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Santiago - October, 30 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 its consolidated financial results for the third quarter and the nine-month period ended in September 30, 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$22.7 million in net income for the third quarter of 2003. Earnings were three times last year s level of US$7.6 million, making this the best result for this period in the Company's history.
Accumulated nine-month net income amounted to US$48.4 million, also more than three times last year s reported earnings of US$15.3 million, and the highest in the Company's history.
Operating income for the quarter rose 66.1% from US$20.3 million in 2002 to US$33.8 million in 2003 as operating margins increased 2.7 points to 8.4%. Accumulated nine-month operating income increased 70.8% to US$69.8 million.
Profitability increased primarily due to a 12.0% increase in revenues. Passenger revenues grew 14.6% due to market share gains on existing routes, expansion into new markets, and a slight recovery in demand at key points of sales. Cargo revenues grew 8.7% mainly due to an improving pricing environment and a cargo fuel surcharge. Operating revenues per ATK grew 9.8%.
Operating expenses grew 8.8% mainly due to high fuel prices and higher variable expenses from increasing operations. Unit costs grew 6.0%, while unit costs ex-fuel rose only 2.9%.
On September 24, LAN ECUADOR, one of the Company's regional affiliates, initiated service between Ecuador and Spain. This operation, scheduled for three weekly flights, also serves the Peruvian market by connecting with a new LAN PERU flight between Lima and Guayaquil.
On September 30, the Company arranged the incorporation of an additional leased Boeing 767-300ER passenger aircraft. This aircraft adds to the 10 existing Boeing 767-300s passenger aircraft and will begin operating in December 2003.
On October 14, LAN CHILE Cargo launched Positive FS, a new flight-specific product that leverages LAN CHILE s passenger itinerary to offer a differentiated product with higher yields.
In the third quarter, the Company also received a number of important awards. On October 2, a survey by German magazine Reise & Preise selected LAN CHILE as one of the world s ten best airlines. On September 12, the content of the Company's in-flight entertainment program was selected at the Avion awards as one the best three in the world for a midsize fleet. On a corporate level, Global Finance magazine selected LAN CHILE as the "Best Airline in Latin America", and the Company was voted as Chile s Third Most Respected Company in a survey by Chilean financial newspaper El Diario and PriceWaterhouse Coopers.
In the best third quarter in the history of the Company, LAN CHILE earned US$22.7 million in net income, which was three-times the 2002 result of US$7.6 million. LAN CHILE overcame the challenges of continued softness in demand and high fuel prices by fully leveraging strategic adjustments made in previous quarters. In summary, the Company has been able to further improve its competitive position, enhance its regional network, and drive its streamlined cost base. With improved results, the Company has also continued to strengthen its financial base with significant advances in its liquidity position.
Operating income for the third quarter increased from US$20.3 million in 2002 to US$33.8 million in 2003. Operating margins grew 2.7 points to 8.4%, as revenues grew 12.0% and operating costs grew 8.8%. Passenger revenues grew 14.6% due to a 17.0% increase in traffic and a 2.1% reduction in yields. Traffic growth outpaced a 7.0% increase in capacity, leading to a 6.2 point increase in load factors. Total traffic improved as the growth of international traffic fully offset the decline of Chilean domestic traffic. However, yields decreased due to a 9.4% increase in average trip lengths (reflecting a passenger mix with a higher international long-haul component), a relative increase in connecting traffic, and several commercial strategies aimed at stimulating demand.
The growth in international passenger traffic stemmed mainly from market share gains, deeper penetration into new markets, the launch of new operations, and the recovery of demand in key points of sale. The Company has increased its market share in routes from Chile to the United States and Europe, and in regional markets such as routes to Brazil and Argentina. The Company's passenger affiliates, LAN PERU and LAN ECUADOR, were also key sources of revenue growth. Not only did the Company benefit from the third quarter high season in Peru and Ecuador, but also from LAN PERU s market share gains in its international routes, and LAN ECUADOR s international expansion with additional frequencies to the United States and new services to Argentina and Spain. Improvements in demand in some markets also supported traffic growth. Specifically, Argentine feeder traffic and Chile-originating international traffic showed signs of an incipient recovery, although both markets continue to be depressed compared to historical levels.
Cargo revenues grew 8.7% during the quarter as a 2.4% decrease in traffic was fully offset by an 11.3% increase in yields. Cargo capacity fell 0.6% and load factors decreased 1.2 points. Cargo traffic declined during July and August due to a temporary reduction in export volumes out of Chile (due to a fall in salmon production linked to weather-related reasons), soft southbound traffic, and the reduction in available belly space caused by high passenger load factors. Traffic grew slightly in September with improving export volumes and southbound traffic. Higher yields resulted from the implementation of a fuel surcharge and an improved pricing environment. In summary, revenues per ATK increased 9.3%.
