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08/14/2017 - Avianca Holdings Reports Second Quarter 2017 Adjusted Operating Income1 of $62.8 Million

Aug 14, 2017
Bogota, Colombia, August 14, 2017 – Avianca Holdings S.A. (NYSE: AVH, BVC: PFAVH) today reported its financial results for the second quarter of 2017 (2Q 2017). All figures are expressed in millions of US dollars unless otherwise stated. The information within is presented in accordance with International Financial Reporting Standards (IFRS). The reconciliation between IFRS and non-IFRS financial information can be seen in the financial tables section of this report. Except when noted, all comparisons refer to second quarter 2016 (2Q 2016) numbers. Figures and operating metrics of Avianca Holdings S.A. (“Avianca Holdings” or “the Company”) are presented on a consolidated basis.

Second Quarter 2017 Highlights

  • 2Q2017 results were primarily driven by a 16.5% increase in total operating revenues1 as the Company benefited from increased traffic, strong load factors and the first year over year yield increase since 1Q 2014. Moreover, Cargo and Other revenues1 increased 10.4% year-on-year, partially driven by higher revenues from mile redemption and other services. This was offset by a 14.4% increase in operating expenses1.
  • Adjusted Net Income excluding special items totaled $8.8 million compared to a loss of $ 3.9 million in 2Q2016. Adjusted net income margin1 for 2Q2017 therefore reached 0.8%; a 123 bps increase vs. 2Q 2016. Operating income (EBIT1) reached $62.8 million, with an operating margin1 of 5.7%, the strongest 2Q margin since listing on the New York Stock Exchange. Further, operating revenues reached $1.09 billion for the quarter; a 16.5% year-on-year increase1.
  • For the second quarter 2017, yields reached 8.5 cents; a 3.2% increase when compared to 2Q 2016, representing Avianca’s first year-over-year increase since yields began their double digit decline in early 2015. This trend was supported by a 14.5% year-on-year increase in second quarter 2017 traffic numbers (RPKs) as well as an average fare increase of 10.0%.
  • Cost per available seat kilometer (CASK1) increased 4.9% to 8.2 cents in 2Q 2017, compared to 7.8 cents in 2Q 2016. This was primarily driven by higher effective jet fuel prices, which increased 13.1% in the second quarter of 2017, as well as by a 24.4% year-on-year increase in Air Traffic and 16.5% in Ground Operations expenses. The latter was partially offset by a -5.5% decrease in General Administrative and Other expenses. 2Q2017 CASK ex-fuel1 therefore increased 3.0%, to 6.3 cents.
  • EBITDAR1 for the 2Q 2017 was $211.9 million, while the EBITDAR margin1 reached 19.4%, a 40 bps increase when compared to 2016.
  • Capacity, measured in Available Seat Kilometers (ASKs), increased 9.0% during 2Q 2017, primarily due to the effect of the international capacity deployed to Europe during 2016, as well as a capacity increase from our Home Markets to South America. Passenger traffic, measured in Revenue Passenger Kilometers (RPKs), increased by 14.5%, reaching a strong consolidated load factor of 82.0% across the network.
  • The Company phased out one A319 and one A300F aircraft between April and June 2017, in line with the Company’s fleet plan. Avianca Holdings S.A. and its subsidiaries therefore ended the quarter with a consolidated operating fleet of 179 aircraft.

CEO Message

Dear Shareholders,

Avianca’s results for the second quarter of 2017 highlight again the continued strengthening of our financial and operational performance as a direct result of the new customer centric initiatives that the company began implementing last year. Avianca’s ongoing focus on increasing revenues, cost reduction and optimized efficiency throughout our organization, have enabled the company to capture important benefits over the last three months. In addition, we saw stable economies in the region, after more than two years of economic downturn, as well as a relative stable oil price after the ups and downs of the previous periods.

This quarter we were again recognized for our commitment to innovation and the customer experience. In June, we were honored to receive the renowned Skytrax World Airline Award as “2017 Best Airline in South America” and “Best Regional Airline in South America” as well as the Organization of Consumers and Users award for “Second Best Airline in the World”. In addition, Airbus distinguished Avianca with the award for “Best Operational Performance of A320 fleet” in the Americas.

