GOL Downgraded to Underperform - Analyst Blog

We have recently downgraded our recommendation on GOL Linhas (GOL) from Neutral to Underperform.

During the third quarter, Gol’s operating costs and expenses increased 19.8% year over year. Higher expenses such as salaries, wages and benefits, landing fees among others raised cost significantly. Added to its woes is the airport infrastructural crisis that has raised costs while lowering flight efficiency from Brazilian airports. Moreover, rising fuel prices continue to aggravate concern for the stock.

Over time, the company has witnessed, frequent government intervention in the Brazilian economy which has impacted air travel demand and fares, significantly. Moreover, government approvals, in order to expand capacity, have also been adding uncertainty to the company’s longer-term earnings projections. In addition, availability of capital, we doubt, may cause volatility in GOL’s earnings stream in the coming quarter.

Mention may be made of the huge amount of Gol's costs pertaining to fuel. However, all revenue has been derived in Brazilian real. Hence, risks related to appreciation of the U.S. dollar, in relation to the real, raises concern. This, we believe, may negatively impact Gol's profitability. The negative net income, recently recorded in the third quarter, was also primarily the outcome of the depreciation of the Brazilian currency against the US dollar, which generated a huge net expense.

Furthermore, the competitive airline industry causes volatility in GOL’s earnings stream. Adding to this, the declining customer demand for GOL’s flights across domestic/ international route network seem to affect revenues and earnings adversely in the coming quarters.GOL Linhas has been overtly dependent on a few big suppliers like Boeing for its 737-700/800 Next Generation aircraft and CFM 56-7B engines. An unwanted shift in loyalty among suppliers can negatively affect the company’s operations, up next.

Gol Linhas however, has shown a few positive indications which may combat the above risks, in time. GOL displayed an efficient use of its fleet, both in terms of higher productivity and occupancy rate, despite a fiercely competitive air traffic market. The airline recorded a domestic demand increase of 2.8% year over year with a load factor of 65.5% for the month of December. Moreover, the company has adopted a prudent approach toward adding capacity in the domestic market expecting to fetch attractive market fares across its popular route network.

GOL continues to reinforce its long-term business strategy, focusing on high demand routes that may continually be used and expanded. The company has been able to achieve successful expansion programs thus far, without compromising on its commitment to safety and quality of service. GOL’s low-cost differentiated approach alongside consultancy services for saving fuel and reducing gas emissions have been creating significant operational synergies, since long.

The company has been offering ancillary services on the lines of insurance, car rentals and ticket sales from kiosks which are anticipated to increase sales in the coming quarters. All this certainly creates new opportunities for sales and ancillary revenue for the company, boosting investor confidence. Moreover, the company’s domestic demand growth forecast of 12% to 18% RPK (Revenue Passenger Kilometer) and the operating fleet plan of 131 aircrafts, by 2015, appear impressive.

About the Company

Gol Linhas, the largest low-cost and low-fare airline in Latin America, offers more than 940 daily flights to 63 destinations that connect all the important cities in Brazil and 13 major destinations in South America and Caribbean. It faces stiff competition from its peers including Copa Holdings SA (CPA), LAN Airlines S.A (LFL), and TAM S.A (TAM).

Gol Linhas has a Zacks #3 Rank, implying a short-term (1-3 months) Hold rating.

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