It’s taken five years, but the merger that created Latin America’s largest airline might finally be bearing fruit.
Latam Airlines Group SA, once the world’s most valuable carrier, is in its strongest financial condition since predecessor Lan Airlines bought Brazil’s TAM in 2012, said Chief Financial Officer Ramiro Alfonsin, in an interview in Santiago. The airline has had to navigate Brazil’s worst recession in history, as well as try to combine two companies with vastly different cultures.
“Now we’re focusing on cutting down the cost of our debt, on competing efficiently with new entrants in the market,” Alfonsin said Friday after the release of Latam Airlines’ second quarter results. “There’s a whole new mindset in the company.”
Investors seem to be in agreement. The American depositary receipts advanced 1.5 percent to $11.94 and yields on its dollar bonds contracted after the carrier reported revenue and earnings before items that beat estimates. Not even the net loss of $138 million — attributed to the weaker Brazilian real and costs from the return of some aircraft as it cuts its fleet — dampened enthusiasm.
The focus is instead on a 20 percent increase in earnings before interest, tax, depreciation, amortization and rentals, or Ebitdar, and passenger unit revenue growth that was the highest since the first quarter of 2015. And even though Brazil hurt results in the quarter, demand for domestic flights started recovering in March after falling for 20 straight months, according to the Brazilian airline association. Analysts have also grown more positive on the stock, with the average price target for the ADRs at its highest in two years.
It’s still a far cry from 2012, when Latam Airlines was the world’s largest airline by market capitalization. The shares peaked in 2010 at more than $30. It now ranks 15th among global peers, after China’s Hainan Airlines Holding Co. and Australia’s Qantas Airways Ltd.
To face the turbulent journey, Latam aggressively downsized its fleet and reduced routes in Brazil, Latin America’s largest economy, losing the medal of largest airline by market share in the country in the process.
Still, analysts see risks for Latam’s future as the entry of new low-cost carriers may lead to a price war in its key domestic Spanish speaking countries. This year, JetSmart, which is owned by Indigo Partners LLC, began operations in Chile, while Viva Peru is operating in Peru. FlyBondi, created of Cartesian Capital Group LLC, is set to begin operations in Argentina later this year.
Latam is confident it will be in a good position to compete with the new entrants and defend its market share.
Ticket prices for domestic flights in Chile have fallen by around 40 percent since 2007 and there is some room for more cuts “without compromising the quality of our service,” Alfonsin said. And low-cost carriers can’t compete with flight connectivity.
“If anything, the low-cost carriers will stimulate more traffic,” Alfonsin said.
—With assistance from Fabiola Moura
©2017 Bloomberg L.P.