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LATAM Airlines Group S.A. (NYSE:LFL)

Q2 2013 Earnings Call

August 21, 2013 11:00 am ET

Executives

Gisela Escobar

Andrés Osorio - Chief Financial Officer

Roberto Alvo Milosawlewitsch - Executive Vice-President of Corporate Functions

Cláudia Sender - Vice President of Sales and Marketing, Director and Chief Executive Officer of TAM Airlines

Jorge Vilches

Analysts

James D. Parker - Raymond James & Associates, Inc., Research Division

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Richa Talwar - Deutsche Bank AG, Research Division

Eduardo Siffert Couto - Morgan Stanley, Research Division

Kevin Kaznica

Brian Foster

Operator

Good day, everyone, and welcome to LATAM Airlines Group earnings release conference call. Just a reminder, this conference is being recorded. LATAM Airlines Group earnings release for the period was distributed on Tuesday, August 20. If you have not received it, you can find it in our website at www.latamairlinesgroup.net in the Investor Relations section.

At this time, I would like to point out that statements regarding the company's business outlook and anticipated financial and operating results constitute forward-looking comments. These expectations are highly dependent on the economy, the airline industry and the international market. Therefore, they are subject to change.

Now it is my pleasure to turn the call over to Ms. Gisela Escobar, Investor Relations Director of LATAM Airlines Group. Ms. Escobar, please begin.

Gisela Escobar

Thank you, operator. Good morning, everyone, and thanks very much for joining us in -- on the call this morning. I'd like to introduce the people that we have here in the room. First, Mr. Andrés Osorio. He's the new CFO of LATAM Airlines Group as of this month.

Andrés Osorio

Hi, everybody. Glad to be with you today.

Gisela Escobar

And we also have joining us Mr. Roberto Alvo, who's the Chief Corporate Officer of LATAM Airlines; and Mr. Tomas Silva from the Cargo division; Andrés del Valle from the Finance Department. And joining us from Brazil, we have Cláudia Sender, the CEO of TAM Linhas Aéreas; and Jorge Vilches, from the International Long-haul Passenger Operations.

Before we go through the brief presentation that is on our website, I would like to turn the call over to Roberto Alvo, the Chief Corporate Officer, for some introductory remarks.

Roberto Alvo Milosawlewitsch

Thank you, Gisela. Good morning to everyone. So before going to presentation, I'd like just to give you a few remarks. First of all, I think it's important to mark that we have completed our first anniversary of the merger, and we're very satisfied with the work we've done in the last 12 months. We've significantly improved our operating margins as compared to second quarter of last year on a pro forma basis in more than 500 basis points, which we believe is a substantial change with respect to the company's operation on a pro forma basis as of last year.

In particular, in the case of domestic Brazil, we have made a very significant improvement in our operating margins. We have significantly reduced our capacity. We have increased our load factors by more than 9 percentage points as compared to last -- second quarter last year, and we have been able to increase our revenue per ASK in local currency in Brazilian reals in more than 14%. We've been able to achieve this despite a depreciation of the Brazilian real of 5.3% against the dollar as compared to the second quarter of last year.

In international business, there are 2 important milestones we have achieved in this time. We're doing a strong optimization of capacity in both LAN and TAM, in particular with canceled flights from Rio de Janeiro to Europe in order to strengthen our presence in the hub of São Paulo, which is the main hub for regional and local traffic in South America. And the changes in capacity in LAN are enabling us to make substantial improvements in cost and product in TAM by replacing all A330s that the company has operated for more than 10 years by 767s that are made available by LAN. We believe that this will improve significantly our strategic positioning out of Brazil. These 767 airplanes have full-flat, business-class seats, so our improvement in product is also very substantial.

In addition to that international business, another very important step towards strengthening our international presence out of Brazil is the implementation of the co-chair agreement between TAM and American Airlines, which came into effect last week. This will enable us to connect more than 50 destinations in the U.S. from the cities that TAM currently operates in the East Coast, mainly Miami and New York. TAM has a strong presence to the United States. More than 30% of the capacity of the long-haul business of TAM is to the East Coast of the United States.

