LATAM Airlines Group SA (LTM) 2005 Q1 法說會逐字稿

Good day , everyone, and welcome to the LAN Airlines conference call. As a reminder today's call is being recorded. At this time I'd like to turn the call over to Maria Barona.

Thank you. Good morning everyone, and welcome to LAN Airlines first quarter conference call. We thank you very much for joining us today. The LAN Airlines earnings release for the period was distributed earlier today. If you did not receive it, please contact us in New York at 212-406-3690.

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 the international markets, therefore, they are subject to chain. At this time it is my pleasure to turn the call over to Alejandro De la Fuente, Chief Financial Officer of LAN Airlines. Mr. De la Fuente, please begin.

Thank you, Maria. I'm Alejandro de la Fuente, Chief Financial Officer, and with me are [inaudible], Luis Riguelme from our International Passenger Division; Almero Garril from our carrier division and Andres Bianchi from our Investor Relations Department. Today I will discuss our financial results for the quarter, review three recent developments, and comment on our expectations for the rest of 2005. Then we will be pleased to answer your questions.

The first quarter. LAN had a positive first quarter with net income amounting to $46 million almost in line with the results obtained last year. This is an extremely significant accomplishment as we faced record fuel prices that led to $37 million in additional expenses. Considering this, we are extremely proud of our maintaining our profitability and generating a 9.3% operating margin. Moreover, we conform to the practice used by all airlines and treat the $9 million fuel hedging gain we recorded during the quarter as an operating item, operating margins will have exceeded 11%, a remarkable result for a mainline carrier operating in the competitive market.

All these facts continue to prove that LAN's business model has the tools required to successfully accommodate different shocks, therefore, enable us to continue generating positive results and maintaining our focus on our long-term strategy. Our first quarter performance was driven by three key factors - - strong revenue growth in passenger and cargo, the impact of high fuel prices, and the effective cost controls.

The passenger business. Passenger revenues for the quarter grew 27% due to a 19% increase in traffic and a 6% improvement in yield. This improvement, together with the 2.4 increase in load factors, led to a 10% rise in revenues per A.S.K. During the quarter our performance was driven by four main elements - - improvements in demand, increased competitive activity, successful capacity increases and an improvement in yields. Demand in key markets continued to evolve positively during the quarter, while positive economic performance in Chile has boosted travel demand, Argentina, Peru, and Ecuador also continue to recover although at a lower pace.

As we anticipated in our previous call, competitive activity increased moderately during the quarter. In Chile, Aerolinheas Azul is serving two destinations although with little impact on our operations. In Peru several carriers have initiated or expanded deliberations, and the market has to be moving toward long-term equilibrium. In regional routes we have seen increases capacity from several carriers such as [Stam] from Chile [inaudible] from Mexico city. Finally on inter-continental routes conditions remain fairly stable, considering last year's capacity additions by carriers such as Air Canada to Chile and from some Spanish carriers to Ecuador and Peru. Despite these changes, LAN has been enabled to continue growing revenues either by expanding into new routes or by maintaining or increasing market share on key segments. With that aim, we have actively managed capacity on all our market segments.

On domestic routes we continue benefiting from our strong position in Peru, and we adjusted itineraries in Chile to increase load factors. In our regional routes our [inaudible] although still in the development stage, continues to deliver excellent results. We also manage capacity to leisure destinations during the summer in order to respond to change in demand trend.

Finally, on inter-continental routes we gradually added capacity from Chile and Peru to the United States and from Chile to the South Pacific. Yields increased year-over-year due to fuel-related [firs] increases, security surcharges, improved implementation and a 7% reduction of our [inaudible] mainly because of the expansion of our Peruvian operations.

The cargo business. Cargo revenues grew 24% year over year due to a 13% increase in traffic and a 10% improvement in yield. Revenues per each case rose 8% as the latter was partially offset by a 0.9 point decrease in load factors. Three elements had significant impact during the quarter - - strong northbound demand, immediate growth on southbound routes, and increased competition. While Northbound volumes for most markets remained strong, Southbound demand was slightly below our expectations during the first quarter, especially to Argentina.

