The FINANCIAL — LATAM Airlines Group S.A. announced on May 14 its consolidated financial results for the first quarter ended March 31, 2015.
“LATAM” or “the Company” makes reference to the consolidated entity, which includes passenger and cargo airlines in Latin America. All figures were prepared in accordance with International Financial Reporting Standards (IFRS) and are expressed in U.S. dollars. The Brazilian real / US dollar average exchange rate for the quarter was BRL 2.87 per USD, according to LATAM Airlines Group.
HIGHLIGHTS
LATAM reported strong operating results for first quarter 2015, with operating income reaching US$227 million, 102% higher than the US$113 million reported in first quarter 2014. Operating margin reached 8.1%, compared to 3.5% in the same period 2014.
The significant margin expansion during the first quarter 2015 was mainly driven by a 16% reduction in the Company’s operating costs. Cost per ASK equivalent decreased by 17%, including the effect of lower fuel prices. Furthermore, excluding fuel, cost per ASK equivalent decreased by 10%, reflecting efficiencies achieved as a result of our ongoing cost reduction programs , as well as the effect of local currency depreciations on our costs denominated in those currencies.
LATAM reported a net loss of US$40 million in first quarter 2015, similar to a net loss of US$41 million in first quarter 2014. Non-operating losses were driven by a non-cash foreign exchange loss of US$205 million mostly recognized at TAM as a result of the 20% devaluation of the Brazilian real during the quarter. The Company has mitigated foreign exchange losses by consistently reducing the exposure to the Brazilian real on TAM’s balance sheet.
On May 14, 2015, LATAM Airlines Group successfully priced its first EETC issuance, becoming the first EETC issuer in Latin America and the largest outside the United States . The total amount of US$1,021 million will finance 17 new aircrafts (11 Airbus A321s, 2 Airbus A350-900 and 4 Boeing 787-9s), which are currently scheduled for delivery between July 2015 and March 2016.
The company ended the quarter with 85.8% of its flights on time, increasing 3.9 p.p. as compared to the same quarter of last year. The increase of our on-time performance is a result of a 6.6 p.p. increase in the domestic Brazil operations and a 5.2 p.p. increase in the international operations.
LATAM continues to work on enhancing its passenger experience by providing better service before and during the flight. During the quarter, the Company installed a new entertainment system in 10 single-aisle airplanes to allow passengers access to a selection of content from their own devices, and enabled the use of devices in airplane mode during the whole flight. Additionally, our in-flight entertainment on the aircrafts’ individual screens is now active from gate-to-gate in LAN flights, so that passengers may enjoy them during the whole flight. Regarding ground services, the Company installed single check-in modules in Miami, Madrid and Sao Paulo Guarulhos airports, and also launched a new VIP Lounge in Santiago, the largest in South America.
In May, LATAM Airlines Group announced the selection of Sabre Corporation as the technology provider for our combined Passenger Service System (PSS), the platform for reservation, inventory and check-in. As part of this new agreement, TAM will migrate to the SabreSonic CSS technology, creating a unified reservation system for the entire airline group and resulting in improved service for our customers as well as increased efficiency for the Group.
In line with LATAM’s focus on creating the best connectivity within, to and from South America, the Company announced in April that it started feasibility studies to develop a new hub in the Northeast region of Brazil. “The project will expand the capillarity of the Group in Brazil, South America, and internationally, particularly by increasing the number of destinations in Europe. It will also reaffirm the Group’s leadership in Latin America, increase connectivity options for customers and optimize coverage of passenger and cargo flows between Brazil and other markets,” said Claudia Sender, CEO of TAM S.A. and of TAM Linhas Aereas.
In line with the Company’s fleet renewal plan, during first quarter 2015 LATAM took delivery of the first two B787-9s in Latin America. These aircraft are the first wide body aircraft to feature the new unified cabin interior for LATAM Airlines Group, and are testament to the airline’s constant pursuit of innovation to offer passengers the best possible travel experience.
