LATAM Airlines Group SA (LTM) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for waiting. At this time we would like to welcome everyone to TAM's second quarter 2008 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 Investor Relations website, www.tam.com/ir, and that the presentation is available to download at the Presentations and Conference Call section.

(OPERATOR INSTRUCTIONS) Before proceeding let me mention that forward-looking statements are based on the beliefs and assumptions of TAM's management and on information current 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 results to differ materially from those expressed in such forward-looking statements.

Now I'll turn the conference over to Mr. David Barioni Neto, DEO. Mr. Barioni, you may begin your conference.

Good morning. We would like to thank you all for your presence. Let's begin the presentation of the second quarter 2008 results. Let's turn to slide number three.

The domestic aviation market in Brazil has great growth potential, presenting double-digit growth in the past several years. In 2008, we have seen another growth spurt of 10% accumulated from January to July.

On slide number four, the international market among Brazilian carriers that fly international routes decreased 5% in 2007 but has been recovering after the second half of the year. In 2008, the average growth is 38%, mainly due to TAM's international network's strong [will], the strength in the international market in 2006 and 2007 from the Brazilian side and balanced ratio compared to the international carriers that used to transport 58% of the passengers and now transport 70%. This new reality creates additional opportunity for Brazilian carriers in this market.

On slide number six, we can observe the sales of the bilateral agreement with the countries to which we operate regular flights. In all cases, there is growth opportunity for TAM. The United States is the most evident case in which from 126 weekly frequencies for each flight, 105 are operated by foreign carriers. And we, the only Brazilian companies flying on [whole], are operating 35 weekly frequencies. Remember that as of September 19, this number will increase to 42 because we will launch the new [basic] frequency between Rio de Janeiro and Miami.

On slide number seven, we are both domestic and international market leaders. According to ANAC's figures released this week, our average market share for July is 51% in the domestic and 72.5% in the international.

The highlights of the second quarter of 2008 were the increase of three A320 and the re-delivery of four Fokker 100s, following our phase-out plan of the 100 fleet aircraft, standardization of our fleet at TAM Airlines, former [no] of TAM Mercosur, which now operates solely aircraft [above] A320.

Regarding operational efficiency, our daily block hours per aircraft reached 12.7 hours in the second quarter of 2008. Considering only the operating fleet, excluding spares and aircraft maintenance, we posted a daily utilization of 13.6 hours per aircraft. Our total average load factor for the quarter was 70%.

In the seven first months of the year, we had the highest domestic [owned-wallet] index in the market, achieving 85% while the market average was 81%. We signed memorandums of understanding with Air Canada and Swiss Air to implement codeshare agreements with both companies.

On slide number nine, we renewed our SOX international certification. We continue strengthening our international network with the authorization to fly to Lima and Peru and several new flights to Buenos Aires from different Brazilian capitals, including Brasilia, our capital.

Regarding the price we were awarded in specialized magazine, Airfinance, should award TAM with the Latin America best 2007 deal for our bond issues at 7.375% in the total amount of $300 million. We have also won one of the best in Brazil for corporate governance by IR Global Ranking 2008. Service Excellence Award from Consumidor Moderno Magazine, 2008 Top of Mind among airlines in Rio Grande do Sul and Valor 1,000 as the best company in the transportation and logistics sector.

We continue with our share buy-back program. In the second quarter, we bought another 75,000 shares, summing up 228,700 shares.

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

Good morning to all. On slide number 10, addressing now all second quarter 2008 results. We recorded a 27% increase in total gross revenues. In the domestic market we presented a 31% growth composed by an 8% increase our domestic demand combined into a huge increase that I will comment on the next slide.

In the international market revenues also increased 13% due to the raise in demand of 29%, made possible by the fleet increase, partially offset by the 17% appreciation of the Real against the dollar and the beginning of several new routes which are usually launched with promotional fares.

We also had a 31% increase in cargo revenues due to higher availability of aircraft, [cargo-based of sales], especially in international operations. To complement our revenues, we have a 45% increase in other gross revenue, mainly due to the increase of Loyalty Program revenues and accounting for expired tickets.

