Earnings Call Transcript - LTM Q3 2025

Operator, Operator

Ladies and gentlemen, thank you for joining us, and welcome to the Third Quarter 2025 LATAM Airlines Group Earnings Conference Call. Before I turn the call over to management, I'd like to remind you that certain statements in this presentation and during Q&A may relate to future events and expectations and as such, constitute forward-looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans, objectives and expected performance or guidance are forward-looking statements. These statements are based on a range of assumptions that LATAM believes are reasonable, but are subject to uncertainties and risks that are discussed in detail in the published 20-F 2025 updated guidance, earnings release, financial statements and related CMF and SEC filings. The company's actual results may differ significantly from those projected or suggested in any forward-looking statements due to a variety of factors, which are discussed in detail in our SEC filings. And if there are any members of the press on the call, please note that for the media, this is a listen-only call. I will now hand the conference over to Ricardo Bottas, Chief Financial Officer. Ricardo, please go ahead.

Ricardo Bottas, CFO

Hello, everyone, and good morning. Welcome to our third quarter 2025 conference call, and thank you all for joining us today. My name is Ricardo Bottas, and I am the CFO of LATAM Airlines Group. Here with me is Roberto Alvo, our CEO; Andrés del Valle, Corporate Finance Director; and Tori Creighton, Head of Investor Relations. And we will present our highlights and results for the third quarter. I will hand it over to Roberto to share his opening remarks. Once finished, I will present the key operational and financial figures as well as provide other updates.

Roberto Alvo Milosawlewitsch, CEO

Good morning. Thank you, Ricardo, and thanks to all for being here today. This month, 3 years ago, LATAM emerged from financial restructuring. This period was one of learning, designing and executing. LATAM defined a blueprint that has a collection of essential elements we needed to excel. This blueprint was implemented and is working. The group's network is the most expansive in the region, and our loyalty program is by far the largest and most valued. No one else can connect South America within the region and to the world, reward loyalty and provide choice to customers as LATAM Group can. However, these results are the product of more than a co-branded credit card and a map of routes. At LATAM, we are obsessed with execution. Every day, in every interaction, we strive to be better, to depart on time, standard zero on every flight, to improve on what we do, seek and find cost-saving opportunities for each of our activities, to make sure we deliver what was promised to the customer at every interaction and to provide the care and respect that each one of them deserves as they entrust their journey to LATAM. We have made considerable progress, but are not satisfied. I believe we can do better. Looking forward, we must ensure that we remain disciplined, disciplined in execution and disciplined in controlling costs. At the center of all of this is our people, a group of more than 40,000 employees who care about and love what they do every day. People who believe in what they do and what it represents. They are the engine and the spirit that drives LATAM Group forward, and the most important commitment is to them, making sure that they feel that every day it is worth being part of the LATAM family. As we look into the future, I'm confident that we can continue the journey of improvement and deliver on purpose that we have, which is elevating every single journey. Thank you very much. Now back to Ricardo for a description of how we are achieving profitable growth, improving the quality of our traffic, keeping high customer satisfaction and maintaining our cost under control.

