================================================================================UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
[ ]
| ¨ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2002
2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-14728
Lan Chile S.A.
(Exact
(Exact name of registrant as specified in its charter)
Lan Chile S.A. Republic of Chile
(Translation of registrant's name (Jurisdiction of incorporation
into English) or organization)
| Lan Chile S.A. | Republic of Chile | |
| (Translation of registrant’s name into English) | (Jurisdiction of incorporation or organization) |
Avenida AmericoAmérico Vespucio Sur 901
Comuna de Renca,
Santiago, Chile
(Address
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class: on which registered:
- --------------------------------------------------------------------------------
American Depositary Shares (as evidenced by New York Stock Exchange
American Depositary Receipts), each representing
five shares of Common Stock, without par value
Title of each class: | Name of each exchange on which registered: | |
American Depositary Shares (as evidenced by American Depositary Receipts), each representing five shares of Common Stock, without par value | New York Stock Exchange |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
----
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
----
Indicate the number of outstanding shares of each of the issuer'sissuer’s classes of capital or common stock as of the close of the period covered by the annual report: 318,909,090
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes Xx No --- ---
¨
Indicate by check mark which financial statement item the registrant has elected to follow: Item 17 ¨Item 18 X
--- ---
================================================================================
TABLE OF CONTENTS
PART I
ITEM 1. Identity of Directors, Senior Management and Advisers.................3
ITEM 2. Offer Statistics and Expected Timetable...............................3
ITEM 3. Key Information.......................................................3
ITEM 4. Information on the Company...........................................11
ITEM 5. Operating and Financial Review and Prospects.........................37
ITEM 6. Directors, Senior Management and Employees...........................53
ITEM 7. Major Shareholders and Related Party Transactions....................59
ITEM 8. Financial Information................................................61
ITEM 9. The Offer and Listing................................................62
ITEM 10. Additional Information...............................................63
ITEM 11. Quantitative and Qualitative Disclosure about Market Risk............76
ITEM 12. Description of Securities other than Equity Securities...............78
PART II
ITEM 13. Defaults, Dividend Arrearages and Delinquencies......................78
ITEM 14. Material Modifications to the Rights of Security Holders
and Use of Proceeds................................................78
ITEM 15. Controls and Procedures..............................................78
ITEM 16. Not Applicable.......................................................78
PART III
ITEM 17. Financial Statements.................................................79
ITEM 18. Financial Statements.................................................79
ITEM 19. Exhibits.............................................................79
i
PRESENTATION OF INFORMATION
Lan Chile S.A. ("LanChile") is a publicly-held stock corporation
(sociedad anonima abierta) incorporated under the laws of the Republic of Chile.
In this annual report on Form 20-F, unless the context otherwise requires, references to "LanChile"“LanChile” are to LanChile,Lan Chile S.A., the unconsolidated operating entity, and references to "we," "us"“LAN,” “we,” “us” or the "Company"“Company” are to LanChile and its consolidated subsidiaries. All references to "Chile" or the "Republic"“Chile” are references to the Republic of Chile.
This Form 20-Fannual report contains conversions of certain Chilean peso amounts into U.S. dollars at specified rates solely for the convenience of the reader. These conversions should not be construed as representations that the Chilean peso amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated. Unless we specify otherwise, all references to "$“$”," "US$ “US$”," "U.S. dollars" and "dollars" “U.S. dollars” or “dollars” are to United States dollars, references to "pesos," "Chilean pesos"“pesos”, “Chilean pesos” or "Ch$"“Ch$” are to Chilean pesos and references to "UF"“UF” are toUnidades de Fomento, a daily indexed Chilean peso-denominated monetary unit that takes into account the effect of the Chilean inflation rate. Unless we indicate otherwise, the U.S. dollar equivalent for information in Chilean pesos is based on the observed exchange rate reportedpublished byBanco Central de Chile (which we refer to as the Central Bank of Chile), on December 30, 2003, which at December 31, 2002 was Ch$718.61=599.42=US$1.00. The observed exchange rate on June 23, 20038, 2004 was Ch$705.75=644.61=US$1.00. The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos. For more information regarding
historical rates of exchange in Chile since January 1, 1996, see "Key
Information--Exchange Rate Information"See “Key Information—Exchange Rates” under Item 3.
LanChile and the majority of our subsidiaries (including our main cargo subsidiary LanChile Cargo S.A., which we refer to as “LanChile Cargo”) maintain their accounting records and prepare their financial statements in U.S. dollars. Some of our other subsidiaries, however, maintain their accounting records and prepare their financial statements in Chilean pesos. Our consolidated financial statements include the results of these subsidiaries translated into U.S. dollars. Current generally accepted accounting principles in Chile, or Chilean GAAP, requiresrequire monetary assets and liabilities to be translated at year-endperiod-end exchange rates, non-monetary assets and liabilities to be translated at historical rates of exchange as of the date of acquisition or incurrence and incomerevenue and expense accounts to be translated at the average monthly exchange rate for the month in which they wereare recognized. As required by Chilean GAAP, the financial statements of our subsidiaries that report in Chilean pesos are adjusted to reflect changes in the purchasing power of the Chilean peso due to inflation. These changes are based on the consumer price index published by the Chilean National Institute of Statistics.
We have rounded percentages and certain U.S. dollar and Chilean peso
amounts contained in this annual report for ease of presentation. Any
discrepancies in any table between totals and the sums of the amounts listed are
due to rounding.
This annual report contains certain terms that may be unfamiliar to
some readers. You can find a glossary of these terms on page 2 of this annual
report.
This annual report contains forward-looking statements. Forward-looking
statements are statements that are not historical facts, including statements
about our beliefs and expectations. These statements are based on current plans,
estimates and projections, and, therefore, you should not place undue reliance
on them. Forward-looking statements speak only as of the date they are made, and
we undertake no obligation to update publicly any of them in light of new
information or future events. Forward-looking statements involve inherent risks
and uncertainties. We caution you that a number of important factors could cause
actual results to differ materially from those contained in any forward-looking
statement. These factors include, but are not limited to: our ability to service
our debt and fund our working capital requirements, the maintenance of
relationships with customers, the effects on us from competition, future demand
for passenger and cargo air service in Chile and other countries in Latin
America, the state of the Chilean and world economies and airline industries,
future terrorist incidents or related activities affecting the air travel
industry, the relative value of the Chilean peso compared to other currencies,
inflation, increases in interest rates and changes in the regulatory environment
in which we operate.
GLOSSARY OF TERMS
The following terms, as used in this annual report, have the meanings
set forth below.
Capacity Measurements:
"available seat kilometers" or "ASKs"........ The number of seats made available for sale multiplied by the
kilometers flown.
"available ton kilometers" or "ATKs"......... The number of tons of capacity available for the transportation of
revenue load (passengers and/or cargo) multiplied by the kilometers
flown.
"systems available ton kilometers" or
"systems ATKs".......................... The number of total tons capacity for the transportation of revenue
load (passenger and cargo) multiplied by the kilometers flown.
Traffic Measurements:
"cargo ton kilometers"....................... The cargo load in tons multiplied by the kilometers flown.
"revenue passenger kilometers" or "RPKs"..... The number of revenue passengers carried multiplied by the kilometers
flown.
"revenue ton kilometers" or "RTKs"........... The load (passenger and/or cargo) in tons multiplied by the kilometers
flown. Yield Measurements:
"cargo yield"................................ Revenue from cargo operations divided by RTKs.
"overall yield".............................. Revenue from airline operations (passenger and cargo) divided by RTKs
(passenger and cargo).
"passenger yield"............................ Revenue from passenger operations divided by either RPKs or RTKs.
"ton"........................................ A metric ton, equivalent to 2204.6 pounds.
Load Factors:
"cargo load factor".......................... RTKs (cargo) expressed as a percentage of ATKs (cargo).
"overall break-even load factor"............. Operating costs (operating expenses plus net interest expense less
other revenue) per ATK (passenger and cargo) divided by overall yield.
"overall load factor"........................ RTKs (cargo and passenger) expressed as a percentage of ATKs (cargo
and passenger).
"passenger break-even load factor"........... Operating costs (operating expenses plus net interest expense less
other revenue) per ASK divided by passenger yield.
"passenger load factor"...................... RPKs expressed as a percentage of ASKs.
Use and Other:
"on time rate"............................... Percentage of flights that depart within fifteen minutes of scheduled
take-off.
"utilization rates".......................... The actual number of flight hours per aircraft per operating day.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
Selected Financial Data
The following table presents our summary
Our consolidated financial
information for each of the periods indicated. This information should be read
in conjunction with, and is qualified in its entirety by reference to, our
financial statements, including the notes thereto. Our financial statements are prepared in accordance with generally accepted accounting principles in Chile,
or Chilean GAAP, which differdiffers in certain significant respects from generally accepted accounting principles in the United States, or U.S. GAAP. For a description of certain significant differences between Chilean GAAP and U.S. GAAP as they relate to us, together with a reconciliation of our net income and shareholders'shareholders’ equity to U.S. GAAP, see Note 2524 to our audited consolidated financial statements.
We have rounded percentages and certain U.S. dollar and Chilean peso amounts contained in this annual report for ease of presentation. Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.
This annual report contains certain terms that may be unfamiliar to some readers. You can find a glossary of these terms on page 3 of this annual report.
This annual report contains forward-looking statements. Such statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” or other similar expressions. Forward-looking statements are statements that are not historical facts, including statements about our beliefs and expectations. These statements are based on current plans, estimates and projections, and, therefore, you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. These factors include, but are not limited to:
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them, whether in light of new information, future events or otherwise.You should also read carefully the risk factors described in “Key Information—Risk Factors” under Item 3.
The following terms, as used in this annual report, have the meanings set forth below.
| Capacity Measurements: | ||
| “available seat kilometers” or “ASKs” | The number of seats made available for sale multiplied by the kilometers flown. | |
| “available ton kilometers” or “ATKs” | The number of tons of capacity available for the transportation of revenue load (passengers and/or cargo) multiplied by the kilometers flown. | |
| “systems available ton kilometers” or “systems ATKs” | The number of total tons capacity for the transportation of revenue load (passenger and cargo) multiplied by the kilometers flown. | |
| Traffic Measurements: | ||
| “cargo ton kilometers” | The cargo load in tons multiplied by the kilometers flown. | |
| “revenue passenger kilometers” or “RPKs” | The number of revenue passengers carried multiplied by the kilometers flown. | |
| “revenue ton kilometers” or “RTKs” | The load (passenger and/or cargo) in tons multiplied by the kilometers flown. | |
| “traffic revenue” | Revenue from passenger operations plus revenue from cargo operations. | |
| Yield Measurements: | ||
| “cargo yield” | Revenue from cargo operations divided by RTKs. | |
| “overall yield” | Revenue from airline operations (passenger and cargo) divided by RTKs (passenger and cargo). | |
| “passenger yield” | Revenue from passenger operations divided by either RPKs or RTKs. | |
| “ton” | A metric ton, equivalent to 2,204.6 pounds. | |
| Load Factors: | ||
| “cargo load factor” | RTKs (cargo) expressed as a percentage of ATKs (cargo). | |
| “overall break-even load factor” | Operating costs (operating expenses plus net interest expense less other revenue) per ATK (passenger and cargo) divided by overall yield. | |
| “overall load factor” | RTKs (passenger and cargo) expressed as a percentage of ATKs (passenger and cargo). | |
| “passenger break-even load factor” | Operating costs (operating expenses plus net interest expense less other revenue) per ASK divided by passenger yield. | |
| “passenger load factor” | RPKs expressed as a percentage of ASKs. | |
| Other: | ||
| “ACMI Contract” | A type of aircraft leasing contract, under which the lessor provides the aircraft, crew, maintenance and insurance on a per hour basis. Also referred to as a “wet lease”. | |
| “on time rate” | Percentage of flights that depart within fifteen minutes of scheduled take-off. | |
| “utilization rates” | The actual number of flight hours per aircraft per operating day. | |
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
Selected Financial Data
The following table presents our summary financial and other information for each of the last five fiscal years in the period ended December 31, 2003 and the three months ended March 31, 2003 and March 31, 2004. The summary financial information at and for the three fiscal years in the period ended December 31, 2003 has been derived from our audited consolidated financial statements.
You should read the information below in conjunction with our audited consolidated financial statements and the notes thereto, as well as “Presentation of Information” and “Operating and Financial Review and Prospects”.
Annual Financial Information
| Year ended December 31, | Three months ended March 31, (unaudited) | |||||||||||||||||||||||||||
| 1999 | 2000 | 2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||||||||
| (in US$ millions, except per share and capital stock data) | ||||||||||||||||||||||||||||
The Company(1) | ||||||||||||||||||||||||||||
Statement of Income Data: | ||||||||||||||||||||||||||||
Chilean GAAP | ||||||||||||||||||||||||||||
Operating revenues | ||||||||||||||||||||||||||||
Passenger | $ | 692.3 | $ | 750.7 | $ | 803.0 | $ | 803.7 | $ | 918.4 | $ | 225.1 | $ | 292.3 | ||||||||||||||
Cargo | 474.3 | 593.5 | 539.5 | 520.8 | 602.0 | 140.4 | 169.7 | |||||||||||||||||||||
Other | 70.1 | 81.0 | 85.8 | 127.9 | 118.4 | 30.3 | 29.9 | |||||||||||||||||||||
Total operating revenues | 1,236.7 | 1,425.2 | 1,428.3 | 1,452.4 | 1,638.8 | 395.8 | 491.9 | |||||||||||||||||||||
Operating expenses(2) | 1,186.4 | 1,349.9 | 1,378.1 | 1,390.4 | 1,527.1 | 369.6 | 428.9 | |||||||||||||||||||||
Operating income | 50.3 | 75.3 | 50.3 | 62.1 | 111.7 | 26.3 | 63.0 | |||||||||||||||||||||
Other income (expense) | ||||||||||||||||||||||||||||
Interest income | 4.6 | 5.3 | 5.5 | 3.8 | 6.3 | 1.3 | 2.2 | |||||||||||||||||||||
Interest expense | (25.1 | ) | (31.7 | ) | (35.5 | ) | (40.8 | ) | (39.4 | ) | (10.1 | ) | (9.4 | ) | ||||||||||||||
Miscellaneous-net(2) | 18.1 | 10.0 | (8.4 | ) | 13.2 | 24.1 | 8.6 | 2.8 | ||||||||||||||||||||
Total other income (expense) | (2.4 | ) | (16.4 | ) | (38.4 | ) | (23.8 | ) | (9.0 | ) | (0.2 | ) | (4.4 | ) | ||||||||||||||
Minority interest | (0.1 | ) | (0.1 | ) | (1.6 | ) | (0.4 | ) | (0.9 | ) | 0.2 | 0.2 | ||||||||||||||||
Income before income taxes | 47.8 | 58.8 | 10.3 | 37.8 | 101.9 | 26.3 | 58.8 | |||||||||||||||||||||
Income taxes | (0.2 | ) | (10.4 | ) | 0.6 | (7.0 | ) | (18.3 | ) | (4.6 | ) | (10.7 | ) | |||||||||||||||
Net income | $ | 47.6 | $ | 48.4 | $ | 10.8 | $ | 30.8 | $ | 83.6 | $ | 21.6 | $ | 48.1 | ||||||||||||||
Net income per common share(3) | $ | 0.15 | $ | 0.15 | $ | 0.03 | $ | 0.10 | $ | 0.26 | $ | 0.07 | $ | 0.15 | ||||||||||||||
Net income per ADS(3) | $ | 0.75 | $ | 0.76 | $ | 0.17 | $ | 0.48 | $ | 1.31 | $ | 0.34 | $ | 0.75 | ||||||||||||||
U.S. GAAP | ||||||||||||||||||||||||||||
Operating revenues | $ | 1,236.7 | $ | 1,425.2 | $ | 1,441.3 | $ | 1,452.4 | $ | 1,638.8 | — | — | ||||||||||||||||
Net income | 37.1 | 50.4 | 1.0 | 34.2 | 88.8 | — | — | |||||||||||||||||||||
Basic and diluted earnings per share(3) | 0.12 | 0.16 | 0.00 | 0.11 | 0.28 | — | — | |||||||||||||||||||||
Net income per ADS(3) | $ | 0.58 | $ | 0.79 | $ | 0.02 | $ | 0.54 | $ | 1.39 | — | — | ||||||||||||||||
Balance Sheet Data: Chilean GAAP Cash, time deposits and marketable securities Miscellaneous current assets(4) Property and equipment Total other assets Total assets Long-term liabilities Shareholders’ equity U.S. GAAP Total assets Long-term liabilities Shareholders’ equity Capital stock (millions of shares) At December 31, At March 31,
2004
(unaudited) 1999 2000 2001 2002 2003 (in US$ millions, except capital stock data) $ 40.4 $ 68.7 $ 73.4 $ 159.4 $ 219.0 $ 256.5 229.0 266.0 261.1 256.4 267.7 255.7 606.0 707.2 985.8 1,026.4 1,009.5 997.4 101.2 107.6 114.7 143.2 132.3 137.0 976.6 1,149.6 1,435.5 1,585.4 1,628.5 1,646.7 471.9 531.9 722.2 813.5 765.4 767.1 261.3 288.4 288.5 308.9 352.6 400.7 $ 982.1 $ 1,136.9 $ 1,422.4 $ 1,545.4 $ 1,610.5 — 494.6 544.5 740.8 821.6 777.0 — 223.4 259.5 237.3 258.9 323.5 — 318.9 318.9 318.9 318.9 318.9 —
| (1) | For more information on the subsidiaries included in this consolidated account, see Note 2(b) to our audited consolidated financial statements. |
| (2) | To reflect operational results more clearly, fuel hedging gains or losses have been reclassified as a non-operational item in the Miscellaneous-net line in each of 1999, 2000, 2001, 2002 |
| (3) | We had 318,909,090 common shares outstanding in each of |
| (4) | Total |
In accordance with the Company consolidatesChilean Corporation Law, LanChile Cargo (formerly
Ladeco) beginning July 1, 1997, LanPeru beginning August 1, 2001 and
LanLogistics LLC asmust pay annual cash dividends equal to at least 30% of January 1, 2002. For more information aboutits annual consolidated net income each year (calculated in accordance with Chilean GAAP), subject to the effect of the consolidation of LanPeru on our 2001 results, see "Operating
and Financial Review and Prospects--2001 Compared with 2000" under Item 5,
and for more information about the effect of the consolidation of
LanLogistics on our 2002 results, see "Operating and Financial Review and
Prospects--2002 Compared with 2001" under Item 5. Financial results for
Ladeco for 1997 have been translated from Chilean pesos into U.S. dollars
at the exchange rates on the dates on which the revenues and expenses were
received, paid or accrued. Beginning on January 1, 1998, LanChile's
results are accounted for in U.S. dollars. To reflect operational results
more clearly, fuel hedging gains or losses have been reclassified as a
non-operational item in the Miscellaneous-net line in each of 1999, 2000,
2001 and 2002. We recorded an $8.1 million fuel hedge gain in 2000, a
$10.5 million fuel hedge loss in 2001 and a $5.5 million fuel hedge loss
in 2002.
Welimited exceptions set forth above.
LanChile declared aggregate dividends of US$9,308,956 with respect to income
for 1998, US$14,271,282$14,271,282 with respect to income for 1999, US$14,513,753$14,513,753 with respect to income for 2000, US$1,406,760$1,406,760 with respect to income for 2001, and
US$13,808,763$13,812,763 with respect to income for 2002.2002 and $41,775,366 with respect to income for 2003. As of March 31, 2004 we have paid $34,999,348 million with respect to income for 2003. The final dividend of $6,776,018 with respect to income for 2003 was paid on May 13, 2004. The table below sets forth the cash dividends per common share, as well as the number of common shares entitled to such dividends, for the years indicated. Dividend per common share amounts have not been adjusted for inflation and reflect common share amounts outstanding immediately prior to the distribution of such dividend.
Dividend for year: | Payment date(s) | Total dividend payment | Number of common shares entitled to dividend | Cash dividend common share | ||||
| (U.S. dollars) | (in millions) | (U.S. dollars) | ||||||
1999 | April 19, 1999 May 10, 2000 | 3,884,313 10,386,969 | 318.91 318.91 | 0.01218 0.03257 | ||||
2000 | January 19, 2001 May 10, 2001 | 9,998,000 4,515,753 | 318.91 318.91 | 0.03135 0.01416 | ||||
2001 | May 10, 2002 | 1,406,760 | 318.91 | 0.00441 | ||||
2002 | January 15, 2003 May 9, 2003 | 8,958,156 4,854,607 | 318.91 318.91 | 0.02809 0.01521 | ||||
2003 | August 19, 2003 November 21, 2003 May 13, 2004 | 11,583,448 23,415,900 6,776,018 | 318.91 318.91 318.91 | 0.03632 0.07343 0.02124 |
We declare cash dividends in U.S. dollars, but make dividend payments in Chilean pesos, converted from U.S. dollars at the observed exchange rate onthree days prior to the dateday we first make payment to shareholders. Our board of directors has the authority to declare interim dividends. Year-end dividends, if any, are declared by our shareholders at our annual meeting. Payments of cash dividends to holders of American Depositary Receipts, ("ADRs"),or
ADRs, if any, are made in Chilean pesos to the custodian, which converts those Chilean pesos into U.S. dollars and delivers those U.S. dollars to the depositary for distribution.distribution to holders. For a description of our dividend policy, see "Other“—Other Financial Information-Dividend
Policy"Information—Dividend Policy” under Item 8. In the event that the custodian is unable to convert immediately the Chilean currency received as dividends into U.S. dollars, the amount of U.S. dollars payable to holders of ADRs may be adversely affected by devaluations of the Chilean currency that occur before such dividends are converted and remitted.
Exchange Rate Information
Rates
The following table sets forth, for the yearly periods indicated, the high, low, average and period-end observed exchange rate for the purchase of U.S. dollars, expressed in Chilean pesos per U.S. dollar. The rates have not been restated in constant currency units.
| Daily Observed Exchange Rate Ch$ per US$ | ||||||||
Year Ended December 31, | High | Low | Average(1) | Period- end | ||||
1999 | 550.93 | 468.69 | 508.78 | 530.07 | ||||
2000 | 580.37 | 501.04 | 542.62 | 572.68 | ||||
2001 | 716.62 | 557.13 | 636.39 | 656.20 | ||||
2002 | 756.56 | 641.75 | 694.46 | 712.38 | ||||
2003 | 758.21 | 593.10 | 687.51 | 599.42 | ||||
Source: Central Bank of Chile
(1) Average of month-end rates.
| (1) | Average of the month-end exchange rates for the relevant period. |
The following table sets forth, for the monthly periods indicated, the high and low exchange rate for the purchase of U.S. dollars, expressed in Chilean pesos per U.S. dollar.
Exchange Rate
-----------------------
Low High
--- ----
Month in 2002
- -------------
December....................................... 692.94 718.61
Month in 2003
- -------------
January........................................ 709.22 738.87
February....................................... 733.10 755.26
March.......................................... 725.79 758.21
April.......................................... 705.32 731.56
May............................................ 694.22 714.10
- ----------------
| Daily Observed Exchange Rate Ch$ per US$ | ||||
| High | Low | |||
Month in 2003 | ||||
November | 632.23 | 616.34 | ||
December | 621.27 | 593.10 | ||
Month in 2004 | ||||
January | 596.78 | 559.21 | ||
February | 598.60 | 571.35 | ||
March | 623.21 | 588.04 | ||
April | 599.36 | 624.84 | ||
May | 644.42 | 622.25 | ||
June(1) | 632.02 | 643.00 | ||
Source: Central Bank of Chile
| (1) | Period through June 7, 2004. |
On June 23, 2003,8, 2004, the observed exchange rate was Ch$705.75=644.61=US$1.00.
Risk Factors
We wish to caution readers that the following important factors, and those important factors described in other reports submitted to, or filed with, the Securities and Exchange Commission, among other factors, could affect our actual results and could cause our actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. In particular, as we are a non-U.S. company, there are risks associated with investing in our American Depositary Shares, or ADS, that are not typical for investments in the shares of U.S. companies. Prior to making an investment decision, you should carefully consider all of the information contained in this prospectus, including the following risk factors.
Risks Related to our Operations and the Airline Industry
Our performance is heavily dependent on economic conditions in the countries in which we do business.
Passenger and cargo demand is heavily cyclical and highly dependant on global and local economic growth, economic expectations and foreign exchange rate variations. In the past we have been impacted by weak economic growth in Chile, recession in Argentina and poor economic performance in certain emerging market countries in which we operate. Any of the following factors could adversely affect our business, financial condition and results of operations in the countries in which we operate:
Similar future events occurring in one or more countries in which we operate could have a material effect on our results of operations.
A future incident similar to the September 11, 2001 terrorist attacks in the United States could have a severe impact on the air travelairline industry and adversely affect our revenues.
The terrorist attacks in the United States on September 11, 2001 had a severe adverse impact on the air travelairline industry, particularly on foreign air carriers operating international service to and from the United States. Airline traffic in the United States fell dramatically after the attacks. Throughout South America, airline and passenger traffic also decreased substantially, although the decrease was less severe than that in the United States. Our passenger revenues are largely dependent on the number of passengers traveling on our flights. Following September 11, 2001, we experienced a significant decline in passenger traffic and, therefore, a significant decline in revenues. Any furtherfuture terrorist attacks or the threat thereof, whether or not involving commercial aircraft, the general increase of hostilities relating to reprisals against terrorist organizations or otherwise, and any related economic impact or prolonged general reduction in travel demand could result in decreased passenger traffic and, as a result, cause a material adverse effect on our business, financial condition and results of operations.
The airline industry has experienced increased costs following the September 11, 2001 terrorist attacks. Airlines have been required to adopt additional security measures and may be required to comply with more rigorous security guidelines in the future. Premiums for insurance against aircraft damage and liability to third parties have increased substantially and could escalate further. While governments in other countries have agreed to indemnify airlines for liabilities that they might incur from terrorist attacks, the Chilean government has given no indication of an intention to provide a similar indemnification for Chilean airlines. In addition, fuel prices and supplies, which constitute a significant cost for us, may increase as a result of any future terrorist attacks, a general increase in hostilities or a reduction in output of fuel, voluntary or otherwise, by oil-producing countries. Such increases may result in both higher airline ticket prices and decreased demand for air travel generally, which could have an adverse effect on our revenues and results of operations.
Our business may be adversely affected by a downturn in the airline industry.
Demand for air transportation may be adversely impacted by exogenous events, such as natural disasters, epidemics, war or political and social instability. Situations such as these in one ofor more of the markets in which we operate could have a material impact on our business, financial condition and results of operations.
A significant portion of our cargo revenues comes from relatively few product types and may be impacted by events affecting their production or trade.
Our cargo demand, especially from Latin American exporters, is concentrated in a small number of product categories, such as salmon and produce exports from Chile and fresh flowers from Ecuador and Colombia. Events that negatively affect the production or trade of these goods may adversely affect the volume of goods that we transport and may have a significant impact on our results of operations.
Our operations are subject to fluctuations in the supply and cost of jet fuel.
Higher jet fuel prices or a shortage in the supply of fuel could cause a reduction in our scheduled service and could materially affect our business, financial condition and results of operations. Jet fuel costs have historically accounted for a significant amount of our operating expenses, and accounted for 14.8%17.0% of our operating expenses in 2002.2003. Both the cost and availability of fuel are subject to many economic and political factors and events that we can neither control nor predict. We have entered into fuel hedging arrangements, but there can be no assurance that such arrangements will be adequate to protect us from a significant increase in fuel prices in the near future or in the long term. Also, while these hedging arrangements are designed to limit the effect of an increase in fuel prices, some of our hedging methods (known as "costless
collars") may also limit our ability to take advantage of any decrease in fuel prices. Our ability to lessen the impact of any increase in fuel costs by increasing fares or otherwise passing on a portion of such costs to our customers may also be limited.
We rely on maintaining a high daily aircraft utilization rate to increase our revenues, which makes us especially vulnerable to delays.
One of the key elements of our business strategy is to maintain a high daily aircraft utilization rate, which measures the number of flight hours we use our aircraft per day. High daily aircraft utilization allows us to maximize the amount of revenue we generate from our aircraft and is achieved, in part, by reducing turnaround times at airports and developing schedules that enable us to fly more hours on average per day. Our rate of aircraft utilization could be adversely affected by a number of different factors that are beyond our control, including air traffic and airport congestion, adverse weather conditions and delays by third-party service providers relating to matters such as fueling and ground handling.
Furthermore, high aircraft utilization rates increase the risk that, if an aircraft falls behind schedule, it could remain behind schedule for up to two days. Such delays could result in a disruption in our operating performance, leading to customer dissatisfaction due to any resulting delays or missed connections.
We are often affected by certain factors beyond our control, including weather conditions, which can affect our operations.
Generally, revenues for airlines depend on the number of passengers carried, the fare paid by each passenger and service factors, such as the timeliness of flight departures and arrivals. During periods of fog, ice, low temperatures, storms or other adverse weather conditions, some or all of our flights may be cancelled or significantly delayed and, as a result, our revenues could suffer.
Losses and liabilityliabilities in the event of an accident involving one or more of our aircraft could materially affect our business.
We are exposed to potential catastrophic losses in the event of an aircraft accident, terrorist incident or any other unpredictable event. Although we
believe our insurance coverage is adequate and similar to insurance coverage
obtained by other large international airlines, thereThere can be no assurance that:
o that, as a result of an aircraft accident or incident:
Substantial claims resulting from an accident or incident in excess of our related insurance coverage could have a material adverse effect on our business, financial condition and results of operations. Moreover, any aircraft accident, even if fully insured, could cause the negative public perception that our aircraft are less safe or reliable than those operated by other airlines, which could have a material adverse effect on our business, financial condition and results of operations.
Insurance premiums may also increase due to an accident or incident affecting one of our airline affiliates or alliance partners or affecting other airlines.
Our business may suffer if any of our strategic partners terminate our alliance or commercial relationships.
relationship.
We maintain a number of alliances and other commercial relationships with strategic partners that allow us to enhance our network and, in some cases, offer our customers services that we could not otherwise offer. If our relationship with any of our strategic partners and, in particular, with American Airlines, Iberia, Qantas oroneworld®deteriorates, or any of these agreements are terminated, our business, financial condition and results of operations could be negatively affected. For more information, see "Information
on the Company--Business Overview--Airline Operations and Route
Network--Passenger Operations--Passenger Alliances and Commercial Agreements"
under Item 4.
High levels of competition in the airline industry may adversely affect our level of operations.
Our business, financial condition and results of operations could be adversely affected by high levels of competition within the industry.industry, particularly the entrance of new competitors into the markets in which we operate. Airlines compete primarily over fare levels, frequency and dependability of service, namebrand recognition, passenger amenities (such as frequent flyer programs) and the availability and convenience of other passenger or cargo services. New and existing airlines could enter theour markets in which we operate and compete with us on any of these bases, which, among other things, could force us to reduce
our fares and could negatively affect our financial results.bases. Several of our competitors are larger than us and have greater namebrand recognition and greater resources than we do. Competing carriers include investor-owned, government-subsidized and national flag carriers of foreign countries. The U.S.U.S.-Chile and other open skies agreements may subject us to further competition from international carriers. For more information, see "Information on the
Company--Regulation" under Item 4. In addition to traditional competition among airline companies, we face competition from companies that provide ground transportation, especially in our cargo and domestic passenger businesses. Competition could reduce our passenger traffic, forcing us to reduce our fare levels, which could have a material adverse effect on our revenues and level of operations.
Future increases
Our plans for regional expansion within Latin America depend upon key regulatory and commercial issues.
We plan to continue to increase the scale of our operations and revenues by expanding our presence outside of Chile, both directly and through our affiliates. Our ability to successfully implement this strategy will depend upon many factors, several of which are outside our control or subject to change. These factors include the permanence of a suitable political, economic and regulatory environment in the Latin American countries in which we operate or intend to operate and our lease paymentsability to identify and maintain strategic local partners.
If we are unable to incorporate leased aircraft into our fleet at acceptable rates and terms in the future, our business could be adversely affect our business.
affected.
The majority of our aircraft are subject to long-term operating leases. Our current operating leases require us to return aircraft at the agreed return
conditions at the end of the lease. Our operating leases typically run from three to twelve12 years from the date of delivery. UponWe may face more competition for, or a limited supply of, leased aircraft, making it difficult for us to negotiate terms similar to those we now have upon expiration of theour current operating leases or to lease additional capacity required for our targeted level of operations. If we are subject to the risk that market conditions then
prevailing will require usforced to pay higher lease rates in the future to maintain our capacity and the number of aircraft in our fleet, whichour profitability could be adversely affectaffected.
We fly and depend upon Airbus and Boeing aircraft, and our profitability.
business is at risk if we do not receive timely deliveries of aircraft or if the public negatively perceives our aircraft.
As of April 30, 2004, we operated a fleet of 20 Airbus and 36 Boeing aircraft. As our fleet grows, our risk in relying on these two manufacturers also grows. These risks include:
The occurrence of any one or more of these factors could restrict or end our ability to use the affected property to generate profits or could otherwise limit our operations.
Our business may be adversely affected if we are unable to meet our significant future financing requirements.
We require significant amounts of financing to meet our aircraft capital requirements, and may require additional financing to fund our other business needs. We cannot guarantee that we will have access to or be able to arrange for financing in the future on favorable terms. If we are unable to obtain financing for a significant portion of our capital requirements, our ability to acquire new aircraft or to expand operations could be impaired.
Our business may be adversely affected by our high degree of debt and aircraft lease obligations compared to our equity capital.
We have a high degree of debt compared toand payment obligations under our equity capital.
As is typical in the airline industry, we have a high degree of debtaircraft operating leases compared to equity capital. In order to finance our debt, we depend in part on our operating revenue.cash flow from operations. We cannot assure that in the future we will have
sufficient revenuebe able to fully finance our debt.business operations and expansion efforts. In addition, the majority of our property and equipment is subject to liens securing our indebtedness. In the event that we fail to make payments on the secured indebtedness, creditors'creditors’ enforcement of liens could limit or end our ability to use the affected property and equipment to generate revenue.
Future changes in the status of Chilean and foreign governmental authorizations and licenses could adversely affect our business.
Our business, financial condition and results of operations could be adversely affected if we or Chileancertain aviation authorities (among them, those from Brazil, Chile, the Dominican Republic, Ecuador, Mexico, Peru and the United States) fail to maintain the required foreign and domestic governmental authorizations. In order to maintain the necessary authorizations issued by the ChileanJunta AeronauticaAeronáutica Civil (the
"JAC"), which we refer to as the JAC, and technical operative authorizations issued by the Chilean DireccionDirección General de AeronauticaAeronáutica Civil (the "DGAC"), which we refer to as the DGAC, and other corresponding local authorities, we must continue to comply with applicable statutes, rules and regulations pertaining to the airline industry, including any new rules and regulations that may be adopted in the future.
