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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 second quarter ended June 30, 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$42.6 million for the second
quarter of 2007, a 158.9% increase compared to net income of
US$16.5 million in the second quarter of 2006.
-- The Company reported operating income of US$56.0 million for
the second quarter of 2007 compared to operating income of
US$25.4 million in the second quarter of 2006, increasing its
operating margin from 3.7% to 7.3%. This increase was the
result of an 11.5% increase in revenue, which offset a 7.4%
increase in operating costs.
-- Total revenues for the second quarter of 2007 reached US$769.6
million compared to revenues of US$690.0 million in the second
quarter of 2006, due mainly to an 18.7% increase in passenger
revenues, while cargo revenues increased 3.5% and other
revenues decreased 6.3%. Passenger and cargo revenues
accounted for 60% and 36% of total revenues, respectively, in
the second quarter of 2007. Revenue growth in the passenger
business can be largely attributed to the expansion of LAN's
international operations, both regional and long-haul.
-- During the second quarter, LAN completed the nationwide launch
of its new business model for short-haul operations on all
domestic routes within Chile, with excellent results. Domestic
traffic in Chile grew 29.6% during the quarter while domestic
load factors increased 9 points to 68.4%, largely driven by
fare reductions of over 30% on the lowest fare classes. At the
same time, CASK in the domestic business has been reduced via
a larger Airbus fleet, increased fleet utilization rates,
longer flight legs, and lower distribution costs.
-- In July LAN's Board of Directors approved orders for a total
of 32 Boeing 787 Dreamliners to be received between 2011 and
2016. The total investment in these new aircraft will reach
approximately US$ 3.2 billion, the largest investment in the
Company's history, assuring LAN's future growth and commitment
to the development of air travel in Latin America. LAN has
also placed orders for four Boeing 777 freighters to be
received starting in 2009.
-- In June 2007, LAN successfully completed an equity offering
raising a total of US$320 million in the Chilean and United
States markets through the placement of 19,881,819 common
shares. With this, LAN's total shares outstanding now amount
to 338,790,909. An additional 2,209,091 common shares have not
yet been placed, and are reserved for a Company employee stock
option plan.
Management Comments on Second Quarter 2007 Results
LAN reported net income of US$42.6 million in the second quarter
of 2007. This result reflects strong capacity expansion, with
significant margin improvements resulting mainly from lower costs per
ATK compared to the second quarter of 2006. Total revenues increased
11.5% during the quarter, while LAN's operating margin improved from
3.7% to 7.3%.
Passenger revenues grew 18.7% during the quarter, due mainly to a
24.3% expansion in capacity, partially offset by a 4.4% decline in
revenues per ASK. The latter was driven by an 8.5% decline in yields,
partially offset by an increase in load factors from 67.8% to 70.8%.
LAN's strong traffic growth during the second quarter of 2007 is
especially noteworthy considering that the second quarter is
seasonally the weakest quarter for passenger traffic in Latin America.
During this 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, 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 in
domestic markets resulting from the implementation of the Company's
new business model for short-haul operations, as well as decreases on
certain regional routes compared to the second 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 second quarter of 2007 achieved important profitability
improvements; margins in the cargo business contributed significantly
to LAN's consolidated margin expansion during this quarter. During the
second quarter of 2007, cargo revenues rose 3.5% as capacity rose 7.6%
and unit cargo revenues decreased 3.7%. Lower revenues per ATK
resulted mainly from a 1.3% decrease in yields, as well as a decline
in load factors from 67.0% to 65.4%. Yields were impacted during the
quarter by the aforementioned change in route mix.
Operating expenses rose 7.4% compared to the second quarter of
2006, as capacity increased 12.8%. This led to a 3.9% decrease in
total costs per ATK (including net financial expenses). Excluding the
impact of lower fuel prices, which generated US$2.4 million in lower
fuel costs for the quarter, unit costs decreased 5.0%. Excluding fuel
costs, unit costs decreased mainly as a result of a change in the
commission structure of the cargo business, lower commissions in the
passenger business, lower wages and benefits expenses, and lower fleet
costs resulting from fewer aircraft rentals and ACMI leases. These
factors were partially offset by higher aircraft maintenance costs.
The Company recorded a US$7.6 million non-operating loss in the
second quarter of 2007 compared to an US$8.8 million non-operating
loss in the second quarter of 2006. In the second quarter of 2007,
interest expenses increased due to higher debt related to fleet
financing, while interest income increased due to higher cash balances
resulting from the proceeds of the equity offering completed during
the quarter. The Company recorded a US$4.6 million fuel hedging gain
in the second quarter of 2007, compared to a US$10.4 million fuel
hedging gain in the second quarter of 2006. LAN has hedged
approximately 29% of its fuel requirements for the third and fourth
quarters of 2007. The Company has not hedged any of its fuel
requirements for 2008.
