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

Q1 2014 Earnings Call

May 14, 2014 10:30 am ET

Executives

Andrés Osorio - Chief Financial Officer

Gisela Escobar -

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

Damian Scokin - Senior Vice President of International Passenger Operations

Alvaro Carril -

Andrés del Valle -

Enrique Cueto Plaza - Chief Executive Officer

Roberto Alvo Milosawlewitsch - Chief Corporate Officer

Álvaro Carril -

Analysts

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Savanthi Syth - Raymond James & Associates, Inc., Research Division

Richa Talwar - Deutsche Bank AG, Research Division

Bernardo Vélez

Thomas Kim - Goldman Sachs Group Inc., Research Division

Eduardo Siffert Couto - Morgan Stanley, Research Division

Stephen Trent - Citigroup Inc, Research Division

Pedro Balcão Reis - Santander, Equity Research

Bob McAdoo - Imperial Capital, LLC, Research Division

Daniel Guardiola - LarrainVial S.A., Research Division

Operator

Good day, everyone, and welcome to the LATAM Airlines Group Earnings Release Conference Call. Just as a reminder, this conference is being recorded. LATAM Airlines Group's earnings release for the period was distributed on Tuesday, May 13. If you have not received it, you can find it on our website at www.latamairlinesgroup.net in the Investors 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 international markets. Therefore, they are subject to change.

Now it is my pleasure to turn the call over to Mr. Andrés Osorio, Chief Financial Officer of LATAM Airlines Group. Ms. Osorio, please begin.

Andrés Osorio

Thank you very much. Good morning, everybody. Thanks for attending this call. Today, we will participate from LATAM Airlines, Claudia Sender, CEO of TAM; Alvaro Carril, in-charge of Cargo business; Andrés del Valle, Corporate Finance Director; and Gisela Escobar, Corporate Controller.

So what we will talk about during this call is regarding the financial result. We will talk about that and in compare it to our first quarter of 2013. We have increased our operational margin in 130 basis points. That, excluding nonrecurring fleet restructuring cost that, we will talk later about that. We continue adjusting our capacity. We have decreased 4.3% in compared to the first quarter of last year. Our domestic Brazil continues improving this result basically through improving their yield.

Also, during the conference, we will talk about our fleet restructuring cost, which means that we have booked during this quarter $147 million. 34 out of those are in the operating line and $112 million will be nonoperating cost. The reason of that, we have talked in past, is that we work for long to find the best fleet that we will going to fly in the future. This new fleet is more efficient, more modern. We will present a better product for our passenger. But to do that, we have to take away some families of planes and aircraft. And those which is onetime cost are presented now in our financial segment. And we will talk about that later.

Finally, it's good to announce that on March 31, TAM became a member of the oneworld Alliance. So about this and on all other matter that you wanted to talk later during the Q&A session, we are happy to attend.

Thanks again, and Gisela today will make a presentation.

Gisela Escobar

Great. Thanks, Andrés. Thanks, everyone, for joining. We're going to go through the slides. If you look at Slide #2, you can see the highlights of the results for the first quarter. In the top line, our revenues are down by about 6.8%. 85% of our revenues are passenger business revenues, which are down about 6%. About 13% of revenues are cargo-related, which are down approximately 12%.

And on the cost side, our costs are down, more or less in line with revenues, approximately 7%. That makes for a flat operating income versus the first quarter of 2013. However, that number includes the costs related to fleet restructuring, which we recognized during this first quarter. We'll look in detail at the breakdown of those fleet restructuring costs. But basically, it's important to know that in our operating costs, we have $34 million related to those fleet restructuring costs. If we exclude those $34 million at the operating level, our total operating income is $147 million, which is a 4.6% operating margin.

Net income for the quarter was negative $41 million. Again, excluding the fleet restructuring cost. Net income was positive $81 million. Also important to note here is that, given that the Brazilian real appreciated between December 31, 2013, and March 31, 2014, we actually, this quarter, saw a nonoperating FX gain of $57 million on the nonoperating site. And our EBITDA margin, excluding the fleet restructuring, was 16.4% for the quarter.

Turning to Slide #3. You can see the main variations in our operating margin, excluding the fleet restructuring cost. Overall, you can see that the negative effect during the quarter is coming from a reduction in yield. Passenger yields overall are down 6% in U.S. dollars and cargo yields are down 10%. Part of this is offset by very strong load factors during the quarter, which reached 83% on the Passenger side and 59% on the Cargo side. We saw lower fuel costs during the quarter, driven by a 6.5% decline in the price of fuel versus the first quarter of 2013, as well as lower consumption, and also gains from our hedging strategy.

And on the cost side. Excluding fuel, we saw savings or reduced costs on wages and benefits as a result of reduced personnel. And also, the positive effect of the depreciation of the Brazilian and Chilean currencies, which has a positive impact on the percentage of our costs that are denominated in those currencies.

If you turn to Slide #4. You can see that we continue with a significant capacity adjustment overall in the Passenger business. Capacity is down 4.3% in the first quarter, as compared to the first quarter last year. This is mainly driven by a strong capacity adjustment on the international routes of 7.6% and a continued reduction in the domestic Brazil, where ASKs are down 3.5% versus the first quarter last year.

In Spanish-speaking countries, we have an increase in capacity of 5.4%. This -- we are increasing capacity in all the Spanish-speaking markets, especially Colombia and Peru. And if you look overall at the revenue per ASK, for the whole Passenger business, revenue per ASK is down 2.2%. And there, the main decline is in part due to the domestic Brazil, where we'll look at in the next slide more in depth, but that's mainly related to depreciation of the currency because in reals, we will actually be seeing a strong improvement.

