LATAM Airlines Group SA (LTM) 2004 Q2 法說會逐字稿

Good day, everyone, and welcome to the LAN Airlines second quarter earnings release conference call. Just a reminder, this call is being recorded. At this time, for introductions and opening remarks, I would like to turn the call over to Maria Berona. Please go ahead.

Thank you. Good morning, everyone, and welcome to LAN Airlines second quarter conference call. We thank you very much for joining us today. The LAN Airlines earnings release for the period was distributed yesterday. If you did not yet receive it, please contact us in New York at 212-406-3690, so that we may send you one immediately.

At this time, I’d 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. 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 Airlines. Mr. de la Fuente, please begin.

Thank you, Maria. I am Alejandro de la Fuente, Chief Financial Officer, and with me are Pedro Pablo Errazuriz (ph) from our Chilean Domestic Passenger Division, [indiscernible] and Luis Riquelme from our International Passenger Division, Alvaro Garril (ph) from our Cargo Division, and Andres Bianchi (ph) from our Investor Relations Department.

Today, I will discuss our financial results for the quarter, explain our recent strategic developments, and comment on our expectations for the rest of the year. Then, we will be pleased to answer any questions you may have.

LAN had a record second quarter. Net income increased to more than $31m, as operating margins reached an unprecedented 7.3%. This is a major accomplishment for what is usually our weakest quarter, due to seasonal factors and in a year in which we have faced extremely high fuel prices that added almost $19m in additional expenses.

Three years after 9/11, LAN has consistently delivered record profits. This performance is even more impressive when compared to the evolution of demand, which, in most key markets, is still below its pre 2001 levels. For example, Chilean international demand, despite its recent recovery, is currently 5% below its 2001 levels.

The quarter – our performance during the quarter, during the second quarter, was driven by strong revenue growth on our two main businesses, as well effective cost control across the entire company. Total operating revenues increased 28%, outpacing the 22% in operating costs, and leading to a 4.7 point increase in operating margins.

In the Passenger business, Passenger revenues for the quarter grew 28%, due to a 22% increase in profit, and 5% improvement in yield. With a 5.9 point in load factors, revenue per ASK rose 10%. Passenger revenue growth can be attributed mainly to a recovery in demand, a stronger market position, and the successful capacity increases.

Demand continued to recover during the second quarter, although from very low levels. This recovery has now been spread evenly across markets, and there are significant differences between specific points of sale. While Chile, Argentina, Europe and the United States have grown significantly, Peru and Ecuador remain sluggish.

Meanwhile, competitive activity remains stable, with no major entries or exits from our main markets. We have responded to these conditions by strengthening our leadership position in key segments, and growing capacity in specific areas. On Chilean domestic routes, we have recovered market share, and this, together with improved demand, led to a 10% rise in traffic.

In regional markets, we have leveraged our itinerary and service standards to consolidate our position as market leaders on all of the routes that we serve.

Finally, we have selectively added capacity in long-haul routes, such as those to the United States and Europe in order to satisfy increasing demand. We have also benefited from the performance of our newer routes, while routes added last year, such as [indiscernible] Madrid, and Chilean [Season] Australia, continue to consolidate and deliver positive results. Our new regular routes out of Lima have performed ahead of expectations.

Yields increased, year-over-year, due to improved segmentation, higher premium profit, and the positive impact of a stronger Chilean peso on domestic yields. We have also increased prices on specific routes to compensate for higher fuel prices.

The Cargo business – Cargo revenues grew 36% year-over-year, due to a 24% increase in traffic, and a 10% improvement in yields. These, together with a 2.9 point increase in load factors, led to a 15% increase in revenues per ATK.

Improvements in revenues reflected the recovery of south-bound demand, continued strength in traditional north-bound markets, new sources of north-bound demand, and a stronger competitive position.

In the Cargo business, south-bound volumes to Argentina, Brazil and Chile have continued to recover, while north-bound volumes out of Pacific coast markets remain strong. Additionally, new sources of export demand have appeared in Argentina and Brazil, and by taking advantage of our operational flexibility and market knowledge, we have been able to successfully satisfy these demands through special operations.

Finally, competitive activity has remained stable after the pull-out of several carriers in late 2003. In order to take advantage of these conditions, our Boeing 767 fleet continues to operate at impressive utilization rates of above 17 hours per day, and we expanded temporary capacity even further by wet-leasing up to three aircraft, including additional Boeing 747 and DC10 freighters.

Growth in Cargo yields reflected the [user] charge, improved demand, and reduced pricing pressures as competitors have scaled down Latin American operations, and as high fuel prices have limited the ability of less efficient companies to operate.

