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While shares of U.S.-based airlines have seen a strong rally over the past year, Brazilian discount airline Gol Linhas Aereas Inteligentes (NYSE: GOL ) hasn't enjoyed the same fortunes. Shares were above $7 earlier this year and topped $15 a piece back in 2011. After falling to a low of $2.74, shares of Gol have recently moved back up to trade above $5 per share. And two ongoing developments could help to continue fueling this rally.
The business of air travel is one where having a strong route network brings a significant advantage. For most large airlines, the way to develop a worldwide network is to enter into airline alliances.
However, while Gol isn't yet an official part of a major airline alliance, there have been actions taken to develop codeshares to push Gol in this direction. Back in 2011, Delta Air Lines (NYSE: DAL ) purchased a 3% stake in Gol for $100 million as part of Delta's push for positive relationships with Latin American airlines. The same Delta strategy also saw the Atlanta-based carrier grab a 3.5% stake in Groupe AeroMexico and strengthen its connection with Aerolineas Argentinas.
At that time, neither Delta nor Gol expected that Gol would be joining the SkyTeam alliance alongside such carriers as Delta Air Lines and Air France-KLM (NASDAQOTH: AFRAF ) ; however, this possibility re-emerged more than a year later. By 2013, Delta had acquired a 49% stake in Virgin Atlantic in an effort to boost its London Heathrow presence, the Atlanta-based carrier had increased its stake in Gol to more than 6%, and the director of SkyTeam noted that Brazil was on the list of possible airlines to enter the alliance.
Today, reports are surfacing that Gol is discussing possible codeshare agreements with Air France-KLM and Deutsche Lufthansa (NASDAQOTH: DLAKY ) . Interestingly enough, these potential deals seem to position Gol further from joining SkyTeam, because while Air France is a founding member of the alliance, Lufthansa is a core part of the rival Star Alliance that includes such airlines as United Airlines and Air Canada.
Even if it means Gol will not be joining SkyTeam, these potential codeshare agreements would open up a whole new side of European business for Gol. Even routes to and from Italy may be added as Gol talks with Italian flag carrier Alitalia. (However, Alitalia's current financial state may have it merge into Air France-KLM if enough conditions are met.) Overall, additional codeshare agreements should be seen as a positive for Gol as it opens up another set of opportunities.
Hardly anyone likes paying taxes, and airlines are no exceptions. Fortunately for Gol, the airline's earlier pleas for tax relief may be getting somewhere. Nothing official has been released yet, but one of the near-term catalysts for Gol could be a reduction in the jet-fuel tax.
For an airline in Gol's position, this could go a long way. Gol has been hurt hard by a weakness in the Brazilian real, since most costs (jet fuel, aircraft leases) are in U.S. dollars and most revenues are in Brazilian reals. Government efforts to curb the real's slide have prevented a currency collapse but have been unable to return the real to previous highs.
A reduction in the jet-fuel tax will help to balance the effects of local currency weakness and allow Gol to continue in its turnaround plan while incurring lower costs.
Score a Gol
Two positive developments could be at play for Gol giving the stock major potential upside. Codeshare agreements with major European airlines such as Air France-KLM and Deutsche Lufthansa would give Gol a pathway into the European travel market while not costing large amounts of capital for expansion.
On the more speculative front, a potential reduction in Brazil's jet-fuel tax could cut Gol's costs at a time where Gol is trying to execute a turnaround plan designed to cut costs from within.
Gol offers an interesting approach on the emerging market of Brazil. Both international and airline investors should consider whether these two potential catalysts make Gol worthy of a place in their portfolio.
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