In 2014, the global airline industry was impacted by both positive and negative factors.
In 2014, the global airline industry was impacted by both positive and negative factors. The former included a drop in fuel prices to an average of US$113/barrel (jet fuel) and a slight expansion of the eurozone after its crisis of previous years, while the negative factors included the important depreciation of many local currencies against the dollar and the deceleration of some major economies, particularly China and Brazil.
Despite these opposing forces, 2014 was a good year for the industry as a whole. This was reflected in a 5.9% increase in passenger traffic - above the average for the last ten years and with increases in demand in all the world's different regions - and a significant improvement in the industry's operating results and profits which are estimated to have reached US$19.9 billion (as compared to US$10.6 billion in 2013).
This improvement in airlines' results was possible thanks to the consolidation and capacity discipline seen in most regions which have been key for the success of operations.
At a domestic and regional level, there continues to be a trend towards the low-cost model, which has shown a significant expansion, and greater segmentation of passengers according to their travel needs.
There also continues to be a trend towards the strengthening of alliances and cooperation agreements among the world's airlines which has improved connectivity for passengers.
North American airlines performed well in 2014 and, with their strengthened position and focus on profitability, once again achieved the best results globally, in a much less fragmented and more disciplined industry, with better labor relations and supported by the creation of increased ancillary revenues.
In Europe, growth of traffic was driven by low-cost airlines while the major airlines showed greater capacity discipline, focusing on implementation of their cost restructuring programs. Although the economic context was a little more favorable than in previous years, difficulties persisted, principally due to the crisis between Russia and the Ukraine.
Traffic growth was highest in the Asia-Pacific region, where it was also driven by low-cost airlines and increased domestic demand.
Traffic growth was highest in the Asia-Pacific region, where it was also driven by low-cost airlines and increased domestic demand, principally in China, despite the deceleration of this country's economy. Currencies depreciated strongly against the dollar and competition intensified, principally with Middle Eastern operators on routes to Europe.
The deceleration of Latin American economies, with the resulting strong depreciation of local currencies, and increased competition due to the arrival of new operators to the region, exerted pressure on operators' unit revenues in 2014. The crisis in Venezuela also meant that some operators diverted capacity to other countries in the region with the resulting pressure on tariffs. Despite this challenging context - which also included the Football World Cup in Brazil in June and July - Latin American operators reported positive results in which capacity discipline, principally in Brazil, was a key factor.
In the case of the cargo business, traffic showed a significant improvement, accelerating from 1.4% growth in 2013 to 4.5% in 2014, driven by stronger international trade in the second half of the year
In the case of the cargo business, traffic showed a significant improvement, accelerating from 1.4% growth in 2013 to 4.5% in 2014, driven by stronger international trade in the second half of the year. However, this improvement occurred principally in Asia-Pacific and the Middle East while cargo traffic in Latin America remained weak, due mainly to lower imports in Brazil.
One of the key events of 2014 was the drop in the price of jet fuel in the latter part of the year, which meant an annual average of US$113/barrel, down by more than 8% on the previous year. The impact of this drop, although positive for the airline industry as a whole, differed by region depending on the strength/weakness of their economies and currencies and the level of competition. In some cases, hedging also meant that much of the benefit of lower fuel prices was not captured. In 2015, fuel prices are expected to remain low, benefiting airlines.
Given the industry's current structure and the fuel price outlook, the International Air Transport Association (IATA) anticipates an increase in global returns in 2015, with the industry's profits reaching US$25 billion. It is important to note that global traffic growth would continue to be driven by emerging economies, principally in Asia-Pacific, the Middle East and Latin America. Due to their economic growth outlook and the still low penetration of air travel in these countries, this trend is expected to persist over the next 20 years.
Both the DGAC and the JAC oversee and regulate the Chilean aviation industry. The DGAC reports directly to the Chilean Air Force and is responsible for supervising compliance with Chilean laws and regulations relating to air navigation.
Both the DGAC and the JAC oversee and regulate the Chilean aviation industry. The DGAC reports directly to the Chilean Air Force and is responsible for supervising compliance with Chilean laws and regulations relating to air navigation. The JAC is the Chilean civil aviation authority.
Primarily on the basis of Decree Law No. 2,564, which regulates commercial aviation, the JAC establishes the main commercial policies for the aviation industry in Chile, regulates the assignment of international routes, and the compliance with certain insurance requirements, and the DGAC regulates flight operations, including personnel, aircraft and security standards, air traffic control and airport management.
We have obtained and maintain the necessary authority from the Chilean government to conduct flight operations, including authorization certificates from the JAC and technical operative certificates from the DGAC, the continuation of which is subject to the ongoing compliance with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future.
