LATAM Airlines Group S.A. (NYSE: LFL; IPSA: LAN), the leading airline group in Latin America, announced its consolidated financial results for the second quarter ended June 30, 2016. “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 3.50 per USD.
LATAM Airlines Group reported operating income of US$1.3 million for second quarter 2016 and US$220.4 for the first half of 2016. Operating margin reached 0.1% for the quarter, representing a slight decrease of 0.7 percentage points as compared to the second quarter 2015. Operating margin for the first half of 2016 reached 5.0%, in line with our guidance and 0.3 percentage points above the same period of 2015.
Total revenues during the second quarter 2016 declined by 12.5% due to a 13.7% decline in passenger revenues and a 22.3% decline in cargo revenues. This revenue decrease continues to reflect a weak macroeconomic environment in South America – especially in Brazil – and the devaluations of Latin American currencies during the period. Part of this decline was offset by the continued positive trend in costs, with total operating expenses declining by 12.0%, resulting in a 10.5% decline in costs per ASK equivalent.
As of August 2016, LATAM Airlines Group has reduced fleet assets for 2017 – 2018 by US$1.1 billion, in line with the Company’s previously announced plans to achieve a decrease of US$2.0 to US$3.0 billion in our expected fleet assets for 2018. This reduction was achieved through the deferral of twelve Airbus A320neos and two Airbus A350s, which represent a total reduction of US$829 million in fleet commitments for 2017 and 2018. The Company will also redeliver five more Airbus A320s, three Airbus A319s, and one Boeing 777-200F in 2017 as compared to our previous quarter´s fleet plan, representing a total reduction of approximately US$260 million in fleet assets.
LATAM Airlines Brazil continues to adjust capacity in Brazil in line with demand conditions on both domestic and international operations in that market. LATAM Airlines Brazil reduced domestic capacity by 13.7%, while revenues per ASK increased by 6.2% in second quarter 2016 as compared to the same quarter of 2015, when measured in Brazilian reais. Furthermore, as previously announced, LATAM Airlines Brazil continues to reduce capacity on international routes between Brazil and the US, reaching a reduction of approximately 35% during the second half of 2016 compared to the same period 2015.
Meanwhile, the Company continues to strengthen its network, taking advantage of specific opportunities for profitable growth in LATAM’s South American Spanish-speaking markets (SSC, which include Chile, Peru, Argentina, Colombia and Ecuador). In July, LATAM Airlines Chile began flying directly between Santiago and La Paz and will fly direct between Santiago and Los Angeles, USA in the fourth quarter. Additionally, LATAM Airlines Peru will connect its Lima hub with Barcelona by the end of the year, and with Cartagena, Colombia in January 2017.
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On July 12th, the Company announced that it had entered into a subscription agreement under which Qatar Airways will acquire up to 10% of LATAM’s total shares, which will be acquired through the issuance of new shares at a price of US$10 per share in connection with a capital increase in the amount of US$613 million. On July 18th, LATAM announced that its Board of Directors agreed to call an Extraordinary General Shareholders Meeting for August 18, 2016, in order to submit for shareholder approval the increase for the purpose of strengthening the financial position of the Company. The transaction is expected to be concluded during the fourth quarter 2016.
MANAGEMENT COMMENTS ON SECOND QUARTER 2016
Over the last year, we have implemented significant changes with the objective of transforming LATAM into a simpler, leaner and more efficient group. We have made these changes amidst a challenging and volatile macroeconomic scenario in the region, and we acknowledge that results have not fully met our expectations.
For that reason, and in order to prepare ourselves for future market challenges and opportunities, we recognize the need to become more innovative and to continue working at an accelerated pace to address the changing dynamics of customers and the industry, as well as the economic situation in South America.
With this is mind, and as previously announced, LATAM and its affiliate carriers have further advanced in the redesign of their domestic passenger business model, in order to increase competitiveness and ensure the sustainability of domestic operations in the long term. This project seeks to achieve significant reductions in costs per ASK, allowing us to provide more competitive fares. Increased operational efficiencies will allow us to continue stimulating new demand and driving the growth of air travel in South America. Other key elements under evaluation include pursuing initiatives to increase ancillary revenues. LATAM recognizes the vast opportunities in adopting global best practices that will generate additional revenue, while granting customers greater flexibility and customization throughout their journey. We have made important progress in this project thus far, and are confident of a positive outcome once the new business model is implemented. The project is still in the design phase and we expect to provide more details within the coming months.
