Route Expansion, Collaborations to Boost GOL's Performance
On Sep 19, 2014, we issued an updated research report on GOL Linhas Aereas (GOL).
The company expects consolidation of strategy and improvement of products to deliver a strong performance in 2014. Further, the company’s efforts of curbing the impact of fuel price increases as well as maintaining a low cost structure are likely to enhance profitability. For 2014, the company remains committed to achieve an EBIT margin of 3–6%.
GOL has received permission from the Brazilian National Civil Aviation Agency (ANAC) to run a regular service between Campinas and Miami, with a scheduled stop at Santo Domingo. The company has also won the necessary approval to renew its Sao Paolo-Santiago route in Chile and has already launched direct flights between Fortaleza and Buenos Aires in Argentina. Recently GOL also made a formal request to ANAC to operate four weekly flights to Carajas and three weekly ones to Altamira. Such initiatives are expected to boost the company’s dollar revenues.
We believe GOL’s new Smiles Program, which is aimed at enhancing customer loyalty and offering low-priced flights, will pave way for further growth. Additionally, GOL has turned Smiles into an independent company. We believe creation of a separate entity will add more value to the company and assist in achieving high returns in the future, much like the net margin of 42.1% achieved at the end of the second quarter of 2014.
GOL has entered into a number of collaborations to expand its operating base, including a code share agreement with Delta Airlines Inc. (DAL). The carrier has also won the board and regulators’ approval for its exclusive strategic partnership with Air France-KLM SA, which is aimed at expanding operations between Brazil and Europe. Additionally, In Jul 2014, GOL inked a code share agreement with UAE-based Etihad Airways that will enhance the international offerings of both the carriers.
However, according to the International Monetary Fund, Brazil’s economic growth rate is likely to be slow in 2014 owing to weak customer confidence and tighter financial conditions. Further, slow U.S. GDP growth in the year remains a prime concern for GOL, as the country serves as the largest intercontinental market for Brazil. The global fuel price volatility also poses a significant challenge for GOL.
Depreciation of the Brazilian real against the U.S. dollar could also be a major worry for GOL, tending to impact its profitability. Moreover, operating costs related to aircraft rent, maintenance and promotional activities have put margins under pressure. Further, devaluation of the Venezuelan bolivar as against the dollar also affected GOL’s second quarter cash position to the tune of $58.4 million. The passenger airline presently carries a Zacks Rank #3 (Hold).
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