranda will be issued concurrently with the delivery of each Aircraft, may not be assigned without Boeing’s expressed consent, [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    5.  Aircraft Market Adjustment

     

    Boeing will provide Customer a special Market Adjustment credit memoranda in the amount of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Table 14, model 737-800 Aircraft, subject to escalation to the time of Aircraft delivery.

     

    Such credit memoranda will be issued concurrently with the delivery of each Aircraft, may not be assigned without Boeing’s expressed consent, [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    6.  Special Fleet Volume Acknowledgement

     

    PA 2910                                                                                                                                             

    Special Matters                                                                                                    

    SA-21     

    LA Page 3

    BOEING PROPRIETARY

     

      

       6-1167-DME-1339                                                  


    (a)  Boeing will provide Customer with a Special Fleet volume credit memoranda in the amount of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Table 14 model 737-800 Aircraft, subject to escalation to the time of Aircraft delivery.

     

    (b)  Should Customer choose to exercise its substitution rights for a Table 14 model 737-800 Aircraft to become a model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft, the Special Fleet volume credit memorandum applicable to each such substitution aircraft will be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per aircraft, subject to escalation to the time of aircraft delivery.

     

    Such special fleet volume credit memoranda will be issued concurrently with the delivery of each of the Aircraft, may not be assigned without Boeing’s expressed consent, [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    7.  Special Feature  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

    (a)  Boeing will provide Customer a Special Feature [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] credit memoranda in the amount of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Table 14, model 737-800 aircraft, subject to escalation to the time of each Aircraft delivery.

     

    (b)  Should Customer choose to exercise its substitution rights for a Table 14, model 737-800 Aircraft to become a model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft, the Special Feature - [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] credit memorandum applicable to each such substitution aircraft will be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per aircraft, subject to escalation to the time of aircraft delivery.

     

    PA 2910                                                                                                                                             

    Special Matters                                                                                                    

    SA-21     

    LA Page 4

    BOEING PROPRIETARY

     

      

       6-1167-DME-1339                                                  


    Such Special Feature - [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] credit memoranda will be issued concurrently with the delivery of each of the Aircraft, may not be assigned without Boeing’s expressed consent, [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    8.  Special Fleet Growth Consideration

     

    Boeing will provide Customer a Special Fleet Growth Credit Memoranda associated with the purchase of the Table 14 aircraft in the amount of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Table 14 Aircraft, subject to escalation to the time of Aircraft delivery.

     

    Such Special Fleet Growth Credit Memoranda will be issued concurrently with the delivery of each Aircraft, may not be assigned without Boeing’s expressed consent, [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    9.  New Sub-Type Model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Credit Memorandum

     

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Boeing will provide Customer a special New Sub-Type Model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Credit Memorandum associated with the purchase of each Table 14 Substitute Aircraft in the amount of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] subject to escalation to the time of aircraft delivery.

     

    Such Credit Memoranda will be issued concurrently with the delivery of each Substitute Aircraft, may not be assigned without Boeing’s expressed consent [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    10.  New Customer Credit Memorandum

     

    PA 2910                                                                                                                                             

    Special Matters                                                                                                    

    SA-21     

    LA Page 5

    BOEING PROPRIETARY

     

      

       6-1167-DME-1339                                                  


    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Boeing will provide a special Model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Credit Memorandum associated with the purchase of each Table 14 Substitute Aircraft in the amount of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] subject to escalation to the time of aircraft delivery.

     

    Such Credit Memoranda will be issued concurrently with the delivery of each Substitute Aircraft, may not be assigned without Boeing’s expressed consent[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    11.  Special Boeing Allowance  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

    (a)  Boeing will provide Customer with a special [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] credit memoranda, applicable to the Table 14 model 737-800 Aircraft, in the amount of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    (b)  Should Customer choose to exercise its substitution rights for a Table 14 model 737-800 Aircraft to become a model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft, the Special Boeing Allowance [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] credit memorandum applicable to each such substitution aircraft will be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per aircraft, subject to escalation to the time of aircraft delivery.

     

    Such credit memoranda will be issued concurrently with the delivery of each of the Aircraft, may not be assigned without Boeing’s expressed consent [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    PA 2910                                                                                                                                             

    Special Matters                                                                                                    

    SA-21     

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    BOEING PROPRIETARY

     

      

       6-1167-DME-1339                                                  


     

    12.  Special Base Pricing Credit Memorandum

     

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Boeing will provide Customer a Special Base Pricing Credit Memoranda associated with the purchase of the Model 737-800 Table 14 Aircraft in the amount of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per each Aircraft, subject to escalation to the time of Aircraft delivery.

     

    Such Credit Memoranda will be issued concurrently with the delivery of each of the Aircraft, may not be assigned without Boeing’s expressed consent, [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    13.  Model 737 Aircraft – Multi Sub-model Credit Memorandum

     

    (a)  Boeing will provide Customer with a special Model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Multi Sub-model credit memoranda, applicable to the Table 14 model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Aircraft, in the amount of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] subject to escalation to the time of Aircraft delivery.

     

    (b)  Should Customer choose to exercise its substitution rights for a Table 14 model 737-800 Aircraft to become a model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft, the Special Model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Multi Sub-model credit memorandum applicable to each such substitution aircraft will be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per aircraft, subject to escalation to the time of aircraft delivery.

     

    Such credit memoranda will be issued concurrently with the delivery of each of the Aircraft, may not be assigned without Boeing’s expressed consent[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

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    14.  Model [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]Customer

     

    Boeing will provide Customer a Special Model [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Customer Credit Memoranda associated with signed agreement to purchase Agreement No. 3780 and the purchase of the Table 14 model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft in the amount of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Table 14 Aircraft, subject to escalation to the time of Aircraft delivery.

     

    Such Model [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Customer Credit Memoranda will be issued concurrently with the delivery of each Aircraft, may not be assigned without Boeing’s expressed consent [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    15.  Configuration Flexibility Credit Memorandum

     

    (a)        To assist Customer with its model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] fleet configuration and flight schedule flexibility in a special way, Boeing will provide Customer with a Configuration Flexibility Credit Memorandum in the amount of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Table 14 Aircraft, subject to escalation to the time of Aircraft delivery.  Customer may elect to receive this special credit memorandum, in [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Table 14 Aircraft [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]; 1) Customer’s signature acceptance of this Supplemental Agreement No. 21, and 2) Boeing’s receipt of the requisite funds to re-establish the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] definitive agreement payment requirement under this Supplemental Agreement No. 21, and 3) Customer’s signature acceptance of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

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    (b)        Should Customer choose to exercise its substitution rights for a Table 14 model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Aircraft to become a model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft, the Configuration Flexibility Credit Memorandum applicable to each such substitution aircraft will be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per aircraft, subject to escalation to the time of aircraft delivery.

     

    (c)        Customer may elect to receive this special credit memorandum, in the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Table 14 Aircraft [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], 1) Customer’s signature acceptance of this Supplemental Agreement No. 21, and 2) Boeing’s receipt of the requisite funds to re-establish the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] definitive agreement payment requirement under this Supplemental Agreement No. 21, and 3) Customer’s signature acceptance of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], and 4) Customer’s notice to Boeing to exercise its substitution rights for a Table 14 model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Aircraft to become a model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft.

     

    (d)       Customer has until [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]to notify Boeing of its election to receive the Configuration Flexibility Credit Memorandum [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].  If Customer elects to receive the credit memorandum [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], Customer must also decide if it will substitute any Aircraft into Substitution Aircraft.  All Aircraft and Substitution Aircraft will be treated the same, either all the Aircraft or Substitution Aircraft will receive the Configuration Flexibility Credit Memorandum escalated to delivery or they will all receive the credit memorandum in advance.

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    (e)        Such credit memoranda will otherwise be issued concurrently with the delivery of each of the Aircraft, may not be assigned without Boeing’s expressed consent, and may be used for the final delivery purchase payment, or for other Boeing goods and services, but not for advance payments.

     

    16.  Special Boeing Allowance Credit Memorandum

     

    (a)        [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Boeing will provide Customer with a Special Boeing Allowance Credit Memorandum in the amount of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Table 14 Aircraft, subject to escalation to the time of Aircraft delivery.  Customer may elect to receive this special credit memorandum, in the fixed amount of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Table 14 Aircraft, immediately upon; 1) Customer’s signature acceptance of this Supplemental Agreement No. 21, and 2) Boeing’s receipt of the requisite funds to re-establish the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] definitive agreement payment requirement under this Supplemental Agreement No. 21, and 3) Customer’s signature acceptance of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    (b)        Should Customer choose to exercise its substitution rights for a Table 14 model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Aircraft to become a model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft, the Special Boeing Allowance Credit Memorandum applicable to each such substitution aircraft will be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per aircraft, subject to escalation to the time of aircraft delivery.

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    (c)        Customer may elect to receive this special credit memorandum, in the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Table 14 Aircraft, [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]; 1) Customer’s signature acceptance of this Supplemental Agreement No. 21, and 2) Boeing’s receipt of the requisite funds to re-establish the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] definitive agreement payment requirement under this Supplemental Agreement No. 21, and 3) Customer’s signature acceptance of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], and 4) Customer’s notice to Boeing to exercise its substitution rights for a Table 14 model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Aircraft to become a model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft.

     

    (d)       Customer has until [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] to notify Boeing of its election to receive Special Boeing Allowance Credit Memorandum [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of the Aircraft.  If Customer elects to receive the credit memorandum [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], Customer must also decide if it will substitute any Aircraft into Substitution Aircraft.  All Aircraft and Substitution Aircraft will treated the same, either all the Aircraft or Substitution Aircraft will receive the Special Boeing Allowance Credit Memorandum escalated to delivery or they will all receive the credit memorandum [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

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    (e)        Such credit memoranda will otherwise be issued concurrently with the delivery of each of the Aircraft, may not be assigned without Boeing’s expressed consent, and may be used for the final delivery purchase payment, or for other Boeing goods and services, but not for advance payments.

     

    17.  Assignment

     

    The Credit Memoranda described in this Letter Agreement are provided as a special financial accommodation to Customer in consideration of Customer’s becoming the operator of the Aircraft, and cannot be assigned, in whole or in part, without the prior written consent of The Boeing Company.

     

    18.  Confidential Treatment

     

    Customer and Boeing each understands that certain commercial and financial information contained in this Letter Agreement are considered by both Customer and Boeing as confidential.  Customer and Boeing agree that each will treat this Letter Agreement and the information contained herein as confidential and, except as otherwise required by law, will not, without the prior written consent of the other party, disclose this Letter Agreement or any information contained herein to any other person or entity.

     

     

    If the foregoing correctly sets forth your understanding of our agreement with respect to the matters treated above, please indicate your acceptance and approval below.

     

     

     

     

     

     

     

     

     

     

    Very truly yours,

     

    EXECUTED IN DUPLICATE as of the day and year first above written.

     

     

    THE BOEING COMPANY

     

     

    By _________________________

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    Its                 Attorney‑In‑Fact      

     

     

     

    ACCEPTED AND AGREED TO this

     

    Date :                                       2012­­­­­­­­­ 

     

     

    GAC INC.

     

     

    By _________________________    By _________________________   

     

    Its                                                          Its                                                           

     

     

    Witness                                                  Witness                                                   

     

     

    Special Matters                                                                                                  

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    The Boeing Company
    P.O. Box 3707
    Seattle, WA     98124-2207
       

    GOT-PA-02910-LA-1209208

     

    GAC, Inc.

    PO Box 309, Ugland House

    Grand Cayman

    KY1-1104

    Cayman Islands

     

     

    Subject:          Special Considerations Addressing Current Fleet [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

    Reference:    Purchase Agreement No. PA-2910 ( Purchase Agreement ) between The Boeing Company ( Boeing ) and VRG Linhas Aereas S.A. ( Customer ) relating to Model 737-800 aircraft ( Aircraft ) 

     

    This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement, and reflects the mutual agreement of the parties concerning certain business considerations provided with respect to the Customer’s Model 737-8EH aircraft ( 737-8EH Aircraft ). 

     

    The considerations defined in this Letter Agreement are provided to Customer in recognition of the execution of Purchase Agreement 3780 for 737-8 and Customer’s purchase of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] incremental NG Aircraft [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] and thereafter Customer fully performing all of the obligations as set forth in the Purchase Agreement and Purchase Agreement 3780 for 737-8.  All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement. 

     

    1.                   737-800 [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

    In consideration of Customers purchase of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] 737-8 Aircraft [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] NG Aircraft, Boeing commits to bring to fruition a program to improve the 737-800 [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] so that the 737-8EH Aircraft can be modified and certified to allow between [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] passengers and baggage (at a weight of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Kilograms per passenger and baggage) for take-off and landing [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] for all of the purchased 737-8EH Aircraft in Customer’s fleet as well as 737-8EH Aircraft Customer has under firm contract with Boeing at execution of the Purchase Agreement.

    GOT-PA-2910-LA-1209208                                                                                                           

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    Boeing commits that the in production changes required to accomplish this task will be provided at a [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Aircraft, in [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] dollars.  The following tasks have been identified:

     

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

    It is anticipated that the various production configuration options and post production service bulletins and kits will be defined so that Boeing can, upon Customer’s request, offer proposals to Customer as soon as [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

     

    2.  Assignment

    The considerations provided in this Letter Agreement are provided as a financial accommodation to Customer and in consideration of Customer’s taking title to the Aircraft and incremental 737-8EH Aircraft at time of delivery and becoming the operator of the Aircraft.  This Letter Agreement cannot be assigned, in whole or in part, without the prior written consent of Boeing.

     

    GOT-PA-2910-LA-1209208                                                                                                           

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    3.  Confidentiality

    Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties.  Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.  In addition to any equitable relief that may be available to Boeing in the event of a breach of this clause, Boeing may rescind the Launch Customer Credit Memorandum contained in paragraph 4 above, in the event of any unauthorized disclosure by Customer.

     

    If the foregoing correctly sets forth your understanding of our agreement with respect to the matters treated above, please indicate your acceptance and approval below.

     

    GOT-PA-2910-LA-1209208                                                                                                           

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    Very truly yours,

     

    THE BOEING COMPANY

     

     

    By _________________________

     

    Its                 Attorney‑In‑Fact            

     

     

     

    ACCEPTED AND AGREED TO this

     

    Date:                                       2012   ­­­­­­­­­ 

     

     

    GAC INC.

     

     

    By _________________________          By _________________________         

     

    Its                                                                      Its                                                                 

     

     

    Witness                                                            Witness                                                      

     

     

    GOT-PA-2910-LA-1209208                                                                                                           

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    Airframe Model/MTOW:

    737-800

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    		 

    Detail Specification:

    		 

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    Engine Model/Thrust:

    CFM56-7B27/B1

    		 

    Airframe Price Base Year/Escalation Formula:

    Airframe Price:

    		   

    Engine Price Base Year/Escalation Formula:

    N/A

    N/A

    Optional Features:

    		             

    Sub-Total of Airframe and Features:

    		 

    Airframe Escalation Data:

    		     

    Engine Price (Per Aircraft):

    		   

    Base Year Index (ECI):

    		 

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    Aircraft Basic Price (Excluding BFE/SPE):

    		 

    Base Year Index (CPI):

    		 

    Buyer Furnished Equipment (BFE) Estimate:

    		           

    Seller Purchased Equipment (SPE) Estimate:

    		           
                     

    Deposit per Aircraft:

    		             
                       

     

     

    Escalation

     

     

    Escalation Estimate

    Advance Payment Per Aircraft (Amts. Due/Mos. Prior to Delivery):

     

     

     

    Delivery

    Number of

    Factor

     

     

    Adv Payment Base

    At Signing

    24 Mos.

    21/18/12/9/6 Mos.

    Total

    Date

    Aircraft

    (Airframe)

     

     

    Price Per A/P

    1%

    4%

    5%

    30%

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

     

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total:

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT])

    		               
                     
                     
                     
     
     

     

    Airframe Model/MTOW:

    737-800

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    		 

    Detail Specification:

    		 

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    Engine Model/Thrust:

    CFM56-7B27/B1

    		 

    Airframe Price Base Year/Escalation Formula:

    Airframe Price:

    		   

    Engine Price Base Year/Escalation Formula:

    N/A

    N/A

    Optional Features:

    		             

    Sub-Total of Airframe and Features:

    		 

    Airframe Escalation Data:

    		     

    Engine Price (Per Aircraft):

    		   

    Base Year Index (ECI):

    		 

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    Aircraft Basic Price (Excluding BFE/SPE):

    		 

    Base Year Index (CPI):

    		 

    Buyer Furnished Equipment (BFE) Estimate:

    		           

    Seller Purchased Equipment (SPE) Estimate:

    		           
                     

    Refundable Deposit/Aircraft at Proposal Accept:

    		           
                       

     

     

    Escalation

     

     

    Escalation Estimate

    Advance Payment Per Aircraft (Amts. Due/Mos. Prior to Delivery):

     

     

     

    Delivery

    Number of

    Factor

     

     

    Adv Payment Base

    At Signing

    24 Mos.

    21/18/12/9/6 Mos.

    Total

    Date

    Aircraft

    (Airframe)

     

     

    Price Per A/P

    1%

    4%

    5%

    30%

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

     

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

     

     

     

     

     

     

     

     

     

     

     

    Total:

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    		               
                     
                     
                     
                     
                     

     

     
     

     

    Airframe Model/MTOW:

    737-800

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    		 

    Detail Specification:

    		 

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    Engine Model/Thrust:

    CFM56-7B27/B1

    		 

    Airframe Price Base Year/Escalation Formula:

    Airframe Price:

    		   

    Engine Price Base Year/Escalation Formula:

    N/A

    N/A

    Optional Features:

    		             

    Sub-Total of Airframe and Features:

    		 

    Airframe Escalation Data:

    		     

    Engine Price (Per Aircraft):

    		   

    Base Year Index (ECI):

    		 

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    Aircraft Basic Price (Excluding BFE/SPE):

    		 

    Base Year Index (CPI):

    		 

    Buyer Furnished Equipment (BFE) Estimate:

    		           

    Seller Purchased Equipment (SPE) Estimate:

    		           
                     

    Deposit per Aircraft:

    		             
                       

     

     

    Escalation

     

     

    Escalation Estimate

    Advance Payment Per Aircraft (Amts. Due/Mos. Prior to Delivery):

     

     

     

    Delivery

    Number of

    Factor

     

     

    Adv Payment Base

    At Signing

    24 Mos.

    21/18/12/9/6 Mos.

    Total

    Date

    Aircraft

    (Airframe)

     

     

    Price Per A/P

    1%

    4%

    5%

    30%

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

     

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total:

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    		               
                     
                     
                     

     

     
     

     

    Airframe Model/MTOW:

    737-800

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    		 

    Detail Specification:

    		 

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    Engine Model/Thrust:

    CFM56-7B27/B1

    		 

    Airframe Price Base Year/Escalation Formula:

    Airframe Price:

    		   

    Engine Price Base Year/Escalation Formula:

    N/A

    N/A

    Optional Features:

    		             

    Sub-Total of Airframe and Features:

    		 

    Airframe Escalation Data:

    		     

    Engine Price (Per Aircraft):

    		   

    Base Year Index (ECI):

    		 

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    Aircraft Basic Price (Excluding BFE/SPE):

    		 

    Base Year Index (CPI):

    		 

    Buyer Furnished Equipment (BFE) Estimate:

    		           

    Seller Purchased Equipment (SPE) Estimate:

    		           
                     

    Deposit per Aircraft:

    		             
                       

     

     

    Escalation

     

     

    Escalation Estimate

    Advance Payment Per Aircraft (Amts. Due/Mos. Prior to Delivery):

     

     

     

    Delivery

    Number of

    Factor

     

     

    Adv Payment Base

    At Signing

    24 Mos.

    21/18/12/9/6 Mos.

    Total

    Date

    Aircraft

    (Airframe)

     

     

    Price Per A/P

    1%

    4%

    5%

    30%

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

     

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total:

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    		               
                     
                     
                     
                     
                     

     

     
     

     

     

    Exhibit A-7 to Purchase Agreement No. 2910

    2011 $

     

    Table 14 Aircraft

    Price

    CR

    Title

    Per A/C

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

     

     

    BUYER FURNISHED EQUIPMENT VARIABLES

     

    between

     

    THE BOEING COMPANY

     

    and

     

    GAC INC.

     

     

    Supplemental Exhibit BFE1 to Purchase Agreement Number 2910

     

     

     

    P.A. No. 2910 BFE1- GOT                                                                                                              Supp Exhibit BFE-1
    SA-21

    BOEING PROPRIETARY

    Page 1 of 7

     

     

    BOEING PROPRIETARY

    BUYER FURNISHED EQUIPMENT VARIABLES

     

    relating to

     

    BOEING MODEL 737-8EH AIRCRAFT

     

     

    This Supplemental Exhibit BFE1 contains vendor selection dates, on-dock dates and other variables applicable to the Aircraft.

     

     

    1.         Supplier Selection . 

     

                Customer will:

     

                1.1       Select and notify Boeing of the suppliers and part numbers of the following BFE items by the following dates:

     

                            Galley System                                                 Complete 2005

     

                            Galley Inserts                                                  Complete 2005

     

                            Seats (passenger)                                             Complete 2005

     

                            Cabin Systems Equipment                              Complete 2005

     

                            Miscellaneous Emergency Equipment            Complete 2005

     

                            Cargo Handling Systems                                ****N/A****

                 

     

     

    2.         On-dock Dates

     

     On or before March 2005 , Boeing will provide to Customer a BFE Requirements On-Dock/Inventory Document (BFE Document) or an electronically transmitted BFE Report which may be periodically revised, setting forth the items, quantities, on-dock dates and shipping instructions relating to the in-sequence installation of BFE.  For planning purposes, a preliminary BFE on-dock schedule is set forth in the table below:

     

    P.A. No. 2910 BFE1- GOT                                                                                                              Supp Exhibit BFE-1                                           Supp Exhibit BFE-1
    SA-21

    BOEING PROPRIETARY

    Page 2 of 7

     

    BOEING PROPRIETARY

     

    For planning purposes, preliminary BFE on-dock dates:

     

    Scheduled Month/Year of Delivery:

    Qty

    Seats

    Galleys / Furnishings

     

    Electronics

     

    Miscellaneous/ Emergency Equipment

    Textiles /
    Raw Material

    Cargo Systems

    Provision Kits

    Radomes

    June 2006

    1

    4/19/06

    10/14/05

     

    08/21/05

     

    10/14/05

    7/11/05

    NA

    NA

    NA

    June 2006: Early roll out to support flight test r/o 11/7/05; * Emergency floor lighting will be deferred until after flight test. All other cabin lighting and emergency egress lighting will be fully operational per flight test requirements. Estimated deferred on-dock date for floor lighting 2/19/06; * All carpets and seat track covers will be deferred until after flight test is complete. Estimated on-dock 1/9/06

    July 2006

    2

    5/22/06

    5/15/06

     

    5/15/06

     

    5/15/06

    02/09/06

    NA

    NA

    NA

    Aug 2006

    2

    6/22/06

    6/15/06

     

    4/21/06

     

    6/15/06

    3/13/06

    NA

    NA

    NA

    Sep 2006

    2

    07/24/06

    7/17/06

     

    5/24/06

     

    7/17/06

    4/10/06

    NA

    NA

    NA

    Oct 2006

    2

    8/24/06

    8/17/06

     

    6/24/06

     

    8/17/06

    5/11/06

    NA

    NA

    NA

    Nov 2006

    2

    9/22/06

    9/15/06

     

    7/21/06

     

    9/17/06

    6/9/06

    NA

    NA

    NA

    Mar 2007

    1

    1/23/07

    1/16/07

     

    11/23/06

     

    1/16/07

    9/21/06

    NA

    NA

    NA

    Apr 2007

    1

    2/20/07

    2/13/07

     

    1/16/07

     

    2/13/07

    10/30/06

    NA

    NA

    NA

    Jul 2007

    2

    5/23/07

    5/16/07

     

    3/23/07

     

    5/16/07

    2/9/07

    NA

    NA

    NA

    Aug 2007

    2

    6/22/07

    6/15/07

     

    4/23/07

     

    6/15/07

    3/13/07

    NA

    NA

    NA

    Sep 2007

    1

    7/21/07

    7/14/07

     

    5/21/07

     

    7/14/07

    4/9/07

    NA

    NA

    NA

    Oct 2007

    3

    8/27/07

    8/20/07

     

    6/27/07

     

    8/20/07

    5/14/07

    NA

    NA

    NA

    Nov 2007

    2

    9/24/07

    9/17/07

     

    7/24/07

     

    9/17/07

    6/11/07

    NA

    NA

    NA

    Dec 2007

    2

    10/24/07

    10/17/07

     

    9/24/07

     

    10/17/07

    7/12/07

    NA

    NA

    NA

    Jan 2008

    2

    11/22/07

    11/15/07

     

    11/15/07

     

    11/15/07

    8/10/07

    NA

    NA

    NA

    Apr 2008

    2

    2/25/08

    2/18/08

     

    1/2/08

     

    2/18/08

    11/3/07

    NA

    NA

    NA

    Jul 2008

    1

    5/22/08

    5/15/08

     

    3/21/08

     

    5/15/08

    2/8/08

    NA

    NA

    NA

    Aug 2008

    2

    6/24/08

    6/17/08

     

    4/24/08

     

    6/17/08

    3/14/08

    NA

    NA

    NA

    Sep 2008

    1

    7/23/08

    7/16/08

     

    5/23/08

     

    7/16/08

    4/9/08

    NA

    NA

    NA

    Nov 2008

    2

    9/23/08

    9/16/08

     

    7/23/08

     

    9/16/08

    5/12/08

    NA

    NA

    NA

    Feb 2009

    2

    12/16/08

    12/9/08

     

    10/16/08

     

    12//9/08

    9/2/08

    NA

    NA

    NA

    Mar 2009

    1

    1/22/09

    1/15/09

     

    11/21/09

     

    1/15/09

    9/30/08

    NA

    NA

    NA

    May 2009

    1

    3/23/09

    3/16/09

     

    1/23/09

     

    3/16/09

    12/2/09

    NA

    NA

    NA

    Jul 2009

    2

    5/22/09

    5/15/09

     

    3/23/09

     

    5/15/09

    2/6/09

    NA

    NA

    NA

    Aug 2009

    1

    6/24/09

    6/17/09

     

    6/17/09

     

    6/17/09

    3/13/09

    NA

    NA

    NA

    Sep 2009

    2

    7/24/09

    7/17/09

     

    5/26/09

     

    7/17/09

    4/10/09

    NA

    NA

    NA

    Oct 2009

    2

    8/24/09

    8/17/09

     

    6/23/09

     

    8/17/09

    5/11/09

    NA

    NA

    NA

    Nov 2009

    1

    9/22/09

    9/15/09

     

    7/22/09

     

    9/15/09

    6/9/09

    NA

    NA

    NA

    Dec 2009

    3

    10/23/09

    10/16/09

     

    8/17/09

     

    10/16/09

    8/7/09

    NA

    NA

    NA

    Jan 2010

    1

    11/18/09

    11/11/09

     

    9/18/09

     

    11/11/09

    8/6/09

    NA

    NA

    NA

    May 2010

    2

    3/24/10

    3/17/10

     

    1/25/10

     

    3/17/10

    12/2/09

    NA

    NA

    NA

    Aug 2010

    1

    6/22/10

    6/15/10

     

    4/22/10

     

    6/15/10

    3/10/10

    NA

    NA

    NA

    Sep 2010

    1

    7/22/10

    7/15/10

     

    5/14/10

     

    7/15/10

    4/8/10

    NA

    NA

    NA

    Oct 2010

    1

    8/23/10

    8/16/10

     

    6/23/10

     

    8/16/10

    5/10/10

    NA

    NA

    NA

    Nov 2010

    1

    9/22/10

    9/15/10

     

    7/22/10

     

    9/15/10

    6/9/10

    NA

    NA

    NA

    May 2011

    1

    3/23/11

    3/16/11

     

    1/24/11

     

    3/16/11

    12/1/10

    NA

    NA

    NA

    Jun 2011

    2

    4/22/11

    4/15/11

     

    2/24/11

     

    4/15/11

    1/11/11

    NA

    NA

    NA

    Aug 2011

    2

    6/23/11

    6/16/11

     

    4/25/11

     

    6/16/11

    3/11/11

    NA

    NA

    NA

    Sep 2011

    1

    7/21/11

    7/14/11

     

    5/20/11

     

    7/14/11

    4/7/11

    NA

    NA

    NA

    Oct 2011

    2

    8/24/11

    8/17/11

     

    6/24/11

     

    8/17/11

    5/11/11

    NA

    NA

    NA

    Nov 2011

    1

    9/22/11

    9/15/11

     

    7/22/11

     

    9/15/11

    6/9/11

    NA

    NA

    NA

    Feb 2012

    1

    12/14/11

    12/7/11

     

    10/14/11

     

    12/7/11

    8/30/11

    NA

    NA

    NA

    Jul 2012

    1

    5/22/12

    5/15/12

     

    3/22/12

     

    5/15/12

    2/9/12

    NA

    NA

    NA

    Aug 2012

    1

    6/21/12

    6/14/12

     

    4/23/12

     

    6/14/12

    3/9/12

    NA

    NA

    NA

    P.A. No. 2910 BFE1- GOT                                                                                                              Supp Exhibit BFE-1                                           Supp Exhibit BFE-1
    SA-21

    BOEING PROPRIETARY

    Page 3 of 7

     

    BOEING PROPRIETARY

     

     

    For planning purposes, preliminary BFE on-dock dates:

     

    Scheduled Month/Year of Delivery:

    Qty

    Seats

    Galleys / Furnishings

    Antennas & Mounting Equipment

    Avionics

    Cabin Systems Equipment

    Miscellaneous/ Emergency Equipment

    Textiles /
    Raw Material

    Cargo Systems

    Provision Kits

    Radomes

    Sep 2012

    0

    7/23/2012

    7/16/2012

    5/23/2012

    7/16/2012

    7/6/2012

    7/16/2012

    4/9/2012

    NA

    NA

    NA

    Oct 2012

    0

    8/23/2012

    8/16/2012

    6/22/2012

    8/16/2012

    8/16/2012

    8/16/2012

    5/10/2012

    NA

    NA

    NA

    Nov 2012

    1

    9/20/12

    9/13/12

    7/20/12

    9/13/12

    9/13/12

    9/13/12

    6/7/12

    NA

    NA

    NA

    Dec 2012

    2

    10/24/12

    10/17/12

    8/24/12

    10/17/12

    10/17/12

    10/17/12

    7/12/12

    NA

    NA

    NA

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    P.A. No. 2910 BFE1- GOT                                                                                                              Supp Exhibit BFE-1                                           Supp Exhibit BFE-1
    SA-21

    BOEING PROPRIETARY

    Page 4 of 7

     

    BOEING PROPRIETARY

     

     

     

     

    3.                   Additional Delivery Requirements

     

    Customer will be the “importer of record” (as defined by the U.S. Customs and Border Protection) for all BFE imported into the United States, and as such, it has the responsibility to ensure all of Customer’s BFE shipments comply with U.S. Customs Service regulations.  In the event Customer requests Boeing, in writing, to act as importer of record for Customer’s BFE, and Boeing agrees to such request,  Customer is responsible for ensuring Boeing can comply with all U.S. Customs Import Regulations by making certain that, at the time of shipment, all BFE shipments comply with the requirements in the “International Shipment Routing Instructions”, including the Customs Trade Partnership Against Terrorism (C-TPAT), as set out on the Boeing website referenced below.  Customer agrees to include the International Shipment Routing Instructions, including C-TPAT requirements, in each contract between Customer and BFE supplier.

