We are maintaining our Neutral recommendation on TAM S.A. (TAM)
We are optimistic on the continued increase in the domestic business travel in Latin America, especially Brazil, which is currently one of the fastest-growing markets in the air traffic industry.
Also, TAM’s strategy of increasing the number of flights across high-demand routes continues to augur well for the company. The company’s focus on establishing partnerships and code share agreements with market leaders aim to avoid overcapacity while expanding revenue. Moreover, the company’s investment to enhance economy travel coupled with ancillary products and options, such as easy availability of credit for retail products, and ready ticketing kiosks, are expected to be a major force behind the revenue growth.
TAM focuses on continuous fleet development and renovation program, which are a strategic process to increase flight efficiency. Such renewal measures and tactical investments keep company costs strictly under control. Similarly, superior load factors have strengthened the company’s positions compared to its peers, such as AMR Corporation (AAMRQ) and GOL Linhas A (GOL).
Despite the company’s efforts to expand its business segments beyond domestic borders, the company has witnessed a fall in customer demand in the international market based on sluggish GDP worldwide. Moreover, the company is exposed to foreign currency risk along with the perils of changes in interest rates; aircraft lease payments and aircraft insurance, which may negatively affect cash flow.
The insufficient airport capacity and inadequate air-traffic control systems remain a concern as these may cause operating disruptions and increase expenses for airline companies, including TAM. Moreover, rising aviation fuel prices may hurt margins in the coming quarters.
TAM S.A., operating through its subsidiaries TAM Linhas A?reas and TAM Mercosur, is a renowned air transportation services provider, both in the domestic and international markets. The company holds a Zacks #3 Rank, which translates into a short-term (1-3 months) ‘Hold’ rating.
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