LATAM Airlines Group SA
SGO:LTM
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LATAM Airlines Group SA
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Good day, everyone, and welcome to LATAM Airlines Group Earnings Release Conference Call. Just as a reminder, this conference is being recorded.
LATAM Airlines Group earnings release for the period was distributed on Tuesday, March 3. If you have not received it, you can find it in 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 the international markets. Therefore, they are subject to change.
Now it is my pleasure to turn the call over to Mr. Ramiro Alfonsn, Chief Financial Officer of LATAM Airlines Group. Mr. Alfonsn, please begin.
Thank you, Carmen, and good morning, everyone, and welcome to LATAM Airlines fourth quarter earnings call.
Joining me today are Mr. Roberto Alvo, Chief Commercial Officer; Mr. Jerome Cadier, CEO of LATAM Airlines Brazil; and Mr. Andrs Del Valle, VP of Corporate Finance.
Please join me on Slide 2, where you will find the highlights for the full year 2019. We quickly reacted to growth opportunities in the region after the cease of operations of some airlines in the region. As a consequence, we grew in ASKs by 4.1%. And during 2019, LATAM carried 74 million passengers, the highest number in our history and more than 5 million additional passengers, half of them in Brazil, compared to 2018. This represented more growth than any other airline in the region. In addition to growth, we continued improving 2 main pillars where we put a special attention, our operations and our customers. Regarding our operations, we improved the capillarity of our network, especially from our hub in Santiago, Lima and So Paulo. At the same time, we put a special focus on the reliability of our operations.
We are proud to be named the most punctual airline in the world in the mega carrier category by AOG (sic) [ OAG ] and by Cirium with approximately 86% of our flights being on time. In 2019, we have also been recognized as the most punctual airline in Brazil. CASK ex-fuel remained stable at $0.045 despite challenges and the effects of the social unrest in the region, in particular, in Chile.
Growing in shorter routes and cutting capacity in longer routes, mainly those from Argentina early in the year due to the devaluation of the peso, reduced our average stage length by 3% for the year, diluting fixed cost per flight in fuel hedge space. In addition, the grounding of the Boeing 787 took longer than anticipated. And we had an average of 3 aircraft on ground during 2019 due to engine delays, which we expect to recover by the second quarter 2020. On the other hand, currencies devaluation helped us to offset part of these effects and will remain stable in CASK ex-fuel during the whole 2020 compared to -- 2019 compared to 2018.
Regarding customers, we executed a strategic investments to better serve our passengers and improve their travel experience. During 2019, we invested in our passengers as never before. We acquired Multiplus and we launched our now unified frequent flyer program under the LATAM Pass brand, becoming the fourth largest frequent flyer program in the world. We launched the first planes with our new cabins designed to offer an industry-leading onboard experience and to better serve different types of passengers. We currently have 67 aircraft retrofitted of the 170 we are targeting in this space and that will be concluded by the end of this year 2020.
In addition, we launched our new business service and the Premium Economy service that later Andrs will detail. As a result, our passengers recognized us with several awards such as the Best Airline in South America by Skytrax World Airline Awards, and the Best Global Airline of South America according to the APEX Passenger Choice awards, among others.
In synthesis, during 2019, we improved our network. We improved our operations and our customer service and further strengthened our position as the leading airline in the region and one of the main airline groups in the world.
As previously announced, LATAM will leave the oneworld alliance on May 1, 2020, but will maintain the existing bilateral agreements with all of the oneworld members with the exception of American Airlines and will continue to offer customer benefits such as earning and redeeming of miles, reciprocal lounge access, among other benefits.
We are happy to report a net income of $190 million for the full year 2019. For the third year in a row, we increased our total revenues, reaching more than $10.4 billion. Once again, this revenue increase was driven by our passenger operations, which increased 3.4% year-over-year.
Once again, we generated over $1 billion in free cash flow despite the onetime investments in multiples and the investments we are carrying out by upgrading our cabins of the 170 planes. In 2020, we will finish the retrofit of all these cabins. This cash flow generation allowed us to reduce our financial debt during the year and reached a leverage of 4.0x as of December 2019, while maintaining a healthy liquidity position of approximately 20%.
We further reduced fleet commitments for the following years, which will give us even more financial flexibility for the upcoming years. The agreement with Delta announced last September is a recognition of the footprint that LATAM has in the region, and we are excited about the benefits that this strategic agreement will bring to our shareholders, customers and employees. Delta is currently a shareholder of LATAM after successfully completing the tender offer of 20% of the shares of LATAM.
