We upgrade our rating on TAM S.A. (TAM) from Neutral to Outperform based on the proposed merger of LAN Airlines S.A. (LFL) and TAM to be christened LATAM with the total expected synergies of $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 next two years.
The merger, which is expected to close by the mid of fiscal 2011, will make LATAM a strong competitor in the domestic market. Passengers cargo customers of both companies will stand to benefit from the increase in the number of flights, destinations and connections.
With the revival of the markets, the airline industry as a whole is expected to show some decent results in the coming years. Fuel prices have also settled down to the mid-80s from the peak of nearly $150 per barrel.
The International Air Transport Association (IATA) expects the airline industry to make a profit of $9.1 billion in fiscal 2011. Further, the economic growth in the emerging markets will be higher than the developed markets.
Latin America (especially Brazil) remains one of the fastest-growing markets, particularly in the air traffic industry. The continued increase in the Brazilian domestic airline market, coupled with the extensive use of credit to finance sales, has been a major force behind the revenue growth.
The difficult business environment of 2008 and 2009 reduced the availability of credit, especially retail credit in Brazil. However, with credit markets continuing to stabilize, credit availability for retail products like air tickets are expected to return to earlier levels. This should help the industry resume its growth momentum in the following years, though at a slower rate.
TAM reported decent numbers in the third quarter with a 31.6% increase in adjusted net income and a 23.4% rise in adjusted revenue. EPADS of $1.14 was much above 80 cents per EPADS in the corresponding period of 2009 and 45 cents as anticipated by the Zacks Consensus Estimate.
TAM also continued with its fleet development and renovation strategy and received five new airbus aircraft, two new A321 aircraft, one A320, and two A319 aircraft with a total of 148 aircraft at the end of the third quarter of fiscal 2010, which is expected to increase to 151 aircraft by the end of fiscal 2010. The ADS also currently retain its short-term Strong Buy rating, equivalent to Zacks #1 Rank.
LAN CHILE-ADR (LFL): Free Stock Analysis Report
TAM SA-ADR (TAM): Free Stock Analysis Report
Zacks Investment Research
