LATAM Airlines Group SA (LTM) 2003 Q3 法說會逐字稿

You’re holding for today’s LAN Chile third quarter conference call. Please stand by as we are currently admitting additional participants. We should be under way in just a few moments. Thank you very much for your patience, and please continue to hold.

Please stand by. Good day, everyone. Welcome to the LAN Chile third quarter 2003 conference call. Just a reminder that this call is being recorded at this time for introductions and opening remarks, and I would like to turn the call over to Maria Verona. Please go ahead.

Thank you. Good morning everyone, and welcome to LAN Chile’s third quarter conference call. We thank you very much for joining us today.

The LAN Chile earnings release for the period was produced yesterday. If you have not yet received it, please contact us immediately in New York at 212-406-3690. At this time I would like to point out that certain statements regarding the company’s business outlook and anticipated financial and operating results constitute forward-looking statements. These expectations are highly dependent on the economy, the airline industry and international markets, and therefore they are subject to change. At this time, it is my pleasure to turn the call over to Mr Alejandro De La Fuente, Chief Financial Officer of LAN Chile. Mr De La Fuente, please begin.

Thank you Maria, and thank you for joining us for LAN Chile’s third quarter conference call. I am Alejandro De La Fuente, Chief Financial Officer, and with me today are Pedro Pablo Errazuriz, Vice President, Domestic Passengers Division, Luis Eduardo Riquelme, Home International Passenger Division, Alvaro Carril, Cargo Marketing and Sales Vice President, and Andres Bianchi, Head of Investor Relations. Today I will discuss our financial results, explain some of LAN Chile’s strategic developments, and comment on our expectations for the rest of 2003 and early 2004. Then, we will be pleased to answer any questions that you may have.

The quarter, LAN Chile returned $22.7m in net income in the third quarter, more than three times the $7.6m earned in 2002, and the best result for this quarter in history. This record performance was achieved even as we continue to face major challenges and it’s a demonstration of the successful strategic adjustments we have implemented and that have enabled us to strengthen our competitive position, enhance our regional presence and streamline our costs base.

We faced two main challenges during the quarter softness in demand, and high fuel prices. Domestic demand in Chile remains depressed, and this, together with increased competitive activity, has impacted our domestic profit. In international passenger markets, demand has recovered, but it is still below historical levels. Finally, during the most of the quarter, [indiscernible] cargo demand remains soft. High fuel prices have also impacted us, and they resulted in $7m in additional operating costs during the quarter. Despite this, we were able to grow our revenues and improve profitability for the third quarter operating income by 56.1% from $20.3m in 2002 to $33.8m in 2003. Operating margins increased 2.7 points to 8.4% this year as cost related revenues grew 12%, outpacing an 8.8% increase in total operating expenses.

The passenger business, passenger revenues increased 14.6% due to a 17% increase in traffic and a 2.1% decline in yield. Traffic growth exceeded a 7% increase in capacity, leading to a 6.2 increase in load factors, which, in turn compensated the lower yield and caused a 7% increase in revenues for ASK. Total traffic grew, driven by a 23.8% increase in international traffic, which fully offset the 8.3% fall in domestic traffic due to increased competition and soft demand.

In key international markets, LAN Chile grew [indiscernible] and profitability. The company capitalized on its strong competitive position in routes to the United States and Europe to consolidate its leadership and increased market share. The company also benefited from a stronger presence in markets which have their high season in the third quarter, most notably Peru and [indiscernible]. In [indiscernible] LAN Peru gained market share to the United States and positioned itself as the leading operator between both countries, LAN Ecuador continued its expansion, adding frequencies to the United States, and initiating service to Spain and Argentina. Finally, demand in key points of sale, such as Chile and Argentina, continued to recover, leading to higher load factors and improved pricing. Yields declined due to a 9.4% increase in average trip length, the relative increase in connecting traffic, and several commercial strategies aimed at stimulating demand.

