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LAN Airlines S.A. (NYSE: LFL), one of Latin America's leading
passenger and cargo airlines, announced today its consolidated
financial results for the first quarter ended March 31, 2007. "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.
HIGHLIGHTS
-- LAN reported net income of US$86.1 million for the first
quarter of 2007, an 87.3% increase as compared to net income
of US$46.0 million in the first quarter of 2006, excluding
extraordinary items. (During the first quarter of 2006 the
Company reported a one-time after tax non-operating gain of
US$33.7 million).
-- The Company reported operating income of US$123.5 million for
the first quarter 2007 compared to US$68.7 million for the
first quarter of 2006, increasing its operating margin from
9.4% to 14.9%. This increase was the result of a 14.2%
increase in revenue, which outpaced a 7.3% increase in
operating costs.
-- Total revenues for the first quarter of 2007 reached US$831.3
million compared to US$728.2 million in the first quarter of
2006, due mainly to a 23.0% increase in passenger revenues,
while cargo revenues increased 0.1% and other revenues
increased 6.3%. Passenger and cargo revenues accounted for 65%
and 31% of total revenues, respectively during the first
quarter of 2007. Revenue growth in the passenger business can
be attributed largely to the expansion of LAN's international
operations, both regional and long haul.
-- In March 2007, LAN initiated the commercial launch of its new
business model for short-haul operations on all domestic
routes within Chile, with new fare structures that have
resulted in discounts of up to 30% on the lowest fares. These
flights began on April 9, 2007, and have shown increases in
demand of approximately 60% on average for all domestic
destinations. In addition, during the quarter, the domestic
passenger business achieved significant efficiencies resulting
from longer flight legs, a larger Airbus fleet and lower
distribution costs as a result of the reduction in commissions
to agents. LAN's new business model for short-haul operations
is also being implemented on domestic operations in Peru and
Argentina, as well as certain regional routes.
-- During the quarter, LAN continued planning the expansion of
its fleet. To support the growth of its short-haul operations,
the Company completed fleet orders for a total of 15 Airbus
A320 family aircraft to be received in 2010-2011. To enhance
the development of its cargo business, LAN will potentially
incorporate four Boeing 777 freighter aircraft into its
dedicated cargo fleet in 2009-2011. In addition, for long-haul
passenger operations, LAN will potentially lease three
additional Airbus 340 passenger aircraft in 2008.
-- On April 5, 2007, LAN's shareholders approved a capital
increase of 22,090,910 common shares. It was also approved
that 10% of this issuance will be designated for the
implementation of a stock option plan for Company employees.
-- On April 9, 2007, Fitch Ratings upgraded LAN's foreign
currency rating to 'BBB' from 'BBB-', with rating outlook
'Stable'. This confirms the Company's solid financial
situation and its position as one of the few investment grade
rated airlines in the world.
-- On March 26 2007, LAN became the first Chilean company to
successfully meet the requirements of Section 404 of the
Sarbanes-Oxley Act related to internal controls over the
Company's consolidated financial statements. The Company's
2006 Financial Statements filed with the SEC include the
required certification from LAN's independent auditors,
stating that the controls supporting these financial
statements were effective in all material aspects.
-- On April 1, 2007, LAN Argentina and LAN Ecuador became members
of the oneworld alliance. With this, all the airlines that are
part of the LAN alliance are members of this prestigious
group, underlining the Company's ongoing commitment to
excellent service and the highest international safety
standards.
Management Comments on the First Quarter of 2007 Results
LAN reported a net income of $86.1 million for the first quarter
of 2007. This result reflects a strong operating performance, with
significant margin improvements resulting mainly from higher revenues
per ASK in the passenger business as well as from a lower cost per
ATK, in each case as compared to the first quarter of 2006. While
total revenues increased 14.2% during the quarter, the operating
margin improved from 9.4% to 14.9%. This represents a major
accomplishment for the Company as revenue growth surpassed the 11.2%
expansion in operations, as measured in system ATKs. The Company also
benefited from an estimated US$5.3 million in lower fuel costs as a
result of decreases in the price of jet fuel, partly offset by a
US$4.5 million fuel hedging loss.
