Gol Linhas Aéreas (GOL) is one of Brazil’s biggest airlines with a fleet of over 120 planes. In the last few months, Gol’s day-to-day operations were disrupted by the spread of COVID-19 in South America, and the company now burns R$5 million to R$7 million per day just to stay alive. While its cash preservation measures will help it to stay afloat until the end of the year, its high debt burden will prevent the airline from driving growth once the pandemic is over. At the same time, its high exposure to Brazil makes Gol’s stock unattractive to international investors. In addition to fighting the pandemic, the country entered the recession in Q1, while its currency already depreciated by more than 20% to USD since the beginning of the year. Since the recovery of air travel will take several years, Gol faces an uncertain future ahead. We believe that it’s better to avoid its stock, as there are better opportunities on the market right now with a more attractive risk/reward ratio.
It’s Going to Get Worse
In Q1, Gol managed to avoid major losses, as its revenue of R$3.15 billion was down only 1.9% Y/Y. However, this was solely due to the fact that COVID-19 arrived late to Brazil in comparison to other countries. As of today, Brazil is the second most infected country in the world with more than 800,000 cases of COVID-19. The government of Brazil decided not to impose any strict lockdown measures and the movement restrictions in the country are minimal. However, this won’t help Gol to avoid major losses in Q2. In April, the company’s load factor was down 79.5% Y/Y, while in May, it was down 74.8% Y/Y. Total departures decreased by 90% Y/Y and will remain at such low levels in the foreseeable future.
With a total debt of nearly R$17 billion and only ~R$4 billion in liquidity, Gol’s enormous debt burden will prevent the airline from creating shareholder value anytime soon. The company is currently burning R$5 million to R$7 million per day just to stay afloat, and in 2020, it faces R$3.9 billion of maturities. Considering this, Gol’s stock has very little upside at the current market price.
Even before the pandemic, Gol was a poorly run airline. It constantly missed its EPS and revenue estimates and was unprofitable from time to time in a stable environment. Considering the situation in which the airline is now, its Q2 earnings results will likely be the worst in its history, as the recovery is painfully slow.
Until the end of this year, Gol’s major goal would be to preserve as much cash as possible to survive the pandemic. The management in its recent earnings call said that the airline has liquidity for the next 10 months. To preserve even more cash, Gol is already in talks to delay its ~R$1.5 billion August maturity. At the same time, it recently reached a deal with Boeing (BA) to receive R$2.5 billion as compensation for the groundings of 737 MAX planes.
However, a high debt burden diminishes the airline’s ability to successfully weather the current storm on its own. Recently, S&P Global reaffirmed its B- rating for Gol and decided to keep its negative outlook, as there’s a high risk that the airline will not be able to meet its obligations if it continues to operate in this uncertain environment for a long time. Currently, Gol is in talks with the Brazilian government to receive up to R$2 billion in state aid. However, due to the recent bankruptcy of LATAM, the deal was delayed until the end of June and the negotiations are currently ongoing. The problem with the Brazilian aid is that it will come in the form of a loan, which will increase Gol’s debt burden even more.
In addition to facing a liquidity crisis, Gol is also highly exposed to the weak state of the Brazilian economy. Since more than 90% of its flights are domestic, its dependence on its home country represents a major downside to its stock. In Q1, Brazil’s economy declined by 1.5% Y/Y, but by the end of the year, its annual GDP is expected to be down 6% Y/Y. Due to the excessive bureaucracy, Brazilian entrepreneurs are failing to receive any help from the government, as 86% of businesses that applied for the loan didn’t get anything. On top of that, the country’s currency already depreciated by more than 20% to USD since the beginning of the year and the number of active COVID-19 cases inside Brazil continues to rise daily.
Considering all of this, it’s safe to say that Gol will have a tough time recovering from the current crisis, as there are too many things that are outside of its control. While it does everything that it can to preserve as much cash as possible and survive, its growth prospects remain dim. The consensus right now is that the air traffic will be down ~50% Y/Y and the absolute majority of airlines will be unprofitable at least until the end of the year. It will take several years for the industry to return to its pre-COVID-19 levels, and before that happens, some airlines could go under due to the inability to meet their obligations. Without proper guidance for the rest of the year, we believe that it’s better to avoid Gol’s stock, as it faces an uncertain future ahead, and look for other opportunities that the market offers.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.