We are also subject to various international bilateral air transport agreements between Chilethe countries in which our companies are based and other countries to which we provide service, and we must obtain permission from the applicable foreign governments to provide service to foreign destinations. There can be no assurance that existing bilateral agreements between Chilethe countries in which our companies are based and foreign governments will continue. A modification, suspension or revocation of one or more bilateral agreements could have a material adverse effect on our business, financial condition and results of operations. The suspension of our permission to operate to certain airports or destinations or the imposition of other sanctions could also have a material adverse effect. We cannot assure that a change in a foreign government'sgovernment’s administration of current laws and regulations or that the adoption of new laws and regulations will not have a material adverse effect on our business, financial condition and results of operations.
We are also subject to antitrust regulation by the Chilean government because of our dominant position in the Chilean domestic passenger market. There are no legal barriers to entry in the Chilean airline industry, however, and we could face competition in the future on any or all of our domestic routes, including competition from foreign air carriers that establish a corporate presence in Chile.
Our ability to service certain important destinations could be limited in the future.
If we are unable to obtain favorable take-off and landing authorizations at certain high-density airports, our business, financial condition and results of operations could be adversely affected. Some airports in the United States are subject to take-off and landing restrictions administered by the U.S. Federal Aviation Administration, (the "FAA"). Carriers
request slots, which are allocated byis also known as the FAA on a seasonal basis.FAA. There can be no assurance that we will be able to obtain all requested authorizations and slots in the future because, among other factors, government policies regulating the distribution of the authorizations and slots are subject to change. For more
information, see "Information
Problems with air traffic control systems or other technical failures could interrupt our operations and materially affect our business.
Our operations, including our ability to deliver customer service, are dependent on the Company--Regulation--U.S.
Regulation--Airport Slot Restrictions" under Item 4.
effective operation of our equipment, including our aircraft, maintenance systems and reservation systems, and the commitment of our personnel. Our operations are also dependent on the effective operation of domestic and international air traffic control systems and the air traffic control infrastructure in the markets in which we operate. Equipment failures, personnel shortages, air traffic control problems and other factors that could interrupt operations could adversely affect our operations and financial results and our reputation.
Our financial success depends on the availability and performance of key personnel.
Our success depends to a significant extent on the availability and
performanceability of our senior management team and key financial, commercial,
operating and maintenance personnel to operate and manage LanChileour business effectively. Our employment agreements with key personnel do not contain any non-competition
or non-disclosure provisions. Competition for highly qualified personnel is intense. If we lose any executive officer, senior manager or other key employee and are not able to obtain an adequate replacement, or if we are unable to attract and retain new qualified personnel, such loss could have a material adverse effect
on our business, financial condition and results of operations.
operations could be materially adversely affected.
Our business may experience adverse consequences if we are unable to reach satisfactory collective bargaining agreements with our unionized employees.
A substantial portionnumber of our administrators, cabin crews, flight attendants, pilots and maintenance employeestechnicians are members of unions and have contracts thatand collective bargaining agreements which expire on a regular basis. Our business, financial condition and results of operations could be materially adversely affected by a failure to reach agreement with any labor union representing such employees or by an agreement with a labor union that contains terms that are not in line with our expectations or that prevent us from competing effectively with other airlines.
As an example, during the third quarter of 2001, members of one of our pilot unions implemented a series of actions that disrupted our services prior to the negotiation of their collective bargaining agreement, which had a negative impact on our operations and our profitability.
Increases in our labor costs, which constitute a substantial portion of our total operating costs, would directly impact our earnings.
Labor costs constitute a significant percentage of our total operating costs, and at times in our operating history we have experienced pressure to increase wages and benefits for our employees. As a result, a significant increase in our labor costs above the assumed costs could result in a material reduction in our earnings.
We may experience difficulty finding, training and retaining employees.
Our business is labor-intensive. We employ a large number of pilots, flight attendants, maintenance technicians and other operating and administrative personnel. The airline industry has, from time to time, experienced a shortage of qualified personnel, specifically pilots and maintenance technicians. In addition, as is common with most of our competitors, we may, from time to time, face considerable turnover of our employees. Should the turnover of employees, particularly pilots and maintenance technicians, sharply increase, our training costs will be significantly higher. We cannot assure you that we will be able to recruit, train and retain the qualified employees that we need to continue our current operations or replace departing employees. A failure to hire and retain qualified employees at a reasonable cost could materially adversely affect our business, financial condition and results of operations.
We may not be able to secure the resources necessary to sustain our growth.
Rapid growth of LanChile may strain our existing management resources and operational, financial and management information systems and controls. Expansion will also require us to hire additional skilled personnel, purchase more equipment and additional or larger facilities, upgrade our internal audit function and implement more detailed long-term budgeting procedures. If we are unable to hire skilled personnel or secure the required equipment and facilities in an efficient, cost-effective manner, we may not be able to achieve our growth plans and sustain or increase our profitability.
Failure to comply with applicable environmental regulations could adversely affect our business and reputation.
Our operations are covered by environmental regulations at local, national and international levels. These regulations cover, among other things, emissions to the atmosphere, disposal of solid waste and aqueous effluents, aircraft noise and other activities incident to our business. Future operations and financial results may vary as a result of such regulations. Compliance with these regulations and new or existing regulations that may be applicable to us in the future could increase our cost base and adversely affect our operations and financial results. In addition, failure to comply with these regulations could adversely affect us in a variety of ways, including adverse effects on our reputation.
Risks Related to Chile and Other Emerging Market Countries
Economic and political developments in Chile may adversely affect our business.
We conduct a substantial part of our operations in Chile, an emerging
market country, and, accordingly, our business could be adversely affected by a
downturn in the Chilean economy or high levels of inflation. While inflation has
been under 5% in recent years and Chilean GDP has grown in nine out of the last
ten years and grew 2.1% in 2002, there can be no assurance that such annual
growth will continue in the future. Our business, financial condition and
results of operations could also be adversely affected by:
o changes in economic or other policies of the Chilean
government (which has exercised and continues to exercise a
substantial influence over many aspects of the private
sector);
o changes in the regulatory, legal or administrative practices
of Chilean authorities; or
o other political or economic developments in or affecting
Chile, over which we have no control.
Developments in Latin American countries and other emerging market countries including Argentina, may adversely affect the Chilean economy, negatively impact our business and results of operations and cause the market price of our common shares and ADSs to decrease.
We conduct a significant partportion of our operations in other emerging market countries, particularly in Latin America. As a result, economic and political developments in these countries, including future economic crises and political instability, could impact the Chilean economy or the market value of our securities and have a material adverse effect on our business, financial condition and results of operations. For example, if Argentina'sArgentina’s economic and political environment does not improve, the economy in Chile, as both a neighboring country and a significant trading partner, could be affected and could experience slower growth than in recent years, negatively impacting our business and results of operations. This negative impact could weaken investor confidence in Chile and consequently lead to a reduction in the market price of our common shares or the American Depositary Shares, or "ADSs",ADSs representing our common shares. Although economic conditions in other emerging market countries may differ significantly from economic conditions in Chile, we cannot assure that events in other countries, particularly other emerging market countries, will not adversely affect the market value of, or market for, our common shares or ADSs.
Devaluations of
Fluctuations in the Chilean peso orand other foreign currencies relative to the U.S. dollar may adversely affect our revenues and profitability.
Changes in the exchange rate between the Chilean peso and the U.S. dollar could adversely affect our business, financial condition and results of operations. We operate in numerous countries and face the risk of variation in foreign currency exchange rates against the U.S. dollar or between the currencies of these various
countries. A significant part of our indebtedness is denominated in U.S. dollars, while a portionapproximately 24% of theour revenues and 27% of our operating expenses are denominated in pesos and various other currencies. If the value of the peso or of other currencies in which the revenues are denominated declines against the U.S. dollar, the Companywe will need more pesos or other local currency to repay the same amount of U.S. dollars. The Chilean peso has been
subject to large nominal devaluationsexperienced significant volatility in the past,recent years, including a nominal decrease of approximately 9.8% against the U.S. dollar from December 31, 2001 to December 31, 2002. For more information on exchange rates, see "--Exchange Rate
Information" above.2002 and a nominal increase of approximately 15.9% against the U.S. dollar from December 31, 2002 to December 31, 2003. The exchange rate of the Chilean peso and other currencies against the U.S. dollar may fluctuate significantly in the future. Changes in Chilean and other governmental economic policies affecting foreign exchange rates could also adversely affect our business, financial condition, results of operations and the return to our shareholders on their common shares or ADSs.
For more information, see "Quantitative and Qualitative Disclosures About Market
Risk--Risk of Variation in Foreign Currency Exchange Rates" under Item 11.
We are not required to disclose as much information to investors as a U.S. issuer is required to disclose.
The corporate disclosure requirements that apply to us may not be equivalent to the disclosure requirements that apply to a U.S. company and, as a result, you may receive less information about us than you would receive from a comparable U.S. company. We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, (the "Exchange Act")or the “Exchange Act”. The disclosure required of foreign issuers under the Exchange Act is more limited than the disclosure required of U.S. issuers. Publicly available information about issuers of securities listed on Chilean stock exchanges also provides less detail in certain respects than the information regularly published by listed companies in the United States or in certain other countries. Furthermore, there is a lower level of regulation of the Chilean securities markets and of the activities of investors in such markets as compared with the level of regulation of the securities markets in the United States and in certain other developed countries.
Risks Related to our Common Shares and ADSs
We are controlled by certain
Our majority shareholders whosemay have interests maythat differ from those of our other shareholders.
As of May 31, 2003,April 30, 2004, four independent family groups of shareholders, whom we collectively call our majority shareholders, together, beneficially owned 82.92%81.16% of our voting common shares. For more information about ourThese majority shareholders see "Major Shareholders and Related Party
Transactions--Major Shareholders" under Item 7. These shareholders are entitledin a position to elect a majority of the members of our board of directors, and are in a
position to direct our management and to control substantially all matters that are to be decided by a vote of shareholders, including fundamental corporate transactions. In addition, under the terms of the deposit agreement governing the ADRs,ADSs, if holders of ADRsADSs do not provide The Bank of New York, in its capacity as depositary for the ADSs, with timely instructions on the voting of the common shares underlying their ADRs, the depositary will be deemed to have been instructed to give a person designated by the board of directors the right to vote those common shares.
The market for
Trading of our ADSs and common shares in the securities markets is limited and could become illiquidexperience further illiquidity and volatile.
price volatility.
Chilean securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States. In addition, Chilean securities markets may be materially affected by developments in other emerging markets, particularly other countries in Latin America. Due to the small public float, our common shares are notless actively traded than securities of other companies with larger public floats in more developed countries and, consequently, an ADS holder may have a limited ability to sell ADSs or the common shares underlying ADSs (upon withdrawal from the ADR facility) in the amount and at the price and time that it desires.may desire. This limited trading market may also increase the price volatility of the ADSs or the common shares underlying the ADSs.
Holders of ADSs may be adversely affected by currency devaluations and foreign exchange fluctuations.
If the peso exchange rate falls relative to the U.S. dollar, the value of the ADSs and any distributions made thereon from the depositary, could be adversely affected. Cash distributions made in respect of the ADSs are received by the depositary (represented by the custodian bank in Chile) in pesos, converted by the custodian bank into U.S. dollars at the then prevailing exchange rate and distributed by the depositary to the holders of the ADRs evidencing those ADSs. In addition, the depositary will incur foreign currency conversion costs (to be borne by the holders of the ADRs) in connection with the foreign currency conversion and subsequent distribution of dividends or other payments with respect to the ADSs.
Future changes in Chilean foreign investment controls and withholding taxes could negatively affect non-Chilean residents that invest in our shares.
Equity investments in Chile by non-Chilean residents are generally subject to various exchange control regulations that govern investment repatriation and earnings thereon. Although not currently in effect, regulations of the Central Bank of Chile have in the past and could again require foreign investors acquiring securities in the secondary market in Chile to maintain a cash reserve or to pay a fee upon conversion of foreign currency to purchase such securities. For more information, see "Additional Information--Exchange
Controls" under Item 10.
We cannot assure that additional Chilean restrictions applicable to the holders of ADRs, the disposition of the common shares underlying ADSs or the repatriation of the proceeds from an acquisition, ora disposition or a dividend payment, will not be imposed or required in the future, nor could we make an assessment as to the duration or impact, were any such restrictions to be imposed.
imposed or required.
Our ADS holders may not be entitledable to exercise preemptive rights in certain circumstances.
The Chilean Corporation Act and Regulation thereof,Ley sobre Sociedades AnonimasAnónimas No. 18,046and theReglamento de Sociedades Anonimas
(collectively,Anónimas, collectively known as the "ChileanChilean Corporation Law"), providesLaw, provide that a preemptive rightrights shall be granted to all shareholders (including ADR holders) whenever a company issues new shares for cash, giving such holders the right to purchase a sufficient number of shares to maintain their existing ownership percentage. We will not be able to offer shares to U.S. holders of ADRs evidencing ADSs and shareholders located in the United States pursuant to the preemptive rights granted to such shareholders in connection with any future issuance of shares unless a registration statement under the U.S. Securities Act of 1933, as amended, (the "Securities Act"),or the Securities Act, is effective with respect to such rights and shares, or an exemption from the registration requirements of the Securities Act is available. At the time of any rights offering, we will evaluate the potential costs and potential liabilities associated with any such registration statement in light of any indirect benefit to us of enabling U.S. holders of ADRs evidencing ADSs and shareholders located in the United States to exercise preemptive rights, as well as any other factors that may be considered appropriate at that time, and we will then make a decision as to whether we will file a registration statement. We cannot assure that we will decide to file a registration statement or that such rights will be available to ADR holders.
ADS holders and shareholders located in the United States.
ITEM 4. INFORMATION ON THE COMPANY
BUSINESS
Overview and History and Development of the Company
Lan Chile S.A. is a publicly-held stock corporation (sociedad anonima
abierta) incorporated under the laws of the Republic of Chile, with principal
executive offices at Avenida Americo Vespucio Sur 901, Comuna de Renca,
Santiago, Chile. Our general telephone number at this location is (56-2)
565-2525.
We are the leadingmain provider of domestic and international passenger and cargo air services in Chile and one of the leading airlines in Latin America. We
serveAs of April 30, 2004, we serviced 15 destinations in Chile and 27 international destinations (excluding(plus two seasonal destinations), seven destinations in Peru served(six serviced only by our subsidiary LanPeruLan Perú S.A. ("LanPeru")., or LanPeru), 17 destinations (plus two seasonal destinations) in other Latin American countries and the Caribbean, three destinations in the United States, two destinations in Europe and four destinations in the South Pacific. In addition, as of May 31, 2002,April 30, 2004, through our various code-share agreements we offeroffered service to 33 additional international destinations. We provide cargo service to all our passenger destinations and to 1415 additional freighter destinations. We also offer handling services and courier services through some of our subsidiaries and, over the past three years, we have expanded into the logistics business and now offer logistics, small package and express door-to-door services across our entire
network.in certain Latin American countries. We have also purchased majority and minority stakes in several regional affiliates in order to further strengthen our regional network.
passenger and cargo networks.
The Chilean government founded LanChile in 1929. LanChile was a government-owned company from 1929 until its incorporation in 1983. LanChile began international service to Buenos Aires, Argentina in 1946, to the United States in 1958 and to Europe in 1970. In 1989, the Chilean government sold 51% of LanChile'sLanChile’s capital stock
to Chilean investors and to Scandinavian Airlines System. In 1994, our majority shareholders acquired 98.7% of ourLanChile’s stock, including the remaining stock held by the Chilean government, in a series of transactions. As of May 31, 2003,April 30, 2004, the majority shareholders held 82.92%81.16% of our capital stock. For more information about our majority shareholders, see "Major“Major Shareholders and Related Party Transactions--Major Shareholders"Transactions” under Item 7.
Since the majority shareholders'shareholders’ acquisition of our capital stock in 1994 and the appointment of our current management, we have grown our revenue base and maintained our profitability every year despite significant challenges, including an
economic downturnchallenges. Additionally, we have created a comprehensive network across the region by forming, together with local partners, or acquiring, passenger affiliates in Chile (and financial crises in other parts of Latin
America)Peru, Ecuador, and the crisis that impacted the aviation industry following the
September 11, 2001 terrorist attacks in the United States. Our growth in
operations and positive net results over the past five years have been due
primarily to our focus on maximizing operating efficiencies between passengerDominican Republic and cargo operations. Althoughaffiliates in Brazil and Mexico. In early 2004, we changed our net income decreased 0.6% between 1998corporate image and 2002, we were one ofstarted using the few airlines in the world to maintain our profitability
during these years.
Between 1998 and 2002, our gross revenues increased 34.1%, mainly
reflecting our ability to capitalize on our domestic market position“LAN” brand in order to growbetter reflect the common values and attributes present in all the companies forming our more profitable international passenger and cargo routes, our ability
to expand into new markets in Latin America and our position in Latin American
cargo markets.
We believe that our growth in gross revenues during the last five years
is partially attributable to:
o growth of the Chilean gross domestic product, which has
averaged 2.2.% compounded annual growth since 1998;
o higher demand for air travel in Chile and Latin America;
o increased disposable income among our customers;
o more diversified and extensive trade by Chile and other Latin
American countries;
o greater Latin American regional integration and
interdependency;
o increases in market share; and
o expansion into new markets in Latin America.
In 2002, gross revenues grew by 1.7% as compared to 2001, primarily
reflecting a 0.1% increase in passenger revenues, a 3.5% decrease in cargo
revenues and a 49.0% increase in other revenues. Passenger revenues increased as
the revenue shortfall caused by the September 11, 2001 terrorist attacks in the
United States and the economic crisis in Argentina was fully offset by increased
operations in other Latin American countries (such as Peru and Ecuador) and
market share gains in the domestic market. Cargo revenues decreased primarily as
a result of a weaker economic environment across Latin America, which decreased
demand for high-revenue, high density, southbound cargo. Other revenues
increased as a result of increased aircraft leases and the consolidation of our
subsidiary LanLogistics Corp. LLC ("LanLogistics") in 2002. Excluding
LanLogistics, operating revenues decreased approximately 0.1%.network. We have also continued generating net income due tocomplemented our capacity to
maintainown network with a low cost base by making significant adjustments to operations,
overheadset of bilateral alliances with carriers such as American Airlines, Iberia and fleet. AsQantas, and have been a result, in termsmember of system available ton kilometers or
"system ATKs", (thetheoneworld® alliance since 2000.
Lan Chile S.A. is a publicly-held stock corporation (sociedad anónima abierta) incorporated under the laws of Chile, with principal executive offices at Avenida Américo Vespucio Sur 901, Comuna de Renca, Santiago, Chile. Our general telephone number of tons of capacity available for the transportation
of passengers and cargo multiplied by the number of kilometers flown), our cost
per system ATK decreased from 32.65 cents in 1998 to 30.35 cents in 2002.
Although our total operating costs grew 0.9% in 2002,at this increaselocation is fully
related to the consolidation of LanLogistics. Excluding LanLogistics, operating
costs declined approximately 1.2%. Our ability to reduce our operating and,
consequently, per-unit costs, led to a 1.4 percentage point improvement in
operating margins and a 184.2% growth in net income in 2002, as compared to
2001.
Capital Expenditures
Over the last three years our cash capital expenditures were US$145.6
million in 2000, US$341.3 million in 2001 and US$192.6 million in 2002, mainly
reflecting the acquisition of aircraft and aircraft-related equipment.
As of December 31, 2002, we estimate our material commitments for
future capital expenditures for 2003, 2004 and 2005 (for, among other things,
aircraft, spare parts, equipment, materials and facilities) to be as follows:
o US$100 million for 2003;
o US$155 million for 2004; and
o US$108 million for 2005.
This includes aircraft-related capital expenditures (aircraft only) of:
o US$55 million in 2003;
o US$110 million in 2004;
o US$58 million in 2005;
and other capital expenditures of:
o US$45 million in 2003;
o US$45 million in 2004; and
o US$50 million in 2005.
We expect that cash generated from operations, short-term credit-lines
and the long-term syndicated loans already negotiated with various banks will be
sufficient to meet our cash requirements in the foreseeable future (for more
information, see "Operating and Financial Review and Prospects--Liquidity and
Capital Resources" under Item 5), although events that materially affect our
operating results could also have a negative impact on liquidity. While we
expect to finance non-aircraft capital expenditures internally, the
aircraft-related capital expenditures listed above will be funded by the
syndicate facility that we arranged for to finance our acquisition of Airbus
aircraft. For more information on our current fleet and purchase commitments, as
well as the related financing, see "--Business Overview--Fleet" below.
(56-2) 565-2525.
Organizational Structure
LanChile is a holding company mainlyprimarily involved in the transporttransportation of passengers and cargo. Our operations are carried out principally by LanChile and also by a number of different subsidiaries using a variety of brand names.subsidiaries. In the passenger business we operate five main brands:airlines: LanChile, Transporte Aéreo S.A., or LanExpress, LanPeru, Aerolane Líneas Aéreas Nacionales del Ecuador S.A., or LanEcuador, and Línea Aérea de Navegación Dominicana S.A., or LanDominicana. In the passenger business we market our sales primarily under the LAN brand. LanChile holds a 70%100% stake in LanExpress through direct and indirect interests, a 70.0% stake in LanPeru through direct and indirect interests, a 45% direct45.0% indirect stake in LanEcuador and a 49%49.0% indirect stake in LanDominicana. For more information, see "--Business Overview--Regional
Expansion"“—Business of the Company—Regional Expansion” below. Our cargo operations are carried out by a number of companies, including LanChile and LanChile Cargo and are complemented by the operations of certain subsidiaries, such as Aero Transportes Mas de Carga S.A. ("LanChile Cargo")de C.V., or MasAir, in Mexico and its
affiliates.
WeAerolinhas Brasileiras S.A., or Absa, in Brazil. In the cargo business, we market ourselves primarily under the LanCargo brand.
In addition to our main transportation activities, we provide a series of ancillary services through various subsidiaries. As such, we offer handling services through certain of our subsidiary Prime Airport
Services andsubsidiaries, courier services through our subsidiary LanCourier S.A.
("LanCourier"). We also offer, or LanCourier, and logistics, small package and express door-to-door services through LanLogistics. For
Competitive Strengths
Our strategy is to maximize shareholder value by increasing revenues and profitability by improving our operational efficiencies between cargo and passenger air travel, thoroughly planning for our expansion efforts and carefully controlling costs. We plan to accomplish this goal both by focusing on our existing competitive strengths and by implementing new strategies to fuel our future growth. We believe our most important competitive strengths are:
Leading Airline in South America
We are a complete listmarket leader in the international and domestic passenger and cargo air services both in Chile and in most of the South American markets that we serve. We have the largest market share of passenger traffic in the majority of the key international routes that connect Chile with the United States, Europe, the South Pacific and other Latin American countries. Within Chile, we continue to have the leading market share of domestic passenger traffic. We are also the leading air cargo operator within, to and from South America. Our strong and growing operations are based on high-quality services, safety and network efficiency and flexibility.
Unique Integration of Passenger and Cargo
We believe that one of our distinct competitive advantages is our integrated operations focus, which combines the planning and scheduling of our passenger and cargo operations. Our cargo operations as a percentage of total revenues of 36.7% in 2003 are among the highest in the global airline industry. Our integrated model is valuable because it maximizes our revenues by transporting cargo in the belly of our passenger flights, lowering our break-even load factors, maximizing our profitability and lowering the volatility of our business over time.
Extensive Route Network
We have developed a distinctive network of cargo and passenger operations based on a set of routes and destinations that connect Latin America with the United States, Europe and the South Pacific operated by our various subsidiaries and affiliates based in Chile, Peru, Ecuador, Brazil, Mexico and the Dominican Republic. This varied and extensive network allows us to maximize our daily fleet utilization, an important factor in our low cost structure. In addition, the recent launch of the unified LAN brand will provide our customers with an integrated travel experience both within Chile and on all of our significant
subsidiaries, see Exhibit 8.1 to this annual report on Form 20-F.
Over the last two years,international routes.
Attractive Cost Structure
We believe we have progresseda highly competitive cost structure with a low operating cost of 31.8 cents per ATK in 2003. Our cost advantage arises mainly from our productive and committed employees, high aircraft utilization, a modern and fuel-efficient fleet and a cost-conscious culture. Our wages and labor costs accounted for approximately 16% of total costs in 2003, a lower percentage than that of other mainline carriers. Our itineraries and aircraft rotations are designed to maximize aircraft utilization. During 2003, our Boeing 767 and Airbus A340 aircraft operated more than 15 hours per day. Our long-haul fleet has an average age of 6.5 years, and we periodically renovate aircraft in our plans to develop a
clearer organizational structure. short-haul fleet. Finally, our corporate culture promotes constant process streamlining and productivity enhancement.
Strong Strategic Alliances
We are considering redistributinga member of theoneworld® alliance, and have also entered into bilateral agreements with strategic partners such as American Airlines, Iberia and Qantas, among others, creating a global reach for our existing
directpassengers. Our passenger alliances and indirect subsidiaries intocommercial agreements provide our customers with over 570 travel destinations, a new holding structure comprisedcombined reservations system and attractive schedule flexibility, which substantially enhance our competitive position within the Latin American transcontinental markets. Our strong cargo network is also bolstered by alliances and commercial agreements with partners such as American Airlines in the United States and Lufthansa Cargo in Europe.
Flexible Fleet Strategy
We carefully select our aircraft in order to complement our route network and optimize profitability given that we serve a diverse network of two
main subholding subsidiaries; one would contain all passenger-related entitieslong- and short-haul markets. Our leased fleet is structured with staggered lease maturities over time to create the strategic flexibility to expand or reduce capacity according to market conditions. We believe that our aircraft and the other all cargo-related entities. By more clearly separatingflexible structure of our fleet allow us to maximize aircraft utilization by adapting rapidly to changes in passenger and cargo demand in the markets that we serve.
Business Strategy
The principal areas in which we plan to focus our efforts going forward are as follows:
Leverage the Benefits of Combining our Passenger and Cargo Businesses
We will continue to leverage the benefits of combining our passenger and cargo operations. Our passenger and cargo operations are equally important aspects of our business and we dedicate the necessary resources, employees, facilities, management and fleet, to enable both operations to provide high-quality service and to
compete effectively in their respective markets. We integrate the two businesses by taking into consideration the potential for cargo services when planning passenger routes, and, when most efficient, maintaining certain dedicated cargo routes using our freighter aircraft. Cargo operations represented 36.7% of our total operating revenues in 2003, and we expect that they will be a significant source of additional revenue on our passenger flights, enabling us to offset fixed operating expenses per flight and thereby improve our profitability on a per flight basis. Additionally, this combination enhances revenue diversification and smoothes seasonal revenue fluctuations.
Maintain High Efficiency Standards
We will continue to focus on efficiency by increasing our aircraft utilization and streamlining our operations. We maintain a low-cost base due to our productive, flexible and committed personnel, high aircraft utilization and a continuous effort to streamline operations. We have also enhanced direct sales channels to reduce distribution expenses. Additionally, we plan to increase the efficiency of revenue generation by continuing to use revenue and yield management systems.
Maintain Customer Satisfaction
In both our passenger and cargo businesses, we expectfocus on delivering high quality services that are valued by our customers. In the passenger businesses we focus on high punctuality rates, quick check-in for short-haul flights, a modern fleet, and world-class on-board service. In the cargo business, we focus on providing reliable service, taking advantage of our ability to improve internal transparencyhandle different types of cargo as well as significant cargo volumes, and accountability, facilitateleveraging our new facilities in key gateways, such as Miami, to ensure optimal handling of our customers needs.
Enhance the incorporationValue of strategic partnersthe LAN Brand
In March 2004, we created the LAN brand, our new corporate image, under which all of our passenger companies will now operate (with the exception of LanExpress for domestic routes in Chile). We are updating our plans, signage and better
enable both business areasmarketing. By uniting all companies under the LAN alliance concept, we seek to reach their full potential.enhance the value of our brand, increase efficiency in marketing efforts, and reinforce the idea of an integrated travel experience across all of the alliance’s operators. The rebranding will also involve the use of new paint schemes on our aircraft. We do not expectestimate that suchthis process will be completed by mid-2005.
Build a reorganization would resultComprehensive Network
We are in the disposalprocess of any assetsdeveloping a broad network across the region. In the passenger business, the LAN alliance comprises companies in Chile, Peru, Ecuador and the Dominican Republic, and in the cargo business it includes operators in Chile, Brazil and Mexico. Through this network we are not only able to enhance and diversify our revenue base, but also benefit from seasonal patterns. Our own regional network is complemented by a set of alliances and commercial agreements that strengthen our competitive position and provide customers with access to a global network. We also may grow our network by expanding our operations in other countries. For example, we are currently in the initial phases of negotiation for a potential acquisition of shares of the Argentine airline, American Falcon S.A. For more information, see “—Business of the Company—Regional Expansion” below.
Maintain an Emphasis on Safety
Our top priority is safety, and we have structured our operations and maintenance to focus on safe flying. Our main maintenance facilities are certified by the FAA, DGAC and other civil aviation authorities. Our maintenance procedures and our flight operations are certified under ISO 9001-2000 standards. We have programs in place to train our control. During 2002crews and mechanics at a high level both at facilities abroad or at the training centers we did not move forwardhave developed in association with this process as we focusedworld-class partners.
Maintain a Solid Financial Position
We are one of the few investment-grade rated airlines in the world. We seek to maintain our effortsstrong financial position by preserving our financial liquidity and resources on managing our business in lightcontinuing to structure long-term financing for newly acquired aircraft. We also monitor and seek opportunities to reduce financial risks associated with currency, interest rate and jet fuel price fluctuations.
Business of existing market
conditions.
Business Overview
the Company
Airline Operations and Route Network
We are the leadingmain provider of domesticinternational and internationaldomestic passenger and cargo air services in Chile and one of the leading airlines in Latin America. Our domesticinternational and internationaldomestic passenger and cargo operations and services have increased substantially over the past five years.
years in terms of capacity, traffic and revenue.
In 2002,2003, according to the JAC, the official Chilean civil aviation authority, we held market shares of:
o 94.6%
The following table sets forth the number of passengers we carried and our gross traffic revenues by activity for the periods indicated.
| Year ended December 31, | |||||||||||||||
| 1999 | 2000 | 2001 | 2002 | 2003 | |||||||||||
| (in US$ millions, unless otherwise indicated) | |||||||||||||||
The Company(1) | |||||||||||||||
Passengers carried (thousands) | 4,302.1 | 4,316.1 | 5,236.4 | 5,316.5 | 5,509.1 | ||||||||||
Total passenger revenues | $ | 692.3 | $ | 750.7 | $ | 803.0 | $ | 803.7 | $ | 918.4 | |||||
Total cargo revenues | 474.3 | 593.5 | 539.5 | 520.8 | 602.0 | ||||||||||
Total traffic revenues | $ | 1,166.6 | $ | 1,344.2 | $ | 1,342.5 | $ | 1,324.5 | $ | 1,520.4 | |||||
| (1) | Information provided for the Company consolidates LanPeru beginning August 2001, |
Passenger Operations
The following table sets forth certain of our passenger operating statistics for domesticinternational and internationaldomestic routes for the periods indicated.
| Year ended December 31, | ||||||||||||||||||||
| 1999 | 2000 | 2001 | 2002 | 2003 | ||||||||||||||||
The Company(1) | ||||||||||||||||||||
ASKs (million) | ||||||||||||||||||||
International | 11,654.7 | 11,145.2 | 12,904.6 | 13,011.5 | 14,505.3 | |||||||||||||||
Domestic | 3,389.7 | 3,267.8 | 3,997.1 | 4,055.2 | 3,818.6 | |||||||||||||||
Total | 15,044.4 | 14,413.0 | 16,901.7 | 17,066.8 | 18,323.9 | |||||||||||||||
RPKs (million) | ||||||||||||||||||||
International | 7,639.9 | 7,807.0 | 8,584.9 | 8,457.8 | 10,271.5 | |||||||||||||||
Domestic | 2,116.5 | 2,124.3 | 2,694.9 | 2,681.8 | 2,399.5 | |||||||||||||||
Total | 9,756.4 | 9,931.3 | 11,279.8 | 11,139.5 | 12,671.0 | |||||||||||||||
Passenger yield (passenger revenues/ RPKs, in US cents) | ||||||||||||||||||||
International | US¢ | 6.75 | US¢ | 7.21 | US¢ | 6.97 | US¢ | 6.86 | US¢ | 6.86 | ||||||||||
Domestic | 8.36 | 8.85 | 7.90 | 8.35 | 8.90 | |||||||||||||||
Combined yield(2) | US¢ | 7.10 | US¢ | 7.56 | US¢ | 7.12 | US¢ | 7.22 | US¢ | 7.25 | ||||||||||
Passenger load factor (%) | ||||||||||||||||||||
International | 65.6 | % | 70.0 | % | 66.5 | % | 65.0 | % | 70.8 | % | ||||||||||
Domestic | 62.4 | 65.0 | 67.4 | 66.1 | 62.8 | |||||||||||||||
Combined load factor(3) | 64.9 | % | 68.9 | % | 66.7 | % | 65.3 | % | 69.1 | % | ||||||||||
| (1) | Information provided for the Company consolidates LanPeru beginning August 2001, |
| (2) | Aggregate of international and domestic passenger yield. |
| (3) | Aggregate of international and domestic passenger load |
International Passenger Air Service
Our international destination even though it is
a part of the Republic of Chile, because we serve it with long-haul aircraft)
plus two seasonal destinations (Chillan in the winter season, and Pucon in the
summer season). Our domestic traffic grew 16.0% between 1998 and 2002, from
2,311.1 million RPKs in 1998 to 2,681.8 million RPKs in 2002, primarily due to
higher demand for air travel in Chile and the growth of the Chilean gross
domestic product, which translated into higher disposable income for the Chilean
population in general. LanChile and LanExpress have integrated passenger
operations, including operation under the same two-letter "designator
reservation code," and have coordinated fare structures, scheduling and other
commercial matters, in order to maximize cooperative benefits and revenues for
the two carriers.
This table sets forth our market share, based on RPKs, for domestic
flights in 2002.
Domestic Destination Market Share(1)
- -------------------- ---------------
Antofagasta...................................... 90.3%
Concepcion....................................... 100.0
Iquique.......................................... 89.7
Arica............................................ 86.1
Temuco........................................... 99.2
Calama........................................... 92.4
Puerto Montt..................................... 98.7
La Serena........................................ 100.0
Copiapo.......................................... 100.0
Punta Arenas..................................... 98.3
Valdivia......................................... 99.7
Osorno........................................... 100.0
Balmaceda........................................ 98.8
El Salvador...................................... 100.0
-----
Total/Weighted average of market shares....... 94.6
=====
- -------------------
(1) Market share includes LanChile and LanExpress.
We evaluate our network of domestic routes on an on-going basis in
order to achieve optimal efficiency and profitability. Our strategic objective
is to maintain our leadership position in our domestic routes.
International passenger air service.
