On November 3, 2022, LATAM group successfully emerged from Chapter 11, concluding a challenging reorganization process that started on May 26, 2020, in light of the unprecedented effects of COVID-19 on the aviation industry worldwide. Throughout the process, LATAM worked closely with its creditors, shareholders and various other stakeholders to preserve the Company's operational continuity, reduce its gross debt by approximately US$3.6 billion (-35%), and most importantly, carry out restructuring initiatives that will ensure its leadership and competitiveness in the region. As of the date of publication, LATAM emerged from Chapter 11 with more than US$2.2 billion of liquidity, comprised of over US$1.1 billion in cash plus US$1.1 billion in undrawn revolving credit facilities, US$10.3 billion of additional issuedequity and US$6.8 billion in debt. Following emergence from Chapter 11, the company summoned an Extraordinary Shareholders' Meeting to take place on
November 15, where the new Board of Directors will be elected.
- LATAM operations continued showing a solid quarter-over-quarter recovery, with the group's consolidated capacity reaching 81% of its 2019 levels during the period, compared to a 72.6% recovery in the second quarter of 2022. Domestic markets recovered nearly 100% compared to pre-pandemic levels and the international and corporate segments experienced a strong ramp-up in recent months. In terms of capacity, in September, the Spanish-speaking affiliates and the Brazilian affiliate operated at 84.0% and 103.9% of 2019 levels (measured in ASKs), respectively, while international operations reached 68.7% of 2019 levels. Additionally, the group has progressively resumed servicing most of the destinations flown to in 2019 and has opened new routes in its most profitable markets. In September 2022, the group operated a total of 142 destinations, which compares to the 145 destinations flown in December 2019.
- During the quarter, total operating revenues (including other income from operating activities) registered US$2,587 million, in line with 2019 levels (-2.9%), and 97% above the same period of 2021. Adjusted operating expenses reached US$2,524 million (+5.3% versus 2019), mainly explained by an increase in the price of jet fuel during the quarter following an 88.4% increase compared to the same quarter of 2019. Notably, Passenger CASK ex-fuel (excluding cargo costs and non-cash double counting of fleet PBH) was US$4.0 cents, already below 2019 levels (-3.1%), despite inflationary pressures during the period. This was also accompanied by a 14.2% increase in yields versus 2019, reflecting fuel price's pass-through into yields and a solid demand for air travel.
- In the third quarter, LATAM's Adjusted EBITDAR amounted to US$399.4 million, marking the fourth consecutive quarterly positive EBITDAR reported by the group. Additionally, as per the company's latest Monthly Operating Report (MOR), LATAM registered a positive operating income margin of 6.9% in September, solidifying a positive operating result in the quarter. Primarily due to expenses from its Chapter 11 reorganization process, including certain costs associated with its then-existingdebtor-in-possession (DIP) financing, the Company reported a net loss attributable to the owners of the parent company of US$296.0 million during the quarter, compared to a net profit of US$86.3 million in 2019.
- Additionally, on September 30, 2022, LATAM group and Delta Air Lines received the approval from the US Department of Transportation (DOT) on their Joint Business Agreement. This marked the last milestone in a series of regulatory approvals in Latin America and the United States, which clear the way for the implementation of the commercial partnership between two leading airlines in the United States/Canada and Brazil, Chile, Colombia, Paraguay, Peru and Uruguay. This joint business agreement will enable Delta Air Lines and LATAM to connect the Americas like never before with more than 300 destinations between the two regions, and to coordinate capacity, scheduling and pricing in both passenger and cargo businesses.
- Pursuant to a debt financing issuance in furtherance of LATAM's exit from Chapter 11, following the quarter close on October 11, 2022, LATAM announced that it priced an offering of US$450 million of 5-year senior secured notes due in 2027 with a coupon of 13.375% and US$700 million of 7-year senior secured notes due 2029 with a coupon of 13.375%. Additionally, the Company priced a Term Loan B of US$1.1 billion with an interest rate after emergence from Chapter 11 of either ABR + 8.50% or Adjusted SOFR + 9.50%, at LATAM's election. This Term Loan B and the 5-year notes, which represents over half of the Company's exit financing, will be able to be repaid starting in year three. Altogether, this US$2.250 million of financing enabled LATAM to obtain the necessary funds to repay its then-existing DIP facility, and was a key milestone necessary for its emergence from Chapter 11.