Other non-operating income/expenses in the second quarter of 2007
also included a US$4.3 million one-time cost related to the sale of
the subsidiaries of Lan Logistics Corp. The Company also received
US$3.4 million from Airbus related with a change in the delivery
schedule of certain Airbus A318 aircraft.
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$650 million in cash, cash equivalents and available 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 of its Boeing 767 passenger aircraft with its new
Premium Business Class and upgraded Economy Class. As of June 30,
2007, eleven of LAN's 21 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.
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.
(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.
Recent Events
New Business Model for Domestic/Regional Operations
During the quarter, LAN completed the nationwide launch of its new
business model for short-haul operations on all domestic routes within
Chile, with excellent results. Domestic traffic in Chile grew 29.6%
during the quarter, while domestic load factors increased 9 points to
68.4%, largely driven by fare reductions of over 30% on the lowest
fare classes. At the same time, CASK in the domestic business has been
reduced via a larger Airbus fleet, increased fleet utilization rates,
longer flight legs, and lower distribution costs as a result of the
reduction in commissions to agents and higher Internet sales. Internet
sales in the Chilean domestic operations increased from 16% in 2006 to
34% in June 2007.
Fleet Plan
During the quarter, LAN continued the expansion of its fleet. In
May, the Company received its first Airbus A318 aircraft, destined for
operations on domestic routes within Chile. To continue the growth of
its long-haul passenger operations, the Company also received a new
Boeing 767-300ER, the eleventh of LAN's long haul passenger aircraft
to feature the new Premium Business and Economy classes. In July LAN
also received its fifth leased Airbus A340 for ultra long haul routes.
In July LAN's Board of Directors approved orders for a total of 32
Boeing 787 Dreamliners, including 26 owned and six leased aircraft, to
be received between 2011 and 2016. The total investment in these new
aircraft will reach approximately US$ 3.2 billion, the largest
investment in the Company's history, and assures LAN's future growth
and commitment to the development of air travel in Latin America.
Furthermore, the Company announced in June that it will incorporate
four new Boeing 777 freighter aircraft into its fleet starting in
2009. This model is a world-class freighter, with the largest capacity
and the best efficiency performance in its category.
Sale of Subsidiaries
During the second quarter of 2007, LAN completed the sale of the
subsidiaries of Lan Logistics Corp, including the Miami-based
companies Lan Box Inc. and courier company SkyNet SA, which were not
part of the Company's core airline business. The sale generated a
one-time, non-operating charge of US$4.3 million in the second
quarter.
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 second 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 the Company 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. Overall, LAN
expects passenger ASK growth to be between 19-21% in 2007 and between
28-30% in 2008. LAN expects growth in the cargo business in 2007 will
largely be driven by capacity in the belly space of passenger
aircraft, as well as from possible additional ACMI leases in 2008. As
a result, the Company estimates cargo ATK growth of 4-6% in 2007, and
8-10% in 2008.
Consolidated Second Quarter Results
Net income for the second quarter of 2007 amounted to US$42.6
million compared to net income of US$16.5 million in the same period
of 2006, an increase of 158.9%. Excluding an extraordinary one-time
severance charge in the amount of US$5.3 million recorded in the
second quarter of 2006, net income grew 95.4%. Net margin for the
quarter increased from 2.4% in 2006 to 5.5% in 2007.
Operating income amounted to US$56.0 million in the second quarter
of 2007 as compared to operating income of US$25.4 million in the
second quarter of 2006. Operating margin for the quarter increased
from 3.7% to 7.3%.
Total operating revenues grew 11.5% compared to the second quarter
of 2006, reaching US$769.6 million. This reflected a:
-- 18.7% increase in passenger revenues to US$458.4 million,
-- 3.5% increase in cargo revenues to US$277.3 million, and a
-- 6.3% decrease in other revenues to US$33.9 million.
Passenger and cargo revenues accounted for 60% and 36% of total
revenues for the quarter, respectively.
Passenger revenues were higher driven by a 29.7% increase in
traffic, partly offset by an 8.5% decrease in yields. Load factors
increased from 67.8% to 70.8%, as traffic outpaced the 24.3% increase
in capacity. Overall, revenues per ASK decreased 4.4%. Traffic grew as
a result of a 29.6% increase in Chilean domestic traffic, and a 29.7%
increase in international traffic (including domestic operations in
Peru and Argentina). International traffic accounted for 88% of total
passenger traffic during the quarter. Yields decreased 8.5% mainly due
to fare decreases on regional routes, as well as on domestic routes
related with LAN's new business model for short-haul operations.
