Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Entry archive:

A US airways plane takes off behind an American Airlines jet at Ronald Reagan National Airport last month. (KEVIN LAMARQUE/KEVIN LAMARQUE/REUTERS)
A US airways plane takes off behind an American Airlines jet at Ronald Reagan National Airport last month. (KEVIN LAMARQUE/KEVIN LAMARQUE/REUTERS)

Global Exchange

America's airlines: something in the air Add to ...

It’s all happening in the American skies right now - on both sides of the equator. To the south, Chilean flag-carrier Lan has just begun the share swap for its takeover of Brazil’s Tam, creating the world’s biggest airline by market value. To the north, meanwhile, management of American Airlines caved in on Friday, now saying a merger within bankruptcy is an option.

More related to this story



Investors would be forgiven for ignoring the U.S. and concentrating fully on Latin America. After all, the industry north of the equator has been a disappointment for as long as anyone can remember. The share price of Brazil’s number one carrier, on the other hand, has soared 2,500 per cent over the past decade; Lan has gone up more than 15 times. Latin America has the economic growth, the expanding middle class and the terrible roads. During the 2000s, Tam increased revenue per seat kilometres three times the rate of Brazil’s output growth.



Trouble is, airlines have proven to be terrible investments the world over, no matter how exciting the initial potential. Indeed, Tam has fallen into Lan’s arms partly because of intensifying local competition. What is more, volatile fuel prices and swirling exchange rates are a global problem. Having more than half of their input costs priced in dollars allowed Lan and Tam to spur demand by cutting prices as their domestic currencies appreciated. Last week, however, both airlines reported quarterly profit falls of 22 per cent versus last year, thanks to high fuel costs and weaker demand.



Still want to pay 25 times forward earnings for Lan? Investors could own US Airways, for example, for a fifth of that multiple. The synergy and consolidation benefits of the U.S. carrier owning American Airlines would be considerable. Whether those benefits are enough to offset the inherent risks of owning any airline, however, is debatable.



Follow us on Twitter: @GlobeBusiness

In the know

Most popular video »

Highlights

More from The Globe and Mail

Most Popular Stories