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

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LATAM Airlines Group SA (NYSE: LTM)
Q1 2019 Earnings Call
May 17, 2019, 4:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

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 16. If you have not received it you can find it in 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 the call over to Mr. Ramiro Alfonsin, Chief Financial Officer of LATAM Airlines Group. Mr. Alfonsin, please begin.

Ramiro Alfonsin -- Chief Financial Officer

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. Andres Del Valle, Vice President of Corporate Finance.

Please join me on slide 2, 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 US.

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In addition, revenues per ASK in domestic operations decreased exclusively due to the currency devaluation across Latin America. As a result total revenues decline 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 Sao Paolo to Munich, and we will suspend the flight from Sao Paolo 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 and from Sao Paolo. 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 A320. As a result we adjusted our capacity guidance for 2019. International growth plans are now in the range of between 0-2% and domestic Brazil between 5-7% for 2019. Our consolidated capacity growth will be between 3-5%, which compares with the previous growth plan of 4-6%.

Moving to recent developments, we were contacted by Elliott Management Corporation, the main creator 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 7, 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 100% of Multiplus stock and will now proceed with the 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 25, 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 are 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 Andres Del Valle to see the first quarter in detail.

Andres Del Valle -- Vice President of Corporate Finance

Thank you, Ramiro, and hello, everyone. Please turn to slide 3. On here you'll see a final summary of the income statement.

Total revenues for the company declined by 7.5% in the first quarter to $2.5 million. On the passenger side, even though we carried more than 800 additional passengers and capacity grew 6.5% through the quarter, revenues per ASK fell 12% in the returns. Devaluation of the local currencies affected international demand and revenues in domestic operations while measured in the returns.

Currency devaluation also affected cargo revenues, which decreased by 10.9% due to lower imports to the region, especially to Brazil and Argentina. Finally other revenues fell 19.6% to $94 million due to devaluations of the Brazilian real and Multiplus's revenues.

On the other hand, total costs declined by 0.7% in the quarter to $2.4 billion. Excluding fuel, total cost declined 2.6% and cost per ASK by 8.7%. Consequently operating income for the first quarter amounted to $82 million dollars, which represents an operating margin of 3.2%, a decline of 6.6 percentage points compared with the same period of last year. The non-operating result 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 the previous year due to a lower pre-tax income. As a result, net-loss amounted to $6 million in the first quarter 2019.

Please turn to slide No. 4. As it was the case in the previous quarter, we continue 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 your 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 had a capacity growth of 8.1%. This growth was mostly driven by new international destinations due 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 $0.56. That is 15% lower than in the same quarter of last year.

On the domestic Brazil front, which are 25% of total capacity, we had 1.5% increase in capacity, and load factors were relatively stable at 82.1%. Revenues per ASK continue showing a recovery, growing 7.2% as measured in Brazilian reals, while measured in US dollars growth per ASK declined 7.2% to US$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 10.2% 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, and Chile, due to the devaluation of the Argentina, Chilean, and Colombian pesos. Excluding foreign change effect, revenues per ASK would have grown 3% in the 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 operations slightly reduced capacity, while traffic grew 1.9%. We saw an increase of 1.3 percentage points in load factors to 56%. However, revenues per ATK declined by 10.6% in first quarter, mainly due to lower inputs in the region, especially to Brazil.

Please turn to slide No. 5. Here you can see that we continue delivering results on our cost-saving initiatives. We operated 6.7% more ACKs and carried more than 800 additional passengers through the quarter in a much more efficient way with fewer employees per aircraft. During the quarter our operating costs fell, amounted to $2.4 billion, a reduction of 0.7% compared to the first quarter of 2018. Fuel costs continues to show increases year-over-year, but contrary to the previous quarters at this first quarter the increase was due to an 8% increase in fuel gallons consumed, partially offset by a decline of 6.2% in fuel price per gallon excluding hedges.

