LATAM Airlines Group SA (LTM) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to TAM's 2006 second quarter results conference call. Today with us we have Marco Antonio Bologna, Chief Executive Officer, and Librano Miranda Barroso, Chief Financial Officer and Investor Relations Director. We would like to inform you that this event is being recorded. [OPERATOR INSTRUCTIONS]. We have simultaneous webcast that may be accessed through TAM's IR website at www.tam.com.br. There will be a replay available for this call on the website.

Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of TAM management and on information currently available to the Company. The involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of TAM and could cause results to differ materially from those expressed in such forward-looking statements.

Now, I will turn the conference over to Mr. Marco Antonio Bologna. Mr. Bologna, you may begin the conference.

Good morning. I would like to thank you all for your [visiting]. Let's begin the presentation on second quarter 2006 results.

On slide 2, TAM celebrates this year 30 years of existence, having experienced several situations arising from the [mark] economy, from the sector, and from the competition, evidencing its ability to adapt to the new tendencies of the industry and to the passenger demand. Since 2003, TAM has reinvested its way of approaching the market. Our strategy is based on providing pure quality product with some more attractive value price relations. We understand that the superior service is mainly based on higher quality and [inaudible] rates, offering more relative comfort to the passenger with a broader range of destinations and frequencies [inaudible] taking the passenger from an origin to a destination. Making competitive prices visible, then seek to give a low cost structure. Jointly, these three points reflect a strategy that we believe will give us higher competitive advantage and meanwhile sustain our leadership in the domestic market with profitability.

On slide 3, as from '98, TAM has changed the baseline of its operation. In the year of the Company's capitalization by private equity funds, TAM has tried to operate a new Airbus fleet. At the same period, we began our international long haul operations with flights to Paris and Miami. In July 2003, TAM took the leadership position in the domestic market in Brazil. Since then, TAM has consolidated its position, increasing its gap to competitors. We reached 45.9% domestic market share in the second quarter '06, a difference of approximately 12 percentage points to the second player. In July '06, our market share was 47.6%, 7 percentage points higher than our market share year over year.

On slide 4, it is part of our strategy to grow selectively in the international market, a market with a strong demand by the Brazilian public. With this, we reinforce our commitments in better servicing the need of our passengers and are increasing in a selective manner our share of the international market. We have obtained a 30% international market share in the second quarter '06, reaching almost 38% in June.

On slide 5, we would like to highlight some important facts that took place in the second quarter of 2006. We announced the substitution of our 100 seat fleet by the Airbus A319. The main reason for choosing an aircraft with higher seating capacity was the strong growth of the domestic market. Related to the substitution and to the increasing of our offer, we signed an agreement with Airbus for yet an additional 37 aircraft. The adjustment of our fleet projection is aligned with our flexible fleet planning program and goal to maintain our market position. We are strengthening our network in the domestic market, increasing our frequencies in important hubs, such as Guarulhos and Galeao, and increasing direct flights to Maceio, Porto Velho, Brasilia and Goiania. We also began operating a new route to Boa Vista.

In the international market, we increased the two daily frequencies to Buenos Aires, one departure from Guarulhos and San Paolo and the other from Galeao in Rio de Janeiro. We are flying daily to New York since May. In the third quarter, we will substitute the daytime Sao Paulo/New York leg to a night flight. We have also started to operate a daily flight between Manaus and Miami, connecting Brazilian northeast region directly to the USA. Our daily flight to London is scheduled to begin operations in October. We have concluded the negotiations with Heathrow airport and defined a prime time slot, meaning that our flight will leave Sao Paulo at night and land in London early afternoon, departing from London at night, arriving in Sao Paulo early in the morning. With the beginning of the above-mentioned flights, our three [inaudible] currently subleased will be reintegrated to our fleet as to October this year.

