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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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 Wednesday, March 14. 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 the international markets. Therefore, they are subject to change.
Now it is my pleasure to turn the call over to Ramiro Alfonsín, Chief Financial Officer of LATAM Airlines Group. Mr. Alfonsín, please begin.
Thank you, Carmen, and good morning, everyone, and welcome to LATAM Airlines Fourth Quarter Earnings Call.
Joining me today are Ms. Cláudia Sender, Vice President of Customers; Mr. Andres del Valle, Vice President of Corporate Finance; Mr. Roberto Alvo, Chief Commercial Officer; and Mr. Jerome Cadier, CEO of LATAM Airlines Brazil.
Please join me in Slide 2. We are very happy to present our financial results for 2017, where we registered the highest operating income in the history of LATAM amounting to $715 million. This is an increase of over 25% if compared to the operating income of 2016. Equally important to our company is how much we progressed in the transformation plan that we announced at the end of 2016. Our focus was to prepare the company for a different competitive landscape, adapting to an evolving airline industry. We made changes to compete efficiently in our markets, contained cost under pressure by inflation and the rightsizing of the company, while implementing a new business model in our domestic operations to ensure the sustainability of our operations.
Now we have a leaner organization with a unique market position, and as we look forward, we know we have taken the right steps to ensure that our business model remains competitive and successful over time.
This is the first year of revenue expansion since the combination of LAN and TAM. Total revenues for 2017 increased 6.7% to over $10 billion as we registered unit revenue increases across all our business units. On the cross passenger side, our revenue per ASK grew 6.7% compared to 2016 as a result of an improving demand environment, capacity adjustments that we made in 2016 and the appreciation of the Brazilian real compared to 2016. In cargo, revenues per ATK grew 8.5% compared to 2016, also supported by Brazil economics improvement.
Total operating expenses increased by 5.5%, mainly explained by the 21% increase in fuel prices for the year. Excluding fuel, cost per ASK increased 2.2%, which includes expenses related to the rightsizing of employees and fleet as we phased out 21 aircraft during 2017 and also the appreciation of the currencies, for instance, the real that appreciated 8% during 2017.
For 2017, net income amounted to $155 million, $86 million higher than last year. While last year's net income had a foreign exchange gain, this year was affected by a foreign exchange loss of $19 million, mainly impacting results in the fourth quarter.
As announced, we reduced the number of operating aircraft and improved our utilization. 2017 was the year with the lowest fleet commitments in the history of LATAM, while we continued adjusting our fleet plan for the coming years. As a result, our planned fleet -- our current planned fleet maintains the right amount of flexibility considering the demand environment that we are foreseeing and the macro trends for the region.
The company have started to see the benefits of its higher operating results and its strict investment discipline; improving the company cash flow generation and strengthening our balance sheet. Our leverage ratio improved from 5.3x in 2016 to 4.5x by the end of 2017, while maintaining a healthy liquidity level of 20%.
We also continue to strengthen our route network in South America, offering the best connectivity within the region and to the rest of the world at competitive prices. This is how in 2017 we launched 30 new routes, including the longest non-stop flight in the history of LATAM, Santiago to Melbourne as well as improved the regional connectivity from our hubs.
An important highlight for 2018 was the implementation of the routes to new destinations that we have announced, such as Rome, Boston or Las Vegas, increasing Latin America connectivity with Europe and to North America.
Our customers remain our priority. We continue to develop our strategy, giving more options to passengers to customize their trip and to improve their travel experience through the entire process. Andres del Valle will explain later in more detail these aspects.
Please join me on the next slide, in Slide 3. You will find here a summary of our income statement. Total revenues in the fourth quarter reached $2.8 billion, recording a 7.7% year-over-year increase that was boosted by the passenger revenue as the company benefited from increased traffic, stronger load factors and continuing yield recovery across all LATAM's market.
Passenger revenue per ASK increased by 5.3%. Moreover, cargo revenue rose 9% during the quarter, boosted by a 13% increase in revenues per ATK, consolidating and further improving the turnaround recorded since mid-2017 that we mentioned in our last quarterly call.
