LATAM Airlines Group SA (LTM) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to LATAM Airlines Group earnings release conference call. Just a reminder, this conference is being recorded.

LATAM Airlines Group earnings release for the period was distributed on Wednesday, November 15. If you have not received it, you can find it on our website at www.latamairlinesgroup.net in the Investor Relations section.

At this time, I would like to point out that statements regarding the company's business outlook and anticipated financial and operating results constitute forward-looking comments. These expectations are highly dependent on the economy, the airline industry and international markets. Therefore, they are subject to change.

Now it is my pleasure to turn the call over to Mr. Ramiro Alfonsín, Chief Financial Officer of LATAM Airlines Group. Mr. Alfonsin, please begin.

Thank you, Brian, and good morning, everyone, and welcome to LATAM Airlines Third Quarter Earnings Call.

Joining me today are Ms. Cláudia Sender, Vice President of Customers; Ms. Maria Jose Ortiz, Head of Investor Relations; Mr. Roberto Alvo, Chief Financial -- Chief Commercial Officer; and Mr. Jerome Cadier, CEO of LATAM Brazil Airlines (sic) [LATAM Airlines Brazil].

Please join me on Slide 2, where you will find the highlights of the third quarter 2017.

Our operating income increased 60% year-over-year to $244 million, while the operating margin expanded by 3.2 percentage points year-over-year to 9.2%. This result was explained by a significant improvement in the financial results of our Brazilian operations, especially on international operations, as well as by our cost-cutting initiatives, which helped to contain CASK from growing. The $92 million increase in operating income, together with the $59 million we sold from foreign exchange gains, boosted our net income to $161 million, the highest number in a quarter in the history of LATAM. The foreign exchange gains were explained mainly by the real appreciation from BRL 3.22 in the second quarter to BRL 3.16 in the third quarter.

Total revenues of the company increased by 5% in the third quarter, its fifth consecutive quarter with revenue increases, due mainly to yield improvements across all markets and the 2.5% increase in cargo revenues, its first growth in over 4 years. Notably, we are able to improve yields while increasing passenger capacity by 1.6% year-over-year.

LATAM continues to strengthen its network. This quarter, we announced 4 new long-haul destinations from São Paulo: Rome that will be starting in March 18; Lisbon and Boston, both starting by mid-'18 and subject to regulatory approval; and Tel Aviv from Santiago, which could -- which should kick off by year-end 2018, also subject to regulatory approval.

Now more than ever, we have the customer at the spotlight in -- of our attention. And we will start offering in-flight Internet access on domestic and regional routes of Brazil starting in the first quarter of 2018. This onboard WiFi service will be installed gradually on all our narrow body aircraft in this country, with the rollout expected to be completed by the first half of 2019.

We also recently upgraded our onboard dining offer for the Economy class in our international flights longer than 7 hours by replacing the traditional tray normally associated with in-flight dining with a choice of individual gourmet dishes that are 50% bigger and have less peripheral elements, showcasing Latin American, international and vegetarian cuisine.

The company continues to focus on strengthening its balance sheet. Our net debt amounted to $6.7 billion, a $450 million decrease compared to December 2016 and over $1 billion reduction compared to the same period last year.

Additionally, we have expanded the amount of our revolving credit facility by $75 million quarter-over-quarter, totaling now the RCF, a total of $450 million of undrawn committed credit facility.

Our liquidity as of September amounted to 19.6% of the last 12 months' revenues, and the leverage reached 4.9x, a significant reduction from the 5.8x that we had September 2016.

Last but not least, it is also worth noting that we were included in the World category of the Dow Jones Sustainability Index for the fourth consecutive year, representing one of the only 3 airlines groups in this category globally.

Turning to Slide 3, you will find a summary of our income statement.

Our revenue performance continued to improve in the third quarter 2017, with total operating revenues up by 5% year-over-year to over $2.6 billion. The improvement has been driven by a recovery in passenger revenues as a result of RASK improvement on all passenger business units. Passenger and cargo revenues increased 6% and 2.5%, respectively. Other revenues decreased 4% due to high comps from the selling of tour operations regarding the Olympic Games in Rio de Janeiro last year, which was partially offset by the higher revenues from Multiplus and aircraft subleases compared to the same period of last year.

Our costs amounted to $2.4 billion, increasing 1.4% year-over-year. This increase is mainly explained by the negative impact of the appreciation of local currencies and inflation rates across the region during 2016, which impacts our costs in 2017. This increase was contained by the cost initiative we have put in place during this year and the last semester of 2016.