Furthermore, we have broadened the scope of our transformation initiatives to include regional and long haul operations, applying the lessons learned from the redesign of the domestic model. This will allow us to leverage opportunities to simplify processes, increase efficiencies, and improve the value proposition for our customers. We expect all these changes to positively impact profitability and cash flow generation going forward.
While management continues to focus on initiatives aimed at strengthening the balance sheet, tapping previously unexplored revenue streams and lowering costs, we were proud to supplement these internal efforts with a proposed capital increase and an agreement with Qatar Airways to acquire up to a 10% stake in LATAM. This is a move that not only strengthens our liquidity position, but offers the opportunity to explore stronger ties with this global player. This transaction will benefit consumers in the short and medium term as the Company will be able to evaluate financing options with greater flexibility and continue to invest in technology and products. In the longer term, Qatar’s equity participation in the Company, also offers the opportunity to explore improved connectivity between South America and the Middle East and Asia for our customers.
The group is confident that these initiatives will allow us to preserve LATAM’s position among the leading airline groups in the world, ensuring sustainability in the long term and strengthening our financial position, as well as continuing to be the preferred airline group by its customers and employees.
MANAGEMENT DISCUSSION AND ANALYSIS OF SECOND QUARTER 2016 RESULTS
Total revenues in the second quarter 2016 totaled US$2,110.6 million compared to US$2,412.9 million in second quarter 2015. The decrease of 12.5% is driven by a 13.7% and 22.3% decrease in passenger and cargo revenues, respectively, but slightly compensated by a 42.1% increase in other revenues. Passenger and cargo revenues accounted for 80.9% and 12.3% of total operating revenues, respectively, during the most recent quarter.
Passenger revenues decreased 13.7% during the quarter, which reflects a 14.3% decline in consolidated passenger unit revenue (RASK), offset by a 0.8% increase in capacity, when compared to the second quarter 2015. The RASK decrease was driven by a 15.2% drop in yields, while load factors showed an improvement of 0.8 p.p. to 82.7%. Yield performance continues to be negatively impacted by the weak macroeconomic scenario in South America, as well as weak local currencies.
During the second quarter 2016, demand in the airline group’s Spanish speaking country affiliates (SSC, which include Chile, Peru, Argentina, Colombia and Ecuador) continued to grow at a steady pace, with an increase of 8.4% in passenger traffic as measured in RPKs. Passenger capacity as measured in ASKs grew by 7.2% during the quarter, driven by growth in Peru and Chile, with load factors showing an increase of 0.9 p.p., reaching 78.8%. During the quarter, RASK continued to be pressured mainly due to the fact that local currencies remain below 2015 levels and additional capacity has been added to SSC markets, which remain very healthy. As a result, revenues per ASK in US dollars declined 21.4%, as compared to the second quarter 2015.
In the domestic Brazil passenger operations, LATAM Airlines Brazil reduced capacity by 13.7% in the second quarter 2016 as compared to the same quarter of 2015. Traffic as measured in RPKs decreased by 11.9%, and, as a result, load factors increased 1.7 p.p. to 81.2%. Revenues per ASK increased 6.2% during the second quarter 2016 when measured in BRL. When measured in US dollars, however, LATAM Airlines Brazil’s unit revenue decreased by 9.7%, driven by the 14.0% depreciation of the Brazilian real compared to second quarter 2015.
During the quarter, LATAM’s capacity on international routes increased by 7.9%. LATAM Airlines Brazil has continued to reduce capacity on routes with weaker demand, specifically between Brazil and the US, while LATAM Airlines and its affiliates added capacity on healthy routes, primarily between Spanish Speaking Countries and the US and Europe. Traffic increased by 8.0%, with passenger load factors growing by 0.1 p.p. to a healthy 84.6%. Revenues per ASK in international passenger operations decreased 17.0% as compared 2Q16 % Change (YoY) 2Q16 % Change (YoY) 2Q16 % Change (YoY)
Domestic SSC 6.5 -21.4% 5,301 7.2% 78.8% 0.9 pp
Domestic Brazil 5.4 -9,7%* 8,829 -13.7% 81.2% 1.7 pp
International 5.4 -17.0% 17,679 7.9% 84.6% 0.1 pp
Total 5.4 -14.3% 31,809 0.8% 82.7% 0,8 pp
*RASK in domestic Brazil increased 6.2% when measured in BRL
Note: revenues include ticket revenue, breakage, excess baggage fee, frequent flyer program revenues and other revenues For the three month period ended June 30
RASK ASK Load Factor (US cents) (millions) to the second quarter of 2015. This decline is mainly driven by weak demand from Brazil as well as increased competition and capacity from regional and international carriers.
