LATAM Airlines Group S.A. (NYSE: LFL; IPSA: LAN; BOVESPA: LATM33), the leading airline group in Latin America, announced today its consolidated financial results for the second quarter ended June 30, 2015. “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 3.07 per USD.
- The second quarter of 2015 marks the third anniversary of the association between LAN and TAM, a historic milestone for our companies and a strategic decision that placed us at the forefront of the aviation industry in Latin America. With significant achievements during this year, including cost efficiencies on multiple fronts, the negotiation of our Passenger Service System and the announcement of our new unified brand, we continue to make progress towards our long term objective of consolidating LATAM’s leadership position within the region. However, we have not been immune to the challenging macroeconomic conditions that have affected South American economies, especially Brazil, and which have led us to make certain adjustments. These adjustments, including capacity reductions in the Brazilian domestic market, are a necessary response to the current challenges but in no way alter our long term strategic plans. We firmly believe that, with the best and most diversified network, LATAM Airlines Group is the best positioned airline to respond to a weaker macroeconomic scenario in South America, a position we continue to strengthen through cost efficiencies, enhancement of our key hubs and consistently providing the best experience to our passengers.
- LATAM Airlines Group reported operating income of US$17.2 million with an operating margin of 0.7% for second quarter 2015, an increase of 0.2 percentage points as compared to the second quarter 2014. This result was driven by a strong 20.7% reduction in the Company’s cost per ASK equivalent, including the effect of lower fuel prices. Excluding fuel, cost per ASK equivalent decreased by 13.8%, reflecting efficiencies related to our already announced cost savings plan, as well as the effect of local currency depreciations on our costs denominated in those currencies.
- Total revenues during the second quarter 2015 declined by 20.8%, reflecting a weak macroeconomic environment in Brazil and significant devaluations of Latin American currencies. The challenging economic scenario in Brazil, caused by an increase in inflation, GDP decline -estimated between 1.5% to 2.0% for 2015- and a significant depreciation of the Brazilian real versus the U.S. dollar, has resulted in a slowdown in demand for domestic and international passenger operations, as well as cargo operations.
- Passenger and cargo demand in all of the Group’s operations outside of Brazil, including its affiliates domestic operations in the Spanish Speaking Countries and international operations throughout LATAM’s network outside of Brazil, has generally proved resilient to local currency devaluations. As a result, and in addition to cost efficiencies, profitability in all these operations shows positive trends as compared to 2014.
- Considering the impact of the current economic scenario in Brazil, TAM is adjusting its domestic network and reducing domestic capacity by approximately 8% to 10% by year-end. As a result, the Company has revised its capacity (ASK) growth for this year for the domestic market in Brazil from 0% growth to a contraction of 2 to 4% as compared to 2014. This adjustment in no the way affects the Company’s long-term strategy, which includes the feasibility study for the Northeastern hub and the continuous strengthening of our hubs in Brasília and São Paulo/Guarulhos.
- Furthermore, LATAM Airlines Group is reviewing its fleet plan and fleet requirements for the coming years, and is currently evaluating whether to postpone a number of wide body passenger aircraft currently scheduled for delivery in 2017 and 2018, as well as to sublease at least one freighter aircraft.
- During the second quarter 2015, LATAM Airlines Group completed two significant financial transactions through which we raised a total of US$1.5 billion. With this, we have completed approximately 57% of our fleet financing requirements for 2016, and strengthened our debt profile and financial position. As of June 30, 2015, the Company has US$1.6 billion in cash and cash and equivalents, and has reduced its net leverage to 5.1x.
- On August 6, LATAM Airlines Group took an important step towards enhancing our value proposition by announcing the union of our brands under one name: “LATAM”. The new brand will be implemented over a three year period, gradually becoming visible starting in 2016, and will allow us to offer an improved, consistent service throughout our network, which in turn strengthens our position in the region.
- LATAM continues to work on enhancing its passenger experience by providing better service before and during the flight. As of the end of the quarter, the Company had installed Wireless entertainment system for personal devices in 68 single-aisle airplanes, and we expect to complete the implementation in all of our narrow body fleet by the first quarter 2016. Regarding ground services, the Company is unifying check-in counters between LAN and TAM, and is also testing a Self-Bag Tag service at the Guarulhos and Brasilia airports, expecting to implement this service at other main airports of our network by 2016. In addition, we are improving our contingency channels such as Live Chat and Flight Status.