As you know, we are in the progress of reducing the number of airplanes, increasing utilization and adapting our fleet to changes in demand environment. In addition, we have been rightsizing the company and, therefore, reducing the number of employees. Because of this, the company recognized $37 million of additional expenses associated with fleet redeliveries and severance payments made during the quarter, an amount that was similar to the nonrecurring costs incurred in the third quarter of 2016.

With all this, our operating income amounted to $244 million, which translated into an operating margin of 9.2%, 3.2 percentage points higher than the last quarter of -- the third quarter of 2016.

The nonoperating result of the year-to-date amounted to -- I'm sorry, of the third quarter amounted to $39.7 million compared to the $83 million loss from the same quarter of 2016. The year-over-year improvement was mainly due to a foreign exchange gain of $59 million during the quarter of 2017, while last year was affected by a foreign exchange loss of little over $10 million.

If we look at the figures on a year-to-date basis, our operating margin is 0.7 percentage points higher than the 5.4% from the first 9 months of 2016.

As we have mentioned before, fuel prices in the first quarter of 2016, in particular, were the lowest in over a decade, which resulted in $168 million higher fuel expenses for the 9 months of 2017 compared to the same period of 2016.

Redeliveries and severance payments for these 9 months amounted to $130 million, an increase of $42 million over the same cost of 9 months 2016.

For this same period, net income totaled $88 million compared to the $15 million of 2016 even though the foreign exchange gain from this year is significantly lower than the gain from the 9 months of 2016.

Finally, for the accumulated year by September, LATAM generated $754 million of cash flow after investments, a considerable improvement from $237 million generated in the same period of 2016. This cash flow generation was supported by higher cash flow from operations and the positive impact from the negotiations related to our fleet plan.

Now I would like to hand it over to Maria Jose Ortiz for further details on this quarter's results.

Thank you, Ramiro, and thanks, everyone, for joining us today.

If you could please turn to the next slide, on Page 4, on the webcast presentation. I'm going to start talking about the revenue environment in each of our business units during this quarter, where we continued to see high-single-digit growth on the passenger unit revenue. This is a trend that we have consolidated over the last few quarters that reflects the better pricing environment that we're seeing in the region.

If we look at our overview of our passenger operations, we are seeing an overall improvement on our revenue per ASK of 4.3%, this partly driven by the improvement that we're seeing on our load factor as well as the improvement that we continued to see on yields.

When we look at our international operations, we see that our capacity was up by 3.9%, load factors continued to be very healthy at a high level of approximately 88% and our revenue per ASK was 7.2% higher on a year-over-year basis, mainly explained by the continuous improvement we're seeing on revenue per ASK between Brazil and the U.S. and Europe as well as on interregional routes to Brazil.

Now looking at the domestic Brazil operations, which represents 26% of our total ASK. We have a 1.2% -- 1.6%, sorry, in a decline in total capacity, mainly as a result of the adjustments that we did to our network during 2016. When we look at load factors, our average for the quarter improved by 1.3 percentage points to a very healthy 84%. And furthermore, our revenue per ASK improved by 7% with respect to last year. When we look at this improvement in U.S. dollar terms, we see that part of this growth is driven by the appreciation of the local -- of the Brazilian currency, which was 3%. But even when we look at our revenue per ASK in Brazilian currencies, we had an increase of 2.3%.

Now looking at the Spanish-speaking market, which altogether represents 18% of our capacity. Here, we see that capacity was down 0.4%. And here, despite of more competition in some of our home markets, especially from low-cost operators, we had revenue per ASK increasing by 7.4% when we look at this figure in U.S. dollar terms.

Factoring out the fact that we have some slight appreciation of local currency, revenue per ASK were actually up by almost 10%, as I said, in local currencies. We believe that these results reflect that we're well prepared to compete with low-cost carriers because we have the connectivity and we have also the leader -- the leading, sorry, frequent flyer program.

On the cargo side, we continue with capacity reductions. During the quarter, capacity was down by 5%, and we're seeing load factors at 54.2%, which is almost 5 percentage points more as compared to last year.

This quarter, for a third consecutive quarter, we have seen an improvement in our unit revenues, with revenue per ASK going up by 8% as compared to last year, even though we continue to see a recovery in the Brazilian import market.

Turning to Slide #5. Here, we have an overview of our operating costs for the quarter. We see that our overall costs increased by 1.4% on a year-over-year basis. This number includes $35 million of nonrecurring costs related to severance cost payments and fleet redelivery costs. The increase in our overall cost, as Ramiro mentioned at the beginning, also includes the negative impact of inflation rates and the appreciation of local currency in most of our markets.

When we look at the different group of costs, on the wages side, we had an increase of 1.3% explained by the appreciation especially of the Brazilian real and the annual increase in our unit revenues mainly due to inflation adjustments associated to inflations of 2016.