Passenger revenues grew 23.0% during the quarter, due mainly to a
21.2% expansion in capacity as well as a 1.5% improvement in revenues
per ASK. The latter resulted from an increase in load factors from
74.9% to 78.2%, partly offset by a 2.8% decrease in yields during the
quarter. During the first quarter, the Company managed its capacity in
order to respond to demand growth and market opportunities. As a
consequence, capacity increased on all of LAN's routes, except on
segments to the Caribbean, with the largest capacity increases on
regional routes. Capacity also increased in all of the Company's
domestic markets, namely Chile, Peru and Argentina. During the
quarter, yields decreased, mainly as a result of decreases on certain
regional and domestic routes, as well as lower fuel surcharges
resulting from lower WTI prices as compared to the first quarter of
2006.
LAN's strategy in the cargo business seeks to rationalize its
capacity expansion by focusing on the most profitable routes, as well
as optimizing its fleet by replacing less efficient ACMI leases with
its own Boeing 767 freighters. The implementation of this strategy
during the first quarter of 2007 resulted in limited capacity
expansion and revenue growth, while at the same time achieving
significant profitability improvements. Margins in the cargo business
contributed significantly to LAN's consolidated margin expansion
during this quarter.
During the first quarter of 2007, cargo revenues rose 0.1% as
capacity rose 2.2% and unit cargo revenues decreased 2.0%. Lower
revenues per ATK resulted mainly from a 2.3% decrease in yields,
partly offset by an increase in load factors from 64.2% to 64.4%.
Slower capacity growth was in line with the above mentioned strategy,
as additional capacity on LAN's passenger and freighter aircraft
replaced wet leases and allotment capacity on passenger aircraft of
other carriers. Furthermore, cargo traffic during the first quarter
was affected by a delay in the initiation of the seed export season, a
seasonal product which was accounted for in early March in 2006 and in
late March in 2007, affecting traffic figures and cargo yields.
Operating expenses rose 7.3% compared to the first quarter of 2006
as capacity increased 11.2%. This led to a 2.8% decrease in total cost
per ATK (which include net financial expenses). Excluding the impact
of lower fuel prices, which generated US$5.3 million in lower fuel
costs for the quarter, unit costs decreased 2.4%. Excluding fuel
costs, unit costs decreased mainly as a result of a change in the
commission structure of the cargo business, lower fleet costs
resulting from lower aircraft rentals and ACMI leases, and decreased
expenses in wages and benefits. These factors were partially offset by
higher airport and handling fees and increased passenger services
expenses as a result of an increase in the number of passengers
transported.
The Company recorded a US$19.7 million non-operating loss in the
first quarter of 2007 compared to a US$28.2 million gain in the first
quarter of 2006. Non-operating income in the first quarter of 2006 was
mainly impacted by a US$40.3 million pre-tax one time gain resulting
from a change in the Company's accounting policy for aircraft
maintenance. In addition, the non-operating loss in the first quarter
of 2007 was mainly the result of higher interest expenses due to
higher debt related to fleet financing, as well as a US$4.5 million
fuel hedging loss, as compared to a US$2.9 million fuel hedging loss
in the first quarter of 2006. LAN has hedged approximately 28% of its
fuel requirements for the second and third quarters of 2007 and 29%
for the fourth quarter of 2007.
LAN continues to maintain a solid financial position, with ample
liquidity and a sound financing structure. At the end of the quarter
LAN had US$291 million in cash, cash equivalents and committed credit
lines. Additionally, the Company's long-term debt only finances
aircraft, has 12 to 18-year repayment profiles and features
competitive interest rates.
During the quarter, LAN continued with its retrofit program to
reconfigure all its Boeing 767 passenger aircraft with its new Premium
Business Class and upgraded Economy Class. As of March 31, 2007, eight
of LAN's 20 Boeing 767 passenger aircraft had this new configuration.
Consistent positive results and a solid balance sheet have enabled
LAN to continue advancing on a number of long-term initiatives. These
plans, which encompass all levels and business units, are aimed at
improving LAN's long-term strategic position by enabling the Company
to address opportunities, strengthen its market position and raise
competitiveness.
-0-
*T
EBITDAR Calculation (1)
----------------------------------------------------------------------
The following is a calculation of LAN's EBITDA (earnings before
interest, taxes, depreciation and amortization) and EBITDAR (earnings
before interest, taxes, depreciation, amortization and aircraft
rentals), which the Company considers useful indicators of operating
performance.