     

    Exhibit 10.47

     

     

     

     

     

     

     

     

    PURCHASE AGREEMENT NUMBER 3780

     

    between

     

    THE BOEING COMPANY

     

    and

     

    GAC INCORPORATED (GAC Inc.)

     

    Relating to Boeing Model 737-8 Aircraft

     

     

     

     

    PA 3780                                                                                                                                                                                                                                         

    Page 1

    BOEING PROPRIETARY

     

     

     

    TABLE OF CONTENTS

     

    ARTICLES

    Article 1.

    Quantity, Model and Description

    Article 2.

    Delivery Schedule

    Article 3.

    Price

    Article 4.

    Payment

    Article 5.

    Additional Terms

     

    TABLE

    1.

    Aircraft Information Table

     

    EXHIBIT

    A.

    Aircraft Configuration

    B.

    Aircraft Delivery Requirements and Responsibilities

     

    SUPPLEMENTAL EXHIBITS

    AE1.

    Escalation Adjustment / Airframe and Optional Features

    BFE1.

    BFE Variables

    CS1.

    Customer Support Variables

    EE1.

    Engine Escalation/Engine Warranty and Patent Indemnity

    SLP1.

    Service Life Policy Components

     

     

    PA 3780                                                                                                                                            

                                                                                                   Page 2

    BOEING PROPRIETARY

     

     

    LETTER AGREEMENTS

     

       GOT-PA-3780-LA-1207832       Loading of Customer Software                           

       GOT-PA-3780-LA-1207833       Spare Parts Initial Provisioning                            

       GOT-PA-3780-LA-1207834       Purchase Rights                                                              

       GOT-PA-3780-LA-1207835       Substitution of Model 737-8 into Model 737-7 Aircraft

       GOT-PA-3780-LA-1207836       Advance Payments Matters                                

       GOT-PA-3780-LA-1207838       Promotional Support                                            

       GOT-PA-3780-LA-1207737       Special Matters                                                    

       GOT-PA-3780-LA-1207734       Liquidated Damages – Non Excusable Delay     

       GOT-PA-3780-LA-1207839       Demonstration Flight Waiver                               

       GOT-PA-3780-LA-1207840       [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Escalation Program                    

       GOT-PA-3780-LA-1207841       Boeing Purchase of Buyer Furnished Equipment           

       GOT-PA-3780-LA-1207842       Open Matters                                                       

       GOT-PA-3780-LA-1207845       AGTA Matters

       GOT-PA-3780-LA-1207848       Flexible Delivery Positions                                   

       GOT-PA-3780-LA-1207735       Performance Matters – 737-8                             
    GOT-PA-3780-LA-1207830       Maintenance Cost Guarantee – 737-8                
    GOT-PA-3780-LA-1207847       Aircraft Schedule Reliability Program                 

     

     

    PA 3780                                                                                                                                            

                                                                                                   Page 3

    BOEING PROPRIETARY

     

     

     

     

    Purchase Agreement No. 3780

     

    between

     

    The Boeing Company

     

    and

     

    GAC Incorporated (GAC Inc.)

     

    This Purchase Agreement No. 3780 between The Boeing Company, a Delaware corporation, ( Boeing ) and GAC Inc., a company incorporated under the laws of the Cayman Islands, ( Customer ) relating to the purchase and sale of Model 737-8 aircraft together with all tables, exhibits, supplemental exhibits, letter agreements and other attachments thereto, if any, ( Purchase Agreement ) incorporates and amends the terms and conditions (except as specifically set forth below) of the Aircraft General Terms Agreement dated as of 17 May 2004 between the parties, identified as AGTA-GOT ( AGTA ). 

    1.                             Quantity, Model and Description . 

    The aircraft to be delivered to Customer will be designated as Model 737-8 aircraft ( Aircraft ).  Boeing will manufacture and sell to Customer Aircraft conforming to the configuration described in Exhibit A in the quantities listed in Table 1 to the Purchase Agreement. 

    2.                             Delivery Schedule . 

    The scheduled months of delivery of the Aircraft are listed in the attached Table 1.  Exhibit B describes certain responsibilities for both Customer and Boeing in order to accomplish the delivery of the Aircraft.

    3.                             Price . 

    3.1          Aircraft Basic Price .  The Aircraft Basic Price is listed in Table 1 and is subject to escalation in accordance with the terms of this Purchase Agreement.

    3.2          Advance Payment Base Prices . The Advance Payment Base Prices listed in Table 1 were calculated utilizing the latest escalation factors available to Boeing on the date of this Purchase Agreement projected to the month of scheduled delivery.

    4.                             Payment . 

    4.1          Boeing acknowledges receipt of a deposit in the amount shown in Table 1 for each Aircraft ( Deposit ). 

    4.2          The standard advance payment schedule for the Model 737-8 aircraft requires Customer to make certain advance payments, expressed in a percentage of the Advance Payment Base Price of each Aircraft beginning with a payment of one percent (1%), less the Deposit, on the effective date of the Purchase Agreement for the Aircraft.  Additional advance payments for each Aircraft are due as specified in and on the first business day of the months listed in the attached Table 1.

     

    PA 3780                                                                                                                                            

                                                                                                   Page 4

    BOEING PROPRIETARY

     

     

    4.3          For any Aircraft whose scheduled month of delivery is less than twenty‑four (24) months from the date of this Purchase Agreement, the total amount of advance payments due for payment upon signing of this Purchase Agreement will include all advance payments which are past due in accordance with the standard advance payment schedule set forth in paragraph 4.2 above.

    4.4          Customer will pay the balance of the Aircraft Price of each Aircraft at delivery.

    5.                             Additional Terms . 

    5.1          Aircraft Information Table .  Table 1 consolidates information contained in Articles 1, 2, 3 and 4 with respect to (i) quantity of Aircraft, (ii) applicable Detail Specification, (iii) month and year of scheduled deliveries, (iv) Aircraft Basic Price, (v) applicable escalation factors and (vi) Advance Payment Base Prices and advance payments and their schedules.

    5.2          Escalation Adjustment/Airframe and Optional Features .  Supplemental Exhibit AE1 contains the applicable airframe and optional features escalation formula . 

    5.3          Buyer Furnished Equipment Variables .  Supplemental Exhibit BFE1 contains supplier selection dates, on dock dates and other variables applicable to the Aircraft.

    5.4          Customer Support Variables .  Information, training, services and other things furnished by Boeing in support of introduction of the Aircraft into Customer’s fleet are described in Supplemental Exhibit CS1.   The level of support to be provided under Supplemental Exhibit CS1 ( Entitlements ) assumes that at the time of delivery of Customer’s first Aircraft under the Purchase Agreement, Customer has not taken possession of a 737 aircraft whether such 737 aircraft was purchased, leased or otherwise obtained by Customer from Boeing or another party.  If prior to the delivery of Customer’s first Aircraft, Customer has taken possession of a 737 aircraft, Boeing will revise the Entitlements to reflect the level of support normally provided by Boeing to operators already operating such aircraft.  Under no circumstances under the Purchase Agreement or any other agreement will Boeing provide the Entitlements more than once to support Customer’s operation of model 737 aircraft.

    5.5          Engine Escalation Variables .  Supplemental Exhibit EE1 describes the applicable engine escalation formula and contains the engine warranty and the engine patent indemnity for the Aircraft.

    5.6          Service Life Policy Component Variables .  Supplemental Exhibit SLP1 lists the SLP Components covered by the Service Life Policy for the Aircraft.

    5.7          Public Announcement .  Boeing reserves the right to make a public announcement regarding Customer’s purchase of the Aircraft upon approval of Boeing’s press release by Customer’s public relations department or other authorized representative.

    5.8          Negotiated Agreement; Entire Agreement .  This Purchase Agreement, including the provisions of Article 8.2 of the AGTA relating to insurance, and Article 11 of Part 2 of Exhibit C of the AGTA relating to DISCLAIMER AND RELEASE and EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES , has been the subject of discussion and negotiation and is understood by the parties; the Aircraft Price and other agreements of the parties stated in this Purchase Agreement were arrived at in consideration of such provisions.  This Purchase Agreement, including the AGTA, contains the entire agreement between the parties and supersedes all previous proposals, understandings, commitments or representations whatsoever, oral or written, and may be changed only in writing signed by authorized representatives of the parties.

     

    PA 3780                                                                                                                                            

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    BOEING PROPRIETARY

     

     

     

     

    AGREED AND ACCEPTED this

     

     

     

     

     

     

     

     

    Date

     

     

     

     

     

    THE BOEING COMPANY

     

    GAC Inc.

     

     

     

     

     

     

    Signature

     

    Signature

     

     

     

    David L. Gossard

     

     

    Printed name

     

    Printed name

     

     

     

    Attorney-in-Fact

     

     

    Title

     

    Title

     

     

    GAC Inc.

     

     

    Signature

     

     

    Printed name

     

     

    Title

     

     

     

    ______________________________

    Witness

     

     

     

    ______________________________

    Witness

     

     

    PA 3780                                                                                                                                            

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    BOEING PROPRIETARY

     

     

    The Boeing Company
    P.O. Box 3707
    Seattle, WA     98124‑2207
       

     

     

    GOT-PA-3780-LA-1207832

     

     

    GAC, Inc.

    PO Box 309, Ugland House

    Grand Cayman

    KY1-1104

    Cayman Islands

     

    Subject:          Loading of Customer Software

     

    Reference:    Purchase Agreement No. 3780 ( Purchase Agreement ) between The Boeing Company ( Boeing ) and GAC, Inc. ( Customer ) relating to Model 737-8 aircraft ( Aircraft ) 

    This letter agreement ( Letter Agreement ) amends and supplements the Purchase Agreement.  All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.

    1.             Customer may request Boeing to install software owned by or licensed to Customer ( Software ) in the following systems in the Aircraft:  (i) aircraft communications addressing and reporting system ( ACARS ), (ii) digital flight data acquisition unit ( DFDAU ), (iii) flight management system ( FMS ), (iv) cabin management system ( CMS ), (v) engine indication and crew alerting system ( EICAS ), (vi) airplane information management system ( AIMS ), (vii) satellite communications system ( SATCOM ), and (viii) In-Flight Entertainment ( IFE ). 

    2.             For all Software described in paragraph 1, above, other than Software to be installed in SATCOM and IFE, the Software is not part of the configuration of the Aircraft certified by the FAA and therefore cannot be installed prior to delivery.  If requested by Customer, Boeing will install such Software after the transfer to Customer of title to the Aircraft, but before fly away.

    3.             The SATCOM Software is part of the configuration of the Aircraft and included in the type design.  If requested by Customer, Boeing will install the SATCOM Software prior to transfer to Customer of title to the Aircraft.

    4.             For IFE Software, if requested by Customer, Boeing will make the Aircraft accessible to Customer and Customer’s IFE Software supplier so that the supplier can install the Software after delivery of the Aircraft, but before fly away.

    5.             All Software which is installed by Boeing other than the SATCOM Software will be subject to the following conditions:

     

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    (i)                 Customer and Boeing agree that the Software is BFE for the purposes of Articles 3.1.3, 3.2, 3.4, 3.5, 3.10, 10 and 11 of Exhibit A, Buyer Furnished Equipment Provisions Document, to the AGTA and such articles apply to the installation of the Software.
    (ii)               Customer and Boeing further agree that the installation of the Software is a service under Exhibit B, Customer Support Document, to the AGTA.
    (iii)             Boeing makes no warranty as to the performance of such installation and Article 11 of Part 2 of Exhibit C of the AGTA, Disclaimer and Release; Exclusion of Liabilities and Article 8.2, Insurance, of the AGTA apply to the installation of the Software.

     

    Very truly yours,

     

    THE BOEING COMPANY

     

     

    By ________________________  

     

    Its                 Attorney‑In‑Fact          

     

     

     

    ACCEPTED AND AGREED TO this

     

    Date:                                       2012­­­­­­­­­       

     

     

    GAC INC.

     

     

    By ___________________________                                                      By _______________________

     

    Its  ______________________ _____                                                        Its                                                           

     

     

    Witness_______________________                                                        Witness                                                 

     

     

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    The Boeing Company
    P.O. Box 3707
    Seattle, WA     98124-2207
       

     

     

    GOT-PA-3780-LA-1207833

     

     

    GAC, Inc.

    PO Box 309, Ugland House

    Grand Cayman

    KY1-1104

    Cayman Islands

     

    Subject:          Spare Parts Initial Provisioning

     

     

    Reference:     a) Purchase Agreement No.3780 (the Purchase Agreement ) between The Boeing Company ( Boeing ) and GAC Inc. ( Customer ) relating to Model 737-8 aircraft (the Aircraft )
    b) Customer Services General Terms Agreement No. GOT, dated 30 November, 2000,  between Boeing and Customer (     CSGTA ) 

     

    This letter agreement ( Letter Agreement ) is entered into on the date below and amends and supplements the CSGTA.  All capitalized terms used but not defined in this Letter Agreement have the same meaning as in the CSGTA, except for “Aircraft” which will have the meaning as defined in the Purchase Agreement.

    In order to define the process by which Boeing and Customer will i) identify those Spare Parts and Standards critical to Customer’s successful introduction of the Aircraft into service and its continued operation, ii) place Orders under the provisions of the CSGTA as supplemented by the provisions of this Letter Agreement for those Spare Parts and Standards, and iii) manage the return of certain of those Spare Parts which Customer does not use, the parties agree as follows.

    1.                             Definitions . 

    1.1          Provisioning Data means the documentation provided by Boeing to Customer, including but not limited to the Recommended Spare Parts List ( RSPL ), identifying all Boeing initial provisioning requirements for the Aircraft.

    1.2          Provisioning Items means the Spare Parts and Standards identified by Boeing as initial provisioning requirements in support of the Aircraft, excluding special tools and ground support equipment ( GSE ), engines and engine parts.

    1.3          Provisioning Products Guide means the Boeing Manual D6-81834 entitled “ Spares Provisioning Products Guide ”. 

     

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    2.                                        Phased Provisioning . 

    2.1           Provisioning Products Guide .  Prior to the initial provisioning meeting Boeing will furnish to Customer a copy of the Provisioning Products Guide.

    2.2          Initial Provisioning Meeting .  On or about twelve (12) months prior to delivery of the first Aircraft the parties will conduct an initial provisioning meeting, as applicable, where the procedures, schedules, and requirements for training will be established to accomplish phased provisioning of Spare Parts and Standards for the Aircraft in accordance with the Provisioning Products Guide.  If the lead time from execution of the Purchase Agreement until delivery of the first Aircraft is less than twelve (12) months, the initial provisioning meeting will be established as soon as reasonably possible after execution of the Purchase Agreement.

    2.3          Provisioning Data .  During the initial provisioning meeting Customer will provide to Boeing the operational parameter information described in Chapter 6 of the Provisioning Products Guide.  After review and acceptance by Boeing of such Customer information, Boeing will prepare the Provisioning Data.  Such Provisioning Data will be furnished to Customer on or about ninety (90) days after Boeing finalizes the engineering drawings for the Aircraft.  The Provisioning Data will be as complete as possible and will cover Provisioning Items selected by Boeing for review by Customer for initial provisioning of Spare Parts and Standards for the Aircraft.  Boeing will furnish to Customer revisions to the Provisioning Data until approximately ninety (90) days following delivery of the last Aircraft or until the delivery configuration of each of the Aircraft is reflected in the Provisioning Data, whichever is later.

    2.4          Buyer Furnished Equipment ( BFE ) Provisioning Data .  Unless otherwise advised by Boeing, Customer will provide or insure its BFE suppliers provide to Boeing the BFE data in scope and format acceptable to Boeing, in accordance with the schedule established during the initial provisioning meeting.

    3.                                        Purchase from Boeing of Spare Parts and Standards as Initial Provisioning for the Aircraft . 

    3.1          Schedule .  In accordance with schedules established during the initial provisioning meeting, Customer may place Orders for Provisioning Items and any GSE, special tools, or engine spare parts which Customer determines it will initially require for maintenance, overhaul and servicing of the Aircraft and/or engines.

    3.2          Prices of Initial Provisioning Spare Parts .   

    3.2.1      Boeing Spare Parts .  The Provisioning Data will set forth the prices for those Provisioning Items other than items listed in Article 3.3, below, that are Boeing Spare Parts, and such prices will be firm and remain in effect for ninety (90) days from the date the price is first quoted to Customer in the Provisioning Data.

     

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    3.2.2      Supplier Spare Parts .  Boeing will provide estimated prices in the Provisioning Data for Provisioning Items other than items listed in Article 3.3, below, that are Supplier Spare Parts.  The price to Customer for any Supplier Spare Parts that are Provisioning Items or for any items ordered for initial provisioning of GSE, special tools manufactured by suppliers, or engine spare parts will be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of the supplier's list price for such items.

    3.3          QEC Kits, Standards Kits, Raw Material Kits, Bulk Materials Kits and Service Bulletin Kits .  In accordance with schedules established during the initial provisioning meeting, Boeing will furnish to Customer a listing of all components which could be included in the quick engine change ( QEC ) kits, Standards kits, raw material kits, bulk materials kits and service bulletin kits which may be purchased by Customer from Boeing.  Customer will select, and provide to Boeing its desired content for the kits.  Boeing will furnish to Customer as soon as practicable thereafter a statement setting forth a firm price for such kits.  Customer will place Orders with Boeing for the kits in accordance with schedules established during the initial provisioning meeting.

    4.                                        Delivery . 

    For Spare Parts and Standards ordered by Customer in accordance with Article 3 of this Letter Agreement, Boeing will, insofar as reasonably possible, deliver to Customer such Spare Parts and Standards on dates reasonably calculated to conform to Customer's anticipated needs in view of the scheduled deliveries of the Aircraft.  Customer and Boeing will agree upon the date to begin delivery of the provisioning Spare Parts and Standards ordered in accordance with this Letter Agreement.  Where appropriate, Boeing will arrange for shipment of such Spare Parts and Standards which are manufactured by suppliers directly to Customer from the applicable supplier's facility.  The routing and method of shipment for initial deliveries and all subsequent deliveries of such Spare Parts and Standards will be as established at the initial provisioning meeting and thereafter by mutual agreement.

    5.                                        Substitution for Obsolete Spare Parts . 

    5.1          Obligation to Substitute Pre-Delivery .  In the event that, prior to delivery of the first Aircraft, any Spare Part purchased by Customer from Boeing in accordance with this Letter Agreement as initial provisioning for the Aircraft is rendered obsolete or unusable due to the redesign of the Aircraft or of any accessory, equipment or part thereof (other than a redesign at Customer's request) Boeing will deliver to Customer at no charge new and usable Spare Parts in substitution for such obsolete or unusable Spare Parts and, upon such delivery, Customer will return the obsolete or unusable Spare Parts to Boeing.

     

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    5.2          Delivery of Obsolete Spare Parts and Substitutes .  Obsolete or unusable Spare Parts returned by Customer pursuant to this Article 5 will be delivered to Boeing at its Seattle Distribution Center or such other destination as Boeing may reasonably designate.  Spare Parts substituted for such returned obsolete or unusable Spare Parts will be delivered to Customer in accordance with the CSGTA.  Boeing will pay the freight charges for the shipment from Customer to Boeing of any such obsolete or unusable Spare Part and for the shipment from Boeing to Customer of any such substitute Spare Part.

    6.                                       Repurchase of Provisioning Items . 

    6.1          Obligation to Repurchase .  During a period commencing one (1) year after delivery of the first Aircraft, and ending five (5) years after such delivery, Boeing will, upon receipt of Customer's written request and subject to the exceptions in Article 6.2, repurchase unused and undamaged Provisioning Items which (i) were recommended by Boeing in the Provisioning Data as initial provisioning for the Aircraft, (ii) were purchased by Customer from Boeing, and (iii) are surplus to Customer's needs.

    6.2          Exceptions .  Boeing will not be obligated under Article 6.1 to repurchase any of the following:  (i) quantities of Provisioning Items in excess of those quantities recommended by Boeing in the Provisioning Data for the Aircraft, (ii) QEC kits, bulk material kits, raw material kits, service bulletin kits, Standards kits and components thereof (except those components listed separately in the Provisioning Data), (iii) Provisioning Items for which an Order was received by Boeing more than five (5) months after delivery of the last Aircraft, (iv) Provisioning Items which have become obsolete or have been replaced by other Provisioning Items as a result of Customer's modification of the Aircraft, and (v) Provisioning Items which become excess as a result of a change in Customer's operating parameters, as provided to Boeing pursuant to the initial provisioning meeting and which were the basis of Boeing's initial provisioning recommendations for the Aircraft.

    6.3           Notification and Format .  Customer will notify Boeing, in writing when Customer desires to return Provisioning Items under the provisions of this Article 6.  Customer's notification will include a detailed summary, in part number sequence, of the Provisioning Items Customer desires to return.  Such summary will be in the form of listings, tapes, diskettes or other media as may be mutually agreed between Boeing and Customer and will include part number, nomenclature, purchase order number, purchase order date and quantity to be returned.  Within five (5) business days after receipt of Customer's notification, Boeing will advise Customer in writing when Boeing's review of such summary will be completed.

    6.4           Review and Acceptance by Boeing .  Upon completion of Boeing's review of any detailed summary submitted by Customer pursuant to Article 6.3, Boeing will issue to Customer a Material Return Authorization ( MRA ) for those Provisioning Items Boeing agrees are eligible for repurchase in accordance with this Article 6.  Boeing will advise Customer of the reason that any Provisioning Item included in Customer's detailed summary is not eligible for return.  Boeing's MRA will state the date by which Provisioning Items listed in the MRA must be redelivered to Boeing, and Customer will arrange for shipment of such Provisioning Items accordingly.

     

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    6.5          Price and Payment .  The price of each Provisioning Item repurchased by Boeing pursuant to this Article 6 will be an amount equal to one hundred percent (100%) of the original invoice price thereof except that the repurchase price of Provisioning Items purchased pursuant to Article 3.2.2 will not include Boeing's twelve percent (12%) handling charge.  Boeing will pay the repurchase price by issuing a credit memorandum in favor of Customer which may be applied against amounts due Boeing for the purchase of Spare Parts or Standards.

    6.6          Delivery of Repurchased Provisioning Items . Provisioning Items repurchased by Boeing pursuant to this Article 6 will be delivered to Boeing F.O.B. at its Seattle Distribution Center or such other destination as Boeing may reasonably designate.

    7.                                       Title and Risk of Loss . 

    Title and risk of loss of any Spare Parts or Standards delivered to Customer by Boeing in accordance with this Letter Agreement will pass from Boeing to Customer in accordance with the applicable provisions of the CSGTA.  Title to and risk of loss of any Spare Parts or Standards returned to Boeing by Customer in accordance with this Letter Agreement will pass to Boeing upon delivery of such Spare Parts or Standards to Boeing in accordance with the provisions of Article 5.2 or Article 6.6, herein, as appropriate.

    8.                                       Termination for Excusable Delay . 

    In the event of termination of the Purchase Agreement pursuant to Article 7 of the AGTA with respect to any Aircraft, such termination will, if Customer so requests by written notice received by Boeing within fifteen (15) days after such termination, also discharge and terminate all obligations and liabilities of the parties as to any Spare Parts or Standards which Customer had ordered pursuant to the provisions of this Letter Agreement as initial provisioning for such Aircraft and which are undelivered on the date Boeing receives such written notice.

    9.                                        Order of Precedence . 

    In the event of any inconsistency between the terms of this Letter Agreement and the terms of any other provisions of the CSGTA, the terms of this Letter Agreement will control.

     

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    Very truly yours,

     

    THE BOEING COMPANY

     

     

    By _________________________

     

    Its                 Attorney‑In‑Fact            

     

     

     

    ACCEPTED AND AGREED TO this

     

    Date:                                       2012    ­­­­­­­­­ 

     

     

    GAC INC.

     

     

    By _________________________                                                  By _________________________         

     

    Its                                                                                                              Its                                                                 

     

     

    Witness                                                                                                    Witness                                                      

     

     

     

     

     

    PA 3780                                                                                                                                            

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    BOEING PROPRIETARY

     
    The Boeing Company
    P.O. Box 3707
    Seattle, WA     98124-2207
       

     

     

    GOT-PA-3780-LA-1207834

     

    GAC, Inc.

    PO Box 309, Ugland House

    Grand Cayman

    KY1-1104

    Cayman Islands

     

    Subject:          Purchase Rights

     

    Reference:    Purchase Agreement No. 3780 ( Purchase Agreement ) between The Boeing Company ( Boeing ) and GAC Inc. ( Customer ) relating to Model 737-8 aircraft ( Aircraft ) 

     

    This letter agreement ( Letter Agreement ) amends and supplements the Purchase Agreement.  All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.

    1.                   Right to Purchase Incremental Aircraft . 

    Subject to the terms and conditions contained herein, in addition to the Aircraft described in Table 1 to the Purchase Agreement as of the date of execution of this Letter Agreement, Customer will have the right to purchase ( Purchase Right ) [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] additional Boeing Model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft as purchase right aircraft ( Purchase Right Aircraft ). 

    2.                   Delivery . 

    The Purchase Right Aircraft are offered subject to available position for delivery prior to [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], ( Delivery Period ). 

    3.                   Configuration . 

    3.1          Subject to the provisions of Article 3.2, below, the configuration for the Purchase Right Aircraft will be the Detail Specification for Model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft at the revision level in effect at the time of the Notice of Exercise.  Such Detail Specification will be revised to include (i) changes applicable to such Detail Specification that are developed by Boeing between the date of the Notice of Exercise (as defined below) and the signing of the Definitive Agreement (as defined below), (ii) changes required to obtain required regulatory certificates, and (iii) other changes as mutually agreed.

     

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    3.2          Boeing reserves the right to configure the Purchase Right Aircraft starting from a different configuration specification, provided that it can achieve the same configuration which would result pursuant to the provisions of Article 3.1.

    4.                                       Price . 

    4.1          The Airframe Price, Engine Price, if applicable, Optional Features Prices, and Aircraft Basic Price for the Purchase Right Aircraft will be determined in accordance with the provisions of the Purchase Agreement using Boeing’s [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] prices as of the date of execution of the Definitive Agreement.

    4.2          The Airframe Price, Engine Price, if applicable, Optional Features Prices, and Aircraft Basic Price for each of the Purchase Right Aircraft will be adjusted for escalation in accordance with Supplemental Exhibit AE1 of the Purchase Agreement.

    4.3          Business terms as those described in the reference Purchase Agreement will apply to any such exercised model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] purchase right aircraft delivering before [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    5.                                       Payment . 

    At Definitive Agreement, advance payments will be payable as set forth in Table 1 of the Purchase Agreement.  The remainder of the Aircraft Price for each Purchase Right Aircraft will be paid at the time of delivery.  The Advance Payment Base Price used to determine the advance payment amounts will be developed in accordance with the terms of the Purchase Agreement and determined at the time of Definitive Agreement.

    6.                                        Notice of Exercise and Payment of Deposit . 

    6.1          Customer may exercise a Purchase Right by giving written notice to Boeing on or before the first day of the month [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] months prior to the desired delivery month within the Delivery Period, specifying the desired month(s) of delivery within the Delivery Period ( Notice of Exercise ).  Such Notice of Exercise shall be accompanied by payment, by electronic transfer to the account specified below, of Boeing’s then standard proposal deposit for model 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft ( Deposit ) for each Purchase Right Aircraft subject to the Notice of Exercise.  The Deposit will be applied against the first advance payment due for each such Purchase Right Aircraft. 

     

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    At the time of its receipt of each Notice of Exercise and related Deposit(s), Boeing will advise Customer as to the availability of the delivery month(s) requested.

     

    6.2       If Boeing must make production decisions which would affect the delivery of any or all Purchase Right Aircraft during the Delivery Period, Boeing shall provide written notification to Customer and the Delivery Period shall be adjusted accordingly.  If the new Delivery Period begins [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] months or less from the date of Boeing’s notification, Customer shall have [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] days from the date of Boeing’s notification in which to submit its Notice of Exercise and Deposit for any eligible delivery month(s) that is [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] months or less from Boeing’s notification.  Upon receipt, Boeing will advise Customer as to the availability of the delivery month(s) requested.