The cargo business, in the cargo business revenue grew 8.7% due to a 2.4% decline in traffic, and an 11.3% increase in yields. The main reasons for the decline in cargo traffic were weak salmon exports out of Chile, due to weather-related factors, the slow-down in [indiscernible] traffic, and a decrease in available belly-space due to high passenger load factors. These declines in demand were partially offset by increased volumes in routes to Europe and Brazil. Our agreement with Lufthansa Cargo, has improved our position European markets and supported additional operations to that market. Cargo yields rose due to the implementation of the [indiscernible] charge, and the reduced pricing pressures as competitors have scaled their Latin American operations. Cargo load factors declined 1.2 points during the quarter as capacity decreased 0.6%. However, higher yields fully offset this decrease and led to a 9.3% improvement in revenues for ASK.

Operating costs grew 8.8% during the quarter, outpacing a 2.3% capacity increase and leading to a 6% increase in unit costs. The 12.9% increase in fuel prices was responsible for more than half the increase in unit costs. Excluding the effect of higher fuel prices, unit costs grew only 2.9%. The increase in fuel normalized unit costs can be attributed mainly to factors related to strong passenger profit growth and the creation of new affiliates. Strategically, commissioners handling a landing fee, expenses and passenger service costs grew in line to strong passenger volumes. [Indiscernible] and benefits grew with increase in head count related to new affiliates being part of a stronger Chilean Peso on Peso-denominated wages, and performance-related bonuses. Meanwhile, the company took advantage of lower rental expenses and efficiency gained in maintenance.

For the quarter, non-operating expenses decreased 53.7%, reflecting lower net interest payments and a $1.8m foreign exchange gain and a $2.3m fuel hedging gain. As a consequence, net margins improved 3.5 points from 2.1% to 5.6%. Our positive financial performance has led to a stronger balance sheet and at the end of September 2003 the company had a $175m liquid position. We continue to have no short-term debt, and our long-term debt is related only to aircraft and features long repayment of files and attractive interest rates. In order to respond to high fuel prices, we currently use our financial hedging strategy and a cargo fuel surcharge. We hedge nearly 60% of the total fuel needs for the upcoming quarter, and we have also hedged decreasing fractions for up to six quarters in advance.

Fuel efficiency has also improved, and during the quarter, consumption rose 1.9% as capacity increased 2.3%.

Strategic developments, I would like to mention six key strategic developments. First, I want to comment on the success of our regional affiliates. On September 24, LAN Peru and LAN Ecuador launched a joint Lima-Waikiki-Madrid flight, which together with LAN Ecuador’s new open Waikiki one-sided route have exceeded expectations with low load factors exceeding 75% to Europe and 80% to Argentina. LAN Ecuador currently operates to four international destinations and plans to continue expanding in order to consolidate its position as Ecuador’s leading international airline. Meanwhile, in Peru, LAN Peru continues enhancing its position and during the quarter, the LAN Peru/LAN Chile combination became the leading operator between Peru and the United States. LAN Peru and LAN Ecuador not only provide LAN Chile with significant growth opportunities, but also enable the company to increase efficiency by taking advantage of the synergies that exist in commercial and operational areas. We expect LAN Peru and LAN Ecuador to continue growing in the future, and depending on the availability of traffic rights, it is likely both companies will launch new routes in the short-term.

Secondly, we have continued adjusting our fleet plans to match commercial and operational conditions. In September, we secured the incorporation of an eleventh Boeing 727 passenger aircraft and their operating lease. We also plan to incorporate four additional Boeing 727 passenger aircraft and their operating leases during 2004. The incorporation of these aircraft is necessary to increase capacity in long-haul routes, as we are currently using our aircraft more than fifteen hours per day. We also plan to incorporate two short-haul Airbus [indiscernible] in December this year and three Airbus [indiscernible] in the second half of 2004.

Four, we have recently signed an agreement with Adlas to wet lease two 737 freighters in order to replace two DC10 aircraft we have been operating recently. These aircraft will enable us to increase capacity to respond to growing demand and also marks the return to our working relationship with Adlas.

