Brazilian Airlines Soaring High

Late last week, Brazil’s GOL Linhas Aereas Inteligentes S.A. (GOL - Analyst Report) reported a 6.9% year-on-year increase in air traffic demand during the month of August. This was prompted by better supply and distribution of seats following its merger with VRG's operations in 2008, more aircraft in the fleet, the recovery of yields and the reduction in promotions due to renewed increase in business trips in August after the July holiday season and the continued revitalization of the SMILES program.

Domestic market demand rose by 29% from August 2008, but fell 19.3% sequentially due to seasonality. International market demand dropped by 60.7% year over year due to the strategic repositioning of the company's traffic network at the end of July 2008, which eliminated long-haul routes, and fell by 13.8% compared to last month.

In line with its focus on optimizing operating profitability, the utilization ratio of the company's operational fleet (measured in block hours) averaged around 12 hours/day, versus 11.3 hours/day in the second quarter of 2009. Seating capacity per kilometer flown (ASK) rose 4.2% over the same period last year, but fell 1.7% sequentially due to the lower number of tourist flights.

The global airline industry continues to experience significant financial difficulties, with several carriers filing for bankruptcy protection and recent warnings regarding industry profitability largely due to volatility in oil prices and the economic downturn.

However, since oil prices have almost halved from 2008, operating costs for these companies will reduce considerably. Moreover, falling interest rates in Brazil will help domestic airlines like Lan Airlines S.A. (LFL - Snapshot Report), TAM S.A. (TAM - Analyst Report) and GOL in the coming quarters.

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Read the full analyst report on LAN

Read the full analyst report on TAM