Despite of the fact that this cost line increased, we are very happy with our efficiencies and how these have turned out in a reduction of almost 10% of our employees on a year-over-year basis, which translates in a more efficient scenario for 2017 overall.

When looking at our fleet costs, which include aircraft rentals, depreciation and maintenance expenses, we can see that, that cost line is down 0.3%, in line with our disciplined approach to fleet, which is focused on reducing the number of operating aircraft.

During this quarter, we passed from having 344 passenger aircraft to having 307 passenger aircraft operating despite of the fact that passenger capacity was up by almost 2%.

All of the other costs, which include basically passenger services costs, commission, sales [and] depreciation expenses and other, are up approximately 5%. And then when we look at total operating costs, excluding fuel, we had an increase of 2.3% on a year-over-year basis.

Now looking at fuel prices. The price of fuel was up 3% as compared to last year. And overall, our fuel bill was down 1.4% when compared to last year as gallons consumed during the quarter were down by 2%. As we mentioned before, our total cost increased by 1% on a year-over-year basis, which compares to a 6% increase on the second quarter and a 10% increase on the first quarter. So this is really a very positive trend.

Turning to Page 6. We wanted to briefly talk about our fleet plans, where we have not seen significant changes as compared to what we showed you last quarter.

We expected our overall number of aircraft at the end of this year to reach 308. And for 2018, we're currently expecting a slight increase to 312 aircraft by the year-end. This increase is mainly explained from growth on the narrow body aircraft. And in regards to the wide body fleet, we will be taking deliveries of wide body aircraft, mainly A350, and we'll be phasing out some of our 777s and 1 Boeing 767.

From the bottom of the slide, you can see our fleet commitments, which are $326 million for this year and $716 million for 2018, which continues to be historically low fleet commitments for the company. The number that you're seeing on this slide is irrespective of how they will be financed. For 2017, there is no cash out, as you already know, and we're currently planning to finance approximately 40% of 2018's fleet commitments with financial debt.

For 2019, I know we're -- we continue to work on our fleet plan in order to maintain the right amount of flexibility considering the demand environment that we're seeing in the region, and we're very pleased with the significant work that we've done to achieve this fleet plan not only because of the positive impact on our cash flow generation but also because our fleet utilization during this year is going to be up as compared to what we saw during 2016.

On Slide #7 and turning to the view of our cash flow over the last few quarters, our improved margin and our strict capacity discipline resulted in $900 million of free cash flow, meaning that the cash flow from operation after investment, which represents a significant improvement compared to last year, which is almost triple -- which almost tripled the result that we have -- that we had for full year 2016. We believe that our conservative approach to cash flow commitment allows us to forward-look the next few years, improving our funds from operation after investment and providing more cash flow to continue to improve our financial position.

If we turn to the next slide. Here, you can see our credit metrics for the third quarter. Looking at our leverage, we can see that our adjusted net debt-to-last 12 months' EBITDAR ended the quarter with -- at 4.9x, which is below the 5.2x we had at the end of the second quarter this year. This is driven by the $370 million reduction in our total net debt as well as the 4% increase in our EBITDAR with which -- which reached $2.2 billion for the last 12 months, which shows the solid progress of deleveraging the company and how we're able to adjust our net debt -- our net leverage, which we expect to continue to decrease towards the end of this year.

We also continue to have a very healthy liquidity position of $1.9 billion of cash, which represents 20% of our total revenues. This liquidity position includes $450 million of revolving credit facility, which was increased from $375 million as of the end of the second quarter and then remains completely undrawn at the close of this quarter.

On the bottom part of this slide, you can see our debt maturity profile. And as we mentioned last quarter, 2017 maturities have already been fully financed, including the $312 million that you can see here that we have in terms of debt amortization for the next 3 months, which will be covered with the cash flow generation of the company.

Now on Page #9, you can see our hedge position at the close of September, both on fuel and on FX, and we continue with our same fuel, FX -- fuel and FX hedging policies.

For the third quarter, we have hedged 38% of our estimated fuel consumption, and we had fuel hedging gains of $6 million, which is significantly better than the $21 million loss that we had last quarter. And for the third -- fourth quarter, we have approximately 33% of our total fuel consumption hedged. And for the third semester (sic) [quarter], we currently have only around 4% on average hedged. However, we will be building those positions up as we come closer to those quarters.

Regarding the BRL, and as you know, our total exposure is around $600 million a year. We have hedged approximately 2/3 of that for the next 2 quarters, and we expect -- and during this quarter, we actually recognized a $3.5 million loss related to that FX hedging as a result of the slight depreciation that we have toward the end of this quarter.

Now moving to the more strategic developments of the company. And as Ramiro mentioned at the beginning, we wanted to comment on how we have continued executing our network strategy to improve connectivity both within the region and with other parts of the world.

