November Traffic Update: Is Gol Back On Track?

Summary

• Following a pitiful month of October, Gol managed to deliver impressive traffic, capacity and occupancy growth in November.
• A few trends worth keeping an eye on include (1) rebound in moribund international business and (2) sharp deterioration in on-time departures.
• Because GOL tends to be more exposed to the downside than its peers, I choose to keep my distance from this erratic stock.
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What a month it has been for Gol Linhas Aéreas (NYSE:GOL).

The São Paulo-based air carrier released its November operational update on Thursday morning. With regard to traffic, capacity and utilization, this has been one of Gol's most impressive months in recent memory. Better yet, it happened right after a period of concerning and unusual contraction in both total company RPK (revenue passenger kilometer) and ASK (available seat kilometer), which I called a "yellow flag" roughly one month ago.

Credit: UOL

The company's 2018 spring off-season seemed to be faced with tough comps, as traffic growth in the fourth quarter of 2017 had been the best of the past 18 months at least: About 8% per month, on average. Gol lavishly topped my subdued expectations in November, delivering an RPK increase of 6.1%, the third best reading of the year over a respectable 7.1% improvement in November 2017. Seat supply also was up, but by a more modest 4%, helping to push load factor up a sizable 160 bps to 82.6%. This ratio was much better than Gol's trailing 18-month average of 79.6% and on par with the busy December-January holiday season.

The charts below, on a total company basis, provide further details. Notice the encouraging rebound in RPK growth in the most recent month (left graph).

Source: DM Martins Research, using data from company reports

Although by a long stretch the smallest of Gol's segments, at about 10% of total RPK on average, the international business performed well beyond what I could have projected (see graph on the right below). After taking a worrisome turn for the worse in October, flights to and from foreign destinations saw a 32% increase in traffic on capacity that rose 30%.

It may be a bit too early to credit the improvement to a slowly recovering Brazilian Real or to optimism over an improving domestic economy. Therefore, it's worth keeping an eye on how the trend evolves into the important southern hemisphere vacation months in order to better assess whether Gol's international supply-demand imbalance could be finally nearing an end.

Source: DM Martins Research, using data from company reports

One final item worthy of mention is Gol's severe deterioration in on-time departures. Although this had been a trend in the 10 months of 2018 leading to November, the drop of nearly eight percentage points to only 85.2% was eye catching. Considering the total number of departures of 20,143 in the most recent month, Gol's flights were delayed an average of 100 times per day vs. only 48 times in November 2017.

While this metric may not be detrimental to traffic in the short term, I will be curious to learn more about whether the soft reading may develop into a longer term trend reflective of operational challenges, which would be much more concerning. ANAC's (Brazilian aviation agency) sector-wide cancellation and on-time departures report for November should come out in approximately one week.

Parting thoughts

Those who follow me know that I'm not much of a GOL fan - at least relative to its peer Azul (AZUL), which I consider a much higher-quality company and stock in the Brazilian airline sector. But Gol's November traffic report served at least to ease concerns that may have been raised with the company's much less impressive October update.

As fuel prices continue to drop and the Brazilian currency seems to have found stability at around R$3.90/USD, GOL could benefit from being a higher risk, higher reward play. The stock already has more than doubled within the past three months, and strong operational performance suggests that the trend could remain favorable in the short term. But because GOL tends to be more exposed to the downside than its peers (think of the 64% nosedive between April and June 2018, arguably all of it macro-driven), I choose to keep my distance from this rather erratic stock.

For now, I remain a confident AZUL shareholder, but will continue to monitor the performance of other players in the industry going forward.

Analyst’s Disclosure: I am/we are long AZUL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.