Tuesday October 02, 2012
by Benjamin Shepherd, editor Global Investment Strategist
Airlines are shunned by many investors. But the sector faces a bright horizon south of the border, where a growing middle class is clamoring for air travel. At its current pace of growth, air traffic in the region should more than triple over the next 20 years.
Given the rosy outlook for air travel in Latin America, it’s surprising that LATAM Airlines Group (LFL), the late June marriage of Chile-based LAN Airlines and Brazilian TAM SA, met with very little fanfare.
With a market cap of nearly $13 billion, the newly created LATAM Airlines is now one of the largest in the world, and is on a flight path to become one of the world's most profitable airlines.
LATAM realized an estimated $200 million in cost savings from the merger. And management expects the airline’s earnings to grow by about $600 million over the next four years, doubling the amounts the two airlines were each making as standalone entities just last year.
The combined entity now also handles 42 percent of the passenger traffic within Latin America and nearly a third of all air freight. Moreover, it’s the second-largest airline on routes to the US and the third largest to Europe.
Despite the dominant market share and operational efficiencies realized by LATAM Airlines from the merger, the share price of the combined entity has essentially been flat since the deal was completed in late June.
That lackluster performance largely stems from the general malaise that’s still hanging over the global economy. That said, I look for LATAM to outperform.
Pre-merger, both LAN and TAM had long histories of maintaining operating costs that are among the lowest in the business.
As a result, they coped well during the Great Recession. Air travel in Latin America remained amazingly resilient, reflecting the region’s economic vibrancy against a drab global canvass.
With new and significant cost efficiencies embedded within its post-merger operating environment, the combined entity should hold up even better if another global recession materializes.
If the economy actually rebounds, this airline’s stock should soar. Buy shares of LATAM Airline Group up to 30.
Learn more about this financial newsletter at Benjamin Shepherd's Global Investment Strategist.