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Avianca Holdings (AVH) Q3 2019 Earnings Call Transcript

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Avianca Holdings (NYSE: AVH)
Q3 2019 Earnings Call
Nov. 14, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Avianca Holdings Third Quarter 2019 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Luca Pfeifer, Investor Relations Officer for Avianca Holdings. Thank you. Mr. Pfeifer, you may begin.

Luca Pfeifer -- Investor Relations Officer

Thank you, operator. Good morning, everyone, and welcome. Thanks for joining us this morning to review our results for the third quarter 2019. As on prior occasions, we will be simultaneously translating our earnings results conference call from English to Spanish.

Joining me on the call today is our CEO, Anko van der Werff; and CFO, Adrian Neuhauser. Anko will begin our call with a review of key operational highlights from the third quarter 2019 and we'll then turn the call over to Adrian, who will discuss highlights from our financial results. We will conclude the call with Anko's brief closing comments and then open the floor for question-and-answer session.

As a reminder, I'd like to call your attention to the safe harbor statement in connection with today's call. Please note that management will make forward-looking statements today, including those with respect to expected future operating results, that are based on our current expectations, forecasts and assumptions, and involve risks and uncertainties. Please refer to the risk factors inherent in the company's business and that have been filed with the SEC. Actual results may materially differ from any forward-looking statements that the company makes today.

Avianca Holdings does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise expect as required under the applicable law.

With that, I'd now like to turn the call over to Anko van der Werff. Anko, please go ahead.

Anko van der Werff -- Chief Executive Officer

Thank you, Luca, and good morning and thank you everyone for participating today. It's been an exciting and productive three months for me working with the entire Avianca team. Today I'm very excited with the task ahead and feel honored to lead Avianca to its next 100 years. As you know, Adrian Neuhauser, our CFO, our management team and I have been working tirelessly on advancing the execution of our Avianca 2021 plan and have successfully delivered on important key objectives, while maintaining our unwavering focus on our customers.

And I'm pleased to share with you today the many areas, where we have swiftly gained meaningful traction to achieve the critical initial changes that will strengthen our company's competitiveness, while we implement crucial financial adjustments to strengthen Avianca's capital structure.

Avianca delivered a third quarter showing improvements from an operational perspective, and let me walk you through our progress during the quarter on our planned key pillars. I'll begin with our operational efficiency, which was driven by our decision to streamline and rationalize our routes with an eye toward optimizing overall profitability and simplifying our fleets. During the quarter, we successfully delivered on key milestones outlined on our second quarter call, canceling 21 unprofitable routes and redeploying free capacity.

Further, we sold two Airbus A320s and one Airbus A318 aircraft and we made meaningful progress phasing out the Embraer's 190s, and A318 aircraft within our fleet, which we expect to conclude by year-end 2019. As a result, our capacity growth trends measured in ASK decelerated down to plus 0.9% year-over-year increase for the third quarter 2019, down from the first quarter of 8.5% and the second quarter growth of 4.7%, as we adjust for third-party operated capacity in 2018.

Year-over-year capacity growth in our domestic markets has already trended negative. On delivering operational excellence, our ongoing focus -- on delivering operational excellence has enabled us to improve Avianca's on-time performance by 10.4 percentage points, reaching nearly 81% for the third quarter, which is directly in line with the fundamental pillar of our Avianca 2021 plan.

I'm pleased to note that during the third quarter, we also made progress on unit revenue and cost performance. Avianca's TRASK reflected a 3.2% year-over-year decline. However, once we adjust TRASK for foreign exchange headwinds and one-time events, we see a year-over-year increase of plus 0.2%.

Adjusted for the one-time events directly related to the execution of our Avianca 2021 plan, as well as for accounting changes and charges relating to Avianca's turnaround process, third quarter 2019 unit cost, excluding fuel decreased 2.6% to $2.06 [Phonetic]. It's the lowest adjusted CASK ex-fuel in our company's history.

As I had emphasized in our second quarter call, we remain confident that the critical initial steps we've taken and continue to implement have enabled us to deliver swift margin expansion in line with the Avianca 2021 plan. As such, we've achieved an adjusted EBIT margin of 8.3% for the third quarter, a 126 basis points increase year-over-year. We understand that we are providing adjusted numbers, which frankly none of us are fan of, but this is done to reflect the improvement in our underlying business. As we progress the Avianca 2021 plan, we expect our unadjusted financial results to reflect the true strength of our business.

