Latam Airlines Group Reports A 10.5% Improvement in Operating Income and Net Income of Us$69.2 Million for Full Year 2016
MANAGEMENT COMMENTS ON FOURTH QUARTER 2016
The year 2016 was challenging for LATAM, with weakening regional economies and recession in Brazil, devalued local currencies and high inflation rates in certain countries. In this context, LATAM continues to be the best positioned airline group in Latin America to respond to these deteriorated conditions, as we continue to improve margins, cash flow generation and deleveraging its balance sheet, showing the resilience of its business model. Furthermore, Qatar’s investment recognizes LATAM’s achievements and supports our project for the future, strengthening our conviction that we are on the right path to reach our goals.
Management has been proactive to address these economic challenges focusing on the aspects under our control. We continue to pursue initiatives to further reduce costs, which were accelerated during the year and resulted in an 8.9% headcount reduction, as well as productivity increases on various fronts. We also successfully restructured its fleet commitments, adapting fleet deliveries to the current demand environment in the region, reaching historically low levels of fleet commitments for 2017, with no cash out requirements.
We continue to work tirelessly to improve profitability and further improve our free cash flow generation, creating value for all our stakeholders while maintaining a solid cash position and continue deleveraging the Company. Over the coming years, we expect further improvement on this front as we continue working on strengthening our operations, implementing our new domestic business model and seeking approval for our Joint Business Agreements (JBAs) with American Airlines and IAG (British Airways and Iberia). On this front, on March 8th, the administrative court of economic defense of CADE (Administrative Council for Economic Defense) in Brazil approved the JBA between LATAM Airlines Group and IAG, representing the final stage in this jurisdiction of its evaluation process that began in June 2016.
Regarding our new travel model for domestic services, the implementation will continue gradually over the coming months. During the second quarter, LATAM will start to implement a branded fare model with clear attributes differentiation and payable ancillaries to provide to our customers more accessible prices and more alignment to their needs. With this new offering, our passengers will have the ability to personalize their travel experience by having the option to add checked luggage, select their seats, change their flight, and vary the amount of accrued kilometers or points in the Frequent Flyer Programs, among others.
Furthermore, one of the most visible changes for our passengers is the sale on board in domestic flights. “Mercado LATAM”, the new service of purchase on board of beverages and food, is already implemented in all of LATAM’s domestic flights in Colombia and in Peru. It will be implemented gradually in Chile, Argentina, Ecuador and Brazil over the coming months. The objective is to improve the travel experience of our passengers who can access, according to their preferences, to a wide gastronomic selection of more than 50 products. Additionally, since December 2016 the affiliate carriers of LATAM Airlines Group (with the exception of LATAM Airlines Brazil’s domestic and regional flights) are charging for the oversized bags such as surfboards, TVs, among others, consistently with the current dynamics of the industry.
The Company continues developing digital initiatives to empower passengers by providing them a digital experience with end-to-end control of their reservation. Passengers of LATAM Airlines Chile and LATAM Airlines Brasil can now change their flights without calling the Contact Center, and during 2017 this service will be gradually expanded to the other subsidiaries that are part of the LATAM Airlines Group. Additionally, our passengers will be able to advance or delay the flight on the same day of the travel, providing more flexibility to their journey.
management discussion and analysis of FOURTH Quarter 2016 Results
Total revenues in fourth quarter 2016 totaled US$2,569.3 million compared to US$2,407.0 million in fourth quarter 2015. The increase of 6.7% is a result of a 6.9% increase in passenger revenues, showing an improvement for the first time after nine consecutive quarters of passenger revenue decline, reflecting a positive revenue per ASK trend in domestic and international routes in Brazil as well as a stronger Brazilian currency. Additionally, revenues were boosted by a 54.2% increase in of other revenues, partially offset by a decrease of 7.7% in cargo revenues. Passenger and cargo revenues accounted for 82.2% and 12.0% of total operating revenues, respectively, in fourth quarter 2016.
Total revenues for full year 2016 reached US$9,527.1 million compared to US$10,125.8 million in 2015. The decrease of 5.9% is a result of a 6.3% and 16.5% decrease in passenger and cargo revenues, respectively, partially offset by a 39.7% increase in other revenues. Passenger and cargo revenues accounted for 82.7% and 11.7% of total operating revenues, respectively, for the full year 2016.
Passenger revenues increased 6.9% during the quarter as a result of a 7.6% increase in consolidated passenger unit revenue (RASK) offsetting the 0.8% capacity decrease, when compared to fourth quarter 2015. The RASK increase was driven by a 6.1% increase in yields, while load factors showed an improvement of 1.3 p.p. to 84.5%. The yield recovery during this quarter was primarily driven by the improvement in yields in Brazil domestic and internationally, partially offset by weaker demand in the Spanish Speaking markets.
