I picked up a few more shares of Gol Linhas Aereas Inteligentes (NYSE:GOL) Monday, after a nice dip that was precipitated by a Bear Stearns downgrade and some very pessimistic comments by its analyst.
The prices we're getting now can't be ignored, however, and I've now bought just about all the GOL I can handle for my portfolio. I picked up shares Monday at $25.89, just a couple percentage points above the lowest price these shares have seen in over a year.
Fare War Raises Concern
So what was the downgrade concern? Primarily, it's a fare war between GOL and TAM (NYSE:TAM), the two dominant domestic carriers. The analyst sees this slashing profits, particularly in the fourth quarter when a lot of additional capacity comes online with new plane deliveries to both of these companies.
It's possible that Bear Stearns will be right in the short term (meaning, the next year or so), but I have my doubts. This company is so much leaner and so much better run than TAM (which is not a discount airline), that I think a fare war is probably not such a bad thing in the very long run.
GOL's goal, above all else, is to build a vibrant consumer air travel economy in Brazil - something that is just in its first stages. And to bring people into the air and pull them off the buses that rattle along Brazil's unfortunate roadways, it uses low fares.
Opening Up the Market
A low fare airline depends on reducing costs and cutting fares to drive traffic, and on opening up a whole new market of people who never would have considered flying before because of the cost. That's what built Southwest (NYSE:LUV) and RyanAir (NASDAQ:RYAAY) to some degree, and it's even more significant in a lower-income country like Brazil. The percentage of people in Brazil who have never flown in an airplane is dramatically higher than in the U.S. or Western Europe.
So fare wars bring in new customers, and they also may allow GOL to take advantage of market share incursions against the larger TAM, in my opinion, because GOL has the financial wherewithal and the cost-cutting chops to keep fares lower, longer, than TAM. That's just my opinion, of course; it's possible that TAM's stronger hold on the business flier will help it hold off GOL, but I'm guessing not.
And more importantly, my supposition is that this fare war, founded as it is in a short-term desperation period for Brazilian civilian air travel, won't last long.
You see, in my opinion, the major reason for the fare war is the terrible fall and holiday season experienced by Brazilian air travelers. Many people were turned off by air travel because of long delays caused by labor distress among the air traffic controllers due to overwork and anguish about being blamed for the GOL crash last year.
So it's not that the fare war came up organically because these two companies are trying to kill each other. No, the fare war started because both airlines saw major traffic declines over a few months this winter, largely because air traffic delays made air travel unpalatable for many consumers, and they had to do something dramatic to get people back on their planes. I wrote a bit about this not long after the crash last fall here and also here.
I think this is a temporary issue, and that when air traffic control systems and staffing in Brazil are finally upgraded (which may take a couple years, I suppose, depending on political will), general consumer opinion about air travel is likely to improve to pre-last-fall levels.
And when that happens, whether it's next fall or next year or in a couple years, the marketplace can return to a more reasonable level of competition, which I think strongly benefits the smaller, nimbler, lower-cost GOL.
I don't trade much on shorter term issues, so it's possible that the shares will fall further. But I would be surprised if they're not substantially higher within the next couple of years. At a trading PE of about 18 and a very large and growing market to address, I'm convinced that the shares are a very reasonable buy here. The analysts might be wrong on the estimates that give this a forward PE of about 10, but in the long run this is one of the stocks in my portfolio that I'm most convinced has a bright future.
Disclosure: In case it's not obvious, I do own GOL and do not own any other companies mentioned here.
GOL 1-yr chart