On slide 11, our total RASK increased 9.5% year-over-year. Our scheduled domestic yield increased 22% combined to the load factor decreased, resulting in roughly 16% scheduled domestic RASK increase compared to the second quarter of 2007. Our scheduled international yield presented a 6% increase in dollars. The load factor increased roughly 4 percentage points, which combined with the depreciation of the Real versus the dollar in 17% resulted in a 7% scheduled international RASK decrease in Reals.

As we commented on the previous slide, the main reason for this decrease in yields was the inauguration of the new international flights, Caracas, Montevideo, Frankfurt and Madrid, which are still maturing. These new frequencies increased our international average (inaudible), impacting even more the RASK compared to the previous year.

On slide 12 we can observe that our total CASK increased 8% and CASK excluding fuel decreased 3.4%. The main reasons for the CASK increase was the fuel increase. The average cost of fuel per liter in the second quarter increased 34% compared to the second quarter '07. We continue to pursue an increase of efficiency in our operations and believe that it will be a main driver for future profitability.

On slide 13, with combined effects of RASK and CASK our margins increased this quarter. When compared to the second quarter '07, there was an increase of one percentage point in the EBIT margin, reaching 2.7% in the second quarter of 2008.

On slide 14, according to the Brazilian Accounting principals, BR GAAP, our EBITDAR margin reached 12%, representing an amount of BRL301 million, a 19% increase. Our EBIT increased 103% to BRL67 million. Our net income was BRL50 million, a margin of 2% in the second quarter of 2008.

On slide 15, now according to the North American Account Principals, U.S. GAAP, we have observed the following figures in the quarter. Our EBITDAR margin was 11%, representing BRL277 million. The EBIT reached BRL92 million, representing a margin of 4%. Our net income was BRL214 million, representing 9% margin.

On slide 16, our earnings per share increased in the second quarter of 2008. In Brazilian GAAP EPS reached BRL0.33 and in U.S. GAAP BRL1.42, or $0.89 per ADS.

On slide 17 we can understand the main reason for the difference in net income between Brazilian and U.S. GAAP. In U.S. GAAP, 46 aircraft were restated from operating lease, according SFAS 13 requirements [to financial lease]. This means that these aircraft are recorded as fixed assets in Reals and related debt is recorded as liabilities in U.S. dollars, therefore suffering exchange variation and recognition of interest impact in our financial results. In third quarter our net income was impacted mainly by the lease treatment of approximately BRL261 million.

On slide 18, our cash position at the end of the quarter reached BRL2 million and our total debt decreased due to the liquidation short-term loans. When we adjust our total debt by capitalizing seven times the annual lease payment and subtracting the cash and equivalents, dividing the results by capitalization adjusted by adding seven time the annual lease payments, we will arrive to a ratio of 70%.

On slide 19, even with the growth in our international operations, our foreign currency went from 34% in the second quarter of 2007 to 31% in the second quarter of 2008, due to the appreciation of the Real against the dollar 17%, and domestic yields increased 22%. Considering that our costs linked foreign currency represent 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 international flights launched at the end of 2007 and the new ones that will be launched at the end of 2008, we expect foreign currency revenues to increase between 40 to 50% of total revenues until the end of that year.

On slide number 20, since our IPO in June 2005 our stocks reached roughly 68% depreciation at Bovesta by the end of June. In the second quarter the average daily trade of our shares in Bovesta and New York Stock Exchange was around 1.7% of the total fleet load, with a daily trade volume remaining about BRL22 million in Bovesta and $16 million in NYSE. We are part of [eight index] and our shares are covered by several analysts listed in our Investor Relations website.

On slide 21, we foresee domestic market demand growing in the range of 8% to 12% in RPKs. The accumulated for the year already grew 10%. Regarding our operations, we held 49% domestic market share and roughly 71% international, keeping leadership in both markets. We grew capacity in ASK by 14% in the domestic market and 33% in the international. Our total load factor including both markets is roughly 72%.

In terms of CASK, we reduced 4.5% CASK excluding fuel year-over-year in Brasilia. As far as international markets, we have already announced the new direct flight to Miami via Rio de Janeiro as of September 19. We also received the authorization to operate flights to Lima and Peru. Soon we will announce the third frequency or destination to be launched this year.

