Santiago, October 26th, 2006
LAN Airlines S.A. (NYSE: LFL), one of Latin America's leading passenger
and cargo airlines, reported today its consolidated financial results for
the third quarter and nine-month period ended September 30, 2006. "LAN"
or "the Company" makes reference to the consolidated entity, which
includes several passenger and cargo airlines in Latin America. All figures
were prepared in accordance with generally accepted accounting principles
in Chile and are expressed in U.S dollars.
Management Comments on 3Q06 Results
LAN reported net income of $51.5 million for the third quarter of 2006. This result reflects a strong operating performance, with significant margin improvements resulting mainly from higher revenues per ATK in both the passenger and cargo businesses. While total revenues increased 22.6% in the quarter, operating margin improved 7.6 points to 9.3%. This represents a major accomplishment for the Company as revenue growth surpassed the 7.5% expansion in operations, as measured in system ATKs. The Company is also advancing in initiatives to control cost per ATK.
Passenger revenues grew 29.0% due to an 11.9% expansion in capacity and a 15.3% improvement in revenues per ASK. The latter resulted from a 17.0% improvement in yield while load-factors decreased 1.1 points during the quarter. During the third quarter, the Company managed capacity to respond to demand growth and market opportunities. As a consequence, capacity grew on routes to Europe, the South Pacific and within South America, while it decreased on segments to the Caribbean and the United States. Capacity also grew in the Chilean and Peruvian domestic markets, and especially in the Argentine domestic market given a low comparison base, as these operations began in June 2005. Load-factors were impacted mainly by higher yields, which rose principally due to improved segmentation and the usage of fuel cost pass-through mechanisms.
Cargo revenues rose 14.5% as capacity rose 3.0% and unit cargo revenues increased 11.2%. Higher revenues per ATK resulted from a 6.3% improvement in yield, as well as a 2.9 points rise in load factors. Conditions in the cargo business remain challenging given the imbalance caused by weak exports and strong imports into Latin America. In response to these conditions, LAN has adjusted its aircraft rotations in order to support northbound flights with stop-overs in various export markets. Additionally, the Company is reducing its ACMI leases of dedicated freighters and increasing the usage of its own fleet of Boeing 767 freighters, leveraging their low operating costs and their ability to adequately serve key destinations. Yield rose due to careful route selection, fuel-cost pass through mechanisms and fare increases, mainly on southbound routes.
Operating expenses rose 13.0% compared to third quarter of 2005 as capacity increased 7.5%. This led to a 6.7% rise in total cost per ATK (which include net financial expenses). Excluding the impact of higher fuel prices, which generated US$21.8 million in additional costs for the quarter, unit costs rose 3.3%. Ex-fuel, unit costs rose due to increased headcount, higher airport fees, and higher fleet related expenses resulting from a larger fleet. These factors were partially offset by lower commercial costs and changes in the on-board service process.
The Company recorded a US$10.9 million non-operating loss in the third quarter of 2006 compared to a US$17.8 million gain in 3Q05. This was mainly the result of lower fuel hedging gains, which decreased by US$15.3 million to US$6.4 million in 3Q06, while foreign exchange gains moved from a US$2.6 million profit in 3Q05 to a US$0.8 million loss in 3Q06.
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$248 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.
LAN incorporated eight new Airbus 319 into its fleet during 3Q06, four of them during the month of August and four in September, destined for the domestic operations of Lan Peru. Regarding its long-haul fleet, in July LAN incorporated a new Boeing 767-300ER, featuring its recently-launched Premium Business Class and upgraded Economy Class. This was the third Boeing 767-300ER delivery of 2006 and will be followed by a fourth aircraft in November, as well as a Boeing 767-300F freighter to be delivered in October.
Consistent positive results and a solid balance sheet have enabled LAN to continue advancing on a number of long-term initiatives. These plans, which encompass all levels and business units, are aimed at improving LAN's long-term strategic position by enabling the Company to address opportunities, strengthen its market position and raise competitiveness.
