LAN-TAM merger could spur further Latin consolidation

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The proposed LAN-TAM tie-up will create an airline powerhouse in Latin America that will control an unprecedented share of traffic and could spur further consolidation in the fast-growing region.

Chile-based LAN and Brazil-based TAM are already the two largest airline groups in Latin America, controlling between them passenger carriers in six countries and cargo carriers in four countries. While the world's three largest airline groups - Air France-KLM, Lufthansa and Delta - each now generate three times as many revenues as the proposed LATAM Airlines Group, LAN and TAM will control an unprecedented share of traffic for a single region.

Combined the duo will account for over one third of the passengers carried by the region's carriers, according to figures from Latin America and Caribbean airline association ALTA. In 2009, LAN and TAM combined carried 45.8 million passengers while all ALTA carriers collectively transported 123.5 million passengers.

On a capacity basis, LAN and TAM flew 103.5 billion ASKs in 2009 while all ALTA carriers flew 253.5 billion. On a revenue basis, LAN and TAM generated almost $9 billion in 2009 while ALTA members collectively generated just over $21 billion.

ALTA members account for over 90% of the region's traffic. As a result, LATAM will potentially account for roughly 35% of passengers carried, roughly 37% of capacity and about 40% of revenues.

"It really puts pressure on the others," says ALTA executive director Alex de Gunten.

Brazil's Gol, currently the third largest airline group in the region after TAM and LAN, could in particular be persuaded to make a move. Gol currently only operates an airline in Brazil, where in the first half of this year it had a 41% share of the domestic market and 14% share of the international market compared to 42% domestic and 86% international shares at TAM.

"LAN, we believe, will make TAM a more competitive airline by lowering its costs and improving its revenue generation. Thus Gol will have to pick up the pace and lower its Brazil-leading low costs even further," says Raymond James analyst Duane Pfennigwerth.

The LAN-TAM deal follows less than a year after Colombia-based Avianca and El-Salvador based Grupo TACA inked a merger agreement which created Latin America's fourth largest airline group. Avianca-TACA was formally established earlier this year, incorporating 13 passenger airlines spread across 10 countries.

Mexico, which has seen five airlines cease operations over the last two years, is also now poised for further consolidation as its largest player, Mexicana, attempts to restructure after filing for bankruptcy in early August. Mexicana and Aeromexico are currently the fourth and fifth largest airline groups in Latin America, slightly ahead of Panama's Copa Holdings based on 2009 revenues. Copa acquired Colombia's Aero Republica in 2006 and the LAN-TAM and Avianca-TACA deals could also prompt it to look for other potential acquisitions.

De Gunten says the LAN-TAM deal "continues the trend of what's been happening in the region for some time [with] fewer and fewer and stronger and stronger players".

While LAN-TAM will account for over one-third of traffic at Latin American carriers and roughly half of all capacity in the intra-South America market, the carriers do not expect any major regulatory challenges. de Gunten points out LATAM will still face major competition in every market except Chile, a small domestic market in which LAN has an over 80% share.

"In the other markets they do have significant domestic local competition. They also have international competition," de Gunten says.

In fact on South America-US routes, American Airlines will retain its number one position even after LAN and TAM merge. On a capacity basis, LAN and TAM in presentation charts outlining their deal say they will be number two in the US-South American market after American but ahead of Delta.

In the South America-Europe routes, LAN and TAM say LATAM will be the fourth largest airline grouping based on July 2010 capacity figures. The British Airways-Iberia combination is the largest player on the South Atlantic, followed by Air-France KLM and Portugal's TAP.

LAN and TAM expect their merger will result in more long-haul flights but clearly these markets will remain competitive.

de Gunten points out that in Ecuador and Peru, both LAN and Avianca-TACA have strong affiliates which compete on domestic as well as international routes.

In Brazil, the region's largest market, TAM competes against Gol as well as Avianca, Azul and Webjet. In fact TAM's market share in Brazil has been steadily shrinking despite its own growth and its acquisition late last year of regional carrier Pantanal. During the first half of this year traffic in Brazil's domestic market jumped 28%, driven mainly by fast expansion at low-cost operators Azul and Webjet.

In Argentina, LAN competes on all its domestic routes against Aerolineas Argentinas, which has been rejuvenated with a new business plan. Aerolineas has struggled to compete internationally against stronger LAN and TAM but Oliver Wyman consultant Vikram Krishnan says "a benign duopoly with LATAM may be better for Aerolineas than a competitive situation with both LAN and TAM".

In South America's other big domestic market, Colombia, LAN is only planning to launch a passenger affiliate carrier next year. Colombia, which recorded 38% domestic passenger growth in the first half of this year, is now mainly controlled by Avianca, fast-growing low-cost carrier Aires and Copa subsidiary Aero Republica.