Lan Airlines Earnings Call Insights: LAN Columbia, Light Cargo

On Monday, Lan Airlines SA ADR (NYSE:LFL) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

LAN Columbia

Richa Talwar – Deutsche Bank: This is actually (Richa Talwar) filling in for Mike Linenberg. Just a few questions from my side; first, can you just flush out from more detail on what’s going on with your Colombian operation. Luis states that you are seeing additional cost pressures there and I was hoping you could maybe update us on the status and when we might start to see that business turn around or start contributing to the bottom line?

Alejandro de la Fuente Goic – CFO: Well, we have Hernan Pasman, CEO of LAN Colombia. He can explain to you the future developments in LAN Colombia.

Hernan Pasman – CEO, LAN Colombia: My name is Hernan Pasman. I am the CEO of LAN Colombia. Thanks for having me here today. Well, at the turnaround, we could say that in Colombia the operational turnaround is almost done and we’d be able to get to LAN’s standards in terms of service, in terms of on-time performance. As an example, we got the Company from 45% on-time performance to 80% today, which certified (indiscernible) during last year. So, we are on LAN’s standards in terms of safety standards as well. Financially, it’s taking a little longer than we expected to turn around the Company. We are expecting – initially we thought that we were able or that we might have been able to turn around the company during this year and it’s going to take a little longer than expected and it’s due to because we are investing – we’re still investing in the Company and in the operations and we think we might be able to turn around the Company by ’13.

Richa Talwar – Deutsche Bank: So, this year should we expect like a breakeven or maybe more of a loss from that operation?

Hernan Pasman – CEO, LAN Colombia: This year I think is going to be more of the loss. I mean, we think the business is going turn around by the second semester. Whether it’d be close to breakeven, our expectation is to be close to breakeven for the third quarter and be profitable on the fourth quarter. But that’s not going to get in throughout the year.

Richa Talwar – Deutsche Bank: Is there a number where you could quantify how much money they lost this past quarter?

Hernan Pasman – CEO, LAN Colombia: We can talk about the investments if you want. I mean, we’ve been investing in this company for around – we expect to invest in this company $140 million including all the losses that we had last year and this year. And it was mostly the initial investment that was around $125 million, and when thinking – when we think that the last or the first quarter is going to be around $25 million.

Richa Talwar – Deutsche Bank: Secondly, just on dividends, we noted that you had a 50% dividend payout ratio for 2011, and that just seemed a bit on the high side, I believe you’re required to payout at least 30% as distributable net income, and I was hoping you could walk us through why it was relatively high this year?

Alejandro de la Fuente Goic – CFO: No. This year, no, we paid dividends in January according to 2011 results, and then we completed that payout to be 50% based on 2011 results, but going forward, we don’t have a declared policy, just we are obliged to have minimum law to distribute 30% of the previous year’s net income. So, that’s bottom line. So, going forward, we don’t give any guidance on dividend payments.

Gisela Escobar Koch – IR, Officer: Also the 50% for 2011 is in line with what we have paid in the previous years. Our dividend policy since 2007-2006 has been between 50% and 70%.

Light Cargo

Eduardo Couto – Goldman Sachs: Hi, good morning. This is actually Eduardo speaking. I have a couple of questions. The first one is regarding the Cargo business, you know, I would say soft first quarter in terms of Cargo demand, and the April numbers that were released a couple weeks ago were also very light. So I was just wondering if you guys could comment a little bit about what is the outlook for Cargo demand in the coming quarters, what are the main products where you have seen a deceleration. And another point is, you still have – LAN still has two freighters to be received I think this year. So, if demand does not get back would you reconsider those deliveries or what can you do to accommodate a softer demand on higher aircraft deliveries?

