LATAM Airlines Group reports a 25.8% improvement in operating income and net income of US$155.3 million for full year 2017

Santiago, Chile, March 14, 2017 – LATAM Airlines Group S.A. (NYSE: LTM; IPSA: LTM), the leading airline group in Latin America, announced today its consolidated financial results for the fourth quarter ending December 31, 2017. "LATAM" or "the Company" makes reference to the consolidated entity, which includes passenger and cargo airlines in Latin America. All figures were prepared in accordance with International Financial Reporting Standards (IFRS) and are expressed in U.S. dollars. The Brazilian real / US dollar average exchange rate for the quarter was BRL 3.25 per USD.

HIGHLIGHTS

LATAM Airlines Group reported an operating income of US$270.0 million for the fourth quarter of 2017, a 38.4% increase compared to the US$195.2 million operating income in the fourth quarter of 2016. Operating margin reached 9.8%, an increase of 2.2 percentage points as compared to the same period last year. This margin expansion was driven by increases in unit revenues across both passenger and cargo business units, and was despite the increase of 16.9% in fuel cost during the quarter. For full year 2017 the Company reached an operating margin of 7.0%, in line with guidance, and an improvement as compared to the 6.0% operating margin for the full year 2016.
LATAM reported net income of US$67.2 million for the fourth quarter 2017, an increase of 23.6% compared to same period 2016, despite a foreign exchange loss of US$67.0 million resulting from the 4.7% devaluation of the Brazilian real during the quarter. For full year 2017, the Company reached a net income of US$155.3 million, which compares to US$69.2 million in 2016, the best result in the recent history of LATAM.
Total revenues in fourth quarter reached US$2,767.6 million, an improvement of 7.7% year-on-year, primarily driven by higher traffic across passenger markets, a stronger load factor and continuing yield recovery across all of LATAM’s markets, resulting in a 5.3% increase in revenues per ASK. Moreover, cargo revenue increased 9.0% in the quarter, thanks to a 13.1% increase in revenues per ATK and confirming the recovery trend observed during the second half of 2017. For full year 2017, revenues reached US$10,163.8 million, an increase of 6.7% as compared to same period 2016. This represents the first annual revenue expansion since the combination of LAN and TAM.
Total operating expenses in the fourth quarter increased by 5.2%, primarily as a result of a 16.9% or US$93.9 million increase in fuel cost during the period due to the rise of the jet fuel price. Excluding fuel cost, total operating cost increased by 1.6%, which is less than the average inflation rate of the countries in which LATAM operates. For full year 2017, total operating cost increased 5.5%, driven by a 12.7% or US$262.2 million increase in fuel cost during the year. Excluding fuel costs, operating costs increased by 3.3%. In addition, during 2017 the Company gradually reduced its operating fleet from 329 to 307 aircraft, which caused extraordinary aircraft redelivery expenses.
LATAM continued improving its capital structure, as deleveraging is still one of the Company’s main priorities. During 2017, free cash flow1 reached US$1,379.3 million, a US$830.2 million increase compared to 2016. Consequently, LATAM reduced its leverage ratio – measured as Adjusted Net Debt/EBITDAR – to 4.5x as compared to 5.3x in 2016. Furthermore, liquidity reached US$2.1 billion, including cash on hand and US$450 million of an undrawn revolving credit facility2 (RCF), equivalent to 20.3% of last twelve month revenues.
In December 2017, LATAM received the Platinum certification in IATA’s Fast Travel initiative, which recognizes airlines that provide self-service options during the entire travel process to provide passengers with greater comfort and control of the trip. LATAM is the first airline group in Latin America to receive this certification and one of only 15 airlines worldwide. The recognition is based on the Company ́s self-service travel tools and reaffirms LATAM’s commitment to offering an industry-leading travel experience to its customers.
Finally, during February 2018 LATAM began the migration of the Passenger Service System (PSS) – the platform for reservation, inventory and check-in — used by LATAM Airlines Brazil and LATAM Airlines Paraguay. The migration will be completed during the first half of 2018, resulting in a unified reservation system for the entire airline group and therefore an improved service for customers as well as increased efficiency for the Company.

MANAGEMENT COMMENTS ON FULL YEAR 2017

The year 2017 will definitely be remembered as one of transformation for LATAM. It was a challenging year for the Company, but once again we managed to deliver an improvement in our operating results, met our financial targets and made significant progress on important strategic initiatives. Despite the increase in fuel price, LATAM reached the highest operating result in its recent history, and it did so with a fewer number of aircrafts. During the year, we successfully prepared to compete in an always-evolving industry, facing new competitors entering our markets, with the biggest transformation in our history: the introduction of a new travel model in our domestic markets.

This new travel model for the domestic markets, which covers nearly 76% of our passengers, aims at building a more competitive and sustainable airline while continuing to stimulate demand and drive the growth of air travel in South America. We have fully implemented the new buy on board service and the branded fares model in Chile, Peru, Brasil, Ecuador and Colombia. In parallel, we continued working on our cost efficiency initiatives, resulting in a contained cost increase during 2017 despite the effect of annual inflation adjustments and non-recurring implementation and fleet redelivery costs. Cost control remains one of our top priorities for the coming years, since it is a key element in current competitive markets.

Along the same lines and as part of the strategy of offering a customized service to our passengers, LATAM implemented a series of ancillary initiatives that allow the Company to increase its ancillary revenues generation while giving our clients the option to pay only for the attributes they value the most. As a result, ancillary revenues per passenger increased 28% in 2017 when compared to 2016, mainly from the sale of the first and second bags, preferred seats and same-day flight changes.

In 2017, LATAM had the lowest fleet commitments in its history, resulting in lower capital expenditures and therefore lower financing needs as part of its strategy of deleveraging and continuous strengthening of its balance sheet. Along this line, LATAM has made a significant improvement in its debt payment profile, extending the average maturity and reducing the average cost of its debt, while concluding the refinancing process of the TAM legacy bonds. In addition, LATAM maintained a healthy liquidity level throughout the year and expanded its alternatives for short-term liquidity in case of need, such as the US$450 million revolving credit facility3.
As a result of the improved macroeconomic context, economic growth in the region and stable currencies, together with the capacity discipline implemented across its network, LATAM was able to improve its unit revenues across all its business units, consolidating the first year of revenue increases since the business combination in 2012.

Moreover, LATAM made great progress in the expansion and optimization of its network, continuing to strengthen its route network in South America, offering the best connectivity within the region and to the rest of the world at competitive fares. For instance, LATAM launched 30 new routes in 2017, including Santiago – Melbourne, its longest non-stop flight. We also continued to move forward in the regulatory process to develop our Joint Business Agreements with American Airlines and IAG (British Airways and Iberia), having received already the approval from the regulatory authorities in Brazil, Colombia and Uruguay, only pending the resolution in Chile and in the United States. In addition, for 2018 we announced flights from São Paulo to new destinations such as Rome, Boston and Las Vegas, increasing Latin America’s connectivity with other regions in the world.