And in the Spanish-speaking market, we have a decline of 4.5% in revenue per ASK, which is mainly driven by yield declines in all of these markets, also as a result of strong depreciations in all the local currencies. The Chilean peso during the first quarter depreciated by 17% when we compare to the first quarter of 2013. And the Chilean domestic operation represented approximately half of all of our Spanish-speaking countries' operation. The Peruvian sol also depreciated by 9%, the Argentine peso depreciated 50%, and the Colombian peso depreciated 12%. So we're seeing that impacting our yields in all our Spanish-speaking markets.

If we turn to the next slide, you can see the results of our domestic Brazil operation. Here, we continue to see reductions in ASKs. Capacity is down 3.5%. So we continue with very rational capacity strategy in the domestic Brazil with a very positive effect on load factors. So we have one of the highest load factors in the industry, and we continue to see improvement there. Load factors reached 82% at TAM and are up 3.4 percentage points compared to the first quarter of 2013.

And also importantly, we continue to have a strong leadership position with the corporate passenger in the domestic Brazil. We have a 34% market share in the corporate market. And that's a -- basically, 10% higher than our main competitor in those -- or with those markets.

If we look at the International Passenger operations, we continue with the strategy that we have already been discussing, where, basically, we are focused on a strong capacity adjustment. Most of the capacity adjustment currently on long-haul routes is on route to Europe, where the market is -- continues to be relatively weak in terms of demand. We are also focused on building our regional and international hub at Guarulhos Airport in São Paulo. We expect that to be implemented after the World Cup in the third quarter, with the move of the International Passenger operations to the new Terminal 3 at Guarulhos Airport. We are also focused on a significant restructuring of the fleet on long-haul routes. We are, as we've already mentioned before, phasing out the A330 fleet and replacing it with 767s from the LAN fleet, as well as A350s, when they start being delivered in 2016.

We, at the end of this year, in December, expect to have 13 767s in operation on TAM routes versus the 8 that we are currently operating today. We're also undertaking a retrofit of the 777 fleet of the TAM long-haul 777 aircraft. And that's going to occur between November of 2014 and May of 2015.

And finally, as Andres already mentioned, TAM joined oneworld officially on March 31. So it's now operating as part of the oneworld Alliance, in addition to the bilateral agreement and codeshare that we were already operating with American Airlines.

Our main challenges on international routes during this year are basically 3. We are seeing the -- an impact of the World Cup. As you know, the World Cup is going to occur in Brazil between June and July, and that makes it difficult to predict exactly what the impact is going to be and how demand is going to behave during those 2 months. July is the high season in Brazil for International Passenger operations, and there's a lot of demand of Brazilians that are traveling internationally. And that's something that we're -- it's difficult to predict how that demand is going to behave given that the World Cup will be occurring during those months.

We're also seeing a continued competitive pressure, especially in the Brazilian market, of international carriers, both from the U.S. and from Europe that are increasing operations to Latin America. And in addition to that, what we've seen during the first quarter is an impact in terms of demand of Argentine passengers that are traveling on our international network. As a point of sale, Argentina represents 8% of our total revenues. And given the 50% depreciation of the Argentine currency, we've seen an impact of international passenger demand from Argentina, which we are compensating with increased sales in other parts of our network but at lower yields than what we were seeing from the Argentine market.

On the Cargo side. As we've discussed, we have seen generally a global cargo market that has been relatively flat over the past 2 years. In that context, LATAM has been reducing the freighter capacity. If you look at our first quarter numbers, our cargo capacity measured in ATKs is down 6.6%, which has led to improvement in our load factors that are reaching close to 59% levels in the quarter.

Nevertheless, we've seen declines in yields of approximately 10%, driven by a strong competitive pressure, especially to the Brazilian market. In addition to that, we have seen, in these first months of the year, another impact, which is a very weak seasonal seat exports from the region which we had a very strong seat season in 2013. So for -- that also impacts the comparison versus last year.

If we look at the cost lines, overall, during this quarter, we saw an 8% reduction in operating costs, excluding the $34 million that are related to the fleet restructuring. Here, we have an almost 3% reduction in wages; a 7% reduction in fleet costs; and about 5% reduction in other cost line, in addition to a 5% reduction in fuel costs. Overall, when we look at it on a per ASK basis, the reduction is 3% basically because of the strong reduction in ASK equivalents, which reaches 5% this quarter versus the first quarter last year.

If we look a little bit more in detail at what this fleet restructuring cost that we're recognizing this quarter, basically, it's a total impact of $147 million in this quarter, that's divided in a nonoperating impact and an operating impact. On the nonoperating side, in the other nonoperating cost, we're recognizing $112 million before tax. And this is related to the aircraft that we are phasing out of our fleet. So they're aircraft models that we are no longer going to operate in the medium term. We have 29 aircraft of the total 39 aircraft that will be delivering that are included in this $112 million. And they're basically the old fleets of LAN Colombia. The 737 -- the Boeing 737s of LAN Colombia and the Q400s, some of the old TAM 767s, which we are phasing out, and the A330s. And the A340s, which TAM had a couple and LAN also had A340s. And those are all aircraft models that we will not be operating anymore and that which will be leaving the fleet in 2014, 2015 and 2016.

