More on Gol (GOL)
I've been thinking a little more about Gol Linhas Aereas Inteligentes (GOL) lately, and though that thinking and research has turned up more risks for the company it has also solidified my belief that it is extremely well positioned moving forward.
Before I get into the things that actually matter, you might note that GOL fell precipitously today -- they split, and as is often the case for these underfollowed stocks, not all of the data services noticed right away. I only bring this up because this is one of the rare cases where I think a split actually makes good sense -- I wrote about Rayonier's silly split a month or two ago and generally think splits of average-priced stocks are boneheaded. In thise case, however, the split was brought about simply to bring the GOL ADR's in line with the Brazilian shares -- ADR's for GOL had been a match for two shares on the Brazilian exchange, but now it will be a much simpler 1:1 ratio for the ADR which makes things slightly easier to follow their finances. I have no problem with it, though I also don't think it has any material impact on the company and you'll never see me being a cheerleader for splitting stocks.
I wrote a bit about Gol when I opened my first position last week, so today I have just a couple things to share.
First, Varig -- the current flagship carrier of Brazil and Gol's largest competitor -- looks like it is finding it's way out of bankruptcy, and there was a brief article about the specifics from Reuters today. Varig has been faced with very similar problems to the US flagship carriers in the past couple of years, including a legacy of heavy regulation, huge labor costs, and large liabilities and big debt on the books. If this current deal holds (and it's anyone's guess at this point -- I don't think any other big Brazilian companies have yet gone through the new bankruptcy process they have now), Varig will be controlled by a Brazilian shipping magnate with no aviation experience.
So what does this mean for Gol? I'd guess, not much. One of the other possibilities was that TAM, the other upstart airline that splits most of the business in Brazil with Gol and Varig, would take over the company, but their offer wasn't as solid as this one on the table today. That might have changed the competitive landscape somewhat, but I'd be inclined to say that even if TAM and Varig combined Gol would still have a huge advantage -- neither of them has shown any ability to match Gol's low cost structure or low prices and "think different" approach in the long term.
But with Varig as an independent, there is some slight risk that their bankruptcy will enable them to dramatically cut costs -- as some of the big US carriers have done -- which theoretically would enable them to move more toward the low fare model that Gol and, to a lesser extent, TAM, have followed to great success. In fact, I don't imagine that to be a likely outcome -- I don't think that Varig will be able to dramatically change their corporate culture and become lean and efficient just because they are offloading their debt. US Airways is not a viable competitor for JetBlue and Southwest today, even though they've been through bankruptcy twice and cleansed their balance sheets. Change isn't that easy.
And the other risk I've been thinking about some is government regulation. Government regulation of the airline industry was a significant issue 20 years ago in the US, and it can certainly be argued that the removal of regulatory controls dramatically changed the landscape and brought real competition and allowed new entrants to grow into the marketplace, making air travel much more feasible for all Americans.
Brazil is not about to deregulate it's airline industry, as far as I can tell. The governmental philosophy is dramatically different -- as evidenced by the controlling stake the government holds in Petrobras, the big oil company, for example. The government is committed to letting private enterprise grow, but in my opinion it is also very concerned about directing growth in their economy. How that will work in the larger sense, I have no idea.
But I think it's working fine for Gol. I was surprised to see quotes from Gol management that they believe government regulation to be a benefit for them in many ways, but their argument makes sense.
According to GOL's leaders, the primary focus of the Brazilian government when it comes to air travel is ensuring manageable growth of the overall system. Individual routes have to be approved by the government whenever an airline wants to add capacity to make sure that the industry doesn't overbuild and go into a crash (though how the government can predict that, I have no idea).
But the key is that a focus on overall steady growth and the lack of a truly free market means that Gol's competitive picture should remain relatively steady. GOL now has a significant edge over the small upstarts that might fly a dozen or so routes and who want to build their business -- GOL is now an established company with 400+ flights a day, and they can certainly make a stronger argument for their ability to effectively manage additional routes than can a very small and, in most cases, financially unstable competitor.
So the way I read the regulatory landscape in Brazil (and I'm no expert on this topic), Gol has some protection from smaller carriers that might try to horn in on it's routes by buying market share with even lower prices, because the government doesn't want to see that kind of instability (prices moving dramatically up and down, small companies betting the farm on their ability to buy market share until they run out of money -- see Independence Air for the US version of this cautionary tale).
So Gol can focus primarily on what it does best, which is beat the pants off of Varig and, to a lesser extent, TAM, and, more importantly, build a whole new customer base by bringing in the millions of Brazilians who have never seen the inside of an airplane, all while growing rapidly but steadily with the government's blessing.
Nothing here to make me change my mind on Gol -- they're down a few points from when I purchased my initial position, and I'm hoping that they fall back significantly sometime in the next couple months so that I can fill out my holdings in this well-managed, fast-growing, and fun-to-watch company at a lower price.