In the fourth quarter, total cost amounted to $2.5 billion, a 5.2% increase compared to the same quarter of 2016. This increase is mainly explained by $94 million of higher fuel cost as a result of a 20% increase in the average price per gallon compared to the fourth quarter 2016. Operating expenses, excluding fuel, increased by 1.6% in the quarter.
Consequently, our operating income for the quarter rose 38% to $270 million accounting for a 9.8% operating margin, that is 2.2 percentage points higher than last year's quarter.
The non-operating result amounted to $132 million loss in the fourth quarter 2017, affected by $67 million foreign exchange loss mainly due to the depreciation of the Brazilian real. Hence fourth quarter 2018 net income amounted to $67 million.
For the full year 2017, revenue increased by 6.7%. Our operating income amounted to $715 million with the operating margin expanding 1 percentage point to 7% in line with the guidance that we provided. 2017 net income amounted to $155 million, that is $86 million higher than the net income of 2016.
Finally, for the full year 2017, LATAM generated $1.4 billion in cash flow after investments, well above the $550 million generated in 2016. This cash flow generation was supported by $1.7 billion in cash from own operations and the positive impact of the containment in investments mostly from the negotiations related to our fleet plan that we carried out in 2016 and 2017.
Ladies and gentlemen, after 2 years of weakening regional economies and the recession in Brazil, our focus was to prepare the company for a different competitive landscape, adapting to an evolving airline industry. We have advanced on the rightsizing of the company, and we are seeing the results of our efforts in the improving operating margin.
We want to take this opportunity to thank our employees for the efforts during this year. Together, we set the company for growth, including our first capacity expansion in the domestic market of Brazil since the combination of LAN and TAM, while maintaining our commitment to continue working in our cost initiatives and the deleveraging of the company.
Our clients continue to be at the center of our decision-making process. Our focus is to continue improving the client experience, and that is why, during the next 2 years, we will be investing in the retrofit of the cabins of our Boeing 767s and 777s.
With that, I would like to turn the call to Andres del Valle, Vice President of Corporate Finance to see the quarter in more detail.
Thank you, Ramiro, and good morning, everyone. Please join me on Slide #4. I'd like to start by talking about the revenue environment. During 2017, we saw an improvement in passenger and cargo revenue trends resulting in part by a proactive capacity management across all markets and another part by the positive impact of an improved macroeconomic scenario in the region, specifically in Brazil. As a result, we have been able to add capacity, while improving passenger unit revenues and maintaining hybrid factors at levels of around 85%.
We expect the demand environment to keep improving throughout 2018, so we can grow between 5% to 7% in passenger capacity as previously disclosed in our guidance, while maintaining high load factors.
Our cargo unit revenues have also benefited from better demand, mainly driven by Brazil's import markets, resulting in a consistent improvement in unit revenues and load factors in the past quarters. We decreased cargo capacity by 7.1% in 2017. For 2018, we expect to increase ATKs in the range of 1% to 3%, continue with the focus of maximizing the utilization of the value of the passenger aircraft while using the dedicated freighters as a support for the belly operation.
Regarding our operating statistics in fourth quarter, we should highlight that we are seeing an improvement across all business units for the third consecutive quarter, which reflects a better price environment in the region.
Looking at international operations, with this quarter accounting for 55% of our total ASKs, our capacity was up by 3.8% year-on-year and load factors continue to be at healthy levels, reaching 86.1% during the quarter. Unit revenues were 5.6% high than last year's quarter, driven mainly by long-haul growth from Brazil.
Regarding the domestic Brazil market, which this quarter represented 27% of our passenger capacity, it came to 0.9% year-on-year. It is worth highlighting that this accounted for the first year-on-year increase in capacity in the quarter in almost 3 years, which reflects the better demand environment in the country as load factors increased by 1.5 percentage points to 84.7%. As a result, our unit revenue was also up in the quarter by 6.6% year-on-year in local currency, while our revenue per ASK in USD rose 4% year-on-year.
With regards to the domestic Spanish-speaking countries segment, which represents 18% of the ASKs, our capacity decreased slightly by 0.2% year-on-year, while load factors increased by 1.1 points to 82.3% and unit revenues by 5.5% to $0.076, despite the competitive environment especially in Chile and Peru.
