Santiago, Chile, April 26, 2011 – LAN Airlines S.A. (NYSE: LFL), one of Latin America’s leading passenger and cargo airlines, announced today its consolidated financial results for first quarter ended March 31, 2011. “LAN” 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.
- LAN reported a net income of US$97.2 million for first quarter 2011, an increase of 10.1% compared to the US$88.3 million reported in first quarter 2010. This result is despite the consolidation in the Colombian operations of AIRES, and also reflects LAN’s successful management under the current scenario of increased fuel prices.
- Operating income reached US$153.3 million in first quarter 2011, a 7.3% increase compared to US$142.9 million in first quarter 2010. Operating margin reached 11.2% compared to 13.8% in first quarter 2010.
- Total revenues in first quarter 2011 reached US$1,364.9 million compared to US$1,034.9 million in first quarter 2010 due to a 32.0% increase in passenger revenues and a 30.2% increase in cargo revenues. Passenger and cargo revenues accounted for 71.6% and 25.4% of total revenues, respectively, during first quarter 2011.
- During the quarter, LAN has successfully implemented measures in order to mitigate the impact of higher fuel prices on its operations. For the Company, higher fuel prices during the quarter, which increased 32.2% compared to first quarter 2010, generated US$100.3 million in increased fuel costs.
- Regarding the approval process for the transaction with TAM, on April 20, 2011, the TDLC announced that a public hearing will take place on May 26, 2011 in which the interested parties, including LAN and TAM, may provide their opinion regarding the business combination.
- In line with the Company’s expansion, during first quarter 2011, the Company received a total of 3 Airbus A319 and 6 Airbus A320 passenger aircraft, destined for domestic and regional markets, and 1 Boeing 767-300F freighter, mainly destined for growth on northbound routes.
Management Comments on FIRST Quarter 2011 Results
LAN reported a net income of US$97.2 million in first quarter 2011, driven by continuous growth in both cargo and passenger operations. Net income increased 10.1% compared to first quarter 2010. Operating income for the quarter increased 7.3%, reaching US$153.3 million, with an 11.2% operating margin. Such operating income includes LAN’s operations in Colombia through the acquired airline AIRES, whose turnaround process is aimed at reaching LAN’s standards and implementing LAN’s low cost domestic model, which currently operates in the Company’s other domestic markets. Starting this quarter, LAN’s income statement consolidates AIRES’ operations from December 2010 to March 2011.
During the quarter, LAN has successfully implemented measures in order to mitigate the impact of higher fuel prices on its operations. For the Company, higher fuel prices during the quarter, which increased 32.2% compared to first quarter 2010, generated US$100.3 million in increased fuel costs. Nevertheless, LAN successfully applied fuel surcharges in line with practices in the industry in both the passenger and cargo business, which reflected on the 9.5% increase in passenger yields and the 11.7% increase in cargo yields. Starting this quarter, fuel surcharges based on WTI incorporate for the first time the crack spread to better aligned with variations in jet fuel prices. Furthermore during the quarter, the Company’s active hedging strategy resulted in a US$22.0 million fuel hedge gain. For the remainder of 2011, LAN has hedged approximately 42% of its estimated fuel consumption, including 74% of the estimated consumption for the second quarter 2011 which is the low season for the passenger business. The fuel hedging strategy consists of a combination of collars, swaps and call options of WTI and recently, but to a lesser extent, heating oil in order to more adequately match jet fuel price variations. Regarding operations, facing a higher fuel scenario, the Company adjusted its capacity to certain routes.
During first quarter 2011, LAN’s consolidated revenues increased 31.9% compared to first quarter 2010. Passenger revenues increased 32.0% during the quarter, driven by continued traffic growth and a 9.5% expansion in yields. Passenger traffic growth during the quarter reached 20.5%, while load factors reached 80.9%, 1.6 points higher than the same period 2010. Total passenger capacity as measured in ASKs grew 18.2%. The growth rates in traffic and capacity for first quarter 2011 considered the impact of the earthquake that affected Chile February 27, 2010 resulting in a lower comparison basis. Also, such growth rates considered the inorganic growth resulting from the inclusion of AIRES’ domestic and international operations. Capacity increases focused mainly on regional routes, as well as long-haul routes to the United States. Such capacity growth was a direct result of new routes that LAN and its affiliates launched in 2010 such as Lima – San Francisco in the long-haul business, and Lima – Brasilia and Guayaquil – Galapagos in the regional and domestic operations.
Revenues per ASK (RASK) increased 11.7%, driven by higher load factors, as well as an increase in yields compared to first quarter 2010. Passenger yields increased mainly as a result of a stronger demand environment and an increase in fuel surcharges, in line with the increase of WTI prices and the crack spread.