Before I get into the things that actually matter, you might note that GOL fell precipitously today -- they split, and as is often the case for these underfollowed stocks, not all of the data services noticed right away. I only bring this up because this is one of the rare cases where I think a split actually makes good sense -- I wrote about Rayonier's silly split a month or two ago and generally think splits of average-priced stocks are boneheaded. In thise case, however, the split was brought about simply to bring the GOL ADR's in line with the Brazilian shares -- ADR's for GOL had been a match for two shares on the Brazilian exchange, but now it will be a much simpler 1:1 ratio for the ADR which makes things slightly easier to follow their finances. I have no problem with it, though I also don't think it has any material impact on the company and you'll never see me being a cheerleader for splitting stocks.
I wrote a bit about Gol when I opened my first position last week, so today I have just a couple things to share.
First, Varig -- the current flagship carrier of Brazil and Gol's largest competitor -- looks like it is finding it's way out of bankruptcy, and there was a brief article about the specifics from Reuters today. Varig has been faced with very similar problems to the US flagship carriers in the past couple of years, including a legacy of heavy regulation, huge labor costs, and large liabilities and big debt on the books. If this current deal holds (and it's anyone's guess at this point -- I don't think any other big Brazilian companies have yet gone through the new bankruptcy process they have now), Varig will be controlled by a Brazilian shipping magnate with no aviation experience.
So what does this mean for Gol? I'd guess, not much. One of the other possibilities was that TAM, the other upstart airline that splits most of the business in Brazil with Gol and Varig, would take over the company, but their offer wasn't as solid as this one on the table today. That might have changed the competitive landscape somewhat, but I'd be inclined to say that even if TAM and Varig combined Gol would still have a huge advantage -- neither of them has shown any ability to match Gol's low cost structure or low prices and "think different" approach in the long term.
But with Varig as an independent, there is some slight risk that their bankruptcy will enable them to dramatically cut costs -- as some of the big US carriers have done -- which theoretically would enable them to move more toward the low fare model that Gol and, to a lesser extent, TAM, have followed to great success. In fact, I don't imagine that to be a likely outcome -- I don't think that Varig will be able to dramatically change their corporate culture and become lean and efficient just because they are offloading their debt. US Airways is not a viable competitor for JetBlue and Southwest today, even though they've been through bankruptcy twice and cleansed their balance sheets. Change isn't that easy.
And the other risk I've been thinking about some is government regulation. Government regulation of the airline industry was a significant issue 20 years ago in the US, and it can certainly be argued that the removal of regulatory controls dramatically changed the landscape and brought real competition and allowed new entrants to grow into the marketplace, making air travel much more feasible for all Americans.
Brazil is not about to deregulate it's airline industry, as far as I can tell. The governmental philosophy is dramatically different -- as evidenced by the controlling stake the government holds in Petrobras, the big oil company, for example. The government is committed to letting private enterprise grow, but in my opinion it is also very concerned about directing growth in their economy. How that will work in the larger sense, I have no idea.
But I think it's working fine for Gol. I was surprised to see quotes from Gol management that they believe government regulation to be a benefit for them in many ways, but their argument makes sense.
According to GOL's leaders, the primary focus of the Brazilian government when it comes to air travel is ensuring manageable growth of the overall system. Individual routes have to be approved by the government whenever an airline wants to add capacity to make sure that the industry doesn't overbuild and go into a crash (though how the government can predict that, I have no idea).
But the key is that a focus on overall steady growth and the lack of a truly free market means that Gol's competitive picture should remain relatively steady. GOL now has a significant edge over the small upstarts that might fly a dozen or so routes and who want to build their business -- GOL is now an established company with 400+ flights a day, and they can certainly make a stronger argument for their ability to effectively manage additional routes than can a very small and, in most cases, financially unstable competitor.
So the way I read the regulatory landscape in Brazil (and I'm no expert on this topic), Gol has some protection from smaller carriers that might try to horn in on it's routes by buying market share with even lower prices, because the government doesn't want to see that kind of instability (prices moving dramatically up and down, small companies betting the farm on their ability to buy market share until they run out of money -- see Independence Air for the US version of this cautionary tale).
So Gol can focus primarily on what it does best, which is beat the pants off of Varig and, to a lesser extent, TAM, and, more importantly, build a whole new customer base by bringing in the millions of Brazilians who have never seen the inside of an airplane, all while growing rapidly but steadily with the government's blessing.
Nothing here to make me change my mind on Gol -- they're down a few points from when I purchased my initial position, and I'm hoping that they fall back significantly sometime in the next couple months so that I can fill out my holdings in this well-managed, fast-growing, and fun-to-watch company at a lower price.
Labels: GOL
This article posted by One Guy @ 12/13/2005 12:46:00 PM 4 comments
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