    7.                  Definitive Agreement . 

    Following Customer’s exercise of a Purchase Right in accordance with the terms and conditions stated herein and Boeing’s identification of an available delivery position acceptable to Customer, the parties will sign a definitive agreement for the purchase of such Purchase Right Aircraft ( Definitive Agreement ) within [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] calendar days of such exercise ( Purchase Right Exercise ).  The Definitive Agreement will include the provisions then contained in the Purchase Agreement as modified to reflect the provisions of this Letter Agreement and any additional mutually agreed terms and conditions.

    8.                 General Expiration of Rights . 

     

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    Each Purchase Right shall expire at the time of execution of the Definitive Agreement for the applicable Purchase Right Aircraft, or, if no such Definitive Agreement is executed, on [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    9.                  Assignment . 

    Notwithstanding any other provisions of the Purchase Agreement, the rights and obligations described in this Letter Agreement are provided to Customer in consideration of Customer’s becoming the operator of the Aircraft and cannot be assigned in whole or, in part.

     

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    10.          Confidential Treatment . 

    The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties.  Customer will limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.

     

     

     

    Very truly yours,

     

    THE BOEING COMPANY

     

     

    By _________________________

     

    Its                 Attorney‑In‑Fact            

     

     

     

    ACCEPTED AND AGREED TO this

     

    Date:                                       2012­­­­­­­­­    

     

     

    GAC INC.

     

     

    By _________________________                                                      By _________________________         

     

    Its                                                                                                                  Its                                                                 

     

     

    Witness                                                                                                        Witness                                                     

     

     

     

     

     

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    The Boeing Company
    P.O. Box 3707
    Seattle, WA     98124-2207
       

     

     

    GOT-PA-3780-LA-1207835

     

    GAC, Inc.

    PO Box 309, Ugland House

    Grand Cayman

    KY1-1104

    Cayman Islands

     

    Subject:          Substitution of Model 737-8 into Model 737-7 Aircraft

     

    Reference:    Purchase Agreement No. 3780 ( Purchase Agreement ) between The Boeing Company ( Boeing ) and GAC Inc. ( Customer ) relating to Model 737-8 aircraft ( Aircraft ) 

     

    This letter agreement ( Letter Agreement ) amends and supplements the Purchase Agreement.  All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.

     

    Customer may substitute the purchase of Boeing Model 737[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft ( Substitute Aircraft ) in place of Aircraft with the scheduled month of delivery [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] after delivery of the first 737[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft, subject to the following terms and conditions:

     

    1.                                            Customer’s Written Notice . 

    Customer shall provide written notice of its intention to substitute the purchase of an Aircraft with the purchase of a Substitute Aircraft;

    (i)                    for the first substitution, no sooner than the first day of the month that is [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] after the scheduled month of delivery [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Aircraft; and
     

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    BOEING PROPRIETARY

     

    GOT-PA-03780-LA-1207835

     

     

    (ii)                 no later than the first day of the month that is [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] months prior to the scheduled month of delivery of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] for which it will be substituted, provided that a Substitute Aircraft has not been previously certified and delivered to Customer, or;
    (iii)               no later than the first day of the month that [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] prior to the scheduled month of delivery of Aircraft for which it will be substituted, provided that a Substitute Aircraft has been previously certified and delivered to Customer.

    2.                                        Boeing’s Production Capability . 

    2.1           Customer’s substitution right is conditioned upon Boeing having production capability for the Substitute Aircraft in the same scheduled delivery month as the Aircraft for which it will be substituted. 

    Boeing will tentatively quote delivery position for Substitute Aircraft to allow Customer to secure quotes from Buyer Furnished Equipment vendors, and Boeing to secure quotes from Seller Furnished Equipment vendors which supports the required on-dock dates. If Boeing is unable to manufacture the Substitute Aircraft in the scheduled delivery month as the Aircraft for which it will be substituted, then Boeing shall promptly make a written offer of an alternate delivery month for Customer’s consideration and written acceptance within thirty days of such offer.

    2.2           All of Boeing’s quoted delivery positions for Substitute Aircraft shall be considered preliminary until such time as the parties enter into a definitive agreement in accordance with paragraph 3 below.

    3.                                         Definitive Agreement . 

    Customer’s substitution right and Boeing obligation in this Letter Agreement are further conditioned upon Customer and Boeing’s executing a definitive agreement for the purchase of the Substitute Aircraft within thirty (30) days of Customer’s substitution notice to Boeing or of Customer’s acceptance of an alternate delivery month in accordance with paragraph 1 above.

     

    PA-3780                                                                                                                                           

    Substitution of Model 737-8 into Model 737-7 Aircraft

    Page 2

    BOEING PROPRIETARY

     

    GOT-PA-03780-LA-1207835

     

     

    4.                                         Price and Advance Payments . 

    4.1           The Airframe Price, Optional Features Price and, if applicable, Engine Price will be adjusted to Boeing’s and the engine manufacturer’s [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] prices for such elements as of the date of execution of the definitive purchase agreement for the Substitute Aircraft. The escalation indices and methodology used to estimate the Advance Payment Base Price ( APBP ) will be adjusted to Boeing’s and the engine manufacturer’s [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] provisions for such elements as of the date of execution of the definitive purchase agreement for the Substitute Aircraft, however,  the APBP for the Substitute Aircraft will remain the same as the original APBP of the Aircraft scheduled in the same delivery month for the purposes of calculating advance payments for the Substitute Aircraft.

    4.2       Refer to Letter Agreement GOT-PA-03780-LA-1207737 “Special Matters” for the identification of credit memoranda applicable to the Substitute Aircraft.

     

    5.                                        Assignment . 

    Notwithstanding any other provisions of the Purchase Agreement, the rights and obligations described in this Letter Agreement are provided to Customer in consideration of Customer’s becoming the operator of the Aircraft and cannot be assigned in whole or, in part.

    6.                                       Confidential Treatment . 

    The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties.  Customer will limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.

    1.     Very truly yours,

     

    THE BOEING COMPANY

     

     

    By _________________________

     

    Its                 Attorney‑In‑Fact            

     

     

     

    PA-3780                                                                                                                                           

    Substitution of Model 737-8 into Model 737-7 Aircraft

    Page 3

    BOEING PROPRIETARY

     

    GOT-PA-03780-LA-1207835

     

     

     

     

    ACCEPTED AND AGREED TO this

     

    Date:                                       2012  ­­­­­­­­­ 

     

     

    GAC INC.

     

     

    By _________________________                                                     By _________________________         

     

    Its                                                                                                                 Its                                                                 

     

     

    Witness                                                                                                       Witness                                                      

     

     

     

     

     

     

     

    PA-3780                                                                                                                                           

    Substitution of Model 737-8 into Model 737-7 Aircraft

    Page 4

    BOEING PROPRIETARY

     
    WORD_BLACKSMALLLOGO The Boeing Company
    P.O. Box 3707
    Seattle, WA     98124-2207
       

    GOT-PA-3780-LA-1207836

     

    GAC, Inc.

    PO Box 309, Ugland House

    Grand Cayman

    KY1-1104

    Cayman Islands

     

     

    Subject:          Advance Payment Matters

     

    Reference:    a) Purchase Agreement No. PA-3780 ( Purchase Agreement ) between The Boeing Company ( Boeing ) and GAC Inc. ( Customer ) relating to Model 737-8 aircraft ( Aircraft )

    b) Purchase Agreement No. 2910 (the Purchase Agreement) between The Boeing Company (Boeing) and GOL Transportes Aereos SA (the 737-800 Customer) relating to Model 737-8EH aircraft ( the 737-800 Aircraft)

     

     

    This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement.  All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement.

     

    Customer and Boeing have reached agreement regarding certain modifications to the Agreement as set forth below:

     

     

    1.         Advance Payment Schedule:

                                

    Notwithstanding the advance payment schedule set forth in Table 1 of the Purchase Agreement, Boeing agrees that Customer may make the definitive agreement payment and advance payments for the Aircraft, in accordance with the schedules below described, subject to the terms and conditions further described herein:

     

     

    PA-3780                                                                                                                                           

    Advance Payment Matters

                                                                                                    Page 1

    BOEING PROPRIETARY

     

     

    GOT-PA-03780-LA-1207836

    LETTERHEAD  

     

    a)     Definitive Agreement Payment :
    Payment of the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Aircraft due at Definitive Agreement (DA) in summation for all of the Table 1 Aircraft less the memorandum of Agreement deposits received [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].  This amount will be paid to Boeing as follows:

    Payment Date

    Amount Due in US Dollars

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

     

    b)     Advance Payment : 

     

                 Months Prior to                      Amount Due per Aircraft

                Aircraft Delivery                              (Percent times

                Advance Payment Base Price)

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

    2.         Deferral Charges on Deferred Advance Payments:

     

                The foregoing advance payment schedule constitutes a deferral of certain amounts due Boeing pursuant to the advance payment schedule as set forth in Table 1 of the Purchase Agreement.  Accordingly, Customer shall pay deferral charges to Boeing on all such deferred amounts of the advance payments for the Aircraft, as described herein.

     

    Interest will be calculated and paid on the deferred advance payments.  Interest on the deferred advance payments will accrue at an annual rate equal to the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]. This deferral charge will be calculated on a 365/366 day year . 

     

     

    PA-3780                                                                                                                                           

    Advance Payments Matters                                             

    Page 2

    BOEING PROPRIETARY

     

     

    GOT-PA-03780-LA-1207836

    LETTERHEAD  

     

    Deferral charge payments will be due on [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] day of each [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], for the previous [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], and will be computed on the basis of the actual number of elapsed days for the period commencing on the date such deferred amounts would have been due and terminating on the date of delivery of the designated Aircraft.

     

    Further to the above, following the calculation method stated above, all such [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] deferral charge payments shall be further deferred such that all deferral charge payments for all of the designated Aircraft will be made at the time of each such designated Aircraft delivery.  Any remaining unpaid deferral charge payments for such Aircraft are due and payable at the delivery of the designated Aircraft.

     

    3.         [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

    4.          Re-Scheduling of Aircraft

     

    In the event of a re-schedule, to a later delivery position, of any of the Aircraft under the terms of the Agreement, Boeing will recalculate the amount of advance payments and deferral charges due from Customer under the above described deferred Advance Payment Schedule after giving effect to such re-scheduling and, without interest, refund to Customer within [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] any amounts held by Boeing in excess of such recalculated amounts.

     

    In the event of a re-schedule, except as provided for in Article 2 of the Purchase Agreement, to an earlier delivery position, of any of the Aircraft under the terms of the Agreement, Boeing will recalculate the amount of advance payments due from Customer under the above described deferred Advance Payment Schedule after giving effect to such re-scheduling and Customer will make immediate payment to Boeing of any amounts due within [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], without any additional interest or other charges, as a result of such recalculated amounts applicable to such accelerated delivery position.

     

     

    PA-3780                                                                                                                                           

    Advance Payments Matters                                             

    Page 3

    BOEING PROPRIETARY

     

     

    GOT-PA-03780-LA-1207836

    LETTERHEAD  

     

    In the event that previously paid advance payments are to be returned to Customer pursuant to the contract termination terms and conditions of the Aircraft General Terms Agreement or Purchase Agreement, any accrued but unpaid advance payment deferral charges will be removed and cancelled.

     

    5.         [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

    6.         Set-Off Rights

     

    Customer agrees that in the event of a default of its obligations under any purchase agreement with Boeing or any agreement with any Boeing subsidiary or affiliate, Boeing may apply any or all advance payments, or other payments made by Customer with respect to an aircraft or any other Boeing product to cure, in part or in whole, any default with respect to any other aircraft or Boeing product or with respect to any other obligation under any such Boeing purchase agreement or any such agreement with another Boeing subsidiary or affiliate. In the event that Boeing sets off against, or otherwise exercises rights against any such payments made by Customer, and applies any such amounts to any obligations owed by Customer to Boeing, its subsidiaries or affiliates, Boeing will be entitled, after such application, to require Customer to replace within [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] the amount so applied such that the total amount of advance payments would be restored to the aggregate total amount of advance payments due

    7.         Payments 

    Payments due upon reaching a Definitive Agreement are to be received by Boeing within [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of the signing of such agreement, or supplemental agreement.  All of the other periodic advance payments described in the payment schedule(s) as set forth above are each due on the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of each respective month.  Any payments received later than [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] after its due date will be subject to a late payment interest charge calculated on the basis of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] annual rate.  Late payment interest charges will accrue further interest charges until paid, with any unpaid such late payment interest charges to be included in the final delivery invoice for the respective aircraft.

     

    PA-3780                                                                                                                                           

    Advance Payments Matters                                             

    Page 4

    BOEING PROPRIETARY

     

     

    GOT-PA-03780-LA-1207836

    LETTERHEAD  

     

    8.         Confidential Treatment

    The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties.  Customer will limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.

     

     

    Very truly yours,

     

    THE BOEING COMPANY

     

     

    By _________________________

     

    Its                 Attorney-In-Fact            

     

     

     

    ACCEPTED AND AGREED TO this

     

    Date:                                       2012­­­­­­­­­    

     

     

    GAC INC.

     

     

    By _________________________                                                 By _________________________         

     

    Its                                                                                                             Its                                                                  

        

     

    Witness                                                                                                   Witness                                                      

     

     

     

    PA-3780                                                                                                                                           

    Advance Payments Matters                                             

    Page 5

    BOEING PROPRIETARY

     

     
    The Boeing Company
    P.O. Box 3707
    Seattle, WA     98124-2207
       

     

     

    GOT-PA-3780-LA-1207838

     

    GAC, Inc.

    PO Box 309, Ugland House

    Grand Cayman

    KY1-1104

    Cayman Islands

     

    Subject:          Promotional Support

     

    Reference:    Purchase Agreement No. 3780 ( Purchase Agreement ) between The Boeing Company ( Boeing ) and GAC Inc. ( Customer ) relating to Model 737-8 aircraft ( Aircraft ) 

     

     

    This letter agreement ( Letter Agreement ) amends and supplements the Purchase Agreement.  All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.

    Boeing and Customer wish to enter into an agreement pursuant to which each party will contribute equally to promotional programs in support of the entry into service of the Aircraft as more specifically provided below.

     

    1.                   Definitions . 

    1.1          Commitment Limit shall have the meaning set forth in Article 2, below.

    1.2          Covered Aircraft shall mean those Aircraft identified on Table 1 to the Purchase Agreement as of the date of signing of this Letter Agreement.

    1.3          Performance Period shall mean the period beginning one (1) year before and ending one (1) year after the scheduled delivery month of the first Covered Aircraft.

    1.4          Promotional Support shall mean mutually agreed marketing and promotion programs that promote the entry into service of the Covered Aircraft such as marketing research, tourism development, corporate identity, direct marketing, videotape or still photography, planning, design and production of collateral materials, management of promotion programs, advertising campaigns or such other marketing and promotional activities as the parties may mutually agree.

    1.5          Qualifying Third Party Fees shall mean fees paid by Customer to third party providers for Promotional Support provided to Customer during the Performance Period.

     

     

    PA 3780

    GOT-PA-3780-LA-1207838                                                                      

    Promotional Support                                                                                                         

    Page 1

    BOEING PROPRIETARY

     

     

    2.                  Commitment . 

    As more particularly set forth in this Letter Agreement, Boeing agrees to provide Promotional Support to Customer during the Performance Period in a value not to exceed [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] for the first Covered Aircraft delivered to Customer and not to exceed [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Covered Aircraft for each Covered Aircraft delivered to Customer thereafter.

    3.                   Methods of Performance . 

    3.1          Subject to the Commitment Limit, Boeing will reimburse fifty percent (50%) of Customer’s payments of Qualifying Third Party Fees provided that Customer provides Boeing copies of paid invoices for such Qualifying Third Party Fees no later than twenty-four (24) months after the delivery of the first Covered Aircraft.

    3.2          Notwithstanding the above, at Customer’s request and subject to a mutually agreed project, Boeing will provide certain Promotional Support during the Performance Period directly to Customer.  The full value of such Boeing provided Promotional Support will be accounted for as part of the Commitment Limit and will correspondingly reduce the amount of Qualifying Third Party Fees that are subject to reimbursement pursuant to Article 3.1 above.

    3.3          In the event Customer does not (i) utilize the full amount of the Commitment Limit within the Performance Period or (ii) submit its paid invoices for Qualifying Third Party Fees within the required time, as set forth in Article 3.1, Boeing shall have no further obligation to Customer for such unused Commitment Limit or to reimburse Customer for such Qualifying Third Party Fees, respectively.

    4.                   Project Approval . 

    Following the execution of this Letter Agreement, a Boeing Airline Marketing Services representative will meet with Customer’s designated representative to review and approve the extent, selection, scheduling, and funds disbursement process for the Promotional Support to be provided pursuant to this Letter Agreement.

    5.                     Assignment . 

    Notwithstanding any other provisions of the Purchase Agreement, the rights and obligations described in this Letter Agreement are provided to Customer in consideration of Customer’s becoming the operator of the Aircraft and cannot be assigned in whole or, in part.

     

    PA 3780

    GOT-PA-3780-LA-1207838 May 7, 2012

    Promotional Support                                                         

    Page 2

    BOEING PROPRIETARY

     

     

     

    6.                   Confidential Treatment . 

    The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties.  Customer will limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.

     

    Very truly yours,

     

    THE BOEING COMPANY

     

     

    By _________________________

     

    Its                 Attorney‑In‑Fact            

     

     

     

    ACCEPTED AND AGREED TO this

     

    Date:                                       2012­­­­­­­­­    

     

     

    GAC INC.

     

     

    By _________________________                                               By _________________________         

     

    Its                                                                                                           Its                                                                 

     

     

    Witness                                                                                                 Witness                                                     

     

                 

     

     

     

     

    PA 3780

    GOT-PA-3780-LA-1207838 May 7, 2012

    Promotional Support                                                         

    Page 3

    BOEING PROPRIETARY

     

     

    The Boeing Company
    P.O. Box 3707
    Seattle, WA     98124-2207
       

     

     

     

    GOT-PA-3780-LA-1207737

     

    GAC, Inc.

    PO Box 309, Ugland House

    Grand Cayman

    KY1-1104

    Cayman Islands

     

     

    Subject:          Special Matters – 737-8 

     

    Reference:    Purchase Agreement No.3780 (the Purchase Agreement) between The Boeing Company (Boeing) and GAC Inc. (Customer) relating to Model 737-8 aircraft (the Aircraft)

     

     

                      

    This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement, and reflects the mutual agreement of the parties concerning certain business considerations pertaining to the Aircraft and Aircraft that become the subject of model substitution under the terms and conditions of Letter agreement No. GOT-PA-03780-LA-1207835.  Any Aircraft that are substituted from 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] to become 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft are hereinafter defined as Substitute Aircraft .  The considerations defined in this Letter Agreement are provided to Customer in recognition of the execution of the Purchase Agreement and thereafter Customer fully performing all of the obligations as set forth in the Purchase Agreement.  All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement. 

     

    1.  Model 737-NG Option Exercise Requirement

     

                     Customer shall purchase [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] or more [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] under the terms and conditions of Purchase Agreement 2910, Supplemental Agreement 21, concurrent with the execution of the Purchase Agreement to obtain the business considerations described in this Letter Agreement.

     

    PA 3780                                                                                                                                            

    Special Matters                                                                                                                   

    Page 1  

    BOEING PROPRIETARY

     

    GOT-PA-3780-LA-1207737

     

    The Boeing Company
    P.O. Box 3707
    Seattle, WA     98124-2207
       

     

     

    2.  Basic Credit Memoranda

     

    2.1       Applicable to the Aircraft:

     

    The basic credit memoranda ( Basic Credit Memoranda ) associated with the purchase of the Aircraft will be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Aircraft.

     

    2.2       Applicable to Substitute Aircraft:

     

    The Basic Credit Memoranda associated with the purchase of a Substitute Aircraft will [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Substitute Aircraft.

     

    2.3       Such Basic Credit Memoranda will be issued concurrently with the delivery of each Aircraft or Substitute Aircraft, as applicable, and may be used for [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    3.  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Credit Memoranda

     

    3.1       Applicable to the Aircraft:

     

    Boeing will provide Customer with a special [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] credit memoranda ([CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Credit Memoranda ) associated with the purchase of the Aircraft in the amount of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Aircraft.

     

    3.2       Applicable to the Substitute Aircraft:

     

    The [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Credit Memoranda associated with the purchase of a Substitute Aircraft will be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY

    PA 3780                                                                                                                                            

    Special Matters                                                                

    Page 2

    BOEING PROPRIETARY  

     

    GOT-PA-3780-LA-1207737

     

    The Boeing Company
    P.O. Box 3707
    Seattle, WA     98124-2207
       

     

    WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Substitute Aircraft.

     

    3.3       All such credit memoranda will be issued concurrently with the delivery of each Aircraft or Substitute Aircraft, as applicable, and may be used for [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    4.  Launch Customer Credit Memoranda

     

                In recognition of the Customer being a Launch Customer for the 737-MAX, Boeing will provide the following special consideration:

    4.1       Applicable to the Aircraft:

     

    Boeing will provide Customer with a special launch customer credit memoranda ( Launch Customer Credit Memoranda ) associated with the purchase of the Aircraft in the amount of  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Aircraft.

     

    4.2       Applicable to the Substitute Aircraft:

     

    The Launch Customer Credit Memoranda associated with the purchase of a Substitute Aircraft will be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Substitute Aircraft.

     

    4.3       All such credit memoranda will be issued concurrently with the delivery of each Aircraft or Substitute Aircraft, as applicable, and may be used for [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    5.   MAX Special Allowance Credit Memoranda

     

                In recognition of the Customer being a 737-MAX operator, Boeing will provide the following special consideration:

    5.1       Applicable to the Aircraft:

     

    Boeing will provide Customer with a MAX special allowance credit memoranda ( MAX Special Allowance Credit Memoranda ) associated with the purchase of the Aircraft in the amount of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Aircraft

     

    PA 3780                                                                                                                                            

    Special Matters                                                                

       Page 3

    BOEING PROPRIETARY  

     

    GOT-PA-3780-LA-1207737

     

    The Boeing Company
    P.O. Box 3707
    Seattle, WA     98124-2207
       

     

    5.2       Applicable to the Substitute Aircraft:

     

    The MAX Special Allowance Credit Memoranda associated with the purchase of a Substitute Aircraft will be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Substitute Aircraft.

     

    5.3       All such credit memoranda will be issued concurrently with the delivery of each Aircraft or Substitute Aircraft, as applicable, and may be used for [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

     

    6.  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Credit Memoranda

     

                In recognition of the Customer staying an [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] for the 737-MAX, Boeing will provide the following special consideration:

    6.1       Applicable to the Aircraft:

     

    Boeing will provide Customer with a [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] credit memoranda ([CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Credit Memoranda ) associated with the purchase of the Aircraft in the amount of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Aircraft.

     

    6.2       Applicable to the Substitute Aircraft:

     

    The [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Credit Memoranda does not apply to Substitute Aircraft.   

     

    6.3       All such credit memoranda will be issued concurrently with the delivery of each of the Aircraft, and may be used for [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

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    GOT-PA-3780-LA-1207737

     

    The Boeing Company
    P.O. Box 3707
    Seattle, WA     98124-2207
       

     

     

    7.  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Credit Memorandum

     

    7.1 Applicable to the Aircraft:

     

    In recognition of Customers [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] to operate its fleet, Boeing will provide Customer a [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] credit memorandum ([CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Credit Memorandum ) in the amount of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Aircraft.   

      

    7.2 Applicable to the Substitute Aircraft:

     

    The [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Credit Memoranda associated with the purchase of a Substitute Aircraft will be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Substitute Aircraft.

     

    7.3       All such credit memoranda will be issued concurrently with the delivery of each Aircraft or Substitute Aircraft, as applicable, and may only be used for [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

     

    8.  MAX Introductory Support Credit Memorandum

     

    8.1 Applicable to the Aircraft:

     

     In recognition of the effect that introducing the Aircraft may have on the Customer’s aircraft support operations, Boeing will provide Customer a MAX introductory support credit memorandum ( MAX Introductory Support Credit Memorandum ) in the amount of [CONFIDENTIAL PORTION OMITTED AND FILED

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    SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Aircraft, subject to escalation, at the time of each Aircraft delivery.  Customer may elect to receive the MAX Introductory Support Credit Memorandum in advance on [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] in the fixed amount [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Aircraft not subject to escalation. 

     

    8.2       Applicable to the Substitute Aircraft:

     

    The MAX Introductory Support Credit Memoranda associated with the purchase of a Substitute Aircraft will be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Substitute Aircraft, subject to escalation at the time of each Substitute Aircraft delivery.

     

    8.3       [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    9.  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Credit Memoranda

     

    9.1             [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], Boeing will provide Customer a [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] credit memorandum ([CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Credit Memorandum ) in the amount of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], per Aircraft 

     

    9.2 Applicable to the Substitute Aircraft:

     

    The [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Credit Memoranda associated with the purchase of a Substitute Aircraft will be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], per Substitute Aircraft, at the time of the Substitute Aircraft delivery.

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    GOT-PA-3780-LA-1207737

     

     

    9.3       All such credit memoranda will be issued concurrently with the delivery of each of the Aircraft or Substitute Aircraft, as applicable, and may be used for [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].  The Credit Memoranda to Customer may not [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

     

    10.       Special Considerations for Aircraft Originating from a Purchase Right Exercise

     

                (a)    In the event that the Customer converts a Purchase Right as granted in Letter Agreement GOT-PA-03780-LA-1207834 into a firm Aircraft purchase, that exercised purchase right aircraft is provided with the same special considerations defined for an Aircraft in paragraphs 1 through 9 above with the exception [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].    

     

    (b)  Exercised purchase right aircraft may be converted into Substitute Aircraft per the terms and conditions defined in Letter Agreement GOT-PA-03780-LA-1207835.  In the event that this occurs, the 737-7 aircraft will be provided with the same special considerations defined for a Substitute Aircraft in paragraphs 1 through 9 above.  

     

                (c)  Aircraft originating from a purchase right exercise will also be afforded all other considerations defined for Aircraft or Substitute Aircraft as applicable as in the Purchase Agreement, with the noted exception that [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] as purchase rights are exercised.

     

    11.       Advance Payments and Base Year Pricing – Aircraft and Substitute Aircraft

     

                     (a)  The Advance Payment terms and conditions for the Aircraft and Substitute Aircraft are the same as those terms and conditions described in Letter Agreement No. GOT-PA-03780-LA-1207836, Advance Payment Matters to the Purchase Agreement.

     

                     (b)  The terms and conditions regarding [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] in the Letter Agreement No. GOT-PA-03780-LA-1207835, Substitution of Model 737- [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Aircraft into Model 737- [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Aircraft , notwithstanding, the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Table A (attached hereto) for Substitute Aircraft, but not for 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] aircraft originating from [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] and subsequent or concurrent substitution from a 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] into a 737-[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

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                     (c)  The purchase terms of each of the Substitute Aircraft, as well as all of the business considerations described in this Letter Agreement that are subject to escalation (STE) are each subject to the terms and conditions described in Letter Agreement No. GOT-PA-03780-LA-1207840, [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Escalation Program . 

     

    12.       Escalation of Credit Memoranda

     

    Unless otherwise noted, the amounts of the Credit Memoranda stated in Paragraphs 1 through 9 are in [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] year dollars and will be escalated to the scheduled month of the respective Aircraft or Substitute Aircraft delivery pursuant to the Airframe Escalation formula set forth in the Purchase Agreement applicable to the Aircraft.  Note that this includes the effect of Letter Agreement No. GOT-PA-03780-LA-1207840, [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].  The Credit Memoranda may, at the election of Customer, be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].  They may not be used towards [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

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    13.  Assignment

    Unless otherwise noted herein, the Credit Memoranda described in this Letter Agreement are provided as a financial accommodation to Customer and in consideration of Customer’s taking title to the Aircraft at time of delivery and becoming the operator of the Aircraft.  This Letter Agreement cannot be assigned, in whole or in part, without the prior written consent of Boeing.

     

    14.  Confidentiality

    Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties.  Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.  In addition to any equitable relief that may be available to Boeing in the event of a breach of this clause, Boeing may rescind the Launch Customer Credit Memorandum contained in paragraph 4 above, in the event of any unauthorized disclosure by Customer.

     

    If the foregoing correctly sets forth your understanding of our agreement with respect to the matters treated above, please indicate your acceptance and approval below.

     

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    BOEING PROPRIETARY  

     

    GOT-PA-3780-LA-1207737

     

     

    Very truly yours,

     

    THE BOEING COMPANY

     

     

    By _________________________

     

    Its                 Attorney‑In‑Fact      

     

     

     

    ACCEPTED AND AGREED TO this

     

    Date:                                       2012­­­­­­­­­ 

     

     

    GAC INC.

     

     

    By _________________________          By _________________________         

     

    Its                                                          Its                                                           

     

     

    Witness                                                 Witness                                                  

     

     

     

    PA 3780                                                                                                                                            

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    BOEING PROPRIETARY  

     

     

    		     

    The Boeing Company
    P.O. Box 3707
    Seattle, WA 98124‑2207

        

     

     

    GOT-PA-3780-LA-1207734

     

     

    GAC, Inc.

    PO Box 309, Ugland House

    Grand Cayman

    KY1-1104

    Cayman Islands

     

    Subject:          Liquidated Damages – Non-Excusable Delay

     

    Reference:    a) Purchase Agreement No. PA-3780 ( Purchase Agreement ) between The Boeing Company ( Boeing ) and GAC Inc. ( Customer ) relating to Model 737-8 aircraft ( Aircraft ) 

     

                            b) Letter Agreement No. GOT-PA-03780-LA-1207842, Open Matters

     

                            c) Letter Agreement No. GOT-PA-03780-LA-1207848, Flexible Delivery

        Positions

     

    This letter agreement ( Letter Agreement ) amends and supplements the Purchase Agreement.  All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.

