LATAM Airlines Group S.A. — FY 2017 Form 20-F
Reporting period: Fiscal year ended December 31, 2017; filed April 4, 2018. Although the request identifies 2017 Q4, this is an annual report and does not provide a clear standalone fourth-quarter financial summary. Financial statements are prepared under IFRS as issued by the IASB and presented in U.S. dollars.
Business context and reporting period
LATAM is a South American passenger and cargo airline group with domestic operations in six countries. It carried approximately 67.1 million passengers in 2017 and operated 307 aircraft, including passenger and cargo aircraft. Passenger transportation is the largest revenue source; the group also operates cargo, loyalty, maintenance, leasing and related businesses.
Key financial and operating metrics
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Passenger revenue | US$8,494.5 million | US$7,877.7 million |
| Cargo revenue | US$1,119.4 million | US$1,110.6 million |
| Total operating revenue | US$9,613.9 million | US$8,988.3 million |
| Gross margin | US$2,172.1 million; 22.6% of revenue | US$2,021.3 million; 22.5% |
| Operating income | US$706.8 million; approximately 7.4% of revenue | US$493.3 million |
| Net income | US$200.7 million | US$110.7 million |
| Net income attributable to parent shareholders | US$155.3 million | US$69.2 million |
| Basic earnings per share | US$0.2561 | US$0.1267 |
| Net cash from operating activities | US$1,666.7 million | US$980.9 million |
| Cash and cash equivalents at year-end | US$1,142.0 million | US$949.3 million |
| Total assets / total liabilities | US$18,798.0 million / US$14,530.7 million | US$19,198.2 million / US$15,012.9 million |
Cash, cash equivalents and short-term marketable securities together totaled US$1,614.2 million at year-end 2017. Net cash used in investing activities was US$287.4 million and net cash used in financing activities was US$1,179.1 million. Property, plant and equipment purchases were US$403.7 million; intangible-asset purchases were US$87.3 million.
Interest-bearing financial obligations were approximately US$7.9 billion, including US$1.289 billion of current debt obligations. The average debt interest rate was about 4.1%; 63.3% of debt was fixed-rate or effectively fixed through hedges. Separately, future operating-lease payments totaled US$3.58 billion. Working capital was negative: current assets of US$3.75 billion versus current liabilities of US$5.84 billion. Management stated it expected working capital to cover liquidity requirements for the next 12 months; the company also had a fully undrawn US$450 million committed revolving facility, subject to borrowing-base availability.
At year-end, total passenger load factor was 84.8%, up from 84.2%; passenger capacity (ASKs) rose 1.1% and passenger unit revenue (RASK) increased 6.7%. Cargo capacity (ATKs) fell 7.1%, cargo traffic declined 1.3%, and cargo load factor rose to 54.9%.
Material changes versus FY 2016
- Operating revenue increased 7.0%, led by 7.8% growth in passenger revenue. Cargo revenue rose 0.8%.
- Net income increased 81.3%, while parent-attributable income more than doubled. Operating income rose to US$706.8 million from US$493.3 million.
- Operating cash flow increased US$685.9 million to US$1.67 billion, which management attributed to improved operating performance, regional recovery and efficiency measures.
- Fuel costs increased 12.7% to US$2.32 billion, and cost of sales increased 6.8%. Fuel represented 24.5% of operating expenses; the reported average into-wing fuel price, including taxes, transportation and hedging, rose 17.5% to US$2.00 per gallon.
- Financial costs decreased 5.5% to US$393.3 million, which management attributed mainly to lower gross debt. Foreign-exchange results shifted from a US$121.7 million gain in 2016 to an US$18.7 million loss in 2017.
- Capital expenditure and aircraft activity were moderated: the group received four aircraft in 2017 and subleased aircraft to align capacity with demand. Cost per ASK rose to 6.93 U.S. cents from 6.64 cents; excluding fuel-price variations, it rose to 5.23 cents from 5.11 cents.
Outlook, management commentary, risks and unusual items
- 2018 outlook: Passenger ASK growth was forecast at 5%–7%, including international growth of 6%–8%, Brazil domestic growth of 2%–4%, and Spanish-speaking-country domestic growth of approximately 6%–8%. Cargo ATKs were forecast to grow 1%–3%. These are forward-looking estimates, not results.
- Capacity and investment: The filing’s 2018 estimates list fleet commitments of US$714 million, pre-delivery payments of US$219 million and other expenditures of US$650 million. Total aircraft purchase commitments were stated as approximately US$7.3 billion through 2022; the commitments table reports US$7.259 billion. Operating-lease commitments add another US$3.58 billion.
- Strategy and competition: Management emphasized cost reduction, ancillary revenue, network development and the new domestic travel model, implemented in five of six domestic markets by year-end. It expected increasing competitive pressure, including from low-cost airlines.
- Key risks: Fuel-price volatility, foreign-exchange exposure—particularly the Brazilian real—interest rates, debt service and aircraft lease obligations, economic conditions, labor negotiations, airport capacity and access, competition, aircraft and engine delivery or maintenance issues, cybersecurity, regulation and climate-related requirements. Goodwill was US$2.67 billion; the company reported no impairment in its 2017 annual test.
- Contingencies: Recorded provisions included approximately US$260.2 million for tax contingencies, US$63.4 million for civil contingencies and US$28.7 million for labor contingencies. LATAM and its cargo affiliates faced continuing cargo-competition proceedings: the European Commission reimposed an €8.2 million fine, which LATAM appealed; a Brazilian CADE fine against ABSA was also under judicial challenge. TAM disclosed multiple Brazilian tax disputes, including a US$100.2 million provision for the Airline Workers Fund case and other assessments whose outcomes varied by matter.
- Compliance matter: Under a 2016 DOJ deferred prosecution agreement concerning consultant payments in Argentina in 2006–2007, LATAM paid a US$12.75 million fine and agreed to independent compliance monitoring and subsequent reporting. It also paid the SEC US$6.744 million plus US$2.694 million interest. The DOJ agreement remained subject to its terms and three-year period.
- Reporting and controls: PwC issued an unqualified opinion on the consolidated IFRS financial statements and concluded internal control over financial reporting was effective as of December 31, 2017. The filing says there were no significant subsequent events through issuance.
Most important facts for an investor to verify
- Reconcile the reported US$7.9 billion interest-bearing obligations with aircraft financing, debt maturities, collateral and the separate US$3.58 billion operating-lease commitments.
- Assess liquidity against negative working capital, upcoming debt and lease payments, aircraft commitments, and the borrowing-base conditions on the US$450 million revolving facility.
- Test whether 2017 earnings and cash-flow improvement can persist if fuel prices rise, local currencies weaken, or low-cost competition pressures fares and yields.
- Review the status, possible exposure and provisioning for cargo antitrust cases, Brazilian tax disputes and the DOJ compliance agreement; recorded provisions are not necessarily the maximum exposure.
- Monitor 2018 capacity and capital-spending plans, aircraft and engine delivery risks, and the financial-statement and covenant effects expected from IFRS 16 lease accounting.