LAN Airlines Reports Record Net Income of US$47.6 Million for the Fourth Quarter and US$163.6 Million for the Full Year 2004.
--LAN reported record net income of US$163.6 million for the full year 2004, nearly doubling 2003's net income of US$83.6 million. Operating income increased 54.0% in 2004 to US$172.1 million even as high fuel prices generated US$108.9 million in additional expenses for the full year. Total revenues grew 27.7% to an unprecedented US$2.1 billion. Operating margins reached an all-time high of 8.2%.
--For the fourth quarter of 2004, LAN earned a record US$47.6 million in net income, higher than the US$35.2 million earned in 2003. Operating income amounted to US$34.1 million in 2004 compared to US$41.9 million in 2003. Operating margin amounted to 5.6% as total revenues grew 27.5% to US$609.5 million. High fuel prices generated US$54.2 million in additional expenses that were partially offset by a US$13.8 million fuel hedging gain (classified as a non-operating item).
--Successful international expansion has led to a more diversified revenue mix, with Chilean domestic passenger and cargo revenues accounting for less than 11% of total annual revenues.
--LAN continues to have a strong liquidity position with over US$305 million in cash and other liquid assets.
--During the fourth quarter of 2004, LAN incorporated one leased Boeing 767-300 and two new leased Airbus A319 aircraft. In 2005, the Company expects to incorporate three leased Boeing 767-300 passenger aircraft, two new Boeing 767-300 freighters and two new Airbus A319s.
--During the quarter, LanPeru consolidated its position as Peru's leading domestic operator. Additionally, in December, the Superior Court of Arequipa, Peru, unanimously overturned the cautionary order that had forced LanPeru to suspend it operations for 14 hours in October.
--In November, LAN and Korean Airlines signed a memorandum of understanding that will lead to an alliance between the two companies. The alliance is expected to include code share services between Latin America and Asia, as well as other benefits for passengers traveling in both airlines.
--In January 2005, the Company and the LAN Express pilot union signed a new four-year contract that replaces the one that was to expire on March 2005.
LAN Airlines earned US$163.6 million in net income for the full year 2004, nearly twice the US$83.6 million reported for 2003. This unprecedented result was achieved as net income for the fourth quarter increased from US$35.2 million in 2003 to US$47.6 million in 2004. Customer preference, an efficient cost structure and a solid financial position have enabled LAN to consistently improve its results over the last three years. As a consequence, LAN can focus today on growth and efficiency-oriented initiatives that should lead to higher profitability and value creation.
The key elements that defined LAN's fourth quarter performance were revenue growth, careful cost controls, and the impact of high fuel prices and fuel hedging strategies. While total revenues increased 27.5% to US$609.5 million, operating margins decreased 3.2 points to 5.6%, mainly due to higher fuel costs. As a consequence, operating income decreased from US$41.9 million in 2003 to US$34.1 million 2004. This reduction was partially offset by a US$15.0 million improvement in non-operating results to US$16.3 million driven mainly by increased fuel hedging benefits. Combined, both effects led to 14.4% increase in pre-tax income to US$49.3 million. The Company also benefited from a US$5.7 million one-time reduction in income taxes for the quarter due to the recovery of tax losses generated in previous periods. Overall, net margins for the fourth quarter of 2004 amounted to 7.8%, respectively.
Passenger revenues for the fourth quarter increased 26.0% compared to same period of 2003, driven by a 15.3% increase in traffic and a 9.3% improvement in yields. Load factors fell 0.9 points to 70.6% as capacity increased 16.7% and, as a consequence, revenues per ASK increased 8.0%. The Company's performance was aided by demand growth in key points of sale, such as Chile, Argentina and Peru. LAN's market position improved due to enhanced customer preference as well as capacity increases in routes to Europe, the United States, the South Pacific, and the positive performance of the new regional routes out of Lima. Domestic operations in Peru also experienced significant growth during the quarter as the Company increased capacity significantly in response to competitive changes. Finally, domestic traffic in Chile grew driven mainly due to increased demand. Yields improved mainly as a result of fuel-related fare increases, improved segmentation and lower trip lengths.
Cargo revenues -which amounted to US$238.3 million and accounted for 40% of total revenues- increased 31.5% compared to the fourth quarter of 2003. The fourth quarter is usually the strongest for LAN Cargo given the seasonality of most South American exports. Cargo revenues per ATK increased 18.6% due to improvements in both yield (up 15.4%) and load factors (up 1.9 points). Load factors improved as traffic increased 14.0% and capacity rose 10.9%. LAN added capacity in response to improving southbound demand to Brazil and Chile, high demand for special charter operations and initiatives aimed at penetrating new markets, especially on previously untapped northbound routes. Yields improved mainly because of fuel-related surcharges and fare improvements in specific markets.
