Brazil’s Tam plans $3.2bn investment

Brazil’s biggest airline, Tam, said it would invest $3.2bn in 34 new planes, betting that the country’s rising middle classes and foreign business trips would boost demand for air travel during the coming decade.

The country’s rapid economic growth offers a huge opportunity for the airline sector, but Tam is at a critical juncture as it tries to secure market leadership through a problematic merger with Chilean airline Lan. Unrest in the Middle East has also raised concerns about a spike in oil prices impacting the airline sector.

“We made the order in view of our own market … the growth we see for the future,” Líbano Barroso, chief executive, told analysts and reporters on Monday, adding that the purchase had nothing to do with Tam’s planned merger with Lan.

Tam’s plans to consolidate its market position via a merger with Chile’s Lan, first announced last August, have hit some regulatory roadblocks.

Late last month, Chile’s Free Trade Tribunal announced it would examine the companies’ plans to create Latin America’s biggest airline following monopoly concerns raised by a consumer group.

Tam said it would buy 32 Airbus planes and two from Boeing in its first aircraft purchase for almost two years. They will be delivered between 2014 and 2018.

“It’s a combination of Brazilians travelling more and also more foreigners coming,” Mr Barroso told the Financial Times. “In the long-term, over the next 20 years, demand should grow at the very minimum of 9 per cent a year.”

The announcement came as Tam posted a 7.9 per cent gain in fourth-quarter net profit to R$150.6m (US$90m), from R$139.6m in the same period the previous year. Net operating revenue jumped 29.1 per cent to R$3.225bn from R$2.497bn over the period.

The demand for domestic flights increased almost 24 per cent in 2010, according to Brazil’s National Civil Aviation Agency, as Brazilians ditched the bus for air travel thanks to higher wages and greater access to credit. The strong real has given holidaymakers an extra incentive to travel abroad to places such as Buenos Aires and the rise of Brazil’s economy has also lured many business travellers.

Higher oil prices have caused concern, however, causing Tam’s net income to almost halve to R$637.4m in 2010 from R$1.27bn in the previous year. Gol, Tam’s biggest domestic competitor, last week posted a 76 per cent drop in annual net profit.

The company brushed off concerns about the Middle East, saying that its hedging strategies were sufficient to cope with any further volatility in the price of oil.