As a result, in our passenger operations, revenue per ASK grew 5.3% year-on-year to $0.065, its highest level in almost 3 years. This improvement was driven both by increasing yield, 4% to 6%, and load factor, 0.5 points to 85.1%. We also have increased our capacity by 2.3% year-on-year this quarter.
Lastly, on the cargo front, ATKs decreased 3.6% at -- during the quarter mainly due to the ongoing increase in freighter capacity. Unit revenues increased 13.1% to $0.20. On the other hand, load factor rose by 1.4 points to 58.4%.
Please turn to Slide #5. We'll talk about the cost. We can see that our overall cost increased 5.2% year-on-year to $2.5 billion. Our increase is mainly explained by $93 million of higher fuel expenses, resulting from an almost 20% increase in the average price per gallon, excluding hedge, compared to last year's fourth quarter.
Costs associated to wages and benefits rose 4.7% driven by the high inflation rates in [indiscernible] during 2016 as well as an appreciation of local currencies. However, we were able to partially offset the cost with a 7.1% decline in the average headcount for the period.
Regarding fleet cost, which include aircraft rentals, depreciation and amortization and maintenance expenses, those were up by 7.4% in the quarter affected by fleet redelivery costs associated to 4 aircraft and higher maintenance provisions.
Lastly, the other segments on this slide decreased 3.4% year-on-year mainly as a result of the efficiency initiatives that we have already implemented as we rolled out our new domestic business model, which will further increase our cost savings on a variety of different fronts. As a result, our cost per ASK increased by 2.9% year-on-year, while our cost per ASK ex-fuel decreased 0.6%.
Please turn to Slide #6. Looking at the fleet plan, our operating fleet amounted to 307 aircraft by the end of 2017, while we expect that number can increase to 316 by the end of 2018 and should reach 322 aircraft by the end of 2019. At the bottom of the slide, you can see our fleet commitments. These amounted to $326 million for 2017 as Ramiro said, historical low for the company and were funded completely through operating leases. After 2018, we expect fleet commitment to reach $714 million, with about $250 million being funded with the financial debt. For 2019, we expect to have a $1.2 billion in fleet commitments. For 2020 and onwards, we will continue working our fleet plan, so we can maintain the right amount of flexibility in accordance with the demand environment that we see in the region.
Overall, we're very happy with the results achieved by adjusting our fleet plan as it did not only has allowed us to improve our cash flow generation this year, but also to increase [indiscernible] compared to 2016.
Turning to Slide #7. Our improved margins, together with the discipline of our investments, especially fleet, resulted in $1.3 billion of free cash flow on operations after investments. This represent a significant improvement compared to last year's accounting for more than 2x the one driving for full year 2016. We believe that our conservative approach to investments have allowed us to look forward to next years improving our funds from operation as investment and providing more cash flow to keep improving our financial position, continue with the deleveraging process that we have seen in the past quarters.
Now please turn to Slide #8. Regarding our financial metrics as shown on this slide, we continue having a very good liquidity position with $1.6 billion of cash on hand, plus $450 million of revolving credit facility, which was totally available by December 31st of last year. With this, LATAM's liquidity position reached 20% of last 12 months revenues.
Looking at the leverage. Our adjusted net debt to last 12 months EBITDAR ended the year at 4.5x, below the 5.3x that we have end of 2016. And the latter was driven by an $845 million (sic)[ $841 million ] reduction in our total net debt together with a 9.5% increase on our EBITDAR, which reached $2.3 billion in 2017 showcasing the progress of deleveraging at the company.
Please turn to Slide #9. We were very active in the capital markets in 2017 as payments totaled $1.5 billion for the year, and we were not only able to readjust maturities, but we were able to also significantly improved our debt profile as it is shown on Slide #9. It is worth highlighting the payment of the TAM $300 million bond in April 2017 and the redemption of the TAM $500 million bond with the coupon of 8.375% due in 2021 in September 2017. This liability management provided additional interest expense savings for the company as it was the highest coupons amount LATAM's obligations besides the additional financial obligation for 2021 and also at the same time improving the maturity profile by extending the average duration of our existing debt.