We also, on the operating side, are recognizing $34 million in the delivery costs that are related to fleet that include basically A319s, A320s and 767s, as well as 1 767 freighter, which are aircraft models that we will continue to operate, but that's given this fleet restructuring, we're basically phasing out faster than we had anticipated, and all at the same time, which leads to the strong increase in redelivery costs.

We still have some decisions that we need to make, which are minor compared to these $147 million, but we still have 13 A330s, 5 of them leased and 8 that are owned, that we still need to make a decision regarding how and when we'll be phasing those out. And we also have the Dash 200 of the Colombia fleet, of which we have 7 in operation and that we also expect to be phasing out over the next year or 2.

When we look at our overall fleet plan, basically, we expect to have declines in the number of total jets that are in our fleet, with basically about 20 aircraft deliveries per year that are offset by around 30 aircraft redeliveries each year. And you have the CapEx numbers related to 3 commitments on the bottom of that chart. We have $1.2 billion in aircraft CapEx expected for this year and $1.7 billion in aircraft CapEx in 2015. Most of that expected to be financed with ECA and EX-IM Bank debt as well as selling the stock [ph] finance.

Regarding the guidance for this year, we have basically maintained our operating margin, a guidance between 6% and 8%, excluding these nonrecurring fleet restructuring costs. And on the capacity side, we have maintained overall our capacity guidance on the passenger side at relatively flat, although we have brought down a little bit our estimated ASK growth in the Spanish-speaking countries. We were originally expecting a little bit higher between 6% and 8%. And today, we're looking at growth closer to 5% to 7%.

And on the Cargo side. Given the efforts that we're making to reduce our freighter capacity, we have also brought that number down from approximately 0 to minus 2 to a reduction of between 2% and 4% in our total ATKs for this year.

That concludes the slides that we had prepared, and we'll be happy to take any questions that you may have.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Duane Pfennigwerth, Evercore.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Just wondering if you could give us a sense for capacity change in the second quarter for the Passenger business. It looks like you're still cutting year-to-year maybe about 3 -- 2% to 3%. And are you seeing any firming of the yield environment yet? And I wonder -- you gave us a lot of detail there on FX sort of by region, could you give us just a -- either to the revenue growth or to the change in yield, what a constant currency number would look like?

Gisela Escobar

Yes. Duane, we do expect to see continued reductions in ASKs during the second quarter. Basically, any leveling out of the ASK growth will come especially during the fourth quarter and after the World Cup. So we should continue to see ASK reduction. And overall, if we exclude the currency fluctuations -- it varies by market. Well, you saw in Brazil, we have an improvement in yields of about 12% in the Brazilian currency. So we're seeing a strong improvement and Claudia can speak more in detail to that. But in the other markets, we should basically, in local currencies, we are seeing improvements in yields. However, it's more than offset by the strong depreciations that we have. And we expect that to continue because we are, as I mentioned, pulling back our ASK growth in some of the domestic Spanish-speaking markets for the year.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Okay, that's helpful. And then, just with respect to the World Cup, appreciate your cautious or maybe conservative view on that. But can you talk about kind of revenue visibility today? And I guess, we care most about system, as opposed to international versus domestic. But based on the bookings level that you have over that period of time, based on the fares that you're seeing over that period of time, does the revenue visibility lead you to that cautious commentary? Or is it just the uncertainty of how the closing is going to behave once you're in that period of time?

Cláudia Sender Ramirez

This is Claudia Sender from Brazil. A quick comment on that. I think it's a combination of those. Here, especially when we talk about the corporate segment, bookings come in with advanced searches of around between 7 and 14 days. So there's a lot of uncertainty on what is going to happen in -- during that period since the corporate bookings are still not coming in. What we do see, however, is that people that generally take vacation, leisure vacations, during this period of time, are more cautious and tend to stay home, given the uncertainty of how busy the airports are going to be and also to follow the World Cup here in Brazil. So I would say it's a combination of both factors.

Operator

And your next question comes from the line of Savi Syth with Raymond James.

Savanthi Syth - Raymond James & Associates, Inc., Research Division

On the International side, I understand kind of the currency weakness in Argentina. So is the exposure there now less than 8% of revenue with the devaluation you've seen? And are you -- are any of kind of the -- because you saw 7% year-over-year increase in -- per ASK in the fourth quarter. And so is all of that kind of good things that you've done and getting out of unprofitable markets and everything just getting wiped out as we move forward?

Damian Scokin

This is Damian Scokin from the International business. The exposure of Argentina is reduced from historic levels, thanks to our increased revenue pull out of Brazil and other markets. Nevertheless, it's still significant, and we monitor the Argentina's decision very thoroughly and in detail. The impact on LATAM has been smaller than on other airlines because we have a good pool of bookings in advance. And the perspective we have on the upcoming market conditions is not as bad as the initial thinking was, let's say, February, March. So we see the Argentine market effective but not as much as a couple of months ago. As for your questions on the total impact in capacity reduction and the Argentine effect, I think it's -- the Argentine effect is certainly relevant, though that's -- the net effect of that is a combination of the Argentine effect plus competitive conditions in Brazil in particular.

Savanthi Syth - Raymond James & Associates, Inc., Research Division

Okay. And then, if you turn to Cargo, like, how much of the weakness in Cargo was related to the Brazilian real? Is it depreciation? And how much of it was just from weak seat sales?

Alvaro Carril

This is Alvaro Carril from the Cargo business. Only our domestic operations -- cargo domestic operations within Brazil is denominated in reals. That accounts for around close to USD 400 million, which is still pretty large out of the top.