New Business Model for Domestic/Regional Operations
The Company has recently embarked on an important project to redesign its domestic and regional business model. This project seeks to increase efficiency and improve the margins of LAN's short haul operations, including domestic operations in Chile, Argentina and Peru, as well as regional narrow-body aircraft operations. A key objective of this project is to increase utilization of the Company's narrow-body fleet to a target of approximately 12 block hours day per aircraft. This will be achieved through modified itineraries including more point-to-point and overnight flights, as well as through the phasing out of the existing Boeing 737-200 fleet in favor of the new Airbus 320-family aircraft during 2007. The new fleet will allow for lower unscheduled maintenance costs as well as cost efficiencies achieved through commonality of the fleet and operational efficiencies (i.e. fuel consumption).
Other key elements of LAN's new business model will be the reduction in sales and distribution costs through higher Internet penetration and reduced agency commissions, a faster turn around time, and increased self-check through web check-in and kiosks at airports. These, together with simplifications in back-office and support functions, will allow the expansion in operations to occur without a corresponding increase in fixed costs, spurring an estimated 30% reduction in overhead costs per ASK by year end 2008. LAN plans to pass on these operating efficiencies to consumers through fare reductions, which are expected to have a strong impact on new demand stimulation.
Update on Lan Argentina
LAN Argentina has advanced on a number of key projects aimed at strengthening its operations. During the quarter, the airline advanced in the replacement of its Boeing 737-200s fleet in favor of Airbus 320s, improving LAN Argentina's customer appeal, raising reliability standards and enhancing efficiency. On August 15, Lan Argentina began its international operations with 3 weekly frequencies on the Buenos Aires-Miami route; this became a daily flight as of October 10. Lan Argentina plans to launch its second international destination by year end 2006, consisting of 13 weekly frequencies on the Buenos Aires-Sao Paulo route. Future domestic and international destinations will be evaluated, especially in light of the rights recently awarded to Lan Argentina to operate 35 new domestic and international destinations. Regarding domestic operations, on August 4, 2006, the Argentine government approved a decree allowing for a 20% increase in domestic fares. We expect the benefits of these recent positive events for Lan Argentina to be reflected in the future results of the Company.
The actions mentioned above are part of a broad set of initiatives aimed at reinforcing LAN's future performance. The Company's strong third quarter operating performance provides a solid base for long-term growth and profitability. As a consequence, LAN is in a position to plan for capacity expansion in response to growth opportunities, while leveraging opportunities to improve its cost performance. Combined, these elements will enable LAN to consolidate its position as Latin America's leading international carrier.
LAN is embarked on a very significant fleet expansion program, which contemplates the incorporation of 48 passenger and cargo aircraft between 2006 and 2008. In the first nine months of 2006, the Company has already incorporated 11 new passenger aircraft into its fleet. In addition to additional aircraft, ASK growth will be enhanced as a result of increased aircraft utilization as well as to a lesser extent the densification of its current fleet. Overall, LAN expects passenger ASK growth to be between 10-12% in 2006 and between 23-25% in 2007. Growth in the cargo business over the next two years will result from the delivery of 2 new freighters, as well as from capacity in the bellies of the new passenger aircraft. As a result, we estimate cargo ATK growth of 7-9% in 2006 and 3-5% in 2007.
Consolidated Third Quarter Results
Net income for the third quarter of 2006 amounted to US$51.5 million compared
to US$23.8 million for the same period of 2005. Net margin increased 3.0 points
from 3.8% in 2005 to 6.8% in 2006.
Operating income amounted to US$70.5 million compared to US$10.0 million in 2005. Operating margin for the quarter increased 7.6 points to 9.3%.
Total operating revenues amounted to US$762.3 million, a 22.6% increase compared to the third quarter of 2005. This reflected a:
Passenger revenues grew driven by a 10.2% increase in traffic and a 17.0% increase in yields. Load factors decreased 1.1 points to 75.7% as an 11.9% capacity increase outpaced traffic growth. Overall, revenues per ASK increased 15.3%. Traffic grew as a 1.8% decrease in Chilean domestic traffic was offset by a 12.0% increase in international traffic (including domestic operations in Peru and Argentina). International traffic accounted for 89% of total passenger traffic during the quarter. Yields grew mainly due to fuel cost pass-through initiatives and improved segmentation.