Ricardo Bottas, CFO

Thank you, Roberto. Please join me on Slide 3. This quarter, LATAM Group continues to show the strength of its strategy, its unmatched network footprint, focus on disciplined operational and commercial execution as well as product improvement. In terms of operations, LATAM Group transported over 22.9 million passengers, reinforcing its role as the leading airline group in South America. Capacity grew by 9.3% year-over-year with healthy load factors of 85.4% on a consolidated basis. The group is seeing consistently high levels of customer satisfaction, increased customer preference, especially in the premium segment and sustained customer loyalty. LATAM translated this operational performance into financial results, driven by an 8.4% increase in passenger unit revenues while keeping unit costs broadly stable. Adjusted operating margin expanded to 18.1%, while adjusted EBITDAR reached $1.15 billion during the quarter, and net income totaling $379 million. During this quarter, LATAM executed its second share repurchase program for a total of $433 million with the company's disciplined approach to capital allocation. During this quarter, LATAM Airlines Group signed a major agreement for an acquisition of up to 74 Embraer E2 aircraft. Moving to the next slide about the fleet and this acquisition and the transaction. The E2 will indeed enhance LATAM Group affiliates' regional connectivity in South America and represent an opportunity for our network to open up to 35 new destinations. They also offer a 30% improvement in fuel efficiency per seat compared to previous generation aircraft, reinforcing the group's commitment to sustainability and cost discipline. In total, LATAM Group will receive 24 E2s with 12 deliveries scheduled for the fourth quarter of 2026 and the remaining 12, in 2027. With this addition, LATAM's order book now exceeds 140 aircraft through 2030, supporting the group's long-term growth and fleet modernization strategy. Initial deliveries are set to begin with LATAM Airlines Brazil, which will be the first to deploy these aircraft in its network. In Brazil, this aircraft will enhance capillarity across the country, enabling LATAM Group to expand into under-penetrated regions and destinations that are currently not served by the group. Over time and subject to market conditions and strategic evaluations, other LATAM affiliates may also incorporate the E2s into their operations. Still on this slide, we expect to receive an additional 8 aircraft on this fourth quarter of 2025. And also, we project to receive additional 44 aircraft next year, including the E2s. Let's move to the following slide, Slide 5. As mentioned earlier, LATAM Group delivered another quarter of strong traffic performance, transporting more than almost 23 million passengers with a consolidated load factor of 85.4%. LATAM has been committed to profitable growth at the consolidated level, passenger RASK increased by 8.4% year-over-year in U.S. dollars, a result that reflects the strength of LATAM Group's strategy and execution. A clear example of this is Brazil, where LATAM Airlines Brazil grew capacity by over 12% year-over-year. With this expansion, customer preference remained strong, and the load factor even increased by 2.2 percentage points. During the quarter, the Brazilian affiliate launched 6 new domestic routes, further supporting the strategy to deepen its presence and enhance connectivity in this market. In the Spanish-speaking countries, LATAM Group's affiliates have also improved performance during this quarter with passenger RASK increasing 18% year-over-year. In particular, as compared to 2024, LATAM Airlines Colombia experienced a stable domestic industry capacity, also seeing healthy demand. Demand is in the other Spanish-speaking affiliates domestic markets also remained healthy, except for Chile, where industry traffic figures are stable against last year. However, the focus on delivery execution and a higher premium product offering helped fully offset these effects. Meanwhile, the international segment continued to operate with high load factors, reflecting the relevance of the network and LATAM Group's role as the main connector in the region with a diversified network. Altogether, the unit revenues, even in the context of increased capacity reflect the effectiveness of the group's commercial and customer strategy. It is the result of offering the right product in the right markets while executing with discipline. Looking ahead, LATAM Group continues to focus on maintaining a sustained trajectory of discipline and profitable growth. The group is also focused on reaching the goal of high single-digit consolidated capacity growth next year, compared to 2025, supported by an ongoing focus on efficiency, a relevant fleet delivery schedule and a margin preservation on top of a healthy demand environment. Moving to the next slide, Slide 6, regarding our value proposition and customer experience. LATAM Group remains committed to deliver a superior travel experience and increasing customer preference. During the quarter, the group continued advancing initiatives. The new Lima Lounge was inaugurated at recently opened Jorge Chávez International Airport, one of the group's main hubs. This new space offers a modern and comfortable environment and comes in addition to the signature check-in area that was previously inaugurated at the same terminal, both part of a strategy to elevate the end-to-end experience for premium travelers and LATAM Pass members. Looking ahead, LATAM Group also announced the launch of its new Premium Comfort Class, which will begin rolling out in 2027 on long-haul routes. This product reflects a commitment to offering more choices to our passengers for how they want to fly. The new class will be an additional option other than the existing economy and business class cabins, for passengers seeking more space and personalized service. Finally, LATAM Group was once again recognized by APEX as a Five-Star Global Airline for 2026. This marks the fourth consecutive year the group has received these distinctions based on independent passenger feedback data from over 1 million flights worldwide. It's a