We provide international passenger air service (primarily under our
LanChile brand) tocomprises seven destinations in Peru, (six through LanPeru only; For
more information, see "--Regional Expansion-- Lan Peru S.A." below), 1817 destinations elsewhere(plus two seasonal destinations) in other Latin America,American countries and the Caribbean, three destinations in the United States, two destinations in Europe and four destinations in the South Pacific. Within Latin America LanChile haswe have routes to Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, the Dominican Republic, Ecuador, Mexico, Peru, Uruguay and Venezuela. LanChileWe also fliesfly to a variety of international destinations outside Latin America, including Miami,Auckland, Frankfurt, Los Angeles, Madrid, Miami, New York, the Falkland
Islands, Frankfurt, Madrid, Auckland, SydneyPapeete (Tahiti) and Papeete (Tahiti).Sydney. In addition, as of May 31, 2002,April 30, 2004, through our various code-share agreements, we offeroffered service to 2522 additional destinations in North America, seventen additional destinations in Europe and one additional destination in Latin America. We estimate that as of
December 31, 2002, internationalInternational passengers accounted for approximately 44%57% of our total passengers.
passengers in 2003.
The following table sets forth our market share, based on RPKs,in order of our weekly frequencies of service, for international flights in 2002.
International Destination(1) Market share(2)
- ---------------------------- ---------------
Buenos Aires, Argentina.............................. 63.0
United States (3).................................... 36.4
Lima, Peru........................................... 78.6
Mendoza, Argentina................................... 91.2
Sao Paulo, Brazil.................................... 41.0
Cordoba, Argentina................................... 98.0
La Paz, Bolivia...................................... 82.3
Montevideo, Uruguay.................................. 71.5
Rio de Janeiro, Brazil............................... 61.7
Frankfurt, Germany................................... 13.8
Madrid, Spain........................................ 45.9
Mexico City, Mexico.................................. 61.5
Easter Island, Chile (4)............................. 100.0
Punta Cana, Dominican Republic....................... 97.1
Papeete, Tahiti...................................... 100.0
Bogota, Colombia..................................... 46.8
Cancun, Mexico....................................... 96.2
Caracas, Venezuela................................... 72.6
Guayaquil, Ecuador................................... 85.6
Falkland Islands..................................... 100.0
Habana, Cuba......................................... 41.5
Quito, Ecuador....................................... 78.4
Auckland, New Zealand................................ 97.4
Sydney, Australia.................................... 91.3
-----
Total/Weighted average of market shares........... 43.3
=====
- -------------------
2003.
International destination | Market share(1) | ||
Buenos Aires, Argentina | 68.8 | % | |
United States(2) | 44.2 | ||
Lima, Peru | 78.7 | ||
Mendoza, Argentina | 90.1 | ||
Sao Paulo, Brazil | 38.0 | ||
Cordoba, Argentina | 99.7 | ||
La Paz, Bolivia | 84.7 | ||
Montevideo, Uruguay | 64.5 | ||
Rio de Janeiro, Brazil | 58.9 | ||
Frankfurt, Germany | 23.4 | ||
Madrid, Spain | 44.7 | ||
Mexico City, Mexico | 66.0 | ||
Easter Island, Chile(3) | 100.0 | ||
Punta Cana, Dominican Republic | 100.0 | ||
Papeete, Tahiti | 100.0 | ||
Bogota, Colombia | 58.5 | ||
Cancun, Mexico | 100.0 | ||
Caracas, Venezuela | 77.7 | ||
Guayaquil, Ecuador | 89.3 | ||
Falkland Islands | 100.0 | ||
Habana, Cuba | 71.5 | ||
Quito, Ecuador | 86.0 | ||
Rosario, Argentina | 100.0 | ||
Auckland, New Zealand | 97.3 | ||
Sydney, Australia | 94.6 | ||
Total/weighted average of market shares(4) | 49.4 |
Source: JAC (1) Since LanChile initiated service to Rosario, Argentina on April 10, 2003,
there is no market share data available for 2002.
(2) Market share includes LanChile, LanExpress and LanPeru data for traffic
between Chile and the specified destinations only.
(3) Market share percentage with respect to the United States corresponds to
the combined market share to the total U.S. market destinations, including
those to which LanChile offers service via code-share agreements. We have
a 52.9% market share only with respect to the three destinations to which
LanChile directly operates (New York, Miami and Los Angeles).
(4) Our Easter Island flights use long-haul aircraft and for operational
purposes we therefore classify Easter Island as an international
destination.
| (1) | Market share includes LanChile, LanExpress and LanPeru data for traffic between Chile and the specified destinations only. |
| (2) | Market share percentage with respect to the United States is calculated based on total traffic between Chile and all U.S. destinations. Taking in account only the three destinations to which we operate (New York, Miami and Los Angeles), we have a 52.9% market share. |
| (3) | Our Easter Island flights use long-haul aircraft, and for operational purposes we therefore classify Easter Island as an international destination. |
| (4) | Calculated as our traffic over total traffic for these routes, measured in RPKs. |
Our international passenger traffic grew 32.0%34% between 19981999 and 2002,2003, from 8,718.97,639.9 million RPKs in 19981999 to 8,457.810,271.5 million RPKs in 2002,2003, primarily due to trade liberalization, market share gains, increased connecting traffic from other Latin American countries, the launch of new routes and the consolidation of LanPeru in 2001 and increased operationsLanEcuador and LanDominicana in new markets.
2003.
During the second half of 2001 and the first half of 2002, our international passenger traffic decreased significantly due to two events. First, theThe September 11, 2001 terrorist attacks in the United States not only had a dramatic impact on traffic to and from the United States, but also affected other international routes as well. Second,Additionally, the economic and political collapse
ofcrisis in Argentina severely reduced Argentinetraffic originating traffic.in that country. This reduction not only affected Argentina-Chile routes, but also long-haul routes, as we carried a significant amountnumber of Argentine passengers along these routes. As a result, international traffic declined approximately 6% in the fourth quarter of 2001, 12% in the first quarter of 2002 and 7% in the second quarter of 2002. 2002, in each case, as compared to the same quarter in 2001.
In order to minimize losses related to the September 11th11, 2001 attacks and the Argentine crisis, we adjusted our operations by reducing capacity on some routes. We reallocated this capacity to other routes and intensified our commercial efforts in other countries, such as Peru and Ecuador. Additionally, we continuously adjusted our itineraries to match supply and demand. For example, we capitalized on increased demand to Argentina by providing better connections from other Latin American countries to Argentina through Santiago. We also developed new alliance relationships and expanded existing ones (see "--Passenger
Operations--Passenger“—Passenger Operations—Passenger Alliances and Commercial Agreements"Agreements” below). Due mainlyThese efforts enabled our passenger traffic to these measures,recover and, while traffic fell 6.4% in the first half of 2002, for the full year it only declined 1.0%.
International traffic continued to recover during 2003. During the first quarter of the year, traffic increased despite weak demand (caused by economic uncertainty and the war with Iraq) as we capitalized on market share gains on international routes. Traffic growth accelerated after the second quarter due to our expansion into new routes, our stronger competitive position, an increase in demand in the Chilean market because of improved economic expectations, the partial recovery of Argentinean demand and a stronger local currency. In 2003, our international passenger traffic began recovering duringgrew 10.6% in the first quarter, 22.9% in the second quarter, 23.8% in the third quarter of 2002, with growth of nearly 1%. Inand 28.7% in the fourth quarter, of 2002, international
traffic grew 17%. Meanwhile, ourin each case as compared to the same quarter in 2002. International yields increased during the year dueremained flat in part to
careful management of the capacity allocated to key routes in order to avoid
oversupply, a decline in the amount of Argentine passengers in our long-haul
network (connecting traffic usually features2003, as lower yields than direct traffic)
and a reductiondue to an increase in average trip lengths (due(longer flights generally have lower yields) were offset by higher average fares due to improved segmentation.
International Passenger Market
The following table sets forth estimated total Chilean international air passenger service to or from Chile and Chilean GDP for the periods set forth below.
| 1999 | % change(1) | 2000 | % change(1) | 2001 | % change(1) | 2002 | % change(1) | 2003 | % change(1) | |||||||||||
International air passengers(2) | 14,595.3 | 7.6 % | 14,884.5 | 2.0% | 14,520.0 | (2.4)% | 14,257.7 | (1.8)% | 15,211.4 | 6.7% | ||||||||||
Chilean GDP (Ch$ billions)(3) | 34,115.0 | (0.8)% | 35,646.5 | 4.2% | 36,854.9 | 3.1 % | 37,670.2 | 2.1 % | 38,900.4 | 3.3% |
Source: JAC data
| (1) | Percentage change from previous calendar year. |
| (2) | In RPKs (millions). |
| (3) | In 1996 Chilean pesos; 2003 figures are preliminary. Source: Central Bank of Chile. |
According to JAC data, Chilean international air passenger traffic increased 6.7% in 2003 as compared to 2002, to approximately 15,211.4 million RPKs. Approximately 20 carriers currently operate international flights to and from Chile. We had a 49.4% market share in 2003, based on RPKs. As of December 31, 2003, the other principal carriers that transport passengers to and from Chile included American Airlines, Aerolineas Argentinas, AeroMexico, Air France, COPA, Delta Airlines, Iberia, Lufthansa, TACA and Varig.
The market for scheduled passenger air travel between Chile and international destinations can be divided into four principal segments: Chile-North America, Chile-Europe, Chile-South Pacific and Chile-Latin America.
As of December 2003, four carriers offered direct flights on the Chile-North America market, in addition to carriers offering connections through a third country. For 2003, we had a 44.2% market share (as measured in RPKs) of the total Chile-United States market. The number and identity of companies participating in the Chile-United States market has varied significantly in recent years. In June 2002, AeroContinente Chile ceased its operations from Chile to the United States; in January 2003, United Airlines, which for 2002 had approximately 16% of the Chile-United States market, also stopped flying between the two countries, and in December 2003, Air Canada initiated direct service between Toronto and Santiago three times per week. As of December 31, 2003, our increasedmain competitors on the Chile-United States passenger routes were American Airlines and Delta Airlines.
On Chile-Europe routes, our main competitors are Lufthansa, Air France and Iberia. We also compete indirectly with other Latin American companies offering connections to European destinations, such as Aerolineas Argentinas and Varig. Competitive activity in the market has declined in recent years, as a number of carriers have
reduced service, replaced non-stop flights with one-stop flights or withdrawn entirely. For example, in October 2001, Swissair exited the Chilean market, and during the first half of 2003, Lufthansa reduced its daily frequencies to Santiago from seven to three, reinstating daily service in December 2003. During 2003, we had a 30.7% share of the Chile-Europe market.
We are the sole operator to offer direct flights between Chile and destinations in the South Pacific. However, we compete indirectly with Aerolineas Argentinas on passenger routes from South America to Auckland and Sydney. During 2003, we had a 94.6% share of the Chile-Australia market and a 97.3% share of the Chile-New Zealand market (including passengers carried under our code-share agreement with Qantas to Auckland and Sidney).
On Latin American regional routes, our main competitors are Aerolineas Argentinas, AeroContinente, AeroMexico, TACA Peru (a subsidiary of the Central American airline TACA), COPA and Varig. As of December 31, 2003, we held a market share of approximately 68.8% in the Santiago-Buenos Aires route and a market share of approximately 43.5% of the routes between Chile and Brazil.
Regional Expansion
We believe that there are a number of opportunities for us to provide an integrated travel experience to Latin American destinations and, since 1997, we have been making efforts to expand our operations and presence across the region. Over the past several years, we have developed, together with local partners, new operations in Peru, Ecuador and Ecuador)the Dominican Republic, and we continue to explore other opportunities to expand into new Latin American markets.
For example, we are currently in the initial phases of negotiation for a potential acquisition of shares of the Argentine airline, American Falcon S.A., which is a small, private airline based in Argentina that flies to certain domestic destinations and to certain destinations in Uruguay on a regular basis.
LanPeru
LanPeru initiated commercial operations on July 2, 1999, after receiving operator certification from the Peruvian Air Transport Authorities to commence domestic flight operations. Within Peru, LanPeru has focused on developing the seven domestic markets of Arequipa, Chiclayo, Cuzco, Juliaca, Lima, Puerto Maldonado and Trujillo. As of December 31, 2003, LanPeru provided international service to Guayaquil, Miami and Punta Cana.
In 2004, we started a growth plan aimed at positioning Lima as a hub for regional travel. In February 2004, LanPeru initiated international service between Lima and Buenos Aires (seven times per week), Lima and Caracas (three times per week) and Lima and Quito (four times per week). During April 2004, LanPeru started operations between Lima and Bogota (four times per week) and Lima and Mexico City (three times per week). LanPeru operates Airbus A320 and Boeing 767-300 aircraft.
LanPeru has strategic alliances with other carriers. In 2001, LanPeru initiated a code-share agreement with LanChile on LanChile’s Santiago-Los Angeles, Santiago-Lima and Lima-New York routes. In September 2003, LanPeru connected its flight to Guayaquil with LanEcuador’s Guayaquil-Madrid operation, therefore adding Madrid as a new destination. In addition, since our incorporation into theoneworld® alliance in June 2000, LanPeru has been considered aoneworld® affiliate. As aoneworld® affiliate, LanPeru offers its clients all of theoneworld® benefits, including frequent flyer accrual and redemption, global VIP lounge access and final destination baggage check.
In 2003, LanPeru transported 420,647 passengers on its domestic flights. According to Corporación Peruana de Aeropuertos y Aviación Comercial S.A., or CORPAC, LanPeru had a 24% share of the total Peruvian domestic market (31% on the routes it operates). In addition, LanPeru carried 104,844 international passengers and had a 31% market share of the Lima-Miami route.
LanEcuador
Over the past three years we have developed a strong presence in Ecuador. We formed LanEcuador in October 2001. LanEcuador was certified by the Ecuadorian civil aviation authorities in November 2002. In 2003, we entered into a partnership with local partners. The U.S. Department of Transportation, which is commonly referred to as the DOT, authorized LanEcuador to start service to the United States in March 2003.
LanEcuador initiated international commercial operations between Ecuador and the United States in April 2003. LanEcuador offers daily flights from Quito and Guayaquil to Miami and from Quito and Guayaquil to New York. In July 2003, LanEcuador launched service between Quito/Guayaquil and Buenos Aires (two times per week), and in September 2003, LanEcuador initiated service between Guayaquil and Madrid (three times per week). As of April 30, 2004, LanEcuador offered service to four international destinations. LanEcuador operates Boeing 767-300 and Airbus A320 aircraft.
LanDominicana
LanDominicana is based in the Dominican Republic and was started in 1999 as a new regional venture. LanDominicana was granted its operations certificate by the Dominican Republic authorities in June 2002 and was cleared by the DOT in April 2003. LanDominicana initiated regular service between Santo Domingo, in the Dominican Republic, and Miami in June 2003 three times per week. We suspended these operations in May 2004 and we are currently evaluating new services, which we expect to launch in the second half of 2004.
Domestic Passenger Air Service
Through the companies LanChile and LanExpress we are the leading domestic passenger airline in Chile, accounting for an aggregate of 88.7% of RPKs for the domestic Chilean market during 2001, 94.6% during 2002 and 83.4% during 2003. As of April 30, 2004, we flew to 15 destinations within Chile (not including Easter Island, which we treat as an international destination even though it is a part of Chile because we serve it with long-haul aircraft) plus two seasonal destinations (Chillan in the winter season and Pucon in the summer season). Our domestic traffic grew 13.4% between 1999 and 2003, from 2,116.5 million RPKs in 1999 to 2,399.5 million RPKs in 2003, primarily due to market share gains. However, during 2002 and 2003, our domestic traffic (measured in RPKs) declined due to weak demand and stronger competition. LanChile and LanExpress have integrated passenger operations, including operation under the same two-letter “designator reservation code”, and have coordinated fare structures, scheduling and other commercial matters in order to maximize cooperative benefits and revenues for the two carriers.
According to JAC data, our domestic market share was 94.6% for 2002 and 83.4% for 2003. Although our annual market share declined between 2002 and 2003, it showed a positive trend in the second half of 2003. Through mid-2003 our market share had decreased to 78.3%, but improved consistently in the second half of the year, and by December our monthly market share was 84.7%. As of March 31, 2004, the market continued to be served by the same domestic operators (LanChile, LanExpress and Sky Airline), and our market share as of January 2004 (latest available) was 83.9%.
The following table sets forth our market share, based on RPKs, for domestic flights in 2003.
Domestic destination | Market share(1)(2) | ||
Antofagasta | 71.1 | % | |
Concepcion | 86.8 | ||
Iquique | 73.3 | ||
Arica | 69.0 | ||
Temuco | 78.0 | ||
Calama | 81.1 | ||
Puerto Montt | 83.9 | ||
La Serena | 99.9 | ||
Copiapo | 100.0 | ||
Punta Arenas | 100.0 | ||
Valdivia | 100.0 | ||
Osorno | 100.0 | ||
Balmaceda | 75.1 | ||
El Salvador | 100.0 | ||
Total/weighted average of market shares(3) | 83.4 |
Source: JAC data
| (1) | Market share includes LanChile and LanExpress. |
| (2) | Market share includes data for traffic between Santiago and the specified destinations. |
| (3) | Calculated as LanChile and LanExpress traffic over total traffic for these routes, measured in RPKs. |
We evaluate our network of domestic routes on an ongoing basis in order to achieve optimal operating efficiency and profitability. Our strategic objective is to maintain our leadership position in our domestic routes.
Chilean Air Passenger Market
The following table sets forth estimated total Chilean domestic air passenger service and Chilean GDP for the periods set forth below.
| 1999 | % change(1) | 2000 | % change(1) | 2001 | % change(1) | 2002 | % change(1) | 2003 | % change(1) | |||||||||||
Domestic air passengers(2) | 2,986.2 | (5.6)% | 3,002.7 | 0.6% | 3,073.0 | 2.3% | 2,852.6 | (7.2)% | 2,931.5 | 2.8% | ||||||||||
Chilean GDP (billions Ch$)(3) | 34,115.0 | (0.8)% | 35,646.5 | 4.2% | 36,854.1 | 3.1% | 37,670.2 | 2.1% | 38,900.4 | 3.3% |
Source: JAC data
| (1) | Percentage change from previous calendar year. |
| (2) | In RPKs (millions). |
| (3) | In 1996 Chilean pesos; 2003 figures are preliminary. Source: Central Bank of Chile. |
According to JAC data, Chilean domestic air passenger traffic (including traffic on our domestic flights and those of our competitors) increased 2.8% from approximately 2,852.6 million RPKs in 2002 to approximately 2,931.5 million RPKs in 2003. Industry traffic declined in the first half of 2003, but was fully offset by improvements in the second half of the year due to improved economic performance and expectations.
The Chilean domestic market was mainly served by three carriers in 2003: LanChile, LanExpress and Sky Airline. In 2003, LanChile and LanExpress together had a 83.4% market share, based on RPKs, and Sky Airline had a 16.5% market share. Other airlines have a 0.1% market share.
The competitive structure of the domestic passenger market has experienced significant changes in recent years. In March 2001, Avant Airlines, our main competitor at the time, ceased operations due to AeroContinente Chile’s aggressive pricing strategy. AeroContinente Chile was the Chilean subsidiary of the Peruvian airline AeroContinente, and had initiated domestic operations in Chile in May 2000. In June 2002, Chilean authorities cancelled AeroContinente Chile’s operation certificate for failure to comply with safety regulations, and later that month, AeroContinente Chile filed for bankruptcy. One week before AeroContinente Chile ceased operations in 2002, Sky Airline, a new carrier owned by Chilean investors, started domestic service. Sky Airline initially focused on four destinations in the northern part of Chile. In December 2002, it added three destinations in the southern part of Chile, in April 2003, it initiated service to an eighth destination, and in December 2003, it started seasonal service to a ninth destination. Sky Airline currently operates between five and six Boeing 737-200 aircraft on its domestic operations.
There are currently no foreign airlines participating in the Chilean domestic market. However, Chile permits foreign airlines to operate in Chile if the airline’s home country gives similar treatment to Chilean airlines. Additionally, there are no regulatory barriers that would prevent a foreign airline from creating a Chilean subsidiary and entering the Chilean domestic market using that subsidiary.
Passenger Alliances and Commercial Agreements
Our profitability and the size and scope of our operations have
attracted the attention of various international airlines seeking to form
strategic alliances.
The following are our passenger alliances and partnerships as of May 31, 2003:
o oneworld. In June 2000, we were officially incorporated into the
oneworld alliance, a global marketing alliance consisting of
American Airlines, British Airways PLC, Cathay Pacific Airlines
Ltd., Qantas, Iberia Airlines, Finnair OYJ and Aer Lingus Group
Limited which, among other benefits, offers improved service to
frequent flyer customers. Together, these airlines are able to offer
customers travel advantages, such as 563 worldwide destinations and
schedule flexibility.
o Alaska Airlines. Since 1999, we have been in an alliance with Alaska
Airlines Inc. which currently permits us to provide customers with
service between Chile, the West coast of the United States and
Canada. As part of this agreement, we offer our customers service on
Alaska Airlines flights from Los Angeles to Portland, Seattle,
Vancouver and Calgary.
o American Airlines. Since 1997, we have had an agreement with
American Airlines which enables LanChile and American Airlines to
share carrier codes for certain flights on global reservations
systems, thereby enabling American Airlines passengers to
purchase seats on LanChile flights and vice-versa. The U.S.
Department of Transportation granted antitrust immunity to our
arrangement with American Airlines in October 1999. The antitrust
immunity encompasses cooperation in commercial and operational
areas such as pricing, scheduling, joint marketing efforts and
reductions of airport and purchasing costs, as well as further
implementation of cargo synergies in areas such as handling and
other airport services. For more information, see
"--Regulation--U.S. Regulation--Regulatory authorizations in
connection with strategic alliances" below. Through this alliance
we currently offer service to 19 American Airlines destinations
in the United States and Canada.
o British Airways. In August 2000, we initiated a new code-share
agreement with British Airways on LanChile flights between Buenos
Aires and Santiago. British Airways withdrew from the Chilean market
in August 2000, and continues to use the LanChile code-share
agreement in order to provide service for its passengers traveling
from Buenos Aires to Santiago. On May 8, 2001, we expanded this
code-share agreement to include British Airways' flights between
Madrid and London Heathrow, which gives us access to one of Europe's
most important gateways.
o Iberia Airlines. In January 2001, we initiated a code-share
agreement with Iberia Airlines, pursuant to which we offer
passengers ten non-stop frequencies per week between Santiago and
Madrid on Airbus A340 aircraft and, through code-share flights
operated by Iberia, one-stop service to Bilbao, Barcelona, Rome,
Paris, Amsterdam and London Heathrow. In December 2001, we expanded
this code-share agreement to include Iberia's flights between
Madrid, Zurich and Frankfurt.
o Qantas Airways. On July 1, 2002, we initiated a new code-share
agreement with Qantas to operate between Santiago, Chile and Sydney,
Australia with a stopover in Auckland, New Zealand. This code-share
agreement includes three weekly frequencies operated by LanChile.
Passengers receive all oneworld benefits, including frequent flyer
awards and final destination bag check capabilities. We renewed the
code-share agreement with Qantas for a one-year term beginning April 1, 2003.
o Other alliances. In addition, LanChile has regional code-share
agreements with Tranportes Aereos del Mercosur S.A. ("TAM") to
Paraguay and with Aerovias de Mexico, S.A. de C.V. ("AeroMexico")
and Mexicana de Aviacion S.A. de C.V. ("Mexicana") to routes in
Mexico. In September 2002, we terminated our partnership with Varig
S.A. in routes to Brazil.
30, 2004:
| • | oneworld®.In June 2000, LanChile and LanPeru were officially incorporated into theoneworld® alliance, a global marketing alliance consisting of American Airlines, British Airways PLC, Cathay Pacific Airlines Ltd., Qantas, Iberia, Finnair OYJ and Aer Lingus Group Limited which, among other benefits, offers improved service to frequent flyer customers. Together, these airlines are able to offer customers travel advantages, such as 571 worldwide destinations and schedule flexibility. |
| • | American Airlines.Since 1997, LanChile has had an agreement with American Airlines which enables LanChile and American Airlines to share carrier codes for certain flights on global reservations systems, thereby enabling American Airlines passengers to purchase seats on LanChile flights and vice-versa. The DOT granted antitrust immunity to our arrangement with American Airlines in October 1999. The antitrust immunity encompasses cooperation in commercial and operational areas such as pricing, scheduling, joint marketing efforts and reductions of airport and purchasing costs, as well as further implementation of cargo synergies in areas such as handling and other airport services. For more information see “—Regulation—U.S. Aeronautical Regulation—Regulatory Authorizations in Connection With Strategic Alliances” below. Through this alliance, we currently offer service to 18 additional destinations in the United States and Canada. |
| • | Iberia.In January 2001, LanChile initiated a code-share agreement with Iberia, pursuant to which we offer passengers between ten and fourteen non-stop frequencies per week between Santiago and Madrid on Airbus A340 aircraft. We also offer, through code-share flights operated by Iberia, one-stop service to Amsterdam, Barcelona, Bilbao, Frankfurt, London (Heathrow), Paris, Rome, Zurich and, since 2003, Milan and Brussels. |
| • | Qantas.In July 2002, LanChile initiated a code-share agreement with Qantas to operate between Santiago, Chile and Sydney, Australia with a stopover in Auckland, New Zealand. This code-share agreement includes three weekly frequencies operated by LanChile on Airbus A340 aircraft. |
| • | British Airways.In August 2000, LanChile initiated a new code-share agreement with British Airways on LanChile flights between Buenos Aires and Santiago. British Airways withdrew from the Chilean market in August 2000, and continues to use the LanChile code-share agreement in order to provide service for its passengers traveling from London to Santiago, through a connection in Buenos Aires. On May 8, 2001, we expanded this code-share agreement to include British Airways’ flights between Madrid and London Heathrow. |
| • | Alaska Airlines.Since 1999, LanChile has been in an alliance with Alaska Airlines Inc. which currently permits us to provide customers with service between Chile, the West coast of the United States and Canada. As part of this code-share agreement, we offer our customers service on Alaska Airlines’ flights from Los Angeles to Portland, Seattle, Vancouver and Calgary. |
| • | Other alliances.In addition, LanChile has regional code-share agreements with Transportes Aereos del Mercosur S.A. (“TAM Mercosur”) from Santiago to Asunción, Paraguay (which is operated by TAM Mercosur) and with AeroMexico from Santiago to Mexico City (operated by both companies). In September 2002, we terminated our partnership with Varig in routes from Chile to Brazil, and in December 2003 we terminated our agreement with Mexicana de Aviación S.A. de C.V. in routes between Argentina and Mexico. |
Passenger Marketing and Sales
Our international and domestic marketing strategy stresses punctuality, convenient flight departure schedules and frequent service to major international destinations such as New York, Los Angeles, Miami, Madrid, Sydney, Buenos Aires and Sao Paulo. In order to strengthen our market position, we have continued improving our passenger cabins and service and continually monitor our corporate image. For more information on the recent improvements we have made to our cabins and corporate image see "--Business Strategy--Increase Passenger and Cargo Revenues
By:--Enhancing in-flight amenities and our corporate image"“—Business Strategy” below.
Although we significantly reduced costs significant during 2002, we did not reduce the quality of our service. As a result, we were able to continue providing the service that has always distinguished LanChile. Additionally, we have continued to upgrade our aircraft seats and cabins and the in-flight amenities that we provide.
During 2002
Branding
In March 2004, we launched our new brand “LAN” under which we started to operate all of our international passenger service that we previously operated under the local brands of “LanChile”, “LanPeru”, “LanEcuador” and “LanDominicana”. As part of this marketing program, we are also consolidatedin the process of changing our corporate image, including our logo and aircraft paint schemes. The majority of our fleet will be painted with the new image by the end of 2004. We expect our new image to enhance the visibility of our brand, enhance flexibility and increase the efficiency of our marketing efforts. We will continue to operate domestic routes in Chile under the LanExpress a new domestic brand.
LanExpress focuses on providing an easier, more efficient travel experience.
This initiative includes providing shorter check-in times and other more
streamlined operations as compared to those on international routes. Also,brand, although the aircraft operated by our LanExpress fleet includes a significant number of our new Airbus A320 aircraft
and, is therefore perceived as a more modern in-flight product.
Since September 2000, we have worked intensively on our website,
www.lanchile.com, enabling a powerful new reservations engine. Consistent withwill feature the LanExpress concept, during 2002 we expanded our Internet-based check-in
service for domestic flights. This service allows our passengers to obtain their
boarding passes from their home or office, thus avoiding traditional airport
counter procedures. Through December, more than 10% of our domestic passengers
were using this system. This is part of LanChile's strategy to increasingly use
the Internet as a communication and value-added sales and purchasing tool. For
instance, the members of our frequent flyer program, LanPass, receive their
monthly balances and other information by e-mail.
LAN paint scheme.
Distribution Channels
We use direct and indirect distribution channels. Travel agents conduct indirect sales, and soldaccounted for approximately 63%66% of our airline ticketspassengers during 2002.2003. We paid these travel agents a standard commissions ranging from 0% to 9% depending on the market. Consistent with our efforts to reduce commission of approximately 6% of ticket
prices during 2002. Travel agent commissionscosts, and in line with current market practices, we have declined recently and continue
to do so.reduced standard commissions. For example, as of Februaryduring 2003 consistent with the practice of
other airlines, we eliminated standard commissions in the United States.
States and reduced them in Spain from 8% to 3%. In addition to the payment of a base commission, we have supported the growth of our international operations by offering premiums on commissions to agents who sell tickets in excess of certain target amounts.
Travel agents obtain airline travel information and issue airline tickets through Computer Reservation Systems, or CRSs, that enable them to make reservations on flights from a large number of airlines. CRSs are also used by travel agents to make hotel and car rental reservations. We participate actively in all major international CRSs, including Sabre, Amadeus, Galileo and Galileo.Worldspan. In return for access to these systems we pay transaction fees that are generally based on the number of reservations booked through each system. In Chile, the leading CRS provider, which is owned equally by LanChile and our subsidiary TASA, is Sistemas de DistribucionDistribución Amadeus Chile S.A., which had a market share of approximately 51%53% as of December 2002, based2003 (based on the number of domestic reservations booked.booked through travel agents in Chile).
Direct channels refer to sales by our own ticket offices, call-centers and website. In addition to travel agency sales, we2003, direct bookings accounted for approximately 34% of all of our passengers. We have an extensive salesales and marketing network consisting of 40more than 150 domestic and 100 international ticket offices and general sales agents in more than 38 countries. In 2002, direct bookings accounted for approximately
37% of all of our bookings.
In order to increase the volume of direct sales, support the growth of our international operations and provide improved service to our customers, we have developed a call-center network. Our main call-center is located in Santiago and we have additional call-centers in Argentina, the United States and Peru. We plan to add additional call-centers in other countries in the future. Our call-center network operates 24 hours-a-day, 7 days a week. During 2003, we designed a plan to modernize our call centers. This plan will be implemented during 2004 and encompasses several initiatives, such as the incorporation of voice-recognition technology and the deployment of remote agents (which will connect to the call-center from their homes). This plan aims to support future growth, increase flexibility and enhance service quality.
Since September 2000, we have worked intensively to consolidatemake our Chilean reservations offices into one call center locatedwebsite an integral part of our commercial and marketing efforts. Since March 2004, we replaced our previous sites withwww.lan.com as part of the launch of our new corporate image. Together with other direct sales initiatives, our website provides us with a very important tool to reduce our distribution costs. Internet sales have increased significantly: they increased 71% in Santiago de Chile. Currently, customers anywhere2003 compared to 2002, amounting to approximately US$30 million. Additionally, we have utilized our website as an alternative to sell distressed inventory through “Last Minute Offers” at discounted prices. Besides serving as a sales channel, we have utilized our website as a tool to provide value-added services and enhance communication. We send weekly promotional e-mails to more than 350,000 subscribers, and members of our frequent flyer program receive their monthly balances and other information by e-mail and can access the data and redeem awards through our website. Additionally, consistent with the LanExpress concept, during 2003 we strongly promoted our Internet-based check-in service for domestic flights. This service allows our passengers to obtain their boarding passes from their home or office, thus avoiding traditional airport counter procedures. Through December 2003, more than 12% of our domestic passengers were using this system.
As part of our effort to reduce distribution costs, in 2003 we also launched an Internet portal for travel agents called Portal Asociados Mundo LAN. This portal enables agents to book domestic tickets in Chile candirectly through the Internet and provides access to a number of services. We have also developed a similar corporate portal for use by large corporate clients.
Electronic Ticketing
In 1997, we introduced electronic tickets, commonly referred to as e-tickets, and have since worked in increasing their penetration. E-tickets are a single
toll-free number that connects them withkey element in our sales efforts through the call center twenty-four hours a
day, seven days a week. We plan to gradually close the local reservation
facilities in favor of the call center. During 2002 we began to incorporate
remote operators, who connect toInternet and our call center systems from their homes.
Remote operatorscenters and therefore enable us to increase the efficiency and flexibilitysignificantly reduce distribution costs. E-tickets, which accounted for approximately 57% of our
call center and enable us to offer a new alternative to our call center workers.
Through our call center, we offer tickets by mail and, since March
1999, we offer e-tickets on our domesticsold during 2003, are currently available in more than 95% of LanChile routes. In 2000,2003, we started using
e-tickets for the Santiago-Buenos Aires route. Since then we have expanded the
number ofimplemented them on LanPeru’s domestic routes on which e-tickets are available, and by December 2002 we were
able to offer e-tickets on nearly 95% of our routes. Additionally, e-tickets
accounted for nearly 64% of our total passengers and more than 85% of our total
domestic passengers. In order to increase the number of e-tickets sold, we are currently working on implementing e-tickets on LanPeru’s and LanEcuador’s international routes, as well as on interline e-tickets between LanChile and its affiliates. In 2003, we also launched interline e-tickets with American Airlines, and we expect to launch interline e-tickets (an
electronic ticket enabling passengers to fly different segments on separate
airlines).
implement similar agreements with otheroneworld® partners in 2004.
Advertising and Promotional Activities
Our advertising marketing and promotional activities include the use of television, print and radio advertisements as well as direct marketing. During 2002,2003, we conducted significant marketing activities to stimulate travelsupport the launch of LanEcuador and strengthen our brand recognition inLanDominicana, as well as to support the regioncommercialization of new routes. We also implemented a campaign to promote web-based check-in on domestic routes and continued our campaigns aimed at increasing low-season travel. Additionally, toward the end of 2002, we
launched a campaigntravel and at stimulating purchases through our website. The latter included campaigns to promote the advanced purchase of high-season tickets.
Together with other direct sales initiatives, our website, LanChile.com,
provides us with a very important tool to reduce our distribution costs.
Internet sales have increased significantly: in 2002 they more than doubled
compared to 2001,sell distressed inventory through last-minute offers and discounts on tickets paid for using credit cards issued by December 2002 they amounted to more than US$1.6 million
per month.
marketing partners.