Turning to Avianca's financial reprofiling, while Adrian will go into deeper detail, I'd like to comment on the significant progress we've made during the quarter related to our bond exchange. As announced, the bond exchange offer launched on August 14 this year and successfully closed November 1st. Over 88% of the outstanding bonds were tendered, a truly outstanding results, which reaffirms our investor support and confidence in our Avianca 2021 plan.

Following the successful bond exchange, both United Airlines and Kingston Holdings reiterated their commitment to provide Avianca with a $250 million secured convertible loan, an important milestone for our company and a catalyst, which will further improve our capital structure. This commitment will become fully binding once the lenders and Avianca finalized the necessary documentation and obtain the appropriate corporate approvals for the convertible loan, which we expect to conclude as soon as possible.

Further, LifeMiles remains an important component to our continued strength in delivering an outstanding customer experience and to the success of our Avianca 2021 plan. The program again demonstrated a healthy 9.9% year-on-year -- 9.9% year-on-year membership increase reaching an outstanding 9.5 million total members for the third quarter 2019. Strong performance during the quarter was again driven by a 25.6% year-on-year expansion of our commercial alliance, which enables us to further strengthen our leading position as one of the most relevant loyalty companies in the region.

Turning to the future. On December 4, Avianca Holdings will celebrate 100 years of continuous operation, marking a significant milestone in our corporate and worldwide aviation history. This Centennial also represents an exciting and meaningful turning point for our company as we establish a solid foundation for Avianca's medium-term strategy and for the future ahead.

Specifically, in addition to the many steps we've already implemented, I'm pleased to announce that we're launching our new customer-driven operating plan starting in 2020, which will fully leverage our Bogota's hubs privileged geographical location and considerable potential. This new flight plan enables us to redeploy aircraft and to increase international city fares by more than 20% in the first year alone, leveraging the Bogota hub's unique access to Colombia's strong domestic market of over 21 million passengers, the region's important OMD market, as well as increased North side connectivity, all while maintaining rigorous capacity discipline.

In addition, in order to further improve connectivity for our customers, we've already signed new code share agreements with Gol and Azul as well as launch new routes between Bogota to Asuncion and Bogota to Montevideo. We've also made the decision to densify part of the Avianca A320 fleet operating primarily in domestic markets. This will result in increased available seats per aircraft from 150 to 174, which significantly improves gross performance on a per aircraft basis.

Densification will be executed throughout 2020 and its program to be finalized by the end of the year 2020. Along the lines of driving revenue, strengthening competitiveness and enhancing profitability, we've begun rolling out Avianca's new and exciting branded fares product, starting with Ecuador and Colombia domestic markets.

Our customers are now able to tailor their travel needs exactly to our product offering to select the experience that best fits their preferences and the purpose of their journey and we're very pleased with the initial response we're seeing in both markets both from a best in the revenue mix and incremental ancillary revenues.

With all of these as contacts, we're optimistic about the next phase of the journey we began this year and I could not be more enthusiastic about the progress we're making and the positive response, we've seen from our business partners, our employees and our customers, who continue to choose Avianca for the best-in-class service and travel experience for, which we are known. I look forward to providing more details and updates during our fourth quarter earnings call.

As we continue to demonstrate, we're improving our execution and are delivering meaningful results toward our goals. We're also hardwiring our operating plan to keep to our key priorities and practices throughout the organization to build a customer and people-centric culture, focused on operational excellence, ensuring profitability and sustainable margin expansion for the future ahead.

Before I hand over to Adrian, I'd like this opportunity to confirm our full year 2019 adjusted EBIT margin guidance remains at 4% to 6%.

Let me now turn the call over to Adrian and I'll return later for some brief closing comments. Thank you very much. Adrian?

Adrian Neuhauser -- Chief Financial Officer

Thank you, Anko. Before getting into the details of our third quarter financial results, I'd like to take a moment to discuss the financial reprofiling process that we began at the end of the second quarter of this year.

As we announced on June 25th and discussed on our second quarter earnings call on August 15th, Avianca's management team with the support of our Board made the difficult decision in line with our 2021 capital structure reprofiling plan to temporarily defer payments of between three and nine months depending on the counterparty on certain long-term leases and on payment on principal, on certain loan obligations to preserve Avianca's near-term liquidity levels.