At the same time, from an organizational perspective, we have advanced significant integration. Today, most of the corporate functions of the company are fully integrated as well as the commercial areas of both cargo and international passenger business. In that sense, the company in these areas is working as a single combined entity. And we have also met our synergy targets for the first 12 months after the merger, that actually were slightly higher than what we anticipated last year when we announced our synergies before the merger.

On the fleet side, the important changes in capacity have made us change our fleet plan. And we've been able to adjust to the new reality in capacity, and we have decreased our commitment in fleet for -- by more than $1 billion in the next 30 months, while at the same time, we have retained significant capacity flexibility in order to adjust or as the company changes or sees new opportunities. The flexibility we have been able to attain for the next 2 years gives us the opportunity to vary our capacity between 3 and 6 percentage points per year on both single-aisle and twin-aisle operations.

In summary, I think we believe we have completed significant milestones in these 12 months, both on an operating level as well as in the -- from an organizational perspective. We feel that we've built a solid platform for development going forward, and thus, we expect to see a more predictable and stable operation in the future.

Finally, I'd like to remark one more thing. We believe that the high complexity and the relation of the many businesses of LATAM make difficult to follow our trends and results. In this context, we're working in increasing and be providing better information so that the company can be better understood by the analysts from the market. And as of this quarter, we'll -- we've included operational margin guidance for full year operations of consolidated operations of the company, LATAM. And we'll keep on providing operational guidance for the years coming for -- in the future.

Finally, in a separated note, I'd like to refer to an event that happened yesterday night. Yesterday evening, LAN Argentina S.A., our subsidiary that operates domestic international flights from Argentina, was notified by the national airport agency of Argentina, the ORSNA, that it must vacate the maintenance premises it operates at the Aeroparque Jorge Newbery Airport in Buenos Aires within 10 calendar days and unilaterally anticipated the expiry of that contract, which we have with the airport concession company, Aeropuertos Argentina 2000, that was signed in 2008 in July, and in accordance with its terms, expired or expires in July 2023.

Even though it's early to evaluate the impact of the measure, we believe that the decision is illegitimate and that it -- and that we will evaluate taking every legal action necessary to restate our contracts and our rights to a full and complete effectiveness. This is not an isolated action but rather one that seems to be in line with an increasing level of actions against us and damaging our operations in Argentina. We will report on the effect of the company's financials and operations as soon as we complete our assessment of the event. And in the meantime, we can assure to our customers in Argentina that LAN Argentina will take every and all actions that are necessary to continue to provide as seamless a service as possible, and we can, we -- given the circumstances to every passenger. The measure adopted impacts only domestic operations in Argentina out of the airport of Aeroparque and will not affect international operations to and from Argentina on either LAN Argentina or the other airlines that operate in the LATAM Airlines Group.

Thank you very much. With that, I pass to you, Gisela, for the presentation.

Gisela Escobar

Thank you. Now we will go through the slides that are on the website. If you turn to Slide #3, you can see a summary of our results for this second quarter 2013 as compared to the second quarter pro forma numbers for 2012.

During this quarter, we are happy to show very strong operational improvements despite the fact that the second quarter is seasonally the weakest period of the year and also despite the fact that results were impacted by a 5.3% average depreciation of the Brazilian currency as compared to the U.S. dollar.

As a result, operating margins reached 1.3%, $39 million at the EBIT level as compared to a $117 million loss on a pro forma basis in the second quarter of 2012. EBITDAR margins for the quarter reached 12.4% as compared to 8% in the second quarter of 2012.

It's important to note that at the bottom line level, our net income was impacted negatively by the depreciation of the Brazilian currency in June as compared to the close of the previous quarter in March of 2013. That depreciation was 10%, and it has an impact that is nonoperating and noncash on our balance sheet accounts. That FX loss this quarter amounted to $360 million and resulted in a net income that -- or a net loss for the company of $330 million for the second quarter.