Frequent Flyer Program
Our frequent flyer program is called LanPass. LanPass'sLanPass. LanPass’s objective is to generate incremental revenue and customer retention through customer loyalty and targeted marketing. LanPass awards kilometers to customers based
on distance flown and class of ticket purchased. Based on an award schedule, customers can redeem kilometers for free tickets or upgrades. Under our current frequent flyer program, our passengers are grouped into three different elite levels based on each passenger'spassenger’s flying behavior. These different groups determine thewhich highly-valued passenger benefits customers are eligible to receive, such as free upgrades on a space-available basis, VIP lounge access, and preferred boarding and preferred check-in. LanPass also has highly rated partners, including other airlines, hotels, car rental agencies and credit card issuers from the main financial institutions in Chile, Peru and Argentina,Ecuador, which give additional kilometers to customers for using their services. As an active member of theoneworld® alliance, we have reciprocal frequent-flyer agreements with alloneworld® carriers. In some cases,addition, we have reciprocal agreements, such as our agreement with AmericanAlaska Airlines that allow us to benefit from the loyalty of American'sAlaska Airlines’ customers, as they can accrue miles under American'sAlaska Airlines’ frequent flyer program when traveling on Lan ChileLanChile flights. In
addition, as an active member of the oneworld alliance, we have reciprocal
frequent flyer agreements with all oneworld carriers. Finally, as part of our frequent flyer program, we have developed a comprehensive database with all flying information from LanPass customers, plus demographic and other relevant customer information, that allows us to generate targeted promotions to different customer segments, reducing dilution and maximizing response rate. This type of information is also a source for customer metrics and monitoring providingand provides significant management information.
Chilean Air Passenger Market
According to JAC data, Chilean domestic air passenger traffic
(including traffic on our domestic flights and those of our competitors)
decreased 7.2% from approximately 3,073.0 million RPKs in 2001 to approximately
2,852.6 million RPKs in 2002. This decline relates mainly to weak economic
growth and a decrease in demand due to the disappearance of the low fares
offered by AeroContinente Chile. As of May 31, 2003, there were three main
domestic carriers in Chile (LanChile, LanExpress and Sky Airline). For 2002,
LanChile and LanExpress together had a 94.6% market share, based on RPKs. Sky
Airline had a 4.2% market share and AeroContinente Chile had a 1.1% market
share, based on its accumulated traffic before it ceased operations.
The domestic passenger market has recently experienced significant
competitive changes. In March 2001, Avant Airlines, our main competitor at the
time, ceased operations due to AeroContinente Chile's aggressive pricing
strategy. AeroContinente Chile was the Chilean subsidiary of the Peruvian
airline AeroContinente, and had initiated domestic operations in Chile in May
2000. In June 2001, a court order forced AeroContinente Chile to suspend its
operations. However, upon a court finding of insufficient evidence,
AeroContinente Chile resumed operations in September 2001. In June 2002, Chilean
authorities cancelled AeroContinente Chile's operation certificate for failure
to comply with safety regulations. Later that month, AeroContinente Chile filed
for bankruptcy. One week before Aerocontinente Chile ceased operations, Sky
Airline, a new carrier fully-owned by Chilean investors, started domestic
service. Sky Airline initially focused on four destinations in the northern part
of Chile. In December 2002, it added three destinations in the southern part of
Chile, and in April 2003, it initiated service to an eighth destination in
Chile. Sky Airline currently operates five Boeing 737-200 aircraft.
According to JAC data, at December 31, 2001 our domestic market share
was approximately 88.3%. At December 31, 2002, our domestic market share was
approximately 94.6%. As of March 31, 2003, our market share for the three-month
period between January and March was approximately 85.3%.
There are currently no foreign airlines participating in the Chilean
domestic market. However, Chile permits foreign airlines to operate in Chile if
the airline's home country gives similar treatment to Chilean airlines.
Currently no foreign countries grant Chilean airlines such treatment.
The following table sets forth estimated total Chilean domestic and
international air passenger service and Chilean GDP for the periods set forth
below.
%change %change %change %change %change
1998 (2) 1999 (2) 2000 (2) 2001 (2) 2002 (2)
----------------------------------------------------------------------------------------------
Domestic air passengers (1) 3,162.3 9.7% 2,986.2 -5.6% 3,002.7 0.6% 3,073.0 2.3% 2,852.6 -7.2%
International air passengers (1) 13,556.5 8.1% 14,595.3 7.6% 14,884.5 2.0% 14,520.0 -2.4% 14,257.7 -1.8%
Chilean GDP (billions Ch$) 34,376.6 3.2% 34,115.0 -0.8% 35,536.7 4.2% 36,626.1 3.1% 37,411.8 2.1%
- ----------
Source: JAC Data
(1) In passenger kilometers (millions).
(2) Percentage change from previous calendar year.
International Passenger Market.
According to JAC data, Chilean international air passenger traffic
declined 1.8% in 2002, to approximately 14,257.7 million RPKs. Approximately 20
carriers currently operate international flights to and from Chile. We had a
43.3% market share in 2002, based on RPKs. As of May 31, 2003, the principal
carriers that transport passengers to and from Chile include American Airlines,
Delta, Varig, Iberia and Lufthansa.
The market for scheduled passenger air travel between Chile and
international destinations can be divided into four principal segments:
Chile-United States, Chile-Europe, Chile-South Pacific and Chile-Latin America.
As of May 31, 2002, six carriers served Chile-United States routes,
including carriers offering connections through a third country, however, the
number and identity of companies participating in the Chile-United States market
has varied significantly in recent years. In June 2002, AeroContinente Chile
ceased its operations from Chile to the United States. Additionally on January
6, 2003, United Airlines, which for 2002 had approximately 16% of the
Chile-United States market, stopped flying between the two countries. For 2002,
we had a 36.4% market share (as measured in RPKs) of the total Chile-United
States market. As of May 31, 2003, our main competitors on the Chile-United
States passenger routes were American Airlines and Delta Airlines.
On Chile-Europe routes, our main competitors are Lufthansa, Air France
and Iberia. We also compete indirectly with other Latin American companies
offering connections to European destinations, such as Aerolineas Argentinas and
Varig. Competitive activity in the market has declined in recent years as a
number of carriers have reduced service, replaced non-stop flights with one-stop
flights, or withdrawn entirely. For example, in October 2001 Swissair exited the
Chilean market and during the first half of 2003, Lufthansa reduced its daily
frequencies to Santiago from seven to three. During 2002 we had a 27.6% share of
the Chile-Europe market.
We are the sole operator to offer direct flights between Chile and
destinations in the South Pacific. However, we compete indirectly with
Aerolineas Argentinas on passenger routes from Buenos Aires to Auckland and
Sydney. We have a code-share agreement with Qantas to Australia and New Zealand.
During 2002, including passengers carried under this code-share agreement, we
had a 91.3% share of the Chile-Australia market and a 97.4% share of the
Chile-New Zealand market.
On Latin American regional routes, our main competitors are Varig and
Aerolineas Argentinas. At December 31, 2002, we held a market share of
approximately 63.0% in the Santiago-Buenos Aires route and a market share of
approximately 46.6% of the routes between Chile and Brazil.
Cargo Operations
The following table sets forth certain of our cargo operating statistics for domestic and international routes for the periods indicated.
| Year ended December 31, | |||||||||||||||
| 1999 | 2000 | 2001 | 2002 | 2003 | |||||||||||
The Company | |||||||||||||||
RTKs (millions) | |||||||||||||||
International | 1,702.4 | 2,001.9 | 1,809.1 | 1,788.2 | 1,876.6 | ||||||||||
Domestic | 33.5 | 38.6 | 44.1 | 45.6 | 35.2 | ||||||||||
Total | 1,735.9 | 2,040.5 | 1,853.2 | 1,833.8 | 1,911.9 | ||||||||||
Weight of cargo carried (millions of tons) | |||||||||||||||
International | 306.3 | 373.6 | 358.6 | 388.2 | 397.4 | ||||||||||
Domestic | 26.1 | 29.8 | 32.9 | 32.8 | 26.8 | ||||||||||
Total | 332.3 | 403.4 | 391.5 | 421.0 | 424.2 | ||||||||||
Total cargo yield (cargo revenues/RTKs, in US cents) | 27.32 | 29.09 | 29.11 | 28.40 | 31.49 | ||||||||||
Total cargo load factor (%) | 67.2 | % | 72.8 | % | 69.2 | % | 67.1 | % | 67.1 | % | |||||
Our cargo business generated revenues of approximately US$593.5 million
in 2000, US$539.5 million in 2001, and US$520.8 million in 2002 and US$602.0 million in 2003, representing 41.6%37.8%, 37.8%35.9% and 35.9%36.7%, respectively, of our operating revenues. Cargo revenues as a percentage of our total revenues has decreased over the past three years.grew 11.6% between 2001 and 2003 primarily due to decreased demand in the Latin American cargo markets as a
resultaddition of economic weakness in the regionnew routes and increased competition. However,
cargo continues to represent a significant portion of our business.
improved yields.
Our domestic and international cargo business generally operates on the same route network used by our passenger airline business, and services, andwhich is supplemented by freighter-only operations. Overall, it consists of 4344 international destinations (29 operated by passenger and freighter aircraft and 14approximately 15 operated only by freighter aircraft). We complement our own operations through coordination with our regional affiliates, MasAir in Mexico, and Absa in Brazil. We also have a minority stake in Florida West International Airways in the United States. We carry cargo for a variety of customers, including other international air carriers, freight-forwarding companies and individual consumers. For information about our fleet, see “—Fleet—General” below.
We transport cargo in four ways: in the bellies of our passenger aircraft, in our own dedicated freighter fleet, in belly space that we purchase from other airlines and in aircraft that we wet-lease (a lease pursuant to ACMI contracts (ACMI contracts, or Aircraft, Crew, Maintenance and Insurance contracts, are leases that are also known as “wet-leases” in which the lessor operates the aircraft and provides the aircraft, crew, maintenance and insurance) or charter
(an arrangement by which we lease and operate the aircraft)charters according to short- and medium-term contracts. We use the brand names LanChile, Fast Air, LanChile
Cargo, and South Florida in connection with our cargo operations. We complement
our operations through coordination with our regional affiliates, MasAir S.A. de
C.V. ("MasAir") in Mexico, and Aerolinheas Brasileiras S.A. ("Absa") in Brazil.
We also have a minority stake in Florida West International Airways in the
United States. Finally, we have affiliated companies, including LanLogistics,
LanBox, SkyNet and SkyBox, which are involved in logistics, fulfillment and
e-commerce activities relating to our cargo services. We carry cargo for a
variety of customers, including other international air carriers,
freight-forwarding companies and individual consumers. For information about our
fleet, see "--Fleet--General" below.
International Cargo Operations
Our international cargo routes to, from and within Latin America accounted for approximately 96% of total cargo revenues in 2000,2001, 96% of total cargo revenues in 20012002 and 96%98% of total cargo revenues in 2002.
2003.
Our international cargo operations are based out of Santiagoheadquartered in Miami, whose geographical location positions it as the natural gateway for Latin American imports and Miami.exports to and from the United States, and since 2001, are centered in our 380,000 square-foot facilities located within the Miami International Airport. The United States accounts for the majority of the cargo traffic to and from Latin American.America. Besides being the main market for Latin AmericaAmerican exports by air, the United States is also the main supplier of goods, such as high-tech equipment or spare parts, transported by air to Latin American countries. Miami's geographical location positions it asTo complement our own cargo operations to the natural gateway forUnited States, we have negotiated commercial agreements with American Airlines on some routes from Miami to Latin America.
In Europe, we operate to two gateways: Madrid, which we serve via passenger aircraft (using our flights from Santiago and Guayaquil), and Frankfurt (through passenger flights and freighter-only operations since October 2002, when we signed our partnership with Lufthansa Cargo (for more information on this traffic. During 2001agreement see “—Cargo Agreements” below)). Since January 2000, we moved into our new 380,000 square foot facilities,
located at the Miami International Airport. also serve Paris through a commercial agreement with Transportes Aéreos Meridionais, or TAM, a Brazilian airline.
In Latin America, the principal origins of our cargo are Chile, Ecuador, Peru and Colombia. In Europe, we use Madrid
as our gateway,Colombia, which we serve daily via our passenger network. In 2002, after
we signed our new partnership with Lufthansa Cargo, we replaced Paris with
Frankfurt as our main freighter destination in Europe (for more information on
this agreement see "--Commercial Agreements" below.) Since January 2000, we also
serve Paris throughrepresent a commercial agreement with TAM, a Brazilian airline. Aslarge part of our new passenger code-share agreement with Iberia, we have also
included a coordinated cargo effort on some of the routes covered by the
code-share agreement in order to optimize the utilization of the cargo space on
those routes.
northbound traffic.
Our international cargo operations increased 41.7%10.2% between 19981999 and 2002,2003, from 1,261.61,702.4 million cargo available ton kilometers in 19981999 to 1,788.21,876.6 million cargo available ton kilometers in 2002.2003. We believe that the primary reasons for the growth in cargo operations are:
o
International cargo traffic decreased 9.9% in 2001, anddecreased 1.2% in 2002. This decline can be attributed2002 and increased 4.9% in 2003. The drops in 2001 and 2002 relate mainly to reduced imports by South American
countries, specifically Brazilweak southbound demand and Argentina. Additionally,increased competitive activity. The improvement in 2003 is the result of a rebound in southbound traffic during the firstsecond half of 2002, we faced increased competition from foreign carriers. Although the intensityyear and of thisa stronger competitive activityposition. Our main competitors, AGI and later decreased, it had a significant
impactArrow, significantly reduced their operations during the second half of 2003, and UPS and FedEx either downsized their operations or exited some markets. Today, on trafficLatin America-United States routes, our main competitors are Cielos del Perú S.A., Transportes Aereos Mercantiles Panamericanos S.A., or TAMPA, and yields along key routes. We were able to partially offset
these conditions during 2002 through modification ofPolar Air, and on the Latin American-Europe routes, our freighter itinerariesmain competitors are Cargolux, Lufthansa Cargo, Martinair and the development of new markets and routes.
Air France.
Domestic Cargo Operations
Our domestic cargo operations, based out of Santiago, mainly operate under the LanChile Cargo brand name. Over the last five years our domesticDomestic cargo operations, as measured by RTKs,traffic increased 38.2%, from 33.0 million cargo ton
kilometers14.3% in 1998 to 45.6 million cargo ton kilometers2001, increased 3.4% in 2002 primarily due
to increased demand for domestic cargo transport by air.and decreased 22.8% in 2003. Our domestic transports consist primarily of fresh fish and seafood, express packages, spare parts, newspapers, vegetables and general cargo. We currently use the cargo space available on our passenger aircraft andon domestic routes. In addition, we operate daily (except weekends) overnight services to the largest northern cities with a Boeing 737-200 cargo aircraftaircraft.
Chilean Air Cargo Market
The following table sets forth estimated total Chilean domestic and international cargo transported and Chilean GDP for the periods set forth below.
| 1999 | % change(1) | 2000 | % change(1) | 2001 | % change(1) | 2002 | % change(1) | 2003 | % change(1) | |||||||||||
International air cargo transported(2) | 1,498.0 | (7.8)% | 1,643.9 | 9.7% | 1,819.2 | 10.7% | 1,629.6 | (10.4)% | 1,484.4 | (8.9)% | ||||||||||
Domestic air cargo transported(2) | 44.9 | 0.9% | 47.3 | 5.4% | 48.4 | 2.3% | 49.3 | 1.9% | 44.3 | (10.2)% | ||||||||||
Chilean GDP (Ch$ billions) | 34,115.0 | (0.8)% | 35,646.5 | 4.2% | 36,854.9 | 3.1% | 37,670.2 | 2.1% | 38,900.4 | 3.3% |
Source: JAC data
| (1) | Percentage change from previous calendar year. |
| (2) | In RTKs. |
According to JAC data, between 1999 and 2003, domestic air transport.
cargo transported within Chile decreased 0.3% and international air cargo transported to or from Chile decreased 0.2%. Domestic Chilean air cargo transported amounted to 44.3 million RTKs in 2003, a 10.2% decrease of ton kilometers as compared to 2002, which related mainly to weak economic growth and substitution for ground transportation. International air cargo carried to and from Chile decreased 8.9% in 2003 and amounted to 1,484.4 million RTKs in 2003. This reduction relates mainly to lower import demand in the first half of the year and lower salmon exports due to production problems.
In April 2000, to capitalizedomestic cargo operations, we compete on the strengthbasis of our airport-to-airport
network,punctuality, scheduling and service. Our principal competitor in the domestic cargo market is Sky Airline. For the twelve-month period ended December 31, 2003, we formed LanLogistics,held a new cargo division dedicated to the
development of higher-value door-to-door express cargo products and services
between Latin America and the United States. During 2000 and 2001, we have
developed a number of new initiatives and made two strategic acquisitions to
grow our new logistics division.
We have extended our cargo services to door-to-door express delivery
operations, in which we distribute a variety of small packages through a network
of branches, warehouses and trucks. Through our subsidiary LanCourier we operate
a fleet of approximately 150 vans and trucks and offer distribution and
warehouse services throughout Chile. By using tracking and Internet technology,
LanCourier customers have real-time access to data regarding the status of their
parcels. LanCourier began operating at new facilities in January 2001. These new
facilities, which represented a US$9.0 million investment, include a modern
distribution center that provides us with the technological tools to provide
door-to-door express service to our clients in Chile.
As part of our effort to move into a higher value cargo business
segment, we began a new service in 2000 which allows Latin American customers to
send goods purchased via the Internet to a post-office box address in Miami for
delivery to their door in Latin America by LanChile. In order to further develop
this new business, on February 20, 2001, we purchased 100%91.3% market share of the common stock
of SkyBox Services Corporation, an international logistics solutions company
based in Miami, in exchange for 40% of the common stock of LanBox, a LanChile
domestic air cargo market.
Cargo subsidiary. Also, as part of the acquisition, we made a capital increase
in SkyBox of US$1.8 million. Agreements
In its seven years of business, SkyBox has
developed e-commerce fulfillment services, including the operation of post
office boxes in Miami for Latin American consumers who purchase United States
products on-line, as well as the coordination of transportation of these
products to final destinations throughout Latin America. Currently, SkyBox
provides services to 45,000 clients and has developed operations throughout
Latin America. The acquisition of SkyBox has enabled us to expand the scope of
LanBox's client and operations base and has provided us with a variety of
opportunities to improve the efficiency of the SkyBox business.
In addition, on March 10, 2001, we acquired 60% of the common stock of
SkyNet Worldwide Express ("SkyNet"), a U.S. technology-driven international
distribution and logistics company for US$320,000. Also, as part of the
acquisition, we made a capital increase in SkyNet in the amount of US$500,000.
On September 25, 2002, we acquired 100% of the stock of Skynet by purchasing 40%
of the capital stock held by other shareholders in exchange for 75% of the
common stock of Skypost, Inc, one of our indirect subsidiaries. With its
regional hub in Miami as its major gateway to Latin America, SkyNet has a
presence in several Latin American countries and experience in the courier and
expedited cargo industry. This strategic investment has helped to expand our
door-to-door delivery service between the United States and Latin America.
Commercial Agreements
On JulyJanuary 2002, LanChile Cargo and Lufthansa Cargo signedimplemented an agreement to jointly operate jointly between Europe and Latin America. As part of this partnership,agreement, LanChile Cargo allocates space to Lufthansa spaceCargo on its flightflights between selected cities in Latin America and Europe, and Lufthansa Cargo allocates space to LanChile Cargo space on its flights between Europe and Brazil and Argentina. Also, LanChile Cargo increased its freighter weekly frequencies to Europe from two to three, and now operates to Lufthansa'sLufthansa Cargo’s hub in Frankfurt instead ofFrankfurt.
In January 2000, LanChile Cargo and TAM implemented an allotment agreement pursuant to which we purchase cargo space on TAM’s flights between Brazil and Paris. This agreement was implemented in
October 2002.
Marketing and Sales
We
Our sales and marketing efforts are carried out either directly when we have a local office or through general sales agents. In Latin America we have our own offices in all relevant markets. In the United States we have our own offices in Miami, New York and Los Angeles, and work with representatives in various other cities. In Europe we have offices in Frankfurt, Madrid and Paris and use agents in other relevant cities. Finally, in Asia all our sales efforts are done through general sales agents. In total, we maintain a network of more than 50 independent cargo sales agencies domestically and internationally, and make direct sales through our Santiago de
Chile and Miami operations. internationally.
Our cargo marketing strategy emphasizes our combination of freighter and passenger aircraft cargo capacity, which allows customers to ship large, bulky freight, as well as smaller, high-density cargo, fresh produce and other types of cargo. Our cargo marketing strategy also emphasizes our high-quality services, scheduling flexibility and punctuality. Chilean Air Cargo Market
The following table sets forth estimated total Chilean domestic and
international cargo transported and Chilean GDP forOn some routes, LanChile offers special products such as Positive FS, which enables the periods set forth below.
Fleet
General Sales and Handling Agent in Ecuador,
Transoceanica Cia. Ltd. and its related companies, in order for LanEcuador to
obtain U.S. Department of Transportation approval to operate between Ecuador and
the United States. The U.S. Department of Transportation granted its approval on
March 12, 2003.
LanEcuador initiated international commercial operations between
Ecuador and the United States on April 28, 2003 using Boeing 767-300 aircraft
under wet-lease agreements with LanChile. LanEcuador offers daily flights from
Quito and Guayaquil to Miami and from Quito and Guayaquil to New York.
LanEcuador expects to initiate service to Argentina and Spain during
the second half of 2003. LanEcuador is currently finalizing its certification
process before the Spanish civil aviation authorities in order to formally
announce its proposed round-trip operations between Quito, Ecuador and Madrid,
Spain. LanEcuador has already received approval from the Argentine aviation
authorities and expects to initiate service to Argentina in July 2003.
LanDominicana
In June 1999, Linea Aerea de Navegacion Dominicana, S.A. d/b/a
LanDominicana was incorporated as a new regional venture based in the Dominican
Republic, in which LanChile holds a 49% ownership stake. LanDominicana was
granted its operations certificate by the Dominican Republic authorities in June
2002, and was cleared by the U.S. Department of Transportation in April 2003.
LanDominicana initiated regular service between the Dominican Republic and the
United States in June 2003 using Boeing 767-300 aircraft wet-leased from
LanChile.
Fleet
General
As of December 31, 2002,April 30, 2004, we operated a fleet of 56 aircraft, comprised of 4749 jet passenger aircraft and nineseven jet cargo aircraft, as set forth in the following chart.
| Number of aircraft in operation(1) | Average term of lease remaining (years) | Average age (years) | ||||||||
| Total | Owned | Operating lease | ||||||||
Passenger aircraft | ||||||||||
LanChile | ||||||||||
Boeing 767-300ER(1) | 9 | 3 | 6 | 3.3 | 8.0 | |||||
Airbus A320-200 | 7 | 3 | 4 | 8.6 | 2.6 | |||||
Airbus A340-300 | 4 | 0 | 4 | 9.0 | 3.1 | |||||
LanExpress | ||||||||||
Boeing 767-300ER | 2 | 0 | 2 | 4.9 | 6.8 | |||||
Boeing 737-200 | 17 | 11 | 6 | 1.5 | 25.9 | |||||
Airbus A320-200 | 5 | 1 | 4 | 8.2 | 2.5 | |||||
Airbus A319-100 | 2 | 0 | 2 | 11.6 | 0.4 | |||||
LanPeru | ||||||||||
Airbus A320-200 | 2 | 0 | 2 | 7.1 | 2.7 | |||||
Boeing 767-300ER | 1 | 0 | 1 | 0.9 | 7.8 | |||||
Total passenger aircraft | 49 | 18 | 31 | 5.8 | 11.9 | |||||
Cargo aircraft(2)(3) | ||||||||||
Boeing 737-200F freighter | 1 | 1 | 0 | — | 44.0 | |||||
Boeing 767-300F freighter | 6 | 5 | 1 | 2.6 | 3.9 | |||||
Total cargo aircraft | 7 | 6 | 1 | 2.6 | 8.2 | |||||
Total fleet(4) | 56 | 24 | 32 | 5.7 | 11.4 | |||||
| (1) | Includes a leased Boeing 767-300 passenger aircraft |
| (2) | We have also |
| (3) | We have subleased one freighter aircraft to each of MasAir, Absa and Florida West. |
| (4) | Does not include two McDonnell-Douglas DC-8 freighter aircraft owned by the Company and currently out of |
The daily average hourly utilization rates of our aircraft for each of the periods indicated are set forth below.
| Year ended December 31, | ||||||
| 2001 | 2002 | 2003 | ||||
| (measured in hours) | ||||||
Passenger aircraft(1) | ||||||
Airbus A340 | 15.6 | 15.3 | 15.6 | |||
Boeing 767-300ER | 15.3 | 15.1 | 15.4 | |||
Airbus A320 | 9.1 | 9.0 | 9.2 | |||
Airbus A319(2) | — | — | 8.7 | |||
Boeing 737-200 | 6.6 | 5.8 | 5.3 | |||
Cargo aircraft(3) | ||||||
Boeing 737-200C | — | — | 3.2 | |||
Boeing 767-300F freighter | 16.6 | 15.5 | 15.6 | |||
| (1) | Includes data for both LanChile and LanExpress. |
| (2) | Our two Airbus A319 aircraft were incorporated into our fleet in November and December 2003. |
| (3) | Includes daily average hourly utilization for the use by MasAir and Absa of one subleased freighter aircraft each. |
In recent years, we have significantly modernized our passenger and cargo fleets through the acquisition of new aircraft. Between 1998 and 2001, we incorporated six new Boeing 767-300F cargo freighters into our fleet to replace older and less efficient DC-8 freighters to better serve the Latin American cargo market. We are currently subleasing a total of three of the Boeing 767-300Fs to each of MasAir, Absa and Florida West. By subleasing these aircraft to our affiliates we have been able to increase their utilization and enhance our cargo network. We plan to incorporate two additional Boeing 767-300F aircraft in 2005.
We also continue to modernize our passenger fleet through the acquisition and lease of new Airbus aircraft. Under purchase agreements that we have entered into with Airbus Industrie in 1998 and 1999, we have incorporated into our fleet two Airbus A319-100s, 14 A320s and four A340s, and have a commitment to incorporate into our fleet an additional 14 Airbus aircraft. We plan to gradually replace our existing Boeing 737-200 fleet with the A320-family aircraft, and the A340s will complement our Boeing 767 fleet in our long haul operations. Our purchase contracts with Airbus provide for flexibility with regard to future changes in aircraft types and delivery dates. For more information, see “Additional Information––Material Contracts” under Item 10.
We believe our fleet of A320-200s and A319-100s aircraft will allow us to provide broader service across Latin America, the Chilean domestic market and the Peruvian domestic market. We also believe that they will enable us to increase efficiency levels through reduced fuel consumption and maintenance costs. As replacements for older short-haul Boeing 737-200 aircraft, the new Airbus A320 and A319 aircraft will further modernize and standardize our fleet and allow us to fulfill the requirements of our anticipated route structure more efficiently, given their ability to serve short-haul and medium-haul markets efficiently.
From time to time, we also decide to purchase used aircraft for opportunistic and economic reasons. In 2001, we acquired nine Boeing 737-200 aircraft, four of which were previously leased to LanChile. Because of the attractiveness of the purchase price compared to the cost of continuing to lease the aircraft, we acquired three Boeing 737-200s in 2002 and one DC-8-71 in 2003 that were previously leased to LanChile. In 2003, we converted one of the passenger Boeing 737-200 we owned into a freighter to serve domestic routes. We will also add three Boeing 737-200 aircraft, under three-year operating leases with attractive terms. These aircraft will be incorporated into our operating fleet in the second half of 2004.
We incorporated one Boeing 767-300 during 2003 and a second 767-300 in the first quarter of 2004 pursuant to operating leases. We expect to add up to five more 767-300 aircraft during 2004.
Historically, we have also utilized between one and five cargo aircraft pursuant to short-term ACMI leases. These contracts enable us to adjust capacity on a short- to medium-term basis in order to manage the volatility of the demand for cargo services and increased access to certain cargo destinations. For example, in 2001, as cargo volumes decreased due to economic weakness in Latin America, we cancelled several Boeing 747 ACMI leases. As of March 31, 2004, we were utilizing two Boeing 747 freighters under ACMI leases from Atlas Air. Our current ACMI contracts with Atlas Air for these two 747 aircraft are for a period of five years.
Fleet Leasing and Financing Arrangements
Our acquisition financing and leasing methods include borrowing from financial institutions and leasing under financial leases, tax leases and operating leases.
We financed the acquisition of three Boeing 767-300ER passenger aircraft and five Boeing 767-300F freighters through syndicated loans provided by international financial institutions with the support of guarantees issued by the Export-Import Bank of the United States. While four of these aircraft have 12-year repayment profiles, the remaining four have 15-year repayment profiles.
In 2000, to finance our Airbus aircraft, we entered into a US$1.3 billion umbrella credit facility with a syndicate of international financial institutions under which we borrow in the form of separate loans in connection with the specific financing requirements of each Airbus aircraft (including pre-delivery and long-term payments). This umbrella facility provides for guarantees from the English, French and German Export Credit Agencies. Our repayment profile for each aircraft financed under the facility is 18 years. Under this financing package we have incorporated into our fleet Airbus aircraft through operating leases, financial leases and tax leases. The Airbus financing facility covers the aircraft scheduled to be delivered under our Airbus purchase agreements through December 31, 2006.
As of April 30, 2004, we held only one passenger aircraft, a Boeing 767-200, under a capital lease from a wholly-owned subsidiary of an international financial institution. Consequently, we bear substantially all of the economic risks and rewards of ownership of that aircraft. We sublease this aircraft to a third party at market rates and for a term equal to our obligations under the capital lease, which expires in 2005.
As of April 30, 2004, we held 32 aircraft under operating leases. Under the terms of our operating leases, we are required to return the aircraft in an agreed condition at the end of the lease. Although the title to the aircraft remains with the lessor, we are responsible during the lease term for the maintenance, servicing, insurance, repair and overhaul of the aircraft. As of December 31, 2003, aggregate future minimum lease payments required under our aircraft operating leases were US$869.5 million. Our operating leases have terms ranging from three to 12 years from the date of delivery of the aircraft. For more information, see Note 17 to our audited consolidated financial statements.
Maintenance and Safety
Maintenance
Our heavy maintenance, line maintenance and component shop capabilities are equipped to service our entire fleet of Airbus and Boeing aircraft. Our maintenance capabilities allow us flexibility in scheduling airframe maintenance, substantially reducing our need to rely on third-party maintenance providers.
Our order for the Airbus A320
aircraft is part of a 179-aircraft order (90 firm and 89 options) that we
jointly negotiated with the TACA Group, a group of Central American airlines,
and the Brazilian airline TAM. By negotiating together, we were able to
significantly improve the conditions that each airline could have obtained
negotiating separately. In August 1999, we entered into a purchase agreement for
seven new Airbus A340 aircraft for an estimated aggregate maximum amount of
US$700 million. In the first half of 2000, we exercised options to acquire five
additional Airbus A320 aircraft. The A340s will partially replace our Boeing 767
fleet and will provide us with ultra-long range capability. Our purchase
contracts with Airbus provide for significant flexibility with regard to
aircraft types and delivery dates. Because of this, we have been able to defer
the arrival of a number of aircraft originally scheduled for delivery between
2001 and 2005 and, as a result, we now expect to complete our fleet renewal
program by 2008. LanChile has also agreed with the manufacturer to change the
aircraft type of the two aircraft to be incorporated later in 2003 from the
A320-200 model to the A319-100 model, a technically similar, but slightly
smaller and less expensive model.
During 2002, we took delivery of four additional A320 aircraft. We
believe these aircraft will allow us to provide broader service across Latin
America and in the Chilean domestic market. We also believe that they will
enable us to increase efficiency levels through reduced fuel consumption and
maintenance costs. As replacements for older short-haul Boeing 737-200 aircraft,
the new Airbus A320 aircraft will further modernize and standardize (in terms of
our maintenance programs and otherwise) our fleet and allow us to fulfill the
requirements of our anticipated route structure more efficiently.
In addition to the aircraft that we are incorporating to renew our
fleet, we have also purchased older aircraft for tactical and economical
reasons. Between January and June 2001, we purchased five Boeing 737-200
aircraft for US$21.0 million in order to be able to quickly expand our domestic
operations after Avant Airlines, our largest domestic competitor, exited the
Chilean market. In 2001, we acquired four additional Boeing 737-200 aircraft
that were previously leased to LanChile for a total of US$18.0 million because
of the attractiveness of the purchase price compared to cost to us of continuing
to lease these aircraft. For similar reasons, we acquired three Boeing 737-200
aircraft in 2002 and one DC-8-71 (previously leased to LanChile) in 2003, for a
total of US$9.8 million.
In order to increase the operating efficiency of our fleet and reduce
unused capacity, we reduced our fleet by 21 aircraft between January 2000 and
February 2003 by returning older aircraft under our operating leases and by
subleasing them to third parties. This reduction included the return of three
Boeing 737-200s, one Boeing 767-300 and one DC-8-71 in 2000, five Boeing
737-200s and one Boeing 767-300 in 2001, seven Boeing 737-200s, one Boeing
767-300 and two DC-8-71s in 2002 and one DC-8-71 in February 2003. As of
December 31, 2002, the average age of our passenger fleet and cargo fleet was
11.78 and 15.78 years, respectively.
Fleet Leasing and Financing Arrangements
As of December 31, 2002, we held 31 aircraft under operating leases,
pursuant to which we are generally obligated to make rental payments without
penalties for termination or purchase options and under which the lessor bears
the economic benefits and risks of ownership. Under our current operating
leases, we are required to return the aircraft in an agreed condition at the end
of the lease. Although title to the aircraft remains with the lessor, we are
responsible during the lease term for the maintenance, servicing, insurance,
repair and overhaul of the aircraft. As of December 31, 2002, aggregate future
minimum lease payments required under our aircraft operating leases were
US$865.9 million. For more information, see Note 17 to our consolidated
financial statements. Our operating leases have terms ranging from five to
twelve years from the date of delivery of the aircraft.
We have also acquired aircraft through capital leases, pursuant to
which we were obligated to make lease payments that finance most of the purchase
price of the aircraft over the lease term. At December 31, 2002, we held only
one passenger aircraft, a Boeing 767-200, under a capital lease from a
wholly-owned subsidiaries of Credit Agricole Indosuez. As a result, we bear
substantially all of the economic risks and rewards of ownership of that
aircraft. Under a capital lease, the lease term is approximately equivalent to
the entire estimated useful life of the equipment and we, as the lessee, can
cancel the lease only upon a payment of a substantial penalty. For more
information, see Note 17 to our consolidated financial statements. We subleased
this aircraft to a third party at market rates and for a term equal to our
obligations under the capital lease, which expires in 2005.
Historically, we have also used between one and five aircraft pursuant
to short-term wet leases. These contracts enable us to adjust capacity to market
conditions. For example, in 2001, as cargo volumes decreased due to economic
weakness in the region, we cancelled our several Boeing 747 wet-leases with
Atlas Air. As of December 31, 2002, we were operating one DC-10 aircraft
chartered by South Florida Air Cargo. This charter, like the wet-leased
freighters, provides us with a variable amount of cargo capacity which we can
adjust on a short- to medium-term basis in order to manage the volatility of the
demand for cargo services and increased access to certain cargo destinations. We
also have strong commercial agreements with companies such as TAM and American
Airlines. The belly space, which we purchase from other carriers, also provides
us with a variable capacity. Our use of both passenger aircraft cargo space and
all-cargo freighters in our cargo operations gives us the capacity to
accommodate a wide variety of cargo in terms of size, weight and types,
including seeds, fresh products, equipment, spare parts and livestock.