In addition, our affiliates in Colombia, Peru and Ecuador implemented new codeshare agreements with Delta. We have already announced codeshares in Brazil to be implemented starting in the first half of this year, and we expect to announce codeshares in Chile also during the first half of 2020. We also signed a loyalty program agreement that will enable reciprocal frequent flyer benefits starting April 1, 2020, with Delta.
LATAM Pass members will be able to earn and redeem miles on Delta flights to more than 300 destinations worldwide. We already reallocated our flights to JFK from Terminal 7 -- from Terminal 8, sorry, to Terminal 4 to better serve passengers connecting with Delta flights.
We could not be happier with all these achievements, and we want to thank our employees for the efforts during this year. Together, we solidified LATAM's position in the region, and we improved our competitiveness.
Before turning the call to Andrs for more detail in the fourth quarter, we would like to thank our customers for their continued support and express our commitment to providing the best travel experience and connectivity in Latin America.
The recent outbreak of coronavirus doesn't have us any different. We are following it closely, monitoring constantly its evolution and working closely with health authorities. Our crews and ground staff are prepared to handle situations of this nature. For us, the most important is the safety of our passengers and crews. And therefore, we suspended our flight from So Paulo to Milan until April 16. In addition, we have frozen all nonessential hiring and discretionary expenses and investments.
With that, I would like to pass the call to Andrs Del Valle, our VP of Corporate Finance, to analyze the fourth quarter in more detail.
Thank you, Ramiro, and good morning, everyone. Please turn to Slide 3 where you will find the summary of the income statement. Total revenues for the company reached $2.9 billion in the fourth quarter, representing an increase of 3% year-over-year. Capacity grew 3.2% in the quarter, while revenues per ASK grew by 3.1% in dollar terms as a result of a healthy domestic Brazilian market and a recovery in the international unit revenues. As a result, total passenger revenues rose 6.5%.
Cargo revenues decreased by 10.3% year-over-year, in line with the previous quarter due to the sale of a former cargo subsidiary in Mexico, MasAir, and lower input in the region and disruption cost by the events in Chile.
Other revenues decreased 24% to $113 million, explained by the merger of Multiplus with LATAM Airlines in Brazil. Multiplus' revenues are now recognized on the passenger revenues, same as the revenues of the loyalty program, LATAM Pass.
Total cost increased by 3.1% in the quarter to $2.5 billion, and as a result, our operating income for the quarter amounted to $350 million. This is 2% higher than last year's operating results (sic) [ income ], while operating margin reached 12.2%.
Net income amounted to $227 million in the fourth quarter. This is a decline of $163 million versus last year, mainly explained by the $222 million decline in foreign exchange gains year-over-year.
Looking at full year figures on the right side of the slide, revenues rose 0.6% to $10.4 billion, while costs grew by 2% due to an increase of 4.1% in capacity, resulting in a decline of 1% -- 1.8% in cost per ASK. With that, operating income for the year was $742 million and operating margin 7.1%, in line with our previous guidance. Lastly, our net income amounted to $190 million for the full year 2019.
Please turn to Slide 4. Looking at the different business units, you can see that the international unit revenues are showing a recovery year-over-year. This is a result of the active capacity management of the company. International segment represented approximately 51% of our total ASKs of the quarter, down from 54% in the previous quarter, as a result of the 5% decrease in capacity during the fourth quarter. Traffic declined by 5.2% and load factor rose 0.2 percentage points to 83.2%. Revenues per ASKs were $0.06, which is 4.6% higher than the same quarter of last year.
Looking at the domestic Brazil operations, which represent 30% of the total ASKs, total capacity increased by 17.7% and traffic by 20%. Load factor reached 85.2%. This is 1.7 percentage points higher above the fourth quarter of 2018. LATAM Airlines Brazil leased 14 aircraft previously operated by Avianca Brasil at the beginning of the year, accelerating in that manner, its growth compared with the first half of the year, mainly by operating the slots obtained after the exit of Avianca Brasil.
In addition, the continued recovery of Brazilian domestic demands brought revenues per ASK's growth of 13% in local currency and 6% growth in U.S. dollar terms, reaching $0.071 in the quarter.
In Spanish-speaking countries' domestic operations, which altogether represent 19% of the total passenger capacity, capacity rose 9%, while traffic grew 3.8%, and load factor reached 78.3%. This is almost 4 points lower than the same quarter 2018, affected by the social unrest in Chile. Excluding Chilean operations, capacity rose 13% and traffic rose 12%, reaching a load factor of 82%. Revenues per ASK declined by 4.7% through the quarter, mainly due to the devaluation of local currencies. Excluding foreign exchange effects, revenues per ASKs would have grown 5% in Spanish-speaking countries' domestic operations.
