Latin American airlines to merge

Leading Latin American airlines LAN of Chile and Tam of Brazil have announced merger plans in a bold bid to position themselves for future growth a fast-consolidating global industry.

“As the world industry consolidates we cannot stand still,” said Enrique Cueto, the chief executive of LAN who will also be chief executive of the new parent company, to be called Latam Airline Group.

He told a conference call that emerging markets, and Latin America in particular, were seeing dynamic growth in demand, adding: “Now is our time to capitalise on this trend.”

Under the non-binding memorandum of understanding signed on Friday, the two airlines – market leaders in their respective countries – will team up in a all-share deal which will see LAN offer 0.9 of its shares for every Tam share – a premium of some 47 per cent.

In terms of passenger airlines, it will rank 15th in revenue terms and 11th in passenger numbers, according to LAN and Tam.

The two airlines, with combined 2009 revenues of $8.5bn, will each retain their own brands but operate under a merged parent company.

Shares will be listed in Chile and the US and it has plans to list on Brazil’s Bovespa. Tam shares will be delisted. Mauricio Rolim Amaro, vice chairman of Tam, will be the group’s president.

Alejandro de la Fuente, LAN’s chief financial officer, told the conference call: “We are not only the right partners but we are partnering at the right time.”

The new group says it expects to achieve “real and achievable” annual synergies of $400m through alignment of passenger networks, growth in cargo operations in Brazil and internationally and cost savings.

The two airlines carried a combined 45m passengers and 832,000 tons of cargo in 2009. Merged, they will operate 115 destinations to 23 cities, with a fleet of 220 planes and 40,000 employees.

The companies say Latin America is seeing increased airline demand and the merger will allow faster growth and more profitability than either company could have achieved alone. Lan operates in Chile, Peru, Argentina and Ecuador, while Tam operates in Brazil and operates Tam Mercosur, which also serves Paraguay.

The new group sees growth coming from routes from Brazil to Europe and Africa; from Peru to North and Central America; new hubs to connect to Europe and the US; and in cargo, taking advantage of LAN’s expertise and Tam’s footprint.

The two companies have long been discussing closer co-operation and have code sharing deals, but Friday’s announcement of a merger was nonetheless a surprise. The deal is subject to regulatory and shareholder approval, which could take six to nine months, but executives said a binding deal should be agreed within two to three months.

However, the share ratios announced on Friday will not be subject to change.

“Together LAN and Tam will be able to offer new destinations that neither company could have supported on its own. This will position us to compete with the foreign carriers that continue to increase serviceds to our region,” said Maro Bologna, chief executive of Tam, in the statement.

Tam’s controlling shareholders, Tam Empreendimentos e Participacoes, will retain control of the Brazilian company with an 80 per cent voting stake and will also own an undisclosed stake in LAN.

LAN’s controlling shareholders, Costa Verde Aeronautica SA and Inversiones Mineras del Cantabrico will also retain control of the Chilean airline, Tam said.

The airlines said the planned deal complied fully with Brazilian rules limiting foreign ownership to 20 per cent and they would comply if there were any changes to that in future.

Tam shares rose 27.6 per cent to close at 36.20 reais in Sao Paulo. LAN rose 7.7 per cent to 13,900 Chilean pesos in Santiago.

LAN is a member of the Oneworld alliance, while Tam is a member of Star Alliance, but the companies said it was two early to say how the question of alliances would be managed under the combined structure.