The Airline Sector is Flying High as Latin American Airlines Merge
by Tony D’Altorio, Investment U Research
Thursday, August 19, 2010
Down in areas of Latin America, the normally turbulent airline sector is flying high.
Thanks to a booming local booming economy, Brazil’s two largest airlines – GOL Linhas Aereas ADR (NYSE: GOL) and TAM ADR (NYSE: TAM) – are doing quite well for themselves these days.
Brazil will expand by 6.5% this year, and should grow by 4.5% in 2011. But more importantly, its middle class increased notably in 2009 to 53% of its 200 million citizens.
Those kinds of numbers easily explain how TAM grew revenue-passenger-kilometers three times faster than even its host country’s fast-growing GDP over the last decade.
A hop, a skip and a flight away, Chile’s LAN Airlines ADR (NYSE: LFL) has done well itself. Its share price has nearly tripled in the past three years, thanks again to a booming regional economy.
Those airlines have also benefited from having much of their costs priced in U.S. dollars. While that currency falls, theirs have surged.
Meanwhile, lower input costs for jet fuel and other necessities have allowed them to cut fares, coaxing passengers off of buses and trains.
Chile’s Lan + Brazil’s Tam = Latam Airlines
They say that you can’t have too much of a good thing, and Latin American airlines seem to agree.
Chile’s Lan and Brazil’s top carrier, Tam, have announced a deal to join forces. Lan has efficient management, and international and cargo expertise, while Tam has a stellar local position and strong revenues.
The merged airline, Latam Airlines, will be the world’s 11th largest in terms of passenger numbers, the 15th in revenue, and the biggest corporate acquisition of an airline in at least 20 years. With approval expected in early 2011, the all-share, $3.7 billion deal will give Lan 70% of the new company after the offer of 0.9 Lan shares for every Tam share.
In the regional sector, Lan already holds the most market value, and Tam has the most revenue. But the combined company will have about 50% of the domestic airline market in Latin America’s largest economy, plus $8.6 billion in annual revenue.
Together, they will have an unrivaled network of 116 destinations in 23 countries. And while they plan to fly under their own brands, they predict combined annual operating synergies of $400 million.
They’re also looking forward to the 2014 soccer World Cup and 2016 Olympic Games. Both should boost their profit even more, but their plans reach even higher than that.
Latam Airlines has visions of establishing new routes to Europe, the U.S. and Mexico. To support that, it plans to create new hubs for those connections, all the while expanding its cargo business.
In order to accomplish all that, the two companies together have already placed orders for over 200 aircraft in the next five years… virtually doubling their joint fleet.
As Global Airlines Merge…
This alliance is more than a marriage of convenience or just a growth strategy.
Neither company can risk not merging when its global competitors are doing just that. International airlines have courted each other left and right to deal with volatile oil prices and other economic shocks.
In 2010 alone, Continental Airlines (NYSE: CAL) and United Airlines (Nasdaq: UAUA) announced a merger. And Brirish Airways ADR (PINK: BAIRY) and Iberia (PINK: IBRLF) moved ahead with their own proposed tie-up.
Lan CEO Enrique Cueto isn’t surprised. “We think this issue of [global] alliances is going to continue… this deal allows us to compete on a much more even footing.”
More than likely, he’s right that the trend will continue for a while longer. And if so, there are two Latin American airline stocks that look mindful to merge:
- The previously mentioned GOL, Brazil’s second largest airline by market share and the region’s second by value at $3.8 billion
- Copa Holdings ADR (NYSE: CPA), the operator of Panama’s Copa Airlines, which is valued at $2.2 billion.
Either of them could easily snap up Aerovias del Continente Americano, Columbia’s biggest airline whose shares were delisted in 2003. The company has since formed a joint venture with El Salvador’s Taca.
For that matter, Compania Mexicana de Aviacion, which just filed for protection from creditors on August 4, looks tempting as well.
Either way, the world is changing and the global airline industry is doing what it can to keep pace. Those investors brave enough to fly with them should stick to air carriers in fast-growing emerging markets.
Good investing,
Tony D’Altorio
Related Investment U Articles:
- Global Airline Industry Flies Into Profits
- The “Open Skies” Deal Remains Cloudy… But Airlines Are Enjoying a Huge Turnaround
- Brazil’s Airline Infrastructure Needs an Olympic Upgrade
- US Airways and United Airlines: Airline Consolidation Takes Flight
- Why Brazil’s Airline Stock Profits Won’t Stay Grounded For Long
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