Latam Airlines Sees Return to 10% Margins as Tam Absorbed

Latam Airlines Group SA’s goal of bolstering profit is a bigger priority than restoring the investment-grade credit rating it lost after the $3.9 billion acquisition of Brazil’s Tam SA in 2012.

“We’re going to achieve the 10 percent margin that we had,” Chief Financial Officer Andres Osorio said in an interview at his office in Santiago, without giving a specific target date. “That is our promise today. If the economy improves, then it could be higher. And if things turn worse, then we’ll work to maintain that target.”

Latam Airlines was formed when Chile’s Lan Airlines SA bought Tam to gain a foothold in the biggest emerging market after China. When the deal was announced in 2010, Brazil was expanding at a region-leading pace of 7.6 percent. When the tie-up was completed in 2012, growth had slowed to 1 percent amid softening demand for its exports. This year, Brazil is forecast to expand 1.8 percent, below the regional average of 2.2 percent, according to analysts surveyed by Bloomberg.

A doubling of debt levels following the merger stripped the carrier of its investment-grade credit rating and fueled a 42 percent share slump that sent it from first to 11th place for stock-market value among global airlines. The company is rated BB by Fitch Ratings, the second-highest level of junk, after being classified as high as two levels above high yield by Fitch as recently as June 2012.

Shares of Latam Airlines increased 2.1 percent to 8,204.7 pesos at the close in Santiago. The IPSA benchmark equity index climbed 1.1 percent.

Aircraft Leases

Of the carrier’s $10 billion in debt, $8 billion is tied to aircraft leases, leaving only $2 billion that would be affected by a credit-rating increase, Osorio said. The carrier is paying an annual interest rate of 3.7 percent on its obligations, below the 3.99 percent average yield on investment-grade bonds from emerging-market companies.

Profit growth and swelling cash flows will allow the company to return to investment grade in late 2015 or early 2016, Osorio said. The company isn’t planning bond sales or share sales in the short term, since cash generation and a $950 million share sale last year covered financing requirements.

“What we are working on is to have a growing business with a strong profit, preferred by our customers and with a healthy organizational structure,” he said in the May 20 interview. The company will look to pay down more-expensive Tam debt whenever it’s feasible, he said.

For this year, the company expects an operating margin at the lower end of its 6 percent to 8 percent target range, Osorio said. Lan had an operating margin of 9.1% in 2011 and 14.3% in 2010, according to data compiled by Bloomberg.