Balanced Stance on GOL

We are maintaining our Neutral recommendation on GOL Linhas Aéreas Inteligentes S.A. ( GOL - Analyst Report ) based on its long-term business strategy of route expansion and strategic acquisitions.

However, uncertainty associated with declining customer demand and rising fuel prices give us a cautious stance.

GOL is striving toward maintaining its long-term growth strategy of cost minimization by mitigating the adverse effects of higher fuel prices. The company’s low-cost differentiated approach and consultancy services for reducing gas emissions are expected to bolster its market position.

GOL’s strategy of enhancing its fleet efficacy is expected to boost productivity and occupancy rates in the coming quarters. Also, over time, the company has raised the number of cities served and inaugurated new terminals to ensure better service and convenience for clients.

Furthermore, the company focuses on continuous improvement in the ancillary services. These are expected to reinvigorate customer demand and increase sales.

On the flipside, GOL faces uncertainty from a fierce pricing war in the domestic market. Moreover, declining customer demand for flights across the company’s domestic and international route network has adversely affected revenues for quite some time.

Adding to the woes is the company’s high dependence on a few big suppliers like Boeing 737-700/800 Next Generation aircraft and CFM 56-7B engines. A shift in loyalty among suppliers may negatively affect profitability.

Depreciation of the Brazilian real with respect to the U.S. dollar remains a nagging concern. Moreover, operating costs related to salaries, wages and benefits, and landing fees have put margins under tremendous pressure over the last few quarters.

GOL Linhas, one of the most profitable low-cost airlines in the world, gives tough competition to other industry players, such as Copa Holdings SA ( CPA - Snapshot Report ) , LAN Airlines S.A ( LFL - Snapshot Report ) , and TAM S.A ( TAM ) .

GOL has a Zacks #3 Rank, which translates into a short-term (1-3 months) ‘Hold’ rating.