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Fitch Ratings has upgraded the foreign currency ratings of LAN
Airlines S.A. (LAN) to 'BBB' from 'BBB-'. The Outlook is Stable.
The rating action reflects continued improvement in operating
results and credit protection measures from higher revenue in both
passenger and cargo businesses and non-fuel cost reductions. Credit
protection measures strengthened during 2006 despite an important
increase in debt related to capacity additions. Positive revenue
fundamentals, eased fuel cost pressures, a reduction in the non-fuel
unit cost (CASK - cost available seat kilometer) and the expected
completion by mid-year of a capital increase for approximately US$300
million should allow LAN to continue to grow ASK (available seat
kilometer) capacity while retaining healthy cash balances and moderate
debt indicators. Importantly, the incorporation of a new low-cost
business model for domestic and short haul regional routes should
drive strong margin improvement over the next several quarters.
Robust revenue growth of 21% during 2006 was driven by capacity
additions and yield increases, supported by thriving regional
economies and strong domestic currencies. The main driver of growth
continues to be international passenger traffic. Cargo operations have
also expanded due to strong southbound cargo traffic supported by the
incorporation of an additional dedicated freighter during 2006 and
capacity additions in the bellies of passenger aircraft. The
application of fuel surcharges indexed to WTI prices and continued
reductions of non-fuel costs have contributed to strong margin
improvement. During 2006, the EBITDAR margin reached 19.2%, a
significant advancement from 14.8% in 2005.
The ratings also reflect the company's strong business position,
low cost structure, fleet flexibility and adequate financial profile.
LAN's competitive advantages are underpinned by the integration of
passenger and cargo operations, which provides revenue diversification
and lowers the break-even load factor. The company operates the
largest passenger and cargo route networks in Latin America, which
optimizes the rotation of its long-haul and short-haul aircraft. These
advantages allow LAN to maintain a cost structure that is among the
lowest in the industry. The fleet is modern, fuel-efficient and has
staggered delivery and lease expiration dates, which provides
flexibility in capacity management. The ratings also incorporate
industry-related risks, including revenue volatility, high operating
leverage, fuel price volatility and competitive pressures.
LAN remains focused on capacity growth, supported by strong
traffic trends, continuing to add frequencies and incorporate new
international routes within the Latin America region and from the
region to the United States, Europe and the South Pacific. Although
supply pressures and fare discounting activity in the regional market
have intensified in recent months, LAN has continued to consolidate
its strong market position as the leading Latin American carrier.
Today, the company services most capitals, important cities and
tourist destinations in South America as well as key destinations in
the Caribbean and Mexico, the United States, Europe and the South
Pacific through its four key hubs in Santiago, Lima, Guayaquil and
Buenos Aires. It also has dominant market positions in the domestic
markets of Chile and Peru and growing operations in the domestic
Argentine market.
During 2007 and 2008, the company will take delivery of a total of
36 passenger aircraft (11 and 25 respectively), composed of 24 Airbus
318/319/320 family mix aircraft, eight Boeing 767s and four long haul
Airbus 340 passenger aircraft. During this period, LAN will also
complete the phase-out of its existing fleet of 16 Boeing 737s. This
represents an increase in ASK of approximately 20% in 2007 and over
25% in 2008. Cargo capacity expansion should be more moderate, around
5% per year in 2007-2008, driven by the bellies of passenger aircraft.
Responding to changes in competitive and cost conditions over the
past several years, the company is in the process of redesigning the
business model for its short haul operations, which include domestic
operations in Chile, Peru and Argentina as well as short haul regional
routes. The back-bone of LAN's new low-cost model is higher aircraft
utilization, expected to improve to 12 hours from 9 hours by 2008 due
to more point-to-point flying and the incorporation of early, late and
overnight flights, supported by the replacement of the Boeing 737
short haul fleet in favor of the more efficient Airbus 320 family mix,
reductions in overhead costs (including lighter on-board services) and
the use of low-cost distribution channels (i.e. internet). LAN is
expected to translate cost reductions to lower fares, thereby
stimulating passenger demand and travel.
Operating cash flow generation and proceeds from a US$300 million
capital increase expected to be placed by mid-year in both the Chilean
and international equity markets (in the form of ADRs) should allow
LAN to fund US$600 million of capital expenditures during 2007 while
strengthening cash balances and credit protection measures. Total
adjusted debt including aircraft leases should increase by
approximately US$200 million during 2007. Credit protection measures
should continue to strengthen driven by strong cash generation and
margin improvement. The fixed-charge coverage ratio measured as
EBITDAR/interest plus lease expense should improve by the end of 2007
to around 3.3 times (x) from 2.7x in 2006 and the net adjusted
debt/EBITDAR ratio should improve to 3x or less from 4.2x.
LAN maintains a solid liquidity position, with $281 million of
cash and marketable securities and committed credit lines at Dec. 31,
2006. On-balance-sheet debt of $1.4 billion includes $1.1 billion of
long-term secured bank loans with maturities due in 12 to 18 years
related to the purchase of aircraft and $230 million of capital
leases. The debt profile also includes $32 million outstanding in
securitizations of ticket receivables originated in the United States.
As customary in the industry, the company has off-balance-sheet
liabilities related to aircraft operating leases, which at Dec. 31,
2006 totaled approximately $1.3 billion.
LAN operates domestic and international passenger and cargo
operations with a fleet of 70 passenger aircraft and 10 dedicated
cargo aircraft. The company is a member of the oneworld alliance. LAN
serves 15 destinations in Chile, 12 in Peru, 10 in Argentina, two in
Ecuador, 13 in other Latin American countries and the Caribbean, three
in North America, two in Europe and four in the South Pacific, in
addition to 52 destinations served through code share agreements with
its partner airlines. The company also offers cargo service between
South America and the United States and Europe. In 2006, LAN had
revenues of $3 billion, which were composed of passenger (60%), cargo
(35%) and other (5%).
Fitch's rating definitions and the terms of use of such ratings
are available on the agency's public site, www.fitchratings.com.
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality,
conflicts of interest, affiliate firewall, compliance and other
relevant policies and procedures are also available from the 'Code of
Conduct' section of this site.
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