LATAM Airlines Group SA (LTM) 2007 Q2 法說會逐字稿

Good morning. My name is Henry and I will be your conference operator today. At this time I'd like to welcome everyone to the LAN Airlines Second Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer period. [OPERATOR INSTRUCTIONS] Thank you.

It is now my pleasure to turn the floor over to [Pete Majeski] Sir, you may begin your conference.

Thank you Henry and good morning everyone. Today LAN Airlines management will be discussing the second 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, international markets and therefore are subject to change.

At this time it 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 Pete. I am Alejandro de la Fuente, Chief Financial Officer of LAN, and with me are Ernesto Solis from our International Passenger Division, Tomas Silva from our Cargo Business and Gisela Escobar, our Head of Investor Relations.

We hope that you have all been able to access the webcast presentation that is available on our website for a better understanding of our results for the quarter. Today I will discuss our financial results for the quarter, review a few key developments and comment on our expectations for 2007 and 2008. Then we'll be pleased to answer your questions.

On slide two, you can see the main highlights of LAN's results for the second quarter of 2007. LAN earned $43 million in net income for the second quarter, a significant improvement compared to the second quarter of 2006. In the second quarter of 2006, LAN recorded a one time pre-tax severance charge of $6 million even excluding this charge net income grew 95% in 2007. The main driver of our strong results this quarter was traffic growth and lower costs per ATK. This led to significant expansion in operating income on margins. EBITDA reached $129 million and EBITDA margins reached 16.8%, 3 points above second quarter 2006.

Turning to slide three, you can see the elements that contribute to this margin expansion. Overall, LAN increased its EBITDA margin by more than 3 points. During the second quarter LAN experienced decreases in both cargo and passenger yields. This effect was offset in part by higher load factors in the passenger business and by lower fuel prices, but mostly by cost efficiencies. A 1% decrease in fuel prices during the quarter led to $2.4 million in lower fuel costs contributing very little to EBITDA margin. Efficiency gains came mainly from lower commissions both in the cargo and in the passenger business as well as the reduction in wet-leases in the cargo business and efficiency in wages and benefits. This performance highlights the Company's focus on profitable growth and on increasing deficiency levels in our ratios. During the quarter we were successful in increasing margins and profitability in both the passenger and the cargo business.

On slide 4, you can see in detail the breakdown of revenue growth in the passenger business. Passenger revenues grew 19% during the quarter driven mainly by strong traffic growth which reached 24%. Such expansion during the second quarter is especially relevant since this is the weakest seasonal quarter for the passenger traffic in Latin America.

Market conditions remained positive as demand keeps growing consistently in all of LAN's markets. It is important to know that we have been able to maintain our leadership position despite increased competition in regional routes.

Yields during the quarter were affected mainly by decreases in domestic markets as a result of the implementation of the new business model as well as by decreases in our regional routes. Part of the decrease was offset by higher load factors especially in domestic operations where load experienced increases of nine points reaching close to 70%. On international routes load factors exceeded 71% driven by increases in our old travel long-haul routes and on regional routes.

As you can see on slide 5, despite significant growth in our domestic businesses, international operations remained the main driver of passenger ASK growth. International operations both regional and long-haul represent 78% of LAN's total passenger business. LAN has seen consistent growth especially in regional and long-haul markets. The capacity grew on all international routes during the second quarter. The strongest growth came in regional operations, followed by routes to the United States.

In the region our effort has been focused on strengthening our [haul] with Lima as well as adding capacity on routes to Brazil. Facing more competition on our South American routes, we increased frequencies to Santiago to Buenos Aires, Brazil and Peru. We also continue adding frequencies from Lima to most regional destinations especially Bogota, Quito and Bolivia.

During the quarter we also began new direct flights from Santiago to the United States. In June we began flying three weekly non-stop frequencies, from Santiago to New York and five weekly non-stop frequencies to Los Angeles.

We have also announced for August, the beginning of three weekly non-stop flights from Lima to Madrid.

Moving to slide 6 you can see that cargo revenues for the quarter grew 3.5%. This was driven mainly by a 7.6% increase in capacity offset in part by the 3.7%. decline in unit revenues. The latter resulted from lower yields and load factors during the quarter. Our strategy in the cargo business is currently focused on rationalizing capacity expansion and focusing on the most profitable routes; in this way improving efficiency and profitability.