- Also in the context of LATAM's Chapter 11 process, in connection with its obligations under its Restructuring Support Agreement (RSA), on August 30th LATAM released an updated version of its business plan. This revised version contains 5-year financial projections through 2027. For 2024, the group projects passenger operations measured in available seat kilometers (ASK) similar to 2019, though with a shorter average stage length, and expects to exceed 2019 levels of total revenues in 2023.
MANAGEMENT COMMENTS - THIRD QUARTER 2022
LATAM's successful emergence from its Chapter 11 proceedings on November 3, 2022, marked the end of an over 2.5
year-long process, resulting in one of the group's most significant transformations to date. The reorganization has been a priority for LATAM's management during this entire period, and in the latter half of the third quarter in particular, LATAM was focused on carrying out several key steps to implement the Company's plan of reorganization. This included facilitating a creditor election period for plan recoveries, conducting a preemptive rights offering period of various securities to shareholders, and obtaining the US$2.25 billion of exit financing necessary to execute the plan of reorganization. Simultaneously, LATAM continued to progress its operational recovery and return to profitability, in the context of strong air travel demand.
"This marks an incredibly important milestone for LATAM, as the group emerges from its Chapter 11 process and starts a new era, poised to continue as South America's leading airline group," said LATAM CEO Roberto Alvo. "We have
achieved so much from a financial and organization perspective during these past 30+ months - de-leveraging by approximately 35%, implementing over US$1 billion in recurring cost savings initiatives, rolling out a digital transformation and making important advances in long-term sustainability. None of this would have been possible without the hard work and sacrifice from LATAM's employees and the support from our clients, suppliers, financiers,
and other stakeholders."
With the structural improvements made as a result of the reorganization process, LATAM will move forward as an even stronger player in the region, with an optimal capital and costs structure that will allow it to face challenges that the industry and/or the macroeconomic environment might bring. For the third consecutive year, LATAM was recognized as the Best Airline in South America by Skytrax and for the seventh consecutive year, by the World Travel Awards,
reaffirming LATAM's continued focus on its customers and value proposition. LATAM's network of 142 destinations as
of September 30, 2022, is unmatched in South America and continues growing, bolstered by an improved cost structure that helps make new routes more profitable. In Brazil alone, LATAM Airlines Brazil continues to expand operations and
has incorporated 10 new destinations (including Sinop, Montes Claros, Juiz de Fora and Caxias do Sul), which it did not serve prior to the pandemic, and the group plans to operate 36 new routes in 2023.
LATAM also continues to push forward its "A Necessary Destination" sustainability agenda. The group is committed to eliminating single-use plastics from operations in 2023 and has recently reported a 75% reduction. During the quarter, LATAM launched a new on-board service in its economy cabin, which will help remove 1,200 tons of single-use plastics by replacing them with bamboo, reusable trays and other paper products.
Additionally, working with the Ministry of the Environment, Water and Ecological Transition of Ecuador and the Galapagos Ecological Airport, LATAM launched the "Baltra, free of plastics" campaign, which reinforces the Solidarity Plane program and the group's commitment to the conservation of strategic ecosystems through the removal of plastics in the Galapagos Islands. During the quarter the group also expanded its sustainability ambassadors program in Brazil and added 400 employees to the initiative, which will allow LATAM to continue developing its sustainability strategy throughout the region and implementing actions that mobilize company-wide cultural change.
In the third quarter, LATAM's total operating revenues amounted to US$2,587 million, situating revenues in line with pre-pandemic figures and representing a 2.9% decrease compared to 2019. This is mainly explained by an 8.3% decrease registered in passenger revenues versus 2019, as operations continue to recover but still remain below pre- pandemic levels, reaching a level of 81% (measured in ASKs) versus the same quarter of 2019. During the quarter, LATAM's cargo affiliates continued to show a strong performance, with cargo revenues reaching US$412.5 million (63.9% over 2019 levels). As a result, passenger and cargo revenues represented 82.9% (+5.9 p.p. vs 2Q22) and 15.9% (-4.9 p.p. vs 2Q22) of total operating revenues for the quarter, respectively.
