TAM Sets New Record

Earlier this week, TAM S.A. (TAM - Analyst Report) disclosed its operating data for August 2009. For the month, TAM gained a record 89.4% market share in the international market, representing a 15.5% growth year on year. However, the domestic market share was 43.8%, down 10.4% compared to the same period in 2008.
 
In the domestic market, TAM experienced a 5.9% increase in offered capacity but a 1.7% decrease in demand.  In the international market, the company obtained a 16.8% growth in demand when compared to the same period last year, while the supply grew 24.5%.
 
Currently, as the Brazilian real appreciates against the U.S. dollar, net income should grow in the following quarters. We believe that the combined effect of lower interest rates and a stronger Brazilian real will boost demand for international flights among domestic travelers in the country through the rest of the year.
 
A stronger real will make international travel more affordable. However, there is growing concern that the liberalization of international flight tariffs in Brazil would lead to a 50% drop in airfares in the following quarters.
 
While we do expect tariffs to fall, we do not see a drop below 30%-40% as demand will rise with availability of credit and a stronger real. Moreover, the recent recovery of the real will make international air travel cheaper for Latin American travelers.
 
However, the growing competition in the Latin American airline industry is a source of concern. Additionally, the recent surge in oil prices also remains a problem. Furthermore, we do not expect a significant recovery in the global airline industry even in 2010. Thus, reiterate Neutral recommendation on the stock.