During the quarter yields were affected by the change in route mix as we reduced our operations to Europe following our profitable routes within Latin America. Another important element in LAN's cargo study has been to optimize fleets by replacing less efficient releases in our own -- with our own Boeing 777 freighters leveraging the low operating costs and ability to adequately serve key destinations.

This resulted in significant margin improvements in the cargo business during the quarter. As we have seen over the past years the cargo business continues to experience an imbalance generated by strong inputs and weak exports from Latin America, while exports out of Latin America have been declining due to stronger local currencies and changes in product mixes. Inputs have continued to boom, thanks to the appreciation of local currencies and weaker price elasticity. LAN continues to deal with this scenario by designing aircraft rotations in order to increase north bound loads taking advantage of our vast network within the region.

On slide 7, you can see in detail the evolution of LAN's costs. We are very pleased with the reduction in costs per ATK this quarter. LAN saw a 3.9% decline in costs per ATK and a 5% decline in costs per ATK ex-fuel. The main driver here was commercial costs and especially commissions, which decreased as a percent of revenue both in the passenger and cargo businesses.

In the passenger business commissions decreased from 6% to 1% in February for all economy class tickets in Chile. In addition, we have been able to double the penetration of Internet sales in the domestic operations in Chile. 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.

The Company also saw lower wages and benefit expenses per ATK; this was driven by lower headcounts in our back office and support areas, which offset the expansion in operations. We also reduced fleet costs, which include aircraft rentals and depreciation. Lower fuel costs per ATK were due mainly to lower other aircraft rentals during the quarter. These effects were partially offset by higher maintenance costs, which increased driven by higher utilization especially in the passenger business as well as the normal escalation in aircraft maintenance contracts.

We will continue to use financial hedging as a tool to mitigate the impact of higher fuel prices. We have currently hedged 29% of our exposure for the third and fourth quarters of 2007 -- in other words, these positioned are of the price around $1.92 per gallon. We have not set any forward fuels requirements for 2008. LAN continues to apply a fuel surcharge in both passenger and cargo business with successful results.

Turning to slide number nine, I will now discuss certain key developments. As you know LAN has embarked on a significant fleet expansion program. During the second quarter we received our first of 23 Airbus A318 aircraft, which is designated to the domestic routes within Chile. We also took delivery of our 21st Boeing 767 aircraft for the passenger business, featuring our new premium business and new economy classes. It is important to mention that all of our fleet purchases for 2007 and 2008 have already been financed with ECA and Ex-Im [guarantees] at a very attractive sub-LIBOR interest rate.

Overall, we will be taking delivery of 11 aircrafts in 2007, and 25 aircraft in 2008 with significant fleet expansion together with the renewal of our short-haul fleet are the necessary conditions for continued growth and increased efficiency in our domestic, international and cargo operations. A very important element in our future plan for the cargo business is the arrival of four Boeing 777 aircraft starting in 2009. This new and more planes have doubled the capacity of our current Boeing 767 freighters, and will allow LAN cargo to develop its European operations as well as strengthen its position from core regional routes.

We are also very happy to report an important highlight in term of fleet expansion. After much analysis LAN has decided on its long term fleet and will be placing orders for 32 Boeing 787 Dreamliners, 26 of these will be owned and 6 of them will be leased. This aircraft will be arriving as early as 2011 and will eventually replace our Boeing 767 fleet -- 767 fleet. This is an historical investment for LAN, reaching a total of $3.2 billion we are convinced this will ensure LAN's long-term growth and continued leadership position as the dominant operator in the region. Please turn to slide 10.

We are very pleased with the result of the implementation of our new low cost business model for short-haul operations. As you know this was launched in April nationwide on all domestic routes in Chile and has also been implemented in Peru and Argentina. Lower fares have had a strong effect on demand stimulation. With domestic traffic growing 30% in Chile and 38% in Peru during the quarter. However fares in Chile have decreased approximately 11% as compared with the second quarter of 2006.

Although we have implemented discounts of over 30% in the lower fare classes, demand has increased across the board on all domestic routes and all passenger segments. Load factors have increased 9 points in Chile and 12 points in Peru reaching record high for the quarter that is usually seasonally weak.

