LATAM Airlines Group S.A. (LTM) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to the Second Quarter 2026 LATAM Airlines Group Earnings Conference Call. [Operator Instructions] Before I turn the call over to the management, I'd like to remind you that certain statements in this presentation and during the Q&A may relate to future events and expectations and as such, constitute forward-looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans, objectives and expected performance or guidance are forward-looking statements. These statements are based on a range of assumptions that LATAM believes are reasonable, but are subject to uncertainties and risks that are discussed in detail in the published 20-F 2026 guidance earnings release, financial statements and related CMF and SEC filings. The company's actual results may differ significantly from those projected or suggested and any forward-looking statements due to a variety of factors, which are discussed in detail in our SEC filings. And if there are any members of the press on the call, please note that for the media, this is a listen-only call. I will now hand the conference over to Ricardo Bottas, CFO, Mr. Bottas, please go ahead.

Thank you. Hello, everyone, and good morning. Welcome to our second quarter 2026 conference and thank you all for joining us today. Here with me is Roberto Alvo, our CEO; Andres Del Valle, Corporate Finance Director; and Tori Creighton, Head of Investor Relations, and we will present the highlights and results for the second quarter 2026. I hand it over to Roberto to share his opening remarks. Roberto?

Good morning, and thank you, Ricardo. The second quarter of 2026 was an important demonstration of the resilience of LATAM's group's business model. During this period, the industry faced 1 of the sharpest increases in jet fuel prices in recent years, creating a significant cost headwind across the sector. As we estimated back in May along had our first quarter publication, the impact of higher jet fuel prices was in excess of $700 million in addition to -- in the second quarter alone. Yet despite this environment, LATAM delivered profitable results reflecting an adjusted operating margin of 5.4%, which was also on the higher end of the estimate that we have made of mid- to low single digits back then. These results are not explained by a single initiative. We are the outcome of a business that has been consistently strengthened over the last several years to perform across different environments, which starts with a dedicated effort to care for our customers constant to improving their experience and making them willing to experience LATAM. In addition to this, a diversified business structure integrating our passenger, cargo and LATAM Pass businesses, together with an effective commercial strategy, a competitive cost structure, a strong balance sheet and above all, the commitment of more than 43,000 employees across the group, enabled LATAM's agile response while maintaining a focus on profitability. Throughout the quarter, this ecosystem delivered exactly what it was designed to deliver. Customer preference remains strong across the network, particularly in the premium segment, which now accounts for 29% of the passenger revenues allowing the group to partially offset higher fuel costs through deferred adjustments while preserving healthy demand. At the same time, cargo, loyalty and other ancillary sources of revenue diversification reinforce the resilience of the model during a particularly challenging period. Diversification only becomes an asset where it's supported by effective execution and LATAM has consistently demonstrated that capability. During the period, the group rapidly activated multiple commercial operation initiatives to mitigate the impact of higher fuel prices while continuing to invest in customer experience, operational reliability and the long-term competitiveness of the business. Financial strength also remained the key enabler, particularly in such a volatile environment. A strong balance sheet and healthy liquidity over 26% of last 12 months revenues provided LATAM with the flexibility to navigate a period of heightened uncertainty without losing focus on its long-term strategy and value-creating objectives. As we enter the second half of 2026, the environment remains highly dynamic, significant swings in jet fuel prices we have seen over the last few weeks are a clear reminder that volatility continues to be present. The second quarter provided us with 1 of the most severe fuel prices in the industry has experienced in recent years, and we believe we have navigated it well. We don't expect that price volatility to decrease during the remainder of the current quarter. In this sense, we remain cautious though this quarter also reinforces our confidence in the group's ability to navigate this challenging environment. As we now enter what is seasonally a stronger half of the year for the business, we do so with the confidence that comes from having demonstrated the resilience of our business model. LATAM Group has commercial and financial tools, operational flexibility and most importantly, the people and the mindset to continue adapting effectively, not being gaining volatility and creating long-term value. Finally, regarding guidance, given the information we gathered in the past quarter and therefore, better visibility we are reinstating our full list of parameters, and we have improved our outlook for the year. However, it is important to note that because of the high fuel price volatility, these numbers should not be only seen as our expectation given the stated assumptions, but also as understanding of the resilience of the model in the current environment. With that said, I'll hand it over to Ricardo to go over the specifics of LATAM's performance during the quarter. Thank you.