- The Company ended the quarter with 88.9% of its flights on time, increasing 4.8 p.p. as compared to the same quarter of last year. These record punctuality indicators, together with the optimization of our fleet, renewed cabin design and harmonization of processes and services, have resulted in a renewed customer experience and have led LAN and TAM to be recognized for the seventh consecutive year as the leaders in the World Airline Survey in the categories “Best Airline in South America” and “Best Service in South America”. This survey is considered the main reference for satisfaction levels for the industry globally.
- In line with LATAM’s focus on creating the best connectivity within, to and from South America, during the second quarter 2015 the Company launched a new service from Lima to Orlando, from Brasilia to Orlando, from Brasilia to Buenos Aires and from New York to Toronto, as a continuation of its flight from Guarulhos to New York. In addition, in November 2015, LAN will launch a daily flight between Santiago de Chile and Milan (via Sao Paulo) operated with the new Boeing 787 and TAM will launch a new service from Guarulhos to Barcelona. The Company will also launch operations from Antofagasta, Chile, and from Montevideo, Uruguay to Lima, Peru in December 2015 and January 2016, respectively.
MANAGEMENT DISCUSSION AND ANALYSIS OF SECOND QUARTER 2015 RESULTS
The Company reported an improvement in operating income, which reached US$ 17.2 million, a 12.1% increase compared to the US$15.4 million operating income in second quarter 2014. Operating margin reached 0.7%, compared to 0.5% in 2014. LATAM Airlines Group’s net loss reached US$49.7 million for second quarter 2015, compared to a net loss of US$58.9 million for the same period 2014.
Total revenues in the second quarter 2015 reached US$2,412.9 million compared to US$3,047.7 million in second quarter 2014. The decrease of 20.8% is a result of a 21.8% decrease in passenger revenues and a 21.3% decrease in cargo revenues, partially offset by a 6.8% increase in other revenues. Passenger and cargo revenues accounted for 81.9% and 13.9% of total operating revenues, respectively, in second quarter 2015.
Passenger revenues decreased 21.8% during the quarter. Total passenger traffic increased by 1.2%, while passenger capacity increased by 2.0%. As a result, passenger load factor for the quarter decreased 0.6 p.p., but remain at a very healthy 81.8%. Consolidated revenue per ASK (RASK) decreased by 23.3%, when compared to the second quarter 2014, driven by a decrease of 22.8% in yields. Yields continue to be impacted mainly by the weaker macroeconomic scenario in South America, the depreciation of local currencies (especially the Brazilian real), and the decrease in corporate demand in Brazil.
Revenues per ASK for LATAM’s main passenger business units are shown in the table below.
*RASK in the domestic Brazil decreased 12.1% when measured in BRL
Note: revenues include ticket revenue, breakage, excess baggage fee, frequent flyer program revenues and other revenues
During the second quarter 2015, demand in the Company’s Spanish speaking countries (SSC, which include Chile, Peru, Argentina, Colombia and Ecuador) continued to grow at a moderate pace, with an increase of 5.4% in passenger traffic as measured in RPKs. Passenger capacity as measured in ASKs grew by 4.3% during the quarter, allowing for an improvement of 0.8 percentage points in load factor as compared to second quarter 2014, reaching 77.9%. In general, yields in the SSC domestic markets showed improvements during the quarter when measured in local currencies. The depreciation of local currencies, mainly the Chilean, Peruvian and Colombian peso which depreciated 10.0%, 11.3% and 28.4%, respectively, impacted revenues per ASK, which in US dollars declined only 7.0%, as compared to the second quarter 2014.
In the domestic Brazil passenger operations, TAM decreased capacity by 0.5% in the second quarter 2015 as compared to the same quarter of 2014. Traffic as measured in RPKs decreased by 1.9%, resulting in a decrease of 1.2 percentage points in load factor, which reached a healthy 79.5%. During the second quarter traffic and yields remained weak, mainly impacted by reduced corporate demand and weak GDP growth expectations in Brazil, resulting in a drop of 12.1% in TAM’s revenues per ASK in Brazilian reais. When measured in US dollars, TAM’s unit revenue decrease was even higher as a result of the 36.4% depreciation of the Brazilian real in the quarter as compared to second quarter 2014.
