NEW YORK ( Karvy Global) -- Brazil's TAM ( TAM) and Gol Linhas Aereas Inteligentes ( GOL) are two airline stocks to watch.

Shareholders in TAM may benefit from the company's merger with another Latin America airline, while Gol could rise from a favorable industry outlook and strong fundamentals.

Brazilian domestic air traffic soared 18.6% to 6.98 billion passenger kilometers (4.33 billion miles) during December 2010 compared with the year-ago period, while international traffic rose 17.7% on a year-over-year basis during the same month, according to Brazil's Civil Aviation Authority (Anac).

For all of 2010, air traffic increased 23.5% to 70.2 billion passenger kilometers (43.6 billion miles), Anac adds. The Brazilian airline industry is witnessing rapid growth, benefiting from a significant increase in business travel and the country's robust economic growth (estimated at 7% for 2010).

Brazilian President Dilma Rousseff announced earlier this month that the government is mulling a plan to sell stakes in the country's airport authority, thereby bolstering private participation.

Brazil will experience higher passenger inflows related to the 2014 World Cup and 2016 Olympics. Moreover, the government is planning to ramp up investments for expanding airports.

According to Goldman Sachs, less than one-third of Brazilian families are potential air travelers right now. But that's expected to rise to 50% by 2020, with almost 12 million families flying for first time. What's more, international passenger traffic increased by 8.8% in 2010, due to a significant recovery in business and leisure travel, especially in Brazil, Russia, India and China, according to a United Nations report.

TAM serves routes to 42 cities. Through regional alliances it serves another 40 domestic destinations. In addition, TAM directly flies to 18 international destinations. Of the 10 analysts covering the stock, seven rate it a buy while the others rate it a hold. On average, analysts expect upside of 18% from current levels.

Investors in TAM are not betting on this company alone, however. That's because the airline has agreed to be acquired by Chile's Lan Airlines ( LFL), to create a new airline company called LATAM.

The all-stock deal, valued at $2.7 billion, is likely to be completed by the middle of this year. Of the 15 analysts covering Lan Airlines, 47% rate it a buy, while the rest rate it a hold, and the stock has an expected 16% upside from current levels.

Lan will be the parent company and hold a 73% stake of the merged airline, while TAM's shareholders will receive 0.9 shares in the merged airline for each share of TAM that they currently hold.

Total synergies from the merger are expected to be $400 million, with $133 million reaped during the first year of the transaction closure and the balance $267 million in the upcoming two years. In addition, there will be an increase in the number of flights, destinations and connections as passengers and cargo customers of both the airlines will be on one platform.

Gol Linhas Aereas Inteligentes is a low-cost airline operating flights to almost 61 destinations. Gol connects all Brazilian cities and flies to cities in South America and a few tourist destinations in the Caribbean. Of the 13 analysts covering the stock, 77% rate it a buy while the remaining suggest a hold. The stock has a 25.5% upside from current levels.

Gol has a 40% market share in the Brazilian airline industry and recently completed 10 years of operations, carrying more than 160.5 million passengers. For December 2010, Gol reported a 4.5% increase in its domestic traffic, and a 3.1% year-over-year rise in international traffic. Analysts expect business air travel to and from emerging markets will remain high in 2011.

Gol's fleet modernization plans assure one of the youngest and most modern fleets in the world. At the end of 2012, 65% of the fleet will consist of 737-800 SFP aircraft. Meanwhile, Gol's total operating fleet size is estimated to reach 115 by the end of 2011 from 111 at the end of 2010. Gol expects its 2011 domestic air travel to increase by 10%-15%, driven by a Brazil's growing middle class, increasing wages, and rising tourism in South America and the Caribbean. Furthermore, it estimates 33 million to 36 million passengers with travel with Gol during 2011.

During December 2010, BlackRock acquired a 5.09% stake in Gol with 4.8 million preferred shares and 1.9 million ADRs. Gol Linhas recently entered into a code-sharing agreement with Qatar Airways, authorizing Qatar Airways to add its code to Gol's departing flights from Sao Paulo to 48 destinations in Brazil.

Moreover, at the end of the third quarter, the company placed an order to buy 30 Boeing ( BA) planes with delivery scheduled between 2014 and 2017. Gol now has 104 firm orders and 40 remaining options to buy Boeing 737 planes, clearly reinforcing the airline's growth plans in the coming months.

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