Operating costs for the quarter grew 20%, as system capacity increased 18%. As a consequence, costs per ATK, which also includes net financial expenses and other operating revenues, increased 4.9% year-over-year. Fuel prices remained extremely high, and accounted for $19m in additional expenses, or 1.5c per ATK.

Excluding the impact of high fuel prices, costs per ATK were almost flat, increasing only 0.2%. From a structural point of view, costs not only were flat, but actually fell, year-over-year.

For instance, unit revenue growth has led to higher commissions, a cost increase that clearly does not imply an efficiency loss. In fact, if we isolate the impact, unit costs would have decreased by more than 1%.

This encouraging costs performance is the result of our permanent effort to streamline our operations, and reduce costs. During the quarter, we leveraged the lower lease rate we negotiated last year, as well as increased employee productivity.

On the non-operating side of the business, the company had a $3.9m non-operating gain for the quarter, compared to a $5m loss last year. This reflects lower net interest payments, a $0.8m foreign exchange gain, and an $11.5m fuel hedging gain.

Liquidity and financial resources – our positive financial performance has led to a much stronger financial position. Aside from maintaining no short-term debt and well-structured long-term financing, we were able to generate a significant amount of cash during the quarter.

By June 30, we had $291m in cash and equivalents, more than twice the amount recorded on the same date last year, $134m more than our cash position on March 2004.

While we have hedged 33% of our fuel requirements of our Passenger operations, for the rest of the year at approximately 72c per gallon, our Cargo division will continue benefiting from the fuel surcharge. Although we have no hedge recently even from prices, we are constantly evaluating prices [inaudible], and we remain fully ready to enter into new contracts.

Strategic developments – first I will briefly review the situation in Peru. In early July occurred issues and orders that could potentially ground LAN Peru pending an investigation on the company’s minority shareholder.

However, this order has not become effective since the [indiscernible] has not formally notified LAN Peru, and, more importantly, the Peruvian government issued two emergency decrees, preventing the grounding of LAN Peru based on national interest.

We believe that the lawsuit that led to this situation is groundless, as all of LAN Peru’s shareholders comply with Peruvian laws and relations. Therefore, we expect this position will be overturned.

We remain committed to Peru, and to providing Peruvian passengers with high quality air transport, especially since Aero Continente, the country’s largest domestic airline, is no longer operating.

Although a fraction of its operations are being covered by its successor, Nuevo Continente, we will have reinforced LAN Peru’s domestic operations, in order to satisfy and serve demand.

Secondly, we signed the key alliance with Mexican Airlines, Mexicana and Aero Mexico. This partnership, which is the first time by the LAN alliance, and therefore, includes LAN Chile, LAN Peru and LAN Ecuador is of key strategic value, as Mexico has become an increasingly important destination for South American carriers.

This agreement will strengthen our positions on routes between South America and Mexico, as well as growing our routes network in Mexico and Central America.

Thirdly, we signed a new four year agreement with our heavy maintenance union. The previous agreement was due to expire in September 2004, and the new one features wage increases based only on inflation, and increased scale of flexibility.

Fourth, we have continued strengthening our fleet. Last month, we added two leased Boeing 767-200 Passenger aircraft to our long-haul fleet, and we have also leased three Boeing 737-200s that have [indiscernible], and will replace some of our older models.

We will receive three new Airbus A319s this year, under operating leases, and expect to incorporate two more lease Boeing 767-200s by the end of the year.

Finally, we have purchased two new Boeing 737-200 freighters that will be delivered next year. These aircraft have proven to be extremely valuable to our Cargo operations, and the addition of this aircraft will significantly enhance our operational capacity and flexibility.

Negotiations to secure the necessary financing are currently underway, and we expect they will be completed soon.

The future – our second quarter results confirm the positive trend that began two years ago. We have consistently improved profitability despite facing major challenges by expanding into new markets, exploiting opportunities, carefully managing capacity, and continuously streamlining our costs structure.

Thanks to these actions, we are in an unprecedented position to continue growing and strengthening our leadership on the Latin American market. For that, we are working on initiatives to service and satisfy demand in Peru, launch new routes, improve service quality and increase customer loyalty, strengthen our alliance network, and ply new gains in operating efficiency.

In terms of capacity growth, we plan to add capacity on both existing and new routes in response to improving demand, and new competitive opportunities. For the third quarter, we plan to grow capacity in the Passenger business between 17% and 20%, and in the Cargo business, between 18% and 21%.

Meanwhile, for the fourth quarter, we plan to expand capacity by between 13% and 17% in the Passenger business, and between 9% and 12% in the Cargo business. We also continue to monitor events in other Latin American markets, to study possible expansion opportunities.

Argentina remains our top priority, and we are currently reviewing a number of options from starting a new airline, to investing in one or more existing companies. During the quarter, as we informed Chilean authorities, we performed [Gidileans] on American Falcons, but failed to reach an agreement.