[indiscernible]

Savanthi Syth - Raymond James & Associates, Inc., Research Division

Okay. And then, the last question, I guess. I'm a little surprised by -- given the kind of 1Q performance, maybe the margin guidance still remaining unchanged. And just to achieve the high end of margin guidance, I wonder what you would need to see -- or why -- what kind of environment you would be able to reach that, the high end of the margin guidance?

Gisela Escobar

Well, I think today given the situation that we're seeing, we are probably estimating something closer to the lower end of the range, closer to the 6% than to the 8%. But I think there is some uncertainty in that number related to what we expect after the World Cup. And obviously, the -- there is external factors that can make a difference that are basically the usual fuel and currency impacts. So a significantly stronger Brazilian real environment, a significantly stronger demand environment, a significant change in our competitive environment, all of those things could obviously help for the positive.

Operator

And your next question comes from the line of Richa Talwar with Deutsche Bank.

Richa Talwar - Deutsche Bank AG, Research Division

So first, I just wanted to talk a little bit more about the fleet restructuring plan. Can you quantify the impact of your efforts on that? And if not, I mean, if you can't give us like a precise savings number you'd expect from the actions, if you could talk through how we should be thinking about that and long term, how they should benefit the profitability of the company.

Gisela Escobar

Yes. We -- well, there's a few things. I think, first, we are aiming at adjusting -- and this has been a long process that we've been, I think, mentioning over the past year or so because we really have been aiming at adjusting the fleet plan and the aircraft orders of LAN and TAM to what we think is the right fleet for LATAM Airlines Group. And the -- there's many sort of different ways of looking at it. But one of the important things is that we see a very significant technological change, especially in the long-haul fleet, but also in the narrow bodies with the A320neos and so forth, where we -- where the new technologies are significantly more efficient than the existing one. And if we compare, for example, an A350 with one of the TAM A330s, we have about a 20% to 23% savings in terms of cost per ASK. If we compare a 787 with one of the existing 767s in our fleet, we have approximately a 12% reduction in terms of cost per ASK. So if you look at, currently, our fleet plan going forward, after this fleet restructuring, the only aircraft that are being delivered are 787s, A350s; and in the narrow bodies, A320neos and the larger A320 and A321 of the narrow body fleet. So we are not taking any new deliveries of the older or existing aircraft technologies. And we're also reducing our residual value risk of those existing aircraft because we are doing -- basically creating the flexibility in order to phase those aircraft out. There are some savings associated, for example, to the A330 fleet that we -- given the fact that we are phasing those out of the fleet, we have about a little bit over $20 million of savings in lease cost, for example, that we expect to save. But basically, most of it will come from a -- from having the right fleet and being able to be in a position to benefit from the competitive advantage that the new fleet technologies will bring.

Richa Talwar - Deutsche Bank AG, Research Division

Okay. And then, one on the balance sheet, you made great progress on improving liquidity position of the company. And I was hoping you could talk a little bit about any low-hanging fruit left on the leverage fund, like, in terms of potentially refinancing higher coupon debt. And maybe you can refresh us on your thoughts on regaining your investment grade credit rating.

Andrés del Valle

I think -- Andrés del Valle here. I think we have seen a boost on the liquidity that basically came from the April offering done last year, last [indiscernible] of the bonds. With that, we have basically prepaid and repaid a lot of the short-term debt. The liquidity position as of end of the year, last year, was something like a 19%. The target, that is to maintain a level of approximately 15%, plus we have uncommitted lines of roughly $800 million, and we have committed lines, reaching up at $200 million. We feel confident with the turn liquidity position. We can say that all of the CapEx of this year, which is $1.2 billion, has been completely secured with financing. So the next financing campaign will start in, maybe, September of this year, aiming at the deliveries of 2015. So for this year, I don't think we should be seeing any sort of a novelty adjusted targets to maintain the level of cushion of that 15% of cash.

Richa Talwar - Deutsche Bank AG, Research Division

Okay. And on the investment grade credit rating? Do you think you'll get to that anytime soon?

Andrés del Valle

I think we continue with the deleveraging of the company. We -- when we merged with TAM, the -- I mean, the leverage indicator was 7.9x. We are down to 4.8x roughly. And the plan is continue with that deleveraging process. End this year, should we achieve, I mean, the expected margin, it should be down to maybe 4.5x. And then, I think according to the plan, maybe by 2016, we should be back to investment grades metrics.

Operator

And our next question comes from the line of Bernardo Vélez

With GBM.

Bernardo Vélez

I was wondering regarding the fleet restructuring expenses on the quarter. First, if you could give us more color regarding this provision recognizing other nonoperating costs. Is this provision is what we can expect off of operating expenses throughout the year? And what impact would the total phaseout of the LAN Colombia airplanes would have on expense?

