We recently reiterated our Neutral recommendation on the Brazilian airline, GOL Linhas Aéreas Inteligentes S.A. (GOL - Free Report) .
The company is one of the most profitable low-cost airlines in the world and the most profitable airline in South America, having surpassed the mark of 160 million passengers carried in just 10 years of operations.
Gol Linhas’ long-term growth strategy includes cost minimization by mitigating the adverse effects of higher fuel price. Its low-cost differentiated approach and consultancy services for reducing gas emissions are expected to bolster its market position.
In addition, the company is working towards enhancing its fleet efficacy that 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.
These long-term growth prospects notwithstanding, weak financial results and uncertainties associated with declining customer demand across the company’s domestic as well as international route network, rise in fuel prices and negative impact of foreign currency translation induce our cautious stance.
GOL’s 2Q12 results were weaker than its comparable quarters as loss widened and nearly doubled to settle at R$715 million. Loss per ADR came in at US$1.37. Revenue hike of 17% was more than offset by higher operating expenses.—caused mainly due to devaluation of real against dollar and rise in fuel prices.
Also, fierce competition from other industry players, such as Copa Holdings SA (CPA - Free Report) and LAN Airlines S.A remain a nagging concern on the stock.
GOL Linhas currently GOL has a Zacks #3 Rank, which translates into a short-term (1-3 months) ‘Hold’ rating.