Latam, the result of a merger between South American airlines Lan and Tam, is probably hoping to weather the economy for two years and then come out on top as business picks up for the World Cup.
Latam Airlines Group SA, the world’s most valuable carrier created by Lan Airlines SA’s tie-up with Tam SA, said it can operate profitably in a market as “unbelievably expensive” as Brazil and meet savings goals.
Latam will use Lan’s expertise in managing networks to help contain costs in Brazil, Lan Chief Executive Officer Ignacio Cueto said. Tam, Brazil’s top airline by market share, lost 363 million reais ($214 million) in the past 12 months as Brazil’s economy grows at the slowest pace in three years.
“We know very well that the situation in Brazil is difficult and there’s a reason why aviation there in the last 20 years has had problems making money,” Cueto said yesterday in an interview from his Santiago office. “For their authorities it’s hard to understand how expensive they are. For example, fuel taxes are different in every state. If in Chile we have two people in charge of fuel, in Brazil you need 15.”
Brazil’s economy will grow 1.8 percent this year, according to the latest central bank survey. That compares with 7.6 percent in 2010, the year Lan announced the $3.3 billion merger. Passenger carriers in Brazil are facing overcapacity and rising costs, Standard & Poor’s said in an Aug. 15 report. Still, Latam is “comfortable” with its ability to achieve annual savings and new revenue of $700 million in four years, said Cueto.
“Brazil still has a strong economy, will have a World Cup in two years and is growing,” he said. “Maybe not at 5 percent, but 2 or 3 percent it’s definitely going to grow.”
The Tam takeover, completed June 22, made Latam the world’s largest airline by market value. It also cost Latam its investment-grade credit rating. While Lan has posted annual profits since 1994 and was profitable throughout the global financial crisis, Tam has had annual losses in two of the past four years because of increased competition and higher fuel prices. Latam shares have lost 17 percent since the merger.
Latam has the worst ratio of free cash flow to total debt among carriers with a market value of at least $5 billion, according to data compiled by Bloomberg. Latam’s negative 0.16 compares with a positive 0.19 for Ryanair Holdings Plc, which leads the ranking, the data show.
The carrier, based in Santiago, forecasts debt ratios to recover in the first half of next year and return to a positive ratio of free-cash flow to debt within 12 months, Chief Financial Officer Alejandro de la Fuente said in the same interview. The company expects to have its credit rating raised next year, he said. Latam will reduce dividends to minimum levels and may sell stock, De la Fuente said.
The airline is confident of achieving its savings and sales targets from the merger even as the global economic outlook dims, Cueto said.
“We still feel comfortable with the estimate number as in the first 45 days after the merger we are doing OK,” he said. “We need to have the most up-to-date figures and then we’ll have the details of when we’ll reach the final number of synergies and revenues.”
Fitch Ratings lowered Latam by two levels to BB+, one level below investment grade, from BBB on June 22 when the transaction was completed. Feller Rate, a local affiliate of Standard & Poor’s, cut its rating to A-, the seventh-highest of 10 possible investment grade ratings, from A. Latam is scheduled to meet with rating agencies in January to discuss progress on improving debt indicators, De la Fuente said.
Before the tie-up Lan distributed half of its profit in dividends. Latam will pay out 30 percent for the next 6 to 10 months, the minimum allowed in Chile, De la Fuente said.
The carrier plans to invest $7.9 billion on its fleet through 2014, according to an Aug. 13 presentation. The company has financing in place for this year’s investments and probably will discuss with banks in the fourth quarter funding for next year, De la Fuente said.
Latam, with a market value of $11 billion, may raise money by selling new stock in the second half of next year “if necessary,” he said.
With assistance from Sebastian Boyd and Matthew Craze. Editors: James Attwood, Jonathan Roeder. To contact the reporter on this story: Eduardo Thomson in Santiago at [email protected]. To contact the editor responsible for this story: David Papadopoulos at [email protected].
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