As you know, and following the approval of LATAM Joint Business agreement with American Airlines and IAG by Brazil's CADE, we have now announced that we will fly from São Paulo to Rome, Boston, Lisbon and Tel Aviv. With this, we continue to demonstrate our commitment to provide our passengers in Brazil and Latin America with the benefits that we expect from the JBA, including more destinations and increased connectivity. With the -- when we add these 4 new routes to our network, we will be offering 143 destinations in 26 countries, which includes the 25 new routes that we have announced since the beginning of 2016.

Turning to Slide #11. We wanted to talk about how we're going with implementation of our new model. In our domestic market, we have 8 million passengers that have already tried our buy-on-board service and more than 8 million passengers flying with our new sales model.

When we look at branded -- when we look at our branded fare structure, which is aimed to offer customers with more choices, we are actually seeing and reaching an actual 36%, which accounts for approximately $25 million of higher revenue.

We have also made meaningful progress to improve our passenger experience through implementation of self-service technology while increasing productivity, which is very important to us. And as of September, we had installed approximately 700 kiosks in over 80 airports. We also understand that the in-flight experience is very important to our passenger, and that's why we'll continue to listen to their feedback and we'll continue to invest in our offering, whether it's in digital tools or improvement in our cabin service and dining. And that's why we have announced that LATAM Brazil will be offering in-flight Internet access on domestic and regional routes from the beginning of the first quarter of 2018. This service is additional to what we already are offering in all our short-haul flights, which is wireless in-flight entertainment in all of our markets.

Furthermore, we have also created a first-of-a-kind dining concept for our Economy cabin on international flights over 7 hours, where passengers are presented with a menu of 3 options for lunch and dinner as well as 2 breakfast choices at no additional cost to our passengers. We believe that with this and with the customer-oriented culture that we have implemented in the company, we will be able to provide a service of excellence and to really differentiate ourselves from our competitors.

Turning to Page #12. We're very happy to say that LATAM was named as a Five Star Global Airline for its in-flight experience in the APEX 2018 Airlines Official Ratings. LATAM is one of the only 3 airlines in the Americas to be given this award, and it is our honor to be recognized for our commitment to continue meeting and exceeding passenger needs, both on and off our aircraft.

And as Ramiro mentioned at the beginning, for the fourth consecutive year, LATAM was named in the World category of the Dow Jones Sustainability Index, representing one of only 3 airlines in the world in this category. Today, where we believe that responsible investment and having sustainable practices is important, it's great to be considered once again a global leader in this field and reflects our commitment to incorporate sustainable thinking and practices in every aspect of our business.

Now turning to the final slide, which is I wanted to have a quick word on our guidance. As you can see here, we're adjusting our capacity guidance, just narrowing the range that we originally provided to the lower end of the range. So we're currently expecting capacity growth to be between 1% and 2% for the full year 2017.

When you look at capacity for the 9-month period between January and September, we're growing approximately 1% in terms of ASK. And therefore, we expect that our growth rate for the fourth quarter will be within the range that we provided in our guidance.

On the cargo side, we are maintaining our guidance, and we expect that capacity will be reduced between 10% and 12%.

And finally, we're maintaining our guidance for this year in terms of operating margin. Looking at the margin performance that we've had in the first 9 months of the year, we'll continue the target to be between 4% to 6% operating margin.

This concludes the prepared remarks that we have for you this quarter. And now we will be happy to take questions that you have for the management team.

(Operator Instructions) Our first question comes from the line of Savi Syth from Raymond James.

Just I was looking at your fleet and looking at the -- on at least a year-on-year basis, it looks like seats are growing about 4% next year, most on the wide body. I was wondering if you have any preliminary thoughts on what growth could look -- capacity growth could look like in 2018.

As you know, every year, we provide guidance of growth around January of each year. But I think that considering the new routes that we are launching, the ones that Maria Jose mentioned, you can expect growth -- positive figures of ASKs in international for next year. But we will provide new guidance in the beginning of 2018 for the whole year.

Okay. And then maybe if I can ask, it sounds like maybe Brazil's starting to gain a lot more traction here. I wonder if you could provide any thoughts on what you're seeing on the corporate demand side and your thoughts on kind of the demand and pricing outlook in domestic Brazil.

Yes, I'll...

Jerome, maybe you want to address that?

I will. This is Jerome Cadier from Brazil. When we talked the last quarter, we were conservative on the outlook for demand and still seeing the corporate demand fluctuate from week to week. I think that fluctuation is less so right now. We do see a positive outlook, and we're a bit more optimistic than what we discussed 3 months ago. Nevertheless, we still remain conservative as we know that there are some reforms that need to be passed, specifically in the Congress, that will help the trend to be more than just a couple of months but still to look at positive trends overall for more longer-term perspective that we still don't see today.

