LATAM Airlines Group SA (LTM) 2007 Q3 法說會逐字稿

Thank you for waiting. At this time, we would like to welcome everyone to TAM's third quarter 2007 earnings conference call. We would like to inform you that this call and the slides are being broadcast on the Internet at the company's website, www.tam.com.br/ir, and that a presentation is available to download at the investor information section.

Also, this event is being recorded and all participants will be on a listen-only mode during the company's presentation. After the company's remarks are completed there will be a question and answer session. At that time further instructions will be given. (OPERATOR INSTRUCTIONS).

Before proceeding, let me mention that forward-looking statements are based on beliefs and assumptions of TAM management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the 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 the results to differ materially from those expressed in such forward-looking statements.

Now I'll turn the conference over to Mr. Marco Antonio Bologna, CEO. Mr. Bologna, you may begin your conference.

Good morning. We would like to thank you all to attend the presentation of the third quarter 2007 results.

On slide number three, our strategy is based on providing a superior quality product with a more attractive value price relation consistent with the commitment to serve. We understand that the superior service is mainly based on offering more relative comfort to the passenger, with punctuality and regularity, with a broader range of destinations and frequency, decide the speed in taking the passenger from an origin to a destination. To make it competitively priced as feasible then continuously seek to keep a low cost structure.

Jointly, these three points reflect a strategy that we believe will give us higher competitive advantage and we will also sustain our leadership in the market with the profitability.

On slide four, the domestic aviation market in Brazil has been growing at double-digit rates for the last four years. 2004, the growth was 12%, in 2005 19%, and last year the market grew 12%. (Inaudible) statistics up to September show a commodities growth of 10%. August was a very weak month presenting a reduction of growth when compared to 2006 for the first time in several months. Dates for September -- our data for September and October already indicate a recovery in demand.

On slide five. In July 2003, TAM took the leadership position in the mass market. We reached 49.1% domestic market share in the first nine months of the year and in September reached 48.1%. The average of the third quarter was 49.3%.

On slide six. In 2004 and 2005 the international market increased 1.6 and 3 times Brazilian GDP when considering Brazilian carriers that fly international route. However, in 2006 the market decreased 30%, mainly due to the reductions of [bodies]. Accumulated until September 2007, the market increased a total of 16% year-over-year.

Slide seven. As a result, due to the nature of the bilateral agreements, international carriers have represented a higher ratio of international traffic flowing to and from Brazil. This opened an unprecedent opportunity for Brazilian carriers in particular, to capture additional growth; in the first nine months of 2007 we grew capacity 75%.

Slide eight. The year-to-date numbers up to September demonstrate that we have reached the international market share of 66%. As the fiscally in September 2007, our market share reached 69.8%.

Slide nine. The highlights of the third quarter of 2007 were the increasing our fleet of two Airbus A320, two A321, and the redelivery of four Fokker 100s following our phase out plan of the [old] 106 aircraft. As part of our fleet strategy plan, in order to improve utilization of our slot, we are increasing capacity by adding larger aircraft with more seats.

In the third quarter '07, we started our daily flights to Caracas, and recently our daily freight to Montevideo. Also, we received the authorization to initiate long-haul flights to Frankfurt as of November 30, and Madrid (inaudible) to December 21.

The increase of international revenue has been fundamental in maintaining a higher level of profitability in the third quarter and we believe we will continue to provide a steady stream of revenues and results for the company going forward, as well as helping increasing passenger loyalty with TAM and providing further growth opportunities in the cargo business.

In the domestic market, we reorganized our network due to the new definitions as we will be presenting in the next slide. We signed a new commercial agreement with NHT, a regional carrier located in Porto Alegre, south of Brazil. With this new partnership, together with the Pantanal, Passaredo, Total and Trip, we are now serving a total of 81 locations in Brazil.

Slide ten. We continue to provide full support to victims' families, authorities and employees regarding the accident with flight 3054.

