LAN Airlines Reports Net Income of US$76.1 Million for Q1 2012

LAN has reported a net income of US$76.1 million in Q1 2012, a decrease of 21.8% compared to Q1 2011.

Operating income in the quarter decreased 27.4%, reaching US$111.2 million, with a 7.2% operating margin. Results this quarter were impacted by a 14.7% increase in fuel prices and a more challenging environment in the cargo business, as well as by the ongoing development of LAN Colombia’s operations.

During Q1 2012, LAN’s consolidated revenues increased 12.6% compared to Q1 2011. Passenger revenues increased 16.4% during the quarter, driven by continued traffic growth and a 2.2% expansion in yields. Passenger traffic growth during the quarter reached 14.0%, while load factors reached 82.9%, 1.9 points higher than 2011, and an historically high level even considering the high season. Total passenger capacity as measured in ASKs grew 11.3% and revenues per ASK (RASK) increased 4.6%.

Capacity increases focused mainly on domestic routes within Chile and regional routes within South America.

During  Q1 2012, cargo revenues increased 6.2%, driven by a 1.5% increase in cargo traffic and a 4.7% increase in yields, despite a more challenging scenario in Latin American cargo markets. Capacity increased 2.3% during the quarter. As a consequence, load factors decreased from 67.9% to 67.4%. Yields showed a 4.7% improvement compared to first quarter 2011, driven by a higher fuel surcharge, greater than anticipated seasonal demand, and itinerary optimization, leading to a 3.8% increase in unit revenue.

The low increase in cargo capacity during the quarter is a result of no additional freighters being incorporated since January 2011 in addition to decreased availability in the bellies of passenger aircraft due to a higher passenger load factor. On the other hand, the low increase in traffic during the quarter is a response to weaker cargo markets, increasing competition in routes into Latin America, as well as new regulations in Argentina that reduced imports during February 2012, partially offset by growth of the Chilean export market.

Operating expenses increased 17.7% compared to first quarter 2011, while costs per ATK (including net financial expenses) increased 11.9%. Operating costs were also impacted by ongoing expenses related to the development of LAN Colombia’s operations.

Higher fuel prices during the quarter, which increased 14.7% compared to Q1 2011, generated US$65.0 million in increased fuel costs. Nevertheless, LAN partially offset this impact via fuel surcharges in both passenger and cargo operations. Starting in March 2011, fuel surcharges based on WTI incorporated the crack spread to be better aligned with variations in jet fuel prices. During the quarter, the company’s financial hedging strategy resulted in a US$13.6 million fuel hedge gain. LAN has hedged approximately 50% of its estimated fuel consumption for the rest of 2012. The fuel hedging strategy consists of a combination of collars, swaps and call options for WTI and Brent.

LAN continued to maintain a solid financial position, with adequate liquidity and a solid financial structure, as reflected by the company’s BBB Investment Grade international credit rating (Fitch). LAN is one of the few airlines in the world with an Investment Grade rating. At the end of the quarter, LAN reported US$276.8 million in cash and cash equivalents representing 4.7% of revenues for the last twelve months. As of 31 March 2012, the company reported deposits with aircraft manufacturers (pre-delivery payments) of US$1,118.9 million, US$571.9 million of which were funded directly by LAN. In 2011, the company also secured committed credit lines for US$208 million. Additionally, the company has practically no short-term debt, while its long-term debt is mainly related to aircraft financing and has 12 to 15 year repayment profiles with competitive interest rates.

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