2. The Company
Recommendation: Buy Price Target - $21.11
Current Price 15.68
52-week range 25.15 – 11.50
Shares outstanding 545MM
Market Cap 8,619.7MM
P/E (2013) N/A
EV/EBITDA (2013) 8.9x
3. Company Profile
• Founded 1929
• Headquarters: Santiago, Chile
• Enrique Cueto, CEO
• Operates in approximately 27 countries
• 52,000 employees
• Sector: Airlines
LATAM is the largest airline group in South America. Founded in 1929 the current LATAM management and controlling
shareholders acquired control of LAN Chile in 1994. After restoring stability, management began acquiring and fixing
airlines across South America. By the time LAN acquired TAM, it already had separate airlines, separate for regulatory
reasons, based in Chile, Peru, Argentina, Ecuador, and Colombia, all now operating under the LAN brand and all
acquired and successfully integrated by the current LAN management.
• LATAM is one of the largest airline groups in the world in terms of network connections, providing passenger transport
services to about 135 destinations in 22 countries and cargo services to about 144 destinations in 27 countries, with a
fleet of 328 aircraft.
4. Investment Thesis
• Industry Leader
• Industry Consolidation
• Merger Synergies
• CASK* Reduction
• Fleet Capacity Reduction and Yield Improvement
• Improvement in RASK**
• Macro Tailwinds
• Capital Structure Improvements
– Rights offering to raise equity (~$750-1,000MM)
• Shareholder Alignment
* Cost per Available Seat Kilometer
** Revenue per Available Seat Kilometer
5. Industry Leader
Passenger operations
• Domestic Brazil:
– ~33% of LATAM passenger capacity
– 43.7% total domestic brazil market share
• International
– ~35% of LATAM passenger capacity
– Within South America LATAM has international capacity share of 54.9%
• Spanish Speaking Countries (SSC): LAN Chile, LAN Peru, LAN Ecuador, LAN Argentina,
and LAN Columbia
– ~32% LATAM passenger capacity
– Largest carrier in Chile, Peru, and Ecuador
– Second largest in Columbia and Argentina
LAN is a leader in the Latin America Market South American operations ranked by capacity to/from/within South America, as of 10/11/13
7. Merger Synergies
• LATAM expects to achieve $600-700M in merger synergies by 2016
LATAM Estimated Synergies
In US$mn, unless otherwise stated
8. • Even if merger synergies are half ($300-350MM) of what is expected,
LATAM is still trading below its intrinsic valuation
• Operational improvements to domestic TAM are not included within merger
synergy guidance
– Capacity cuts in 3Q13 drove RASK up 19% from 3Q12 levels
Merger Synergies
Domestic Brazil: Successful turnaround
9. • Fuel costs are ~ 35% of LFL costs
• I believe we are at a turning point in the 30yr secular bull market in oil for the following reasons:
– Technological advances in the energy sector (specifically E&P)
– Highest level of oil production in U.S. history (future supply to outpace demand)
– Iran and Libya can’t get much worse in terms of impact in lack of production
– Further innovation in battery/electric (car) technology
• Each car replaced today with a new car is 25% more efficient in terms of oil consumption
• Airlines have adapted to be profitable with $102 per barrel in oil
• Despite producing ~80% of aviation fuel domestically (Brazil), Petrobras prices aviation fuel based on
prices in Houston (USA) and adjusts these by an import tariff. This practice leads to higher fuel prices but
also makes Brazilian airlines fuel costs much more tied to USA oil prices
CASK Reduction
Cost Breakdown in % Fuel Price Evolution in R$/liter
10. • LATAM has decided to reduce fleet commitments between 2013 and 2015 to
approximately $1.1bn. This reduction represents a 17% decrease from the combined
fleet plan at the time of the merger.
• The updated fleet plan allows for flexibility to adjust capacity between 3.0-6.0% per
year in 2014 and 2015
• Modernization of fleet (new efficient aircraft expected to reduce unit costs by ~10%)
Fleet Capacity Reduction
LATAM Airlines Group: Diversified passenger capacity growth
11. • LATAM has reduced total employees by .7% September 2013 vs. December 2012
– As a result, wages decreased 3.6% over the same time period
• Potential improvements in Ancillary revenue opportunities
• Q3 revenue trends within domestic Brazil improved significantly from year ago levels and suggest
management is continuing to be proactive in restructuring the domestic Brazil. Capacity reductions
in domestic Brazil drove improved load factors and improved domestic Brazil RASK of 14% vs. a
year ago
LATAM Airlines Group: Diversified passenger capacity growth
Improvement in RASK
Labor Costs as % of Total Costs
12. • Reduction in oil prices will spur disposable income
– Airlines are significantly exposed to per capita GDP
– Increasing real wages and greater formalization rates will allow
many Brazilians to travel more
• Brazilian airport capacity improvement
– Currently only 13 (65%) of the 20 main airports are operating at full
capacity
– R$25-30bn in investments are going to be made in the sector.