Regarding our efficiency, daily block hours per aircraft reached 12.6 hours in the third quarter of 2007, maintaining the same level as in the second quarter. When considering only the operating aircraft without including the spare one, and in maintenance we maintain 13.4 hours. Our total average load factor for the third quarter of 2007 was 69%.

On October 31, we signed an agreement with the ABAV, the Association of Brazilian Travel Agents, to establish a new method for the compensation payments resulting in greater transparency regarding the services purchased by the end user.

Finally, we launched a new institutional investors relation website with improved browsing, friendly layout and extra facilities to TAM loyalty card holders [particularly] passengers.

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

Good morning to all. On slide 11, as mentioned, we signed with ABAV, Brazilian Association of Travel Agents, an agreement to establish a new method of compensation payment. As of January, passengers can expect to have the ticket price and corresponding travel agent compensation for departures specified on the ticket itself. The agreement will first be implemented in the Brazilian market and subsequently internationally.

According to the agreement, travel agents' compensation, previously known as the commission, and required as an integral part of the tariff, will consist of a service charge of 10% of the ticket value or R$30, whichever is greatest. And will be levied on domestic tickets which will be charged separately and directly to the final client. The amount will be charged by the travel agent directly to the customer as a service charge.

The new procedure will be put into practice by agents linked to ABAV and by TAM at all point of sale, e-stores and TAM Viagens, outsourced agents and call center, but we will exclude electronic sales where there is no participation by a natural sales representative. This change will lead to a reduction in our administrative and general expenses. Passengers, in turn, will be able to determine the ticket cost as well as service fee for the transaction. We expect to increase our direct sales through the website substantially.

On slide 12, CONAC's resolution number six issued July 20 suggested a series of modifications in the regulatory environment in Brazil, among which the restriction of operations in Congonhas, reducing the total number of slots per hour and discontinuing chartered flights from the airport.

In terms of impact for TAM, in July 30, we transferred 30 flights out of Congonhas to Guarulhos, canceled 11 flights in our total network and adjusted [convoys] in Guarulhos Airport schedules. The overall impact of such change in our network was a reduction of approximately half hour per day in airfreight utilization.

On slide 13. Following the same resolution it was also proposed that the new international flights should be allocated outside the Sao Paulo terminal. However, our new international frequencies from Guarulhos were based on the exchange of already existing slots. Appointment on possible locations for a new airport in Sao Paulo have been postponed 180 days.

The redistribution of space to permit accommodation of a larger number of passengers at Guarulhos was adopted in August and has already improved check-in and luggage handling efficiency. There are a few areas to be redistributed at certain airport space currently occupied by companies under bankruptcy or reorganization.

On slide 14. Addressing now our third quarter results -- third quarter 2007 results, we recorded a 1.4 percentage point decrease in total gross revenue. In the domestic market we presented a 17% reduction due to a 19% domestic yield reduction and basically no variation in demand. In the international market, revenues increased 22% due to the increase in demand of 55%, partially impacted by the decrease of 23% of the yield in reais.

The supply increase was mainly due to addition of new long haul routes made possible by the increasing fleet. We also had a 61% increase in cargo revenues due to a higher availability of airfreight cargo space for sale, especially in international operations. To complement our revenues we had a 29% increase in other gross revenue, mainly due to the increase on loyalty program revenues.

On slide 15. Our total RASK decreased 23% year-over-year. Our scheduled domestic yield decreased 19% year-over-year, which combined with the decrease of 9 percentage points in the load factor, resulted in a 28% scheduled domestic RASK reduction.

The next slide will discuss the domestic scenario. Our scheduled international yield presented an 8% decrease in US dollars and the load factor decreased 9%, which combined with the appreciation of the real versus dollar in 15%, resulted in a 31% scheduled international route decrease.

The new international flights, which are still maturing, are largely responsible for the decrease in load factors and yields. Being the latter negatively impacted by the increase in stage length as well.

On slide 16. Despite the difficulties faced in the quarter, TAM presented a better load factor both in the domestic and international markets for all months of the quarter.