We financed the acquisition of three Boeing 767-300ER passenger
aircraft and five Boeing 767-300F freighters with support from the Export-Import
Bank of the United States. We have financed these aircraft through syndicate
loans. While four of these aircraft have 12-year repayment profiles, the
remaining four have 15-year repayment profiles. We incorporated a sixth Boeing
767-300F pursuant to an operating lease from GE Capital Aviation Services.
In 2000, we secured financing for both pre-delivery and long-term
payments covering 20 Airbus A320 and seven Airbus A340 aircraft with a bank
syndicate that was jointly arranged by Credit Lyonnais, Citibank, N.A.,
Bayerische Hypo-und Vereinsbank, Lloyds TSB Bank plc and Kreditanstalt fur
Wiederaufbau. This long-term financing package amounts to approximately US$1.32
billion and provides the necessary financing for 20 Airbus A320 family aircraft
and seven Airbus A340 aircraft. Through a complex structure, which includes a
guarantee from the English, French and German Export Credit Agencies, we
obtained an 18-year repayment profile. In addition, the Airbus financing
structure also allows us to acquire the Airbus aircraft pursuant to operating
leases, capital leases or tax leases (structures under which we receive
favorable rent terms and the lessor receives certain tax benefits). We
incorporated the four A320 aircraft delivered during 2002 pursuant to capital
leases.
Business Strategy
Our strategy is to increase revenues and profitability by maximizing
the operational efficiencies between cargo and passenger air travel, expanding
operations, controlling costs and increasing efficiency. The principal features
of our business strategy are to:
Maximize operating efficiencies between cargo and passenger service:
We believe that one of our distinct competitive advantages is our
integrated operational focus, which combines both passenger and cargo operations
in order to maximize revenues per flight. We treat our passenger and cargo
operations as equally important aspects of our business and dedicate the
necessary resources, in terms of employees, facilities, management and fleet, to
enable both operations to provide high-quality service and to compete
effectively in their respective markets. We integrate the two businesses by
taking into consideration the potential for cargo services when planning
passenger routes, and, when most efficient, maintaining certain dedicated cargo
routes using our freighter aircraft. Cargo operations, which represented 35.9%
of our total operating revenues in 2002, are a significant source of additional
revenue on passenger flights, enabling us to offset fixed operating expenses per
flight and thereby improve our profitability on a per flight basis. Our use of
both passenger aircraft cargo space and dedicated freighter space enables us to
provide our customers with dependable service and full range of flight options.
We plan to continue developing both our passenger and cargo operations in order
to maximize revenues and profitability.
Increase passenger and cargo revenues by:
o Increasing the number of frequencies between profitable
destinations. We monitor and adjust our flight operations in order
to focus on profitable routes. To ensure optimal use of resources,
we use detailed route profitability analyses to adjust the frequency
of flight service on certain routes based on passenger and cargo
load factors, utilization rates, connecting traffic to other
destinations and other profitability measures. Our strategy has been
to increase the number of flights between our most profitable
destinations, such as our Santiago de Chile-Miami route, rather than
to expand the overall number of flight destinations we serve. In
recent years, when we have had the appropriate opportunity, we have
increased our frequencies through code-share agreements with other
foreign carriers. We will continue to expand in this manner to the
extent it provides us with an opportunity to offer improved service
to a number of new destinations in a cost-effective way. For more
information regarding our code-share agreements, see "--Business
Overview--Passenger Operations--Passenger Alliances and Commercial
Agreements" above.
o Forming strategic alliances. We have a variety of alliances with
other carriers, including code-share and frequent flyer agreements.
These alliances have enabled us to increase the number of
destinations we serve, especially in the United States and Europe.
They have also allowed us to improve our competitive position and
increase our presence in other markets. For example, through the
oneworld alliance, a global alliance of some of the world's most
prestigious airlines, we offer improved benefits to our frequent
flyer customers and we benefit from the association with the other
internationally-recognized member airlines. For more information,
see "--Business Overview--Airline Operations and Route
Network--Passenger Operations--Passenger Alliances and Commercial
Agreements" and "--Business Overview--Airline Operations and Route
Network--Cargo Operations" above.
o Managing our revenue. We determine the prices we charge our
customers and allocate fares in accordance with market demand and
elasticity in both our domestic and international routes. We
maintain a research and development team within our distribution and
revenue management division to ensure that we remain a leader in the
use of revenue management and pricing technology and that we
prioritize initiatives with a high impact on net profit margins.
o Enhancing in-flight amenities and our corporate image. Our marketing
strategy stresses punctuality, convenient flight schedules, frequent
service to major international destinations and world-class service.
We have focused on developing a solid corporate image around these
attributes, and have continued to improve our product. Our long-haul
fleet has improved premium class cabins featuring "full-flat" seats
in first class and seats with increased recline in business class.
We are also gradually incorporating a new in-flight entertainment
system with audio and video-on-demand technology and computer games
throughout the entire cabin. Additionally, during 2003, we replaced
our traditional headphones in premium classes with new headsets
featuring noise-reduction technology. We have also improved our
short-haul aircraft with the addition of new Airbus A320 aircraft to
our fleet.
o Offering superior service. We profit from the high quality of our
passenger and cargo services. In our passenger operations, our
high-quality services are evidenced by:
o the punctuality of our flights;
o the benefits provided by alliances;
o our attentive in-flight service;
o our frequent flyer program;
o our tour and hotel/air packages;
o the broad distribution of our flight schedules through various
computer reservation systems;
o our convenient, comfortable and attractive VIP lounges;
o our attractive cabin designs; and
o our improved in-flight meals.
With respect to cargo services, we offer strong customer support
throughout the booking, storage, transportation and administrative phases of
cargo shipment. In addition, our cargo customers can access our Internet site
from anywhere in the world and obtain updated information about their shipments
24 hours a day.
Our intense emphasis on customer service in both passenger and cargo
operations has earned us a number of important accolades. In 2001 and 2003, the
Official Airline Guide selected LanChile as the "Best Airline with service to
South America, Central America and the Caribbean" based on a survey of frequent
flyers, and in April 2001, and again in April 2002, LanChile was voted "Best
Airline in South America" in a survey of 2.7 million passengers that was
conducted by SkyTrax research of the United Kingdom. In 2002, Forbes Magazine
ranked LanChile's new VIP lounge at the Santiago International Airport, among
the top ten VIP lounges in the world. During 2003, Latin Trade selected LanChile
as having the "Best Airline Lounge in Latin America" and the "Best Airline Food
in Latin America."
o Maintaining our emphasis on safety. We place a top priority on
safety by requiring high standards with respect to pilot training
and aircraft maintenance. Our maintenance repair station is approved
by the FAA. We have had no aircraft accidents involving major
injuries to passengers, crew or aircraft in the past ten years. As a
result, we are able to obtain favorable insurance rates. Chile has
been rated as Category 1 by the FAA, the highest possible category,
because of the Chilean government's supervision and regulation of
airline safety, as well as its safety-related inspections and
procedures. We have formed arrangements with third parties to
enhance our safety programs. In 1999, LanChile agreed to a joint
venture with Lufthansa Flight Training GmbH for the creation of an
international flight-training center based in Chile to train pilots
from both airlines and other regional pilots. In addition, in
conjunction with the Federico Santa Maria University, we have
created the Academia de Ciencias Aeronauticas ("Academy of
Aeronautical Sciences"), which offers diverse courses of study
relating to the aviation industry. This University began enrolling
students in 2000.
Continue to control costs and increase efficiency by:
o Continuing productivity improvements. Since 1994, we have
implemented a strategy to:
o streamline and consolidate operations;
o increase employee productivity;
o improve systems technology; and
o take advantage of improving economies of scale.
As part of this strategy we offer our employees a number of training programs,
ranging from language classes to specific technical instruction.
o Expanding and modernizing our fleet. Over the last several years we
have made significant changes to our fleet. In general, we seek to
enhance scheduling flexibility, improve load factors, facilitate
high aircraft use and lower fuel costs by using aircraft well suited
to our different operations. We have been retiring older aircraft
and have been introducing newer, more fuel-efficient aircraft. Since
2000, we have incorporated new Airbus A320 and Airbus A340 aircraft
to our passenger fleet. The A320 aircraft will gradually replace our
Boeing 737 aircraft and the new A340 aircraft will partially replace
our Boeing 767 aircraft and will allow us to perform ultra-long-haul
flights. The new A320s and A340s will enable us to increase our
service standards, open new routing alternatives and increase the
efficiency of our operations. In recent years, we have also
modernized our cargo fleet with the addition of six new Boeing
767-300 freighter aircraft. These freighters, which we added to our
fleet between 1998 and 2001, provide us with higher efficiency than
the DC-8 aircraft that they replaced. We plan to continue to
modernize our fleet and obtain the most favorable lease rates and
purchase prices possible through the joint negotiation of leases for
our subsidiaries and affiliates. For more information, see
"--Business Overview--Fleet--Fleet Leasing and Financing
Arrangements" and "--Business Overview--Regional Expansion" above.
o Maintaining technological advantages. We also seek to increase our
efficiency, reduce our costs and increase our service quality to the
level required of members of the oneworld alliance by using the most
up-to-date technology available in the air transport industry. On
May 13, 2000, after a year of preparation during which over 2,000
people were trained, LanChile, Ladeco and LanPeru successfully
changed their passenger computer systems with minimal or no
disruption. This changeover upgraded approximately 200 ticket
offices and airports throughout the world and provided us with a
modern and user-friendly technological platform. In addition, the
new systems provide us with higher quality information concerning
the availability of space on other airlines, as well as information
on tourism services, such as hotels and car rentals. The new systems
are more efficient than our previous systems and are designed to
handle the check-in of thousands of passengers daily, which will
enable us to better manage our code-share operations. Additionally,
during 2002 we continued to upgrade our website, www.lanchile.com.
Features of our website include a user-friendly interface, enhanced
on-line purchasing options and a web-based check-in system for
Chilean domestic routes. Additionally, we have capitalized on the
Internet as tool to sell distressed inventory through a "Last Minute
Offers" system.
Regulation
Chilean Aeronautical Regulation
Both the DGAC and the JAC, oversee and regulate the Chilean aviation
industry. The DGAC reports directly to the Chilean Air Force and is responsible
for supervising compliance with Chilean laws and regulations relating to air
navigation. The JAC is the Chilean civil aviation authority. Primarily on the
basis of Decree Law No. 2,564, which regulates commercial aviation, the JAC
maintains jurisdiction over assignment of domestic and international routes, and
the DGAC regulates flying operations, including personnel, aircraft and security
standards, air traffic control and airport management. We have obtained and
maintain the necessary authority from the Chilean government to conduct flight
operations, including authorization certificates from the JAC and technical
operative certificates from the DGAC, the continuation of which is subject to
the ongoing compliance with applicable statutes, rules and regulations
pertaining to the airline industry, including any rules and regulations that may
be adopted in the future.
As an airline providing services on international routes, LanChile is
also subject to a variety of bilateral civil air transport agreements that
provide for the exchange of air traffic rights between Chile and various other
countries. There can be no assurance that existing bilateral agreements between
Chile and foreign governments will continue, and a modification, suspension or
revocation of one or more bilateral treaties could have a material adverse
effect on our operations and financial results.
Chile is a contracting state, as well as a permanent member, of the
International Civil Aviation Organization, or the ICAO, an agency of the United
Nations established in 1947 to assist in the planning and development of
international air transport. The ICAO establishes technical standards for the
international aviation industry, which Chilean authorities have incorporated
into Chilean laws and regulations. In the absence of an applicable Chilean
regulation concerning safety or maintenance, the DGAC has incorporated by
reference the majority of ICAO's technical standards. We believe that we are in
material compliance with all the relevant technical standards.
Route Rights
Domestic Routes. Chilean airlines are not required to obtain permits in
connection with carrying passengers or cargo on any domestic routes. Non-Chilean
airlines are permitted to provide domestic air service between destinations in
Chile, provided that the country in which the foreign airline is based grants a
reciprocal right to Chilean airlines. To date, no country has granted this
reciprocity to Chile and there are no foreign airlines that participate in
Chilean domestic operations.
International Routes. International route rights, as well as the
corresponding landing rights, are derived from a variety of air transport
agreements negotiated between Chile and foreign governments. Under such
agreements, the government of one country grants another government the right to
designate one or more of its domestic airlines to operate scheduled services
between certain destinations in that country. In Chile, when additional route
frequencies to and from foreign cities become available, any eligible airline
may apply to obtain them. If there is more than one applicant for a route
frequency the JAC awards it through a public auction. The JAC grants route
frequencies subject to the condition that recipient airline operate them on a
permanent basis. If an airline fails to operate a route for a period of six
months or more, the JAC may terminate its rights to that route. International
route frequencies are freely transferable. In the past, we have generally paid
only nominal amounts for international route frequencies obtained in uncontested
auctions. We made no material payments for international routes during 2002.
Air Fare Pricing Policy. Chilean airlines are permitted to establish
their own domestic and international fares without government regulation, as
long as they do not abuse any dominant market position they may enjoy. For more
information, see "--Competition/Antitrust Law" below. Airlines may file
complaints before the Antitrust Commission with respect to monopolistic or other
pricing practices by other airlines that violate Chile's antitrust laws. In
1997, the Antitrust Commission approved and imposed a specific self-regulatory
fare plan for us consistent with the Antitrust Commission's directive to
maintain a competitive environment. According to this plan, we must file notice
with the JAC of any increase or decrease in standard fares on "non-competitive"
routes and any decrease in fares on "competitive" routes at least twenty days in
advance. We must file notice with the JAC of any increase in fares on
"competitive" routes at least ten days in advance. In addition, the Chilean
authorities now require that we justify any modification that we make to our
fares. We must also ensure that our average yields on a non-competitive route
are not higher than those on competitive routes of similar distance. Since the
withdrawal of Avant (a Chilean airline) from the domestic market and as of May
31, 2001, 70% of the routes in which we operate have been classified as
"non-competitive and are thus subject to the requirements described above.
Registration of Aircraft. Aircraft registration in Chile is governed by
the Chilean Aeronautical Code. In order to register or continue to be registered
in Chile, an aircraft must be wholly-owned by either:
o a natural person who is Chilean citizen; or
o a legal entity incorporated in and having its domicile and
principal place of business in Chile and a majority of whose
capital stock is owned by Chilean nationals.
The Aeronautical Code expressly allows the DGAC to permit registration of
aircraft belonging to non-Chilean individuals or entities with a permanent place
of business in Chile. Aircraft owned by non-Chileans, but operated by Chileans
may also be registered in Chile. Registration of any aircraft can be canceled if
it is not in compliance with the requirements for registration and, in
particular, if:
o the ownership requirements are not met; or
o the aircraft does not comply with any applicable safety
requirements specified by the DGAC.
Competition/Antitrust Law. The Chilean antitrust authority, the
Comision Antimonopolio, which is referred to as the Antitrust Commission,
oversees antitrust matters, which are governed by Decree Law No. 211 of 1973, as
amended (the "Antitrust Law"). The Antitrust Law prohibits any entity from
preventing, restricting or distorting competition in any market or any part of
any market. Chilean competition law also prohibits any business or businesses
having a dominant position in any market or any substantial part of any market
from abusing that dominant position. An aggrieved person may sue for damages
arising from a breach of Antitrust Law and/or file a complaint with the
Antitrust Commission requesting an order to enjoin the violation of the
Antitrust Law. The Antitrust Commission has the authority to impose a variety of
sanctions for violations of the Antitrust Law, including termination of
contracts contrary to the Antitrust Law, dissolution of a company and imposition
of fines and daily penalties on businesses. Courts may award damages and other
remedies (such as an injunction) in appropriate circumstances. LanChile and
TASA/LanChile Cargo must comply with Chilean competition law that prohibits a
carrier from abusing a dominant position in the market. As described above under
"--Air Fare Pricing Policy", in October 1997, the Antitrust Commission approved
a specific self-regulatory fare plan for us consistent with the Antitrust
Commission's directive to maintain a competitive environment and, in 2001,
imposed a new obligation on us to justify any modification that we make to our
fares.
At the request of the Antitrust Commission, an investigating attorney
was appointed to review our self-regulatory fare plan that has been in effect
since 1997. The resulting report delivered to us in 2003 by the attorney was
generally favorable as to our fulfillment of our obligations under the
self-regulatory fare plan, and did not find any anticompetitive behavior. The
attorney recommended that we separate our domestic cargo and domestic passenger
businesses, however, this recommendation is neither binding on the Antitrust
Commission nor on us.
Safety. The DGAC requires that all aircraft operated by Chilean
airlines be registered either with the DGAC or with an equivalent supervisory
body in a country other than Chile, so long as that country is a member of the
Warsaw Convention. All aircraft must have a valid certificate of airworthiness
issued by either the DGAC or an equivalent non-Chilean supervisory entity. In
addition, the DGAC will not issue maintenance permits to a Chilean airline until
the DGAC has assessed the airline's maintenance capabilities. The DGAC renews
maintenance permits annually and has approved our maintenance operations. Only
DGAC-certified maintenance facilities or facilities certified by an equivalent
non-Chilean supervisory body in the country where the aircraft is registered may
maintain and repair the aircraft operated by Chilean airlines. Aircraft
maintenance personnel at such facilities must also be certified either by the
DGAC or an equivalent non-Chilean supervisory body before assuming any aircraft
maintenance positions.
Security. The DGAC establishes and supervises the implementation of
security standards and regulations for the Chilean commercial aviation industry.
Such standards and regulations are based on standards developed by international
commercial aviation organizations. Each airline and airport in Chile must submit
an aviation security handbook to the DGAC describing its security procedures for
the day-to-day operations of commercial aviation and procedures for staff
security training. LanChile has submitted its aviation security handbook to the
DGAC. Chilean airlines that operate international routes must also adopt
security measures in accordance with the requirements of applicable bilateral
international agreements.
Chilean Airport Policy. The DGAC supervises and manages airports in
Chile, including the supervision of take-off and landing charges. The DGAC
proposes airport charges, which are approved by the JAC and are the same at all
airports. In the last two years, a number of Chilean airports have been
privatized, including the Santiago International Airport. At the privatized
airports, the airport administration manages the facilities under the
supervision of the DGAC and JAC.
Environmental and Noise Regulation. There are no material environmental
regulations or controls imposed upon airlines or that otherwise affect us in
Chile, except for environmental laws and regulations of general applicability.
There is no noise restriction regulation currently in place in Chile. However,
Chilean authorities are planning to pass a noise-related regulation governing
aircraft that fly to and within Chile. The proposed regulation will require all
such aircraft to comply with certain noise restrictions, referred to in the
market as State 3 standards. The majority of LanChile's fleet already complies
with the proposed restrictions
U.S. Regulation
Flight operations to the United States are governed generally by the
open skies agreement that Chile and the United States signed on October 21,
1999. Operations to the United States are subject to Title 49 of the U.S. Code,
under which the Department of Transportation (the "DOT") and the FAA exercise
regulatory authority. The open skies agreement replaces the previous bilateral
air transport agreement, which placed certain restrictions on the number of
destinations in the United States and on the number of flights that we and other
carriers could operate. Under the new open skies agreement, there are no
restrictions on the number of destinations or flights that either an American or
a Chilean carrier may operate between the two countries.
Authorizations and Licenses. The DOT maintains authority over
international aviation with respect to the United States, subject to review by
the President of the United States, and has jurisdiction over unfair trade
practices and consumer protection policies on domestic and international routes
and fares. We are authorized by the DOT to engage in charter and cargo services,
including the transportation of persons, property and mail, or combinations
thereof, between points in Chile and points in the United States and beyond (via
intermediate points in other countries). We hold the necessary authorizations
from the DOT, in the form of a foreign air carrier permit, exemption authority
and statements of authorization, to conduct our current operations to the United
States. Exemptions and statements of authorization are temporary in nature and
are subject to renewal and therefore there can be no assurance that any
particular exemption or statement of authorization will be renewed.
In the United States, we are subject to the FAA's jurisdiction with
respect to aircraft maintenance and operations, including flight operations,
equipment, aircraft noise, ground facilities, dispatch, communications,
training, weather observation and other matters affecting air safety. The FAA
requires each foreign air carrier to obtain certain operations specifications
that authorize it to operate to particular airports on approved international
routes using specified equipment. We currently hold FAA operations
specifications under Part 129 of the Federal Aviation Regulations. We believe
that we are in compliance in all material respects with all requirements
necessary to maintain in good standing our operations specifications issued by
the FAA. The FAA can amend, suspend, revoke or terminate those specifications,
or can suspend temporarily or revoke permanently our authority if we fail to
comply with the regulations, and can assess civil penalties for such failure. A
modification, suspension or revocation of any of our DOT or FAA authorizations
or operations specifications could have a material adverse effect on our
business.
The FAA also conducts safety audits and has the power to impose fines
and other sanctions for violations of airline safety regulations. We have not
incurred any material fines related to operations.
Noise restrictions. Under the Airport Noise and Capacity Act of 1990
and related FAA regulations, aircraft that fly to the United States must comply
with certain Stage 3 noise restrictions, which are currently the most stringent
FAA noise requirements. All of our aircraft that fly to the United States meet
the Stage 3 requirements. FAA regulations also require compliance with the
Traffic Alert and Collision Avoidance System, approved airborne windshear
warning system and aging aircraft regulations, which requirements our fleet
meet.
Airport slot restrictions. Some airports in the United States are
subject to slot restrictions and allocations administered by the FAA under
federal statutory and FAA regulations. A "slot" is an authorization to take off
or land at a designated airport within a specified time window. In the United
States, the FAA has established restrictions on the number of slots available at
so-called "high density rule" airports such as John F. Kennedy International
Airport ("JFK"), LaGuardia Airport and Washington Reagan National Airport. Of
these airports, we currently operate only to JFK. In the past, we have generally
been successful in obtaining the slots we need to conduct our planned operations
to JFK. However, slots are requested by carriers and allocated by the FAA on a
seasonal basis, and there can be no assurance that we will be able to obtain all
requested slots in the future because, among other factors, government policies
regulating the distribution of slots are subject to change.
Proposed laws and regulations. Additional laws and regulations have
been proposed from time to time that could significantly increase the cost of
airline operations by imposing additional requirements or restrictions on
airline companies. Laws and regulations have been considered from time to time
that would prohibit or restrict the ownership and transfer of airline routes or
slots. There can be no assurance that laws and regulations currently enacted or
enacted in the future will not adversely affect our ability to maintain our
current level of operating results.
Regulatory authorizations in connection with strategic alliances
The alliance between LanChile and American Airlines includes three
major components: a frequent flyer agreement, a reciprocal code-share agreement
and the coordination of pricing, scheduling and other functions. The last two of
these items required the approval of regulatory authorities in both Chile and
the United States. With respect to the code-share agreement, the open skies
agreement between Chile and the United States expressly permits code-sharing
operations by U.S. and Chilean airlines. With regard to the coordination of
pricing and scheduling, LanChile and American Airlines filed a joint application
with the DOT in December 1997, requesting exemption and immunity from the
application of all U.S. antitrust laws pursuant to Title 49 of the U.S. Code.
LanChile and American Airlines received approval from the DOT, and implemented
the code-share agreement in October 1999.
Seasonality
Our operating revenues are substantially dependent on overall domestic
and international passenger and cargo traffic volume, which is subject to
seasonal and other changes in traffic patterns. Our passenger revenues generally
are higher in the first and fourth quarters, during the vacation months of
Chile's spring and summer, than in the second and third quarters. Our cargo
revenues generally are higher in the third and fourth quarters, which correspond
to the harvest season in the southern hemisphere.
Maintenance and Safety
Maintenance
Our heavy maintenance, line maintenance and component shop capabilities
are among the most extensive in Latin America and are certified as an
FAA-approved repair station. In 2001, we signed an exclusive power-by-the-hour
maintenance contract with Lufthansa Technik for our Airbus A320 and A340
component support, and in the same year we signed a similar contract with
General Electric for the maintenance of our A340 engines. We have full line
maintenance and heavy maintenance capabilities for our Boeing 737-200 and
767-300 aircraft, and in 2001, we performed our first heavy maintenance overhaul
revisions, or "C-Checks," on our Airbus A320 and A340 aircraft. Our maintenance
capabilities allow us flexibility in scheduling maintenance for our aircraft,
freeing us from the need to use third-party maintenance facilities where
availability might to limited. We also perform certain maintenance services for
other airlines. Our aircraft maintenance base is at the Arturo Merino Benitez
International Airport in Santiago, Chile. As of December 31, 2002, we employed
approximately 3,032 maintenance and engineering personnel. Our aircraft
maintenance personnel participate in extensive training programs at the
jointly-operated Lufthansa LanChile Technical Training S.A. For more
information, see "Directors, Senior Management and Employees--Employees" under
Item 6.
The hangar at our Santiago repair station can service two narrow-body
and one wide-body aircraft simultaneously. The division also has maintenance
workshops for repairing avionics, hydraulics and pneumatics components. In
addition, we have facilities for designing and manufacturing galleys, structures
and composite materials, and we have the capability to retrofit aircraft
interiors, including sophisticated in-flight entertainment equipment. Our
maintenance personnel were initially trained at the Airbus facilities in
Toulouse, France, and receive additional training in our in-house training
school, which is also a joint venture with Lufthansa Technik. Our Maintenance
and Engineering Division purchased a new maintenance management information
system from Unisys in September 2000. We further expanded this system in 2001 to
include bar-coding, electronic documentation and general purchasing.
During 2002, our Maintenance and Engineering Division received ten
external audits, which included routine FAA Repair Station audits and audits by
foreign regulatory agencies necessary in order for us to increase our
maintenance repair authority for foreign registered aircraft. All audits were
satisfactory. In 2001, the FAA granted our line maintenance organization an FAA
Repair Station Certificate as well.
Safety
We place a high priority on providing safe and reliable air service. We
have uniform safety standards and safety-related training programs that cover
all of our operations. In particular, we periodically evaluate the skills,
experience and safety records of our pilots in order to maintain strict control
over the quality of our pilot crews. All of our passenger aircraft pilots
participate in training programs, some of which are sponsored by aircraft
manufacturers, and all are required to undergo recurrent training. For more
information, see "Directors, Senior Management and Employees--Employees" under
Item 6.
Since 1991, we have had no accidents involving major injury to
passengers, crew or aircraft, or resulting from lapses in security controls.
Fuel Supplies
The availability and cost of jet fuel have a significant impact on our
results of operations. Fuel costs represented approximately 17.2%, 16.1% and
14.8% of our operating expenses in 2000, 2001 and 2002, respectively. Since
January 1, 2002, we have purchased a substantial portion of the fuel for our
domestic flights and a portion of the fuel for our international flights through
one-year renewable contracts with Exxon Mobil Aviation and Shell Chile S.A.C.I.
We renewed both contracts on January 1, 2003. We purchase a portion of the fuel
for our international flights from foreign fuel suppliers located at the
destinations of those flights, generally at international market prices. Over
the last few years, our fuel consumption and expenses have increased primarily
as a result of increases in kilometers flown. However, in 2002, fuel costs
decreased 7.6% due to a 7.8% decrease in average fuel prices for the year, which
was slightly offset by a 0.2% increase in consumption due to our increased
operations. Our fuel costs are influenced by economic and political factors and
events occurring throughout the world that we can neither control, nor
accurately predict, however, we offset our risks, in part, through our jet fuel
hedging program. For more information, see "Quantitative and Qualitative
Disclosures About Market Risk--Risk of Fluctuation in Jet Fuel Prices" under
Item 11.
The following table details our consolidated fuel consumption and costs
(which exclude fuel costs related to charter operations in which fuel expenses
are covered by the entity that charters the flight), after giving effect to our
fuel hedging activities, for the periods indicated.
Year ended December 31,
-----------------------------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Fuel consumption
(thousands of gallons)......... 203,313.2 217,363.6 224,960.3 244,891.6 245,456.5
Available ton kilometers
(ATKs) (millions)(1)........... 3,055.2 3,854.1 4,126.8 4,237.1 4,281.8
Fuel consumption per ATK
(thousands of
gallons)(1).................... 0.07 0.06 0.05 0.06 0.06
Total fuel costs
(US$ thousands)................ US$118,167 US$144,464 US$232,612 US$222,402 US$205,524
Cost per gallon (US$)(2).......... US$0.58 US$0.66 US$1.03 US$0.91 US$0.84
Total fuel costs as a
percentage of total
operating costs................ 11.4% 12.2% 17.2% 16.1% 14.8%
- -------------------
(1) Available ton kilometers or "ATKs" are the number of tons of capacity
available for the transportation of passengers and/or cargo multiplied by
the kilometers flown.
(2) Average price paid per gallon on fuel.
Ground Facilities and Services
Our operations are centered at the Arturo Merino BenitezBenítez International Airport in Santiago, Chile is among the most extensive in Latin America and has been certified as an FAA-approved repair station. The hangar at our Santiago repair station can service two narrow-body and one wide-body aircraft simultaneously, and contains maintenance workshops for repairing avionics, hydraulics and pneumatics components. In addition, we have facilities for designing and manufacturing galleys, structures and composite materials, and we have the capability to retrofit aircraft interiors, including sophisticated in-flight entertainment equipment.
During 2003, our engineering and maintenance division received more than ten external audits from the DGAC and from foreign air authorities such as the FAA, the Argentine DNA, Bermuda’s BDCA and the Brazilian DAC. The audits were conducted in connection with each country’s certification processes and enable us to continue to perform maintenance for aircraft registered in the certificating jurisdictions. Also in 2003, our engineering and maintenance division received ISO 9001-2000 certification and applied for certification under the EASA Part-145 standard (new JAA JAR-145).
We also rely on third parties for certain maintenance of our aircraft and engines. Lufthansa Technik provides our Airbus A320 family and A340 component support on a power-by-the-hour basis under a long term contract, which runs until 2013. The maintenance of our Airbus A340 engines is provided by General Electric under a similar contract which runs until 2013. Substantially all of our other engine maintenance is also provided by third parties.
We occasionally perform certain maintenance services for other airlines. Our aircraft maintenance personnel participate in extensive training programs at the jointly-operated Lufthansa LanChile Technical Training S.A.
Safety
We place a high priority on providing safe and reliable air service. We have uniform safety standards and safety-related training programs that cover all of our operations. In particular, we periodically evaluate the skills, experience and safety records of our pilots in order to maintain strict control over the quality of our pilot crews. All of our passenger aircraft pilots participate in training programs, some of which are sponsored by aircraft manufacturers, and all are required to undergo recurrent training. For more information, see “Directors, Senior Management and Employees—Employees” under Item 6.
Since 1991, we have had no accidents involving major injury to passengers, crew or aircraft.
Fuel Supplies
The availability and cost of jet fuel have a significant impact on our results of operations. Fuel costs represented approximately 16.1%, 14.8% and 17.0% of our operating expenses in 2001, 2002 and 2003, respectively. In 2003, we purchased a substantial portion of the fuel for our domestic flights and a portion of the fuel for our international flights through one-year renewable contracts with Exxon Mobil Aviation and Shell Chile S.A.C.I. We are currently renegotiating these contracts. We are also currently negotiating a contract with Air BP-COPEC in Chile. We also purchase a portion of the fuel for our international flights from foreign fuel suppliers located at the destinations of those flights, at international market prices. In Peru, we purchase our fuel from Repsol YPF and Exxon Mobil. In Ecuador, we purchase our fuel from Repsol YPF. In the United States, we purchase our fuel from Shell, Air BP and Glencore.
Over the last few years, our fuel consumption and expenses have increased primarily as a result of increases in our operations. Fuel efficiency (measured as fuel consumption per ATK) has improved in recent years due to the utilization of newer aircraft. As a result, fuel consumption per ATK declined approximately 0.5% between 2001 and 2003. Fuel prices are influenced by economic and political factors and events occurring throughout the world, and this has led to significant volatility. In 2003, fuel costs increased 26.3% due to a 20.6% increase in average fuel prices for the year and 4.7% increase in consumption. We can neither control nor accurately predict fuel prices; however, we offset our price variation risk, in part, through our jet fuel hedging program and the application of a cargo fuel surcharge. For more information, see “Quantitative and Qualitative Disclosures About Market Risk––Risk of Fluctuation in Jet Fuel Prices” under Item 11.
The following table details our consolidated fuel consumption and operating costs (which exclude fuel costs related to charter operations in which fuel expenses are covered by the entity that charters the flight).
| Year ended December 31, | ||||||||||||||||||||
| 1999 | 2000 | 2001 | 2002 | 2003 | ||||||||||||||||
Fuel consumption (thousands of gallons) | 217,363.6 | 224,960.3 | 244,891.6 | 245,456.5 | 261,147.2 | |||||||||||||||
ATKs (millions) | 3,854.1 | 4,119.7 | 4,212.5 | 4,281.8 | 4,539.2 | |||||||||||||||
Fuel consumption per ATK (thousands of gallons) | 0.06 | 0.05 | 0.06 | 0.06 | 0.06 | |||||||||||||||
Total fuel costs (US$ thousands) | US$ | 144,464 | US$ | 232,612 | US$ | 222,402 | US$ | 205,524 | US$ | 259,566 | ||||||||||
Cost per gallon (US$)(1) | US$ | 0.66 | US$ | 1.03 | US$ | 0.91 | US$ | 0.84 | US$ | 0.99 | ||||||||||
Total fuel costs as a percentage of total operating costs | 12.2 | % | 17.2 | % | 16.1 | % | 14.8 | % | 17.0 | % | ||||||||||
| (1) | Average price paid per gallon on fuel. |
Ground Facilities and Services
Even though our main operations are based at the Arturo Merino Benítez International Airport in Santiago, Chile, we also operate from various other airports within Chile.the country. We operate hangars, aircraft parking and other airport service facilities at the SantiagoArturo Merino Benítez International Airport and other airports throughout Chile pursuant to concessions granted by the DGAC. We also maintain two customs warehouses at the SantiagoArturo Merino Benítez International Airport, additional customs warehouses in other Chilean cities (Iquique and Punta Arenas) and operate cargo warehouses at the Miami International Airport to service our cargo customers. During 2001, we opened our newOur facilities at Miami International Airport. These facilitiesAirport, which were inaugurated in 2001, include corporate offices for our cargo and passenger operations and temperature-controlled and freezer space for imports and exports.
We provide all of our own ground services and handling of passengers and cargo at the SantiagoArturo Merino Benítez International Airport and all of the other Chilean airports we service. In addition, we provide services to most of the principal foreign airlines that operate at the SantiagoArturo Merino Benítez International Airport. At most of the other airports where we operate abroad, foreign airport services companies provide the ground services for our flights. However, since January 2004, we own two ground handling companies (for passenger and cargo services) in Ecuador, which provides us with all of our needs in Quito and Guayaquil. This new venture should bring us significant savings and will allow us to market services to third party clients.
During 2001, we opened of our new VIP lounge at the SantiagoArturo Merino Benítez International Airport. The new 7,500 square foot lounge represented an investment of US$600,000. The lounge has already been widely acclaimed, and was ranked as one of the top ten VIP lounges in the world byForbesmagazine in 2002.2002 and in 2003,Latin Trade magazine selected it as the “Best Airline Lounge” in Latin America. In addition, in 2001, we improved other personnel facilities at the SantiagoArturo Merino Benítez International Airport, constructing 20,000 square feet of new office space.