On the other hand, it is also worth highlighting the successful issuance of a $700 million senior and unsecured notes maturing in 2024, and a $350 million of unsecured local Chilean -- local denominated notes with maturities in 2022 and 2028. These has allowed us to meet with the maturities due for the year, while at the same time, taking advantage of good market opportunities by accessing attractive interest rate levels.
I want to highlight that in Q4 '17, we were able to significantly reduce the mismatch between TAM's assets and liabilities from USD 1.3 billion in September 2017 to about $800 million by the end of 2017. This would allow us to reduce the impact of FX gains and losses on our net income line, thus making it less sensitive to external factors beyond the company's performance.
Looking ahead, we expect to continue reducing TAM's currency mismatch in order to keep mitigating the impact of the BRL fluctuation on our net income line, and as a result, being able to provide a less volatile bottom line and dividend payments to our shareholders.
Please join me on Slide #10 regarding fuel and FX hedging portfolio. For the fourth quarter of 2017, we have hedged approximately 23% of the estimated fuel consumption, recorded $17 million on fuel hedging gains above the $4.4 million gains recorded in last year's quarter. In the first quarter of 2018, we have 20% of the estimated consumption hedged. Our hedge position for the second, third and fourth quarter 2018 is 40%, 44% and 23%, respectively.
Regarding the BRL, during the fourth quarter 2017, we recognized a $3.5 billion loss related to foreign currency contracts compared to the $2.9 billion loss recorded in the same period of 2016. We have hedged $100 million for the first 3 quarters of 2018 and $60 million for Q4 of 2018.
Please turn to Slide #11. As Ramiro mentioned earlier, 2017 was a year of transformation for LATAM. On the inside, we have strengthened the financial position of the company throughout 2017 with several financial initiatives, maintaining a healthy liquidity level. We also finished the year with a much leaner organization after several quarters of adjusting our headcount and fleet and implementing productivity measures.
On the outside, 2017 was a year when economic landscape of the region started to turn around with the recession in Brazil, one of the deepest in the recent history of the country finally showing signs of coming to an end. Looking ahead, we welcome the shift with a much leaner and productive organization. We are aware of the attractiveness of the region now that is resuming its growth and it has a lot of untapped potential. That's why in 2017, we prepared ourselves to face a new competitive landscape by unbundling our first in our dependent markets and dependent more ancillary revenues opportunities.
However, we have not forgotten what sets LATAM apart from other airlines in the region, which is why during 2017, we also put a lot of effort on keeping developing our network and need of the client improving airport experience by adding around 700 self-service kiosks for check-in and check baggage, also improving in-flight experience with a new premium menu for flights longer than 7 hours, and with Mercado LATAM, a new [indiscernible] scheme that allows our passengers to access high-quality food at economic prices on the domestic flights. Moreover, we expect to keep improving our passenger experience throughout 2018 with Wi-Fi in Brazil domestic and regional narrow body flights starting only Q1 of this year and new cabin in our widebody fleet enabling Boeing 767s and the Boeing 777s.
Our efforts to bring greater control and comfort to the passenger have been recognized... [Audio Gap] self-serving tools and reaffirms the company's commitment to offering [indiscernible] travel experience to its customers.
Please turn to Slide #12. As you can see here, we have continued the development of our ancillary revenue strategy. Internally, we kicked up the upgrade bidding in our flights from Brazil. This bidding session allows our passengers to access business class and premium economy seats, thus enabling us a better management of empty seats. We also started the sale of preferred seat in Chile in April, in Peru in June and in Colombia and Ecuador, in July. With this initiative, our passengers can purchase preferred seats either in the booking process or digitally through our ancillary markets.
In May, we consolidated the charts for passengers extra baggage with exception of top-tier and business cabin passengers, which includes sports gear and musical instruments. During the same month, we also launched our new sales model with branded fares, first bag and seat selection charges. This model allows our customer to choose how to fly by paying only for what they use. Lastly, we also launched the same day flight changes in Chile in August, in Colombia and Ecuador in October and in Peru in December. As a result, our clients can now make itinerary changes the same day of their flight on our digital platform, LATAM.com.