Thank you, Roberto. Please join me on the Slide 4 to have a look at our overall results. As Roberto just explained, the second quarter was defined by an unprecedented increase in jet fuel prices. During the quarter, the all-wheel average fuel price, including heads increased by more than 80% year-over-year, resulting in a 93% increase in total fuel costs. and creating 1 of the most significant cost headwinds the industry has faced in recent years. In response, LATAM rapidly implemented revenue management actions and target capacity adjustments. With these, total revenues increased almost 28% year-over-year, reaching nearly $4.2 billion. This was problem by passenger revenues, which grew 28%, reflecting the consistent capacity growth together with the successful implementation of continued fare adjustments while preserving resilient demand across the network. Cargo revenues increased almost 22%, benefiting from both higher yields and continued growth in tons transported, which demonstrate the flexibility of this business to adjust pricing given its significantly shorter booking cycle. On the cost side, the adjusted costs, excluding fuel increased by 14%, broadly in line with the continued growth of the operation. It's worth noting that part of this increase reflects costs that are directly linked to higher passenger fares together with the appreciation of local currencies, particularly the Brazilian real, which pressures the dollar-denominated cost base. Just as a reference, the Brazilian reference in Q2 2025 was 5.66 and now was 5.05. That said, passenger CASK ex-fuel remained sequentially in line at 4.5 cents. Despite these unprecedented fuel environment and while growing capacity by 8.9% at a healthy 82% consolidated load factor level, LATAM remained profitable and delivered an adjusted operating margin, as Roberto mentioned, at 5.4% during what is seasonally the weakest quarter of the year. This translated all the way to the bottom line, with the group generating a positive net income of $125 million. These results demonstrate that while the fuel shock had a significant impact on cost and costs -- the combination of effective execution, commercial flexibility and the resilience of LATAM's diversified business model allowed the group to increase unit revenues this quarter. So tail mitigating a substantial portion of that impact. Let's now take a closer look at the commercial execution behind these results on the next slide, Slide #5. During the quarter, LATAM Group continued executing its profitable growth strategy, increasing consolidated capacity by 8.9% year-over-year alongside some targeted capacity adjustments to mitigate the impact of higher fuel prices. These actions were selective, allowing LATAM to preserve profitability without compromising the strength, connectivity or integrity of its overall network. Importantly, demand for LATAM Group remained resilient across all markets, even under a high share environment. Consolidated load factors declined modestly from 83.5% to 81.8%, Reman healthy levels across all markets where the group's affiliates operate during the quarter. It's worth mentioning that particularly in June, there was a higher impact on demand, reflecting the temporary impact of the FIFA World Cup on travel patterns across South America. This combination of effective case management, a differentiated value proposition, revenue actions and resilient demand translate into a 17.5% increase in consolidated passenger RASK during the quarter, which allowed LATAM group affiliates to successfully pass through a significant portion of the increase in fuel costs. Looking at the different markets, LATAM's affiliates in the Spanish-speaking countries domestic markets delivered a particularly strong performance, increasing passenger RASK by 15% in local currency or 20% in U.S. dollars. For its part, LATAM Airlines Brazil and its domestic market also successfully increased its unit revenues with passenger RASK growing 12% in local currency and almost 24% in U.S. dollars demonstrating its ability to implement fare adjustments while preserving healthy demand. Lastly, the international segment increased passenger rest by almost 13%, even while we're expanding capacity by 12%. The quality of LATAM revenues also played an important role. Premium demand continued to demonstrate greater resilience than the broader market, allowing the group to implement fair adjustments while preserving passenger preference across the network. Let's jump now to Slide 6 to take a better view at this. LATAM's resilient revenue quality was particularly evident in 2 areas that continue to deliver exceptional results for the group: premium traffic and the LATAM Pass ecosystem. In the quarter, as challenge as this one, these 2 elements once again proved to be especially available because they make up a part of the LATAM customer base that is structurally less elastic and more resilient. On the premium side, demand remaining strong and continue to enhance the quality of the group's revenue mix with premium revenues now representing 29% of the passenger revenues and growing at a rate faster than main cabin revenues. More importantly, this segment continued to respond positively to the differentiated value proposition LATAM has built over time. and reflected in Net Promoter Score that remains 3 points above the overall passenger average in line with historically high levels. This confirms that the investments made in product and services continue to strengthen customer preference. LATAM Pass also