On slide 6, continuing our highlights, our operating efficiencies took a qualitative leap. We increased our daily block hour for aircraft by 13% from 10.7 hours in the second quarter '05 to 12 hours in the second quarter this year, important in order to dilute our fixed costs. We received four new aircraft, Airbus 320 this quarter. Even though we increased the capacity by 23.8%, we reached an average load factor of almost 75% in the second quarter, representing an increase of 8.4 BPs compared to the second quarter '05. During the second quarter 2006, we transported 1.6 million passengers more than in the second quarter last year, reaching [6.05] million revenue passengers in the quarter. As part of our strategy in order to price competitively, TAM seeks to maintain a low cost structure. Through continuous revisions in our internal process and reduction in commercial costs, we reduced our CASK quarter over quarter by 2.2%. Excluding jet fuel, our CASK fell 6.1%. We signed an agreement with Boeing which will allow TAM to have access to all [steps] of documents, [inaudible] and technical handbook on the U.S. manufacturer's maintenance of components in aircraft. This contract will have the necessary duration to allow TAM to be fully certified by the Brazilian Civil Aviation Authority to provide services for the entire Boeing line at the Technological Center of the [inaudible], enhancing the qualification of the maintenance site. We were awarded by the seventh consecutive year the Modern Consumer prize for Excellent in Customer Service in the airline category. The prize is considered a market indicator that identifies and recognizes companies that value the customer section as a part of their strategy.

I would like now to invite our CFO, Mr. Librano Barroso, to comment on our results in the quarter.

Good morning to all. On slide number 7, advancing now our second quarter 2006 results. We recorded a 39.6% increase in our gross revenue. This was mainly due to a 39.4% demand expansion compared to a 23.8% increase in our offer, which led to an 8.4 percentage point increase in our load factor. Despite [inaudible], the increasing offer was mainly due to decreasing daily block hours per aircraft, which reached 12 hours for the quarter. We also had 13.5% increase in cargo revenues due to higher availability of aircraft cargo base of sales. The growth in other revenues was basically due to the increasing sales of points from our Loyalty Program and expired tickets.

On slide number 8, traditionally, the second quarter is the weakest quarter of the year. However, in 2006, the second quarter exceeded the first quarter due to aggressive demand, both in the domestic and international markets. Despite the drop in our scheduled domestic use, our scheduled domestic RASK increased 6.8% in the quarter as a result of a raising load factor of 9.2 percentage points. Our scheduled international RASK increased by 21.3% due to the increase both in the yields and the load factor, despite the real appreciation against the U.S. dollar of approximately 8%. The increasing other revenue previously mentioned also impacted our total RASK positively. As a result, our total RASK increased 12.2 quarter over quarter.

Moving to slide number 9, as you know, part of our strategy is to offer a quality project at competitive price. In order to do so, it's important to maintain a low cost structure, striving to increase efficiency, increasing aircraft utilization, reducing commercial costs and improving our internal process. Our cost gap to our main competitor has been dropping dramatically. We came in 2002 from 4% and a 32% gap to very-- and go respectively to 14% and 16% respectively based on the last published financial statement of each company. We can observe that our CASK dropped 2.2% quarter over quarter, 6.1% ex-fuel. The negative effect of the increasing fuel price was offset by the appreciation of the real. Including fuel, approximately 50% of our expenses are dollar linked. Our efforts on reducing costs continue to bear fruits. The main mentioned were reduction of commercial costs, aiming to broaden the spectrum of passenger service while decreasing the total amount [inaudible]. Dilution of fixed costs due to the increase of block hours. We continue to pursue an increase of efficiency in our operations and believe that it will be a main driver for increase in future profitability.

On slide number 10, we have been improving our margins and expanding the spread between RASK and CASK. We closed the first semester of 2006 with an EBIT margin of 12.5% compared with 7.5% in 2005, demonstrating strong growth.

