GOL Upgraded to Neutral - Analyst Blog

We are upgrading our recommendation on GOL Linhas Aereas (GOL), the first Brazilian low-fare airline, from Underperform to Neutral stemming from our optimism about the continuous increase in passenger traffic and the fleet renewal program. 

GOL has been continuously recording an increase in passenger traffic with a 12.2% year-over-year increase in July 2010. During the second quarter of fiscal 2010, domestic traffic grew 17.0% year over year and international traffic shot up by 13.7%.

GOL is expected to largely 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; with the total operating fleet size 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.

Increase in the frequency of flights to the existing high-demand markets and the addition of new routes is also encouraging. GOL has initiated a couple of flights from Brasilia to the Caribbean.

However, an intense competitive environment particularly due to the 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.

Overt dependence on a few clients such as The Boeing Co. (BA) and CFM International and an increase in net debt also force us to remain on the sidelines. The stock currently retains its short term Hold rating, equivalent to a Zacks #3 Rank.

 
BOEING CO (BA): Free Stock Analysis Report
 
GOL LINHAS-ADR (GOL): Free Stock Analysis Report
 
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TAM SA-ADR (TAM): Free Stock Analysis Report
 
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