We will continue to evaluate any and all possible alternatives to expand into Argentina in a manner that is value-creative. Our efforts and performance clearly demonstrate our unique position in commercial transportation across the region.

With this quarter’s results, we have completed eight consecutive quarters of profit. More importantly, our profitability continues to improve, and, for example, our trailing twelve month operating margins reached 9.4%, while net income amounted to a record $137m.

Despite this unprecedented performance, we believe that we have only just begun to realize our full potential and continue to be aggressively committed to making future financial gains, and delivering continued value for shareholders.

Although we remain concerned about current and predicted fuel prices and [costs] are stronger in the second half, we are confident that our business model and competitive strengths will enable us to continue growing profitability in the near future.

Now, we will be pleased to answer any questions you may have. However, I would like to emphasize that due to regulatory restrictions, we cannot comment on the possible secondary offering of LAN’s shares that was announced in March, and on any recent activity by our shareholders. Thank you.

Thank you very much. [OPERATOR INSTRUCTIONS]. Our first question today will come from Michael Linenberg with Merrill Lynch.

Yes, gentlemen, good morning, and nice job on the quarter. I’ve got a couple of questions here. Can you give me, or provide a breakdown of what the Chilean domestic market looks like today, market share between LAN Chile and Sky, and any other local competitors?

Hi, Michael, this is Andres. Basically, the market is about 80% LAN and the remainder of that is Sky, with 1% in the hands of very small competitors in niche markets. So it’s basically LAN and Sky.

Okay, and then my next question is, with respect to capacity growth, it does look like that you’ve stepped up capacity growth in the second half of the year, particularly in the third quarter. Where – you know, both Cargo and Passenger – where is the focus? Is that, you know, up to the US? Is that adding more capacity in Peru, to take advantage of the shutdown of Aero Continente? Any color on that would be helpful.

Okay, this is Luis Riquelme. The capacity, basically, is between Peru and the United States. We started recently, during August, four new frequencies between Lima and Miami. We have scheduled new frequencies between Lima and Los Angeles, starting in October, and we also have a slight increase in our offer to Europe and to Sydney.

Okay. And this is, if I could just throw in one other question, Alejandro, I heard that you made a comment about volumes from the Pacific Coast markets were strong, I believe when you were talking about Cargo. Pacific Coast markets – is that Ecuador and Peru, or are you talking of cargo up to California? If you could just elaborate on that.

Hello, this is Alvaro Garril from the Cargo division. What we’re talking about with Pacific cargo is the west coast, or the Pacific coast of South America. We’re talking about Chile, Peru and Ecuador, also Colombia, and the areas where most of the north-bound cargo is, perishable cargo, mostly.

So when we’re talking about Pacific coast cargo, it’s out of the Pacific coasts of South America, and it goes mainly to Miami, part of it to LA and to New York, but roughly 80%, I would say, of this cargo goes to Miami and the rest to LA and New York.

Very good, thank you.

You’re welcome.

And next we’ll hear from Steve Trent with Smith Barney.

Good morning, gentlemen, and congratulations again, a terrific quarter.

Thank you, Steve.

I have two quick questions here. I know that you kind of temporarily, or maybe not temporarily, but you picked up some gains last month in Peru, which coincided with Aero Continente’s grounding. Now that [the cargo] has kind of gotten back up here, could you give us a sense as to what sort of permanent gain you’ve made in that market, if any, and kind of, what might be the timeline in terms of having the dispute resolved within Peru?

Then my second question actually pertains to fuel prices. I was wondering at this point if you were willing to give us a sense as to what percentage of kind of next year’s gains you might plan to hedge?

Okay, this is Luis again. I will answer the first part of the question. In Peru, with the downing of the planes of Aero Continente, we have been able to increase our market share. We have been increasing it from 25% to around 50%.

The situation is, I would say, it’s developing because, as we mentioned, there is a start-up of Nuevo Contintente but the situation of our competitor is still not very clear.

Regarding our situation, we believe that there are not very important fundamentals to support what we have –- for the legal issue we have been facing in Peru, okay? So we believe that we are not going to be grounded as it has been said in the press, and as there was the fear, I would say, one month or two months ago.

In terms of fuel hedging, Steve, we plan to have about 15% to 20% of our exposure for next year at roughly 73c or 74c.

That’s terrific, guys, thanks very much.

You’re welcome.

Glenn Engel, with Goldman Sachs, has a question.

I have a couple of bits, one – and good morning. When times get good, and especially now the Cargo business is good, not only you, but a lot of people start looking at adding supplier. Are you starting to see a fair amount of capacity added by your competitors?

