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Santiago - April, 29 2003
LAN CHILE S.A. ("LAN CHILE" or "the Company") (NYSE: LFL), Chile's largest domestic and international passenger and air cargo carrier, announced today consolidated financial results for the first quarter of 2003. All figures were prepared in accordance with generally accepted accounting principles in Chile and are expressed in millions of U.S. dollars.
LAN CHILE earned US$ 21.6 million in net income during the first quarter of 2003, compared to US$ 17.1 million in 2002. Operating income increased nearly 48.8% and amounted to $26.3 million.
These results were achieved despite facing weak demand conditions and the effects of the conflict in Iraq over passenger traffic and fuel prices. Fuel expenses grew 58.3% driven by a 49.6% increase in jet fuel prices. This price increase resulted in nearly $22.6 million in additional expenses. The Company was able to offset this impact by capitalizing on efficiency gains, which resulted in a 7.8% decline in ex-fuel unit costs, leveraging its comprehensive fuel-hedging policy and implementing a cargo fuel surcharge.
Total Revenues increased 14.2% as passenger revenues advanced 7.1% and cargo revenues rose 24.4%. Although market conditions remained depressed, the Company was able to grow its revenues through expansion into new markets, market share gains and new alliances.
On March 26th, LAN CHILE announced that it had renegotiated several aircraft lease contracts. The Company expects this to result in a $15 million reduction in expenses during 2003.
On April 1st, LAN DOMINICANA, a regional affiliate in which LAN CHILE holds a 49% stake, was authorized by the U.S. Department of Transportation to operate between the Dominican Republic and the United States.
On April 7th, the Company and its Line Maintenance Union signed, in advance, a new 4-year collective agreement.
On April 10th, LAN CHILE launched service to Rosario, Argentina. LAN CHILE will fly twice a day from Santiago to Rosario via Cordoba, Argentina.
On April 10th, the Official Airline Guide (OAG) designated LAN CHILE as the "Best Airline in Central/South America/Caribbean".
On April 28th, LAN ECUADOR, a regional affiliate in which LAN CHILE holds a 45% stake, initiated its operations. LAN ECUADOR will fly initially between Ecuador and the United States.
LAN CHILE earned $21.6 million in net income for the first quarter of 2003. This result compares very positively to the $17.1 million net profit posted in the same period of 2002. Operating income for the quarter increased nearly 48.8% to $26.3 million, reaffirming the positive trend started in mid-2002.
These results confirm LAN CHILE continued careful and able management of the significant revenue shortfalls caused by the September 11th attacks in the United States, the Argentine crisis and economic weakness across Latin America. During the first quarter, overall demand continued to be depressed; fuel prices rose due to the Iraq conflict; and the domestic market showed continued weakness. Nevertheless, the Company responded and was able to deliver positive results by exploiting opportunities in new markets, driving market share gains on key routes, and further controlling costs.
Total Revenues for the first quarter increased 14.2% year-over-year. Passenger revenues increased 7.1% due to a 4.4% increase in traffic and a 2.6% improvement in yield. While domestic traffic declined nearly 12.4% due to weak economic conditions and pricing pressures from new competitive activity, international operations recovered at a strong pace. The Companys continued financial success reflects its ability to respond to adverse market conditions by expanding into new markets, adapting itineraries to changes in passenger flows (such as heightened travel demand to Argentina), adjusting capacity and managing commercial initiatives to drive market share gains, and leveraging its strong alliance network.
The recovery of the cargo business was especially significant in the quarter. Cargo revenues grew 24.4% as traffic increased 10.9% and yield rose 12.2%. Careful capacity management enabled the Company to increase its load factors 1.8 points and, more importantly, led to a 15.2% improvement in revenues per ATK. Yield increased due to excess demand on key northbound routes and the implementation of a fuel surcharge. Strong northbound demand, new alliances and expanded operations out of Mexico and Brazil boosted cargo traffic. Although southbound demand has recovered slightly, it is well below normal levels and the recovering trend still appears uncertain. LAN CHILE has continued to capitalize on its competitive advantages for market share gains which will continue to benefit the Company in the near future.
LAN CHILEs cost controls were another key driver of this quarters results. While total operating costs grew 12.3% as total ATKs expanded 7.7%, the increase can attributed entirely to higher fuel expenses, which rose 58.3% as a result of a 49.6% increase in prices. In fact, the price increase alone resulted in an additional US$22.6 million in operating expenses. Excluding fuel expenses, costs per ATK declined nearly 7.8% due to a efficiency gains and the expansion of operations.
