The current stock market weakness could prove an opportunity to participate in major long-term growth in Latin America’s aviation industry. The area’s airline companies thrive due to limited competition in the region, rapid middle-class growth, strong secular economic growth accompanied by low unemployment and an increase in the international scope of Latin American businesses.
Economic growth forecasts have been revised higher in the past three months, despite the rise in commodity prices. World GDP is now forecast to rise 3.1% in 2011. As a result of this, and the strengthening of business confidence, the International Air Transport Association (IATA) is now forecasting growth in passenger markets of 5.6% this year, and growth of 6.1% in air cargo.
Asia-Pacific, Latin American and African airlines continue to benefit from the strong regional economic growth.
Signs of the strong volume growth are already visible in Latin America. Chile-based LAN Airlines SA (NYSE:LFL) reported that system passenger traffic increased 15.6% and capacity rose 15.2% in February as compared with a year earlier.
In addition to a healthy level of internal economic growth, airlines in Brazil can expect steady gains from international travelers. The nation is slated to host global sporting events such as the FIFA World Cup in 2014 (dozens of times bigger than the Super Bowl) and the Olympic Games in 2016. Sensing the tantalizing near-term prospects, Brazilian-based TAM SA (NYSE:TAM) placed a $3.2 billion order for 34 aircraft last month.
And it’s not just the airlines that might benefit here. Growth opportunities also exist for Brazilian aircraft manufacturer, Embraer SA (NYSE:ERJ), which commanded a 20% share of executive jets delivered globally, to be driven by overseas markets over the long-term.
Clearly, the largest near-term risk here is that high oil prices persist, cutting into the profits of airlines and forcing less efficient planes out of service. At $96 per barrel oil, the IATA is forecasting operating income for global commercial airlines at $18 billion, down 33% from 2010. We’re forecasting a bumpy ride for shareholders in the airline stocks, but a safe landing.