For 2018, our challenge is to further consolidate and optimize our new sales model by initial feedback we have received so far to learn from our customers endorse the same products that fit better with the needs and profile. Even though we are very happy with the results of Q4 2017 regarding this new sales model, we still see room for improvement, and therefore, to continue increasing our ancillary revenue. Furthermore, we also expect to release new ancillary product this year, which is why we're looking for the challenges ahead.
Please turn to Slide 13. Like I said before, our network is among the things that set us apart from other airlines and we're committed to maintaining our network leadership. That is why throughout 2017, we launched 30 new routes also in '17 including the longest in LATAM's history, Santiago to Melbourne. We keep strengthening our hubs adding 4 routes from São Paulo, 7 from Santiago and 5 from Lima. At the same time, in order to keep improving our passengers itineraries, we have also added 7 direct flights between secondary cities in domestic routes in Chile, Peru and Colombia, considerably reducing travel time. We also continue to optimizing our route portfolio by canceling 10 low performing routes during 2017. Overall, we concluded the year with 137 destinations across 24 countries.
We have high expectations for 2018, having already announced flagship destination for this year, such as Rome, Boston, and Las Vegas. Furthermore, we also expect the ruling of the Chilean authorities regarding the approval of our JBAs with American and IAG for this year. If approved, these agreements will allow us to access to a network of over 420 destinations to more flights and better connections and increased seat availability at competitive prices. In summary, better option for all of our passengers.
Lastly, please turn to Slide 14. We would like to reaffirm the guidance provided for 2018. We're expecting total capacity to grow between 5% to 7% this year. This breaks down 6% to 8% for the international and the domestic Spanish-speaking countries segments. And 2% to 4% growth for the domestic Brazil business units, the first growth in the domestic market Brazil since the business relation between LAN and TAM.
We also expect cargo capacity to increase between 1% to 3% in 2018. However, it is worth mentioning that this growth will come from a highly [indiscernible] due to the increased capacity on the passenger side. As a result, we expect our operating margin to be between 7.5% to 9.5% this year, an improvement from the 7% margin recorded in 2017.
This concludes our presentation. And we will be happy to open the line for questions. Thank you.
[Operator Instructions] And our first question is from the line of Michael Linenberg with Deutsche Bank.
I have a couple of questions here. The first, if you could just give me kind of a sense or an update on the competitive backdrop? There's been some new entrants in Chile and some new entrants in Argentina. And I'm just curious about how maybe the market dynamic is changing, and maybe there's been some share shift, how -- kind of the early sort of the initial innings of this new competition, what you're seeing and how you're responding? Because your numbers -- your unit revenue numbers were quite good for the quarter. And I'm just curious if we're seeing those trends continue into the March quarter, with some of the new competition?
This is Roberto. We do have, of course, an entrant in Chile. Also, at the same time, we have an exit in Chile. There's a company called LAW, a bit small, had 5% capacity shares last year and stopped operations in domestic Chile in February and currently is not flying. So yes, there's important changes in capacity in domestic Chile. We've seen, of course, a substantial increase in capacity in domestic Chile. We have seen a relatively good response from the market. We changed our strategy, we're setting one-way fares in domestic Chile, something that we didn't do. Our loads are very high. We are increasing our load from respect to last year and we're very confident that the new sales model, together with our revenue management strategy, is proving right, and we feel relatively comfortable today in the current market situation in domestic Chile.
In Argentina, it's too soon to tell, I would say, Flybondi started operations just a few weeks ago out of, I would say, secondary or tertiary airport in Buenos Aires. The airport has some infrastructure constraints and the operation has been easy to start because of the infrastructure situation. I would say that we haven't seen yet an impact at all from this new entrant in domestic Argentina at this point in time.
Roberto, is the new service added, the Buenos Aires Airport, I think, that, that's I guess the old military base, a military base. Is that an airport that LATAM Argentina would consider flying out as well? Are you going to stay at the international airport and Jorge Newbery Aeroparque?
First, I think that's significant challenges for that airport to work on a relative scale there's a legal injunction in Argentina today where you can have very limited operations. The infrastructure is really very poor. This is an airport that's not been adapted for passengers. Of course, in due time, we would consider eventually the airport itself. But the current infrastructure and access to the airport is really not adequate for our customers. We will see how this develops in Argentina at this point in time. We don't think it's a good alternative for passengers out of Buenos Aires.