Efficient unit costs were achieved despite facing higher depreciation and amortization expenses (+58%) arising from the incorporation of new aircraft and a $1.3 million charge due to a change in aircraft depreciation policies. This increase was fully offset by reductions in aircraft rentals and maintenance expenses. Maintenance expenses decreased 6.8% due to a $2.8 million gain due to changes in return conditions for leased aircraft. Aircraft rentals declined due to a reduction in the number of aircraft. While the recent renegotiation of several lease contracts will result in a $15 million reduction in lease expenses for 2003, first quarter results were not yet positively impacted. This saving should increase gradually until they reach approximately US$30 million per year in 2005.
During the first quarter the Company also continued to produce significant advances in other areas such as the growth of regional affiliates and the agreement of new labor contracts.
In March, LAN ECUADOR, a new regional affiliate, was authorized to start its operations to the United States. LAN ECUADOR, in which LAN CHILE holds a 45% equity stake, initiated its operations yesterday with daily flights between Quito and Guayaquil and New York and Miami, and is expected to launch operations to Argentina and Spain later this year. Additionally, LAN DOMINICANA, another regional affiliate, was recently cleared by the U.S. Department of Transportation to start service between the United States and the Dominican Republic and is expected to start doing so later in 2003.
During the quarter, the Company also signed a new 4-year contract with its line-maintenance union. This new long-term agreement reflects the positive working relationship LAN CHILE has with its unions and provides invaluable stability on which to base future growth.
These advances and the financial results obtained during the first quarter continue to set LAN CHILE apart from its peers. By leveraging its business model, efficiency and solid financial base, the Company has been able to generate positive results, strengthen its competitive position and take advantage of opportunities to expand its revenue base and reduce costs. In short, LAN CHILE remains one of the only airlines across the globe to continue to produce positive results and grow in a depressed environment. Although demand in the domestic market remains weak and global travel demand is being affected by a number of extraneous factors such as the SARS outbreak, we are confident that results for 2003 will exceed those of 2002 due to our more diversified revenue stream, our stronger competitive position and our solid financial base.
For the first quarter 2003, the Company reported $26.3 million in operating income versus $17.7 million in 1Q02. Net income amounted to $21.6 million versus a $17.1 gain in 2002.
Total operating revenues amounted to $395.9 million, a 14.2% increase compared to revenues for 1Q02. This reflected: a 7.1% increase in total passenger revenues amounting to $225.1 million, a 24.4% increase in cargo revenues amounting to $140.4 million, and a 29.1% increase in other revenues, amounting to $30.3 million. Total passenger revenues increased as a result of a 2.6% increase in yield and a 4.4% increase in traffic. Passenger load factors slightly fell to 68.0% as a 4.4% traffic increase was fully offset by a 5.1% capacity growth. Cargo revenues grew due to the combination of a 10.9% increase in traffic, measured in RTKs, and a 12.2% increase in in cargo yields caused primarily by the introduction of a fuel surcharge, the expansion of operation in new markets and the new alliance with Lufthansa Cargo. Cargo traffic growth outpaced an 8.0% increase in capacity resulting in a 1.8-point improvement in cargo load factors, which reached 66.3%. Other revenues grew 29.1% mainly due to the consolidation of new affiliates, which contributed an estimated $3.5 million in additional revenues for the quarter. The increase in other revenues also arose from increased on-board sales, and third party maintenance and handling services.
Total operating expenses increased by 12.3% during the first quarter mainly due to the 7.7% increase in capacity, measured in ATKs, and to the increase in fuel price. Per unit (ATK) costs, which include total operating expenses and financing costs, increased 2.5%. Wages and benefits increased 11.5% because of the consolidation of new affiliates. Excluding this effect, wages and benefits rose 1.5%. Fuel costs rose 58.3% due to a 49.6% increase in price and a 5.8% increase in consumption. The Company recorded a $6.9 million fuel hedging gain this quarter, compared to a $8.0 million fuel hedging loss in 2002. (Fuel hedging gains and losses are recorded as non-operating items in the "Miscellaneous-Net"line of the "Other Income (Expense)".). Commissions to agents grew 12.9% as increased cargo commission more than offset the decrease in passenger commissions caused by lower base commissions and higher direct sales. As a percentage of operating revenues, commissions to agents remained flat as 14.5%. Depreciation and amortization rose 15.5% due to a change in accounting policies and to the acquisition of two new Airbus A320s. Other rental and landing fees increased 5.9% as a result of increased operations. Passenger services expenses increased 2.1% as a result of decline in the number of passengers and slightly higher per passenger unit cost. Aircraft rentals declined 8.9% as the return of leased Boeing 767, Boeing 737 and DC-8 aircraft fully offset the incorporation of two Airbus A320s. Maintenance expenses decreased 6.8% as the costs related to increased operations were offset by a $2.8 million one-time gain related to modifications on the return conditions of leased aircraft. Other operating expense increased 8.4% mainly due to the incorporation of new affiliates and to increased sales.