Moving to 22, we are [most of] fleet in the domestic market, having only Airbus A320 family aircraft, and are looking for CASK reduction. We are starting the substitution of the [MB11] by the new Boeing 777 ER. To [take] international growth opportunities, we are adding two Boeing 767-300s into our fleet in the upcoming months. We intend to end up 2008 with young fleet having an average age of five years composed by 123 aircraft.

I will pass the floor back to David Barioni, our CEO.

Okay on slide number 23, our strategy is based on providing a superior quality product, meaning more attractive value price relation to our customers. To do so we are also working and focusing on excellence, excellence in service, working with the commitment to serve and offering always a differentiated product to our passengers. And we understand that the [combination in prices] such as excellence in service and Top of Mind previously mentioned.

Excellent in Technical-Operational, focusing at all times on safety, maintaining quality operations, with owned-wallet irregularity, achieving for example the best of quality [accumulated] in the year. Excellence in management, hire and training the best people which support from a specialized company. In the next weeks we will be conducting some focus groups with TAM's executives to evaluate the motivation as well as the understanding and [dissemination] of the branding concepts.

The role of the executives is fundamental in this process as it will guarantee that TAM's branded assets is recognized, understood and practices throughout the organization, constantly improving our service, highly performance and efficiency culture, controlled costs. Management has key performance indications (inaudible) and aligned to the priorities of the year. They are aggressive targets that are motivating TAM's high performance culture (inaudible) in the management key performance indicators, the topic of succession plan.

In the next [two days] we will be signing a partnership with (inaudible), an important education institute in Brazil for a management develop program. It will be a [true] program aiming to prepare TAM's senior executives with the managing practice, strategic alignment and internationalization. It is (inaudible) combination, I will participate as of this month as a group of CEOs that will have the opportunity to exchange information and experiences, and to build a forum for discussion for the topic of strategic anticipation.

Other important partnerships signed by TAM to help management perform a development and its active [MBA] development with [SIPE] that has been in place for a few years now. A project with the consultant company [Presimento] that has trained TAM's managers with leadership principals, feedback, communication and planning. [Showing to me] these three points reflect a strategy that we believe will give us higher competitive advantage and we will also sustain our leadership in both domestic and international markets with profitability. Thank you.

Ladies and gentlemen, we will now initiate the question-and-answer section. (OPERATOR INSTRUCTIONS) Your first question is coming from Duane Pfennigwerth of Raymond James. Please go ahead.

Hi, good morning, it's Duane and Jim, just a couple questions here. In terms of your CASK ex-fuel reduction for the rest of the year, do you expect the reduction to increase for 2Q levels or be about the same level from here?

Hi Duane, Libano. We are very confident to deliver our guidance which is 7% reduction year-over-year in Brazilian GAAP. And to achieve that what we have on the second semester now in the next two quarters, we will have full [access] of monofleet in Brazil's South America Jet Airbus. We will not have F100 anymore. Replacement of the three MB11 by four brand new 777 (inaudible).

Full year of the new commission [scheme] in the domestic market, we are not paying commissions any more since January 11, so this is an important effect. Full year of effectiveness of our operational measures to better maneuver and deploy the fleet and the operations on [land] (inaudible) and on flights, and several other things that we are doing on SG&A, full effectiveness of the in-sourcing of the [stations] that we had last year. So we are very confident to achieve the level of 7% full year.

Thanks for that detail, Libano. And just on the one that mentioned on the commission change with the travel agencies, I wonder if you could quantify for us the impact on CASK ex-fuel this quarter, as well as any color on the domestic yield. Because I assume some of that actually flowed through your revenue line last year and did not this year, so actually the domestic yield increase might be larger than what we're seeing. Thanks.

Okay you are right, Duane, because last year the commissions used to be part of the revenue. So this year the revenue is net of this because the travel agents are charging directly the clients. Without making a kind of like-for-like, if we didn't change this, probably this increase that we post on 22% of the domestic yield probably should be 25 or higher than that.

In fact, we increased more than enough to offset this net scheme and then to offset partially the fuel impact. I'll take the benefit for your question and [just to slide] that we are still testing the ceiling for the elasticity price to demand in Brazil, because the industry changed a lot since the last 16 years.