Cargo revenues increased 3.5% due to a 4.9% increase in traffic,
partly offset by a 1.3% yield decrease. Yields decreased primarily due
to the change in route mix mainly given the reduction of frequencies
to the European market where yields were higher, but profitability was
lower than other routes. Capacity during the quarter increased 7.6%.
As a consequence, load factors decreased from 67.0% to 65.4%. Revenues
per ATK decreased 3.7% compared to the second quarter of 2006.
Other revenues decreased 6.3%, mainly driven by the sale in the
second quarter of 2007 of the subsidiaries of Lan Logistics Corp,
including the Miami-based companies Lan Box Inc. and courier company
SkyNet SA, which were not part of the Company's core airline business.
This effect was partly offset by increased revenues from on board
sales and aircraft rentals, maintenance and handling services to third
parties.
Total operating expenses increased 7.4% during the quarter, while
capacity, as measured in system ATKs, increased 12.8%. As a
consequence, unit (ATK) costs decreased 3.9%. Lower jet fuel prices
during the quarter led to approximately US$2.4 million in lower fuel
costs. Excluding fuel, unit costs decreased 5.0%. Changes in operating
expenses were driven by:
-- Wages and benefits increased 5.6%, in line with inflation and
the impact of a stronger Chilean peso on local
Peso-denominated wages. This was offset by a lower headcount
as compared to the second quarter of 2006, despite the 12.8%
increase in operations.
-- Fuel costs increased 11.4%, as a 12.7% increase in consumption
was offset by a 1.1% decrease in prices, as well as by fuel
efficiencies resulting from a newer fleet.
-- Commissions to agents decreased 11.3% due to a 12.5% increase
in traffic revenues (passenger and cargo), which was offset by
a 3.4 point reduction in average commissions. This reduction
was mainly related to a change in the commission structure in
the cargo business, as well as to lower commissions in the
passenger business in Chile.
-- Depreciation and amortization increased 21.4%, mainly due to
the incorporation of five new Boeing 767 aircraft, eight new
Airbus A319 aircraft and one new Airbus A318 aircraft.
-- Other rental and landing fees increased 12.1%, mainly due to
the impact of increased operations on airport landing fees and
handling expenses, which were offset in part by lower variable
aircraft rentals, as a result of lower ACMI leases in the
cargo business, in addition to the termination of certain
cargo allotment agreements.
-- Passenger service expenses increased 23.0%, driven by the
31.8% 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 49.7% mainly as a result of the
expansion in operations, a larger fleet and the increased
fleet utilization, as well as higher maintenance rates per
hour due to escalation in maintenance contracts.
-- Other operating expenses increased 3.1% due to increased
operations, which resulted in increased sales costs. This was
partially offset by the de-consolidation of the costs related
to the subsidiaries of Lan Logistics Corp, which were sold
during the second quarter.
Non-operating results for the second quarter of 2007 amounted to a
US$7.7 million loss compared to an US$8.8 million loss in the second
quarter of 2006.
-- Interest income increased 156.9% due to higher average cash
balances resulting from the proceeds of the equity offering
completed during this quarter.
-- Interest expenses increased 37.5% due to increased average
long-term debt related to fleet financing.
-- In the other income-net item, the Company recorded an US$8.0
million gain compared to a US$3.7 million gain in 2006. In the
second quarter of 2006, this item included a US$6.4 million
pre-tax, one-time charge related to severance payments. The
Company recorded a fuel hedging gain of US$4.6 million in the
second quarter of 2007 (compared to a US$10.4 million gain in
the second quarter of 2006), as well as a US$4.6 million
foreign-exchange gain (compared to a negligible gain in the
second quarter of 2006). In the second quarter of 2007, this
item also included a US$4.3 million one-time cost related to
the sale of the subsidiaries of Lan Logistics Corp. The
Company also received US$3.4 million from Airbus related with
a change in the delivery schedule of certain Airbus A318
aircraft.
Consolidated First Half 2007 Results
Net income for the first half of 2007 amounted to US$128.7 million
compared to net income of US$96.1 million in the same period of 2006,
an increase of 33.9%. Excluding extraordinary items that amounted to
US$28.3 million during the first half of 2006, net income rose 89.9%
and net margin for the period increased from 6.8% in 2006 to 8.0% in
2007.
Operating income amounted to US$179.5 million in the first half of
2007 compared to US$94.1 million in the first half of 2006. Operating
margin for the period increased from 6.6% to 11.2%.
