2014 was a year of renovation during which we took important steps towards achieving our mission of becoming one of the world's three most important airline groups in the world.
Dear shareholders,
For LATAM Airlines Group, 2014 was a year of renovation during which we took important steps towards achieving our mission of becoming one of the world's three most important airline groups in the world. Despite macroeconomic and other external factors that had an adverse effect on our business, LATAM Airlines Group made progress on numerous fronts of its renovation plan, including fleet renewal, the continuous improvement of our product and the renovation of the airport infrastructure we use for our operations.
Our achievements during the year reinforce our belief that the decision which LAN and TAM took over two years ago to combine their businesses was the right one. Getting where we are today has certainly been difficult but, if we were to go back in time, we would do it all again. We continue to make progress towards the objectives we established for the association. Although aware that the challenge we have set ourselves will require further efforts in the years to come, we have confidence in the sound foundations we have laid down.
In 2014, the company moved forward with its fleet renewal plan to reduce the number of models it operates, gradually taking less efficient models out of service and allocating aircraft according to which are most appropriate for each of its markets. The fleet renewal plan forms part of our long-term strategy which we believe is essential in order to achieve a cost-efficient operation and enhance the competitiveness of our airlines in the long term. In line with this, ten modern latest-technology Boeing 787 Dreamliners were incorporated into LAN's fleet while, in TAM's long-haul fleet, Airbus A330s were replaced with Boeing 767s, which will allow it to make important savings on fuel as well as offering a better product to passengers.
As regards the renewal and continuous improvement of our product, TAM also began to remodel the cabins of its Boeing 777s, eliminating first class and reconfiguring business class in order to significantly improve passengers' travel experience. TAM also joined oneworld which became the global alliance of LATAM Airlines Group. For our customers, this will mean more comfortable travel, increased connectivity and greater opportunities to redeem their points/miles. Another important milestone was the opening of our new VIP lounges in Sao Paulo and Santiago in October 2014 and March 2015, respectively. This took the number of new lounges we have opened in the past 18 months to four, including Bogotá and Buenos Aires.
The significant investments that Brazil made in infrastructure and, particularly, airports prior to the Football World Cup have had a positive long-term impact for that country's airline industry. Thanks to these investments, we were able to move our operations to Terminal 3 at the Guarulhos Airport and Terminal 2 at the Brasilia Airport. These very important milestones will enable us to continue developing connectivity through our hubs, reducing connection times and offering our passengers greater comfort.
Finally, I would like to point out that LAN and TAM were once again recognized by their passengers, taking first and second place, respectively, in the Best South American Airlines prize in the Skytrax World Airline Awards. This prize is regarded as a global barometer of customer satisfaction since it is awarded exclusively on the basis of passengers' opinions.
Having achieved important and tangible progress on numerous fronts during such a challenging year allows us to look to the future with great confidence since we have systematically overcome obstacles and taken important steps towards our companies' integration, fulfilling our goal of not only becoming one of the world's leading airlines but also a company to which our employees are happy to belong.
Mauricio Amaro
Chairman of the Board
LATAM Airlines Group
We are aware that, in our region, the coming years will be complex and challenging, due to slower growth of its economies and important depreciations of its currencies.
Dear shareholders,
The consolidation of LATAM Airlines Group as Latin America's best airline group has been our paramount focus in recent years and, to this end, we have worked consistently and with discipline. Along the way, we have achieved great progress and, although results have been slower in coming than we anticipated, we also know that, looking to the long term, the association between LAN and TAM is the most strategic decision we have made. We also firmly believe that LATAM Airlines Group is the group of airlines best prepared to address adverse scenarios because we have a position in the region that is unique in the world.
All this is the fruit of many years of work and shows us that we are on the right road to achieve our objective of positioning LATAM Airlines Group as one of the world's three most important airline groups by 2018. In order to achieve this goal, we have designed a strategic plan based on critical factors for success that seek to take advantage of our strengths and our great potential.
Our strategy focuses primarily on constantly enhancing our customers' experience during all stages of their journey, seeking always to differentiate ourselves as regards service. In this context, we have approved investments for over US$100 million to boost the use of technology in all our passenger contact points. Our aim is for passengers to be able to manage their travel in a simple, transparent and totally independent manner. Similarly, we are working to migrate to a new single brand as well as to develop a unified culture, product and value proposition, all of which will enable LATAM Airlines Group to be fully perceived as a single airline company.
We believe that, in order to achieve these objectives, the most important element that sets us apart is our people. We have the best human team, a team of people who are passionate about their work and focused on the construction of a common culture, which is the basis of all we do and to which safety, the customer, collaboration as a team and excellence in every sphere are central. This is the way in which we have harnessed our organization to the goal of offering our customers distinctive value, consistently surpassing our competitors.
