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On June 27, 2014, we issued an updated research report on GOL Linhas Aereas (GOL - Analyst Report). We are encouraged by the company’s command over the Brazilian air travel sector supported by international network expansion, fleet restructuring efforts, competitive pricing and enhancement of customer services. However, a competitive sector scenario, weak domestic currency and imbalance in supply and demand ratio, particularly in the international market, remain our concerns. The passenger airline holds a Zacks Rank #3 (Hold).

GOL is witnessing surging demand in Brazil owing to the World Cup and is focused on flexibility, efficiency, punctuality and competitive rates to tap the opportunity. The company expects consolidation of strategy and improvement of products to deliver profitability in 2014 and remains committed to achieve an EBIT margin of 3–6%.

The carrier also seeks to increase the frequency of daily flights between Sao Paolo and Rio de Janeiro via the Campinas and Santos do Dumont airports to 130. GOL is pursuing necessary approval to restart its Sao Paolo-Santiago route in Chile and has already launched direct flights between Fortaleza in Brazil and Buenos Aires in Argentina, which are expected to boost the company’s dollar revenues.

We believe GOL’s new Smiles Program, which is aimed at enhancing customer loyalty and offering low-priced flights, will pave way for further growth. Smiles also entered into an agreement with Aerolineas Argentinas and TAP Portugal to allow GOL passengers to accumulate miles while flying with the two carriers, and then use them to redeem points.

GOL has entered into a number of collaborations to expand its operating base, including a code share agreement with Delta Airlines Inc. (DAL - Analyst Report). Recently, the carrier got the board and regulators’ approval for its exclusive strategic partnership with Air France-KLM SA, which is aimed at expanding operations between Brazil and Europe.

However, the slump in the Brazilian economy remains the primary headwind for GOL, which is expected to grow at a rate of 1.85% as compared with 2.3% in 2013. Further, an expected decline in 2014 U.S. GDP growth remains a concern for GOL, as the country serves as the largest intercontinental market for Brazil.

Moreover, around 18.5% depreciation in Brazilian real value against the U.S. dollar could impact the company’s profitability. The global fuel price volatility also remains a significant challenge for GOL, as the political turmoil in Iraq continues to put upward pressure on crude.

Key Picks from the Sector

Some notable stocks within this sector are Southwest Airlines Co. (LUV - Analyst Report) and Republic Airways Holdings Inc. (RJET - Snapshot Report). Both sport a Zacks Rank #1 (Strong Buy).

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