Revenues per ASK for LATAM’s main passenger business units are shown in the table below:
During the fourth quarter 2016, demand in the airline group’s Spanish speaking country affiliates (SSC, which includes LATAM Airlines Chile, LATAM Airlines Peru, LATAM Airlines Argentina, LATAM Airlines Colombia and LATAM Airlines Ecuador), which accounts for a 21.2% of total passenger revenues, showed an increase of 6.9% in passenger traffic as measured in RPKs. However, despite stable local currencies during the quarter, RASK continued under pressure mainly due to a weaker macroeconomic scenario which has impacted demand throughout the region combined with a more competitive environment. Passenger capacity as measured in ASKs grew by 7.4% during the quarter, while load factors showed a decrease of 0.4 p.p. to 81.2%.
In the domestic Brazil passenger operations, which represents a 28.9% of total passenger revenues, LATAM Airlines Brazil continues to adjust capacity resulting in a significant improvement during the quarter with revenues per ASK increasing by 34.8% in USD and 14.8% in BRL. Domestic capacity was reduced by 10.9% and traffic as measured in RPKs decline by 9.4% in fourth quarter 2016 as compared to the same quarter of 2015. As a result, load factor increased 1.4 p.p. to 83.2%.
The airline group’s capacity on international routes, which represents a 49.9% of total passenger revenues, increased by 2.2% during the quarter. LATAM Airlines Brazil has continued to reduce capacity on routes with weaker demand, specifically between Brazil and the US. As a result of capacity adjustments and the stronger demand environment related to the appreciation of the Brazilian currency, RASK on those routes increased during the quarter compared to the same period last year. On the other hand, LATAM Airlines Group and its affiliates have added capacity on routes between Spanish Speaking Countries and the US and Europe. Traffic increased by 4.4%, with passenger load factors growing by 1.8 p.p. to 86.3%. Revenues per ASK in international passenger operations increased by 3.9% as compared to the fourth quarter of 2015 reflecting an improved revenue trend.
Cargo revenues decreased by 7.7% in the quarter, driven by a 3.1% decline in cargo traffic and a 4.8% decline in cargo yields as compared to the fourth quarter of 2015. Exports to North America were mainly impacted by lower production in the salmon industry as well as a decrease of certain products as flowers and Asparagus, partially offset by an improvement in imports from North America and Europe to Brazil, as a result of the appreciation of the Brazilian Real. As a result, cargo revenues per ATK declined 1.9% as compared to the same quarter of the previous year.
LATAM and its affiliates continue working to adjust freighter capacity, while focused on maximizing the belly utilization of the passenger fleet. In the fourth quarter cargo capacity, as measured in ATKs, declined 5.9%, which includes a 13.2% reduction of freighter operations, resulting in a load factor of 57.0%, which represents an improvement of 1.7 percentage points as compared to the fourth quarter 2015.
Other revenues increased by 54.2% reaching US$147.9 million during fourth quarter 2016. This growth is primarily due to gains on aircraft sales and leaseback transactions as well as an increase in revenues derived from aircraft leases.
Total operating expenses in the fourth quarter reached US$2,374.1 million, a 5.2% increase as compared to the same period of 2015. This increase is explained by US$121.0 million of non-recurring costs associated mainly to fleet sales and redeliveries, severance payments, among others. Cost per ASK equivalent (including net financial expenses) excluding non-recurring costs increased by 2.3% when compared to the same period 2015. Although the Company continues with the implementation of its ongoing costs reductions efforts, the increase in unit costs this quarter reflects the negative impact of high inflation rates in the region, the appreciated local currencies, and the 2.7% decline in capacity as compared to the fourth quarter 2015.
Changes in operating expenses were mainly due to the following:
- Wages and benefitsincreased by 7.6% mainly explained by the increase of US$44.0 million in severance payments and performance bonuses during the fourth quarter 2016 as compared to the same period 2015. Excluding these effects, wages and benefits costs declined by 2.0% driven by the 6.1% decline in headcount, partially offset by the appreciation of local currencies during the period, especially the Brazilian real.
- Fuel costs decreased by 2.8% mainly as a result of a 3.6% decrease in the gallons consumed during the period as compared to the fourth quarter of 2015 as well as a fuel hedge gain recognized during the quarter, which totaled US$4.4 million, relative to a US$40.5 million loss in the fourth quarter 2015, partially offsetting the 7.3% increase in the average fuel price per gallon (excluding hedge) as compared to the fourth quarter of 2015. At the same time, the Company recognized an US$2.8 million loss related to foreign currency hedging contracts, mainly Brazilian real, compared to a US$7.6 million gain recognized in the same period of last year.
- Commissions to agents increased by 11.5% mainly due to the negative impact of the 14.3% average appreciation of the Brazilian real in passenger commissions at LATAM Airlines Brazil, and in line with the 6.9% increase in passenger revenues.
- Depreciation and amortization increased by 7.8% due to the negative impact of the appreciation of the Brazilian real during the fourth quarter, as well as an increase in amortization expenses of our intangible assets of TAM´s brand.
- Other rental and landing fees increased by 3.4% mainly due to an increase in aeronautical rates.
- Passenger service expenses increased by 4.6% despite the decrease of 1.0% in the number of passenger transported, explained by a lower comparison base due to a reversal of US$3.7 million related to catering expenses in fourth quarter 2015. Excluding this effect, passenger services declined 0.5%.
