By popular (?) demand, GOL & TAM (flying trainwrecks)

Some guy called "anonymous" (strange name) just left this comment under that last post about LFL:

Anonymous said...

Do you have an opinion on GOL or Tam? Thanks.

So Ok, let's have a closer look at both, starting with the charts (click on any chart to enlarge if necessary). Here's GOL's one year chart...

.... and this one is TAM's for the same period.

And here's the comparative chart, with Lan Airlines (LFL) and the XAL airlines index thrown in for good measure.
So after saying "ouch", "uff", "doh", and suchlike, the future is what should concern us so let's see if there's any hope for GOL or TAM. The first thing to note is that the worst of the three airlines mentioned today, GOL, is only as bad as the airlines index XAL. This implies that the crud North of the Darien Gap is feeling even worse than the crud down here. Not that GOL is a bad business, of course. It's won awards in its time and it's currently suffering from a double whammy of rocketing fuel prices at the same time as trying to consolidate its expansion program started late 2006.

GOL is a good case in point, in fact. As it's the worst performing of the two recently, let's focus in. It has issued profits warning after profits warning over the last 12 months, and last quarter it returned a net loss, but it was only U$2m and there are a lot of airlines that would envy such a position. It's total ASK is up over 30% YoY, and although it is carrying more passengers in absolute terms, its total load factor has generally declined, as we can see in this chart.

But the main problem facing GOL right now is that of liquidity; in the last qtr, the cash at bank dropping by 30% or so to R$1Bn. This might make GOL think twice about those new jets it has ordered and therefore curtail its fleet requirements for the time being in order to keep the cash flowing correctly. Wall St. doesn't like curtailed growth...not one little bit.

But is it such a big problem after all? I don't think so. This is because it can always totally batten down the hatches, cancel those new jets, mothball the new Varig international routes (which is has been doing) and concentrate its efforts on carrying domestic passengers. And even though they might be forced to charge more, the flight market in Brazil is growing at a good clip and GOL has proven itself as popular and profitable under this model. So yes, there's plenty of reason to like GOL at some point, and there's no doubt it's been whacked down to bargain basement valuations. Another possible with GOL is that the controlling family does an OPA, buys back the stock at these basement levels and goes private again, which would make for a short term profit for those brave enough to buy the airline sector at U$142/bbl oil.

Most of the above also applies to TAM, of course. I just picked on GOL for the sake of brevity.

The bottom line is that neither GOL nor TAM strike me as a Chap11 candidate, not in the slightest, not least because between them they have a close-on-duopoly of the Brazilian skies. Or put another way, if GOL/TAM go bankrupt there would have to be a whole slew of other airlines that will have to fall before they do. Therefore we should find a bottom in the stocks somewhere, and by the looks of the recent accelerated selling that bottom may be sooner than later. But after saying all that, I'm not planning on buying tomorrow. I'm far too chicken.