Cost associated wages and benefits have decreased by 7.5% year-over-year, mainly driven by a reduction of 5% in the average head count for the quarter and the 16% and 98% devaluation of the Brazilian and Argentine currencies respectively.

We incurred fleet costs, which includes representation and amortization and maintenance expenses. They were up by 1.8% year-over-year in the quarter, mainly due to six additional aircraft in our fleet as compared to the first quarter of 2018. Lastly, other segments declined 2.8% year-over-year, despite increasing operations, as a result of our efficiency initiatives. As a result cost per ASK decreased 6.9% to US$0.064, while the cost per ASK ex fuel declined by 8.7% year-over-year to US$0.045.

Please turn to slide No. 6. Here we can see some adjustment 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 stop serving the direct routes from Santiago and Sao Paolo 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 canceled and postponed respectively, while the flight to Rome, launched last year from Sao Paolo, will remain operative until October of this year. With these adjustments, we expect to balance the capacity with the current demand environments.

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 and regions such as Cali, Brasilia, or Quito. In addition, we have identified a tracking point upon routes such as Cuzco-La Paz that we will start operating this July.

Please turn to slide No. 7. Our customers continue recognizing LATAM for the outstanding travel experience that we offer to our passengers. This reflects the effort that we continue to put in all the steps of the travel and reaffirms our commitment to improve the travel experience of our passengers. 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 in comfort, best cabin service, best food and beverage, bester 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 checkering service in South America for the second year running.

Please turn to slide No. 8. Regarding our financial metrics shown in slide 8, our ghost debt reached $7.6 million dollars and the leverage 4.3x. We continue having a very good liquidity position, with $1.5 billion cash in hand plus $575 million of revolving credit facility, which is totally undrawn as of today. With this, LATAM's liquidity position reached almost 21% of the last twelve months' revenues.

Our debt maturity profile, shown at bottom of slide, shows a remainder of around $770 million payable in 2019 and $1.5 million for 2020, due to the maturity of the unsecured 2020 notes of $5 million.

Please turn to slide No. 9, which shows our fuel hedging portfolio. For the first quarter of 2019, we had approximately 65% of estimated fuel consumption. For 2019, we have a good portion of our estimated fuel consumption hedged, with 65% hedged for the second quarter, 42% for the third quarter, and 20% for the last quarter of this year.

Finally, regarding our guidance, please turn to slide No. 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 expected growth for international markets between 0-2%, which compares to a previous growth plan between 3-5%. In addition, we have increased the capacity growth for domestic Brazil operations, moving from a range between 2-4% to now a range between 5-7%. We are not changing our capacity guidance for domestic Spanish-speaking countries, which remains between 8-10%. As a result, total growth for 2019 will be between 3-5%.

Regarding the cargo segment, capacity for 2019 will be in the range of 0-2% as a result of the adjustment made to the international capacity on the passenger aircraft. Our operating margin guidance remains unchanged between 7-9%. 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, and now we will be happy to open the line for questions. Thank you.

Questions and Answers:

Operator

Ladies and gentlemen, if you have a question at this time, please press * then the number 1 key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the # key. To prevent any background noise we ask that you please place your line on mute once your question has been stated. Once again, that's *1 for questions, *1.

And our first question will come from the line of ??? from Raymond James. You may begin.

Savanthi Syth -- Raymond James -- Analyst

Hey, good afternoon, everyone. Just a question on Brazil. I'm 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'm just wondering if you could talk a little bit more within that trend that you're seeing in Brazil as well.

Roberto Alvo -- Chief Commercial Officer

Yes. Hi, Savi. This is Roberto Alvo. As you know, the results of the auction are unclear so the final...the final draw of the network of additional capacity of course haven't been totally defined yet, but we see important opportunities both in the routes we operate today and in potential additional markets to place the aircraft that 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 5-7% as explained before.

