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Published on : Thursday, March 10, 2016
LATAM Airlines Group S.A. (NYSE: LFL; IPSA: LAN; BOVESPA: LATM33), the leading airline group in Latin America, announced today its non-audited consolidated financial results for the fourth quarter ended December 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 3.85 per USD.
MANAGEMENT COMMENTS ON FOURTH QUARTER 2015 RESULTS
“For the airline industry in South America, 2015 was a challenging year, especially in Brazil. Despite the slowdown in GDP growth in the region and the depreciation of all local currencies, LATAM was able to improve our operating result by one percentage point compared to 2014, as a result of our focus on cost discipline and network enhancement,” said Enrique Cueto, LATAM’s CEO.
The Company’s ongoing cost savings initiatives launched in 2014 have resulted in efficiency gains during the quarter and throughout 2015. During the year, LATAM achieved total cost reductions of approximately US$325 million, above our initial estimates. In addition to these efficiencies, our operating costs have also benefited from the devaluations of local currencies and, together, have resulted in an 11.5% decline in our cost per ASK-equivalent (excluding fuel) for 2015.
We also continue to advance on improving our passengers’ experience, and remain deeply committed to offering the best service before and during the flight, creating a distinctive customer experience as well as a competitive advantage. LATAM prioritizes our customers, placing them at the center of our strategic plans, implementing innovative tools such as the wireless entertainment system for personal devices and the new app for LAN and TAM, which allows passengers to be in charge of their own journey. Additionally, during the fourth quarter of 2015 LATAM delivered more than 1,000 tablets to its pilots and cabin crew and more than 2,000 tablets to our heads of service on board, with software especially designed for a more efficient navigation, consolidating in one place and digitally all the necessary information. Furthermore, LATAM has launched a new service on its website: “Reschedule your flight,” allowing customers to choose the best flight option in case of delays or contingencies. It is also important to highlight that, advancing in our gradual change to the LATAM brand name, the Company launched the new cabin crew uniforms, which will be tested over a period of three weeks in seven different countries.
The Company ended the year with 85.6% of its flights on time, increasing 0.8 p.p. as compared to the full year 2014. The increase of our on-time performance is mainly driven by a 2.9 p.p. increase in the on-time performance of domestic Brazil operations.
Driven by our focus on adjusting capacity in the Brazilian market to current market conditions and recovering yields, the Company has revised its capacity (ASK) guidance for this year for both domestic and international routes. On domestic Brazil routes, guidance was revised from a contraction of 6% to 9% to a contraction of between 8% and 10%, while maintaining the connectivity we offer to our passengers, as well as the continuous strengthening of our hubs in Brasília and São Paulo/Guarulhos. International passenger ASKs for full year 2016 are now expected to increase between 3% and 5% from the previously expected growth of 4% to 6%. This adjustment is driven by a reduction of approximately 25% on international routes between Brazil and North America for the second semester of 2016. Meanwhile, we continue to see opportunities for growth and healthy demand levels in LATAM’s South American Spanish-speaking markets, where we expect to increase capacity on both international and domestic routes. Domestic operations in Spanish-speaking markets are expected to increase by approximately 6% to 8% in 2016.
Regarding LATAM’s network development, we have signed two different joint business agreements to deepen our partnership with American Airlines Group and IAG (British Airways and Iberia), both members of the oneworld alliance. These agreements will improve the connectivity between South America and the United States/Canada and also between South America and Europe, allowing our passengers access to a network of more than 420 destinations. Both agreements are subject to regulatory approval in different countries which could take approximately 12 to 18 months.
We expect 2016 will be a challenging year for Latin American markets in general. In this context, we are permanently evaluating opportunities to rationalize capacity throughout our network, especially in Brazil. We are convinced that cost efficiencies are critical and, as we aggressively pursue cost savings initiatives, we seek to maintain the passenger experience at the center of our strategic decision making. Furthermore, we continue to pursue opportunities to reduce capital expenditures, while maintaining at all times adequate liquidity levels.
MANAGEMENT DISCUSSION AND ANALYSIS OF FOURTH QUARTER 2015 RESULTS
Total revenues in the fourth quarter 2015 reached US$2,407.0 million compared to US$3,104.7 million in fourth quarter 2014. The decrease of 22.5% is a result of a 21.8% and 26.8% decrease in passenger and cargo revenues, respectively, as well as a 20.7% decrease in other revenues. Passenger and cargo revenues accounted for 82.1% and 13.9% of total operating revenues, respectively, in fourth quarter 2015.
Total revenues for full year 2015 reached US$10,125.8 million compared to US$12,471.1 million in 2014. The decrease of 18.8% is a result of a 19.0% and 22.4% decrease in passenger and cargo revenues, respectively, partially offset by a 2.2% increase in other revenues. Passenger and cargo revenues accounted for 83.1% and 13.1% of total operating revenues, respectively, for the full year 2015.