On slide 17. As mentioned in the previous slide, we can measure how difficult the quarter was by the reduction of 4% in demand quarter-over-quarter and a typical situation, given that the third quarter is usually a strong one. We remain stable because of the reduction in our chartered operations when considering the scheduled operations. And with positively schedule operations, we presented the same growth as the market.

The decrease in demand during the third quarter '07 caused a reduction of our chartered operations, which resulted in a stable domestic RPK year-over-year. The scheduled RPK in the domestic market grew proportional to the market.

On slide 18. Despite the depressed demand scenario, domestic yields have continued to recover or most returning to the fourth quarter '06 levels.

On slide 19. In addition to competitive pricing, part of our strategy is to offer a quality product, maintaining a low cost structure, striving to increase efficiency, increase aircraft utilization, reduce commercial cost and improve our internal processes. We can observe that our CASK year-over-year reduced 10% and ex-fuel 7%.

The main reasons were fixed cost dilution due to airfreight utilization; decrease in commercial costs due to the increase of direct sales and the internalization of the stations; decrease of the fuel costs by increasing the international portion of our business since tax of fuel (inaudible) outside of Brazil; and depreciation of the real in 15%. We continue to pursue an increase of efficiency in our operations and believe that it will be a main driver of future profitability.

On slide 20. With the combined the effects of RASK and CASK, our margins suffered this quarter reducing this trend year-over-year. When compared to the second quarter, there was an increase of 1 percentage point in the EBIT margin reaching 3%.

On slide number 21. In BR GAAP our EBITDAR margin decreased from 27% to 15%, reaching an amount of R$313 million, a 45% reduction. Our EBIT margin decreased from 17% to 3%, reaching R$57 million. Our net income was R$49 million, a decrease in the margin from 10% to 2% in the third quarter of '07.

On slide 22. According to the North American accounting principles, the US GAAP, we have also preserved the following margins in the third quarter: Our EBITDAR margin decreased from 26% to a 15% of net revenues reaching R$306 million. Our EBIT margin decreased from 18% to 6% reaching R$113 million. Our net income decreased from R$229 million in the third quarter of 2006 to R$143 million at the same period of 2007.

On slide 23, we can understand the main reasons for the difference in net income between Brazilian and US GAAP. In US GAAP, 41 aircraft are re-stated from operating lease according to SFAS 13 requirements to financial needs. This means that these aircraft are recorded as fixed asset in reais and the related debt is recorded as liability in US dollars, therefore suffering exchange variation in recognition of interest impacting our financial results. In the third quarter, our net income was impacted mainly by the lease treatment in approximately R$129 million.

On slide 24 our earnings per share reduced in the third quarter of 2007. In BR GAAP the EPS R$0.32, in US GAAP R$0.95 or $0.52 per ADS.

Slide 25. Our cash position at the end of the quarter reached approximately R$2.5 billion and our debt increased due to the issue of bonds in April and GDP financing [turn] in May. If we adjust our debt by capitalizing the lease payments seven times and add back shareholders' equity we will arrive to an adjusted debt -- to adjusted capitalization of 92% and net debt to adjusted capitalization, 65%.

On slide 26. Additional growth has [spurred] from the increase in our international operations boosting our revenues in foreign currency from 21% in the third quarter 2006 to 34% in the third quarter of 2007. Even with a 5% appreciation of the real in the third quarter versus the second quarter of 2007, we maintained international revenues at 34% of total revenues. Considering our cost link into foreign currency represents approximately 50%, we are improving the natural hedge of the business, reducing the necessity for FX hedging with derivatives and therefore decreasing the overall spend on these transactions.

With the new international flight schedule for the next months we expect foreign currency revenues to increase to 40% to 45% of total revenues in the next year.

Slide 27. Our expansion in the international is based on the increase of our own operations to selected destinations and the signature of full code-share agreements with key partners. Since June 2007 we have already started flying to Caracas and Montevideo. In November and December we will start the long-haul routes to Frankfurt and Madrid respectively.

