Brazilian airline TAM said Monday it will pay BRR13 million reais (USD$7.3 million) to buy control of smaller rival Pantanal, expanding its footprint in the fast-growing regional aviation market and winning more slots in one of the country's busiest airports.
As part of the deal, Brazil's largest airline will also assume about BRR70 million of debt owed by Pantanal, executives told analysts. The transaction still requires regulatory approval from the civil aviation authority and antitrust authorities.
Pantanal services six cities in the Brazilian states of Sao Paulo and Minas Gerais. Last month, regulators deprived Pantanal, which is in bankruptcy proceedings, of about 61 of the 196 slots it had at Sao Paulo's domestic airport, Congonhas, because of frequent service glitches and delays.
While bolstering TAM's presence in Congonhas, one of Brazil's busiest airports, the purchase would present TAM with an opportunity to expand in farming and agribusiness regions where demand for aviation services is growing, analysts said.
"Did they have to buy a problematic balance sheet to enter this market?" Osmar Camilo, an analyst with Sociedade Corretora Paulista, said in an interview. "Markets will gauge that at some point."
By integrating Pantanal, TAM could eventually fly to 100 Brazilian small- and mid-sized cities where demand for jets with fewer than 100 seats is growing steadily, acting CEO Libano Barroso said.
Air traffic growth in Brazil should increase in these regions as mainline routes seem to be nearing saturation.
"We are incorporating a new business line that aims at combining our strategy of operating a smaller carrier like Pantanal that flies planes with less than 100 seats," Barroso said in an interview.
'QUITE EXPENSIVE'
TAM could pay about 18 times Pantanal's 12-month earnings, a level that an analyst called "quite expensive."
"The move seemed a little defensive, fearing rivals could go and get the remaining Pantanal slots in Congonhas," said the analyst, who declined to be quoted by name.
TAM's main competitor, GOL, currently holds the most slots at Congonhas, thanks to its purchase in 2007 of Varig, once Brazil's flagship airline.
TAM already has regional code-share partners with domestic air carriers including Trip.
Barroso said in November that travel demand was rapidly improving in Brazil, which could lead the company to raise ticket prices as early as the start of 2010 by around 10 percent.
TAM could beef up Pantanal's existing fleet with the purchase of Embraer aircraft. The regional carrier currently operates three ATR-42 planes, Barroso said.
Buying aircraft from Embraer would mark a shift away from TAM's long-standing policy of relying on one major supplier.
Out of TAM's 133 planes, 126 are made by Airbus and the rest come from Boeing. Switching to other suppliers could increase operating costs as well as maintenance, purchase and training expenses, analysts said.
