LATAM Airlines Group S.A. (LTM) Q1 2019 Results – Earnings Call Transcript

LATAM Airlines Group S.A. (NYSE:LTM) Q1 2019 Results Conference Call May 19, 2019 4:00 PM ET

Company Participants

Ramiro Alfonsín – CFO

Roberto Alvo – Chief Commercial Officer

Jerome Cadier – CEO, LATAM Airlines Brazil

Andrés Del Valle – VP, Corporate Finance

Conference Call Participants

Savi Syth – Raymond James

Duane Pfennigwerth – Evercore ISI

Mike Linenberg – Deutsche Bank

Victor Mizusaki – Bradesco

Petr Grishchenko – Barclays

Stephen Trent – Citi

Sebastián Ramírez – Banchile

Bruno Amorim – Goldman Sachs

Operator

Good day, everyone, and welcome to LATAM Airlines Group Earnings Release Conference Call. Just a reminder, this conference is being recorded. LATAM Airlines Group earnings release for the period was distributed on Thursday, May 16th. If you have not received it, you can find it in on our website, www.latamairlinesgroup.net in the Investor Relations section.

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

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

Ramiro Alfonsín

Thank you, Victor, and good afternoon, everyone, and welcome to LATAM Airlines’ first quarter earnings call. Joining me today are Mr. Roberto Alvo, Chief Commercial Officer; Mr. Jerome Cadier, CEO of LATAM Airlines Brazil; and Mr. Andrés Del Valle, Vice President of Corporate Finance.

Please join me on the slide two where you will find the highlights for the first quarter of 2019. LATAM faced adverse economic conditions during this first quarter. International demand slowed down, especially from Argentina and Brazil, influenced by the devaluation of their respective currencies, and by excess capacity in routes from Brazil to Europe and to the U.S.

In addition, revenues per ASK in domestic operations decreased exclusively due to the currency devaluation across Latin America. As a result, total revenues declined by 7.5% during the quarter. Excluding foreign exchange, revenues per ASK improved 7% in domestic Brazil and 3% in Spanish-speaking countries.

On the other hand, we continued working hard on our cost saving initiatives. Cost per ASK decreased 6.9% while cost per ASK excluding fuel cost, decreased 8.7%. As a result, operating income for the quarter amounted to $82 million, representing an operating margin of 3.3%.

We are reacting to the weak international demand by reducing frequencies and suspending routes in international operations where demand has softened and in markets with overcapacity. As an example, we suspended our flights from Rio de Janeiro to Miami, the plans to fly from São Paulo to Munich, and we will suspend the flights from São Paulo to Rome in October. In addition, we are reducing our international supply to Argentina by approximately 20%, including the suspension of flights to secondary cities from Santiago from São Paulo.

On the other hand, we will increase our growth in domestic Brazil due to the healthy demand environment and the capacity declines recently made by one of our competitors. For that purpose, we signed a lease contract for 10 additional aircraft Airbus A320s. As a result, we adjusted our capacity guidance for 2019. International growth plans are now in the range of between 0% to 2% and domestic Brazil between 5% to 7% for 2019. Our consolidated capacity growth will be between 3% to 5% which compares with a previous growth plan of 4% to 6%.

Moving to recent developments. We were contacted by Elliott Management Corporation, the main creditor of Avianca Brazil, to participate in a potential restructuring plan later approved by the judge and the creditors in April. The plan included an expected auction for May 7th, but it was suspended and there is no certainty of the new timeline. We will continue monitoring the opportunity to increase our presence in some attractive airports in Brazil as we continue to see a healthy demand environment in the coming quarters.

On April 30, LATAM Airlines Brazil acquired a minority stake, thus owning a 100% of Multiplus stock and will now proceed with integration of both companies. This will allow us to manage the program in a similar way to how we currently handle LATAM Pass. Having the flexibility to offer the program members a better value proposition for redeeming their points and increasing the preference of our services.

