Worst Airline Stock in Americas Tests Investors’ Merger Patience

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When Chile’s Lan airline merged with Brazil’s Tam in 2012, the new group promised “greater value for shareholders.” Three years in, investors are getting impatient.

A stock slump at Latam Airlines Group SA, the worst performer this decade on the Bloomberg Americas Airlines Index, is quickening in 2015, sending the shares to a six-year low. Sales are poised to drop through the third quarter, for seven straight declines, according to data compiled by Bloomberg.

Brazil’s recession this year only adds to the strains on an airline that was, at its creation, the world’s largest by market value and the dominant South American carrier. With some Lan and Tam operations still separate after the merger, the economic slowdown means the benefits of the deal are being pushed further into the future.

“The problem with the Lan-Tam merger is that when they were buying Tam and the Brazilian market, they were buying the biggest country in the region whose economy was growing at a fast pace and with a strong currency,” said David Galante, a senior investment analyst at Banco Penta in Santiago. That’s “a very different macroeconomic scenario than we see today.”

Latam said the merger is on track. In the face of “challenges,” the airline is working to offer its passengers the best travel experience, according to an e-mailed statement.

“Our objective is to be among the three best and biggest in the world” Tam Chief Executive Officer Claudia Sender said in a May 19 interview at Bloomberg’s Sao Paulo office. “It’s a super challenge.”

Challenges Ahead

Demand in Brazil, particularly for business travel, is weakening and competition from Azul SA and Avianca Brasil is driving fares down, said Bradford Jones, who manages $150 million in Latin American stocks at Sagil Asset Management in London.

“Until demand picks up in Brazil, which we don’t see happening this year, we think there’s down pressure on the shares and on earnings,” said Jones, who hasn’t held Latam shares in more than two years.

Just 22 percent of analysts recommend buying Santiago-based Latam, compared with 71 percent in June 2012, according to data compiled by Bloomberg.

Lan and Tam’s joint reservations systems won’t be fully operational until 2017, and a new, unifying name is still being debated. The planes continue to fly under their own livery in their home countries with separate certificates.

High Expectations

When the merger was announced, Latam promised passengers improved routes and flight frequencies and shorter connection times. With service to 24 countries, Latam had projected annual savings and new revenue of as much as $700 million four years hence. The high investor expectations were set just as Brazilian growth was starting to fall.

In 2010, when the deal was first proposed, Brazil’s economy grew 7.6 percent. By the time the union was sealed two years later, gross domestic product had slowed to 1.8 percent and it’s projected to contract this year for the first time since 2009. Latam is now worth about a third of it was when the merger was completed.

Latam shares rose 1.7 percent to 4,830 pesos at 12:05 p.m. in Santiago trading.

“The timing of the acquisition was unfortunate,” said Savanthi Syth, a Raymond James Financial Inc. analyst, who rates the stock underperform. “They probably underestimated what had to be addressed.’

Profit Forecast

Raymond James’ Syth and Citigroup analyst Stephen Trent said Latam could wind up in the black this year for the first time in its short history. The average analyst forecast for profit excluding one-time items is $263 million in 2015, according to data compiled by Bloomberg.

For now, Latam is facing too much competition in Brazil, with a volatile local currency that makes it hard to do business when fuel is priced in U.S. dollars, said Roberto Lampl, who helps manage $120 million in emerging market stocks as head of Latin American investments at Alquity Investment Management Ltd.

‘‘In the long term it seems an interesting company,” Lampl, who doesn’t own shares, said in a phone interview. “But these days we see that they’ve had a very hard time integrating two very different cultures with very different costs.”

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