In the Brazilian airline space, those who follow me know that I haven't been much of a Gol Linhas Aéreas Inteligentes (GOL) fan. The carrier's October traffic report, released on November 6th, seems to have justified some of my caution towards the company and its stock.
As far as I can tell, October was the worst month of operational performance in Gol's recent past - since July 2017, to be more precise. Interestingly, investors seem to have reacted with disdain, as the stock has been down only roughly as much as the broad Brazilian equities market (EWZ) over the past few days.
Credit: Aviation Tribune
To be fair, Gol's southern hemisphere's spring off-season will bring with it tough comps, as traffic in the fourth quarter of 2017 was particularly strong. Still, there is little to celebrate about total company traffic, measured in terms of RPK (revenue passenger kilometer), that shrank YOY by 3% - the worst metric reading since June 2016 at least. Seat supply also declined, but not enough to prevent load factor from dipping a sizable 150 bps to 79.1% - still aligned with Gol's 18-month average of 79.3%, but far from inspiring.
The charts below, on a total company basis, provide further details. Notice the fast declining RPK and ASK growth rates represented by the red and light blue lines.
Source: DM Martins Research, using data from company reports
On the smaller international segment that represented 9% of total RPK in October, traffic took a turn for the worse. The improving trend that culminated in last month's -5% over the previous year's robust +13% met an October RPK that shrank by double digits over much easier comps. It is possible that a weak Brazilian Real and a local economy that is taking long to recover may have contributed to the international supply-demand imbalance that Gol has been battling for nearly two years.
Source: DM Martins Research, using data from company reports
Parting thoughts
I pointed out last month that Gol's September traffic report had been short of impressive, specifically in regards to the deterioration in consolidated traffic and occupancy rates. The bright spot had been the moribund international segment that started to show signs of having a pulse. Not much if at all improved on the traffic and occupancy fronts in October, while international unfortunately seems to have lost its momentum.
As I have argued in the past, Gol is an erratic stock (even compared to its volatile Brazilian peers) as I believe market participants perceive an investment in the company to be riskier. In good times that might include stable or lowering fuel prices, strong economic activity, a recovering local currency and robust operational performance, Gol is most likely to outperform - as has been the case since mid-September. When things don't go as planned, Gol tends to be exposed to the downside more so than its peers, as was witnessed during the stock's 64% nosedive between April and June of this year.
Given the October traffic results, I fear that Gol could be positioning itself to disappoint investors in the next few months, possibly leading up to a less-than-impressive 4Q18 earnings report to be released in the early days of February. For this reason, I am ever more convinced now that betting on quality is the best approach to playing the volatile Brazilian airline space.
Therefore, I continue to favor a more calculated move towards peer Azul Linhas Aéreas (AZUL), which I perceive to be a relatively safer stock that could still offer very enticing returns of about 80% on aggregate through the next few years, per my estimates.
Note from the author: I have recently concluded a study on the U.S. airline sector, and shared my findings first - along with my working Excel file containing all the details - with my Storm-Resistant Growth group. To access all the premium material and dig deeper into how I have built a risk-diversified portfolio designed and back-tested to generate market-like returns with lower risk, join the Storm-Resistant Growth community. Take advantage of the 14-day free trial, read all the content written to date and participate in the discussions.