LAN-TAM’s Unscored Goal: South America’s largest airline group looks to regain its groove after post-merger turbulence

Brazilians and Chileans, working together? Hard to believe after watching them at each other’s throats on the football/soccer field this weekend.

But it’s true: In the summer of 2010, just three months after United and Continental announced plans to create the largest airline in North America, LAN and TAM unveiled plans to do exactly the same in South America. Well four years later, the two Latin companies have something else in common. United has become the more famous example of a merged airline not living up to its promise. But LAN/TAM too has been a disappointment, one it’s working hard to correct.

On its own, the Chilean carrier LAN, with joint ventures in Perú, Ecuador and Argentina, consistently ranked among the world’s most profitable airlines. Not impressed by its 12% operating margin in 2007, a good year for many airlines? Well, in 2008 and 2009, both horrible years for most airlines, LAN’s operating margin excluding special items remained at 12% for both years. That rose to 14% in 2010 and was a solid 10% in 2011, when LAN was still reporting separately from TAM—the merger wasn’t finalized until mid-2012.

TAM was a success story too. It also earned operating profits in the down years of 2008 and 2009 and showed flashes of brilliance earlier in the decade, such as the 15% operating margin it posted in 2006. Everything was going right for Brazil then: The currency was strong. The economy was booming. And after several mergers and liquidations, the airline industry was largely duopolized. TAM enjoyed a good year in 2010 too and stayed profitable in 2011, ex special items anyway. This really did look like a match made in airline heaven. “Checkmate,” as former Continental CEO Gordon Bethune had said about United and Continental.

But then came 2012, when LAN woke up to a painful realization. It was joining with TAM just as the fundamentals of Brazil’s airline industry were tanking. The economy slowed to a crawl. The exchange rate caused fuel and other dollar-denominated costs to soar. A young challenger called Azul, which itself would merge with the regional airline TRIP, was growing at a lightning-fast pace. So was Avianca Brazil. Weighed down by heavy Brazilian losses rooted in these adverse trends, the newly combined LAN/TAM lost…

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