LATAM Airlines Group SA (LTM) 2003 Q1 法說會逐字稿

Good day everyone, and welcome to the LanChile first quarter earnings release conference call. Just a reminder, this conference is being recorded. At this time for opening remarks and introductions, I would now like to turn the call over to Maria Barona with i-advize Corporate Communications. Please go ahead.

Thank you. Good morning everyone. Welcome to LanChile's first quarter conference call. We thank you very much for joining us today. The LanChile earnings release for the period was distributed yesterday, and if you have not received it, please contact us immediately in New York at 212-406-3690 and we will send you one. At this time, it is my pleasure to turn the call over to Mr. Alejandro de la Fuente, Chief Financial Officer of LanChile. Mr. de la Fuente, please begin.

OK, thank you Maria, and thank you for attending LanChile's first quarter conference call. I am Alejandro de la Fuente, Chief Financial Officer. I am with (inaudible) from the International Passenger Division. (inaudible), Cargo Marketing, and Sales Vice President and (inaudible) of Investor Relations.

Today I will discuss the financial results, explain some strategy developments and comment on our expectations for the rest of 2003. 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 urban industry, and international markets. They are for, they are subject to change.

LanChile earned $21.6 million in its income for the first quarter. This result compares very positively to the $17.1 million net profit posted in the same period of 2002. Operating income increased nearly 48.8 percent to $26.3 million confirming the positive trend started in mid-2002. This quarter's results prove LanChile's ability to respond to challenging conditions, factos (ph) continues with demand, high too prices uses the war in Iraq and the decreased domestic traffic. Nevertheless, the company has responded and was able to deliver positive results by exploiting opportunities to generate additional revenues and by increasing efficiency. Total revenues for the first quarter grew 14.2 percent and amounted to $396 million.

Passenger revenues advanced 7.1 percent due to a 2.6 percent improvement in yields and a 4.4 percent increase in traffic. Low factos (ph) declined half a point to 68 percent as capacity increased 5.1 percent. It is important to know that although last year's comparison base may appear to be easy, markets have not recovered from the depressed levels seen during the first quarter of 2002. In addition to that, this year we face new challenges, such as the impact of the war in Iraq, according to National Passenger Traffic, and the decline of domestic passenger traffic caused by weak demand and increased competition. LanChile was able to overcome these challenges and grow with its revenues by expanding into new markets, making market share gains and capitalizing on its alliance relationships. In the passenger business we took advance, of the withdrawal (ph) of United Airlines from the Chile/U.S. market and increased our market share nearly six points. Not only offsetting the decline in traffic, but actually growing the number of passengers flown during the quarter by more than 14 percent.

The United States, Ecuador, Peru, and Argentina are our markets in which we have had a positive performance. Sales in the United States have shown a significant improvement and in Peru and Ecuador, we have continued to grow our market share. We are currently the second most important carrier between the United States and Peru, and we are close to achieving the same in the Ecuador/U.S. market. We have successfully redesigned our itineraries in order to provide better connections between Santiago and Buenos Aries in order to take advantage of increased demand from other Latin American countries to Argentina.

Additionally the first signs of a rebound in Argentine feeder (ph) traffic were perceived late in the quarter. Cargo revenues had an even more impressive recovery with a 24 percent increase, while yields grew 12. 2 percent, traffic increased nearly 10.9 percent and low factos (ph) improved 1.8 points to 66.3 percent. Cargo volumes have grown due to market share gains, slight improvements in southbound (ph) demand, expanded operations out of Brazil and Mexico, and our new partnership with Lufthansa Cargo. Cargo yields increased substantially due to a more rational pricing environment and because of a few surcharge. Finally, other revenues increased 29.1 percent, partly because of the consolidation of LanLogistic, LanLogistics. Excluding LanLogistics, they will have grown 12.8 percent due to improvements in areas such as on board sales and ground services.

LanChile's costs controls were another key driver of this quarter's results. Total operating costs grew 12.3 percents as total 80 case (ph) expanded 7.7 percent. The increase can be attributed to do higher fuel expenses, which rose 58.3 percent as a result of the 49 percent increase in price. In fact, the price increase alone resulted in an additional $22.6 million in operating expenses. This was partially offset by a $66.9 million non-operating, fuel hedging gain. Nevertheless, we were able to control all of our costs. Excluding fuel expenses, unit costs declined 7.8 percent as we benefited from the efficiency gains and a 7.7 percent increase in sistance 80 case (ph).

