Santiago, April 26th, 2006
LAN Airlines reported net income of US$79.7 million for the first quarter of 2006. Excluding a US$40.3 million non-recurrent pre-tax gain announced in March, net income for the quarter was almost flat at US$46.0 million. LAN was able to maintain these results despite US$37.4 million in additional expenses due to higher fuel prices thanks to double-digit revenue growth and careful cost management. At the same time, LAN has continued to advance in several initiatives aimed at enhancing its revenue base, improving customer preference, modernizing its fleet and optimizing its cost structure.
Higher operating income was the main driver behind the Company's first quarter performance. Operating income for the period rose from US$56.6 million in 2005 to US$68.7 million in 2006. This 21.4% increase was generated by a 19.8% expansion in total revenues and a 0.1-point improvement in operating margin to 9.4%.
Passenger revenue growth was associated with strong demand, which enabled LAN to improve revenues per ASK by 10.3% while increasing capacity by 7.0%. Unit revenues rose as a 12.6% increase in yields was offset by a 1.5-point drop in load factor. The latter was mainly related to the fact that the busy Easter holiday travel season fell in April instead of March. During the quarter the Company actively managed supply, adding new aircraft and shifting capacity between routes in order to maximize profitability. As a consequence, additional frequencies were scheduled to Europe and the South Pacific, with part of the required capacity coming from routes to the United States and the Caribbean. LAN Peru also continued to strengthen its regional operations by adding new frequencies to several destinations out of its Lima hub. Capacity on the Chilean domestic market rose as the Company incorporated additional aircraft. Meanwhile, LAN Argentina's domestic capacity was flat compared to the previous quarter. Yields have increased due to improved segmentation, fuel-cost pass-through measures, the appreciation of the Chilean peso, and strong premium-class volumes.
Cargo revenues for the quarter grew 20.9% compared to 2005 as capacity increased 11.2% and unit revenues rose 8.7%. Revenues per ATK expanded due to a 10.7% improvement in yield and stable load-factors. These results reflect the current imbalance between northbound and southbound flows. Imports to the region have continued to expand supported by economic growth and strong currencies. However, weak exports from Chile and Brazil have limited the number of roundtrips which are possible to these markets. In order to sustain an adequate number of southbound operations, return flights have been supported with stopovers in export markets located outside of the Southern Cone. The Company has also benefited from its new operations to Amsterdam and addition of frequencies to Frankfurt. Yields rose due to fuel-cost pass-through measures and as imports -which feature higher average rates- have increased their relative weight.
Careful cost management also played a major role during the quarter. Operating expenses rose 19.7% as system capacity increased 7.7%, leading to a 10.9% rise in unit costs . Excluding the effect of high fuel prices, unit costs rose 4.3%. The majority of this rise is explained by the appreciation of the Chilean peso, the impact of high revenue growth on sales-related expenses and costs associated with the launch of LAN Argentina. These factors were partially offset by efficiency gains arising from the incorporation of newer aircraft, replacement of wet-leased capacity, service optimization and savings from the renegotiation of third-party contracts.
Non-operating income improved from a US$1.6 million loss in 2005 to a US$28.2 million gain in 2006, mainly due to a non-recurrent adjustment in maintenance provisions. This adjustment, which was driven by the growth of LAN's fleet and operations have experienced in recent years, aligns the Company's maintenance accounting policy with those of other major international carriers. The new policy was made effective retroactively since January 1, 2006. The change generated a US$40.3 million non-operating, non-recurrent pre-tax gain in the first quarter of 2006 due to the elimination of provisions constituted using the previous method. Excluding this one-time benefit, non-operating income decreased to a US$12.1 million loss due to higher net interest expenses and fuel-hedging losses.
LAN continues to maintain a solid financial position, with ample liquidity and a sound financing structure. By the end of the quarter LAN had US$181 million in cash, cash equivalents and committed credit lines. Additionally, the Company's long-term debt only finances aircraft, has 12 to 18-year repayment profiles and features very competitive interest rates. During the first quarter, LAN secured a new US$920 million financing package which will support the acquisition of 32 Airbus A320-family aircraft between 2006 and 2008. This new facility, which is designed to be supported by the European ECAs, will be used to finance 85% of each aircraft, features sub-LIBOR rates and 12-year repayment profiles. During the quarter, LAN's healthy financial position and consistent profitability led Fitch Ratings to affirm the Company's investment grade credit rating and confirm the positive outlook on the rating.