On slide number 11, as a result of the increasing RASK and reduction in CASK, our margins expanded in the period. Our EBITDAR margin went up from 13.7% to 25.1%, reaching an amount of 436 million reais, which represents a 155% growth. Our EBIT margin increased from 0.2% to 13%, representing at total 225 million reais. Our net income summed up to 97 million reais, a 5.6% margin.

On the slide number 12, according to the U.S. GAAP, we also observed margin expansion. Our EBITDAR margin improved from 10.4% to 20%, reaching an amount of 344 million reais, a 167% increase. Our EBIT margin went up from 4.6% to 14%, reaching 242 million reais, a 325% growth. Our net income summed up to 146 million reais, a 32% decrease and a margin of 8.5%. This decrease was due to the effect on the leased debt, since the real appreciation was stronger in the second quarter '05.

Moving to 13, we can understand the main reason for the difference in net income between Brazilian and U.S. GAAP. In U.S. GAAP, [inaudible] aircraft are restated from operating lease to finance lease, according to the SFAS-13 requirements. This means that these aircraft are recorded as a fixed asset in reais, and the related debt is recorded as liability in U.S. dollars; therefore suffering exchange variation in recognition of interest impact in our financial results. In the second quarter, our net income was impacted mainly by the lease treatment in approximately 58 million reais.

On slide 14, our cash position at the end of the quarter reached 1.6 billion reais, while our debt remained practically stable at 449 million reais. If we adjust our debt by capitalizing the lease payments seven times and add back shareholders' equity, we will arrive at an adjusted debt to adjusted capitalization of 85%, demonstrating a systematic decrease since 2003. Using the same adjusted debt divided by annualized EBITDAR, we arrive at 3.4 times, also demonstrating a systematic decrease since 2003.

On slide number 15, after the [follow on] on March 10, our free floats have reached 45.3%. Since the offering, our shares performed approximately 40% above the Ibovespa and Dow Jones index. Average daily trade of our share is 1% of the free floats, and the daily trade volume is about 20 million reais. We are presenting 5 [index]. As you see, index for shares with different corporate [inaudible] for shares with differentiated tag along rights. This index for value shares of second tier companies and the Morgan Stanley capital international. Currently, we have 18 analysts covering our Company, and you can find the list in our Investor Relation website, www.tam.com.br/ri.

On slide 16, at year end in 2005, we issued our guidance for '06. However, '06 has been stronger than previously anticipated with an accumulative domestic growth of 22% this far. In this first semester, we reached an average domestic market share of 45.2%. Our accumulated load factor is 73.7%, superior to the 69.5% in our guidance. We believe our block hours will remain above 12 hours. Lastly, we continue to pursue cost reduction, and we will reach a 5% currency decrease year over year in 2006. In our network, we have already initiated our daily New York flight, and we will be inaugurating London in October.

On slide number 17, we are expanding our estimated fleet for the next years due to our growth expectations. In 2006, we will be reintegrating the three A330s previously subleased to our fleet to serve the international market expansion. An additional six A330s will be arriving at 2009. We will be adding a net 447 Airbus [inaudible] aircraft to our fleet up to 2010. We plan to close 2006 with 96 aircraft in operation.

For the closing, I'll hand the floor back to Marco Antonio Bologna, our CEO.

On slide [18], I would like to end by presenting TAM's positioning in relation to several other airlines worldwide. In the graph on the vertical axis are the cash costs. Excluded from the costs related to aircraft, have [inaudible] the different capital structures. On the horizontal axis is the EBITDAR margin of each company. The data refers to 2005. We can clearly certify that TAM is among the most profitable airline in the world, with one of the lowest costs. The outlook of reducing costs and therefore increasing profitability should make us move to the right side of the chart. We intend to boost our leadership without abandoning our fundamentals, which means we remain offering a quality product while increasing our profitability.

Thank you.

[OPERATOR INSTRUCTIONS]. Our first question comes from Mr. [Jean de Madiras] with Banco Pactual.