Finally, on April 25th, LATAM shareholders meeting approved the dividend distribution of $54.6 million, which represents 30% of the net income of 2018. This is the third consecutive year of dividend payments after the association between LAN and TAM and the highest since then.

Despite the challenging quarter where we saw international demand soften, we’re strengthening our leadership in the region and the operations in our markets. We are growing in the domestic markets where demand is healthy and we see attractive opportunities for our network such as in Brazil, Peru, Colombia and Chile, and reacting to the challenging international market by adjusting our network accordingly.

We are receiving the first aircraft with the new cabin, which will help us to maintain the preference of our passengers and a competitive product.

In summary, we are taking the right steps to consolidate our leadership and ensure the long-term sustainability of LATAM.

With that, I would like to turn the call to Andrés Del Valle to see the first quarter in detail.

Andrés Del Valle

Thank you, Ramiro, and hello, everyone.

Please turn to slide three. Here, you’ll see a final summary of the income statement.

Total revenues of the Company declined by 7.5% in the first quarter to $2.5 billion. On the passenger side, even though we carried more than 800 additional passengers and capacity increased 6.7% during the quarter, revenues per ASK fell 12% in dollar terms. Devaluation of the local currencies affected international demand and revenues from domestic operations were measured in dollar terms. Currency devaluation also affected cargo revenues, which decreased by 10.9% due to lower imports to region especially to Brazil and Argentina. Finally, other revenues fell 19.6% to $94 million due to the devaluation of the Brazilian real on Multiplus’ revenues.

On the other hand, total costs declined by 0.7% in the quarter to $2.4 billion. Excluding fuel, total costs declined by 2.6% and cost per ASK by 8.7%. Consequently, operating income for the first quarter amounted to $82 million, which represents an operating margin of 3.3%, a decline of 6.6 percentage points, compared with the same period of last year.

The non-operating results amounted to $126 million loss in the first quarter, almost the same as in the first quarter of 2018 while taxes were $34 million lower than previous year, due to a lower pretax income. As a result, net loss amounted to $60 million in the first quarter of 2019.

Please turn to slide number four. As it was the case in the previous quarter, we continued to see a decline in unit revenue trends for both passenger and cargo, mainly as a result of the devaluation of local currencies year-over-year.

Looking at each of the business units, you can see that international operations were affected the most. They represented approximately 57% of our total ASKs during this quarter and we have a capacity growth of 8.1%. This growth was mostly driven by new international destinations in 2018 such as Lisbon, Boston and Tel Aviv. Traffic was up 5.5% and load factors declined 2.2 percentage points to 85.1%, mainly due to fewer Argentine passengers and overcapacity in long haul routes from Brazil especially to Europe. As a result, revenues per ASK were $0.056, that is 15% lower than the same quarter of last year.

On the domestic Brazil front, which represents 25% of total capacity, we had 1.5% increase in capacity, and load factors were relatively stable at 82.1%. Revenues per ASK continued showing a recovery, growing 7.2% as measured in Brazilian reals, while measured in U.S. dollars, revenue per ASK declined 7.2% to $0.062.

Looking at the Spanish-speaking countries domestic operations, together representing 18% of our total passenger capacity, we grew capacity by 9.6%, while traffic increased 10.3% during the quarter, especially in Peru, Ecuador and Chile. As a result, load factors increased 0.5 percentage points to 84.2%. Revenues per ASK declined by 10.4% during the quarter, mainly in Argentina, Colombia, Chile due to the devaluation of the Argentine, Chile and Colombian pesos. Excluding foreign exchange effect, revenues per ASK would have grown 3% in Spanish-speaking countries’ domestic operations. As a result, our overall passenger capacity grew by 6.7% year-over-year this quarter; revenues per ASK declined 12.3% year-over-year and load factor reached 84.2%. Lastly, our cargo base has slightly reduced capacity while traffic grew 1.9%. We saw an increase of 1.3 percentage points in the load factors to 56%. However, revenues per ATK declined by 10.6% in first quarter, mainly due to lower imports to the region, especially to Brazil.