If you turn to Slide 4, you'll see the main variations in our operating margin during this quarter. You can see that we had yield declines that amounted to 3% in the passenger business and over 1% in the cargo business. That was partly offset by load factor improvements of about 2 points in the passenger business. And in addition to that, we saw the positive impact of a decline in fuel prices, which declined almost 10% in the second quarter as compared to the same period of 2012, and a series of efficiency initiatives, both in terms of fuel consumption as well as other efficiency initiatives related to the synergies from the merger with TAM.

On the cost side, it's also important to note that we are -- that the depreciation of the Brazilian real has a positive effect on the cost of items denominated in real.

Turning to Slide #5. You can see a summary of the variations in our passenger operations. These are variations in total passenger operations for the consolidated group. Passenger capacity overall declined 0.6% in the quarter. Passenger traffic showed an increase of almost 2%. As a result, load factors overall reached 79% for the quarter.

Yields were slightly down by 3.2%. Here again, we have the impact of the depreciation of the Brazilian currency on the revenues of the domestic Brazil operations. And as a result, revenue per ASK declined by 0.7% as compared to the second quarter last year.

Slide #6. You can see the distribution of our passenger capacity. We continue to have a very diversified breakdown in terms of our total passenger operations. Our growth or our 0.6% decline in total ASKs was mainly driven by an 11.6% decline in Brazilian domestic routes. This was offset by an increase of about 18% in the Chile domestic and Peru domestic operations, which is where we saw the most capacity growth and a slight increase of 3.6% in capacity on international routes, both long-haul and regional.

Regarding where we are at in terms of the strategy of our international passenger operations, the main focuses of this operation is a rationalization of the international passenger operations as we integrate the operations of LAN and TAM. And as Roberto already mentioned at the beginning, we have been focusing on reducing capacity from Brazil, especially from Rio, on long-haul routes to Europe and focusing on consolidating our capacity at the São Paulo hub at Guarulhos Airport.

In terms of fleet, we have been making certain changes. Specifically to the TAM long-haul fleet, we have been grounding the oldest of the Airbus A320 aircraft. We have 3...

Roberto Alvo Milosawlewitsch

A330.

Gisela Escobar

A330 aircraft, sorry. We have 3 of these aircraft grounded as of June and expect to eventually reach 10 of these aircraft grounded that are also in the process of being sold. And we have replaced some of that reduction with the 767 aircraft from LAN that are going to TAM to be operated by TAM. These aircraft, the 767s, have a significantly lower cost per ASK as compared to the A330s and also allow us to offer an improved product to our customers since they have the full-flat, business-class configuration.

We also want to highlight the importance of the co-chair agreement that TAM has signed with American Airlines. This is an agreement that we had already mentioned in previous calls but that is now being marketed as of last week. And it's very significant in terms of allowing TAM to provide improved connectivity from the destinations it operates in the U.S. So passengers now will be able to connect to up to 50 destinations in the U.S. from the TAM gateways in North America, which are basically Miami and New York and also Orlando.

Regarding the Brazil domestic operation on the next slide, we continue with the strategy in this business unit that we have discussed already in the past. We continue focused on reducing capacity. We have shown approximately an 11% reduction in ASKs at June 2012 as compared to -- at June 2013 as compared to June 2012.

This, together with a much better segmentation of the market, has allowed for a significant improvement in load factors that has been between 9 and 13 percentage points in the past 4 quarters. Our load factors for the second quarter reached 78%. Our load factors in July, which we already published, were well over 80%. And this has allowed us to show an improvement in revenue per ASK of over 14% in Brazilian reals as compared to the previous year. This improvement is less, obviously, when we look at it in U.S. dollars because of the depreciation of the Brazilian currency. But it's still a positive variation as compared to the second quarter of 2012 in U.S. dollar terms.

Turning to the next slide, to talk a little bit about the cargo operations. During the quarter, we saw about a 3% increase in cargo capacity and a 3.3% increase in cargo traffic. This increase was in part driven by delayed seasonal demand as compared to the second quarter last year. And that was offset in part by the continued trend of relatively weak demand on routes into Latin America, especially Brazil. On the yields side, we've seen a decline of about 1.5% in terms of cargo yields, basically resulting from increased competitive pressures that we continue to see, both from regional cargo operators as well as from international cargo operators.