testament to the team's dedication and to the impact of the investments being made across the network. In addition, LATAM Cargo Group was named Air Cargo Airline of the Year by Air Cargo News, becoming the only South American carrier to win in any category, further underscoring the group's excellence across all segments of the business. Together, these efforts underscore LATAM Group's dedication to continuous improvement and reinforce its strategic commitment to quality, consistency and the passenger experience, a focus that continues to support more passengers choosing to fly with LATAM and the group's ability to capture premium revenues. Next, let's move to the Slide 7. I will now walk you through the financial results for the third quarter, a period in which LATAM once again reflects a solid execution. Total revenues reached $3.9 billion, an increase of 17.3% year-over-year, supported by growth across both Passenger and Cargo segments. Passenger revenue rose by 18.5% with revenues from premium travelers also showing relevant growth, increasing by more than 15% compared to the same period last year, while Cargo revenues grew by 6.3%. On the cost side, total adjusted expenses ex-fuel increased by 21% year-over-year, driven mainly by increased operations, especially international and also a lower base of comparison due to the one-offs impact in the same period of last year. This increase was partially offset by a 4.7% year-over-year decrease in jet fuel costs. That said, on the unit cost front, LATAM upheld its firm commitment to cost efficiency, a key pillar of its strategy. As a result, LATAM delivered an adjusted operating margin of 18.1%, testament to LATAM's operational excellence through profitable growth while also holding its cost control performance and advantage. Again, a nonnegotiable and relevant part of LATAM's strategy. Lastly, net income for the quarter totaled $379 million, up 26% year-over-year, even after $105 million negative non-operational income statement impact related to the liability management exercise completed in last July, as disclosed to the market before. Net income for the 9 months was $976 million, 38% higher than the same period of last year. Now moving to the Slide 8. As you can see on this slide, LATAM operational performance this quarter is a result of consistent and disciplined execution of the group's strategy over the past several years. Since 2019, LATAM has steadily expanded its adjusted operating margin, rising from 7.1%, to 18.1% in the third quarter of 2025. At the same time, LATAM has maintained tight control of its cost base. Adjusted passenger CASK ex-fuel has been stable between $0.042 and $0.043 on the last 12 months basis, despite inflationary pressures and higher activity. This disciplined approach to cost has enabled LATAM to consistently grow margins while preserving efficiency, in order to continue delivering sustainable and profitable growth going forward. With regard to cash generation, as shown on Slide 9. In the third quarter, LATAM delivered strong adjusted operating cash flow generation, reaching $859 million. Interest payments remaining contained at $52 million, mainly as a result of the debt refinancing executed in 2024, which enabled LATAM's significant reduction of the cost of its non-fleet financial liabilities, which continue to translate into meaningful interest savings and overall cost of capital reduction. After both 2024 and 2025, refinance execution, combined interest payment savings expected for next year amount to $151 million compared to last year. And finally, during the quarter, LATAM executed its second share repurchase program for a total of $433 million. This reflects the group's capital allocation strategy and discipline. Let's move to Slide 10 to discuss LATAM's capital structure. LATAM ended the third quarter with a liquidity level of 25.8%, slightly above the upper end of the financial policy range, the execution of the share repurchase program this quarter brought liquidity more in line with the target levels. LATAM ended the quarter with an adjusted net leverage ratio of 1.5x, aligned with the full year guidance and well below the cap from the financial policy. A strong capital structure is not just a financial metric for LATAM. It's a strategic asset. It gives the group the flexibility to pursue growth where it's most profitable, return capital to shareholders when appropriate and manage the most accretive capital structure. This financial strength, combined with assets and cost advantage set LATAM apart from its peers and remains central to its ability to compete, adapt and lead into the region over the long term. Please join me on Slide 11. Given this solid year-to-date performance, supported by continued customer preference and the disciplined execution of a strategy centered on profitable growth, cost efficiency, and financial strength, LATAM has updated its full year 2025 guidance. Consolidated capacity is projected to remain broadly in line with previous estimates, while revenues are expected to be higher within a tighter range. In terms of margins, adjusted EBITDAR guidance has also been refined to be between $4 billion and $4.1 billion, which is close to 9% higher than the previous guidance. The updated range reflects a more constructive outlook now positioned higher than the previous estimate. Adjusted passenger CASK ex-fuel was updated to be between $4.35 and $4.40, mainly due to FX variation in this period. Liquidity was also updated after the execution of the share repurchase program, and we are maintaining the same estimate to be above $4 billion by the end of this year. Mainly considering debt adjusted EBITDAR improvement in cash generation, the forecasted leverage for year-end is now at 1.4x. For next year, as I mentioned before, the group is focused on achieving high single-digit capacity growth compared to 2025, supported by our ongoing dedication to efficiency and margin preservation. Finally, before we move to the Q&A, I'd like to remind you that LATAM will be hosting an Investor Day in New York on December 9, 2025. We invite you to tune into the live webcast for these events. With that, we now open the line for your questions.

