Bad news. I mean really, really bad news. On July 28 Chile’s LAN Airlines (LFL) reported that second quarter profit dropped a huge 93%, although the company did manage to stay profitable (to the tune of $4.2 million) during the quarter.
But maybe a turning point. On August 13 Chile’s central bank kept its benchmark interest rate unchanged at 0.5%. That signaled the bank’s intention to keep stimulating the economy but also indicated—in that the bank didn’t cut rates further—that the economy may be nearing a bottom after seven interest rate cuts.
LAN Airlines has come through the global economic slowdown in much better shape than most of the world’s airlines.
 Even the disastrous results of the second quarter were a result of a $53 million loss on fuel hedging rather than from a collapse in traffic. Excluding the fuel hedging losses the airline made a second quarter operating profit of $88 million, an increase of 56% from the second quarter of 2008.
Passenger revenue fell 11% in the quarter from the second quarter of 2008. Cargo revenues were hard hit, though, plunging 43% from the second quarter of 2008. The bulk of LAN’s air cargo revenue comes for its Chile to Miami routes that have been heavily hit by the U.S. recession.
Even in this tough period, though, LAN Airlines has kept its passenger load factor pretty much steady. In July 2009 it was 76%, down just 2.8% from July 2008. System passenger miles climbed 6.7% from July 2008. System capacity (measured by available seat miles) climbed by almost 11%.
Chilean economists project that the national economy shrank by 4.4% in the second quarter and that GDP will contract for all of 2009. That will be the first time in a decade that Chile’s economy has shown negative growth.
Chile’s national bank had raised rates to a high of 8.25% in 2008 to fight inflation that had reached 9.9%. Annual inflation in Chile slowed to 0.3% in July thanks to the country’s recession. Economists are projected deflation for 2009 as a whole because of falling fuel costs.
Those economists are projecting that the economy will pick up in the second half of 2009. Retail sales, new car sales, building permits, and cement orders all showed slight improvement in June.
(Full disclosure: I own shares of LAN Airlines in my personal portfolio.)
Jim,
I surely would like to echo other requests that you continue to provide target price information and recommendations as you previously have with MSN. You always provided a really valuable combination that I have not gotten anywhere else – (1) Your excellent analysis – great analysis of the big picture and how it impacted the market, specific sectors, and specific stocks – provided in an understandable, common-sense way that I have seldom found, (2) recommendations, and target prices and dates for your stock recommendations.
This rare combination has made you the market analyst I have followed the most and depended upon the most. I really hope you can continue to include the specific recommendation information that you have in the past?
Jim,
Thank You for all you do! I am a HUGE fan and a few days age received your book. I agree if there is any way possible for you to expound on your recommendations as you did with MSN as some of us are NEWBIES!, combared to others.
The direction would be GREAT with your knowledge but either way I AM HOOKED ON JIM JUBAK! Thank You Again! You are AWESOME.
Jim,
I like the fact that you have gone out on your own and are providing more regular updates to your picks. However, as a regular reader of Jubak’s picks for the last 3 years, I am a little dissatisfied with the format of your recent updates. Previously, when you posted updates to your picks on MSN, you used to conclude by providing clear direction to your readers, such as “With these recent developments, I am lowering my target to $x, keeping the target date the same.” , or “With this bad news, I am lowering my target price to $x and extending my target date to March 2010.” With the new format, I like the daily updated information you provide, but as a relative novice to the game, sometimes it is hard for me to decipher the true significance of the information you provide. What does it mean exactly in terms of this stock?
Would it be possible for you to provide more concrete direction for your readers with the updated news? Even if you don’t get so specific as to name a new price, a concluding sentence that provides more directional guidance would be very useful. Thanks. bhallock
Are you doing this intentionally to a
Jim,
I spend time down in the region and you are exactly right. I have flown Lan a few times as well. Traveling from destinations such as Tierra Del Fuego are 2-3 days by car and 3 hrs by plane. Getting supplies into the area is very expensive as well.
They are also strengthening their Argentina domestic market which I think is the real key. There is some protectionism built for locals as they can get preferential fares on Aerolinas Argentinas (and Austral). Argentina is so cheap comparatively to other countries around and is a huge destination spot.
This pick also is interesting play as the Chilean Peso has a solid future forecast on the dollar with a solid commodity base. Jim I always appreciate how you did these stocks up!
I’ve never flown LAN although I’ve taken flights on quite a few other South American and Central American carriers. One of my strongest impressions is that air travel is a true growth market in these countries with increasing incomes and where ground travel can be so impossible. When we stayed in Panama last March, the owner of “our” hotel flew from one coast to the other to go shopping at Costco. The trip took him less than 2 hours by air each way. By road about 8 hours in one direction. You’ve also got to look at the competition in each market. The analogy to the U.S. or European markets can be very misleadingt because in the U.S. all you really need to start a new airline is a bundle of cash from optimistic investors. Not anywhere near that easy in the Latin American markets.
I’m wondering if Jim spent any time traveling in South America before this pick?
I think one of the best (and safest) plays in South America. Chilean government is well advanced compared to its peers. South America will be a growth story with commodities and farmland
I can’t I spent all my money on bonds! LOL
load up!
Wanna know to make a small fortune? Start with a large fortune and day trade. 😉
With to bond bubble about to pop why invest in stocks at all?
I think that the increased risk associated with airlines is reflected in the value of their stocks in general. And I think LAN Airlines has excellent potential.
Jim,
out of all the sectors, why in god’s name monkey around with an airline stock??
for those of you living under a rock and haven’t heard this saying……
“wanna know how to make a small fortune? Start with a large fortune and buy an airline”
enjoy the rest of your vacation!