Passenger revenues decreased 21.8% during the quarter, which reflects a 3.4% increase in capacity, offset by a 24.4% decline in consolidated passenger unit revenue (RASK), when compared to the fourth quarter 2014. The RASK decrease was driven by a 23.6% drop in yields, while load factors showed a small decline of 0.9 p.p. reaching 82.9%. Yield performance continues to be negatively impacted by the weak macroeconomic scenario in South America, as well as weak local currencies, especially in Brazil.
Revenues per ASK for LATAM’s main passenger business units are shown in the table below.
* Domestic Brazil RASK decreased 2.3% when measured in BRL.
Note: revenues include ticket revenue, breakage, excess baggage fee, frequent flyer program revenues and other revenues.
During the fourth quarter 2015, demand in the airline group’s Spanish speaking countries (SSC, which include Chile, Peru, Argentina, Colombia and Ecuador) continued to grow at a moderate pace, with an increase of 5.8% in passenger traffic as measured in RPKs. Passenger capacity as measured in ASKs grew by 5.5% during the quarter, driven by growth in Peru and Argentina, with load factors showing an increase of 0.2 p.p., reaching 81.5% During the quarter, RASK was impacted by a weaker pricing environment in most markets, as well as by the depreciation of local currencies, mainly the Colombian, Argentinian and Chilean peso which depreciated 40.5%, 19.4% and 16.6%, respectively. As a result, revenues per ASK in US dollars declined 13.3%, as compared to the fourth quarter 2014.
In the domestic Brazil passenger operations, TAM reduced capacity by 9.4% in the fourth quarter 2015 as compared to the same quarter of 2014, leading the capacity reductions in the industry. Traffic as measured in RPKs decreased by 10.8%, resulting in a decrease of 1.2 percentage points in load factor, which reached a healthy 81.8%. Revenues per ASK showed a slight decrease of 2.3% during the fourth quarter 2015 when measured in BRL. When measured in US dollars, TAM’s unit revenue decrease was higher as a result of the 50.8% depreciation of the Brazilian real in the quarter as compared to fourth quarter 2014.
During the quarter, LATAM’s capacity on international routes increased by 11.6% as measured in ASKs, focused on strengthening our international hubs and our routes to the Caribbean. At the same time, the Company has also reduced capacity on routes with weaker demand, including operations between Brazil and United States. Traffic increased by 10.1%, with passenger load factors reaching a strong 83.9%. Pressures on yields continued during the quarter, mainly in the operations to and from Brazil, related to weaker local demand for international travel as a result of the depreciation and volatility of the Brazilian real. The Company is managing this situation by reducing capacity in selected routes, especially between Brazil and the United States, as well as by adjusting its point of sale mix within the region in order to focus on the markets with stronger demand. Revenues per ASK in international passenger operations decreased 22.8% as compared to the fourth quarter of 2014.
Cargo revenues decreased by 26.8% in the quarter, driven by a 13.4% decline in cargo traffic and a 15.4% decline in cargo yields as compared to the fourth quarter of 2014. During the quarter, cargo demand remained weak, especially in the Brazilian domestic and international market. In addition, connecting cargo traffic in Sao Paulo Guarulhos airport was affected by an ongoing strike in customs personnel. Pressures on cargo yields continued, mainly as a result of the competitive scenario, 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. As a result, cargo revenues per ATK of the fourth quarter declined 24.9% as compared to the same quarter of the previous year.
The Company continues working to adjust freighter capacity, while focused on maximizing the belly utilization of the Company’s passenger fleet. In the fourth quarter, cargo capacity, as measured in ATKs, declined 2.4%, which includes a 13.3% reduction of the freighter operation.
Other revenues decreased by 20.7%, amounting to US$95.9 million during the fourth quarter 2015, affected by a US$ 14.0 million gain related to the asset sales during the fourth quarter 2014. In addition, income from Multiplus declined 9.6% when measured in US dollars.
Total operating expenses in the fourth quarter 2015 reached US$2,257.9 million, a 20.4% reduction as compared to the fourth quarter of 2014. Cost per ASK equivalent (including net financial expenses) decreased by 20.5%, including the effect of the 42.8% decrease in fuel price paid per gallon (including hedge). Furthermore, cost per ASK equivalent excluding fuel dropped 8.0%, mainly due to our ongoing cost reduction program, as well as the positive effect of local currency depreciations on our costs denominated in those currencies. Changes in operating expenses were mainly due to the following:
LIQUIDITY AND FINANCING
At the end of the fourth quarter 2015, LATAM reported US$1,361.1 million in cash and cash equivalents, including certain highly liquid investments accounted for as other current financial assets, equivalent to 13.4% of net revenue in the last twelve months. As of December 31, 2015, the Company reported deposits with aircraft manufacturers (pre-delivery payments) of US$941 million, US$410 million of which were funded directly by LATAM. Furthermore, the Company’s liquidity position is also enhanced by US$105 million in undrawn committed credit lines with Chilean and international banks.
