GoL Airlines Expands Globally - Analyst Blog

Low-cost Brazilian airline, GOL Linhas Aereas Inteligentes S.A. (GOL) signed a code-share agreement with American Airlines, a subsidiary of AMR Corporation (AMR) to increase connectivity between various destinations in the United States and Brazil.

 

The agreement is expected to have a positive impact on Brazilian tourism. The agreement is justified by the continuous increase in international passenger traffic recorded by American Airlines during the last couple of months. During August, international traffic rose 7.1%, in July it increased 7.8% and in June it inched 6.6%.

 

In order to expand its domestic reach as well, Gol joined hands with NOAR Linhas Aereas, a Brazilian regional carrier. Gol has been continuously increasing the frequency of flights to its existing high-demand markets and adding new routes. Gol recorded a 12.2% year-over-year increase in passenger traffic in July 2010 and 16.6% during the second quarter of fiscal 2010.

 

Gol is also expected to benefit from its fleet renewal program. During the second quarter of fiscal 2010, Gol consolidated its fleet renovation program by reducing the number of grounded aircraft by 15 (return of 11 B737-300s and the reactivation of four B767s for charter activities). The decrease in the number of aircraft would definitely lower operating costs in the latter half of fiscal 2010, which will improve bottom-line results.

 

Gol Linhas is in the final phase of its plan to replace 737-300 and 767-300 aircraft with 737-800NGs and 737-700NGs for operations on short- and medium-haul routes. In 2010, it will renew its entire fleet and the total operating fleet size is expected to reach 111. The fleet modernization plan guarantees that Gol's fleet will maintain its status as one of the youngest and most modern in the world. At the end of 2012, 65% of the fleet will comprise 737-800 SFP aircraft, maintaining a low average age of 6.9 years.

 

However, an intense competitive environment particularly due to the proposed merger of two major Latin American airlines - LAN Airlines S.A. (LFL) and TAM S.A. (TAM) - will put the stock under pressure. The combined company will be called LATAM Airlines Group S.A. (LATAM)

Thus, over the long term, we maintain our Neutral recommendation. The stock currently has a Zacks #3 Rank (short term Hold rating).