Despite being one of the biggest airlines of Brazil with a fleet of over 100 planes, Gol Linhas Areas Inteligentes (GOL) faces an uncertain future ahead, as its liquidity is drying up and there are no signs of recovery. The bailout package that the Brazilian government discussed with major airlines a couple of months ago seems to be out of the picture and Gol, along with others, is unlikely to receive any substantial help from the state in the near term. At the same time, the airlines cash burn is going to increase in Q3, as Gol is about to repay a $300 million loan to Delta (NYSE:DAL) in the next few weeks, which raises the chances of a liquidity crisis happening in the next couple of months. Back in June, the airlines own independent auditor said that Gol could face insolvency in the foreseeable future. Considering this, we believe that Gol could become bankrupt and its better not to invest in the company since the risk is too high, while growth opportunities are limited.
The biggest advantage of Gol is that it operates solely a Boeing 737 fleet, which makes the airline more efficient in comparison to its competitors. As a low-cost airline, it has one of the lowest operating expenses, which during normal times is considered a substantial competitive advantage. However, as COVID-19 started to spread all around Brazil, Gol was forced to shrink its fleet and return 18 leased 737-800 planes, while keeping the option to reduce its fleet by additional 30 planes in the next couple of years. The airline also decreased the number of its 737MAX orders from 219 to 95 planes and reduced the salaries of its workers to improve the cash burn rate. Despite those cash preservation measures, its unlikely that Gol will survive in its current state without going through a restructuring process, which will wipe out all the current shareholders.
In its Q2 report, the airline said that its revenues decreased by 88.6% Y/Y to R$358 million, while its traffic was down 92.3% Y/Y. At the same time, its daily cash burn was R$3 million and theres every reason to believe that the cash burn will only increase in Q3. As the airline faces an uncertain future ahead, we dont see any upside for its stock.
The biggest disadvantage of Gol is that its exposed to Brazil. With more than 3 million confirmed COVID-19 cases, Brazil is the second-most infected country in the world, after the United States, and its healthcare system is on the brink of collapse. The pandemic also disrupted the countrys economy and since the beginning of the year, the Brazilian real depreciated by more than 35% to the United States Dollar. This is bad news for Gol, since the airline makes most of its revenues in Brazilian currency, while the majority of its debt is dollar-denominated. At the same time, as the countrys GDP is about to shrink by more than 5% in 2020, Gol will have a hard time recovering to its pre-COVID-19 levels in its current state anytime soon.
Brazils Projected GDP Growth. Source: Statista
Back in June, Gols independent auditor KPMG stated that the airline could become insolvent and will not be able to survive the pandemic. The companys Latin American competitors LATAM and Avianca already filed for Chapter 11 and Gol could face the same destiny. A month after the warning was issued, Gol decided to fire KPMG and hired Brazilian Grant Thornton Auditores Independentes as its new independent auditor. Such a move raised concerns and several law firms started to investigate whether the company is committing fraud and hiding something from its shareholders. In one of its statements, Pomerantz law firm said the following:
The investigation concerns whether Gol Linhas and certain of its officers and/or directors have engaged in securities fraud or other unlawful business practices.
In its latest conference call, Gols management stated that the airline has R$3.3 billion of liquidity at the end of June. In Q3, the airline will repay R$2.9 billion worth of loans and will continue to burn cash on a daily basis, since air travel is not going to recover anytime soon. In addition, R$0.7 billion of debt will mature in Q4 and the company is risking becoming insolvent by the end of the year. While it managed to raise an additional R$1.2 billion from its loyalty program, the airline will still face a liquidity crunch in the following months, as it will not be able to make any profits and generate cash in the current environment, while burning money at the same time.
Source: Gol
However, even if Gol manages to survive until the end of the year, the companys high debt load will inevitably lead the airline to bankruptcy. At the end of Q2, Gols total debt was R$18.94 billion. While the majority of that debt matures in 2024 and beyond, it will prevent the airline from creating shareholder value anytime soon. By having one of the worst profitability margins among its peers, we believe that Gol is uninvestable even if it somehow manages to avoid a liquidity crunch.
Source: Capital IQ
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.
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Gol Linhas Areas: Bankruptcy Appears To Be Imminent - Seeking Alpha