LANAirlines Benefits - Analyst Blog

Chilean airlines, LANAirlines S.A. (LFL) released its passenger traffic data for August 2010. Total passenger traffic grew significantly by 13.7% year over year, with a 15.1% increase in domestic traffic and 13.1% in international traffic. International passenger traffic accounted for approximately 70% of the total passenger traffic.

 

Cargo traffic increased 16.0% year over year based on higher imports into Latin America and increased operations to Europewith the Boeing 777-200 freighter fleet.

 

During July 2010 as well, LAN recorded a 14.5% increase in its passenger traffic with domestic traffic increasing 17.6% and international traffic rising 13.3%. Cargo traffic increased 20.7% year over year

 

LAN recorded a 9.7% year-over-year increase in total passenger traffic in the second quarter of fiscal 2010 with increases of 12.5% and 8.4% in domestic and international traffic, respectively. Thus, passenger revenues grew 24.5%. Cargo traffic increased 37.9% year over year based on the recovery in the global cargo market and hence cargo revenues went up by 30.6%.

 

The primary reasons for this increase were the World Cup 2010 and new routes to United States, Europe, Mexicoand the Caribbeantogether with improving economic conditions.

 

An increase in passenger traffic during the first two months of the third quarter of fiscal 2010 signifies a jump in traffic during the third quarter. We also expect a considerable increase in passenger traffic both domestically and internationally during the third 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 TAMS.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 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 emerging markets will be higher than the developed markets. Until the merger materializes, we reiterate our Neutral recommendation on the ADR and the

stock retains its short term “Hold” rating (Zacks #3 Rank).