As we have described the team and I have been engaged in active discussions with Avianca's primary stakeholders, strategic lenders and other creditors to establish terms to preserve near-term liquidity levels and enable us to advance Avianca's reprofiling plan, aimed at strengthening the company's financial position.

I'm pleased to let you know that we have made significant progress with the vast majority of counterparties. And in fact we resumed paying our lease obligations as they come due starting this past October 2019. We're, therefore, in the final stretch of the documentation phase and we're hopeful that we'll be able to complete the necessary steps required to conclude our reprofiling as soon as practical.

Results very shortly. In fact with regards to the May 2020 bond as Anko discussed, we successfully closed the bond exchange on November 1st with a total of 88.1% of the bonds tendered and we provided certain collateral to the tendering bondholders. We're very pleased with the successful bond exchanges; it's a key step in our reprofiling exercise.

Bondholders, who have participated in the exchange will automatically convert into a new secured note with the same collateral, a 9% coupon and a May 2023 maturity once the United Airlines and Kingsland Holdings stakeholder financing of $250 million has been funded.

Turning to our third quarter results, let me take this opportunity to review certain one-time events impacting our P&L this quarter. The most relevant of these effects are related to the implementation of Avianca's 2021 strategic plan. We are also related to accounting changes in charges, which we've been able to identify since initiating the turnaround process as we continue to review and recalibrate our accounting. We adjusted third quarter cargo and other revenues by $10.4 million due to a reversal of intercompany transactions, that were generated in the first half of 2019. Maintenance and repair expenses were affected by an increase related to the disposal of the Embraer fleet and an additional charge has been reflected within Q3 maintenance and repair expenses as certain prior quarter maintenance expenses have not historically accurate -- been accurately reflected in the maintenance systems.

In addition, selling expenses were adjusted due to a provision for doubtful accounts in relation to outstanding Oceanair lease payments.

Finally, fees and other expenses were affected by an increase in professional services cost required to the turnaround plan in addition to an overstatement that we identified in inventory levels in prior quarters.

Moving on to our third quarter results. Total revenues decreased 1.5% year-on-year, largely due to a reduced number of passengers transported as we shrank our presence in the Peruvian domestic market and cut other unprofitable routes. Results during the quarter were also adversely impacted by the weakened macroeconomic environment in local currency depreciation effects on our average fare.

However, as Anko noted, we're seeing encouraging signs on our OpEx side, resulting in a 2.6% year-on-year decrease in unit cost adjusted for one-time events and CASK, therefore reached $0.06 [Phonetic] the lowest CASK ex-fuel number in Avianca's corporate history as Anko already commented. As such adjusted for one-time events, we achieved a third quarter 2019 EBITDA margin of 21.8% and EBIT margin of 8.3%. Both of those are on an adjusted basis. It's important to note that our 2019 EBITDA figures are not comparable to our 2018 EBITDA figures due to the adoption of IFRS 16.

Moving on to P&L, the price of jet fuel decreased by 12.1% year-on-year, while our fuel consumption increased by 4% in line with our strategy to focus on more profitable long haul routes. Together this resulted in a net decrease of roughly $18 million in fuel expenses for the company.

In addition, passenger services expenses fell by 10.4% as we continue to leverage efficiencies. Ground operations costs decreased by 5.3% due to a reduction in outsource services and flight simulator maintenance also consistent with our plan.

Finally, salaries wages and benefits fell by 17% due to weaker local currencies and as we continue to right-size the company. These effects were partially offset by a 27.4% increase in maintenance and repair expenses as we incurred additional maintenance costs in line with the phase out of the E190 and Airbus A318 fleet, which require final service and maintenance prior to redeliver.

Finally, fees and other expenses grew mainly due to an increase in professional fees related to the 2021 turnaround plan.

Moving on to our current jet fleet status, we closed the sale of two A320s and one A318 during the third quarter and all of our E190s have been grounded as we prepare for their phase-in in the coming weeks. As such, we expect to remain on track to remove an efficient aircraft from our fleet and aim to close the year with approximately 148 jet aircraft.

From an operational perspective, capacity growth measure in ASKs slowed to less than 1% year-over-year. The third quarter of the year marks an important turning point in terms of capacity deployment, as we expect capacity growth to in fact turn negative once the remaining aircraft earmarked for sale are completed in the coming weeks. Now despite the fact that capacity growth continues to be above our full year target capacity, we've continued to achieve strong load factors at almost 83%.