We don't have a historical track record to determine what is the proper price demand to elasticity. But this year we are doing this and we are trying to increase the price, we are maintaining price. In fact, July of the [domestic] international yields are higher than the second quarter average and we are maintaining a modest, the same level as July.

And the good news regarding this is the initial days of August, as of yesterday, we are with load factor in the domestic market with close to 70 and international higher than 80, which means that our forecast for the load factor on the domestic market for August will be in the range of 68 to 70 and on international higher than 80, closer to 81%, 82%. It's very good because August normally is a weak month, especially this year because we have [on these comps] last year. Market should grow higher than 20% August year-over-year.

Thanks, Libano. I think Jim may have a question.

Good morning, David and Libano, just a couple questions here. One, Libano, will you update us on TAM's plans for spinning off/selling or doing something with the Loyalty Program to enhance shareholder value?

Hi, Jim.

Hi.

We are remember, [effects] are following this closely because, together with this, last year on our [Sunday] and with the name of [daily] was [unlucky value], one of our priorities for this year was exactly to unlock value in other areas of the company, apart before. And we are starting [including all reports] with many, many fronts. We are starting to spin off the [MRO] and the Loyalty Program.

We are in a phase that probably up to the end of the year we will be able to announce news regarding this. But all we can at this stage announce is that both are working as [different units] with (inaudible) separate P&L, cost allocation, KPIs. And we are very confident that we will be able to deliver good results in terms of value creation in both MRO and Loyalty Program.

Moreover, we have another theme and remember that we [only core] to create more value. We will announce, just a reminder, up to the end of the year we will be able to announce another important step in our growth and sustainability, which answering on the global alliance. So after the end of the year we will be able to announce that. Another thing that is very important is that we are very confident that will bring to us important results.

Okay. Just one more question, there is a new entrant starting up in Brazil, Azul, that will begin operations in early '09. What is the availability of slots for a new carrier like Azul at [Congoinas] and Santos, [Demolp] and other capacity constrained airports within Brazil?

Hello Jim, David, good morning.

Good morning.

Jim, the availability of slots in Congoinas Airport, the Congoinas Airport is complete over, there is no available slot. About the Santos (inaudible) airport, the Brazilian Aviation Authorities are studying the possibility to open those airports to flights between them and other nearby airports, which today is forbidden, just aircrafts with 50 seats are able to fly from [Santo Joban] to nearby airports. And so we present the request for new routes parting from Central [Jamar and Bambulia].

And regarding Azul, we don't know yet where airports are then intending to fly. We've heard a lot of places, but so far we do not official requesting for them about one or another airport.

Okay thanks.

Thank you, Jim, see you.

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

Good afternoon, guys, let's talk about 2009 and potential growth plans for 2009. Do you have any estimates of what your plan would be for 2009? Specifically on domestic and on the international side we've seen GOL announce a new fleet plan that reduces our expectations for their increase in 2009. Could it be that you might maybe pull back or moderate the amount of increase that you see in 2009 for capacity domestically and maybe shift over to international? Or do you seem to be having better experience?

And then the follow on that is, since Azul is now talking about starting up in November, do you see an impact from that? And is there enough room for them, considering that they're going to be expanding -- we expect them, anyway, to expand dramatically in '09, do you think there's enough room for them in addition to GOL and TAM in the domestic market?

Hi Nick, this is Libano.

Hi.

So far we are maintaining our fleet plans for 2009. We didn't release yet our view for 2009 in terms of RPK, in terms of ASK and the market [as a whole]. But what we believe is, as we are foreseeing the market, we are now facing the rational marketing in Brazil, rational marketing where all the companies are looking to provide good service for the client at a fair price.

It means that all the companies are managing the challenges, especially with fuel, and are transferring this part of this impact to the fares and acting in a rational way (inaudible) what we faced in second quarter last year in where we have a warfare, what we are not foreseeing anymore in the market, which is good. It's important because it's different and challenging moment at times for the industry.

We are happy that in Brazil we have a combination of the strong demand. We have been able to grow more than the market. As you see, we are maintaining load factors higher than the 70% system wide, and we are confident to maintain that because of the figures in August which is the weakest month of the year.