Total operating revenues grew 12.9% compared to the first half of
2006, reaching US$1.6 billion. This reflected a:
-- 21.0% increase in passenger revenues to US$995.8 million,
-- 1.9% increase in cargo revenues to US$532.6 million, and a
-- flat other revenues which amounted to US$72.5 million.
Passenger and cargo revenues accounted for 62% and 33% of total
revenues for the period, respectively.
Passenger revenues grew driven by a 28.0% increase in traffic,
partly offset by a 5.5% decrease in yields. Load factors increased
from 71.5% to 74.6%, as traffic outpaced the 22.7% increase in
capacity. Overall, revenues per ASK decreased 1.4%. Traffic grew as a
result of an 18.5% increase in Chilean domestic traffic and a 29.5%
increase in international traffic (including domestic operations in
Peru and Argentina). International traffic accounted for 87% of total
passenger traffic during the period. Yields decreased 5.5% mainly due
to fare decreases on regional routes, and on domestic routes related
to the new business model for short-haul operations, as well as lower
fuel surcharges in the beginning of the period resulting from lower
WTI prices compared to the same period of 2006.
Cargo revenues increased 1.9% due to a 3.7% increase in traffic,
partially offset by a 1.8% yield decrease. Yields decreased primarily
due to the change in route mix mainly given the reduction of
frequencies to the European market where yields were higher, but
profitability was lower than other routes, as well as lower fuel
surcharges in the beginning of the period compared to the same period
of 2006. Traffic growth was exceeded by a 4.8% capacity increase. As a
consequence, load factors decreased from 65.6% to 64.9%. Revenues per
ATK decreased 2.8% compared to the first half of 2006.
Other revenues remained flat, as increased revenues from on-board
sales and aircraft rentals, maintenance and handling services to third
parties were offset by the sale in the second quarter of 2007 of the
subsidiaries of Lan Logistics Corp, including the Miami-based
companies Lan Box Inc. and courier company SkyNet SA, which were not
part of the Company's core airline business.
Total operating expenses increased 7.4% during the period while
capacity, as measured in system ATKs, increased 12.0%. As a
consequence, unit (ATK) costs decreased 3.3%. Lower jet fuel prices
during this period led to approximately US$7.4 million in lower fuel
costs. Excluding fuel, unit costs decreased 3.7%. Changes in operating
expenses were driven by:
-- Wages and benefits increased 6.2%, driven by the expansion in
the Company's operations, offset in part by lower headcount
and the impact of a weaker Chilean peso on local
Peso-denominated wages.
-- Fuel costs increased 9.3%, as an 11.3% increase in consumption
was offset by a 1.8% decrease in prices, as well as by fuel
efficiencies resulting from a newer fleet.
-- Commissions to agents decreased 8.1% due to a 13.6% increase
in traffic revenues (passenger and cargo), which was offset by
a 2.8 point reduction in average commissions. This reduction
was mainly related to a change in the commission structure in
the cargo business, as well as lower commissions in the
passenger business in Chile.
-- Depreciation and amortization increased 24.4%, mainly due to
the incorporation of five new Boeing 767 aircraft, eight new
Airbus A319 aircraft and one new Airbus A318 aircraft. Other
rental and landing fees increased 8.5%, mainly due to the
impact of increased landing fees and handling expenses, which
were offset in part 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 22.6%, driven by the
28.8% increase in the number of passengers transported during
the period, 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 33.1% mainly as a result of the
expansion in operations, a larger fleet and the increased
utilization of the fleet, as well as higher maintenance rates
per hour due to escalation in maintenance contracts.
-- Other operating expenses increased 10.0% due to increased
operations, which resulted in increased sales costs and costs
related to the Company's frequent flyer program, "LanPass".
This was partially offset by the de-consolidation of the costs
related to the subsidiaries of Lan Logistic Corp, which were
sold during the second quarter of 2007.
Non-operating results for the first half of 2007 amounted to a
US$27.4 million loss compared to a US$19.4 million gain in the first
half of 2006.
-- Interest income increased 70.6% due to higher average cash
balances resulting from the proceeds of the equity offering
completed during the second quarter.
-- Interest expenses increased 42.4% due to increased average
long-term debt related to fleet financing.
-- In the other income-net item, the Company recorded a US$3.5
million gain compared to a US$41.9 million gain in 2006. In
the first half 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 and a US$6.4 million
pre-tax, one-time loss related to severance payment charges.
The Company recorded a fuel hedging gain of US$0.1 million in
the first half of 2007 (compared to a US$7.5 million gain in
the first half of 2006), as well as a US$5.2 million
foreign-exchange gain (compared to a US$0.2 million gain in
the first half 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 70 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.
For a full version of this release please visit: www.lan.com
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