I have a couple of questions [inaudible]. Sorry; I think it's better now. My first question. I noticed that other revenue improved significantly in Q2. For instance, revenues from the frequent flyer program increased 80% quarter over quarter. Is the improvement recurring? I mean, could I expect that portion of revenues to maintain at such high level?

Yes. This is part of our strategy to create more value to our Loyalty Program. So, this is a trend on the Loyalty Program quarter over quarter to see more revenues from this line of revenues. We have another one; it's more-- another item that increased the other revenues-- are the tickets - non-redeemed tickets, which means that we started this quarter accounting for the tickets that-- expired tickets more than 13 months. We accrued the value, as you can see, on this item. This is not a trend. But, on the Loyalty Program, you can consider the trend quarter over quarter.

Okay. Then, my second question, Librano, could you give us some quality regarding the hedging loss or the expense in Q2, and, also, what could be done to improve the hedging program and avoid such losses to repeat ahead?

Okay. We faced this loss. This loss is part accrued losses and part provision. So, none-- unrealized derivative losses. What we did though to change this profile is first, as you can see, now we are with just seven months covered on this policy because the effect is more stable now. And, second, we are now changing the way how we operate this, changing from instruments like [color], like forward - more to cash expense derivatives like call options.

Okay. So you don't expect any kind of mismatch ahead that could bring, let's say, very high losses again, just because this was something important that significantly affected your bottom line. Do you believe those measure enough to limit the losses and have, let's say, a more stable program?

Yes; you're right.

Okay. And then my final question, Librano. I believe, to be honest, that growth for the domestic market decelerated significantly in July to something around 0%, at least this is what I expect for the trust - that this is to be released by a mark in the following days. For me it's [inaudible] potential behavior was supply driven rather than demand driven. In other words, what I'm saying is that it seems that trust in July grew less due to lack of adequate supply. So, could you share with us your view about that and also how the stock market could favor yields and profitability in the following quarters? Thank you.

We agree with you. We are waiting for the official release from the anarchy-- [inaudible] probably in the beginning of next year-- sorry; next week. And, we agree with you. This was [drived] to the lack of capacity on the market, and directly reflects on it; you are right. In our case, we are-- On July, we are facing higher yields compared with June, which means that we are returning to the same level as April and May. You know that at this quarter, the yields behaved worst, increasing April, increasing May and then important decreasing in June because of the market dynamics, especially because of competition. But now in July, we are returning to the level of April, which means at roughly the same level as the first quarter.

Okay. And do you believe that you should [inaudible]? Taking into account capacity that you're bringing and also Go is bringing, do you believe that you could see high [inaudible] figures ahead; or do you believe that this adjustment should be mostly based on [inaudible] for the following months?

We believe both because both companies are-- we were this year at least more eight narrow bodies on our fleet, and we are expanding aircraft utilization. Go is the same. They are adding more aircraft, and we believe we will have the double effect on RASK up to the year end.

Thank you.

Our next question comes from Mr. Rodrigo Goes with Banco UBS.

Just a couple of questions - a quick couple of questions - to follow up on Jean's first question with regards to the other line within other revenues. You reported some 75 million reais or so, which was a huge jump. Is the 20 million reais level perhaps a more realistic level going forward for that specific line item, which is what you reported about a year ago?

Yes. You can use this.

Perfect. Now, if you-- just looking at your EBITDAR reported under U.S. GAAP numbers, could you walk me through the reconciliation? You had EBIT of 242, which you show in your presentation, but you had DNA of 56 and rental expenses of 100. No?

Sorry?

I'm just trying to get to that figure, 344, which I believe you have in your slide, for U.S. GAAP EBITDAR. I was wondering if you could reconcile that for me, starting with the 242 in EBIT.