In-flight
In Santiago, in-flight meals and other catering services for our flights are provided primarilyprepared by ourselves and assembled by La Marmite Productos Alimenticios S.A. pursuant to a three-year contract that expires in 2005. This contract also includes one-year renewal provisions. We generally have arranged contracts with local catering companies for flights originating from airports outside of Chile. In the United States, Gate Gourmet, Inc. provides the catering services for our flights originating from the United
States.
In addition,Los Angeles and New York and Sky Chefs for our operations in Miami. Eurest is our catering supplier in Madrid, Gate Gourmet, Inc. provides our catering in Peru and Ecuador, and Sky Chefs services our operations in Australia.
Finally, we incur certain airport usage fees and other charges for services performed by the various airports where we operate, such as air traffic control charges, take-off and landing fees, aircraft parking fees and fees payable in connection with the use of passenger waiting rooms and check-in counter space.
Ancillary Airline Activities
In addition to our airline operations, we generate revenues from a variety of other services. In 2002, our2003, LanChile generated other revenues for US$118.4 million.
Our total revenue from aircraft leases (including subleases to certain of our cargo affiliates, dry-leases, wet-leases and capacity sales to alliance partners) and charter flights, amounted to US$49.9 million. During 2002, we also started consolidating the revenues of
LanLogistics into our financial information. During 2002, LanLogistics generated
revenues of approximately US$27.9 million. In 2002, LanCourier, our domestic
package delivery operation, generated revenues of approximately US$11.439.2 million our storage and customs brokerage operations generated revenues of approximately
US$8.9 million, our ground service operations generated revenues of
approximately US$8.7 million and our duty-free in-flight sales generated
revenues of approximately US$8.2 million.in 2003. In addition, in 2002,2003, our aircraft maintenance services for third parties generated revenues of approximately US$5.38.8 million, while our security business generated revenues of approximately US$2.8 million.
LanChile also provides cargo-related services such as courier, warehousing, fulfillment and customs services, through various subsidiaries. Through our subsidiary LanCourier we operate a fleet of approximately 160 vans and trucks and offer distribution and warehouse services throughout Chile. By using tracking and Internet technology, LanCourier customers have real-time access to data regarding the status of their parcels. LanCourier began operating new facilities in January 2001. These new facilities include a modern distribution center that provides us with the technological tools to provide door-to-door express service to our clients in Chile. In April 2000, to capitalize on the strength of our airport-to-airport network, we formed LanLogistics, a LanChile Cargo subsidiary dedicated to the development of higher-value door-to-door express cargo products and services between Latin America and the United States. LanLogistics operates through different subsidiaries and brands, such as LanBox and SkyBox for the Internet-based fulfillment services and as SkyNet for the international courier services. During 2003, LanLogistics generated revenues of approximately US$12.1 million, LanCourier generated revenues of approximately US$15.3 million, and our storage and customs brokerage operations generated revenues of approximately US$10.1 million.
During 2003, we also had revenues of US$10.8 million for ground services, US$10.8 million for duty-free in-flight sales, while our Amadeus Chile CRS (computer reservation system) service distribution generated revenues from sales to third parties of approximately US$2.2 million and our
security business generated revenues of approximately US$2.22.3 million. Finally, in 20022003 we generated revenues of approximately US$3.26.2 million from other activities.
Insurance
We carry hull insurance that includes, among other coverage, "all
risk"“all risk”, war and allied risks, spares and liability for passengers, cargo, mail, baggage and third parties. Additionally, we renew our insurance coverage on a
year-to-year basis,yearly, and are subject to deductibles that vary depending on the type of coverage and the type of aircraft. Deductibles can beOur deductibles vary depending on the type of loss, and are approximately US$1,250 for loss or damage associated with passenger baggage liabilities, US$10,000 for loss or damage associated with cargo liabilities and US$1.0 million for hull "all risk"“all risk” insurance for Boeing 767 and Airbus A340 aircraft.
Our insurance coverage has a one-year term ending in November of each year. The aggregate cost of our insurance coverage for the period from November 17,
20012003 calendar year was US$19.7 million, which represents a 9.0% decrease in insurance expenses compared to November 16,the 2002 was over US$22 million, while the estimated aggregate
cost of insurance for the one-year period beginning on November 17, 2002 is
approximately US$17.4 million.calendar year. This decrease of US$4.6 million (-20.9%) relates
mainlywas primarily due to a market reduction in market premiums relative to those charged following the September 11, 2001 terrorist attacks in the United States.
Information Technology
IT systems are vital to our company.
We use information technology in virtually every aspect of our business.
Our IT department, which has developed some of the systems that we use,
has integrated all of our IT systems.
With the exception of our reservations, departure control (check-in), inventory, flight planning and baggage tracing systems, which are operated by Amadeus, Iberia and SITA, we operate our systems from two data center facilities in Santiago.
Third party suppliers provide us with the following technical infrastructure elements:
o
Basic Infrastructure Operation
During 2002,
Since early 2003, we solicited bids for the outsourcing ofhave outsourced our basic IT infrastructure whichmanagement to EDS. This service includes the administration and support of the data processing centers and desktop equipment. We
selected EDS to provide these services. EDS'sEDS’s assistance has enabled us to:
o
Telecommunications
During
Since 2002, we initiated a programhave used the latest technology available with regard to our increase efficiency by
upgrading our global telecommunications network with the latest technology
available.network. We have redesigned our network by combining traditional private datedata channels with virtual private networks through the Internet. The program also involves voice transmission through data-channels. This initiative has enabled us to reduce our communications expenses significantly.
Front End Systems
During 2002, we deployed new systems to support our sales personnel. These systems provide the employees who deal directly with our customers with additional tools to improve service, enhance customer information and increase efficiency. During 2003, we planbegan to implement these systems inat our airportsairport counters and in our call centers.
Enterprise Resource Planning
During the second half of 2002, we purchased an enterprise resource planning system from the software company SAP. ThisOnce fully implemented, this new system shouldwill increase the efficiency of our back-office operations. The first stage of thisThis program will cover departmentscovers areas such as finance, accounting, human resources, purchasing and management information systems. The SAP system was successfully implemented in most of our smaller and midsize subsidiaries in 2003. In April 2004, we began the final stage of implementing this new system in all of our remaining subsidiaries. We expect to complete the implementation phase by the third quarter of 2004.
Regulation
Chilean Aeronautical Regulation
Both the DGAC and the JAC oversee and regulate the Chilean aviation industry. The DGAC reports directly to last 24
months.
Credit Card Receivables Securitizationthe Chilean Air Force and Other Mattersis responsible for supervising compliance with Chilean laws and regulations relating to air navigation. The JAC is the Chilean civil aviation authority. Primarily on the basis of Decree Law No. 2,564, which regulates commercial aviation, the JAC regulates the assignment of domestic and international routes, and the DGAC regulates flying operations, including personnel, aircraft and security standards, air traffic control and airport management. We have raisedobtained and maintain the necessary authority from the Chilean government to conduct flight operations, including authorization certificates from the JAC and technical operative certificates from the DGAC, the continuation of which is subject to the ongoing compliance with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future.
Chile is a totalcontracting state, as well as a permanent member, of US$100 million through two similar
transactions involving the private placementInternational Civil Aviation Organization, or the ICAO, an agency of certificates backedthe United Nations established in 1947 to assist in the planning and development of international air transport. The ICAO establishes technical standards for the international aviation
industry, which Chilean authorities have incorporated into Chilean laws and regulations. In the absence of an applicable Chilean regulation concerning safety or maintenance, the DGAC has incorporated by our
credit card receivables. In these transactions,reference the majority of the ICAO’s technical standards. We believe that we sold ourare in material compliance with all the relevant technical standards.
Route Rights
Domestic Routes. Chilean airlines are not required to obtain permits in connection with carrying passengers or cargo on any domestic routes. Non-Chilean airlines are permitted to provide domestic air service between destinations in Chile, provided that the country in which the foreign airline is based grants a reciprocal right to receiveChilean airlines. There are no regulatory barriers, however, that would prevent a foreign airline from creating a Chilean subsidiary and entering the Chilean domestic market using that subsidiary.
International Routes. As an airline providing services on international routes, LanChile is also subject to a variety of bilateral civil air transport agreements that provide for the exchange of air traffic rights between Chile and various other countries. There can be no assurance that existing bilateral agreements between Chile and foreign governments will continue, and a modification, suspension or revocation of one or more bilateral treaties could have a material adverse effect on our operations and financial results.
International route rights, as well as the corresponding landing rights, are derived from a variety of air transport agreements negotiated between Chile and foreign governments. Under such agreements, the government of one country grants another government the right to designate one or more of its domestic airlines to operate scheduled services between certain presentdestinations in that country. In Chile, when additional route frequencies to and future from foreign cities become available, any eligible airline may apply to obtain them. If there is more than one applicant for a route frequency the JAC awards it through a public auction. The JAC grants route frequencies subject to the condition that recipient airline operate them on a permanent basis. If an airline fails to operate a route for a period of six months or more, the JAC may terminate its rights to that route. International route frequencies are freely transferable. In the past, we have generally paid only nominal amounts for international route frequencies obtained in uncontested auctions. We made no material payments for international routes during 2003.
Air Fare Pricing Policy. Chilean airlines are permitted to establish their own domestic and international fares without government regulation, as long as they do not abuse any dominant market position they may enjoy. For more information, see “—Antitrust Regulation” below. Airlines may file complaints before the Antitrust Commission with respect to monopolistic or other pricing practices by other airlines that violate Chile’s antitrust laws. In 1997, the Antitrust Commission approved and imposed a specific self-regulatory fare plan for our domestic operations consistent with the Antitrust Commission’s directive to maintain a competitive environment. According to this plan, we must file notice with the JAC of any increase or decrease in standard fares on “non-competitive” routes and any decrease in fares on “competitive” routes at least twenty days in advance. We must file notice with the JAC of any increase in fares on “competitive” routes at least ten days in advance. In addition, the Chilean authorities now require that we justify any modification that we make to our fares. We must also ensure that our average yields on a non-competitive route are not higher than those on competitive routes of similar distance. As of January 31, 2004, 36% of the domestic routes that we operate had been classified as “non-competitive” and were subject to the requirements described above.
Registration of Aircraft. Aircraft registration in Chile is governed by the Chilean Aeronautical Code. In order to register or continue to be registered in Chile, an aircraft must be wholly-owned by either:
The Aeronautical Code expressly allows the DGAC to permit registration of aircraft belonging to non-Chilean individuals or entities with a permanent place of business in Chile. Aircraft owned by non-Chileans, but operated by Chileans or by an airline which is affiliated with a Chilean aviation entity, may also be registered in Chile. Registration of any aircraft can be cancelled if it is not in compliance with the requirements for registration and, in particular, if:
Safety. The DGAC requires that all aircraft operated by Chilean airlines be registered either with the DGAC or with an equivalent supervisory body in a country other than Chile, so long as that country is a member of the Warsaw Convention. All aircraft must have a valid certificate of airworthiness issued by either the DGAC or an equivalent non-Chilean supervisory entity. In addition, the DGAC will not issue maintenance permits to a Chilean airline until the DGAC has assessed the airline’s maintenance capabilities. The DGAC renews maintenance permits annually, and has approved our maintenance operations. Only DGAC-certified maintenance facilities or facilities certified by an equivalent non-Chilean supervisory body in the country where the aircraft is registered may maintain and repair the aircraft operated by Chilean airlines. Aircraft maintenance personnel at such facilities must also be certified either by the DGAC or an equivalent non-Chilean supervisory body before assuming any aircraft maintenance positions.
Security. The DGAC establishes and supervises the implementation of security standards and regulations for the Chilean commercial aviation industry. Such standards and regulations are based on standards developed by international commercial aviation organizations. Each airline and airport in Chile must submit an aviation security handbook to the DGAC describing its security procedures for the day-to-day operations of commercial aviation and procedures for staff security training. LanChile has submitted its aviation security handbook to the DGAC. Chilean airlines that operate international routes must also adopt security measures in accordance with the requirements of applicable bilateral international agreements.
Chilean Airport Policy. The DGAC supervises and manages airports in Chile, including the supervision of take-off and landing charges. The DGAC proposes airport charges, which are approved by the JAC and are the same at all airports. Since the mid-90s, a number of Chilean airports have been privatized, including the Arturo Merino Benítez International Airport. At the privatized airports, the airport administration manages the facilities under the supervision of the DGAC and JAC.
Environmental and Noise Regulation. There are no material environmental regulations or controls imposed upon airlines, applicable to aircraft, or that otherwise affect us in Chile, except for environmental laws and regulations of general applicability. There is no noise restrictionregulation currently applicable to aircraft in Chile. However, Chilean authorities are planning to pass a noise-related regulation governing aircraft that fly to and within Chile. The proposed regulation will require all such aircraft to comply with certain noise restrictions, referred to in the market as Stage 3 standards. The majority of LanChile’s fleet already complies with the proposed restrictions.
Regional Aeronautical Regulation (Brazil, the Dominican Republic, Ecuador, Mexico and Peru)
Our subsidiaries operate throughout the Latin American region under the routes granted by the relevant authorities in each jurisdiction where they are based.
International Routes.Under the Brazilian, Dominican, Ecuadorian, Mexican and Peruvian laws, international route rights, as well as the corresponding landing rights, are derived from air transport agreements negotiated between the relevant home jurisdiction and foreign governments.
Domestic Routes. Under Brazilian, Dominican Republic and Mexican regulations, domestic airlines are not required to obtain permits in connection with carrying passengers or cargo on any domestic routes. However, Peruvian law provides that a domestic airline must request the consent of the air authority to fly a determined domestic route, and Ecuadorian law requires the airline to obtain a specific concession to fly domestically.
U.S. dollar payment obligations,Aeronautical Regulation
General. Flight operations between Chile and the United States by airlines licensed by either country are governed generally by the open skies air transport agreement that Chile and the United States signed in October 1997. Under the open skies agreement, there are no restrictions on the number of destinations or flights that either a U.S. or a Chilean airline may operate between the two countries or on the number of U.S. and Chilean airlines that may operate. Operations to the United States by non-U.S. airlines, such as LanChile, are subject to Title 49 of the U.S. Code, under which the DOT and the FAA exercise regulatory authority. The U.S. Department of Justice also has jurisdiction over airline competition matters under the federal antitrust laws.
Authorizations and Licenses. The DOT has jurisdiction over international aviation with respect to the United States and related route authorities, subject to review by the President of the United States. The DOT also has jurisdiction with respect to unfair practices and methods of competition by airlines and related consumer protection matters. LanChile is authorized by the DOT to engage in scheduled and charter air transportation services, including the transportation of persons, property (cargo) and mail, or combinations thereof, between points in Chile and points in the United States and beyond (via intermediate points in other countries). We hold the necessary authorizations from the DOT in the form of a foreign air carrier permit, an exemption authority and statements of authorization to conduct our current operations to and from the United States. Exemptions and statements of authorization are temporary in nature and are subject to renewal and therefore there can be no assurance that any particular exemption or statement of authorization will be renewed. Our foreign air carrier permit has no expiration date, while our exemption authority (which includes the open skies traffic rights) will need to be renewed on November 26, 2005. We plan to amend our foreign air carrier permit prior to this date to include the open skies rights, however, which would eliminate our need to renew the exemption authority.
In the United States, we are subject to the FAA’s regulation with respect to safety matters, including aircraft maintenance and operations, equipment, aircraft noise, ground facilities, dispatch, communications, personnel, training, weather observation and other matters affecting air safety. The FAA requires each foreign air carrier to obtain certain operations specifications that authorize it to operate to particular airports on approved international routes using specified equipment. LanChile currently holds FAA operations specifications under Part 129 of the Federal Aviation Regulations. We believe that we are in compliance in all material respects with all requirements necessary to maintain in good standing our operations specifications issued by the FAA. The FAA can amend, suspend, revoke or terminate those specifications, or can suspend temporarily or revoke permanently our authority if we fail to comply with the regulations, and can assess civil penalties for such failure. A modification, suspension or revocation of any of our DOT authorizations or FAA operations specifications could have a material adverse effect on our business.
The FAA also conducts safety audits and has the power to impose fines and other sanctions for violations of airline safety regulations. We have not incurred any material fines related to operations.
Security. On November 19, 2001, Congress passed, and the President signed into law, the Aviation and Transportation Security Act, also referred to as future credit card receivables, arising from the purchaseAviation Security Act. This law federalized substantially all aspects of civil aviation security and created the Transportation Security Administration, or TSA, which took over security responsibilities previously held by the FAA. The TSA is an agency of the Department of Homeland Security. The Aviation Security Act requires, among other things, the implementation of certain security measures by airlines and airports, such as the requirement that all passenger ticketsbags be screened for explosives. Funding for airline and airport security required under the Aviation Security Act is provided in part by a US$2.50 per segment passenger security fee, subject to a US$10 per roundtrip cap; however, airlines are responsible for costs in excess of this fee, which through the year 2004 cannot exceed an airline’s security screening expense level in 2000. Implementation of the requirements of the Aviation Security Act has resulted in increased costs for airlines and their passengers. Since the events of September 11, 2001, Congress has mandated and the TSA has implemented numerous security procedures and requirements that have imposed and will continue to impose burdens on airlines, passengers and shippers.
Noise Restrictions. Under the Airport Noise and Capacity Act of 1990, or ANCA, and related services through American Express, Diner's Club, Discover, VisaFAA regulations, aircraft that fly to the United States must comply with certain Stage 3 noise restrictions, which are currently the most stringent FAA noise requirements. All of our aircraft that fly to the United States meet the Stage 3 requirements.
Under the direction of the ICAO, governments are considering the creation of a new and MasterCard to Pelican Finance Ltd.more stringent noise standard than that contained in the ANCA. The ICAO adopted new noise standards in 2001 that established more stringent noise requirements for aircraft manufactured after January 1, 2006. In the first transaction, completedU.S., legislation known as the “Vision 100 – Century of Aviation Reauthorization Act”, which was signed into law in December 2003, requires the FAA, by April 1, 2005, to issue regulations implementing Stage 4 noise standards consistent with recommendations adopted by the ICAO. In December 2003, the FAA issued a proposed rule that would implement such standards.
FAA regulations also require compliance with the Traffic Alert and Collision Avoidance System, approved airborne windshear warning system and aging aircraft regulations. Our fleet meets these requirements.
Airport Slot Restrictions. Four U.S. airports - Chicago O’Hare, LaGuardia (New York), John F. Kennedy International (New York) and Reagan National (Washington, D.C.) - have been designated by the FAA as “high density traffic airports”. Operations at these airports are or have been subject to slot restrictions during certain periods of the day. A “slot” is an authorization to take off or land at a designated airport within a specified time window. Legislation passed in March 1999,2000 resulted in the elimination of slot restrictions at Chicago O’Hare on July 1, 2002 and at LaGuardia and Kennedy International on January 1, 2007. Of these airports, LanChile currently operates only to JFK. In the past, we sold US$40 millionhave generally been successful in obtaining the slots we need to conduct our planned operations at JFK. However, slots are requested by carriers and allocated by the FAA on a seasonal basis, and there can be no assurance that we will be able to obtain all requested slots in the future because, among other factors, government policies regulating the distribution of ourslots are subject to change.
Proposed Laws and Regulations. Additional U.S. laws and regulations have been proposed from time to time that could significantly increase the cost of airline operations by imposing additional requirements or restrictions on airline companies. Laws and regulations have been considered from time to time that would prohibit or restrict the ownership and transfer of airline routes or slots. There can be no assurance that laws and regulations currently enacted or enacted in the future credit card receivables to Pelican
which then issued notes to a United States trust, backed by payments received on
these payment obligations, which in turn issued trust certificates, backed by
payments received on the notes, to investors. In August 2002, we entered into a
similar sale of future credit card receivables to Pelican for an additional
US$40 million. Our sale of these payment obligations authorizes Pelican to
collect payments on them until the earlier of the date the notes issued by
Pelican are fully redeemed and March 2006 for the first transaction, and August
2009 for the second.
On February 27, 2003, Fitch Ratings affirmed LanChile's "Investment
Grade" credit rating by assigning LanChile a "BBB-" rating. Fitch's rating is
based on our strong position in our cargo and passenger routes,will not adversely affect our ability to manage aircraft capacitymaintain our current level of operating results.
Regulatory Authorizations in Connection with Strategic Alliances
The alliance between LanChile and American Airlines includes three major components: a frequent flyer agreement, a reciprocal code-share agreement and the coordination of pricing, scheduling and other functions. The last two of these items required the approval of regulatory authorities in both Chile and the United States. With respect to the code-share agreement, the open skies agreement between Chile and the United States expressly permits code-sharing operations by U.S. and Chilean airlines. With regard to the coordination of pricing and scheduling, LanChile and American Airlines filed a joint application with the DOT in December 1997, requesting approval of their alliance agreement and immunity from the application of all U.S. antitrust laws pursuant to Title 49 of the U.S. Code. LanChile and American Airlines received approval and antitrust immunity from the DOT in September 1999, and implemented the code-share agreement in October 1999. In accordance with the terms of the DOT’s 1999 approval, LanChile and American Airlines were required to resubmit their alliance agreement to the DOT for review within three years after the DOT’s grant of approval. LanChile and American Airlines resubmitted the agreement in September 2002 and did not receive any comments from the DOT. The approval and antitrust immunity remain in effect, and there is no further obligation to submit the agreement to the DOT for review.
Antitrust Regulation
The Chilean antitrust authority, which we refer to as the Antitrust Commission, oversees antitrust matters, which are governed by Decree Law No. 211 of 1973, as amended, or the Antitrust Law. The Antitrust Law prohibits any entity from preventing, restricting or distorting competition in any market or any part of any market. Chilean competition law also prohibits any business or businesses that have a dominant position in any market or a substantial part of any market from abusing that dominant position. An aggrieved person may sue for damages arising from a breach of Antitrust Law and/or file a complaint with the Antitrust Commission requesting an order to
enjoin the violation of the Antitrust Law. The Antitrust Commission has the authority to impose a variety of sanctions for violations of the Antitrust Law, including termination of contracts contrary to the Antitrust Law, dissolution of a company and imposition of fines and daily penalties on businesses. Courts may award damages and other remedies (such as an injunction) in appropriate circumstances. LanChile, TASA and LanChile Cargo must comply with Chilean competition law that prohibits a carrier from abusing a dominant position in the market. As described above under “—Route Rights—Air Fare Pricing Policy”, in October 1997, the Antitrust Commission approved a specific self-regulatory fare plan for us consistent with the Antitrust Commission’s directive to maintain a competitive environment within the domestic market and, in 2001, imposed a new obligation on us to justify any modification that we make to our financial profile.
Property, Plantsfares.
At the request of the Antitrust Commission, an investigating attorney was appointed to review our self-regulatory fare plan that has been in effect since 1997. The resulting report delivered to us in 2003 by the attorney was generally favorable as to our fulfillment of our obligations under the self-regulatory fare plan, and Equipment
We owndid not find any anticompetitive behavior. While the attorney recommended that we separate our domestic cargo and domestic passenger businesses, this recommendation is neither binding on the Antitrust Commission nor on us.
On January 30, 2004, the Antitrust Commission imposed a fine of 500Unidades Tributarias Mensuales (equal to approximately US$25,000) on each of LanChile and LanExpress for minor breaches of the self-regulatory fare plan to which they are subject. The Company had argued that such breaches were mainly caused by the impossibility to maintain the fare plan under any circumstances and, as a result, the Antitrust Commission also provided that LanChile must present amendments to the self-regulatory fare plan within 90 days from the official communication of the abovementioned final resolution.
Property
Headquarters
Since 1998, our corporate headquarters have been located on approximately five acres of land we own near the SantiagoArturo Merino Benítez International Airport. The complex includes approximately 150,695 square feet of office space (containing modern offices for LanChile and LanChile Cargo personnel), 32,292 square feet of conference space and training facilities and 9,688 square feet of dining facilities. We have
occupied these headquarters,During the first quarter of 2004, we adapted part of this building to meet our expanding training needs, which include rooms for technical instruction, in-flight and airport services.
During the fourth quarter of 2003, we constructed at a total cost of US$20.1
million, since 1998. We are currently movingmoved some of our executive offices tointo a new building in a more central location in Santiago.Santiago, where we occupy a total of four floors. We have already spent approximately US$1.3
million and anticipate spendingare currently evaluating the possibility of acquiring additional space in total approximately US$6.5 million. We
estimate that we will complete the project in September 2003, and planthis building to continue financing the project internally.
support our future growth.
Maintenance Base
Our 877,258-square foot maintenance base is located on landa site that we own inside the grounds of the SantiagoArturo Merino Benítez International Airport. This facility contains our aircraft hangar, warehouses, workshops and offices, as well as a 559,723 square foot aircraft parking area capable of accommodating 17 Boeing 737 aircraft. We also have a five-floor,five floor, 53,820 square foot office building on this
property. During 1999, we added an additionalplus a 10,000 square feet offoot office and workshop spacespace. This facility is certified by the FAA and, as such, we are permitted to thisperform maintenance work for third parties at the facility. The FAA periodically inspects the facility to ensure its compliance with FAA standards. In 2004, we expect to make a US$1 million investment to modernize and improve the actual infrastructure. We also utilizelease from the DGAC 193,750 square feet of space inside the SantiagoArturo Merino Benítez International Airport for operational and service purposes
underpurposes.
Miami Facilities
We occupy a lease from the DGAC that expires in 2013.
Through a joint venture with Lufthansa Flight Training, we use 16 acres
of land on the west side of the Santiago International Airport for our flight
training center. The36.3 acre site which we acquired in October 1997, contains a Boeing
737-200 full flight simulator manufactured by Thomson Training and Simulation.
In 1999, we signed an agreement withat the Miami International Airport forthat has been leased to us by the airport under a 36.3 acre concession of land, one of the last land concessions available
at that airport. Airis,agreement. Our facilities include a North American developer, constructed aUS$65 million, 48,000 square foot corporate building, a 378,000 square foot cargo warehouse and a 783,000 square foot platform for aircraft parking on the site. These new facilities
represented an investment of approximately US$65 million,site, which has been
financedwere
constructed and are now leased to us under a long-term contract by a group of foreign investors. Upon completion of construction, the
developer leased the facilities back to us pursuant to a long-term lease, which
effectively doubled our space in Miami.North American developer. We began using these new facilities in September 2001 for our passenger and cargo offices (with the exception of our reservations and ticket offices). In April 2000,We are planning to convert 21,528 square feet of the warehouse into fully furbished offices. We estimate that we purchasedwill spend approximately US$1 million on this project in 2004.
Other Facilities
We own a building and 16 acres of land on the west side of Arturo Merino Benítez International Airport that houses our B737-200 flight training simulator. We rent this flight training center under a long-term lease run by CAE Inc. (a Canadian leading company in the flight training business).
We own a 661,980-square foot warehouse for US$5.25
million,in Santiago, which includes 91,493 square feet of space for offices and other administrative facilities. In Januaryfacilities and 45,000 square foot distribution center. Beginning in 2001, we began using this new facility to expand our LanCourierLanCourier’s door-to-door cargo transport business. We completed the
second stage of the project, the development of a 45,000 square foot
distribution center, during the first half of 2001.
In Chile, as in other countries that form our cargo network, our
affiliates and/
Terminal de Exportación Internacional, or subsidiaries provide cargo handling and warehouse services. In
December 2001, TEISA, one of our subsidiaries inaugurated its new facilities at
the Santiago International Airport. TEISA provides cargo management and storage
space for exporters. Its newowns a 97,000 square-foot facilities includefacility that includes a large freezer capacity for the maintenance of perishable exports at optimal conditions.
conditions located at the Arturo Merino Benítez International Airport.
In 2003, Fast Air Almacenes de Carga S.A., or Fast Air, one of our subsidiaries, initiated the building of its new import warehouse and office at the Arturo Merino Benítez International Airport. This new 172,000 square feet building will be developed in conjunction with two other operators. Fast Air is expected to invest US$1.5 million and the building is expected to be completed during the second quarter of 2004.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Basis of Presentation
The following discussion is derived from our financial statements,
which are presented in Item 18 of this Form 20-F. This discussion does not
include all of the information included in these financial statements.
You should read thesethe following discussion of our financial condition and results of operations together with our audited consolidated financial statements to gain a better understandingand the accompanying notes beginning on page F-8 of our
business and our historical results of operations.
this annual report.
Our financial statements have been prepared in accordance with Chilean GAAP, which differdiffers in certain respects from U.S. GAAP. See Note 25 to our
financial statements for a descriptionA discussion of the principal differences between Chilean GAAP and U.S. GAAP as they relate to us. us is described in Note 24 to our audited consolidated financial statements.
Overview
The discussion presented below,
except where otherwise noted orprincipal and most distinctive aspect of our business model is the context otherwise requires, relatesway in which we integrate our passenger and cargo activities. Our sophisticated service-oriented approach to combining passenger and cargo traffic enables us to better utilize our aircraft, reduce our break-even load factors on passenger flights, and diversify our revenue streams. These benefits have helped us improve our profitability during the period between 2001 and the first quarter of 2004, when the airline industry suffered from sharp declines in demand and cost pressures in the aftermath of terrorist attacks and worldwide economic slowdown.
We generate the balance of our operating revenues from airport ground services, aircraft leases, logistics and courier services, on-board sales, tour services, third-party maintenance, ground handling, storage, charter operations, credit card co-branding, CRS services and airline-related security services.
Between 2001 and the first quarter of 2004 we overcame significant challenges. Our passenger demand was negatively affected by the terrorist attacks of September 11, 2001 in the United States, the political and economic crisis in Argentina and poor economic performance in other key markets, particularly Chile. Cargo demand was negatively affected by weak economic conditions, including weaker local currencies, which reduced South America’s demand for imports. Furthermore, we faced increased competition on our international passenger and cargo routes from 2001 until mid-2003, and on our Chilean domestic routes since mid-2001. Finally, higher security and insurance costs after September 11, 2001 and high fuel prices created significant cost pressures.
Despite these challenges we were able to increase profitability significantly, with net income increasing to US$83.6 million in 2003 from US$10.8 million in 2001. Operating income also increased to US$111.7 million from US$50.3 million in 2001. Net income and operating income for 2003 are the highest for a full year in our history. Further improvement in the first quarter of 2004 led net income to amount to US$110.1 million and operating income to amount to US$148.4 million for the 12-month period ended March 31, 2004. These results can be attributed to our ability to rapidly adapt our route network and capacity to market conditions, leverage opportunities to expand our revenue base and reduce costs.
Passenger Business
In general, our passenger revenues are driven by international and country-specific political and economic conditions, competition, the attractiveness of the destinations that we serve, and the capacity we allocate among our different routes.
Our passenger business faced significant challenges during the last three years, including poor economic conditions, external demand shocks and increased competition. Major global events, such as the September 11, 2001 terrorist attacks in the United States and the war in Iraq generated a major drop in traffic, especially on our routes to the United States. Passenger demand was also negatively affected by the economic crisis in Argentina due to our significant operations in Argentina and dependence upon Argentine customers who connect to our long-haul routes out of Chile. Demand was also impacted by the depreciation of the Chilean peso as it had a negative impact on our domestic yields in dollar terms and reduced international outbound demand from Chile. Demand showed signs of recovery during 2003 and the first quarter of 2004, primarily in Chile and Argentina. While traffic in Chile increased late in 2003, demand in Argentina began to increase earlier in the year, although from a very low base.
The competition we faced on both our domestic and international passenger routes changed over the last several years. In 2001, we saw our market share of Chilean domestic routes increase significantly as competitors discontinued operations. During 2002 and 2003, new competition entered the Chilean domestic market and our total domestic traffic and market share were adversely affected. On our international routes, competition from other carriers during 2001 and 2002 was strong and depressed our yields. In 2003, competition in key international routes weakened, primarily as some competitors discontinued or downsized their operations.
We were able to overcome these challenges and take advantage of opportunities by using our competitive advantages. Our integrated business model and the efficiency of our operations enabled us to sustain our operations even as we faced very low demand, which ultimately led to market share gains as other competitors reduced their operations.
Additionally, we took advantage of our flexibility to reallocate capacity quickly. Initially, we cut frequencies on our operations from Chile to Argentina, the United States and Europe, and used our alliances to provide passengers with additional frequencies. We have monitored demand closely and increased our operations to and from Argentina when we noted improvements in travel demand to Argentina as a result of the depreciation of the Argentine peso.
We have used the capacity that has become available as a result of reducing certain frequencies to commence new operations. We decided to expand our presence by adding stops in Peru and Ecuador on our flights between Chile and the United States and increasing frequencies and capacity on flights between Chile and the United States. In late 2002, LanEcuador, was authorized to start operations and initiated international service in 2003. LanEcuador has strengthened our service between Ecuador and the United States and captured demand by launching new routes to Spain and Argentina. We have also used available capacity to launch new routes to Australia and New Zealand under our new agreement with Qantas. By redeploying capacity into these routes we have been able to offset the loss of Argentine revenues and have avoided having to ground aircraft.
Cargo Business
During the past three years, our cargo business has also faced significant challenges. Our cargo business depends on exports from and imports to South America and is, therefore, affected by economic conditions, foreign
exchange rates, changes in international trade, the health of particular industries, competition and fuel prices (which we usually pass on to our customers through a cargo fuel surcharge). The weakening of our main import markets due to the crisis in Argentina and the subsequent devaluation of the Argentine peso, together with the weakening of the Chilean peso and the Brazilian real, caused a fall in southbound cargo demand and an imbalance with northbound demand in 2001 and 2002. This caused a decline in traffic and created downward pressure on the rates we charge for carrying cargo from the U.S. to Latin America. We faced increased competition during this period, which reduced yields and impacted our market share. In 2003, problems affecting salmon production, one the most important products on our northbound routes, reduced northbound cargo traffic. However, the improvement in economic conditions in Latin America and the appreciation of currencies such as the Brazilian real and the Chilean peso led to improved import traffic into the region and balanced out the import and export traffic.
We responded to these challenges in several ways. We adjusted our capacity through the return of wet-leased freighter aircraft in order to avoid idle capacity during periods of low demand. We monitored demand and redesigned our freighter itineraries accordingly. The flexibility of our freighter operations enabled us to accommodate lower demand and avoid unprofitable routes by combining service to several destinations in the same trip. Our expanded route network led to increased diversification and helped us to partially compensate for falls in traffic to specific markets. Our cost-effective operations and operating network also gave us a competitive advantage that allowed us to increase market share as other competitors reduced the scale of their operations, which were further benefited by our integrated business model and the utilization of our Boeing 767-300 freighters.
Overall, these adjustments enabled us to endure a complicated environment and ultimately led to an improved market position. More importantly, these advances placed us in an excellent position to take advantage of the recovery in demand that started at the end of 2003 and continued in the first quarter of 2004.
