Wednesday, December 28, 2005

Fuel Falls, Airliners Take Off: GOL

Airliners have been bedeviled by bloated pension/health care costs, cutthroat competition, and nosebleed energy prices for the last couple of years.

That meant investing in airliners was equivalent to getting body slammed by the Roc. On a fire hydrant. Twice.

Apparently, with fuel prices stabalizing, a turnaround is on its way; several household name airliners have seen their shares edge higher on the news.

On Monday, Prudential (PRU) raised its earnings estimates for some carriers to reflect "reduced fuel price assumptions."

Everyone's got their eye on the big name domestics, but we could care less -- we're all over the Brazilians like a bad rash.

Meet Gol Linhas Aéreas Inteligentes (GOL).

The small South American airliner has shrugged off fuel costs, emptied people off Brazil's crowded buses, and seen its share price pop.

Shares are up 12% since we recommended the stock three weeks ago (12/6).

We'll refresh your memory:

...the low-cost, low-fare airliner has been profitable since 2002 and now commands about 28% of Brazil's airline market. What's Gol's secret formula? It's their structure -- a mix of Southwest's (LUV) efficiency and Jet Blue's (JBLU) value proposition.

Gol keeps things simpler than Thoreau: one Boeing fleet, one class of service. In addition, Gol manages fuel and labor costs better than its US counterparts. For instance, Gol's average pilot salary is $35K; in comparison, Southwest drops roughly $200K on each of its pilots. That explains Gol's juicier operating margins.

The skies of Gol's future certainly look bright -- Gol has plans to expand heavily, but not beyond it core, underserved South American market...there are over 500 million people in South America to which Gol can offers its peanuts. Gol has first-mover advantage, which will be its leg up on the competition as it strives to maximize revenue-per-seat and amass market share. If fuel costs stabilize even further, expect to see shares of Gol really soar in 2006.
Gol is a veritable success story because it's both a low end and a new market disruptor.

If you can figure out what that means, your next trip to Brazil is on us.

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