LATAM Airlines Group SA (LTM) 2007 Q1 法說會逐字稿

Good day, everyone. Welcome to the LAN conference call. As a reminder, today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the conference over to Ms. Maria Barona. Please go ahead.

Thank you, and good morning. Today, LAN Airlines management will be discussing the first quarter earnings report, which was released yesterday. Please note that certain statements regarding the company's business outlook and anticipated financial results constitute forward-looking statements. These expectations are highly dependent on the economy, the airline industry, the international market and therefore 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.

Mr. de la Fuente, please begin.

Thank you, Maria. I am Alejandro de la Fuente, Chief Financial Officer, and with me are [Ernesto Solis] from our International Passenger Division, [Tomas Silva] from our Cargo Division and Gisela Escobar, our Head of Investor Relations.

Please note that, as you all know, LAN is in the process of a capital increase. We are unable to discuss details of this transaction for the time being. Therefore, we ask that you refrain from asking specific questions related to the capital increase at this time. A press release with details of this transaction will be released upon the finalization of all the terms, and at that time, the company will be free to go into more details.

For legal reasons, we will not be providing any specific forecasts or projections although, as usual, we will provide general guidance on the business outlook and the main trends that we see in our operations at this time. For the same reasons, we will not be providing a webcast presentation this quarter.

Today, I will discuss our financial results for the quarter, review the development of the passenger and cargo businesses and discuss our fleet expansion plan. Then we will be pleased to answer your questions.

LAN earned $86 million in net income for the first quarter, a significant improvement compared to 2006. It's important to know that the year-over-year comparison is affected by a $33 million one-time gain in 2006 as a result of the change in the aircraft maintenance accounting policy done last year and extensively explained at that time.

Strong results this quarter were driven by expansion in the passenger business and important cost efficiencies as EBITDAR reached $198 million and EBITDAR margins reached 23.8%, five points above first quarter 2006. Revenue growth exceeded capacity expansion, driven mainly by higher revenues per ASK in the passenger businesses. The decline in fuel prices had a positive impact during the quarter, resulting in $5 million as lower fuel costs.

Cost per ASK declined this quarter, showing the benefits of our efficiency projects and demonstrating that we are able to leverage economies of scale. This performance also highlights the strength of LAN's network and the success we have dealing with changing market conditions. The passenger business -- passenger revenues grew 23% on a 21% capacity increase and a 1.5% improvement in unit revenues.

Market conditions remained very positive, with consistent traffic growth, especially in regional and local markets. International markets in Chile, Peru, Ecuador and Argentina all grew at healthy rates year-over-year. Capacity grew on all international routes except routes to Bolivia. The strongest growth was in regional operations, followed by routes to the United States.

Facing more competition on our South America routes, we increased frequencies from Santiago to Buenos Aires and continued to focus on strengthening our regional [haul to] Lima, adding frequencies to most regional destinations, as well as a new daily flight from Lima to Bolivia. We also plan to add new direct flights from Santiago to the United States. In June, we will begin to fly two weekly nonstop frequencies from Santiago to New York and four weekly nonstop frequencies to Los Angeles.

Regarding our domestic markets, we continue to advance on the implementation of our new model for short-haul operations. In Chile, we completed the pilot programs and launched the model commercially to all domestic destinations in March 2007. The first flight began on April 9th. We have already seen the success of our pilot programs but are now seeing demand growing throughout the domestic market. Bookings have grown approximately 60% on average and even double on certain routes driven by lower fares. Approximately half of the additional demand is coming from first-time passengers.

The domestic business in Chile also changed its itinerary and achieved important efficiencies as a result of a longer average flight length and more day rate flights. We continue to operate six fleets of Boeing 737 200s and Airbus 220 family aircraft in the domestic market, but at the larger Airbus fleet -- but a larger Airbus fleet has contributed to more efficient operations.

Regarding this division cost, we also benefited from the reduction in agency commissions implemented in February. This new business model is also being implemented in Peru and Argentina. In all three markets, we are seeing strong demand growth, higher load factors and higher aircraft utilization, with our Airbus 220 family aircraft flying over 11 hours per day.

Yields were lower in the quarter, mainly driven by decreases in domestic market as a result of the implementation of the new business model, as well as the increases in regional routes and lower fuel surcharges. However, yields were compensated by higher load factors, and revenue per ASK increased 1.5%.

