GOL Airlines Soaring: Should You Hitch A Ride?

Jan.16.13 | About: GOL Linhas (GOL)

by Sean Geary

Brazilian low-fare airline Gol Linhas Aereas Inteligentes (NYSE:GOL) has been on a tear recently, jumping almost 50% since late November. Is it too late to get into Gol?

Over the past year, Gol has been in a consistent downtrend thanks to poor technical, negative sentiment about the Brazilian market, as well as disintegrating fundamentals. While the Brazilian domestic aviation market remains poised for long-term growth, Gol still faces a number of very real concerns pertaining to its fundamentals.

Like most entities in the sector, Gol is susceptible to costs that are largely out of control, namely fuel prices. However, unlike other carriers, in addition to oscillating fuel prices, the company has to deal with additional currency concerns.

Gol generates the majority of its revenues in Brazilian real. Because of the Brazilian government's commitment to weaken the real against the dollar to keep the country's exports competitive, Gol has suffered. With roughly two-thirds of Gol's costs dollar-denominated as a result of jet fuel and aircraft payments being priced in dollars, the airline must overcome additional obstacles to achieve profitability. The company's substantial debt load has also contributed to pressure on its shares.

As a result of these hurdles, intense competition in the Brazilian aviation sector, and inefficiencies stemming from its merger with Webjet, the company's equities have struggled.

However, Gol has announced it will dismantle the Webjet brand in order to increase operational efficiency and to eliminate Webjet's aging, inefficient 737-300s. The merger shouldn't be considered a failure, though; the acquisition allowed Gol to acquire valuable slots at airports in Rio de Janeiro and Sao Paulo. The decision to park the older planes was well-received by the market and is largely responsible for Gol's performance over the past month.

While Gol should be applauded for attempting to enhance efficiency, its significant structural problems and lack of profitability make a fundamental investment at this point difficult, especially after such a significant run up.

Traders could continue to play this stock on the upside until the trend is broken; however, given the stock's mediocre underlying fundamentals, a better strategy may be to wait for a reversal in Gol and then play the stock to the downside.

Disclosure: Author has no position in any of the stocks mentioned, but may open a short position in GOL in the next 72 hours.