Please turn to slide number five. Here, you can see that we continue delivering results on our cost saving initiatives. We operated 6.7% more ASKs and carried more than 800 additional passengers during the quarter in a much more efficient way with fewer employees per aircraft.

During the quarter, our operating costs amounted to $2.4 billion, a reduction of 0.7% compared to the first quarter of 2018. Fuel costs continued to show increases every year, but contrary to the previous quarters, at this first quarter, the increase was an 1.8% [ph] increase in fuel gallons consumed, partly offset by decline of 6.2% in fuel price per gallon excluding hedges.

Cost associated with wages and benefits have decreased by 7.5% year-over-year, mainly driven by a reduction of 5% in the average headcount for the quarter, and the 16% and 98% devaluation of the Brazil and Argentine currencies, respectively. Regarding fleet cost, which includes depreciation and amortization and maintenance expenses, they were up by 1.8% year-over-year in the quarter, mainly due to six additional aircraft in the fleet as compared to the first quarter of 2018. Lastly, other segment declined 2.8% year-over-year, despite increasing operations as a result of our efficiency initiatives. As a result, cost per ASK decreased by 6.9% to $0.064. While cost per ASK ex-fuel declined by 8.7% year-over-year to $0.045.

Please turn to slide number six. Here we can see some adjustments that we are making in our network during this year. As Ramiro mentioned, the main challenges we’re currently facing are related to Argentine demand and international overcapacity in certain routes. Accordingly, we decided to stopped serving the direct routes from Santiago and São Paulo to Tucuman in Argentina in March, while in the second half of the year, we will stop serving the routes from those same cities to Rosario, Argentina. In addition, we announced the plans to serve new destinations such as Munich and Montego Bay were cancelled and postponed respectively while the flight to Rome, launched last year from São Paulo will remain operative until October of this year. With these adjustments, we expect to balance the capacity with the current demand environment.

On the other hand, we have seen attractive opportunities to densify our network in South America. We’re improving the connectivity from our hubs in Lima and Santiago, with other relevant cities in regions such as Cali, Brasilia or Quito. In addition, we have identified attractive point-to-point routes such as Cuzco – La Paz that we will start operating this July.

Please turn to slide number seven. Our customers continue recognizing LATAM for the ultimate travel experience that we offer to our passengers. This reflects the efforts that we continue to put in all the steps of the travel and we reaffirms our commitment to improve the travel experience of our passages. We have been recognized for the second year running as the Best Global Airline in South America by the Passenger Experience Association Of Airlines, APEX, Passenger Choice Awards. LATAM was also recognized for the Best Seat Comfort, Best Cabin Service, Best Food and Beverage, Best Entertainment, and Best Wi-Fi in South America. In addition, the readers of the publication, PAX International, chose us as the airline with the best catering service in South America for the second year running.

Please turn to slide number eight. Regarding our financial metrics shown on slide eight. Our gross debt reached $7.6 million and leverage up 4.3 times. We continue having a very good liquidity position with $1.5 billion cash on hand plus $575 million of revolving facility, which is totally undrawn as of today. With this, LATAM’s liquidity position reached almost 21% over the last 12 months revenue. Our debt maturity profile shown at bottom of slide, shows a remainder of $770 million payable in 2019 and $1.5 million for 2020 due to the maturity of the unsecured 2020 notes of $500 million.

Please turn to slide number nine, which shows our fuel hedging portfolio. For the first quarter of 2019, we had approximately 65% of estimated fuel consumption. After 2019, we have a good portion of our estimated fuel consumption hedge which 65% 2% hedged just in second quarter, 42% for the third quarter and 20% for the last quarter of this year.

Finally, regarding our guidance, please turn to slide number 10. We have adjusted the capacity guidance for 2019. The main change is the lower growth for the international operations, considering the adjustments previously discussed during the presentation. We expect a growth for international markets between 0% to 2%, which compares to a previous growth plan between 3% to 5%. In addition, we have increased the capacity growth for domestic operations, moving from range between 2% to 4% to now a range between 5% to 7%. We’re not changing our capacity guidance for our domestic Spanish-speaking countries, which remains between 8% to 10%. As a result, total growth for 2019 will be between 3% to 5%.