Now despite this challenging environment that we've been operating in, in the cargo business, we continue to focus on certain very important initiatives and basically in order to reaffirm the business model that LAN has historically had of integrating the cargo and passenger operations and maximizing the utilization of the belly capacity of the company's long-haul aircraft. So the belly, which now represents about 50% of our total cargo capacity, is the main focus of the cargo operations. We also are focusing on new opportunities in the domestic Brazil cargo operations with better integrating the freighter operations that LAN had with the belly operations that TAM operated. We are focusing on shorter-term operational and cost efficiencies and optimizing the operations with the company's dedicated freighter fleet.

Regarding the synergies from the merger, these synergies are on track. We continue to expect to achieve the $600 million to $700 million at an EBITDA level by the fourth year after the merger, which is June of 2016. During the first 12 months since the merger, we have estimated that merger synergies reached about $230 million in terms of the P&L impact. This is before merger costs, so onetime merger costs reaching approximately $100 million over this same period. And the main cost synergies are detailed on the -- both cost and revenue synergies are detailed on the slide and basically have to do, on the cargo side, with integrating the cargo operations of LAN and TAM and maximizing the utilization of belly capacity; on the passenger side, by enhancing the connectivity, by synchronizing the networks of LAN and TAM, as well as sharing best practices; and on the cost side, by a series of contract renegotiations and procurement initiatives as well as other efficiency initiatives and best practice sharing.

Now with -- the next couple of slides, basically, are to explain the impact on our financial results of the exposure to the Brazilian currency. As you can see on this slide, in terms of our operating exposure, we have about 35% of total LATAM revenues that are denominated in Brazilian reals and approximately 27% of the overall costs of the company denominated in real. So this means a gap of about 8 points that creates, obviously, a negative impact when we see a depreciation of the Brazilian currency versus the U.S. dollar.

Over -- we have a series of initiatives that are focused on trying to manage this operating exposure, basically by trying to increase U.S. dollar-denominated sales in the Brazil operations, for example, as well as by increasing the percentage of costs that are denominated or indexed to the Brazilian real.

We have already been able to reduce some of this exposure. Over the last 12 months since the merger, we estimate that this exposure has been reduced by approximately $100 million...

Unknown Executive

Per year.

Gisela Escobar

A year.

Now on the balance sheet, and this is something that we have also been discussing since the beginning of the merger, since a year ago basically. The balance sheet exposure is generated because on the TAM balance sheet, the assets are denominated in Brazilian reals, and liabilities are denominated in U.S. dollars. Therefore, we see a negative impact that is noncash and that is recognized as a non-operating impact but that still generates significant volatility at a net income level.

This exposure on the TAM balance sheet was approximately $4 billion on day 1 of the merger in the second quarter of 2012. And we have certain initiatives in order to reduce that exposure that are already well advanced. And as you can see on the slide, we've reduced the exposure to approximately $2.4 billion by June of this year. That means that the volatility in our income statement is much less and we expect to continue to reduce this exposure and to completely eliminate it by June of 2014 or mid-2014. Basically, this plan entails moving aircraft from the TAM balance sheet to the balance sheet of LATAM Airlines Group where the functional currency is the U.S. dollar.

Regarding the company's fleet plan, you can see on the next slide, our fleet plan at year end for the next 3 years, we expect to end 2013 with 327 aircraft, the same number that we had at the end of 2012; for 2014, a slight reduction in total number of aircraft; and for 2015, 334 aircraft. We want to highlight that we have been working hard on modifying this CapEx plan and our fleet deliveries over the next few years, basically as a result of our strategies in both the domestic and international passenger businesses and also as a result of the macro environment in general in the region. We believe that it's very important for the company to have a conservative fleet plan and also a fleet plan that maintains a certain degree of flexibility each year in order to adjust ASK growth as necessary.

