LATAM Airlines EPS Estimates Southbound: Should You Avoid the Stock?

LATAM Airlines' Q2 aircraft fuel expense surged 93.1% year over year to $1.71 billion as all-in fuel prices rose 81.3% to $194.50 per barrel, driving adjusted operating margin down to 5.4% from 12.9%. The carrier also posted $33 million in foreign-exchange losses, while consensus EPS estimates for Q3, Q4, 2026 and 2027 have been cut over the past 60 days. Despite a higher 2026 EBITDA outlook and 16.3% one-year share-price gain, LTM trades at a 0.83x forward P/S versus the industry's 0.52x and carries a Zacks Rank #4 (Sell).

Analysis

The relevant setup is not simply fuel sensitivity: LTM combines USD-linked operating costs with a partially hedged BRL mismatch, creating a two-factor earnings squeeze if crude remains firm while Latin American currencies strengthen. Because airline demand is generally priced in local currency but major costs are dollarized, fare increases can lag cost pressure by a quarter or more; this makes the next two earnings prints more exposed than headline traffic growth suggests. A lower margin base also increases the equity’s sensitivity to even modest consensus EBITDA cuts and reduces tolerance for capacity-led load-factor dilution.

Competitive read-through is nuanced. CPA has structurally less direct Brazil exposure and its Panama hub provides better connecting-network economics, making it the cleaner regional relative winner if LTM is forced to protect yields by slowing marginal capacity. RYAAY is not an appropriate fundamental hedge for Latin American FX, but is a useful short only for broad airline fuel-beta; its European cost/revenue structure and balance sheet mean a simple LTM-versus-RYAAY pair can be distorted by regional demand divergence.

Consensus bearishness may already be reflected in near-term estimates, so an outright short after a sharp selloff has poor asymmetry without confirmation that fuel and FX assumptions are worsening. The decisive catalyst over 1-3 months is whether LTM can preserve unit revenue as capacity grows; a recovery in operating margin toward management's implied second-half trajectory would drive a rapid de-rating reversal. Over 6-18 months, fleet expansion is value-accretive only if it consolidates network share without structurally lowering yields—an outcome that remains unproven from the available data.

Key Decisions for Investors

• Initiate a 1-3 month relative-value position: long CPA / short LTM, sized beta-neutral. The thesis is superior insulation from Brazil-linked FX and a potential LTM capacity retrenchment; target 10-15% relative outperformance. Exit if LTM reports stable/improving unit revenue and operating-margin recovery for two consecutive quarters, or if CPA guides to material yield deterioration.
• Do not initiate an outright LTM short solely on analyst revisions. Add only if Brent remains above the company’s implied second-half fuel assumption and LTM’s next traffic release shows load-factor or yield deterioration; use a 7-10% stop above entry because fuel-price relief or a stronger USD can mechanically reverse the earnings narrative.
• For existing LTM exposure, reduce ahead of the next earnings release unless independently verified fuel hedging, currency sensitivity, and capacity/yield data show downside consensus risk has been absorbed. The key falsifier is management reaffirming EBITDA guidance while demonstrating margin expansion despite current fuel and FX conditions.
• Monitor USO and the BRL/USD cross as operational risk triggers rather than standalone trades: sustained oil strength together with BRL appreciation is the adverse combination for LTM. A reversal—lower fuel prices and BRL depreciation—would remove the principal basis for the relative short.