In addition, our passenger yields continue to be pressured during the third quarter, as currency depreciation has affected our Latin American customers purchasing power and thus demand. As such, yields declined 2.5% year-over-year reaching $0.092 [Phonetic].

Looking at our business units, I would like to begin with a review of our cargo business unit. Despite ongoing pressure on the global cargo market, we were able to increase transported tons by 12.3% year-over-year, while maintaining our load factors in line with 2018.

The result -- it reflects robust performance in the perishable e-commerce and pharmaceutical product transport segments. As such, we remain the most relevant player out of Bogota, which is the largest air carrier in hub in Latin America and we reached a close second in Miami Airport. As Anko mentioned earlier, our LifeMiles loyalty program continues to demonstrate healthy membership growth with nearly 10% year-on-year increase, reaching a total of 9.5 million members.

Strong performance during the quarter was again driven by 25.6% year-on-year expansion to our commercial alliance, which enables us to further strengthen our leading position as one of the most relevant loyalty companies in the region.

In addition, our co-branded credit cards grew by 7.7% year-over-year, reaching a total of 723,000 cards, allowing bank customers to earn miles on every credit card transaction and redeem them across our partnership network.

In closing, we continue to see headwinds during the third quarter due to a challenging macroeconomic backdrop in the region coupled with volatile local currencies, which pressured our top line. Nevertheless, we are seeing the silver lining on operating costs as we continue to rightsize the company in our operations. We have also begun to see a trend change in unit revenue and expect to see unit revenue begin to improve as we move forward.

We are encouraged by the positive results achieved in the bond exchange offer and are confident that our Avianca 2021 plan will continue to yield positive results going forward. And we therefore maintain our EBIT guidance for the full year, our adjusted EBIT guidance for the full year of 2019 of between 4% and 6%.

With that, I'd like to turn it back over to Anko for closing remarks.

Anko van der Werff -- Chief Executive Officer

Yes. Thanks, Adrian, and before we begin with the Q&A session. I'd like to thank everyone for joining our call today. We recognize that we have considerable amount of work ahead of us but we're pleased with the operational performance of the third quarter 2019 and the important initial progress and measurable results we've delivered thus far on our strategic plan.

I specifically, would like to thank our entire Avianca team around the world, particularly our front line employees who are the face for Avianca and provides a world-class service to our customers every day. I also would like this opportunity to thank our stakeholders including the investment community for your continued support.

And with that, we conclude today's presentation and open the floor to your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Michael Linenberg with Deutsche Bank. Please proceed with your question.

Michael Linenberg -- Deutsche Bank -- Analyst

Yes. Hi, good morning everybody. I have a couple here. I just -- maybe starting with the operations. The fact that you improved your on-time 10 points to 80.8%. What drove that? Was it -- were you coming off of an easy comp, or were there structural changes that you're starting to implement, that is just making you run a better operation? Can you go into a little bit more detail on what drove that turnaround?

Anko van der Werff -- Chief Executive Officer

Yeah, sure, Mike. Hey, good morning. It's Anko. And I think -- it's a bit of every bit of everything to be honest -- so first of all, last year indeed we were at some months, we were our on-time performance was in the low 60s. So that is of course a very low bar to jump. But hats off to the team, because it's not been just one or two things that we've done -- I think really across the board adjusting network, adjusting of course capacity, but making sure that actually people are focused on targets again, making sure that the turnaround times actually match the network that we wanted to give.

There's a lot of airports that are -- that have fog issues in many of our secondary cities let's say, Bogota as well as parts of the year. So adjusting our network for those things making sure actually that really the whole company works as one team and allows the operational team to shine and do their job.

Many things in dispatch, many things when it comes to pilots, crew assignments that we have done focusing on our basis not just in Bogota of course, but different bases where we've made adjustments to the rostering. All of that led to in some months as I said more than 20 points in the second quarter primarily in the third quarter some months still 15. On the whole over 10 points improvement, right? Not 10%, but 10 full points improvement.