On slide 11; you can see that the implementation of this model also considers certain important changes focused on increasing operational efficiency and reducing costs per ASK. In that sense with in the second quarter we have increased our fly rate in Chile by 11% mainly due to a larger number of direct flights. We have also increased by 24% the adjudication of our short haul Airbus A320 family fleet reaching 10.4 hours. This target is to continue improving these indicators during the second half of 2007 and 2008.

Regarding distribution costs, we are very pleased to have double internet sales during the first half of 2007 reaching 44% in June. This in addition to the reduction in commissions from 6% to 1% implemented in February 2007 has an important impact on distribution costs. As you can see in the graph we have also doubled the percentage of web and ATM check-ins for domestic flights. All these elements together with the continued reduction in our Boeing 737-200 fleet have a very positive impact on our margins of the domestic operations contributing to the continued improvement in LAN's overall margins.

Finally on slide 12; I would like to mention our very successful equity offering, which was completed in June 2007. This was a primary offering of 19.9 million shares equivalent to almost 4 million ADRs. LAN reached a total of $320 million between the Chilean and international markets. 60% of the offering was placed in Chile especially with the participation of the LAN pension fund. Considering this equity offering, LAN strengthened its already solid financial position reaching merit ratios in the range of 22% in line with our Triple B investment grade ratings.

Slide 13, shows our expectations for capacity growth in the following years. LAN's solid operating performance during the first half of 2007 and the attractive conditions in our markets provide an encouraging starting point for the expansion we have planned for the coming years.

In the passenger business we believe that we have a number of attractive opportunities to expand our operation and as a consequence our current plan is to grow total passenger capacity between 19% and 21% for the full year of 2007 and between 28% and 30% in 2008.

2007 will be a unique year in term of capacity expansion in the passenger business. Only about 60% of our estimated ASK growth is due to new aircraft. The remaining 40% will be achieved due to higher utilizations mainly in short haul operations as well as due to increased densification of the fleet increasing the number of seats per aircraft.

International passenger growth in 2007 will come for the most part from expansion in regional operations including increased operations from Lima to Quito and Bogota as well as increased frequencies to Brazil, Argentina and Peru. On long-haul routes the main expansion this year will come from more frequencies between Santiago and the United States, between Lima-Madrid and an additional frequency to Sydney. In 2008 expansion will come from growth in U.S. European and regional routes.

With respect to the tragic accident that occurred last week in Sao Paulo, we would like to express our profound sadness and sympathy especially with the victims of this unfortunate event. We support the management of TAM in this difficult time and have offered them our assistance in any way possible. I also want to mention that the commercial agreement reached with TAM continues to operate normally seeking to provide improved connectivity in our passengers in Latin America.

On the cargo side, we expect capacity growth to be around 5% for this year and between 8% and 10% in 2008, driven mainly by growth in the passenger fleet. The focus in the cargo business will be on an efficient and profitable selection of routes.

In summary, we believe that our performance in second quarter and the first half of 2007 was positive. As we successfully implemented the changes in our domestic operations and dealed with the dynamic competitive environments, preparing the ground for major improvements in the future. As a consequence, we believe we are in a good position to continue to grow revenues, expanding margins and creating value for shareholders.

Now we will be pleased to answer your questions.

Thank you. [OPERATOR INSTRUCTIONS]. Your first question is coming from Ray Neidl of Calyon Securities. Please go ahead.

Well good morning, I am just wondering overall with the aggressive growth that you are doing both in the freight and the passenger side, do you have any interest in expanding aggressively or expanding at all into Asia -- Transpacific Asia and is there a market for that from South America?

Yes in the passenger side -- we will as Alejandro said we were increasing our [passenger] frequency from Santiago to Sydney routes at the end of this year. For the next year we don't have plan either to increase the frequency. We think that we are reaching a very successful business, so we would like -- the only problem that, we don't have the right plane as you know, we need to fly with Airbus 340 to this route and for the next year we are just concentrating in the Boeing 767 fleet. So I would say in the short term we are not going to expect to increase frequencies to these markets.

Okay and how about the freight operations out of Miami? Is there any limitation how much you can do -- Trans-Pacific out of Miami if you wanted to do that?

On the freighter side?

Yes.

Yeah well on the freighter side we currently are with Asia. We are satisfying the market needs via block space agreement with main Asian carriers. At the present time we have about 200 tons per week and we believe that that's enough as we have already said on the passenger side that we don't have the fleet -- right -- to operate this on the short-term. However on the long-term when we get the 777's its something that we will evaluate at that time.

