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With high labor and fuel costs, razor-thin profit margins and
vulnerability to economic downturns, airlines are shunned by many
. However, this sector faces a bright horizon south of the border,
where a growing middle class is clamoring for air travel.
In much of the world, demand for international air travel
capacity has been flat to falling. According to the International
Air Transport Association, North American travel volume declined by
2.1 percent in July and Asian demand grew by just 0.9 percent. By
contrast, Latin America has experienced consistent monthly demand
growth of about 6 percent for several years.
Latin America's gross domestic product (
) growth is on track to average a little more than 7 percent this
year, compared to average global GDP growth of 3.5 percent. As a
result, the ranks of the region's middle class are expected to grow
by about 75 percent over the next two decades. While that's
creating huge demand for everything from cars and homes to
televisions and telephones, it's also driving a huge spike in air
travel as Latin American consumers demand the good life.
During the brutal economic downturn of 2008-2009, regional stars
such as Latin America fared better than most. In addition to strong
domestic demand, international tourism to the region barely dipped
during the crisis and quickly rebounded to pre-crisis levels.
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 the late June marriage of the region's two largest
and best-run airlines, 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 Group
) is now one of the largest in the world, second only to Air China
(Hong Kong: 0753) with a market cap of $60.9 billion.
LATAM is on a flight path to becoming one of the most profitable
airlines in the world, a far cry from US-based domestic carriers
that seem to operate on an endless cycle of bankruptcies. LATAM
realized an estimated $200 million in cost savings from the merger.
LATAM 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
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, despite the
introduction of a third round of quantitative easing (QE3) from the
US Federal Reserve and the European Central Bank's announcement
that it will begin supporting the sovereign debt of its troubled
member nations. The market's general skepticism of the
effectiveness of those stimulus measures is largely justified. So
far, nearly free money has yet to kick start global growth.
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. For 5
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