Airlines Improving at BRICs

Gol Linhas Aereas (GOL - Analyst Report), the first Brazilian low-fare airline, has recently expanded its footprint in the Caribbean region with new daily flights from smaller domestic cities in order to expand across Brazil. However, due to the current economic situation, the company has stopped flights to Europe and North America, suspended its flights to Lima, Peru, and reduced the frequency of its flights within South America.

Gol has a very limited number of international flights, and is expected to face tough competition from TAM (TAM - Analyst Report), which has a greater number of international destinies, including the U.S. and Europe. International destinations are in high demand among Brazilian travelers.

However, the company posted decent results during the first quarter 2009 and is expected to report excellent numbers during the second quarter due to an increase in domestic passenger traffic in May 2009 and synergies from Varig, which has finally been raised to GOL's efficiency and profitability standards.

The decrease in oil prices from US$150 per barrel to US$70 per barrel currently is a positive sign for the aviation industry as it reduces airline fuel costs, but the recession in Europe and U.S. is a big problem. We believe that the global airline industry will continue to endure financial difficulties in the short term.

The International Air Transport Association (IATA) has forecasted the global aviation industry would bear US$9 billion losses in 2009, which will lead to a 15% reduction in revenues during the year. However, in countries like Brazil, China, Russia and India (BRIC), there is room for recovery as the domestic business in growing.

Accordingly, we continue rate the shares of GOL, TAM, Grupo Aeroportuario del Centro Norte S.A. de C.V. (OMAB - Snapshot Report), Lan Airlines S.A. (LFL - Analyst Report), Grupo Aeroportuario del Pacifico (PAC - Analyst Report) and Grupo Aeroportuario del Sureste, S.A. de C.V. (ASR - Analyst Report) a Hold.