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Tough Time Ahead for GOL

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It has been a tough couple of years for Brazilian low-fare airline GOL Linhas Aereas (GOL - Free Report) owing to soft domestic air travel demand and the subsequent fall in profitability. The carrier’s problem has only been aggravated by the weakening of the Brazilian Real, which has increased its fuel expenditure.

Market sentiment on the stock has also remained bearish from the beginning of the year as the stock has lost almost 37% of its value year to date. It seems now that the scenario could remain the same next year.

The biggest impediment toward GOL’s 2014 growth is the persistent weakness in Brazil’s economy. The country’s central bank expects its GDP (gross domestic product) growth to fall to 2.1% in 2014 as opposed to an expansion of 2.5% in 2013. Further, significant long-term debt  of R$5,054.7 million (approximately $2,395.4 million) at the end of the third quarter, remains a concern for the company.

Although GOL foresees stable demand within Brazil, it has warned of reducing network next year if the situation warrants. The company is preparing for asset sales, layoffs and other cutbacks to return to profitability and strengthen balance sheet.

Brazil will host the 2014 football world cup, which is one of the biggest sporting extravaganzas. The country is expected to get around 600,000 international visitors in addition to 3 million domestic fans during the event, presenting a big opportunity for passenger carriers like GOL.  

However, Brazilian tourism agency Embratur remains sceptical about the capability of the domestic carriers to support air travel demand during the month long event. The agency is in favour of opening up Brazilian skies to foreign players, who currently run international flights to and from Brazil. A decision on the matter is expected in the first week of December.     

If indeed the proposal is cleared it would increase the struggles for domestic carriers like GOL and Latam Airlines Group SA , which are already facing stiff fare competition in the domestic market.

GOL currently carries a Zacks Rank #4 (Sell). Other stocks within this sector within the sector are U.S. Airways Group Inc. and Spirit Airlines Inc. (SAVE - Free Report) . Both the stocks carry a Zacks Rank #1 (Strong Buy).

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