Gol maintains altitude (GOL)
I haven't written much about Gol Linhas Aereas Inteligentes (FARO) in the last couple months. It's been a fairly quiet summer since the drama of Varig's slow demise held my attention through the World Cup, with Brazilian soccer fans stranded in Germany thanks to Varig's inability to make payments on its leased fleet, and the Brazilian courts struggling through their first high profile bankruptcy case under a new set of laws.
But Gol's business has continued to be rock solid. For those who don't know, Gol is the second largest airline in Brazil (the largest is TAM), and is benefitting both from the rapid growth of air travel in South America and in its own competitive position as a low cost carrier in the mold of Southwest Airlines. TAM is also doing well, but I like the high insider family ownership in GOL, their excellent investor relations and disclosure policies, and the fact that they're a newer, more focused competitor (TAM has been around for much longer, though they've also in recent years moved to a discount model).
It's really a two horse race in Brazil now, with Varig, the former flagship carrier, essentially trying to be reborn as a startup ... and there may be more than one winner. Both TAM and GOL should benefit tremendously as the civilian air travel industry there grows by leaps and bounds. According to an Investors Business Daily article earlier this week, there are fewer than two airplane trips taken for every one hundred Brazilians each year -- as opposed to the US market, where each individual takes an average of more than two trips a year. Clearly, Brazil has great room for growth in this industry as their economy grows ... if they even grew to travel by air as often as Chileans, that would be more than a tenfold increase in air traffic in Brazil.
But none of that is news -- what's been going on with Gol lately, as their share price has more or less stagnated over the past six months?
Three developments have left me with continuing optimism about my GOL investment:
1) They're continuing to cut costs aggressively. They recently opened a new maintenance center so they can do their own servicing and stop paying third parties, which they believe will save them $2 million a year. Add that to the declining oil prices, and margins should continue to be excellent (they already have second-to-none profit margins).
2) They're continuing to steadily branch out and build their network into underserved areas of Brazil and neighboring countries, using the same low-cost, point-to-point strategy that has served them so well to date. GOL now flies to Argentina, Chile, Paraguay, Uruguay, Peru and Bolivia and is trying to expand to Mexico, Venezuela, Colombia, and Ecuador (the Mexican expansion, which would require building a domestic fleet in that country which is just now opening up to low cost competition, is on hold as GOL decided this summer to focus on South America for the time being).
3) Even as they bring new capacity online -- they're buying 20+ new planes this year, and the year-over-year seat miles have increased 45% -- they continue to build their efficiency as measured by the load factor (the percentage of available seat/miles that are filled). In July, that load factor hit an unbelievably high 84% as the grounded capacity of Varig continues to be absorbed. That high a number might not be sustainable, but they report it monthly and it has consistently been excellent. August, while significantly lower than July at 77%, was dramatically better than the 66% they hit in August of last year. I was a little worried that the buildout of international routes would hurt this performance, but clearly it hasn't as the company has focused on high-traffic routes and managed them very well.
4) Though prizes don't mean much on their own, GOL continues to win industry prizes and high rankings among their peers, and they stand out as one of the strongest companies in the developing world. They consistently win accolades for their investor relations and disclosure policies, as well as for their exceptional business performance, and the company is clearly proud of their status as a highly ethical leader in the marketplace. A few recent examples from just this past Summer are awards or high rankings from Latin Finance, Aviation Week and Space Technology, and the Brazilian Economic Institute.
GOL has underperformed the larger (and more international) TAM since the latter came public this past Spring (as you can see from the six month chart below), but I continue to be a believer in GOL's high insider ownership, strong track record of cost cutting and aggressive price cutting that is helping to expand their market, and excellent management.
GOL remains one of my larger holdings, and the only thing that is likely to change that would be a sustained recession in Brazil.
But Gol's business has continued to be rock solid. For those who don't know, Gol is the second largest airline in Brazil (the largest is TAM), and is benefitting both from the rapid growth of air travel in South America and in its own competitive position as a low cost carrier in the mold of Southwest Airlines. TAM is also doing well, but I like the high insider family ownership in GOL, their excellent investor relations and disclosure policies, and the fact that they're a newer, more focused competitor (TAM has been around for much longer, though they've also in recent years moved to a discount model).
It's really a two horse race in Brazil now, with Varig, the former flagship carrier, essentially trying to be reborn as a startup ... and there may be more than one winner. Both TAM and GOL should benefit tremendously as the civilian air travel industry there grows by leaps and bounds. According to an Investors Business Daily article earlier this week, there are fewer than two airplane trips taken for every one hundred Brazilians each year -- as opposed to the US market, where each individual takes an average of more than two trips a year. Clearly, Brazil has great room for growth in this industry as their economy grows ... if they even grew to travel by air as often as Chileans, that would be more than a tenfold increase in air traffic in Brazil.
But none of that is news -- what's been going on with Gol lately, as their share price has more or less stagnated over the past six months?
Three developments have left me with continuing optimism about my GOL investment:
1) They're continuing to cut costs aggressively. They recently opened a new maintenance center so they can do their own servicing and stop paying third parties, which they believe will save them $2 million a year. Add that to the declining oil prices, and margins should continue to be excellent (they already have second-to-none profit margins).
2) They're continuing to steadily branch out and build their network into underserved areas of Brazil and neighboring countries, using the same low-cost, point-to-point strategy that has served them so well to date. GOL now flies to Argentina, Chile, Paraguay, Uruguay, Peru and Bolivia and is trying to expand to Mexico, Venezuela, Colombia, and Ecuador (the Mexican expansion, which would require building a domestic fleet in that country which is just now opening up to low cost competition, is on hold as GOL decided this summer to focus on South America for the time being).
3) Even as they bring new capacity online -- they're buying 20+ new planes this year, and the year-over-year seat miles have increased 45% -- they continue to build their efficiency as measured by the load factor (the percentage of available seat/miles that are filled). In July, that load factor hit an unbelievably high 84% as the grounded capacity of Varig continues to be absorbed. That high a number might not be sustainable, but they report it monthly and it has consistently been excellent. August, while significantly lower than July at 77%, was dramatically better than the 66% they hit in August of last year. I was a little worried that the buildout of international routes would hurt this performance, but clearly it hasn't as the company has focused on high-traffic routes and managed them very well.
4) Though prizes don't mean much on their own, GOL continues to win industry prizes and high rankings among their peers, and they stand out as one of the strongest companies in the developing world. They consistently win accolades for their investor relations and disclosure policies, as well as for their exceptional business performance, and the company is clearly proud of their status as a highly ethical leader in the marketplace. A few recent examples from just this past Summer are awards or high rankings from Latin Finance, Aviation Week and Space Technology, and the Brazilian Economic Institute.
GOL has underperformed the larger (and more international) TAM since the latter came public this past Spring (as you can see from the six month chart below), but I continue to be a believer in GOL's high insider ownership, strong track record of cost cutting and aggressive price cutting that is helping to expand their market, and excellent management.
GOL remains one of my larger holdings, and the only thing that is likely to change that would be a sustained recession in Brazil.
Labels: GOL
This article posted by One Guy @ 9/27/2006 03:14:00 PM 1 comments
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