GOL-Air France-KLM Deal Gets Approval - Analyst Blog

Brazilian carrier GOL Linhas Aereas SA GOL has received the green signal from its board to proceed with its exclusive strategic partnership with European giant Air France-KLM SA. GOL expects to expand its operations between Brazil and Europe on the back of this deal.

The approval came after the board sanctioned a capital increase of up to R$ 185.8 million ($82.9 million), of which R$ 116.0 million ($52.0 million) will be subscribed to by Air-France KLM, while the current shareholders will have the first right to the rest of the new shares. GOL will sell 6.78 million new preference shares at R$27.40 ($12.31) per share.

In Feb 2014, GOL announced the deal for the first time, which entails an investment of $100 million from Air France-KLM. The European carrier will get a 1.5% stake in GOL for its aforementioned $52.0 million investment. The remaining $48 million will be invested as part of commercial agreements and bonus based on cost savings.

Earlier this month, GOL received the nod from Brazilian antitrust regulator CADE (Conselho Administrativo de Defesa Economica) to go ahead with the strategic partnership.

The alliance includes increased code share, joint sales activities and enhanced offerings through GOL's frequent flyer program, which will allow the company to extend its service in Europe, while Air France-KLM will benefit by boosting its presence in Brazil. The agreement will allow both companies to augment their service to 318 destinations across 115 countries.

It is worth noting in this regard that GOL already has a code sharing agreement with Delta Airlines Inc. DAL, whereby the two carriers are able to maximize the connecting routes in the Brazil-United States passage. The current code share agreement allows Delta to access 23 destinations in Brazil while GOL customers can operate in 5 markets that Delta currently serves.

Brazil is set to host the 2014 football world cup followed by the 2016 summer Olympics – two of the biggest sporting extravaganzas. This year the country is expected to get around 600,000 international visitors in addition to 3 million domestic fans in the course of the soccer tournament, which presents a big opportunity for passenger carriers like GOL.

The partnership will strengthen GOL's position in Europe – one of the most popular destinations for people from Brazil. On the other hand, Air France-KLM will also leverage from the tie-up as Europe is likely to bring in strong air traffic to Brazil as the football world cup draws near, thus driving growth. However, persistent weakness in the Brazilian economy, a depreciating Real and surging operating costs remain some of the potent headwinds for GOL.  

GOL currently carries a Zacks Rank #3 (Hold). Better-ranked stocks within this sector include Southwest Airlines Co. LUV and American Airlines Group Inc. AAL. Both stocks sport a Zacks Rank #1 (Strong Buy).