Chile is a contracting state, as well as a permanent member, of the ICAO, an agency of the United Nations established in 1947 to assist in the planning and development of international air transport.
The ICAO establishes technical standards for the international aviation industry, which Chilean authorities have incorporated into Chilean laws and regulations.
In the absence of an applicable Chilean regulation concerning safety or maintenance, the DGAC has incorporated by reference the majority of the ICAO’s technical standards. We believe that we are in material compliance with all relevant technical standards.
Domestic Routes.
Chilean airlines are not required to obtain permits in connection with carrying passengers or cargo on any domestic routes, but only to comply with the technical and insurance requirements established respectively by the DGAC and the JAC. There are no regulatory barriers that would prevent a foreign airline from creating a Chilean subsidiary and entering the Chilean domestic market using that subsidiary. On January 18, 2012 the Secretary of Transportation and the Secretary of Economics of Chile announced the unilateral opening of the Chilean domestic skies. This was confirmed in November 2013 and is valid as of today
International Routes.
As an airline providing services on international routes, LAN is also subject to a variety of bilateral civil air transport agreements that provide for the exchange of air traffic rights between Chile and various other countries. There can be no assurance that existing bilateral agreements between Chile and foreign governments will continue, and a modification, suspension or revocation of one or more bilateral treaties could have a material adverse effect on our operations and financial results.
International route rights, as well as the corresponding landing rights, are derived from a variety of air transport agreements negotiated between Chile and foreign governments. Under such agreements, the government of one country grants the government of another country the right to designate one or more of its domestic airlines to operate scheduled services to certain destinations of the former and, in certain cases, to further connect to third-country destinations.
In Chile, when additional route frequencies to and from foreign cities become available, any eligible airline may apply to obtain them. If there is more than one applicant for a route frequency the JAC awards it through a public auction for a period of five years. The JAC grants route frequencies subject to the condition that the recipient airline operate them on a permanent basis. If an airline fails to operate a route for a period of six months or more, the JAC may terminate its rights to that route. International route frequencies are freely transferable. In the past, we have generally paid only nominal amounts for international route frequencies obtained in uncontested auctions.
Chilean airlines are permitted to establish their own domestic and international fares without government regulation. For more information, see “—Antitrust Regulation” below.
In 1997, the Antitrust Commission approved and imposed a specific self-regulatory fare plan for our domestic operations in Chile consistent with the Antitrust Commission’s directive to maintain a competitive environment.
According to this plan, we must file notice with the JAC of any increase or decrease in standard fares on routes deemed “non-competitive” by the JAC and any decrease in fares on “competitive” routes at least twenty days in advance. We must file notice with the JAC of any increase in fares on “competitive” routes at least ten days in advance.
In addition, the Chilean authorities now require that we justify any modification that we make to our fares on non-competitive routes. We must also ensure that our average yields on a non-competitive route are not higher than those on competitive routes of similar distance.
Aircraft registration in Chile is governed by the Chilean Aeronautical Code (“CAC”). In order to register or continue to be registered in Chile, an aircraft must be wholly owned by either:
The DGAC requires that all aircraft operated by Chilean airlines be registered either with the DGAC or with an equivalent supervisory body in a country other than Chile. All aircraft must have a valid certificate of airworthiness issued by either the DGAC or an equivalent non-Chilean supervisory entity. In addition, the DGAC will not issue maintenance permits to a Chilean airline until the DGAC has assessed the airline’s maintenance capabilities.
The DGAC renews maintenance permits annually, and has approved our maintenance operations. Only DGAC-certified maintenance facilities or facilities certified by an equivalent non-Chilean supervisory body in the country where the aircraft is registered may maintain and repair the aircraft operated by Chilean airlines.
Aircraft maintenance personnel at such facilities must also be certified either by the DGAC or an equivalent non-Chilean supervisory body before assuming any aircraft maintenance positions.
The DGAC establishes and supervises the implementation of security standards and regulations for the Chilean commercial aviation industry.
Such standards and regulations are based on standards developed by international commercial aviation organizations. Each airline and airport in Chile must submit an aviation security handbook to the DGAC describing its security procedures for the day-to-day operations of commercial aviation and procedures for staff security training. LAN has submitted its aviation security handbook to the DGAC. Chilean airlines that operate international routes must also adopt security measures in accordance with the requirements of applicable bilateral international agreements.
The DGAC supervises and manages airports in Chile, including the supervision of take-off and landing charges. The DGAC proposes airport charges, which are approved by the JAC and are the same at all airports.
Since the mid-90s, a number of Chilean airports have been privatized, including the Comodoro Arturo Merino Benítez International Airport in Santiago. At the privatized airports, the airport administration manages the facilities under the supervision of the DGAC and JAC.
