LAN Airlines S.A. (LFL) reported outstanding results during the third quarter of fiscal 2010 with double the net income compared to the third quarter of fiscal 2009.
During the quarter, LAN posted a net income of $106.2 million from $52.1 million in the year-ago quarter. Earnings per ADS came to 31 cents compared to 15 cents in the corresponding quarter of fiscal 2009. The increase was basically driven by increases of 49% and 20% in the cargo and passenger revenue, respectively. Reported EPADS also surpassed the Zacks Consensus Estimate of 29 cents.
Increases of 14.2% in passenger traffic and 19.0% in cargo traffic during the quarter were the prime reasons for revenue growth. We also expect a considerable increase in passenger traffic both domestically and internationally in the upcoming quarters based on market recovery. Moreover, LAN’s continuous fleet expansion and renewal program are expected to fetch profitable returns in future.
Total operating revenues rose 25.6% year over year to reach $1,152.3 million from $917.5 million in the year-ago quarter. EBITDAR (earnings before interest, tax, depreciation, amortization, and aircraft rentals) grew 35.1% year over year to $264.0 million from $195.3 million. EBITDAR margin also increased 160 basis points to 22.9%.
Moreover, we remain optimistic about the proposed merger of LAN and TAM S.A. (TAM), which is to be christened LATAM Airlines Group S.A. (LATAM). According to the agreement, LAN will become the parent company with a 73% stake in TAM and shareholders of TAM will receive 0.9 shares of LATAM for each share of TAM. It will be an all-stock transaction worth approximately $2.7 billion.
The merger is expected to provide annual synergies of approximately $400 million, out of which approximately $133 million will be realized in the first year of the close of transaction and $267 million in the following two years. Passengers and cargo customers of both companies will stand to benefit from the increase in the number of flights, destinations and connections.
Moreover, LAN is well positioned to benefit from the global economic recovery, particularly from the emerging economies in Latin America. The economic growth in emerging markets will be higher than the developed markets. Until the merger materializes, we reiterate our Neutral recommendation on the ADS and the stock retains its short term “Hold” rating (Zacks #3 Rank).
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