From an operational perspective, we maintained our thoughtful capacity expansion strategy with a 9.0% year-on-year increase, measured in Available Seat Kilometers (ASK), while Revenue Passenger Kilometers (RPK) increased by a robust 14.5% for the second quarter 2017. Thus, Avianca achieved a load factor of 82.0% for the second quarter 2017; the highest second quarter load factor since 2012 and a 330 basis point increase when compared to the next best result achieved in 2Q 2015. Strengthened performance is mainly driven by our international operation, with top regions including Home Markets to Europe and Home Markets to South America.

In line with our improved operational performance and the healthy demand we’re seeing throughout our network for our premium product offering and operational reliability, I am pleased to let you know that this quarter we reported Avianca’s first year over year yield increase since 1Q 2014. Second quarter 2017 yields increased 3.2%, to 8.5 cents. Consistent with this strong trend, we achieved USD $1.09 billion in revenues for the quarter, a 16.5% year-on-year increase. Avianca also achieved its strongest second quarter EBIT1 margin since its listing on the New York Stock Exchange, with a 168 basis point year on year increase in consolidated EBIT margin of 5.7% for the quarter and adjusted net profit1 of USD $8.8 million.

Complementing the strong performance of our passenger business, Avianca’s Cargo operations achieved healthy results this quarter. In May, Avianca Cargo moved a total of 12,652 tons of Mother’s Day flowers from Colombia and Ecuador to the United States, representing a 6% increase compared to last year’s Mother’s Day season. Avianca Cargo increased its revenue ton kilometers (RTK) for the quarter by 16.6%, achieving a consolidated load factor of 53.6%.

Avianca’s LifeMiles loyalty program also achieved solid results for the second quarter of this year, expanding its cobranded credit card base by 23.0%, to 591,000 cards. Further, LifeMiles reached 7.3 million members, an 8.2% year-on-year increase while growing its commercial partnerships throughout Latin America to 320, up 9.2% since the same period of last year. This trend of strong results, combined with our ongoing effort to improve our customer loyalty offerings resulted in a 21.6% year over year increase in LifeMiles revenue.

As we advance on our “digital journey”, we updated our website www.avianca.com, launched our redesigned app for both Android and IOS devices and continued the roll out of our “Carla” digital assistant for Facebook users. This approach focuses on a seamless customer experience when browsing for Avianca´s products and services.

In closing, our customer-centric approach continues to resonate on our results. We therefore expect to maintain our trend of operational excellence as we continue to provide travelers with the best in class service for which we are known, and expect further strong operational performance throughout the second half of this year. As such, we are revising our EBIT margin guidance upwards for the full year from 6.0%-8.0% range to 7.0%-9.0%.