EBITDAR (in US$ millions)
1Q07 1Q06 %Chg
Revenues 831.3 728.2 14.2%
Operating Expenses (707.8) (659.5) 7.3%
----------------------------------------------------------------------
Operating Income 123.5 68.7 79.8%
Depreciation and Amortization 36.7 28.8 27.5%
----------------------------------------------------------------------
EBITDA 160.2 97.5 64.3%
EBITDA Margin 19.3% 13.4%
Aircraft Rentals 37.9 39.0 -2.8%
----------------------------------------------------------------------
EBITDAR 198.1 136.5 45.1%
EBITDAR Margin 23.8% 18.7%
(1) EBITDA and EBITDAR are non-GAAP measures and should not be
considered in isolation nor as a substitute for net income prepared
in accordance with generally accepted accounting principles in Chile
as a measure of operating performance. Furthermore, these
calculations may not be comparable to similarly titled measures used
by other companies.
*T
Recent Events
New Business Model for Domestic/Regional Operations
In March 2007, LAN initiated the commercial launch of its new
business model for short-haul operations on all domestic routes within
Chile, with new fare structures that have resulted in discounts of up
to 30% on the lowest fares. These flights began on April 9, 2007, and
have shown increases in demand of approximately 60% on average for all
domestic destinations. In addition, during the quarter the domestic
passenger business achieved significant efficiencies resulting from
longer flight legs, a larger Airbus fleet and lower distribution costs
as a result of the reduction in commissions to agents. LAN's new
business model for short-haul operations is also being implemented on
domestic operations in Peru and Argentina, as well as certain regional
routes.
Capital Increase
On April 5, 2007, LAN's Extraordinary Shareholders Meeting
approved a share issuance of 22,090,910 common shares, amounting to
6.9% of the Company's current capital on a fully diluted basis.
Furthermore, as approved at the Shareholders Meeting, 10% of this
issuance will be designated for the implementation of a stock option
plan for Company employees, under conditions to be defined by the
Company's Board of Directors.
Fleet Plan
During the quarter, LAN continued planning the expansion of its
fleet. To support the growth of its short-haul operations, the Company
completed fleet orders for a total of 15 Airbus A320 family aircraft
to be received in 2010-2011, in addition to the 24 already on order.
For the development of its long-haul passenger fleet, LAN has orders
for 11 Boeing 767 passenger aircraft to be received between 2007 and
2009. The Company also plans to lease four Airbus A340 passenger
aircraft in 2007-2008. Furthermore, to enhance the development of its
cargo business, LAN will potentially incorporate four Boeing 777
freighter aircraft into its dedicated cargo fleet in 2009-2011. LAN's
complete fleet plan and associated capital expenditures are shown in
the table below.
Outlook
The actions mentioned under "Recent Events" above are part of a
broad set of initiatives aimed at reinforcing LAN's future
performance. The Company's strong first 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, LAN believes that these
elements will enable LAN to consolidate its position as Latin
America's leading international carrier.
LAN has embarked on a very significant fleet expansion program,
which includes the delivery of a total of 11 passenger aircraft in
2007 and 25 in 2008. In addition to more aircraft, ASK growth will be
enhanced as a result of increased aircraft utilization and, to a
lesser extent, the densification of its current fleet.
Consolidated First Quarter Results
Net income for the first quarter of 2007 amounted to US$86.1
million compared to US$79.7 million for the same period of 2006,
increasing 8.1%. Excluding extraordinary items that amounted to
US$33.7 million during the first quarter of 2006, net income grew
87.3%. Excluding extraordinary items, net margin for the quarter
increased from 6.3% in 2006 to 10.4% in 2007.
Operating income amounted to US$123.5 million in the first quarter
of 2007 as compared to US$68.7 million in the first quarter of 2006.
Operating margin for the quarter increased from 9.4% to 14.9%.
Total operating revenues grew 14.2% compared to the first quarter
of 2006, reaching US$831.3 million. This reflected a:
-- 23.0% increase in passenger revenues to US$537.4 million,
-- 0.1% increase in cargo revenues to US$255.3 million, and a
-- 6.3% increase in other revenues to US$38.6 million.
Passenger and cargo revenues accounted for 65% and 31% of total
revenues for the quarter, respectively.
Passenger revenues grew driven by a 26.5% increase in traffic,
partly offset by a 2.8% decrease in yields. Load factors increased
from 74.9% to 78.2% as traffic outgrew the 21.2% increase in capacity.
Overall, revenues per ASK increased 1.5%. Traffic grew as a result of
a 10.6% increase in Chilean domestic traffic and a 29.3% increase in
international traffic (including domestic operations in Peru and
Argentina). International traffic accounted for 87% of total passenger
traffic during the quarter. Yields decreased 2.8% mainly due to lower
fuel surcharges resulting from lower WTI prices as compared to the
first quarter of 2006, as well as fare decreases on regional and
domestic routes related with the new business model for short-haul
operations.