remained at a key lever during the quarter. The program continued to deepen customer engagement and strength loyalty across the network while supporting a more resilient and higher quality revenue base. Over time, LATAM Pass has evolved well beyond the traditional frequent flyer program into a broader engagement ecosystem, allowing the group affiliates rent their customers' relationship, both in and beyond the travel experience. Today, more than 67% of passenger revenues are generated by LATAM Pass members, up from 6% previously. reinforcing the growing importance of the program within the commercial ecosystem. The engagement of Elite members also continues to deepen. While the numbers of Elite members increased by 26% year-over-year, third-party sales generated by this segment grew 48% compared to the same period of 2025. highlighting the increasing of relevance of these customers across the board, the broader LATAM Pass ecosystem and they're growing engagement with the partner network. Altogether, the trust in the LATAM brand by customers, the alignment with the premium customers and the LATAM Pass acquisition help explain why LATAM affiliates were able to preserve revenue quality and successfully pass through a significant portion of higher fuel costs during the quarter. More importantly, they represent the strategic pillars that create value across the cycle, not only strengthening the group's resilience during periods of Heinz and volatility, but also structural growth drives that will continue to support LATAM's group's commercial performance as operating environment improves over time. Let's move to the Slide 7. The differentiated value proposition we just discussed is not only reflected in Premium and LATAM Pass. It is the result of several complementary elements working together with the network playing a central role. The incorporation of the Embraer's E2 split is a key embot of this strategy, allowing LATAM Group to further strengthen its premium offer, expanding connectivity and opening new sources of profitable growth. The entry into service initiatives are advancing positively and are on track. The first aircraft have or red being manufactured, Cabin certification is currently underway, and the seventh aircraft is already in production. LATAM airlines Brazil expect to receive the first 12 aircraft between October and December of this year with commercial operations confirmed on November 3, 2026. The network will increase capillarity while furthering strength in LATAM Airlines Brazil connectivity. The initial deployment will cover a total of 42 domestic routes within the Brazilian market, which includes 8 new routes, for net in Guarulos with the new destinations of Cabo Frio, Giparala, undonopolis and Macae enabling LATAM Airlines Brazil to expand into markets that were previously not part of its network and 4 additional routes linking existing bases. These aircraft provide the flexibility to expand the group's connectivity across Brazil, increasing capillarity and broadening access to regions with attractive corporate and leisure demand profiles while creating new opportunities. Altogether, LATAM lateralize Brazil will reach a total of 67 domestic destinations, the largest network in its history compared to 44 in 2019. Looking ahead, the airline is also evaluating up to 18 potential new bases for the next phase of its Zimbra P2 expansion as an additional aircraft are delivered beginning early 2027. Beyond the domestic market, while this network expansion significantly enhanced connectivity with in Brazil, the strategic value goes well beyond the mask travel by connecting smaller regional markets into the main focus cities, the Embraer E2 will provide customers with access to LATAM's Group extensive network across South America and the 4 continents served by the group. The increase the connectivity of overall network building LATAM Group's addressable market and further enhance the group's value proposition. From a product perspective, the Embraer E2 will feature both the economy and premium economy cabin, reinforcing consistency across the fleet and preserving the differentiated experience that LATAM Group customers expect. Even with the differentiated aircraft configuration of the group, we will continue delivering a consistent product standard so that the new aircraft type does not mean a different customer experience. Overall, the incorporation of the Embraer 2 is not only about adding aircraft. It's about reinforcing the network, improving connectivity through a more efficient and versatile aircraft. and continue to build on the differentiated value proposition that LATAM Group has developed across the region. Moving on to Slide 8, let's keep back to the quarter's performance and take a look on the cash generation. The group's strong operating performance continued to translate into solid cash generation during this quarter. LATAM generated $476 million in adjusted operating cash flow, even considering the impact of high jet fuel prices. Once again, demonstrating the business ability to consistently convert earnings into cash. As a result, the group generated a positive cash -- change in cash, close to $150 million before dividend payments and ended the quarter with a positive net cash valuation of $110 million. It's worth noting that these dividend payments correspond only with the remaining balance required to complete the mandatory 30% dividend distributed base on 2025 net income. As you may recall, LATAM had already distributed $400 million in interest