GOL Downgraded to Underperform - Analyst Blog
February 28 2012 - 3:30AM
Zacks
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.
COPA HLDGS SA-A (CPA): Free Stock Analysis Report
GOL LINHAS-ADR (GOL): Free Stock Analysis Report
LAN CHILE-ADR (LFL): Free Stock Analysis Report
TAM SA-ADR (TAM): Free Stock Analysis Report
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