Regional discount airlines all across the world fill niche geographic areas that are typically not fully serviced by major airlines.  These smaller airlines have found success in multiple countries, but they also face regionally focused issues that major airlines tend not to deal with.  Further, these smaller regional airlines have greater negative swings when the economy or other negative regional factors present themselves.  But the opposite is also true, when the regional economy begins to turn positive, so do the fortunes of the small discount airline.  That is the situation with our Zacks Bull of the Day, GOL Linhas Aereas Inteligentes .

This Zacks Rank #1 (Strong Buy) company provides regular and non-regular flight transportation services for passengers, cargoes, and mailbags in Brazil and internationally. The company operates in two segments, Flight Transportation and Smiles Loyalty Program. It also develops and manages its own or third party’s customer loyalty program, as well as sells redemption rights of awards related to the loyalty program. The company has a strategic partnership with Air France-KLM. Gol Linhas Aéreas Inteligentes S.A. was founded in 2001 and is based in Sao Paulo, Brazil.

Recent Earnings Report

In mid-February, GOL announced Q4 16 earnings, and they came in below both the Zacks consensus earnings and revenue estimates.  On a year over year basis, revenues improved by +17.1%, while EPS was up +346%.  

GOL’s Guidance Update

A week after their earnings announcement, GOL’s management team announced several guidance updates for 2017.  First, management sees Revenue Per Available Seat Mile (RASM) improving by +7%, and revised their EBIT margin rate to a range of 6-8% from a range between 5-7%.  Second, competitive capacity is also supposed to turn positive in Q1 17 (+2%, vs. -5% in 2016).  Third, preliminary schedules point towards +4% growth in Q2 17 due to improved forward bookings in February and March.  Fourth, management increased their average fair which is expected to make passenger yields improve by +6%.  Fifth, management now expects EBITDA margins to improve from flat to a range between +11 to +13% in 2017.  Sixth, company management expects to reduce their non-fuel cost per available seat kilometer (CASK), because they are reducing the age of their fleet, and expect to operate an even more fuel efficient fleet in 2017 and beyond.    

Management’s Take

According to Paulo Kakinoff, Chief Executive, “In 2016, GOL achieved the number one position as the largest airline in Brazil, as measured by market share of RPKs and passengers transported. We are Brazil’s favorite airline, having carried almost 400 million passengers since our first flight in 2001. In 2016, over 32 million passengers chose to fly GOL. And our forward bookings and traffic are rising.”

“GOL is recognized by customers for having the most attractive flight network in Brazil, the leadership in punctuality, and the best customer experience and service. Our fleet of 120 Boeing 737 aircraft and order for another 120 Boeing 737 MAX will allow us to maintain the lowest operating costs of any airline in Brazil.”

“GOL has a team of more than 15,000 skilled aviation professionals delivering Brazil’s best on-time performance, and an industry-leading 16-year flight safety record.”

Price and Earnings Consensus Graph

As you can see below, the revised 2017 financial guidance caused the stock price to jump, and future estimates to increase as well.

Gol Linhas Aereas Inteligentes S.A. Price and Consensus

Gol Linhas Aereas Inteligentes S.A. Price and Consensus | Gol Linhas Aereas Inteligentes S.A. Quote

Increasing Earnings Estimates

After management announced the updated guidance, coverage analysts significantly increased earnings estimates for Q1 17, Q2 17, FY 17 and FY 18 over the past 30 days; Q1 17 improved from $0.00 to $0.15, Q2 17 rose from -$2.35 to -$1.70, FY 17 vaulted up from -$3.10 to -$0.34, and F Y18 rocketed up from -$1.80 to $0.94.

Bottom Line

There are two outside factors that will impact GOL’s recovery; the Brazilian Real, and the probability for Brazil’s economy to strengthen through 2017 into 2018.  Current expectations are for the Real to improve against the U.S. dollar; As of March 2, the Real was around 3.09, with the currency expected to be around 3.14 by the end of Q1, and to be around 3.27 by the end of 2017.  This Real recovery will have a positive impact on both the top and bottom lines going forward.  Further, the overall economy in Brazil is expected to improve over the next two years as well.  

GOL’s management team continues to improve their capital structure, and they are currently on track to return to profitability in 2018.  The recent guidance upgrade in several different crucial categories has given analysts confidence to significantly upgrade the company’s expectations for both 2017, and 2018.

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