We continue to hold our ‘Neutral’ recommendation on Gol Linhas Aereas (GOL).
We are still optimistic on GOL’s long-term business strategy, which involves successful expansion of high-demand routes, strategic acquisitions and codeshare agreements with market leaders. Also, the company’s focus onenhancing the efficacy of its fleet is expected to boost the productivity and occupancy rates in the coming quarters.
The company’s focus on ancillary services including extensive e-commerce platform, insurance, car rentals and ticket sales from kiosks are expected to reinvigorate customer demand while increasing sales. Gol’s divestiture strategy on less profitable routes looks favorable toward expense management.
GOL’s long-term growth strategy of cost minimization is believed to offset the adverse effects of high fuel prices. The company’s low-cost differentiated approach, consultancy services toward fuel saving while reducing gas emissions will continue to strengthen its market position over time.
However, the company is facing fierce competition in the domestic market from industry players, such as Copa Holdings SA (CPA), LAN Airlines S.A (LFL), and TAM S.A (TAM). Nevertheless, within the company’s international route network, declining customer demand for flights has also been adversely affecting revenues over quite some time.
Rising fuel prices, leading to the company’s shrinking profitability, remain a cause of concern. In addition, the airport infrastructural crisis in Brazil continues to lower flight efficiency, with rampant cases of flight cancellations and delays. GOL’s weaker balance sheet on account of the company’s huge loans, liabilities and increased debt, raises anxiety on the stock.
The company’s first-quarter 2012 results reported loss in net income, reflecting the adverse effect of depreciation of Brazilian real against the U.S. dollar. Moreover, operating costs related to salaries, wages and benefits, and landing fees pressurized margins, depressing our view on the stock.
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