You can see on the next slide how we have varied our fleet commitments as compared to the fleet plans that we had on day 1 of the merger. Fleet commitments in our prior fleet plan as at June of 2012, for the next 3 years was $6.1 billion. Today, we have reduced the net fleet deliveries in 21 aircraft and therefore reduced our total fleet commitments in $1.1 billion. In addition to that, we have returned or plan to return a certain number of aircraft and to sell also certain aircraft, for example, the A330s. There's 10 A330s that we mentioned previously, and this also has a positive impact when you look at the company's adjusted net debt. If you add these 2 items together, the total impact on adjusted net debt, the total reduction would be $2.5 billion over this 3-year period as compared to what we had at June of 2012.

Finally, we are -- we want to share the guidance that we have for year end of 2013 as compared to 2012. On the ASK front, in our passenger operations, we expect total passenger capacity this year to grow by between 0 and 2%. This breaks down as shown on the slide. The international passenger operations grow in capacity between 2% and 4%. Domestic Brazil operations -- in that market, we expect to reduce capacity by between 7% and 9%. And in the Spanish-speaking countries, we expect to increase capacity between 12% and 14%.

Important to note that, for example, in the international passenger business, this decreased capacity growth is actually reflected in a smaller operation when you look at year end or the month of December of 2013 compared to December of 2012. So at December 2013, we actually have an operation that is 10% smaller than the operation that we had at year end of 2012.

On the cargo front, growth there being mainly driven by the growth in our international passenger operations by the bellies of our wide-body aircraft, and we expect cargo ATK growth this year to be between 0 and 2%. And on the synergy side, we expect the synergy capture at an EBITDA level to be between $250 million and $300 million. This was a figure that we had already mentioned to you last quarter. And on the operating margin front, this is a new guidance that we are introducing now and that we will be updating on a quarterly basis. We expect operating margin for the full year 2013 to reach between 4% and 6% in 2013. And this includes certain assumptions regarding the average exchange rate of the Brazilian real versus the U.S. dollar, which we currently have for the second half of 2013 at approximately BRL 2.30, and the jet fuel price for the second half of this year as well of USD 122 per barrel.

That concludes the prepared remarks that we have, and now we'll be happy to answer any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Jim Parker representing Raymond James.

James D. Parker - Raymond James & Associates, Inc., Research Division

I have a question, first off, regarding capacity, domestic capacity growth in Brazil. So you give -- for the year, you give the number -- well a decrease for the year and then December year-to-year. So what does that imply for the third and fourth quarters year-to-year domestic Brazil capacity?

Gisela Escobar

Thanks, Jim. Cláudia?

Cláudia Sender

This is Cláudia Sender from Brazil. We actually -- December is a month where last year, we had already decreased our capacity quite significantly. For the first semester, we've already decreased our capacity by between 10% and 11%. So the second semester should have a slightly lower capacity reduction, which should be around 5% to 6%.

James D. Parker - Raymond James & Associates, Inc., Research Division

So how much would that be in the third quarter year-to-year and then how much in the fourth quarter?

Cláudia Sender

It should be around 5% to 6% both quarters.

James D. Parker - Raymond James & Associates, Inc., Research Division

Both quarters? Okay.

Cláudia Sender

Yes.

James D. Parker - Raymond James & Associates, Inc., Research Division

And, Claudia, regarding TAM, all right? Now so in reals, if you could, excluding any currency exchange impact, what is the profitability? Or is domestic Brazil profitable? And how does that look year-to-year for the second quarter? And I ask the same question about TAM's international operations.

Cláudia Sender

Jim, as you know, we do not comment on individual business unit profitabilities. What I can tell you is that our RASK increase has been quite significant and well above our cost increase. So our flexibilities have been improving significantly every quarter since second quarter last year. And we've been working to offset all of the cost increases that are a consequence of the exchange rate movements here in Brazil. But we do not comment on the profitability of each business.

James D. Parker - Raymond James & Associates, Inc., Research Division

Okay. You say you do reveal that the unit revenue domestically is up in the quarter year-to-year 14%. I may have missed it, but what was the improvement or what's the year-to-year change in international unit revenue in Brazil?

