LATAM Airlines Group reports first consolidated financial statements as of June 30, 2012

LATAM Airlines Group S.A. (NYSE: LFL; IPSA: LAN; BOVESPA: LATM11), the leading airline in Latin America, announced today its consolidated financial results for the second quarter and for the six months ended June 30, 2012. “LATAM” or “the Company” makes reference to the consolidated entity, which includes passenger and cargo airlines in Latin America. All figures were prepared in accordance with International Financial Reporting Standards (IFRS) and are expressed in U.S Dollars, except for TAM S.A. (“TAM”) second quarter 2012 Income Statement figures, which are expressed in Brazilian reais.

 Highlights

  • LATAM Airlines Group S.A. today reported its first consolidated financial results for the second quarter and first half of 2012, following the successful completion of the exchange offer and mergers that combined the businesses of LAN Airlines S.A. and TAM S.A. (“TAM”). Because the transaction was completed on June 22, 2012, results for the period ended June 30, 2012 include the last eight days of TAM results, from June 23 to June 30, 2012.  
  • Net income of LATAM Airlines Group reached US$49.7 million in the second quarter 2012. Operating income reached US$23.2 million, resulting in a 1.5% operating margin for the second quarter 2012. Consolidated LATAM results include net income of US$46.3 million and an operating loss of US$13.9 million corresponding to the eight days of consolidation of TAM between June 23 and June 30, 2012. Non-operating results for this eight day period reflect a foreign exchange gain of US$57,4 million and a positive mark-to-market of fuel hedging derivatives in the amount of US$ 26,7 million, as a result of the appreciation of the Brazilian real and an increase in the price of fuel, respectively, during the last eight days of the quarter. 
  • The second quarter 2012 presented a challenging environment due to reduced cargo demand and the depreciation of local currencies, especially the Brazilian real. However, passenger demand in most of Latin America remains solid and the successful completion of the business combination between LAN and TAM provides the Company with a more diversified revenue base and significant growth and synergy opportunities. Furthermore, the domestic Brazil market has shown sustained capacity discipline, providing the basis for improved profitability.
  • LATAM Airlines Group is advancing in the process of achieving the expected synergies from the business combination with TAM. Regarding its international passenger operations, the Company has established fare combinability between LAN and TAM, cross selling of LAN and TAM flights, and code shares on various international routes, such as Santiago – Orlando, Santiago – Madrid, and Santiago – London. Cross selling will assist the Company in capturing connectivity synergies by offering our customers a single network in a one-stop shop.
  • In July 2012, the cargo divisions of LAN and TAM were integrated, taking advantage of the highly complementary nature of their operations. 
  • On September 4, 2012, LATAM Airlines Group will hold an Extraordinary Shareholders’ Meeting in order to reelect the Board of Directors of the Company, as well as to approve the placement, through a preemptive rights offering to LATAM shareholders, of the remaining 7,436,816 shares of the Company that were authorized for the TAM exchange offer, and that were not exchanged.
  • During the remainder of 2012, LATAM expects to receive 12 Airbus A320 family aircraft to operate domestic and regional routes, as well as 8 Boeing 767-300, 4 Boeing 777-300 and the first 3 Boeing 787-8 Dreamliners for long-haul routes. The Company will also take delivery of 2 Boeing 777 freighter aircraft. 
  • LAN Airlines S.A. (renamed LATAM Airlines Group S.A.) – excluding the consolidation of TAM - reported net income of US$5.2 million for the second quarter of 2012, a decrease of 67.5% compared to the US$15.9 million reported in second quarter 2011. Operating income reached US$37.1 million, a 33.5% decrease compared to the US$55.8 million in second quarter 2011. Operating margin reached 2.6%, a decrease of 1.6 points compared to 4.2% in 2011. The Company continued to show strong passenger revenue growth, despite a seasonally low quarter, partially offsetting the impact of a more challenging environment in the cargo business, as well as the ongoing development of LAN Colombia’s operations. In addition, operating results include a one-time cost of US$7.1 million related to the successful completion of the collective bargaining process with certain unions, as well as US$9.2 million in transaction costs related to the business combination with TAM. 
  • TAM reported a net loss of R$928.1 million, compared to net income of R$60.3 million reported in second quarter 2011. For the second quarter 2012, TAM reported an operating loss of R$284.2 million, compared to the R$8.8 million gain in second quarter 2011. Operating results were mainly impacted by a 23.0% depreciation of the Brazilian real and decreased revenues from Multiplus, resulting from accounting changes in the recognition of such revenues implemented in the first quarter 2012. Non-operating results reflect a foreign exchange loss of R$845.9 million, and the negative mark-to-market of fuel hedging derivatives  in the amount of R$93.6 million, resulting from the depreciation of the Brazilian real and the decrease in fuel prices, respectively, as compared to March 31, 2012.


Recent Events

Business Combination of LAN Airlines S.A. and TAM S.A.