Regarding the cargo segment, capacity for 2019 will be in the range of 0% to 2%, as a result of the adjustment made to the international capacity on the passenger aircraft.

Our operating margin guidance remains unchanged between 7% to 9%. We see a better second half of the year due to more balanced markets between demand and capacity as well as more stable currencies.

This concludes our presentation. Now, we will be happy to open the line for questions. Thank you.

Question-and-Answer Session

Operator

[Operator instructions] And our first question will come from the line of Savi Syth from Raymond James. You may begin.

Savi Syth

Hey. Good afternoon, everyone. Just a question on Brazil. A little unclear, is the increased capacity just backfilling some of the routes that Avianca Brazil has pulled back, and not related to kind of the potential auction? And therefore, if you do get some of the Avianca Brazil assets, could we see that capacity going up? I was just wondering if you could talk a little bit more within that — the trend that you’re seeing in Brazil as well.

Roberto Alvo

Yes. Hi, Savi. This is Roberto Alvo. As you know, the results of the auction are unclear. So, the final draw of the network as per the additional capacity of course, hasn’t been totally defined yet. But, we see important opportunities, both in the roots we operate today and in potential additional markets to place the aircraft, as Ramiro mentioned before, during the second half of this year. So, if you count the previous guidance together with the added capacity coming from those aircraft, that brings the new guidance to 5% to 7%, as explained before.

Savi Syth

And any color on what you’re seeing today from a fare environment in Brazil?

Roberto Alvo

Fares have been increasing in the last two weeks, but the market, I would say, still very difficult to forecast where it will stabilize at this point in time. But, we see double-digit RASK growth in reals terms for the second quarter as of the bookings we have today.

Savi Syth

That’s very helpful. And if I may ask a question, I think last quarter, on the non-fuel unit cost, the thought was maybe it’ll be flattish, you saw a good performance here in 1Q, I’m guessing second half will have a little bit tougher comp. Are you still thinking flattish for the year or has yet view changed from a non-fuel unit cost standpoint?

Roberto Alvo

I’m sorry. What type of cost?

Savi Syth

The CASK ex, [ph] I think, in the last call, you thought maybe it was flattish for 2019. I was wondering if that’s still the thinking?

Ramiro Alfonsín

Yes. That’s still the thinking at this point, Savi. This is Ramiro.

Savi Syth

All right thank you.

Operator

Thank you. And next question comes from the line of Duane Pfennigwerth from Evercore ISI. You may begin.

Duane Pfennigwerth

Hi. Good afternoon. Just on the recent aircraft deal, the leases that you’re assuming, I wonder why does it make sense to take incremental leased aircraft versus just reallocating some of the existing 240 Airbus family narrowbodies that you have?

Roberto Alvo

Thanks. This is Roberto again. So, we haven’t until now made a final decision if those 10 aircraft will go specifically to the Brazilian market. And at this point in time, both in Chile, Peru and as previously said, in Colombia, we see good market opportunities. So, we believe that we can locate these aircraft within our different business units without impact to the current RASK and this is important opportunity that we see going forward.

Duane Pfennigwerth

So, you felt like you had a need for incremental A320 lift, and this was just — the terms on this were so attractive, what was it about this deal?

Roberto Alvo

I think that at this point in time, we see outside of international and in some domestic markets, obviously excluding Argentina, good market opportunities, both in Brazil and in these countries, and we believe that it’s a good opportunity to place that additional capacity. I would not comment on terms of the list of course.

Duane Pfennigwerth

Got it. And then, just with respective to how we’re starting the year with this first quarter under our belt, would you say that we’re tracking maybe more towards the lower end of the full-year margin guidance?