The cargo business. Our study in the cargo business focused on rationalizing capacity expansion and focusing on the most profitable routes, this way improving efficiency and profitability. During the first quarter, cargo capacity grew 2%, and additional capacity on our own passenger and freighter aircraft replaced wet lease capacity.

In this way, we increased the usage of our own fleet of Boeing 727 freighters, leveraging the low operating cost and ability to adequately serve key destinations. This resulted in significant margin improvements in the cargo business during the quarter. Cargo revenues for the quarter were almost flat due to a 2% expansion in capacity and a 2% decline in unit revenues. The latter resulted from a 2% drop in yield, offset by a small increase in load factors.

Cargo traffic during the first quarter was affected by a delay in the seed export season. This is a seasonal product which occurs in March and has relatively high yield. 2007, the seed export season began in late March, affecting traffic figures and cargo yields. However, it should have a positive effect on the second quarter figures.

Operating costs. Operating costs grew 7% during the quarter, reflecting a 2.8% decrease in cost per ATK, lower prices this quarter resulted in $5 million in fuel savings. Ex fuel, cost per ATK increased 2.4%, mainly because of three main factors. First, lower commissions. Commissions decreased as a percent of revenue both in the passenger and cargo businesses.

The passenger business commissions decreased from 61% in February for all economy class tickets. In the cargo business, this reduction was mainly related to a change in the commission structure given the decline in European traffic, where commissions are higher as a result of cargo route optimization.

Second, lower fixed costs, which include aircraft rentals with leases and appreciation. Lower costs per ATK were due mainly to lower aircraft rentals and lower wet leases in the cargo business.

Finally, the company also saw lower wages and benefits expenses per ATK. This was driven by lower headcount in our back office and support areas, as well as a weaker Chilean peso. We continued to use financial hedging as a tool to mitigate the impact of higher fuel prices. We have currently hedged 28% of our exposure for the second and third quarters of 2007 and 29% for the full quarter. On average, our 2007 positions are at prices around $1.90 per gallon.

I would now like to discuss briefly our fleet expansion plans for the future. As you know, LAN has embarked on the most significant fleet expansion program in its history. During this quarter, we will receive a total of seven Airbus A320 family aircraft, three Boeing 767s and one Airbus 340. For 2008, we expect to receive a total of 25 aircraft. In addition to more aircraft, ASK growth will be enhanced as a result of increased aircraft utilization and the densification of our current fleet.

During the quarter, we continued planning to expand on our fleet. In addition to our orders for 2007 and 2008, which most of you already know, we completed orders for a total of 15 Airbus A320 family aircraft to be received in 2010/2011. For our long-haul passenger fleet, we will be receiving three additional Boeing 767 passenger aircrafts in 2009.

We also plan to lease four Airbus A340 passenger aircraft, one in 2007 and three in 2008. Regarding our cargo fleet, we are evaluating the order of four Boeing 777s, a new type of dedicated freighter, to complement our Boeing 727 fleet. These would be for reception in 2009 and 2011. Most of the new additions are purchases. You can find our complete fleet plan until 2011 in our press release.

Outlook. We had a solid operating performance during the first quarter, and this together with attractive conditions provides an encouraging starting point for the expansion we have planned for the rest of the year.

In general terms, we believe that we have a number of attractive opportunities to expand our operations. 2007 will be a unique year in terms of capacity expansion in the passenger business. We expected ASK growth of approximately 20%. Only half of this figure is due to new aircraft being incorporated into the fleet, with the rest resulting from higher utilization and increased densification of the fleet, increasing the number of seats per aircraft.

ASK growth in 2008 is expected to be around 25%. International traffic growth will come for the most part from growth in Argentina's international operations and strengthening the Lima [half] with additional frequencies. As seen in the first quarter, we expect to continue to expand margins through cost-reduction initiatives. These initiatives include projects to enhance efficiency on short-haul operations and in the cargo business and to reduce commercial expenses.

Our strategy regarding fuel will continue to be to pass on higher fuel prices to consumers through the fuel surcharge mechanism in both cargo and passenger businesses. In summary, we believe that our performance during the first quarter was positive and that it puts us in a good position to continue growing revenues, expanding margins and creating value for shareholders. Now we will be pleased to answer your questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from Stephen Trent of Citigroup.

Good morning, gentlemen. Just one or two quick questions for me. The first is on cargo. I was wondering if you could give us this sense of expected ATK growth for 2007 and what assumptions you're making about the Chilean peso versus the dollar. And then my second question is looking at your expansion into Peru and [Argi] and some of these other markets, what's your strategy in terms of labor? Is any strategy changing in terms of the unions that you're using? And if so , any color on contract expiration? Thanks very much?