Okay, great. And then just a question on cargo. It had seen that cargo trends were sort of going in the wrong way for a long time. And now we've started to see cargo pick back up. And I appreciate the fact that your cargo growth in -- for the most part, looks like it's actually going to be a growth that's driven by passenger belly growth. So it's not about adding freighters, it's more about utilizing your passenger aircraft better. Can you talk about the longer-term trend on cargo and as it relates to e-commerce? My sense is that e-commerce is in the very early stages in Latin America, and it would seem that LATAM would be in a very good position to participate in the growth of e-commerce as it matures. Are you getting some of that business? And do you see opportunities from the likes of Amazon and others, that, that is a business you can pick up because of your positioning?
Yes. Well, yes. First, I would say that from the second semester of last year, we started seeing a healthy recovery in traffic -- in cargo traffic and yields to the region. Basically, seeing southbound traffic rebounding, particularly in Brazil, but also in Chile and to an extent, in Argentina. We haven't yet reached the prerecession levels in Brazil in terms of volume. So we see, for the time being, a rebound of what has been the last 5 years in cargo. Northbound traffic is stable, remember that these are basically basic goods [indiscernible] from here. It's relatively healthy as well, but it's stable, it hasn't changed too much for the last couple of years.
Yes, going to your second question -- or to your main question, yes, we see huge potential of e-commerce traffic in the region. It's very, very in its early stages. You can see in domestic Brazil some developments already. I mean, I would say that a non-minor part of our airfreight cargo today already relates to some kind of e-commerce traffic currently within Brazil. But the prospects of this increasing in the region remain very interesting in the medium-term. As we go forward, our cargo strategy relates more to filling putting our bellies. But we have a portion of our 767 passengers that will mature, and we see conversions of those passenger aircraft into freighter aircraft to support both our growth and the aging of our cargo fleet as some of the aircraft are approaching 20 years. But we have the adequate means of sustaining our cargo freighter capacity and increasing it, and we believe that e-commerce trends kick up -- I don't know what the word is, just as it has happened in the more developed countries.
Can I -- just 1 quick 1 on the conversions. As -- I see that your 767-300 freighter fleet does grow in 2018 and '19. Those are -- are those -- those are newbuild aircraft, those -- or are those conversions?
Those are conversions. We're converting 2 passenger aircrafts into freighters.
Very good, very efficient.
Our next question comes from the line of Savvy Syth with Raymond James.
Maybe just to kind of follow on, on Mike's question there on the cargo, and I have another question after that. On the cargo front, how quickly can you ramp up or ramp down to take advantage of the kind of the cargo environment? It seems like -- I was a little surprised that maybe you didn't take your cargo capacity growth assumptions up for this year? And just kind of curious as how you think the recovery will progress from here?
So yes, as you see, our guidance for ATKs, which is relatively low, we are -- we have disposed of our 777 freighters, the 2 ones that we were operating and we are using more 767s, basically our belly capacity. We also use ACMI, A-C-M-I, which [ leases ] for current freighters that you don't see in the fleet plan, but are there. So our main focus today is filling up our bellies. We still have some space in our bellies to conduct our cargo southward and that is the best way of seizing the market opportunity and we will support that with freighters and we are converting 1 particular aircraft this year to support the rebounding in traffic that we've seen in the region. So we're quite comfortable with our strategy.
What we have done in the past years is getting out of markets that are not strategic, and that were purely freighter markets, where we didn't have any synergies to a network. And those markets are not connected to the rebound we're seeing in the Southern traffic actually our ATKs plan for the southbound market, which is what's growing -- grow significantly this year.
And do you expect to kind of go into some of those markets again with the recovery? Or are going to stick to this where it fits?
We're sticking to our freighter supporting belly strategies. Strategy -- our assets in the freighter business are mainly focused in supporting our passenger network. And outside of opportunities, our freighter capacity is dedicated to supporting our passenger network.