There are no material environmental regulations or controls imposed upon airlines, applicable to aircraft, or that otherwise affect us in Chile, except for environmental laws and regulations of general applicability. There is no noise restriction regulation currently applicable to aircraft in Chile. However, Chilean authorities are planning to pass a noise-related regulation governing aircraft that fly to and within Chile.
The proposed regulation will require all such aircraft to comply with certain noise restrictions, referred to in the market as Stage 3 standards.
LAN’s fleet already complies with the proposed restrictions so we do not believe that enactment of the proposed standards would impose a material burden on us.
The Chilean antitrust authority, which we refer to as the Antitrust Court (previously the Antitrust Commission), oversees antitrust matters, which are governed by Decree Law No. 211 of 1973, as amended, or the Antitrust Law.
The Antitrust Law prohibits any entity from preventing, restricting or distorting competition in any market or any part of any market. The Antitrust Law also prohibits any business or businesses that have a dominant position in any market or a substantial part of any market from abusing that dominant position.
An aggrieved person may sue for damages arising from a breach of Antitrust Law and/or file a complaint with the Antitrust Court requesting an order to enjoin the violation of the Antitrust Law.
The Antitrust Court has the authority to impose a variety of sanctions for violations of the Antitrust Law, including termination of contracts contrary to the Antitrust Law, dissolution of a company and imposition of fines and daily penalties on businesses. Courts may award damages and other remedies (such as an injunction) in appropriate circumstances. As described above under “—Route Rights—Airfare Pricing Policy,” in October 1997, the Antitrust Court approved a specific self-regulatory fare plan for us consistent with the Antitrust Court’s directive to maintain a competitive environment within the domestic market.
Since October 1997, LAN Airlines S.A. and LAN Express follow a self-regulatory plan, which was modified and approved by the Tribunal de la Libre Competencia (the Competition Court) in July 2005, and further in September, 2011.
In February 2010, the Fiscalía Nacional Económica (the National Economic Prosecutor’s Office) finalized the investigation initiated in 2007 regarding our compliance with this self-regulatory plan and no further observations were made.
By means of Resolution No. 37/2011, issued on September 21, 2011 (the “Resolution”), the Tribunal de Defensa de la Libre Competencia de Chile (“TDLC”) approved the merger between LAN and TAM and imposed 14 mitigation measures on LATAM, which scope and details are set out in said Resolution and which, for convenience only, are briefly described below:
The Brazilian Council for Economic Defense – CADE has approved the LAN/TAM merger by unanimous decision during the hearing session of December 14, 2011, subject to the conditions: (1) the new combined group (LATAM) should leave one of the two global alliances to which it was part (Star Alliance or oneworld); and (2) the new combined group (LATAM) should offer to swap two pairs of slots in Guarulhos International Airport, to be used by an occasional third party interested in offering direct non-stop flights between São Paulo and Santiago do Chile. These impositions are in line with the mitigation measures adopted by the TDLC, in Chile.
Furthermore, the association was submitted to the antitrust authorities in Germany, Italy and Spain. All these jurisdictions granted unconditional clearances for this transaction. The merger was filed with the Argentinean antitrust authorities, which approval is still pending.
LATAM Airlines Group reported an operating income of US$513.4 million in 2014, representing a drop of 20.3% as compared to the previous year. Operating margin stood at 4.1%, down by 0.7 percentage points as compared to operating margin for 2013.
LATAM Airlines Group reported an operating income of US$513.4 million in 2014, representing a drop of 20.3% as compared to the previous year. Operating margin stood at 4.1%, down by 0.7 percentage points as compared to operating margin for 2013. These lower results reflected a weaker macroeconomic environment, with slower growth in South American countries and depreciation of local currencies; as well as a more challenging competitive environment for LATAM's international operations, and the Football World Cup, which was held in Brazil in June and July, with a negative impact on results of some US$140 million to US$160 million.
Total revenues in 2014 reached US$12,471.1 million as compared to US$13,266.1 million in 2013. This 6.0% drop was explained by reductions of 6.2% and 8.0% in passenger and cargo revenues, respectively, which was partly offset by a 10.6% increase in other revenues. These results include the negative impact on revenues denominated in Brazilian reais of this currency's 9.1% average depreciation in 2014.
As of 31 December 2014, passenger and cargo revenues accounted for 83% and 14% of total revenues, respectively. The 6.2% reduction in passenger revenues reflected a 1.9% increase in passenger traffic that was offset by a 7.9% drop in yields. In 2014, the load factor reached 83.4%, up by 2.5 percentage points on the previous year, with the increase driven by higher traffic accompanied by a 1.1% reduction in capacity.
Consolidated revenues per ASK (RASK) were down by 5.1% on 2013, mainly due to lower yields which, in turn, were affected by intense competition in the international market.