Regarding full code-share agreements, we are operating with Air France and TAP and we are in implementation phase with LAN to get, we hope, 66% of total capacity in South America. United Airlines replacing American, in order to provide a better network choice to our customers, as they complement our US destination with Chicago and Washington. And Lufthansa to be implemented by first quarter 2008.

On slide 28. Besides the full code-share agreements we have also interline agreement with 137 airlines, of which 63 are SPA, special pro rate agreements, which enable some passengers to connect with the world's main airlines.

Onto slide 29. Our shares have an increase in valuation of 22% since our follow-on offering in March 2006. Average daily trade of our share in Bovespa was 1.4% of the [pre-close] and the daily trade volume remained above R$47 million and $35 million at NYSE. We are part of NYSE index and our shares are covered by several analysts listed in our Investor Relation website at www.tam.com.br/ir.

On slide 30. Although there are many uncertainties in the industry at this moment, and based on what has been established so far, we continue to enforce our same guidance for 2007 originally released at the end of 2006. We forecast that the domestic market will grow between 10% to 15%; up to September it has grown almost 10%.

Our accumulated domestic market share position is 49% versus 50% from the guidance. For the load factor we believe we will have an average domestic load of 70%, exactly where we stand up to September.

The aircraft utilization has been affected by the change in regulations. We had, up to September, 12.8 and it might be the only variable in the guidance that we -- is likely missed. However, when considering our operational aircraft, our total utilization is 13.4 hours.

Finally, we continue with our constant cost reduction actions that will result in the next few CASK reductions year-over-year calculated in Brazilian GAAP of 7%. In the first nine months of 2007, we had an 8.5% decrease in the ex-fuel CASK.

In the international market, regarding the long-haul opportunities, we have already increased the third frequency to Paris in January, leaving from Rio de Janeiro and started our flight to Milan in March. Frankfurt we will start on November 30 and Madrid on December 21.

On slide 31 we are now releasing and sharing with you our guidance for 2008. First we foresee domestic market demand growing in the range of 8% to 12% in RPK.

Regarding our operations, we will maintain leadership both in the domestic and international markets. We will grow capacity in ASK by 14% in the domestic market and 40% in the international.

The load factor for the system, including both markets, will be approximately 70%. In terms of CASK, we continue with our cost reduction programs and commit to deliver another 7% CASK ex-fuel reduction year-over-year in Brazilian GAAP.

As for the international market, we will capture additional opportunities still available by inaugurating three new destinations or/and frequencies in 2008.

On slide 32. Regarding our narrow-body fleet used in the domestic market, given to the growth in demand and searching for cost reduction, we will substitute the F100 fleet. We will finalize 2007 with six F100 aircraft with three effectively flying in our subsidiary in Paraguay (inaudible). And we will be monofleet in the domestic market as of the first quarter 2008, having only Airbus A320 family aircraft.

We have closed a deal with Boeing to support our growth in international market with the acquisition of four B777-300ER to be delivered by the middle of 2008. We also exercised the four options that will be delivered as of 2012. As a bridge solution, we have leased from Boeing Capital three MD11 then will be returned at the delivery of the B777 estimated at the middle of 2008. We intend to end 2007 with a total of 110 aircraft.

I will pass the floor back to Marco Antonio Bologna, our CEO.

Finally, we would like to thank you again for the interest in our webcast, and we are looking forward to those coming to the TAM day. On Sunday and Monday, we will be hosting our TAM day for the first time in Sao Paulo including a visit to our maintenance facilities in Sao Carlos. This is yet another demonstration of our commitment to [transform] corporate policies, bringing the (inaudible) community closer to our economy. Thank you.

Ladies and gentlemen, we will now initiate the question and answer session. (OPERATOR INSTRUCTIONS). Our first question is coming from Mike Linenberg of Merrill Lynch.

Good morning everyone. This is Lily, on behalf of Mike. My first question is regarding the demand outlook. I know you've mentioned in your prepared speech that demand is showing recovery as seen in your load factor. I was wondering what you're seeing on the yield side, and if you could, say for 2008, what you expect yield to be?