Ramiro Alfonsín

Hi, Duane. This Ramiro. I think that is a correct assumption. We believe this year has started very challenging. We know that the second half of the year, it’s a better comparison. You know that the currency has started depreciating in the second half of 2018, particularly in the Argentinean peso and real itself, but Argentinean peso last second semester, depreciated by almost 100%. So, the comparison is a little bit better. But, yes, I would, I would tend to think on the on the lower end of the guidance.

Duane Pfennigwerth

Okay. Thank you very much.

Operator

And our next question comes from the line of Matt Fallon from Deutsche Bank. You may begin.

Mike Linenberg

Yes. Hey, it’s Mike Linenberg on for Matt. I guess, I have two questions. I guess, the first one, this morning, I think we saw the headline that IATA has suspended Avianca Brazil from the bank settlement plan. And usually, when we see that, that usually is the beginning of the end. And I’m just curious about where things would stand from a liability perspective, vis-à-vis the whole Avianca Brazil auction process? And what I’m getting at is that I believe you have lent them a certain amount of money, I think it was $13 million. And the $70 million would be if you were successful in bidding for one of the units. If the auction doesn’t happen, because Avianca Brazil shuts down in the next 24 to 48 hours, what are you on the hook for? Is it just $13 million? Is there a breakup fee? Like, what is the full liability that LATAM will have to — what are they on the hook for essentially, even if nothing happens, if we — if there’s no option et cetera? Can you just give me a sense on that? Thank you.

Ramiro Alfonsín

Hi, Michael. This is Ramiro. How are you doing?

Mike Linenberg

Hi, Ramiro. I’m doing okay. Thank you.

Ramiro Alfonsín

It is confusing because sometimes we see Matt on the list and it’s you and sometimes we see you and it’s Matt. But, it’s always — very happy to have you on our calls.

Mike Linenberg

I apologize. Yes. We were mixing things up this time…

Ramiro Alfonsín

No problem. If the Avianca auction would not happen, what we have committed to Avianca itself is $13 million that was already provided for and it was oriented mainly to working capital needs that the company had. But, we also, in the same commitment, in the same agreement we have reached with Elliott Management, we disbursed commitment of $35 million. We didn’t disburse all of it yet, but we have that commitment of $35 million. And if there is a closing at the end of the day, and there is an auction, we would get those 35 and those 13 back. If the auction does not happen, the total commitment that we currently have is 35 plus 13.

Mike Linenberg

Okay. Okay, that’s great. So, that’s capped, that’s capped at that $48 million. So, that would be the extended admin, [ph] presumably, there would probably be some allocation by the government of some of the scarce assets of Avianca Brazil to the incumbent carriers that probably would be a potential scenario, I could play out I presume.

Jerome Cadier

Hi, Mike. This is Jerome from Brazil. We don’t know exactly what will be the position of government regarding the passengers that do hold an Avianca ticket today if the company goes to auction or if the company does not succeed in getting to the auction. So, this is unclear today how the government will deal with that potential situation there.

Mike Linenberg

Okay, great. And then, just my second question, what I look out in the forward schedules, it does look like that you are adding a decent amount of frequency in some Colombian domestics markets, some of the bigger markets. And my question is, why now, the timing? And I know, it’s probably over the next couple of months where it looks like you really ramp up the frequency in the Colombian domestic market. I know that you’ve always had a good presence there, and I think you’re strong number two in that market. Is it just the timing or just being opportunistic that there are domestic markets there that you feel like you can gain more share? Like, what’s driving that decision that larger move into the Colombian domestic market?

Roberto Alvo

Hi, Mike. This is Roberto. We announced this three months ago and we discussed it a little bit on the prior call. We devoted two aircraft, a little bit more than two aircraft to domestic Colombia, mainly focusing the business routes, the most important business routes in Colombia. Our belief is that we see that there is an interesting and important opportunity of becoming a real alternative to the domestic business traveler in Colombia. I think, that we’ve done our homework throughout the last year to putting ourselves in that position. And that together with the JV with both American and IAG, and our own international network, we believe also provide a very interesting value proposition for those same passengers for international routes. So, that’s the growth we are foreseeing in the second semester of 2018 and that’s the reason.

