Everyone Should Benefit From LAN-TAM Merger

According to Reuters, Santiago based LAN Airlines S.A. (LFL) is trying to reduce its fares on the Santiago-Sao Paulo route in order to get approval for the acquisition of Sao Paulo based, TAM S.A. (TAM).

The merger, which was proposed in August 2010, will be christened as LATAM Airlines Group S.A. ("LATAM"). According to the agreement, LAN will become the parent company with a 73% stake in TAM and shareholders of TAM will receive 0.9 shares of LATAM for each share of TAM. It will be an all-stock transaction of approximately $2.7 billion.

The merger is expected to provide annual synergies of approximately $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. Passengers and cargo customers of both companies will benefit from the increase in the number of flights, destinations and connections.

LAN will benefit from the geographical diversification. Moreover, LAN is well positioned to benefit from the global economic recovery, particularly from the emerging economies in Latin America.

The economic growth in the emerging markets will be higher than the developed markets. These markets have considerably boosted passenger traffic both domestically and internationally, and would continue to do so in future. LAN’s continuous fleet expansion and renewal program are also expected to fetch profitable returns in future.

Total passenger traffic during October 2010 grew significantly by 16.0% year over year, with an 11.9% increase in domestic traffic and 17.7% in international traffic. International passenger traffic accounted for approximately 70% of the total passenger traffic.

Cargo traffic shot up 18.5% year over year based on higher imports into Latin America and increased operations to Europe with the Boeing 777-200 freighter fleet.

During the third quarter of fiscal 2010, LAN recorded a 14.2% increase in passenger traffic and 19.0% in cargo traffic. The primary reason for this increase was the new routes to United States, Europe, Mexico and the Caribbean together with improving economic conditions.

We reiterate our Neutral recommendation on the ADR for the long term. The stock retains its short-term Hold rating (Zacks #3 Rank).