Savanthi Syth -- Raymond James -- Analyst

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

Roberto Alvo -- Chief Commercial Officer

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

Savanthi Syth -- Raymond James -- Analyst

Very helpful, and if I might ask a question. I think last quarter on the non-fuel cost, the thought was maybe it'll be flat-ish. You know, you saw good performance here in 1Q and I'm guessing second half is a little bit tougher comp. Are you still thinking flat-ish for the year or has that view change from a non-fuel cost standpoint?

Roberto Alvo -- Chief Commercial Officer

I'm sorry. What type of cost?

Savanthi Syth -- Raymond James -- Analyst

The CASK ex. I think in the last call you thought maybe it was flat-ish for 2019. I was wondering if that's still the thinking.

Ramiro Alfonsin -- Chief Financial Officer

Yes, that's still the thinking at thinking at this point, Savi. This is Ramiro.

Savanthi Syth -- Raymond James -- Analyst

All right. Thank you.

Operator

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

Duane Pfennigwerth -- Evercore ISI -- Analyst

Hi. Good afternoon. Just on the recent aircraft, 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 narrow bodies that you have?

Roberto Alvo -- Chief Commercial Officer

Thanks. This is Roberto again. So we haven't until now made the final decision that 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 opportunity. So we believe that we can locate these 10 aircraft within our different business units without impact to the current rack and seeking important opportunities that we see going forward.

Duane Pfennigwerth -- Evercore ISI -- Analyst

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

Roberto Alvo -- Chief Commercial Officer

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 this country, and we believe that it's a good opportunity to play that additional capacity. I would not comment on terms of the lease, of course.

Duane Pfennigwerth -- Evercore ISI -- Analyst

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

Ramiro Alfonsin -- Chief Financial Officer

Hi, Duane. This is 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 is a better comparison. You know that the currencies had started depreciating in the second half of 2018, in particular in the Argentinian peso and the real itself, with the Argentinian peso last second semester depreciated by almost 100%. So the comparison is a little bit better, but yes, I would tend to think on the lower end of the guidance.

Duane Pfennigwerth -- Evercore ISI -- Analyst

Okay. Thank you very much.

Operator

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

Mike Lenneberg -- Deutsche Bank -- Analyst

Oh, yeah, hey. It's Mike Lenneberg on for Matt. I guess I have two questions. I guess the first one, this morning I think we saw the headline that AIATA 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-a-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 there's no auction, etc.? Can you just give me a sense on that? Thank you.

Ramiro Alfonsin -- Chief Financial Officer

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

Mike Lenneberg -- Deutsche Bank -- Analyst

Oh, hi, Ramiro. I'm doing OK. Thank you.

Ramiro Alfonsin -- Chief Financial Officer

It's 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 a very happy surprise to have you on our calls.

Mike Lenneberg -- Deutsche Bank -- Analyst

I apologize. Yeah, no. We were mixing things up this time. Keep you guys on your toes.

Ramiro Alfonsin -- Chief Financial Officer

No problem. 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 had in that same commitment, that same agreement we have with Elliott Management we dispersed a 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 million and those $13 million back. If the auction does not happen, the total commitment that we currently have is $35 million plus $13 million.

Mike Lenneberg -- Deutsche Bank -- Analyst

Okay. Okay. That's great. So that's capped? That's capped at that $48 million? So that would be the extent of it, and then 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 that could play out, I presume?

Jerome Cadier -- CEO of LATAM Brazil

Hi, Mike. This is Jerome from Brazil. We -- Hi, Mike. We don't know exactly what will be the position of the 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 Lenneberg -- Deutsche Bank -- Analyst

Okay. Great. And then just my second question. Excuse me. When I look out in the forward schedules, it does look like that you're adding a decent amount of frequency in some Colombian domestic markets, some of the bigger markets, and my question is why now, the timing? And I know it's probably over the next couple months where it looks like you really ramp up the frequency in the Colombian domestic market, and I know that you've always had a good presence there. And I think you're a strong No. 2 in that market. Is it just the timing or just being opportunistic? That there are domestic markets there that you feel like you gain more share? Like what's driving that decision, that larger move into the Colombian domestic market? Thank you.

