Tags: GOL | Brazil | TAM | LFL

Brazilian Airline Gol Gains Altitude

By Julian Dowling   |   Friday, 19 Aug 2011 11:47 AM

Brazilian low-cost airline Gol Linhas Aereas (GOL), the country’s second-largest airline by market share, has been buffeted by strong competition and high fuel prices, but it could soon dominate Brazil’s domestic market if its purchase of rival airline Webjet is approved.

In July, Gol agreed to buy Webjet — Brazil’s fourth-largest carrier — for $61 million, but the buy must be approved by Brazil’s civil aviation and antitrust regulators. The deal is expected to close in 2012.

The Webjet acquisition would help Gol consolidate its position in Brazil’s highly competitive market. It currently has a 38 percent share, slightly less than its main domestic rival TAM (TAM), which is in the process of merging with Chile’s LAN Airlines (LFL).

More Brazilians are flying these days thanks to the strong appreciation of their currency and low fares. Gol’s challenge is to keep revenues up amid rising competition from a handful of new carriers which, like Webjet, target routes underserved by Gol and TAM.

Strong demand helped Gol increase its July load factor, a measure of how much of an airline's passenger carrying capacity is used, by 9.9 percentage points to 75.8 percent. Demand grew 16.2 percent year-on-year on its total route network.

The company’s shares rose sharply on the news, but it remains to be seen if Gol can turn higher occupancy into better results. Gol posted a second-quarter net loss of $220 million, seven times deeper than a year earlier, as fuel costs soared and passenger revenue fell.

"The loss was chiefly due to the highly competitive scenario in the Brazilian market, which led to a 2.3 percent decline in passenger revenue in the second quarter and pressured operating costs," Gol management said.

The worst could be still to come. On July 28 management cut the company’s 2011 operating margin estimate, citing high fuel prices.

Gol announced in the filing a plan to buy back 10 percent of its preferred shares outstanding over the next 12 months, which will later be resold or cancelled. Given that fuel costs are expected to remain high, the company is implementing an additional cost reduction plan that should save $412 million in 2012.

But there is some good news. Yields, a gauge of ticket prices, are expected to recover 4 percent to 5 percent by the end of the year, CEO Constantino de Oliveira Junior said at a recent conference.

Savings plan

Argus Research downgraded Gol to hold from buy in December of last year, joining four others in the neutral opinion. However, five analysts tracked by Thomson/First call nevertheless call the stock a buy and one considers it a strong buy.

The São Paulo company, controlled by the Constantino family, is not preparing for a crash landing. If anything, it is gaining altitude as it looks ahead to the Webjet merger which, if approved, should save it about $63 million within two years.

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Brazilian low-cost airline Gol Linhas Aereas (GOL), the country s second-largest airline by market share, has been buffeted by strong competition and high fuel prices, but it could soon dominate Brazil s domestic market if its purchase of rival airline Webjet is approved....
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