dividends during the fourth quarter of 2025 with this payment simply reflecting the final remaining. This consistent cash generation remains 1 of the LATAM's key pillars, providing the financial flexibility to continue investing in the business, strengthen the balance sheet and executing the group's long-term strategy. Moving to Slide 9, see how this translates into continuing strengthening the balance sheet. and level of liquidity. The group closed the quarter with liquidity of more than $4.2 billion, equivalent to 26.2% of last 12 months' revenues. On the leverage side, adjusted net leverage remained at 1.5x, comfortably below the company's financial policy target and consistent with the planned capital management that has chartered at LATAM over the last several years. This liquidity and net leverage position, together with management's perception that the stock is under valuated at the current prices supported the Board's decision to propose a new share her purchase program, which was approved by shareholders early this week. The new proven contemplates a duration of no more than 5 years and allows for the repurchase up to 5% of the company's total subscriber and paid shares. With these, shareholders have delegated to the Board of Directors, they afford you to determine the terms of the program's execution, including its time, mechanisms, price and other relevant conditions. With this, we remain confident that the strength and fundamentals of LATAM business model, the commercial strategy and execution capacity, both commercially and operationally, combined with the strength of the capital structure maintain the solid foundations of the aspiration contained in the financial policy. The policy which considers the preservation of liquidity ratios between 21% and 25% and a net leverage below 2x, allow us to continue on the path of improving LATAM's credit ratings. Now let's move to the Slide #10, following the second quarter. And as also, as Roberto mentioned, we see a more constructive outlook for jet fuel prices over the remainder of the year. LATAM is updating its full year guidance for 2026, reincorporating the full set of metrics, including capacity with year-over-year growth between 9% and 10%. and revenue projections between $17.3 billion and $17.7 billion, among others. The updated guidance reflects a more constructive backdrop for the remainder of the year than the 1 anticipated on the prior guidance was issued, particularly with respect to prices. based on the assumptions incorporated today, LATAM expected the second quarter to have represented the most challenging operating environment of the year as the group enters a seasonally stronger second half of the year under more favorable assumptions, the updated outlook also incorporates what LATAM demonstrated during this dip. It's a bit to execute the discipline and deliver solid results even under challenging conditions. Turning first to the assumptions behind the updated guidance. In the prior guidance, LATAM assumed an average fuel price of $170 per barrel for the third quarter and $150 for the fourth quarter. Today, reflecting the evolution of the market, the company now expect average fuel prices of $147 per barrel in third quarter and $130 per barrel in the fourth quarter. Based on these updated assumptions, LATAM now expect adjusted EBITDA between $4.1 billion and $4.4 billion, improving the midpoint of the prior guidance by $250 million. Passenger CASK ex V is expected to remain in line with the prior guidance between 4.5 cents and 4.7 cents as the assumption of BRL exchange rate stayed at the same level of BRL 5.15 per dollar, In terms of the balance sheet, liquidity is expected to end the year of at least 4.7 billion, while adjusted net leverage is projected to be equal to or below 1.6x. Overall, the update guidance reflect a business that has multiple levers to deliver results, and that's now supported by a more constructive macroeconomic backdrop despite the level of uncertainty and the fuel price volatility. Lastly, let's move on to Slide 11 for a few closing remarks. First, the second quarter did not change our strategy. It validated. In 1 of the most challenging operating environments in recent years, LATAM once again demonstrated that the business has built and planned to perform across different macro and market conditions with now even more solid and tested foundations. Second, the group showed that it has multiple efforts to deliver results. effective execution, commercial flexibility and the group diversified ecosystem allowed LATAM to preserve profitability, increase unit revenues and mitigate a substantial portion of the fuel shop. Third, the high level of trust from customers and the quality of the group's revenue base continue to be among LATAM's key elements. Premium customers and LATAM Pass ecosystem once again, supported by a more resilient demand profile allowing the group to preserve revenue quality even in a significantly higher fare environment, fully a profitable growth strategy, combining capacity increase with healthy load factors levels. And finally, LATAM is updating its full year guidance for 2026 to reflect a more constructive outlook for the remainder of the year, having demonstrated to deliver solid results during what we expect to have been to have been the most challenging quarter of the year, the group now enters a more favorable operating backdrop, while we remain focused on disciplined execution, risk and revenue management. Thank you, and let's open the line for questions.