You have to-- the first to mention the difference in terms of EBIT last year on the same quarter. EBIT last year was-- the difference between EBIT '05 and EBIT '06 was more linked-- In '05, we had a strong real appreciation at this quarter on the '05. This year, it was not so important. That's why we are showing this reduction. For instance, as you can-- just to remind-- the real effect on the second quarter last year was-- '05 we had this 2-- sorry-- 235, and this year 216. This explains a lot effect variation. There is a more important effect on this. We faced 8.6 appreciation of real this year. The other things you have when you put this effect directly on the leased expenses, this explains the difference on the lease payments, and the other more important item is we have to add back the potential impact on the IR that the payment of [inaudible] because of we have to-- the income tax we have to make with this new level [inaudible], we have to add back reduced 27 million reais. I don't know if I guided you correctly on this.

I think so. I guess the bottom line is that it's not as simple as simply taking EBIT, adding back your rental expense and your DNA. There are other adjustments that are a little bit trickier to get to, I suppose.

Depreciation on-- especially because of depreciation. When we add back the 40 [inaudible], we have a new depreciation and amortization level. We have a footnote explaining. The number of the footnote on U.S. GAAP is-- I will guide you with the number of this footnote on U.S. GAAP. But, if you have more doubts, we can detail for you by e-mail.

That's fine, Librano. The other question I was going to ask is with regards to this new proposal or plan suggested by [inaudible], which is I guess a three-stage plan in order to ramp up and get back to a more meaningful fleet by year end. What is your view on what you guys may or may not get from the standpoint of slot and airport infrastructure from now until, let's call it, the end of the year. What do you expect to receive from the ANAC, if anything?

As you know, they announced this new [inaudible] plan yesterday. The plan is in two phases. The first phase, they're going to operate only ten aircraft. That means three [inaudible] long haul and seven [inaudible] in the domestic market, keeping eight destinations in Brazil. We have to wait unto the regulators in order to see what's going to be the approval for this plan. So, if you take in consideration this, we're going to be prepared to say our reaction in terms of new flights or new slots because at the end of the day the only things that are under consideration are slots at the airport, as you know, mainly here in Sao Paulo downtown airport, and international destinations that is [inaudible]. We can apply for it. So, I would say it's better to wait to see the approval - the final approval of the Civil Aviation agency. That's going to happen up to the end of this month.

Okay; up to the end of this month. All right. Okay. Thank you very much, guys.

Our next question comes from Mr. [Alesandre Tojano] with [inaudible].

Bologna and Librano, congratulations for the strong results. I have a couple of questions. The first question-- I would like to know what is the target for [inaudible] in the future, modeling for the end of the year. How many block hours we could see TAM operating in the future? And, the other question is regarding load factor. What are you expecting for the load factor in the second half of the year, because you have a scenario of [inaudible] supply and demand and RASK?

Our view for load factor - first with load factor. Load factor in July we-- the official figure will be released, but we can anticipate that on the domestic market it will be higher than 80% and in the international market higher than 84%. As you know, the second half traditionally is stronger than the first half. We believe that we can maintain this level higher than 70%, so roughly 70% to 75% load factor in the domestic market is our view and international from 75% to 80%. That's our best view for now for now on. And, on the block hours, we have been-- we faced an important change in the Company on the operational side, as we have been able to improve positivity and maintain the [inaudible] for the aircraft. We have a high level [inaudible]. So, we are confident that we can fly on the range between 12 to 13 block hours on the fleet because we have a high level of response from the maintenance side and from the network people. So, 12 to 13 block hours.

Okay. I have one more question regarding international routes. We have some doubts about the future regarding [inaudible] and things like that. I would like to know if you could add some new international routes-- we will be able to bring new Airbus wide bodies to operate those routes or you have some [inaudible] if you decide to operate Milan and more frequencies to Paris or U.S.