Operating costs grew 8.8% as system capacity grew 2.3%, leading to a 6.0% increase in unit costs. More than half of this increase was caused by higher fuel prices, as fuel-normalized unit costs grew 2.9%. Ex-fuel operating costs increased mainly due to increased expenses associated with the Company's regional expansion, the growth of international passenger traffic, and higher landing fees at several airports. Specifically, increases in wages and benefits and other operating expenses were mainly related to the operation of new affiliates, while higher distribution, handling and passenger service expenditures were related to higher passenger volumes. Personnel expenses also rose due to the impact of a stronger Chilean peso over peso-denominated wages and increases in performance-related bonuses. These cost increases were partially offset by reductions in aircraft lease expenses due to the amendment of lease contracts during the first quarter.
The Company's positive financial performance has contributed to a stronger balance sheet. LAN CHILE s liquidity position has increased and currently amounts to US$174.7 million in liquid assets (US$160.7 million in cash, time deposits and marketable securities and US$14.0 million in other liquid assets, accounted for in the Other Assets section of the balance sheet). This provides the necessary flexibility for an uncertain environment. In addition, the Company continues to carry no short-term debt and holds long-term debt related only to aircraft, featuring both extended payment profiles and attractive conditions.
During the quarter, LAN CHILE and its affiliates also continued advancing on strategic plans as well as adjusting the fleet to respond to market conditions. In late September, LAN ECUADOR initiated three weekly flights from Guayaquil to Madrid, increasing the number of international destinations it serves to four. This operation also serves the Peru-Madrid market as it connects with new LAN PERU flights between Lima and Guayaquil. In October, LAN CHILE Cargo initiated the implementation of Positive FS, a new flight-specific product that takes advantage of LAN CHILE s passenger itinerary to offer a differentiated cargo product featuring higher average yields. In order to match increased demand and support additional capacity growth, LAN CHILE also arranged the incorporation of a leased Boeing 767-300 passenger aircraft, which is expected to be operational in mid-December. The Company will also add, as scheduled, its first two Airbus A319 aircraft in December, and will replace its DC-10 wet-leased freighters with larger Boeing 747 freighters to respond to improving cargo demand.
LAN CHILE s positive third quarter demonstrates how the adjustments implemented during the past two years have enabled the Company to resume revenue growth and improve profitability in a challenging environment. The Company's enhanced regional network, strong competitive position in key markets, and streamlined cost base put it at the forefront of the Latin American and global airline industry. LAN CHILE remains committed to its strategic plan and will continue to closely monitor demand trends in order to take advantage of the recovery in both the cargo and passenger businesses. It will also continue to analyze opportunities to achieve further efficiency gains. With additional revenue growth expected into the future, the Company expects to continue increasing profitability and creating shareholder value.
For the third of 2003, the Company reported US$33.8 million in operating income compared to US$20.3 million for the same period of 2002. Net income amounted to US$22.7 million compared to a US$7.6 million net profit in 2002.
Total operating revenues amounted to US$403.5 million, a 12.0% increase compared with the third quarter of 2002. This reflected a 14.6% increase in total passenger revenues amounting to US$236.7 million, a 8.7% increase in cargo revenues amounting to US$140.7 million, and a 8.5% increase in other revenues, amounting to US$26.1 million. Passenger revenues grew as a 17.0% increase in traffic offset a 2.1% decrease in yields. Traffic growth outpaced a 7.0% capacity increase, leading to a 6.2 point increase in load factors to 72.7%. Traffic grew as a 8.3% decrease in domestic traffic was fully offset by a 23.8% increase in international traffic. Yield declined due to a 9.4% increase in average trip lengths, a relative increase in connecting traffic, and pricing strategies aimed at stimulating demand.
Cargo revenues grew due to a 11.3% increase in yields and a 2.4% decrease in traffic, measured in RTKs. Yields rose primarily due to the introduction of a fuel surcharge and reduced pricing pressures by competitors. The decline in cargo traffic growth outpaced the 0.6% decrease in capacity, resulting in a 1.2 point reduction in cargo load factors, which amounted 67.0%. Other revenues grew 8.5% as reduced aircraft lease revenues were fully offset by the contribution of new affiliates (which generated approximately US$2.9 million in additional revenues for the quarter), increased sales by LanCourier, higher on-board sales, and increased handling services to third parties.
Total operating expenses increased by 8.8% during the quarter as capacity, measured in system ATKs, increased 2.3%. Per unit (ATK) costs (which include total operating expenses as well as net financing costs) increased 6.0%; however, per unit costs excluding fuel increased 2.9%. Wages and benefits increased 22.0%, due to the consolidation of new affiliates, increases in headcount, the impact of a weaker foreign-exchange rate on peso-denominated wages, real salary increases, and higher provisions for bonus payments. Fuel costs rose 15.0% due to a 12.9% increase in prices and a 1.9% increase in consumption. (During the third quarter of 2003, the Company recorded a US$2.3 million fuel hedging gain compared to a US$1.8 million gain in 20021). Commissions to agents grew 15.0% due to increased passenger and cargo revenues, as well as higher average cargo commission rates. As a percentage of traffic revenues, commissions to agents increased 0.3 percentage points to 14.6%. Depreciation and amortization rose 9.0% due to a change in accounting policies and the acquisition of new Airbus A320s. Other rental and landing fees increased 9.2% because of higher landing charges in specific international airports and increased wet-lease and allotment expenses, which were partially offset by lower insurance expenses. Passenger service expenses increased 13.6% due to increased traffic. Aircraft rentals declined 14.6% as the incorporation of an Airbus A320 under an operating lease was fully offset by the reduction of lease rates during the first quarter and the return of leased Boeing 737 and DC-8 aircraft. Maintenance expenses decreased 4.0% as the impact of increased operations was offset by efficiency gains. Other operating expenses increased 7.0%, mainly due to the incorporation of new affiliates, sales growth and increased training and marketing expenses related to the launch of new services.
