LAN Traffic Rises Significantly - Analyst Blog

Chile-based LAN Airlines S.A. (LFL) released its passenger traffic data for October 2010. Total passenger traffic 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 expect a considerable increase in passenger traffic both domestically and internationally during the fourth quarter of 2010 based on market recovery. Moreover, LAN's continuous fleet expansion and renewal program are expected to fetch profitable returns in future.

Recently, LAN signed a memorandum of understanding for buying 50 modern Airbus A320 family aircraft to be delivered between 2012 and 2016. It has also signed an agreement with The Boeing Co. (BA) for five 787-8 Dreamliner aircraft in 2012 in addition to ten Boeing 787-8 Dreamliners announced in March 2010.

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 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.

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.

However, €8.2 million (approximately US$11.5 million) fine for the infringement of antitrust regulations of the European Union will have downward pressure on the upcoming results. Hence, we reiterate our Neutral recommendation on ADR and the stock retains its short term Hold rating (Zacks #3 Rank).