Cláudia Sender

We are not -- as of now, we've been looking at the revenue as an aggregate, not necessarily separated by brand. But I will turn it over to Jorge Vilches then.

Jorge Vilches

Yes. Just a quick remark on that. What we're seeing so far is a significant improvement in RASK for this second semester. And this also comes with the capacity reductions that we are taking place already. So that's what we can say. And also, we're increasing a lot our international O&Ds going to São Paulo, and that reduces our exposure to the Brazilian market. And so far, what we are seeing in these last months, we're doubling the presence of international passengers from South America in long-haul passengers -- in long-haul trips coming out of Brazil. And that's -- that reduces significantly our exposure in the international TAM operation.

Operator

Your next question comes from the line of Duane Pfennigwerth representing Evercore.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

I just wanted to ask on your CapEx plan versus the last update and maybe not versus the second quarter last year but versus what you have published in the March quarter this year. It looks like sort of the sum of '13 through '15 is actually up about $200 million, yet your aircraft are lower. So it looks like maybe '14 is lower, but '15 is net higher, and net, it's a little bit higher. So can you just explain, if the fleet plan is lower, which is good, and looks like it supports capacity reduction into next year, why would the CapEx plan be higher?

Roberto Alvo Milosawlewitsch

Yes. This is Roberto Alvo. Just a clarification there. We made a mistake in the last quarter CapEx release because we included in 2015. We took out from the CapEx airplanes that are already being financed through sale and lease back. But -- so we're changing -- actually, as you can see here, we're talking now about fleet commitments so that you can clearly understand exactly which aircraft are entering the company regardless of they're going to be financed with normal financial debt or with sale and lease back. So the decrease is $1.1 billion as compared to 1 year ago. The decrease in 2015 or the change in particular in 2015 from the previous quarter is pretty much unsubstantial. The most important change from the previous quarter relates to a lower quantity of airplanes arriving on the single aisle -- on single aisle. So less 325 million [ph] aircraft than what we anticipate in 2014 as of last quarter.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Okay, that's very helpful. I wonder if you would begin to discuss or maybe give investors some visibility into how you think about your total net adjusted debt. And I appreciate certainly, as a first step, the reduction versus the plans you had this time last year. But maybe just from the level at the end of the second quarter, I think there's roughly $12 billion in net adjusted debt. How should investors be thinking about that line in over the next 3 years?

Unknown Executive

Yes. We believe that the company has declared that it is a very important goal to go back to investment-grade metrics. According to our internal planning, we believe that through the course of maybe 2015, that should be achieved on a gradual deleveraging process of the company as soon as we see margins getting more to the levels that we expect to be in long-run margins. And then of course, this is going to be coupled with the equity offering at some time. But this is something that we expect to be happening in the next maybe 3 months, to go back to investment-grade metrics...

Roberto Alvo Milosawlewitsch

3 years, 3 years.

Unknown Executive

At 3 years, which is roughly talking about the adjusted net debt going back to levels of 3.5x to 4x adjusted net debt over EBITDAR.

Operator

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

Richa Talwar - Deutsche Bank AG, Research Division

It's actually Richa Talwar filling in for Mike. First, just general housekeeping. On your cash, can you tell us what the biggest driver was behind the increase in cash? I believe it went from $780 million at the end of the March quarter to $1.2 billion. What was the key driver behind that?

Unknown Executive

Maybe increasing balance from loans and cash flows, so, yes, we stand at $1.2 billion as of June this year, and we expect to sustain the same levels of our cash going forward, absent any equity offering.

Richa Talwar - Deutsche Bank AG, Research Division

Great, okay. And then on your co-chair operation now with American Airlines and TAM, I know it's really early. You said that it's only been running for a week or so, but what's your initial take from the start of that? Is it -- are the developments positive? And are you feeling good about your prospects with pursuing that arrangement?