Consolidated revenues per ASK (RASK) were down by 5.1% on 2013, mainly due to lower yields which, in turn, were affected by intense competition in the international market, the depreciation of local currencies (principally the Brazilian real and the Chilean peso) and the impact of the Soccer World Cup on business demand in June and July.
The reduction of capacity in 2014 as compared to 2013 was explained mainly by a 2.4% reduction in the LATAM's international business as it continued to rationalize capacity on these routes, and ongoing discipline in the Brazilian domestic market where LATAM reduced its capacity for third consecutive year, in this case by 1.4%. Capacity in Spanish-speaking domestic markets continued to expand but at a slower pace, with an increase of only 3.7%, and in line with slower economic growth, mainly in Chile and Peru.
The 8.0% drop in cargo revenues in 2014 reflected a drop of 3.3% in traffic and of 4.8% in yields. This was a result of the still weak global cargo markets, the weakness of imports from the region (mainly from Brazil) and greater competition in South America from other regional and international airlines. In response, LATAM reduced its cargo capacity by 5.6% in 2014, focusing on optimizing the utilization of the bellies of its passenger aircraft, while it gradually phases out of the fleet some of its cargo dedicated freighters, one of which was phased out in March 2014. The drop in yields also reflected the negative impact of the 9.1% depreciation of the Brazilian real on cargo revenues in that domestic market.
Operating costs reached US$11,957.8 million in 2014, down by 5.3% as compared to 2013, resulting in a 2.4% reduction of the cost per ASK equivalent (including net financial costs).
Operating costs reached US$11,957.8 million in 2014, down by 5.3% as compared to 2013, resulting in a 2.4% reduction of the cost per ASK equivalent (including net financial costs). This decrease mainly reflected a reduction in expenditure on fuel and wages and the positive impact of the depreciation of local currencies on certain components of costs.
At US$4,167.0 million, expenditure on fuel represented a drop of 5.6% from US$4,414.2 million in 2013. This was explained by both lower consumption and lower fuel prices.
In 2014, fuel consumption measured in gallons was down by 3.7% in line with the Company's strategy of rationalization of its passenger and cargo operations (as reflected in a 2.8% reduction in ASK-equivalents) and the initiatives it implemented during the year in order to achieve efficiency gains, principally related to the fleet.
In the case of fuel prices, the reduction reflected a 4.9% drop in the fuel price (without hedging) in 2014. In addition, LATAM recognized a fuel hedging loss of US$108.7 million as compared to a fuel hedge gain of US$22.1 million in 2013.
In the case of fuel prices, the reduction reflected a 4.9% drop in the fuel price (without hedging) in 2014. In addition, LATAM recognized a fuel hedging loss of US$108.7 million as compared to a fuel hedge gain of US$22.1 million in 2013. In the case of exchange-rate hedging, LATAM Airlines Group reported a gain of US$3.8 million on hedging for the Brazilian real in 2014, also recognized in the fuel cost line.
Wages and benefits showed a drop of 5.7% in 2014, due principally to the decrease of 0.3% in the number of employees and the impact on wages of the depreciation of currencies, mainly the 9.1% depreciation of the Brazilian real and the 15.2% depreciation of the Chilean peso as compared to 2013. In the last quarter of 2014, LATAM also reported a recognized again of US$108 million related to the reversal of performance bonuses for the year.
In 2014, LATAM Airlines Group reported one-time costs arising from the fleet restructuring plan it began to implement in the second half of 2013. This plan seeks to meet LATAM's needs after the business combination and consists on reducing the number of aircraft models operated, gradually phasing out less efficient models and allocating the most appropriate planes to each of its markets.
As a result, LATAM Airlines Group recognized a provision for fleet restructuring costs for US$112 million in the first quarter of 2014.
As a result, LATAM Airlines Group recognized a provision for fleet restructuring costs for US$112 million in the first quarter of 2014 as part of the process of gradually phasing out of its fleet all of its A330s, A340s, B737s, Dash 8-Q400s and Dash 8-200s. These one-time costs were mainly related to estimated fines resulting from the early delivery of aircraft and maintenance expenses for redelivery.
Finally, LATAM Airlines Group reported a net loss of US$109.8 million in 2014 as compared to a net loss of US$281.1 million in 2013. This result implied a net margin of -0.9% which represented an improvement of 1.2 percentage points on its net margin in 2013.
LATAM's net loss in 2014 was affected by the fleet restructuring costs discussed above for US$112 million and an exchange-rate loss of US$130.2 million mainly due to the depreciation of the Brazilian real between 31 December 2013 and 31 December 2014. This compares to an exchange-rate loss of US$482.2 million recognized in 2013 when the imbalance of TAM’s assets and liabilities in Brazilian reais was higher.