  • On June 22, 2012, LAN Airlines S.A. and TAM successfully completed the exchange offer and mergers through which they combined their businesses and created the LATAM Airlines Group, the leading Latin American airline group with the largest fleet of aircraft in the region. As a result, LAN Airlines S.A. has been renamed LATAM Airlines Group S.A. LATAM Airlines Group will offer passengers more flights to more destinations than any other affiliated group of airlines in South America, initially reaching about 150 destinations in 22 countries and transporting cargo to 169 destinations in 27 countries. The transaction was carried out through an exchange offer in which TAM's shareholders could elect to exchange their TAM shares or ADRs (American Depositary Receipts) for LAN shares or ADRs at a ratio of 0.9 LAN shares/ADRs for each TAM share/ADR. The offered LAN shares were delivered in the form of BDRs (Brazilian Depositary Receipts) in Brazil. The exchange offer, which culminated in the auction that took place on BM&FBOVESPA on June 22, 2012, was subject to the minimum tender and delisting conditions that were satisfied when 99.9% of the TAM shares/ADRs held by participants in the exchange offer agreed with TAM’s deregistration as a public company in Brazil and the tendered shares/ADRs, together with the TAM shares committed by the TAM Controlling Shareholders, represented 95.9% of the total outstanding shares of TAM.
  • On July 18, 2012, CVM cancelled the registration of TAM as a publicly listed company and TAM was delisted from BM&FBOVESPA. Subsequently, the remaining shares of TAM that did not participate in the exchange offer were redeemed by TAM.

As of July 31, 2012, LATAM Airlines Group has 476,118,975 shares outstanding, with the following ownership structure:

Election of the Board of Directors of LATAM Airlines Group

On June 28, 2012, Jose Cox Donoso and Dario Calderon Gonzalez resigned their positions as board members of LATAM Airlines Group, and were replaced by Mr. Mauricio Rolim Amaro (previously Vice Chairman of the Board of Directors of TAM) and Ms. Maria Cláudia Amaro (Chairman of the Board of Directors of TAM). Furthermore, on August 3, 2012, Mr. Jorge Awad Mehech resigned as Chairman of the Board of LATAM Airlines Group and the Board elected Mr. Mauricio Rolim Amaro as Chairman. The entire Board of Directors of LATAM Airlines Group is subject to reelection at an Extraordinary Shareholders’ Meeting to be held on September 4, 2012.

Rights Offering

  • The Board of LATAM Airlines Group approved the placement, through a preemptive rights offering to LATAM shareholders, of the remaining 7,436,816 shares of the Company that were authorized for the TAM exchange offer, and that were not exchanged as a result of the number of TAM shares that participated in the offer. Any shares not subscribed in the rights offering will be offered and placed in the securities markets. The rights offering and the subscription price of the shares are subject to approval at the Extraordinary Shareholders’ Meeting to be held on September 4, 2012.

Synergies from the business combination of LAN Airlines S.A. and TAM

  • As has been previously announced, the Company projects pre-tax synergies of approximately US$170 million to US$200 million for the first 12 months after combination, gradually increasing to annual pre-tax synergies of between US$600 million and US$700 million, beginning four years after the completion of the combination. Approximately 40% of the total estimated potential synergies are expected to derive from revenue increases in the international passenger business, 20% from revenue increases in the cargo business, and the remaining 40% from cost savings.
  • LATAM Airlines Group is advancing in the process of achieving the expected synergies. Regarding its international passenger operations, the Company has established fare combinability between LAN and TAM, cross selling of LAN and TAM flights, and code shares on various international routes, such as Santiago – Orlando, Santiago – Madrid, and Santiago – London. Cross selling will assist the Company in capturing connectivity synergies by offering our customers a single network in a one-stop shop. In addition, passengers of both airlines have access to the benefits of each other’s frequent flyer programs, TAM Fidelidade and Lanpass.
  • LAN Cargo is also advancing in the process of the expected synergies with the cargo division of TAM Linhas Areas S.A., taking advantage of the highly complementary nature of their operations. The extensive network of TAM Linhas Aereas S.A.’s passenger aircraft allows for broad coverage, with over 40 domestic destinations, while LAN’s Brazilian cargo affiliate ABSA operates freighters that can provide increased capacity for denser routes. ABSA has obtained the required approval for the use of the brand name “TAM Cargo” and pursuant to a  capacities agreement between ABSA and TAM Linhas Aereas S.A., all domestic and international cargo operations in Brazil, including belly capacity and freighter aircraft, will be commercialized under the TAM Cargo brand, which is well positioned in the Brazilian market. Furthermore, ABSA is receiving a fourth Boeing 767 freighter for the Brazilian market and this freighter will be painted with the TAM Cargo livery. In addition, the Company is investing in a new warehouse at Guarulhos Airport and enhancing the cargo installations at Congonhas Airport. Cargo operations outside Brazil will continue to be commercialized under the LAN Cargo brand, which has strong brand recognition in the markets where it operates. Pursuant to the cargo block-space agreements that are already in place, the belly capacity of TAM Linhas Aereas S.A.’s international passenger operations to and from  Brazil, previously commercialized mainly through third parties, is being commercialized  by LAN and ABSA, respectively 
  • LATAM Airlines Group estimates one-time costs associated with the closing of the transaction and the realization of synergies of approximately US$200 million, most of which are expected to be incurred in the first 12 months after the completion of the combination. These costs do not include the transaction costs that have been incurred by LATAM and TAM separately until the end of the second quarter 2012.