On April 28, 2015, LATAM Airlines Group held its Annual General Shareholders’ Meeting in Santiago during which the Board of Directors was reelected for a two year period.
MANAGEMENT DISCUSSION AND ANALYSIS OF FIRST QUARTER 2015 RESULTS
During the first quarter 2015, LATAM Airlines Group was able to successfully manage a complex macroeconomic environment, reporting a strong improvement in operating income, which reached US$ 227.0 million, a 101.5% increase compared to the US$112.6 million operating income in first quarter 2014. Operating margin reached 8.1%, compared to 3.5% in 2014.
LATAM’s management has successfully adjusted its capacity growth to address the economic slowdown in the region, and expects to maintain capacity discipline throughout the year. During the first three months of the year, capacity grew by only 2.1% while our total costs decreased by 16.3% as compared to same period in 2014. Excluding fuel, the decline was driven by efficiency gains related to our cost savings plan, as well as the effect of the currency depreciation on our costs denominated in local currencies.
LATAM reported a net loss of US$39.9 million in first quarter 2015, similar to a net loss of US$41.3 million in first quarter 2014. Non-operating losses were driven by a non-cash foreign exchange loss of US$204.6 million mostly recognized at TAM as a result of the 20.3% devaluation of the Brazilian real during the quarter. We have been able to mitigate this effect by consistently reducing the imbalance between BRL- denominated assets and USD-denominated liabilities on TAM’s balance sheet.
Total revenues in the first quarter 2015 reached US$2,791.1 million compared to US$3,177.4 million in first quarter 2014. The decrease of 12.2% is a result of a 12.8% decrease in passenger revenues and a 16.7% decrease in cargo revenues, partially offset by a 42.8% increase in other revenues. Passenger and cargo revenues accounted for 84.0% and 12.6% of total revenues, respectively, in first quarter 2015.
Passenger revenues decreased 12.8% during the quarter. Total passenger capacity increased by 2.1% in the quarter and total passenger traffic as measured in RPKs increased by 3.0%, with passenger load factors reaching a very healthy 83.4%, 0.7 percentage points higher than the same period in 2014. However, RASK decreased by 14.7% when compared to the first quarter 2014, driven by a decrease of 15.4% in yields. Yields continue to be impacted by the slower macroeconomic scenario in South America, the depreciation of local currencies (especially the Brazilian real, Chilean peso and Colombian peso), and a decrease in corporate demand in Brazil.
During the first quarter 2015, demand in the Company’s Spanish speaking countries (SSC, which include Chile, Peru, Argentina, Colombia and Ecuador) continued to grow at a moderate pace, with an increase of 3.7% in passenger capacity as measured in ASKs. Passenger traffic as measured in RPKs grew by 4.5% during the quarter, allowing for an improvement of 0.7 percentage point in load factors as compared to first quarter 2014, reaching 82.4%. Yields in the SSC domestic markets generally showed positive trends during the quarter when measured in local currencies. The 4.1% decline in revenue per ASK as compared to the first quarter 2014 was driven by depreciation of local currencies, mainly the Chilean and Colombian peso which depreciated 13.2% and 23.0% respectively, as compared to the first quarter 2014.
In the domestic Brazil passenger operations, TAM increased capacity by 1.0% in the first quarter 2015 as compared to the same quarter of 2014. Traffic as measured in RPKs increased by 2.6%, resulting in an increase of 1.3 percentage points in load factors, which reached 83.0%. During the first quarter of the year yields remained weak, mainly impacted by reduced corporate demand and weak GDP growth expectations in Brazil, resulting in a drop of 5.3% in TAM’s revenues per ASK in Brazilian reais. When measured in US dollars, TAM’s unit revenue decrease was even higher as a result of the 21.4% depreciation of the Brazilian real in the quarter as compared to first quarter 2014.
