Brazilian operator GOL Linhas Aereas Inteligentes could shrink this year as it adapts to an unexpected dip in domestic demand and the continued integration of Webjet Linhas Aereas Economicas.

The new guidance marks a further decline in 2012 expectations for GOL, which only a month ago dropped a previous available seat kilometer (ASK) growth target of 4% to 0-2%.

Now GOL’s most optimistic forecast foresees no growth for the year, but demand trends over the next few months could force the airline to “maybe record a decline in ASKs” in 2012, said President and CEO Constantino de Oliveira Jr. during the company’s fourth-quarter results conference call.

The warning signs were evident in the first two months of the year, when demand slumped a couple of percentage points on about 7% more supply, added CFO Leonardo Porciuncula Gomes Pereira during the call, so the airline initiated an immediate plan to trim capacity, starting this month. Pereira noted that the full effect of the plan’s measures will not be apparent until April at the earliest.

Those cuts have seen GOL cut capacity 2.5% in March and 2.9% in April (using GOL and Webjet’s combined annual comparisons), effectively dropping 80 to 100 daily flights from its 1,100-strong schedule. De Oliveira also confirmed that supply in the second quarter will be down year-on-year, indicating capacity cuts also are planned for May and June.

But the ASK reductions are only part of a strategy GOL is adapting to mitigate the effects of a surprising decline in Brazil’s GDP growth and growing competition from domestic startups, such as Azul Linhas Aereas Brasilias, which now provides almost 10% of the country’s commercial capacity.

Part of the strategy includes increased reliance on ancillary revenues, which grew 17.7% in 2011 and 36.9% in the fourth quarter. The Brazilian operator also is strengthening ties with Delta Air Lines, a partner de Oliveira says will play a key role in the “very important” Brazil-U.S. corridor, while GOL concentrates on its domestic and near international routes, particularly in the Caribbean.

GOL also is developing a fleet plan to accommodate the new demand environment, and it is hoping to negotiate an early return to lessors of 18 Boeing 737-300s operated by Webjet. “The company’s fleet plan for 2012 and the coming years is being revised in order to include Webjet’s required fleet renewals. In 2012, the increase in the two companies’ combined seat supply will not exceed 2%,” notes GOL, which ended 2011 with 123 737-700 and 800 aircraft and Webjet’s 24 737-300s

The airline’s top executive, however, accepts that capacity control and building unit revenues may not be sufficient in a high fuel cost environment, so GOL also is implementing an initiative to improve fuel efficiency. The airline also is trimming payroll, although the number of staff that will be affected has yet to be determined, said de Oliveira.

The past year was tough for GOL, and its 2011 results reflect the challenges. Fuel rose 33.8% year-on-year, but non-fuel costs also grew, up 16.8% from 2010. Revenues, meanwhile, increased 8% on 5.6% more capacity and 8.4% more traffic (although this demand disappeared in the fourth quarter), resulting in an operating loss of BRL186.7 million (US$103 million) and a net loss of BRL710.4 million. In 2010, GOL reported an operating income of BRL697.8 million and a BRL214.2 million net profit.

GOL also announced a deal with two of Brazil’s largest banks to waive a non-compliance condition on some of its debt for three quarters.