Unidentified Company Speaker: This (indiscernible) from the Cargo division. Yes. as you said before we’ve seen a decrease, a deceleration on the Cargo front starting in the second semester last year and continuing in the first semester of this year. This is mainly what we call south bound cargo, meaning south bound cargo coming from the U.S., Europe and Asia into Latin America. This is mainly in investments or high tech products, cellular phones, computing and things all related to consumer electronics or investment for the industry here in Latin America as the growth for the countries here has been this is relating a little bit especially in Brazil, because roughly 40% to 45% of all these, the traffic that we load into Latin America goes to Brazil, and as Brazil has decelerated a little bit, we have also seen the cargo flows has been coming down a little bit or not growing at the same pace as we were expecting. On the other hand, the south bound cargo, the north bound cargo as we call it, which are the exports from Latin America to the rest of the world, mainly perishables, have been improving, mainly the (indiscernible) out of Chile that has recovered almost 100% what was its peak three years ago, it’s back again. So, exports in Chile have been growing a lot and also exports out of the other countries, mainly Peru, Colombia and Ecuador with flowers mainly for the Mother’s Day and also for Valentine’s in February, all were up compared with last year. So, this balance from inbound cargo or south bound cargo which down and export cargo which is up. What we see for the rest of this year and regarding the two fares, we have a plan for these fares and first of all, we are going to replace part of our (DCMI) capacity. We currently have two weightlifters that are flying for us and we are going to be replacing this capacity with the new aircraft interest coming and also, we are expecting to increase our work in (indiscernible) Europe (based on) 777 and also we are going to be using the 777s to increase our operations into Latin America replacing the 767s to destinations such as Brazil, Chile and taking 767s that we are going to be pushing out because of the entrants of the 777s in those markets. The 67s, we’ll not be trying then to expand our short haul flight out of Miami into Bogota, Australia, and (indiscernible).

Eduardo Couto – Goldman Sachs: So, can we say that just to see if I understood it clearly, can we say that most of the additional capacity on the cargo side will be basically replacement to existing capacity, so we can use incremental capacity coming from these traditional freighters will be more or less linked, that’s the idea?

Alejandro de la Fuente Goic – CFO: It’s going to be roughly one-third of each of the three ideas that as I mentioned. One-third will be re-pricing seat mile capacity, one-third will be increasing our European operation. We’re currently flying four 777s, and two 767s, the 67 is not really the right aircraft to fly to Europe, so we’re going to replacing those with 777s, that will be the one-third, and also the last one-third will be an increase in operations mainly to short haul routes of Miami with the 767s that we’re going to pull out on the long-haul routes of Miami that will be replaced with the 777, and that’s all I can say.

Eduardo Couto – Goldman Sachs: Okay. It’s clear. Just a second question now on the Passenger business, guys, just to understand also your fleet plan for passengers is also quite aggressive especially compared to other Latin American airlines especially here in Brazil, companies who are really creating their fleet plan, so you’re adding I think around 10, more than that the 10 aircraft this year, and another 13 aircrafts next year. So I was just wondering, if you see really a demand to fuel all those fleets and you don’t expect any impacts on load factor or yields, or would you consider maybe a reduction or a slowdown of the fleet plan if you think that passenger demand is decelerating following what we have seen on the Cargo business so far. I just want to get your impressions about the fleet plan on the Passenger side.

Unidentified Company Speaker: This is (indiscernible) from the Passenger division. So, we see that the current lead is in line with what we expect the growth would be in the markets. I am especially thinking of new opportunities that we expect will arise with the integration with TAM, but still we have some what you are seeing in slide 10 with the net fleet increases. There is some flexibility regarding the A340s and the 737 in the next year. So, this plan could be affected downwards depending on the final conditions of the market. So, at this moment we feel pretty confident with the fleet side with the arrivals we are having. Also, what is important to mention is that by the end of this year, in the last quarter we are expecting the arrivals of the 787, and that also is being a very efficient aircraft will give room to increase operations to certain markets that with the current fleet we believe are not the right aircraft and that will mean that we will have much more efficient operations to certain markets outside Latin America.

Eduardo Couto – Goldman Sachs: Do you have an idea of how many aircraft you can cut your fleet plan if demand really slow down or just could be like five, four an aircraft. What is your flexibility in terms of reducing the fleet plan?

Alejandro de la Fuente Goic – CFO: We have like two or three leases ending this year in the case of 767 and also we have the possibility to get rid of the A340s. That’s the total fleet of five aircrafts fleet. So, we have flexibility of around eight or nine aircrafts. Also, some of the aircraft of LAN has to be (paid for), some of them already are. So, one of the alternatives also is to get rid of some of the aircrafts (turns with) hours. So, we have wider flexibility there.