Cuts in capacity, fleet push LATAM to record 2Q operating profit

LATAM Airlines Group’s route capacity and fleet management efforts, combined with a 10.6% rise in passenger revenues, helped to push its 2017 second-quarter operating profits to a company record of $48.2 million, compared to $1.3 million for 2Q 2016.

However, LATAM posted a $138 million net loss for the quarter, deepened from its $92.1 million net loss a year ago. The company attributed the net loss $120.2 million in foreign exchange losses recognized during the quarter, partially offset by lower income tax payments.

LATAM has reduced its total operating fleet by 5.2% so far in 2017, from 329 aircraft on Dec. 31, 2016 to 312 on June 30, and said is it on track to reduce the fleet to 306 aircraft by the end of the year “ensuring [LATAM] has the right level of capacity to match market conditions while maintaining a healthy balance sheet.”

During the quarter, the Santiago, Chile-based airline group deferred two Boeing 787-9s and three Airbus A320 family aircraft, and converted orders of two A350-1000s into two A350-900s, shaving $448 million off its fleet commitments for 2019. The company is evaluating further fleet restructuring.

LATAM is also capitalizing on its Latin American hubs by introducing new strategic point-to-point routes within the group’s domestic markets. Two new routes connecting LATAM’s Lima hub with Rio de Janeiro and San Jose, Costa Rica were announced during the 2Q, adding to eight new routes announced in the 1Q. Summer service between Brasilia-Punta Cana and Santiago-Bariloche and Santiago-Punta del Este will also be implemented.

Additionally, the company’s new LCC-like domestic market travel model is gaining acceptance among passengers. The program, with branded fares, ancillary fees for checked baggage and preferred seating, and a buy-on-board “Mercado LATAM,” helped to push LATAM’s 2Q revenue to $2.3 billion, up 7.7% year-over year (YOY). Passenger revenue made up the bulk of that, growing 10.6% YOY to $1.9 billion. LATAM’s cargo revenue slipped 1.3% during the quarter, to $256.5 million.

The company’s consolidated operating expenses increased 5.5% to $2.2 billion, with significant cost rises in aircraft fuel expenses (up 9.1%), maintenance expenses (up 41.3% resulting from redelivery costs as LATAM returned seven leased aircraft during the quarter) and aircraft rental expenses (up 10.5% as the company has leased more modern aircraft—A321s, 787s, A350s—while reducing its leased A320s, A330s and Boeing 767s since 2Q 2016). Since the end of 2Q 2016, LATAM has reduced its fleet of leased aircraft by nine.

LATAM’s consolidated system traffic increased 0.9% during the quarter, to 35 billion RPKs, as capacity decreased 3.1% to 47.4 billion ASKs, producing a systemwide load factor of 73.9%, up 2.9 points YOY. Yield increased 8% YOY to 6.1 cents. RASK increased 12.5% YOY to 4.5% and CASK was up 8.6% to 4.9 cents. CASK ex-fuel increased 7.6% YOY to 3.8 cents.