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Executive summary:

  • GOL is an airline with a good business plan.
  • Difficult operating conditions are causing great accumulated losses.
  • A new strategy has been implemented, and the initial results are promising.
  • One can buy with caution now or try to get a better opportunity soon.

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GOL Linhas Aéreas Inteligentes S.A. (GOL), the largest low-cost and low-fare airline in Latin America, was founded in 2001 and is headquartered in Sao Paulo, Brazil. The Company has reached a domestic market share of 35.5% in the third quarter of 2013 with around 9 million passengers carried. It has over 16,000 employees and a fleet of 140 Boeing 737. GOL currently offers around 910 daily flights to 65 destinations, connecting the most important cities in Brazil, and the 10 primary international markets in South America, Caribbean and the United States.

The company's strategy is to capitalize on its competitive advantages to achieve sustainable growth, based on four main strategic pillars: increasing passenger revenue, expanding ancillary revenue, reducing costs, and improving financial resilience.

GOL's brand recognition is strong and has become synonymous with innovation and value in the airline industry. It has one of the largest e-commerce platforms in Brazil, and in 2012, the company booked 88.8% of its ticket sales through a combination of its website and application programming interface.

Varig is the brand that operates GOL's longest international routes. The company's strategy of increasing its international presence also includes the development of partnerships. The codeshare agreement with Delta (DAL) has been expanded, and all of Delta's destinations in Brazil are now connected to GOL's network and available through GOL's sales channels. Seeking to further strengthen GOL's presence in the Argentinean market, its subsidiary VRG Linhas Aéreas celebrated a code-share agreement with Aerolíneas Argentinas.

GOL posted operating income [EBIT] of $16 million in 3Q13, $100 million more than in 3Q12. The 3Q13 margin came to 1.7%, 12 percentage points up when compared to 3Q12. This increase was achieved despite the 13% average period depreciation of the Real against the Dollar and the highest jet fuel price in the company's history.

The year-to-date operating margin was a positive 1.7%. The net loss, in turn, stood at $83 million in 3Q13 and $296 million in 9M13, 36.3% and 33.8% less, respectively, than in the same periods last year.

Net revenue reached $936 million in the quarter, a 12.2% or $103 million improvement over 3Q12, despite the 7% decline in domestic supply.

(click to enlarge)

www.tradingeconomics.com

GOL closed 3Q13 with a cash position (cash, financial investments and short and long-term restricted cash) of $1.2 billion, corresponding to 35.1% of net revenue in the last 12 months [LTM] and a new record, both in nominal and proportional terms.

On September 30, 2013, the Company's total loans and financing came to $2,311 million (including financial leasing), 4.7% up on 3Q12, primarily due to the increased exposure of the company's total Dollar-denominated debt (from 70% in 3Q12 to 76% in 3Q13). More than 90% of its total debt is long term, and the average maturity is 5.6 years. GOL has managed to avoid any pressure on repayment plans for the next two years as two-thirds of total debt is due only after 2015. Proceeding with its gradual deleveraging process, net debt has fallen by $145 million in the last 9 months of 2013.

Financial Debt Amortization Schedule (in million)

www.voegol.com

GOL's financial leverage ratio is still too high, though it fell by 30% over the previous quarter. The LTM adjusted gross debt/EBITDAR ratio stood at 10.9x in 3Q13 (versus 15.5x in 2Q13) due to the improvement in operating margins, posting LTM EBITDAR of $391 million in 3Q13 versus $275 million in 2Q13. Year-to-date EBITDAR came to $409 million, 223% up year-over-year.

The company has been experiencing serious problems of profitability presenting increasing losses in the past two years. Nevertheless, the company is dealing particularly well with the problem. As a matter of fact, during 2013 and especially in the third quarter of this year, a true turnaround has been put in place whose effects can be seen in the table below.

$Millions2010201120121Q132Q133Q139M13
Revenue4,2044,0423,9588758039362,614
Operating Income420-131-44242-151643
Net Income (Loss)129-403-739-31-182-83-296

The dramatic change in the downward trend of recent years was due to the adjustment of the strategy, especially focused on its cost structure and streamlining of domestic supply.

If the Real devaluation against the Dollar could slow down, the situation would become far more favorable.

US Dollar to Brazilian Real Exchange Rate Chart

US Dollar to Brazilian Real Exchange Rate data by YCharts

With an interesting business plan, the company has undeniable potential, and investors are expecting that adverse conditions may change soon. In fact, GOL has kept operating costs low. Besides, its debt management and cash flow generation is showing results.

It's expected that 4Q13 results, which will be reported on February 26, will confirm the trend of recovery expressed, showing probably a very small net loss which may lead the company to sustained profits in 2014.

Looking at the chart below, share prices have shown a downward trend over the past three years following the negative evolution of the company. The change in strategy has led to a rise in prices, but as the second quarter of 2013 disappointed investors, shares have fallen sharply. After the third quarter, prices have been sustained but are clearly in a period of expectation and volatility. The last quarter of 2013 will be crucial for GOL, and its share prices will reflect that as well.

(click to enlarge)

Chart courtesy of StockCharts.com

On January 20, GOL has announced a new organizational structure. The changes maintain the focus on revenue generation, leadership in costs, efficiency and the strengthening of management, governance and planning. Thus, it will create the Sales and Marketing Executive Office, and the Planning Executive Office, which encompass the departments of Profitability, Network Planning and Aeronautical Asset management. It is noted that the company is focused on an increasingly professional management with a specialized structure.

Conclusion

GOL seems to have a dynamic management that substantially changed the strategy of the company when in 2012 the accumulated losses became a huge problem. However, exogenous factors that the company cannot control continue to pose enormous challenges that GOL is trying to overcome. In fact, the devaluation of the Real, the increase in jet fuel prices, and economic difficulties in Brazil which have led to the reduction of domestic demand are all issues that have remained, and even have worsened in recent times.

I believe that GOL is able to overcome these tough times, and I hope to see reasonable results in the last quarter of 2013. If the company will report positive figures, we will probably see share prices challenging the intermediate top at $5.82, and then will have the potential to go beyond that level.

Source: In addition to other research, the data collected by the author was obtained through the Company Annual Reports, SEC filings and related documents.

Source: GOL: Will It Fly Higher After February 26th?