Mike Linenberg

That’s very good. Thank you, Roberto.

Jerome Cadier

Mike, just — Jerome again, just clarifying on an earlier question you had around Brazil. I did answer around the passengers. But Ramiro pointed me, he said that the question was around the slots as well. So, what we expect, if there is no auction, we do expect that falls [ph] the current rules, which means the slots go back to the pool and then distributed to the current players. So, that’s the alternative scenario in case there is no auction.

Operator

Thank you. And our next question comes from the line of Victor Mizusaki from Bradesco. You may begin.

Victor Mizusaki

I have two questions here. The first one, when we take a look on your current aircraft fleet, we can see like 9, 11 subleased aircraft. So, my first question is, can you explain when these contracts will expire? And my second, think about yield and load factor. I mean, we can see very high load factor of 82%, 84% in domestic Brazil and Spanish-speaking countries. But even considering this high load factor, we continue to see operating margins under pressure. So, I would like to understand why did decided to increase capacity and not to continue to raise fares?

Ramiro Alfonsín

Okay. Regarding — if I understood correctly, your question is when are the subleases due, is it the correct question?

Victor Mizusaki

Yes.

Ramiro Alfonsín

Okay. You see them — for instance, in 2019 you see that we have three A350s leased, and this will be — two will be returned in 2020 and the remaining one will be returned in 2021. And that is why we will not have any more A350s leased. Regarding the 320s, they will continue to be leased until for four years. And the Boeing 76s will continue to be leased in the medium term. There’s not any specific deadline; that’s a renew contract that we have with one company to sublease these two freighters.

Roberto Alvo

Yes. Regarding the yield and load factor on domestic Spanish-speaking, so I think a few things to point out. First, as you probably know, there’s a Peruvian company that seized operating late last year called LC Perú and also we saw a reflection of Avianca Perú in that domestic market. That freed up a significant number of slots in Lima Airport. Lima Airport is extremely congested, and today it’s fully congested in the peak time. So, one of the things we did is that we took the opportunity of increasing our presence in the Lima Airport by taking out a good portion of those remaining slots. And that’s one of the reasons why you’re seeing an increase in capacity in domestic Spanish-speaking.

The second thing is that, as you know we have an important level of competition in domestic market, Spanish-speaking class, particularly in Chile and also to an extent in Peru with local carriers and we believe that we’re effectively competing with them at this point in time. We’re getting higher load factors than they have. And as Andrés also explained, if you take out devaluation of the currency, it’s actually the RASK in local currencies is positive, it’s over 3% [ph]. So, it’s a accommodation of the opportunities we’re in the market, with our competitive position underway we are trying to hold the leadership in the most important markets in Spanish-speaking countries.

Victor Mizusaki

Okay. Thank you.

Operator

And our next question comes from the line of Petr Grishchenko from Barclays. You may begin.

Petr Grishchenko

Hi. Good afternoon. Thanks for taking my questions. I’m just curious how comfortable are you with your current fleet commitments, given lower guidance for ASK this year? And I guess, we saw some of your competitors who are scheduling deliveries aggressively following sort of signs of weakness, weaker than expected international traffic. And if I recall correctly, I think you cut your commitment by $2 billion last quarter. So, I’m just curious if you can provide some more color on how you’re thinking of commitments now?

Ramiro Alfonsín

Thank you, Peter. This is Ramiro. And yes, we’re constantly reviewing our fleet commitments. For this year, we originally expected to be a little bit of north of $1.1 billion of total fleet commitments. And that is always being reviewed according to macro conditions. So, maybe in the future, we have a decent update to provide you. At this point, we still have to think the same commitments that are according market conditions, gives us enough flexibility to move forward these next two years.

Petr Grishchenko

Got it. And maybe, can you discuss if you have flexibility in terms of adjusting your operations in terms of — you are showing weaker or like softer international capacity and higher domestic Brazil, just so you can reshuffle fleets in the sense that you don’t have to change your commitments?