As a result, overall passenger capacity grew by 3.2% year-over-year this quarter. Revenues per ASKs rose 3.1% year-over-year, and load factor remained relatively stable at 83%.
Lastly, if we exclude the effect of our former Mexican subsidiary, our cargo operations increased capacity by 0.6%, while traffic declined 0.6%. We saw a decline of 0.7 percentage points in load factor to 56.4%. Revenues per ASK declined by 8.7% in the fourth quarter, mainly driven by lower imports into region, especially to Brazil and Argentina, and disruptions generated by the social unrest in Chile during the fourth quarter of 2019.
Please turn to Slide #5. Once again, I'm showing this slide so that you can track the main changes by point of sale of the passenger and cargo revenues in the past 12 months. On the left side, you can see the revenues by point of sale in 2018. Here, Brazil represented approximately 35% of total revenues, while Argentina represented 10% of the revenues. If you move to the graph on the right, which reflects the revenues by country for the same period in 2019, we can see a 4 points increase for Brazil, while Argentina declined 4 points, accounted for only 6% at the point of sale. This diversification allows us to adjust our operations and to offset the impacts that we may face in certain markets.
Please turn now to Slide #6. As Ramiro said, we maintained our cost per ASK ex-fuel despite the operational challenges we faced during the year such as adjustments to the international network, social unrest in region and an average of 3 Boeing 787 aircraft on ground during the year. At the top of the slide, you can see that LATAM today continues to expand its operations and transport more passengers. We carried almost 20 million passengers in the fourth quarter and reduced number of employees per aircraft compared to last year. Fuel costs decreased by 10.6% due to decline of 14% in the fuel price per gallon, offset by a 3% increase in fuel consumption, in line with the capacity increases. Costs associated with wages and benefits declined by 5.7% in the fourth quarter of 2019, mainly explained by the devaluation of the local currencies.
If you look at the fleet cost, which includes maintenance, depreciation and amortization expenses, those were up around $100 million year-over-year in the quarter, mainly due to the addition of 29 aircraft in our fleet during the year, half of them in Brazil.
Lastly, other costs on this slide increased 12% as we carried 9.4% more passengers year-over-year, higher airport rates and non-recurrent PIS/CONFINS reversal in fourth quarter 2018. As a result, cost per ASK declined by 0.1% to $0.066 while cost per ASK ex-fuel increased by 6.7% year-over-year to $0.046. After the full year 2019, cost per ASK declined by 1.8% and CASK ex-fuel remained stable at $0.045.
Please turn to Slide #7. During the year, we have made important progress with the fleet commitment schedule. We have now further reduced by $1.1 billion to fleet commitments to be delivered between 2020 and 2022. This is equivalent to a 38% reduction in fleet commitments for this 2-year period. We believe that this plan gives us the necessary flexibility for better go to different market conditions and allows us to continue improving cash flow after investments, helping us maintain control our debt profile and a healthy liquidity level.
Please turn to Slide #8. As Ramiro said, LATAM has never invested more in its passenger than in the last year in 2019. We began with the upgrade of our cabins of our fleet and we are already flying 67 aircraft with the new cabins, leading to significant improvement in customer satisfaction. We have also deployed our self-bag drop system at 6 airports and have inaugurated our VIP lounge in Miami, all contributing to improved customer satisfaction through different stages of the journey.
During 2019, we also launched a new basic economy class to give more options to our passengers, and in March 2020, we will become the only airline in the region with a Premium Economy service in all its international and domestic flights. This new premium service consists in different stages of service at airports such as access to VIP lounges, priority check-in and boarding as well as differentiated onboard service such as middle seat block for more comfort and privacy, differentiated catering service and exclusive overhead bins for the luggage. We have invested in our passengers, and we will continue to do so without increasing our debt, as you can see in the next slide.
Turning to Slide #9, our gross debt declined by $292 million from the previous quarter to $7.2 billion, thus our leverage was down to 4x in December from 4.2x in September. We continued having a very good liquidity position with $1.5 billion of cash on hand plus a revolving credit facility of $600 million in the fourth quarter, which is completely undrawn. With this, LATAM's liquidity position reached 20% of last 12 months revenue.
Moving on to our hedges. At the bottom left, you can find our updated fuel hedge position as of today. For the fourth quarter of 2019, we hedged approximately 56% of our total consumption. For this year, we had a good portion hedged for the first half with 65% and 81%, respectively, Q1 and Q2 that is, while for the third quarter, we currently have 49% of consumption hedge.