And then a related note. Do you have any flexibility in your fleet, especially on the domestic side, to better match demand should it does not recover as fast as you'd like it to?

Hi Lily.

Hello.

Hi, good morning. First of all, on the domestic market our review for yield in 2008 is to maintain flat, stable yields compared with the fourth quarter of '07. So the whole year '08 at the same level that we are reaching now on the fourth quarter '07.

On the international market, we are considering a flat yield with -- in dollar terms. In reais, probably there will be a kind of volatility because the real had been appreciating a lot against the dollar, but in dollar terms, flat situation.

For 2008, we are releasing in our guidance our new fleet plan. If you had noticed we -- what we did with this new guidance is we increased from the last release that we had. We increased two wide bodies because we are envisioning some good and important opportunities on international long haul destinations. That's why we are with this -- now we are [testing] for 40% ASK growth on international '08, '07.

On the domestic market what we did is -- because of the dynamics of the market now in Brazil, the new competition environment, what we did is we add more, three metal bodies in '08. Remember that some months ago we reduced five across the board, but as we are reading our market, we add back three and so this is a net effect of two across the board. What -- and we did so because we are clear optimist that with the demand side, on 8% to 12%, probably this will be more 9% to 10%, we will be on a requisition to capture opportunities also on the domestic market.

We have -- we still have flexibility. As you see, we have a kind of flexibility in certain aircraft, because we have agreements with [Lasore], we have -- that we can -- we have some certain LOIs -- a number of LOIs still in place. Another flexibility that we have is, as we have a great relationship -- long-term relationship with Airbus, we have the ability to anticipate or postpone certain deliveries with a prior notice of X certain months. And just to -- for the record, we -- this year, in Airbus, we are the company that -- we received the more -- the major number of aircraft in the world, so we are beating all the other airlines in the world in terms of deliveries with Airbus. That's why we have this level of flexibility with them.

Great. And then, if I may, one more question on the cost side. Did you provide an amount, a dollar amount of savings from changing around the commission structure with your agents?

And also looking to 2008, another 7% decline in ex-fuel unit cost, it's very impressive. I was just wondering if you could give a little bit more detail on exactly which areas you're going to target at, to achieve that? Thank you.

Okay Lily, regarding the zero commission, this came with the travel agents. We start implementing this on January 1, first on the domestic market and then deploying -- moving forward the international market probably maximum at the middle of the year.

On the beginning, the effect will be just on -- as of today we are recording the full ticket as revenue and part of this ticket we have commissioned inside and then we record also in -- on the cost -- on the sales cost. What we -- the EBIT -- with this change the price for the client, the customer, will be the same. In practical terms in our P&L, because we reduce revenue and reduce commercial costs, EBIT costs are the same. In fact there will be a positive effect on EBIT because we will save VAT tax on sales with this proportion of commissions that we use to include on the ticket. So there is a 3% to 4% reduction in VAT tax out of the commission that we use to charge on the domestic ticket.

On the first quarter in 2008, we will be more prepared to be give you a dollar figure especially for this saving. Because this saving will be a combination of cost efficiency on back office because as will not charge any more the commission, we will save costs in our administrative costs and other things. We have this VAT tax collection economy, we will reduce. And the other factor that we believe that it will be very important is this new zero commission is keen that there will be a service fee that we will be charged from the travel agents on the indirect sales.

In our case we will charge for this fee the same fee agreed with them on the cost center and on our airport ticket office. But there will be no fee charged on the website, the B2C channel. That's why we believe there will be another wave, another round of direct sales meaning B2C we are forecasting an important increase of B2C sales for the next year. But it's soon for us to give you a figure.

To summarize, the 7% ex-fuel reduction, once again, this will be a combination of the strong commitment from the high level objectives of the company to continue to deliver a better product with less cost, but we will save costs, mainly on the middle and the back office instead of impacting the service quality for our clients.

This will be a combination of new fleet, more new fleet on the domestic market, just Airbus family flying more block hours per day. With this efficiency, we will save costs on fuel burning, with maintenance and we are implementing several operational new guidelines for our crew to be more efficient and to operate with more efficiency the fleet.

