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Latam Airlines Group Reports A 25.8% Improvement in Operating Income and Net Income of Us$155.3 Million for Full Year 2017

March 16, 2018 Aviation No Comments Email Email

LATAM Airlines Group S.A. (NYSE: LTM; IPSA: LTM), the leading airline group in Latin America, announced today its consolidated financial results for the fourth quarter ending December 31, 2017. http://www.lagunaphuket.com/foodandmusicfestival/“LATAM” or “the Company” makes reference to the consolidated entity, which includes passenger and cargo airlines in Latin America. All figures were prepared in accordance with International Financial Reporting Standards (IFRS) and are expressed in U.S. dollars. The Brazilian real / US dollar average exchange rate for the quarter was BRL 3.25 per USD.

MANAGEMENT COMMENTS ON FULL YEAR 2017

The year 2017 will definitely be remembered as one of transformation for LATAM. It was a challenging year for the Company, but once again we managed to deliver an improvement in our operating results, met our financial targets and made significant progress on important strategic initiatives. Despite the increase in fuel price, LATAM reached the highest operating result in its recent history, and it did so with a fewer number of aircrafts. During the year, we successfully prepared to compete in an always-evolving industry, facing new competitors entering our markets, with the biggest transformation in our history: the introduction of a new travel model in our domestic markets.

This new travel model for the domestic markets, which covers nearly 76% of our passengers, aims at building a more competitive and sustainable airline while continuing to stimulate demand and drive the growth of air travel in South America. We have fully implemented the new buy on board service and the branded fares model in Chile, Peru, Brasil, Ecuador and Colombia. In parallel, we continued working on our cost efficiency initiatives, resulting in a contained cost increase during 2017 despite the effect of annual inflation adjustments and non-recurring implementation and fleet redelivery costs. Cost control remains one of our top priorities for the coming years, since it is a key element in current competitive markets.

Along the same lines and as part of the strategy of offering a customized service to our passengers, LATAM implemented a series of ancillary initiatives that allow the Company to increase its ancillary revenues generation while giving our clients the option to pay only for the attributes they value the most. As a result, ancillary revenues per passenger increased 28% in 2017 when compared to 2016, mainly from the sale of the first and second bags, preferred seats and same-day flight changes.

In 2017, LATAM had the lowest fleet commitments in its history, resulting in lower capital expenditures and therefore lower financing needs as part of its strategy of deleveraging and continuous strengthening of its balance sheet. Along this line, LATAM has made a significant improvement in its debt payment profile, extending the average maturity and reducing the average cost of its debt, while concluding the refinancing process of the TAM legacy bonds. In addition, LATAM maintained a healthy liquidity level throughout the year and expanded its alternatives for short-term liquidity in case of need, such as the US$450 million revolving credit facility3.

As a result of the improved macroeconomic context, economic growth in the region and stable currencies, together with the capacity discipline implemented across its network, LATAM was able to improve its unit revenues across all its business units, consolidating the first year of revenue increases since the business combination in 2012.

Moreover, LATAM made great progress in the expansion and optimization of its network, continuing to strengthen its route network in South America, offering the best connectivity within the region and to the rest of the world at competitive fares. For instance, LATAM launched 30 new routes in 2017, including Santiago – Melbourne, its longest non-stop flight. We also continued to move forward in the regulatory process to develop our Joint Business Agreements with American Airlines and IAG (British Airways and Iberia), having received already the approval from the regulatory authorities in Brazil, Colombia and Uruguay, only pending the resolution in Chile and in the United States. In addition, for 2018 we announced flights from São Paulo to new destinations such as Rome, Boston and Las Vegas, increasing Latin America’s connectivity with other regions in the world.

MANAGEMENT DISCUSSION AND ANALYSIS OF FOURTH QUARTER 2017 RESULTS

Total revenues in fourth quarter 2017 totaled US$2,767.6 million compared to US$2,569.3 million in fourth quarter 2016. The 7.7% increase is mainly a result of a 7.7% increase in passenger revenues, as well as a 9.0% and 5.5% increase in the cargo segment and other revenues, respectively. Passenger and cargo revenues accounted for 82.2% and 12.2% of total operating revenues, respectively in fourth quarter 2017. Total revenues for full year 2017 reached US$10,163.8 million compared to US$9,527.1 million in 2016. The 6.7% increase is mainly explained by a 7.8% increase in passenger revenues, as well as the 0.8% and 2.1% increase in cargo and other revenues, respectively. Passenger and cargo revenues accounted for 83.6% and 11.0% of total operating revenues, respectively, for full year 2017.