The company continued working on the consolidation of its hub strategy in domestic operations in Brazil, leveraging Brasilia’s central geographic location, economic strength relative to the rest of the country and new airport infrastructure. During this quarter, TAM started three domestic operations – São José do Rio Preto, Aracaju and Boa Vista- and communicated the opening of two international routes, from Brasilia to Orlando and Buenos Aires. Overall, these destinations will increase the number of city pairs served through Brasilia, and will offset capacity reductions in other parts of the network where RASK has been impacted by weakness in corporate demand. Furthermore, TAM has also progressed in strengthening its regional aviation network, already flying to Jaguaruna since April, and selling three additional destinations -Bauru, Juazeiro do Norte and São José dos Campos- which the company will start to operate during the second half of the year.
During the quarter, LATAM’s capacity on international routes increased by 2.4% as measured in ASKs, focused mainly on routes to the Caribbean. Traffic increased by 2.7%, allowing for an improvement of 0.2 percentage points in load factors, reaching 83.9%. Pressures on yields continued during the quarter, mainly as a result of volatility in local currencies, which impacted local demand for international travel, especially in Brazil. The Company is managing this situation by adjusting its point of sale mix within the region in order to focus on the markets with stronger demand. As a results, revenues per ASK in international passenger operations decreased 8.0% as compared to the first quarter of 2014.
In line with the LATAM’s focus on creating the best connectivity within the region, the Company recently announced that it started feasibility studies to develop the first international and domestic hub in the Northeast of Brazil. The new hub will focus on significantly increasing connectivity for passengers, both for domestic flights within Brazil, and for connections with Latin America and major European cities. Guarulhos Airport in Sao Paulo will continue to operate as our main international hub; while the new Northeast hub will strategically complement the Group’s objectives. The new hub will be operated using the Group’s current fleet plan, and will not require further aircraft deliveries. The host city is expected to be chosen by the end of 2015, followed shortly by the implementation of the hub. Operations are expected to start in December 2016.
Cargo revenues decreased by 16.7% in the quarter, driven by a 9.6% decline in cargo traffic and a 3.3% decline in cargo capacity. Trends in the cargo market continue to be weak mainly driven by weaker imports into Latin America, a decrease in exports of certain products from the region, as well as a weaker domestic market in Brazil. Additionally, cargo yields declined by 7.9% as compared to the first quarter 2014 due to competitive pressures from regional and international cargo carriers, the depreciation of local currencies, mainly the Brazilian Real and the Euro, and a lower cargo fuel surcharge related to the drop in fuel prices.
In line with the LATAM’s approach towards a more rational and disciplined freighter capacity, and an enhanced focus on optimizing the belly utilization of the passenger fleet, the Company leased 3 Boeing 767- 300Fs to another cargo operator in a different market for a period of three years. The Company materialized the lease of two of these freighters last year, and this quarter leased the third one.
Other revenues increased by 42.8%, amounting to US$97.3 million during the first quarter 2015. This result is mainly explained by a US$24.7 million increase in revenues from Multiplus as a result of more breakage and non-air redemptions.
Total operating expenses in the first quarter 2015 reached US$2,564.2 million, a 16.3% reduction as compared to the first quarter of 2014. Cost per ASK equivalent (including net financial expenses) also decreased by 17.0%, including the effect of the 31.0% decrease in fuel price paid per gallon (including hedge). Excluding fuel, cost per ASK equivalent showed a decrease of 9.6%. Part of the costs which are denominated in local currencies were positively impacted by the depreciation of certain local currencies during the quarter. Changes in operating expenses were mainly due to the following:
Wages and benefits decreased by 4.0% despite the increase of 0.5% in average headcount in the high season months. The decrease is mainly driven by the positive impact of the depreciation of local currencies on wages denominated in those currencies, partially offset by increased average compensations made to certain unions as part of the successful completion of their collective bargaining process.
Fuel costs decreased by 31.1%, as a result of a decrease of 40.6% in the average fuel price per gallon (excluding hedge) and a decrease of 0.7% in fuel gallons consumed, despite the slight increase in operations, mainly resulting from fuel efficiency programs and increasingly efficient fleet. This was partially offset by the recognition of a US$103.5 million fuel hedge loss, compared to a US$0.5 million fuel hedge gain in the first quarter of 2014.
