LAN Affiliate Fined in EU - Analyst Blog

Subsidiary of LAN Airlines S.A. (LFL) LAN Cargo, was fined €8.2 million (approximately US$11.5 million), for the infringement of antitrust regulations of the European Union, the investigation of which began in 2006. A total of €800 million (approximately US$1.1 billion) has been fined from 11 air carriers.

This would have a negative impact on the revenue to be generated by LAN cargo in the upcoming quarter. Moreover, the segment will not be able to report in good numbers as it did in the third quarter of fiscal 2010, when the cargo revenue went up by 49.0% year over year. Hence, LAN reported outstanding results with double the net income compared with the third quarter of fiscal 2009.

Net income was $106.2 million, up from $52.1 million in the year-ago quarter with earnings per ADS of 31 cents compared with 15 cents in the corresponding quarter of fiscal 2009. Reported EPADS also surpassed the Zacks Consensus Estimate of 29 cents.

Increases in the passenger traffic and cargo traffic were the prime reasons for revenue growth. We also expect a considerable increase in passenger traffic both domestically and internationally in the upcoming quarters based on market recovery. Moreover, LAN's continuous fleet expansion and renewal program are expected to fetch profitable returns in future.

Moreover, we remain optimistic about the proposed merger of LAN and TAM S.A. (TAM), which is to be christened 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 worth 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 following two years. Passengers and cargo customers of both companies will stand to benefit from the increase in the number of flights, destinations and connections.

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. Until the merger materializes, we reiterate our Neutral recommendation on ADS and the stock retains its short-term Hold rating (Zacks #3 Rank).