Operator, Operator

Your first question comes from the line of Guilherme Mendes with JPMorgan.

Guilherme Mendes, Analyst

Congrats on another strong results. My question is on the international front. When compared to Brazil domestic and Spanish-speaking countries, it looks like the past performance was relatively weaker, although still growing on a year-over-year basis. Can you share more details on how international is tracking, maybe on a per-region basis, which other routes have been pressuring the overall results and which are doing relatively better?

Roberto Alvo Milosawlewitsch, CEO

So we have seen, in general, stable and healthy demand in most of the international segments. I would say that South America to U.S. is a little bit softer than what we used to see in the last few months. And this is, in our view, linked to people probably avoiding going to the U.S. and moving themselves a little bit into other regions. Also the northern part of South America, the regional traffic, which is international flights on the northern part, is a little bit softer as well. But in general, nothing that we have seen that is worrisome or concerning with respect to the level and the quality of the demand. So in that sense, we remain confident on the prospects for the remainder of the year.

Guilherme Mendes, Analyst

Very clear, Roberto. When you say softer into the U.S., is it more leisure related or even corporate related?

Roberto Alvo Milosawlewitsch, CEO

No. This is more leisure related.

Operator, Operator

Your next question comes from the line of Mike Linenberg with Deutsche Bank.

Michael Linenberg, Analyst

I have a couple here. I guess, Roberto, can you just update us on this measure in Brazil to potentially force airlines to offer up a free bag? Is that just domestic? Is that domestic and international? And where is that in the legislative process right now?

Roberto Alvo Milosawlewitsch, CEO

A few weeks ago, a couple of weeks ago, the lower chamber in Brazil passed a law to allow basically passengers to carry a bag without being charged and also select a seat without charge on seats that have no distinction in terms of space. This, as the law was passed, was for both domestic and international flights, it affects eventually therefore, domestic and international carriers into Brazil. The law needs to go to the Senate. It has not been presented at the Senate floor at this point in time, and we have no clarity if that would happen and when it will happen. So for the time being, that still has the second step. Ultimately, presidential veto is also something that the Brazilian constitution allows for laws like this. So we will see.

Michael Linenberg, Analyst

The reason I ask about international issues is that while domestic flights are one thing, international flights from a U.S. perspective might be seen as facing potential taxes or additional costs that could be considered unilateral, potentially violating bilateral agreements. I'm curious how this will be implemented internationally since carriers in different countries have various pricing strategies and are protected by the bilateral agreements established between Brazil and those nations.

Roberto Alvo Milosawlewitsch, CEO

Yes, I completely agree with you, Michael. LATAM does not support the passing of the law, and we, along with IATA and ABEAR in Brazil, have been clearly explaining the impact of this potential measure. This is not good for the airline industry in Brazil and could lead to higher fares for passengers flying to or from Brazil. At an industry level, we are making significant efforts to ensure that everyone understands the impact this has on traffic and on the industry, and we are confident that this would not be a positive measure for us all.

