LATAM Airlines Group - and certain of its debtor-affiliates in Brazil, Chile, Colombia, Ecuador, the United States, and Peru - have received more than USD5 billion in non-binding capital and financing proposals to exit from Chapter 11 bankruptcy proceedings, according to an SEC filing.
The airline group also released its five-year business projection, which it said marked one of the final stages before the presentation of its plan of reorganisation. LATAM forecasts recovering 2019 profitability by 2024, and a 78% operational result increase by 2026 when compared to pre-pandemic figures in 2019, the company said in a statement.
The offers “from its most significant claim holders and its majority shareholders” contemplate raising the new funds through the issuance of new debt and equity in LATAM, which would be "backstopped by the parties making the proposal". “In addition, in each exit proposal, the proponents contemplate that if such proposal is approved and implemented, it would result in the substantial dilution of LATAM’s currently existing shares,” according to the filing by chief executive officer Roberto Alvo on September 9, 2021.
“LATAM will continue to discuss the exit proposals with their respective proponents and will continue to engage in discussions regarding its reorganisation plan with such proponents and other stakeholders, some of whom have agreed to remain under non-disclosure agreements," he said.
“LATAM is focused on ensuring that any exit strategy allows it to emerge from the Chapter 11 proceeding with a robust capital structure, adequate liquidity, and the ability to execute its business plan in a sustainable manner over time. Any plan will be implemented in accordance with the relevant requirements of the US Bankruptcy Code and Chilean law,” Alvo said.
An extraordinary meeting of shareholders would be called when appropriate, subject to the progress of the negotiations with the various stakeholders. The carrier’s largest shareholders include Delta Air Lines (DL, Atlanta Hartsfield Jackson) (20%), the Cueto Group (16.4%), and Qatar Airways (QR, Doha Hamad International) (10%). Other shareholders have 34.4% ownership in LATAM.
LATAM and its subsidiaries - which entered US Chapter 11 bankruptcy protection on May 26, 2020 - have also filed a motion with the Bankruptcy Court for the Southern District of New York for an extension until October 15 for the period during which debtors have the exclusive right to submit a plan of reorganisation, and until December 15 to solicit acceptances of a plan. The court is scheduled to consider the motion at a hearing on September 23, 2021.
As of July 31, 2021, LATAM reported about USD1.9 billion in liquidity, considering USD1.1 billion in cash and cash equivalents and USD800 million in undrawn Debtor-in Possession (DIP) financing.
LATAM’s existing debtor-in-possession financing provides for a possible additional third tranche (the “Tranche B Facility”) of secured financing up to USD750 million, in addition to the existing USD1.3 billion Tranche A facility and the USD1.15 billion Tranche C facility, which are not fully drawn as of this time. Given the currently favourable market conditions, LATAM was soliciting interest from potential lenders in providing a Tranche B Facility and would consider proposals to determine whether it was able to borrow funds at a more competitive rate than under the existing Tranche A and C facilities.
Meanwhile, a telephonic hearing will be held in the US Bankruptcy Court on October 28, 2021, on a motion filed by the debtors to assume various aircraft agreements and for related relief totalling about USD52.4 million according to a notice filed by the court on September 10, 2021.
Alongside the news of its proposed exit funding, LATAM also disclosed its financial projections coming out of Chapter 11 until 2024 by when it expects to fly a similar amount of Available Seat Miles (ASKs) as it did in 2019 and a growth of 7% by 2026, resulting from an estimated recovery of the domestic markets by 2022 and the international ones by 2024. However, its mix of operations would be very different. "The stage length will be shortened as domestic markets recover faster than international, and we will be carrying 12% more passengers with a lower corporate passenger mix compared to pre-pandemic," the airline said.