Other important areas, with this on the sale -- on the commission costs we will collect this year the full benefit of internalization of our stations. Remember that last -- this year 2007, we start collecting the benefit just in May. Always will be the full effect of this cost saving structure and the boost on the direct sales provided by the internalization and the zero commission scheme.

Other things that we're having, we are once again implementing other several measures to reduce overhead costs. We will continue to analyze if we have the productivity, effect, redesigning, resetting standard process. And other important things, so important as cost reduction. We will put an extra effort on unlocking value on other ancillary revenues. We are considering important areas of the company as potential business units like MRO, so maintenance, repair and overhaul. Other areas we will put a great effort to extract value will be the frequent flyer program. Other areas, like cargo, cargo we will increase 2008 on 2007 a minimum of 50% and we have our other areas like handling, like our two operators (inaudible).

So we are very optimistic and confident in both sides on cost reduction and also extracting more value from other areas of the company.

Great, thank you very much for the thorough answer.

Thank you.

Thank you. Our next question comes from Nick Sebrell of Morgan Stanley.

Hi guys. First a clarification on the guidance discussion you had. Were you saying flatter shields for next year, domestically?

Yes, how are you? Yes there you are right, flattish compared with the fourth quarter '07. Full year '08, flattish with fourth quarter '07.

Okay, right, that's quite clear. The next thing I wanted to talk about was a little bit -- you said you changed the fleet plan. From I'm looking at, you reduced '08 by a couple of planes on the narrow bodies and you deferred them to '09 and then you have two more. Is that correct?

Nick, what we did, we two or three months ago in fact we reduced, remember we reduced it across the board five narrow bodies beyond 2008. What we did now is we are returning back with three -- three aircraft from 2008 across the board, we are adding back three aircraft. And on -- then on the wide bodies, we are increasing by two new wide bodies. This is the change that we made.

Alright so -- but for 2009, you're adding another plane or is -- maybe I'm looking at the changes wrong.

Yes, we are adding.

Okay, alright. Next question is if you could comment on the impact, if you see any, from the BRA news that we heard?

And then my last question has to do with cargo revenue. Should we expect that to track international revenue or international ASK? Or how might we think about that as it grows in 2008?

Okay, first on BRA, this as I said is happening in the market because we prefer to compete with several players. We believe that competition is the best scenario for -- because this will create problems with employees and other things. But the market is prepared to supply this demand. If you look at the number of seats offered by BRA, it's quite less than what the other system is adding in 2007, so this will be easily supported by the other competitors in the market. We are endorsing their tickets, we are receiving their tickets upon availability on our aircraft and this will be a future receivable of (inaudible).

On the cargo revenues, we are targeting for 40%. First on ASKs, our forecasting in international growth for the next year will be 40% in ASKs. But for cargo, we believe there will be a 50% increase in revenues. So we will be more efficient than the ASKs.

Great, thank you.

Thank you. Our next question comes from Ray Neidl from Caylon Securities.

Yes, it looks like from the news items that we're seeing coming across, and I know you're going to talk a bit more about it Monday, but roughly it looks like the situation in Brazil for the air traffic infrastructure is pretty much returning to normal. Would you say that's a good estimate or is there still a lot more work do to?

Hi Ray. In fact Ray, this is, to be honest and frank with you, things are calm but not sorted, so we still have problems with -- in terms of air traffic control. You are right that it is more calm, more stable, but we are still facing many delays because of weather conditions, combined with aircraft delays in certain airports, airport service delays. So we are still facing problems related to infrastructure in Brazil. What it is, they add many new air traffic controllers but they didn't solve the key points for them, which is to increase their wages, their compensation impact. So this is calm but not sorted.

The other question please?

Yes. The second question is, with the fuel prices going through the roof over the past couple of weeks, what is your situation there as far as fuel surcharge goes, passing on fuel cost increases? I know you're going to have a more efficient fleet in cutting back fuel wastage, but as far as the revenue side going forward, what do you think the probability is of being able to pass along some of these fuel cost increases, especially if they keep going up?

