LATAM Airlines Group S.A. — 2019 Form 20-F summary
Reporting period: Fiscal year ended December 31, 2019; filed March 18, 2020. This is an annual report, not a standalone fourth-quarter filing. The supplied filing text does not provide a clear set of Q4-only financial results. Financial statements are prepared under IFRS in U.S. dollars; 2018 and 2017 comparatives were restated for IFRS 16 lease accounting.
Business context and operating performance
LATAM is a South American passenger and cargo airline group operating in six domestic markets, with approximately 74 million passengers carried in 2019. Passenger transport represented 86.3% of total revenues, cargo 10.2% and other activities 3.5% (the company’s revenue mix presentation).
- Passenger capacity (ASKs) rose 4.1% and passenger traffic (RPKs) rose 4.6%; the combined passenger load factor improved 0.4 percentage points to 83.5%.
- Passengers carried increased 7.8% to 74.2 million. Cargo traffic declined 1.6%, capacity declined 2.2%, and cargo load factor increased 0.4 percentage points to 55.5%; cargo yield fell 8.8%.
- Management cited regional currency devaluation, weaker international demand, intensified low-cost competition and social unrest as operating factors. Chilean unrest was estimated to have a 2019 impact of approximately US$40 million.
Financial results and liquidity
| US$ millions, except per-share data | 2019 | 2018, restated | Change |
|---|---|---|---|
| Operating revenue | 10,070.1 | 9,895.5 | +1.8% |
| Passenger revenue | 9,005.6 | 8,709.0 | +3.4% |
| Cargo revenue | 1,064.4 | 1,186.5 | -10.3% |
| Gross margin | 2,118.8 | 2,122.0 | -0.2% |
| Income from operating activities | 753.1 | 940.5 | -19.9% |
| Pre-tax income | 141.9 | 415.7 | -65.9% |
| Net income | 195.6 | 341.8 | -42.8% |
| Net income attributable to parent shareholders | 190.4 | 309.8 | -38.5% |
| Basic earnings per share (US$) | 0.314 | 0.511 | -38.5% |
- Gross margin was approximately 21.0% of revenue, versus 21.4% in 2018. Operating income was approximately 7.5% of revenue, versus 9.5%; net income margin was approximately 1.9%, versus 3.5%.
- Reported net income exceeded pre-tax income because of a US$53.7 million income tax benefit; 2018 had a US$73.9 million tax expense. Financial costs increased 9.4% to US$589.9 million, while fuel costs declined 1.8% to US$2,929.0 million.
- Operating cash flow was US$2,826.7 million, up from US$2,073.3 million. Investing cash outflow was US$1,419.2 million, including US$1,276.6 million of property and equipment purchases and US$140.2 million of intangible asset purchases. Financing cash outflow was US$1,343.5 million.
- Cash and cash equivalents were US$1,072.6 million; short-term marketable securities were US$386.7 million, for combined cash and securities of approximately US$1,459.2 million. The company also reported a US$600 million undrawn revolving credit facility, subject to borrowing-base and covenant conditions.
- Total assets were US$21,087.8 million, total liabilities US$17,958.6 million, and total equity US$3,129.2 million. Interest-bearing financial debt was US$7,193.5 million; reported lease liabilities were approximately US$3,172.2 million. Contractual obligations included US$14,551 million of financial debt, lease obligations and fleet commitments, with US$2,371 million due within one year.
- Management stated that working capital would be sufficient for the next 12 months, based on conditions known when the filing was prepared. Current liabilities exceeded current assets at year-end; the filing does not present this as an assurance under the subsequent COVID-19 conditions.
Material changes, outlook and risks
- COVID-19 and outlook: On March 12, 2020, LATAM suspended its 2020 guidance because demand and recovery timing could not be estimated. On March 16, it announced an approximately 70% reduction in total capacity, comprising 90% for international and 40% for domestic operations, principally for April and May. Management said the financial impact could not yet be quantified. These developments occurred after the 2019 year-end and are not reflected in 2019 results.
- Strategic alliance and financing: Delta’s tender offer for 20% of LATAM was completed in December 2019 and settled January 3, 2020, for approximately US$1.9 billion. Delta also agreed to pay US$350 million of transition costs and acquire four A350 aircraft and assume commitments for ten more. LATAM ended its oneworld membership and announced it would not proceed with proposed joint business agreements with American Airlines or IAG. The Delta alliance remained subject to regulatory approvals.
- Fleet and leases: LATAM adopted IFRS 16 retrospectively, recognizing lease right-of-use assets and liabilities and changing the classification of lease expense and cash flows. It reduced 2020–2022 fleet commitments by US$1.1 billion, approximately 38%; outstanding aircraft purchase obligations at year-end were US$3.4 billion on the company’s stated contractual basis. Future capital spending could be materially lower due to COVID-19, but estimates were not yet revised.
- Debt, currency and fuel exposures: 38.4% of consolidated debt was floating-rate after hedging; a 100-basis-point LIBOR increase was estimated to reduce pre-tax earnings by US$27.6 million. Fuel represented 30.2% of operating expenses. LATAM reported foreign-exchange losses of US$32.6 million and warned that currency movements, fuel prices, interest rates and access to financing could materially affect results.
- Other risks and contingencies: Principal risks include regional economic and political volatility, airline competition, airport capacity and route access, labor disruption, aircraft and engine availability, cybersecurity, and the pandemic’s effects on travel demand and supply chains. The company reported US$291.6 million in other provisions, including tax, civil, labor and European Commission matters. Certain tax claims and litigation remained unresolved; outcomes and additional exposure may differ from recorded provisions.
- Accounting estimates and audit focus: Goodwill was US$2,209.6 million and indefinite-lived airport-slot and loyalty-program intangibles totaled about US$1,109.8 million. Auditors identified impairment testing, recoverability of deferred tax assets and loyalty-program breakage valuation as critical audit matters. No goodwill impairment was recorded. The auditor gave an unmodified opinion and concluded internal control over financial reporting was effective.
- Other unusual item: In 2019, Multiplus was acquired and merged into LATAM Airlines Brazil; its loyalty revenue moved from other operating income to passenger revenue, affecting year-over-year revenue-line comparisons. A US$57.1 million dividend reserve for 2019 was set aside for payment in 2020.
Most important facts for investors to verify
- COVID-19 capacity reductions, actual subsequent demand, liquidity, access to the committed facility, and any later guidance or capital-spending revisions.
- Debt and lease maturities, covenant headroom, collateral requirements, and the distinction between financial debt, lease liabilities and fleet purchase commitments.
- Whether passenger revenue and load-factor trends can offset falling yields, cargo weakness and higher operating costs.
- Regulatory approvals and realization of the Delta alliance, transition compensation, aircraft transactions and associated commitments.
- Potential changes in tax, competition, civil and labor exposures, and whether recorded provisions remain adequate.
- Goodwill, airport-slot and loyalty-program valuation assumptions, including revenue forecasts, exchange rates, fuel prices and discount rates.