Cargo revenues decreased by 22.3% in the quarter, driven by a 13.2% decline in cargo traffic and a 10.4% decline in cargo yields as compared to the second quarter of 2015. During the quarter, cargo traffic was affected by a strike in Chile, which negatively impacted fresh salmon exports. Additionally, imports from North America and Europe continue to show weakness, with Brazil still the most affected market, both internationally and domestically.
Pressures on cargo yields continued during the quarter, mainly as a result the depreciation of local currencies and lower fuel surcharge. As a result, cargo revenues per ATK declined 17.2% as compared to the same quarter of the previous year.
LATAM and its affiliates continue working to adjust freighter capacity, while focused on maximizing the belly utilization of the passenger fleet. Along these lines, we are redelivering two of our four Boeing 777s-200F currently operated by LATAM by first quarter 2017. In the second quarter cargo capacity, as measured in ATKs, declined 6.1%, which includes a 13.4% reduction of freighter operations. Cargo load factors were weak as capacity management could not keep up with the decline in traffic, falling 4.0 percentage points.
Other revenues increased by 42.1%, amounting to US$143.9 million during the second quarter 2016. This growth is primarily due to an increase in revenues derived from Multiplus, gains on aircraft sale and leaseback transactions, and the sale of fixed assets. Additionally, during the second quarter 2015, other revenues were affected by a recognized loss related to the sale of the three A340s, of which there were no such losses this quarter.
Total operating expenses in the second quarter declined to US$2,109.3 million, a 12.0% reduction as compared to the second quarter of 2015. Cost per ASK equivalent (including net financial expenses) decreased by 10.5%, including the effect of the 30.6% decrease in fuel price paid per gallon (including hedge). Furthermore, cost per ASK equivalent excluding fuel dropped 3.4% compared to the same period in 2015. Changes in operating expenses were mainly due to the following:
Wages and benefits decreased by 15.5%. The decrease is driven by a decline in average headcount, which is in line with capacity reductions in Brazil and the ongoing efficiency initiatives throughout the Company. This decline also reflects the positive impact of the depreciation of local currencies during the period.
Fuel costs decreased by 30.7% mainly as a result of a 26.9% decrease in the average fuel price per gallon (excluding hedge) as compared to the second quarter of 2015. Furthermore, fuel hedge losses totaled US$2.5 million, relative to a US$40.2 million loss in the second quarter 2015. At the same time, the Company recognized an US$18.0 million loss related to foreign currency hedging contracts, mainly Brazilian reais, compared to a US$4.4 million gain recognized in the same period of last year.
Commissions to agents decreased by 15.3% in line with the decline in sales and an increase in the percentage of direct sales.
Depreciation and amortization decreased by 1.9% mainly explained by a decrease in maintenance depreciation and the positive impact of the depreciation of the Brazilian real throughout the quarter, despite the increase in the number of owned aircraft.
Other rental and landing fees decreased by 4.4% mainly due to a decline in the rental of cargocapacity from third parties in line with the slowdown of demand, and cost savings in our handling expenses, despite an increase in aeronautical rates.
Passenger service expenses decreased by 5.9% due to a 1.9% decrease in passengers transported and lower variable costs.
Aircraft rentals increased by 7.6% as a result of the incorporation of more modern aircraft under operating leases. The Company had more Airbus A321s and Boeing 787s this year while phasing out Airbus A330s partially and Bombardier Dash8/200s completely relative to the second quarter 2015, bringing the total number of leased aircraft to 109, versus 106 during second quarter 2015.
Maintenance expenses continued to decrease significantly this quarter by 24.9% due to efficiencies related to the renewal of our fleet and savings from external service providers. Additionally, in second quarter 2015, the Company recognized a one-time loss of US$5.6 million resulting from aircraft redelivery costs. Excluding last year’s one-time cost, maintenance expenses decreased 21.0%.
Other operating expenses increased by 17.4%, mainly due to a one-time benefit recognized in the second quarter of 2015 as a result of negotiations for the change in our passenger service system. In addition, during the second quarter of 2016 we recognized lower reversals of tax contingencies in Brazil, which are recurring during the year.
For more information: LATAM
Fuente: Seeking Alpha
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