Okay, it’s [indiscernible]. The situation, in [indiscernible], yes, of course, when things get better, we will try to come in here, but the situation is that the Asian market is even much better, and there is a huge increase in the demand for freighters there, so also, the demand is still strong for the charters for the Army to Iraq and that region, so we see now a shortage of freighters around the world.

Everybody is putting more and more capacity to Asia, European carriers and American carriers like Polar, or Asian carriers as well, taking more wet-leases from [Air Plus] or from whatever they can get, to add capacity through the Pacific from Asia to the US, or from US to Europe. So we don’t see a big trend for airlines coming here. They are paying more attention to those markets, at least – I should say, in the medium-term, let’s say from here to the end of the year, or early in the beginning of next year.

Okay, so in terms of the international passenger demand, I would say, or the movement of our competitors, I would say that in terms of Chile and the States, things look more or less stable. We don’t see any entrances there.

Between Peru and the States, as I commented, we are the ones that are putting new offers into the market in the next months, and between Ecuador and the States, we also see that demand and supply are more or less –- are compensated, so we don’t see any entrances there also.

The big problems, or the big increases, could come from Europe, and there, what we are planning is to add capacity between Peru and Europe in the near-term. We have been working for that for the last month, and between Chile and Europe is the other issue. I would say we don’t see any entrances in the short-term, as of at least the main entrance to Europe, that is, Spain. The traffic rights are absolutely used right now.

Hi, this is Pedro Pablo Errazuriz from the Domestic Passenger division. Perhaps the most relevant competitor that is saying that they are going to come to the market is Aerolineas [de la Sul], which is a subsidiary of Aerolineas Argentina, and they say that they are going to start flying in September. We are seeing what’s happening.

We assume that they’re going to start flying in November, and as long as they do what they’re saying that they’re going to do, it is not substantial competition, but we should see what will be the real number of aircraft that they’re planning to bring into the market.

Would you have a rough guide for us for overall capacity in 2005?

Roughly about 10%, 12%.

And finally, can you help us out, just for the third quarter, what you’d expect to be paying for fuel?

As we said, we have hedged about 35% of our exposure, on about 73c per gallon, so it should be an average between that and the remaining 67% at market rates.

Thank you very much.

You’re welcome.

[OPERATOR INSTRUCTIONS]. Our next question will come from Rodrigo Martin with Santander Investments.

Hi, gentlemen, good morning. First of all, congratulations for such a remarkable quarter, and my question is related to the [supply and demand] since the grounding of Aero Continente. Which percentage of that market do you expect to gain and maintain in the medium-term, in both International and Domestic markets?

Okay, this is Luis again. As I mentioned before, the situation is not very stable, in terms of that we don’t know what’s going to happen with the competitors. We believe we’re going to keep our market share around the 50% we are right now, more or less around that, 5 points more, 5 points less than that, Domestic.

Okay, thank you very much.

Okay, you’re welcome.

At this time, there are no questions in the queue. [OPERATOR INSTRUCTIONS]. And Michael Linenberg, with Merrill Lynch, has a follow-up question.

Hi, yes, you may not have this data, but I was just curious, you know, where Taca Peru is, you know, the size that they have in Peru, and if you’re close to 50%, and Nuevo Continente has another 10% or 20%. I mean, is it fair to say that Taca Peru is maybe a quarter of the market? I’m just trying to size up the market.

Okay, Taca Peru really has decreased their operations in Domestic in Peru in the last several – I think the last year. They have only a 10% share there, and they are reducing their share from the 10% they used to have, okay? But they are not a very important competitor right now in the Domestic Peruvian routes.

Would you happen to know what they are internationally, out of Peru?

Well, internationally they are, you know, they have a hub out of Lima, so they have operations, big operations, on more than daily operations to Buenos Aires, they have operations to Santiago, and they have operations also to Brazil and they, out from Lima, they go to the north and they connect to Caracas, Bogota, and also Ecuador. Okay? They are an important competitor in those routes for us.

So it sounds like they’re the largest carrier internationally in that market today. Is that a fair statement?

No, it depends on the market. In Santiago, Lima, we are the most important, in the [places like] Lima. We are also gaining with our new operations from LAN Peru. We are also one of the biggest participants right now, and in Lima and Caracas, they are important, they are more important than us.

They have a lot more supply than we have, and in the Lima/Bogota market they compete in a very aggressive manner with Avianca. So in certain markets, they’re important, also in the Lima/Ecuador, they are important.

Okay, thank you very much.

You’re welcome.

[OPERATOR INSTRUCTIONS]. At this time there are no questions in the queue. I will now turn the conference back over to Mr. Alejandro de la Fuente for any closing or additional remarks.

Okay, 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. Thank you very much, and goodbye.

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