As an organization, we have always worked to be the best option for any one traveling within, to or from South America, constantly striving to expand our connectivity and strengthen our network. There is no other airline group in the world that is present in seven domestic markets in a single continent as is the case of LATAM Airlines Group which, in addition, has regional, international and cargo operations. In order to take advantage of this potential, we have set ourselves the goal of increasing connectivity within South America and strengthening our hubs in the region, particularly Sao Paulo's Guarulhos Airport - the principal gate of entry into South America - as well as Brasilia and Lima.
We have, in addition, redefined our cost structure in a bid to increase our competitiveness and simplify the organization, increasing the flexibility and speed with which we are able to take decisions. The aim is to achieve a reduction of some US$800 million in total costs by 2018 or, in other words, approximately 5% of LATAM Airlines Group's annual expenditure, a saving that is in addition to the efficiency gains achieved through the incorporation of new-technology aircraft. In brief, we aim to work in a simpler manner with a culture of greater austerity.
We are aware that, in our region, the coming years will be complex and challenging, due to slower growth of its economies and important depreciations of its currencies. We are, however, convinced that the strategic plan we have drawn up and are implementing will allow us to successfully achieve our long-term goals, overcoming the difficulties that currently affect our markets and the volatility inherent to the context in which we operate. We know that we cannot be oblivious to the realities of our industry and the region in which we operate. We have, therefore, given priority to proactive risk management, taking into account all our stakeholders, in line with our belief that a broad and integral view of risk and its proper management are key for our long-term success.
Although the integration of LAN and TAM has taken time, we are convinced that the association of these two companies has meant gains for all of us - LAN, TAM and LATAM Airlines Group. As well as thanking our shareholders for the trust they have placed in this administration, I would, therefore, also particularly like to pay tribute to the more than 53,000 people who work in the different countries where we operate. They have given the best of themselves in contributing to the consolidation of this historic project for Latin America's airline industry. And, above all, I would like to invite them to continue working with the same passion and commitment to make LATAM Airlines Group one of the world's three most important airline groups.
Enrique Cueto
CEO of LATAM Airlines Group
LATAM Airlines Group
In 2014, LATAM Airlines Group's member airlines operated a fleet comprised by 327 aircraft with an average age of 6.9 years, being one of the youngest in the industry.
During the year, further progress was achieved on the fleet restructuring plan launched in 2013 to reduce the number of aircraft models operated. This plan, which is the result of a profound analysis of the LATAM's fleet needs after the association between LAN Airlines and TAM and the structural changes that have occurred in the competitive environment, implies that, over the next few years, 39 less efficient planes will be phased out of the fleet and aircraft models will be allocated to the most appropriate markets.
In 2014, LATAM phased out all of its Dash Q400s and Boeing 737s (inherited from the Aires airline in Colombia) as well as seven A330s and three A340s and expects to conclude the phase out of these older models by 2016. As a result, its fleet will comprise the most efficient aircraft available in the market.
In the first quarter of the year, LATAM recognized a provision of US$112 million for estimated penalties related to the anticipated redeliveries and other redelivery expenses expected to be incurred as a result of this fleet restructuring process.
For its short-haul passenger operations - flights on domestic routes and regional routes within South America – the airlines that make up LATAM Airlines Group utilized a fleet of 238 aircraft in 2014.
For its short-haul passenger operations - flights on domestic routes and regional routes within South America – the airlines that make up LATAM Airlines Group utilized a fleet of 238 aircraft in 2014, mainly from the Airbus A320 family, positioning it as one of the world's three largest operators of Airbus planes in the world. In 2014, LATAM incorporated 11 Airbus A321s, the largest model in this family, which is used on the busiest regional routes. This left LATAM with a total of 21 aircraft of this model as of December 2014.
LATAM’s medium-term plan on short haul routes is to have a fleet formed exclusively by aircraft from the A320 family, with a focus on A321s and A320neos, whose use represents significant savings in comparison to A320s. The A320neo is a new option within the A320 family with a more efficient engine and new sharklets implying savings of up to 15% on fuel and a reduction in annual CO2 emissions of 3,600 tons. LATAM has placed orders for 36 A320neos which will be delivered between 2016 and 2018.
For its long-haul passenger operations, the airlines that make up LATAM Airlines Group utilized a fleet of 74 aircraft in 2014, including ten Boeing 787-8 Dreamliners, five of which were incorporated during the year, as part of an order for a total of 32 aircraft of this model for delivery over the next four years. Considered "ecological" and the most efficient of its type, this model is now operated by the Company on almost all its main long-haul routes. In addition to the Company's daily operations from Santiago to Madrid-Frankfurt, New York and Buenos Aires, the Dreamliner began to be utilized on five other routes starting in August: Miami, Punta Cana, Cancun, Mexico City and Sao Paulo. LATAM Airlines Group is the first group of airlines in the region to operate this aircraft model which stands out for characteristics that include its unrivalled performance in regard to fuel consumption, presenting a 12% reduction in costs per ASK as compared to the Boeing 767.
