Some three years after the merger of Chilean carrier LAN and Brazil’s TAM, Latam Airlines Group SA has been declared the worst performer of this decade on the Bloomberg Americas Airline Index. The carrier’s stock price continues to slump and post poor results, including sending shares to a six-year low this month. According to data compiled by Bloomberg, sales are expected to drop through the third quarter.
When the merger took place in 2012, Brazil’s economy was growing and the country’s currency was strong, but that all changed. A recent article in The Economist said that Brazil’s GDP was stagnant in 2014 and actually contracted by 1.6 percent the first quarter of this year, compared to last year’s Q1, and is expected to shrink by 2 percent this year. Interest rates as high as 13.75 percent have left consumers with little disposable income. Brazil’s government debt sits at 62 percent. It’s also troubling that unemployment in Brazil, which was below 5 percent for most of 2014, rose to 6.4 percent in April, with economists predicting it will reach 8 percent later this year.
Another problem facing Latam is competition from Azul SA, which is backed by JetBlue Airways founder David Neeleman, and Avianca Brasil, the national carrier. Azul, however, has been unsuccessful in launching an IPO after several attempts. Only 22 percent of analysts recommend buying Latam now, compared to 71 percent in June 2012, according to data compiled by Bloomberg.
The timing of the merger was also unfortunate. The two airlines’ joint reservations systems still are not operational and most likely won’t be until 2017. The aircraft from each respective carrier continue to fly under their own livery in their home countries, with separate air operator’s certificates. Latam has acknowledged “challenges,” but Tam CEO Claudia Sender told Bloomberg in May that “our objective is to be among the three best and biggest in the world.”Like This Post