Fifth, competitive activity in Latin America cargo markets has declined significantly as several operators have reduced or shut down their Latin American routes. Specifically, ARO Air announced recently it is ending its services to Chile and Argentina. FedEx ended its Latin American field operation, and UPS cancelled its operations to Peru and reduced its services to Ecuador by half. We expect LAN Chile Cargo and its affiliates to benefit significantly from these changes in the competitive environment.

Six, on October 14, LAN Chile Cargo launched Positive FS, a new flying specific product that guarantees customer space on a given flight, the four providing them with a known time of arrival. Positive FS takes advantage of our passenger itinerary to offer customers a differentiated product, and it is one of the several products through which we will incorporate revenue and capacity management in links to the cargo business. We estimate that this and all similar products may boost yields by up to 2% in the next twelve months. Positive FS will initially be offered on some [indiscernible] Miami passenger flights, and will be later expanded to most passenger routes.

Seven, we have earned several awards recently which highlight our high service standards as well as our corporate performance. In October, our in-flight [indiscernible] was selected as the third best in the world for a mid-size airline at the Avion [indiscernible] Awards. Also in October, the German magazine, [indiscernible] selected us as the ninth best airline in the world and our business-class as the seventh best on the global level. In terms of corporate performance, in September the survey by Chilean financial newspaper [indiscernible] and Price Waterhouse Coopers selected us as Chile’s third most respected company, and in October, Global Finance magazine named us as the best airline in South America.

The future, despite facing adverse market conditions, LAN Chile has achieved significant revenue and earning growth in recent months and this not only provides compelling evidence of the resilience of our business model, but it also puts us in an unprecedented position for the future. Therefore, we are encouraged to see the first signs of a recovery in Chilean demand, driven by positive economics, lower exchange rates and improving consumer confidence. Meanwhile, we have increased our market share in [indiscernible] routes, which has led to high load factors and improving yields. In order to take advantage of these factors, we plan to increase capacity in the near future. For the fourth quarter we expect to grow passenger capacity between 9% and 12%, with international capacity increasing between 15% and 18%. Meanwhile, in the cargo business, which is entering its high season, capacity should increase between 15% and 20%.

For 2004, we estimate capacity growth in the passenger business to be between 10% and 15%, and in cargo business, capacity should grow slightly more than that. For the longer-term we expect to continue to increase our revenues to market share gains, opening new routes and increasing frequency in some routes. We also continue monitoring events in Latin American markets, in order to analyze possible expansion opportunities. However, and contrary to what some press reports have suggested, we have not decided yet to enter any other Latin American markets.

Two years after 9/11, LAN Chile has been able to return to strong revenue growth and sheltered profitability, enabling us to confirm our position as Latin America’s leading airline. We follow our strategic plans, and although we have been impacted by adverse conditions, we have delivered profits consistently. We are confident that we can improve our results even if market conditions do not improve significantly, and we also have strong leverage to take advantage of positive changes in the operating environment. In summary, we believe there is still room for additional revenue growth, more efficiency gained, and more importantly, increased profitability. OK, thanks to all for what we have achieved in the last two years. LAN Chile’s today in an excellent position to continue growing, taking advantage of opportunities and, more importantly, creating shareholders value. Now we will answer any questions you may have.

Thank you very much. The question and answer session will be conducted electronically. If you would like to ask a question today, you can do so by pressing *1 on your telephone keypad. Once again, that is *1. We will take as many questions as time permits today, and we will proceed in the order that you do signal us. If you are using a speakerphone, please ensure that your function is off, so that our equipment can receive your signal. We’ll pause just one moment to assemble our roster.

Our first question today will come from Steve Trent with Smith Barney.

Uh, good morning, gentlemen, uh, congratulations first of all on the solid third quarter results.

Thanks Steve.

Um, just two or three quick questions, um, I’d noticed actually that the commissions to agents had not grown quite as quickly as I had expected, with actually somewhat below my forecast. What are you seeing in terms of trends in on-line bookings, and I was also wondering if you could give us some color on the adjustment you have made to depreciation expense? Thank you.

