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On 13 August, LAN Airlines and TAM Airlines announced plans to merge through a holding company, called Latam Airlines Group. The brands will be operated separately. If the deal is finalised, the new entity will control over 17% of passenger revenues in Latin America, creating the largest airline in Latin America.

Bigger is better for airlines

The recession has forced airlines, especially in poor performing regions, to consolidate. The benefits of consolidation include better capacity control, geographic diversity, economies of scale to cut costs, and robust networks to drive revenues.

The merger of LAN and TAM is in direct response to the merger of Avianca and Taca, which was finalised in February 2010. However, now LAN and TAM will be, by far, the largest player in the region. Latam Airlines Group will have revenues of US$9 billion—three times larger than Avianca-Taca.

Implications of the merger

Overall, this is a strong move for both LAN and TAM, solidifying their codeshare agreement into merger that will allow for more coordination on routes and pricing as well as increasing negotiating power with suppliers. Furthermore, this expands the geographic presence of both airlines. TAM does not have domestic operations outside of Brazil and LAN, while strong in Chile, Argentina, Ecuador and Peru, could not break into the large and fast growing Brazilian market due to foreign ownership restrictions.

It will likely lead to better, more efficient connections between Brazil and other South American countries as these two companies rationalise their routes, much like Avianca-Taca have done. This will likely lead to stronger growth in intra-regional air travel.

Let battle commence

The merger certainly indicates a battle between LAN-TAM and Avianca-Taca for Colombia and Brazil. LAN announced that it intends to operate domestic flights within Colombia in 2011. LAN-TAM have significant cash on hand to survive the fare wars in Colombia and build a permanent presence, likely to connect Brazil and Colombia as well. This is will compete directly with Avianca-Taca’s Avianca subsidiaries in Colombia and Brazil. LAN-TAM may try its best to drive Avianca from the Brazilian market to defend its turf.

The other significant implication is for the global alliances. LAN is a part of oneworld while TAM is part of the Star Alliance. Although TAM just joined the Star Alliance in May 2010, there could be a possibility that TAM defects to oneworld since LAN is well integrated with that alliance. This would lead to a significant gap in Latin American coverage for the Star Alliance.

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