Star Alliance Inducts TAM

TAM S.A. (TAM - Analyst Report) signed partnership agreements with two members of Star Alliance yesterday. It signed agreements with airline bmi (British Midland Airways Ltd.) and Austrian Airlines to allow members of the TAM Fidelidade program to accumulate and redeem points on flights operated by the British company and Austrian company respectively. The partnership benefits TAM's customers since Oct 1. Other members of Star Alliance include Thai Airlines, Shanghai Airlines and U.S. Airways.
 
Effective Nov 1, members of bmi's Diamond Club program will also be able to earn and redeem points on TAM flights. The agreement was signed with the strategy of integration into Star Alliance. With this, the company will establish partnerships with the main airline companies in the world, which will help in expanding the benefits to the clients.
 
The agreement will help clients by simplifying the flight reservation process, allowing convenient connection on one single airline ticket and through baggage check-in. This will increase demand in the domestic market.
 
We believe that the combined effect of lower interest rates and a stronger Brazilian real will also 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.
 
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, we reiterate our Neutral recommendation on the stock.