Michael Linenberg, Analyst

Great. My second question is about capital allocation. This is Roberto, and I’m asking you or Ricardo how you view this from a long-term perspective. You've managed to maintain a nice balance. The dividend is statutory, but you continue to pay it. You've also been reducing debt and buying back stock. As we look towards the future, can we expect regular reductions in shares outstanding, or was that more of an opportunistic move on your part?

Roberto Alvo Milosawlewitsch, CEO

Thanks, Mike. As we consider capitalization, it's important to prioritize the development of the business and our growth opportunities. This will always take precedence over other decisions. At this time, we feel we have implemented a balanced mix of initiatives and are very close to achieving our financial policy targets. We are satisfied with what we accomplished in 2025. Moving forward, this will be a decision made by the Board. The dividend payout in Chile is determined at a shareholder meeting, which is scheduled for April. However, all options for capital allocation and growth investments are still on the table. In the coming months, the company will certainly communicate with the market about our progress, depending on our results and the regional situation along with any potential opportunities.

Operator, Operator

Your next question comes from the line of Gabriel Rezende with Itau BBA.

Gabriel Rezende, Analyst

Congrats on these very strong results. I would like to follow up on your comments regarding the investments and the efforts you have been putting into bringing a more premium experience to the customers. And just trying to understand how relevant it has been so far in terms of your revenue growth as well as your profitability. So if you could maybe provide some color on how relevant these premium revenue are at this point? You mentioned that it has grown by 15% year-on-year. So just trying to understand how much it represents out of the total passenger revenue at this point? And how much could it represent in the future as you bring more efforts into this?

Roberto Alvo Milosawlewitsch, CEO

Thank you for the question. First, it's important to highlight what we're experiencing. Premium revenue is growing faster than our capacity. A significant part of the improvement we see in RASK for Spanish-speaking domestic Brazil, and to some degree, internationally, is due to a shift in our mix, leading to a larger share of premium revenue from these areas. This includes both corporate and high leisure revenue. This trend is influenced by two main factors. Most importantly, our exceptional execution and care in every customer interaction. Additionally, we've made improvements to our products, as highlighted in the presentation, such as the Lima Lounge and premium economy offerings in international markets. By enhancing our product offering, we've focused on improving the customer experience. This has resulted in a willingness to pay from customers that we were not fully capitalizing on before, likely because our product was not meeting their expectations. Now, we are clearly seeing the positive impact this has on our results.

Operator, Operator

Our next question comes from Felipe Ballevona with Santander.

Felipe Ballevona, Analyst

Can you hear me?

Roberto Alvo Milosawlewitsch, CEO

Yes, we can.

Felipe Ballevona, Analyst

Great. Awesome. So well, first of all, congrats on the strong results. I have a couple of questions here. First, following actually on the first question of the Q&A. What was the reason behind the growth slowdown in international traffic recorded in October? Is international traffic being dragged down by Colombia? The last couple of data points of the IDOCB that have showed a slowdown in your international, not only in the domestic as has been the case for the previous months, but also in the international front. And also my second question, if you have any news regarding a potential buyback?

Roberto Alvo Milosawlewitsch, CEO

Yes. Felipe, so first of all, our international Colombia operation is very small as compared to the total international traffic. We have not seen, in particular, an impact on international travel in and out of Colombia, and that it's very unsubstantial to the size of our traffic, particularly out of Brazil and secondly, Chile and then Peru. No, I guess this is a function, as I explained in the beginning, softer demand into the U.S., particularly on leisure traffic. We believe that this is linked to people probably deciding to go elsewhere and probably spending more time within their countries and to the region. But we don't see this as a fundamental slowdown in demand. It's probably assigned to more external factors than that. So that's the main reason, okay? Having said that, do remember that we expect that our ASK growth for the whole of 2025 is going to be around 10% to 10.5% increase in capacity, which is a significant increase in capacity, and that's a reflection of a good level of demand that we see to operate this.

Felipe Ballevona, Analyst

That's very good color. And do you have any news regarding a potential buyback or...

Roberto Alvo Milosawlewitsch, CEO

Sorry.