As you know, we have our international strategies based on a selected approach to the main routes where you have a better mix of business travelers originating in Brazil. We are operating today two daily frequencies long hauls to Miami. We add a new one from Manaus to Miami in the short haul. Also, we started flying daily to New York last year. It's performing very well. So, considering the U.S. market, we want to increase the frequencies in this area. And, probably this is going to happen next year. So, as you know, U.S. is an easy bilateral, so we can add flights without any problems. It depends only in our capacity. For the European market, we want to do the three frequencies in the bilateral with France - with Paris. We have two out of three; Varig has one. They are not operating for the last two months, and we have to wait for the authorities in order to see what's going to happen with their plane. And we want to apply for this third flight. Also, we're going to start to fly to London in October this year. So, that means our fleet plans for this-- for all these flights means ten A330s. We have already announced another six A330 firm orders to be delivered in '07, '08 and '09. And, also, we have some MOU signed with a similar source in order to cover our needs if necessary. If we can anticipate the third frequency to Paris and also to apply for the Milan flight between Brazil and Italy, it is a [inaudible] the market so the narrow body has arrived is they are not operating this flight for the last two months as well. So, we have enough capacity today, and also we have some LOI signed with some source in order to cover this need in two to three months.

Okay. Thank you.

Rodrigo Goes, I know why you have some doubts, and, in fact, we made a mistake on the slide when we-- the EBITDAR figure for U.S. GAAP on the slide number 12. Instead of 344 million reais, the correct figure is 400. And, the margin is 23.2%. Probably that's why you can't match the figures. Okay?

Our next question comes from Ms. Vanessa [Sejas] with [inaudible].

My question is regarding your shorter flights because in this quarter you reduced your [inaudible] in domestic shorter flights to 7.3% of your domestic [inaudible]. And I was wondering is this a recurring figure, or should we see the increase of shorter [inaudible] in the coming quarter?

The trend is to be stable at this level. And, in fact, this is due to the-- as we are flying more with higher load factor, we have less availability for shuttles charter flights. That's why you can consider this as stable.

Okay. Thank you.

Our next question comes from Frank Boroch from Bear Stearns.

A couple of questions. One, could you maybe talk about the yield performance in markets where Varig had stopped flying over the last month and a half versus the markets where Varig has continued to fly? Also, could you provide your capacity growth plans for the next couple quarters? Thank you.

In fact, the dynamic of the market is not related exactly just with Varig because Varig, despite of-- All the players have been rational on the market. The dynamic of the competition is linked more with the size of demand, and this is not-- we don't have any different markets. As you can see, Varig has been reducing a lot their capacity in the market. So, they are important player. They have been rational. But they are not impacting a lot on the dynamic of the market. Our ASK expansion is roughly this year on the domestic market-- We are increasing 30% on the domestic market in terms of ASK and another, roughly, 35% on the international market. This is the whole year of '06.

Okay. Thank you very much.

Our next question comes from Ray Neidl from Calyon.

Good quarter, guys. Basically, you're talking in your guidance-- you're talking about a 5% CASK reduction for the year. One, I just want to verify if that was ex-fuel. And, is that an aggressive number if it doesn't include fuel?

You are correct on our guidance on 5% reduction. This includes fuel. And, as you know, this an aggressive target because fuel is appreciating. But, on the quarter, as you can see, 2.2% reduction and 6.1% ex-fuel. But we are confident with this sum. We have-- any items that we are pursuing to reduce costs, especially on the three areas - more aggressive utilization. On the commercial side, you can observe that we reduced a lot the marketing expense, commercial expense, especially because we have been able to improve the variable compensation for the travel agents. They are-- to receive more proceeds, they have to sell more TAM, and they are receiving more commissions of six flights and less commissions in six flights. And, the third area is overhead. We have an important and aggressive target on overhead to reduce costs in the Company, bringing more efficiency and more positivity. So, we are pursuing to maintain the initial guidance of 5% reduction year over year in total CASK.

Okay. That would be good if you can achieve that. On the other hand, as far as your guidance goes-- I think you answered this already. The 59% projected load factor is too low. You're going to come in much higher than that from the second half guidance you gave. But, overall with what's going on down there with Varig, it looks like Varig is going to try and come back. Whether they make it or not we don't know. But, it looks like there's going to be more emphasis initially on their international routes. I got to think that this gives you opportunity to get your prices up and your yields up domestically. Are you and Go purposely holding down your prices because of government oversight, because Varig's out of the market, or is it a real market pressure on the yields?