And if I can turn over to kind of the domestic strategy. You're following -- 1 concern that I have is maybe the strategy that might work in some of the Spanish-speaking countries may not work as well in Brazil. Along those lines, I was wondering what your thoughts were on why you haven't seen a lot of ULCC penetration in Brazil that you started to see in some of the South American countries? If that was a function of operating cost in Brazil? Or maybe kind of a function of consumer behavior that might be different?
I'm not going to speculate on why possible investors are not entering in Brazil. I think that their decision. We have to be a very competitive landscape in Brazil with 4 important carriers. The market is well served. You have the different products for the different segments. The main hubs have good coverage and the coverage of this mono market has been also growing. So we think that the situation in Brazil today is a more stable and the competition that we have today is already intense.
Maybe if I can ask that in a slightly different way. Since you've kind of started introducing the new domestic model in Brazil, just have you seen any changes in either kind of the corporate share or kind of leisure segments?
I'll take this one. This is Jerome from Brazil. We have not seen a major change in purchasing behavior since the introduction of the branded fares that will alter market dynamics in a significant way between corporate and leisure. But we do expect that the flexibility of the branded fares model will bring some additional growth throughout 2018 as we're seeing in our guidance a rare case.
Our next question comes from the line of Duane Pfennigwerth with Evercore ISI.
Just with respect to CapEx. You've had a big moderation here over the last 4 years. And I'm just wondering what does the company view as a normalized rate of investment? How do you view normalized CapEx? In other words, as we look at 2017 and 2018, below $1 billion -- significantly below $1 billion. Do you think you were under-investing during that period of time? Or how do you think about normalized CapEx going forward?
No. I think we -- this is Ramiro. I think we haven't been under-investing. We had opportunities to review our itineraries and increase utilization of our fleet. And we also believe that we can still do that during 2018 and '19 with still room for utilization improvements. We feel comfortable with the trend that we have presented here, $700 million in 2018 and maybe $1.2 billion in 2019. Although as we see utilization room for improvement, and we're consolidating those figures, maybe that is the maximum fleet CapEx that we're seeing for 2018 and 2019. You should consider those numbers as maximum fleet commitments for 2018 and '19.
In terms of non-fleet CapEx, as we mentioned, we're going to retrofit the 777s and the 767s in order to improve our customer experience in the business cabin and the economy cabin. And these investments will be carried out in 2018 and '19.
And then I appreciate the very positive unit revenue that you posted in the commentary about recovery. But I wonder, because you cover so many levers -- markets, could you review markets where RASK is still negative and may be deteriorating from here? Do you still have markets like that?
I would say that, generally speaking, the markets look healthy. I would say that the most challenging market today in terms of dollar-denominated revenues is Argentina, basically because of the high inflation and of the fact that it's difficult to pass inflation into prices with those levels. Otherwise, I would say that the demand and the trends look relatively healthy in general.
And then just lastly on cargo. It looks like the fourth quarter is really your big quarter to yield up. Fourth quarter is always a seasonally stronger period. I wondered do you have opportunities -- do you feel it's strong enough that you have opportunities to really push on yields in quarters other than the fourth quarter?
Yes. The fourth quarter -- the second semester, in general, is better than the first semester in terms of demand. And the base of yields of the first half of last year is relatively low. So we see a good momentum in the market today to see good trends in revenue in cargo for the first semester.
[Operator Instructions] And our next question is from Alberto Valerio with Citibank.
I have a couple of questions for you. About the Open Skies agreement between Brazil and U.S., do you see any impact on it if the agreement does not go through?
Alberto, this is Cláudia. We do expect that the Open Skies agreement will go through. It was ratified by the Senate last week and we think now it's running its course through the engines of the government. So we are still working in line with our game chart going forward for the implementation of the JVs early next year.
Perfect. But this agreement doesn't look like the President's initial statements said that there could be allowances for U.S. tax -- over tax on Brazil's due? Do you see an impact? Or not on a short term, more in the long term?
The JV is obviously -- and the JV with American Airlines is dependent on the ratification of the Open Skies agreement. So of course, it could have an impact. But thinking about the historical behavior of the Brazilian diplomacy, we do not expect this type of retaliation to happen. So we're following very closely and expect that it will run its course as planned.