During the quarter, LATAM’s capacity on international routes increased by 2.9% as measured in ASKs, focused on strengthening our international hubs and our routes to the Caribbean. Traffic increased by 2.1%, with passenger load factors reaching a strong 84.5%. Pressures on yields continued during the quarter, mainly in the operations to and from Brazil, related to weaker local demand for international travel as a result of the depreciation and volatility of the Brazilian real. The Company is managing this situation by adjusting its point of sale mix within the region in order to focus on the markets with stronger demand. As a result, revenues per ASK in international passenger operations decreased 15.9% as compared to the second quarter of 2014.
Cargo revenues decreased by 21.3% in the quarter, driven by a 12.5% decline in cargo traffic and a 10.1% decline in cargo yields as compared to the second quarter of 2014. During the quarter, cargo traffic was impacted by an eight day strike at the Customs Office in Santiago, which stopped cargo traffic in Chile during this period. Additionally, cargo demand remained weak, especially in the Brazilian domestic and international market. Pressures on cargo yields continued during the quarter, mainly as a result of the competitive scenario, the depreciation of local currencies, mainly the Brazilian Real and the Euro, and a lower cargo fuel surcharge related to the drop in fuel prices. As a result, cargo revenues per ATK of the second quarter declined 20.2% as compared to the same quarter of the previous year.
The Company continues with a rational and disciplined approach toward freighter capacity utilization, while focused on maximizing the belly utilization of the Company’s passenger fleet. In the second quarter, cargo capacity, as measured in ATK, declined 1.3%, which includes a 7.1% reduction of the freighter operation.
Other revenues increased by 6.8%, amounting to US$101.2 million during the second quarter 2015. This result is mainly explained by an increase in revenues related to aircraft leases to third parties, as well as an increase in tours and travel services.
Total operating expenses in the second quarter 2015 reached US$2,395.6 million, a 21.0% reduction as compared to the second quarter of 2014. Cost per ASK equivalent (including net financial expenses) also decreased by 20.7%, including the effect of the 33.5% decrease in fuel price paid per gallon (including hedge). Excluding fuel, cost per ASK equivalent showed a decrease of 13.8%, mainly due to the efficiencies achieved as a result of our ongoing cost reduction programs, as well as the positive effect of local currency depreciations on our costs denominated in those currencies. Changes in operating expenses were mainly due to the following:
- Wages and benefits decreased by 14.3% mainly due to the decrease of 1.1% in average headcount, as well as the positive impact of the depreciation of local currencies, especially the Brazilian real, during the quarter as compared to the second quarter of 2014 in wages denominated in that currency.
- Fuel costs decreased by 34.3%, mainly as a result of a decrease of 37.3% in the average fuel price per gallon (excluding hedge) as compared to the second quarter of 2014. Furthermore, fuel gallons consumed remained flat, despite the increase in ASK-equivalent, mainly resulting from fuel efficiency programs and increasingly efficient fleet. This was partially offset by the recognition of a US$40.2 million fuel hedge loss, compared to a US$1.2 million fuel hedge loss in the second quarter of 2014. At the same time, the Company recognized a US$4.4 million gain related to foreign currency hedging contracts, compared to a US$6.3 million loss recognized in the same period of last year
- Commissions to agents decreased by 30.6% mainly due to lower passenger and cargo sales.
- Depreciation and amortization decreased by 5.0%, despite the increase in the number of owned aircraft, mainly as a result of the positive effect of the 36.4% devaluation of the Real against the Dollar during the quarter in a portion of these costs.
- Other rental and landing fees decreased by 19.7% mainly due to a decrease in aeronautical rates resulting from the decrease in cargo operations.
- Passenger service expenses decreased by 8.7%, mainly as a result of 0.2% decrease in passengers transported, and the positive effect of the depreciation of the Brazilian real.
- Aircraft rentals decreased by 3.3%, as a result of the return of 18 aircraft under operating leases over the past 12 months, partially offset by the addition of 7 leased aircraft during that same period.
- Maintenance expenses increased by 14.9% as a result of one-time redelivery costs related to the Company’s fleet restructuring, offset by ongoing efficiencies related to the renewal of fleet.
- Other operating expenses decreased by 22.9% mainly due to lower commercial and distribution system costs, as well as IT services costs.