Sincerely,

Hernán Rincón
Chief Executive Officer

ConsolidatedFinancial and Operational Highlights 2Q-16 2Q-17 ∆ Vs.2Q-16
ASK's (mm) 11,575 12,621 9.0%
RPK's (mm) 9,037 10,346 14.5%
Total Passengers (in millions) 7,073 7,706 9.0%
Load Factor 78.1% 82.0% 399 bp
Departures 75,938 77,082 1.5%
Block Hours 141,440 146,583 3.6%
Stage length (km) 1,012 1,048 3.6%
Fuel Consumption Gallons (000's) 120,446 129,920 7.9%
Yield (cents) 8.2 8.5 3.2%
RASK (cents) 8.3 8.6 3.5%
PRASK (cents) 6.4 6.9 8.1%
CASK (cents) 8.1 8.2 0.4%
CASK ex. Fuel (cents) 6.5 6.3 -2.5%
CASK (Adjusted) (cents) 7.8 8.2 4.9%
CASK ex. Fuel (Adjusted) (cents) 6.1 6.3 3.0%
Foreign exchange (average) COP/US$ $ 2994.7 $ 2919.6 -2.5%
Foreign exchange (end of period) COP/US$ $ 2916.2 $ 3038.3 4.2%
WTI (average) per barrel $ 45.4 $ 48.1 5.9%
Jet Fuel Crack (average) per barrel $ 8.2 $ 10.8 32.0%
US Gulf Coast ( Jet Fuel average) per barrel $ 53.6 $ 58.9 9.9%
Fuel price per Gallon (including hedge) $ 1.58 $ 1.80 13.1%
Operating Revenues ($M) $ 966.2 $ 1092.1 13.0%
EBITDAR ($M) $ 166.3 $ 211.3 27.0%
EBITDAR Margin 17.2% 19.3% 213 bp
EBITDA ($M) $ 89.4 $ 133.5 49.3%
EBITDA Margin 9.3% 12.2% 297 bp
Operating Income ($M) $ 25.5 $ 62.1 143.4%
Operating Margin ($M) 2.6% 5.7% 305 bp
Net Income ($M) -$ 23.2 $ 10.6 145.9%
Net Income Margin -2.4% 1.0% 337 bp
EBITDAR (Adjusted) ($M) $ 178.4 $ 211.9 18.7%
EBITDAR Margin (Adjusted) 19.0% 19.4% 37 bp
EBITDA (Adjusted) ($M) $ 101.5 $ 134.1 32.1%
EBITDA Margin(Adjusted) 10.8% 12.3% 145 bp
Operating Income (Adjusted) ($M) $ 37.6 $ 62.8 66.8%
Operating Margin ($M) (Adjusted) 4.0% 5.7% 173 bp
Adjusted Net Income ($M) -$ 4.0 $ 8.8 322%
Net Income Margin (Adjusted) -0.4% 0.8% 123 bp

Management Comments on 1Q 2017 Results

Avianca Holdings reached an operating income (EBIT1) of $62.8 million, with an operating income (EBIT1) margin of 5.7%. These results were primarily driven by a 16.5% increase in total operating revenues1 as the Company benefited from record load factors and strong passenger traffic in conjunction with its first year-on-year yield increase since 1Q 2014. Consequently, passenger revenues increased by 18.1%; its strongest year-on-year increase since 4Q 2014. Moreover, Non-Passenger Revenues1 increased 10.4%, in part due to higher revenues from mile redemption and other services. The latter was partly offset by an increase in operational expenses1, primarily driven by higher fuel costs and a 24.4% increase in Air Traffic expenses, which was primarily driven by a 9.0% increase in passengers as well as an increase in passenger indemnifications related to unscheduled repairs, delays and over booking.

Total operating revenues1 amounted to approximately $1.09 billion during 2Q 2017. This represents the strongest second quarter revenue since 2014 with a 16.5% year-on-year increase, mainly due to a 18.1% increase in passenger revenues. In addition to increased traffic and strong load factors, the Company also benefited from its first year-on-year yield increase since 2014. Moreover, Cargo and Other revenues1 increased 10.4%, primarily driven by higher revenues from mile redemption and other services as well as a 9.3% increase in transported tons. Cargo and other revenues1 represented 19.9% of total revenues in the second quarter 2017.

The LifeMiles Loyalty Program continued to deliver strong results during the 2Q2017, with a 21.6% increase in revenues when compared to the same period of 2016. In terms of membership growth, the quarter ended with almost 7.3 million members; an 8.2% year-on-year increase. The retail partnership program also continued to expand 2Q 2017, with a 9.6% increase in the number of new commercial partners, to 320. Finally, LifeMiles’ active co-branded cards ended the quarter with more than 591,000 cards; a 23.0% year-on-year increase.

Avianca transported more than 7.7 million passengers in the second quarter of 2017; a 9.0% year-on-year increase. Traffic figures (RPKs) continued to increase well above capacity (ASKs), resulting in a consolidated load factor of 82.0%, the highest second quarter load factor on record since the Company’s merger with TACA. In particular, routes to Europe reached an average consolidated load factor of 85.5%, while domestic routes in Colombia reached a healthy 80.7% during the second quarter 2017.