The recovery scenario was supported by LATAM Airlines Brazil’s domestic market’s operational ramp-up to date, which reached a 77% ASKs in August, compared to 2019, and was forecast to surpass 100% of 2019 levels at the beginning of 2022. The domestic markets of the affiliates in Colombia (LATAM Airlines Colombia), Ecuador (LATAM Airlines Ecuador), Peru (LATAM Airlines Perú), and Chile (LATAM Airlines) already reached 72% in August, while the international recovery of the group, both regional and long-haul, continued to be affected by travel restrictions.
Meanwhile, LATAM had simplified its fleet and was now operating an all Boeing wide-body fleet, creating additional efficiencies. “We will be flying newly retrofitted B777s from Brazil and in the coming months, we will be introducing the B787-9 in Brazil. We are also continuing to retrofit the cabins of our narrow-body fleet.” According to the ch-aviation fleets ch-aviation module, the airline group has a fleet of 294 aircraft spread across its various AOCs including forty-four A319-100s, 132 A320-200s, twelve A320-200Ns, forty-eight A321-200s, twenty-four B767-300ERs, ten B777-300ERs, ten B787-8s, and fourteen B787-9s.
Cost reduction initiatives addressed during the Chapter 11 process, including leveraging LATAM’s digital transformation to improve efficiency, supplier renegotiations, and fleet restructuring, saved USD900 million annually and allowed LATAM to structurally change its cost base. It said an important part of its cost containment was coming from the renegotiation of its fleet, which represented its largest fixed cost. Fleet costs alone note annual cash cost savings of over 40% compared to 2019. "We have already obtained court approval for all the new terms regarding 95% of our fleet. These new terms will allow us to reduce the fleet-related cash outflows by over 40% in the forecasted period when compared to 2019. We have also entered into interest-only or variable payments depending on utilisation, extending to 2022 for 60% of our narrow-body fleet and to 2023 for 50% of our wide-body fleet.” Its MRO facilities in Brazil and Chile would allow it in-source most of its maintenance.
LATAM Group said it had secured slots for converting passenger aircraft into freighters, allowing it to increase cargo capacity by 80% by 2024. "This heavier cost structure (larger cargo operations, more frequencies, shorter stage-length, more passengers) and the five-year inflationary pressure will all be offset by cost-saving initiatives. By 2024, before inflation, we expect our total Cost of Available Seat Kilometre (CASK) ex-fuel to amount to 3.9 cents, representing a 0.6 cent improvement on the 2019 CASK ex-fuel."
LATAM expects its revenues to increase by 13% to USD11.8 billion in 2026 and its EBIT margin to reach 25% in the same year. Passenger revenues were expected to grow 8% and cargo revenues by 59% compared to 2019.
The cargo affiliates of LATAM would incorporate at least eight new freighters into their fleet and some of these aircraft conversions had already started. The slower recovery in the international business provides for a unique opportunity for this business unit as there was less belly capacity available.
On the passenger front, the Group foresaw a competitive environment during the initial years of projections. "We expect the capacity of the group to exceed the demand and the unbundling of our fares and the improved cost structure will play a key role. In the later years of the projections, we are forecasting a more balanced supply and demand." LATAM unbundled its fares in 2017, implementing an ancillary products strategy, which it said, would be a pillar of future growth.
Operating cash flow was forecast at USD1 billion in 2022, increasing to USD2.8 billion in 2026. Free cash flow, including fleet CAPEX, would be positive in 2023 and ramp-up to USD 1 billion in 2026. "All additional aircraft are modelled as operating leases and therefore will not imply a cash-out," it noted.
In addition to fleet and cargo conversions, LATAM would be investing in improving its performance and product, including digitalisation, cabins, and Wi-Fi connectivity.
The Group said it had leveraged the Chapter 11 process and would exit it with an improved operational cost structure that would position it competitively. "The reorganisation has allowed LATAM to introduce structural transformations: renegotiated fleet, further improved an already competitive cost position and a strengthened network. We are convinced that LATAM Group will come out of this crisis stronger than ever," it said.