Meanwhile, competitive activity has increased as [exceesing] regional carriers such as [Tamp] in Colombia, [Alcieras] in Peru have expanded their operations. LAN has responded to market conditions by rapidly adjusting itineraries and capacity. During the quarter we utilize up to six wed-leased aircraft which operated alongside our fully utilized Boeing 737 freighter fleet. In terms of pricing, yields improved due to hikes in the fuel surcharge, improved demand, and reduced pricing pressures.

Operating costs. Operating costs for the quarter grew 28%, assistant capacity increased 16%. As a consequence costs for ATK which also include net financial expenses and other operating revenues, increased 12% year over year. Cost increases were mainly driven by high fuel prices as they led - - led to $37 million in additional expenses and accounted for almost two-thirds of the unit cost increase.

Excluding the impact of high fuel prices, cost per ATK increased 4%. Basically, due to the reduction in our, [inaudible] increases in commissions and other [sais] related expenses and high-yield personal costs. Specifically growth on the Peruvian domestic market had led to a 4% reduction in our staged LAN that directly impacts unit cost and is particularly relevant given the configuration of our 320, family fleet - - 8320 family fleet. Meanwhile commissions for ATK rose 9% almost in line with the 8% increase of profit revenues in ATK.

Finally personal expenses rose mainly because of head count increases necessary to support future growth. Despite these increases our cost structure remain robust as most of the items move according with our expectations and increasing line or below with their selected drivers. For example, further fleet costs included include [inaudible] depreciation, and wed-leases - - and wed-leases increased only 4% as capacity rose 16%. As a consequence fleet costs per ATK decreased 10% thanks to higher aircraft utilization and lower rental rates.

Our financial position strengthened during the quarter as we remain free of short-term debt and have a healthy equitable position with more than $300 million in cash and equivalents as of year-end. In term of fuel hedging, we have covered approximately 20% of our consumption for the rest of the year at $1 per gallon.

Now, I will discuss three strategic topics. The creation of Fly Argentina, our credit rating, and the status of LAN Peru. Now, Argentina. In April LAN announced that it had acquired a stake in Argentina [inaudible]. Argentina is an attractive market for LAN literally because it's ties, but also because the land is positioned there. We estimate that a total Argentine market, including domestic and international routes, amount to over $1.9 billion per year, roughly 1.7 times the Chilean market.

Over the years LAN has developed a strong position on Argentina and has become the second international player by flying to seven cities in that country. In order to capitalize on this position during April, we acquired together [AUDIO INTERRUPTED - FOLLOWING TEXT NOT VERIFIED] with local investors the small local carrier. We will own 49% of it with the remaining 51% remaining in local hands. It is a small carrier that by the time we acquire it has a valuable rate of operations certificate and was flying Peru's flights for domestic and international flights. We'll offer the a government owned airline a chance to us. They will provide them with the experience manpower necessary to initiate its operations.

In recent weeks we have held talks with most of the unions, and we are pleased to inform that we have already signed an agreement with 100% of workers. We expect the operation to start in early June with four narrow-body aircraft serving the most important domestic destinations in Argentina. We plan to adapt to 12 more aircraft and achieve a 30% market share over the following 18 months. On the second half of 2005, we also plan to lounge international flights from Argentina focusing initially on the main international destinations. Its services will utilize both narrow-body and wide-body aircraft and will be developed rapidly. We expect Argentina will break even in 2006 with annual revenues exceeding $200 million. Our initial investment in Argentina will amount to billion $30 million including infrastructure, spare parts, wages, training expenses, and working capital requirements.

We are confident that LAN Argentina will be a success, given our high service and much international network as superior business model. We are committed to the Argentina market and will do our best to provide our customer there with a new and attractive alternative. Credit rating. On March announced it was improving the outlooks of LAN's investment rating from stable to positive. Among other factors, supported this on LAN's business model strong competitive position, efficient cost base, solid financial structure, and high liquidity. We are very pleased that in a time of high fuel prices and in which many airlines are having trouble both in positive results, they have given a strong thing about LAN's financial condition. LAN Peru.

