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LAN expects only minimal impact from Avianca-TACA merger

LAN executives do not expect the planned merger of Latin American rivals Grupo TACA and Avianca to have a significant impact on competition in the region.

LAN's VP of North/Central America and Asia, Eduardo Riquelme, told analysts yesterday the carrier only expects a minor impact in select markets where the proposed combination of El Salvador-based Grupo TACA and Colombia-based Avianca could create a stronger single carrier.

"We see marginal impact in certain markets but it's just in a few regional markets. We don't see a huge impact right now," Riquelme said during LAN's third quarter earnings call.

He says it is hard to definitively predict the impact because it is unclear what if any network changes or restructuring will result from the merger, but adds: "We have been looking very closely at this deal and we have checked out how the different operations of TACA and Avianca will create a stronger network. And we really don't see [a stronger network] right now. We don't see really that the merger itself is going to provide a lot of upside in many markets."

Even after the merger LAN will remain the largest airline group in Latin America outside Brazil. The LAN group now includes passenger carriers in Chile, Argentina, Ecuador and Peru as well as cargo carriers in Chile, Brazil, Mexico and the US. The proposed Avianca-TACA combination would overlap with LAN in Ecuador and Peru, where Avianca and TACA respectively have passenger carrier affiliates.

In Ecuador, new Avianca sister carrier AeroGal is planning to launch services in December between Guayaquil and New York, a route now served by LAN Ecuador. But Riquelme says LAN "doesn't see a huge impact" in the US-Ecuador market because the market is "underserved" and "operates at very, very high load factors".

There could also potentially be overlap in the larger markets of Brazil and Colombia as LAN has been looking for some time at possibly establishing passenger operations in both countries through acquisitions or launching new affiliates. LAN CFO Alejandro de la Fuente told analysts "we are always looking at new opportunities in Brazil or in the region" but "at least for now" there are no plans to pursue mergers or acquisitions.

LAN saw its profits drop in the third quarter by 37% to $52 million. Revenues dropped 19% to $917 million, including a 10% drop in passenger revenues despite an 8% increase in passenger capacity and a 40% drop in cargo revenues despite only a 4% decline in cargo capacity.

The carrier blames poor demand for causing the 16% erosion in passenger yields and 35% deterioration in cargo yields. But de la Fuente says "in September, we have seen improving demand and traffic trends and we feel we are in a good position to take advantage of growth opportunities to come".

The carrier is now planning to grow passenger capacity by about 10% in 2010 as it takes delivery of one additional Boeing 767 and six Airbus A320 family aircraft. It also expects to end 2009 with 10% ASK growth compared to last year.

LAN plans to end 2009 with 85 passenger aircraft, including 53 A320 family aircraft, 27 767s and five Airbus A350s. It began the year with a fleet of 81 passenger aircraft.

Cargo capacity, however, will be down 7% to 8% for the full year in 2009 as LAN has reduced its wet-leased fleet in response to the economic downturn. LAN, which operates its own fleet of nine 767 and two 777 freighters, is now only wet-leasing a single 767.

But de la Fuente says LAN is planning to grow cargo capacity next year by 16% to 18% "in line with the global recovery in cargo volumes". The capacity increase will be driven by increasing the utilisation of LAN's 767F fleet and from flying its two 777Fs, which were delivered in the second quarter of this year, for the full year.

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