Passenger revenues increased 7.7% during the quarter as a result of a 5.3% increase in consolidated passenger unit revenue (RASK) while capacity increased 2.3% year-on-year. The RASK increase was driven by a 4.6% increase in yield, coupled with a load factor improvement of 0.5 p.p., reaching 85.1%. The yield recovery during this quarter was primarily driven by the strong pricing environment in the international segment, especially on routes to the US and Europe.

Revenues per ASK for LATAM’s main passenger business units are shown in the table below:

LATAM Airlines group’s Spanish speaking country affiliates (SSC), which include LATAM Airlines Chile, LATAM Airlines Peru, LATAM Airlines Argentina, LATAM Airlines Colombia and LATAM Airlines Ecuador and account for 20.3% of total passenger revenues, reduced its domestic capacity by 0.2% during the quarter as compared to the same period 2016, driven mainly by Argentina, offsetting the increases in Colombia and Ecuador, while capacity in Chile and Peru showed a slight increase. Traffic measured in RPK increased by 1.2%, while load factors increased by 1.1 p.p. to 82.3%. Revenues per ASK in USD increased 5.5% in the quarter, as result of a more disciplined capacity environment.

In Brazil’s domestic passenger operation – which represents 27.9% of total passenger revenues – LATAM Airlines Brazil increased its domestic capacity for the first time after 10 consecutive quarters of decline. LATAM Airlines Brazil domestic capacity increased by 0.9%, strengthening its connectivity especially from our Guarulhos and Brasilia hubs, while traffic as measured in RPKs increased by 2.7% in fourth quarter 2017 as compared to the same quarter of 2016. As a result, load factor increased 1.5 p.p. to 84.7% and Revenues per ASK increased by 8.9% in USD and 6.6% in BRL.

In International passenger operations, which represent 51.8% of total passenger revenues, capacity increased 3.8% during the quarter. RASK continues to increase, driven mainly by routes from Brazil to Europe and routes between Spanish Speaking Countries and the US. On routes from Brazil to the US, LATAM grew by 10% as a result of the improvement in the macroeconomic conditions in Brazil, after eight consecutive quarters of capacity adjustments. International traffic increased by 3.6%, with passenger load factors reaching 86.1%. Revenues per ASK in international passenger operations increased by 5.6% as compared to the fourth quarter of 2016.

Cargo revenues increased by 9.0% in the quarter reaching US$337.0 million, driven by an increase of 10.3% in cargo yields, while cargo load factors reached 58.4%, an improvement of 1.4 percentage points as compared to the fourth quarter 2016. Imports from North America and Europe to Brazil and Chile showed an improvement in terms of revenues per ATKs, driven by major imports of electronics and spare parts. Export markets are also showing a recovery year over year driven by a strong season of fruits, flowers and fresh salmon exports, especially from Chile, Argentina, Colombia and Ecuador. Cargo markets, for the first time since 2011, are showing signs of equilibrium between the exports and imports markets, allowing us to maximize our network profitability.

As a result, cargo revenues per ATK improved by 13.1% as compared to the same quarter of the previous year, consolidating and further improving the positive trend shown since the beginning of the year, as we have managed to adjust our capacity.

In the fourth quarter, cargo capacity, as measured in ATKs, declined 3.6%, which includes a 9.6% reduction of freighter operations, while traffic decreased only by 1.1% year over year. Other revenues increased by 5.5% reaching US$156.0 million during fourth quarter 2017. The increase is primarily due to higher revenues derived from Multiplus, as well as higher aircraft subleases compared to the same period 2016, as the Company ended the year with 8 aircraft operated by third parties.

Total operating expenses in the fourth quarter amounted to US$2,497.6 million, a 5.2% increase compared to the same period of 2016. This increase is mainly explained by US$93.9 million of higher fuel expense, resulting from a 19.6% increase in the average price per gallon (excluding hedge) as compared to the fourth quarter 2016. Operating expenses excluding fuel increased by only 1.6%, mainly as a result of US$41.0 million of higher maintenance expenses associated with fleet redeliveries and maintenance provisions made during the quarter, as compared with US$10.1 million of the same costs recognized in the fourth quarter 2016. Changes in operating expenses were mainly explained by:

