On Nov 28, 2013, we maintained our Neutral recommendation on GOL Linhas Aereas (GOL). We are encouraged by the company’s command over the Brazilian air travel sector supported by network expansion across the globe, fleet restructuring, competitive pricing and enhancement of customer services. However, a competitive sector scenario, imbalance in domestic supply and demand ratio and a weak domestic currency remain our concerns. The passenger airline holds a Zacks Rank #4 (Sell).
Why Kept at Neutral?
GOL expects leisure air travel demand to increase in Brazil during the football world cup in 2014 and is thus focusing on flexibility, punctuality and competitive rates to tap the opportunity. While the company expects domestic supply in 2014 to remain flat year over year, it is preparing for asset sales, layoffs and cutbacks to return to profitability.
We believe the company’s new Smiles Program, which is aimed at increasing customer loyalty and offering a cost effective flight will pave way for further growth. GOL has entered into a number of collaborations to expand its operating base, including a code share agreement with Delta Airlines Inc. (DAL). The carriers have attained their immediate goal of expanding the code share agreement, thus effectively serving GOL customers on long haul flights and providing access to 5 markets that Delta currently serves.
However, the shrinkage in the Brazilian economy remains the primary headwind for GOL, which is expected to reduce by 16% in 2014. GOL faces stiff fare competition from the existing players. The trend is expected to continue considering the economic weakness along with the slump in the domestic air travel demand.
The company declared that it could further reduce its domestic operations in 2014 due to the slow pace of Brazilian economic growth, while increasing its international presence. In the process, the company is being exposed to currency fluctuation risk. This problem is aggravated by depreciation in the value of Brazilian Real against U.S. dollar. Thus we remain sidelined on the stock.