Brazil’s largest low-fare airline operator, GOL Linhas Aereas Inteligentes S.A. (GOL), recently reported positive February passenger traffic details. The company experienced a 4.5% year-over-year increase in demand with domestic demand rising by 4.4% and international by about 5.9%. Recovery in market conditions, particularly Latin America’s return to economic stability, has brought about this sudden spurt in passenger traffic.

International traffic was also influenced by the continuous increase in the frequency of flights to the existing high-demand markets and the addition of new routes. However, sequentially, demand dropped 18.8% in domestic markets and 17.8% in the international markets due to January’s seasonality and lower number of operational days in the month.

Gol Linhas responded to the enhanced year-over-year demand by raising its supply by 3.8%. The replacement of B737-300s with B737-800s having more seating capacity proved beneficial for the company. Load factor in the month was 71.2%.

In addition to the above, GOL is expected to largely benefit from its fleet renewal program. The company replaced its entire 737-300 and 767-300 aircraft with 737-800NGs and 737-700NGs for operations on short-and medium-haul routes. Hence, the total operating fleet size, which reached 114 at the end of fiscal 2010, is now expected to reach 115 by the end of fiscal 2011 and 131 by the end of 2015.

The fleet modernization plan guarantees that GOL’s fleet will maintain its status as one of the youngest and most modern in the world. At the end of 2011, 65% of the fleet will comprise 737-800 NG, including SFP (Short Field Performance) aircraft.

GOL Linhas also anticipates domestic demand growth to vary within the 10% to 15% range in the fiscal year 2011.

However, an intensely competitive environment, caused particularly by the proposed merger of two major Latin American airlines – LAN Airlines S.A. (LFL) and TAM S.A. (TAM) will put the stock under pressure. The combined company will be called LATAM Airlines Group S.A. (LATAM). Thus, currently, we maintain our Neutral recommendation on GOL Linhas.

 
GOL LINHAS-ADR (GOL): Free Stock Analysis Report
 
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