That's helpful. If I may ask just one last question. I'm just wondering, with the ancillary revenue being kind of a bad season in Brazil or some of the unbundling that you're doing in kind of the other domestic markets, where do we see that? And like what's the -- what has the contribution been so far? And any thoughts on what we could see there?

So, Savi, our average -- looking at all markets together, our ancillary revenue has increased on a per-passenger basis around 30%. We do not open that in our quarterly basis. You'll see it on the revenue passengers. But the new sales model we've implemented during this year has brought positive results in all markets. And all in all, on a per-passenger basis again, it's approximately 30% increase of ancillary revenues.

Yes, when we discussed -- Savi, to complement that answer from Roberto, when we discussed the new business model when we launched in November last year, we were thinking that our ancillary revenues per passenger would range from short of 3% to 5% during 2017, and we're right on track on what we anticipated.

Our next question comes from the line of Duane Pfennigwerth from Evercore.

So just expanding on Savi's question about Brazil, you cover such a diverse set of markets and economies. I wonder if you could just comment broadly, where are you seeing the strongest recovery or the biggest rate of change across the individual markets that you serve? And where are you seeing weaker trends?

It's interesting that when the downturn in the economy of Brazil came 2 or 3 years ago, we saw a very quick drop in Brazil to U.S. first, followed by Brazil to Europe. The recovery has been more or less in the same pace, so we started looking at recoveries from Brazil to the U.S. earlier in the year and then Brazil to Europe. So in that order, we've seen recoveries in the international market, also a very healthy recovery in regional flying from Brazil, particularly to most countries in South America. And just compounding with -- to what Jerome said, the domestic Brazil has been more fluctuating. And where we've seen a recovery, that it's looking better, but still we're being conservative regarding the trend.

Appreciate that. I guess the context was relative to other domestic markets and other international markets that you serve, would you say Brazil was the strongest recovery domestically? Or are you seeing other markets that are recovering more strongly? And along those lines, are there other domestic markets that you serve that are actually seeing weakness?

Okay. I'm sorry, I misunderstood the question. We are seeing good demand levels international out of Argentina, specifically. Spanish-speaking countries to Europe were weak in the first half of the year have been recovering in terms of international traveling and have remained pretty much flat in domestic. Colombia has been relatively flat during the year, although because of the industrial things in the last few months, it's been, of course, better. And Ecuador has been a steady increase in performance during 2018.

Yes, maybe a note...

(inaudible).

Duane, on Argentina is that the new routes that we've put in place connecting Rosario, Tucumán, Salta, San Juan, Neuquén to our hubs are performing very well. And so international traffic from Argentina is doing well. However, on the domestic side in Argentina, we're not seeing demand catching up on domestic traffic.

That's great. And then just for my second question, I heard a reference to free breakfast, which I definitely perked up when I heard free breakfast. We're both speaking the same language on that one. Can you comment on if that's specific to Brazil? And how should we interpret that? I thought the idea was to sort of unbundle and have more of like an unbundled product? And are you starting to bring perks back within Brazil? Or I just wanted to better understand the context for some of that commentary about free offerings.

Yes. So just to clarify, we're maintaining our buy-on-board model in all domestic markets. The change that Maria Jose mentioned was basically on our long-haul flights over 7 hours, where we have improved significantly the quality of the food for the Economy cabin. So the free -- the -- actually, we -- what we're doing is improving the quality of the service with no additional charge for the passengers. So we maintain both in general our flights overnight, the dinner and the breakfast meal included in the prices with a much better option.

Our next question comes from the line of Michael Linenberg from Deutsche Bank.

I want to just touch back on -- you brought up the, I guess, the Joint Business agreement with American. And obviously, there is an opportunity with IAG's -- their partner airlines as well. But when I think about the ultimate implementation of this JV, it does require an open skies agreement to be formalized. And so I know you're getting approval from the Brazilian regulators, and that was good news, and it looks like we're getting closer. And yet, when the original open skies agreement with Brazil was initialed in 2012, the view was that it was a 3-year phase, and then by October 2015, we would have that agreement in place. So here we are 2 years later, you're moving along with this agreement. Is it -- I guess you're going to know the political system and what's going on behind the scenes much better than what we're able to tell from up here, but the fact is it -- is the government going to move on open skies once you have all the agreements in place with respect to having an antitrust-immunized JV in place from, I guess, the various competition authorities? What prevents -- what happens if you get approval from all the different countries and yet you're not able to implement it because of a formality, the government not just signing the document?