Operating costs for the quarter grew 32.0% driven by capacity growth, high fuel prices and increases in sales-related expenses. Costs per ATK(1) increased 16.4%, compared to the same quarter of last year, as system capacity increased 13.5%. Fuel prices explain the majority of this increase, accounting for over US$54.2 million in additional expenses. Excluding the fuel-price impact, operating expenses increased 19.5% and cost per ATK ex-fuel rose 4.8%. Higher sales-related expenses and a stronger Chilean Peso also contributed to increases in operating expenses. However, their impact was partially offset by efficiency gains in aircraft utilization and in administrative areas.
LAN's financial condition continues to be strong. As of December 31, 2004, LAN had more than US$305 million in cash. The Company has no short-term debt and its long-term debt finances aircraft and features very attractive terms and conditions.
LAN's strong strategic, competitive, and financial condition has enabled the Company to continue advancing on its long-term plans. During the quarter, LAN expanded its presence in Peru, developed new alliances, signed a new contract with one of its pilot unions, and strengthened its fleet plan.
LanPeru took advantage of competitive opportunities and by leveraging its modern fleet, high service standards and operational flexibility it consolidated its position as the leading domestic airline in Peru. Additionally, on December, the Superior Court of Arequipa ruled unanimously in favor of LanPeru in its appeal against the cautionary order that had forced LanPeru to suspend its operations for 14 hours in October.
LAN also continued developing its alliance relationships. In November, LAN and Korean Airlines agreed to develop a comprehensive alliance that will lead to code-share operations to destinations in Asia and Latin America, and provide passengers with benefits such as reciprocal accrual and redemption of frequent-flyer benefits and seamless connections. This alliance, which is consistent with LAN's efforts to expand it presence in the Asia-Pacific region, will be implemented during the first half of 2005. Additionally, LAN continued implementing its alliances with Mexican airlines, Mexicana and AeroMexico, and during the quarter it added nine new Mexican code-share destinations to its network.
In January, the Company signed a new contract with the pilot union of LanExpress. This new four-year agreement is similar to the one that it replaces and that was set to expire in March 2005.
LAN has also advanced on its fleet plan and during the fourth quarter it added one leased Boeing 767-300 passenger aircraft and two Airbus A319 aircraft. For 2005, LAN plans to incorporate two new Airbus A319 passenger aircraft and two Boeing 767-300F freighters, and lease up to three Boeing 767-300 passenger jets. During the fourth quarter, LAN ordered three new Boeing 767-300 passenger aircraft and one Boeing 767-300F freighter for delivery in 2006.
Over the last three years, LAN has leveraged its unique business model, regional growth strategy, world-class service standards, and efficient cost base for increased profitability. Record results in each quarter of 2004 are the result of this process. However, LAN continues to work focused on the future and the strategic developments mentioned above provide the basis for its growth. The Company is also working on several strategies aimed at improving service standards, increasing productivity and enhancing operational efficiency. LAN expects these projects to lead to increased profitability and consolidate the Company as Latin America's leading airline.
Consolidated Fourth Quarter Results
Net income for the fourth quarter of 2004 amounted to US$47.6 million compared to US$35.2 million for the same period of 2003. Net margin improved 0.5 points from 7.4% in 2003 to 7.8% in 2004.
Operating income amounted to US$34.1 million compared to US$41.9 million in 2003. Operating margin for the quarter decreased 3.2 points to 5.6%.
Total operating revenues amounted to US$609.5 million, a 27.5% increase compared with the fourth quarter of 2003. This reflected a:
--26.0% increase in passenger revenues to US$331.3 million,
--31.5% increase in cargo revenues to US$238.3 million, and
--17.5% increase in other revenues to US$39.8 million.
Passenger and cargo revenues accounted for 54% and 39% of total revenues for the fourth quarter.
Passenger revenues improved due to a 15.3% increase in traffic and a 9.3% increase in yields. Load factor decreased 0.9 points to 70.6% as traffic growth was slightly outpaced by a 16.7% capacity increase. Overall, revenue per ASK increased 8.0%. Traffic grew thanks to a 3.0% increase in Chilean domestic traffic and a 18.2% increase in international traffic (including domestic operations in Peru). International traffic accounted for 83.2% of total traffic during the quarter. Yields grew mainly due to fuel-related fare increases, a decrease in average trip lengths, and a stronger Chilean peso.