Jorge Vilches

Yes, Jorge Vilches again. Actually, we don't comment on the merger between these 2 airlines. But what we can say is that our co-chair, TAM and American, is moving forward. And we're really excited about the prospectus because -- let me give you some figures on this. Today, the Brazil-U.S. online market doubles the size of the Brazil online market. And on that market, we only have 5% of market share. So this opens a tremendous opportunity to grow into the biggest market in connecting Brazil to the U.S., which is the Brazil-U.S. offline. So it is going forward, and we are through with the prospectus starting right now for the second semester of next year.

Richa Talwar - Deutsche Bank AG, Research Division

Okay, that's very helpful. And then lastly, I just had a question about your revenue management system. I don't know if it's in the plan to have a joint revenue management system between LAN and TAM. Can you comment on that? And if you are planning to have a fully joint revenue management system, if there's any timing that we should be aware of just because in the past, we've seen some airlines usually face operational issues when they reach that technology milestone. So I wanted to get more clarity around that.

Jorge Vilches

Yes. On our international operations, here we are working with Proctor and Stabler [ph], but we are slowly introducing routes in a single revenue management system. We already have decided which one it is, and by the end of this year and first quarter of next year, we're going to have all our international operations in only one revenue management system.

Operator

Your next question comes from the line of Eduardo Couto representing Morgan Stanley.

Eduardo Siffert Couto - Morgan Stanley, Research Division

Gisela, I have 2 questions if I may. The first one is on the -- if there is any update on the equity offer. That's the first one.

Gisela Escobar

Yes. We are -- we continue to work on the registration of the rights offering. It's a rights offering that's going to be registered both in Chile as well as outside of Chile, and we are currently working towards being able to launch the rights offering in the fourth quarter.

Eduardo Siffert Couto - Morgan Stanley, Research Division

Okay. And the size, Gisela, it's going to be $1 billion, that's the number?

Gisela Escobar

Well, yes. As the -- I mean, what we approved at the shareholders' meeting that was held in June was the issuance of 63.5 million new shares. Of those, up to 1.5 million could be used for the company's stock option plans, and the remaining 62 million would be what's issued in the market. So the dollar amount is going to depend on the price at which the rights offering occurs. And that is going to be defined by the board prior to the launch of the rights offering period.

Eduardo Siffert Couto - Morgan Stanley, Research Division

Okay. No, very clear. And just a second question, I saw that you guys kept the fleet plan for -- especially for next year. There was also an adjustment for this year. But for next year, there was, like, you are now expecting 10 aircraft less and what's you're going to end this year. And then when we look to mix, it's pretty much a decline on the 319s, which are domestic aircraft. I was just wondering, this year you're getting, like, 10% capacity in Brazil. So can you -- can we expect another capacity reduction in Brazil next year, given that you're going to have less 319s, which I think operate pretty much here in Brazil.

Roberto Alvo Milosawlewitsch

Yes, Eduardo. This is Roberto Alvo. We are -- the fleet plan going forward is focused basically on 787s and 321s. We have more than 50 319s in both LAN and TAM today. And our expectation going forward is to change the size -- average size of the airplanes, single aisles, both in the Spanish-speaking countries and in Brazil. So we're very comfortable by decreasing an amount of 319s in the years following. And we will see an important increase in 321s, particularly in Brazil next year and the Spanish-speaking countries probably in 2015. We're very -- we feel very comfortable by the fact that we'll reduce our cost per ASK close to 20% with the replacement of the 319s with 321s in particular.

Eduardo Siffert Couto - Morgan Stanley, Research Division

But this is going to translate in lower capacity overall for Brazil next year or no?

Roberto Alvo Milosawlewitsch

Cláudia, would you like to talk on capacity for next year?

Cláudia Sender

Yes, let me comment. As of now, we're not looking at any capacity increase for 2014, and we're building flexibility to reduce capacity if necessary, given the macroeconomic conditions of the market. So there are -- we're not looking for another capacity cap in cost, but we'll do it if necessary.