    Definition of Terms:

    Non-Excusable Delay :  Delay in delivery of any Aircraft beyond the last day of the delivery month ( Scheduled Delivery Month ) established in the Purchase Agreement by any cause that is; 1) not associated to any Aircraft delivery schedule adjustments as provided for in Reference (b), Article 1, 2) not associated to any Aircraft delivery schedule adjustments as provided for in Reference (c) and, 3) not an Excusable Delay pursuant to Article 7 of the AGTA and for which Customer is otherwise entitled to a remedy from Boeing pursuant to applicable law.

    1.             Liquidated Damages . 

    1.1          Model 737-8 Aircraft:

    Boeing agrees to pay Customer liquidated damages for each day of Non-Excusable Delay in excess of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT](collectively the Non-Excusable Delay Payment Period ) at a rate of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Aircraft not to exceed an aggregate sum of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION

     

     

     

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    GOT-PA-3780-LA-1207734

    		 

    		     
        

    PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Aircraft ( Liquidated Damages ).  Liquidated Damages shall be payable at (i) actual delivery of the Aircraft, or, [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], whichever occurs last.

    1.2          Model 737[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Substitute Aircraft:

    In the event than an Aircraft is converted into a Substitute Aircraft, Boeing agrees to pay Customer liquidated damages for each day of Non-Excusable Delay in excess of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] days (collectively the Non-Excusable Delay Payment Period ) at a rate of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per day per Aircraft not to exceed an aggregate sum of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Aircraft ( Liquidated Damages ).  Liquidated Damages shall be payable at (i) actual delivery of the Aircraft, or, [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], whichever occurs last.

     

    2.             Interest . 

    In addition to the Liquidated Damages in paragraph 1,  for each day of Non-Excusable Delay commencing [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] days after the Scheduled Delivery Month, Boeing will pay Customer interest calculated as follows ( Interest ): 

    The product of the daily interest rate (computed by dividing the interest rate in effect for each day by three hundred sixty-five (365) day, or three hundred sixty-six (366) days, as the case may be) times the entire amount of advance payments received by Boeing for such Aircraft.  The interest rate in effect for each day shall be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    Such interest will be calculated on a simple interest basis and paid in full concurrent with the payment of the Liquidated Damages.

    3.             [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    Customer will not have the right to refuse to accept delivery of any Aircraft because of a Non-Excusable Delay unless and until the aggregate duration of the Non-Excusable Delay for such Aircraft exceeds [CONFIDENTIAL PORTION OMITTED AND

     

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    FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] ( Non-Excusable Delay Period ). Within [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] days of receipt of written notice from Boeing that delivery of an aircraft will be delayed beyond the Non-Excusable Delay Period, either party [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] by written or telegraphic notice given to the other. If neither Party [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] within said [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] day period the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] for that Aircraft.

    4.             Disposition of Advance Payments . 

    If the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] with respect to any Aircraft for a Non-Excusable Delay, Boeing will, in addition to paying Liquidated Damages and Interest as described above, [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    5.             Exclusive Remedies . 

    The remedies set forth in this Letter Agreement are Customer’s exclusive remedies for a Non-Excusable Delay and are in lieu of all other damages, claims, and remedies of Customer arising at law or otherwise for any Non-Excusable Delay in the Aircraft delivery.  Customer hereby waives and renounces all other claims and remedies arising at law or otherwise for any such Non-Excusable Delay.

    6.             Assignment . 

    Notwithstanding any other provisions of the Purchase Agreement, the rights and obligations described in this Letter Agreement are provided to Customer in consideration of Customer’s becoming the operator of the Aircraft and cannot be assigned in whole or, in part.

    7.             Confidential Treatment . 

    The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties.  Customer will limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.

     

     

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    GOT-PA-3780-LA-1207734

    		 

    		     
        

     

    Very truly yours,

     

    THE BOEING COMPANY

     

     

    By _________________________

     

    Its                 Attorney‑In‑Fact      

     

     

     

    ACCEPTED AND AGREED TO this

     

    Date:                                       2012­­­­­­­­­ 

     

     

    GAC INC.

     

     

    By _________________________          By _________________________         

     

    Its                                                                      Its                                                           

     

     

    Witness                                                            Witness                                                  

     

     

     

    PA-3780
    Liquidated Damages Non-Excusable Delay  LA Page 5
    BOEING PROPRIETARY

     

     

     

    		     

    The Boeing Company
    P.O. Box 3707
    Seattle, WA 98124-2207

        


    GOT-PA-3780-LA-1207839

     

     

    GAC, Inc.

    PO Box 309, Ugland House

    Grand Cayman

    KY1-1104

    Cayman Islands

     

     

    Subject:          Demonstration Flight Waiver

     

    Reference:    Purchase Agreement No.3780 (the Purchase Agreement) between The Boeing Company (Boeing) and GAC Inc. (Customer) relating to Model 737-8 aircraft (the Aircraft)

    This letter agreement ( Letter Agreement ) amends and supplements the Purchase Agreement.  All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.

    Definition of Terms:

     

    Correction Costs :  Customer's direct labor costs and the cost of any material required to correct a Flight Discrepancy where direct labor costs are equal to the Warranty Labor Rate in effect between the parties at the time such labor is expended.

     

    Flight Discrepancy :  A failure or malfunction of an Aircraft, or the accessories, equipment or parts installed on the Aircraft which results from a defect in the Aircraft, Boeing Product, engine or Supplier Product or a nonconformance to the Detail Specification for the Aircraft.

     

    The AGTA provides that each aircraft will be test flown prior to delivery for the purpose of demonstrating the functioning of such Aircraft and its equipment to Customer; however, Customer may elect to waive this test flight.  For each test flight waived, Boeing agrees to provide Customer an amount of jet fuel at delivery that, including the standard fuel entitlement, totals the following amount of fuel:

     

    Aircraft Model

    Total Fuel Entitlement
    (U.S. Gallons)

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

     

     

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    Further, Boeing agrees to reimburse Customer for any Correction Costs incurred as a result of the discovery of a Flight Discrepancy during the first flight of the aircraft by Customer following delivery to the extent such Correction Costs are not covered under a warranty provided by Boeing, the engine manufacturer or any of Boeing’s suppliers.

    Should a Flight Discrepancy be detected by Customer which requires the return of the Aircraft to Boeing's facilities at Seattle, Washington, so that Boeing may correct such Flight Discrepancy, Boeing and Customer agree that title to and risk of loss of such Aircraft will remain with Customer.  In addition, it is agreed that Boeing will have responsibility for the Aircraft while it is on the ground at Boeing's facilities in Seattle, Washington, as is chargeable by law to a bailee for mutual benefit, but Boeing shall not be liable for loss of use.

    To be reimbursed for Correction Costs, Customer shall submit a written itemized statement describing any flight discrepancies and indicating the Correction Cost incurred by Customer for each discrepancy.  This request must be submitted to Boeing’s Contracts Regional Director at Renton, Washington, within ninety (90) days after the first flight by Customer.  Such Correction Costs reimbursement will be made by Boeing to Customer within thirty (30) days of Boeing's receipt of Customer's request for reimbursement.

     

     

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    Very truly yours,

     

    THE BOEING COMPANY

     

     

    By _________________________

     

    Its                 Attorney‑In‑Fact      

     

     

     

    ACCEPTED AND AGREED TO this

     

    Date:                                       2012­­­­­­­­­ 

     

     

    GAC INC.

     

     

    By _________________________          By _________________________         

     

    Its                                                                      Its                                                           

     

     

    Witness                                                            Witness                                                  

     

     

     

     

    PA-3780
    Demonstration Flight Waiver    LA Page 3
    BOEING PROPRIETARY

     

     

     

     

    		     

    The Boeing Company
    P.O. Box 3707
    Seattle, WA 98124-2207

        

    GOT-PA-3780-LA-1207840

     

    GAC, Inc.

    PO Box 309, Ugland House

    Grand Cayman

    KY1-1104

    Cayman Islands

     

    Subject:          [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Escalation Program

     

    Reference:    Purchase Agreement No. 3780 ( Purchase Agreement ) between The Boeing Company ( Boeing ) and GAC Inc. ( Customer ) relating to Model 737-8 aircraft ( Aircraft ) 

    This letter agreement ( Letter Agreement ) amends and supplements the Purchase Agreement.  All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.

    1.                             Definitions . 

    Escalation Notice means the written communication provided by Boeing to Customer in accordance with the requirements of Article 4.1, below.

    Program Aircraft means each Aircraft specified in Table 1 of the Purchase Agreement as of the date of this Letter Agreement.

    2.                             Applicability . 

    Notwithstanding any other provision of the Purchase Agreement to the contrary, the parties agree that the Escalation Adjustment for the Airframe Price and Optional Features Prices for each Program Aircraft shall be determined in accordance with this Letter Agreement. Should Customer exercise its right of substitution such that a Program Aircraft shall become a model 737-7 aircraft, such model 737-7 aircraft will become Program Aircraft under the terms of this Letter Agreement.

     

    3.                             Escalation Forecast . 

    Boeing will release an escalation forecast in February and August of each year based on Boeing’s then current standard ECI-MFG/CPI escalation formula.  Only one escalation forecast shall be used to conduct the escalation analysis performed in accordance with Article 4.1, below, for a given Program Aircraft.  The escalation forecast applicable to a given Program Aircraft is set forth in Attachment A.

     

     

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    GOT-PA-3780-LA-1207840

    		 

    		     
        

     

     

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    6. Applicability to Other Financial Consideration . 

    The escalation adjustment for any other sum, identified in the Purchase Agreement as subject to escalation pursuant to Supplemental Exhibit AE1, and which pertains to the Program Aircraft shall be calculated using the escalation methodology established in this Letter Agreement for such Program Aircraft notwithstanding any other provisions of the Purchase Agreement to the contrary.

    7.     Assignment.  

    Except for an assignment by Customer to a wholly-owned subsidiary as permitted under Article 9, entitled “Assignment, Resale, or Lease” of the AGTA, this Letter Agreement is provided as an accommodation to Customer in consideration of Customer becoming the operator of the Aircraft and cannot be assigned in whole or in part.

    8.     Confidential Treatment . 

    Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties.  Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.

     

    Very truly yours,

     

    THE BOEING COMPANY

     

     

    By _________________________

     

    Its                 Attorney‑In‑Fact      

     

     

     

    ACCEPTED AND AGREED TO this

     

    Date:                                       2012­­­­­­­­­ 

     

     

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    GOT-PA-3780-LA-1207840

    		 

    		     
        

     

     

    GAC INC.

     

     

    By _________________________          By _________________________         

     

    Its                                                                      Its                                                            

     

     

    Witness                                                            Witness                                                  

     

     

     

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    ATTACHMENT A

    Escalation Forecast & Escalation Notice Date

     

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

     

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    ATTACHMENT B

    Escalation Factors - July 2011 Base Year

     

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

     
    PA-3780
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    BOEING PROPRIETARY

     

     

     

    The Boeing Company
    P.O. Box 3707
    Seattle, WA     98124-2207
       

     

    GOT-PA-3780-LA-1207841

     

     

    GAC, Inc.

    PO Box 309, Ugland House

    Grand Cayman

    KY1-1104

    Cayman Islands

     

    Subject:          Boeing Purchase of Buyer Furnished Equipment

     

    Reference:    Purchase Agreement No. 3780 ( Purchase Agreement ) between The Boeing Company ( Boeing ) and GAC, Inc. ( Customer ) relating to Model 737-8 aircraft ( Aircraft ) 

    This letter agreement ( Letter Agreement ) amends and supplements the Purchase Agreement.  All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.

    Customer will sell to Boeing the Buyer Furnished Equipment ( BFE ) listed in the Annex to Exhibit A to this Letter Agreement under the terms and conditions set forth below.

    1.                  Customer will deliver to Boeing a bill of sale for the BFE conveying good title, free of any encumbrances, in the form of Exhibit A to this Letter Agreement ( BFE Bill of Sale ) immediately prior to delivery of the Aircraft.

    2.                  The BFE purchase price will be the amount stated on the BFE Bill of Sale applicable to the Aircraft and will be paid to Customer immediately after receipt by Boeing of the Aircraft Price balance and Aircraft delivery, at which time Boeing will deliver a bill of sale for the BFE to Customer at the time of payment in the form of Exhibit B to this Letter Agreement.

    3.              Customer will pay to Boeing a fee equal to [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of the BFE Purchase Price ( Fee ) as part of this Letter Agreement.

    4.               The purchase price of the Aircraft will be increased by the amount paid by Boeing for the BFE as shown on the applicable BFE Bill of Sale plus any amounts which are identified at the time of Aircraft delivery to be due to Boeing from Customer pursuant to the provisions of paragraph 3, above.  The remainder of any charges due Boeing from Customer pursuant to paragraph 3 will be payable to Boeing upon demand.

     

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    5.             Customer will indemnify and hold harmless Boeing from and against all claims, suits, actions, liabilities, damages, costs and expenses for any actual or alleged infringement of any patent issued or equivalent right under the laws of any country arising out of or in any way connected with any sale, purchase, use, ownership, delivery, transfer, storage or other activity associated with any of the BFE purchased as part of this Letter Agreement.

    6.             Customer will indemnify and hold harmless Boeing from and against all claims and liabilities, including costs and expenses (including attorneys' fees) incident thereto or incident to successfully establishing the right to indemnification, for injury to or death of any person or persons, including employees of Customer but not employees of Boeing, or for loss of or damage to any property, including any aircraft, arising out of or in any way connected with the performance by Boeing of services or other obligations under this Letter Agreement and whether or not arising in tort or occasioned in whole or in part by the negligence of Boeing.

    7.             Boeing makes no warranty other than warranty of such title to the BFE as has been transferred by Customer to Boeing pursuant to this Letter Agreement.  The exclusion of liabilities and other provisions of the AGTA are applicable to this Letter Agreement.

    8.             For the purposes of this Letter Agreement, the term "Boeing" includes The Boeing Company, its divisions, subsidiaries, affiliates, the assignees of each, and their directors, officers, employees and agents.

     

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    Very truly yours,

     

    THE BOEING COMPANY

     

     

    By _________________________

     

    Its                 Attorney‑In‑Fact            

     

     

     

    ACCEPTED AND AGREED TO this

     

    Date:                                       2012­­­­­­­­­    

     

     

    GAC INC.

     

     

    By _________________________          By _________________________         

     

    Its                                                                      Its                                                           

     

     

    Witness                                                           Witness                                                  

     

     

     

    PA 3780

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    Exhibit A

    FULL WARRANTY BILL OF SALE

     

    GAC, Inc.(or GOL, or ) ( Seller ) in consideration of the promise of The Boeing Company ( Buyer ) to pay to Seller + U.S. Dollars ($+) hereby sells to Buyer the goods described in the Schedule of Equipment attached hereto ( BFE ).  Such payment by Buyer will be made immediately after delivery to Seller of and payment for the Aircraft bearing Manufacturer's Serial No. + on which the BFE is installed.

    Seller warrants to Buyer that it has good title to the BFE free and clear of all liens, encumbrances and rights of others; and that it will warrant and defend such title against all claims and demands whatsoever.

    This Full Warranty Bill of Sale is delivered by Seller to Buyer in Seattle, Washington, and governed by the law of the State of Washington, U.S.A. EXCLUSIVE OF WASHINGTON'S CONFLICTS OF LAWS PRINCIPLES.

     

    GAC, Inc.

     

     

    By:

     

     

    Date:

     

     

    Receipt of this Full Warranty Bill of Sale is hereby acknowledged by Buyer by its duly authorized representative.

     

    THE BOEING COMPANY

     

    By:

     

     

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    SCHEDULE OF EQUIPMENT (BFE)

    Applicable to

    Model 737-_ Aircraft bearing

    Manufacturer's Serial No. <MSN>

    Document PED

    Issued +

    Revision of +

     

    PA 3780

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    Exhibit B

    BOEING BILL OF SALE

    The Boeing Company ( Seller ) in consideration of the sum of $1.00 and other valuable consideration hereby sells to GAC, Inc. ( Buyer ) the goods described in the Schedule of Equipment attached hereto ( BFE ). 

    Seller represents and warrants that it has such title to the BFE as was previously transferred to Seller by Buyer and that it hereby conveys such BFE and such title thereto to Buyer.

    This Boeing Bill of Sale is delivered by Seller to Buyer in Seattle, Washington, and governed by the law of the State of Washington, U.S.A EXCLUSIVE OF WASHINGTON'S CONFLICTS OF LAWS PRINCIPLES.

     

    THE BOEING COMPANY

     

    By:

     

     

    Receipt of this Full Warranty Bill of Sale is hereby acknowledged by Buyer by its duly authorized representative.

     

    GAC, Inc.

     

     

    By:

     

     

    Date:

     

     

    PA 3780

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    SCHEDULE OF EQUIPMENT (BFE)

    Applicable to

    Model 737-__ Aircraft bearing

    Manufacturer's Serial No. <MSN>

    Document PED

    Issued +

    Revision of +

     

     

    PA 3780

    Boeing Purchase of BFE                                                                                           

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    BOEING PROPRIETARY

     

     

     

     

     

    The Boeing Company
    P.O. Box 3707
    Seattle, WA     98124-2207
       

     

    GAC, Inc.

    PO Box 309, Ugland House

    Grand Cayman

    KY1-1104

    Cayman Islands

     

     

     

    Subject:          Open Matters

     

    Reference:    Purchase Agreement No. 3780 ( Purchase Agreement ) between The Boeing Company ( Boeing ) and GAC, Inc. ( Customer ) relating to Model 737-8 aircraft ( Aircraft ) 

     

    This letter agreement ( Letter Agreement ) amends and supplements the Purchase Agreement.  All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.

     

                Given the long period of time between Purchase Agreement signing and delivery of the first Aircraft and the continued development of the 737-8 program, certain contractual elements may be subject to further refinement or development.  Such elements may include but are not limited to; Aircraft delivery schedule, Aircraft configuration, pre-delivery customer support, performance guarantees, etc.  In consideration, Boeing and Customer agree to the following:  

     

    1.             Aircraft Delivery Schedule . 

    1.1          The scheduled delivery of the Aircraft, as of the date of this Letter Agreement, is provided in Table 1 of the Purchase Agreement in delivery years (Delivery Year).  No later than [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] months prior to each Delivery Year, Boeing will provide written notice to Customer with a revised Table 1 of the applicable Delivery Year Aircraft in [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] months prior to each Delivery Year Boeing will provide written notice to Customer with a revised Table 1 of the applicable Delivery Year Aircraft [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]. For illustrative purposes, as applicable to the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY

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    WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Delivery Year [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Aircraft, Boeing will provide delivery notice to Customer as follows[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    1.2          Subsequent to Customer’s receipt of the notices described in Article 1.1, Boeing will consider and make reasonable efforts to accommodate any Customer requests regarding Aircraft quantities in certain periods.  Such notices provided by Boeing will constitute an amendment to the Table 1 of the Purchase Agreement.  The amended Table 1 shall be the scheduled delivery positions for the purposes of applying all provisions of the Purchase Agreement, including without limitation the BFE on-dock dates, calculation of Escalation Adjustment, and determination of the advanced payment schedule, however, the amended Table 1 will not revise or change the Advance Payment Base Price for the Aircraft. 

    2.             Aircraft Configuration . 

    2.1       The initial configuration of Customer's Model 737-8  Aircraft is an open configuration based on the 737-8 basic specification D019A007 with an Optional Features Price estimate applied that provides a configuration similar to the Customer existing 737-800 configuration ( Initial Configuration ).  Final configuration of the Aircraft ( Final Configuration ) will be completed using the then-current Boeing 737-8 configuration documentation in accordance with the following schedule:

    2.1.1      No later than twenty-four (24) months prior to the first Aircraft's scheduled delivery, Boeing and Customer will discuss potential optional features.

    2.1.2      Within sixty (60) days after that meeting, Boeing will provide Customer with a proposal for those optional features that can be incorporated into the Aircraft during production.

    2.1.3      Customer will then have sixty (60) days to accept or reject the optional features.

    2.1.4      Within thirty (30) days following Final Configuration, Boeing and Customer will execute a written amendment to the Purchase Agreement which will reflect the following:

    2.1.4.1                 Changes applicable to the basic Model 737-8 aircraft which are developed by Boeing between the date of signing of the Purchase Agreement and date of Final Configuration.

    2.1.4.2                 Incorporation into Exhibit A of the Purchase Agreement, by written amendment, those optional features which have been agreed to by Customer and Boeing ( Customer Configuration Changes ); 

     

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    2.1.4.3                 Revisions to the Supplemental Exhibit BFE1 to reflect the selection dates and on-dock dates of BFE;

    2.1.4.4                 Changes to the Optional Features Prices, and Aircraft Basic Price to adjust for the difference, if any, between the prices estimated in Table 1 of the Purchase Agreement for optional features reflected in the Aircraft Basic Price and the actual prices of the optional features reflected in the Customer Configuration Changes.  Such changes will be reflected in Exhibit A of the Purchase Agreement and revised Advance Payment Base Price provided in Table 1. 

     

    3.             Customer Support Variables.

    3.1          The initial customer support package contained in Supplemental Exhibit CS1 to the Purchase Agreement is predicated upon the 737NG customer support package.  Boeing intends to further refine the customer support package for the 737-8 and will provide this revised package to Customer no later than twenty-four (24) months prior to the first month of the scheduled delivery quarter of the first Aircraft.  The provision of such revised Supplemental Exhibit CS1 will constitute an amendment to the Purchase Agreement and will provide the Customer in aggregate an overall Boeing customer support package that is equivalent to, or better than, the Supplemental Exhibit CS1 included in the Purchase Agreement as of the date of this Letter Agreement.

     

    3.2       Additionally, Boeing will engage in discussions with Customer in conjunction with providing the updated Supplemental Exhibit CS1 to offer to Customer additional uniquely tailored post delivery customer support services beyond the scope of the Supplemental Exhibit CS1 that will further enhance the maintainability and operational efficiency of the Aircraft.

     

    4.             Performance Guarantees . 

    At the time of signing of the Purchase Agreement, the performance specification for the Aircraft is not fully defined and as such, Boeing will provide Customer a forecast of the fuel burn of the 737-8 for the performance conditions in the Comparison Procedure, as defined in the Performance Matters Letter Agreement GOT-PA-0370-LA-1207735, applicable to the Aircraft [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] months prior to delivery of the Customer’s first Aircraft (Interim Performance Assessment).   Refer to Letter Agreement GOT-PA-0370-LA-1207735 “Performance Matters” [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

     

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    5.             Other Letter Agreements :

    Boeing and Customer     acknowledge that as they work together to develop the 737-8 program, and as Boeing refines the definition of the Aircraft and associated production processes, there may be a need to execute or amend the letter agreements addressing one or more of the following: 

    5.1          Software .  Additional provisions relating to software and software loading.

    5.2          Buyer Furnished Equipment ( BFE ) .  Provisions relating to the terms under which Boeing may install and certify Customer’s BFE in the Aircraft.

     

    If the foregoing correctly sets forth your understanding of our agreement with respect to the matters treated above, please indicate your acceptance and approval below.

     

     

    Very truly yours,

     

    THE BOEING COMPANY

     

     

    By _________________________

     

    Its                 Attorney‑In‑Fact            

     

     

     

    ACCEPTED AND AGREED TO this

     

    Date:                                       2012­­­­­­­­­     

     

     

    GAC INC.

     

     

    By _________________________          By _________________________         

     

    Its                                                                      Its                                                                 

     

     

    Witness                                                            Witness                                                     

     

     

     

    The Boeing Company
    P.O. Box 3707
    Seattle, WA     98124-2207
       

     

    GOT-PA-3780-LA-1207845

     

     

    GAC, Inc.

    PO Box 309, Ugland House

    Grand Cayman

    KY1-1104

    Cayman Islands

     

    Subject:          AGTA Matters

     

    Reference:    Purchase Agreement No.3780 (the Purchase Agreement) between The Boeing Company (Boeing) and GAC Inc. (Customer) relating to Model 737-8 aircraft (the Aircraft)

    This letter agreement ( Letter Agreement ) amends and supplements the Purchase Agreement.  All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.

    1.             AGTA Basic Articles . 

    1.1.1      Article 2.1.1, “Airframe Price,” of the basic articles of the AGTA is revised to read as follows:  Airframe Price is defined as the price of the airframe for a specific model of aircraft described in a purchase agreement.  (For Models 737-600, 737-700, 737-800, 737-900, 737-7, 737-8, 737-9, 747-8, 777-200LR, and 777-300ER the Airframe Price includes the engine price at its basic thrust level.)

    1.1.2      Article 2.1.3, “Engine Price” of the basic articles of the AGTA is revised to read as follows:  Engine Price is defined as the price set by the engine manufacturer for a specific engine to be installed on the model of aircraft described in a purchase agreement (not applicable to Models 737-600, 737-700, 737-800, 737-900, 737-7, 737-8, 737-9, 747-8, 777-200LR and 777-300ER).

    1.1.3      Article 2.1.5, “Escalation Adjustment” of the basic articles of the AGTA is revised to read as follows:  Escalation Adjustment is defined as the price adjustment to the Airframe Price (which includes the basic engine price for Models 737-600, 737-700 737-800, 737-900, 737-7, 737-8, 737-9, 747-8, 777-200LR and 777-300ER) and the Optional Features Prices resulting from the calculation using the economic price formula contained in the Airframe and Optional Features Escalation Adjustment supplemental exhibit to the applicable purchase agreement.  The price adjustment to the Engine Price for all other models of aircraft will be calculated using the economic price formula in the Engine Escalation Adjustment supplemental exhibit to the applicable purchase agreement.

     

    2.             Appendices to the AGTA . 

     

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    2.1          Appendix I, entitled “SAMPLE Insurance Certificate” the Combined Single Limit Bodily Injury and Property Damage: U.S. Dollars ($) any one occurrence each Aircraft (with aggregates as applicable) is added for the 737-7/8/9 in the amount of US$550,000,000. 

    3.             Exhibit C to the AGTA, “Product Assurance Document” . 

    3.1       Part 2, Article 3.1, subsection (i), of Exhibit C of the AGTA is revised to read as follows:      for Boeing aircraft models 777F, 777-200, -300, 737-600, -700, -800, -900, -7, -8, -9, 787 or new aircraft models designed and manufactured with similar, new technology and for the model 747-8, the warranty period ends forty-eight (48) months after Delivery. 

     

    Very truly yours,

     

    THE BOEING COMPANY

     

     

    By _________________________

     

    Its                 Attorney‑In‑Fact            

     

     

     

    ACCEPTED AND AGREED TO this

     

    Date:                                       2012­­­­­­­­­     

     

     

    GAC INC.

     

     

    By _________________________          By _________________________         

     

    Its                                                                      Its                                                           

     

     

    Witness                                                            Witness                                                  

     

     

    PA 3780                                                                                                                                           

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    The Boeing Company
    P.O. Box 3707
    Seattle, WA     98124-2207
       

     

    GOT-PA-3780-LA-1207848

     

    GAC, Inc.

    PO Box 309, Ugland House

    Grand Cayman

    KY1-1104

    Cayman Islands

     

    Subject:          Flexible Delivery Positions

     

    Reference:    Purchase Agreement No. 3780 ( Purchase Agreement ) between The Boeing Company ( Boeing ) and GAC Inc. ( Customer ) relating to Model 737-8 aircraft ( Aircraft ) 

     

    This letter agreement ( Letter Agreement ) amends and supplements the Purchase Agreement.  All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.

     

    To provide the flexibility to adjust its fleet plans to accommodate uncertain market conditions, Boeing provides to Customer, and Customer in turn agrees to allow Boeing the right to reschedule up to [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Aircraft, subject to the following terms and conditions:

     

    1.                             Aircraft with Flexible Delivery Positions:

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    2.                             Written Notice . 

    2.1       Customer’s Written Notice:            Customer shall provide Boeing written notice of its request to reschedule an Aircraft’s delivery position no later than the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] day of the month that is [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] months prior to the Aircraft’s contracted delivery position as defined in Table 1 of the Purchase Agreement.  Note that the delivery positions may be defined as Delivery Year, [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Window, or Scheduled Delivery Month depending on the timing of Customer’s request to reschedule.  The maximum schedule adjustment is [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] months from the Aircraft’s contracted delivery position.

               

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    Customer’s right to request a rescheduled delivery date for an Aircraft expires in the event that a written request to reschedule is not provided to Boeing in the time period defined above.  At any time prior to the written notice requirement, Customer may provide written notice to Boeing of its desire to forfeit its reschedule right related to certain Aircraft.  Once Customer forfeits it’s reschedule right the specified Aircraft can no longer be rescheduled by either party.

     

    2.2       Boeing’s Written Notice: In the event that Boeing desires to reschedule one or more of the Aircraft delivery positions noted in Article 1 above, Boeing shall provide Customer a written notice of its desire to reschedule an Aircraft’s contracted delivery position no later than the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] day of the month that is [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] months prior to the Aircraft’s contracted delivery position as defined in Table 1 of the Purchase Agreement.  Note that Delivery Positions may be defined as Delivery Year, [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Window, or Scheduled Delivery Month depending on the timing of Boeing’s request to reschedule.  The maximum schedule adjustment is [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] months from the Aircraft’s contracted delivery position.

                Boeing’s right to reschedule a delivery date for an Aircraft expires in the event that a written reschedule notification is not provided to Customer in the time period defined above.

     

    3.                             Boeing’s Production Capability . 

    Once Boeing has received Customer’s written request, Boeing will review Customer’s request to reschedule a contracted delivery position into a new Delivery [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], or [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] (as applicable) and either concur with the requested reschedule or, if Boeing is unable to manufacture the Aircraft in the requested Delivery [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], or [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] then Boeing shall promptly make a written offer of an alternate Delivery [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], or [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] for Customer’s consideration and written acceptance within [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of such offer.  Such offer to Customer will be based on the following factors:

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    3.1          Boeing having the production capability to produce the Aircraft in the requested Delivery [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] or [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    3.2          Rescheduling the Aircraft to the requested Delivery [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] or [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] cannot create a gap in the Customer’s delivery stream of more than [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] months between delivery positions.