This is Claudia. Yes, we do need the open skies agreement to be ratified for the JV between LATAM Brazil and American Airlines to be formalized. But we see it moving. It has already been -- so if you remember a couple years back, it was stuck in the presidential office. Now it has gone through a couple of commissions both in Congress, and we needed to -- now what needs to happen is that it has to go through the plenary of the Camara de los Deputados (sic) [Câmara dos Deputados]. So, it is in the agenda. As you might understand, the Brazilian political agenda has been quite crowded, and this is not probably the top of the -- on the top of the priority list for all of Congress. But we do think that it will move forward either by the end of this year or early next year. We're quite optimistic on that.

And, Mike, just to complement, remember that the European Union does not require open skies in regards of the JV approvals. And therefore, we don't need that step to happen in particular in any country to finalize the agreement with IAG.

Okay, okay. That's very helpful. And then just a question to Ramirez (sic) [Ramiro]. What you have done on your balance sheet over the last year has been very impressive, the fact that your adjusted net debt-to-EBITDAR is now under 5x. As you'll recall, a few years back, and maybe it was a bit more like 4, maybe 5 years back, you did have an investment-grade credit rating as a company. And I'm just curious, is that still a stated objective to get the balance sheet to a point where you have an investment-grade credit rating? Or do you feel that, that necessarily does not have to be a goal of the company given the fact that you can borrow at relatively attractive rates? Typically, you borrow on a secured basis. So whether you have the investment-grade rating or not, it's not that all important, and maybe it's more symbolic than anything else. Ramiro, what is your view on that, whether or not you need to get it to an investment-grade credit rating?

Thank you, Michael, for the question and for your comment. Indeed, we have improved the financial situation of the company. Our perception is that we don't necessarily need to be, again, an investment-grade company. However, we are fully focused on continuing the deleveraging process that we started. We are committed to reaching less than 4x leverage by 2019, and we are focusing ourselves in improving the cash flow generation and deleveraging of the company. We don't think that the goal necessarily is to become investment grade again. As you said, most of our investment is secured. We're reaching attractive rates. All the deleveraging process and the refinancing we have done, we have been improving our interest rates and coupons of the different initiatives that we made. So we're confident that the future deleveraging, we will be able to continue to improve the trend and the interest expense for the company.

And our next question comes from the line of Petr Grishchenko from Barclays.

Nice deleveraging. And just a follow-up, I guess, on Brazil. I just wanted to understand a little better what you're seeing in terms of competitive environment in the domestic market. And we see both Azul and Gol ramping up their fleets and kind of being more aggressive on switching it to more efficient aircraft. So I'm just wondering how you see the competitive environment evolving there.

Jerome, would you take that?

Thank you for the -- yes, I'll take it from here. I think we have seen finally positive outlook in terms of market growth that has been reflected in the third quarter and, hopefully, for the fourth and next year. So from a situation where we were reducing capacity, we go from that situation to one where probably, we expect capacity to increase next year, which is an important change. And we do see that reflected in the other competitors in the market. Hopefully, we also expect that capacity increase to be on the conservative side so we can remain with the load factors that we see right now that are relatively positive. And we hope that to continue throughout 2018. Obviously, as mentioned earlier in the call, our expectations for 2018 will be revealed in the first month of next year.

Got it. And also, you mentioned launching a new destination to Lisbon. And I was wondering like just timing-wise, what led to a sudden increase in demand? Because again, like you and Azul are launching same destination at the same time. I was wondering what led to the decision.

Well, Lisbon is a very important international market for Brazilians. I think it's one of the biggest destinations internationally. It's something we've been looking at for a lot of time. And the only step we have today to publish the flight is registration in Portugal for LATAM Airlines Brazil, which is a bureaucracy step that we need to take, and it'll take a couple more months.

Got it. And last for me, please. Just can you confirm what you said? So you intend to target less than 4x net leverage by the end of '19. Is that what you said?

Yes, that's what we said. This is one we're -- we have announced already in the past. So less than 4x by 2019.

Our next question comes from the line of Stephen Trent from Citi.

Just a few from me. How should we think about, on a long-term normalized basis, what your annual fleet spend might be? So going from almost $2 billion in commitments last year to just $300 million this year, I appreciate you've mentioned 2018 and 2019 numbers going up, but just curious, what -- how should we think about the normalized long-term annual fleet spend?

So 2 or 3 concepts, I think, we need to put here, Steve, for that one. First, on a general basis, we've been increasing gauge of our fleet. And therefore, one driver of growth we expect in the future is less tied to the number of aircraft, more to the average size of the aircraft. Second, we believe that we still have an important or relatively important step that we can take towards optimizing our utilization. So I think that we have 2 interesting drivers that will help us increase with the market and depending on how the market fares because volatility in this part of the world, unfortunately, is quite high in terms of market growth. And therefore, we believe we can sustain a moderate fleet plan going forward, which should not be very different from our depreciation levels that we have on a yearly basis.

