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Was the TAM merger a mistake for LAN?

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LAN CEO Ignacio Cueto: “The question might be: Was it worth it to go into Brazil? Definitely.”

LATAM Airlines Group, created by the 2012 merger of Chile’s LAN Airlines and Brazil’s TAM, is going through a rough patch. Its net loss through the first nine months of 2015 topped $200 million, prompting LATAM to embark on a restructuring of its 2016-2018 fleet plan that aims to save $3 billion by deferring aircraft deliveries and selling aircraft. Its fleet commitments for the three-year period are being reduced by 40%.

Prior to the  merger with TAM, in which LAN acquired the second largest carrier in Brazil via a stock-swap transaction valued at around $3.5 billion, LAN had steady financial success—despite the 2008-2009 global financial crisis and a major earthquake in Chile in 2010. But Brazil’s once fast-growing economy is now shrinking and the country’s currency, the real, has collapsed. The merger with TAM and the creation of LATAM meant that LAN became highly exposed to Brazil, for better or worse. Lately, it has been worse.

Speaking last week at the Latin American and Caribbean Air Transport Association (ALTA) Airline Leaders Forum in San Juan, Puerto Rico, LAN CEO Ignacio Cueto (whose brother Enrique Cueto is LATAM’s CEO) said Brazil is in the midst of “a long, deep crisis,” adding, “In three years, I’ll tell you how we got out of this.”

Cueto was asked point blank whether he regretted LAN’s acquisition of TAM. “How many things in life would you not change if you could go back?” he quickly responded, generating a laugh from the crowd at the ALTA conference. He then turned more serious. “But sure enough, this is something I would not go back on,” Cueto said. “The question might be: Was it worth it to go into Brazil? Definitely.”

He explained that LAN, which prior to the TAM merger had launched affiliates in Argentina, Ecuador, Peru and Colombia, wanted to create a pan-continental airline that would become South America’s signature air transport operator. How can you do that without Brazil in the fold?

Cueto said LATAM is maintaining “as much optimism as possible” through the current difficulties. “Tough times happen and you have to rough them out,” he said.

I visited LAN’s headquarters in Santiago de Chile in 2012 just months after the LAN/TAM merger closed. Here’s a paragraph from the October 2012 ATW cover feature, LAN’s Leap, I wrote following that trip:

A strong impression gleaned—after spending a couple of days at LAN’s downtown and airport headquarters, maintenance base, and pilots’ training center—is that the early months of LATAM are proving to be somewhat overwhelming. “We could only see some [TAM] numbers” before the merger officially closed in June, LAN senior VP-corporate affairs Pablo Querol said. “Now we are forced on the fly to understand how TAM works and how that relates to how LAN works. The benefits of joining the two networks, the synergies expected, are going to be there. But we need to finish the research on how to combine the networks of LAN and TAM . . . Now that we can see the numbers of both carriers, we can figure out exactly what we need to do to get the synergies.”

My point in reprising the above paragraph is to note that, even before the current Brazil crisis, not all was smooth with the merger. LAN did “leap” into it without completely understanding TAM. 

In fact, at the 2013 ALTA Airline Leaders Forum in Cancun, Enrique Cueto conceded cultural integration issues had led him to push out management staff who had not bought into the merger. “There are people who don’t want to change and you have to replace them,” he said then.

To be fair to LATAM, all airlines in Latin America are suffering right now. “The economic weakness has spared no one,” Copa Airlines CEO Pedro Heilbron, also speaking last week in Puerto Rico, said. But Brazilian carriers TAM and GOL appear to be, by far, suffering the most. Copa and Avianca, LATAM’s two biggest Latin American rivals, are managing to stay profitable.

Would LAN be better off without TAM? In the near term, undeniably yes. But the creation of LATAM was a bet on the long-term future of Latin American commercial aviation, about which Heilbron, the Cuetos and, among others, Boeing and Airbus remain very optimistic.  

LAN believes the current storm will eventually pass and, come the 2020s and beyond, it will have a network unrivaled in the region. As LAN’s Querol told me in 2012: “You don’t have any one [airline] company in the world that has the position on one continent that we have in South America. You don’t find one company on one continent that can offer the kind of connections we can to all parts of the world.”

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