South America’s LATAM Airlines Group reported a first-quarter 2017 net profit of $65.6 million, down 35.9% from the company’s $102.2 million net income in 1Q 2016.

Operating revenue for the quarter increased 6.4% year-over-year (YOY) to $2.5 billion. LATAM attributed the increase to the company’s capacity management combined with stronger local currencies, particularly in Brazil. Total expenses increased 10.3% YOY to $2.3 billion as fuel and labor costs rose 29% and 7.5%, respectively YOY.

The Santiago, Chile-based carrier has decreased its workforce headcount by 12.4% since the 1Q 2016 as part of the company’s cost efficiency transformation.

LATAM Group’s operating income for the quarter fell 30.5% YOY to $152.3 million; the company’s operating margin for the quarter was 6.1%, down 3.3 points from 1Q 2016.

“We are in the middle of transforming LATAM and [are] improving the value proposition for our clients with the renewal of the domestic flight model,” LATAM Airlines Group CEO Enrique Cueto said. “While we still have a lot of work to do, we are off to a solid start.”

LATAM’s fleet commitments for 2017 total $469 million, the lowest amount in LATAM’s recent history, and consist entirely of pre-arranged operating leases. LATAM’s 2018 fleet commitments total $555 million, which has been pared down by $1 billion since September 2016. The company took delivery of one Boeing 787-9 and returned three Airbus A320-200s and one 767-300F during the quarter.

“LATAM continues to take a flexible approach to its fleet plan, adapting to operational requirements and market conditions,” the company said. “Confirmed reductions [now] amount to $2.2 billion, in line with [our] … plans to achieve a decrease of $2 billion to $3 billion in our expanded fleet assets by 2018.”

By the end of 2017, LATAM plans to reduce its fleet by 18 aircraft. Among its narrowbody fleet, LATAM intends to remove three Airbus A319-100s and 20 A320-200s by year-end and take delivery of five new A320neos. Among its widebodies, LATAM will remove one Boeing 767-300 and take delivery of two 787-9s by year-end. A 777-200F is also slated for removal by year-end.

During the quarter, LATAM launched its new domestic service travel model, first announced in November 2016. Implementation of the domestic model will continue gradually over 2017 and will pursue a low-cost carrier (LCC) format, with segmented fares and ancillary service offerings. LATAM launched its “Mercado LATAM” buy-on-board food and beverage service in Colombia in February, followed by Peru in March and Chile in April. The service will roll out on LATAM’s domestic flights in Argentina, Ecuador and Brazil over the remainder of 2017.

LATAM plans to increase regional connectivity in coming months; a new nonstop route between Lima, Peru and Tucuman, Argentina will launch in September; and three new direct routes from Santiago, Chile to Argentina cities Tucuman, San Juan and Neuquén will begin in October. Also in October, LATAM will launch its Santiago-Melbourne, Australia 3X-weekly service, reportedly the longest direct flight in LATAM’s history (15 hrs. and 11,000 km).

LATAM Airlines Group is parent company to LATAM-branded subsidiaries in Peru, Argentina, Colombia and Ecuador; LATAM Cargo; LATAM Airlines Brazil, and LATAM Airlines Paraguay.

Mark Nensel