Operating margins for the quarter increased 2.7 points to 8.4%. Total non-operating results for the third quarter amounted to a net loss of US$5.1 million compared to a US$10.9 million net loss in 2002. While interest income nearly doubled due to higher liquidity, interest expenses increased 1.5% due to the incorporation of new A320 passenger aircraft. In the miscellaneous net line, the Company recorded a US$3.3 million gain, mainly related to a US$2.3 million fuel hedging gain as well as a US$1.8 million foreign-exchange gain. Consequently, net margins improved from 2.1% in 2002 to a positive 5.6% in 2003.
For the first nine months of 2003, the Company reported US$69.8 million in operating income versus US$40.9 million in 2002. Net income for the same period amounted to a US$48.4 million profit in 2003 compared to US$15.3 million in 2002. Total operating revenues increased 12.9% reflecting a 11.2% improvement in total passenger revenues, a 13.7% increase in cargo revenues, and a 24.2% increase in other revenues. System RTKs rose 5.4% while system ATKs increased 4.4%, leading to a 0.6 point improvement in system load factor, which amounted to 66.8%. Unit revenues, as measured per ATK, increased 7.4% due higher load factor and a 6.4% improvement in total per unit system yields as measured per RTK.
Total operating expenses increased 10.5% during the first nine months as capacity grew 4.4%. As a result, per unit (ATK) costs, which include total operating expenses and aircraft interest expenses, increased 4.4%. Wages and Benefits increased 13.6% due to the consolidation of new affiliates and increased headcount. Fuel expenses rose 29.1% due to a 25.0% increase in prices and a 3.3% increase in consumption. (During the first nine months of 2003, the Company recorded a US$9.0 million fuel hedging gain compared to a US$7.3 million loss in 20021). Commissions to agents grew 13.7% due to revenue growth and increased cargo commissions. Depreciation and amortization for the first half rose 14.7% due to the acquisition of four new Airbus A320s, and two used Boeing 737s, as well as to changes in depreciation policies. Other rental and landing fees rose 7.8% as increased landing charges and wet-leased expenses were offset by lower insurance costs. Passenger service expenses grew 8.4% due to increased passenger traffic. Aircraft rentals decreased 11.8% as the incorporation of new Airbus A320s was fully offset by a reduction in lease rates and the return of Boeing 737 and DC-8 aircraft. Maintenance expenses were flat as the impact of increased operations was fully offset by efficiency gains and the effects of a US$5.0 million one-time reduction in expenses in 2003 and a US$4.0 million one-time reduction in expenses in 2002. Other operating expenses increased 12.0% due to the consolidation of new companies, increased sales-related costs, and higher marketing expenses. Operating margins for the first nine months advanced 2.0 percentage points to 6.0%.
On September 24, LAN ECUADOR initiated service to Guayaquil. This new operation, which features three weekly flights on a Boeing 767-300 aircraft, also serves the Peruvian market since it connects with LAN PERU s new flights between Lima and Guayaquil.
On September 30, LAN CHILE arranged the incorporation of an additional Boeing 767-300ER passenger aircraft. This aircraft will be incorporated pursuant to a three year operating lease and will be added to the 10 Boeing 767-300ER passenger aircraft and 6 Boeing 767-300F cargo aircraft currently operating with the Company and its affiliates.
On October 14, LAN CHILE Cargo launched Positive FS, a new flight-specific product that guarantees customers space on an specific flight, therefore providing a definite delivery time. Positive FS is one of several initiatives through which the Company expects to improve yields by applying revenue and capacity management techniques in the cargo business. This product will initially be offered in passenger routes between Santiago and Miami and will be later expanded to most passenger routes.
LAN CHILE s In-Flight Entertainment Chosen as the Third Best in the World for a Mid-Size Fleet On September 12, LAN CHILE s in-flight entertainment content was designated as the third best in the world for a mid-size fleet at the Avion international awards. This award is based on an evaluation of the content of in-flight entertainment media, including video, audio, and print.
On October 24, German magazine Reise & Preise selected LAN CHILE as one of the world s ten best airlines in terms of service. This selection was based on surveys to German frequent flyers and also designated LAN CHILE s Business class as the seventh best on a global level.
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, seven destinations in Peru, 18 destinations in Latin America, 25 in North America, nine destinations in Europe and four in the South Pacific. Currently, the Company operates 45 passenger aircraft and 9 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 Company's business outlook and anticipated financial and operating results regarding the Company's 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.