And we have this long-term study on our website for 20 years. We believe our industry should grow 2.5 to three times EBITDA. Probably the industry should grow next year close to 10%. And we believe all the industry will deploy fleets in a [way to] maintain the level of load factor that we are facing, which means that we are truly confident on ASK growing pari passu RPKs, which is good and reflects exactly this rational momentum that we are facing in the industry.

But we don't have exact figures to release yet, probably this will be in the third quarter or closer to the fourth quarter we'll be able to release that. But as a statement, we are very confident with rational for the market beyond this year.

In terms of the new competitor, you know that we believe competition is very good. Our founder used to say that the competitors made us to awake earlier and it's important. We are always looking to our competitors, we never under estimate anyone. [Incidentally], regarding Azul, the new entrant, we don't know yet their schedule, it's not published yet.

We are waiting for that to understand what routes they will prefer, the number of frequencies and other things to see if this will be a complementary (inaudible) for our trunk network or if this will represent any overlap flights. It's too soon to analyze that, but we are prepared for any kind of competition. And we believe the market has room for everybody with a good level of service.

Okay. So it's fair to say then that, in your view, the two main carriers are acting rationally, that they'll control capacity as per demand warrants and you don't seem to be very worried about Azul. That's fair to say?

Yes. It's fair to say that we are confident with rationality in terms of demand and capacity, yes, maintaining [founding] good level factor. And we are looking carefully to the competition, which I believe is a fair assessment.

Great, thank you.

Thank you. Your next question is coming from Michael Linenberg of Merrill Lynch. Please go ahead.

Yes just two questions, Libano. I wanted to go over a point that you made earlier where your international revenue was 31% of total revenue and I want to make sure I heard you correctly. You said that by either the second half of '08 or maybe the fourth quarter that it would be somewhere between 40% and 50% because of the new international routes that you've started. Is that right?

Hi, Mike. Exactly. In fact, we have been increasing a lot of -- this calculation we made dividing the final figure in Reals. So because of the appreciation of the Real and because of the increase on domestic yields, the proportion for foreign revenues reduced the balance compared to the Real-denominated revenues. But you are right that because of more new international routes and more increase on yields in dollars, we are confident that probably this balance will be more 40% to 50% on U.S.-denominated revenues.

Okay good. And then just my second question, Libano or even David, about slots at Congois, I think, David, earlier you had indicated that Congois for the most part the slots weren't available. At this point what are the number of operations per hour in Congois? And is there still the possibility that with punctuality rates back up and air traffic flowing more smoothly, that the government could add some additional slots per hour, whether it goes to you or new carriers, your thoughts on that?

Hello Mike, David, good morning. The Congois Airport is over in terms of slots. There are no slots available for regular aviation, just for the [Copine] Jet. Congois (inaudible) was returned the day before yesterday and (inaudible) research showed that TAM's owned wallet is the same as the United Kingdom. And so our reach a [first-world] owned wallet back in Brazil. But things are going well, of course the air traffic needs to improve a little bit more, but the [whole] quality and the efficiency return on the Sao Paolo terminal in the total aircraft in Brazil.

Okay thank you very much.

Thank you, Michael.

Thank you. (OPERATOR INSTRUCTIONS) Your next question is coming from Steve Trent of Citigroup. Please go ahead.

Good morning, gentlemen, I just have one or two quick questions. And forgive me, I missed part of the call, you were saying something that's going to be announced later this year, I believe it was in relation to a global alliance. I'm not sure if that's correct, but if you could just update me.

Hello Steve, David, (spoken in foreign language)

(spoken in foreign language).

Thank you very much, [regard]. Yes Steve, we're going to announce within a couple of months the sign up with a global alliance, something around September or October.

Okay super, September or October. Great. I'm sorry, I missed that part of the call. Just one other quick question, your former employer and cross-town rival is making a lot of noise about current competition, forget about [Nilman], and here you guys are putting up very good numbers and strong load factors. Do you think to some degree this is simply a difference in terms of the product you're offering versus other existing products in the market and that you guys are maybe ahead of the curve in terms of your yield management? Just curious.

