Get ready for the world’s largest airline to take off this week. But don’t look north or east — the globe’s most valuable carrier is set to be South American. Chile’s LAN Airlines is on track to finally consummate its marriage to Brazilian rival TAM this Friday, almost two years after announcing the tie-up. But the promise of greater regional integration has fuelled big expectations that economic headwinds will make difficult to meet.
Investors eager to buy into a promising Latin America growth story have pushed TAM shares up more than a third since the deal hit in August 2010. That values the firm at $3.6 billion — a pricey bump for LAN, whose shares have risen by just 10 per cent. But at $12.5 billion the combined airline will be worth almost double Ryanair, 50 per cent more than Delta and around 15 per cent more than Air China.
The new airline, to be called LATAM, is enticing for several reasons. There’s not much overlap. LAN gets access to Brazil, the region’s largest airline market, while TAM gains from its partner’s far larger cargo business. And, LAN is growing fast: executives expect passenger traffic to grow by 14 per cent this year. That should boost its already solid performance: LAN cranked out a 16.8 per cent Ebitda margin last year, handily surpassing Delta’s 9 per cent.
But economic growth is slowing across Latin America. Brazil’s crowded airline industry is struggling to cut capacity. In fact, TAM’s bosses have already signalled a problem with seat capacity, estimating a 2 per cent decline this year in available seat kilometers, a key metric. Meanwhile, LAN’s cargo business is facing increased competition as European rivals redeploy planes from their home markets to a healthier Latin America — the company expects growth in available tonne kilometres to be 5 per cent this year, a fifth of its 2010 level.
Combined, that makes it harder to achieve the sales growth that was supposed to account for most of the $700 million in synergies promised from the deal. LATAM may well start life as the world’s most valuable carrier. But it might not retain the title for long.