OK, um, mainly I would say that the way the commissions have been behaving is a result of our strategy of developing direct sales and I would say that the control of commissions in every territory, I would say is in line with what’s happening in all industry. I wouldn’t say something different, and it’s an expansion of that strategy for all the territories.

What’s the single question, sorry?

Oh yes! I noticed that you changed something about your accounting policy under depreciation and I was just wondering whether you could just give us a little color on that.

Basically we adjusted the [depreciation] rate for some of our aircraft and made it shorter and that increased depreciation rates slightly on that particular account which is basically shortening the life of the asset.

OK, great. Thanks very much, guys.

You’re welcome.

As a reminder, if you would like to ask a question, you can do so by pressing *1 on your telephone keypad. Next we’ll hear from Glenn Engel from Goldman Sachs.

Good morning, and well done.

Thank you, Glenn.

A few questions, please. One is, can you talk about the business nexus, is that improving yet for the first premium-class cabins?

OK, no. I would say there is certain recovery but it’s not near yet what we had before 9/11. We have been doing some strategies to try to rise sales and that kind of thing, particularly in terms of the fixed [indiscernible] profits but still I would say except for certain specific routes there is not a general recovery yet of the premium traffic.

Can you go over what your market share is in the markets, and how that compares to last year, or another timeframe?

OK, in the case of, as was mentioned before, in the Chile/US we have been performing quite well, although there is a mix in terms of the traffic right now. It’s a little different to what we had last year in terms that we are much more consolidated in terms of, for example, the offline traffic to the United States. In the case of Europe, we have experienced an important market share increase and that’s of course related to the competitive situation and in the case of Latin America, we have increased and maintained our market shares in the Santiago/Buenos Aires; that’s a very important market for us, beside the recovery and increased operations of [indiscernible], basically because all the other competitors that were before [indiscernible] have been disappearing. So, I would say in general terms, we have gained some points in all of our key markets during the last quarter.

Is Europe a market that you’re making money in yet?

Sorry?

Is the European market a happening thing?

Very well indeed, yes. The European market is one of the markets that has suffered the least up to 9/11 in terms of the kind of profit we are making over there, as we are very aware that we are the only ones that operate non-stop. We have a really important market share in terms of the business profits and [indiscernible] between Chile and Europe.

Your unit cost from the quarter was up 6%. What’s pushing the cost up, and as you start accelerating in growth next year, should I expect unit costs to come down again?

: I would say that unit costs rose 6% but half of that is fuel. If you exclude fuel then you would have increases in areas that are more related to sales and I think the impact of high load factors is clear there, that being mainly passenger commissions, or handling and landing fees and operating expenses related to distribution costs. Now, also it has increased because of the consolidation of affiliates, and that has awarded some benefits which were also partially affected by the stronger Peso which drove [indiscernible] up, as well as strong performance-related bonuses given that certain goals had been accomplished. So I think basically it’s related to sales growth and traffic growth and we expect our costs not to come up significantly in the near term.

And in 2004, if you’re going to be adding that much supply, should I expect unit costs actually to be falling, the cost [indiscernible]?

We hope and would expect unit costs to be flat or come down slightly in the near future.

And finally, can you go over, when you’re looking to... you have Ecuador, you have Peru. When you’re looking to develop these international joint ventures, what... what are you looking for, what makes you, you know, go for one country versus another, or one company versus another, and you know, down the road, would you expect them all to come under one banner again or is that just... would it take a change in the market?

Ecuador is an interesting market for us in terms that we can use and our [indiscernible] research has mainly been the aircraft. As we have said Ecuador has started a very successful operation to Europe, and the plans in the future will depend on the behavior of the market. What we have seen right now is that the Ecuadorian market is unbelievably depressed, and that is something related to the economic conditions right now over there, and we have seen better demand from the Peruvian markets, but from the other side, we have seen very, very important demand from Europe coming down and that also includes Ecuador, Peru, and also Chile. Depending on the way that the [indiscernible] is going to behave, and depending on how will be the economic impact in Ecuador is the [indiscernible] we are going to separate both operations, and increase operations, of course.