Felipe Ballevona, Analyst

You're fine.

Roberto Alvo Milosawlewitsch, CEO

As I mentioned earlier, we are currently close to our financial policy targets. Moving forward, we'll wait to see what the Board decides. Remember that the company has various options for capital allocation, and our top priority will always be to grow the business. Any surplus we deem appropriate for shareholders will be addressed using several available methods. So please stay tuned for updates.

Operator, Operator

Your next question comes from the line of Jens Spiess with Morgan Stanley.

Jens Spiess, Analyst

Congratulations on the strong results. Can you provide some context on next year, specifically how the order book and booking curve are looking? Additionally, what growth do you anticipate in terms of ASKs for next year based on your fleet plan? It would also be helpful if you could remind us how many leases are expiring next year. Thank you.

Roberto Alvo Milosawlewitsch, CEO

Yes, Jens. As we mentioned in the press release and Ricardo stated, we are aiming for high single-digit ASK growth for 2026. We will provide more detailed guidance on this in a few weeks. Regarding your first question about the fleet, as shown on Slide 4 of the presentation, we expect to receive 41 A320 family aircraft, 7 E2 aircraft, and 3 wide-bodies. We have relatively few leases, and while I don't have the exact number right now, we do have the option to extend them if needed. Our expectation is to end the year with a total fleet of just over 400 aircraft, around 410. This is also noted in the press release. Additionally, I want to assure you that we have the fleet necessary to support our expected growth for next year, and we don’t anticipate making changes to our fleet plan based on our capacity needs. Regarding the booking curve for the beginning of the year, it’s still very early, especially in the domestic markets, where booked seats are currently low. However, the initial trends for the first couple of months align with what we observed in the third quarter and what we expect for the remainder of the year.

Operator, Operator

Your next question comes from the line of Ewald Stark with BICE.

Ewald Stark Bittencourt, Analyst

I want to know if you can provide any color behind what is driving the lower percentage of hedged fuel during this quarter? Especially I would like to focus on, is anything on booking going forward that is driving this lower percentage of hedged fuel, or maybe you're looking something different about forecast of oil?

Unknown Executive, Unidentified

Yes, thanks for the question. If you look at the press release, it's nothing that different for what we usually do. You have about a 47% for Q4 of this year and then 33% for Q1. And of course, as soon as we approach the next quarters, we will have, of course, consistent with the policy, an increase the fuel hedge. But I wouldn't say that this is any different than what you have seen in the past. It's a very standard, I think, coverage that we have today for fuel price, nothing that really deviates from the policy.

Ewald Stark Bittencourt, Analyst

Financial statements say that you have a 26% hedge fuel for the next 12 months. Starting from first quarter of 2026, every quarter is below 30%.

Unknown Executive, Unidentified

Yes. If you examine the details in the earnings release, you'll find more specific information. The financials are based on a weighted average looking forward, and here you can see the actual percentages covered for each quarter: 47% for Q4 and 33% for Q1. This is what you're observing in the financials. As of November 14, 2025, this information is more current. While the financials are referenced as of September 30, this reflects the latest view of the current portfolio as of November 14.

Operator, Operator

Your next question comes from the line of Guilherme Mendes with JPMorgan.

Guilherme Mendes, Analyst

Can you share some potential expected impact for the fourth quarter regarding the pilot strike in Chile? I understand it should be material, but I just wanted to hear your thoughts on what we could expect from this negotiation.

Roberto Alvo Milosawlewitsch, CEO

Thank you, Guilherme. At this point in time, we have no clarity of the potential impact. So we will update that if necessary at an appropriate time.

Operator, Operator

There are no further questions at this time. I will now turn the call back to Ricardo Bottas for closing remarks.

Ricardo Bottas, CFO

I would like to thank you all for participating in today's call and remind you that we will have our Investor Day again on December 9. So we would love to have all of you participating on that opportunity to get more information from the company and the additional updates. Thank you all, and have a good day.

Operator, Operator

This concludes today's call. Thank you for attending. You may now disconnect.