LAN/TAM increase merger synergy estimates

Chile's LAN Airlines and Brazil's TAM said their planned merger under LATAM Airlines Group, expected to be completed by the end of March, will produce even more synergies than previously expected. The carriers last week revised upward from $400 million per year to $600-$700 million annually the value of the synergies expected to result from a merger that will create a mega-airline group controlling more than 40% of Latin America's air passenger market.

The $600-$700 million annual figure won't be realized until four years after the completion of the merger transaction, but the airlines believe $170-$200 million will be achieved within a year of the combination's finalization.

The higher synergy estimate "reflects further revisions and updates of the expected combined cost savings and revenue generating opportunities arising from the proposed combination and includes best practice sharing benefits that have been identified in certain areas," the carriers said in a statement.
Breaking down the numbers further, LAN/TAM said approximately 40% of the potential synergies will come from increased passenger revenue ($225-$260 million), 20% from higher cargo revenue ($120-$125 million) and 40% from cost savings. According to LAN/TAM, expense savings will come from consolidating frequent flyer programs ($15-$25 million), coordinating airport and procurement activities ($100-$135 million), improved maintenance efficiency ($20-25 million) and information technology system convergence ($120-$130 million).

The synergy estimates do not count one-time merger costs of $170-$200 million expected to be incurred by LAN/TAM. But those costs will be somewhat offset longer-term by reduced investments of around $150 million for engine and spare part purchases that will be avoided because of the merger.

Source: ATW