LATAM Airlines Group reports consolidated operating income of US$152.3 million and net income of US$65.6 million for first quarter 2017

Santiago, Chile, May 15, 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 first quarter ending March 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 3.14 per USD.

HIGHLIGHTS
 LATAM Airlines Group reported an operating income of US$152.3 million and a net income of US$65.6 million. Operating margin reached 6.1% for the quarter, a decline of 3.3 percentage points compared to the same period last year. Although revenues improved on a year-over-year basis they were offset by a 44.4% increase in fuel prices.
 During the first quarter 2017, total operating revenues increased 6.4% to US$2,477.4 million, reflecting LATAM’s proactive capacity management as well as stronger local currencies, especially in Brazil. Passenger revenues increased 7.6%, with a yield improvement of 6.9% and load factors increasing by 0.5 p.p. to 84.7%.
 Total operating expenses in the first quarter increased by 10.3% mainly as a result of a 29.0% or US$133.6 million increase in fuel costs during the period. Additionally, labor costs increased US$36.5 million as a result of the negative impact of the appreciation of local currencies and inflationary costs, despite the 12.4% reduction in average headcount in first quarter 2017 as compared to the same period 2016.
 As a result of capacity adjustments made during 2016, domestic capacity in Brazil was reduced by 9.5% during the first quarter, and revenues per ASK increased by 24.6% as compared to the same quarter of 2016. Furthermore, LATAM Airlines Brazil reduced capacity by 26% on international routes between Brazil and the U.S. as compared to first quarter 2016.
 During the quarter, LATAM and its affiliate carriers have made significant progress in the implementation process of the redesign of their domestic passenger business model. “Mercado LATAM”, the new buy on board service for food and beverages, has already been implemented on all of LATAM’s domestic flights in Colombia, Peru, and Chile; and it will be implemented gradually in Argentina, Ecuador and Brazil over 2017.
 Meanwhile, the Company continues to strengthen its network announcing new routes in order to improve connectivity within the region. In September, the Company will start the operation of a new nonstop route between Lima and Tucumán, while in October, the Company will start flying directly between Santiago and three cities in Argentina – San Juan, Neuquén and Tucumán – as well as the previously announced direct flight to Melbourne, the longest in the history of LATAM.
 As of March 31, 2017, LATAM’s net financial debt decreased by US$108 million compared to December 31,2016, reaching a leverage of 5.4x, which represents a slight increase from the 5.3x the Company had at the end of 2016. Furthermore, during April LATAM successfully priced a US$700 million senior unsecured notes issuance, due in 2024, at an annual interest rate of 6.875%.

MANAGEMENT COMMENTS ON FIRST QUARTER 2017

“We are very excited about 2017 as we are in the middle of transforming LATAM and improving the value proposition for our clients with the renewal of the domestic flight model. While we still have a lot of work to do, we are off to a solid start and remain focused on improving margins, cash flow generation and on deleveraging the balance sheet” said Enrique Cueto, CEO of LATAM Airlines Group.

During the first quarter, LATAM reached an operating margin of 6.1%. Over the last few quarters, we have made substantial adjustments in order to improve LATAM’s profitability as we focus on actively managing capacity and achieving sustainable yield increases and healthy load factors across all markets. Furthermore, we continue to pursue cost efficiency initiatives which have resulted in a 12.4% average headcount reduction, as well as lower depreciation and fleet maintenance costs (excluding the negative impact of local currency appreciation), agency commissions and passenger services.

When looking at LATAM’s cost performance during first quarter 2017, we continue to see the positive outcome of our continued cost reductions; although there is a very tough comparison basis with the first quarter of 2016 as the average price of fuel in that quarter was the lowest in more than 10 years. Excluding fuel costs, LATAM’s costs would increase by 5.0% below the 6.4% increase in revenues explained mainly by the negative impact of the local currencies appreciation, especially the Brazilian real. In addition, our capacity declined by 3.5% (measured in ASK-equivalent) as compared to the first quarter of 2016. As a result, CASK ex-fuel increased 7.4% during the first quarter 2017 as compared to the same period of 2016.

Since April 16, 2017, LATAM Pass and LATAM Fidelidade have evolved and changed the process by which Kilometers (KMS) are accumulated. Now it will be easier to calculate the accrual of KMS because each category will have a unique multiplier applied to the amount spent on the plane ticket. This way we can reward our passengers when their expenses are higher. In addition, the higher the membership category, the higher the multiplier.