- Aircraft rentals increased by 11.5% as a result of the incorporation of more modern aircraft under operating leases. The Company had more Airbus A321s, Boeing 787s and Airbus A350 this year while reducing the number of Airbus A320s, Airbus A330s and Boeing 767s relative to the fourth quarter of 2015, bringing the total number of leased aircraft to 110, as compared to 107 during the same period of 2015.
- Maintenance expenses continued to decrease this quarter by 9.5% due to efficiencies related to the renewal of our fleet partially offset by higher aircraft redelivery costs related to the Company´s fleet rightsizing initiatives.
- Other operating expenses increased by 14.4%, mainly driven by certain non-recurring items as mentioned above, including US$53.5 million related to fleet sales and redeliveries.
- Interest income increased by 107.8% to US$21.8 million in fourth quarter 2016 from US$10.5 million in the same period 2015 mainly due to the reduction of the investments market value in Argentina. This reduction in the market value was related to the local currency depreciation in Argentina in December 2015.
- Interest expense increased by 5.9% to US$105.8 million in fourth quarter 2016 from US$99.9 million, mainly due to the recognition of non-cash expenses related to prepayment of the revolving credit facility.
- Under Other income (expense), the Company recognized a US$81.8 million net loss, including US$68.0 million of aircraft redelivery costs, and US$7.2 million in foreign exchange losses. This compares to the US$124.0 million loss in other income (expense) in the fourth quarter of 2015, which included the recognition of a US$71.0 million provision mainly related to aircraft redelivery costs, and a foreign exchange loss of US$57.1 million.
Net Income increased from a loss of US$16.3 million on fourth quarter 2015 to a gain of US$54.3 million in the same period 2016 mainly explained by an increase of US$46.0 million in the operating result as well as a US$50.0 million lower foreign exchange loss compared with same period 2015, partially offset by 42.2% decrease in the positive income taxes as compared to the same period 2015.
LIQUIDITY AND FINANCING
At the end of the fourth quarter 2016, LATAM reported US$1,486 million in cash and cash equivalents, including certain highly liquid investments accounted for as other current financial assets, equivalent to 15.6% of net revenue of the last twelve months. Furthermore, the Company´s liquidity position is also enhanced by US$325 million in undrawn revolving credit facility (RCF) line, which was totally available as of December 31, 2016.
Additionally, on December 28, 2016, LATAM announced the successful conclusion of its capital increase, in which 60.8 million shares were subscribed at a price of US$ 10 per share, generating proceeds of approximately US$608 million with Qatar Airways completing its acquisition of 10% of LATAM.
Fleet commitments for 2017 amount US$469 million, all of which are pre-arranged operating leases, being the lowest amount in the recent history of LATAM. For 2018, our fleet commitments have been substantially reduced to US$555 million, a reduction of US$1,039 million compared with September 2016. The Company continues to adjust its fleet to the current demand environment improving its cash flow generation for the coming periods, and its balance sheet position.
Additionally, LATAM expects to have non-fleet CAPEX, including intangible assets, of approximately US$500 million per year, including fleet and non-fleet maintenance, expenditures on spare engines, fleet components, and new business model implementation costs, among others.
LATAM’s financial debt during the fourth quarter 2016 totaled US$8,605 million, a decrease of US$457 million as compared to same period 2015. For 2017, the Company has debt maturities of approximately US$1,543 million.
The main objective of LATAM Airlines Group Hedge Policy is to protect medium term liquidity risk from fuel price increases and BRL depreciation, while participating of benefits from fuel price reduction and BRL appreciation. Accordingly, the Company hedges a portion of its estimated fuel consumption and Brazilian real operating exposure. Hedge positions per quarter for the next twelve months are shown in the table below:
LATAM FLEET PLAN
LATAM continues to take a flexible approach to its fleet plan, adapting to operational requirements and market conditions. The confirmed reductions currently amount to US$2.2 billion, in line with the Company’s previously announced plans to achieve a decrease of US$ 2.0 – 3.0 billion in our expected fleet assets by 2018.
These reductions will improve the balance sheet and create flexibility to better respond to market conditions over the coming years. The benefits of these reductions will be seen over the next years starting in 2017 in the form of lower leasing expenses and capital expenditures, along with a decreased need for financing, improving the Company’s cash flow generation and strengthening our balance sheet.
During 2016, LATAM took delivery of 24 aircrafts and returned 23 aircrafts, ending the year with an operating fleet of 329 aircrafts. By the end of 2017, the Company will operate a total fleet of 311 aircraft, and it will have 7 aircrafts under subleasing contracts.
Note: This table does not include 4 A350-900 that will be subleased to Qatar for periods of between six and 12 months during 2017 and 2018.
Does not include two B777-200F (one currently leased to a third party), three A330 and one A320 that were reclassified from property plant and equipment to hold for sale.
Capacity growth guidance for 2017 remains unchanged (see table below). In addition, the Company maintains its guidance for an operating margin of between 6.0% and 8.0% for full year 2017.
LATAM filed its quarterly financial statements for the three month period ended December 31, 2016 with the Superintendencia de Valores y Seguros of Chile on March 15, 2017. These financial statements will be available in Spanish and English languages at http://www.latamairlinesgroup.net.