LATAM Airlines Group SA (LTM) 2002 Q1 法說會逐字稿

Good morning everyone and welcome to LAN Chile's first quarter 2002's conference call. We thank you very much for joining us today. The LAN Chile earnings release for the period was distributed yesterday. If you have not yet received it, please contact us in New York at 212-406-3690 so we may send you one immediately. At this time it's my pleasure to introduce from LAN Chile, Mr. Alejandro De La Fuente, Chief Financial Officer. Alejandro, please begin.

De La Fuente: Thank you for attending LAN Chile's first quarter conference call. I am Alejandro De La Fuente, chief financial officer. I am with Abel Buchon vice president of the international passenger division: Alvaro Carril, cargo marketing and sales vice president; and and , our investor relations team. Today, I will give an overview of the quarter, review the financial results, and comment on our expectations for the rest of 2002. Then we will be pleased to answer any questions. I would like to mention that the following statements regarding the company's business outlook and anticipated financial and operating results constitute forward-looking comments. These expectations are highly dependent on the economy, the industry, and international markets. Therefore they are subject to change.

An overview. In the first quarter, LAN Chile continued to face significant challenges, but produced positive results while our earnings continued to record losses. During the first quarter, while Chile grew slightly, demand in Argentina fell approximately 50 percent. In addition, increased political disruption resulted in reduced air transport demand to, from, and within other countries in Latin America. As a result, some carriers also implemented aggressive price discounts making the competitive environment more intense. Despite these challenges, LAN Chile continues to manage this situation in order to minimize the effect on our earnings. As a result of our adjustment and cost control initiatives, in September we were able to generate $17.7 million in operating income in the first quarter. Specifically, we have reduced passenger frequencies, rerouted southbound freighters, cut our freighter leases, reduced headcount, frozen salaries, delayed new aircraft arrivals, returned operating leased aircraft, and implemented insurance and security as well as fuel surcharges. As a result, for the quarter, we were pleased to be able to reduce our unit costs by 1 percent, as we cut our operations by 8 percent.

The results. While few airlines recorded positive results, we are pleased to have earned $17.7 million in operating income and $17.1 million in net income. For the first quarter, operating revenues per ATK decreased 6.5 percent while operating costs per ATK fell 1 percent. Total revenues were 12 percent below the previous year at $347 million, reflecting decreased demand due to economic weakness in the region, and the continued fallout from the terrorist attacks. Passenger revenues fell 8 percent. Passenger revenues per ATK decreased 6 percent due to a 3 point decrease in load factors and a 2 percent reduction in yields. Reduced load factors reflect a percent decrease in traffic which outpaced a 3 percent decrease in . Passenger figures were lightly affected by the consolidation of LAN Peru from August 2001. For the first quarter, LAN Peru contributed to $12.7 million to revenue and $12 million to operating costs. On domestic passenger routes we increased capacity by 15 percent as domestic traffic increased 13 percent. Dollar denominated domestic yields continue to fall reflecting the slower- than-expected economic rebound in Chile and a weaker peso. Our domestic fares are in pesos.

On international routes, we cut capacity 15 percent as traffic fell 19 percent. In addition yields fell 3 percent due to increased price competition. Cargo revenues decreased 22 percent and cargo revenues per ATK decreased 14 percent due to a 5.6 point decrease in load factors and a 6 percent reduction in yields. Cargo traffic fell 17 percent due to slower demand resulting from economic weakness in the region. Southbound traffic from the United States to Latin America has decreased and more competition has pressured yields. In order to manage a weak cargo situation, we have focused on improving the efficiency of our , and our , reducing the use of rent-lease 747s , and operating leases, DC-8s, and turning around of southbound freighters in Brazil. In a weak environment, the careful management of our cost base was key in preserving our profitability.

Total operation expenses decreased 7.8 percent during the first quarter, and per ATK operating costs, including aircraft interest expenses, decreased 1 percent. As a result of revenue weakness in the quarter, our operating margin fell from 9.3 percent to 5.1 percent. Non-operating results for the quarter amounted to a net gain of $3 million versus a net loss of $9 million in 2001. Two non-recurring gains had a significant effect on our non-operating results. We realized an $18.5 million extraordinary gain from additional transactions, and a $6.8 million extraordinary gain from a sale of assets, specifically spare parts. These extraordinary non-operating gains were partially offset by the 32 percent decrease in interest income due to lower interest rates. A percent increase in interest expenses due to the acquisition of two new Boeing 77 freighters and two new A-320 passenger aircraft. An $8.1 million fuel hedging loss in 2002 versus a $.4 million loss in 2001. A $2.1 million foreign exchange loss versus $.3 million loss in 2001. And a $1.5 million provision for bad debt.

The future. For the remainder of this first semester, continued extraordinary gains will contribute to our cash provision and help to preserve our profitability. However, given the recovery of our passenger business already evident since March, our operating results should improve in the second semester. The rebound in our passenger business will help to offset the continued weakness that we expect in our cargo business throughout the end of the year. In the passenger business, Argentina continues to be our top concern and it is not clear that the demand in that market will return by the end of the year. To compensate for Argentina we have leveraged our growing operations in Peru and abroad. We are also developing alliance relationships to generate new, higher-yielding traffic and to increase the utilization of our fleet. We have high expectation for the of LAN Chile, service plan for July. We have also recently expanded our relationships with American and Alaska Airlines to increase our reach into the higher-yielding North American market. Because we anticipate an 8 percent decrease in international passenger demand for the full year, we have plans to reduce our international capacity 6 percent to better match supply and demand. The domestic market will continue to benefit from our strong market share. As a result, we plan to increase capacity by 7 percent, year-over-year, for the full year.