Okay great and then secondly you are changing your business plan for the short haul domestic in Chile. In other words you are trying to get your traffic up, your load factors up at the expense of yield. I'm just wondering why did you change that strategy, what's your long-term thinking there?

Well it's basically to just increase our margin pay scale capacity, as in this market we work in kind of under capacity. So since we will use the yield it was a really elastic demand so at the end the RASK increased a lot and since we are reducing the cost [by SK] at the end the [mast] in the market increased. So I think we are in the right way in order to try to duplicate these experience into the other markets in Argentina and Peru probably we -- we are going to do something on these issues in the second semester of the year.

Yes. Okay great thank you gentlemen.

Thank you. Your next question is coming from Nick Sebrell of Morgan Stanley. Please go ahead.

Hi good morning. Two questions the first on yields, the second, on the impact of shifting away from wet-leases. On yields, kind of curious what you might see in terms of the second half, I know its better seasonally but in terms of whether you expect a material change in the yield that we saw in the second quarter considering your new short-haul strategy, considering the competition that we've seen regionally -- is there enough competition and does the impact of reducing your yields on due to the short-haul strategy mean that we could see a quarter-over-quarter decrease in yields from second quarter to third quarter for example?

And then on shifting away from wet-leases, I am just curious if you look at your ATK just on the cargo side, what percentage of that is usually under a wet-lease if you average it over time. What impact to your financials do you think coming off of those wet-leases could we see in the second half or next year? And then the last part is, do you ever see a scenario where you completely get away from wet-leases and use your own fleet strictly?

Going to your yield question you are right, we have some kind of impact in the yield side of our business especially in the regional markets, as you know we were facing more competition especially from Gol and clearly it was some impact in the yield side -- at the end, impacted our RASK capability. We think that in the second semester we are going to be able to increase a little more of this gap, regarding to 2006. We think its going to below 2006 the yield but with respect to the last quarter we think we are going to be able to increase Q3 and Q4 for 2007. So, we are forecasting probably our reaction in the [yield] side. We are not really sure what is the number, but we think in the second semester we are going to be able to reduce the [help] that we had in the Q2.

Okay.

On the wet-leases now in 2006 we had an average of 20% of our capacity on wet-lease aircraft, this year the average would be about 10%, so we are going to half the percentage. In terms of margins, it depends on in which route we finally fly the wet-leases, but margins will increase considerably on the routes where we use our own fleet instead of the wet-leases.

Okay. And just go back to the competition question, you said you have seen market competition from Gol, I think on the obvious routes to like Argentina, and of course Brazil. Since you are expanding to Brazil, would you expect more pressure from them or more, I guess I'm asking if there is going to be more exposure to competition from Gol? And then second part of that is, do you see other carriers that are as aggressive as Gol in terms of lowering prices and going head-to-head with you?

Yes, I would say for 2007 we are not expecting to more competition especially for Gol, I think there is a lot troubles in the domestic market in Brazil as you know with this unfortunate accident on tarmac and [the recent] ATC problems or our capacity problems there might be some -- so they are probably going to be more busy, what's happening in the market, I think we have the right strategy in the routes where we are competing, with Gol. We want to be really dominant in these routes as you know Santiago-Buenos Aires and Santiago-Brazil. We certainly have been really successful for our strategy, we increased the load of our capacity. Our [DGA] got reduced, but also we feel that we have more RASK capability than our competitors.

Probably for TACA and Copa they are making some movements but this not really a huge impact in our markets. So we say for this year we are not expecting more competition or more aggressive competition in the [Brazil] market. For early for 2008 since the Brazilian situation is going to be more -- is moved probably it is going to be a more aggressive -- movement for our competitors but also we are receiving a lot of short-haul planes for next year so we are analyzing what should be our business strategy in order to reinforce and [train] our position in the Brazil market. We want to be a really important operator in the Brazil market so I think its going to be for the next year more competition side in the business.

Great thank you.

You are welcome.

Thank you. Your next question is coming from Daniela Bretthauer of Goldman Sachs, please go ahead.

Hi good morning gentlemen a question regarding your trend again can you give us more detail like for instance can you break down between passenger and cargo use? They were softer in the second quarter of this year but is there any change that we can expect for the second half just following up on the previous question but you should -- could give us more detail where passenger is going this way cargo is going this other way and the comment for full year '07 that would be great that is the first question.