Other Revenues
Other revenues grew significantly between 2001 and the first quarter of 2004. This increase related mainly to an increase in aircraft lease revenues and the consolidation of our subsidiary, LanLogistics Corp., or LanLogistics. The latter, however, is in its first stages of growth and had no positive impact on profitability in 2002 and 2003. Other revenues are driven mainly by the scope of our operations and of those of other airlines to which we provide services.
Controlling Costs
Cost controls were critical to maintaining our profitability over the period from 2001 to the first quarter of 2004, especially as we faced increased fuel prices and insurance and security costs following September 11, 2001. In absolute terms, the main drivers of our costs are the size of our operations, fuel prices, fleet costs, and exchange rates.
As an airline, we are subject to fluctuations in costs that are outside our control, particularly fuel prices. However, we manage part of our exposure to changes in fuel prices through a fuel-hedging policy and the use of a cargo fuel surcharge. Additionally, the incorporation of newer aircraft has enabled us to gradually reduce fuel burn. Personnel expenses are another significant component of our overall costs. Because a significant portion of our labor costs is denominated in pesos, appreciation of the peso against the dollar can result in increased costs in dollar terms and can negatively affect our results. Commissions to travel and cargo agents also compose a significant cost to us. We compete with other airlines over the amount of commission we pay per sale, particularly in connection with special programs and marketing efforts, and to maintain competitive incentives with travel agents. The amount of commissions we pay agents per sale is in most cases adjusted to match industry standards. Fleet related expenses, basically aircraft rentals and depreciation, are another significant cost. These costs are mainly fixed and we have succeeded in reducing per unit costs by achieving high aircraft utilization rates.
In 2002, we cut costs significantly as we adjusted for the decrease in traffic and revenue generated by September 11, 2001. These adjustments allowed us to increase profitability and consisted primarily of an 8% reduction in personnel during the fourth quarter of 2001, the renegotiation of contracts with suppliers during 2002, and the return of aircraft under both operating and ACMI leases. With these adjustments, we were able to significantly reduce per unit costs. We also benefited from a market-wide decline in fuel prices in 2002, which fell an average of 8% year-over-year. In ATK terms, our costs declined 2.8% and, excluding the effect of lower fuel prices, cost per ATK fell 1.5%.
In 2003 and the first quarter of 2004, we continued our cost control efforts and leveraged opportunities for cuts in specific areas. However, we faced cost pressures as, for example, higher sales volumes translated into higher aggregate commissions to agents and other sales-related expenses. Additionally, the depreciation of the Chilean peso in the second half of 2003 drove wages and benefits higher. We partially offset these cost increases by negotiating important reductions in aircraft leasing costs and increasing our aircraft utilization rates. On average in 2003, our long-haul passenger and cargo aircraft were in use more than 15 hours per day. Our utilization strategy in 2003 was designed in concert with the addition of new routes to our network.
Outlook
Additions to our route network and capacity are part of our long-term goal of regional expansion in Latin America. All of our passenger operations are now marketed under a single brand name, LAN. By uniting all of our passenger subsidiaries under the LAN name, we plan to enhance the value of our brand and increase the efficiency of our marketing efforts. As part of this re-branding initiative, we are in the process of repainting our aircraft with our new logo and paint scheme.
Our results in 2003 and the first quarter of 2004 and our outlook for the future are based upon our position as one of the market leaders of international and domestic passenger and cargo air services both in Chile and in the South American markets where we have established affiliates. We have the largest market share of passenger traffic on key international routes that connect Chile with the United States, Europe, the South Pacific and other Latin American countries. Within Chile, our competitive position remains solid, as we continue to carry the vast majority of domestic passenger traffic. In early 2004, the Spanish business group Marsans, which owns Aerolineas Argentinas, announced its intention to enter the Chilean domestic and international passenger market in the near future. In the event that we face new competition, we believe that our established operations, brand loyalty and quality service will allow us to substantially maintain our market share.
Operating Results
The following table sets forth certain income statement data for LanChile.
| In US$ millions | As a percentage of total revenues | % change | |||||||||||||||||||||||||
| 2001 | 2002 | 2003 | 2001 | 2002 | 2003 | 02/01 | 03/02 | ||||||||||||||||||||
Operating revenues: | |||||||||||||||||||||||||||
Passenger | $ | 803.0 | $ | 803.7 | $ | 918.4 | 56.2 | % | 55.3 | % | 56.0 | % | 0.1 | % | 14.3 | % | |||||||||||
Cargo | 539.5 | 520.8 | 602.0 | 37.8 | 35.9 | 36.7 | (3.5 | ) | 15.6 | ||||||||||||||||||
Other | 85.8 | 127.9 | 118.4 | 6.0 | 8.8 | 7.2 | 49.0 | (7.5 | ) | ||||||||||||||||||
Total operating revenues | 1,428.3 | 1,452.4 | 1,638.8 | 100.0 | 100.0 | 100.0 | 1.7 | 12.8 | |||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||||||
Wages and benefits | 203.0 | 215.3 | 240.9 | 14.2 | 14.8 | 14.7 | 6.0 | 11.9 | |||||||||||||||||||
Aircraft fuel | 222.4 | 205.5 | 259.6 | 15.6 | 14.2 | 15.8 | (7.6 | ) | 26.3 | ||||||||||||||||||
Commissions to agents | 200.5 | 192.7 | 224.0 | 14.0 | 13.3 | 13.7 | (3.9 | ) | 16.2 | ||||||||||||||||||
Depreciation and amortization | 51.9 | 67.8 | 72.6 | 3.6 | 4.7 | 4.4 | 30.6 | 7.1 | |||||||||||||||||||
Other rentals and landing fees | 244.9 | 228.7 | 258.5 | 17.1 | 15.7 | 15.8 | (6.6 | ) | 13.0 | ||||||||||||||||||
Passenger services | 35.9 | 32.3 | 36.2 | 2.5 | 2.2 | 2.2 | (9.9 | ) | 12.1 | ||||||||||||||||||
Aircraft rentals | 146.4 | 159.8 | 139.1 | 10.3 | 11.0 | 8.5 | 9.1 | (12.9 | ) | ||||||||||||||||||
Aircraft maintenance | 105.2 | 95.1 | 97.9 | 7.4 | 6.6 | 6.0 | (9.6 | ) | 2.9 | ||||||||||||||||||
Other operating expenses | 167.8 | 193.1 | 198.3 | 11.7 | 13.3 | 12.1 | 15.1 | 2.7 | |||||||||||||||||||
Total operating expenses | 1,378.1 | 1,390.4 | 1,527.1 | 96.5 | 95.7 | 93.2 | 0.9 | 9.8 | |||||||||||||||||||
Operating income | 50.3 | 62.1 | 111.7 | 3.5 | 4.3 | 6.8 | 23.5 | 80.0 | |||||||||||||||||||
Other expense: | |||||||||||||||||||||||||||
Interest income | 5.5 | 3.8 | 6.3 | 0.4 | 0.3 | 0.4 | (31.4 | ) | 67.1 | ||||||||||||||||||
Interest expense | (35.5 | ) | (40.8 | ) | (39.4 | ) | (2.5 | ) | (2.8 | ) | (2.4 | ) | 14.9 | (3.5 | ) | ||||||||||||
Miscellaneous-net | (8.4 | ) | 13.2 | 24.1 | (0.6 | ) | 0.9 | 1.5 | (257.3 | ) | 82.9 | ||||||||||||||||
Total other expense | (38.4 | ) | (23.8 | ) | (9.0 | ) | (2.7 | ) | (1.6 | ) | (0.5 | ) | (37.9 | ) | (62.4 | ) | |||||||||||
Income before minority interest | 11.9 | 38.2 | 102.8 | 0.8 | 2.6 | 6.3 | 221.9 | 168.7 | |||||||||||||||||||
Minority interest | (1.6 | ) | (0.4 | ) | (0.9 | ) | (0.1 | ) | (0.0 | ) | (0.1 | ) | (72.8 | ) | 100.5 | ||||||||||||
Income before income taxes | 10.3 | 37.8 | 101.9 | 0.7 | 2.6 | 6.2 | 267.5 | 169.5 | |||||||||||||||||||
Income taxes | 0.6 | (7.0 | ) | (18.3 | ) | 0.0 | (0.5 | ) | (1.1 | ) | (1,369.2 | ) | 161.8 | ||||||||||||||
Net income | $ | 10.8 | $ | 30.8 | $ | 83.6 | 0.8 | % | 2.1 | % | 5.1 | % | 184.2 | 171.2 | |||||||||||||
The following table sets forth certain income statement data for LanChile for the three months ended March 31, 2003 and March 31, 2004, expressed as a percentage of total operating revenues.
| In US$ millions | As a percentage of total revenues | % change | |||||||||||||||
| Three months ended March 31, (unaudited) | Three months ended March 31, (unaudited) | Three months ended March 31, 2004/2003 | |||||||||||||||
| 2003 | 2004 | 2003 | 2004 | ||||||||||||||
Operating revenues: | |||||||||||||||||
Passenger | $ | 225.1 | $ | 292.3 | 56.9 | % | 59.4 | % | 29.8 | % | |||||||
Cargo | 140.4 | 169.7 | 35.5 | 34.5 | 20.9 | ||||||||||||
Other | 30.3 | 29.9 | 7.7 | 6.1 | (1.6 | ) | |||||||||||
Total operating revenues | 395.8 | 491.9 | 100.0 | 100.0 | 24.3 | ||||||||||||
Operating expenses: | |||||||||||||||||
Wages and benefits | 52.2 | 67.2 | 13.2 | 13.7 | 28.6 | ||||||||||||
Aircraft fuel | 68.3 | 83.0 | 17.3 | 16.9 | 21.4 | ||||||||||||
Commissions to agents | 53.0 | 66.1 | 13.4 | 13.4 | 24.6 | ||||||||||||
Depreciation and amortization | 18.2 | 19.4 | 4.6 | 3.9 | 6.7 | ||||||||||||
Other rental and landing fees | 61.9 | 67.0 | 15.6 | 13.6 | 8.2 | ||||||||||||
Passenger services | 8.9 | 11.6 | 2.2 | 2.4 | 30.9 | ||||||||||||
Aircraft rentals | 38.6 | 32.6 | 9.8 | 6.6 | (15.6 | ) | |||||||||||
Aircraft maintenance | 23.8 | 28.2 | 6.0 | 5.7 | 18.7 | ||||||||||||
Other operating expenses | 44.7 | 53.9 | 11.3 | 11.0 | 20.7 | ||||||||||||
Total operating expenses | 369.6 | 428.9 | 93.4 | 87.2 | 16.1 | ||||||||||||
Operating income | 26.3 | 63.0 | 6.6 | 12.8 | 139.8 | ||||||||||||
Other expense: | |||||||||||||||||
Interest income | 1.3 | 2.2 | 0.3 | 0.4 | 73.6 | ||||||||||||
Interest expenses | (10.1 | ) | (9.4 | ) | (2.5 | ) | (1.9 | ) | (6.6 | ) | |||||||
Miscellaneous-net | 8.6 | 2.8 | 2.2 | 0.6 | (67.4 | ) | |||||||||||
Total other expense | (0.2 | ) | (4.4 | ) | (0.1 | ) | (0.9 | ) | NM | ||||||||
Income before minority interest | 26.1 | 58.6 | 6.6 | 11.9 | 124.7 | ||||||||||||
Minority interest | 0.2 | 0.2 | 0.0 | 0.0 | 13.5 | ||||||||||||
Income before income taxes | 26.3 | 58.8 | 6.6 | 12.0 | 124.0 | ||||||||||||
Income taxes | (4.6 | ) | (10.7 | ) | (1.2 | ) | (2.2 | ) | 129.9 | ||||||||
Net income | $ | 21.6 | $ | 48.1 | 5.5 | % | 9.8 | % | 122.7 | ||||||||
Results for the Three Months Ended March 31, 2004 Compared with Results for the Three Months Ended March 31, 2003
Net Income
Our net income increased 122.7% from US$21.6 million for the three months ended March 31, 2003 to US$48.1 million for the three months ended March 31, 2004. This increase is mainly due to a 139.8% improvement in operating income which offset a higher non-operating loss as compared to the first quarter of 2003. We achieved this improvement even as demand remained weak compared to historical levels and as fuel prices remained at high levels. We were able to overcome these factors by taking advantage of our integrated passenger and cargo businesses, adjusting capacity and maximizing the efficiency of our cost structure.
Operating Revenues
Operating revenues for the three months ended March 31, 2004 totaled US$491.9 million, a 24.3% increase over operating revenues of US$395.8 million for the three months ended March 31, 2003.
Our consolidated passenger revenues grew 29.8% to US$292.3 million for the three months ended March 31, 2004 from US$225.1 million for the three months ended March 31, 2003, due to a 21.4% increase in passenger
traffic and a 6.9% improvement in yield (from US¢7.14 to US¢7.63). Passenger traffic (as measured in RPKs) increased primarily due to the launch of new routes out of our regional hub in Lima, growth into new markets (mainly related to growth on LanEcuador’s routes to the United States, Europe and Latin America) and increased capacity on specific routes based on demand. International passenger traffic grew 27.1%, while domestic passenger traffic grew 1.9%. Yields increased due to the positive impact of a stronger Chilean peso on fares denominated in Chilean pesos, improved segmentation on our international routes and an improvement in market conditions during the quarter.
Cargo revenues grew 20.9% to US$169.7 million during the three months ended March 31, 2004 from US$140.4 million during the three months ended March 31, 2003, as traffic increased 11.4% and yield increased 8.6% to US¢33.52 from US¢30.88. Traffic grew in cargo during the three months ended March 31, 2004 as increased international cargo traffic, which grew 11.7% and accounted for 98.5% of total cargo traffic, offset a 7.9% decrease in domestic cargo traffic. Overall, cargo traffic increased mainly due to a stronger competitive position, an improvement in southbound traffic from the United States to South America and strong northbound demand from South America to the United States. Cargo yields increased mainly due to an improvement in fares and the application of a cargo fuel surcharge.
Other revenues declined 1.6% as reduced aircraft lease revenues were partially offset by increased on-board sales and courier sales in Chile.
Operating Expenses
Operating expenses during the three months ended March 31, 2004 totaled US$428.9 million, a 16.1% increase over operating expenses of US$369.6 million during the three months ended March 31, 2003. Excluding the impact of fuel prices, which resulted in US$4.8 million of additional expenses in the first quarter of 2004 compared to the first quarter of 2003, operating costs increased 14.8%. Our unit costs (measured as operating costs and capital expenses minus other revenues, per ATK) increased 4.6% during the three months ended March 31, 2004. Excluding the impact of higher fuel prices, per unit costs grew 3.3%. As a percentage of total operating revenues, consolidated operating expenses fell from 93.4% to 87.2%.
Wages and benefits expenses grew 28.6% to US$67.2 million during the three months ended March 31, 2004 from US$52.2 million during the three months ended March 31, 2003, mainly due to higher costs in dollar terms caused by the effect of a stronger Chilean peso on wages denominated in Chilean pesos, higher bonus payments and an increase in headcount related to the expansion of our operations.
Aircraft fuel expenses during the three months ended March 31, 2004 totaled US$83.0 million, a 21.4% increase over aircraft fuel expenses of US$68.3 million during the three months ended March 31, 2003. Fuel expenses rose due to a 6.1% increase in average fuel prices and a 14.5% increase in fuel consumption. To reflect our operational results more clearly, the gains and losses incurred due to fuel hedging activities have been reclassified into the “Other Income (Expense)” line of the “Other Income (Expense)” section of our financial conditionstatements. During the three months ended March 31, 2004, we recorded a US$7.3 million fuel hedging gain, as compared with a US$6.9 million fuel hedging gain during the three months ended March 31, 2003.
Commissions to agents (related to both passenger and cargo sales) increased 24.6% to US$66.1 million during the three months ended March 31, 2004 from US$53.0 million during the three months ended March 31, 2003, primarily due to a 26.4% increase in traffic revenues (passenger and cargo). As a percentage of traffic revenues (passenger and cargo), commissions to agents decreased 0.2 percentage points from 14.5% to 14.3% as lower average passenger commissions offset higher average cargo commissions.
Depreciation and amortization expenses increased 6.7% to US$19.4 million during the three months ended March 31, 2004 from US$18.2 million during the three months ended March 31, 2003.
Other rental and landing fees increased 8.2% to US$67.0 million during the three months ended March 31, 2004 from US$61.9 million during the three months ended March 31, 2003. This increase resulted from an increase in landing fees due to increased operations and higher costs at some international airports, higher allotment expenses (the purchase of capacity in other carriers) due to increased operations and an increase in ACMI leases to support growth in our cargo capacity. These increases were partially offset by a reduction in insurance expenses.
Passenger service expenses totaled US$11.6 million during the three months ended March 31, 2004 and US$8.9 million during the three months ended March 31, 2003. This 30.9% increase resulted from increased passenger traffic, changes in the mix of passengers traveling in different classes of service and improvements in passenger services.
Aircraft rental expenses decreased 15.6% to US$32.6 million during the three months ended March 31, 2004 from US$38.6 million during the three months ended March 31, 2003 as the incorporation of new aircraft into our fleet was more than fully offset by the reduction of lease rates during the first quarter of 2003.
Aircraft maintenance expenses increased 18.7%, from US$23.8 million during the three months ended March 31, 2003 to US$28.2 million during the three months ended March 31, 2004. Aircraft maintenance expenses increased due to increased operations and the net effect of a one-time reduction of US$1.3 million in 2004 and a one-time reduction of US$2.5 million in 2003 due to changes in the return conditions of leased aircraft. Excluding these items, maintenance costs grew 12.2%.
Other operating expenses increased 20.7% to US$53.9 million during the three months ended March 31, 2004 from US$44.7 million during the three months ended March 31, 2003. Other operating expenses include sales-related expenses, communication, distribution and data processing costs, and banking and non-collectable account expenses. Other operating expenses increased during the first quarter of 2004 due to increased sales-related expenses and increased training to support our capacity for growth.
Operating Income
Operating income increased 139.8% to US$63.0 million during the three months ended March 31, 2004 from US$26.3 million during the three months ended March 31, 2003. Operating margins improved 6.2 percentage points from 6.6% during the three months ended March 31, 2003 to 12.8% during the three months ended March 31, 2004 as a 24.3% increase in operating revenues outpaced a 16.1% increase in operating expenses. For the first quarter of 2004, revenues per ATK (passengers and cargo) grew 13.2% (from US¢32.90 to US¢37.25), as costs per ATK increased 4.6% (from US¢31.32 to US¢32.75).
Non-Operating Income (Expense)
Net non-operating expenses increased during the three months ended March 31, 2004 to US$4.4 million as compared to US$0.2 million during the three months ended March 31, 2003. Non-operating results for the three months ended March 31, 2004 and March 31, 2003 included no special items. Interest income increased 73.6% to US$2.2 million from US$1.3 million due higher cash balances. Interest expenses fell 6.6% to US$9.4 million during the three months ended March 31, 2004 from US$10.1 million during the three months ended March 31, 2003 due to lower interest rates and a reduction in average debt. Miscellaneous gains decreased 67.4% from US$8.6 million during the three months ended March 31, 2003 to US$2.8 million during the three months ended March 31, 2004. This included a US$7.3 million fuel hedging gain (compared to a US$6.9 million fuel hedging gain during the first quarter of 2003) and a US$3.4 million foreign exchange loss (compared to a US$0.3 million foreign exchange loss during the first quarter of 2003).
Income Taxes
Income tax expense increased to US$10.7 million during the three months ended March 31, 2004 from US$4.6 million during the three months ended March 31, 2003 due to higher taxable income. For more information, see “—Critical Accounting Policies––Deferred Income Taxes” below and Note 13 to our audited consolidated financial statements. Our effective income tax rate was 18.1% during the three months ended March 31, 2004, as compared to an effective income tax rate of 17.7% during the three months ended March 31, 2003.
2003 Compared with 2002
Net Income
Our net income increased 171.2% from US$30.8 million in 2002 to US$83.6 million in 2003. This increase is mainly due to a 80.0% improvement in operating income and a lower non-operating loss as compared to 2002. This improvement was achieved even as we continued to face weak demand in both the passenger and cargo businesses in the first part of the year, increased competition in the domestic passenger market, and high fuel prices. We were able to overcome these challenges by continuing to expand its operations in new markets, opening new routes, capitalizing on competitive opportunities in international markets, and controlling costs.
Non-operating losses in 2003 declined when compared to 2002 due to lower net interest expense and higher non-operating gains (as explained under “Non Operating Income (Expense)”). Finally, income tax expense increased from US$7.0 million tax in 2002 to US$18.3 million in 2003 due primarily to the increase in our taxable income.
Operating Revenues
Operating revenues in 2003 totaled US$1,638.8 million, a 12.8% increase over operating revenues of US$1,452.4 million in 2002.
Our consolidated passenger revenues grew 14.3% to US$918.4 million in 2003 from US$803.7 million in 2002, due to a 13.7% increase in passenger traffic and a 0.5% improvement in yield (from US¢7.22 to US¢7.25). Passenger traffic (as measured in RPKs) increased primarily because of market share gains on the international business, the launch of new routes, growth into new markets (mainly related to LanEcuador’s launch of operations in April 2003), and an improvement in market conditions in the final months of LanChilethe year. These items offset lower traffic in domestic routes due to increased competition. Passenger yields improved slightly as the impact of longer average trip lengths (longer trips feature lower revenues per kilometer) was offset by higher average fares due to improved segmentation and the positive impact of a stronger Chilean peso on fares denominated in Chilean pesos.
Our domestic passenger revenues in Chile, which accounted for 23.2% of passenger revenues in 2003 and for 27.8% in 2002, decreased 4.6% to US$213.5 million in 2003 from US$223.8 million in 2002. Domestic passenger traffic (as measured in RPKs) decreased 10.5%, while passenger capacity (as measured in ASKs) decreased 5.8%, resulting in a 3.3 percentage point drop in load factor from 66.1% in 2002 to 62.8% in 2003. Domestic passenger yield improved 6.6% from US¢8.35 in 2002 to US¢8.90 in 2003.
International passenger revenues, which accounted for 76.8% in 2003 and for 72.2% of passenger revenues in 2002, increased 21.6% to US$704.9 million in 2003 from US$579.9 million in 2002. International passenger traffic (as measured in RPKs) increased 21.4%, while passenger capacity (as measured in ASKs) increased 11.5%, resulting in a 5.8 percentage point improvement in load factor from 65.0% in 2002 to 70.8% in 2003. Total international passenger yield (based on RPKs) remained flat at US¢6.86.
Cargo revenues grew 15.6%, to US$602.0 million in 2003 from US$520.8 million in 2002, as traffic increased 4.3% and yield increased 10.9% to US¢31.49 from US¢28.40. Revenue growth in cargo was driven by increased international revenues, which grew 17.2% to US$588.3 in 2003 from US$502.0 in 2002. Overall, cargo traffic increased mainly due to market share gains and to an improvement in southbound traffic from the United States to South America in the second half of the year. Cargo yields increased mainly due to an improvement in fares and the application of a cargo fuel surcharge.
Other revenues declined 7.5% as lower sales from logistics affiliates and reduced aircraft leasing revenues were partially offset by increased on-board sales and ground handling revenues.
Operating Expenses
Operating expenses in 2003 totaled US$1,527.1 million, a 9.8% increase over 2002’s operating expenses of US$1,390.4 million. Excluding the impact of higher fuel prices, which resulted in US$40.9 million of additional
expenses compared to 2002, operating costs increased 6.9%. Unit costs (measured as operating costs and capital expenses minus other revenues, per ATK) increased 4.7% in 2003. Excluding the impact of higher fuel prices, unit costs grew 1.7%. As a percentage of total operating revenues, consolidated operating expenses fell from 95.7% to 93.2%.
Wages and benefits expenses grew 11.9% to US$240.9 million in 2003 from US$215.3 million in 2002, mainly due to an increase in headcount related to the expansion of our operations and the higher costs in dollar terms caused by the effect of a stronger Chilean peso on wages denominated in Chilean pesos.
Aircraft fuel expenses in 2003 totaled US$259.6 million, a 26.3% increase over 2002’s aircraft fuel expenses of US$205.5 million. Fuel expenses rose due to a 18.7% increase in average fuel prices and a 6.4% increase in fuel consumption. To reflect our operational results more clearly, the gains and losses incurred due to fuel hedging activities have been reclassified into the “Other Income (Expense)” line of the “Other Income (Expense)” section of our financial statements.
Commissions to agents (related to both passenger and cargo sales) increased 16.2% to US$224.0 million in 2003 from US$192.7 million in 2002, primarily due to a 14.8% increase in traffic revenues. The remainder of the increase is related to higher average cargo commissions, which fully offset lower passenger commissions (due to lower travel agent commissions and increased direct sales). As a percentage of traffic revenues (passenger and cargo), commissions to agents increased 0.2 percentage points from 14.5% to 14.7%.
Depreciation and amortization expenses increased 7.1% to US$72.6 million in 2003 from US$67.8 million in 2002. Depreciation and amortization increased mainly due to the full year impact of aircraft incorporated to our fleet in 2002.
Other rental and landing fees increased 13.0% to US$258.5 million in 2003 from US$228.7 million in 2002. This increase resulted from an increase in landing and overflight fees due increased operations and higher costs in some airports, higher handling expenses due to increased operations and an increase in ACMI leases to support growth in our cargo capacity. These increases were partially offset by a reduction in insurance expenses.
Passenger service expenses totaled US$36.2 million in 2003 and US$32.3 million in 2002. This 12.1% increase is lower than the 13.7% increase in passenger traffic, reflecting our focus on maintaining high service standards in a cost-effective manner.
Aircraft rental expenses decreased 12.9%, to US$139.1 million in 2003 from US$159.8 million in 2002 primarily due to the renegotiation of aircraft leases completed in April 2003, which led to a reduction in expenses of approximately US$15 million. Additionally, these expenses further declined as 12 aircraft we previously leased were either purchased or returned. These factors were partially offset by the full year impact of the incorporation of two Airbus A320 aircraft in December 2002 and the incorporation of two Airbus A319 aircraft and a Boeing 767-300 aircraft in December 2003.
Aircraft maintenance expenses increased 2.9%, from US$95.1 million in 2002 to US$97.9 million in 2003. Aircraft maintenance expenses increased due to increased operations and to the net effect of one-time reductions in expenses in 2002 and 2003. In 2002, we recorded one-time reductions in expenses for a total of US$3.6 million due to the return of leased aircraft and the phase-out of our DC-8 fleet, while in 2003 we recorded a US$5.0 million one-time reduction in expenses due to changes in the return conditions of leased aircraft. Excluding these items, maintenance costs grew 4.3%.
Other operating expenses increased 2.7% to US$198.3 million in 2003 from US$193.1 million in 2002. Other operating expenses include sales-related expenses, communication, distribution and data processing costs, and banking and non-collectable account expenses. Other operating expenses increased in 2003 as the impact of expanded operations and higher sales volumes was mostly offset by efficiency improvements.
Operating Income
Operating income increased 80.0%, to US$111.7 million in 2003 from US$62.1 million in 2002. Operating margins improved 2.5 percentage points from 4.3% in 2002 to 6.8% in 2003 as a 12.8% increase in operating revenues outpaced a 9.8% increase in operating expenses. For the full year, revenues per ATK (passengers and cargo) grew 8.3% (from US¢30.93 to US¢33.50), as costs per ATK increased 4.7% (from US¢30.35 to US¢31.76).
Non-Operating Income (Expense)
Net non-operating expenses declined 62.4% to US$9.0 million in 2003 from US$23.8 million in 2002. Non-operating results for 2003 included no special items. In 2002, net non-operating expenses included a US$23.6 million gain from finance-related items. Interest income increased 67.1% to US$6.3 million from US$3.8 million due higher cash balances. Interest expenses fell 3.5% to US$39.4 million in 2003 from US$40.8 million in 2002 due to lower interest rates and a reduction in average debt. Miscellaneous gains increased 82.9% to US$24.1 million in 2003 from US$13.2 million in 2002 as a US$12.3 million fuel hedging gain (compared to a US$5.5 million fuel hedging loss in 2002) and a US$12.1 million foreign exchange gain (compared to a US$4.7 million foreign exchange loss in 2002) fully offset the US$23.6 million special gain in 2002 mentioned above.
Income Taxes
Income tax expense increased to US$18.3 million in 2003 from US$7.0 million in 2002 due to higher taxable income. For more information, see “—Critical Accounting Policies—Deferred Income Taxes” below and Note 13 to our audited consolidated financial statements. Our effective income tax rate fell 0.5 percentage points from 18.5% in 2002 to 18.0% in 2003 due to a higher percentage of our net income being generated in Chile.
2002 Compared with 2001
Net Income
Our net income increased 184.2% to US$30.8 million in 2002 from US$10.8 million in 2001. This increase is mainly due to a 23.5% improvement in operating income and a lower non-operating loss as compared to 2001. Operating income increased even though demand on both our passenger and cargo businesses was impacted by the economic crisis in Argentina, weak economic conditions and increased uncertainty in South America and the repercussions of the September 11, 2001 terrorist attacks in the United States. In order to offset the revenue shortfall caused by the aforementioned events, we implemented a strategy aimed both at developing new revenue sources and controlling operating costs.
Operating Revenues
Operating revenues in 2002 totaled US$1,452.4 million, a 1.7% increase over operating revenues of US$1,428.3 million in 2001.
Our consolidated passenger revenues grew 0.1% to US$803.7 million in 2002 from US$803.0 million in 2001, as a 1.2% decrease in passenger traffic was fully offset by a 1.3% improvement in yield (from US¢7.12 to US¢7.22). Passenger revenues for 2002 and 2001 also include the impact of the consolidation of LanPeru. From its subsidiariesconsolidation on August 1, 2001 until December 31, 2001, LanPeru generated US$20.3 million in operating revenues, and from January 1, 2002 until December 31, 2002, LanPeru generated US$63.8 million in operating revenues. Traffic declined mainly due to the economic crisis in Argentina, weak economic conditions and increased uncertainty across Latin America, and the depressed demand to the United States during the first part of the year because of the impact of terrorist attacks of September 11, 2001.
Our domestic passenger revenues, which accounted for 27.8% in 2002 and for 26.5% of passenger revenues in 2001, increased 5.1% to US$223.8 million in 2002 from US$213.0 million in 2001. Domestic passenger traffic (as measured in RPKs) decreased 0.5%, while passenger capacity (as measured in ASKs) increased 1.5%, resulting in a 1.8 percentage point decrease in our domestic passenger load factor to 65.6% in 2002 from 67.4% in 2001. Domestic passenger yield improved 5.6% to US¢8.35 in 2002 from US¢7.90 in 2001.
International passenger revenues, which accounted for 72.2% of passenger revenues in 2002 and 73.5% 2001, decreased 1.7%, to US$579.9 million in 2002 from US$590.0 million in 2001. International passenger traffic (as measured in RPKs) declined 1.5%, while passenger capacity (as measured in ASKs) increased 0.8%, resulting in a 2.3 percentage point decrease in the international passenger load factor from 66.5% in 2001 to 65.0% in 2002. Total international passenger yield (RPKs) remained relatively flat (it declined only 0.2% from US¢6.87 in 2001 to US¢6.86 in 2002) as weaker yields during the first half of the year were offset by higher ones in the second semester due to a reduction in average trip lengths and a reduction in the relative weight of lower-yielding Argentine connecting traffic.
Our cargo revenues fell 3.5% to US$520.8 million in 2002 from US$539.5 million in 2001 as traffic declined 1.0% and yield decreased 2.5% to US¢28.40 from US¢29.11. Cargo load factors decreased 2.1% as capacity increased 2.0%. Reduced cargo traffic was caused by weak southbound demand for imports to the region following the Argentine crisis, and weak GDP growth and currency depreciation in Brazil and Chile. These situations, together with increased competition, also led to lower yields. International cargo revenues accounted for over 95% of total cargo revenues during both years and decreased 3.1% to US$502.0 million in 2002 from US$518.2 million in 2001.
Other revenues increased 49.0%. This improvement relates mainly to increased aircraft leases (including dry-leases, wet-leases, capacity sales to alliance partners and charter flights) and the growth of in-flight sales and to the consolidation of LanLogistics. Excluding LanLogistics, other revenues increased 18.7%.
Operating Expenses
Operating expenses in 2002 totaled US$1,390.4 million, a 0.9% increase over 2001’s operating expenses of US$1,378.1 million. Total operating cost for the full year increased 0.9% as capacity increased 1.1%. Excluding LanLogistics, a subsidiary that was consolidated basis.
during 2002, operating expenses decreased 1.2% as capacity increased 1.1%, reflecting the measures that we took to streamline our airline operations. Operating expenses for 2001 and 2002 also include the impact of the consolidation of LanPeru. From its consolidation on August 1, 2001 until December 31, 2001, LanPeru generated US$18.9 million in operating expenses, and from January 1, 2002 until December 31, 2002, LanPeru generated US$63.3 million in operating expenses. Unit costs (measured as operating costs and capital expenses, per ATK) declined 2.8% in 2002. As a percentage of total operating revenues, consolidated operating expenses fell from 96.5% to 95.7%.
Our wages and benefits expenses in 2002 totaled US$215.3 million, a 6.0% increase over 2001’s wages and benefits expenses of US$203.0 million. Excluding LanLogistics, wages and benefits expenses increased 0.7%, due to increases in headcount in order to support a 1.1% increase in total capacity.
Aircraft fuel expenses in 2002 totaled US$205.5 million, a 7.6% decrease over 2001’s aircraft fuel expenses of US$222.4 million. This decrease was primarily due to a 7.8% decrease in average fuel prices which was primarily offset by a 0.2% increase in fuel consumption. To reflect our operational results more clearly, the gains and losses incurred due to fuel hedging activities have been reclassified into the “Other Income (Expense)” line of the “Other Income (Expense)” section of our financial statements. In 2002, we recorded a US$5.5 million loss from our swap fuel contracts, compared to a US$10.5 million loss in 2001.
Commissions to agents expenses fell 3.9% to US$192.7 million in 2002 from US$200.5 million in 2001 primarily due to our focus on reducing distribution costs, especially in the passenger business (for example, by increased direct sales via the Internet and our call centers). Results from these efforts were partially offset by higher cargo commissions. As a percentage of operating (passenger and cargo) revenues, commissions to agents decreased 0.4 percentage points from 14.9% to 14.5%.
Depreciation and amortization expenses in 2002 totaled US$67.8 million, a 30.6% increase over 2001’s depreciation and amortization expenses of US$51.9 million. This increase was due to the incorporation in 2002 of new aircraft in our fleet as well as the effect of a full year of depreciation relating to the aircraft we incorporated into our fleet during 2001 (which we incorporated into our fleet mainly during the fourth quarter of 2001).
Other rental and landing fees decreased 6.6% to US$228.7 million in 2002 from US$244.9 million in 2001. This decrease resulted from a significant decrease in the use of wet-leased aircraft and other cost reduction initiatives, which were partially offset by increased insurance expenses following the September 11 attacks and increased over-flight and landing fee expenses due to increased operations.
Passenger service expenses totaled US$32.3 million in 2002 and US$35.9 million in 2001. This 9.9% decrease reflects efficiency gains given that per passenger costs declined while maintaining product quality.
