Air travel to Latin America still growing

Can Latin air travel stocks find a bottom?

By Rudy Martin | 2008-07-07

Air travel numbers in Latin America continue to hit new highs. In contrast the prices of air travel-related stocks continue to decline. At some point, these two must head in the same direction. Maybe the market has it wrong and now is a good time to look into these stocks.

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Last week GOL announced that traffic continues to grow at a solid pace. Consolidated domestic passenger traffic for June 2008 increased 18% and capacity increased 25% year-over-year (vs. June 2007). Domestic consolidated load factor for the month was 67% and international consolidated load factor was 58%. GOL’s total system load factor for the month of June was 65%.

The traffic results from other sources reinforce that air travel to and within Latin America is still growing over last year’s levels. According to the company that manages the Cancun, Mexico airport, Grupo Aeroportuario del Sureste, (ASR: NYSE), overall domestic and international travel is up 10.7% at the nine major Mexican airports.

The market reaction has been negative on the airline stock ADRs. Gol Linhas Aereas Inteligentes (GOL: NYSE) is down 71% over the last 52 weeks. The other airline stocks, Tam, SA (TAM: NYSE), Lan Airlines (LFL: NYSE), Copa Holdings (CPA: NYSE) are also down 51%, 39% and 62% respectively over the last year.

The reaction has been a little less negative on the airport management stocks where fuel costs are not a direct factor. ASR is down 6% over the last year. The interesting thing about this is how airlines are viewed as direct losers when fuel prices rise.

The assumption that airlines only make money with low fuel prices may be wrong. While some profit erosion will occur, fuel costs must be eventually passed on in the form of higher prices. These companies are dominant in their markets and do have substantial pricing power, especially as international competitors find it more expensive to operate too.

If you believe that inflation is a reality and that it is a factor in Latin economies then maybe the airlines actually benefit from inflation.

Company News

• PetroBras (PBR: NYSE) Brazil's state-run PetroBras set a new monthly oil production record in Brazil up 4.2 higher than in the last year. It also posted 36% greater natural gas production. This is in stark contrast to production statistics coming out of Mexico and Venezuela.

• Vale (RIO: NYSE) Vale announced a global equity offering of up to $15 billion. The price is expected to be set next week. Vale will use the net proceeds of this offering for general corporate purposes, which may include financing its program of organic growth based on its US$59 billion investment plan, strategic acquisitions and increased financial flexibility. Vale remains one of our top focus list stocks at Latin Capital Markets.

• Sociedad Quimica y Minera (SQM: NYSE) the stock was among the hardest hit last week. The ADR dropped 20% over five trading sessions from $48 to $38 as investors took profits on this very popular stock in the wake of news about Brazil increasing its output of crop nutrients.

General News

• Venezuela’s state oil company Petroleos de Venezuela (PDVSA) announced that it expects its capital investments to reach $15 billion in 2008, up 50% compared to $10 billion in 2007, reported the daily Venezuelan newspaper El Panorama. However, the 50% increase in capital investments is only expected to result in a single digit increase in the production of crude oil.

• The emerging capital markets dropped again last week. The average Large Cap Latin Beat Universe Stock was down 5% last week and is down 11.5% for the month. Stocks with gains for the week totaled 12 and losers totaled 105. Among the gainers was Cosan (CZZ: NYSE) the leading ethanol and energy stock up. The most dramatic drop was posted by SQM, down 20% in one week.