Okay. We are surcharging for fuel in all international flights, including South America. The fuel in Brazil, despite of this spike that we have for the last week, we had a partially -- this was partially offset because of the real appreciation. The majority, more than 85%, probably 95% of our fuel we sell in reais in Brazil. Because of this, the accumulated effect of jet fuel, accumulated so far in November, is just 3.6% accumulated in the year. But we are envisaging that for December, there will be another increase, probably in more 8 percentage points, reaching the total year with an accumulated effect of 11% to 12%.

Okay.

What we are doing to mitigate this? We are implementing several operational measures to reduce fuel burning, to operate more efficient. As we are growing internationally, we have a mix of fuel, international fuel, without certain tax burdens because we don't pay VAT tax on the international flights and we pay on the domestic.

Other things that is important we have our fuel hedging strategy. We have today, as of today, 37% of our 12 months consumption hedged with a strike -- average strike price of 6 to 7 per barrel -- $6 to $7 per barrel. So we are in place with a combination of fuel, operational schemes, and other -- and hedging positions.

Okay. Great. And then just finally, if you want to comment quickly on your growing relationship with LAN. What is the ultimate -- where do you see that agreement ultimately going?

Yes. This is in place with LAN. The effect on this is the combined network for both companies, TAM and LAN, represents 66% of total ASKs, total capacity in South America. This will enable, and is enabling now, but it will be better in the future, to better optimize connections, connectivities for the companies, saving aircraft for other routes and improving load factor on both companies. So this -- and for the passenger we will provide more connection with one single check-in, for luggage exchange, to exchange mileage, so it's very win-win.

Great. Thank you very much.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS). Our next question comes from Jamie Baker of JP Morgan.

Yes. Good morning everybody. I apologize for jumping off the call earlier. Did you identify the components of the R$106 million other income in the third quarter?

Hi. How are you?

I'm doing well. Thank you.

Fine. The majority of this representing almost R$78 million or R$80 million, seventy something, is the frequent flier program that we are selling -- we sell points to financial institutions and retail institutions. We have other revenues related to extra weight luggage of other charge in airports and other -- we have certain underlying revenues; we have revenues from the MRO, so we are charging for maintenance for third parties, especially these.

But I'm sorry, and that shows up below the line? I was referring to the financial income. I thought those numbers that you just identified were in sort of the above the line other revenue category?

This is the -- the items I mentioned was in revenues. They're in revenues.

Okay. Yes. I was referring -- apologies if I was unclear. I was referring to the other income, so below your operating line, that was R$105.9 million in the quarter?

This is in US GAAP [I mentioned]?

Yes. I believe so.

Okay. In US GAAP, this is the effect of when you compare US GAAP with Brazilian GAAP the effect -- the difference between both is in US GAAP, according to the past [13], despite of all the lease that we have, our operational lease, we have to restate 41 aircraft as capital lease. When we restate them as capital lease we have to accrue the aircraft as an asset, and the liabilities are for the lease on the liabilities side. With this, this lease we have to adjust monthly by monetary exchange variation and interest. This monetary exchange variation, due to the real appreciation in Brazil that happened this quarter, we had this positive effect as this income that you are mention. On this quarter, the effect directly on US GAAP was R$129 million.

Okay. Alright. That's very helpful. And a second question, if I may. You -- and I guess this is a follow-up to Lily's question earlier. Is there any potential in the fourth quarter for RASK to rise year-on-year? And as we look out to 2008, it seems there's a good chance for domestic RASK to rise year-on-year but given the international growth that you and your primary competitor plan, it would seem to imply RASK declines internationally. Would you agree with this? Care to comment?

The first comment on the international RASK, we believe, in our case, what -- we are adding new flights, we are -- and we are -- this will be a near to mature flight that we started this year. So we started this year, the (inaudible) frequency of Paris, Milan. And we will start long-haul destination, Madrid and Frankfurt. Both are on the fourth quarter; 2008 we have a full effect of that.