Eduardo Siffert Couto - Morgan Stanley, Research Division

Okay. And just a final question, Cláudia, if I may regarding the Brazilian strategy. Now you -- clearly, this year, you're shifting your load factor, right, big jump now almost 80% load factor, 10 percentage points higher than last year. But now we are at this 80% level, which seems a high level. So I was just wondering, if you really continue to reduce on capacity or keep capacity flat in Brazil, do you see much more room to start to increase prices more aggressively? Or how do you see the price trend given that your load factor is now in a much higher level?

Cláudia Sender

We've been saying this very -- at every call, our strategy is to maximize RASK, right? And as you mentioned, we have achieved high levels of load factors. There are still some improvements that can be achieved. However, the future RASK increases will definitely come more focused on yields improvement rather than load factors. We have -- for the third and fourth quarter of 2013, we have expectations to keep the high 10% or above 10% RASK increased levels at around 14%, 15% for the second semester and for 2014 where the cost impacts that we've had most likely will have some price increases to offset part of the cost increase.

Operator

Your next question comes from line of Stephen Trent representing Citi.

Kevin Kaznica

This is Kevin Kaznica filling in for Stephen Trent. Now we were just kind of curious. I know you've been alluding to possible equity offering to reach your target net debt to EBITDA levels on. And also, you were talking about the rights offering that you already mentioned. We're just kind of curious if you were going to try to, I guess, sell more than that 63.5 million shares on any timing like the next couple of years. Or is it kind -- is that kind of the ceiling there?

Cláudia Sender

The rights offering and the equity -- the offering are the same transaction. So the -- this new share issuance is being done through a rights offering first. And no, for now, this is the only transaction that we have planned, and we are planning to issue the amount of shares that we have approval for. And that's really the only plans that we have for the near future. We will reevaluate as necessary in the coming years if the need arises.

Kevin Kaznica

All right, great. That was very helpful. Also, we just wanted to know if you sold any receivables during the second quarter.

Jorge Vilches

No, that still has been the deal that future flow [ph] receivable of $450 million has been delayed because of mainly market conditions but that we expect to go back at -- we're testing the waters now, and maybe in September or early October, the plan is to go with that transaction to market, with the $450 million.

Operator

Your next question comes from the line of Brian Foster representing CreditSights.

Brian Foster

Yes. Just had a question about the balance sheet. Were the TAM senior unsecured bonds also moved up from the holding company? And if not, are there any plans to replace the value of the aircraft at the TAM subsidiary?

Jorge Vilches

There are no plans on the TAM bonds for tending.

Brian Foster

So they're stuck at the -- they're at the TAM subsidiary?

Jorge Vilches

I'm sorry. What did you say?

Brian Foster

So the TAM bonds are still at the TAM subsidiary. They weren't moved up to the holding company? Okay.

Jorge Vilches

That's correct. Yes.

Operator

You have a follow-up question from the line of Duane Pfennigwerth representing Evercore.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

I just wanted to ask, I think LAN historically had persistently high margins, right, double-digit margins? I look at this period, 2006 to 2010, and maybe that -- clearly, that was a better economic environment in many of your markets. But is there any part of your business today that's sort of operating at similar levels to what LAN achieved historically? And how should we be thinking about sort of getting back to high margins for the company? Is there anything about TAM that's sort of structurally different that would prevent you from ultimately getting back to the kind of margins that your company has historically enjoyed?

Jorge Vilches

Okay. Yes, I think that it's important to note, this is not a TAM problem at all. The rationale -- the strategic rationale of doing this deal and the value that we contemplated when we thought about the transaction, the synergies and the positioning of the company in the region and what it means, stays exactly the same. We see no fundamental reason to think about not being able to come back to the previous LAN margins. So we're confident that what we're doing is providing fruits already. You can see that in the change of results in the second quarter as compared to last year. So we're confident that we will reach profitability levels that you used to see at LAN before the merger.

Operator

At this time, there are no further audio questions.

Gisela Escobar

Great. Well, thank you, everyone, for joining the call, and we'll speak to you next quarter. And you can reach us, obviously, at any time in between for any follow-up questions you may have. Thanks again. Bye.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.

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