Cargo revenues grew due to a 14.0% increase in traffic and a 15.4% improvement in yields, measured in RTKs. Yields rose primarily due the application of a higher fuel surcharge. Growth in cargo traffic outpaced a 10.9% increase in capacity, resulting in a 1.9-point increase in cargo load factors to 69.4%. As a consequence, revenues per ATK rose 18.6%.
Other revenues increased 17.5% as lower aircraft leasing were offset by increased sales of handling and storage services.
Total operating expenses increased 32.0% during the quarter as capacity, measured in system ATKs, increased 13.5%. Per unit (ATK) costs increased 15.3%. Excluding the impact of higher fuel prices, per unit costs increased 4.8%. Changes in operating expenses were driven by:
--Wages and benefits increased 18.8% due to increases in headcount, bonus payments and a stronger Chilean peso.
--Fuel costs increased 87.6% due to a 64.5% increase in prices and a 14.0% increase in consumption due to capacity growth.
--Commissions to agents rose 25.2% driven primarily by a 28.3% increase in traffic (passenger and cargo) revenues. As a percentage of traffic revenues, commissions decreased from 14.6% to 14.3% mainly due to increased in direct passenger sales.
--Depreciation and amortization increased 10.8% due to the incorporation of additional assets.
--Other rental and landing fees increased 10.9% as the impact of increased operations on landing fees and ground handling expenses was partially offset by efficiency gains, lower insurance expenses and reductions in ACMI-lease expenses.
--Passenger service expenses increased 22.2% mainly due to increased passenger traffic.
--Aircraft rentals increased 6.7% as the incorporation of new aircraft was partially offset by reduced lease rates.
--Maintenance expenses rose 18.7% mainly due to increased operations.
--Other operating expenses increased 42.3% due to increased operations, sales related costs and higher training expenses to support growth.
Non-operating income for the fourth quarter amounted to a US$16.3 million gain compared to a US$1.3 million gain in 2003. While interest income increased 49.7% due to higher cash balances and higher interest rates, interest expense decreased 7.4% due to a reduction in average debt. In the miscellaneous-net item, the Company recorded a US$21.4 million gain compared to a US$8.4 million gain in 2003. In 2004 this included a US$13.8 million fuel hedging gain (compared to a US$3.3 million gain in 2003) as well as a US$8.2 million foreign-exchange gain (compared to a US$6.2 million gain in 2003).
Income tax expenses decreased from US$8.0 million in 2003 to US$1.8 in 2004 mainly due to a US$5.7 million adjustment related to tax losses generated before December 1999. At that date, Chilean accounting standards changed to the deferred tax method and according to the rules governing this change, the use of previous tax losses will generate a credit to tax expenses in the period in which they are utilized. Excluding this adjustment, tax expenses decreased to US$7.5 million as higher pretax income was fully offset by a lower effective tax rate.
Consolidated Full Year Results
For the full year 2004, the Company reported US$163.6 million in net income compared to US$83.6 million for 2003. Net margins improved 2.7 points from 5.1% in 2003 to 7.8% in 2004.
Operating income amounted to US$172.1 million compared to US$111.7 million in 2003. Operating margin for the full year 2004 increased 1.4 points to 8.2%.
Total operating revenues amounted to US$2.1 billion, a 27.7% increase compared with 2003. This reflected a:
--27.3% increase in passenger revenues to US$1.2 billion,
--32.8% increase in cargo revenues to US$799.7 million, and
--4.9% increase in other revenues to US$124.2 million.
Passenger revenues accounted for 56% of total revenues, while cargo revenues accounted for 38%.
Passenger revenues improved due to a 19.4% increase in traffic and a 6.6% increase in yields. Traffic growth outpaced a 15.4% capacity increase, leading to a 2.4-point increase in load-factor to 71.5%. Improvements in both yields and load factor led to a 10.3% increase in revenues per ASK. Traffic grew thanks to a 4.4% increase in Chilean domestic traffic and a 22.9% increase in international traffic (including domestic operations in Peru). Yields grew mainly because of better segmentation, fuel-related fare increases, improved business traffic, and a stronger Chilean peso.