Thank you, Steve. Tomas, cargo?

Yes, this is Tomas Silva. In terms of the ATK growth for 2007, our budget, and we expect to comply with that, will be about 5%.

Okay, great. And then in terms of your labor strategy in the new markets, are you guys going into expanding in Argi and Peru with unionized labor or just some color there on your labor strategy in the expansion?

There hasn't been really any change in terms of the union structure in -- really in Peru and Argentina. What we have is different labor unions for different types of employees, and usually for the LAN group as a whole the expiration of the labor contracts are staggered, and that remains the case still.

Okay, very clear. Thank you very much.

You're welcome.

Thank you. Your next question comes from Margaret Kalvar of Harding, Loevner Management.

Yes, hi, I was wondering if you could talk about your expansion in Brazil and what kind of traffic trends you're seeing in the Brazilian market and how it's affecting your overall regional strategy.

Well, initially our expansion correlates to this conversation that we had with [Newbury], since it happened. Really, we're going to try to move freight and frequency from Argentina and Chile. It's not really clear at this moment, but probably next year we are going to try to move ahead with some plans in order to move from Chile, Sao Paolo, Miami, or Buenos Aires, Sao Paolo, Madrid, but especially a long-haul operation. We are not at this moment trying to seize the opportunity in the short haul on the domestic offline Brazilian market.

Okay, so you plan to just use it as a long-haul base and not to integrate it and some domestic flights within Brazil into your regional network.

At this moment, no, just long haul.

Okay, thank you.

You're welcome.

Thank you. Your next question comes from [Adolfo Puente] of MetLife.

Hello, everyone. I will have a question regarding the financing mix you have for these additional CapEx plans. I would like to know more or less how the mix between operating leases, bank loans, how do you finance the pre-delivered deposits in the sense what is the percentage of the plan you need to put as a pre-delivery and how much timing advance? And how much is the equity percentage, let's say the down payment, that you keep the ownership of the plane?

Okay, well, in terms of most of the additional aircraft will be purchased, as I mentioned, except the A340 fleet. In terms of financing, we have always indicated most of the aircraft, and we are financing the PDP by our own cash resources, and part of the increase of equity will be dedicated to these fleet expansions, mostly all of the increase of capital.

Okay, but what percentage of a plane is put as a down payment, and how much is financed?

As in what we've been doing with the aircraft that we're purchasing is we have basically the ones that are coming in 2007 are financed with bank debt with a guarantee from the export credit agencies. So the 85% value of the asset which is guaranteed by the export credit agencies is bank debt, and the 15% additional is financed with cash.

Okay, perfect. Okay, thank you.

The PDP payments are also financed with our own cash, and they are about 30% of the value here.

Okay, 30%. How much time in advance you need to provide the PDP?

Two years in advance.

Three years, okay.

Two years, two years.

Two years, okay. And do you have any commitment or policy going forward for liquidity, let's say, as a percentage of revenues on cash?

Well, we used in the past to have at least 10% of our revenues. Right now we are in the lowest position of cash, but we expect increase to be around 12% to 15% at the end of the year.

12 to 15?

12 to 15.

Okay, thank you.

[OPERATOR INSTRUCTIONS]

Your next question comes from Nick Sebrell of Morgan Stanley.

Hi, guys. Quick question. On the utilization rate of 11 hours, where do you think that's going over the next couple of years? Do you see that increasing markedly? I know you said about half of your ASK increase is coming from utilization and new seats. And then next question is you mentioned that a lot of your new demand is first-time flyers. I was wondering, where generally do they come from? Are they mostly Chileans that are flying domestically, or is it a different kind of passenger? Thanks.

Regarding the aircraft utilization, the 11 hours is for our short-haul fleet for the Airbus A320 family, and we would be targeting to get that up to 12% next year -- I mean to 12 hours next year. Our long-haul fleet Boeing 767s fly over 14 hours. About 14.5 hours is the utilization for our long-haul fleet.

And regarding the passenger growth in the domestic businesses?

Most of the new passengers came from I would say the [inaudible] bus industry, so we have seen a lot of people are flying for the first time in a plane. I used to drive in bus, so I think close to 30% to 35% of new passengers came from this industry.

Okay, and have you taken a look at what kind of price point passengers are willing to switch from bus to plane? I mean, is there a standard premium or percentage difference between what it would cost on a bus and how much more they'd be willing to pay for a plane ticket?