    3.3          The maximum delivery position reschedule cannot exceed [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] from the contracted delivery date to the rescheduled delivery date.

     

    PA-3780                                                                                                                                           

    Flexible Delivery Positions                                                                                               

    Page 3

    BOEING PROPRIETARY

     

    GOT-PA-3780-LA-1207848  

     

    3.4          All of Boeing’s quoted delivery positions for rescheduled Aircraft shall be considered preliminary until such time as the parties enter into a definitive agreement to incorporate the effect of the reschedule in the Purchase Agreement.

    4.                             Definitive Agreement . 

    The reschedule rights and Boeing obligation in this Letter Agreement are further conditioned upon Customer and Boeing’s executing a definitive agreement for the purchase of the rescheduled Aircraft within [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] days of Customer’s written Notice to Boeing or of Customer’s acceptance of an alternate delivery month in accordance with Article 2 and 3 above.  In the event that definitive agreement defining the rescheduled delivery position is not reached, and there is less than [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT](months) between the originally contracted delivery date and the rescheduled delivery date, then the right to reschedule that particular Aircraft expires. 

    5.                             Price and Advance Payments . 

    5.1          The Airframe, Engine, and Optional Features Price will be provided in [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] dollars and escalated to the new delivery month using CPI base indices for the newly provided delivery positions in accordance with the terms and conditions of the Purchase Agreement. [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    6.                             Assignment . 

    Notwithstanding any other provisions of the Purchase Agreement, the rights and obligations described in this Letter Agreement are provided to Customer in consideration of Customer’s becoming the operator of the Aircraft and cannot be assigned in whole or, in part.

    7.                             Confidential Treatment . 

    The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties.  Customer will limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.

    PA-3780                                                                                                                                         

    Flexible Delivery Positions                                                                                               

    Page 4

    BOEING PROPRIETARY

     

    GOT-PA-3780-LA-1207848  

     

     

    Very truly yours,

     

    THE BOEING COMPANY

     

     

    By _________________________

     

    Its                 Attorney‑In‑Fact           

     

     

     

    ACCEPTED AND AGREED TO this

     

    Date:                                       2012­­­­­­­­­     

     

     

    GAC INC.

     

     

    By _________________________          By _________________________         

     

    Its                                                                      Its                                                           

     

     

    Witness                                                            Witness                                                  

     

     

    PA-3780                                                                                                                                         

    Flexible Delivery Positions                                                                                               

    Page 5

    BOEING PROPRIETARY

     

     

     

    The Boeing Company
    P.O. Box 3707
    Seattle, WA     98124-2207
       

     

    GOT-PA-3780-LA-1207735

     

     

    GAC, Inc.

    PO Box 309, Ugland House

    Grand Cayman

    KY1-1104

    Cayman Islands

     

     

     

    Subject:          Performance Matters – 737-8

     

    Reference:    Purchase Agreement No.3780 (the Purchase Agreement) between The Boeing Company (Boeing) and GAC Inc. (Customer) relating to Model 737-8 aircraft (the Aircraft)

     

     

                     This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement.  All terms used but not defined in this Letter Agreement shall have the same Meaning as in the Purchase Agreement.

     

    All terms of this Letter Agreement will prevail in the event of any conflict between this Letter Agreement and any provision of the Purchase Agreement.

     

    As defined in the “Open Matters” Letter Agreement GOT-PA-03780-LA-1207842 between Boeing and Customer, Boeing will provide Customer with an Interim Performance Assesment (Interim Performance Assesment) of the 737-8 [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] prior to delivery of Customer’s first Model 737-8 Aircraft.

     

    1.         [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

      

    PA 3780                                                                                                                                            

    Performance Matters                                                                                                         

    Page 1

    BOEING PROPRIETARY  

     

    GOT-PA-3780-LA-1207735

     

     

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

     

    2.         Short Field Landing Weight Performance Capability

    Boeing projects that the short field landing weight capability of the Aircraft in [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] will [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] the landing weight capability of Customer's model 737-800 Aircraft delivering to Customer in [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] under Purchase Agreement 2910 based on a [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

     

    This landing weight capability provides the equivalent of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], using [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] combination. 

     

    PA 3780                                                                                                                                            

    Performance Matters                                                                                                         

    Page 2

    BOEING PROPRIETARY  

     

    GOT-PA-3780-LA-1207735

     

    Boeing's projection for the short field landing weight capability of the Aircraft is based upon of the use of available solutions including, but not limited to [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].  The performance guarantee confirming the short field landing weight capability of the Aircraft will be made available to Customer on or about the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]. 

    3.         Payload – Range Performance Capability

    Boeing projects that the payload – range capability of the Aircraft will [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] under Purchase Agreement 2910, [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]. 

    The specific capability is dependent on design weight selections and for certain airports, thrust selection. 

    The performance guarantee confirming the payload-range capability of the Aircraft will be made available to Customer on or about the 4th quarter of 2013.

     

    4.         Duplication of Benefits

     

    Boeing and Customer agree it is not the intent of the parties to provide benefits hereunder that duplicate benefits to be provided (a) by Boeing under the Purchase Agreement, or any other agreement between Boeing and Customer, or (b) by engine manufacturer under any agreement between engine manufacturer and Customer, due to the Aircraft not satisfying any performance metric similar to the Block Fuel Commitment or any performance metric that otherwise impacts fuel burn.  Boeing may offset its obligation to provide benefits hereunder against the benefits provided or to be provided to Customer by engine manufacturer or Boeing pursuant to such other guarantee or commitment.

     

    5.         Assignment

    Unless otherwise noted herein, the Credit Memoranda described in this Letter Agreement are provided as a financial accommodation to Customer and in consideration of Customer’s taking title to the Aircraft at time of delivery and becoming the operator of the Aircraft.  This Letter Agreement cannot be assigned, in whole or in part, without the prior written consent of Boeing.

     

    6.         Confidentiality

    PA 3780                                                                                                                                            

    Performance Matters                                                                                                         

    Page 3

    BOEING PROPRIETARY  

     

    GOT-PA-3780-LA-1207735

     

    Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties.  Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.  In addition to any equitable relief that may be available to Boeing in the event of a breach of this clause, Boeing may rescind the Launch Customer Credit Memorandum contained in paragraph 4 above, in the event of any unauthorized disclosure by Customer.

     

     

    If the foregoing correctly sets forth your understanding of our agreement with respect to the matters treated above, please indicate your acceptance and approval below.

     

    Very truly yours,

     

    THE BOEING COMPANY

     

     

    By _________________________

     

    Its                 Attorney‑In‑Fact            

     

     

     

    ACCEPTED AND AGREED TO this

     

    Date:                                       2012­­­­­­­­­     

     

     

    GAC INC.

     

     

    By _________________________          By _________________________         

     

    Its                                                                      Its                                                                

     

     

    Witness                                                            Witness                                                      

     

     

    PA 3780                                                                                                                                            

    Performance Matters                                                                                                         

    Page 4

    BOEING PROPRIETARY  

    Attachment A to Letter Agreement

    No. GOT-PA-03780-LA-1207735

    Page 1

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]
    FOR GOL (VRG Linhas Aereas S.A.) MODEL 737-8
    vALUE pRICING

    SECTION                       CONTENTS

    1              AIRCRAFT MODEL APPLICABILITY

    2              [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    3              AIRCRAFT CONFIGURATION

    4              CONDITIONS

    5              DEMONSTRATION

    P.A. No. 3780

    AERO-B-BBA4-M12-0306                                                                                                                           

    SS12-0107

    BOEING PROPRIETARY

     

    Attachment A to Letter Agreement

    No. GOT-PA-03780-LA-1207735

    Page 2

     

    1                      AIRCRAFT MODEL APPLICABILITY

    1.1                    The [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] contained in this attachment is applicable to the 737-8 Aircraft equipped with Boeing furnished LEAP-1B engines. 

    1.2                    The [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] is based on the performance of a 737-800 Aircraft with winglets and a maximum takeoff weight of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] pounds, a maximum landing weight of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] pounds, and a maximum zero fuel weight of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] pounds, and equipped with [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] engines.

    2                      [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    2.1.1               The [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] for a stage length of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] nautical miles in still air with a [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] pound payload using the conditions and operating rules defined below is:

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    P.A. No. 3780

    AERO-B-BBA4-M12-0306                                                                                                                           

     SS12-0107

    BOEING PROPRIETARY

     

    Attachment A to Letter Agreement

    No. GOT-PA-03780-LA-1207735

    Page 3

    Conditions and operating rules:

    Stage Length:

    The stage length is defined as the sum of the distances for the climbout maneuver, climb, cruise, and descent.

    Block Fuel:

    The block fuel is defined as the sum of the fuel used for taxi-out, takeoff and climbout maneuver, climb, cruise, descent, approach and landing maneuver, and taxi-in.

    Takeoff:

    The airport altitude is sea level.

     

    The takeoff gross weight is not limited by the airport conditions.

     

    Maximum takeoff thrust is used for the takeoff.

     

    The takeoff gross weight shall conform to FAA Regulations.

    Climbout Maneuver:

    Following the takeoff to [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] feet, the Aircraft accelerates to [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] KCAS while climbing to [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] feet above the departure airport altitude and retracting flaps and landing gear.

    P.A. No. 3780

    AERO-B-BBA4-M12-0306                                                                                                                           

    SS12-0107

    BOEING PROPRIETARY

     

    Attachment A to Letter Agreement

    No. GOT-PA-03780-LA-1207735

    Page 4

     

    Climb:

    The Aircraft climbs from [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] feet above the departure airport altitude to [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] feet altitude at [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] KCAS.

     

    The Aircraft then accelerates at a rate of climb of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] feet per minute to the recommended climb speed for minimum block fuel.

     

    The climb continues at the recommended climb speed for minimum block fuel until [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Mach number is reached.

     

    The climb continues at [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Mach number to the initial cruise altitude.

    P.A. No. 3780

    AERO-B-BBA4-M12-0306                                                                                                                           

    SS12-0107

    BOEING PROPRIETARY

     

    Attachment A to Letter Agreement

    No. GOT-PA-03780-LA-1207735

    Page 5

     

     

    The temperature is [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] during climb.

     

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] climb thrust is used during climb.

    Cruise:

    The Aircraft cruises at [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Mach number.

     

    The initial cruise altitude is [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] feet.

     

    A step climb or multiple step climbs of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] feet altitude may be used when beneficial to minimize fuel burn.

     

    The temperature is [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] during cruise.

    P.A. No. 3780

    AERO-B-BBA4-M12-0306                                                                                                                           

    SS12-0107

    BOEING PROPRIETARY

     

    Attachment A to Letter Agreement

    No. GOT-PA-03780-LA-1207735

    Page 6

     

     

    The cruise thrust is not to exceed [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] cruise thrust except during a step climb when maximum climb thrust may be used.

    Descent:

    The Aircraft descends from the final cruise altitude at [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] to an altitude of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] feet above the destination airport altitude.

     

    Throughout the descent, the cabin pressure is controlled to a maximum rate of descent equivalent to [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] feet per minute at sea level.

     

    The temperature is [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] during descent.

    Approach
    and Landing Maneuver:

    The Aircraft decelerates to the final approach speed while extending landing gear and flaps, then descends and lands.

     

    The destination airport altitude is [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] airport.

    P.A. No. 3780

    AERO-B-BBA4-M12-0306                                                                                                                           

    S12-0107

    BOEING PROPRIETARY

     

    Attachment A to Letter Agreement

    No. GOT-PA-03780-LA-1207735

    Page 7

     

    Fixed Allowances:

    For the purpose of this guarantee and for the purpose of establishing compliance with this guarantee, the following shall be used as fixed quantities and allowances:

     

    Taxi-Out:
    Fuel

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Pounds

     

    Takeoff and Climbout Maneuver:
    Fuel

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Pounds


    Distance

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Nautical Miles

     

    Approach and Landing Maneuver:
    Fuel

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Pounds

    P.A. No. 3780

    AERO-B-BBA4-M12-0306                                                                                                                           

    SS12-0107

    BOEING PROPRIETARY

     

    Attachment A to Letter Agreement

    No. GOT-PA-03780-LA-1207735

    Page 8

     

     

    Taxi-In (shall be consumed from the reserve fuel):
    Fuel

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Pounds

     

    Usable reserve fuel remaining upon completion of the approach and landing maneuver: [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Pounds

     

    For information purposes, the reserve fuel is based on a standard day temperature and a) a contingency fuel allowance equivalent to [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] percent of the trip time from takeoff through the completion of the approach and landing maneuver at the destination airport, starting at the end of the mission cruise at [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Mach number, b) a missed approach and flight to a [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] nautical mile alternate, c) a [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] minutes hold at [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] feet above the alternate airport altitude of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], and d) an approach and landing maneuver at the alternate airport.

    P.A. No. 3780

    AERO-B-BBA4-M12-0306                                                                                                                           

    SS12-0107

    BOEING PROPRIETARY

     

    Attachment A to Letter Agreement

    No. GOT-PA-03780-LA-1207735

    Page 9

     

    2.1.2               737-800 Operational Empty Weight Basis

    The Operational Empty Weight (OEW) derived in Paragraph 2.1.3 is the basis for the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of Paragraph 2.1.1.


    P.A. No. 3780

    AERO-B-BBA4-M12-0306                                                                                                                           

    SS12-0107

    BOEING PROPRIETARY

     

    Attachment A to Letter Agreement

    No. GOT-PA-03780-LA-1207735

    Page 10

    2.1.3 737-800 Weight Summary - GOL Airlines

     

     

     

     

    Pounds

     

     

    Standard Model Specification MEW

    [ CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT ] 

     

    Configuration Specification [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Tourist Class Passengers

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Engines

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] lb ([CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] kg) Maximum Taxi Weight

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] U.S. Gallons ([CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] liters) Fuel Capacity

     

    Changes for GOL Airlines

    Interior Change to [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Passengers ([CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] TC)

    (Ref: [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]) [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] kg) Maximum Taxi Weight

    HF/VHF Communications

    Extended Operations (ETOPS)

    Standby Power - [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]-Minute Capability

    Heavy Duty Cargo Compartment Linings/Panels

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Performance Enhancement with [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Position Tail Skid

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    Customer Options Allowance

     

    GOL Airlines Manufacturer's Empty Weight (MEW)

     

    Standard and Operational Items Allowance

    (Paragraph 2.1.4)

     

    GOL Airlines Operational Empty Weight (OEW)

     

    Quantity

    Pounds

    Pounds

     

     

     

     

    * Seat Weight Included:

     

     

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

     

     

    Economy Class Triple

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    Economy Class Triple w/3 In-Arm Food Trays

    P.A. No. 3780

    AERO-B-BBA4-M12-0306                                                                                                                           

    SS12-0107

    BOEING PROPRIETARY

     

    Attachment A to Letter Agreement

    No. GOT-PA-03780-LA-1207735

    Page 11

     

     

     

    2.1.4 Standard and Operational Items Allowance

     

     

     

     

     

     

     

     

    Qty

    Pounds

    Pounds

    Pounds

     

     

     

     

     

    Standard Items Allowance

     

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

    Unusable Fuel

    Oil

    Oxygen Equipment

    Passenger Portable / Masks

    Crew Masks

    Miscellaneous Equipment

    P.A. No. 3780

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    Crash Axe

     

    Megaphones

    Flashlights

    Smoke Hoods

    Galley Structure & Fixed Inserts

     

    Operational Items Allowance

     

    Crew and Crew Baggage

    Flight Crew

    Cabin Crew

    Navigation Bags & Manuals

    Catering Allowance & Removable Inserts

    Passenger Service Equipment

    Potable Water - 60 USG

    Waste Tank Disinfectant

    Emergency Equipment

    Escape Slides - Forward

    Escape Slides - Aft

    Life Vests - Crew

     

    Total Standard and Operational Items Allowance

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

    P.A. No. 3780

    AERO-B-BBA4-M12-0306                                                                                                                           

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    Attachment A to Letter Agreement

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    Page 13

    3                      AIRCRAFT CONFIGURATION

    3.1                    737-800 Aircraft Configuration

                            The [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] contained in this attachment is based on the 737-800 Aircraft configuration as defined in the original release of Detail Specification TBD, the 737-800 Aircraft weights specified in Section 1.2 and the OEW derived in Section 2.1.3.  

    3.2                   737-8 Aircraft Configuration

                            The configuration of the 737-8 used to demonstrate performance relative to the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] will be the delivered configuration of 737-8 as defined in the Detail Specification TBD (hereinafter referred to as the Detail Specification) plus adjustments, if required, to reflect a configuration similar to that of the 737-800W in Section 2.1.3.

    4                      CONDITIONS

    4.1                   The performance data of Section 2 are based on the International Standard Atmosphere (ISA) and specified variations therefrom; altitudes are pressure altitudes.

    4.2                   The climb, cruise and descent portions of the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] include allowances for normal power extraction and engine bleed for normal operation of the air conditioning system.  Normal electrical power extraction shall be defined as not less than a 50 kilowatts total electrical load.  The APU is turned off unless otherwise specified.

    4.3                   The climb, cruise and descent portions of the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] commitment is based on an Aircraft center of gravity location not to be aft of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] percent of the mean aerodynamic chord.

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    4.4                   Performance, where applicable, is based on a fuel Lower Heating Value (LHV) of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] BTU per pound and a fuel density of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] pounds per U.S. gallon.

    5                      DEMONSTRATION

    5.1                   Demonstration of the 737-8 performance relative to the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] shall be based on the conditions specified in Section 2 (other than the OEW and fixed allowances), the 737-8 Aircraft configuration of Section 3 and the conditions of Section 4 and the fixed allowances of paragraph 5.2 and the OEW established in paragraph 5.4.

    5.2                   For the purpose of demonstrating the performance of the 737-8 relative to the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] the following shall be used as fixed quantities and allowances:

     

    Taxi-Out:
    Fuel

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Pounds

     

    Takeoff and Climbout Maneuver:
    Fuel

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Pounds
    Distance [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Nautical Miles

     

    Approach and Landing Maneuver:
    Fuel

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Pounds

     

    Taxi-In (shall be consumed from the reserve fuel):
    Fuel

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Pounds

     

    Usable reserve fuel remaining upon completion of the approach and landing maneuver: [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]Pounds.

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    5.3                   Demonstration of the 737-8 performance for the climb, cruise and descent portions of the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] commitment shall be established by calculations based on flight test data obtained from a 737-8 aircraft in a configuration similar to that defined by the Detail Specification.

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    5.4                   The OEW used for demonstrating the 737-8 performance relative to the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] shall be the actual MEW plus the Standard and Operational Items Allowance in Paragraph 03-60-00 of the Detail Specification plus adjustments to the GOL (VRG Linhas Aereas S.A.) Manufacturers Empty Weight and Standard and Operational Items Allowance to reflect a configuration similar to that of the 737-800W shown in Section 2.1.3.

    5.5                   The data derived from tests shall be adjusted as required by conventional methods of correction, interpolation or extrapolation in accordance with established engineering practices to demonstrate performance of the 737-8 relative to the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    5.6                   The demonstrated performance shall be based on the performance of the airframe and engines in combination, and shall not be contingent on the engine meeting its manufacturer's performance specification.

     

    P.A. No. 3780

    AERO-B-BBA4-M12-0306                                                                                                                           

    SS12-0107

    BOEING PROPRIETARY

    The Boeing Company
    P.O. Box 3707
    Seattle, WA     98124-2207
       

    GOT-PA-3780-LA-1207830

     

     

    GAC, Inc.

    PO Box 309, Ugland House

    Grand Cayman

    KY1-1104

    Cayman Islands

     

     

     

    Subject:          Maintenance Cost Guarantee – 737-8

     

    Reference:    Purchase Agreement No.3780 (the Purchase Agreement) between The Boeing Company (Boeing) and GAC Inc. (Customer) relating to Model 737-8 aircraft (the Aircraft)

    This letter agreement ( Letter Agreement ) amends and supplements the Purchase Agreement.  All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.

    Recitals

    1.                             Customer has requested a program which will either demonstrate the projected maintenance costs for the Aircraft or, if such projected costs are not demonstrated, provide Customer specific remedies.

     

    2.                             In response to Customer’s request Boeing offers the following maintenance cost program ( Program ) for estimating and validating the maintenance costs incurred by Customer in the operation of the Aircraft and providing specific remedies to Customer in the event maintenance costs for the Aircraft as defined in this Letter Agreement exceed specified values.

    Agreement

    1.             Covered Aircraft . 

    The Program shall apply to each of the Aircraft operated by Customer on Customer's routes during the Program Term ( Covered Aircraft ). 

    2.                             Program Term . 

    The Program shall begin on the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] in which the first Covered Aircraft is delivered by Boeing to Customer, continue for [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] thereafter ( Program Term ) and consist of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] periods beginning on the date the Program Term commences and thereafter on the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] thereof ( Reporting Period ( s )). 

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    3.                             Covered Maintenance . 

    The maintenance costs covered by the Program shall be the costs (as more fully defined herein) of labor performed and materials used in the airframe, airframe component and engine line maintenance of the Covered Aircraft where the maintenance is performed as part of a maintenance program approved by Customer’s regulatory authority ( Covered Maintenance ). 

    4.                             Program Commitment . 

    The Cumulative Actual Maintenance Cost [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] as these terms are defined in this Article 4 ( Program Commitment ).  If the performance of the Covered Aircraft does not comply with the Program Commitment ( Noncompliance ), Customer shall have the remedies specified in Article 8, below.

    4.1          Cumulative Actual Maintenance Cost means the aggregate Actual Maintenance Cost of Covered Maintenance for all then-completed Reporting Periods divided by the Fleet Flight Hours for all such completed Reporting Periods.

    4.2          Actual Maintenance Cost means the sum of (i) the Direct Material Cost, (ii) the Direct Labor Cost, (iii) the Subcontracted Maintenance Labor Cost, and (iv) the Subcontracted Maintenance Material Cost incurred by Customer during a Reporting Period for Covered Maintenance, where:

    4.2.1      Direct Material Cost means the actual cost paid by Customer for materials required to perform the Covered Maintenance in a Reporting Period, as reported by Customer and adjusted by Boeing pursuant to the provisions of this Letter Agreement and exclusive of those costs and other charges as set forth in Article 9; and

    4.2.2      Direct Labor Cost means the product of Direct Labor Hours and Labor Rate, where:

    4.2.2.1                 Direct Labor Hours means the hours actually expended by Customer in performing the Covered Maintenance during a Reporting Period, as reported by Customer and adjusted by Boeing pursuant to the provisions of this Letter Agreement exclusive of time consumed by employees while waiting for work, traveling to or from work, training, vacation, sick leave, or in any other similar absences from the actual maintenance work, and

    4.2.2.2                 Labor Rate means the average direct hourly labor rate during such Reporting Period, as reported by Customer and adjusted by Boeing

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    pursuant to the provisions of this Letter Agreement exclusive of fringe benefits, premium time allowances, social charges and business taxes paid to Customer's employees who actually perform the Covered Maintenance, and

    4.2.3      Subcontracted Maintenance Labor Cost means the cost as reported by Customer and adjusted by Boeing pursuant to the provisions of this Letter Agreement incurred by Customer for labor for Covered Maintenance performed for Customer during a Reporting Period by either a third party certified to perform such Covered Maintenance pursuant to 14 United States Code of Federal Regulations, Part 145, or European Union Commission Regulation EC 2042/2003, Part 145; and

    4.2.4      Subcontracted Maintenance Material Cost means the cost as reported by Customer and adjusted by Boeing pursuant to the provisions of this Letter Agreement incurred by Customer for materials for Covered Maintenance performed for Customer during a Reporting Period by either a third party certified to perform such Covered Maintenance pursuant to 14 United States Code of Federal Regulations, Part 145, or European Union Commission Regulation EC 2042/2003, Part 145.

    4.3          Fleet Flight Hours means the total airborne time (aircraft takeoff-to-touchdown) accumulated by all of the Covered Aircraft during a Reporting Period.

    4.4          Fleet Landings means the total number of landings accumulated by all the Covered Aircraft during a Reporting Period.

    4.5          Cumulative Target Maintenance Cost means the value calculated at the end of each completed Reporting Period by multiplying the Target Maintenance Cost for each completed Reporting Period by the Fleet Flight Hours reported by Customer for each such completed Reporting Period, adding the products together and dividing the sum by the total Fleet Flight Hours for all completed Reporting Periods.

    4.6            Target Maintenance Cost means the sum of the target Direct Material Cost, target Direct Labor Cost, target Subcontracted Maintenance Labor Cost and target Subcontracted Maintenance Material Cost for a Reporting Period, determined or recalculated by Boeing as appropriate pursuant to the provisions of this Letter Agreement and provided to Customer pursuant Attachments C and F to this Letter Agreement, as applicable pursuant to Article 5, below.

    5.                             Calculation of Target Maintenance Cost

    5.1          No later than [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] delivery of the first Covered Aircraft, Customer will provide to Boeing the maintenance cost data and operational assumptions described on Attachment A for Customer’s [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] covering the [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST

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    FOR CONFIDENTIAL TREATMENT] of operation ( Maintenance Cost Benchmark Data ). 

    5.2          Using the methodology set forth in Attachment B, Boeing will adjust the Maintenance Cost Benchmark Data to a mature maintenance level for Customer’s model 737-800 fleet ( Mature Benchmark Fleet Value ). 

    Boeing will then [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] by [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] to establish the mature equivalent maintenance cost for the Covered Aircraft ( Mature Equivalent Maintenance Cost ). 

    Using the methodology in Attachment B, Boeing will derive from the Mature Equivalent Maintenance Cost the baseline cost elements described in Table 1 of Attachment B ( Covered Aircraft Maintenance Cost Baseline Values ). 

    Using the operational assumptions provided by Customer in Attachment A for the Covered Aircraft, the Covered Aircraft Maintenance Cost Baseline Values and the methodology set forth in Attachment B, Boeing will then derive the target mature maintenance cost for the Covered Aircraft ( Target Mature Maintenance Cost ). 

    Finally, Boeing will apply the age adjustment methodology set forth in Attachment B to the Target Mature Maintenance Cost to establish Target Maintenance Costs for the Covered Aircraft for each Reporting Period and will report such values to Customer in the form specified in Attachment C.

    5.3          Boeing will recalculate the Target Maintenance Costs in the circumstances and using the methodology provided in Attachment B and will report any recalculated Target Maintenance Costs to Customer in the form specified in Attachment F.

    6.                             Reporting of Actual Maintenance Data . 

    6.1          Within ninety (90) days after the last day of each Reporting Period Customer will complete and return to Boeing Attachment D to provide to Boeing the data specified therein for that Reporting Period.  Customer will report costs in Customer's currency.

    6.2          Failure to provide the data specified in Article 6.1 to Boeing within the specified ninety (90) day period shall constitute Customer’s acknowledgment that the performance of the Covered Aircraft complies with the Program Commitment.  If the Covered Aircraft subsequently should fail to perform in a manner consistent with the Program Commitment, however, Customer will, within ninety (90) days after the last day of the Reporting Period in which such Noncompliance occurs, report to Boeing the data specified on Attachment D for all then‑completed Reporting Periods of the Program Term.

     

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    7.                             Calculation of Actual Maintenance Costs and Compliance with the Program Commitment . 

    7.1          Subject to the limitations described in Article 9, within thirty (30) days after receiving Customer's report pursuant to Article 6 for each Reporting Period, Boeing will use the data provided by the Customer in such report and the methodology in Attachment B to calculate the Cumulative Actual Maintenance Costs for the Covered Aircraft as of the end of such Reporting Period and will provide to Customer a report in content and form as shown in Attachment E.   Boeing will convert values expressed in Customer’s currency to U.S. Dollars as described in Attachment B in order to perform the computations and comparisons contemplated by this Letter Agreement.  Monetary amounts determined and reported by Boeing will be expressed in U.S. dollars.

    7.2          If the data determined pursuant to Article 7.1 indicates that the performance of the Covered Aircraft for the applicable Reporting Periods does not comply with the Program Commitment, Customer will, upon request, submit to Boeing sufficient information to allow Boeing to verify:

    7.2.1      the data reported by Customer pursuant to Article 6;

    7.2.2      the data does not reflect assumptions other than those relied upon in developing the Target Maintenance Costs; and

    7.2.3      the data is consistent with all provisions of this Letter Agreement.

    7.3          If after completing the verification and analysis described in Article 7.2 the data indicates that the performance of the Covered Aircraft for the applicable Reporting Periods does not comply with the Program Commitment, Boeing will take corrective action as defined in Article 8; provided that throughout the period of such Noncompliance, Customer, upon request, submits to Boeing such information as is necessary for Boeing to:

    7.3.1      analyze the problems causing such Noncompliance; and

    7.3.2      develop, when required, appropriate corrective action.

    7.4          At Customer’s request Boeing will provide Customer sufficient information to verify the data described in Article 7.1 and 7.3 and the calculations used to produce that data.

    8.                             Corrective Action . 

    8.1          Should corrective action pursuant to Article 7.3 be appropriate:

    8.1.1      Boeing will investigate the circumstances and possible causes of the Noncompliance;

    8.1.2      Boeing will provide technical assistance to Customer in the form of analysis and recommendations for reducing Actual Maintenance Cost;

    8.1.3      if necessary, Boeing will initiate a design review of the systems, accessories, equipment or parts determined by Boeing to be the primary cause of the

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    Noncompliance and, when in Boeing's judgment a redesign is indicated as a technically and economically practicable means of complying with the Program Commitment, Boeing will redesign or cause the redesign of such items; and

    8.1.4      if such redesign results in retrofit kits being offered by Boeing or Boeing's suppliers, Boeing will provide such kits or cause such kits to be provided at no charge to Customer.  Boeing will also reimburse at Boeing's then existing warranty labor rate Customer's reasonable Direct Labor Costs for incorporation of any such kit manufactured to Boeing's or Boeing's supplier's detailed design.  Such reimbursement will be provided pursuant to Exhibit C, “ Product Assurance Document ,” of the AGTA.