I don't believe in pressures in price. First of all, I think we are living in a free pricing policy. Also, if you see in the last three years, the yields are being - reducing the market. So, if you see our results this quarter, we made more RASK based on load factors, not in yields. So, we want to keep our planned fares and promotional fares. We think this is an opportunity to grow and to bring more passengers to the airline industry. In the end of the day, this is the reason why the market is growing 21% while the GDP is growing around 3% to 3.5%. So, the explanation of this is because the industry is offering more competitive fares that are generating more airline passengers in the industry.

Okay. That sounds fair. Your cargo revenues look like they're growing really strongly. Is that mainly because you're increasing your long distance international?

Both. It is because of both international and domestic because in the long haul we are doing more flights with A330, so that means container cargo. And, also, we are increasing our Airbus fleet in the domestic market, so this is using the F100. So we have more balance basis to [fractionary] cargo in the domestic market.

Okay. And, finally, I was surprised that your average length of haul isn't that much longer than Go's, since you have some long distance international routes. Does your long distance international represent only a small percentage of your total ASKs for your international division?

Yes. You are talking about the average stage length?

Average stage-- yes.

Yes. We are-- Because we are-- at the same time that we are improving domestic we are improving the international. As we are improving more the international, adding more New York, more Miami, more London, you are right that there is a trend to increase a little bit the stage length and the combination of domestic and international. But, so far, you are right. This is not reflecting directly on the average stage length. But, as a trend, this will affect.

Okay. That's what I thought. And, just one last thing. Of your total costs-- all your costs were up, of course, because you're growing so rapidly, but I did notice that your insurance costs were down. Was this an industry trend where insurance rates are coming back down to more normal levels?

Yes. The insurance quote has been reducing in two years. Last year, the premium was reduced by 15%. As a trend, we believe this year we will have roughly another 10%. This is a combination of the better risk profile for Brazil and in our Company we are increasing the number of operations. We have more scale and with a better risk profile. So, as a trend, insurance will reduce. The premiums can reduce roughly 10%, and we have the real appreciation that affects this because it's a dollar-linked item.

Great. Thank you very much.

Our next question comes from Michael Linenberg from Merrill Lynch.

I guess two questions. First, I know we've talked a lot about Varig and the doubt of that company going forward. But the fact is when you go to their website in the U.S., the headline there is they've suspended operations. It's been that way for the last day or so. You can't book a flight from the U.S. What is Varig operating? What flights are they currently operating? Are they serving London? What are they flying within Brazil right now? Can you just give us an update on that?

Okay. They are flying mainly in the shuttles. In the domestic market, they are flying mainly in the shuttle services between Sao Paulo and [Rio]. And they are flying some six to seven destinations in Brazil. In the long haul, they are keeping flying Frankfort. They are flying to London. I would say it depends on the day - an average of [inaudible] per week. They are flying one day to Miami and another day to New York. So, it's not so regular flights.

Okay. I know it seems like effective immediately they're not serving the U.S. But, I'm sure that's subject to change. My second question has to do with the guidance. In this press release, the guidance is exactly the same of what you had when you reported your March quarter results. Yet, it seems like you're running well ahead of every single metric, maybe with the exception of unit costs. And I think Librano just indicated that you're still targeting the down CASK of 5% for the year. Why are you so conservative, or is it just a function of a lot of uncertainty with one of your largest competitors?

We are on a [inaudible] according to the Brazilian regulations because we-- as you notice, we present that we are on a process of issuing debentures. And, as a kind of advice from our lawyer, we have to be cautious not to try to create another kind of selling moment for the Company. That's why we are more cautious and not changing this guidance for the future. But, as you can see, we are over delivering them. Probably in the short term we will issue the new guidance. But for sure we are strong-- we have strong confidence on over delivering this guidance.

