Zacks_Analysts' Blog : Weak 2Q for GOL - Analyst Blog

GOL Linhas A (GOL) reported financial results for the second quarter of fiscal 2011 on August 11, 2011. Net loss in the quarter was recorded at R$358.7 million (US$225.6 million) compared with a loss of R$51.9 million (US$29.2 million) in the year-ago quarter.

The loss was primarily attributable to a 2.3% decline in passenger revenue on the backdrop of a competitive Brazilian air traffic market, worsened by rising fuel prices.

GOL Linhas reported loss per share of R$1.33 (US$0.84 per ADS) in the quarter compared with the Zacks Consensus Estimate of a loss of US$0.15 per ADS.

Revenue

During the second quarter, net revenue was R$1,566.3 million (US$985.1 million), down 1.5% year over year and 17.4% sequentially. The year-over-year decline reflected highly competitive fares, which increased competition in the Brazilian aviation market, pushing the company’s yield down by 13.8%.

The load factor on GOL’s route network reached 66.5% in 2Q11, up from 60.4% reported in 2Q10 and down from 72.3% in the prior year quarter. GOL's domestic demand increased 14.2%, whereas international route network grew by 4.8% over the prior-year quarter. GOL’s total demand moved up by 11.4%, while supply grew by 4.7% during the quarter.

The company was able to make more efficient use of its fleet, both in terms of increased productivity and higher occupation rate.

GOL Linhas closed the quarter with a standardized operational fleet of 115, B737-700 and 800 NG aircraft (in line with the fiscal 2011 guidance), with an average age of 6.9 years and a total fleet of 121 aircrafts.

Margins

Operating expenses in the quarter increased 19.8% year over year and 7.9% sequentially to R$1,837.2 million (US$1,155.5 million). Operating loss (EBIT) came in at R$270.8 million (US$170.3 million) with a margin of negative 17.3% compared with an operating income of R$57.3 million (US$32.2 million) with a margin of 3.6% in the prior-year period. The loss reflected higher-than-expected expenses which includes salaries, wages and benefits, landing fees, expenses from aircraft returns among others.

The company reported an EBITDAR of a negative R$67.6 million (US$42.5 million) including a negative margin of 4.3% compared with a positive R$274.2 million (US$154 million) with a margin of 17.2% recorded in the second quarter of 2010.

Balance Sheet

Exiting the second quarter, GOL Linhas’ cash and cash equivalents decreased 8.6% sequentially to R$1,643.5 million (US$1,046.8 million).  Long-term debt increased 12.4% to R$3,700.1 million (US$2,356.8 million) in the reported quarter.

Cash Flow

Net cash provided by operating activities declined year over year to a negative R$15 million (US$9.4 million) versus a positive R$438 million (US$246.1 million) in the previous year quarter. Payment for property, plant and equipment decreased 46.4% year over year to R$118.3 million (US$74.4 million).

Guidance:

The company maintains the capital expenditure for fiscal 2011 within the range of approximately R$500–R$550 million. The company revises operating margin guidance in the rage of 1% to 4% and presents the operating fleet plan of 131 aircrafts by fiscal 2015. GOL Linhas also revised their expectation of Domestic Demand growth within the range of 12% to 18% RPK,                      

The company’s cost reduction initiatives are anticipated to keep costs appropriate with its business model while maintaining commitment to safety and quality.

GOL Linhas is one of the most profitable low-cost airlines in the world connecting the cities of Brazil as well as those in Argentina, Bolivia, Chile, Paraguay, Peru and Uruguay. The company currently operates about 38% of Brazil's domestic flights and 12% of international flights. It competes directly with its peers, such as Copa Holdings SA (CPA), LAN Airlines S.A (LFL), and TAM S.A (TAM).

We currently maintain a long-term Neutral recommendation on the stock. GOL has a Zacks #3 Rank, which translates into a short-term Hold rating (1-3 months).