Regarding our new travel model for domestic services, the implementation will continue gradually over 2017. Passengers will have access to clearly segmented fares, with detail about the additional services included in the different fare segments, in order to have a price aligned with their needs.

We continue to adopt global best practices that generate additional revenue, while providing customers with greater flexibility and customization throughout their journey. In line with this strategy, we are pursuing a series of ancillary revenue opportunities which will allow passengers to customize their journey and enable the Company to develop additional revenue streams.

Additionally, on April 26, 2017, LATAM launched a buy on board service for food and beverages in Chile. Chile became the Company’s third domestic market to offer this service, which was introduced in Colombia in February and in Peru in March. Under the name “Mercado LATAM”, domestic passengers in Chile, Colombia and Peru, now have access to a wide selection of local and international food and beverages in order to improve their travel experience.

On April 27, 2017, the Ordinary Shareholders Meeting of LATAM elected a new Board of Directors for the next two years. Ignacio Cueto Plaza, Antonio Luiz Pizarro Manzo, Nicolás Eblen Hirmas and Eduardo Novoa Castellón were elected for the first time and will join our re-elected directors Juan José Cueto Plaza, Carlos Heller Solari, Giles Edward Agutter, Henri Philippe Reichstul and Georges Antoine de Bourguignon Arndt. At the recent board meeting, Ignacio Cueto Plaza was elected as the president of the board, while the Audit Committee will comprise Georges Antoine de Bourguignon Arndt, Eduardo Novoa Castellón and Nicolás Eblen Hirmas.

Finally, LATAM’s shareholders approved a dividend, which will distribute 30% of the earnings obtained in 2016, equivalent to US¢3.42 per share, payable on Thursday, May 18, 2017.

MANAGEMENT DISCUSSION AND ANALYSIS OF FIRST QUARTER 2017 RESULTS

Total revenues in first quarter 2017 totaled US$2,477.4 million compared to US$2,327.6 million in first quarter 2016. The increase of 6.4% is a result of a 7.6% increase in passenger revenues, positively impacted by the appreciation of the local currencies as well as capacity adjustments in the markets in which this was necessary, especially in domestic routes and international routes between Brazil and the US. Additionally, revenues were boosted by a 25.9% increase in other revenues, due to higher revenues from Multiplus. On the other hand, cargo revenues decreased by 8.1% as transported tons declined by 9.1%. Passenger and cargo revenues accounted for 85.0% and 10.2% of total operating revenues, respectively, in first quarter 2017.

Passenger revenues increased 7.6% during the quarter as a result of a 7.5% increase in consolidated passenger unit revenue (RASK) while capacity remained unchanged, when compared to first quarter 2016. The RASK increase was driven by a 6.9% increase in yields, while load factors showed an improvement of 0.5 p.p. to 84.7%. The yield recovery during this quarter was primarily driven by the improvement in yields in Brazil’s domestic and international operations, partially offset by weaker demand in the Spanish Speaking markets.

During the first quarter 2017, demand in the airline group’s Spanish speaking country affiliates (SSC, which includes LATAM Airlines Chile, LATAM Airlines Peru, LATAM Airlines Argentina, LATAM Airlines Colombia and LATAM Airlines Ecuador), which accounts for 19.8% of total passenger revenues, showed an increase of 0.1% in passenger traffic as measured in RPKs. Revenues per ASK decreased 4.4% in USD, mainly due to a weaker macroeconomic scenario which has impacted demand throughout the region, partially offset by lower capacity increases by LATAM Airlines and the industry in the Spanish Speaking Countries. Passenger capacity as measured in ASKs grew by 2.1% during the quarter, while load factors showed a decrease of 1.6 p.p. to 82.1%.

The capacity adjustments made in 2016 to Brazil’s domestic passenger operations – which represent 26.3% of total passenger revenues – helped LATAM Airlines Brazil to increase its revenues per ASK by 2.8% in BRL, and as a result of the 19.3% appreciation of the Brazilian real, revenues per ASK increased by 24.6% in USD. LATAM Airlines reduced domestic capacity by 9.5% and traffic as measured in RPKs declined by 9.9% in first quarter 2017 as compared to the same quarter of 2016. As a result, load factor decreased 0.4 p.p. to 82.1%.