Well you know that probably can be defined from a lot of things. First, quality is very important. We have a Loyalty Program, we have the highest on quality and regularity in Brazil, we have the youngest fleet in Brazil, we are operating thousands of international flights. And of course all of these items weigh a lot in terms of decisions on the side of TAM. So we believe that the superior quality of TAM and of course a very prestigious yield management is supporting our good results.

Okay that's great. Thanks again, guys.

Thank you. Your next question is coming from Keith Wiseman of Calyon Securities. Please go ahead.

Hi, Libano, just a couple of questions (inaudible) been touched on a little bit so far. But in the domestic market, looking to 2009, people are still talking about capacity but I wanted to touch on pricing. Do you expect, when Azul enters the market, that they'll offer lower introductory fairs to get their market share up initially? And do you have concern about that next year?

Hi Keith. Our view is for 2009 we foresee a rational market where capacity we will increase pari passu at the same level of demand. We believe Brazil's domestic market should grow once again closer to three times GDP, which means at least 10% next year it's fair to assume, because of the penetration, because of the economy is growing in all sectors.

And we still have a strong concentration in business travelers, closer to 70% on the market. So we are very confident and the market has been able to increase fares to offset the impact of the field. We are among the few profitable airlines in the world this quarter and the market is growing.

For new entrants, I believe if you look at the combination on the domestic market, it's more a play for CASK. Because we here in Brazil do not have real point-to-point flights. The majority of the flights are a combination of hub and spoke or over hub flights, because we have geographic concentrations of [GBP]. If you look, probably 60% of GBP is concentrated southeast to the south of the country. But we have important and fast growing regions in north east, north and Middle West in Brazil.

A company using 100-seat aircraft is just a matter of math. A hundred seats has to have higher CASK compared to 174 seats. And we have lower seat costs but higher CASK. At the end to be profitable a company must have a yield unit revenues higher compared with some companies as we are, with higher [gauge] we have 174 seats.

That's why we believe rationality means that they yields, and I believe they are entering the market with a service proposal, we believe the price will be priced at market levels instead of seats at huge discount or fare wars. And we don't believe any new entrants will enter the market with some number of planes making huge discounts. This is our best view for now, but it's too early because so far they didn't announce yet their schedule. But we are looking carefully at that.

And on the international side with [Barick] pulling out from their international flying routes, what type of benefit will that be to you in terms of pricing as well?

The thing is the competition on the international, on long-haul flights, we have been competing half and half bilaterally with the North American companies, European companies and in South America with other companies. The opportunities in these markets are more related to what happened in the past, in 2004, where the international companies increased a lot their participation, reaching 70%, and in 2004 was 58%.

So we have tremendous opportunity to grow. As we presented on one slide, the figures we have opportunity to put more frequencies on the North American market and we are doing that this year. In Europe we are considering this. We are increasing the number of seats offered by aircraft, the 777 we came with 362 seats, the [pre-study] with 226. So we are increasing the number of aircraft, higher gauge and more near frequencies with price on a competitive level.

The long-haul flights are more disciplined. We don't have any silly competition on long-haul because the costs are pretty similar, because we have strong utilization in terms of (inaudible) aircraft. In fact, the number of crew still is similar. That's why the prices are more balanced on long-haul flights.

So what we are doing is taking the opportunities to put frequencies we announced Rio de Janeiro to Miami, this is official, Lima to Peru official, we'll use that. But we are confident to open more and we will [also] deliver the three frequencies or destinations from our guidance. Probably we will another two new destinations with less frequencies, long-haul this year. So we are increasing. We believe this year will be at least 40% ASK growth international year-over-year.

And a last one, can you discuss the fuel hedging program for third quarter, fourth quarter or next year?

Okay as of today we have 45% of the next 12 months hedged with an average flight price at 115. And this represents we are higher than this level for the fourth quarter. And on the third quarter we are average on 43 to 45%. And we are maintaining this quality of 12-months rolling, hedging on a daily basis. We are looking at opportunities and we are maintaining this level of price for closer to 115.

Great, thank you.

Thank you. Next is a follow-up question coming from Nick Sebrell of Morgan Stanley. Please go ahead.

