The first Brazilian low-airfare airline, GOL Linhas Aereas Inteligentes S.A. (GOL), announced the sale of the fourth issue of its non-convertible debentures to raise R$600 million.
 
Out of the amount, R$378 million will be used to repay for its third debenture issue in May 2009. The balance is expected to be used for working capital.
 
At the end of the second quarter of fiscal 2010, cash, cash equivalents and short-term investments were R$1,839.8 million, equivalent to 24.7% of annual net revenues, up 1.4% from the previous quarter. Net debt was R$1,681.1 million, down from R$1,740.0 million at the end of the previous quarter.
 
We are optimistic about GOL’s continuous increase in passenger traffic and the fleet renewal program. GOL is seeing an increase in passenger traffic with a 12.2% year-over-year growth in July 2010. During the second quarter of fiscal 2010, domestic traffic grew 17.0% year over year and international traffic shot up by 13.7%.
 
GOL is expected to largely benefit from its fleet renewal program. During the second quarter of fiscal 2010, GOL consolidated its fleet renovation program by reducing the number of grounded aircraft by 15 (return of 11 B737-300s and the reactivation of four B767s for charter activities). The decrease in the number of aircraft would definitely lower operating costs in the latter half of fiscal 2010, which will improve bottom-line results.
 
GOL Linhas is in the final phase of its plan to replace 737-300 and 767-300 aircraft with 737-800NGs and 737-700NGs for short- and medium-haul routes. In 2010, it will have renewed its entire fleet; with the total operating fleet size expected to reach 111. 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 2012, 65% of the fleet will comprise 737-800 SFP aircraft, maintaining a low average age of around 7 years. Increase in the frequency of flights to the existing high-demand markets and the addition of new routes is also encouraging. GOL has initiated a couple of flights from Brasilia to the Caribbean, a tourist’s paradise.
 
However, an intensely competitive environment particularly due to the merger of two major Latin American airlines – LAN Airlines S.A. (LFL) and TAM S.A. (TAM) to be called LATAM will put the stock under pressure.
 
We reiterate our Neutral recommendation on the stock, which currently retains its short-term “Sell” rating, equivalent to a Zacks #4 Rank.
 
BOEING CO (BA): Free Stock Analysis Report
 
GOL LINHAS-ADR (GOL): Free Stock Analysis Report
 
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