The airline group’s capacity on international routes, which represents 53.9% of total passenger revenues, increased by 4.5% during the quarter. As a result of capacity adjustments made in 2016 on routes with weaker demand specifically between Brazil and the US which reached a reduction of 26% during the first quarter 2017, RASK on those routes increased during the quarter compared to the same period last year, with the RASK on the routes between Brazil and the US increasing over 40% during the period. On the other hand, LATAM Airlines Group and its affiliates have added capacity on routes between Spanish Speaking Countries and the US and Europe. Traffic increased by 6.2%, with passenger load factors growing by 1.4 p.p. to 86.8%. Revenues per ASK in international passenger operations increased by 6.2% as compared to the first quarter of 2016, confirming an improving revenue trend.

Cargo revenues decreased by 8.1% in the quarter, driven by a 7.3% decline in cargo traffic and a 0.8% decline in cargo yields as compared to the first quarter of 2016. The decrease in cargo revenues was in line with the 9.1% decline in total tons transported during the first quarter 2017 as compared to the same period 2016. Export markets were mainly impacted by lower production in the salmon industry as well as a decrease of certain products such as fruits from Chile due to strong volumes in 2016 and flowers from Colombia due to meteorological impacts. This was partially offset by an improvement in imports from North America and Europe to Brazil, as a result of the appreciation of the Brazilian Real and improved market conditions in the country. As a result, cargo revenues per ATK improved by 2.4% as compared to the same quarter of the previous year, showing an improvement for the first time after 19 consecutive quarters of revenue per ATK decline, reflecting the capacity adjustments in line with the guidance provided by the Company.

LATAM and its affiliates continue working to adjust freighter capacity, while focused on maximizing the belly utilization of the passenger fleet. In the first quarter, cargo capacity, as measured in ATKs, declined 10.2%, which includes a 23.5% reduction of freighter operations, resulting in a load factor of 52.9%, which represents an improvement of 1.6 percentage points as compared to the first quarter 2016.

Other revenues increased by 25.9% reaching US$117.5 million during first quarter 2017. This growth is primarily due to higher revenues on Multiplus, resulting from increased in points’ sales and breakage, as well as the appreciation of the Brazilian real during the quarter.

Total operating expenses in the first quarter amounted to US$2,325.2 million, a 10.3% increase compared to the same period of 2016. This increase is mainly explained by US$133.6 million of higher costs in aircraft fuel, resulting from a 44.4% increase in the average price per gallon (excluding hedge) as compared to the first quarter 2016. Operating expenses excluding fuel increased by 5.0%, mainly as a result of the negative impact of the appreciation of local currencies on certain costs denominated on those currencies and high inflation rates in the region. Furthermore, cost per ASK equivalent excluding fuel costs increased by 7.4% in the same period, as LATAM Airlines capacity declined by 3.5% as compared to the first quarter 2016. Changes in operating expenses were mainly due to the following:

Wages and benefits increased by 7.5% mainly explained by the appreciation of local currencies during the period, especially the 19.3% appreciation of Brazilian real, and the annual increase in unit salaries, mainly due to the 6% inflation in Brazil in 2016. This was partially offset by a 12.4% decline in the average headcount. Furthermore, we recognized US$23.6 million in severance payments during the quarter as compared to the US$14.7 million in severance payments during the same period 2016.

Fuel costs increased by 29.0% mainly as a result of the 44.4% increase in the average fuel price per gallon (excluding hedge) as compared to the first quarter of 2016, partially offsetting the 4.6% decrease in the gallons consumed during the period as well as a US$2.4 million fuel hedge gain recognized during this quarter, relative to a US$28.8 million loss in the first quarter 2016.
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Commissions to agents decreased by 7.4% due to lower sales incentives paid to agencies and lower revenues from cargo operations.

Depreciation and amortization increased by 5.3% due to the negative impact of the appreciation of the Brazilian real during the first quarter, partially offset by three fewer aircraft on the balance sheet compared with the same period of 2016.

Other rental and landing fees increased by 6.6% mainly because of an increase in aviation fees as a result of the appreciation of local currencies during the quarter as well as lower revenues from rental space to third parties in our cargo aircrafts.

Passenger service expenses decreased by 4.0% due to a 2.4% decline in the number of passenger transported.

Aircraft rentals increased by 12.6% as a result of the incorporation of more modern aircraft under operating leases. The Company had more Airbus A321s, Boeing 787s and Airbus A350 this year while reducing the number of Airbus A320s, Airbus A330s and Boeing 767s relative to the first quarter of 2016, bringing the total number of leased aircraft to 109, as compared to 106 during the same period of 2016.