~R$7bn will be deployed through 2010-2014 in preparation of the
2014 World Cup and Summer Olympics 2016
Travel Expenses by Social Class, 2002-12
In R$ bn
Travel Intentions by Social Class, 2012
In mn people
Macro Tailwinds
Bus vs. Plane Passengers
In mn passengers
13. • 62MM share rights offering
– Shareholders/Management, which own ~40% of the shares outstanding pre-agreed to
purchase up to half of the 62MM shares
– Total raise (~$1 billion) will be used to:
• 50% pre-pay short-term financial liabilities, improve equity and liquidity
• 50% to replace older and less efficient aircraft
• Goal towards reestablishing investment grade status
– LAN held investment grade prior to TAM acquisition
– LATAM has stated that cash flows will be used to pay down debt
– Each 100bps reduction in cost of debt would increase EPS ~20%
• LATAM has reduced debt exposure to the Brazilian Real from US$4.1 billion on June
30, 2012 to US$2.1 billion 3Q13 and expects to further reduce it to US$1.6 billion by
the end of 2013 and to eliminate this exposure by June 2014
• Current Debt/EBITDAR declined from 6.3x in December 2012 to 5.8x in September
2013
• Liquidity position improved from 8.5% in December 2012 to 13.2% in September 2013
Capital Structure Improvement
14. Shareholder alignment
• The Cueto Group is entitled to elect three of the nine members of our board of directors and is in a
position to direct the management of the Company
• In addition to these shareholders, there are two other major shareholder groups. Bethia Group,
which includes LATAM director Carlos Heller Solari, and the Eblen Group, which includes LATAM
director Ramón Eblen Cádiz
• Significant ownership (~40%) is concentrated within the controlling shareholders of LAN and TAM
Latest Holders
Holder Common Stock Equivalent Held % Of CSO
Costa Verde Aeronautica SA (SNSE:CVA) 111,901,866 23.142
Includes:
Mr. Jan Jose Cueto Plaza (Director)
Mr. Ignacio Cueto Plaza (CEO LAN)
Mr. Enrique Cueto Plaza (CEO LATAM)
Tep Chile S. A. 65,554,075 13.557
Bethia S.A. 13,152,718 2.72
Includes:
Heller Solari (Director) 6.24%
Betlan Dos S.A. 13,152,516 2.72
Banchile E. C. De B.S.A. 10,314,524 2.133
Eblen Kadis, Ramón
(Director, Member of Directors Committee, Member of Leadership
Committee and Member of Brand, Product & Frequent Flyer Program
Committee)
9,489,354 1.962
Cueto Group 4,058,181 0.839
de la Fuente Goic, Alejandro
(Former Chief Financial Officer)
70,000 0.014
Valdivieso Montes, Armando
(Senior Vice-President of Passenger Business-Spanish Speaking
Countries)
59,704 0.012
16. My view is based on the fact that airlines have been benefiting from some of the lowest
borrowing costs since the1960s as debt investors have a better understanding or appreciation
for the financial improvement and significant structural change in the airline industry such as:
• Consolidation
• Rising barriers to entry
• Improving mix in variable vs. fixed costs
• Capacity reduction
This view has been supported by upgrades of airline credit ratings by the credit agencies over
the prior 12 months.
In conjunction with the aforementioned tailwind, I believe the longer-term reduction in
operating costs will be driven by:
• Lower fuel costs
• Employee count reduction
• More fuel efficient aircraft
• Broader improvement in GDP per capita in SSC and Brazil
The airline market shows a high correlation to GDP per capita. As income increases, so does
disposable income and the consumption of “non-essential” goods such as air travel.
Why Now?
19. Summary
• Largest and most diversified South American Airline
• Industry Consolidation
• Merger Synergies
• CASK Reduction
• Fleet Capacity Reduction and Yield Improvement
• Improvement in RASK
• Macro Tailwinds
• Capital Structure Improvements
– Rights offering to raise equity (~$750-1,000MM)
• Positive management and shareholder alignment.
Management owns ~40% of outstanding shares
