Recently, TAM S.A. (TAM) posted second-quarter results which were hurt by a 22.6% depreciation of the Brazilian real against the US dollar towards.

Domestic revenue fell 15.9% year over year in local currency, international sales declined 3.1% year over year and Cargo revenue was down 16.0%. However, cash flow generation was sound. The company reported a net income of R$788.9 million, up 134.1% year over year based on quarterly net financial income of R$1,283.9 million.

Currently, as the Brazilian real has appreciated against the US dollar, net income should grow in the following quarters. We believe that the combined effect of lower interest rates and a stronger Brazilian real will boost demand for international flights in the country through the rest of the year.

For the month of July, TAM set a record 88.3% market share in the international market, representing 15.8% growth year on year. However, domestic market share was 43.2%, down 7.9% compared to the same period in 2008.

A stronger real will make international travel more affordable. However, there is growing concern that the liberalization of international flights tariffs in Brazil would lead to a 50% drop in airfares in the following quarters.

While we do expect tariffs to fall, we do not see a drop below 30%-40% as demand will rise with availability of credit and a stronger real. Moreover, the recent recovery of real will definitely reduce interest expenses and make international air travel cheaper for Latin American travelers.

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