Wages and benefits increased 11.5 percent, mainly due to increased head count and the consolidation of new companies, such as LanLogistics. Commissions to agents increased 12.9 percent due to increased sales. Commissions remain flat as a percentage of revenues. Depreciation and amortization increased 15.5 percent due to the incorporation of new aircraft, and a $1.3 million charge related to adjustments in depreciation policies. These changes related mainly to modifications on the depreciation rates of some aircraft. Other rentals and landing fees increased 5.9 percent, reflecting increased operations. Aircraft rentals declined 8.9 percent as the incorporation of two airbuses 80/20s (ph), sorry as the incorporation of two airbuses 80/20's (ph) was fully offset by the return of one Boeing 767; 6.7 for the seven and three DCA (ph) aircraft. Aircraft maintenance declined 6.8 percent as the, in part of the increased operations, was fully offset by a $2.5 million gain arising from new returns conditions for certain leased aircraft.

Finally, our operating expenses increased 8.4 percent, also due to the consolidation of LanLogistics. Excluding LanLogistics, our operating expenses declined 2.5 percent. Overall, operating expenses increased 12.3 percent as the revenues increased 14.2 percent. This led to a 48.8 percent increase in operating income, which amounted to $26.2 million. Non-operating income amounted to $.2 million loss compared to a $3.2 million gain in 2002. As a result, net income increased 26.6 percent from $17.1 million to $21.6 million.

Strategy developments. Before addressing the future, I would like to emphasize three key strategy developments. First, yesterday was a very significant for LanChile as LanEcuador, a new regional airline in which we hold a 45 percent stake, started its operations. Initially, LanEcuador plans to focus on the U.S./Ecuador (ph) market, utilizing aircraft with leased from LanChile. However, LanEcuador also has traffic rights to operate to Spain and Argentina, and is expected to launch services to both countries later this year. LanEcuador is expected to be profitable this year and will be a valuable addition to LanChile; helping us to improve the position of the LanBran (ph) across the region, and increasing the utilization of our fleet.

Second, we renegotiated several our lease contracts and this will help us to dramatically reduce operating costs. This renegotiation was related mainly with our Boeing 77 fleet and will result in a $15 million reduction in lease expenses for 2003. This amount will increase over time and is expected to be close to a $30 by 2005. These new terms will enable us to improve our competitive positions, our adjust leverage, and our financial results.

Finally, I want to highlight the signing of a new long-term contract with our Lan maintenance (ph) workers. This continues to reflect the importance that we place on reaching long-term, productive agreements with all of our employees. In fact, over the last 18 months, LanChile has signed long-term contracts with pilots, flight attendants, and maintenance unions as well as with other, smaller groups. Our continued good employee relationship will provide the company with a strong base for growth.

The outlook. LanChile had an extremely positive first quarter, even though we continue to face adverse market conditions and new challenges, challenges appear we adjusted successfully and as a consequence operating income increase 48.8 percent and produced $31.6 million in net income. This not only positioned us as the best performing carrier in Latin America, but as one of the few profitable carriers in the world. During 2002, LanChile made significant adjustments and these results prove them to be successful. We expanded into new markets, developed new relationships, streamlined our operations, and increased efficiency. And by preserving the quality of our product and implementing an effective commercial strategy, we have been able to increase our market share. And while our region appears struggle, we have continued to advance on our long-term strategy by capitalizing on opportunities to both grow our revenues and reduce costs even further. The four (ph) were confident our results will continue to improve even if markets fail to rebound.

In summary, I believe that LanChile is on an unprecedented position to improve profitability and consolidate its position as Latin America's most important airline. Thank you very much. Now we're open to answer any questions you have.

At this time, if you have a question please press the star key followed by the digit one on your touch-tone telephone. If you are using a speakerphone please make sure that your mute function is turned off to allow your signal to reach our equipment. Again, please press star-one at this time if you do have a question.

Our first question will come from Glenn Engle of Goldman Sachs.

Good morning, Alejandro and congratulations.

Thank you, Glenn.

A couple of questions. One is can you share with us what the capacity forecasts are for 2003, both domestic and international and cargo?

OK, Mr. Vargo (ph).

OK, hello this is Liz Lecalme (ph), and the capacity, the forecast is an increase of 3.4 percent in international, and a reduction of about 10 percent or five to 10 percent in the domestic routes. That's the forecast for the year.

OK, and the forecast for cargo mainly, Avero (ph) can mention.

Regarding cargo, we are fully utilizing our six 767 aircraft and we have one rented DC-10 from Germany. If we see the continued growth on demand, we are looking forward renting a second aircraft for sorting (ph) some other kind of aircraft. This is not decided yet, but if we see this continued trend and increased demand, we will have to do so because there is no possibility for us to fly more of our own aircraft.

A second. In the first quarter, you had some modest passenger yield gains. Is that from a better mix, or is that just from higher fares. How is the business class doing?