During the quarter, LAN also advanced on several key initiatives aimed at enhancing its competitive advantages. In March, LAN unveiled its new long-haul product that includes new aircraft interiors, a new in-flight entertainment system and new seats in economy and business class. LAN's new business class, branded "Premium Business", includes full-flat seats and 15-inch high-definition screens for every seat and combines attributes from LAN's current first and business classes.
The first aircraft to feature this configuration was the Company's newest Boeing 767-300ER, which is the first of four such deliveries in 2006. The Company also plans to receive one new Boeing 767-300F freighter and eight new Airbus A319s during the rest of 2006. In March, LAN purchased three additional Boeing 767-300ERs for delivery during 2007-2008. LAN also modified the composition of its previous order with Boeing; as a result, the Company now plans to receive 11 Boeing 767-300 passenger aircraft and one Boeing 767 freighter in the next three years.
LAN Airlines' competitive advantages have allowed it to successfully overcome the impact of US$37.4 million in additional costs due to higher fuel prices. Growth in multiple markets, strong customer preference, and careful cost management enabled LAN to overcome this challenge and raise operating results while operating in a highly competitive environment. The Company believes that continuous strengthening of these critical attributes has enabled it to make its performance more sustainable. Furthermore, the Company is currently working on a number of programs aimed at improving profitability by expanding into new markets, increasing efficiency, streamlining operations, leveraging economies of scale, and reducing commercial expenses. LAN believes these plans will deliver positive results, therefore leading to continued value creation for shareholders.
Consolidated First Quarter Results
Net income for the first quarter of 2006 amounted to US$79.7 million. Excluding a US$40.3 million pre-tax, non-operating extraordinary gain, net income for the quarter was US$46.0 million, roughly in line with 2005's result. Net margin increased 3.3 points from 7.6% in 2005 to 10.9% in 2006. Comparable net margin decreased 1.3 points to 6.3%.
Operating income grew 21.4% to US$68.7 million from US$56.6 million in 2005. Operating margin for the quarter increased 0.1 points to 9.4%.
Total operating revenues grew 19.8% year-on-year to US$728.2 million. This reflected a:
Passenger and cargo revenues accounted for 60% and 35% of total revenues for the quarter, respectively.
Passenger revenues grew driven by a 4.9% increase in traffic and a 12.6% improvement in yields. Traffic growth was outpaced by a 7.0% rise in capacity, leading to a 1.5% point reduction in load-factors. However, yield expansion offset lower load-factors, enabling unit revenues to increase by 10.3%. Traffic grew as a 1.7% decrease in Chilean domestic traffic was offset by a 6.1% increase in international traffic (including domestic operations in Peru and Argentina). International traffic accounted for 85% of total passenger traffic during the quarter. Yields grew mainly due to cost pass-through initiatives, improved segmentation, and a higher premium traffic component.
Cargo revenues grew due to a 9.2% increase in traffic and a 10.7% improvement in yield. Yield rose primarily due to higher southbound rates and cost-based rate increases. An 11.2% capacity increase exceeded traffic growth. As a consequence, load factors decreased 1.2 points to 64.3%. However, higher yields generated an 8.7% rise in revenues per ATK.
Other revenues rose 36% due to increased on-board sales handling for third parties, and courier revenues.
Total operating expenses increased 19.7% during the quarter as capacity, measured in system ATKs increased 7.7%. As a consequence, unit (ATK) costs increased 10.9%. Excluding the impact of higher fuel prices that led to US$37.4 million in additional expenses, unit costs increased 4.3%. Changes in operating expenses were driven by:
LAN Airlines is one of the leading airlines in Latin America. "LAN" makes reference to the consolidate entity that includes LAN Airlines, LAN Express, LAN Peru, LAN Ecuador, and LAN Argentina, as well as LAN Cargo and its affiliates. Through its own operations and code-share arrangements, the LAN Alliance serves 15 destinations in Chile, eleven destinations in Peru, nine 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 67 passenger aircraft and nine dedicated freighters.
LAN Airlines is a member of oneworld (TM), the world's leading quality alliance. It has bilateral commercial agreements with oneworld partners American Airlines, British Airways, Iberia and Qantas and also with Alaska Airlines, AeroMexico, Mexicana, and TAM. For more information visit www.lan.com or www.oneworldalliance.com.
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