Passenger revenues during the period more than doubled compared to 2021 (+134.6%), following a year-over-year increase of 79.8% in demand (measured in RPKs) and a 30.5% increase in yields. This represented an 8.3% decrease compared to 2019, primarily explained by a 19.7% decrease in traffic (measured in RPKs) but also partially offset by a 14.2% yield increase during the quarter versus 2019 due to strong demand, elevated fuel prices and a notable recovery in the international and corporate segments. In terms of capacity, the group continued to demonstrate positive quarter- over-quarter recovery, with total ASKs reaching 81% of 2019 levels, compared to 72.6% during the second quarter of 2022. Additionally, the group has been able to increase its operations while maintaining a healthy consolidated load factor of 82.9% (-0.7 p.p. versus 2019), particularly in international operations, where the group's load factor reached 84.5% during the quarter (-0.7 p.p. versus 2019).
Cargo revenues increased 14.1% compared to 2021, mainly explained by an increase in cargo-dedicated capacity operated by LATAM following the addition of new converted freighters, which has led to a 23.6% year-over-year increase in cargo demand (measured in RTKs). Compared to the pre-pandemic context, revenues outperformed the same period of 2019 by 63.9%, amounting to US$413 million. This result is mainly explained by the Company's recovery in international operations and continued strong performance from the group's cargo-dedicated fleet, which was increased by two additional converted freighters delivered during the third quarter. As a result, and for the first time since the beginning of the pandemic, the group's consolidated cargo capacity (measured in ATKs) exceeded 2019 pre- pandemic levels (+2%), representing a 37.8% increase versus the same period of 2021. As the air cargo supply industry remains healthy, average yields during the period increased by 55.9% versus 2019, while load factor registered a 1.6 p.p. increase in comparison with 2019.
Other income amounted to US$29.6 million, corresponding to a 59.5% decrease compared to 2019-mainly due to reduced revenues from the subleasing of aircraft to third parties. During the third quarter of 2022, LATAM did not sublease any aircraft to third parties, as compared to seven aircraft during the third quarter of 2019. Additionally, as international travel has been slower to recover than domestic travel, certain revenues from LATAM Travel hotel and tour reservations have been reduced as a result.
Total adjusted operating expenses during the quarter registered US$2,524.3 million, representing a 5.3% increase versus the same period of 2019. Most of this can be explained by the increase in the price of jet fuel during 2022, reflected as a 54.8% increase in the group's cost line of Aircraft Fuel during the quarter. Despite the above, the cost
initiatives implemented during the Company's reorganization process are reflected in several cost lines such as: wages
and benefits (-32.4% vs the same period of 2019), depreciation and amortization (-19.3% vs 3Q19) and other operating expenses (-21.7% vs 3Q19). The changes in adjusted operating expenses during the quarter were mainly explained by:
- Wages and benefits decreased 32.4% versus 2019. This aligns with the 24.5% reduction in average headcount as compared with the same quarter of 2019. Additionally, during 2021, the affiliates in Brazil, Ecuador and Peru outsourced important parts of their airport operations in order to improve efficiency, further decreasing costs.
- Aircraft fuel costs increased 54.8% compared to 2019, following an 88.4% increase in average fuel price (excluding hedges) during the quarter versus the same period of 2019. This effect was partially offset by a 16.4% decrease in total fuel consumption during the period due to reduced levels of operations (versus the pre-pandemic context). As of September 30, 2022, LATAM recognized a gain of US$15.9 million related to hedging contracts, which compares to a gain of US$5.8 million during the same period of 2021.
- Commissions to agents decreased 21.7% compared with the same quarter of 2019, which aligns with an 8.3% reduction in passenger revenues as compared to 2019, in addition to a higher proportion of domestic ticket sales that imply lower commissions to agents.
- Depreciation and amortization decreased 19.3% versus 2019, mainly explained by LATAM's reduction of its fleet and other related negotiations carried out during the group's reorganization process (in particular, rejections of wide-body aircraft and its A350 fleet). As a result, the group's fleet has been reduced from 332 aircraft at the end of the third quarter of 2019 to 301 aircraft as of September 30, 2022.
