LATAM: A Latin American Airline's Emergence as a Global Player
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Case Code: BSTR524 Case Length: 21 Pages Period: 2011-2017 Pub Date: 2017 Teaching Note: Available |
Price: Rs.500 Organization: LATAM Airlines Industry: Aviation Countries: Latin America, Global Themes: Growth Strategy, Mergers & Acquisitions, Post-Merger Integration |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
TAM Airlines
The history of TAM dates back to 1961, when five charter flight pilots founded an air taxi company called Taxi Aéreo Marilia in Marilia, a city in the interior of Brazil, to transport mail and passengers. The company transported cargo and chartered passengers between the states of Paraná, São Paulo, and Mato Grosso. In 1966, the airline was sold to an entrepreneur Orlando Ometto (Ometto). However, the airline struggled to make profits. In 1971, Ometto offered Captain Rolim Adolfo Amaro (Rolim), who had worked at Táxi Aéreo Marília earlier in 1963, a stake of 33% to rejoin the company. A year later, Rolim upped his stake to 50%, taking control of the airline’s management...
The Merger
LAN had been eyeing the Brazilian airline market for more than a decade as that region with a population of about 200 million as of 2010 was a lucrative market for airlines and had immense potential for growth. Between 2003 and 2009, the middle class grew by 50% in Latin America and comprised nearly one-third of Brazil’s population. Though LAN set up subsidiaries in Colombia, Peru, Ecuador, and Argentina, the airline was unable to establish its presence in Brazil, because of foreign ownership restrictions in the country. Moreover, Brazil was a regulated market and it was hard for foreign players like LAN to gain a significant foothold in the region on a stand-alone basis...
Synergies
The merger of LAN and TAM created the largest passenger and cargo airline group in South America by traffic. The association placed 40% of passenger traffic within South America in the hands of LATAM. In 2010, LAN had a market capitalization of US$9 billion while TAM’s value was US$4 billion. The combined market capitalization (US$13 billion) would make LATAM the second largest airline in the world by market value after Air China Limited . LATAM would be the first Latin American carrier to find a place among the top 15 airlines in the world based on passenger traffic...
The New Strategic Plan 2015-2018
In 2014, LATAM took some important steps toward achieving its goal of becoming one of the top three airlines in the world. The group launched a new Strategic Plan 2015-2018 and renewed its commitment to sustained profitability in order to deliver greater returns to shareholders. The Strategic Plan was based on five central factors – Customer Experience, Network, Efficiency and Cost Reduction, Organization Strength, and Proactive Risk Management. As part of the plan, LATAM made advances on numerous fronts including fleet renewal, improvement of products and services, and the renovation of its airport infrastructure for operations...
A Global Player
Through a successful expansion strategy, LATAM became the leading international and domestic passenger airline group as well as the largest cargo operator in Latin America. With a significant presence in the largest hubs in South America – Lima and Sao Paulo – LATAM offered the best connectivity between South America and the rest of the world. Besides remaining focused on maintaining its leadership position in Latin America, LATAM continued to expand internationally. North America and Europe were two of its most important long-distance markets. In addition, the airline also served Australia, Asia, the Middle East, and New Zealand...
Tough Times
Some analysts called LATAM “the biggest disappointment” as the benefits of the consolidation between LAN and TAM were yet to be seen. “I don’t see the excitement in the management team at either airline, and they still seem to be operating largely as separate entities,” said Jay Sorensen, president of aviation consultancy IdeaWorksCompany.com. The airline had been losing money consistently since 2012 and was reportedly one of the most indebted airlines in Latin America. Weak economic conditions, the high price of fuel, and currency devaluations in many Latin American markets rendered LATAM’s path toward achieving synergies difficult, said analysts. Cueto himself was far from relaxed after the merger, saying, “I sleep less calmly today than before.”...
A New Identity
After operating independently under a single group for about three years, in early 2016, the LAN and TAM brands were finally unified under a single airline “LATAM” as part of the final step in the merger. The move, which began after nearly two years of internal planning and deliberations, would see the two airlines and their affiliates establish a common livery, marketing strategy, and customer experience. Commenting on the considerable time gap before rebranding as a single airline...
Challenges Ahead
Analysts said that going forward, one of the biggest challenges for Cueto would be boosting LATAM’s declining profits. LATAM consistently reported full year losses between 2012 and 2015. As its operations were mostly based in emerging markets, particularly in Latin America, the economic and political instability in these countries adversely affected its business prospects. The Brazilian economy remained fragile as analysts estimated that Brazil’s economy could shrink by 0.15% in 2016. According to analysts, the airlines’ revival was pinned to that of its key Brazilian market, which was facing a deep recession and a political crisis with the impeachment of President Dilma Rousseff. “We continue seeing a very challenging scenario in Brazil. As well as all the volatility that the political process is generating, business demand is not improving,” said Gisela Escobar, Corporate Controller and Director, Investor Relations, LATAM...
The Road to Recovery
After some very difficult years, in the first quarter ended March 2016, LATAM showed timid signs of recovery in some of its key markets as fuel costs dropped and Latin American currencies stabilized. The airline’s operating margin increased by 1.3pp to 9.4%, over the corresponding quarter of the previous year. It also posted a net income of US$102 million, compared to a loss of US$40 million in the same period last year. However, in the second quarter ended June 2016, LATAM’s revenues declined by 12.5% to US$2,110.6 million compared to US$2,412.9 million in the corresponding quarter of 2015...
Exhibits
Exhibit I:The Best Airlines in South America 2016
Exhibit II: LAN Airlines S.A.-Consolidated Income Statement
Exhibit III: TAM S.A- Key Financials Financial Data
Exhibit IV: Corporate Structure of LATAM Airlines
Exhibit V: Ownership Structure of LATAM Airlines (as of 2015)
Exhibit VI: Top 12 Airlines in the World (2011)
Exhibit VII: Passenger Network of LATAM Airlines
Exhibit VIII: Comparison of LAN and TAM (as of June 2011)
Exhibit IX: LATAM Airline’s Global Market Position (as of 2012)
Exhibit X: LATAM Airlines -Income Statement
Exhibit XI: LATAM Airlines -Consolidated Financial Results
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