Finally, on Slide 10, regarding guidance, we are not changing the guidance provided in December of last year. We expect total capacity to grow between 3% to 5% this year. This is composed by a 0% to 2% target for our international business, 7% to 9% growth for domestic Brazil and 6% to 8% for domestic Spanish-speaking countries' operations. We are also expecting cargo capacity to increase between 4% to 6% this year.
And with that, we conclude the presentation for today, and we'd be happy to open the line for questions. Thank you.
[Operator Instructions] And our first question comes from Michael Linenberg with Deutsche Bank.
This is actually Kate on for Mike. We're wondering though if you could just talk about any more changes that you might make to -- like your route network in response to corona, just in addition to Milan, if there's any other regions that you're particularly concerned about or watching closely.
Yes, this is Roberto. So at this point in time, we only have made a change in Milan. We are very closely monitoring trends in traffic. We don't see an impact on domestic markets at this point in time in any of the countries where we operate. However, we are starting to see certain softness in demand on international routes, partly due to changes in policy travel rules from companies in general. But at this point in time, we are in the process of just looking very carefully how this develops in the next few weeks.
Our next question comes from Savi Syth with Raymond James.
Just kind of curious on the Colombia kind of plan to kind of grow your corporate share. What's kind of the latest development there? And just in this kind of current environment with the commodity uncertainty and FX uncertainty, can I -- is this kind of more of an opportunity? Or are you kind of scaling back your plans there?
Savi, this is Roberto. So just to remind everyone, we launched a plan to grow in Colombia. We increased our operations as of July 1, 2019, focused mostly on corporate markets in Colombia. As I explained in the last conference call, we are satisfied with the current outcome of this first stage of the plan. Given the macroeconomic situation in Colombia, particularly devaluation last year, we decided to pause our growth for a few months. And at this point in time, we are at that stage. But we're looking at the developments very closely, and we're satisfied with what we have achieved in the last 7 months.
Okay. And then if I may, just on domestic Brazil, one of your competitors have been kind of sounding concerned about capacity growth levels. Just -- and you just kind of finished a strong 4Q, but now you're starting to lap maybe some of the Avianca Brasil capacity pullout. Just any updated thoughts on kind of what you're seeing here in 1Q and kind of thoughts on capacity in 2Q?
Yes. So first semester capacity will grow double digits as compared to first semester last year, and this is basically because of the incorporation of the 14 aircraft that Andrs made reference to. We have, at this point in time, no plans of increasing our capacity in terms of number of aircraft further than that. So you will see a gradual decline in growth in the second half, basically because of the base of second half of last year.
And are you still seeing kind of double-digit RASK increases kind of on a local currency basis here in the first quarter? Or are we starting to see that moderate?
No, we see healthy RASKs in the first quarter. But it's starting to compare to the base of last year. So it's not a double-digit increase at this point in time.
Our next question comes from Matthew Wisniewski with Barclays.
I wanted to just talk about cash flows. Expectations of margins are roughly flat. CapEx steps down materially this year. I think it's $400 million on aircraft from over $1 billion last year. What -- given that it should produce pretty healthy cash flows this year, what else could impact kind of cash flows which we should keep in mind? And then as a kind of a second question, what -- can you kind of revisit what cash flow priorities are if cash does inflect higher this year? Could we see dividends or deleveraging further? Any color on that would be great.
Thank you, Matthew. Well, you're right. We are reducing, compared to 2019, our fleet commitments and, therefore, our free CapEx from $1 billion to maybe $400 million. And some of these aircraft will probably be arranged through sale and leaseback. So they will not be considered CapEx and will be financed. However, the company is still carrying on significant non-fleet investments. We are concluding our retrofit of the cabins. So that is requiring cash flow this year. There are a lot of engine repairs that are included in the non-fleet CapEx. And we're targeting a non-fleet CapEx of approximately $1 billion this year, which is similar to the one that we had in 2019.
Regarding priorities, our main 2 priorities besides the engine repairs that are mandatory for our recurrent operations. The main 2 projects, I would say, are the retrofitting of the cabins and our investments in IT. We're improving our digital IT services to our customers. And those are the 2 main priorities.
Our next question comes from Bruno Amorim with Goldman Sachs.
So I just have a follow-up question on the unit revenue perspectives in Brazil. You have mentioned that you were seeing a deceleration in the pace of growth in unit revenue in the first quarter. And so if you are not taking capacity out of the market, this means that the market as a whole will likely face a much tougher comparison base in terms of year-on-year variation of ASKs, of capacity in the second quarter. And since you are already in the single-digit level for unit revenue growth in the first quarter, is it possible for us to see a negative variation in the unit revenue in the second quarter? Any indication you could provide at this point?
