Santiago, Chile, October 27th, 2005
· LAN earned a net income of US$23.8 million in net income for the third quarter of 2005 compared to US$36.4 million in 2004. This is strong performance was achieved despite record fuel prices (which led to US$54 million in additional expenses) and start-up costs related to the launch of LAN Argentina.
· Operating income for the quarter amounted to US$10.0 million compared to US$41.1 million for the same period of last year. As a consequence, operating margin declined to 1.6%. Non-operating income increased almost 4 times to US$17.7 million driven by US$21.7 million in fuel hedging gains. If operating results were adjusted to include fuel-hedging gains - in line with the practice used by other major airlines - operating income and margin for the quarter would have amounted to US$31.7 million and 5.1%, respectively.
· Total revenues for the quarter grew 17.6%, mainly due to a 24.1% increase in passenger revenues, a 7.5% rise in cargo revenues, and a 21.2% increase in other revenues. Passenger and cargo revenues accounted for 59% and 35% of total revenues, respectively.
· During the quarter, LAN Argentina continued to expand its operations, initiating service to three new domestic destinations, also incorporating two new aircraft. LAN Argentina currently serves six destinations with five aircraft. LAN Argentina expects to initiate daily services between Buenos Aires and Miami on December 1st.
· On September 20, LAN implemented a new passenger fuel surcharge, which varies according to international oil prices. The Company has made publicly available the table governing these changes in order to provide passenger with transparent and current information. This table can be found at www.lan.com.
· On October 6th, LAN signed the final purchase contract for the acquisition of 25 new short-haul aircraft. The aircraft add to seven pending deliveries from a previous order. Accordingly, LAN plans to incorporate 20 Airbus A318s, eight A319s and four A320s between 2006 and 2008.
· On July 28, LAN took delivery of its seventh Boeing 767-300F. This
new freighter will be mainly utilized to replace aircraft under ACMI (Aircraft,
Crew, Maintenance and Insurance) leases.
· During the third quarter, LAN adjusted its liquidity policy in order to minimize net financing expenses. As a result, the Company is internally financing the majority of its pre-delivery deposits associated to its Boeing fleet. This had no impact on the Company's actual liquidity as LAN has secured committed credit lines for the majority of the funds allocated for this purpose.
LAN Airlines reported net income of US$23.8 million for the third quarter
of 2005 compared with US$36.4 million in 2004. Results were significantly
impacted by record fuel prices causing US$54 million in additional costs,
as well as by start-up costs in Argentina. LAN delivered positive results
despite these challenges by leveraging strong revenue growth, fuel-hedging
gains and efficiency improvements. Sustained profitability has enabled the
Company to continue advancing on key strategic initiatives, such as strengthening
LAN Argentina, preparing and financing its growth plans, and streamlining
its cost structure. The Company expects that these measures, combined with
new fuel-price mitigation measures, will not only enable it to continue delivering
strong results on the near future, but also improves the Company's long-term
Operating income for the third quarter decreased from US$41.1 million in 2004 to US$10.0 million in 2005. Operating margin fell from 7.8% to 1.6% as a 17.6% increase in total revenues was outpaced by a 25.5% increase in operating costs. The latter was mainly associated with higher fuel prices. Fuel hedging gains of US$21.7 million partially offset this cost increase and led a major improvement in non-operating gains to US$17.8 million in 2005 from US$3.7 million in 2004. If, in order to improve cross-company comparisons, operating results are adjusted to reflect fuel hedging gains, operating income would have been US$31.7 million in 2005, and operating margin would have amounted to 5,1%.
Passenger revenues for the quarter grew 24.1% compared to same period last year. Traffic rose 15.5%, outpacing a 12.0% increase in capacity and leading to a 2.3-point improvement in load-factor. Traffic growth was driven mainly by a 18% rise in international traffic, supported by strong demand and market share gains in key points-of-sale such as Chile, Peru, Ecuador and Argentina. This has enabled LAN to successfully increase capacity, especially on long-haul routes to the South Pacific and on regional routes out of Lima. Additionally, the Company has benefited from market share gains in Peru and the launch of new routes in Argentina. Yield improved 7.5% because of higher average fares in response to rising fuel-price, as well as a reduction in average trip lengths.
