We have downgraded our recommendation on
) from Outperform to Neutral. The downgrade is backed by declining
business travel, rising fuel cost and fluctuating forex. However,
the above uncertainties are balanced on the flipside by the
anticipation of growing aviation market in 2012.
Brazilian air transport has faced repeated mishaps in the past,
which have revealed inefficiencies in the aviation sector. Such
inadequacies can affect the company's flight operations, negatively
impacting their results.
The company is exposed to market risks due to changes in
interest rates, aircraft lease payments and aircraft insurance.
Such variations are anticipated to unfavorably affect its cash flow
and future expenses.
Over and above, the potential risk of a fall in customer demand
on the backdrop of sluggish global growth, may adversely impact
expected revenues and earnings for the upcoming quarters.
However, the above pessimism is tempered by expectation of a
growing aviation market in 2012 with a rebound in passenger demand,
both domestic and international. In such a scenario, TAM's
presumptions of improved profitability and business growth would be
Foreseeing a strong and growing market in the near future, the
company focuses on establishing partnerships and code-share
agreements with market leaders - a strategic move to strengthen its
position in a highly competitive market.
Further, TAM continues to emphasize the importance of increasing
the number of flights, destinations and connections, thereby
striving to boost the company's profitability and yield. The
company's investments across all market segments, via enhanced
economy travels and easy availability of credit for retail
products, are noteworthy.
Also, the company's fleet development and renovation programs,
alongside restructuring of old operations over time are
commendable. These have consistently increased efficiency while
keeping costs strictly under control.
TAM's strategy of expansion in the number of passengers/route
network as well as its demand upsize efforts have given a tight
competition to the flight operators, such as
GOL Linhas A
TAM has a Zacks #3 Rank, which translates into a short-term (1-3
months) Hold rating.
AMR CORP (AAMRQ): Free Stock Analysis Report
GOL LINHAS-ADR (GOL): Free Stock Analysis
TAM SA-ADR (TAM): Free Stock Analysis Report
To read this article on Zacks.com click here.