Bruno, this is Roberto. Just to clarify, we are not taking out capacity. What I was trying to explain is that incorporation of the 14 aircraft happened around mid next -- last year. And therefore, what you will see is high growth in the first half as compared with the first half of last year because of the lower base. And that gap will start to shrink as the year continues because we will have already the impact of those 14 aircraft in -- we had it in the second semester of 2019. So capacity will still be positive and our guidance, as first explained, is 7% to 9% for domestic Brazil in the year as a whole, okay? So yields have improved, as I said, as compared to last year in the first quarter. And the comparison in the second quarter, we'll still see also how the market develops. The only point of consideration is that yield base also increased significantly last year because by the time of the second quarter, Avianca has mostly ceased its operation.
Yes. So that was my concern because there was a big jump in yields seasonally adjusted in the second quarter last year. And then with a much tougher comparison basis, do you have any indication if it could be negative in the second quarter? Or it's still too early to say?
I think it's too early to say. However, I think that if you put everything together, our expectation for yields or RASK, if you want for the whole year, would be in the range of stability as compared to what we saw in 2019.
Our next question comes from Roberta Versiani with Citibank.
Just a quick question. If you have had recent conversations with Qatar Airlines regarding current -- various future with LATAM.
Thank you, Roberta. No, we have not had management conversations with Qatar other than the recurrent business conversations.
Our next question comes from Joe Kogan with Scotiabank.
I wanted to ask another question about coronavirus. I know it's still very early and there's not very much information, but I was wondering if you could help us get a sense of how large the impact could be in different scenarios. I mean are there any historical precedents for something like this you would use in your analysis of figuring out what the traffic impact is? Are you considering some bad scenarios or good scenarios? I'm just trying to understand order of magnitude. I mean would the impact on traffic be 5% or 50% is really the thrust of the question.
Yes. Joe, first, I'm not sure that any of the precedents before would serve as an example. Both MERS and SARS had very little effect in Latin America when those happened. However, swine flu that started in Mexico last -- 2 decades ago, I don't know -- 15 years ago, had a slightly bigger effect and traffics were double-digit impacted at the time. Honestly, I can't remember exactly the figures. And I'm not sure that this is a good point of comparison with whatever can happen this year. However, what I can tell you is we have very little traffic coming and going from and to Asia, so the impact in Southeast Asia and Asia in general is relatively limited in terms of our exposure. In Europe, we fly to certain cities, several -- 8 cities. We've seen the impact mostly in [ Italy ]. We are not seeing anything too significant yet in other countries in Europe, and we do not fly to Iran either, which is another country where there is a significant number of cases. So it's very hard to foretell, to be totally honest. What I can tell you is that we're following very closely. And as Ramiro explained, we took the measures in terms of freezing nonessential hiring, nonessential expenses and nonessential investments just to be on the safe side with respect to this.
[Operator Instructions] And our next question is from Savi Syth with Raymond James.
Just I want to ask a little bit about Brazil. I know it takes time to change perceptions, but you've kind of implemented this new kind of onboard experience and you are kind of change -- retrofitting the fleet. Any early observations on what you're seeing as a result of those changes?
So we will launch Premium Economy in all domestic markets on March 16. So it hasn't started. So maybe on next quarter, we can provide some color on how this is going. However, we believe that we will have a premium product. We actually do not believe we will have -- we will be the only airline that will have a premium product in most Latin American markets. We believe that this will distinguish us from our competition, and we expect that this will be very well taken with our customers.
Does that help you in the very near term with your kind of corporate discussions? Or is that something that kind of develops over time?
Sorry, Savi, does it help on what type of discussion?
Just wondering if that helps you with your corporate account discussions and getting the market share immediately? Or is it something that perception changes, and over time, you expect the revenue benefits?
Savi, this is Jerome from Brazil. We have already seen some positive results regarding market share with corporate agencies. Given that we're offering a better product, that will be even better after March 15. So we have seen positive results and are excited about what's coming up.
Got it, Jerome. And then just one clarification on the hedging. You got some good hedge positions, but curious at what level you've hedged given the sharp pullback in fuel prices here.
Yes, the hedges were taken high starting this year, were taken, of course, slightly above the current levels. So at today's prices, we have sort of expected today's price at negative compensation, which is in a way, it's -- we will benefit from the downside of our fuel given that we don't use, I think, swaps, we use limited instruments for most part. So I think it's a negative effect for now. I think the market changed in 2 weeks here. But it's, I think, slightly under the water, the hedges.
Thank you. And ladies and gentlemen, this concludes our Q&A session and program for today. Thank you again for joining us. Please feel free to contact our Investor Relations department if you have any additional questions. We look forward to speaking with you again soon.