Categories Analysis, Industrials

LATAM Airlines shares rally; is it a buy?

Airline stocks got a relief this week after travel restrictions were lifted in many countries. The NYSE ARCA Airline Index (XAL), which consists of 16 airline companies (mainly US carriers), continued the positive momentum it experienced during the last week. Out of these 16 airline companies, only one company had given a negative return in the past one month and that is Chile-based LATAM Airlines (NYSE: LTM), which filed for bankruptcy two weeks back.

Recent performance

While LTM stock declined 17% in the last 30 days, it is the only stock that soared more than 100% (118%) in the past week. LATAM shares got the lift as investors’ sentiment was boosted by the recent upward movement in the airline industry. As passengers started to travel again, all the major airlines have started slowly increasing their flight schedules. However, everyone knew that travel bookings will be lower than the pre-pandemic level and all the carriers are taking actions to reduce their costs.

Bankruptcy filing

On May 26, LATAM Airlines Group filed for Chapter 11 protection in the US with the financing support of $900 million by the Cueto and Amaro families and Qatar Airways, who hold 21.46% and 10% stake of LATAM, respectively. 

While LATAM’s Chile, Peru, Colombia, Ecuador and the US affiliates are included in the Chapter 11 filing, the largest South American carrier excluded the affiliates in Argentina, Brazil and Paraguay. LATAM also said that it is discussing with the Brazilian government about the next steps and financial support for their Brazilian operations.

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LATAM Airlines had assured that it will continue to operate passenger and cargo flights, subject to demand and travel restrictions. LATAM group expects to increase its total pre-crisis capacity from 5% to 9% in this month, while preparing to reach 18% in July. The company said that the employees will get their pay and receive benefits as per their employment agreements. At the end of March 31, 2020, the group had a total of 42,589 employees compared to 41,729 employees as of December 31, 2019.

Delta Air Lines partnership

Delta Air Lines (NYSE: DAL) joined hands with LATAM by paying $1.9 billion to LATAM and now it holds 20% of LATAM’s shares. During its Q1 earnings call, when answering a question on investments in international partners, CEO Ed Bastin said,

“We’re not in a position to be making any financial commitments to any of them and they are aware of that. And we will work with them as the recovery takes hold. This recovery is going to be choppy. It’s going to take some time. My expectation, I think our expectation is domestic will come back faster than international, but international will come back, and there is a path to getting there. And we’re very proud of those partnerships and I have no interest in trying to sell them or monetizing them at this point or any time in the future candidly.”

Q1 results

On May 29, LATAM reported a loss of $2.12 billion in the first quarter of 2020, hurt by $1.73 billion of goodwill impairment loss as a result of the COVID-19 crisis. Total revenue declined 7% year-over-year. Passenger revenue and cargo revenue decreased by 7% and 4%, respectively. At the end of March 31, 2020, the group had a total of 42,589 employees. At the end of the first quarter, LATAM’s financial debt amounted to $7.58 billion and cash and cash equivalents totaled $1.66 billion. The company didn’t conduct the first quarter earnings call as it filed for Chapter 11.

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What’s next

Even though the airline stocks have bounced back to some extent recently, it’s better that investors follow the wait and watch approach. The worst is not yet over for the airline industry as no one knows when the economic uncertainty will come to an end. Shares of LTM jumped about 38% today and surged about 15% further in the extended hours. However, investors have to be still cautious while buying a company’s shares which had filed for bankruptcy. It’s better to stay away from LATAM despite its recent upward momentum and higher trading volumes.

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