Yeah well as I said before I am clearly in the passenger side we are facing more pressure in upward prices not only in the [Brazil] market as you know there is more competitors in also American and US market. There is new operator like Spirit in Lima-Miami market. There is more movement for Avianca, TACA they are making more connections in the [half] their [housing] is in Columbia and Central America and also is the issue that the U.S. industry to South America has been really weak in the first semester. All these issues really put pressure in the price. So for the second semester, we think that we are going to be able to try to offset these reductions. We are making some change in our schedule in the fleet. We are trying to be more a -- I would say more a -- [not really] more aggressive in our price strategy. So probably we are going to be looking more profit side of the business, but as I said before [periods] are going to be below 2006 -- the deal. Now also, it is important that we are putting a lot of more capacity we are increasing close to 25% ASK.

So at the end there are a lot of issues that are putting pressure in the price. So we've think at the end the reduce in price and the reduce in the RASK is going to be highly [compensated] by the decrease in ASK. I think that is important, because that equation is an increase in revenues.

No absolutely but so yields -- so yields would be down year-on-year for passenger low single digits you would say between I don't know one and five?

Yes, yes. On the cargo side in Q2 we took a hit on yields basically because we -- because of the European operations, which were reduced considerably. Also last year we had an agreement, we had a -- have an agreement for the past four years with TAM from Europe which ended in December, 2006. So that was our European cargo so we're also in that sense the yield fell.

Also fuel surcharge -- last -- it will compare Q2 2007 with Q2 2006 it was about $0.02 lower per kilo in 2007 so those three reasons explained the lower yields. What we can expect for Q3 is basically higher yields, one is because fuel surcharges will be the same as in 2006 reaching about $0.60 per kilo and also we've had some pricing initiatives basically on the southbound market, we have increased rates and also we have done a very aggressive revenue management on basically on the long-haul markets for Miami and Los Angles. So, we expect a better Q3 2007 compared to Q2.

Thank you. Your next question is coming from [Paulino Pereira] of BCI. Please go ahead.

Good morning gentlemen, I have two quick questions. One is given the strong investment program or CapEx program, is the management expecting or presenting a change in dividend policy given the cash flows that would be needed for this investment program and the second question is regarding Aeromexico. Are you taking a look at that process and have you been contacted by the company? Thanks.

Yeah, thank you. No, in order to the CapEx we continue with our policy of dividend around between, 50% to 70% -- 70% [of place] and we don't see any problem for the future. As I mentioned all of our fleet is been financed until 2008 and early next year we are starting to trying to obtain financing -- for the 2009 fleet.

In terms of the Mexican companies, we all the time we have -- we invite to participate for buying this company, but we don't have the short-term plans to be in those markets. Our strategy is to be one of the best airlines in the southern part of Latin America, and our focus is to develop our strategy in Peru, Ecuador, Argentina and maybe in the future Brazil through this alliance with TAM.

Thank you very much.

You're welcome.

Thank you. The next question is follow-up from Daniela Bretthauer of Goldman Sachs. Please go ahead.

Sorry, gentlemen I somehow got disconnected. Just to wrap up the question on the cargo front, so you should be flat to slightly positive for cargo for full year '07?

Yes.

Okay. And then the second part of the question is, well yes, there is this Brazil crisis going on as you correctly stated. And what is LAN exposure to Brazil, let's say as a percentage of your total sales how much are we talking about? And have you sensed any impact on your travel experience to Brazil since last week?

I would say our exposure to the Brazilian markets that is a huge -- is basically a [high level] number but could be close to 7% or 6% of our income something like that. We are probably seeing in the future that could be some kind of impact in our operations. We are not really sure what is going to happen with Congonhas operations -- is it going to be shut down, is it going to be reduced -- the capacity to land there. So probably they are going to move to landing planes to [Valdivia] where we operate and so probably there is going to be [some impact] of a lot in schedule, what is going to happen we are not really sure we are taking all the necessary measures in order to reduce our exposure and but I think it is not going to be a huge issue for us in the short-term.

Okay thank you very much.

You're welcome.

Thank you the next question is coming from Rodrigo Goes of UBS please go ahead.

Hi, just one quick question on the passenger side the yield decline of about 8.5% was that entirely due to lower fares or did it -- were there some fuel surcharges being unwound as well?

Basically the fuel surcharge was in line with what we saw in the second quarter of 2006 so this was mostly related to fare so nominal fare decreases.