Because of an unfortunate mistake, a video that has been considered to be damaging to the was displayed on LAN Peru's aircraft. LAN Peru retired this video as soon as it become aware of the situation. Although the video was filmed by personals unrelated to LAN and has been played extensively in other media, we have presented an apology gee for the Peruvian public for this error and have taken all the necessary measures to effect Iively resolve this matter. LAN Peru is extremely interested in promoting tourism in Peru, and therefore we are actively cooperates with Peruvian authorities to implement a program aimed at preparing the damage that we have caused. We hope that the Peruvian public understands it was a mistake, and that LAN Peru never intended to damage Peru's status at an attractive tourist destination.

The future. Besides the incremental capacity provides by Argentina, we also plan to grow our core operations during 2005. In that regard for the rest of the year we plan to increase capacity between 12% and 14% on the positive business and between 12% and 15% in the cargo business. We expect competitive activity will continue to increase in the near future.

The Chilean domestic market we expect it to increase capacity. We've also seen smaller carrier continue to EKTS up and down on the Peru market. We also expect to see additional capacity being added on original routes to Chiles specially from Brazil given changes in the bilateral treaty between both countries. We also expect to see additional capacity being added to regional routes to Chile, especially from Brazil given changes in the bilateral treaty from both companies. On local routes activity will vary from market to market between Latin America Europe capacity is expected to increase as growing demand has driven current operators to modify their itineraries and increase capacity slightly. A new carrier it's plans to announced new plan to say operate into Chile starting in June.

Finally we expect competition to remain at similar levels as though we faced during the first quarter. In terms of yields, we expect passenger yields to remain fairly stable based on capacity increases and competitive increase. In cargo we expect first to remain relatively stable with cross-yields being impacted mainly by changes in fuel surcharge. Given the most likely scenario is that fuel prices will remain at current levels or longer than anticipated, we have devised a number of initiatives aimed at increasing efficiency. This program will complement previous long-term air fare aimed at commercial and increasing the commercialization of our fleet. Also the replacement of some wet lease capacities with our two now Boeing 767 freighters is in the second half of 2005 should lead to further further efficiencies.

In summary, we believe LAN continues to be in an impressive position to continue creating value for share holders . Diversify revenue streams strengthen or different valuable prop positions, build more fuel-efficient fleet and stream lined costs continue to deliver positive results and more importantly have led to new and attractive opportunities. Hence, we are confident we are in position to overcome current challenges and continue growing long-term profitable. Now we will be happy to answer your questions.

[Operator Instructions] Our first question today comes from Steven Trent with Smith Barney.

good afternoon, gentlemen. One one or two quick questions. With respect to your plan to increase cargo capacity 12 to 15%, it looks like you added a capacity at least on the year-over-year basis you added capacity than is a slightly higher rate than you fill the cargo facts if you compare factors this quarter versus a year ago quarter. I was wondering what you're seeing in terms of areas for improvement? Do you think southbound traffic is going to rebound significantly?

Thank you, Steve. Alejandro de la Fuente. Yes. We expect for this year that southern traffic will continue to increase from what it was last year, and specifically that the traffic will increase. But also the northern traffic continues to grow, especially out of Brazil to the U.S. also is growing from last year. Also Argentina is growing and from the rest of the normally -- normal exporters by year like Chile and Peru, all of them are also growing in northbound traffic.

Great. Just one other quick question. With regard to Argentina, you mentioned that $200 million in revenue for 2006. I'm assuming that is the portion that is economically due to you guys giving your 49% stake and not the total revenue for that company?

No. This is the total revenues that we expect for 2006.

Okay. So you're specifically -- LAN airline's incremental gain will be $200 million? Yes, because we expect to consolidate with Argentina.

Okay. Thanks very much. You're welcome.

Next is Glen Engle with Goldman Sachs.

Good afternoon. Can you go through how you plan to finance all those -- the narrow-body and wide-body Argentina planes, who will LAN finance them and sublease them to LAN Argentina?