LATAM continues actively working to maintain a strong balance sheet and to maintain its cash position at approximately US$1.5 billion, which we consider to be an adequate level for the Company under current market conditions.
LATAM’s financial debt during the fourth quarter 2015 reached US$9,061.4 million, an increase of 2.1% as compared to the third quarter 2015. The Company maintained an adequate debt amortization profile, with approximately US$1.2 billion in debt amortization during the year, of which 61% was related to aircraft financing. Funding issuances during the quarter totaled US$487 million, of which US$393 million are related to fleet financing. For 2016, the Company has debt maturities of approximately US$1.2 billion.
Regarding the Company’s fleet commitments, during 2015 LATAM had obligations for US$1.7 billion, of which 51% were capital expenditures financed through financial leases and 49% were operating leases. For 2016, fleet commitments amount to US$2.0 billion, of which 45% are capital expenditure requirements in the form of financial leases and 55% will be operating leases. Year to date, we have completely financed our fleet obligations for 2016. In addition, LATAM has reduced non-fleet capex to approximately US$300 million per year, including expenditures on spare engines, components and information technology, among others.
One of the objectives of LATAM Airlines Group is to reduce the volatility of our financial results and cash flow caused by external factors such as foreign exchange rate and fuel price fluctuations. In addition, the Company has hedged approximately the 83% of its estimated total net Brazilian real monthly operating exposure for the next nine months through foreign exchange derivative contracts.
In relation to fuel exposure, LATAM Airlines Group has hedged approximately 45% of its estimated fuel consumption for the next twelve months, including approximately 28% of its estimated fuel consumption for the next six months that has been executed at existing price levels. The Group’s fuel hedging strategy, consisting of a combination of Jet Fuel options, has allowed us to limit our potential fuel hedge losses to a maximum amount of US$77 million for the full year 2016.
LATAM FLEET PLAN
Driven by the reductions on both domestic and international capacity in Brazil, LATAM Airlines Group has restructured its fleet delivery schedule for 2016 – 2018, reducing fleet commitments for this period by US$2.9 million -equivalent to a reduction of 37%-, through deferrals and sales of both wide body and narrow body aircraft. This is in line with the Company’s previously announced plans to achieve a 40% reduction in its fleet commitments for the period, and represents a further reduction of $1.0 billion compared to the fleet plan shown in November 2015. This restructuring seeks primarily to adjust capacity to the prevailing market conditions in Latin America, and is in line with our focus on maintaining a healthy balance sheet and adequate liquidity by reducing capex and pre-delivery payments. The fleet plan shown below reflects the Group’s current fleet commitments, as well as redeliveries planned for 2016.
For 2016, the Company´s fleet capex is approximately US$900 million, with the remaining fleet commitments to be financed through sale and leaseback transactions.
In December 2015, LATAM Airlines Group took delivery of its first A350-900, becoming the first airline in the Americas and the fourth in the world to operate this modern and efficient aircraft. The Company ended the quarter with a total of 36 Airbus A321s, one Airbus A350 and 17 Boeing 787 aircraft, making LATAM’s one of the most modern fleets in Latin America and the world.
Note: This table does not include three 767-300Fs and one 777-200F that LATAM is currently subleasing to a third party.
Considering the weakness in demand in the Brazilian market and the resulting slowdown in the airline industry, the Company has increased capacity reductions for Brazil in both domestic and international markets.
The Company expects total passenger ASK growth to be between -1% and 2% for full year 2016. TAM’s domestic passenger ASKs in the Brazilian market are expected to decline between 8% and 10% during 2016. International passenger ASK growth for full year 2016 is expected to reach between 3% and 5%, reflecting additional capacity reductions on international routes to and from Brazil. ASKs in domestic Spanish-speaking countries are expected to increase by approximately 6% to 8% during 2016. The Company will continue to review capacity in markets where demand has been most impacted during this year, but at the same time will continue to pursue growth opportunities in specific markets.
Regarding cargo operations, LATAM expects cargo ATKs to decline between 2% and 0% as compared to 2015, mainly driven by increased capacity in the bellies of passenger aircraft.
LATAM will file its quarterly financial statements as at December 31, 2015 with the Superintendencia de Valores y Seguros of Chile on March 21, 2016.
Source:- Latam Airlines
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