Cargo revenues grew driven by a 7.8% increase in cargo traffic and a 6.3% increase in yields. Yields rose primarily due to higher southbound rates as well as cost-based rate increases. Traffic growth outpaced a 3.0% increase in capacity and resulted in a 2.9 point increase in cargo load factors to 66.9%. As a consequence, revenues per ATK rose 11.2%.
Other revenues increased 5.3% as increased on-board sales and aircraft leasing revenues were offset by lower handling and courier revenues.
Total operating expenses increased 13.0% during the quarter as capacity, measured in system ATKs, increased 7.5%. As a consequence, unit (ATK) costs increased 6.7%. Excluding the impact of higher fuel prices, unit costs increased 3.3%. Changes in operating expenses were driven by:
Consolidated First Nine-Month Results
Net income for the first nine months of 2006 amounted to US$147.7 million compared to US$96.7 million for the same period of 2005. Net margin increased 1.4 points from 5.4% in 2005 to 6.8% in 2006.
Operating income for the first nine months of 2006 was US$164.6 million compared to US$82.4 million in 2005. Operating margin for this nine month period increased 3.0 points to 7.6%.
Total operating revenues amounted to US$2.2 billion, a 21.1% increase compared with the first nine months of 2005. This reflected a:
Passenger revenues grew driven by a 7.0% increase in traffic and a 15.3% increase in yields. Load factors decreased 1.1 point to 73.0% as an 8.6% capacity increase outpaced traffic growth. Overall, revenues per ASK increased 13.6%. Traffic grew as a 0.1% decrease in Chilean domestic traffic was offset by an 8.2% increase in international traffic (including domestic operations in Peru and Argentina). International traffic accounted for 87% of total passenger traffic during the first nine months of 2006. Yields grew mainly due to fuel cost pass-through initiatives and improved segmentation.
Cargo revenues grew due to an 8.1% increase in traffic and a 9.4% improvement in yields, measured in RTKs. Yields rose primarily due to improvements in southbound rates and cost driven rate increases. Growth in cargo traffic outpaced a 6.9% increase in capacity, resulting in a 0.7 point increase in cargo load factors to 66.0%. As a consequence, revenues per ATK rose 10.7%.
Other revenues grew 15.2% as higher revenues from on-board sales, handling activities, aircraft leasing revenues and courier operations were partially offset by lower third party maintenance revenues.
Total operating expenses increased 17.4% in the first nine months of 2006 compared to 2005, as capacity, measured in system ATKs, increased 7.3%. As a consequence, unit (ATK) costs increased 10.4%. Excluding the impact of higher fuel prices, unit costs increased 4.9%. Changes in operating expenses were driven by:
Non-operating results for the first nine-month of 2006 amounted to a US$8.6
million gain compared to a US$32.5 million gain in 2005. While interest income
decreased 48.6% due to lower cash balances and lower interest rates, interest
expense increased 49.9% due to an increase in average debt. In the miscellaneous-net
item, the Company recorded a US$45.4 million gain compared to a US$50.3 million
gain in 2005. In 2006 this included a US$13.9 million fuel hedging gain (compared
to a US$47.2 million gain in 2005) as well as a US$0.6 million foreign-exchange
loss (compared to a US$2.7 million gain in 2005).
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, nine destinations in Argentina, two in Ecuador, 30 destinations in other Latin American countries, 25 in North America, 13 destinations in Europe, four in the South Pacific and one in Asia. Currently, the LAN Alliance operates 75 passenger aircraft and nine 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. For more information visit
www.lan.com or www.oneworldalliance.com.
Note on Forwards Looking Statements
This report contains forward-looking statements. Such statements may include words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe" or other similar expressions. Forward-looking statements are statements that are not historical facts, including statements about our beliefs and expectations. These statements are based on current plans, estimates and projections, and, therefore, you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them, whether in light of new information, future events or otherwise.