Enrique Cueto Plaza

What's going on, on the -- on this booking is we have studied which fleet we wanted to stay in the future. The restructuring, the IFRS, when you have a merge or acquisition, give us through the accounting rules a possibility to book, on a nonoperational side, the effect of restructuring any fixed asset or whatever part of a business you're not going to use in the future. So what we have booked is because of the new fleet that we're going to manage in the future, we have moved away from some families of aircraft or some aircraft. What is -- on the ongoing concern, which means if you have about 300 aircraft, you're going to be redelivering aircraft every year. But if it's from the ongoing concern business that will be operating cost from now and the future. What we have recognized is what is an effective cost of the restructuring of this fleet because of the merge of these 2 companies. So on the future, you will find on the operating side the provision -- monthly provision in order to -- when you get the moment to redeliver the plane [ph] that will basically all provisioned and all book. Today, we have talked this very long with the auditors, and we have get to these numbers. So at the end of the day, because -- and it's more accounting, very complex, tough to explain through a phone call, but the full number of $147 million are all the effect related to what we have seen up today on the restructuring of our fleet for 2014, mainly 2015 and 2016 as well, and that part is on the nonoperational side. What we're going to do on 2014 is already booked on first quarter, which are this $34 million, but that is for the whole year. We don't expected to do any other bookings regarding this concept on the future. That's good information that we have up-to-date. If there's any other consequence of restructuring, because of restructuring this fleet, for example, some A330s that we haven't decided yet because this is important to say. To do this, you have to take a plan. You have to have talked to your supplies [ph] and everything. It's not that you have only an intention. If whenever we decided to and we have a full agreement with A380s [ph], for example, which are less, we're going to book that number as well.

Bernardo Vélez

Okay. And just a ballpark number. What would these expenses reach if you decide to phase out all of this fleet?

Gisela Escobar

No. Well, with the A330s, we -- it depends. It depends on how we decide if -- we have 5 that are -- I mean, a portion of the 13 A330s we have left or leased and a portion are owned. It depends on the sale price. It depends on how the phaseout will occur. So we're not in a position to give you an estimate at this point.

Enrique Cueto Plaza

But the bigger number is already booked. Whatever is left is much smaller in proportion to this.

Operator

And your next question comes from the line of Thomas Kim with Goldman Sachs.

Thomas Kim - Goldman Sachs Group Inc., Research Division

I have a few questions here. First, I want to start off with the proceeds from PP&E disposals. Can you detail for us what the $514 million comprises? Because it's a large number, and it's more than sort of what the commentary suggested in the text. So can you just give us a little bit more detail as to what's behind that big number, the $514 million in your cash flow statement in the first quarter?

Andrés Osorio

We -- I don't know [ph] -- it's mostly related to our capitalizations [ph] and all that and different things. I think we also need -- we can -- happy to send you the detail of exactly what it is. We need to carefully look at the cash flow savings. It's comprised by many different things. So we'll send you that onto you.

Thomas Kim - Goldman Sachs Group Inc., Research Division

Okay. And also, can you let us know if like how many sale leaseback transactions did you enter into, and what gains, if any, were booked on those?

Gisela Escobar

We have done, so far, sale and leasebacks for 8 777s and for 10 A330s. And they -- the effect in terms of one-time gains were none really. There was not any relevant impact in terms of one-time gains.

Thomas Kim - Goldman Sachs Group Inc., Research Division

Okay. And then, there was also a couple of planes that were sold as well. Couple of A -- I think, was it -- I forget the exact orders of the A320s.

Gisela Escobar

Yes, A320s?

Thomas Kim - Goldman Sachs Group Inc., Research Division

Yes. So did you call out exactly what those?

Gisela Escobar

Well, we financed basically the -- when you finance a new aircraft delivery with the sale and leaseback, there's no one-time effect because it's an aircraft that you haven't yet booked because it hasn't been delivered. So the only times is when we would've had an impact would be for one of an owned aircraft that we sell and lease back, that is not a financing of a new plane. And that was the case for 8 of the A330s and 4 of the 777s. But those didn't generate any significant impact. We do expect to finance of our total CapEx. We're financing approximately 1/3 of our deliveries with sale and leaseback. [indiscernible]

Thomas Kim - Goldman Sachs Group Inc., Research Division

Okay, that's helpful. Okay. So just to clarify, the 2 Airbus A320s, they were not owned aircraft? They were actually sale -- because it wasn't clear. To me, it looked like they were owned because you specifically said that there was this sale leaseback with the 4 777s and so on. So the 2 Airbuses were also on a sale leaseback, not owned aircraft, not previously owned already?

Gisela Escobar

Yes, that's right. I'm going to -- wait, just -- Roberto, I don't know if you want to add something here.

Roberto Alvo Milosawlewitsch

Yes. This Roberto Alvo and I'm in charge of [indiscernible]. Let me clarify 777s here. We've done [indiscernible] of the 777s basically to phase them out towards the end of the decade. We don't do these transactions to book any gains, with respect to this aircraft. What we've done basically is give us the flexibility so that these airplanes [ph] can be replaced with 350 as the end of the decade cost, okay? Out of the 10 777s that TAM currently operates, 6 of those have been entered into several [ph] different transactions already, 4 of those are still owned for us and pending. But the main reason for doing this is to give us ourselves better flexibility going forward, and there's no impact in the P&L due to this [ph] effect.

Thomas Kim - Goldman Sachs Group Inc., Research Division

Okay, all right. And then, can I just ask -- with regard to the merger synergies, obviously, there's a lot going on, so many moving parts right now. So it's hard for us to know what's happening with the merger synergies and what you've been achieving. Can you just update us on what your target would be for 2014? What you kind of see, what you have seen so far and whether you think you're on track to sustain the improvements this year, just given that some of the challenges and some of the -- also importantly, some of the proactive changes, which, on the fleet side, look encouraging.

Gisela Escobar

Yes, we are on track to meet the target during 2013. We recognize over $300 million at the EBIT level related to the initiatives that were identified as the synergies, both on the cost side and on the revenue side. And for 2014, it should be a number over that. And that basically puts us on track to reach our target of between $600 million and $700 million annual synergies on an ongoing basis by mid-2016. We have basically -- at this point, the synergies are very much incorporated in the day-to-day management of the operations. If you recall, we had approximately 40% of the total synergies that were coming from international passenger operation, and those are, today, very much part of the day-to-day operations of the international passenger business. So we're not necessarily detailing them. But if we don't do -- even if we did nothing new with regards to synergies, just to the ramp-up of the actions that we have already taken related to synergies puts us to achieving the $650 million approximately in mid-2016.