Cargo revenues grew due to a 18.2% increase in traffic and a 12.4% improvement in yields. Growth in cargo traffic outpaced a 15.4% increase in capacity, resulting in a 1.6-point increase in cargo load factors to 68.7%. As a consequence, revenues per ATK increased 15.1%. Yields rose primarily due to an improved competitive environment and the application of a higher cargo fuel surcharge. Traffic grew as southbound traffic into Brazil, Chile and Argentina continued to recover and LAN Cargo expanded into new export markets.
Other revenues increased 4.9% as lower aircraft lease revenues were partially offset by increased handling, courier and on-board sales.
Total operating expenses increased 25.8% for the full year as capacity, measured in system ATKs, rose 15.8%. Per unit (ATK) costs (which include total operating expenses as well as net financing costs) increased 9.1%. Excluding the impact of higher fuel prices, per unit costs increased 2.6%. The evolution of operating costs is explained by a:
--Wages and benefits increased 21.5% due to the impact of a stronger Chilean peso on domestic wages, increases in headcount, and higher bonus payments,
--Fuel costs rose 59.7% due to a 17.8% increase in consumption and a 35.6% increase in prices (in 2004 the Company recorded an US$45.6 million fuel hedging gain compared to a US$12.3 million gain in 2003, both of which were recorded as non-operating items).
--Commissions to agents grew 30.2% mainly due to a 29.5% increase in traffic (passenger and cargo) revenues. As a percentage of traffic revenues, commissions to agents increased 0.1 percentage points to 14.8% due to changes in revenue mix (cargo increased from 40% to 41% of traffic revenues) and as lower average passenger commissions offset increased average cargo commissions.
--Depreciation and amortization increased 6.6% due to the incorporation of additional assets and a one-time charge of US$0.5 milllion.
--Other rental and landing fees increased 11.4% as the impact of increased operations on landing fees and ground handling costs, as well as higher ACMI-lease expenses were partially offset by lower insurance costs and efficiency gains.
--Passenger service expenses increased 24.3% due to increased passenger traffic and costs associated with increased premium traffic.
--Aircraft rentals decreased 4.8% as the incorporation of new aircraft was fully offset by the reduction of lease rates during the first quarter of 2003.
--Maintenance expenses increased 23.5% due to increased operations and the net effect of a US$1.9 million one-time reduction in expenses in 2004 due to adjustments in provisions for 2004, as well as a one-time US$5.0 million reduction in expenses in 2003.
--Other operating expenses increased 30.3% due to increased operations and sales-related expenses, increased training, and costs associated with the expansion of operations in Peru.
Total non-operating results for 2004 amounted to a US$19.6 million gain compared to a US$9.0 million loss in 2003. Interest income increased 72.5% due to higher cash balances and higher interest rates. Interest expense decreased 7.3% due to a reduction in average debt. In the miscellaneous net line, the Company recorded a US$45.2 million gain in 2004 compared to a US$24.1 million gain in 2003. In 2004 this includes a US$46.5 million fuel hedging gain (compared to a US$12.3 million gain in 2003) as well as a US$2.4 million foreign-exchange gain (compared to a US$12.1 million gain in 2003).
Income tax expenses increased from US$18.3 million in 2003 to US$28.3 in 2004. This includes a US$5.7 million reduction in expenses related to tax losses generated before Chilean accounting standards changed to the deferred tax method. According to the standards, the use of tax losses would generate a credit to tax expenses at the time they are utilized. Excluding this adjustment, tax expenses increased from US$ 18.3% to US$33.8 million as higher pretax income was partially offset by a 0.3 point decrease in the effective tax rate to 17.7%.
LAN Airlines ("LAN") is one of the leading airlines groups in Latin America. The LAN Alliance includes LAN Airlines, LanPeru and LanEcuador. Through its own operations and code-share arrangements, the LAN Alliance serves 15 destinations in Chile, eleven destinations in Peru, two in Ecuador, 27 destinations in Latin America, 25 in North America, ten destinations in Europe and four in the South Pacific. Currently, the LAN Alliance operates 56 passenger aircraft and seven dedicated freighters.
LAN is a member of oneworld (TM), the most international of the global airline alliances. It has bilateral commercial agreements with oneworld partners American Airlines, British Airways, Iberia and Qantas and also with Alaska Airlines, AeroMexico, Mexicana, TAM and Lufthansa Cargo. For more information visit www.lan.com or www.oneworldalliance.com.
Note on Forwards 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 include. 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.
(1) Cost per ATK = (Operating Cost + Net Financial Expenses - Other Operating Revenues) / System ATK