This is Andres Bianchi. Basically the fleet that we're stuck flies in Argentina will be leased, and we expect those narrow bodies to start with 737. So it's going to be in the beginning relatively small requirement in terms of leased aircraft.

So as it gets larger, will the planes be financed by LAN Airlines and then subleased to the Argentina, or will the Argentina finance the planes on its own?

Yes. Glen, all of the financing will be through LAN. From Chile probably probably will lease to Argentina, those aircraft.

And you're saying that LAN Argentinian, LAN Peru is all flowing the revenue line as consolidated operations, correct?

Yes, yes.

The yields being up, how much in the first quarter did you receive a benefit from the way Easter fell, and will that make second quarter revenue comparisons a bit tougher?

Basically the effect of Easter going into March wasn't very important for the increasing yield. If you see the month over month and the predictions that we have, you just realize that the effect is almost negligible. So I would say that the increase on yields basically due to three factors. The first factor is that we have been able to better segment the market and capitalize from some market growth. Secondly, the fact that in an environment where high fuel prices are, you know, hitting all the carriers, there are less carry willing to do crazy things. Then the third factor is that we have decreased a little bit of our average stage length, and therefore it increases our yields due to that effect too.

Can you say what -- you're saying that the Easter benefit wasn't on yield. Was there much of a benefit on traffic?

Easter?

Yes.

The increase in traffic in March probably is explained 90% due to either to better market shares we've gotten that are there to stay and attempt to send because of the Easter effect and we will see that when April comes and you will see good figures in April too.

Okay. Thank you.

Thank you, Glen.

Our next questions come from Rodrigo Martin.

Hi. Good afternoon, guys. Well, I had two questions. One of them was already answered. My question is related in regard to Argentina during this week. LAN already had an agreement with 90% and with Alejandro. On the remark of this I wanted to know if there's potential conflict with a local union? I mean, this conflict did it disappear, or do you think that they're on the road to the opposition from local --

I think that as we consolidate our project there and we get more and more involved with more and more contact with the people prosecute laugh SA, we -- the tradeoff of potential problems continues to decrease. The people that we have been able to incorporate to the LAN family are, in fact, a very good people that we -- that they're -- most of them are very agitated to LAN. LAN are very hesitant to having them join LAN, and we're very sure that we will do a very positive feat with them in that we will get along very well.

Okay. Thank you very much. Do you have already signed an agreement with the union? Do you need that in order to launch the operations, or you can start without doing that?

It's already signed.

Okay.

It's already signed. With most of the -- we have signed with almost 100% of the people that we were supposed to be signing agreements and incorporating to the company. Therefore, that job is done, and now what we're doing is just incorporating them to their jobs, to their new jobs.

Okay. Great. Thank you very much.

You're welcome.

Rick with is next.

good afternoon. Getting back to LAN Argentina, 30 million investment is your part or the entire part for the start-up?

The entire part.

Okay. And the other owners, the other 51%, do they control the company, or can you not say?

No. Together we are controlling the company. Obviously, LAN with the experience and the knowledge, but they are very involved in the administration of the company.

Are you not allowed to own more than 49% by Tyne regulations

The maximum amount is 49%.

And to get -- what do you think is a capacity number for, say, year-end '05, year-end 'on 06 and then made a load to get that 200 million in revenue?

Well, let me --

We have a plan in Argentina that -- where we're very confident that we will achieve with a narrow bodies and those, some international destinations and I'm sorry. We don't disclose that information now, but for competitive reasons, I will --

How many airplanes are you going to have between now and the end of the year and in '06 on average, do you think?

We will start with three to four planes in the domestic market and four planes -- four planes in the domestic market, and we will probably triple that capacity in -- within a year. But I'm sorry. I don't disclose those figures.

Okay. And now you say LAN Argentina is going to be international as well. Does that mean that the international part from LAN from Capitol Hill Lee or LAN does now is going to be given to them, given up? I don't understand how you're going to do it. How are you going to do both. Who takes Santiago, Buenos Aires, for example

They can be flown either by Argentina or by P LAN Chile, but there are several destinations out of Buenos Aires that we could be serves. We could be serves probably -- there are flights to almost all the continents from that capital to the rest of the world, and also enter Latin America.