Operator

And your next question comes from Eduardo Couto with Morgan Stanley.

Eduardo Siffert Couto - Morgan Stanley, Research Division

I have 2 questions. The first one, on the -- regarding the World Cup. Just want to hear your thoughts. Do you think the World Cup is going to be positive or negative for LATAM? Now we have been discussing this with some other airlines, and the company seems concerned about the impact on June and July. So just want to hear your thoughts on that. And the second question is on the Brazil long haul. Now I just want to try to understand this strategy a little bit because the -- we have seen competitors adding capacity, right? The global players and also local carriers that will launch operations in the upcoming months. So I just want to understand if the strategy on the -- in the long haul is to cut capacity or to cut prices. Or what are you going to do to respond to this external competition?

Cláudia Sender Ramirez

This is Cláudia. Let me try [ph] answering the first question by saying that the World Cup -- we look at the World Cup from 2 different points of view. First, from a long-term perspective, we think it's extremely positive. I think the World Cup has somehow made viable the really necessary, the very much needed investment in infrastructure. And we think long term, this is a very important legacy for our country and will actually help us grow again and eliminate most of the bottlenecks. Also, it will give the country a very important visibility worldwide, and we think we're very capable of delivering good service and good logistics during this period of time. So long term, we think it's very, very positive. Short term, during the periods of between mid-June and mid-July, there will be an important impact in demand, yes. And revenues will come to a shortfall, for sure, given that the corporate traffic will be reduced due to the number of holidays that we will have here in Brazil. So I think it's -- we have to look at the World Cup from these 2 perspectives. And then, I'm going to hand over to Damian who will talk a little bit about the international [ph] business.

Damian Scokin

The international business out of Brazil, I think it's something you need to look in the context of the international business of Latin America because that's exactly the big difference between LATAM and other carriers increasing capacity into Brazil. The competitive environment in Brazil remains very intense and [indiscernible] in which the economy is growing not as fast as in the past. But it will remain extremely positive because LATAM has a lot of structural advantages that other carriers do not have. One of them is exactly what I was mentioning, the part of having the network of Latin America. And based on that, we are building the hub of Guarulhos into a deeper level from the past. As you know, this week, the airport opened a new terminal which gives us a lot of opportunities to increase our connectivity in Guarulhos and that's the driver of the capacity reductions we decided out of Rio. The capacity reductions, even though were mostly out of Rio, because we knew in advance that we're going to focus in Guarulhos. So the strategy is basically to strengthen our popularity in Latin America and make a much stronger hub [ph] out in Guarulhos. And that will give us the opportunity to grow in destinations out of Latin America. On top of that, if you also consider that the origination of passengers in most international routes out of Brazil is heavily tilted towards Brazilian passengers, we still have a lot of room to improve our commercial execution in Brazil than we leverage our frequent flyer programs and the position domestic that will further increase our competitiveness in this market. I don't know if that answers your question.

Eduardo Siffert Couto - Morgan Stanley, Research Division

But do you expect to cut capacity on the international or not?

Damian Scokin

No. We don't expect to cut capacity further.

Eduardo Siffert Couto - Morgan Stanley, Research Division

Okay. And just one final point on the Guarulhos expansion, right? I understand that long, long term, it's positive. But don't you think that it also brings much more competition? Because so far, what we had was TAM with a very strong position in Guarulhos, especially in the international. And the global players really struggling to get slots and being able to increase capacity. So now with the expansion, I think those international carriers will be the -- will have room, right, to add much more capacity. So don't you see that even though the Guarulhos expansion could be good for the long, long term, it could also bring more competition from international carriers?

Damian Scokin

Yes. You're right in the sense that we expect more competition in the future. Though, as I said, we rely on our competitive advantages to remain very profitable in the long haul. Moreover, those carriers that arrive at Guarulhos will also help our overall business by requiring our distribution, now that TAM joined oneworld, which is another source of advantage, that will help us overall in terms of the usage of our -- not only [indiscernible] and domestic, but regional network.

Operator

And your next question comes from the line of Stephen Trent with Citi.

Stephen Trent - Citigroup Inc, Research Division

Two for me. The first is on President Dilma's regional aviation plan in Brazil, which I know is not exactly official. Are you seeing any early indications that there's going to be enough of a benefit there to offset the increased cost of airlines potentially adding new fleet types, or is it way too early to tell at this point?

Cláudia Sender Ramirez

I think -- this is Cláudia again. Looking from an incentive perspective, it's still early to say which way this is going to go. Talking specifically about the regional aviation, we're looking at it from strategic and financial point of view if it makes sense to invest in this market or not. It has to make sense regardless of investment for us to make a significant move going forward. But I think anything we say about the subsidy right now is just pure speculation.

Stephen Trent - Citigroup Inc, Research Division

Okay. Very helpful, Cláudia. Appreciate that. And just one other question. It was actually a follow-up to somebody else's question. You guys gave helpful color about this year's aircraft CapEx, roughly being 1/3 financed by sale leaseback activity. Any broad color as to what extent aircraft sales might finance some of that?