Perfect. Perfect. And thinking of competition in Chilean markets and Argentinian, would you think that LATAM could open local subsidiary as your competitors did in the past?
This is definitely an idea that we have looked at and we will continue looking at. I would not discuss that in the present moment.
And my last question, sorry for bothering, the problem on the engine of Airbus news had impact something on these results of the last quarter as I see some aircraft maintenance are a bit higher than in the past?
I'm sorry, you were asking for the engines?
Yes.
Can you clarify your question whether you referred to engines, what's assumption?
I saw that the Airbus news has some problems with the engines in the fourth quarter. And I saw as well the line of aircraft maintenance coming [ 53.2 ] higher than in last quarter -- 1 year ago, the fourth quarter of '16. This have some relationship? Or did the engine didn't impact the fleet of LATAM?
No, they are unrelated aspects. We do have issue such order caressing the industry with engines basically related to the 787 problem. Rolls Royce engines have been having problems with durability, which has implied that they have to go for maintenance earlier than expected. This has impacted us in having some aircraft on ground for a period of time. We currently do have 787s on ground because of this reason. There's a similar situation going with the Pratt-powered 320neos, albeit in our case, we have only 2 aircraft that have been affected out of a fleet of more than 200, so it's less significant. There's an issue with the engines on both Rolls Royce and Pratt suppliers, which has not materially affected our operations. And I'll pass on to Ramiro to answer the cost question.
Happy to. Regarding the aircraft maintenance, they're completely unrelated. And as you know, we redelivered 21 aircrafts during 2017, a part of those was were redelivered in the fourth quarter, and the cost of those redeliveries are reflected in that line, in aircraft maintenance. And this is why you see a hike there.
And we have a follow-up from the line of Savvy Syth with Raymond James.
Yes. Just on the PSS system integration. I was just wondering if you should be concerned about any -- from operational, how complex that might be? But more importantly, once that system's integrated, what could we expect that you can't do today that you'd be able to do? Or how might that show up from a P&L standpoint?
I'll take this question as it probably affects Brazil more than any other market. When we started implementing the PSS transition in a phased approach that we called drain down, which means we do a transition over the month of February to May. That lowers the risk and the potential impact on sales and operation. The first period was done in the 5th and 6th of February, which was mainly on the sales front. That was a successful transition that we called C1, was a successful transition. And now we're preparing ourselves for the second transition, which affect airports that will be in the month of May. So far, we are on track with the timing and with potential risks and effects on the P&L, which we think will be minimal and included in whatever the business case numbers that we took deciding to do the transition 2 years ago. All going well.
Sorry -- yes, go ahead.
No, go ahead, Savvy.
I was wondering then on the kind of the positive impact once that's done like what do you expect?
Yes. Once this is fully implemented, this has a recurrent saving of approximately $40 million to $50 million on an annual basis. As Jerome said, this implementation will be carried out between February and May this year. So for this year, our estimate is that we're going to reduce cost by $25 million. And this is included in the guidance we provided.
Okay. Are there any kind of revenue benefits from the integrated system?
No. Not particular.
Not particularly. What we believe is it provides the full integration between any of the LATAM flights. So it brings all the network that we wanted that befits of our customers that they will see any flights being from Brazil, from Chile, from any other countries the same way. So it materializes with LATAM and tends to be in terms of network. But we did not anticipate significant impact this year in terms of revenue, mostly cost.
That's helpful. And if I may ask one last question just, I know you don't want to provide a lot of detail on kind of the level of the fuel and real hedges. But I was just wondering kind of generally from a modeling perspective, what we should think about the hedge levels for the kind of the currency and the fuel?
Yes. Andres del Valle here. If you look at that Slide 10 that shows the current portfolio, as we have said that what we have saved now, we protect on the way up, but we also have sort of a stop loss the way down. With this coverage, this is I can say it's in the money, we do not provide specific levels, but the hedge portfolio for fuel is in the money and so it is the case for BRL, out of which, we have almost 2/3 of the exposure we hedge. It's $100 million every quarter on the BRL or roughly $150 million exposure.
And this concludes our Q&A and conference for today. Thank you, again, for joining us. Feel free to contact our Investor Relations department if you have additional questions. We look forward to speaking with you again soon.