2Q 2017 operating expenses1 were $1.03 billion; a 14.4% year-on-year increase. This was primarily driven by a 22.0% increase in Fuel Expenses associated with higher jet fuel prices as the Company’s effective jet fuel prices increased by 13.1%, from an average of US$1.58 to US$1.80 per gallon. Further, Air traffic expenses increased 24.4% primarily driven by a 9.0% increase in passengers as well as an increase in passenger compensation related to unscheduled repairs, delays and over booking. Ground Operations expenses increased 16.5%, primarily driven by an increase in our international operation as well as by an increase in landing fees. These results were partially offset by a 5.5% decrease in General, Administrative and Other Costs for the second quarter 2017, mainly due to a loss generated by the sale of an A319 in 2Q 2016.

As part of the Company’s ongoing fuel hedging strategy, a total of 104.4 million gallons of fuel were hedged at the end of the second quarter 2017, out of which 75.6 million gallons correspond to approximately 34.0% of the total expected volume to be consumed over 2017. The remaining volume represents approximately 6.2% of the total expected fuel consumption for 2018. Coverage levels were set at approximately $1.43 per gallon.

In accordance with the Company’s fleet plan, Avianca phased out one A319 and one A300F aircraft between April and June 2017. Avianca Holdings S.A. and its subsidiaries therefore ended the quarter with a consolidated operating fleet of 179 aircraft.

The Company recorded other non-operating expenses of $39.4 million for the 2Q 2017, compared to a non-operating expense of $47.2 million for the same quarter of 2016. Interest expenses increased $0.7 million as the Company marginally increased the aircraft under financial lease contracts. The Company also recorded a $2.3 million gain related to the foreign exchange non-cash translation adjustments, as compared to a $12.4 million expense for the same period of 2016. This effect is primarily due foreign exchange translation adjustments, consisting of the net non-cash gain (or loss) from monetary assets and liabilities denominated in Colombian Pesos, Argentinian Pesos, and Venezuelan Bolivares subject to the USD exchange rate.

The Company ended the quarter with cash and cash equivalents and available-for-sale securities, in the amount of $308.5 million. Including short-term certificates and bank deposits, adjusted cash and cash equivalents and available-for-sale securities (other current assets) were $359.2 million, equivalent to approximately 8.4% of revenues for the last twelve months. As of June 30, 2017 the Company valued its cash balances held in Venezuela at the latest DICOM exchange rate of 2,640 VEF per 1.00 USD, resulting in a cumulative loss of $1.0 million. Accordingly, the carrying amount of cash balances held in Venezuela have been classified as follows: $0.37 million as cash and cash equivalents, which is expected to be used over the next three months as part of the normal operations in Venezuela and $ 1000 as short-term restricted cash, which is expected to be used in the subsequent nine months.

In line with the Company’s deleveraging strategy, as of June 30, 2017, the Company’s leverage position (Net Adjusted debt to EBITDAR2) decreased to 5.8x, from 6.3x on June 30, 2016. The Company’s total long-term debt amounted to $2.85 billion, while total liabilities came in at $5.03 billion.

Full Year 2017 – Outlook

In line with the strong demand across the network, driven by Avianca Holdings customer centric approach the company remains committed to strengthening its capital structure, enhancing free cash flow generation and ensuring sustainable margin expansion for all stakeholders. Due to the fact that the Company’s cost control and revenue enhancing measures have continued to gain traction, while traffic growth outpaces capacity deployment, Avianca has revised its guidance for the full year of 2017 as follows:

OutlookSummary FullYear 2017
Total Passenger Increase 4.5% – 6.5%
Capacity (ASK) Increase 7% – 9%
Load Factor 80.0% – 82.0%
EBIT Margin 7.0% – 9.0%

Analysis by ASKs (in U.S. cents)