Andrés Osorio

For this year, Stephen -- Andrés here. Everything has been financed. It's a combination with sale leasebacks, commercial financing, some [indiscernible] we're not relying on [indiscernible] this year. For next year, again, given the CapEx that we have in front, again, to be very well diversified, again, mostly the same mix. But I don't know what exactly would that addresses your question. Any more sales this year? I think has been done this year already. So with [ph] that...

Operator

And your next question comes from the line of Pedro Balcão with Santander.

Pedro Balcão Reis - Santander, Equity Research

It's Pedro Balcão from Santander here. I do appreciate the fact that you recognized that the guidance for the EBIT margin this year is now more challenging than before. I just wanted to clarify, to what extent is that the result simply of the depreciation of the LATAM currencies, or really, if it's really a weaker market that is penalizing this guidance?

Gisela Escobar

I think the World Cup poses a big challenge in terms of revenue, especially in one of our highest season months. And this has a significant impact in our overall profitability for this year. We don't see this as a structural trend going forward. Does that answer your question?

Pedro Balcão Reis - Santander, Equity Research

Not really, I'm sorry. I was wondering -- I think you recognize that the guidance for the EBIT margin of 6% to 8% this year. It has become more challenging than before than when you announced it back in November. I just wanted a clarification to what extent the fact that is now more challenging reflects simply the depreciation of the Lat Am currencies year-to-date or if it actually reflects a weaker market, a weaker demand in Latin America.

Cláudia Sender Ramirez

Yes. This is -- we -- I think it's really a mixture. I mean, we -- there's various elements that are moving parts in the environment, and we have definitely been impacted by the weaker currencies. There's also, as Cláudia mentioned, other variables that we are still in the process of quantifying, like the World Cup, like a more challenging competitive environment that we have seen basically increased capacity in the markets. So I think it's not really only one thing. Because also in addition, we have taken certain business decisions in light of this environment that also -- that are a reaction to the environment that we're seeing and that we also expect to offset some of these negative impacts going forward, certain minor capacity adjustments in the local domestic markets, for example, and certain decisions of how to operate around the World Cup, et cetera. So it's really very difficult to say that it's only one single element.

Pedro Balcão Reis - Santander, Equity Research

One additional question Bradesco and Banco do Brasil here in brazil, they just announced the creation of a new loyalty program company here in Brazil. How does that affect your strategy for Multiplus? Could you just make a brief comment on that?

Andrés Osorio

Yes. We heard of the announcement. We don't think, at this point in time, this change is significant to the Multiplus [ph] situation, although we have to look at this in more detail. And I'm sure that Multiplus will address this in our further conference calls with more detail.

Operator

And your next question comes from the line of Bob McAdoo with Imperial Capital.

Bob McAdoo - Imperial Capital, LLC, Research Division

Most of my questions have been asked. But it seems like last quarter, you mentioned that you had 1 freighter that was parked and was continuing weakness in the freight system. Wondering, is that still parked or have your parked an additional freighter? And also, then, related to that, I noticed in the list of the aircraft that are scheduled to be returned, there is one freighter there. Is that the one that is parked or is that a different one? Just trying to understand that a little bit.

Álvaro Carril

Yes. This is Álvaro Carril from the Cargo division. What I mentioned in previous conference call is that we have the equivalent -- 2.5 freighters are not being operated. It's not that we have these freighters parked actually, but that we have used our [indiscernible] in order to utilize our complete fleet in much less hours that the equivalent -- that means that equivalent of 2.5 freighters is being parked, but there's not actually one freighter parked, they're all flying. Yes, we have been concealing [ph] with you in the previous restructuring plan. We are considering to reduce one freighter from our fleet. But as I said before, we have the equivalent of 2.5 less aircraft actually fly.

Bob McAdoo - Imperial Capital, LLC, Research Division

You say the equivalent of 5 aircraft less flying. [indiscernible]

Álvaro Carril

2.5, 2.5, 2.5.

Bob McAdoo - Imperial Capital, LLC, Research Division

2.5, okay. And then, the other thing is there was a mention that weakness in the -- from -- in the revenue stream from the Brazilian domestic freight. And I was wondering is that because Brazilian domestic freight is denominated in real and therefore, when translated into the U.S. dollar, it makes it -- even though the demand is there for freight services, it turns into less U.S. dollars on the corporate books? Or is there actually a weakened demand for Brazilian domestic freight service?

Gisela Escobar

No. The demand in the Brazilian domestic market has been strong in terms of cargo. The impact is -- has been basically with relation [indiscernible]

Unknown Executive

[indiscernible]

Gisela Escobar

No.

Bob McAdoo - Imperial Capital, LLC, Research Division

Excuse me, I could not hear.

Gisela Escobar

Sorry, we had a problem with the lines. But what I was mentioning is we have, in the domestic Brazil market, for cargo demand, has been very strong. But the impact that we see for that portion of the business is that since revenues are denominated in Brazilian reals, the depreciation of 18% of the Brazilian currency has a negative impact. And the demand...

Bob McAdoo - Imperial Capital, LLC, Research Division

Yes, that's what I thought, okay.

Gisela Escobar

Approximately 20 [ph], the total cargo business.

Operator

And your next question comes from the line of Savi Syth with Raymond James.

Savanthi Syth - Raymond James & Associates, Inc., Research Division

Just -- since you mentioned that you're increasing in SSC or increasing capacity into Colombia and Peru, I was wondering if you could talk a little bit about Colombia, from -- just anecdotally, it sounds like it's probably weak in the domestic market, with -- you've seen Copa pulling out capacity and you've seen Viva Colombia really come into that market. And I believe that's largely a breakeven market for you, and I was just kind of curious as to the thinking around adding capacity to that market.

