Brazilian airline operator, TAM S.A. (TAM) remains well positioned to benefit from the favorable outlook for the Brazilian economy with declining interest rates. Since 2009, the Brazilian Central Bank has slashed its interest rate five times, which is 8.75% currently.
We believe there is still a lot of room for additional cuts since inflation for 2010 is expected to be below 4.5%. We expect the Brazilian domestic rates to reach 8% by the end of 2010. A continued decrease in domestic rates should help offset the impact of the international economic downturn in the short term.
Latin America, especially Brazil , remains one of the fastest-growing markets. The extensive use of credit to finance sales has been a major force behind revenue growth. The difficult business environment of 2008 and 2009 did reduce the availability of credit in Brazil, even retail credit.
However, with credit markets stabilizing, credit availability for retail services like air travel is expected to return to earlier levels. This should help the industry gradually resume its growth momentum in the upcoming years.
TAM is actively pursuing growth opportunities by expanding its domestic and international network. TAM joined the Star Alliance network, which will helped cover various international destinations from which management expects revenue to increase by US$ 60 million annually.
However, TAM will be impacted by competition in the Latin American airline industry, which is expected to increase in the short-to-medium term due to the emergence of Oceanair and Azul, and Gol Linhas Aereas (GOL), the second-largest Brazilian airline, which has been growing since the incorporation of Varig in Brazil as Varig helps in expanding its reach to international destinations.
2009 was one of the toughest years encountered by the airline industry. The only good news was the price of oil, which has come down from close to $150 per barrel in 2008. We do not expect better prospects in 2010 either, which could be further strained by gyrating fuel prices. We reiterate our Neutral rating on the ADR.
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