Okay.

And mainly on the domestic because of the short-haul model and in the regional.

Okay. Perfect my other questions were answered before okay thank you very much.

Thank you.

Thank you. Your next question is coming from Steve Trent of Citigroup, please go ahead.

Good morning gentlemen and first of all thanks for your comments about Brazil we -- we are definitely right there with you with our condolences. Wanted to ask very quickly most of my questions are answered, but first of all looking at 2008 fleet plan in terms of ASK growth are you saying that average [stage length] is basically going to be about the same as it is for 2007? And my second question pertains to taxation, looks like this quarter's rate was unusually low and how should we think about taxes through the rest of the year? Thank you.

On the stage [length] question we -- there should be many changes on the international side, on the domestic side we are seeing increases. They are mainly related to the implementation of the new models because of itinerary changes. We are focused -- trying to focus on increasing direct flights and that's going have an impact on increasing stage [lengths] on those.

On taxations well first remember that LAN does not pay cash taxes. For tax purpose LAN makes a provision on the income statement but we do not pay taxes because we have had a accumulated loss in the last seven years. These losses are because of the affiliated depreciation on the airplane. As per Chilean regulation we are allowed to depreciate our aircraft in five years. And this gives us the deferred tax benefit. Even though the tax rate in Chile is 17% for LAN it is around 16.5% because of some credit that we have from -- deferred taxes for the previous year.

For the fist quarter you are right, the tax rate was around 14% to 16% close to 16% because this quarter we applied some losses from the startup of the operations in Argentina. But if you look at the first half the tax rate is 16.5%. - 16.3%. And this is a better indication of what we expect for the year. But obviously the rates will be around 16.5%. Just the provision because as I mentioned we don't pay because we have a -- this losses, cumulative losses for depreciation.

Okay very clear thanks very much.

You are welcome.

Thank you. Your next question is coming from Margaret Kalvar of Harding, Loevner. Please go ahead.

Yes, good morning. Could you give us a little bit more detail on the increase in the margins of the domestic operations since you did have yield compression as is expected in a low cost model? I'd be curious to know exactly what the spread between the decline in RASKs and the decline in CASKs was as you clearly were able to keep costs down even more and whether you would expect the same magnitude or greater or lesser contribution to margins going forward from the low-cost operations.

Hi, Margaret. You are right we've seen important margin improvements in the domestic business because the reduction on the cost ASK side has exceeded the small drops in -- and have exceeded the drops in yield and small drops in revenue for ASK. In terms of margins for the domestic businesses, this has increased if we look at 2007 compared to 2008 we're expecting an increase of somewhere around -- of the levels of the low 20s to close to 30% and we would expect to get 30% for 2008.

Okay, that's on the domestic low-cost model operations?

And that's EBITDA margin.

EBITDA, Okay. Very good, thank you very much.

You are welcome.

Thank you. [OPERATOR INSTRUCTIONS]. Your next question is coming from Ian Crooke of Raymond James. Please go ahead.

Hi, I think my question has been answered. So thank you very much.

Thank you. Your next question is coming from Nick Sebrell of Morgan Stanley. Please go ahead.

Hi thanks for the follow-up. I wanted to touch on costs. And costs this quarter per unit did pretty well and I am curious to find out if you expect this to continue into the second half and what kind of performance, how long do you think you can reduce your cost per ATK on a system basis and will this continue into next year or is this something that you see that we have got into may be we will reach a wall in the end of '07?

And then in addition to that just a little more on the regional routes, you said I think in your presentation that you expected a lot of the growth in ASK from your regional routes and I am curious to find out if that's mostly additional frequencies on the same routes or mostly additional cities with new frequencies?

On the cost per ATK side we will see -- we do expect to see continued efficiencies coming from [some] fleet as we continue to implement the change to the new model in the domestic businesses and we also continue to be focused on efficiencies and growth on the international side should have the effect of diluting our fixed cost base. So we do expect to see continued efficiencies.

I would say probably in the second half of 2007, it will be less than what we saw in the second quarter because in the second half of 2006 we already started implementing some of this. So the comparison will be a little different but it should still continue in 2007 and in 2008.