    8.2          At Boeing's request, Customer will assign to Boeing, any of Customer's rights against the manufacturer of any equipment, accessory or part installed in the Covered Aircraft as Boeing may reasonably require to fulfill its obligations with respect to any corrective action provided by Boeing hereunder.

    9.                             Conditions and Limitations . 

    9.1          If, with the intent of reducing the cost of Covered Maintenance, Boeing or any supplier issues service bulletins, service letters or other written instructions or offers no-charge retrofit kits, Customer and its subcontractors will comply with such instructions or install such kits ( Comply ) within a period of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] days after issuance of such instructions or receipt of such kits at Customer's facility, or such longer period as may be mutually agreed by the parties ( Response Period ).  If Customer or any of its subcontractors does not Comply within the Response Period, after expiration of such Response Period all maintenance costs which Boeing determines would have been eliminated if such instructions or kits had been incorporated will be subtracted from the Actual Maintenance Costs reported.

    9.2          Customer will promptly notify Boeing in writing of any variations in its maintenance cost accounting system or procedures or those of its subcontractors which would affect the proper reporting of Actual Maintenance Costs.  Boeing will make adjustments to the Cumulative Target Maintenance Cost to reflect the effect of any such variations.

    9.3          Upon reasonable notice to Customer, Boeing will have the right to audit all Actual Maintenance Cost Data reported by Customer during the Program Term as well as the maintenance practices and procedures related thereto.  Customer will also obtain from its subcontractors permission for Boeing to audit from time to time and upon reasonable notice such subcontractors’ maintenance records and practices during the Program as they pertain to the Covered Aircraft.  Boeing will have the right to disapprove costs it deems improperly reported or for which it does not receive sufficient data to verify either the Direct Labor Hours performed or the Direct Material Costs incurred in performing such maintenance.  Boeing will provide Customer written notification of its disapproval of any such costs, and, if Customer does not provide proof

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    within [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] days after such notification that such costs are properly chargeable, Boeing's disapproval will be deemed final and conclusive and Boeing will deduct such costs from the computation of Actual Maintenance Costs.

    9.4          Upon reasonable notice to Customer, Boeing may inspect Customer's maintenance facilities, programs and procedures.  If Boeing recommends in writing reasonable changes to Customer's or its subcontractors’ maintenance programs and procedures which would reduce Actual Maintenance Costs and Customer or its subcontractors do not implement such changes or delay implementing such changes beyond the Response Period set forth in Article 9.1, Boeing will adjust the Actual Maintenance Costs that have been reported to deduct the increased maintenance costs which Boeing estimates resulted from the failure or delay in implementing such changes.

    9.5          Actual Maintenance Cost will not include any of the following costs:

    (i)             costs arising from loss of, or damage to, any Covered Aircraft, or any system, accessory, equipment or part thereof.
    (ii)           any taxes, duties, tariffs, surcharges, transportation, insurance interest or overhead.
    (iii)          the costs of initial or sustaining spare parts inventory or the depreciation of such spare parts; costs resulting from any modification to the Covered Aircraft or any system, equipment, accessory or part thereof other than modifications described under Articles 8.1.4 and 9.1 herein.
    (iv)          costs resulting from the negligent acts or omissions of Customer.
    (v)           costs resulting from the failure to comply with Boeing's or Boeing's suppliers' applicable written instructions for the operation, service, maintenance or overhaul of any Covered Aircraft, or any system, accessory, equipment or part thereof.
    (vi)          costs attributable to loss of use, revenue or profit.
    (vii)         costs of consumable fluids, including fuel.
    (viii)       costs due to acts of God, war, armed hostilities, riots, fires, floods, earthquakes or serious accidents, governmental acts or failure to act affecting materials, facilities or aircraft needed for the maintenance of Covered Aircraft.
     

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    (ix)          Costs due to strikes or labor troubles causing cessation, slowdown or interruption of work related to the maintenance of Covered Aircraft.
    (x)           costs resulting from failure of or delay in transportation or inability, after due and timely diligence, to procure materials, systems, accessories, equipment or parts needed for the maintenance of Covered Aircraft.
    (xi)          amounts for any part provided by Boeing or Boeing's suppliers to Customer at no charge.
    (xii)         amounts equal to the difference between the reported price for any part and the reduced price for such part as provided by Boeing or Boeing's suppliers to Customer.
    (xiii)       amounts related to any warranty, maintenance cost guarantee or similar agreement, for which there is a credit memorandum or other payment scheme established in Customer's favor and issued by Boeing or Boeing's suppliers to Customer.

    9.6          The Program will be suspended if during any Reporting Period the average utilization for the Covered Aircraft is less than the flight hour amounts shown in the table below:

    Aircraft Model

    Flight Hours

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    The Program will resume on the first day of any subsequent Reporting Period during which the average utilization for the Covered Aircraft exceeds that set forth above.  The Actual Maintenance Cost, Cumulative Actual Maintenance Cost, and the Cumulative Target Maintenance Cost as of the end of any Reporting Period during the Program Term will exclude all Actual Maintenance Cost and Fleet Flight Hours accumulated during any Reporting Period in which the Program was suspended as provided above.  The Program will not be extended to reflect any period wherein it was suspended.

    10.                          Notice . 

    10.1       All reports submitted to Boeing will be addressed to the attention of:

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

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    10.2       All reports submitted to Customer will be addressed to the attention of:

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

    11.                          Exclusive Remedy . 

    The remedies provided in Article 8 of this Letter Agreement are Customer’s exclusive remedies in the event of Noncompliance and are in lieu of all other damages, claims and remedies of Customer arising at law or otherwise for Noncompliance.  Customer hereby waives and renounces all other claims and remedies arising at law or otherwise for any such Noncompliance.

    12.                          DISCLAIMER, RELEASE AND EXCLUSION . 

    THIS LETTER AGREEMENT AND THE RIGHTS AND REMEDIES OF CUSTOMER AND OBLIGATIONS OF BOEING HEREIN ARE SUBJECT TO THE DISCLAIMER AND RELEASE, AND EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES PROVISIONS OF EXHIBIT C, PRODUCT ASSURANCE DOCUMENT, OF THE AGTA.

    If the foregoing correctly sets forth your understanding of our agreement with respect to the matters treated above, please indicate your acceptance and approval below.

    13.                          Assignment . 

    Notwithstanding any other provisions of the Purchase Agreement, the rights and obligations described in this Letter Agreement are provided to Customer in consideration of Customer’s becoming the operator of the Aircraft and cannot be assigned in whole or, in part.

    14.                          Confidential Treatment . 

    The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties.  Customer will limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.

     

    Very truly yours,

     

    THE BOEING COMPANY

     

     

    By _________________________

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    Its                 Attorney‑In‑Fact      

     

     

     

    ACCEPTED AND AGREED TO this

     

    Date:                                       2012­­­­­­­­­ 

     

     

    GAC INC.

     

     

    By _________________________          By _________________________         

     

    Its                                                                      Its                                                                

     

     

    Witness                                                            Witness                                                      

     

     

     

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    The Boeing Company
    P.O. Box 3707
    Seattle, WA     98124-2207
       

     

    Attachment A:  Maintenance Cost Benchmark Data

    and Covered Aircraft Operational Assumptions

     

    Airline’s Historic Benchmark Data

     

    Year 1:____

    Year 2:____

    Year 3:____

    Year 4:____

    Year 5:____

    Direct Labor Cost

    ($ per Flight Hour)

     

     

     

     

     

    Direct Material Cost

    ($ per Flight Hour)

     

     

     

     

     

    Subcontract Maintenance Cost ($ per Flight Hour)

     

     

     

     

     

    Direct Labor Rate

    ($ per Labor Hour)

     

     

     

     

     

    Maintenance Subcontracted. %

     

     

     

     

     

    Subcontract Labor Rate

    ($ per Labor Hour)

     

     

     

     

     

    Annual Fleet Landings

    (Total for Year)

     

     

     

     

     

    Annual Fleet Fight Hours

    (Total for Year)

     

     

     

     

     

    Average. Fleet Size for Year (Number of Airplanes)

     

     

     

     

     

    Average Fleet Age:

    ·1 In Flight Hours

    ·2 In Landings

    ·3 In Years

     

     

     

     

     

     

    Operational Assumptions for Covered Aircraft

     

    Direct Labor Rate

    ($ per Labor Hour)

     

    Maintenance Subcontracted. %

     

    Subcontract Labor Rate

    ($ per Labor Hour)

     

    Annual Fleet Landings

    (Total for Year)

     

    Annual Fleet Fight Hours

    (Total for Year)

     

     

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    Attachment B:  Adjustments

     

    Boeing will adjust as described in this Attachment B the Maintenance Cost Benchmark Data submitted in Attachment A, the Target Maintenance Costs reported in Attachment C and Actual Maintenance Cost Data reported in Attachment D.

    1.                             Currency Exchange Rate . 

    Boeing will convert maintenance cost data submitted in the Customer’s currency to U.S. Dollars by multiplying such reported costs by the applicable exchange rate published in the U.S. edition of the Wall Street Journal on the day (not including weekends or U.S. national holidays) nearest to the midpoint of the applicable Reporting Period.

    2.                             Escalation Indices . 

    2.1          Material Price Inflation .  The measure of material price inflation will be the Producer Price Index for " Other Aircraft Parts and Auxiliary Equipment Mfg " ((North American Industry Classification System ( NAICS ) code 336413, BLS Series ID = PCU336413)) obtained from the publication "Producer Prices and Price Indexes" published monthly by the U.S. Department of Labor, Bureau of Labor Statistics ( BLS ) or any comparable successor publication published by the U.S. Department of Labor Bureau of Labor Statistics or any comparable successor agency ( Material Index ). 

    2.2          Labor Price Inflation .  The measure of labor price inflation will be the " Employment Cost Index for workers in aircraft manufacturing - Wages and Salaries " (ECI code 3721) obtained from the publication published quarterly by the U.S. Department of Labor, Bureau of Labor Statistics or any comparable successor publication published by the U.S. Department of Labor Bureau of Labor Statistics or any comparable successor agency ( Labor Index ).  As the Labor Index values are only released on a quarterly basis, the value released for the month of March will be used for the months of January and February; the value for the month of June will be used for the months of April and May; the value for the month of September will be used for the months of July and August; and the value for the month of December will be used for the months of October and November.

    3.                             Benchmark Method for Determining Target Maintenance Costs . 

    The Target Maintenance Costs will be determined for the Covered Aircraft as specified in paragraphs 3.1 through 3.1 of this Attachment B.

    3.1          The Direct Material Costs reported in the Maintenance Cost Benchmark Data will be revised to values expressed in base year [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] ( Base Year ) by multiplying such costs by the ratio of the average of the values for the Material Index published during the twelve months of the Base Year to the average of the values for the Material Index published for the months in which such Direct Material Costs were incurred.

     

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    3.2          The Direct Labor Costs reported in the Maintenance Cost Benchmark Data will be revised to values expressed in the Base Year by multiplying such costs by the ratio of the average of the values for the Labor Index published during the twelve (12) months of the Base Year to the average of the values for the Labor Index published for the months in which the Benchmark Direct Material Costs were incurred.

    3.3          The methodology and the applicable factors will be used as set forth in paragraph 5.6 of this Attachment B to convert the Benchmark Maintenance Cost Data to a Mature Benchmark Fleet Value, which reflects a maturity factor equal to one (1.00).

    3.4          Next Boeing will increase the Mature Benchmark Fleet Value by the percentage specified in Article 5.2 of the Letter Agreement to determine the Mature Equivalent Maintenance Cost for the Covered Aircraft.

    3.5          From the Mature Equivalent Maintenance Cost Boeing will derive the Covered Aircraft Maintenance Cost Baseline Values for the elements described in Table 1 of this Attachment:

    Table 1: Covered Aircraft Maintenance Cost Baseline

     

    Material $ per FH

    Material $ per Cycyle

    Labor Hours per FH

    Labor Hours per Cycle

    In-Houes Material Factor

    In-house Labor Factor

    Contracted Material Factor

    Contracted Labor Factor

     

    AA

    BB

    CC

    DD

     

     

     

     

    Line

    A Check

    C or 1C-3C Check

    D/S1 or 4C/S1 Check

    Brakes

    Wheels/Tires’

    Landing Gear

    APU

    Other Components

    QEC Line

     

     

     

     

     

     

     

     

    3.6          The following formulas, the Covered Aircraft Maintenance Cost Baseline Values and the operational assumptions for the Covered Aircraft provided by Customer in Attachment A to the Letter Agreement will be used to generate the Target Mature Maintenance Cost for the Covered Aircraft, where the Target Mature Maintenance Cost is the sum of the values derived in the following formulas:

     

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

    Where :  In-house Material Factor, In-house Labor Factor, Contracted Material Factor, and Contracted Labor Factor will have values (i) determined by Boeing and provided to the Customer on Attachment C and, if applicable, Attachment F and (ii) are derived by dividing the Direct Material Cost, Direct Labor Cost, and Subcontracted Maintenance  Cost reported in Attachment A (or subsequently in Attachment D) by fleet wide industry averages which Boeing derives from published industry sources and data collected form airlines.

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    3.7          Then the methodology and the applicable factors set forth in paragraph 5.6 of this Attachment B will be applied to the Target Mature Maintenance Cost to determine the Target Maintenance Cost for the Covered Aircraft for each Reporting Period with respect to each line item identified in Table 1 of this Attachment B.

    4.                             Reporting Period Adjustments . 

    The reported Direct Material Cost for a Reporting Period and the reported Subcontracted Maintenance Material Cost for a Reporting Period will be revised to values expressed in the Base Year by multiplying such costs by the ratio of the average of the values of the Material Index published for the twelve months of the Base Year to the average of the values for the Material Index published during twelve months of the applicable Reporting Period.

    The reported Direct Labor Cost for a Reporting Period and the reported Subcontracted Maintenance Labor Cost for a Reporting Period will be revised (i) by multiplying the reported Direct Labor Cost by the ratio of the Labor Rate specified in the operational assumptions section of Attachment A to the Customer’s then-current Labor Rate, as reported in Attachment D, and (ii) by multiplying the reported Subcontracted Maintenance Labor Cost by the ratio of the Subcontracted Maintenance Labor Rate specified in the operational assumptions section of Attachment A to the Subcontracted Maintenance Labor Rate as reported in Attachment D.

    5.                             Recalculation of Target Maintenance Cost . 

    5.1          Airframe Maintenance Performed by Others .  If during any Reporting Period, the operational assumptions reported in Attachment A and subsequently reported in Attachment D with regard to airframe maintenance performed by others ( Subcontracted Maintenance ) are different by more than [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], the In-house Material Factor, In-house Labor Factor, Contracted Material Factor, and Contracted Labor Factor, as applicable, will be revised by Boeing by dividing the reported maintenance costs in Attachment D by fleet wide industry averages which Boeing derives from published industry sources and data collected from airlines.  Using such revised factors the Target Maintenance Cost for that Reporting Period will be adjusted as specified in paragraph 5.3 below.

    5.2          Average Flight Time .  If the Actual Average Flight Time ( AAFT ) for any Reporting Period differs from the Projected Average Flight Time ( PAFT ) of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] by

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    more than [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Flight Hours, the target Direct Material Cost ( TMC ) and target Direct Labor Cost for that Reporting Period will be adjusted using the methodology as specified in paragraph 5.3 below to reflect the AAFT, where:

    5.2.1      AAFT  is obtained by dividing Total Fleet Flight Hours reported in Attachment D by Total Fleet Landings reported in Attachment D, and

    5.2.2      PAFT  is obtained by dividing Total Fleet Flight Hours reported in the Operational Assumptions section of Attachment A by Total Fleet Landings reported in the Operational Assumptions section of Attachment A.

    5.3          Method for Recalculating Target Maintenance Cost .  The Target Maintenance Cost for a Reporting Period will be recalculated using the following formulas and using the operational assumptions provided by the Customer for the Reporting Period in Attachment D to the Letter Agreement as adjusted, if applicable pursuant to paragraphs 5.1 and 5.2, of this Attachment B:

     

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

    Where :  AA, BB, CC and DD have the values reported for those elements on Attachment C to the Letter Agreement.

    5.4          Covered Aircraft .  The Target Maintenance Cost is based on the number of Covered Aircraft.  If the number of Covered Aircraft changes during any Reporting Period, the Target Maintenance Cost will be recalculated for that Reporting Period to address any change to the average fleet age by using the methodology specified in paragraph 5.6, below.

    5.5          Delivery Schedule .  The Target Maintenance Cost is based on the delivery schedule of Covered Aircraft as described in Table 1 of the Purchase Agreement.  If the delivery schedule for the Covered Aircraft changes during any Reporting Period, the Target Maintenance Cost will be recalculated for that Reporting Period and subsequent Reporting Periods to address any resulting changes to the average fleet age using the methodology specified in paragraph 5.6, below.

    5.6          Age Adjustment .  Age Adjustments will be based on the average fleet age during a Reporting Period and the factors set forth in the tables below.  Maintenance Cost Benchmark Data will be adjusted to Maturity by dividing the cost for a given period by the Maturity Factor which corresponds to the average fleet age.  The Target Maintenance Cost will be calculated by multiplying the Target Mature Maintenance Cost by the maturity factor corresponding to the average age of the Covered Aircraft at the time of the Reporting Period.  The Composite Airplane table applies to the 787

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    aircraft; the MSG‑3 table applies to aircraft 757, 767, A‑310, A‑320, 777, MD‑11, A‑340, 717, 737‑600, 737‑700, 737‑800, 737‑900, and A‑380, and the Pre-MSG‑3 table applies to all other aircraft.

    5.7          Covered Aircraft Configuration .  Target Maintenance Costs set forth in this Program are based on the configuration for the Covered Aircraft as set forth in Exhibit A to the Purchase Agreement as of the date of signing of the Purchase Agreement.  Such Target Maintenance Costs may be recalculated as appropriate to reflect the configuration of the Covered Aircraft at the time of delivery to Customer and to reflect any changes to the configuration occurring during the Program Term.

     

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     
     

    Maturity Factor

    Composite Airlines

    Flt hrs/yr

     

    Year

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH

    THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL

    TREATMENT]

    0

    1

    2

    3

    4

    5

    6

    7

    8

    9

    10

    11

    12

    13

    14

    15

    16

    17

    18

    19

    20

    21

    22

    23

    24

    25

    26

    27

    28

    29

    30

    31

    32

    33

    34

    35

    36

    37

    38

    39

    40

     

    Note: For all intermediate utilization, interpolate between factors

    Maturity is defined as a maturity factor of one (1)

     

         

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    Attachment C:  Target Maintenance Cost for Covered Aircraft and Covered Aircraft Maintenance Baseline

     

    To:       GAC Inc.

     

    Reference:    Letter Agreement No. GOT-PA-03780-LA-1207830 to Agreement No. 3780 ( Purchase Agreement ) and Maintenance Cost Guarantee

     

    Subject:          Target Maintenance Cost reported pursuant to Article 5.2 of the referenced Letter Agreement.

     

     

     

    Reporting

    Period

    Fleet Size

    Average Fleet Age

    Target Direct

    Labor Cost

    ( $ per flt hr ) 

     

     

    +

    Target Direct

    Material Cost

    ( $ per flt hr ) 

     

     

    +

    Target

    Subcontracted Maintenance

    Labor Cost

    ( $ per flt hr ) 

     

    Target

    Subcontracted

    Maintenance Material Cost

    ( $ per flt hr ) 

     

     

    =

     

    Projected

    Target

    Maint. Cost

    ( $ per flt hr ) 

    One

     

     

    $

    +

    $

    +

     

     

    $

    =

     

    Two

     

     

    $

    +

    $

    +

     

     

    $

    =

     

    Three

     

     

    $

    +

    $

    +

     

     

    $

    =

     

    Four

     

     

    $

    +

    $

    +

     

     

    $

    =

     

    Five

     

     

    $

    +

    $

    +

     

     

    $

    =

     

     

    Covered Aircraft Maintenance Cost Baseline Values

     

     

    Material $ per FH

    Material $ per Cycyle

    Labor Hours per FH

    Labor Hours per Cycle

    In-Houes Material Factor

    In-house Labor Factor

    Contracted Material Factor

    Contracted Labor Factor

     

    AA

    BB

    CC

    DD

     

     

     

     

    Line

    A Check

    C or 1C-3C Check

    D/S1 or 4C/S1 Check

    Brakes

    Wheels/Tires’

    Landing Gear

    APU

    Other Components

    QEC Line

     

     

     

     

     

     

     

     

     

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    Attachment D

     

    To:                   Director ‑ BCA Warranty and Product Assurance Contracts

                            Boeing Commercial Airplanes

                            P.O. Box 3707, Mail Code 2L-46

                            Fax: 425-237-1706

                            Seattle, Washington  98124‑2207

     

    Reference:    Letter Agreement No GOT-PA-03780-LA-1207830 to Agreement No. 3780 ( Purchase Agreement ) and Maintenance Cost Guarantee

     

    Subject:          Data reported pursuant to Article 6 of the referenced Letter Agreement.

     

    Reporting Period No. _____

    Beginning date _________ ending date _________

     

    Currency of the costs shown below:  _________

     

     

     

    Actual

    Maintenance Costs

     

    Direct

    Labor Cost

    (total cost)

     

    Direct

    Material Cost

    (total cost)

    Subcontracted

    Maintenance Labor Costs

    (total cost)

    Subcontracted Maintenance Material Costs

    (total cost)

    Total

     

     

     

     

     

    Note:  The above labor costs have been calculated in accordance with Article 4.2. of the referenced Letter Agreement and are exclusive of time consumed by employees while waiting for work, traveling to or from work, training, vacation, sick leave, or in any other similar absences from the actual maintenance work.  The above material costs have been calculated in accordance with Article 4.2 of the referenced Letter Agreement and exclude all costs described in Article 9 therein.

     

    Direct Labor Rate

    ($ per Labor Hour)

     

    Maintenance Subcontracted. %

     

    Subcontract Labor Rate

    ($ per Labor Hour)

     

    Annual Fleet Landings

    (Total for Year)

     

    Annual Fleet Fight Hours

    (Total for Year)

     

    Average Number of Covered Aircraft

     

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    The above labor rate has been calculated in accordance with Article 4.2 of the Letter Agreement and excludes, without limitation, all fringe benefits, premium time allowances, social charges and business taxes.

     

    GAC Inc.

     

    By

     

     

    Its

     

     

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    Attachment E

     

    To:       GAC Inc.

     

    Reference:    Letter Agreement No GOT-PA-03780-LA-1207830 to Agreement No. 3780 ( Purchase Agreement ) and Maintenance Cost Guarantee

     

    Subject:          Data reported pursuant to Article 7 of the referenced Letter Agreement.

     

    Reporting Period No. _____

    Beginning date _________ ending date _________

     

    Actual Maintenance Costs as reported by Customer expressed in U.S. Dollars:

     

     

     

    Actual

    Maintenance Costs

     

    Direct

    Labor Cost

    (total cost)

     

    Direct

    Material Cost

    (total cost)

    Subcontracted

    Maintenance Labor Costs

    (total cost)

    Subcontracted Maintenance Material Costs

    (total cost)

    Total

     

     

     

     

     

    Actual Maintenance Costs and Target Maintenance Costs as determined by Boeing expressed in U.S. dollars.

     

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    Reporting
    Period 1

    Reporting
    Period 2

    Reporting
    Period 3

    Reporting
    Period 4

    Reporting
    Period 5

    Year

     

     

     

     

     

     

    Year dollars

     

     

     

     

     

     

    Direct Labor Cost

     

     

     

     

     

    Direct Material Cost

     

     

     

     

     

    Subcontracted Maintenance Labor Cost

     

     

     

     

     

    Subcontracted Maintenance Material Cost

     

     

     

     

     

     

    Cumulative Actual Maintenance Cost

     

     

     

     

     

     

     

     

     

     

     

    Total Fleet Flight Hours

     

     

     

     

     

    Total Fleet Landings

     

     

     

     

     

    Number of Covered Aircraft

     

     

     

     

     

    Per man-hour Labor Rate

     

     

     

     

     

     

    Material Inflation factor

     

     

     

     

     

    Currency Exchange factor

     

     

     

     

     

     

    Target Labor Cost

     

     

     

     

     

    Target Material Cost

     

     

     

     

     

    Target Maintenance Cost

     

     

     

     

     

    Cumulative Target Maintenance Cost

     

     

     

     

     

     

    THE BOEING COMPANY

     

    Reported By

     

     

    Its

     

     

    Date

     

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    Attachment F:  Recalculated and Adjusted Target

    Maintenance Cost for Covered Aircraft

     

    To:       <CustomerName>

     

    Reference:    Letter Agreement No. <ContractNo> to Agreement No. <PA> ( Purchase Agreement ) and Maintenance Cost Guarantee

     

    Subject:          Data reported pursuant to Article 5.3 of the referenced Letter Agreement.

     

     

     

    Reporting

    Period

    Fleet Size

    Average Fleet Age

    Target Direct

    Labor Cost

    ( $ per flt hr ) 

     

     

    +

    Target Direct

    Material Cost

    ( $ per flt hr ) 

     

     

    +

    Target

    Subcontracted Maintenance

    Labor Cost

    ( $ per flt hr ) 

     

    Target

    Subcontracted

    Maintenance Material Cost

    ( $ per flt hr ) 

     

     

    =

     

    Projected

    Target

    Maintenance Cost

    ( $ per flt hr ) 

    One

     

     

    $

    +

    $

    +

     

     

    $

    =

     

    Two

     

     

    $

    +

    $

    +

     

     

    $

    =

     

    Three

     

     

    $

    +

    $

    +

     

     

    $

    =

     

    Four

     

     

    $

    +

    $

    +

     

     

    $

    =

     

    Five

     

     

    $

    +

    $

    +

     

     

    $

    =

     

     

     

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    The Boeing Company
    P.O. Box 3707
    Seattle, WA     98124-2207
       

    GOT-PA-3780-LA-1207847

     

     

    GAC, Inc.

    PO Box 309, Ugland House

    Grand Cayman

    KY1-1104

    Cayman Islands

     

     

    Subject:          Aircraft Schedule Reliability Program

     

    Reference:    Purchase Agreement No.3780 (the Purchase Agreement) between The Boeing Company (Boeing) and GAC Inc. (Customer) relating to Model 737-8 aircraft (the Aircraft)

                             

    This letter agreement ( Letter Agreement ) amends and supplements the Purchase Agreement.  All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.

    1.                             Definition of Terms : 

    1.1          Achieved Technical Schedule Reliability shall mean a number calculated pursuant to the following formula:

     

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

    Where:

     

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    1.2          Analysis Period shall mean [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of Scheduled Revenue Departures commencing at the start of the Program Term and running in a series until the end of the Program Term.  For the avoidance of doubt, no Analysis Period shall overlap with another Analysis Period.

    1.3          Average Flight Length shall mean the flight hours for the fleet of Covered Aircraft during an Analysis Period divided by the number of Scheduled Revenue Departures for the fleet of Covered Aircraft during the same Analysis Period.

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    LETTERHEAD  

     

    1.4          Chargeable Schedule Interruption or “ Interruption ” shall mean a cancellation, turn-back, diverted landing or delayed departure of any Scheduled Revenue Departure which [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], other than as provided in Section 4, below, and results directly from a Technical Malfunction of such Covered Aircraft.

    1.5          Covered Aircraft shall mean those Aircraft operated by Customer on Customer's routes during the Program Term.

    1.6          Program  shall mean the rights and obligations defined in this Letter Agreement.

    1.7          Program Term shall mean [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] commencing on the delivery date of the first Covered Aircraft delivered in [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    1.8          Scheduled Revenue Departure shall mean any departure of a Covered Aircraft for a scheduled revenue flight segment, including, but not limited to (i) any departure of a Covered Aircraft for a charter flight or extra section flight or (ii) any canceled departure of a flight segment.

    1.9          Technical Malfunction shall mean a failure or indication of failure of a mechanical, electrical, or electronic (including software) component on a Covered Aircraft, or any system, accessory, equipment or part (including engines) installed thereon, unless otherwise excluded in accordance with Section 4, below and/or the “Houston” READI rules (in effect 2008 through 2010).

    2.             Program Description . 

    " Technical Schedule Reliability Targets " or " Targets " for the fleet of Covered Aircraft during the Program Term are as follows:


    Program Term

     

    Targets

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    These Targets are based on an average flight length of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] per Scheduled Revenue Departure for the fleet of Covered Aircraft in revenue service operations.  The Targets are subject to change based on changes in the Customer’s actual Average Flight Length and other factors under Customer's control.

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    GOT-PA-3780-LA-1207847

     

    LETTERHEAD  

    3.             Remedial Action . 

    3.1          Following the first Analysis Period, if Customer (i) notifies Boeing that the Achieved Technical Schedule Reliability for such Analysis Period is more than [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] below the applicable Target ( Agreed Threshold Value ) for such Analysis Period and (ii) provides the status reports and other substantiation data required pursuant to Section 5 (Administrative Requirements) below, Boeing will:

    3.1.1      investigate the circumstances and possible causes for an Achieved Technical Schedule Reliability being lower than the Agreed Threshold Value;

    3.1.2      provide technical assistance to Customer in the form of analysis and recommendations of a kind and nature which Boeing determines to be best suited for improving the Achieved Technical Schedule Reliability;

    3.1.3      initiate a design review of the system, accessory, equipment or part (other than engines and engine parts) which are determined by Boeing to be the primary cause of an Achieved Technical Schedule Reliability being lower than the Agreed Threshold Value;

    3.1.4      when in Boeing's judgment a redesign is indicated as a technically and economically practical means of improving the Achieved Technical Schedule Reliability, redesign or cause the redesign of such system, accessory, equipment or part;

    3.1.5      if such redesign results in retrofit kits being offered by Boeing or Boeing's suppliers, provide such kits or cause such kits to be provided, at Customer's request, at no charge to Customer and reimburse Customer's reasonable direct labor costs for incorporation of any such kit manufactured to Boeing's detailed design.  Such reimbursement will be provided pursuant to Boeing Warranty (Part 2 of Exhibit C, Product Assurance Document, of the AGTA, including without limitation Article 11 therein); and

    3.1.6      if Boeing determines that the design of engines or engine parts is the primary cause of an Achieved Technical Schedule Reliability being lower than the Agreed Threshold Value, Boeing will, if requested by Customer, take whatever reasonable action is permitted under Boeing’s contracts with the engine manufacturer in an effort to obtain correction of such design.