During first quarter 2011, cargo revenues increased 30.2%, reflecting the continued strong growth in LAN Cargo’s traffic, with RTK growth of 16.6%. Cargo capacity in the quarter grew 18.0%, resulting in a load factor of 67.9%, 0.8 points lower than first quarter 2010. Yields showed an 11.7% improvement compared to first quarter 2010, driven by strong demand and higher fuel surcharges leading to a 10.4% increase in unit revenue.
The Company has selectively added capacity in response to robust demand in its core markets. Import flows to Latin America remain solid, while export volumes have recovered, partly driven by the gradual resurgence of salmon exports. The Company leveraged the three additional Boeing 767-300F freighter aircraft incorporated into its fleet between November 2010 and January 2011 to add capacity on routes from Latin America to North America and Europe. Meanwhile, ABSA, the Company’s Brazilian affiliate, expanded its domestic operations. The Company also continues to successfully optimize the utilization of the bellies of its passenger aircraft to maximize synergies associated with the Company’s integrated passenger/cargo business model. Meanwhile, yields improved thanks to improved yield management tools and higher cost pass-through via fuel surcharges.
Operating expenses increased 35.8% compared to first quarter 2010, while costs per ATK (including net financial expenses) increased 13.8%. Excluding fuel, unit costs increased 10.1%, mainly due to higher wages and benefits and higher costs related to rentals and maintenance due to the incorporation of AIRES’ fleet. Higher fuel prices generated US$75.3 million in increased fuel costs in the quarter, including the net impact of fuel hedges, considering current fuel consumption levels.
LAN continues to maintain a solid financial position, with adequate liquidity and a solid financial structure, as reflected by the Company’s BBB Investment Grade international credit rating (Fitch). LAN is one of the few
airlines in the world with an Investment Grade rating. At the end of the quarter, LAN reported US$388.5 million in cash and cash equivalents representing 8.0% of revenues for the last twelve months. Additionally, the Company has practically no short-term debt, while its long-term debt is mainly related to aircraft financing and has 12 to 15 year repayment profiles with competitive interest rates. The Company has limited exposure to foreign exchange rate fluctuations as approximately 85% of revenues and 60% of costs are U.S. dollar denominated.
LAN’s strong operating results during the quarter evidenced the ample growth opportunities in both cargo and passenger markets, enhancing the Company’s leadership position in Latin America and reflecting its ability to face and mitigate impacts of adverse scenarios such as the current fuel crisis affecting the aviation industry. Based on LAN’s diversified, solid and flexible business model, as well as the Company’s consistent track record and solid balance sheet, LAN is continuously improving the Company’s long-term strategic position by addressing opportunities, strengthening its market presence and increasing competitiveness.
EBITDAR Calculation (1)
The following is a calculation of LAN’s EBITDA (earnings before interest, taxes, depreciation and amortization) and EBITDAR (earnings before interest, taxes, depreciation, amortization and aircraft rentals), which the Company considers useful indicators of operating performance.
(1) EBITDA and EBITDAR are not accounting measures and should not be considered in isolation nor as a substitute for net income prepared in accordance with International Financial Reporting Standards (IFRS) as a measure of operating performance. Furthermore, these calculations may not be comparable to similarly titled measures used by other companies.
Agreement with TAM
On August 13, 2010, LAN and TAM announced that they entered into a non-binding MOU, outlining their intentions to combine their holdings under a single parent entity to be known as LATAM Airlines Group. The proposed combination of LAN and TAM would be among the 10 major airline groups in the world.
On January 19, 2011, LAN and TAM announced the signing of the binding agreements between both companies and their respective controlling shareholders, in line with the MOU signed August 13, 2010. These binding agreements included an Implementation Agreement and an Exchange Offer Agreement containing the definitive terms and conditions of the proposed business combination of LAN and TAM.
On January 27, 2011, LAN signed with the Fiscalía Nacional Económica (“FNE”), the Chilean antitrust authority, an out-of-court agreement in connection with an ongoing investigation by the FNE regarding the potential competitive impacts of a business combination between LAN and TAM. On the same date, this agreement was submitted to the Tribunal de Defensa de la Libre Competencia (“TDLC”), Chile’s antitrust court.
On January 28, 2011, in response to a petition filed by a Chilean consumer association, the TDLC decided not to review the agreement reached by the FNE and LAN, and instead, decided to submit the business combination between LAN and TAM to the general voluntary procedure for TDLC approval (a procedure permitted by the Chilean antitrust laws). This could delay the merger. LAN and TAM cannot complete the business combination until this procedure is completed and TLDC renders a final decision approving the transaction.