Maintenance expenses continued to decrease this quarter by 10.1% due to efficiencies related to fleet renewal.

Other operating expenses increased by 6.1%, due mostly to a provision related to the change of our Passenger Service System partially offset by ongoing efficiency initiatives.

Non-operating results
Interest income increased by US$12.0 million to US$22.9 million in first quarter 2017 as compared to the same period 2016 mainly as a result of a cash balance increase.
Interest expense decreased by 7.0% to US$95.8 million in first quarter 2017 from US$103.0 million in the same period 2016 mainly due to gross debt reduction.

Under Other income (expense), the Company registered a US$48.9 million net gain, including US$35.4 million in foreign exchange gains. This compares to the US$71.4 million net gain in other income (expense) in the first quarter of 2016, which included a foreign exchange gain of US$67.9 million.

Net Income in the first quarter amounted to US$65.6 million, a 35.9% decline compared to the same period of 2016 mainly explained by a decrease of US$66.8 million in the operating result as well as a lower foreign exchange gain, partially offset by US$28.8 lower income taxes, which was mainly due to lower pre-tax results in the first three months of 2017 and a decline of US$19.3 million in net financial costs.

LIQUIDITY AND FINANCING
At the end of the first quarter 2017, LATAM reported US$1,414 million in cash and cash equivalents, including certain highly liquid investments accounted for as other current financial assets. Furthermore, the Company ́s liquidity position is also enhanced by US$325 million in undrawn revolving credit facility (RCF) line, which was totally available as of March 31, 2017. As a result, as of March 31, 2017, LATAM’s liquidity position is equivalent to 18.0% of the net revenue of the last twelve months.

On April 6, 2017, LATAM successfully issued US$700 million 6.875% senior unsecured notes, which mature on April 11, 2024. Also, on April 25, 2017, the Company completed the payment of the US$300 million 7,375% senior unsecured notes issued by TAM’s subsidiary TAM Capital Inc.

Fleet commitments for 2017 amount to US$469 million, all of which are pre-arranged operating leases, being the lowest amount in LATAM’s recent history. For 2018, fleet commitments have been substantially reduced to US$555 million, a reduction of US$1,039 million compared with September 2016. The Company continues to adjust its fleet to current demand, improving its cash flow generation after investments for the coming periods, and its balance sheet position.

Additionally, LATAM expects to have non-fleet CAPEX, including intangible assets, of approximately US$500 million per year, including fleet and non-fleet maintenance, expenditures on spare engines, fleet components, and new business model implementation costs, among others.

LATAM’s financial debt during the first quarter 2017 totaled US$8,425 million, a decrease of US$180 million as compared with the end of 2016. For the rest of 2017, the Company has debt maturities of approximately US$1,241 million.

The main objective of LATAM Airlines Group Hedge Policy is to protect medium term liquidity risk from fuel price increases and BRL depreciation, while participating of benefits from fuel price reduction and BRL appreciation. Accordingly, the Company hedges a portion of its estimated fuel consumption and Brazilian real operating exposure. Hedge positions per quarter for the next months are shown in the table below:

LATAM FLEET PLAN
LATAM continues to take a flexible approach to its fleet plan, adapting to operational requirements and market conditions. The confirmed reductions currently amount to US$2.2 billion, in line with the Company’s previously announced plans to achieve a decrease of US$ 2.0 – 3.0 billion in our expected fleet assets by 2018.

These reductions will improve the balance sheet and create flexibility to better respond to market conditions over the coming years. The benefits of these reductions will be seen over the next years starting in 2017 in the form of lower leasing expenses and capital expenditures, along with a decreased need for financing, improving the Company’s cash flow generation and strengthening our balance sheet.

During the first quarter 2017, LATAM took delivery of 1 aircraft and returned 4 aircrafts, ending the quarter with an operating fleet of 326 aircrafts. By the end of 2017, the Company will operate a total fleet of 311 aircraft, and it will have 7 aircrafts under subleasing contracts.

GUIDANCE
Capacity growth guidance for 2017 remains unchanged (see table below). In addition, the Company maintains its guidance for an operating margin of between 6.0% and 8.0% for full year 2017.

LATAM filed its quarterly financial statements for the three month period ended March 31, 2017 with the Superintendencia de Valores y Seguros of Chile on May 15, 2017. These financial statements will be available in Spanish and English languages at http://www.latamairlinesgroup.net.