Latam Airlines Sees Return to Investment-Grade Rating Next Year
Latam Airlines Group SA (LAN), the world’s
most valuable carrier created by Lan Airlines SA’s tie-up with
Tam SA, said it can operate profitably in a market as
“unbelievably expensive” as Brazil and meet savings goals.
Latam will use Lan’s expertise in managing networks to help
contain costs in Brazil, Lan Chief Executive Officer Ignacio Cueto said. Tam, Brazil’s top airline by market share, lost 363
million reais ($214 million) in the past 12 months as Brazil’s
economy grows at the slowest pace in three years.
“We know very well that the situation in Brazil is
difficult and there’s a reason why aviation there in the last 20
years has had problems making money,” Cueto said yesterday in
an interview from his Santiago office. “For their authorities
it’s hard to understand how expensive they are. For example,
fuel taxes are different in every state. If in Chile we have two
people in charge of fuel, in Brazil you need 15.”
Brazil’s economy will grow 1.8 percent this year, according
to the latest central bank survey. That compares with 7.6
percent in 2010, the year Lan announced the $3.3 billion merger.
Passenger carriers in Brazil are facing overcapacity and rising
costs, Standard Poor’s said in an Aug. 15 report. Still, Latam
is “comfortable” with its ability to achieve annual savings
and new revenue of $700 million in four years, said Cueto.
‘Still Strong’
“Brazil still has a strong economy, will have a World Cup
in two years and is growing,” he said. “Maybe not at 5
percent, but 2 or 3 percent it’s definitely going to grow.”
Latam shares climbed 3.3 percent to 11,537 pesos at the
close in Santiago, the biggest gain since May 31. The stock is
down 14 percent since the merger was completed on June 22.
Taking over Tam made Latam the world’s largest airline by
market value at $11 billion. It also cost Latam its investment-
grade credit rating. While Lan has posted annual profits since
1994 and was profitable throughout the global financial crisis,
Tam has had annual losses in two of the past four years because
of increased competition and higher fuel prices.
Latam has the worst ratio of free cash flow to total debt
among carriers with a market value of at least $5 billion,
according to data compiled by Bloomberg. Latam’s negative 0.16
compares with a positive 0.19 for Ryanair Holdings Plc (RYA), which
leads the ranking, the data show.
Cash Flow
The carrier, based in Santiago, forecasts debt ratios to
recover in the first half of next year and return to a positive
ratio of free-cash flow to debt within 12 months, Chief
Financial Officer Alejandro de la Fuente said in the same
interview. The company expects to have its credit rating raised
next year, he said. Latam will reduce dividends to minimum
levels and may sell stock, De la Fuente said.
The airline is confident of achieving its savings and sales
targets from the merger even as the global economic outlook
dims, Cueto said.
“We still feel comfortable with the estimate number as in
the first 45 days after the merger we are doing OK,” he said.
“We need to have the most up-to-date figures and then we’ll
have the details of when we’ll reach the final number of
synergies and revenues.”
Fitch Ratings lowered Latam by two levels to BB+, one level
below investment grade, from BBB on June 22 when the transaction
was completed. Feller Rate, a local affiliate of Standard
Poor’s, cut its rating to A-, the seventh-highest of 10 possible
investment grade ratings, from A. Latam is scheduled to meet
with rating companies in January to discuss progress on
improving debt indicators, De la Fuente said.
Minimum Dividend
Before the tie-up Lan distributed half of its profit in
dividends. Latam will pay out 30 percent for the next 6 to 10
months, the minimum allowed in Chile, De la Fuente said.
The carrier plans to invest $7.9 billion on its fleet
through 2014, according to an Aug. 13 presentation. The company
has financing in place for this year’s investments and probably
will discuss with banks in the fourth quarter funding for next
year, De la Fuente said.
Latam may raise money by selling new stock in the second
half of next year “if necessary,” he said.
To contact the reporter on this story:
Eduardo Thomson in Santiago at
ethomson1@bloomberg.net
To contact the editor responsible for this story:
David Papadopoulos at
papadopoulos@bloomberg.net
Aug. 16 (Bloomberg) — Ignacio Cueto, chief executive officer of Lan Airlines SA, talks with Bloomberg’s Eduardo Thomson about Latam Airlines Group SA’s outlook and debt ratios.
Latam was formed in June by a tie-up between Chile’s Lan and Brazil’s Tam. (This report is in Spanish. Source: Bloomberg)
Article source: http://www.bloomberg.com/news/2012-08-16/latam-airlines-sees-return-to-investment-grade-rating-next-year.html
Posted by braziltribune
on Aug 18 2012 Filed under Market.
You can follow any responses to this entry through the RSS 2.0.
You can leave a response or trackback to this entry