In the cargo business, weak demand across Latin America, due to soft economic consolidation, is not likely to recover before the end of the year. Southbound, higher-yielding cargo demand has contracted significantly and price race competition has been intense. In the northbound routes, demand is stronger but increased competition will continue to prevent us from increasing prices. As a result we will continue to reduce cargo capacity and change the mix of our freighter fleet. Our three new 767 aircraft, which are subleased to our affiliates -- and -- have helped to generate improved aircraft utilization. Finally, in order to maintain our liquidity, we will continue to capitalize on all possible non-operating gains and cut capital expenditures. On the cost side, we will be helped by lower fuel prices. We will continue to take advantage of cost saving opportunities, such as contract renegotiations, joint purchasing agreements, and fleet adjustments. With LAN Chile's financial, commercial, and operational competitive advantages, we continue to believe that our growth prospects for the future are better than those for any other carrier in the region, especially as the need for in Latin America becomes more and more evident. Thank you for your attention. At this time we will be pleased to answer any questions.

Our first question comes from Pablo Belo with Santander.

Good morning. Regarding the cargo business, how would you manage capacity if southbound demand has dropped dramatically, and northbound demand had increased dramatically?

First of all, we have readapted our router capacity by entering into new markets. We have reduced flights to South America and we have started a Central America operation through West, which was started in February, an operation from Miami to Costa Rica and Guatemala. Furthermore, we also started an operation with the 767 subleased to , domestically in Brazil from Via Corpus to . So we have the capacity that we took away from the long haul routes to South America, we have managed to replace them with these new markets that we already started. And to supply the northbound market with the demanding needs, we are doing more round trips, especially to the northern parts of South America. I am referring especially to Colombia and to Ecuador, flying with no cargo southbound and only picking up the northbound cargo, which for such short flights still is profitable.

Do you see your competitors in the Brazilian and Chilean markets?

Yes, our main competitors in the southern markets, Brazil and Chile, are and AGI, a company located in Miami which is using Atlas aircrafts. These two companies are our main competitors and the competition with them is strong in those two markets.

Our next question will come from Juan Enrique Riberos with Citigroup

First of all, congratulations, I think you had a fabulous quarter given the circumstances affecting the industry. Good job to all the team at LAN Chile. My first question is related to non-recurring gains in 2002. Are you predicting more gains for the rest of the year? Or pretty much this is going to be it.

De La Fuente: Yes. We are predicting to have at least two more that we are planning to finish in the first semester. It involves two Airbus 220s. And probably we are planning to arrange more new operation for the second semester.

Do you have an estimate of the amount that would impact on your financials?

De La Fuente: At least, around $5 million. It's not a big amount but the minimum is around $5 million.

The second question is cargo related also. I know that the drop in cargo revenues was almost 100 percent offset by the increase in other, which essentially is described as leases to your affiliates. Is that, do you expect that to continue that trend in terms of more revenue from the leases? What's your projection there for the remainder of the years? Are those markets you describe, for Brazil and Central America, are they projected to be less affected than their southbound-northbound traditional markets?

Yes, that's the reason why we entered those markets. The reason for entering Central America was that pulled out their freighter operation in the region. So there was a market niche there already created that we just replaced the operation. On the other hand, in Brazil, the possibility of flying through our Brazilian affiliate gives us new possibilities which we did not have in the past, like moving cargo from Brazil to other countries around Brazil, like Venezuela and Bogota, Lima, where there is some market, there is market, from Brazil to these countries, and then taking up cargo from these countries and going back to the U.S. These are new market possibilities that we can only take through this Brazilian affiliate. So we expect that this new markets for us will replace the loss of our other traditional ones.

One last question that is passenger-related, and coach, with your Alliance Partners. The new code share flights to Sydney. Is that going to replace the Qantas flights that they had to Buenos Aires? And are your continuing to fly to Tahiti with your traditional flight stopping in Easter Island? Is this new or is Sydney going to be covered by the Tahiti aircraft?

In fact, we're doing Qantas. That's a flight that will operate from Santiago to Sydney, replacing the Qantas flight that used to operator from Argentina. And this is going to take place three times a week. But it's not going to replace our Tahiti flight, which mainly takes passengers from South America to , and to Easter Island. They are two different operations.

So it's in addition to the Tahiti market that you already serve?

Yes indeed.

So you are starting that when? In May?

July 1.

Best of luck. Thank you very much.

Next we'll hear from Bob Booth with Aviation Latin America.

I want to echo the last remarks of the speaker about having done a great job in very difficult times. You guys have, the whole management team, and everybody we're very proud of you. LAN Chile's really incredible. Quick question. You mentioned Peru and Ecuador. I know LAN Peru, I understand, I can't read some of the fine print in my copy of the report. I understand that you consolidate LAN Peru with LAN Chile, is that correct?

We consolidated LAN Peru first.

I'm just curious. Just a ballpark, what does LAN Peru generate in terms of overall revenues?

We told you that for the quarter LAN Peru generated $12.7 million.

Okay. Second question. On Ecuador, I understand you are flying with or for Ecuadoriana. Where does that stand? That was going to be an equity investment there?

No. We are operating in Ecuador to Miami, New York, we are not planning on that.

De La Fuente: Thank you again for joining us today. Please feel free to contact our investor relations department if you have any additional questions. We look forward to speaking with you again after the second quarter.