Cargo revenues increased 7.5% compared to the third quarter of 2004. Cargo traffic remained flat as capacity increased 6.7%. This led to a 4.3-point decrease in load factors that was mainly caused by lower-than-expected northbound demand. The latter has declined as exporters shifted their export patterns in response to higher transportation fares and stronger local currencies. Lower load-factors on northbound routes have been partially offset by healthy southbound traffic and improved pricing. In fact, revenues per ATK increased as lower load-factors were fully offset by an improved yield arising from higher cargo fuel surcharges and increased southbound fares.
Operating costs for the quarter increased 25.5% as capacity rose 9.2%. This led to a 15.1% increase in cost per ATK that was mainly driven by increased fuel prices and a stronger Chilean currency. Higher fuel prices accounted for almost 70% of the unit cost increase. Unit cost excluding the fuel price effect increased 4.4%. The appreciation of the Chilean peso accounted for a significant portion of this increase, as expenses denominated in that currency, such as personnel costs, increased in dollar terms. Excluding these two factors, costs per ATK increased marginally as higher commercial costs due to higher unit revenues, the costs associated to the launch of LAN Argentina, and the impact of the shortening of average trip lengths, were partially offset by renegotiation of maintenance contracts, the replacement of aircraft under ACMI leases, lower fuel burn rates, and other efficiency-related initiatives.
LAN has taken several long-term measures to mitigate the impact of higher fuel prices. Specifically, the Company has implemented fuel-burn reduction measures, adjusted its cargo fuel-surcharge, and more significantly, launched a new passenger fuel surcharge. This new system aims to cover most of the incremental costs generated by high prices. This surcharge will vary based on the average price of WTI oil for the previous fifteen days. In an effort to make this mechanism transparent to customers, the Company has posted the table upon which the surcharge will be set at Company's website (www.lan.com).
During the quarter, LAN's cash and cash equivalents decreased by approximately US$133.0 million as LAN modified its liquidity management policy. This decision is aimed at optimizing net financing costs and implies financing internally the majority of the pre-delivery payments associated with the Company's upcoming Boeing 767 deliveries. As of September 30, recoverable pre-delivery deposits amounted to approximately US$98 million. In order to maintain its internal liquidity targets, the Company has secured committed credit lines that enable it to recover the majority of the funds allocated for this purpose. As a consequence, LAN's actual liquidity position through the end of the quarter amounted to approximately US$249 million.
During the quarter, LAN Argentina increased frequencies on its original routes and added three new domestic destinations to its route network. LAN Argentina has supported this expansion through the incorporation of two additional aircraft. As a consequence, LAN Argentina now operates a fleet of five Boeing 737-200s.
International operations will begin on December 1st with the launch of daily service between Buenos Aires and Miami. LAN Argentina is expected to continue growing during 2006 by adding new international and domestic destinations.
In October, LAN signed the final purchase contract with Airbus Industrie in connection with the acquisition of 25 Airbus A320-family aircraft. These new aircraft, together with seven backlog aircraft, will be delivered between 2006 and 2008. Although the purchase agreement allows for flexibility with regards to the aircraft types, LAN currently plans to incorporate 20 A318 aircraft, 8 A319 aircraft and 4 A320 aircraft.
In July, LAN received the first of twelve Boeing 767 aircraft that it expects to add to the fleet through 2008. The current plan calls for the incorporation of a total of seven Boeing 767-300ER passenger aircraft and five Boeing 767-300F freighters. A second freighter will be delivered in November, to be followed by five aircraft in 2006 (four passenger and one dedicated cargo aircraft). LAN had already financed all of the 2005 aircraft and the first 2006 delivery, and in September it arranged the financing for the remaining 2006 orders. This new financing, which covers 85% of the total investment and is guaranteed by Ex-Im bank, is the first sub-LIBOR loan ever to be granted to a Chilean company.
The Company has also continued to improve its alliance agreements. In September, LAN and Korean Airlines implemented their code-share agreement in which LAN places its code on Korean Airlines' flights between Los Angeles and Seoul, and Korean Airlines' places its code on LAN's flights between Los Angeles and Santiago.
Despite facing major challenges, LAN has continued delivering strong results. Thanks to strong value propositions on both the passenger and cargo business and a competitive cost base, LAN has been able to successfully address challenges and focus on the future. The Company has implemented measures to mitigate the impact of high fuel prices and has rapidly adjusted its cargo operations in the face of depressed demand. The Company expects that these actions will enable it to sustain its profitability. Furthermore, LAN expects that a number of initiatives will enable it to expand into new international and domestic routes, raise service standards across its network, and improve efficiency by taking advantage of cost reduction programs and economies of scale. As a consequence, LAN believes that it is on an unprecedented position to continue creating value for its employees, customers and shareholders.