No, I wouldn't say it's a business class issue; it's a different composition of traffic. As you know, our Argentinean traffic has slowed down, so that is even though the crisis last year, starting in January we were able to move a lot of traffic last year that we were not able to move during January and February; that's one issue. The other issue is in the increase in the traffic between Chile and Argentina, and directly that it's quite important traffic for the company, and with a very high yield as it's a short, short whole (ph) route, and the other issue is the ability with a decreased demand, sorry, a decreased supply in the Chile/Europe market and with the adjustments of the United out of the market, we were able to sustain more rational prices in the Chile/U.S. market. That's very important also.

In the, currently have you seen a, are bookings and traffic back to where they were before the war started?

We have, well what we have seen is an impact during March and April, especially in the Chilean origin that was the, that really suffered from the Iraq War, but we have been seeing a rebound especially during last week after the Easter holidays. For May and June specifically in the Chilean point of sale.

What did you pay for fuel in the first quarter and where are you currently?

Sorry again?

Fuel.

In the first quarter, what did you pay and what is the fuel price currently?

The fuel price for the fist quarter was about $1 per gallon.

Was that including the hedge or not?

Excluding the hedge. That's based on what we have on the operating expense.

OK.

And we are, obviously there's a lack on the decline in prices, but we're currently paying let's say between 85 and 90 cents, and that's going down as the market declines, and we are hedged about 60 percent as let's say in between 70 and 75 cents.

Thank you.

You're welcome.

And once again, please press the star key followed by the digit one if you have a question. If you're using a speakerphone, make sure that your mute function is turned off to allow your signal to reach our equipment.

And our next question will come from Ben Laidler of UBS Warburg.

Hi, Alejandro. Congratulations on a great quarter. I just had two quick questions. Firstly, could you just quick outline the structure over the fuel hedge for second quarter/third quarter? And could you just give us an idea on the difference in pricing between Northbound and Southbound cargo?

OK, under the fuel.

Under the fuel hedge banner (ph) we've a mixed structure for the second quarter, which is based on straps and end caps. We're hedged about 54 to 60 percent for the second quarter and that goes down in the third to about 40 percent. And Alejandro will comment on the cargo.

On the cargo pricing, we, there's been a dramatic change in the pricing that we do Northbound versus the Southbound. As southbound traffic has decreased, rates have decreased dramatically as well. Now pricing Southbound is, went down 20 percent compared to two years ago or even more; taking into account let's just say Miami to the, Miami to all the Latin American region is roughly around $1.10, $1.15 per kilo, and it used to be $1.60, $1.70 per kilo two years ago. And on the Northbound, the Northbound has compensated that, going up from 70 or 80 cents it was three years ago, to a rate that is goes over 1.20/1.30 a kilo. From South America, main exported (ph) countries like Chile and Ecuador to the U.S.

So there's really no difference in pricing between Southbound and Northbound?

Today, today there's no difference; the rates are almost the same; both ways.

OK. OK, that's great. Thanks.

Thank you.

Thank you.

And as a final reminder, please press star-one if you have a question. Our next question will come from Christina Acle of Larrain Vial.

Good morning. Can you comment about the advice of the anti-trust commission in order to segregate passengers and cargo businesses?

Hi, Christina (ph).

Hi.

First just for the knowledge of everybody, what has been issued is a recommendation to (inaudible) and no options have been taken so far. The recommendation is based on attaining (ph) a report, which contains some different facts, among them two interesting things to mention; one is that is that it highlights the fact that the Chilean market has no barriers to entry and therefore it's very open, and that's certainly of something to take on when monopoly issues arise. Second, while their recommendation is basically says that we, they would like us to separate our cargo and our passenger, domestic cargo and passenger businesses. But we believe that, that recommendation has little chance to being put in place by the anti-monopoly commission since it lacks, it lacks certain economic and legal fundamentals.

First of all, as you all know by combining our passenger cargo operations, we've been able to increase efficiency, and by separating those, we would probably see less efficiency and higher, we will have to increase prices, and that's hardly an outcome than probably the monopoly commission would like to have. And second, our competitors on the passenger business have to lower prices, and if what this recommendation says that with subsidizing, the passenger business with the cargo business, this implies that we could be sort of charging lower prices on the passenger business. And the fact is that our competitors have lower prices than us, so that sort of proves the fact that we are not subsidizing operations on the passenger side with cargo revenues.

OK, thank you.

You're welcome.

And there are no further questions in the queue at this time Mr. de la Fuente. I'll turn the conference back over to you sir.

OK, thank you again for joining us today. Please feel free to contact our investor relations department if you have any additional questions. We'll look forward to speaking with you again after the second quarter. Thank you very much and good-bye.

Thank you. This does conclude today's conference call. Thank you for your participation.

END