Brazilian airline TAM is "well positioned" to withstand the current economic downturn and the burden of costly fuel hedge contracts that have weighed on its balance sheet, chief executive David Barioni Neto said in an interview on Tuesday.
"In 2009 our financial result is going to be positive," Barioni told the Reuters Latin American Investment Summit in Sao Paulo. "We're well positioned and our balance sheet is not under stress."
He made the remarks a day after Fitch Ratings cut the company's debt ratings to BB- from BB, citing concerns about the deterioration of its credit profile and its operating margins.
Barioni also said that TAM has embarked on strict cost-cutting to weather the current economic turmoil, and added that money-losing fuel and currency hedge contracts will return to profitability this year.
He added that he was confident that Brazil's economy is already on the rebound and that passenger traffic in 2009 would outpace expectations.
"The worst is over," Barioni said.
Like many airlines around the world, TAM sought to hedge against the skyrocketing cost of jet fuel last year by locking in a strike price above USD$100 a barrel.
That bet turned sour when the price of oil dropped in the second half of 2008 and Brazil's currency, the real, weakened sharply against the dollar, leading TAM to book a net financial expense of BRR1.96 billion reais (USD$991.6 million) in the fourth quarter of last year.
As a result, TAM chalked up a net loss of BRR1.12 billion in the quarter, compared with a profit of BRR118.5 million in the year-earlier period. The company is due to report first-quarter results on Thursday.
Barioni, a professional pilot who previously served as an executive at TAM's rival Gol, said TAM has no plans to increase the use of derivative contracts to cope with currency fluctuations.
In justifying its decision to downgrade TAM's credit rating, Fitch voiced concerns about the airline's ability to service its debts without deteriorating its cash flow.
Barioni said TAM is prepared to service BRR928 million of debt that matures within the next 36 months without the need to sell bonds or deplete cash holdings.
He also said the company is considering several options to further trim expenses, and it might even ask Airbus to delay plane deliveries scheduled for this year until 2010.
"We might ask them to push the deliveries back, but no way would we cancel them," he said.
DEREGULATION DEBATE
Barioni also said a recent move to deregulate international air fares in Brazil will lead to industry concentration as it compresses profit margins for domestic carriers. The measure is forcing TAM to cut costs in a sector where margins have hovered between 3 percent and 5 percent over the past 15 years.
TAM's margins at the end of last year were the equivalent of 5.7 percent of revenues. TAM has a market share for domestic flights of about 50 percent and 37 percent for international flights out of Brazil.
TAM and Gol, which together command more than 90 percent of Brazil's aviation market, have battled the measure, defended by government regulator ANAC, saying it puts local airlines at a disadvantage to their international counterparts because of high fuel costs and domestic taxes.
"Deregulation only led the bigger players to attempt to grow further at the expense of the smaller ones," Barioni said. "The Brazilian market lacks the required size to withstand more than two carriers."
Barioni said Brazil's high tax burden, which he dubbed the "Brazil penalty," will make it harder for local airlines to compete with foreign carriers. He said state aid through a credit facility by government development lender BNDES might be necessary to mitigate the impact of the measure.
Consumers have long fretted about costly air fares and a lack of options among carriers, which ANAC and analysts say enjoyed protection from competition for decades. According to a recent ANAC study, tickets bought in Brazil are up to 66 percent more expensive than those purchased abroad for the same international routes.