Roberto Alvo -- Chief Commercial Officer

Hi, Mike. This is Roberto.

Mike Lenneberg -- Deutsche Bank -- Analyst

Oh, hi, Roberto.

Roberto Alvo -- Chief Commercial Officer

Yes, I think we announced this three months ago, and we discussed a little bit on the prior call. So we devoted two aircraft, a little bit more than two aircraft, to domestic Colombia, mainly focused on the business routes, the most important business routes in Colombia. Our belief is that we see that there's 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 years to putting ourself 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 2019 and after.

Mike Lenneberg -- Deutsche Bank -- Analyst

Okay, that's very good. Thank you. Thank you, Roberto.

Jerome Cadier -- CEO of LATAM Brazil

Mike, just -- Jerome again -- just clarifying on an earlier question you had around Brazil. I did answer around the passengers, but Ramiro pointed me to the question was around the slots as well. So what we expect if there is no auction, we do expect that an act follows the current rules, which means the slots go back to the pool and are then redistributed to the current players. So that's the alternative scenario in case there is no auction.

Mike Lenneberg -- Deutsche Bank -- Analyst

Okay. Okay. Very good then. Okay, thanks, Jerome. I appreciate it. Thanks, everyone.

Jerome Cadier -- CEO of LATAM Brazil

Thank you.

Operator

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

Victor Mizusaki -- Podesto -- Analyst

Hi. Thank you. 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 disclose when these contracts here expire? And my second question, think about yields and load factor, I mean we can see a very high load factor of 82-84% in Brazil and Spanish-speaking countries, but even considering this high load factor we continue to see operating margins under pressure. So I'd like to understand why did you decide to increase capacity and not to continue to raise price?

Andres Del Valle -- Vice President of Corporate Finance

Okay, regarding, if I understood correctly your question, it's when are the subleases due? Is this the correct question?

Victor Mizusaki -- Podesto -- Analyst

Yes.

Andres Del Valle -- Vice President of Corporate Finance

Okay. You see them, for instance 2019, you see that we have three 350As leased, and this will be -- two will be returning 2020, and the remaining one will be returning in 2021. And that is why we will not have any more A350s leased. Regarding the 320s, they will continue to be leased until four years, and the Boeing 760s will continue to be leased in the medium term. There is not any specific deadline. That's a renewed contract that we have with one company to sublease these two freighters.

Roberto Alvo -- Chief Commercial Officer

Yeah, regarding yields and load factor on domestic Spanish-speaking, so I think a few things to point out. First, as you probably no, there's a proven company that ceased operating late last year called LC Peru, and also we saw a retraction of Avianca Peru 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 a good portion of those remaining slots. And that's one of the reasons why you're seeing an increasing 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, particularly in Chile and also to an extent in Peru with local carriers, and we believe that we are effectively competing with them at this point in time. We're getting higher load factors than they are that they have, and as Andres also explained, if you take out devaluation of the currencies actually, the rack in local currencies is positive over 3%. So it's the combination of the opportunities we're seeing in the market with our competitive position and the way we are trying to hold the leadership in the most important markets in Spanish-speaking.

Victor Mizusaki -- Podesto -- Analyst

Okay. Thank you.

Ramiro Alfonsin -- Chief Financial Officer

Thank you, Victor.

Operator

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

Peter Grishchenko -- Barclays -- Analyst

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 rescheduling deliveries aggressively following sort of signs of weakness. We can expect that the 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 in how you're thinking of commitments now.

Ramiro Alfonsin -- Chief Financial Officer

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 north of $1.1 billion of total fleet commitments, and that is always being reviewed according to my current conditions. So maybe in the future we have a recent update to provide you. At this point we still have the same fleet commitments that according to market conditions gives us enough flexibility to move forward these next two years.