[Operator Instructions] Your first call comes from Michael Linenberg from Deutsche Bank.

Good morning, everyone, and well done, the fact that we're now back to an EBITDA guide for the year that is within spitting distance of where you were prior to the war even beginning. So well done on the revenue recapture or revenue recovery. I have 2 questions here. Just more specifically on the international where the PRASK was up just under 13%, can you just give me a better feel for how that looked via geography? And I don't care about Oceana or Africa. I care more about Europe, North America and just regional how those may have differed the trends in those various key markets?

All right, Mike, and thanks for the comments. Again -- yes, across the board, international was solid. In the previous quarters, I mentioned that we saw a little bit of weakness from South America to the U.S. linked at some point in time with potential visa restrictions also with the announcements and policies of the U.S. government in general. We have seen, I would say, a little bit of an improvement in those lines vis-a-vis what we have seen in previous quarters. Europe remains very solid. We had a little bit of a slowdown in demand generally for the World Cup, actually, a little bit more than what we expected. We know that these events always have a little bit of an impact. And this I think also had some impact on the second quarter results, but we probably would have been a little bit better. But regardless of that, the demand remains very solid. In the regional I would divide it into, I would say that Argentina is a little bit slower, and this is probably a function of the economic situation of Argentina at this point in time. It was very, very strong in the beginning of the year. So a little bit weaker in that sense. The northern part of South America is in a good place. But I wouldn't mark any specific large concerns with respect to how we're seeing international demand. And Oceania, even though you don't want to hear, it's also a good place.

Okay. Good. Okay. And then just my second question to Ricardo. I did see that you took a tax credit in the quarter, what drove that? And what's a good tax rate that we should use for the back half of 2026?

Michael. that mentioned in the tax credits, I call a regular business as usual situation because remember that we have a different tax environment in each country. So in some countries, we could have in some moments, some additional provisions or some tax grads that could take in some local administrative or even the judicial decision. So that was the reason that we have that situation today in 1 affiliate. And I think the best way to see, Michael, because I mentioned, there is not one-off itself, I think, is to have last 12 or 24 months average tax rate, and I think it could be a good driver for you.

Can you hear me?

Now we can hear you, yes.

Okay. My question is you think about 2027, now that the disability is gradually improving. And looking at your fleet plan, the average number suggests that it should be increasing by mid- to high single digits in next year. Just either up their assumption for capacity growth into 2027. And think about this yield environment that we are seeing given the fuel spike, is it fair to assume that once fuel comes down, LATAM and the rest of the industry should be able to keep most of that price increases that we saw throughout 2026 for 2027.

