Latam Airlines bullish on overpriced Brazil

Latam Airlines Group, the world’s most valuable carrier created by Lan Airlines’s tie-up with Tam, said it can operate profitably in a market as “unbelievably expensive” as Brazil and meet savings goals. Latam will use Lan’s expertise in managing networks to help contain costs in Brazil, Lan Chief Executive Officer Ignacio Cueto said. Tam, Brazil’s top airline by market share, lost 363 million reais ($214 million) in the past 12 months as Brazil’s economy grows at the slowest pace in three years. “We know very well that the situation in Brazil is difficult and there’s a reason why aviation there in the last 20 years has had problems making money,” Cueto said in an interview from his Santiago office. “For their authorities it’s hard to understand how expensive they are. For example, fuel taxes are different in every state. If in Chile we have two people in charge of fuel, in Brazil you need 15.” Brazil’s economy will grow 1.8 per cent this year, according to the latest central bank survey. That compares with 7.6 per cent in 2010, the year Lan announced the $3.3 billion merger. Passenger carriers in Brazil are facing overcapacity and rising costs, Standard & Poor’s said in an August 15 report. Still, Latam is “comfortable” with its ability to achieve annual savings and new revenue of $700 million in four years, said Cueto. ‘Still strong’ “Brazil still has a strong economy, will have a World Cup in two years and is growing,” he said. “Maybe not at 5 per cent, but 2 or 3 per cent it’s definitely going to grow.” Latam shares climbed 3.3 per cent to 11,537 pesos at the close in Santiago, the biggest gain since May 31. The stock is down 14 per cent since the merger was completed on June 22. Taking over Tam made Latam the world’s largest airline by market value at $11 billion. It also cost Latam its investment- grade credit rating. While Lan has posted annual profits since 1994 and was profitable throughout the global financial crisis, Tam has had annual losses in two of the past four years because of increased competition and higher fuel prices. Latam has the worst ratio of free cash flow to total debt among carriers with a market value of at least $5 billion, according to data compiled by Bloomberg. Latam’s negative 0.16 compares with a positive 0.19 for Ryanair Holdings Plc, which leads the ranking, the data show. Cash flow The carrier, based in Santiago, forecasts debt ratios to recover in the first half of next year and return to a positive ratio of free-cash flow to debt within 12 months, Chief Financial Officer Alejandro de la Fuente said in the same interview. The company expects to have its credit rating raised next year, he said. Latam will reduce dividends to minimum levels and may sell stock, De la Fuente said. The airline is confident of achieving its savings and sales targets from the merger even as the global economic outlook dims, Cueto said.