Operating margins for the quarter increased 1.5 points to 6.6%. Total non-operating results amounted to a net loss of $0.2 million compared to a net gain of $3.2 million in 1Q02. Interest income increased 21.8% due to higher cash balance. Interest expenses declined 6.4% as lower interest rates offset incorporation of two new A320 passenger aircraft. In the miscellaneous net line, the Company recorded a $8.6 million gain, mainly related to $6.9 million fuel hedging gain as well as foreign-exchange losses, the sale of assets and the settlement of some pending labor suits. Consequently, net margins amounted to 5.5%, a 0.5-point improvement when compared to the same period in 2002.
On March 25th, LAN CHILE announced that it had agreed with its lessors to renegotiate some of its aircraft lease agreements with regard to their terms, lease rentals and redelivery conditions. These amendments will result in a reduction in operating expenses for the next five years. The Company expects this reduction to amount to US$ 15 million in 2003 and to increase gradually until it reaches US$30 million in 2005.
On April 1st, LAN DOMINICANA, a regional affiliate based in the Dominican Republic in which LAN CHILE holds a 45% stake, was authorized by the U.S. Department of Transportation to operate to the United States. LAN DOMINICANA is currently working on operating aspects and is expected to launch services between the United States and the Dominican Republic later in 2003.
On April 7st, LAN CHILE and its Line Maintenance Union signed a new collective agreement. This new four-year contract provides the Company with enhanced flexibility. The agreement was reached in advance and is scheduled to expire in March 2007.
On April 10th, LAN CHILE launched service to Rosario, Argentina. LAN CHILE will fly twice a day from Santiago to Rosario by extending its current flight to Cordoba, Argentina. Operations to Rosario were initially scheduled to start in September 2001, but were suspended after the September 11th terrorist attacks and the Argentine economic crisis. Rosario is LAN CHILE fourth destination in Argentina as the Company already operates to Buenos Aires, Cordoba and Mendoza.
On April 10th, the Official Airline Guide (OAG) announced it had designated LAN CHILE as the Best Airline in Central/South America and the Caribbean. This prestigious award is based on the votes of business travelers.
On April 28, LAN ECUADOR initiated its operations. LAN ECUADOR is a regional airline in which LAN CHILE holds a 45% stake. The remaining 55% is owned by local investors. In its first phase, LAN ECUADOR will operate between Guayaquil and Quito in Ecuador and New York and Miami in the United States. LAN ECUADOR also has traffic rights to operate to Spain and Argentina and is expected to launch service to destinations on both countries during the second half of 2003.
LAN CHILE S.A. is the largest domestic and international passenger/cargo air carrier in Chile and one of the leading airlines in Latin America. Together with its code-share arrangements and affiliated airlines, the Company serves 15 destinations in Chile, eight destinations in Peru, 17 destinations in Latin America, 25 in North America, eight destinations in Europe and four in the South Pacific. Currently, the Company operates 43 passenger aircraft and 10 cargo freighters. LAN CHILE is a member of oneworld (TM), the most international of the global airline alliances. It has bilateral commercial agreements with oneworld partners American Airlines, British Airways, Iberia and Qantas and also with Alaska Airlines, AeroMexico, TAM and Lufthansa Cargo. For more information visit www.lan.com or www.oneworldalliance.com.
Statements included in this report regarding the Companys business outlook and anticipated financial and operating results regarding the Companys growth potential, constitute forward-looking statements and are based on management expectations regarding the future of the company. These expectations are highly dependent on changes in the market, general economic performance of the home country, industry and international markets, and are therefore subject to change.