Peter Grishchenko -- Barclays -- Analyst

Got it. And maybe can you discuss if you have flexibility in terms of adjusting your operations in terms of, you know, you're showing weaker or like softer international capacity and higher domestic Brazil. Do you think you can reshuffle the fleet in the sense that you don't have to change your commitments?

Roberto Alvo -- Chief Commercial Officer

Yes, that's the case. A good example, I would say, is that the reduction of capacity that we have seen toward Argentina and that Ramiro pointed out, which is around 20% international, we redeployed a significant portion of that capacity into domestic Peru for the conditions I told in the previous question. So yes we do move aircraft around. We have quite a high level of flexibility of doing that, and we of course shuffle it as we see how the market changes.

Peter Grishchenko -- Barclays -- Analyst

Great. Thank you very much.

Operator

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

Stephen Trent -- Citigroup -- Analyst

Good afternoon, gentlemen, and thanks very much for taking my questions. Two from me. One, could you, and apologies if I missed it, but could you give us an update as to, excuse me, 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 -- Chief Commercial Officer

Yes, so the JV was reviewed by the Supreme Court. Remember that the JVs 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 said in their website 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 DOC. Our petition was filed three years ago, and we basically updated it after Brazil filled out open skies with the US last year. We submitted that to the DOC, and we expect the DOC to take the normal time, which is around a year, to have a final say. Those are the two regulatory steps that are pending on both the JVs on American with the DOC and Chile and with IAG only in Chile.

Stephen Trent -- Citigroup -- Analyst

Okay. Very helpful. And just one other question, kind of a question for Jerome, maybe a follow-up to some extent on Mike Lenneberg's question about the Avianca Brazil slots. Assuming at this point that the ANACI seizes the slots and redistributes them, would you or would you not expect some antitrust scrutiny of LATAM and Gould getting more slots, for example, with those two airlines having overwhelming market share in Congonhas as it stands today?

Jerome Cadier -- CEO of LATAM Brazil

Hi, Stephen. We, according to the past, the process of slot redistribution has gone through ANAC's normal procedure, and we do not expect that CADE will interfere in that. It is possible, but we do not expect that to happen in a case of a redistribution. It will follow the current rules that are already part of ANAC's definition. So it is Brazil. A 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.

Stephen Trent -- Citigroup -- Analyst

Oh, OK. Let me leave it there. Thanks for you feedback.

Operator

Thank you. And our next question comes from the line of Sebastian Ramirez from Bank Chile. You may begin.

Sebastian Ramirez -- Bank Chile -- Analyst

Hi. Many thanks for receiving our questions. The first one comes a little bit more with the strategy. You've put out that during the second half of the year you will 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 segments doing in that respect, and how easy do you think that will be for Brazil market to receive your acceleration in growth there? And also I would like to ask a few questions about IFR-16 and the effect on the EBIT figures that we have served. I'm having some troubles to make those two numbers to compare themselves, EBIT to 1Q '18 to '19. So if you can give me some color on that, that would be great.

Ramiro Alfonsin -- Chief Financial Officer

So with respect to strategy, and I understood your question correctly, you mentioned incumbent, first we don't give an opinion on the strategies and what our competitors do. Just I think that just one point in the case of domestic Brazil, Avianca was operating approximately 50 aircraft in the beginning of the year in domestic Brazil. Their current operation is below 10 aircraft. So that's the size of the operation in that market, and as we explained previously our increase in ASK for domestic Brazil is 5-7%.

Sebastian Ramirez -- Bank Chile -- Analyst

Okay...

Roberto Alvo -- Chief Commercial Officer

Sorry, Sebastian, I was going to address the IFRS question, but if you have another question please go --

Sebastian Ramirez -- Bank Chile -- Analyst

No, no. That's perfectly all right. I'm OK with the first question. IFR-16, just want to make to reconcile the numbers of 1Q '18 with the one that we are serving right now.