     

    4.             Interruption Exclusions . 

     

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    LETTERHEAD  

    4.1          An Interruption does not include any cancellation, turn-back, diverted landing or delayed departure of any Scheduled Revenue Departure of any Covered Aircraft which is caused by any of the following events:

    (i)             late arrival of an inbound flight;
    (ii)           late return from out-of-service status;
    (iii)          operation, service, maintenance or overhaul of such Covered Aircraft or any system, accessory, equipment or part (including engines) installed thereon, in a manner other than in accordance with Customer's approved instructions and requirements;
    (iv)          logistics problems such as lack of spare parts at stations where spares could reasonably be expected to be available, as determined in accordance with industry standard provisioning practices, or inordinate delays in the availability of spares;
    (v)           a malfunction caused by any extrinsic force such as foreign object damage;
    (vi)          failure to utilize the FAA approved minimum equipment list ( MEL ) to defer corrective maintenance, or failure to correct any deferred item within the time period specified in such MEL;
    (vii)         Buyer Furnished Equipment;
    (viii)       tires; 
    (ix)          normal brake wear;
    (x)           acts or omissions of Customer or any strikes or labor troubles causing cessation, slowdown or interruption of work related to the operation or maintenance of the Covered Aircraft; or
    (xi)          any other cancellation, turn-back, diverted landing or delayed departure which cannot fairly be attributed to Technical Malfunction of the Covered Aircraft, or any system, accessory, equipment or part (including engines) installed on the Covered Aircraft.

    4.2          If a Covered Aircraft is used as a substitute for one of Customer’s other aircraft that is not subject to the terms and conditions of this Letter Agreement ( Non-Covered Aircraft ) or a Non-Covered Aircraft is used as a substitute for a Covered Aircraft, and if the revenue flight affected by such substitution:

     

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    (i)             Departs without an Interruption, then no Chargeable Schedule Interruption will be deemed to have occurred.
    (ii)           Experiences an Interruption, then the Interruption is charged against the aircraft initially scheduled for the flight rather than its substitute.

    4.3          An Interruption, which affects a subsequent segment or flight for a Covered Aircraft, will count as only one (1) Interruption unless such Interruption is separate from and unrelated to the initial Interruption.

    5.             Administrative Requirements . 

    5.1          Customer will provide status reports every month ( Reporting Period ). 

    5.2          The Customer’s status reports shall include the data required to calculate the Achieved Technical Schedule Reliability for each month of the Reporting Period using the formulas described in Section 1, above, and a list of the Chargeable Schedule Interruptions for the Reporting Period.  Customer shall submit such data to Boeing electronically in accordance with the provisions of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

    All data submitted pursuant to Subsection 5.2 will be addressed to the attention of:

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    5.3          Customer claim reports will include the data described in Subsection 5.2 above and sufficient data to substantiate any claimed Chargeable Schedule Interruption.  Customer will submit to Boeing reasonable proof that any claimed Chargeable Schedule Interruption does in fact constitute a Chargeable Schedule Interruption.  In addition, Customer will maintain and submit to Boeing such data as may reasonably be required to:

    (i)             determine Achieved Technical Schedule Reliability,
    (ii)           analyze the problems causing any claimed Chargeable Schedule Interruption, and
    (iii)          when required, develop appropriate remedial action.

    5.4          Failure to file the status reports or provide the information as specified in Subsections 5.1 through 5.3, above, will constitute an acknowledgment by Customer that the Achieved Technical Schedule Reliability is equal to or greater than the Agreed Threshold Value for such Analysis Period, and Boeing will not be obligated to provide any of the remedies arising under this Program for such Analysis Period.

     

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    LETTERHEAD  

    5.5          All claim reports submitted to Boeing will be addressed to the attention of:

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    6.             Conditions and Limitations . 

    6.1          If, to improve schedule reliability, Boeing or any Boeing supplier issues service bulletins, service letters or other written instructions ( Instructions ) or offers no-charge retrofit kits, Customer will accomplish such Instructions or install such kits within a period of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] after availability of such Instructions or kits at Customer's facility or such longer period as may be established by mutual agreement of the parties.  If Customer does not accomplish the Instructions or install the kits within such time period, Chargeable Schedule Interruptions relating to the systems, accessories, equipment or parts affected by such Instructions or kits will be excluded from this Program from the date the Instructions or kits were available at Customer’s facility until such time as Customer notifies Boeing that Customer has incorporated such Instructions or kits on all affected Aircraft.

    6.2          Boeing may inspect at all reasonable times Customer's maintenance facilities and review its maintenance programs and procedures.  If Boeing recommends in writing reasonable changes in Customer's maintenance programs and procedures which would improve the Achieved Technical Schedule Reliability and Customer does not effect such changes within [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] days after receiving such written recommendations or such longer period as may be established by mutual agreement of the parties, Boeing will have the right to redefine the Chargeable Schedule Interruptions after the date Customer received such written recommendations so as to eliminate interruptions which Boeing estimates result from Customer's failure to effect the recommended changes within such time period.

    6.3          If, for any Analysis Period, the actual Average Flight Length or other factors affecting schedule reliability of the Covered Aircraft materially change, the Target for such Analysis Period will be appropriately adjusted by the parties.

    6.4          At Boeing's request, Customer will assign to Boeing any of Customer's rights against any manufacturer of any system, equipment, accessory or part installed in the Covered Aircraft as Boeing may reasonably require to fulfill its obligations with respect to any remedy provided by Boeing hereunder.

    6.5          THE DISCLAIMER AND RELEASE and EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES provisions stated in Article 11 of Exhibit C of the AGTA apply to this Program.

     

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    LETTERHEAD  

    7.             Duplication of Benefits . 

    Boeing and Customer agree it is not the intent of the parties to provide benefits hereunder that duplicate benefits to be provided (a) by Boeing under the Purchase Agreement, or any other agreement between Boeing and Customer, or (b) by engine manufacturer under any agreement between engine manufacturer and Customer, due to the Aircraft not satisfying any performance metric similar to the Technical Schedule Reliability Target, Agreed Threshold Value, or any performance metric that otherwise impacts schedule reliability.  Boeing may offset its obligation to provide benefits hereunder against the benefits provided or to be provided to Customer by engine manufacturer or Boeing pursuant to such other guarantee.

    8.             Exclusive Remedy . 

    Customer agrees that the remedies contained in Sections 3 herein are Customer’s exclusive remedies for purposes of resolving all issues with respect to the Program and are in lieu of all other rights, remedies, claims and causes of action Customer may have, arising at law or otherwise, in connection therewith and shall constitute complete, full and final settlement and satisfaction of any and all of Boeing’s obligations and liabilities to Customer in connection therewith.  Customer releases Boeing and its successors, affiliates and subsidiaries from all present, past and future rights, remedies, claims and causes of action, whether arising at law or otherwise, known or unknown, relating to or arising from such Program.

    9.             Assignment . 

    Except for an assignment by Customer to a wholly-owned subsidiary as permitted under Article 9, entitled “Assignment, Resale, or Lease” of the AGTA, this Letter Agreement is provided as an accommodation to Customer in consideration of Customer becoming the operator of the Aircraft and cannot be assigned in whole or in part.

     

    10.          Confidential Treatment . 

    Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties.  Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.

    If the foregoing correctly sets forth your understanding of our agreement with respect to the matters treated above, please indicate your acceptance and approval below.

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    LETTERHEAD  

     

    Very truly yours,

     

    THE BOEING COMPANY

     

     

    By _________________________

     

    Its                 Attorney‑In‑Fact            

     

     

     

    ACCEPTED AND AGREED TO this

     

    Date:                                       2012­­­­­­­­­     

     

     

    GAC INC.

     

     

    By _________________________          By _________________________         

     

    Its                                                                      Its                                                                 

     

     

    Witness                                                            Witness                                                      

     

     

     

     

     

     

    Airframe Model/MTOW:

    737-8

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    		 

    Detail Specification:

    		 

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    Engine Model/Thrust:

    CFM-LEAP-1B

    0 pounds

    		 

    Airframe Price Base Year/Escalation Formula:

     

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    Airframe Price:

    		 

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    		 

    Engine Price Base Year/Escalation Formula:

    N/A

    N/A

    		 

    Optional Features:

    		               

    Sub-Total of Airframe and Features:

    		 

    Airframe Escalation Data:

    		       

    Engine Price (Per Aircraft):

    		   

    Base Year Index (ECI):

    		 

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    Aircraft Basic Price (Excluding BFE/SPE):

    		 

    Base Year Index (CPI):

    		 

    Buyer Furnished Equipment (BFE) Estimate:

    		             

    Seller Purchased Equipment (SPE) Estimate:

    		             
                       
                       

     

     

     

     
     

     

    Deposit per Aircraft:

    		               

     

     

    Escalation

     

     

    Escalation Estimate

    Advance Payment Per Aircraft (Amts. Due/Mos. Prior to Delivery):

     

     

     

    Delivery

    Number of

    Factor

     

     

    Adv Payment Base

    At Signing

    24 Mos.

    21/18/12/9/6 Mos.

    Total

    Date

    Aircraft

    (Airframe)

     

     

    Price Per A/P

    1%

    4%

    5%

    30%

    2018

    		   

     

     

    		         

    2019

    		 

     

     

    		         

    2020

    		   

     

     

    		         

    2021

    		  [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

    2022

    		   

     

     

    		         

    2023

    		   

     

     

    		         

    2024

    		   

     

     

    		         

    2025

    		   

     

     

    		         

    2026

    		   

     

     

    		         

    Total:

    		                 

     

     

     

     

     

     

     

     

     

     

    AIRCRAFT CONFIGURATION

     

    between

     

    THE BOEING COMPANY

     

    and

     

    GAC Inc.

     

    Exhibit A to Purchase Agreement Number PA-3780

    GOT-PA-3780-EXA                                                                                                                        

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    Exhibit A

     

    AIRCRAFT CONFIGURATION

     

    Dated __________________

     

    relating to

     

    BOEING MODEL 737-8 AIRCRAFT

     

    The Detail Specification for these aircraft is not yet developed.  Such Detail Specification will be comprised of D019007,revision TBD, as amended to incorporate the optional features ( Options ) selected by the Customer per the schedule mutually agreed to in letter agreement  GOT-PA-3780-LA-1207842 “Open Matters”,  including the effects on Manufacturer's Empty Weight ( MEW ) and Operating Empty Weight ( OEW ).  As soon as practicable, Boeing will furnish to Customer copies of the Detail Specification, which copies will reflect such Options.  The Aircraft Basic Price at delivery shall reflect and includes all effects of such Options, except such Aircraft Basic Price does not include the price effects of any Buyer Furnished Equipment or Seller Purchased Equipment. 

    The content of this Exhibit A will be defined pursuant to the provisions of Letter Agreement GOT-PA-3780-LA-1207842 to the Purchase Agreement, entitled “Open Matters”.

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    GOT-PA-3780-EXA                                                                                                                        

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    AIRCRAFT DELIVERY REQUIREMENTS AND RESPONSIBILITIES

     

    between

     

    THE BOEING COMPANY

     

    and

     

    GAC INCORPORATED (GAC Inc.)

     

    Exhibit B to Purchase Agreement Number PA-3780

    PA-3780-EXB                                                                                                                                  

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    Exhibit B

     

    AIRCRAFT DELIVERY REQUIREMENTS AND RESPONSIBILITIES

     

    relating to

     

    BOEING MODEL 737-8 AIRCRAFT

     

    Both Boeing and Customer have certain documentation and approval responsibilities at various times during the construction cycle of Customer’s Aircraft that are critical to making the delivery of each Aircraft a positive experience for both parties.  This Exhibit B documents those responsibilities and indicates recommended completion deadlines for the actions to be accomplished.

    1.             GOVERNMENT DOCUMENTATION REQUIREMENTS . 

    Certain actions are required to be taken by Customer in advance of the scheduled delivery month of each Aircraft with respect to obtaining certain government issued documentation.

    1.1          Airworthiness and Registration Documents.  Not later than six (6) months prior to delivery of each Aircraft, Customer will notify Boeing of the registration number to be painted on the side of the Aircraft.  In addition, and not later than three (3) months prior to delivery of each Aircraft, Customer will, by letter to the regulatory authority having jurisdiction, authorize the temporary use of such registration numbers by Boeing during the pre-delivery testing of the Aircraft.

    Customer is responsible for furnishing any Temporary or Permanent Registration Certificates required by any governmental authority having jurisdiction to be displayed aboard the Aircraft after delivery.

    1.2          Certificate of Sanitary Construction . 

    1.2.1      U.S. Registered Aircraft.  Boeing will obtain from the United States Public Health Service, a United States Certificate of Sanitary Construction to be displayed aboard each Aircraft after delivery to Customer.  The above Boeing obligation only applies to commercial passenger-configured aircraft.

    1.2.2      Non-U.S. Registered Aircraft.  If Customer requires a United States Certificate of Sanitary Construction at the time of delivery of the Aircraft, Customer will give written notice thereof to Boeing at least three (3) months prior to deliver y.  Boeing will then use commercially reasonable efforts to obtain the Certificate from the United States Public Health Service and present it to Customer at the time of Aircraft delivery.  The above Boeing obligation only applies to commercial passenger-configured aircraft.

    1.3          Customs Documentation . 

    1.3.1      Import Documentation .  If the Aircraft is intended to be exported from the United States, Customer must notify Boeing not later than three (3) months prior to delivery of each Aircraft of any documentation required by the customs authorities or by any other agency of the country of import.

     

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    1.3.2      General Declaration ‑ U.S .  If the Aircraft is intended to be exported from the United States, Boeing will prepare Customs Form 7507, General Declaration, for execution by U.S. Customs immediately prior to the ferry flight of the Aircraft. For this purpose, Customer will furnish to Boeing not later than twenty (20) days prior to delivery all information required by U.S. Customs and Border Protection, including without limitation (i) a complete crew and passenger list identifying the names, birth dates, passport numbers and passport expiration dates of all crew and passengers and (ii) a complete ferry flight itinerary, including point of exit from the United States for the Aircraft.

    If Customer intends, during the ferry flight of an Aircraft, to land at a U.S. airport after clearing Customs at delivery, Customer must notify Boeing not later than twenty (20) days prior to delivery of such intention.  If Boeing receives such notification, Boeing will provide to Customer the documents constituting a Customs permit to proceed, allowing such Aircraft to depart after any such landing.  Sufficient copies of completed Form 7507, along with passenger manifest, will be furnished to Customer to cover U.S. stops scheduled for the ferry flight.

    1.3.3      Export Declaration ‑ U.S .  If the Aircraft is intended to be exported from the United States following delivery, and (i) Customer is a non-U.S. customer, Boeing will file an export declaration electronically with U.S. Customs and Border Protection ( CBP ), or (ii) Customer is a U.S. customer, it is the responsibility of the U.S. customer, as the exporter of record, to file the export declaration with CBP.

    2.             Insurance Certificates . 

    Unless provided earlier, Customer will provide to Boeing not later than thirty (30) days prior to delivery of the first Aircraft, a copy of the requisite annual insurance certificate in accordance with the requirements of Article 8 of the AGTA.

    3.             NOTICE OF FLYAWAY CONFIGURATION . 

    Not later than twenty (20) days prior to delivery of the Aircraft, Customer will provide to Boeing a configuration letter stating the requested "flyaway configuration" of the Aircraft for its ferry flight.  This configuration letter should include:

    (i)             the name of the company which is to furnish fuel for the ferry flight and any scheduled post-delivery flight training, the method of payment for such fuel, and fuel load for the ferry flight;
    (ii)           the cargo to be loaded and where it is to be stowed on board the Aircraft, the address where cargo is to be shipped after flyaway and notification of any hazardous materials requiring special handling;
    (iii)          any BFE equipment to be removed prior to flyaway and returned to Boeing BFE stores for installation on Customer's subsequent Aircraft;
    (iv)          a complete list of names and citizenship of each crew member and non-revenue passenger who will be aboard the ferry flight; and
     

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    (v)           a complete ferry flight itinerary.

    4.             DELIVERY ACTIONS BY BOEING . 

    4.1          Schedule of Inspections .  All FAA, Boeing, Customer and, if required, U.S. Customs Bureau inspections will be scheduled by Boeing for completion prior to delivery or departure of the Aircraft.  Customer will be informed of such schedules.

    4.2          Schedule of Demonstration Flights .  All FAA and Customer demonstration flights will be scheduled by Boeing for completion prior to delivery of the Aircraft. 

    4.3          Schedule for Customer's Flight Crew .  Boeing will inform Customer of the date that a flight crew is required for acceptance routines associated with delivery of the Aircraft.

    4.4          Fuel Provided by Boeing .  Boeing will provide to Customer, without charge, the amount of fuel shown in U.S. gallons in the table below for the model of Aircraft being delivered and full capacity of engine oil at the time of delivery or prior to the ferry flight of the Aircraft.

    Aircraft Model

    Fuel Provided

    737

    1,000

    747

    4,000

    757

    1,600

    767

    2,000

    777

    3,000

    787

    2,000

    4.5          Flight Crew and Passenger Consumables .  Boeing will provide reasonable quantities of food, coat hangers, towels, toilet tissue, drinking cups and soap for the first segment of the ferry flight for the Aircraft.

    4.6          Delivery Papers, Documents and Data .  Boeing will have available at the time of delivery of the Aircraft certain delivery papers, documents and data for execution and delivery.  If title for the Aircraft will be transferred to Customer through a Boeing subsidiary and if the Aircraft will be registered with the FAA, Boeing will pre‑position in Oklahoma City, Oklahoma, for filing with the FAA at the time of delivery of the Aircraft an executed original Form 8050‑2, Aircraft Bill of Sale, indicating transfer of title to the Aircraft from Boeing's subsidiary to Customer.

    4.7          Delegation of Authority .  If specifically requested in advance by Customer, Boeing will present a certified copy of a Resolution of Boeing's Board of Directors, designating and authorizing certain persons to act on its behalf in connection with delivery of the Aircraft.

    5.             DELIVERY ACTIONS BY CUSTOMER . 

    5.1          Aircraft Radio Station License .  At delivery Customer will provide its Aircraft Radio Station License to be placed on board the Aircraft following delivery.

    5.2          Aircraft Flight Log .  At delivery Customer will provide the Aircraft Flight Log for the Aircraft.

    5.3          Delegation of Authority .  Customer will present to Boeing at delivery of the Aircraft an original or certified copy of Customer's Delegation of Authority designating

    PA-3780-EXB                                                                                                                                  

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    and authorizing certain persons to act on its behalf in connection with delivery of the specified Aircraft.

    5.4          TSA Waiver Approval .  Customer may be required to have an approved Transportation Security Administration ( TSA ) waiver for the ferry flight depending upon the Customer’s en-route stop(s) and destination unless the Customer already has a TSA approved security program in place.  Customer is responsible for application for the TSA waiver and obtaining TSA approval.  Customer will provide a copy of the approved TSA waiver to Boeing upon arrival at the Boeing delivery center.

    5.5          Electronic Advance Passenger Information System .  Should the ferry flight of an Aircraft leave the United States, the Department of Homeland Security office requires Customer to comply with the Electronic Advance Passenger Information System ( eAPIS ).  Customer needs to establish their own account with US Customs and Border Protection in order to file for departure.  A copy of the eAPIS forms is to be provided by Customer to Boeing upon arrival of Customer’s acceptance team at the Boeing delivery center.

     

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    ESCALATION ADJUSTMENT

    AIRFRAME AND OPTIONAL FEATURES

     

    between

     

    THE BOEING COMPANY

     

    and

     

    GAC INCORPORATED (GAC Inc.)

     

    Supplemental Exhibit AE1

    to Purchase Agreement Number 3780

    PA 3780                                                                                                                                            

    Airframe Escalation                                                                                  

    Supp Ex AE1 Page 1

    BOEING PROPRIETARY

     

     

     

    ESCALATION ADJUSTMENT

    AIRFRAME AND OPTIONAL FEATURES

     

    relating to

     

    BOEING MODEL 737-7/-8/-9 AIRCRAFT

     

    1.             Formula . 

    Airframe and Optional Features price adjustments ( Airframe Price Adjustment ) are used to allow prices to be stated in current year dollars at the signing of this Purchase Agreement and to adjust the amount to be paid by Customer at delivery for the effects of economic fluctuation.  The Airframe Price Adjustment will be determined at the time of Aircraft delivery in accordance with the following formula:

     

    P a = (P) (L + M) ‑ P

     

    Where:

     

    P a =     Airframe Price Adjustment.  (For Models 737, 747-8, 777-200LR, 777-F, and 777-300ER the Airframe Price includes the Engine Price at its basic thrust level.)

     

    P =      Airframe Price plus the price of the Optional Features (as set forth in Table 1 of this Purchase Agreement).

     

    L = .65 x

    ( ECI  

    ECI b )

     

    Where:

     

    ECI b is the base year airframe escalation index (as set forth in Table 1 of this Purchase Agreement);

     

    ECI is a value determined using the U.S. Department of Labor, Bureau of Labor Statistics, Employment Cost Index for NAICS Manufacturing – Total Compensation (BLS Series ID CIU2013000000000I), calculated by establishing a three (3) month arithmetic average value (expressed as a decimal and rounded to the nearest tenth) using the values for the 11 th , 12 th , and 13 th months prior to the month of scheduled delivery of the applicable Aircraft.  As the Employment Cost Index values are only released on a quarterly basis, the value released for the first quarter will be used for the months of January, February, and March; the value released for the second quarter will be used for the months of April, May, and June; the value released for the third quarter will be used for the months of July, August, and September; the value released for the fourth quarter will be used for the months of October, November, and December.

     

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    Airframe Escalation                                                                                  

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    M = .35 x

    ( CPI   

    CPI b )

     

    Where:

     

    CPI b is the base year airframe escalation index (as set forth in Table 1 of this Purchase Agreement); and

     

    CPI is a value determined using the U.S. Department of Labor, Bureau of Labor Statistics, Consumer Price Index – All Urban Consumers (BLS Series ID CUUR0000SA0), calculated as a three (3) month arithmetic average of the released monthly values (expressed as a decimal and rounded to the nearest tenth) using the values for the 11 th , 12 th , and 13 th months prior to the month of scheduled delivery of the applicable Aircraft.

     

    As an example, for an Aircraft scheduled to be delivered in the month of July, the months of June, July, and August of the preceding year will be utilized in determining the value of ECI and CPI.

     

    Note:

    (i)             In determining the values of L and M, all calculations and resulting values will be expressed as a decimal rounded to the nearest ten‑thousandth.
    (ii)           .65 is the numeric ratio attributed to labor in the Airframe Price Adjustment formula.
    (iii)          .35 is the numeric ratio attributed to materials in the Airframe Price Adjustment formula.
    (iv)          The denominators ( base year indices ) are the actual average values reported by the U.S. Department of Labor, Bureau of Labor Statistics.  The actual average values are calculated as a three (3) month arithmetic average of the released monthly values (expressed as a decimal and rounded to the nearest tenth) using the values for the 11th, 12th, and 13th months prior to the airframe base year.  The applicable base year and corresponding denominator is provided by Boeing in Table 1 of this Purchase Agreement.
    (v)           The final value of P a will be rounded to the nearest dollar.
    (vi)          (vi)          The Airframe Price Adjustment will not be made if it will result in a decrease in the Aircraft Basic Price.

    2.             Values to be Utilized in the Event of Unavailability.

     

    PA 3780                                                                                                                                            

    Airframe Escalation                                                                                  

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    2.1          If the Bureau of Labor Statistics substantially revises the methodology used for the determination of the values to be used to determine the ECI and CPI values (in contrast to benchmark adjustments or other corrections of previously released values), or for any reason has not released values needed to determine the applicable Airframe Price Adjustment, the parties will, prior to the delivery of any such Aircraft, select a substitute from other Bureau of Labor Statistics data or similar data reported by non-governmental organizations.  Such substitute will result in the same adjustment, insofar as possible, as would have been calculated utilizing the original values adjusted for fluctuation during the applicable time period.  However, if within twenty-four (24) months after delivery of the Aircraft, the Bureau of Labor Statistics should resume releasing values for the months needed to determine the Airframe Price Adjustment, such values will be used to determine any increase or decrease in the Airframe Price Adjustment for the Aircraft from that determined at the time of delivery of the Aircraft.

    2.2          Notwithstanding Article 2.1 above, if prior to the scheduled delivery month of an Aircraft the Bureau of Labor Statistics changes the base year for determination of the ECI and CPI values as defined above, such re-based values will be incorporated in the Airframe Price Adjustment calculation.

    2.3          In the event escalation provisions are made non‑enforceable or otherwise rendered void by any agency of the United States Government, the parties agree, to the extent they may lawfully do so, to equitably adjust the Aircraft Price of any affected Aircraft to reflect an allowance for increases or decreases consistent with the applicable provisions of paragraph 1 of this Supplemental Exhibit AE1 in labor compensation and material costs occurring since August of the year prior to the price base year shown in the Purchase Agreement.

    2.4          If within twelve (12) months of Aircraft delivery, the published index values are revised due to an acknowledged error by the Bureau of Labor Statistics, the Airframe Price Adjustment will be re-calculated using the revised index values (this does not include those values noted as preliminary by the Bureau of Labor Statistics).  A credit memorandum or supplemental invoice will be issued for the Airframe Price Adjustment difference. Interest charges will not apply for the period of original invoice to issuance of credit memorandum or supplemental invoice.

    Note:

    (i)             The values released by the Bureau of Labor Statistics and available to Boeing thirty (30) days prior to the first day of the scheduled delivery month of an Aircraft will be used to determine the ECI and CPI values for the applicable months (including those noted as preliminary by the Bureau of Labor Statistics) to calculate the Airframe Price Adjustment for the Aircraft invoice at the time of delivery.  The values will be considered final and no Airframe Price Adjustments will be made after Aircraft delivery for any subsequent changes in published Index values, subject always to paragraph 2.4 above.
     

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    (ii)           The maximum number of digits to the right of the decimal after rounding utilized in any part of the Airframe Price Adjustment equation will be four (4), where rounding of the fourth digit will be increased to the next highest digit when the 5th digit is equal to five (5) or greater.

     

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    BOEING PROPRIETARY

     

    BUYER FURNISHED EQUIPMENT VARIABLES

     

    between

     

    THE BOEING COMPANY

     

    and

     

    GAC INC.

     

     

    Supplemental Exhibit BFE1 to Purchase Agreement Number PA-3780

     

     

     

    GOT-PA-3780-BFE1                                                                                                                                 

    BOEING PROPRIETARY

     

     

     

    BUYER FURNISHED EQUIPMENT VARIABLES

     

    relating to

     

    BOEING MODEL 737-8 AIRCRAFT

     

     

    This Supplemental Exhibit BFE1 contains vendor selection dates, on-dock dates and other variables applicable to the Aircraft.

     

     

    This Supplemental Exhibit BFE1 contains supplier selection dates, on-dock dates and other requirements applicable to the Aircraft.

    1.     Supplier Selection . 

    Customer will:

    Select and notify Boeing of the suppliers and part numbers of the following BFE items by the following dates:

    Supplier Selection dates will be provided 24 months before the first aircraft delivery.

     

    Galley System

    TBD

     

     

    Galley Inserts

    TBD

     

     

    Seats (passenger)

    TBD

     

     

    Overhead & Audio System

    TBD

     

     

    In-Seat Video System

    TBD

     

     

    Miscellaneous Emergency Equipment

    TBD

    Cargo Handling Systems*

    (Single Aisle Programs only)

    TBD

     

    *For a new certification, supplier requires notification ten (10) months prior to Cargo Handling System on-dock date.

    Customer will enter into initial agreements with the selected Galley System, Galley Inserts, Seats, and In-Seat Video System suppliers on or before five calendar days after the above supplier selection dates to actively participate with Customer and Boeing in coordination actions including the Initial Technical Coordination Meeting ( ITCM ). 

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    2.         On-dock Dates and Other Infromation.

     

    On or before nine months prior to delivery, Boeing will provide to Customer the BFE Requirements electronically through My Boeing Fleet ( MBF  in My Boeing Configuration ( MBC ).  These requirements may be periodically revised, setting forth the items, quantities, on-dock dates and shipping instructions and other requirements relating to the in-sequence installation of BFE.  For planning purposes, preliminary BFE on-dock dates are set forth in Table 1 below:

    GOT-PA-3780-BFE1                                                                                                                                      

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    Table 1

    For planning purposes, preliminary BFE on-dock dates:

     

    Scheduled Month/Year of Delivery:

    Quanity

    Seats

    Galleys / Furnishings

    Antennas & Mounting Equipment

    Avionics

    Cabin Systems Equipment

    Miscellaneous/ Emergency Equipment

    Textiles /
    Raw Material

    Cargo Systems

    Provision Kits

    Radomes

    [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

     

     

    Preliminary BFE on-dock dates will be provided 24 months before each aircraft delivery.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    GOT-PA-3780-BFE1                                                                                                                                      

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    3.                   Additional Delivery Requirements – Import.