In 2014, LATAM also began retrofitting TAM's Boeing 777s in order to include an improved business class and offer a better product on long-haul routes, mainly to the United States.
In 2014, LATAM also began retrofitting TAM's Boeing 777s in order to include an improved business class and offer a better product on long-haul routes, mainly to the United States. As of December2014, four of these aircraft had been already retrofitted and full retrofit of this fleet is expected to be completed by mid-2015. This process seeks to enhance passengers' travel experience for the next years, while TAM waits to receive a larger critical mass of Airbus A350s. The incorporation of this aircraft model will imply a very important increase in efficiency as compared to existing aircraft in this category, thanks to operating costs that are around 25% lower than those of other aircraft, such as TAM's Airbus A330s, and a significant reduction in CO2 emissions. In 2015, LATAM Airlines Group expects to take delivery of the first Airbus A350 aircraft out of a total order of 27 A350s, which will be a milestone in the step towards a new generation of long-haul aircraft in TAM's fleet.
Overall, the LATAM's constant renewal of its fleet seeks to incorporate the best technology and position it as a leader on efficiency and an increase in capacity through the incorporation of larger models.
As of December 2014, LATAM had a fleet of 15 full dedicated cargo, comprising eleven Boeing 767Fs - two of which have been leased to a cargo operator outside the region since the last quarter of 2014 and one of which was also leased to the same operator in 2015 - and four Boeing 777Fs, the most modern freighters of their type in the industry. The latter have a significant advantage as compared to the B767 freighters since they may transport double capacity but only consume 50% extra fuel.
LATAM's cargo business strategy aims to optimize the use of the bellies of its passenger aicraft and, as a result, implies a gradual reduction in its freighter fleet.
LATAM's global fleet plan envisages commitments for US$1,689 million in 2015 and US$2,343 million in 2016. These will be financed using a combination of financial lease and sale and leaseback (acquisition with subsequent rental).
In 2014, LATAM Airlines Group continued to consolidate the integration of LAN's and TAM's Maintenance, Repair and Overhaul (MRO) installations, a process that began in 2013.
With facilities in Brazil and Chile, the MRO is the unit responsible for heavy maintenance of the LATAM's aircraft and occasionally also provides services to third parties. In Brazil, the facility, located in the São Carlos (SP/Brazil) Technological Center, has an area of 100,000 m² and its own 1,720-meter runway while the Chilean facility, at Santiago's International Airport, has an area of 10,000 m². Services not provided by this unit are outsourced to some of MRO's partners around the world.
LATAM's MRO unit is audited and certified by major international aviation authorities from the United States, Europe, Brazil, Chile, Argentina, Ecuador, Paraguay and Canada as well as other countries for Heavy Maintenance and Components Repair and Overhaul for the Airbus A320 and A330 families, Boeing 767s and 787s, ATR-42/72s and Embraer E-Jet 170/190s. LATAM also has minor capabilities for the repair and overhaul of Airbus A340 and Boeing 777 components.
The facilities located in São Carlos also provide engineering services and have a complete technical training center for the development of LATAM MRO's capabilities as regards human skills.
In 2014, the MRO unit carried out 2.5 million man-hours of work (a 39% increase on 2013), serviced 274 aircraft for LATAM and third parties, provided approximately 60,000 components and performed 15 landing-gear overhauls. In addition, it carried out heavy maintenance for almost 100% of the Company's aircraft from the Airbus A320 and A330 families and covered 75% of its demand for General Component Repair and Overhaul. TAM's external maintenance and repair clients include Azul, Trip, Avianca, the Brazilian Air Force, Embraer, Goodrich and Hamilton Sundstrand.
It is important to note that, in 2011, LATAM embarked on a process of transformation of its MRO area in order to align it with international standards as regards cost, quality, reliability and time. In 2014, in the context of this process, it completed a year without any type of accident at MRO Sao Paulo while MRO Santiago reduced its accident rate by 40%.
In June 2014, LATAM Airlines Group started construction of a modern new maintenance hangar at Miami's international airport. Representing an investment of over US$15.7 million, this will have an area of 9,150 m² and will be its first such facility in the United States. Located in the airport's cargo area, it will provide maintenance services such as daily controls, A checks, engine changes and major repairs for both the passenger and cargo planes of LAN, TAM and the subsidiaries that operate to and from Miami. Changes of components will also take place at the facility since it will serve to store spares, components and aircraft engines to support maintenance services of this type.