So there won't be or there will be some transfer? Because instead of making -- say you have five flights a day, Santiago, Buenos Aires. Now you have three flights 100% owned by you and two flights are 50% owned by you.

We're not counting on transfers. We are counting only basically on adding a network to the LAN alliance.

Okay. [AUDIO RESUMES] And then any cargo business is also shared 50/50, or does the LAN cargo have exclusive rights to the bellies of these airplanes, for example?

Well, our idea is buy the bellies from LAN Argentina. Then LAN cargo will buy the bellies from LAN Argentina. This is what we've already do with other companies in LAN Peru and actually with other extended companies as we're doing currently today, buying the belly capacity from [inaudible - highly accented].

Okay. Then just a last question. What was the CapEx this quarter? You know, between more or less in millions of dollars?

The CapEx?

Yes. What did you spend in, I don't know, whatever

Around 50 million

$50 million?

15.

That doesn't include any airplanes.

No, no. It just included investment in the - -

Okay, is that 15.25 million a more or less normal number going forward for the rest of the year?

Yes.

Excluding Argentina, I mean, obviously.

Yes, excluding Argentina.

Thanks a lot. I appreciate your time.

You're welcome.

[Operator Instructions] Next is Michael Linenberg with Merrill Lynch.

Hi. Good morning or good afternoon. Just a couple here. I believed you gave us the number or the potential revenue that you could see in an Argentina operation, the 200 million. What are we presently seeing in your business in Peru, if you could provide that, and I think you indicated that it's still a developing or growing market. What sort of revenue could we see thrown off by your Peruvian operation within the next couple of years?

The domestic Peru is a $100 million business, a little more than that, $120 million business. International is about that too. We expect that to continue growing by 15% year in year.

Okay, and the 120 and 120, those are LAN's numbers, not the aggregate numbers for Peru?

Yes.

Okay. Then my second question I think when you were highlighting the ownership of the LAN Argentinian carrier, you indicated that 49% was the upper limit. With the European company, owning I believe 70 or maybe as much as 90% of Aerolinheas Argentinas, is that an old rule? Have they been grandfathered since they do have a majority position of that company? Has that number come down? Can you just reconcile the differences?

Well, at the time that the Spanish investor went to Argentina, they wanted the right to buy 100% of the company. But, years later they put in a special law regulation on that, and right now we are able just to go until 49%.

Okay.

We don't expect that they move or change that in the short term, but it could be possible. I don't know.

Okay. Good. Just my last question. Alejandro, maybe you can give me an update on labor, where you are on the various contracts. Do we have any contracts that come up for renewal this year, et cetera?

Michael, this is Andres. At this point we are - - we have seen very positive relationships over the last years and they continue to be that way. We don't have any major contracts outstanding in the short term.

Okay. Very good. Thank you.

Okay. Thank you, Mike.

[Operator Instructions] Ben Laidler with UBS has a question.

Good afternoon. I guess most of my questions have been answered. Just one question on Ecuador. Any impact on traffic from all your operations generally there from the political unrest we're seeing?

Hi. This is Luis Riguelme. No we have an impact only during the days where the problems were the biggest, but we see normal crossings and we see normal bookings for the future.

Okay. That's great. Thanks.

Thank you, Ben.

[Operator Instructions] Next we'll hear from a follow-up with Ricardo Fernandez

Sorry. I forgot to ask. The Lima hub project idea, does it get a major setback because of this video problem? What's the status of that at the moment?

No. We are planning to increase our Lima hub basically in the intraregional routes into [inaudible] Latin America routes during these months, and I think we plan to continue strengthening our position there. We haven't detected any decrease in traffic due to these things and due to this unfortunate problem. We hope that we could overcome these problems in the near future and to recompose what we did wrong.

Okay. All right thanks. I appreciate it.

At this time we have 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.

That concludes our conference call. Thank you for joining us today.