Getting Greater South of the Equator: LATAM strives for thus-far elusive post-merger success

Is LATAM a loser? An untrained observer might jump to that conclusion after its four consecutive years of net losses. From 2011 through 2015, Latin America’s largest airline accumulated $676m in red ink, which sounds almost Air Berlin- or Alitalia-like in its severity.

But wait: Did these losses reflect the true health of LATAM’s business? Hardly. They were burdened by large and notvery-meaningful accounting adjustments that obscured an underlying profitability throughout most of the period, particularly beyond 2012. Sure enough, LATAM, which will report its Q1 earnings this week, was back in black ink in 2016, with or without extraneous accounting items.

Alright then, so if LATAM isn’t a loser, is it one of the airline industry’s big winners this decade? No, that’s not the case either. Instead, LATAM’s underlying operating earnings these past few years have been mediocre at best: 2% in 2012, 5% in 2013, then 4%, 5% and inching up to a still-underwhelming 6% last year.

As 2017 unfolds, LATAM is an airline still striving for the success it envisioned at its formation five years earlier, when the Chilean airline LAN merged with the Brazilian airline TAM. A year prior to the merger’s completion, LAN itself was still earning double-digit profit margins, something it managed to do even in 2008 and 2009, during the fuel spike and then the thick of the global financial crisis. At that time, LAN was a big industry winner—a profit superstar, really, and one emboldened to fill the big Brazilian white spot in its network by engineering the TAM mega-merger. TAM at that point was earning smaller profits, for sure, but profits nonetheless, and with flashes of superstardom in the mid-2000s—its operating margin in 2006 was an outstanding 15%, beating LAN by a wide margin that year. The table seemed to be set for a highly synergistic merger: two strong airlines joining forces at a time when South America’s commodity-rich economies were booming.

Then came the letdown. The Brazilian market that LAN had coveted for so long quickly became not a land of riches but a quagmire. Commodity exports collapsed. The Brazilian currency tanked. The country’s politics descended into scandal and dysfunction. And airline yields plummeted. Last year, Brazil’s economy shrank a painful 4%.

This was no small matter for the combined company, which…

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