Going to your ATK question about the growth in the regions -- as you know we have basically three hubs with Rio in Santiago, Lima and Buenos Aires, ready for the next year and we want to strengthen our operation in Buenos Aires -- in the region also try to put more capacity in the Lima half. I would say probably 50% is going to be in the same frequency level we are flying at this moment and 50% is going to be in newer routes that we are going to put in and all this [we have].

Okay so pretty evenly distributed?

Yes.

And do you see more growth coming from the South or from the North in terms of not just the hubs like Lima in the North but also do you see more traffic going North-South or do you see more traffic -- are there any patterns that you could make generalizations about?

Are you saying the Rio market?

Well I am just trying to get a better understanding of the market and whether like in East-West would be obviously Brazil or Chile, Argentina and then North-South obviously is from the Northern part of South America or even Central America down to Chile or in the middle. I am just trying to figure out where you see most of the growth and another way of asking as to how does Brazil figure into your plans?

Yes as you consider Lima hubs others [point] I think is going to be in the North side clearly there should have been more flying to the North region here South America.

Okay thanks.

Thank you [OPERATOR INSTRUCTIONS]. Your next question is coming from [Prabhu Kumar] of Lucite Research please go ahead.

New business model is it a local LTC model you have implemented in Chile and have you implemented in all domestic markets or is it just tested in Chile alone?

Well it has been right now fully implemented in Chile and in Peru and it's something that we are in the process of implementing in Argentina where the dynamics are a little different because it's a regulated [fare and tier]. And to the extent possible we will implement some of it on the short-haul regional routes where we operate with narrow body aircrafts. I don't know if that answers your question.

I'm enquiring about the yield trend. So with the implementation of the new business model what is your perception about the yield trend is it going to be flat or going to go down? Passenger yields going forward?

Well we what we have already seen -- since the basis of the model I mean an important element is to stimulate demand. So this what we've done and what we've already seen in Chile and Peru is we've been able to stimulate demands through share decrease. So that's why we've seen the yield decreases in the first and second quarters this year.

Thank you.

Your next question is coming from Mike Linenberg of Merrill Lynch please go ahead.

Yes hi, good morning. I guess really one question and this is may be more of a follow-up on some of the answers regarding Brazil. I think you indicated that your traffic to the US has been quite strong and I'm curious because of the issues that Brazil has faced for some time. How much traffic may be originating in Brazil; are you picking up in your Santiago and Lima hubs; whether you are taking it on to the US or on to Europe. Can you give us a sense of that?

Well and just to be sure are you asking how it is going to impact the traffic to US and Europe from Brazil.

No I was just wondering if you have seen any pickup in transfer traffic either, over the last year and even more recently with a lot of cancellations into the key airports in Brazil. Are people Brazilians who want to fly abroad rather than taking a Brazilian airline, flying long and connecting over one of your hubs on a long-haul destination. So sort of that's part one, and then part two with the TAM code share when does that start ramping up if in fact I must -- in the event I mean I am not sure if its already started to ramp up, what's the timing on that?

Yes, going to this your second question and we've seen that the TAM code share is going to be fully deployed on September 1st of this year, so its just one month more. There's going to be a really have a huge impact in our operations especially for our Peru and Argentina operations to the domestic marketing in Brazil. Clearly there is going be -- you asked to the benefits to connect to --of flying in Brazil -- it's something that we have in this moment. I think that's going to be a huge benefit for our passenger also for the TAM passengers they are going to have the domestic market that we have in Peru, Argentina and Chile.

Going to your first question and clearly I don't have I would say some kind of [flail] [would happen]. But we see for example, some Brazilian passengers that would prefer to fly with us through Lima to for example, to Los Angeles and we have -- the hub, and so clearly what's happening at this moment actually it could be some kind of [fright] to fly in some kind of domestic Brazilian air carriers. I am not really sure what you are going to have in the impact probably the impact is going to be first in the domestic side. After that clearly there's going to be some impact in the international side.

So far we are not really sure how we can take advantage of that as I said in the last conference we are analyzing in order to use some kind of [free air] in Brazil from Buenos Aires and from Chile in order to pick passengers from Sao Paulo and move to US and Europe, that function that we are analyzing this moment. Probably we are going to try to do that kind of movement probably in the first semester of the next year.

Okay, very good. Thank you.

Thank you Mike.

Thank you. [OPERATOR INSTRUCTIONS]. Thank you. There appears to be no further questions at this time. I would now like to turn the floor back over to Mr. De La Fuente for any closing remarks.

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