On March 1, 2011, Agência Nacional de Aviação Civil (“ANAC”), Brazil’s aviation authority, approved the transfer of the shares representing TAM’s equity capital, as requested in order to implement the transaction and business combination with LAN. This transaction remains subject to the approval of other relevant government authorities and respective shareholders.
On April 13, 2011, LAN filed an expedited procedure allowed by Chilean law that states that if the applicant, in this case LAN, accepts the recommendations suggested by the FNE, the TDLC is obliged to convene a public hearing. On April 20, 2011, the TDLC announced that the public hearing will take place May 26, 2011.
Sale of Blue Express
On April 6, 2011, the Company concluded the sale of 100% of the shares of companies Blue Express Intl S.A. and Blue Express S.A., companies dedicated to ground courier services, to Bethia S.A. for approximately US$54 million in cash. The effects of the sale will be reflected in second quarter 2011’s financial results by generating a onetime non-operating profit of approximately US$45 million.
In line with the Company’s expansion, during first quarter 2011, the Company received a total of 3 Airbus A319 and 6 Airbus A320 passenger aircraft, destined for domestic and regional markets, and 1 Boeing 767-300F freighter, mainly destined for growth on northbound routes.
During the remainder of 2011, LAN expects to receive 11 additional Airbus A320 family aircraft to operate domestic and regional routes, as well as 3 Boeing 767-300s for long-haul routes. During 2011, the Company’s fleet plan also includes the sale of 5 Airbus A318 aircraft. As a result of LAN’s purchase of AIRES, the Company’s fleet also currently includes aircraft operated by AIRES, consisting of 9 Boeing 737-700s, 11 Dash 8-200s and 4 Dash 8-Q400s, all under operating leases.
LAN’s estimated fleet plan and associated capital expenditures are shown in the table below.
Considering the changes in market conditions while facing a higher fuel scenario, the Company is lowering its expected passenger ASK growth in 2011 from between 20% and 22% to between 16% and 18%. Such growth is driven by the net delivery of 18 passenger aircraft and the incorporation of AIRES’ operations. LAN Cargo’s expected cargo ATK growth in 2011 remains between 16% and 18%, mainly driven by the delivery of 3 Boeing 767-300F freighters between November 2010 and January 2011.
Consolidated FIRST Quarter 2011 Results
Net income in first quarter 2011 amounted to US$97.2 million compared to US$88.3 million in the same period 2010. Net margin for the quarter decreased from 8.5% in 2010 to 7.1% in 2011.
Operating income amounted to US$153.3 million in first quarter 2011 compared to US$142.9 million in first quarter 2010. Operating margin in the quarter decreased from 13.8% in 2010 to 11.2% in 2011.
Total operating revenues increased 31.9% compared to first quarter 2010, reaching US$1,364.9 million. This reflected a:
- 32.0% increase in passenger revenues to US$977.8 million,
- 30.2% increase in cargo revenues to US$346.4 million, and a
- 45.1% increase in other revenues to US$40.6 million.
Passenger and cargo revenues accounted for 71.6% and 25.4% of total revenues for the quarter, respectively.
Passenger revenues increased 32.0%, driven by 20.5% growth in traffic and a 9.5% increase in yields. Load factors increased from 79.3% to 80.9%, as the growth in traffic outpaced the 18.2% increase in capacity. The growth rates in traffic and capacity in first quarter 2011 considered the impact of the earthquake that affected Chile February 27, 2010 resulting in a lower comparison basis. Also, such growth rates considered the inorganic growth resulting from the inclusion of AIRES’ domestic and international operations. Overall, revenues per ASK increased 11.7%. Traffic grew as a result of a 27.8% increase in domestic traffic (including domestic operations of LAN and its affiliates in Chile, Argentina, Peru, Ecuador and Colombia), and a 17.4% increase in international traffic. International traffic accounted for 67.9% of total passenger traffic during the quarter. Yields increased 9.5% due to higher fares as a result of a stronger demand environment, as well as higher fuel surcharges.
Cargo revenues increased 30.2% in the quarter, driven by a 16.6% increase in cargo traffic and an 11.7% increase in yields, reflecting growth in global cargo markets, as well as improved revenue management practices. Capacity increased 18.0% during the quarter. As a consequence, load factors decreased from 68.7% to 67.9%. Revenues per ATK increased 10.4% compared to first quarter 2010.
Other revenues increased 45.1%, mainly driven by an increase in tours and travel services, as well as an increase in aircraft leases to third parties and duty free sales.