Okay, very helpful. I was also wondering with respect to individual markets, did you see any noteworthy pickup in your flow in Colombia given some labor actions that one of your competitors was enduring?

Definitely, there was a substantial decrease in capacity during a few weeks in Colombia because of the situation in market there. We tried to help our passengers in Colombia. We actually regulated ourselves in terms of maximum fares so that we did not provide a terrible situation for passengers that were stranded. It was a positive reaction from the media, from the passengers and from the regulators of what we did. But of course, the whole impact in Colombia has had a positive impact on our revenues for the time that the situation happened.

Okay, got it. And just one last question. When I think about what's occurring in your market share in some of the ex Brazil places, you mentioned kind of flattish growth. But any kind of view regarding, a, at this early level that some new airlines have just launched, have you seen any trend on a market share side? And b, do you have any stated objective on maintaining a certain level of share in markets like Argentina and Chile?

So of course, there's a significant increase in industrial capacity in some of these markets, particularly in Chile and a little bit as well in Peru. We are leaders in those markets. And in the long term, we are committing to keeping our leadership position there. And therefore, those are key markets not only for our domestic operations but also for sustaining the breadth and depth of our international network. The increase in capacity is substantial, and, therefore, we'll probably see some pressure on our market shares. But we will keep very healthy market shares and leadership going forward more so in Chile and Peru. For us, those are strategic markets.

Our next question comes from the line of [Rino Bianchi] from Cantor Fitzgerald.

Two questions. The first one, I'm a little bit surprised that you're sticking to a conservative cargo capacity plan. I mean, globally, there's been a tremendous pickup in growth I believe that's the same pace from Latin America, at least hearing from what other airlines provided. I would like to hear from you the rationale for sticking to such a conservative cargo capacity plan.

Over the years, we've changed a little bit our strategy with respect to cargo. Until a few years ago, we had a dedicated cargo fleet for purely cargo, non-passenger related, if you want, objectives. We don't believe today that's our main focus, and we are focusing our cargo network in order to sustain our significant, we believe, competitive advantages in the belly. And therefore, the cargo capacity we have today is much more related to where our passenger network is and in which way that can contribute to increasing our belly revenues more than flying freighters for a full cargo, non-passenger network-related basis. In that sense, the fleet of 10 cargo aircraft that we're forecasting for next year is adequate, and we believe that gives us the edge that this company's always had in having more cargo revenues as compared to the industry average and, in general, our competitors. Having said that, we are seeing, I would say, a continuous trend in improvement in cargo, particularly in the southbound, so North America and Europe to South America. This is a change for -- finally because we've spent many, many years with very weak industries in the region. So the outlook for cargo is better, but our fleet plan will be related mostly to our passenger network going forward.

My second question regards the operating cash flow in the third quarter, which was extremely robust. The initial press release does not disclose enough detail to see exactly every single line items. But when I plug my numbers, seems like operating cash flow in the quarter -- in third quarter 2017 benefit to the tune of around $135 million of positive swing in all other items, which, I believe, include mostly working capital items. My question is, can you confirm that that's the case? And second, if there is anything then we need to know in terms of working capital management that has changed compared to the prior period?

No particulars. Your understanding is correct. Main improvement on cash flow is from operating cash flow. A certain portion of the improvement on cash flow generation comes from reduced investments also. But on the third quarter, we don't have any particular impact on working capital. And we don't foresee in the future significant variations on working capital for the fourth quarter, not at this point in time.

Our last question comes from the line of Miguel Moreno from Larrain (sic) [LarrainVial].

I have 2 questions. The first question is regarding the load factor. You mentioned that you want to keep this level of load factor. What we should expect in terms of each division? Internationally, you say you have a record growth in your growth (sic) [load] Factor. With the growth of capacity in the new routes, do you think that you can maintain the load factor? And maybe from Spanish-speaking countries, if an increase, do you have a target on all of that? The second question is regarding the trade-off of deleveraging and the age of the fleet. It seems that for the new low-cost competitor that you have, they are increasing the fleet so they might have a competitive advantage about that. How do you make that trade-off? And how relevant is the age of the fleet?

I'm -- sorry, what's his name?

Miguel.

This is Roberto. Thank you for the question. So on load factors, I'll answer that one and then I'll pass to Ramiro for the other one. Yes, we've seen an increase, a substantial and steady increase, in load factors. I think we've learned to fill our planes better with the right segmentation. Our international load factors are approaching 90%, which is record. We believe that we can keep them going forward. And in the case of domestics, the new business model that we launched during the year are moved to providing passengers with better options, will, we believe, keep having a positive impact on load factors. We just moved 2 weeks ago in Chile to full one-way fares. We still have a significant portion of our fares in round-trip, and that, we believe, will have a positive impact in load factors going forward. So our goal is still to continue increasing the efficiency of the use of our aircraft. And high load factors with the right segmentation is a focus, and we believe we have both opportunities and a good performance today.