  2Q 2016 2Q 2017 Var%
Operating revenue:      
Passenger 6.40 6.93 8.3%
Cargo and other 1.95 1.72 -11.7%
Total Operating Revenues 8.3 8.7 3.7%
Operating expenses:      
Fligh t Operations 0.11 0.12 9.1%
Aircraft fuel 1.44 1.85 28.5%
Ground Operations 0.88 0.88 0.0%
Aircraft rentals 0.69 0.64 -7.2%
Passenger services 0.31 0.34 9.7%
Maintenance and repairs 0.63 0.54 -14.3%
Air traffic 0.43 0.49 14.0%
Sales and marketing 1.35 1.05 -22.2%
General, administrative, and other 0.35 0.35 0.0%
Salaries, wages and benefits 1.35 1.37 1.5%
Depreciation and amortization 0.55 0.57 3.6%
Total Operating Expense 8.13 8.16 0.4%
Operating Income 0.22 0.49 123.2%
Total CASK 8.13 8.16 0.4%
CASK ex. Fuel 6.48 6.32 -2.5%
Total Cask (Adjusted) 7.8 8.2 4.9%
CASK ex. Fuel (Adjusted) 6.1 6.3 3.0%
Yield 8.20 8.46 3.2%

Non-IFRS Financial Measure Reconciliation

In USD Millions 2Q2016 2Q2017 Var%
Net Income as Reported (23.2) 10.6 145%
Special items (adjustments):      
(+) Extraordinary Projects - 0.6  
(+) Gain on Sale of Property and Equipment F100 (2.0) -  
(+) Loss on Sale of Property and Equipment A319 6.4 -  
(+) Loss on adjustment of Aircraft reasonable value 7.7 -  
(+) Derivative Instruments 5.3 (0.9)  
(+) Foreign Exchange Gain (loss) (12.4) (2.3)  
Net Income Adjusted (4.0) 8.8 322%

Reconciliation of Operating Cost per ASK excluding special items

in US$ cents 2Q2016 2Q2017 Var%
Total CASK as reported 8.1 8.2 0.4%
Aircraft Fuel 1.6 1.8  
Total CASK excluding Fuel as reported 6.5 6.3 -2.5%
(+) Cargo Discount (0.4) -  
(+) Extraordinary Projects - >(0.0)  
Total CASK excluding Fuel and special items 6.1 6.3 3.0%

Interim Condensed Consolidated Statement of Comprehensive Income for the Three-month period ended June 31, 2016 and 2017 (In USD thousands)

  2017 (Unaudited)   2016 (Unaudited)
       
Operating revenue:      
Passenger 875,139   740,906
Cargo and other 216,918   225,284
Total operating revenue   1,092,057 966,190
Operating expenses:      
Flight Operations 14,465   15,152
Aircraft fuel 232,521   190,663
Ground operations 119,154   102,238
Aircraft rentals 77,730   76,919
Passenger services 42,989   36,037
Maintenance and repairs 75,727   69,844
Air traffic 61,540   49,450
Sales and marketing 130,764   123,080
General, administrative, and other 36,870   50,484
Salaries, wages and benefits 166,767   162,901
Depreciation, amortization 71,385   63,889
Total Operating expenses 1,029,912   940,657
Operating Profit 62,145   25,533
Other non-operating income (expense): -39,481   -47,189
Interest expense -43,668   -43,011
Interest income 1,767   2,936
Derivative instruments 98   5,256
Foreign Exchange 2,321   -12,370
Profit before income tax 22,663   -21,656
       
Income tax expense- current -8,908   -5,285
Income tax expense- deferred -3,116   3,747
Total income tax expense -12,024   -1,538
       
Net profit for the period $10,639   $-23,194

Interim Condensed Consolidated Statement of Financial Position (in USD thousands)