Commissions to agents decreased by 21.8% mainly due to lower passenger and cargo sales, as well as the positive impact of the depreciation of the Brazilian real in TAM.
Depreciation and amortization decreased by 3.3%, despite the increase in the number of owned wide body aircraft, mainly as a result of the phase out of leased aircraft with the consequent decrease in maintenance depreciation. Additionally, the devaluation of the Real against the Dollar positively impacted part of these costs during the quarter.
Other rental and landing fees decreased by 11.8% mainly due to a decrease in aeronautical rates resulting from the depreciation of local currencies.
Passenger service expenses increased by 2.6%, in line with the 2.4% increase in passengers transported.
Aircraft rentals increased by 0.8%, despite fewer leased aircraft, as a result of the incorporation of larger and more modern aircraft under operating leases (i.e. 4 Boeing 787s).
Maintenance expenses decreased by 12.6%, mainly as a result of the Company’s fleet renewal initiatives and the provision of US$34 million during the first quarter of 2014 for redelivery costs related to the fleet restructuring.
Other operating expenses decreased by 15.4% mainly due to the prescription and other reversals of tax contingencies in Brazil.
Non-operating results
Interest income decreased by 5.4% to US$18.5 million in first quarter 2015, mainly due to the reduction in the Company’s cash balance.
Interest expense decreased from US$131.4 million in first quarter 2014 to US$95.3 million in the same quarter 2015, mainly due to the recognition in the first quarter 2014 of US$23 million in breakage costs related to the sale and lease-back of 4 Boeing 777 aircraft as well as the reduction of short term debt in Brasil which had a higher coupon.
Under Other income (expense), the Company recognized a US$198.0 million loss, impacted by a foreign exchange loss of US$204.6 million mostly recognized at TAM as a result of the devaluation of the Brazilian real during the quarter. This compares to US$27.3 million expense in the first quarter 2014, which included a foreign exchange gain of US$57.0 million resulting from the appreciation of the Brazilian real during the same quarter of 2014 as well as the recognition of a US$112 million provision related to the Company’s fleet restructuring program.
FINANCING AND LIQUIDITY
At the end of the first quarter 2015, LATAM reported US$ 1,364.5 million in cash and cash equivalents, including certain highly liquid investments accounted for as other current financial assets. As of March 31, 2015, the Company reported deposits with aircraft manufacturers (pre-delivery payments) of US$912.3 million, US$334.4 million of which were funded directly by LATAM. Furthermore, as of March 2015, LATAM Airlines Group had US$210.0 million in undrawn committed credit lines with Chilean and international banks.
The company has in place a hedging program to partially mitigate the impact of exchange rate variations of the Brazilian reais. The company has hedged approximately 50% of its estimated total net Brazilian real monthly exposure for the next twelve months through foreign exchange forward contracts. In relation to the fuel exposure, the Company has hedged approximately 30% of its estimated fuel consumption for the next twelve months. The Company’s fuel hedging strategy consists of a combination of collars, swaps and options for Brent and Jet Fuel.
On May 14, 2015, LATAM Airlines Group successfully priced its first EETC issuance, becoming the first EETC issuer in Latin America and the largest outside the United States. The total amount of US$1,021 million will finance 17 new aircrafts (11 Airbus A321s, 2 Airbus A350-900 and 4 Boeing 787-9s), which are currently scheduled for delivery between July 2015 and March 2016.
GUIDANCE
LATAM expects total passenger ASK growth to be between 2% and 4% for full year 2015. International passenger ASK growth for full year 2015 is expected to increase between 4% and 6%. TAM’s domestic passenger ASKs in the Brazilian market are expected to be flat during 2015. ASKs in domestic Spanish – speaking countries are expected to increase by approximately 4% to 6%.
Regarding cargo operations, LATAM expects cargo ATKs to decline between 2% and 0% as compared to 2014, mainly driven by the rationalization of our cargo operations.
The Company expects to improve profitability and estimates operating margins for the full year 2015 to be in the range of 6% to 8%.
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