Roberto Alvo -- Chief Commercial Officer

What we have represented 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 statement that we have provided the market, they're both comparable. So you can fully compare. The main difference, as you know, is that interest, our rentals is divided in depreciation and in 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.

Sebastian Ramirez -- Bank Chile -- Analyst

Definitely. Definitely. In that sense, if we 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 add up something close to 1-1.5% to the figures that were served previously?

Roberto Alvo -- Chief Commercial Officer

Very similar. Yes, very similar to 1.5% ex IFRS.

Sebastian Ramirez -- Bank Chile -- Analyst

That's right. Yeah. Okay. Super clear. One last question. We were referring to RASK in local currencies for the whole network, and both in Brazil and SSC were 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 we should expect over there?

Roberto Alvo -- Chief Commercial Officer

Yeah, 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 are still seeking to maintaining our cost per ASK during this year, which is a challenging target.

Sebastian Ramirez -- Bank Chile -- Analyst

Perfect. Many thanks.

Roberto Alvo -- Chief Commercial Officer

No problem.

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 -- Goldman Sachs -- Analyst

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

Ramiro Alfonsin -- Chief Financial Officer

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

Bruno Amorim -- Goldman Sachs -- Analyst

Thank you.

Ramiro Alfonsin -- Chief Financial Officer

No problem.

Operator

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

Savanthi Syth -- Raymond James -- Analyst

Hey, guys. Sorry about that. Just a question on cargo. I was just wondering, you know, I understand your view on kind of second half packed cargo. Is it a similar trend where second half comps are easier, or how should we think about what you were saying on cargo and your expectations as you head through the year?

Roberto Alvo -- Chief Commercial Officer

Yes. 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 toward the second half of 2018 due mostly to the situation in Argentina and to the devaluation in Brazil. So the comparison for first semester is quite challenging, but we already saw in the second semester of 2018 an important slow down on cargo, mostly southbound. Northbound cargo has remained relatively stable over the past 12 to 18 months.

Savanthi Syth -- Raymond James -- Analyst

That's helpful. Thank you. And then just on the fuel hedging, it looks like you've kind of moved away from fuel hedging there. Is that kind of related to balance sheets as you make some of these acquisitions and things like that? Or what's your latest thinking on the hedging strategy?

Andres Del Valle -- Vice President of Corporate Finance

No. Andres here, Savi. No, on the contrary, we still maintain the same policy. If you look at the chart here, we still have 65% for Q2, up 42%, so still about the same with the same instruments, three- and four-way instruments, which protects in case of a downside. Today I would say the expected I think compensation's slightly neutral to positive by today's curve.

Savanthi Syth -- Raymond James -- Analyst

Okay. I guess I noticed you haven't really added any more into 1Q. You're not layering as much as you were just given the runoff maybe. Is that...?

Andres Del Valle -- Vice President of Corporate Finance

Yeah. That's a fair statement.

Savanthi Syth -- Raymond James -- Analyst

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

Andres Del Valle -- Vice President of Corporate Finance

Sure.

Operator

And 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.

Duration: 48 minutes

Call participants:

Ramiro Alfonsin -- Chief Financial Officer

Andres Del Valle -- Vice President of Corporate Finance

Roberto Alvo -- Chief Commercial Officer

Jerome Cadier -- CEO of LATAM Brazil

Savanthi Syth -- Raymond James -- Analyst

Duane Pfennigwerth -- Evercore ISI -- Analyst

Mike Lenneberg -- Deutsche Bank -- Analyst

Victor Mizusaki -- Podesto -- Analyst

Peter Grishchenko -- Barclays -- Analyst

Stephen Trent -- Citigroup -- Analyst

Sebastian Ramirez -- Bank Chile -- Analyst

Bruno Amorim -- Goldman Sachs -- Analyst

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