So really hats off the entire Avianca team, because it's not been one or two things, but yes last year was very low. I do think that, if you look now right at the 80.8% roughly 81%. In some months we've actually seen 82s, 83s [Phonetic]. That is very decent. We're back to -- yes, that is on par with the better airlines in the world. We have also again worked with people helping us at the more governmental side of things, right? So making sure that the infrastructure works a lot of progress with the airport. So assignment processes making sure that there's potentially review of some noise restrictions at Bogota Airport, which will further alleviate pressure in the morning banks, since really been across the board.

Michael Linenberg -- Deutsche Bank -- Analyst

Okay. Great. And then the second to Adrian, just on the cost side, when I look at the decline in your selling expenses. Looking at travel agency commissions and then also looking on passenger services on board. I suspect that some of these agreements maybe with the travel agency community maybe they weren't industry standard, maybe your onboard product was above and beyond what was competitive in the marketplace. Can you just talk -- because those are sizable reductions, when you look at it just versus your capacity? Like, what was driving that? What were the things besides like agency commissions and even just the onboard product?

Anko van der Werff -- Chief Executive Officer

Yes. If you don't mind Mike, I'll take that one a little bit more and then maybe Adrian, I do think it needed some of those deals were above the market. And we've make sure to put them more in line with what the industry is used to. And that's -- well hard to mention names of course here, but there's been a few of those very considerable sizable agreements, where we've made adjustments.

I do think that on the onboard product, there actually we put some money back.

So we did pullback earlier this year. And by and large I think that was the right decision. It also follows of course the reduction of capacity as a whole, right? But we did bring some improvements to the product back. Better blankets, better food, more food over the last months. It started roughly mid-September. And actually, what we would like to see is if we can further adjust that upwards again here in 2020.

Michael Linenberg -- Deutsche Bank -- Analyst

Okay. Great. And then just one last one and this is more of a technical one. I saw the 6-K out not that long ago that talked about your service to Cuba and whether or not you could fly to or from that country depending on your ownership. And I'm just curious, because I did see you follow through then with the cancellation of I believe Lima Havana. I'm not sure, if that was driven by that, or if it was just poor performance because I do believe that you're still flying to Havana by way of Bogota. Can you just clarify or clear up the Cuban situation and whether or not Avianca can serve that market or not just based on ownership?

Adrian Neuhauser -- Chief Financial Officer

So sure, so Lima Havana actually was twofold, right? We have decided to shut down Lima Havana because of performance.

Michael Linenberg -- Deutsche Bank -- Analyst

Okay.

Adrian Neuhauser -- Chief Financial Officer

So that was a bit of a separate. You will see a shutdown the flying into Cuba shortly. Unfortunately, the conclusion we came to is when -- the -- and we've disclosed this before as regards to loan, right? Remember that when the loan between United and Synergy was put in place, a structure was put in place to reinforce the collateral, where the shares in Avianca Holdings that Synergy owns are no longer held directly by Synergy. They're held in a subsidiary of Synergy called PRW. That PRW subsidiary is a US entity. It's a Delaware thing. And as such, we've determined that by sticking that subsidiary in between we've now become -- that decision effectively made us become subject to Cuba sanctions.

So we have to respect that and stop flying. When we -- depending on how the ultimate ownership structure plays out, a lot of the disputes that are going there and if we are no longer -- if that holding company disappears from our ownership change then we believe we would have to have the right to restart those operations.

Michael Linenberg -- Deutsche Bank -- Analyst

Okay, OK. So that's -- it's a fascinating geopolitical predicament, but it all makes sense. So thanks for clearing that up. Nice job this quarter gentlemen. Really good progress.

Adrian Neuhauser -- Chief Financial Officer

Thanks, Mike.

Anko van der Werff -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Ricardo Sandoval with Bancolombia. Please proceed with your question. I'm sorry it seems that Ricardo has disconnected. [Operator Instructions] Thank you. It seems there are no further questions at this time. I'll turn the floor back to management for any final comments.

Anko van der Werff -- Chief Executive Officer

Thank you very much. Good to see that we've apparently been very clear in our explanation of the quarter this morning. We thank you all for your attention and we will be in touch first during the quarter and otherwise during the next earnings call for the fourth quarter. Thank you very much.Thank you.

Operator

[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

Luca Pfeifer -- Investor Relations Officer

Anko van der Werff -- Chief Executive Officer

Adrian Neuhauser -- Chief Financial Officer

Michael Linenberg -- Deutsche Bank -- Analyst

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