Roberto Alvo

Yes. That’s the case. A good example, I would say is that the reduction of capacity that we have seen towards Argentina, and that Ramiro pointed out, which is around 20% international, will really provide a significant portion of that capacity into domestic Peru, as per the conditions I told in the previous question. So, yes, we do move our aircraft around, we have quite a high level of flexibility of doing that. And we, of course, reshuffle it as we see how the market trends.

Petr Grishchenko

Great. Thank you very much.

Operator

Thank you. And our next question comes from Stephen Trent from Citi. You may begin.

Stephen Trent

Good afternoon, gentlemen. And thanks very much for taking my questions. Two for me. One, could you — and apologies if I missed it, but could you give us an update as to the legal challenge that your joint business agreement is facing that you American and British Airways are planning? And what’s the latest in terms of the challenge in Chile?

Roberto Alvo

Yes. So, the JV was reviewed by the Supreme Court. Remember that the JV is in Chile, were taken to the Supreme Court last year by a number of people. They were reviewed in the Supreme Court about 40 days ago. The Supreme Court says in the verdict [ph] that they have an agreement on this and they will issue at some point in time in the next few months their final decision. That’s the only relevant or the only approval that we need for having all the approvals necessary for the JV with IAG, so South America to Europe. And also in the last week, we refiled our petition with the DoT. Our petition was filed three years ago and we basically updated it after Brazil cleared out open-skies with the U.S. last year. We submitted that to the DoT and we expect the DoT to take the normal timing, which is around the year to have a final say. Those are the two regulatory steps that are pending on both the JVs on American with the DoT and Chile and with IAG all in Chile.

Stephen Trent

.

Okay, very helpful. And just one other question, kind of a question for Jerome, maybe a follow-up to some extent on Mike Linenberg’s question about the Avianca of Brazil slots. Assuming at this point that ANAC [ph] seizes the slots and redistributes them, would you or would you not expect some antitrust scrutiny of LATAM and go getting more slots for example with those two airlines having overwhelming market share Gol Linhas going as it stands today?

Jerome Cadier

Hi, Stephen, we — according to the — the progress of slot redistribution has gone through ANAC’s normal procedure. And we do not expect that Carey [ph] will interfere in that. It is possible but we do not expect that to happen in the case of a redistribution. It will follow the current rules that are already part of ANAC’s definition. So, it is Brazil, lot of things are possible. But, our scenario is that in the case of the auction that it does not go through then the current rules are applied by ANAC as it was in the past.

Operator

And our next question comes from the line of Sebastián Ramírez from Banchile. You may begin.

Sebastián Ramírez

The first one comes a little bit more with the strategy. We know that during the second half of the year you sharply reduce your ASK growth in international markets and also accelerate your growth in Brazil. So, I wanted to understand what were the other incumbents in both segment in that respect, and how easy do you think that it will be for the market to receive your acceleration in growth there? And also, I would like to ask you a few questions about IFRS 16 and the effect on the EBIT figures that we observed. I’m having some troubles to make those two numbers to compare themselves, EBIT for 1Q in ‘18 to ‘19, so if you can give me some color on that that would be great.

Roberto Alvo

With respect to strategy and if I understood your question correctly and you mentioned incumbents. First, we don’t give an opinion on the strategies and what our competitors do. And just I think one point in the case of domestic Brazil, Avianca was operating approximately 50 aircraft in the beginning of the year in domestic Brazil. The current operation is below 10 aircraft, so that’s the size of the decrease of the operation in that market. And as we explained previously, our increase in ASKs for domestic is 5% to 7%.

Ramiro Alfonsín

Sorry Sebastián, I was going to address the IFRS question, but if you have another question, please go ahead.

Sebastián Ramírez

No. That’s perfectly right. I’m okay with first question. So, IFRS 16, just want to — need to reconcile the numbers of 1Q ‘18 with the one that we’re observing right now.