Thanks for taking the follow up. I just wanted to ask two quick questions. First, any efficiency impact by the ANAC rule that stipulates minimum ground times, particularly in the major airports? That's the first question.

And then the second question is revisiting the CASK. You know it went down 3.4% year-over-year, ex-fuel, I'm kind of surprised it only went down that much. I was wondering is the reason that it didn't perform better due to maintenance, due to returning planes or was it something else?

Nick, regarding the second question for the CASK, you are right, we have 3.4% year-over-year reduction in CASK, ex-fuel, second quarter accumulated in the fourth quarter 4.5. And we are confident to deliver the 7%.

What caused this reduction of the second quarter you are right, we had many costs related to re-delivery of the F100s and these were concentrated. And we had some impact regarding F100s related to the spare parts and other inventories this second quarter. And that's why for the third and fourth quarter we are confident to enter at a level to be able to comply with the 7% ex-fuel CASK by the reasons that I mentioned, that we will be able to fly monofleet Airbus, Brazil, South America, MB11 replaced by 777, better block hours, better deployment of the fleet in terms of operational measures. And full year effectiveness of the new commission [exchange] with travel agents in domestic markets and several other measures that we have taken. But we will be able to deliver the 7% next year.

Hello Nick, David. About the first part of your question, the ground time, the ground time was returned because the air traffic controls are working well in terms of ground. Where we need to go better is in the route time where we are facing some holding during the route. And so the ground time is okay and the route time needs to improve a little bit more in order to return the numbers that we faced in the beginning of 2006 and 2005.

Okay. And what quarter do you tend to do most of your maintenance? What's the maintenance quarter during the year?

Our maintenance is spread across the 12 months. Of course we have a plan not to have maintenance in our high utilization months, which are July, November and in December and January. And so in those three months we keep the heavy maintenance in the low numbers. But in the other nine months of the year we are spreading the maintenance. That's a great advantage to have the own MRO where we can use our own slots, put them in the best days, best weeks where the aligned can spot the planes in the MRO and (inaudible).

Great, thank you.

Thank you. Your next question is coming from [Erin Carp] of Air Transport World Magazine. Please go ahead.

Yes hello. You talked some about the fare wars that you had in the market and some of the problems with air traffic control down there. What's the situation now with the air traffic control system? And why do you think that the market has become more rational?

Well part of the air traffic control, they return because of first in numbers are showing us that we are facing almost the same numbers in terms of ground time. In terms of route, we need to expedite to optimize a little bit more the operation because we are losing some time, especially between the congestion cities in Brazil like Sao Paulo, Rio, Brazil is mainly (inaudible). And so in the end air traffic control is being returned almost to the normal operation because we are 100% okay at the ground time but we need to improve in the route time. Okay?

Okay.

And just to complement that, we believe the market is more rational because of our combination of fares. You know that have challenges that we are facing with fuel and because of the nature now that we have in terms of the coverage of the country by two big companies covering all the country, representing 92% of the market.

We believe the competition is more rational because two companies are founding the (inaudible) terms. Each one has its own [throughput proposition] and both are able, with their other several regional alliances, are able now to provide better services in the country. And with the competition more rational in terms of profitability, not people just seeking market share or looking desperate by cash. That's why market is more rational now.

And what advantage is the redistribution of Varig's flights? And they're pulling out of the international market, what advantage has that given to you?

The thing is, we never count with any slots or frequencies by the former Varig or the new VRG. We have been competing and increasing our international destinations, competing head to head with the other airlines on the bilateral. So we have been competing with the North American, European companies and prepared to face this with our product. We have new aircraft with people trained with our (inaudible) of service.

So in fact, you are right that this is a strong opportunity for us because we are the unique company flying long haul from the Brazilian side. But this didn't change our view that what will support us long term is service at a fair price. And we never rest because we are a long haul on the Brazilian side. In fact, this increases our responsibility to provide better service for our clients.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) This concludes the question-and-answer section. At this time I would like to turn the floor back to Mr. Barioni for any closing remarks.

On behalf of TAM, I would like to thank you very much for your presence and we're going to meet each other in the next quarter. Thank you very much and good morning, good afternoon to everybody.

Thank you. This concludes today's presentation, you may disconnect your lines at this time and have a nice day.