In terms of RASK, we are -- the components of RASK, they're huge. We are considering flattish in dollar terms and in terms of load factor, we are considering at least 70% to 72% load factor on international, which means that in dollar, RASK will be flattish equivalent. We are not considering impact according to the competition environment in Brazil because the international companies are capped -- they are on the limit or on the bilateral agreements. From the Brazilian side, the total traffic from and to Brazil now is -- comprises 35% for Brazilian flight carriers and 65% international fight carriers. So we have room to reach the nature balance of 50-50, and we have, because of the real appreciation in Brazil, this is very cheap for Brazilians to fly. So demand is hot on the international flight. We are not envisaging impact on RASK on that side.

Okay. Thank you very much.

Okay.

Thank you. Our next question is coming from Frank Boroch of Bear Sterns.

Hello, Libano and Marco Antonio. Could you give us an update on the October traffic data, what you saw for on domestic yields, and what you are seeing for November December at this point? Hello.

Hi, Frank. How are you? Hello?

Fine. Thank you.

It's Libano. So what we see, as you see on our quarter release, the yields are recovering on the year. When we compare the third quarter compared on the domestic market compared with the second quarter, we have an increase of 9.4% compared with the second quarter. October was flattish compared with this. The same level. We didn't have any appreciation on yields in October compared with the third quarter.

In terms of -- for the next -- for the end of the year, we are -- what we are envisaging for November and December is the -- to maintain the same level of this, maintain the same level of what we are seeing now. So it will be flat with a little bit of increase probably but we don't have the clear vision of December. The best estimate now is to maintain flat where we are now but with better load factor. So it means that probably roughly we will be better.

Okay. And could you mention what you are paying for jet fuel today? And does your CASK assumption for 2008, does that assume constant foreign exchange or what's the assumption bedded in the 7% CASK ex-fuel improvement next year for foreign exchange?

Okay. For the next year, what we are considering is there's the consensus for market with FX which is still a little bit higher than what we a spot now, it's 1.85. The FX rate for the next year as an average, 180 to 190. Probably the middle, 185. So, as this is ex-fuel 7% but we can share with you that we are considering fuel probably at $85 per barrel as an average for the year, for the next year, for 2008.

Okay. And in terms of jet fuel in the fourth quarter, is that looking closer to R$1.60 per liter or where are you seeing that?

Jet fuel is accumulated growth increase up to November, now it's 3.6% just in the year. But in December there will be an appreciation, an adjustment probably we will reach accumulated on the year 12% -- 11% to 12% the whole year.

Okay. And last question is can you give us an update, I know there was some discussion about lowering the South American tariff floors allowing airlines to increase the discounts on the tariff floors. Has there been any changes on that?

Are you mentioning the tariff band between the both sides?

Yes.

Yes. A protection. So, no. What -- there is a discussion to defer this. This is not defined yet, but probably there will be a deferred period of time to reduce this in two or three years. So -- but it's not defined yet. We are -- this is still in place this band from the Brazilian side, from Brazil to other countries in South America. We still have a minimum tariff to be charged.

Great. Thank you.

Thank you. Our final question comes from Steve Trent of Citigroup.

Good morning gentlemen. Most of my questions have been answered at this point. Just one other quick thing for me. With respect to the issue of air traffic controllers' salaries with the large bulk of these guys still being military. Any comment or any color on the Defense Ministry's proposal for a 35% increase in military salaries? Do you have any angle as to the potential ramifications for the controllers that are indeed still under military jurisdiction? Thank you.

Hi, Stephen. In fact, we don't have any comment on this side because this is a thing that is more due to governmental [appraisal]. We will prefer to wait for the final arrangements from the government. Okay?

Fair enough. Thanks very much, guys.

Thank you.

Thank you. There appear to be no further questions at this time. Mr. Bologna, any closing remarks?

Thank you very much everybody. Have a good day. Thank you.

Thank you. This concludes today's conference call. You may now disconnect, and have a great day.