Lan expects more healthy profits in 2009

Washington DC
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Lan is maintaining its projection for equal or higher profits in 2009 despite downward pressure on yields and unit revenues.

Executives from the Chilean-based carrier told analysts today that yields are expected to drop 10% to 15% on the passenger side and about 20% on the cargo side.

Unit revenues are projected to drop 12% to 17% on the passenger side and 25% on the cargo side as load factors slip by two percentage points for passengers and by five percentage points for cargo.

CFO Alejandro de la Fuente acknowledges Lan is impacted by the global drop in demand for air cargo services with the southbound market particularly affected. In certain markets there is also pressure on the passenger side and de la Fuente says this could result in "slightly lower fares on certain routes".

But he adds the drop in both passenger and cargo yields is mainly being driven by a reduction in fuel surcharges. Lan also is confident the drop in unit revenues will be offset by an improvement in unit costs.

The drop in unit costs will be driven by a decline in fuel costs, and the depreciation of local South American currencies against the US dollar, which will result in lower salaries and a reduction in operating costs driven by the replacement of wet-leased Boeing 747 freighters with more efficient dry-leased Boeing 777 freighters.

As a result, Lan is expected to at least match the $536 million operating profit and 11.8% operating profit margin posted in 2008.

Lan also is maintaining plans to expand passenger capacity by 10% in 2009, following growth of 11.5% in 2008. de la Fuente says Lan is comfortable with its capacity plan because most of the growth is on domestic and intra Latin American markets, which remain relatively strong.

The 10% increase in passenger capacity is also being driven mainly by the delivery of several aircraft in the second half of 2008 rather than 2009 deliveries. Lan plans to grow its passenger fleet this year from 81 to 85 aircraft, taking three additional A320s and one Boeing 767.

"2009 is a relatively slow year in terms of aircraft deliveries," de la Fuente says, pointing out Lan took delivery of 19 new passenger aircraft in 2008 including six in the fourth quarter.

He adds that "we already have financing in place for most of the aircraft to be delivered this year".

de la Fuente says Lan's fleet plan is highly flexible and could be reduced if there a strong downturn in demand. "Despite the fact most of our new aircraft are purchases, Lan continues to maintain the flexibility to adjust the size of our fleet in case of a strong downturn in demand," he told analysts during a conference call to discuss fourth quarter earnings.

He adds Lan has three aircraft leases expiring in 2009, three more in 2010 and another three in 2011. All these aircraft can be returned without penalty should Lan decide it no longer needs the capacity.

de la Fuente says from 2010 some of Lan's Boeing 767 fleet will also be fully paid for, giving the carrier more flexibility to reduce its widebody fleet should market conditions warrant.

In November Lan placed orders for four additional 767-300ERs, following through on plans de la Fuente first unveiled during a conference call in late October to discuss third quarter earnings. These will be delivered in the first half of 2012 and will make up the capacity shortfall created by delays in delivery to the 32 Boeing 787s Lan has on order.

On the cargo side, Lan will grow its fleet from nine to 11 freighters this year as it take delivery of its first two Boeing 777s in the second quarter. But cargo capacity overall will be down by 5%, compared to an original plan to grow capacity by 8%. Lan is achieving this by reducing its use of wet-leased freighters.