GOL Linhas Aereas: Competition, Slow Economy Holding Back Growth

| About: GOL Linhas (GOL)
This article is now exclusive for PRO subscribers.

We maintain our Neutral recommendation on Brazilian low-fare airliner GOL Linhas Aereas (NYSE:GOL).

GOL Linhas remains better positioned to capitalize on the growth of discounted air travel in Brazil and the rest of Latin America, given its strong market share and efficient operations. The company has been delivering positive and increasing operating profit for the last seven consecutive quarters.

During the first quarter of fiscal 2010, net revenues were R$1,729.8 million (US$968.7 million), up from R$1,517.0 million (US$652.3 million) in the corresponding quarter of 2009.

The improvement in revenue is the result of the company's competitive advantages in relation to greater flight frequency between domestic airports, low-cost leadership, and strong indicators of on-time record, regularity, safety, and differentiated client service, as well as increased demand from the domestic and international markets.

GOL posted an operating income of R$191.4 million (US$107.2 million) and an operating margin of 11.1%, up 82.1% from R$105.1 million and a 6.9% margin in the first quarter of 2009.

We expect GOL to experience growth in the short-to-medium term, given its continued investment in fleet renovation and international agreements. GOL Linhas is in the final phase of its plan to replace its fleet of 737-300 and 767-300 aircraft with 737-800NGs and 737-700NGs for operations on short- and medium-haul routes. In 2010, the entire fleet will be renewed; with the total operating fleet expected to number 111.

The fleet modernization plan guarantees that GOL’s fleet will maintain its status as one of the youngest and most modern in the world. At the end of 2012, 65% of the fleet will comprise 737-800 SFP aircrafts, maintaining the low average age of 6.9 years.

Recently, GOL signed a new code-share agreement with Delta Air Lines Inc. (NYSE:DAL) and expanded its international distribution channels and initiated a couple of flights from Brasilia to the Caribbean and other international destinations. Based on adjustments in the company’s international network, international revenue increased, which will continue in the coming months.

However, competitive pressure and the uncertain economic environment is a source of concern. 2009 was one of the toughest years for the airline industry. The only good news was the price of oil, which has come down from $150 per barrel in 2008. However, we do expect better prospects into 2010 together with gyrating fuel prices.