LAN Airlines S.A. and TAM S.A. have entered into a non-binding MoU that outlines their intentions to combine their holdings under a single parent entity.

Published: 16 Aug 2010

LAN Airlines S.A. and TAM S.A. have entered into a non-binding MoU that outlines their intentions to combine their holdings under a single parent entity.

The new group, to be known as LATAM Airlines Group, would include Lan Airlines and its affiliates in Peru, Argentina and Ecuador; Lan Cargo and its affiliates; TAM Lineas Aereas S.A.; TAM Mercosur and all other holdings of LAN and TAM.

Each of the airlines in the group would continue to operate under their existing operating certificates and brands.

The transaction is subject to both parties entering into a binding definitive agreement and satisfaction of conditions.

In 2009 these carriers had combined revenues of US $8.5 billion and carried more than 45 million passengers.

The combination is expected to generate annual synergies of approximately US$400 million. These synergies are expected to come broadly in equal proportion from alignment of the passenger networks, growth in the cargo network (both internationally and in Brazil), and reduced cost.

(Other than net cost synergies, airlines when they merge also talk about revenue synergies. For instance, some of the revenue synergies from merging airlines come from an enhanced route network and better overall brand presence. In regards to alliances, revenue management should be heavily involved in the class mapping process both at the negotiation phase of an alliance and throughout the life of the alliance, Read more: Assessing the role of RM in ensuring financial success of an alliance in the aviation industry).

Structure

The all-stock transaction would consolidate the economic interests of LAN and TAM under a single parent entity while satisfying the foreign ownership and control requirements of each country where they operate. In connection with the transaction, LAN Airlines would be renamed LATAM Airlines Group and would serve as a parent company that will align activities for all group holdings.

TAM shareholders would be offered 0.90 shares of common stock of LATAM for each share of TAM.

LATAM would retain its listing in the Santiago stock exchange and its ADR listing in the New York Stock Exchange and plans to list its shares, via BDRs, in the Bovespa in Brazil.

Within the group, TAM would continue to operate as a Brazilian company with its own structure. The current holdings of LAN Airlines S.A. would operate as an independent business unit within the group (and be referred to as LAN Airlines). Each airline within the group would maintain its current headquarters and governance structure.

The controlling shareholders of LAN and TAM have agreed to a governance model to jointly manage strategic decisions relating to the alignment of the activities of LATAM group holdings.

Mauricio Rolim Amaro, currently Vice-chairman of the Board of Directors at TAM S.A., will serve as Chairman of Board of Directors of LATAM and Enrique Cueto, currently CEO of LAN, will serve as LATAM CEO.

Within the Group, Maria Claudia Amaro, currently Chairman of the Board of Directors of TAM, will serve as Chairman of TAM under the new structure. Marco Bologna, currently President/CEO of TAM S.A. will serve as CEO of TAM. Libano Barroso, currently president of TAM Lineas Aereas S.A., will remain in that capacity. Ignacio Cueto, currently President/COO of LAN, will serve as CEO of LAN Airlines.