- Other rental and landing fees decreased by 5.9% compared to 2019, driven by the reduced level of operations.
- Passenger services expenses declined 22.7% versus 2019, mostly due to an 11.5% reduction in the total number of passengers carried during the quarter. This has also been influenced by the types of flights operated by the group; the recovery of LATAM's international operations, which offer more intensive catering and onboard services than domestic flights, continues to lag behind domestic operations.
- Aircraft rentals expenses, which correspond to LATAM's fleet's power-by-the-hour (PBH) contracts, amounted to US$32.9 million, which represents a US$40.9 million decrease compared to the second quarter of 2022. This is largely explained by the expiration of most of the narrow-body aircraft PBH contracts by the end of the second quarter of 2022. It is worth mentioning that several wide-body PBH contracts will remain in effect until 2024. These variable payment agreements were implemented following their approval by the U.S. Bankruptcy Court during the second and third quarters of 20211.
- Aircraft maintenance expenses totaled US$138.5 million, corresponding to a 32.5% increase versus 2019, based on higher unit costs due to global inflationary pressures and an increase in the group's projected future operations. As illustrated in LATAM's five-year business plan, maintenance expenses during the current year are expected to
remain above pre-pandemic 2019 levels due to catch up on task deferrals and costs associated with the return of aircraft into service, new incorporations as operations continue to recover and an increase in the cargo operations.
- Other operating expenses decreased by 21.7% compared to 2019, mainly due to accounting reversals associated with bad debt provisions, portfolio regularization, plus additional banking tax and legal costs.
- Interest income amounted to US$24.3 million in the quarter, representing a US$20.2 million increase compared to the same quarter of 2019, mainly explained by interest related to tax refunds recognized during the quarter.
- Interest expense increased 64.3%, to US$239.6 million during the quarter compared to 2019. This increase is mainly explained by LATAM's DIP financing and certain base rate increases the market is currently experiencing, following a 1.5% increase in the SOFR's curve during the quarter. As of September 30, 2022, the then-existing DIP financing, which came into effect on April 8, 2022, had increased LATAM's outstanding debt by US$2.75 billion and had led to an increase of approximately US$125 million in accrued interest.
- Under Adjusted other income (expense), the Company recorded a US$223.5 million expense during the quarter, compared with a US$72.3 million expense in 2019. This is primarily due to expenses associated with the reorganization process of US$182.3 million plus foreign exchange losses of US$37.6 million due to the depreciation of the Chilean peso and the Brazilian real.
Net loss attributable to the owners of the parent company during the quarter amounted to US$296.0 million, largely explained by costs associated with the Company's DIP financing and the aforementioned reorganization costs registered under Adjusted other income/(expense). This compares with a US$86.3 million profit in the same period of 2019.
At the end of the quarter, LATAM's financial debt amounted to US$8.49 billion, a US$68 million increase compared to the previous quarter. Notably, following its emergence from Chapter 11, the group was able to reduce its gross debt to approximately US$6.8 billion, representing a 35% decrease from its pre-filing amount.
LATAM also reported US$897.5 million in cash and cash equivalents and certain highly liquid investments accounted for in other current financial assets. As of its emergence from Chapter 11, LATAM reported liquidity of over US$2.2 billion, with more than US$1.1 billion of cash, in addition to two fully undrawn revolving credit facilities ("RCF"), one in the amount of US$500 million and the other in the amount of US$600 million.
Once again, the Company registered a positive net cash flow from operating activities in the amount of US$230.9 million during the quarter, mainly as a result of a strong air travel demand and the cost initiatives the group implemented pursuant to its reorganization process.
With respect to LATAM's fuel hedging policy, the main objective of the policy is to protect against medium-term liquidity risk from fuel price increases, while benefiting from fuel price reductions. Accordingly, LATAM hedges a portion of its estimated fuel consumption. Hedge positions per quarter for the next months, as of September 30, 2022, are shown in the table below:
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LATAM Airlines Group SA published this content on 08 November 2022 and is solely responsible for the information contained therein. Distributed by, unedited and unaltered, on 09 November 2022 01:00:03 UTC.