Consolidated Third Quarter Results
Net income for the third quarter of 2005 amounted to US$23.8 million compared to US$36.4 million for the same period of 2004. Net margin decreased 3.1 points from 6.9% in 2004 to 3.8% in 2005.
Operating income amounted to US$10.0 million compared to US$41.1 million in 2004. Operating margin for the quarter decreased 6.2 points to 1.6%.
Total operating revenues amounted to US$622.0 million, a 17.6% increase compared to the third quarter of 2004. This reflected a:
· 24.1% increase in passenger revenues to US$369.2 million,
· 7.5% increase in cargo revenues to US$216.0 million, and a
· 21.2% increase in other revenues to US$36.8 million.
Passenger and cargo revenues accounted for 59% and 35% of total revenues for second quarter, respectively.
Passenger revenues grew driven by an 15.5% increase in traffic and a 7.5% increase in yields. Load factor increased 2.3 points to 76.8% as traffic growth outpaced a 12.0% capacity increase. Overall, revenues per ASK increased 10.8%. Traffic grew as a 0.6% decrease in Chilean domestic traffic was offset by an 18.2% increase in international traffic (including domestic operations in Peru and Argentina). International traffic accounted for 87% of total passenger traffic during the quarter. Yields grew mainly due to lower average trip lengths, a higher premium traffic component, improved segmentation and fuel-related fare increases.
Cargo revenues grew despite flat cargo traffic remained as yields improved 7.5%. Yields rose primarily due the application of a higher fuel surcharge. Flat cargo traffic and a 6.7% increase in capacity resulted in a 4.3-point decrease in cargo load factors to 64.1%. Yields fully compensated this, and, as a result, revenues per ATK rose 0.7%.
Other revenues increased 21.2% due to increased handling and courier revenues and higher on-board sales.
Total operating expenses increased 25.5% during the quarter as capacity,
measured in system ATKs, increased 9.2%. As a consequence, unit (ATK) costs
increased 15.1%. Excluding the impact of higher fuel prices, unit costs increased
4.4%. Changes in operating expenses were driven by:
· Wages and benefits increased 35.1% mainly due to increases in headcount and the 13% appreciation the Chilean peso experienced relative to the US Dollar.
· Fuel costs increased 57.6% due to a 47.0% increase in prices and a 7.2% increase in consumption.
· Commissions to agents rose 16.3% driven primarily by a 17.4% increase in traffic (passenger and cargo) revenues. As a percentage of traffic revenues, commissions remained almost flat, decreasing from 15.3% to 15.2% as lower average passenger commissions outweighed higher cargo commissions.
· Depreciation and amortization increased 7.3% mainly due to the incorporation of a new Boeing 767 freighter.
· Other rental and landing fees increased 4.2% as the impact of increased operations on landing and ground-handling expenses fees fully compensated lower ACMI leases and insurance expenses.
· Passenger service expenses rose 29.3%, mainly due to the 24.1% increase in passengers transported.
· Aircraft rentals increased 12.1% mainly because of the incorporation of additional Boeing 767 and Airbus A319 aircraft.
· Maintenance expenses rose 5.3% as increased costs due to capacity growth were compensated by efficiency gains related to the renegotiation of maintenance contracts with third parties.
· Other operating expenses grew 17.1% due to increases in booking expenses, sales related costs and taxes, and expanded marketing activities.
Non-operating results for the third quarter of 2005 amounted to a US$17.8 million gain compared to a US$3.7 million gain in 2004. While interest income increased 7.8% due to higher average cash balances and higher interest rates, interest expense increased 11.0% due to the increase in average long-term debt. In the miscellaneous-net item, the Company recorded a US$24.4 million gain compared to a US$9.6 million gain in 2004. In 2005 this included a US$21.7 million fuel hedging gain (compared to a US$13.8 million gain in 2004) as well as a US$2.6 million foreign-exchange gain (compared to a US$3.2 million loss in 2004).
Consolidated First Nine-Month Results
Net income for the first nine-month of 2005 amounted to US$96.7 million compared to US$116.0 million for the same period of 2004. Net margin decreased 2.4 points from 7.8% in 2004 to 5.4% in 2005.
