Brazil’s Real Rally May Rescue Tam From Oil Hedges
By Heloiza Canassa
Aug. 10 (Bloomberg) -- A soaring real is helping rescue Tam SA, Brazil’s biggest airline, from wrong-way bets that crude prices would average more than $100 a barrel this year.
The world’s best-performing currency has risen 26 percent this year, cutting Tam’s dollar-denominated debt and aircraft costs and offsetting losses tied to oil hedges, said Victor Mizusaki, an airline analyst at Itau Corretora in Sao Paulo.
“The currency gain has a very positive impact, it’s the most important thing holding earnings up,” Mizusaki said in an Aug. 6 telephone interview. He rates Tam “sector perform.”
Tam may say this week second-quarter net income rose to 305.2 million reais ($166 million), the highest since at least 2003, according to the median of four analysts in a Bloomberg survey. The Sao Paulo-based airline posted a loss of 1.12 billion reais in the fourth quarter after betting oil, which touched a record $147.27 on July 11, 2008, would extend a rally into 2009. The economic crisis has curbed demand, leading crude to fall more than half from July’s highs to about $70 a barrel.
Tam hedged more than 45 percent of estimated consumption this year at prices of at least $105 a barrel, according to Deutsche Bank AG and Itau. The oil hedges resulted in a 919 million-real expense in the fourth quarter after it renegotiated some contracts, Tam said. In the first quarter, the company had an expense of 62 million reais related to the hedges, reducing net income to 54.43 million reais.
Currency Helps
“The currency helps airlines on many fronts: it cuts costs and when the real rises Brazilians tend to travel more,” said Greg Lesko, who helps manage $625 million as head of equity at Deltec Asset Management in New York.
Tam, which is scheduled to report earnings Aug. 13, wouldn’t comment on the hedges, according to a spokesman who declined to be named, citing company policy.
Smaller competitor Gol Linhas Aereas Inteligentes SA has a different oil-hedging position. The company has 22 percent of its expected fuel needs in the second half hedged at $72 per barrel, according to the first-quarter earnings statement.
Crude oil for September delivery fell 33 cents to settle at $70.60 a barrel at 2:56 p.m. on the New York Mercantile Exchange. Oil will fall to $60 by the end of the third quarter and end the year at $65, according to the median estimate of 33 analysts in a Bloomberg survey.
Real’s Rally
Brazil’s real rallied as a rebound in the price of the country’s commodity exports including iron ore, central bank interest-rate cuts and share offerings by Brazilian-based companies lured foreign investors, swelling dollar inflows.
Gol, based in Sao Paulo, may post second-quarter net income of 14.8 million reais after a loss of 216.8 million reais a year earlier, according to a survey of four analysts. Gol is scheduled to report earnings tomorrow.
“Although the second quarter is seasonally the weakest for the industry, these results are likely to be positively affected by the 15.7 percent appreciation of the real against the dollar in the second quarter,” Mizusaki wrote in a report today.
The IMF expects Brazil’s economy to shrink 1.3 percent this year, before rebounding 2.5 percent in 2010.
Tam fell 38 centavos, or 1.6 percent, to 24.20 reais in Sao Paulo, after earlier rising as much as much as 3.7 percent. The decline followed a drop in the Brazilian real, which fell 1.1 percent to 1.8407 per dollar today.
Tam’s Gains
Tam gained 27 percent this year, underperforming Gol’s 61 percent rally and a 51 percent rise for the Bovespa benchmark stock index.
Tam gets about 33 percent of its revenue from international operations, compared with 10 percent for Gol. Both airlines have about 60 percent of their costs linked to the U.S. currency, most of which are aircraft leases and fuel expenses, according to Mizusaki.
Tam’s fuel hedging “puts it at a strategic disadvantage in 2009 and represents a substantial cash obligation at current oil price levels,” Deutsche Bank analyst Dan McGoey, who is based in Mexico City, wrote in a July 31 note to investors.
Airlines are struggling to stay profitable amid the global economic contraction and a collapse in demand for business travel. British Airways Plc had a second-quarter net loss of 106 million pounds ($175 million) on July 31 and said ticket prices may fall further. Delta Airlines Inc., the world’s largest carrier, posted a loss of $257 million for the period.
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