Cargo revenues remained almost flat due to a 2.5% increase in
traffic, offset by a 2.3% yield decrease. Yields decreased primarily
due to the delay in the initiation of the seed exports season, a
product that seasonally occurs in March and that has relatively high
yields, as well as to lower fuel surcharges. Traffic growth slightly
exceeded a 2.2% capacity increase. As a consequence, load factors
increased from 64.2% to 64.4%. Revenues per ATK decreased 2.0% as
compared to the first quarter of 2006.
Other revenues increased 6.3%, mainly driven by increased handling
and aircraft rental revenues.
Total operating expenses increased 7.3% during the quarter while
capacity, as measured in system ATKs, increased 11.2%. As a
consequence, unit (ATK) costs decreased 2.8%. Lower jet fuel prices
during the quarter led to approximately US$5.3 million in lower fuel
costs. Excluding fuel, unit costs decreased 2.4%. Changes in operating
expenses were driven by:
-- Wages and benefits increased 6.9%, driven by the expansion in
the Company's operations and increases in the variable portion
of employee wages, offset in part by lower headcount and the
impact of a weaker Chilean peso on local Peso-denominated
wages.
-- Fuel costs increased 7.0% as a 9.9% increase in consumption
was offset by a 2.7% decrease in prices as well as by fuel
efficiencies resulting from a newer fleet.
-- Commissions to agents decreased 4.9% due to a 14.6% increase
in traffic revenues (passenger and cargo) which was offset by
a 2.5 point reduction in average commissions. This reduction
was mainly related to a change in the commission structure in
the cargo business.
-- Depreciation and amortization increased 27.5%, mainly due to
the incorporation during 2006 of five new Boeing 767 aircraft
and eight new Airbus A319 aircraft.
-- Other rental and landing fees increased 5.1%, mainly as the
impact of increased operations on landing fees and handling
expenses were offset by lower variable aircraft rentals as a
result of lower ACMI leases in the cargo business, as well as
the termination of certain cargo allotment agreements.
-- Passenger service expenses increased 22.2%, driven by the
26.2% increase in the number of passengers transported during
the quarter, partially offset by changes in the passenger and
route mix.
-- Aircraft rentals decreased 2.8% mainly due to a decrease in
the average number of leased aircraft.
-- Maintenance expenses increased 19.9% mainly as a result of the
expansion in operations, a larger fleet and the increased
utilization of the fleet.
-- Other operating expenses increased 16.8% due to increased
operations, which resulted in increased sales costs and costs
related to the Company's frequent flyer program, "LanPass".
Non-operating results for the first quarter of 2007 amounted to a
US$19.7 million loss compared to a US$28.2 million gain in the first
quarter of 2006.
-- Interest income increased 21.9% due to higher average cash
balances.
-- Interest expenses increased 47.9% due to increased average
long-term debt related with fleet financing.
-- In the other income-net item, the Company recorded a US$4.4
million loss compared to a US$38.2 million gain in 2006. In
the first quarter of 2006 this item included a US$40.3 million
pre-tax one-time gain related to the change in the Company's
aircraft maintenance accounting policy. The Company recorded a
fuel hedging loss of US$4.5 million in the first quarter of
2007 (compared to a US$2.9 million loss in the first quarter
of 2006), as well as a US$0.6 million foreign-exchange gain
(compared to a US$0.2 million gain in the first quarter of
2006).
About LAN
LAN Airlines is one of the leading airlines in Latin America.
"LAN" makes reference to the consolidated entity that includes LAN
Airlines, LAN Express, LAN Peru, LAN Ecuador, and LAN Argentina, as
well as LAN Cargo and its affiliates. The LAN Alliance serves 15
destinations in Chile, 12 destinations in Peru, ten destinations in
Argentina, two destinations in Ecuador, 15 destinations in other Latin
American countries and the Caribbean, three destinations in the United
States, two destinations in Europe and four destinations in the South
Pacific, as well as 52 additional international destinations through
its various code-share agreements. Currently, the LAN Alliance
operates 68 passenger aircraft and 10 dedicated freighters.
LAN Airlines is a member of oneworld (TM), the world's leading
global airline alliance. It has bilateral commercial agreements with
oneworld partners American Airlines, British Airways, Iberia and
Qantas, as well as with Alaska Airlines, AeroMexico, Mexicana, TAM,
Korean Air and JAL. For more information visit www.lan.com or
www.oneworldalliance.com.
Note on Forward-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. These factors and uncertainties include in
particular those described in the documents we have filed with the
U.S. Securities and Exchange Commission. 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.
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