Gisela Escobar

Yes. It's -- basically, we see a very important opportunity in the domestic Colombian market. It's a market that is growing at healthy rates, and it's also the second largest market in the region. So we see that there's definitely a continued opportunity there. We do, however, see obviously a much more challenging competitive environment in the domestic Brazil than we do in our other domestic markets because obviously, we are not the leading player in that market and there's another flag carrier, that's the Colombian airline. So we have seen, I think, from a competitive standpoint, that it's a challenging market, but nevertheless, we see an opportunity to grow there. And we also see an opportunity to improve our position with the corporate passengers in the domestic Colombian market, which is something that we are [ph] strategizing to do.

Savanthi Syth - Raymond James & Associates, Inc., Research Division

What's the timeframe around that? I know that the corporate position was a little bit of a harder to really crack. And so like how long does that opportunity [ph] intake? And how long do you think it takes for Colombia to be more than a breakeven contribution?

Gisela Escobar

It's more like a 2-, 3-year timeframe. It's not something we expect for this year, let's say.

Operator

And your next question comes from the line of Thomas Kim with Goldman Sachs.

Thomas Kim - Goldman Sachs Group Inc., Research Division

Making [ph] the time for the follow-up here. I just want to go back to some of the earlier questions with regard to more operating margins. I think historically, legacy LAN did a phenomenal job just managing through a lot of challenging macro periods of time. And if we just look through only at the first quarter operating margins, like your average had been around 17.5%. And we noticed like for '04, '05, when the conditions were not necessarily as ideal, you were able to respond or sort of snap back and recover margin growth and get back to sort of your normalized level within like 6 quarters or so. And then just -- if you can maybe just help us contextualize what might be different this time around? I mean, there have been questions kind of suggesting or alluding to, is it the macro or is a combination of macro, as well as the integration or the increasing -- is the competitive landscape any different? But from your perspective, I mean, how realistic is it for us to assume that you will be able to get back on track toward your industry-leading margins for a large network carrier, within, let's say, 2015, '16 time horizon? Or should we be maybe resetting some of our expectations just given that the situation is really very different today? You've got tougher macro, you have a growth environment that may not look like what we have seen in the 2000s, and then, obviously, integrating TAM, which is a huge undertaking, also sort of complicating the underlying operations. So I mean, to the extent that you could perhaps help us understand and just setting -- and us setting our expectations, not just for next quarter or 2, but more for medium term, '15, '16 perspective, that'll be really helpful.

Roberto Alvo Milosawlewitsch

This is Roberto Alvo. In the medium to long term, we are confident that the company LATAM, altogether, can return to the levels of profitability that you used to see, as would you call this, the old LAN. We have to say, though, that the macro is affecting in the shorter term. The companies were growing at a very higher pace in the past 5, 6 years than what is today. But we know we are confident in the region and we think that these levels will come back. We've done all the -- we've taken all the necessary steps to organize the company, reduce cost, bring synergies, we still have a lot of work to do in execution, but we don't see any fundamental constraints today, not to think about us returning to levels of double-digit margin -- operating margins for the company in relatively medium term.

Thomas Kim - Goldman Sachs Group Inc., Research Division

Do you think -- are you planning perhaps another Investor Day that will help us walk through, maybe in more detail, like the game plan, and just to help us from the sell side just to better understand, to help us increase the confidence of your ability to get back. Because I think a lot of us do know your history and track record and think you guys have done an amazing job before. But then, do you think that would be helpful and would you be potentially planning something like that?

Gisela Escobar

We do have plans this year to be in -- I mean, to be in all of relevant markets and to have ongoing discussions with investors and with analysts regarding the plan so that people feel comfortable with the story. We are not planning this year to have an Investor Day, but it's something that we are thinking of in more for -- probably for next year.

Operator

And our next question comes from the line of Daniel Guardiola with LarranVial.

Daniel Guardiola - LarrainVial S.A., Research Division

I just have a couple of questions. First of all, I would like to know if you could please give us an update on the situation on Venezuela. And the second one is regarding the entry of TAM to oneworld alliance. I would like to know if you could please share with us by how much are you expecting the increase in USD revenues because of this movement.

Andrés Osorio

On the first topic of Venezuela, as we mentioned during the last conference call, we've taken measures to reduce our exposure to [indiscernible]. And the amount of -- the pool of money of revenues are, in Venezuela today, remains stable or slightly decreasing for -- from our last call. Due to our decisions to sell more seats in other point of sales rather than in Venezuela, and we expect that in the future, that will remain the same. So that's all of the decreasing trend. So [indiscernible] to Venezuela, it's going down. On the other question regarding oneworld, as you know, TAM joined oneworld March 1, so we're in the initial phases of capturing the benefits from that transition. And we remain on track, given the synergy, [ph] destinations that we did before the transition. We keep it [ph] slightly larger. We are not, I believe, at this point, to share a specific number. But all the traffic flow, the frequent flyer revenues and the connecting passengers in Miami, Madrid are slightly above our initial expectations. So that's good news.

Operator

And at this time, I would now like to turn the presentation over to Gisela Escobar. Please proceed.

Gisela Escobar

That -- well, that concludes our call for today. Thank you, all, very much for participating and for your questions. And as usual, we're available if you want to have any follow-up discussions. Thank you, and goodbye.

Operator

Ladies and gentlemen, that concludes the presentation for today's conference. You may now all disconnect and have a wonderful day.

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