Regarding the other question, Miguel, of course we're very focused on deleveraging the company, and this has put a stop to our investments here in this, I would say, 2017 and 2018 in terms of fleet. But nonetheless, we have been able to maintain an average age of the fleet of around 7.5. If you look at average age in 2016, where we made significant investments, it was closer to 7. Now we're closer to 7.4 or so, and we think that this is a correct age for the fleet. The reduction in investment that you have seen in 2017 also comes from the market restrictions that we saw, market demand restrictions that we saw in 2015 and 2016. If we start to see demand to grow, we will have the correct -- the fleet plan that you have -- that we have presented.

Our next question comes from the line of [Brian Chase] from [Itil Asset Management].

The first one is, there's no specific reference to personnel and fleet restructuring costs in the quarterly report. Can we assume that these expenses have essentially ended? And was the lower rental expense a reflection of that?

Well, let me first address the restrictions in personnel. We have made a significant portion of the reductions you have seen during this quarter. We reduced over 9% our employees. For the past 2 years, we have reduced approximately -- over 10,000 employees in the last 2 years. We're at the end of that curve. But we should be expecting that towards the fourth quarter, we might probably see further reductions in terms of the employees. On 2018 and moving forward, we will provide further information when we finish our budget. But we are continuing working on all the different areas in terms of rightsizing and cost reduction and efficiency plan.

But if we start to see growth, of course we will need maintaining the productivity that we have reached at this point. We will need additional personnel probably in airports or cabin crew if we decide to move forward on growth and we see that growth confirming. So maybe on the number of employees itself, we'll start to grow, but we want to commit to maintaining the same productivity that we have reached during 2017 and maybe improving that productivity furthermore during the first half of 2018.

I just wanted to add we did publish in our press release the impact associated to nonrecurring costs on severance payment and fleet redeliveries. The amount that we recognized was $37 million, and around 60% of that is associated to severance payment.

Yes. The renegotiations of the fleet did not incur any cost for the company. The cost that you're seeing as one-offs is only the redelivery of certain planes that we had in 2016 and we'll no longer be using in 2018.

Okay, great. And just one last question. The average life of your leases and how that might impact your net debt calculation under the IFRS adjustments going forward?

Yes. When we take the new IFRS calculation, you probably are going to see a reduction in our net debt. Our initial estimates is probably, I would say, between $500 million to $1 billion of reduction in net debt compared to the 7x that are currently used by the rating agencies.

Our next question comes from the line of Stephen Trent from Citi.

Just one other thing. When one thinks about your operational profitability and your margin's somewhat behind your South American peers, is this something that might be partially related to fleet age? Or do you think that the rightsizing you've done on a personal level could maybe help you catch up to some of your peers, who, this quarter, were all on the double digits on EBIT margin?

Yes, go.

I think it has very little to do -- Stephen, thank you for the question. I think it has very little to do with our fleet costs. I think that when we're compared to our competitors, we see that we are very efficient on fleet cost. We believe that the productivity gains that we have obtained in 2017 and -- you will see the full potential of that in 2018 because we had some implementation costs. When we discussed the installation of kiosks during 2016, the new branded sales model in 2016, the elimination of the buy-on-board of the catering that we were providing in 2016, all these initiatives that we took in place also have impact on costs during 2017 that you will not see in 2018. So certainly, the productivity that we have reached, the more utilization of the planes that we're reaching at this point, you will see the full effect in 2018, and that will get us closer to our benchmark. Our perception is that we will not reach an ultralow cost structure per se, but we want to get as close as possible, and we have set the target to have a gap between an ultralow cost on ourselves between 10% and 15%. And we believe that we can compensate this difference in CASK because we have a better connectivity and a better frequent flyer program and our RASKs are generally higher than our competition. So we believe that we will be able to compete if we arrive at this 10% to 12%, maybe 12% to 15% gap in terms of cost structure.

Just complementing that, Stephen, remember that we operate on many markets with many different dynamics, and we are much more a portfolio of markets than other airlines in the region in particular. And that means that we do see specific and important changes in our profitability in specific markets from time to time. But when you add this at the end, of course our volatility to margins is much lower than airlines that have -- other competitors that have much more focus in specific markets.

And this concludes our Q&A session. Thank you again for joining us today. Please feel free to contact our Investor Relations Department if you have any additional questions. We look forward to speaking with you again soon.

Thank you.

Thank you.