  • Wages and benefits increased by 4.7% explained by the annual increase in unit salaries mainly due to the inflation adjustment (which was based on 2016 inflation rates), especially in Brazil, and currencies appreciation. This was partially offset by a 7.1% decline in the average headcount during the quarter.
  • Fuel costs increased by 16.9% mainly as a result of the 19.6% increase in the average fuel price per gallon (excluding hedge) as compared to the fourth quarter of 2016, partially offsetting the fuel hedge gains during the fourth quarter 2017, which totaled US$17.0 million, as compared to the US$4.4 million fuel hedge gains during the same quarter 2016. At the same time, the Company recognized US$3.5 million loss related to foreign currency hedging contracts, compared to a US$2.9 million loss recognized in the same period of last year.
  • Commissions to agents decreased by 32.8% due to a reversal of a provision in passenger commissions.
  • Depreciation and amortization increased by 2.9% as a result of the incorporation of larger and more expensive fleet, partially offset by three fewer aircraft on average on the balance sheet compared with the same period of 2016.
  • Other rental and landing fees increased by 10.3%, due to an increase in aeronautical rates, particularly in Argentina, as well as higher handling costs due to an increase in operations.
  • Passenger service expenses increased by 8.6% as a result of the increase in the number of passengers transported during the quarter and higher in-flight entertainment costs during the quarter.
  • Aircraft rentals decreased by 8.6% as a result of the reduction of 18 aircraft in the average number of operating aircraft in our fleet under operating leases, offsetting the increase in the unit cost of rent as the Company has more modern aircraft under operating leases.
  • Maintenance expenses increased by 53.2% due to redelivery costs associated to the return of four aircraft during the quarter and higher maintenance provisions that amounted to US$41.0 million, US$30.9 million higher than the same quarter of the last year.
  • Other operating expenses decreased by 9.7%, mainly as a result of the efficiency initiatives implemented by the Company partially offset by higher advertising and marketing costs.

Non-operating results

  • Interest income decreased by US$9.8 million to US$12.0 million in fourth quarter 2017 as compared to the same period 2016 as a result of lower interest rates in Brazil.
  • Interest expense decreased by 14.7% to US$90.2 million in fourth quarter 2017 from US$105.8 million in the same period 2016 mainly due to gross debt reduction of 8.3%.
  • Under Other income (expense), the Company registered a US$54.3 million net loss, including US$67.0 million in foreign exchange losses. This compares to the US$81.8 million net loss in other income (expense) in the fourth quarter of 2016, which included a foreign exchange loss of US$11.2 million.

Net income in the fourth quarter amounted to US$67.2 million, an increase of US$12.8 million compared with the same period of 2016 mainly explained by an increase of US$74.9 million in the operating income and an increase of US$33.2 million in the non-operating result, partially offset by US$100.0 million of higher taxes recognized during the fourth quarter 2017 as compared to the same period 2016.

LIQUIDITY AND FINANCING
At the end of the fourth quarter 2017, LATAM reported US$1,614 million in cash and cash equivalents, including certain highly liquid investments accounted as other current financial assets. Furthermore, the Company´s liquidity position was enhanced by US$450 million of an undrawn revolving credit facility4 (RCF)

line, which remained at the same level compared to the previous quarter. Thus, LATAM’s liquidity position amounted to 20.3% of the last twelve months’ net revenue by December 31, 2017. Fleet commitments for 2018 amount to US$714 million, with approximately US$255 million accounting for capital expenditures. For 2019, expected fleet commitments amount to US$1,213 million. The Company is constantly working on adjusting its fleet to the current demand environment, so it can optimize its utilization and thus maximize profitability.

Additionally, LATAM expects to invest approximately US$650 million in non-fleet CAPEX in 2018, which includes intangible assets, fleet and non-fleet maintenance, expenditures in spare engines and fleet components, as well as expenses related to the retrofit of the Boeing 767s and 777s cabins. This number also includes the implementation of our new Passenger Service System, switching our Brazilian operation to Sabre, currently underway, which we expect to conclude during the first half 2018.

By the end of the quarter, LATAM´s net financial debt amounted to US$6.3 billion, a US$393.5 million reduction compared to the previous quarter, thus decreasing its leverage to 4.5x from 4.9x in September 2017. For 2018, the Company has roughly US$987 million in debt maturities.

Regarding hedging, the main objective of LATAM Airlines Group Hedge Policy is to protect medium term liquidity risk from fuel price increases and BRL depreciation, while benefiting from fuel price reductions 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 months are shown in the table below:

LATAM FLEET PLAN
During 2017, LATAM took delivery of four aircraft and returned 21 aircraft, while maintaining eight aircraft under sublease contracts, as compared with three subleases in 2016, ending the year with an operating fleet of 307 aircraft, a reduction of 22 aircraft as compared to 2016.

For 2018, we have an order for 10 new aircraft and we are incorporating into our operation two Airbus A350 that were previously subleased to Qatar, plus one Boeing 767-300F that will be converted from Boeing 767300 passenger aircraft into a freighter, while we return five aircraft, ending the year with an operating fleet of 316 aircraft. For 2019, we will receive 14 new aircraft and we will return eight aircraft plus one Boeing 767-300F that will be converted from Boeing 767-300 passenger aircraft into a freighter, ending the year with an operating fleet of 322 aircraft. With this, fleet commitments for 2018 and 2019 amount to US$714 million and to US$1,213 million respectively.

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