Balanced View on GOL - Analyst Blog

On April 11, 2014, we issued an updated research report on GOL Linhas Aereas GOL. We are encouraged by the company's command over the Brazilian air travel sector supported by international network expansion, fleet restructuring, competitive pricing and enhancement of customer services. However, a competitive sector scenario, weak domestic currency and reduction in domestic supply remain our concerns. The passenger airline holds a Zacks Rank #3 (Hold).

GOL expects leisure air travel demand to increase in Brazil during the 2014 football world cup and is thus focusing on flexibility, punctuality and competitive rates to capitalize on the opportunity. The company expects consolidation of strategy and improvement of products to deliver profitability in 2014.

We believe the company's new Smiles Program, aimed at enhancing customer loyalty and offering low-priced flights, will pave way for further growth. The carrier's GOL+ product is performing well and ensures greater comfort for passengers. GOL aims to cover 80% of its total flight with GOL+ by the end of May 2014.

GOL has entered into a number of collaborations to expand its operating base, including a code share agreement with Delta Airlines Inc. DAL. To widen its U.S. exposure, GOL made a formal request to the Brazilian Civil Aviation Agency to run a regular service between Campinas and Miami, with a scheduled stop at Santo Domingo.

However, the slump in the Brazilian economy remains the primary headwind for GOL, which is expected to grow at a rate of 1.8% as compared with 2.3% in 2013. GOL declared that it could further reduce its domestic operations in 2014 due to sluggish economic growth and expects its supply to vary between negative 3% and 1% in 2014 within the domestic market.

Around 11% depreciation in Brazilian real value against U.S. dollar could impact the company's profitability. Moreover, operating costs related to salaries, employee bonus and commissions pressure margins. Thus, we remain sidelined on the stock.

Key Picks from the Sector

Stocks that are worth considering within this sector are Southwest Airlines Co. LUV and Alaska Air Group Inc. ALK. Both LUV and ALK currently carry a Zacks Rank #1 (Strong Buy).