Operating income for the first nine-month of 2005 was US$82.4 million compared to US$138.0 million in 2004. Operating margin for this nine-month period decreased 4.7 points to 4.6%.
Total operating revenues amounted to US$1.8 billion a 21.3% increase compared with the first nine-month of 2004. This reflected a:
· 25.7% increase in passenger revenues to US$1.1 billion,
· 15.9% increase in cargo revenues to US$650.7 million, and a
· 14.3% increase in other revenues to US$96.5 million.
Passenger and cargo revenues accounted for 58% and 36% of total revenues for the first nine-month of 2005, respectively.
Passenger revenues grew driven by a 17.6% increase in traffic and a 6.9% increase in yields. Load factor increased 2.1 points to 74.0% as traffic growth outpaced a 14.2% capacity increase. Overall, revenues per ASK increased 10.1%. Traffic grew as a 1.8% decrease in Chilean domestic traffic was offset by a 21.3% increase in international traffic (including domestic operations in Peru). International traffic accounted for 86% of total passenger traffic during the first nine months of 2005. Yields grew mainly due to lower average trip lengths, improved segmentation, higher premium traffic and fuel-related fare increases.
Cargo revenues grew due to a 7.2% increase in traffic and a 8.1% improvement in yields, measured in RTKs. Yields rose primarily due the application of a higher fuel surcharge. Growth in cargo traffic outpaced a 12.3% increase in capacity, resulting in a 3.1-point decrease in cargo load factors to 65.3%. As a consequence, revenues per ATK rose 3.2%.
Other revenues grew 14.3% as higher revenues from on-board sales, third party maintenance, handling activities and courier operations were partially offset by lower aircraft leasing revenues.
Total operating expenses increased 27.7% in the first nine-month of 2005
compared to 2004, as capacity, measured in system ATKs, increased 13.6%. As
a consequence, unit (ATK) costs increased 12.6%. Excluding the impact of higher
fuel prices, unit costs increased 3.2%. Changes in operating expenses were
· Wages and benefits increased 30.2% mainly due to increases in headcount and a stronger Chilean peso.
· Fuel costs increased 62.1% due to a 44.1% increase in prices and a 12.5% increase in consumption.
· Commissions to agents rose 21.3% driven primarily by a 21.8% increase in traffic (passenger and cargo) revenues. As a percentage of traffic revenues, commissions remained flat at 15.0% as lower average passenger commissions offset higher cargo commissions.
· Depreciation and amortization increased 2.6% mainly due to the incorporation of a new Boeing 767 freighter.
· Other rental and landing fees increased 11.2% as the impact of increased operations on landing fees, ground-handling expenses, and ACMI leases was partially offset by efficiency gains and lower insurance expenses.
· Passenger service expenses increased 24.4%, mainly due to the 25.1% increase in the number of passengers transported.
· Aircraft rentals increased 13.1% mainly because of the incorporation of additional Boeing 767 and Airbus A319 aircraft.
· Maintenance expenses rose 14.4%. Excluding a one-time US$1.9 million reduction in provisions recorded during the first half of 2004, maintenance expenses rose 12.6%, as capacity growth has been partially offset by the renegotiation of third-party maintenance contracts.
· Other operating expenses grew 20.5% due to increases in booking expenses, sales related costs and taxes, and expanded marketing activities.
Non-operating results for the first nine-month of 2005 amounted to a US$32.5 million gain compared to a US$3.3 million gain in 2004. While interest income increased 50.0% due to higher cash balances and higher interest rates, interest expense increased 2.5% due to an increase in average debt. In the miscellaneous-net item, the Company recorded a US$50.3 million gain compared to a US$23.8 million gain in 2004. In 2005 this included a US$47.2 million fuel hedging gain (compared to a US$32.7 million gain in 2004) as well as a US$2.7 million foreign-exchange gain (compared to a US$5.8 million loss in 2004).
LAN Airlines ("LAN") is one of the leading airlines in Latin America. The LAN Alliance includes LAN Airlines, LAN Express, LAN Peru, LAN Ecuador, and LAN Argentina. Through its own operations and code-share arrangements, the LAN Alliance serves 15 destinations in Chile, eleven destinations in Peru, ten destinations in Argentina, two in Ecuador, 20 destinations in other Latin American countries, 25 in North America, ten destinations in Europe and four in the South Pacific. Currently, the LAN Alliance operates 57 passenger aircraft and eight dedicated freighters.
LAN 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, Mexicana, TAM and Lufthansa Cargo.