Well, at the end, we are in some kind of pilot process. So we are in some kind of trial and error. And we see the rates and we need to pay with the terms we have in the market where we will use close to 50%. And considering the time that they use to move from point to point, we think we have a very strong value proposition for these clients. Actually, we are moving this kind of reaction in price not only in the domestic flight. We are also doing it to some international flights.

For example, Santiago-Mendoza we just reduced last week close to 50% of our price with the same kind of strategy, try to capture a bus industry passenger and continue -- for example, they use close to six hours to move from Santiago to Mendoza, and in planes they are going to use only two hours. That's kind of the strategy that we are trying to get the fine tuning in the next couple of months in order to have very clear what is the price point that we need to have in the market.

Okay. Then last question, any thoughts on going to a single manufacturer long-haul fleet and switching either all Boeing or all Airbus in the long term?

We are just doing some studies internally and discussing with the manufacturer. But this is a decision that we haven't taken yet. We are evaluating the 787 and the Airbus 350, but nothing is set.

Okay, super. Thank you.

[OPERATOR INSTRUCTIONS]

Your next question comes from Daniela Bretthauer of Goldman Sachs.

Hi, a question on Varig and the acquisition and the acquisition of Gol. Any thoughts on how that may affect your business going forward or not? So can you just comment on the comeback of Varig now that it's under the Gol management? Thanks.

Yes, I was saying in the last conference call, from the commercial side, we never put in our plan that we were working with Varig in the next two years' strategy. It would have been nice to have, not necessarily must to have. So at the end the strategy hasn't changed. We are increasing long-haul routes to the United States. We want to put more planes to Europe, [inaudible]. We want to put priority in next year, more planes to Australia.

We are trying to put more planes in the regional market, where we've seen that it has been really successful in this whole [battle] in the routes that we are competing. And clearly to have access to other in this issue here would be really nice to have, but we spent almost seven years to get into the Argentina market. So in this case I think it's not going to be different, but it's going to be next year, two years more. Clearly it's a priority for us.

In the short term, as I said before, we are going to try to leverage our long-haul deliberations with the Brazil market because, at the end, we are touching the most important city in Brazil with the Sao Paulo and Rio and we [now] have access to [inaudible]. It's close to 30% of the market. But we think that at least having Sao Paulo and Rio in our system, in our network, is good enough in the short term in order to have access to the Brazilian market.

So, as I said before, it's a priority, and this time is not changing our strategy. But clearly in the next year we need to figure out some way in order to have this [operation].

And how did you sort out the payment, the money that you actually lent to Varig? How is that going to be sorted out?

We are in the process, discussing with the partners and lawyers and suppose that we will receive the funds back in the next weeks. So they are finalizing -- or they are finalizing their transaction. After that, we will receive our payment. But right now our lawyers in New York are in contact with their lawyers. So expect --

So you would be [MatlinPatterson] and not Gol, right?

Yes.

Okay, thank you, and congratulations on the strong results.

Thank you. Your next question comes from [Pablo Comoran] of Lucite Research.

Can you give some comment on your fuel exchange strategy for '07 and some guidance on load factors for passenger and cargo for '07?

Our hedging positions right now are for the year 2007, about 28% for the second and third quarters, and 29% for the fourth quarter.

Depends on what sort of prices they are hedged at?

The price, the average, as I mentioned in the conference, is $1.90 per gallon, and we continue daily seeing the market [inaudible] position we will take that. But we have the other mechanisms to pass into the passenger and the cargo clients through the future charge. So we think that we are getting protections to the increase of the fuel price. And in terms of the [inaudible].

The first quarter the load factor increased close to two points, 80%. It was the high season. Clearly, we are moving to the low season in the second quarter. So clearly, it's going to decrease a little, but our forecast for the year is close to 75%, 76%, because it was similar to what we had last year.

The main international business to drive to getting trade business, basically the ASK, so we are growing a lot in ASK, not necessarily in load factor and yield, because our hypothesis is that we're going to maintain our [RAC] for this year.

So your load factor for cargo business will be around 64%, 65%?

Sorry?

For the cargo business?

Yes, we are expecting a small increase in load factor for 2007. It should be around, yes, 65 to 65.5.

Okay, thank you very much.

Thank you, there appears to be no further questions at this time. I would now like to turn the floor back over to management for any closing 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 soon. Thank you very much.

Thank you. This concludes today's LAN conference call. You may now disconnect.