Ramiro Alfonsín

What we have presented in the figures on the press release is an adjusted first quarter 2018 with IFRS. So, it’s fully comparable. So, when you see first quarter 2018 and first quarter 2019 in these figures, in the press release and in the financial statements that we have provided in market, they are both comparable, so you can fully compare. The main difference as you know is that interest — our rental is divided in depreciation and interest and roughly it’s $90 million of additional depreciation and $40 million of additional interest and you eliminate the rentals that you used to have in the EBIT margin. That’s the main difference. We can follow up later if you want more detail.

Sebastián Ramírez

Definitely. On that sense, if you were to adjust last year margins to make it equivalent to the EBIT margins that you’re projecting right now, so last year we should adapt something close to 1% to 1.5% to the figures that we observed previously?

Ramiro Alfonsín

Very similar — yes, very similar to 1.5%. ex-IFRS.

Sebastián Ramírez

That’s right. Yes, okay. Super clear. One last question that we were referring to RASK in local currencies for the all network and both in Brazil and SSC we’re growing in a positive way in local currency. What about CASK ex-fuel in local currencies or just in those markets, what is the evolution that we should expect over there?

Ramiro Alfonsín

Yes. For the first quarter, CASK improves a little bit, even without the foreign exchange impact, so it improves. We have a small efficiency. I would say that of the whole impact in CASK that you see, I would say 75% is foreign exchange rate and 25% is effective efficiency. And going forward, as I told Savi, we’re still sticking to maintaining our cost per ASK during this year, which is a challenging target.

Sebastián Ramírez

Perfect, many thanks.

Operator

Thank you. And our next question comes as a follow up from Savi Syth from Raymond James. You may begin. And our next question comes from the line of Bruno Amorim from Goldman Sachs.

Bruno Amorim

Hi. I just have a follow-up question on IFRS 16, just wanted to check if your prior guidance was also provided under IFRS 16 standards or not. I’m just trying to understand if you’re maintaining the EBIT margin guidance range on a comparable basis or not? Thank you very much.

Ramiro Alfonsín

No problem, Bruno. This is Ramiro. And yes, we have been very clear that when we provided guidance last year, we were including the IFRS 16 impact on those numbers. So, the 7% to 9% that includes that IFRS 16.

Bruno Amorim

Thank you.

Operator

Thank you. And our next question comes from the line of Savi Syth from Raymond James. You may begin.

Savi Syth

Hey, guys. Sorry about that. Just a question on cargo. I was just wondering to understand your view on kind of second half CASK cargo, is it similar trend where second half comps are easier or how should we think about what you’re seeing on cargo and your expectations that you have through the year?

Roberto Alvo

Yes. So, this is Roberto again. First half of 2018 was the best period of time we’ve seen in cargo in many years. And demand particularly southbound started decreasing towards the second half of 2018 due mostly to the situation in Argentina and to the devaluation in Brazil. So, the comparison for the first semester is quite challenging but we’ve already seen — we already saw in the second semester of 2018 an important slowdown on cargo, mostly southbound. Northbound cargo has remained relatively stable over the past 12 to 18 months.

Savi Syth

Okay. That’s helpful. And then, on the fuel hedging, it looks like you kind of moved away from the fuel hedging there. Is that related to balance sheet, as you make some of these acquisitions and things like that or what’s your latest thinking on this hedging strategy?

Andrés Del Valle

No. Andrés here, Savi. No, on the contrary, we’re still maintaining same policy. If you look at the chart here, we still have 65% for Q2, 42%, so still pretty much the same with the same instruments. Three, four-way instruments, which protects at the downside. And today, I would say, the expected I think compensation is slightly neutral to positive about today’s cure.

Savi Syth

Okay. And I guess, I noticed you haven’t really added in more into 1Q, are you not layering as much as you were, given the runoff maybe, is that?

Andrés Del Valle

Yes. That’s a fair statement. Yes.

Savi Syth

Okay. That makes sense. All right. Thank you so much.

Andrés Del Valle

Sure.

Operator

Thank you. Thank you for joining us today. Please feel free to contact our Investor Relations department if you have any additional questions. We look forward to speaking with you again soon. Everyone, have a great day.