LATAM Airlines Group S.A. , an airline group in Latin America, announced today its consolidated financial results for the fourth quarter ended December 31, 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 3.29 per USD

 LATAM Airlines Group reported an operating margin of 7.6% for fourth quarter 2016, an improvement of 1.4 p.p. over the same quarter in 2015, and net income of US$54.3 million, a US$70.6 million improvement over the fourth quarter 2015. The improvement in operating results was driven by a 6.7% increase in total revenues, reflecting a positive revenue per ASK trend in domestic and international routes in Brazil as well as a stronger Brazilian currency.

Total revenues in fourth quarter 2016 reached US$2,569.3 million showing an improvement of 6.7%, mainly driven by an increase of 6.9% in passenger revenue, after nine consecutive quarters of decline. This revenue improvement consolidates and further improves third quarter’s positive trend in revenue per ASK. For full year 2016, revenues reached US$9,527.1 million, a decrease of 6.0% compared to the same period 2015, with the decline of 14.7% occurring during the first half of the year, while increasing by 3.4% during the second half of 2016.

 LATAM Airlines Brazil continues to see positive resulting from the strategy of adjusting passenger capacity on both domestic and international routes in the Brazilian market, with a significant increase in revenues per ASK. Domestic capacity was reduced by 10.9% during the fourth quarter, and consequently revenues per ASK increased by 34.8% as compared to the same quarter of 2015, driven by a 14.8% increase in RASK in BRL as well as by the 14.3% average appreciation of the Brazilian Real. Furthermore, LATAM Airlines Brazil reduced capacity on international routes between Brazil and the US, reaching a reduction of approximately 36% during the fourth quarter compared to the same period last year.

 For the full year 2016, operating income reached US$567.9 million, an increase of 10.5% compared with 2015. Operating margin reached 6.0%, 0.9 p.p. above full year 2015, and in line with the upper bound of the guidance provided by the Company. Net income reached US$69.2 million for the year 2016, compared to a net loss of US$219.3 million for 2015, showing a positive net income for the first time since 2011.

 During the quarter, the Company made significant progress in its plan to reduce total fleet assets and fleet commitments, reaching the lowest fleet commitment levels in the recent history of LATAM for 2017 and 2018. LATAM reduced fleet commitments for 2018 by US$1,039 million and it will also reduce existing fleet assets by returning additional aircraft as compared to the previous quarter fleet plan. With this, the Company will have reached US$2.2 billion reduction in fleet assets for 2016–2018, in line with our previously announced plans to achieve a decrease of US$2.0 to US$3.0 billion in our expected fleet assets by 2018.

 During 2016, the Company achieved a significant improvement in its balance sheet deleveraging to 5.3x as compared to 5.8x in 2015. Furthermore, liquidity reached US$1.8 billion including undrawn committed credit lines, representing 19% of last twelve months revenues. Liquidity was bolstered by the US$608.4 million capital increase that was completed in December 28, 2016, through which Qatar Airways acquired 10% of LATAM’s total shares

MANAGEMENT COMMENTS ON FOURTH QUARTER 2016

The year 2016 was challenging for LATAM, with weakening regional economies and recession in Brazil, devalued local currencies and high inflation rates in certain countries. In this context, LATAM continues to be the best positioned airline group in Latin America to respond to these deteriorated conditions, as we continue to improve margins, cash flow generation and deleveraging its balance sheet, showing the resilience of its business model. Furthermore, Qatar’s investment recognizes LATAM’s achievements and supports our project for the future, strengthening our conviction that we are on the right path to reach our goals.

Management has been proactive to address these economic challenges focusing on the aspects under our control. We continue to pursue initiatives to further reduce costs, which were accelerated during the year and resulted in an 8.9% headcount reduction, as well as productivity increases on various fronts. We also successfully restructured its fleet commitments, adapting fleet deliveries to the current demand environment in the region, reaching historically low levels of fleet commitments for 2017, with no cash out requirements.

We continue to work tirelessly to improve profitability and further improve our free cash flow generation, creating value for all our stakeholders while maintaining a solid cash position and continue deleveraging the Company. Over the coming years, we expect further improvement on this front as we continue working on strengthening our operations, implementing our new domestic business model and seeking approval for our Joint Business Agreements (JBAs) with American Airlines and IAG (British Airways and Iberia). On this front, on March 8th, the administrative court of economic defense of CADE (Administrative Council for Economic Defense) in Brazil approved the JBA between LATAM Airlines Group and IAG, representing the final stage in this jurisdiction of its evaluation process that began in June 2016.

Regarding our new travel model for domestic services, the implementation will continue gradually over the coming months. During the second quarter, LATAM will start to implement a branded fare model with clear attributes differentiation and payable ancillaries to provide to our customers more accessible prices and more alignment to their needs. With this new offering, our passengers will have the ability to personalize their travel experience by having the option to add checked luggage, select their seats, change their flight, and vary the amount of accrued kilometers or points in the Frequent Flyer Programs, among others.