Thank you, Ellie. Let me see if I understood your fleet question correctly. So yes, we have on the fleet plan, that increase in fleet that you see in 2027. Do you remember, that we're receiving a significant number of Embraers in the last 2 months of the year. So even though the count for the end of the year of 410 accounts for a dozen Embraers, they basically will not fly almost anything in 2026. So we'll see the impact of the Embraer fleet most significantly in 2027. We haven't finalized our capacity plans for 2027, So we don't have a figure for you but we have the potential of growing significantly with this part of the fleet and also remember that we have a number of old aircraft that we have decided to keep these in that are -- the flexibility that we have downwards in case of need. Regarding your fair question for 2027, I mean I'd love to have a crystal ball here. I think that the comment here is demand is strong and stable. Premium revenues are growing. We see a lot of premium leisure. We see a lot of corporate. Ultimately, I think that the fair environment in 2027, let's assume that fuel goes down to something that looks a little bit more like 2024, 2025. It will end up being, I guess, a function of industry capacity probably. But what we have seen in the past is that normally, you see fair sticking a little bit longer when they're high before coming down than going the other way around. But let's see how the environment behaves for the time being and for the rest of the year, we have a good outlook in terms of demand and the capacity we are deploying matches well what we believe is what we can serve and what the passengers want to try for the render of the year.

Your next call comes from the line of Andre Ferreira with Bradesco BBI.

Good morning. -- have 2. So 1 is recently the Brazil development and approve credits for airlines usable tabulation funds at attractive rates. My question is, if you plan on moving it and what's the latest on when the credit will actually be the first? And my second question on the guidance, the same domestic ASK continue raise compared to the December guidance, right, while cutting domestic Spanish-speaking countries through 4 to 5, looking at RASK in the 2 regions here where they are somewhat similar. So my question is, if it's is better relative demand strength, capacity discipline by competitors still driven economics? So what was the riding force in the division.

Sorry, the audio was quite bad. So I think we understood your questions. So first 1 regarding a, I'll pass it to Ricardo, and I'll take the capacity question on the domestic Brazil for the guidance.

Okay. Regarding Fnac, I think it was public that was a line of credit provided to the Brazilian Airlines. So we are taking part of the exit of that line of credit. And yes, we are still having some ongoing conversations with the BMS in terms of the ways that we should execute that line. But so far, it is the information we have in terms of the line available for the entire market in Brazil until the end of this year Okay?

Regarding capacity for domestic Brazil, and I think I understood you were comparing it to the guidance for domestic Spanish-speaking countries. Remember again that we have the Embraer fleet coming into domestic Brazil specifically. So we're accounting for that in the guidance. We see very healthy demand in Brazil, in general, we see a number of opportunities to continue growing our network as it was explained before. Domestic Brazil capacity is a little bit higher in this guidance than what we published in the beginning of the year when we gave the first outlook of 2026. This is basically a function of the robustness that we see in demand and the solidity of our network and our presence in Brazil. Also remember the fleet has a lot of flexibility, so we can move capacity around within the network. And the current spread of capacity that you see between Spanish speaking and Brazil is basically a function of where we see the opportunities. I think it's fair to say, finally, on domestic Spanish speaking, that we are seeing a little bit of a weak domestic Chile environment actually, the economy hasn't grown for the last 6 or 7 months, if you see the reports on the economy altogether. And that has a little bit of an impact on the average that we see in Spanish speaking. The position we have in domestic Chile is very healthy, still 65% market share. But the outlook still is positive for the remainder of the year. I hope we answered your questions because we prepare pretty well.

[Operator Instructions] Your next question comes from Jen is from Morgan Stanley. Please go ahead.

Yes. Congrats on the results considering the challenging environment, quite impressive. So I just -- I have 2 questions basically. One on your hedging and the hedging results for the quarter. You had a negative fuel hedging results. So just trying to understand like how to forecast it into the future? Because at the end of the day, I do understand that your hedging strategy protects up to a certain range, but we're still a bit surprised to see like negative results on that line specifically and just want to have a better understanding on how we can do a better job in forecasting that line going forward. And also considering that you're now incorporating more like downside protection without limits. And my second question goes to in general, like the Brazilian market environment, how are you seeing the competitive environment evolving, not just in terms of capacity, but prices, I mean you've been very successful in raising prices. So just wondering what's your like sense of how things are heading.