And Brazil, Argentina... what makes you choose Peru and Ecuador and why not other countries? Why not other companies.

I think basically, the variables are how each country fits into our strategy and how can we employ our assets through [inaudible] have good synergies with the [indiscernible] Corporation, and [inaudible] marketing depends basically on how’s the competitive activity and the competitive environment there, regulatory issues and obviously, economic performance, so you have all those three factors being in life together in order to define where are the markets you would expand to.

Uh, thank you very much.

Alejandro De La Fuente You’re welcome.

Once again, as a reminder, if you would ask to ask a question, press *1 on your telephone keypad, and next we’ll hear from Gavin Kembleton from IAM Trust.

Good afternoon, gentlemen. Um, you mentioned that passenger capacity was going to increase by 10% to 15% next year and cargo maybe a little bit more. Um, you also... I just wanted to have a bit more clarity on that, and also you said that you expect load factors to increase by approximately two points. That is in relation to 2003, not third quarter, I imagine. I just want some more clarity on that, and also if you could comment on when do you see the south-bound cargo, or maybe demand, picking up?

OK, the increasing capacity, I would say, in the international markets, will come from what we expect will be the growth of the markets, specifically with respect to an increase in the Chile/Europe route, and also certain increases between Chile and the United States with probably Peru, and also what we are planning to increase, I mentioned before, we expect that we will be able to squeeze the operation between Ecuador and Peru for maintaining combined [indiscernible] but increase generally the number of frequencies. And also, there are certain markets that we have been participating in, like the Ecuador/Buenos Aires market but we expect to increase our operations over there in the near future and, that’s it. Cargo?

Alejandro De La Fuente Well, in terms of cargo, the increase of capacity is the... comes from the, straight from the DC10 to the 747, and we did so because we expect the recovery in the south-bound traffic, in fact, by the end of the quarter, in September, we started to feel, and to see an actual recovery, a strong recovery, I must say, by the end of September in the south-bound traffic. It’s still far from what we had two years ago, three years ago, but since September this year; I should say, by the end of the third quarter, we started to see a recovery in traffic, in the south-bound traffic, to all our main markets such as Chile, Argentina and Brazil. So, to be prepared for that is that we finally decided to switch from the DC10 to the 74. We expect recovery to maintain the same pace for next year.

OK. So, and even taking into account these capacity increases, you still see that there is space for an increase in load factors in respect to what you’re going to do in 2003?

Reverting to cargo, yes, we do see... we expect to increase our load factors because it’s not only that the market is picking up on the south-bound, but also we mentioned that our competitors are pulling out of some markets, so it’s not only the markets are coming back but also that we are taking more market share. So yes, we in terms of cargo, we expect to have a better load factor.

Uh-huh. One or two points around those figures?

Alejandro De La Fuente I’m not sure, I couldn’t say. [Inaudible], probably something around that, but I cannot say.

Likewise in passenger also?

Yes, in terms of passengers I would say the international passengers load factor should be close to what we have achieved right now. We wouldn’t expect more high increases in certain specific routes, but in general terms I would say we have achieved load factors that could be said that are close to efficiency, so we don’t expect a great increase.

Thank you very much, gentlemen.

Alejandro De La Fuente Yes, in the domestic market we will see, in the early months of the year a higher load factor. We had a low load factor this year, so we will see better numbers.

Thank you very much.

Alejandro De La Fuente Thank you, Gavin.

At this time there are no questions in the queue, but I would like again to take this opportunity to remind the audience if you would like to ask a question, you can do so by pressing *1 on your telephone keypad. We’ll pause just one moment to see if we have additional questions.

And at this time we have no questions in the queue. I will now turn the conference back over to Mr. Alejandro Del La Fuente for any closing or additional remarks.

OK, thank you again for doing 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. Thank you very much.

And that concludes today’s conference call. Thank you very much for joining us today. You may now disconnect.