Furthermore, one of the most visible changes for our passengers is the sale on board in domestic flights. “Mercado LATAM”, the new service of purchase on board of beverages and food, is already implemented in all of LATAM’s domestic flights in Colombia and in Peru. It will be implemented gradually in Chile, Argentina, Ecuador and Brazil over the coming months. The objective is to improve the travel experience of our passengers who can access, according to their preferences, to a wide gastronomic selection of more than 50 products. Additionally, since December 2016 the affiliate carriers of LATAM Airlines Group (with the exception of LATAM Airlines Brazil’s domestic and regional flights) are charging for the oversized bags such as surfboards, TVs, among others, consistently with the current dynamics of the industry.

The Company continues developing digital initiatives to empower passengers by providing them a digital experience with end-to-end control of their reservation. Passengers of LATAM Airlines Chile and LATAM Airlines Brasil can now change their flights without calling the Contact Center, and during 2017 this service will be gradually expanded to the other subsidiaries that are part of the LATAM Airlines Group. Additionally, our passengers will be able to advance or delay the flight on the same day of the travel, providing more flexibility to their journey.

MANAGEMENT DISCUSSION AND ANALYSIS OF FOURTH QUARTER 2016 RESULTS

Total revenues in fourth quarter 2016 totaled US$2,569.3 million compared to US$2,407.0 million in fourth quarter 2015. The increase of 6.7% is a result of a 6.9% increase in passenger revenues, showing an improvement for the first time after nine consecutive quarters of passenger revenue decline,  reflecting a positive revenue per ASK trend in domestic and international routes in Brazil as well as a stronger Brazilian currency. Additionally, revenues were boosted by a 54.2% increase in of other revenues, partially offset by a decrease of 7.7% in cargo revenues. Passenger and cargo revenues accounted for 82.2% and 12.0% of total operating revenues, respectively, in fourth quarter 2016.

Total revenues for full year 2016 reached US$9,527.1 million compared to US$10,125.8 million in 2015. The decrease of 5.9% is a result of a 6.3% and 16.5% decrease in passenger and cargo revenues, respectively, partially offset by a 39.7% increase in other revenues. Passenger and cargo revenues accounted for 82.7% and 11.7% of total operating revenues, respectively, for the full year 2016. 

Passenger revenues increased 6.9% during the quarter as a result of a 7.6% increase in consolidated passenger unit revenue (RASK) offsetting the 0.8% capacity decrease, when compared to fourth quarter 2015. The RASK increase was driven by a 6.1% increase in yields, while load factors showed an improvement of 1.3 p.p. to 84.5%. The yield recovery during this quarter was primarily driven by the improvement in yields in Brazil domestic and internationally, partially offset by weaker demand in the Spanish Speaking markets.

During the fourth quarter 2016, demand in the airline group’s Spanish speaking country affiliates (SSC, which includes LATAM Airlines Chile, LATAM Airlines Peru, LATAM Airlines Argentina, LATAM Airlines Colombia and LATAM Airlines Ecuador), which accounts for a 21.2% of total passenger revenues, showed an increase of 6.9% in passenger traffic as measured in RPKs. However, despite stable local currencies during the quarter, RASK continued under pressure mainly due to a weaker macroeconomic scenario which has impacted demand throughout the region combined with a more competitive environment. Passenger capacity as measured in ASKs grew by 7.4% during the quarter, while load factors showed a decrease of 0.4 p.p. to 81.2%.

In the domestic Brazil passenger operations, which represents a 28.9% of total passenger revenues, LATAM Airlines Brazil  continues to adjust capacity resulting in a significant improvement during the quarter with revenues per ASK increasing by 34.8% in USD and 14.8% in BRL. Domestic capacity was reduced by 10.9% and traffic as measured in RPKs decline by 9.4% in fourth quarter 2016 as compared to the same quarter of 2015. As a result, load factor increased 1.4 p.p. to 83.2%.

 

The airline group’s capacity on international routes, which represents a 49.9% of total passenger revenues, increased by 2.2% during the quarter. LATAM Airlines Brazil has continued to reduce capacity on routes with weaker demand, specifically between Brazil and the US. As a result of capacity adjustments and the stronger demand environment related to the appreciation of the Brazilian currency, RASK on those routes increased during the quarter compared to the same period last year. On the other hand, LATAM Airlines Group and its affiliates have added capacity on routes between Spanish Speaking Countries and the US and Europe. Traffic increased by 4.4%, with passenger load factors growing by 1.8 p.p. to 86.3%. Revenues per ASK in international passenger operations increased by 3.9% as compared to the fourth quarter of 2015 reflecting an improved revenue trend.

 

Cargo revenues  decreased by 7.7% in the quarter, driven by a 3.1% decline in cargo traffic and a 4.8% decline in cargo yields as compared to the fourth quarter of 2015. Exports to North America were mainly impacted by lower production in the salmon industry as well as a decrease of certain products as flowers and Asparagus, partially offset by an improvement in imports from North America and Europe to Brazil, as a result of the appreciation of the Brazilian Real. As a result, cargo revenues per ATK declined 1.9% 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. In the fourth quarter cargo capacity, as measured in ATKs, declined 5.9%, which includes a 13.2% reduction of freighter operations, resulting in a load factor of 57.0%, which represents an improvement of 1.7 percentage points as compared to the fourth quarter 2015.