- Interest income decreased by 47.9% to US$13.4 million in second quarter 2015 from US$25.7 million in the same period 2014, mainly due to the currency and interest rate mix, where the average cash invested in Brazilian reais, with a higher interest rate, decreased during the second quarter 2015.
- Interest expense slightly decreased from US$113.0 million in second quarter 2014 to US$110.3 million in the same quarter 2015, as a result of a stable level of debt over the last twelve months.
- Under Other income (expense), the Company recognized a US$20.2 million gain, positively impacted by a foreign exchange gain of US$35.4 million mostly recognized at TAM as a result of the 2.9% appreciation of the Brazilian real between March 31th and June 30th, 2015. This compares to US$33.5 million gain in other income (expense) in the second quarter 2014, which included a foreign exchange gain of US$103.5 million.
FINANCING AND LIQUIDITY
At the end of the second quarter 2015, LATAM reported US$ 1,609.7 million in cash and cash equivalents, including certain highly liquid investments accounted for as other current financial assets. As of June 30, 2015, the Company reported deposits with aircraft manufacturers (pre-delivery payments) of US$958.7 million, US$373.0 million of which were funded directly by LATAM. Furthermore, as of June 2015, LATAM Airlines Group had US$210.0 million in undrawn committed credit lines with Chilean and international banks.
In June 2015, LATAM successfully executed a liability management exercise where the Company replaced all of the US$300 million 9,50% senior unsecured notes issued by TAM’s subsidiary TAM Capital 2 Inc. due in 2020 and issued its inaugural US$500 million senior unsecured notes, due in 2020, at an annual interest rate of 7.25%.
Additionally, in June 2015, LATAM issued the first Enhanced Equipment Trust Certificates (“EETC”) in Latin America for an aggregate face amount of approx. US$1,021 million to finance 17 new aircraft deliveries composed by 11 Airbus A321-200, 2 Airbus A350-900 and 4 Boeing 787-9, with delivery dates from July 2015 through March 2016. The offering is comprised of Class A Certificates maturing in November 2027 and Class B Certificates maturing in November 2023. The annual interest rate for Class A and B Certificates are 4.20% and 4.50%, respectively.
In relation to financial risk management activities, the Company has in place a hedging program to partially mitigate the impact of exchange rate variations of the Brazilian real. The Company has hedged approximately 40% of its estimated total net Brazilian real monthly exposure for the next twelve months through foreign exchange forward contracts. In relation to the fuel exposure, the Company has hedged approximately 42% of its estimated fuel consumption for the next twelve months. The Company’s fuel hedging strategy consists of a combination of collars, swaps and options for Brent and Jet Fuel.
LATAM FLEET PLAN
The Company continues advancing with the restructuring of its fleet plan, phasing out the less efficient models and allocating aircraft best suited to each one of our markets. As of June 30, 2015, our restructuring plan is on track, having already phased out all of the Airbus A340, Boeing 737 and Dash 8 Q400 aircraft, additionally redelivering 2 Airbus A319s, 9 Airbus A330s and 1 Boeing 767 freighter. Delivered aircraft have been new, more efficient models, such as Airbus A321, of which we received 2 during the second quarter and 1 Boeing 787-9, a larger version of the Boeing 787-8 Dreamliner that transports 27% more passengers and 23% more cargo volume. The Company ended the quarter with a total of 24 Airbus A321 and 13 Boeing 787 aircraft.
LATAM’s current estimated fleet plan and associated financial commitments are shown in the table below.
Note: This fleet plan doesn’t include two of its 767-300Fs leased in 2014 and an additional Boeing 767-300F leased during March 2015.
In the context of a weaker macroeconomic environment in Brazil, caused by an increase in inflation and a strong depreciation of the Brazilian real versus the U.S. dollar, the Company decided to revise downwards the guidance for operating margin to approximately 3.5% and 5.0%, as compared to our previous guidance between 6% and 8%.
LATAM expects total passenger ASK growth to be between 2% and 4% for full year 2015. International passenger ASKs for full year 2015 are expected to increase between 4% and 6%. TAM’s domestic passenger ASKs in the Brazilian market are expected to decrease between 2% and 4%. ASKs in domestic Spanish-speaking countries are expected to increase by approximately 4% to 6% in 2015.
Regarding cargo operations, LATAM expects cargo ATKs to decline between 2% and 0% as compared to 2014, mainly driven by the rationalization of our freighter operations.