Latin American aviation stocks are about to take off

The Latin American travel market has been undergoing a shake-up that could make handy profits for UK investors. James McKeigue picks the best ways to buy in.

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LatAm Airlines, formed from the merger of Brazil's TAM and Chile's LAN, is well-placed to benefit

I write this in the middle of the mother of all flights. After spending six weeks in Peru, I was due to head back to London, but decided to pop' over to Ecuador for a weekend before I did. The result is a monster of a return journey going from Guayaquil via Quito to Lima in Peru, then to the US and then finally to London.

Those of us who travel a lot to Latin America are used to these types of inconveniences. For a long time Brazil, Argentina and Colombia were the only Latin American countries with direct flights to the UK. A combination of old history Britain's only colony on the Latin American mainland was British Guiana (Guayana) mixed with recent history places such as Peru banned British flights after the Falklands war meant that the UK feels further from Latin America than it should do.

But now that's starting to change. Last year Colombian carrier, Avianca, launched the first London to Bogota route. And just last month, British Airways announced two new Latin America services: one direct to Lima, and the other to San Jos, Costa Rica.

The new flights are great news for me. But they're also part of a wider shake-up in the Latin American travel market that could make handy profits for UK investors. I've been writing about Latin American tourism for years now, and so far the theme hasn't let us down. The Mexican airport operator Grupo Aeroportuario Centro Norte (Nasdaq: OMAB) is up 25% since I first wrote about it in 2013 and up 15% since I wrote a bullish update back in March.

Now I have another stock that I think could do even better.

Peru just got closer

The new direct flights from the UK to Latin America should cut around four hours from the Peruvian journey, bringing it down from 16 hours to 12. But more than that, these flights will cut out the bane of any business traveller's trips to Latin America the dreaded US stopover.

Right now, UK passengers have a choice of flying to Europe to catch a flight bound for Latin America, or getting a connection in the US. And the stopover in the US is particularly annoying. Strict security restrictions mean you have to reload your baggage for the second flight, while lengthy queues at immigration and the countless security checks can often make you miss your connection. The joy of the US stopover experience is topped off by airport staff that have mastered the art of barking "Sir!" at you in a way that seems ruder than any insult.

The chance of avoiding that is to be celebrated but of course, this is about more than just convenience. Anwar Chodhury, UK Ambassador to Peru, told me that the direct flight "will give a huge boost to trade [and] its reintroduction is a very tangible sign of the strong link between Peru and Britain". But, while the Ambassador has long been lobbying for the flight, he also acknowledges that the fundamental reason for its return is because of the strong business case. "It's something that we have been lobbying hard for but of course a business will only make a decision like this if it sees the commercial potential."

And that's what should be getting New World readers excited.

Ignore the short-term turbulence

The logic for BA's move is the growing Latin American tourism industry. Increasing numbers of Britons want to visit Latin American cultural wonders, such a Peru's Inca Trail, or natural wonders, such as Costa Rica's incredible ecological reserves. But while British tourist visits to Latin America are growing fast, the UK is just a small part of the story.

Analysis from the UN's World Tourism Organisation (UNWTO) shows that 80% of tourism is generated by visitors from within the region. That is to say, Latin Americans visiting other parts of Latin America. The UNWTO says that, over the next decade, Latin American international arrivals will grow by 4.4% a year twice the rate of developed economies.

The growth is being fed by a number of factors. Firstly, the massive increase in the Latin American middle class around 80 million people have been lifted out of poverty since the turn of the century has created a larger market for local tourism.

Another boost is coming from improving infrastructure. The region has embarked on a construction boom, with new airports, roads and railways springing up across Latin America. The spread of trade blocs such as the Pacific Alliance also helps the industry by cutting visa requirements for citizens of member countries.

Now, you might think that this is a terrible time to invest in Latin American tourism. With commodity prices in a slump, Latin American economic growth has slipped to a measly 1.1%. And you might assume that less exports, lower foreign direct investment and severe cuts in government spending would all dampen Latin American tourism.

I'd disagree. For starters, that regional growth figure is skewed by Brazil's terrible performance. Places such as Chile, Mexico, Peru and Colombia are experiencing strong growth. Secondly, the iron law of aviation' something I first read about in The Economist suggests that it will take something far more powerful to stop the rise in Latin American air travel. The iron law of aviation' says that "rising numbers of urban middle-class people will mean rising demand for air travel, whatever short-term blips the economy suffers". For example, the number of kilometres travelled by fare-paying passengers on aeroplanes has grown by more than 800% since 1970.

chart

When you look at it like that, Latin American air travel is a one-way bet and this current Latin American slowdown provides a buying opportunity rather than an obstacle.

How to play it

Last time around I tipped Mexican Airport Operator Grupo Aeroportuario Centro Norte. The firm runs 13 airports across nine states in northern and central Mexico, serving Monterrey the country's industrial heartland and tourist destinations such as Acapulco. The firm is up by around 25% since 2013.

However, if you missed out on that one last time I have a fresh company to consider today. If anyone is well-placed to benefit from the rise in Latin American air travel it's the region's biggest airline LatAm Airlines, (NYSE:LFL). Formed by the 2012 merger of Chilean airline Lan and Brazilian carrier Tam, the firm has only begun to use its new brand name, LatAm, in the last few months.

The stock has performed terribly over the last few years, with analysts doubtful that it will be able to achieve the benefits of the merger. So far this year its value has halved, far worse than the S&P500, which is down by around 4.5% over the same period. But now looks like a good time to buy with the analysts covering it giving it a consensus 12-month target of $8.39, which would be an increase of around 50% on the current price.

Someone I used to work with once told me that investing in airlines was a mug's game. After all, their margins are razor thin, while they are hostage to volatile fuel costs. It's definitely a riskier investment than the airports group, which has more stable future costs and revenues. So this isn't for the faint-hearted as LatAm could go through some rough times. But if, like me, you are prepared to sit back and invest in the long term then the firm looks well placed to take advantage of Latin America's travel boom.

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