Okay. That's very helpful. Nice quarter.

Our next question comes from [Marcelo Luna] from Citigroup.

This is Marcelo calling on behalf of Steve Trent. I have a couple of follow-up questions. The first one is related to the other revenues. We understand there is this item called others. It is not broken down on the press release, and it amounts to about 75 million reais. That compares to 20 million reais in this same quarter last year. We just want to understand a little bit better what exactly this difference refers to. Is this an accounting item? Or, is it all cash? Is it non-recurring? Can you just let us-- clarify whether we can expect to see this item repeating in the future?

Okay. The differential is because of the tickets that-- unredeemed ticket-- what means-- the expired tickets. According to Brazil regulation - international regulation - and the best international presses, the tickets that are expired more than 12 months we can change their accounting from liability for [inaudible] of ticket sales on the liability side; and we will change this for as revenue. You can translate this as revenue. We changed this at this quarter, and this represented roughly 60 million reais in this figure. That's why you can assume that [inaudible] looking forward, the trends for this will be around 30 million reais, as I mentioned - 30 to 40 million reais. But, this was one event because we use all the stock this quarter, this 60 million reais. But now we are answering on normal phase, which means that we are putting each month one month of this advanced ticket sales - expired tickets - within our-- [inaudible], this represents 2% of the tickets historically. They have been expiring, and they are not used. So, we are returning them to revenues. This is-- we made a survey with companies. You can see that this is the normal presses with international companies. We changed this this month to reflect correctly.

Sure. So, just so I understand, between 30 and 40 million as opposed to 75 million reported this quarter.

Yes.

Okay, between 30 and 40. Okay. Is there any costs associated with that, just in case we want to do our analysis and try to exclude this one-time revenue?

No.

There is absolutely no cost associated with it?

No cost.

Okay. Good. Thanks. The other question is just confirm the EBITDAR - the U.S. GAAP number. I thought I heard you saying it should be 400 million reais.

Yes.

Okay. So, that's U.S. GAAP. Nice. Can you comment on the couple of initiatives that you have on the sales and marketing side and if you have a goal for the full year 2006 in terms of sales and marketing costs as a percentage of revenues?

We are-- On the marketing and commercial costs, what we are doing is a combination of incentivating the direct channel to selling more on the website B2C and to use more the call center. Another thing that we are doing is the variable incentive commission for the travel agents. We are paying more commissions in-- of big flights-- less commissions in big flights. And we are making some important promotional fares. With these promotional fares, we are designing the incentive for the travel agents according exactly to the seasonality to holidays. So, it's a combination of effects. We are not providing a guidance exactly related to this figure, but this quarter is a good representation of the level that we believe we achieved the important level reducing commercial costs. But we have more to come - more to reduce.

Okay. Great. And the last quick question is related to pricing. Can you talk about the international pricing environments, let's say, in July, and what do you expect for the third quarter? We notice that yields went up, and we're wondering whether the international ticket fares have been recovering. Can you discuss that a little?

The international fares was increased mainly because of the fuel surcharge. You know the fuel price is increasing. In international flights, we are charging a surplus in order to cover this expense.

And as a trend in July, we are facing the same trend in the domestic markets. The yields on international on July are improving by a combination of the fuel surcharge and the strong demand with load factor higher than 85%.

Okay. So, domestic and international yields are improving.

Yes.

Excellent. All right. Thank you very much.

Thank you. And, unfortunately, we have to finish now because we have the conference call in Portuguese. If any of you have any questions for us, please feel free to contact us by the IR, directly by e-mail.

This concludes today's question and answer session. I would like to invite Mr. Bologna to proceed with his closing statements. Please, sir, go ahead.

Thank you to attending our web conference, and see you next quarter. Thank you.

That does conclude the TAM audio conference call for today. Thank you very much for your participation, and have a good day.