     

    Customer will be the “ importer of record ” (as defined by the U.S. Customs and Border Protection) for all BFE imported into the United States, and as such, it has the responsibility to ensure all of Customer’s BFE shipments comply with U.S. Customs Service regulations.  In the event Customer requests Boeing, in writing, to act as importer of record for Customer’s BFE, and Boeing agrees to such request,  Customer is responsible for ensuring Boeing can comply with all U.S. Customs Import Regulations by making certain that, at the time of shipment, all BFE shipments comply with the requirements in the “International Shipment Routing Instructions”, including the Customs Trade Partnership Against Terrorism ( C-TPAT ), as set out on the Boeing website referenced below.  Customer agrees to include the International Shipment Routing Instructions, including C-TPAT requirements, in each contract between Customer and BFE supplier.

     

    http://www.boeing.com/companyoffices/doingbiz/supplier_portal/index_general.html

     

     

    GOT-PA-3780-BFE1                                                                                                                                      

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    CUSTOMER SUPPORT VARIABLES

     

    between

     

    THE BOEING COMPANY

     

    and

     

    GAC INCORPORATED (GAC Inc.)

     

    Supplemental Exhibit CS1

    to Purchase Agreement Number 3780

     

    PA 3780                                                                                                                                            

    Customer Support Variables                                                                                   

    CS1 Page 1

    BOEING PROPRIETARY

     

     

    CUSTOMER SUPPORT VARIABLES

     

    relating to

     

    BOEING MODEL 737-7/-8/-9 AIRCRAFT

     

    Customer and Boeing will conduct planning conferences approximately twelve (12) months prior to delivery of the first Aircraft, or as mutually agreed, in order to develop and schedule a customized Customer Support Program to be furnished by Boeing in support of the Aircraft.

    The customized Customer Services Program will be based upon and equivalent to the entitlements summarized below.

    1.             Maintenance Training . 

    1.1          Mechanical/Power Plant Course; one (1) class of fifteen (15) students;

    1.2          Electrical Systems Course; one (1) class of fifteen (15) students;

    1.3          Avionics Systems Course; one (1) class of fifteen (15) students;

    1.4          Aircraft Rigging Course; one (1) class of six (6) students;

    1.5          Advanced Composite Repair Course; one (1) class of eight (8) students.

    1.6          Training materials will be provided to each student.  In addition, one set of training materials as used in Boeing's training program, including visual aids, Computer Based Training Courseware, instrument panel wall charts, text/graphics, video programs, etc. will be provided for use in Customer's own training program.

    2.             Flight Training . 

    2.1          Boeing will provide one classroom course to acquaint up to eight (8) students (four (4) flight crews) with operational, systems and performance differences between Customer's newly-purchased Aircraft and an aircraft of the same model currently operated by Customer.

    2.2          Training materials will be provided to each student.  In addition, one set of training materials as used in Boeing's training program, including Computer Based Training Courseware, instrument panel wall charts, Flight Attendant Manuals, etc. will be provided for use in Customer's own training program.

    3.             Planning Assistance . 

    3.1          Maintenance Engine ering.  Notwithstanding anything in Exhibit B to the AGTA seemingly to the contrary, Boeing will provide the following Maintenance Engineering support:

    3.1.1      Maintenance Planning Assistance .  Upon request, Boeing will provide one (1) on-site visit to Customer’s main base to assist with maintenance program development and to provide consulting related to maintenance planning.  Consultation with Customer will be based on ground rules and requirements information provided in advance by Customer.

     

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    3.1.2      ETOPS Maintenance Planning Assistance .  Upon request, Boeing will provide one (1) on site visit to Customer's main base to assist with the development of their ETOPS maintenance program and to provide consultation related to ETOPS maintenance planning. Consultation with Customer will be based on ground rules and requirements information provided in advance by the Customer.

    3.1.3      GSE/Shops/Tooling Consulting .  Upon request, Boeing will provide consulting and data for ground support equipment, maintenance tooling and requirements for maintenance shops.  Consultation with Customer will be based on ground rules and requirements information provided in advance by Customer.

    3.1.4      Maintenance Engineering Evaluation .  Upon request, Boeing will provide one (1) on-site visit to Customer’s main base to evaluate Customer’s maintenance and engineering organization for conformance with industry best practices. The result of which will be documented by Boeing in a maintenance engineering evaluation presentation.  Customer will be provided with a copy of the maintenance engineering evaluation presentation. Consultation with Customer will be based on ground rules and requirements information provided in advance by Customer.

    3.2          Spares . 

    (i)             Recommended Spares Parts List ( RSPL ) .  A customized RSPL, data and documents will be provided to identify spare parts required for Customer's support program.
    (ii)           Illustrated Parts Catalog ( IPC ) .  A customized IPC in accordance with ATA 100 will be provided.
    (iii)          Provisioning Training .  Provisioning training will be provided for Customer's personnel at Boeing's facilities, where documentation and technical expertise are available.  Training is focused on the initial provisioning process and calculations reflected in the Boeing RSPL.
    (iv)          Spares Provisioning Conference .  A provisioning conference will be conducted, normally at Boeing's facilities where technical data and personnel are available.

    4.             Technical Data and Documents . 

    The following will be provided in mutually agreed formats and quantities:

    4.1          Flight Operations . 

    Airplane Flight Manual

    Operations Manual

    Quick Reference Handbook

    Weight and Balance Manual

    Dispatch Deviation Procedures Guide

    Flight Crew Training Manual

    Performance Engineer's Manual

    Fault Reporting Manual

    FMC Supplemental Data Document

    Operational Performance Software

    ETOPS Guide Vol. III

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    4.2          Maintenance . 

    Aircraft Maintenance Manual

    Wiring Diagram Manual

    Systems Schematics Manual

    Fault Isolation Manual

    Structural Repair Manual

    Overhaul/Component Maintenance Manual

    Standard Overhaul Practices Manual

    Standard Wiring Practices Manual

    Non-Destructive Test Manual

    Service Bulletins and Index

    Corrosion Prevention Manual

    Fuel Measuring Stick Calibration Document

    Power Plant Buildup Manual

    Combined Index

    Significant Service Item Summary

    All Operators Letters

    Structural Item Interim Advisory and Index

    Service Letters and Index

    Maintenance Tips

    Production Management Data Base ( PMDB ) 

    Electrical Connectors Options Document

    4.3          Maintenance Planning . 

    Maintenance Planning Data Document

    Maintenance Task Cards and Index

    Maintenance Inspection Intervals Report

    4.4          Spares . 

    Illustrated Parts Catalog

    Standards Books

    4.5          Facilities and Equipment Planning . 

    Facilities and Equipment Planning Document

    Special Tool & Ground Handling Equipment Drawings & Index

    Supplementary Tooling Documentation

    Illustrated Tool and Equipment Manual

    Aircraft Recovery Document

    Airplane Characteristics for Airport Planning Document

    Aircraft Rescue and Firefighting Document

    Engine Handling Document

    Configuration, Maintenance and Procedures for ETOPS

    ETOPS Guide Vols. I & II

    PA 3780                                                                                                                                            

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    4.6          Supplier Technical Data . 

    Service Bulletins

    Ground Support Equipment Data

    Provisioning Information

    Component Maintenance/Overhaul Manuals and Index

    Publications Index

    Product Support Supplier Directory

     

    4.7          Fleet Statistical Data and Reporting

    Fleet reliability views, charts, and reports

     

    5.             Aircraft Information . 

     

    5.1       Aircraft Information is defined as that data provided by Customer to Boeing which falls into one of the following categories:  (i) aircraft operational information (including, but not limited to, flight hours, departures, schedule reliability, engine hours, number of aircraft, aircraft registries, landings, and daily utilization and schedule interruptions for Boeing model aircraft); (ii) summary and detailed shop findings data; (iii) line maintenance data; (iv) airplane message data, (v) scheduled maintenance data; (vi) service bulletin incorporation; and (vii) aircraft data generated or received by equipment installed on Customer’s aircraft in analog or digital form including but not limited to information regarding the state, condition, performance, location, setting, or path of the aircraft and associated systems, sub-systems and components.

     

    5.2       License Grant .          To the extent Customer has or obtains rights to Aircraft Information, Customer grants to Boeing a perpetual, world-wide, non-exclusive license to use and disclose Aircraft Information and create derivatives thereof in Boeing data and information and products and services provided Customer identification information as originating from Customer is removed.  Customer identification information may be retained as necessary for Boeing to provide products and services Customer has requested from Boeing or for Boeing to inform Customer of additional Boeing products and services.  This grant is in addition to any other grants of rights in the agreements governing provision of such information to Boeing regardless of whether that information is identified as Aircraft Information in such agreement including any information submitted under the In Service Data Program (ISDP).

     

    For purposes of this article, Boeing is defined as The Boeing Company and its wholly owned subsidiaries.

     

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    5.3       Customer will provide Aircraft Information to Boeing through an automated software feed necessary to support Fleet Statistical Analysis. Boeing will provide assistance to Customer under a separate agreement for mapping services to enable the automated software feed. 

     

                 

     

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    ENGINE ESCALATION,

    ENGINE WARRANTY AND PATENT INDEMNITY

     

    between

     

    THE BOEING COMPANY

     

    and

     

     

    GAC INCORPORATED (GAC Inc.)

     

     

    Supplemental Exhibit EE1

    to Purchase Agreement Number 3780

    PA 3780                                                                                                                                            

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    ENGINE ESCALATION

    ENGINE WARRANTY AND PATENT INDEMNITY

     

    relating to

     

    BOEING MODEL 737-7/-8/-9 AIRCRAFT

     

    1.             ENGINE ESCALATION . 

    No separate engine escalation methodology is defined for the 737-7, -8, -9 Aircraft.  Pursuant to the AGTA, the engine prices for these Aircraft are included in and will be escalated in the same manner as the Airframe.

    2.             ENGINE WARRANTY AND PRODUCT SUPPORT PLAN . 

    Boeing has obtained from CFM International, Inc. (or CFM International, S.A., as the case may be) ( CFM ) the right to extend to Customer the provisions of CFM's warranty as set forth below (herein referred to as Warranty ); subject, however, to Customer's acceptance of the conditions set forth herein.  Accordingly, Boeing hereby extends to Customer and Customer hereby accepts the provisions of CFM's Warranty as hereinafter set forth, and such Warranty shall apply to all  CFM-LEAP-1B type Engines (including all Modules and Parts thereof) installed in the Aircraft at the time of delivery or purchased from Boeing by Customer for support of the Aircraft except that, if Customer and CFM have executed, or hereafter execute, a General Terms Agreement, then the terms of that Agreement shall be substituted for and supersede the provisions of paragraphs 2.1 through 2.10 below and paragraphs 2.1 through 2.10 below shall be of no force or effect and neither Boeing nor CFM shall have any obligation arising therefrom.  In consideration for Boeing's extension of the CFM Warranty to Customer, Customer hereby releases and discharges Boeing from any and all claims, obligations and liabilities whatsoever arising out of the purchase or use of such CFM-LEAP-1B type Engines and Customer hereby waives, releases and renounces all its rights in all such claims, obligations and liabilities.  In addition, Customer hereby releases and discharges CFM from any and all claims, obligations and liabilities whatsoever arising out of the purchase or use of such CFM-LEAP-1B type Engines except as otherwise expressly assumed by CFM in such CFM Warranty or General Terms Agreement between Customer and CFM and Customer hereby waives, releases and renounces all its rights in all such claims, obligations and liabilities.

    2.1          Title .  CFM warrants that at the date of delivery, CFM has legal title to and good and lawful right to sell its CFM-LEAP type Engine and Products and furthermore warrants that such title is free and clear of all claims, liens and encumbrances of any nature whatsoever.

    2.2          Patents . 

    2.2.1      CFM shall handle all claims and defend any suit or proceeding brought against Customer insofar as based on a claim that any product or part furnished under this Agreement constitutes an infringement of any patent of the United States, and shall pay all damages and costs awarded therein against Customer.  This

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    paragraph shall not apply to any product or any part manufactured to Customer's design or to the aircraft manufacturer's design.  As to such product or part, CFM assumes no liability for patent infringement.

    2.2.2      CFM's liability hereunder is conditioned upon Customer promptly notifying CFM in writing and giving CFM authority, information and assistance (at CFM's expense) for the defense of any suit.  In case said equipment or part is held in such suit to constitute infringement and the use of said equipment or part is enjoined, CFM shall expeditiously, at its own expense and at its option, either (i) procure for Customer the rights to continue using said product or part; (ii) replace the same with a satisfactory and non-infringing product or part; or (iii) modify the same so it becomes satisfactory and non-infringing.  The foregoing shall constitute the sole remedy of Customer and the sole liability of CFM for patent infringement.

    2.2.3      The above provisions also apply to products which are the same as those covered by this Agreement and are delivered to Customer as part of the installed equipment on CFM-LEAP-1B powered Aircraft.

    2.3          Initial Warranty .  CFM warrants that CFM-LEAP-1B Engine products will conform to CFM's applicable specifications and will be free from defects in material and workmanship prior to Customer's initial use of such products.

    2.4          Warranty Pass-On . 

    2.4.1      If requested by Customer and agreed to by CFM in writing, CFM will extend warranty support for Engines sold by Customer to commercial airline operators, or to other aircraft operators.  Such warranty support will be limited to the New Engine Warranty, New Parts Warranty, Ultimate Life Warranty and Campaign Change Warranty and will require such operator(s) to agree in writing to be bound by and comply with all the terms and conditions, including the limitations, applicable to such warranties.

    2.4.2      Any warranties set forth herein shall not be transferable to a third party, merging company or an acquiring entity of Customer.

    2.4.3      In the event Customer is merged with, or acquired by, another aircraft operator which has a general terms agreement with CFM, the Warranties as set forth herein shall apply to the Engines, Modules, and Parts.

    2.5          New Engine Warranty . 

    2.5.1      CFM warrants each new Engine and Module against Failure for the initial 3000 Flight Hours as follows:

    (i)             Parts Credit Allowance will be granted for any Failed Parts.
    (ii)           Labor Allowance for disassembly, reassembly, test and Parts repair of any new Engine Part will be granted for replacement of Failed Parts.
    (iii)          Such Parts Credit Allowance and Labor Allowance will be:  One hundred percent (100%) from new to two

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    thousand five hundred (2,500) Flight Hours and decreasing pro rata from one hundred percent (100%) at two thousand five hundred (2,500) Flight Hours to zero percent (0%) at three thousand (3,000) Flight Hours.

    2.5.2      As an alternative to the above allowances, CFM shall, upon request of Customer:

    (i)             Arrange to have the failed Engines and Modules repaired, as appropriate, at a facility designated by CFM at no charge to Customer for the first at two thousand five hundred (2,500) Flight Hours and at a charge to Customer increasing pro rata from zero percent (0%) of CFM's repair cost at two thousand five hundred (2,500) Flight Hours to one hundred percent (100%) of such CFM repair costs at three thousand (3,000) Flight Hours.
    (ii)           Transportation to and from the designated facility shall be at Customer's expense.

    2.6          New Parts Warranty .  In addition to the warranty granted for new Engines and new Modules, CFM warrants Engine and Module Parts as follows:

    2.6.1      During the first one thousand (1,000) Flight Hours for such Parts and Expendable Parts, CFM will grant one hundred percent (100%) Parts Credit Allowance or Labor Allowance for repair labor for failed Parts.

    2.6.2      CFM will grant a pro rata Parts Credit Allowance for Scrapped Parts decreasing from one hundred percent (100%) at one thousand (1,000) Flight Hours Part Time to zero percent (0%) at the applicable hours designated in Table 1.

    2.7          Ultimate Life Warranty . 

    2.7.1      CFM warrants Ultimate Life limits on the following Parts:

    (i)             Fan and Compressor Disks/Drums
    (ii)           Fan and Compressor Shafts
    (iii)          Compressor Discharge Pressure Seal ( CDP ) 
    (iv)          Turbine Disks
    (v)           HPT Forward and Stub Shaft
    (vi)          LPT Driving Cone
    (vii)         LPT Shaft and Stub Shaft

    2.7.2      CFM will grant a pro rata Parts Credit Allowance decreasing from one hundred percent (100%) when new to zero percent at twenty-five thousand (25,000) Flight Hours or fifteen thousand (15,000) Flight Cycles, whichever comes earlier.  Credit will be granted only when such Parts are permanently removed from service by a CFM or a U.S. and/or French Government imposed Ultimate Life

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    limitation of less than twenty-five thousand (25,000) Flight Hours or fifteen thousand (15,000) Flight Cycles.

     

     

    2.8          Campaign Change Warranty . 

    2.8.1      A campaign change will be declared by CFM when a new Part design introduction, Part modification, Part Inspection, or premature replacement of an Engine or Module is required by a mandatory time compliance CFM Service Bulletin or FAA Airworthiness Directive.  Campaign change may also be declared for CFM Service Bulletins requesting new Part introduction no later than the next Engine or Module shop visit.  CFM will grant following Parts Credit Allowances:

    Engines and Modules

    (i)             One hundred percent (100%) for Parts in inventory or removed from service when new or with two thousand five hundred (2,500) Flight Hours or less total Part Time.
    (ii)           Fifty percent (50%) for Parts in inventory or removed from service with over two thousand five hundred (2,500) Flight Hours since new, regardless of warranty status.

    2.8.2      Labor Allowance - CFM will grant one hundred percent (100%) Labor Allowance for disassembly, reassembly, modification, testing, or Inspection of CFM supplied Engines, Modules, or Parts therefore when such action is required to comply with a mandatory time compliance CFM Service Bulletin or FAA Airworthiness Directive.  A Labor Allowance will be granted by CFM for other CFM issued Service Bulletins if so specified in such Service Bulletins.

    2.8.3      Life Controlled Rotating Parts retired by Ultimate Life limits including FAA and/or EASA Airworthiness Directive, are excluded from Campaign Change Warranty.

    2.9          Limitations .  THE PROVISIONS SET FORTH HEREIN ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER WARRANTIES WHETHER WRITTEN, ORAL OR IMPLIED.  THERE ARE NO IMPLIED WARRANTIES OF FITNESS OR MERCHANTABILITY.  SAID PROVISIONS SET FORTH THE MAXIMUM LIABILITY OF CFM WITH RESPECT TO CLAIMS OF ANY KIND, INCLUDING NEGLIGENCE, ARISING OUT OF MANUFACTURE, SALE, POSSESSION, USE OR HANDLING OF THE PRODUCTS OR PARTS THEREOF OR THEREFORE, AND IN NO EVENT SHALL CFM'S LIABILITY TO CUSTOMER EXCEED THE PURCHASE PRICE OF THE PRODUCT GIVING RISE TO CUSTOMER'S CLAIM OR INCLUDE INCIDENTAL OR CONSEQUENTIAL DAMAGES.

    2.10       Indemnity and Contribution . 

    2.10.1   IN THE EVENT CUSTOMER ASSERTS A CLAIM AGAINST A THIRD PARTY FOR DAMAGES OF THE TYPE LIMITED OR EXCLUDED IN

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    LIMITATIONS, PARAGRAPH 2.9. ABOVE, CUSTOMER SHALL INDEMNIFY AND HOLD CFM HARMLESS FROM AND AGAINST ANY CLAIM BY OR LIABILITY TO SUCH THIRD PARTY FOR CONTRIBUTION OR INDEMNITY, INCLUDING COSTS AND EXPENSES (INCLUDING ATTORNEYS' FEES) INCIDENT THERETO OR INCIDENT TO ESTABLISHING SUCCESSFULLY THE RIGHT TO INDEMNIFICATION UNDER THIS PROVISION.  THIS INDEMNITY SHALL APPLY WHETHER OR NOT SUCH DAMAGES WERE OCCASIONED IN WHOLE OR IN PART BY THE FAULT OR NEGLIGENCE OF CFM, WHETHER ACTIVE, PASSIVE OR IMPUTED.

    2.10.2   CUSTOMER SHALL INDEMNIFY AND HOLD CFM HARMLESS FROM ANY DAMAGE, LOSS, CLAIM, AND LIABILITY OF ANY KIND (INCLUDING EXPENSES OF LITIGATION AND ATTORNEYS' FEES) FOR PHYSICAL INJURY TO OR DEATH OF ANY PERSON, OR FOR PROPERTY DAMAGE OF ANY TYPE, ARISING OUT OF THE ALLEGED DEFECTIVE NATURE OF ANY PRODUCT OR SERVICE FURNISHED UNDER THIS AGREEMENT, TO THE EXTENT THAT THE PAYMENTS MADE OR REQUIRED TO BE MADE BY CFM EXCEED ITS ALLOCATED SHARE OF THE TOTAL FAULT OR LEGAL RESPONSIBILITY OF ALL PERSONS ALLEGED TO HAVE CAUSED SUCH DAMAGE, LOSS, CLAIM, OR LIABILITY BECAUSE OF A LIMITATION OF LIABILITY ASSERTED BY CUSTOMER OR BECAUSE CUSTOMER DID NOT APPEAR IN AN ACTION BROUGHT AGAINST CFM.  CUSTOMER'S OBLIGATION TO INDEMNIFY CFM HEREUNDER SHALL BE APPLICABLE AT SUCH TIME AS CFM IS REQUIRED TO MAKE PAYMENT PURSUANT TO A FINAL JUDGEMENT IN AN ACTION OR PROCEEDING IN WHICH CFM WAS A PARTY, PERSONALLY APPEARED, AND HAD THE OPPORTUNITY TO DEFEND ITSELF.  THIS INDEMNITY SHALL APPLY WHETHER OR NOT CUSTOMER'S LIABILITY IS OTHERWISE LIMITED.

     

    PA 3780                                                                                                                                           

    Supp Ex EE1                                                                                                              

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    BOEING PROPRIETARY

     

     

     

     

     

     

     

     

     

     

     

     

    SERVICE LIFE POLICY COMPONENTS

     

    between

     

    THE BOEING COMPANY

     

    and

     

    GAC INCORPORATED (GAC Inc.)

     

    Supplemental Exhibit SLP1

    to Purchase Agreement Number 3780

    PA 3780                                                                                                                                            

    Service Life Policy                                                                                                  

    SLP1 Page 1

    BOEING PROPRIETARY

     

     

     

    SERVICE LIFE POLICY COMPONENTS

     

    relating to

     

    BOEING MODEL 737-7/-8/-9 AIRCRAFT

     

    This is the listing of SLP Components for the Aircraft which relate to Part 3, Boeing Service Life Policy of Exhibit C, Product Assurance Document to the AGTA and is a part of Purchase Agreement No. 3780.

    1.             Wing . 

    (i)             Upper and lower wing skins and stiffeners between the forward and rear wing spars.
    (ii)           Wing spar webs, chords and stiffeners.
    (iii)          Inspar wing ribs.
    (iv)          Inspar splice plates and fittings.
    (v)           Main landing gear support structure.
    (vi)          Wing center section lower beams, spanwise beams and floor beams, but not the seat tracks attached to floor beams.
    (vii)         Wing‑to‑body structural attachments.
    (viii)       Engine strut support fittings attached directly to wing primary structure.
    (ix)          Support structure in the wing for spoilers and spoiler actuators; for aileron hinges and reaction links; and for leading edge devices and trailing edge flaps.
    (x)           Trailing edge flap tracks and carriages.
    (xi)          Aileron leading edge device and trailing edge flap internal, fixed attachment and actuator support structure.

    2.             Body . 

    (i)             External surface skins and doublers, longitudinal stiffeners, longerons and circumferential rings and frames between the forward pressure bulkhead and the vertical stabilizer rear spar bulkhead and structural support and enclosure for the APU but excluding all system components and related installation and connecting devices, insulation, lining, and decorative panels and related installation and connecting devices.
     

    PA 3780                                                                                                                                            

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      SLP1 Page 2

    BOEING PROPRIETARY

     

     

    (ii)           Window and windshield structure but excluding the windows and windshields.
    (iii)          Fixed attachment structure of the passenger doors, cargo doors and emergency exits, excluding door mechanisms and movable hinge components.  Sills and frames around the body openings for the passenger doors, cargo doors and emergency exits, excluding scuff plates and pressure seals.
    (iv)          Nose wheel well structure, including the wheel well walls, pressure deck, bulkheads, and gear support structure.
    (v)           Main gear wheel well structure including pressure deck and landing gear beam support structure.
    (vi)          Floor beams and support posts in the control cab and passenger cabin area, but excluding seat tracks.
    (vii)         Forward and aft pressure bulkheads.
    (viii)       Keel structure between the wing front spar bulkhead and the main gear wheel well aft bulkhead including splices.
    (ix)          Wing front and rear spar support bulkheads, and vertical and horizontal stabilizer front and rear spar support bulkheads including terminal fittings but excluding all system components and related installation and connecting devices, insulation, lining, and decorative panels and related installation and connecting devices.
    (x)           Support structure in the body for the stabilizer pivot and stabilizer screw.

    3.             Vertical Stabilizer . 

    (i)             External skins between front and rear spars.
    (ii)           Front, rear and auxiliary spar chords, webs and stiffeners and attachment fittings.
    (iii)          Inspar ribs.
    (iv)          Rudder hinges and supporting ribs, excluding bearings.
    (v)           Support structure in the vertical stabilizer for rudder hinges, reaction links and actuators.
    (vi)          Rudder internal, fixed attachment and actuator support structure.

    4.             Horizontal Stabilizer . 

     

    PA 3780                                                                                                                                            

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    BOEING PROPRIETARY

     

     

    (i)             External skins between front and rear spars.
    (ii)           Front and rear spar chords, webs and stiffeners.
    (iii)          Inspar ribs.
    (iv)          Stabilizer center section including hinge and screw support structure.
    (v)           Support structure in the horizontal stabilizer for the elevator hinges, reaction links and actuators.
    (vi)          Elevator internal, fixed attachment and actuator support structure.

    5.             Engine Strut . 

    (i)             Strut external surface skin and doublers and stiffeners.
    (ii)           Internal strut chords, frames and bulkheads.
    (iii)          Strut to wing fittings and diagonal brace.
    (iv)          Engine mount support fittings attached directly to strut structure and including the engine‑mounted support fittings.

    6.             Main Landing Gear . 

    (i)             Outer cylinder.
    (ii)           Inner cylinder, including axles.
    (iii)          Upper and lower side struts, including spindles, universals and reaction links.
    (iv)          Drag strut.
    (v)           Orifice support tube.
    (vi)          Downlock links including spindles and universals.
    (vii)         Torsion links.
    (viii)       Bell crank.
    (ix)          Trunnion link.
    (x)           Actuator beam, support link and beam arm.

    7.             Nose Landing Gear . 

    (i)             Outer cylinder.
    (ii)           Inner cylinder, including axles.
    (iii)          Orifice support tube.
    (iv)          Upper and lower drag strut, including lock links.
    (v)           Steering plates and steering collars.
    (vi)          Torsion links.

    PA 3780                                                                                                                                            

    Service Life Policy                                                                                               

        SLP1 Page 4

    BOEING PROPRIETARY

     

    NOTE:            The Service Life Policy does not cover any bearings, bolts, bushings, clamps, brackets, actuating mechanisms or latching mechanisms used in or on the SLP Components.

     

    PA 3780                                                                                                                                            

    Service Life Policy                                                                                               

        SLP1 Page 5

    BOEING PROPRIETARY

     

     

    EXHIBIT 12.1

    CERTIFICATION  

    I, Paulo Kakinoff, chief executive officer, certify that:

    1. I have reviewed this annual report on Form 20-F of GOL LINHAS AÉREAS INTELIGENTES S.A.;

    2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

    3. Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the company as of and for the periods presented in this report;

    4. The company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:

    a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

    b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

    c) evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on evaluation; and

    d) disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

    5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and to the audit committee of the company’s board of directors (or persons performing the equivalent function):

    a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

    b) any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

    Date: April 30, 2013

    By:               /s/  Paulo Kakinoff
    Name:              Paulo Kakinoff
    Title:             Chief Executive Officer

     

     

     

     

    EXHIBIT 12.2

    CERTIFICATION  

    I, Edmar Prado Lopes Neto, principal financial officer, certify that:

    1. I have reviewed this annual report on Form 20-F of GOL LINHAS AÉREAS INTELIGENTES S.A.;

    2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

    3. Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the company as of and for the periods presented in this report;

    4. The company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:

    a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

    b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

    c) evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on evaluation; and

    d) disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

    5. The company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and to the audit committee of the company’s board of directors (or persons performing the equivalent function):

    a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

    b) any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

    Date: April 30, 2013

    By:               /s/ Edmar Prado Lopes Neto
    Name:              Edmar Prado Lopes Neto
    Title:            Principal Financial Officer

     

     

     

     

    EXHIBIT 13.1  

    CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,  
    AS ADOPTED PURSUANT TO
    SECTION 906 OF THE U.S. SARBANES-OXLEY ACT OF 2002

         In connection with the Annual Report of GOL LINHAS AÉREAS INTELIGENTES S.A. (the “Company”) on Form 20 F for the fiscal year ended December 31, 2012, as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Report”), I, Paulo Kakinoff, chief executive officer, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the U.S. Sarbanes Oxley Act of 2002, that to the best of my knowledge:

         (i) the Report fully complies with the requirements of section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934; and

         (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

    Date: April 30, 2013

    By:               /s/  Paulo Kakinoff
    Name:              Paulo Kakinoff
    Title:             Chief Executive Officer

     

     

     

     

    EXHIBIT 13.2  

    CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 ,
    AS ADOPTED PURSUANT TO
    SECTION 906 OF THE U.S. SARBANES-OXLEY ACT OF 2002

         In connection with the Annual Report of GOL LINHAS AÉREAS INTELIGENTES S.A. (the “Company”) on Form 20 F for the fiscal year ended December 31, 2012, as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Report”), I, Edmar Prado Lopes Neto, principal financial officer, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the U.S. Sarbanes Oxley Act of 2002, that to the best of my knowledge:

         (i) the Report fully complies with the requirements of section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934; and

         (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

    Date: April 30, 2013

    By:               /s/ Edmar Prado Lopes Neto
    Name:              Edmar Prado Lopes Neto
    Title:             Principal Financial Officer