    As of
June 30, 2017
  As of
December 31, 2016
    (Unaudited)   (Audited)
Assets        
Current assets:        
Cash and cash equivalents   $308,483   $375,753
Restricted cash   5,936   5,371
Accounts receivable, net of provision for doubtful accounts   293,053   313,868
Accounts receivable from related parties   19,436   19,283
Expendable spare parts and supplies, net of provision for obsolescence   95,599   82,362
Prepaid expenses   71,702   59,725
Deposits and other assets   181,730   160,124
Total current assets   975,939   1,016,486
Non-current assets:        
Available-for-sale securities   28   76
Deposits and other assets   130,940   174,033
Accounts receivable, net of provision for doubtful accounts   130,972   92,048
Intangible assets   414,085   412,918
Deferred tax assets   10,814   5,845
Property and equipment, net   4,767,900   4,649,929
Total non-current assets   5,454,739   5,334,849
Total assets   $ 6,430,678   $ 6,351,335
    As of
June 30, 2017
  As of
December 31, 2016
Liabilities and equity        
Current liabilities:        
Current portion of long-term debt   $ 457,200   $ 406,739
Accounts payable   516,183   493,106
Accounts payable to related parties   7,867   9,072
Accrued expenses   155,006   138,797
Provisions for legal claims   10,844   18,516
Provisions for return conditions   16,418   53,116
Employee benefits   38,009   39,581
Air traffic liability    633,791   521,190
Other liabilities   11,654   11,085
Total current liabilities   1,846,972   1,691,202
Non-current liabilities:        
Long-term debt   2,777,155   2,867,496
Accounts payable   6,983   2,734
Provisions for return conditions   155,510   120,822
Employee benefits   137,738   115,569
Deferred tax liabilities   22,483   20,352
Air traffic liability    91,670   98,088
Other liabilities non-current   13,913   14,811
Total non-current liabilities   3,205,452   3,239,872
Total liabilities   5,052,424   4,931,074
Equity:        
Common stock   82,600   82,600
Preferred stock   42,023   42,023
Additional paid-in capital on common stock   234,567   234,567
Additional paid-in capital on preferred stock   469,273   469,273
Retained earnings   505,656   544,681
Revaluation and other reserves   27,365   27,365
Total equity attributable to the Company   1,361,484   1,400,509
Non-controlling interest   16,770   19,752
Total equity   1,378,254   1,420,261
Total liabilities and equity   $ 6,430,678   $ 6,351,335

Glossary of Operating Performance Terms

This report contains terms relating to operating performance that are commonly used in the airline industry and are defined as follows:

A

ASK: Available seat kilometers represents aircraft seating capacity multiplied by the number of kilometers the seats are flown.

ATK: Available ton kilometers represents cargo ton capacity multiplied by the number of kilometers the cargo is flown.

B

Block Hours: Refers to the elapsed time between an aircraft leaving an airport gate and arriving at an airport gate.

C

CASK: Cost per available seat kilometer represents operating expenses divided by available seat kilometers (ASKs).

CASK ex-fuel: Represents operating expenses other than fuel divided by available seat kilometers (ASKs).

Cargo Discount: The cargo discount is the incremental revenue under Cargo and Other Revenue, which recorded the difference between the selling price charged by third party agencies to final customers and the price Avianca Cargo charged third party agencies. The cargo discount was then subsequently discounted as an incremental expense under Sales and Marketing having no impact on nominal profitability. Commencing third quarter 2016 the company no longer records cargo discount.

Code Share Agreement: refers to our code share agreements with other airlines with whom we have business arrangements to share the same flight. A seat can be purchased on one airline but is actually operated by a cooperating airline under a different flight number or code. The term “code” refers to the identifier used in flight schedules, generally the two-character IATA airline designator code and flight number. Code share alliances allow greater access to cities through a given airline’s network without having to offer extra flights, and makes connections simpler by allowing single bookings across multiple planes.

L

Load Factor: Represents the percentage of aircraft seating capacity that is actually utilized and is calculated by dividing revenue passenger kilometers by available seat kilometers (ASKs).

R

RASK: Operating revenue per available seat kilometer represents operating revenue divided by available seat kilometers.

Revenue Passenger: Represents the total number of paying passengers (which do not include passengers redeeming LifeMiles, frequent flyer miles or other travel awards) flown on all flight segments (with each connecting segment being considered a separate flight segment).

RPK: Revenue passenger kilometers represent the number of kilometers flown by revenue passengers.

RTK: Revenue ton kilometers represents the total cargo tonnage uplifted multiplied by the number of kilometers the cargo is flown.

T

Technical Dispatch Reliability: Represents the percentage of scheduled flights that are not delayed at departure more than 15 minutes or cancelled, in each case due to technical problems.

Y

Yield: Represents the average amount one passenger pays to fly one kilometer, or passenger revenue divided by revenue passenger kilometers (RPKs).

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