 

Other revenues increased by 54.2% reaching US$147.9 million during fourth quarter 2016. This growth is primarily due to gains on aircraft sales and leaseback transactions as well as an increase in revenues derived from aircraft leases.

 

Total operating expenses in the fourth quarter reached US$2,374.1 million, a 5.2% increase as compared to the same period of 2015. This increase is explained by US$121.0 million of non-recurring costs associated mainly to fleet sales and redeliveries, severance payments, among others. Cost per ASK equivalent (including net financial expenses) excluding non-recurring costs increased by 2.3% when compared to the same period 2015. Although the Company continues with the implementation of its ongoing costs reductions efforts, the increase in unit costs this quarter reflects the negative impact of high inflation rates in the region, the appreciated local currencies, and the 2.7% decline in capacity as compared to the fourth quarter 2015.

 

Changes in operating expenses were mainly due to the following:

 

[if !supportLists]·          [endif]Wages and benefits increased by 7.6% mainly explained by the increase of US$44.0 million in severance payments and performance bonuses during the fourth quarter 2016 as compared to the same period 2015. Excluding these effects, wages and benefits costs declined by 2.0% driven by the 6.1% decline in headcount, partially offset by the appreciation of local currencies during the period, especially the Brazilian real.

[if !supportLists]·          [endif]Fuel costs decreased by 2.8% mainly as a result of a 3.6% decrease in the gallons consumed during the period as compared to the fourth quarter of 2015 as well as a fuel hedge gain recognized during the quarter, which totaled US$4.4 million, relative to a US$40.5 million loss in the fourth quarter 2015, partially offsetting the 7.3% increase in the average fuel price per gallon (excluding hedge) as compared to the fourth quarter of 2015. At the same time, the Company recognized an US$2.8 million loss related to foreign currency hedging contracts, mainly Brazilian real, compared to a US$7.6 million gain recognized in the same period of last year.

[if !supportLists]·          [endif]Commissions to agents increased by 11.5% mainly due to the negative impact of the 14.3% average appreciation of the Brazilian real in passenger commissions at LATAM Airlines Brazil, and in line with the 6.9% increase in passenger revenues.

[if !supportLists]·          [endif]Depreciation and amortization increased by 7.8% due to the negative impact of the appreciation of the Brazilian real during the fourth quarter, as well as an increase in amortization expenses of our intangible assets of TAM´s brand.

[if !supportLists]·          [endif]Other rental and landing fees increased by 3.4% mainly due to an increase in aeronautical rates.

[if !supportLists]·          [endif]Passenger service expenses increased by 4.6% despite the decrease of 1.0% in the number of passenger transported, explained by a lower comparison base due to a reversal of US$3.7 million related to catering expenses in fourth quarter 2015. Excluding this effect, passenger services declined 0.5%.

[if !supportLists]·          [endif]Aircraft rentals increased by 11.5% as a result of the incorporation of more modern aircraft under operating leases. The Company had more Airbus A321s, Boeing 787s and Airbus A350 this year while reducing the number of Airbus A320s, Airbus A330s and Boeing 767s relative to the fourth quarter of 2015, bringing the total number of leased aircraft to 110, as compared to 107 during the same period of 2015.

[if !supportLists]·          [endif]Maintenance expenses continued to decrease this quarter by 9.5% due to efficiencies related to the renewal of our fleet partially offset by higher aircraft redelivery costs related to the Company´s fleet rightsizing initiatives.

[if !supportLists]·          [endif]Other operating expenses increased by 14.4%, mainly driven by certain non-recurring items as mentioned above, including US$53.5 million related to fleet sales and redeliveries.

 

Non-operating results

                 

[if !supportLists]·          [endif]Interest income increased by 107.8% to US$21.8 million in fourth quarter 2016 from US$10.5 million in the same period 2015 mainly due to the reduction of the investments market value in Argentina. This reduction in the market value was related to the local currency depreciation in Argentina in December 2015.

[if !supportLists]·          [endif]Interest expense increased by 5.9% to US$105.8 million in fourth quarter 2016 from US$99.9 million, mainly due to the recognition of non-cash expenses related to prepayment of the revolving credit facility.

[if !supportLists]·          [endif]Under Other income (expense), the Company recognized a US$81.8 million net loss, including US$68.0 million of aircraft redelivery costs, and US$7.2 million in foreign exchange losses. This compares to the US$124.0 million loss in other income (expense) in the fourth quarter of 2015, which included the recognition of a US$71.0 million provision mainly related to aircraft redelivery costs, and a foreign exchange loss of US$57.1 million.

 

Net Income increased from a loss of US$16.3 million on fourth quarter 2015 to a gain of US$54.3 million in the same period 2016 mainly explained by an increase of US$46.0 million in the operating result as well as a US$50.0 million lower foreign exchange loss compared with same period 2015, partially offset by 42.2% decrease in the positive income taxes as compared to the same period 2015.