Aircraft rental expenses increased 9.1%, to US$159.8 million in 2002 from US$146.4 million in 2001. Aircraft rentals increased primarily due to the full year impact of the aircraft that we incorporated into our fleet through operating leases in 2001 and the lease of two Airbus A320 aircraft during 2002. Because the aircraft that we have incorporated into our fleet under these new leases have higher lease payments than the aircraft that we returned during 2002, aircraft rentals increased despite a reduction in the total number of aircraft leased.
Aircraft maintenance expenses were US$95.1 million in 2002, declining 9.6% from the US$105.2 million recorded in 2001. Aircraft maintenance expenses decreased despite a 1.1% increase in capacity, as measured by system ATKs, due to the incorporation of our new Airbus fleet, streamlined processes and a US$3.6 million net non-recurring reduction in expenses arising from an adjustment to provisions related to the return of leased aircraft, and the phase-out of our DC-8 freighter fleet in 2001. In 2001, we had a US$8.0 million one-time provision for the anticipated phase-out of the DC-8 freighter fleet.
Other operating expenses increased 15.1% to US$193.1 million in 2002 from US$167.8 million in 2001. Other operating expenses include sales-related expenses, communication, distribution and data processing costs, and banking and non-collectable account expenses. Excluding LanLogistics, other operating expenses increased approximately 4.1%.
Operating Income
Operating income increased 23.5%, to US$62.1 million in 2002 from US$50.3 million in 2001. Operating margins improved 0.8 percentage points to 4.3% in 2002 from 3.5% in 2001 as a 1.7% increase in operating revenues outpaced a 0.9% increase in operating expenses. For the full year, revenues per ATK (for passengers and cargo) declined 2.9% from US¢31.87 to US¢30.93, as costs per ATK fell 3.3% from US¢31.39 to US¢30.35.
Non-Operating Income (Expense)
Our net non-operating expenses declined to US$23.8 million in 2002 from US$38.4 million in 2001 (a decrease of 37.9%). This decrease was primarily the result of a number of special items and a decrease in losses relating to fuel price hedging arrangements. Additional non-operating income and expenses in 2002 include a US$23.6 million gain from finance-related items. In 2002, we recorded a US$5.5 million fuel hedging loss, compared to US$10.5 million fuel hedging loss in 2001. In 2001, we realized a non-recurring gain of US$6.0 million related to the sale of a portion of our stake in Equant N.V., a US$5.0 million gain from finance-related items, US$5.5 million loss in severance payments and provisions and a US$3.0 million provision for losses in Argentina. Interest expenses increased by 14.9% from US$35.5 million in 2001 to US$40.8 million in 2002 due to the additional financing related to the incorporation of new aircraft into our fleet. In addition, our foreign exchange losses increased from US$3.8 million in 2001 to US$4.7 million in 2002.
Income Taxes
Income tax expense for 2002 amounted to US$7.0 million. In 2001, we recorded tax loss carry forwards of US$0.6 million. Income tax expense increased due to an increase in our taxable income and increased tax payments by foreign subsidiaries. For more information, see “––Critical Accounting Policies––Deferred Income Taxes” below and Note 13 to our audited consolidated financial statements. Our effective income tax rate in 2002 was 18.5%, compared to a positive tax benefit of 5.4% in 2001.
U.S. Dollar Presentation and Price-Level Adjustments
LanChile (since January 1, 1998) as well asand most of itsour subsidiaries maintain their accounting records and prepare their financial statements in U.S. dollars. For purposes of preparing the audited consolidated financial statements, we translate monetary assets and liabilities denominated in currencies other than U.S. dollars to U.S. dollars at the exchange rate prevailing at the applicable balance sheet date, and we translate income statement accounts at the exchange rate prevailing on the dates on which the revenues and expenses were received, paid or accrued.
Chilean GAAP requires that financial statements prepared in Chilean pesos recognize the effects of inflation. Accordingly, unless we indicate otherwise, we have restated all financial information of our subsidiaries that maintain their accounts in Chilean pesos to eliminate the distorting effects of changes in inflation on non-monetary assets, liabilities and shareholders'shareholders’ equity. We have then translated this financial information to U.S. dollars, as described above, for purposes of consolidating it into theour audited consolidated financial statements. The general price-level gain or loss we record in the income statement under "Other“Other Income (Expense)"” indicates the effect of inflation on our subsidiaries'subsidiaries’ net holdings of monetary assets and liabilities during a period of inflation. We consider assets and liabilities "monetary"“monetary” for purposes of general price-level accounting if their amounts are fixed by contract or otherwise in terms of number of currency units, regardless of changes in specific prices or in the general price level. Examples of "monetary"“monetary” assets and liabilities include accounts receivable, accounts payable and cash.
Effects of Exchange Rate Fluctuations
Our functional currency is the U.S. dollar in terms of the pricing of our products, composition of our balance sheet and effects on our results of operations. We sell mostMost of our servicesrevenues (approximately 89%76% in 2002)2003) are in U.S. dollars or in prices pegged to the U.S. dollar and a substantial portion of our expenses (approximately 80%73% in 2002)2003) is denominated in dollars or pegged to the U.S. dollar, in particular fuel costs, landing and overflight fees, aircraft rentals, insurance and aircraft components and supplies. We have significantAlmost all of our liabilities are denominated in U.S. dollars (approximately 96%96.6% in 2002)2003), including bank loans, air traffic liabilities, and certain supplier payables, and
significantamounts payable to our suppliers. In 2003, approximately 92.4% of our assets were denominated in U.S. dollars, (approximately 94% in 2002), principally aircraft, cash and cash equivalents, accounts receivable and accounts receivable.other fixed assets. Substantially all of our commitments, including operating leases and purchase commitments in respect of nine Boeing aircraft and fourfor Airbus aircraft, are denominated in U.S. dollars.
Although we generally maintain our international passenger fares and cargo prices in U.S. dollars or at prices pegged to the U.S. dollar, we are exposed to foreign exchange losses and gains due to exchange rate fluctuations. We recorded a net exchange lossesloss of US$5.7 million in 2000, US$3.8 million in 2001, anda net exchange loss of US$4.7 million in 2002, and a net exchange gain of US$12.1 million in 2003 which are set forth in theour income statement under "Other“Other Income (Expense)”." For more information, see Notes 2(e) and 20 to theour audited consolidated financial statements. Our exchange losses in 2000, 2001 and 2002 were primarily due to the devaluationdepreciation of Latin American currencies, principally the Chilean peso and the Argentine peso.
peso, and the gain in 2003 was associated with the appreciation of Latin American currencies, primarily the Chilean peso against the U.S. dollar.
GAAP/Non-GAAP Reconciliation
We use “Cost per ATK” and “Cost per ATK excluding fuel price variations” in analyzing operating costs on a per unit basis. “ATKs” (available ton kilometers) measure the number of tons of capacity available for the transportation of revenue load (passengers and/or cargo) multiplied by the kilometers flown. To obtain our unit costs, which is used by our management in the analysis of our results, we divide our total ATKs by our ATK costs, which are calculated by starting with operating costs as defined under Chilean GAAP and making certain adjustments for interest costs and other revenues. This costs component is further adjusted to obtain “costs per ATKs excluding fuel price variations”, in order to remove the impact of changes in fuel prices for the year. “Cost per ATK” and “Cost per ATK excluding fuel price variations” do not have a standardized meaning, and as such may not be comparable to similarly titled measures provided by other companies. They are not Chilean GAAP-based measures of performance or liquidity. These metrics should not be considered in isolation, or as a substitute for
operating costs or as indicators of performance or cash flows as a measure of liquidity. The table below reconciles operating costs as defined by Chilean GAAP to costs used in the calculation of “Cost per ATK” and “Cost per ATK excluding fuel price variations”.
| 2001 | 2002 | 2003 | ||||
Cost per ATK | ||||||
Operating cost (US$ thousands) | 1,378,089 | 1,390,371 | 1,527,083 | |||
+ Interest expenses (US$ thousands) | 35,463 | 40,758 | 39,350 | |||
- Interest income (US$ thousands) | 5,476 | 3,757 | 6,277 | |||
- Other revenues (US$ thousands) | 85,842 | 127,925 | 118,392 | |||
ATK operating costs | 1,322,234 | 1,299,447 | 1,441,764 | |||
Divided by systems ATKs (thousands) | 4,212,462 | 4,281,835 | 4,539,164 | |||
= Cost per ATK (US$ cents) | 31.39 | 30.35 | 31.76 | |||
Cost per ATK excluding fuel price variations | ||||||
ATK operating cost | 1,322,234 | 1,299,447 | 1,441,764 | |||
- Actual fuel expenses (US$ thousands) | 222,402 | 205,524 | 259,566 | |||
+ (Gallons consumed) times (previous year’s fuel price) | 253,221 | 222,929 | 218,662 | |||
ATK operating costs excluding fuel price variations | 1,353,052 | 1,316,853 | 1,400,862 | |||
Divided by systems ATKs (thousands) | 4,212,462 | 4,281,835 | 4,539,164 | |||
= Cost per ATK excluding fuel price variations (US$ cents) | 32.12 | 30.75 | 30.86 |
Seasonality
Our operating revenues are substantially dependent on overall passenger and cargo traffic volume, which is subject to seasonal and other changes in traffic patterns. Our passenger revenues are generally higher in the first and fourth quarters of each year, during the southern hemisphere’s spring and summer, than in the second and third quarters. Our cargo revenues generally are higher in the fourth quarter, which correspond to the harvest season in the southern hemisphere. Since Peru and Ecuador have different seasonal patterns, the expansion into those markets has led to stronger passenger revenues in the second and third quarters, therefore moderating the overall seasonality of our results.
Critical Accounting Policies
A summary of our significant accounting policies is included in Note 2 to our audited consolidated financial statements, which are included elsewhere in this document. We believe that the consistent application of these policies enables us and our subsidiaries to provide readers of the financial statements with more useful and reliable information about our operating results and financial condition. The preparation of financial statements requires management to make certain estimates and assumptions. The following are the accounting policies that we believe are the most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective or complex judgments.
Revenue Recognition
We recognize passenger revenue and related commissions, if any, when transportation is provided or when the ticket expires unused rather than when a ticket is sold. Unused nonrefundable tickets are considered expired one year from the date the ticket was sold, or for partially used tickets, one year after the date of the first flight.
The amount of passenger ticket sales not yet recognized as revenue is reflected as air traffic liability. Commissions related to such unearned revenue are shown net of the air traffic liability. Air traffic liability includes estimates of the amount of future refunds and exchanges, net of forfeitures for all unused tickets once the flight date has passed. We perform periodic evaluations of this estimated liability based on historical experiences. Any adjustments, which can be significant, are included in results of operations for the periods in which the evaluations are completed. These adjustments relate primarily to differences between our estimation of certain revenue transactions and the related sales price, as well as refunds, exchange and other items for which final settlement occurs in periods subsequent to the sale of the related tickets at amounts other than the original sales price.
Events and circumstances outside of historical fare sale activity or historical customer travel patterns can result in actual refunds, exchanges or forfeited tickets differing significantly from estimates. We evaluate our estimates periodically. If actual refunds, exchanges or forfeitures fall outside of this range, we review our estimates and assumptions and adjust “Air traffic liability” and “Passenger revenue” as necessary. Our estimation techniques have been consistently applied from year to year; however, as with any estimates, actual refund and exchange activity may vary from estimated amounts. Furthermore, we believe it is unlikely that materially different estimates for future refunds, exchanges and forfeited tickets would be reported.
Property and equipment
Equipment
The key judgments we must make under the property and equipment policy include the estimation of the useful lives of our various asset types, expected residual values, the election to utilize primarily the straight-line method for recording depreciation, management'smanagement’s judgment regarding appropriate capitalization or expensing of costs related to fixed assets, and our determination that no impairment exists.
Property and equipment are stated at cost and are depreciated by the straight-line method based on the estimated useful lives of the assets,assets. In estimating the lives and expected residual values of our aircraft, we have primarily relied upon actual experience with the exceptionsame or similar aircraft types and recommendations from the manufacturers of the aircraft we operate. Aircraft estimated useful lives are based on the number of “hours” flown and “cycles” flown (a “cycle” is one take-off and landing). We have made a conversion into years based on both our historical and anticipated future utilization of the aircraft. Subsequent revisions to these estimates, which can be significant, could be caused by changes to our maintenance program, changes in utilization of the aircraft (actual cycles during a given period of time), governmental regulations on aging aircraft, and engines owned bychanging market prices of new and used aircraft of the Company, which are depreciated on
the basis of hours flown. The Companysame or similar types.
We also entersenter into capital lease agreements relating to anone aircraft and certain buildings and equipment, which have bargain purchase options at the end of each contract. These assets are not theour legal property, of the Company, because itwe cannot dispose of them until the purchase option is exercised. These assets are recorded at their fair value on the date of the lease agreement, which is determined by discounting the amounts payable in installments and the purchase option at the interest rate implicit, or explicit, in the contract. The corresponding leasing obligations are presented under long-term liabilities and under the current portion of long-term leasing obligations, net of the corresponding deferred interest.
Property and equipment assets are evaluated for possible impairment, as applicable. Factors that would indicate potential impairment may include, but are not limited to, significant decreases in the market value of long-lived assets, a significant change in the long-lived asset’s physical condition and operating or cash flow losses associated with the use of the long-lived asset. This process requires our estimate of future cash flows generated by each asset or group of assets. For any instance where this evaluation process indicates impairment, the appropriate asset'sasset’s carrying values are written down to net realizable value and the amount of the write-down is charged against the results of continuing operations.
Expenditures that substantially improve and/or increase the useful life of facilities, orengines and equipment are capitalized. Minor and other unscheduled maintenance costs of aircraft and engines are charged to income as incurred. Costs of major programmed maintenance are accrued based on the use of the aircraft and engines (flying hours). Our estimation of this accrual and the evaluation of whether an expenditure related to property and equipment substantially improves and/or increases the useful life of an asset and is appropriately capitalized as an addition to the asset'sasset’s cost basis or is expensed as normal maintenance and repair expense can significantly affect results of operations for a given period, as well as our financial position.
Goodwill
Management also must exercise judgment in assessing goodwill and negative goodwill assets for impairment. Goodwill arises from the excess of the purchase price of companies acquired over their net book value. We amortize costs in excess of book value of net assets (and the excess of book value over cost) of our businesses using the straight-line method over a period not to exceed 20 years. This period is based on management'smanagement’s assumption regarding the useful lifeestimated period of assets acquired.recovery regarding these investments. This assumption takes into consideration
various factors including, but not limited to, significant decreases in the market value of the investment, significant changes in legal or regulatory provisions and how these may impact the value of an investment and rates of returns used in calculating operating or cash flow losses associated with the use of our assets. We review the recorded value of our goodwill annually, or sooner if changes in circumstances indicate that the carrying amount may exceed fair value. Recoverability of the carrying value of the asset is determined by comparing to net book value, including goodwill, andto fair value based on the estimated future net cash flows of the relevant assets.
Derivative Instruments Used For Aircraft Fuel
We utilize financial derivative instruments to manage the price risk of changing aircraft fuel prices and interest rates. At December 31, 2003 the fair value of our position under our derivative instruments was a loss of $9.1 million. The fair value of jet fuel derivative instruments was $15.5 million. As a portion of our financial derivative instruments are not traded on a market exchange, we estimate their fair values with the assistance of third parties determined by the use of present value methods or standard option value models, with assumptions about commodity prices based on those observed in underlying markets. In addition, as there is not a reliable forward market for jet fuel, we must estimate the future prices of jet fuel in order to measure the effectiveness of the hedging instruments in offsetting changes to those prices. Forward jet fuel prices are estimated by observing similar commodity futures prices (such as crude oil) and adjusted based on variations to those like commodities. As the majority of our fuel hedges settle within 18 months, the variation between estimates and actual prices are recognized in a short period of time.
Deferred income tax
Income Taxes
Effective January 1, 2000, the effects of deferred income taxes arising from temporary differences between the basis of assets and liabilities for tax and financial statement purposes are recorded in accordance with Technical Bulletin No. 60 of the Chilean Institute of Accountants. The effects of deferred income taxes at January 1, 2000, which were not previously recorded, are recognized in income beginning in 2000 as the temporary differences reverse. Under Technical Bulletin No. 60, deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. In making this determination, we consider both positive and negative evidence and make certain assumptions, including projections of taxable income. Changes in these assumptions may have a material impact on results.
The Operating Environment
Our historical financial results have been, and we expect our financial
results to continue to be, materially affected by the general level of economic
activity and growth of per capita disposable income in Chile, as well as, with
respect to our international cargo operations, the volume of trade between Chile
and other countries. The Chilean economy experienced significant growth during
the 1990s, which contributed to increased levels of demand for our passenger and
cargo air services. However, lower economic growth since 1998 has impacted
demand for our services. The average annual growth rate of Chile's gross
domestic product between 1997 and 2002 was approximately 2.4%. According to
revised figures published by the Chilean Central Bank in 2003, the growth rate
for Chilean GDP was 4.2% in 2000, 3.1% in 2001 and 2.1% in 2002.
Given the significant challenges that we have faced since the second
half of 2001, we have sought to manage our passenger capacity carefully. In the
passenger business, to offset the decreased demand due to the terrorist attacks
in the United States and the economic crisis in Argentina, we expanded our
operations in Peru and Ecuador, and adjusted our capacity on North American,
European and Argentine routes to minimize the impact of the reduced demand on
our revenues. Additionally, we signed new alliance agreements and enhanced
existing ones, and improved our connections to take advantage of increased
demand to Argentina from other Latin America countries. We also increased our
promotional activities and direct sales efforts, and made schedule and product
improvements. In the cargo business, we aimed at strengthening our competitive
position in both new and existing markets, strengthening our cargo affiliates,
managing the reduction in southbound flows, and developing new partnerships.
Growth in Passenger and Cargo Revenues
Despite adverse market conditions, our operating revenues have grown
over each of the last five years. Our operating revenues grew 0.2% between 2000
and 2001 and 1.7% between 2001 and 2002. Growth in 2001 and 2002 was impacted by
the September 11, 2001 attacks, the Argentinean economic crisis and global
economic weakness. The majority of our operating revenues are derived from our
passenger and cargo airline operations. In 2002, 55.3% of our total operating
revenues came from passenger operations and 35.9% came from cargo operations.
The balance of our operating revenues is generated by airport ground services,
aircraft leases, logistics and courier services, duty free sales, tour services,
third-party maintenance, ground handling, storage, charter operations, credit
card co-branding, CRS services and airline-related security services.
Passenger revenues increased 7.0% between 2000 and 2001, and 0.1%
between 2001 and 2002. The increase in 2002 reflects a 1.2% decrease in
passenger traffic (as measured in RPKs) which was fully offset by a 1.3%
increase in passenger yields. Passenger traffic declined mainly due to the
Argentine economic crisis and the impact on demand of the September 11, 2001
attacks in the United States. Passenger yields improved due to a decrease in the
amount of Argentine passengers in our long-haul network (connecting traffic
usually has lower yields) and a reduction in average trip length of our flights
due to increased operations in Peru and Ecuador (on average, we receive more
revenue per kilometer flown on short-haul flights than on longer flights).
Cargo revenues decreased 9.1% in 2001 and 3.5% in 2002. The decrease in
2002 reflected a 1.0% decrease in cargo traffic as measured in RTKs, resulting
from weak demand for imports in Brazil, Argentina and Chile, as well as a 2.4%
decrease in cargo yields, resulting from the combination of weak South-bound
demand and aggressive pricing by competitors.
Other revenues increased 49.0%. This increase can be partially
attributed to the consolidation of LanLogistics. Excluding LanLogistics, other
revenues increased 18.7%. This improvement relates mainly to increased aircraft
leases (including dry-leases, wet-leases, capacity sales to alliance partners,
and charter flights) and the growth of in-flight sales.
Certain Significant Expenses of the Company
Substantially all of our operating expenses result from our passenger
and cargo airline operations. Our operating expenses increased 0.9% between 2002
and 2001. We have focused on controlling operating expenses, and believe that
maintaining a cost advantage is an essential aspect of our business strategy,
especially in a difficult operating environment. We have implemented training
programs for our employees to improve efficiency and productivity, taken
advantage of improving economies of scale, improved our systems technology,
increased direct sales and streamlined and consolidated operations, in
particular to reduce redundant functions between our operating companies. Due to
the adverse operating environment the Company faced during 2002, we implemented
additional cost control measures that included the renegotiation of third-party
supply and service contracts, increased use of technological solutions and
process redesign. As a consequence, operating cost per ATK decreased from
US(cent)31.32 in 2001 to US(cent)30.35 in 2002.
Our operating expenses rose in the past in part as a necessary
condition to, and as a result of, the growth in our capacity, as measured by
ATKs. System ATKs increased 7.1% in 2000, 2.7% in 2001, and 1.1% in 2002. In
2002, system ATKs were 4,281.8 million as compared to 4,237.1 million in 2001.
Cargo ATKs increased 2.0% to 2,731.0 million in 2002 from 2,676.4 million in
2001, and passenger ASKs increased 1.0% from 16,901.7 million in 2001 to
17,066.8 in 2002. This growth in capacity has required higher levels of
investment and commitment of resources by us. A significant percentage of our
operating expenses are fixed costs that do not vary proportionally based on our
load factors, number of passengers carried, number of flights flown or
utilization rates. Thus, a minor change in our yields or load factors can have a
material effect on our results of operations, and our operating results can also
be substantially affected by relatively minor changes in aircraft utilization
rates.
Expenses associated directly with our flight operations include
aircraft fuel costs, aircraft rentals and flight personnel wages, benefits and
training. Expenses associated directly with our aircraft and traffic servicing
operations and navigation fees include rental payments for terminal and other
ground facilities, landing fees and labor costs for ground personnel. Expenses
associated directly with repairs and maintenance in respect of our aircraft
include aircraft repair and maintenance charges, the cost of maintenance
materials and labor costs for maintenance personnel. Expenses associated
directly with promotional and marketing activities include commissions to
agents, fees for use of CRSs, ticket-printing and sales office expenses,
advertising and other promotional expenses. The balance of our operating
expenses includes general and administrative expenses, such as salaries and
benefits for all other personnel not included in any of the foregoing
categories.
Set forth below is a discussion of our most significant operating
expenses.
Wages and Benefits
Labor costs are a significant variable that can substantially impact
airline results. Wages and benefits constituted 14.8% and 14.7% of our total
operating expenses for 2000 and 2001, respectively. For 2002, total wages and
benefits constituted approximately 15.5% of our total operating expenses for
2002. Wages and benefits increased 6.0% between 2001 and 2002. The consolidation
of new subsidiaries, especially LanLogistics, was the main reason for this
increase. Excluding LanLogistics, wages and benefits increased 0.7%.
We continuously strive to increase the quality of our services and
attract highly qualified personnel able to contribute to our growth. In this
regard, we have increased wages in key areas of our operations, such as flight
personnel, maintenance and senior management. In addition, wages also increase
as a result of cost of living adjustments provided for in our collective
bargaining agreements and other employment contracts.
Commissions to Agents
A significant portion of our passenger and cargo sales is made through
independent travel agents located in Chile and overseas. Commissions to agents
constituted approximately 16.6% of operating expenses (passenger and cargo) in
2000, 14.9% in 2001, and 14.5% in 2002. Commissions to agents decreased 3.9%
between 2001 and 2002, primarily because of decreased cargo sales, lower travel
agency commissions and an increase in direct sales. Commissions as a percentage
of passenger and cargo revenues decreased from 14.9% to 13.9% reflecting our
focus on reducing distribution costs, in particular related to our focus on
increasing direct sales in our passenger business. In addition, we, like most
other airlines, compete with respect to the amount of commission paid to travel
agents, in particular in connection with special programs and marketing efforts.
We have conducted an aggressive effort to increase our international passenger
services and, in this regard, have offered premiums on commissions to agents who
have sold tickets in excess of certain target amounts. However, in November
2000, we reduced our standard commission rates from 9% to 6% following the
decision of American Airlines and United Airlines to do the same. The full
effect of this decision on the amount of commission we paid agents on an annual
basis was reflected in 2001.
Aircraft Fuel
Aircraft fuel costs constituted approximately 17.2% of total expenses
in 2000, 16.1% in 2001, and 14.8% in 2002. Fuel costs decreased 4.4% between
2000 and 2001 due to a 12.2% decrease in prices, which was partially offset by
an 8.9% increase in the quantity of fuel our aircraft consumed. Our fuel costs
decreased 7.6% between 2001 and 2002 due to a 7.8% decrease in prices and a 0.2%
increase in consumption. Since 1995, we have entered into petroleum purchase
option contracts to hedge our aircraft fuel purchases against significant
increases in market prices. In 2000, we received a US$8.1 million benefit from
fuel hedging positions. In 2001, we incurred a US$10.5 million fuel hedging loss
and in 2002, we recorded a US$5.5 million loss from fuel hedging. To improve the
clarity of our operating results these hedging profits and losses have been
reclassified into the "Other income (expense) - net" line of LanChile's
consolidated statement of income.
Aircraft Rentals
Aircraft rental expenses increased 9.1% between 2001 and 2002, mainly
due to the full-year impact of the seven aircraft incorporated pursuant to
operating leases during 2001 (which we incorporated into our fleet primarily
during the fourth quarter) and the addition of two Airbus A320 aircraft during
2002. During 2001, we incorporated four new Airbus A320 aircraft, two new A340
aircraft and one Boeing 767 freighter. The addition of these aircraft fully
offset the return or purchase during 2002 of nine aircraft that we had
previously leased. Aircraft rental expenses arising from operating leases vary
from time to time based on rental rates, which change depending on supply and
demand for certain aircraft. In April 2003, we successfully renegotiated several
lease agreements pertaining to aircraft currently in our fleet resulting in a
US$15 million reduction in lease expenses during 2003. This reduction in lease
payments will continue and gradually increase over time and is expected to
result in a savings of approximately US$30 million in 2004, as compared to the
scheduled lease payments under the lease agreements prior to their
renegotiation. For more information, see "Information on the
Company--Fleet--Fleet Leasing and Financing Arrangements" in Item 4.
Interest Expense
During 2002, we incurred US$40.8 million of non-operating expenses in
the form of interest expense, a 14.9% increase over interest expense of US$35.5
million in 2001. The majority of this interest expense was associated with
borrowings incurred to finance the acquisition of aircraft.
Maintaining Profitability Despite Recent Challenges
During 2002, we faced unprecedented challenges. In addition to the
reduction in passenger traffic caused by the terrorist attacks of September 11,
2001 in the United States, the economic crisis in Argentina had an additional
negative effect on revenues. Through the second quarter of 2002, revenues were
down nearly 9.0% and operating income was down 48.8% compared to the same period
in 2001. However, due to a series of adjustments we were able to increase
profitability. For the full year, our operating income for 2002 increased 23.5%
from US$50.3 million in 2001 to US$62.1 million in 2002 due to a 1.7% increase
in revenues which was partially offset by a 0.9% increase in operating costs.
Our total operating margin improved from 3.5% in 2001 to 4.3% in 2002. Due to
the increase in operating income and the 37.9% decrease in our non-operating
expenses in 2002 as compared to 2001, net income improved 184.2% from US$10.8
million in 2001 to US$30.8 million in 2002. Excluding special items, net income
amounted to approximately US$8.7 million. Special items for 2002 included a
US$3.6 million pre-tax reduction in expenses from an adjustment to provisions
related to the return of leased aircraft and phase-out of our DC-8 freighter
fleet and a US$23.5 million pre-tax gain for non-operating finance-related items
(principally tax leases under which received favourable lease rates and were
paid for providing investors with a structure enabling them to take advantage of
tax benefits). In the past two years, we have recorded gains from similar
finance-related transactions (US$5.0 million in 2001 and US$9.7 million in
2000), but it is impossible to predict whether we will have similar gains in the
future. The reduction in non-operating expenses relates mainly to the
aforementioned gain from finance-related transactions and a US$5.0 million
reduction in fuel-hedging losses, which were partially offset by higher interest
expenses.
Our historical results of operations may not be indicative of our
future operating performance. Our future results of operations will be affected
by, among other things:
o overall passenger traffic volume;
o economic and political conditions in Chile and other Latin
American countries;
o global economic and political conditions;
o seasonal variations in travel;
o government regulations;
o fuel prices;
o foreign currency fluctuations;
o competition;
o changes in aircraft acquisition and leasing costs and other
operating expenses; and
o rates of income tax we pay.
Taxes
In 2002 we were subject to income tax in Chile at a rate of 16.0%. We
are subject to a 16.5% income tax rate in 2003 and we will be subject to a 17.0%
rate from 2004 onwards. Outside Chile, we are subject to local income tax
regulations in each jurisdiction in which we operate. Under a reciprocal
exemption confirmed by a bilateral agreement between Chile and the United
States, we are entitled to exclude from our taxable income in the United States
for U.S. federal tax purposes, certain U.S.-source transportation income derived
from the international operation of aircraft. In addition, Chile has similar
bilateral tax agreements with Argentina, Brazil, Uruguay, Spain and Germany, the
countries in which we conduct the major part of our business. Pursuant to
Chilean GAAP, until December 31, 1999, tax loss carryforwards were not
recognized until they were applied to reduce taxable income. Deferred tax
liabilities resulting from timing differences between tax and book income were
not recorded to the extent they were expected to be offset by new temporary
differences of the same nature arising in the year of reversal. However, since
January 1, 2000, we have been required to record the tax effect of all timing
differences between tax and book income under a new accounting pronouncement in
Chile. The pronouncement requires us to offset deferred tax items by
complementary asset and liability accounts, the effect of which is that deferred
income taxes from years prior to 2000 are recognized in the current income tax
provision as they reverse, similar to what was done in prior years. The full
effect of deferred income tax assets and liabilities arising in 2000 and future
years must be recorded as they arise. In 2000, complying with this pronouncement
resulted in the inclusion of US$10.1 million in deferred income taxes in our
income statement which relate to net deferred income tax liabilities arising in
2000. The principal deferred tax liability relates to and is offset by tax loss
carryforwards which are expected to be utilized in future years. For more
information, see Note 13 to our consolidated financial statements.
Seasonality
Our operating revenues are substantially dependent on overall passenger
and cargo traffic volume, which is subject to seasonal and other changes in
traffic patterns. Our passenger revenues generally are higher in the first and
fourth quarters, during Chile's spring and summer, than in the second and third
quarters. Our cargo revenues generally are higher in the third and fourth
quarters, which correspond to the harvest season in the southern hemisphere.
Operating Results
The following table sets forth certain income statement data for
LanChile expressed as a percentage of total operating revenues for each of the
periods indicated.
Years ended December 31,
----------------------------
2000 2001 2002
---- ---- ----
Operating revenues:
Passenger......................... 52.7% 56.2% 55.3%
Cargo............................. 41.6 37.8 35.9
Other............................. 5.7 6.0 8.8
------ ------ ------
Total operating revenues........ 100.0 100.0 100.0
Operating expenses:
Wages and benefits................ 14.1 14.2 14.8
Aircraft fuel..................... 16.3 15.6 14.2
Commissions to agents............. 15.7 14.0 13.3
Depreciation and amortization..... 2.9 3.6 4.7
Other rentals and landing fees.... 17.7 17.1 15.7
Passenger services................ 2.4 2.5 2.2
Aircraft rentals.................. 8.3 10.3 11.0
Aircraft maintenance.............. 5.9 7.4 6.6
Other operating expenses.......... 11.4 11.7 13.3
------ ------ ------
Total operating expenses........ 94.1 96.5 95.7
Operating income...................... 5.3 3.5 4.3
Other expense:
Interest income................... 0.4 0.4 0.3
Interest expense.................. (2.2) (2.5) (2.8)
Miscellaneous-net................. 0.7 (0.6) 0.9
------ ------- ------
Total other expense............. (1.1) (2.7) (1.6)
Income before minority interest....... 4.1 0.8 2.6
Minority interest..................... 0.0 0.0 0.0
------ ------ ------
Income before income taxes............ 4.1 0.7 2.6
Income taxes.......................... (0.7) (0.0) (0.5)
------- ------- -------
Net income............................ 3.4% 0.8% 2.1%
======= ======= =======
2002 Compared with 2001
Net Income
Our net income increased 184.2% from US$10.8 million in 2001 to US$30.8
million in 2002. This increase is mainly due to a 23.5% improvement in operating
income and a lower non-operating loss as compared to 2001. Operating income
increased even though demand on both our passenger and cargo businesses was
impacted by the economic crisis in Argentina, weak economic conditions and
increased uncertainty in South America and the repercussions of the September
11, 2001 terrorist attacks in the United States. In order to offset the revenue
shortfall caused by the aforementioned events, we implemented a strategy aimed
both at developing new revenue sources and controlling operating costs. Traffic
revenues, which had declined 10.0% year-on-year through the first semester, grew
7.9% in the second semester of 2002 when compared to 2001. Revenue generation
improved throughout the year as the Company expanded its operations and
commercial efforts in Peru and Ecuador, redesigned its itineraries in order to
both match supply and demand on key routes to Europe and the United States and
to capitalize on a relative increase in travel demand to Argentina and developed
new alliance relationships. Other revenues also improved, partially due to this
strategy, and, excluding LanLogistics, increased 18.7% between 2001 and 2002.
Cost controls were also key to improving profitability. Excluding LanLogistics,
operating costs fell 1.2% as capacity increased 1.1%, reflecting the measures
that we took to streamline our airline operations. Total operating cost
(including LanLogistics) for the full year increased 0.9% as capacity increased
1.1%. Non-operating losses in 2002 declined when compared to 2001 as lower
interest income and higher interest expenses were offset by miscellaneous gains
(as explained under "Non Operating Income (Expense)"). Finally, income taxes
increased from a gain from tax loss carry forwards of US$552,000 in 2001 to a
US$7.0 million tax expense in 2002.
Operating Revenues
Operating revenues in 2002 totaled US$1,452.4 million, a 1.7% increase
over operating revenues of US$1,428.3 million in 2001. Our consolidated
passenger revenues grew 0.1% from US$803.0 million in 2001 to US$803.7 million
in 2002, as a 1.2% decrease in passenger traffic was fully offset by a 1.3%
improvement in yield (from US(cent)7.12 to US(cent)7.22). Passenger revenues for
2002 and 2001 also include the impact of the consolidation of LanPeru. From its
consolidation on August 1, 2001 until December 31, 2001, LanPeru generated
US$20.3 million in operating revenues, and from January 1, 2002 until December
31, 2002, LanPeru generated US$68.8 million in operating revenues. Traffic
declined mainly due to the economic crisis in Argentina, weak economic
conditions and increased uncertainty across Latin America, and the depressed
demand to the United States during the first part of the year because of the
terrorist attacks of September 11th, 2001. Our cargo revenues fell 3.5% as
traffic declined 1.0% and yield decreased 2.5% from US(cent)29.11 to
US(cent)28.40. Reduced cargo traffic was caused by weak southbound demand for
imports to the region following the Argentine crisis, and weak GDP growth and
currency depreciation in Brazil and Chile. These situations, together with
increased competition, also led to lower yields. Other revenues increased 49.0%.
This improvement relates mainly to increased aircraft leases (including
dry-leases, wet-leases, capacity sales to alliance partners and charter flights)
and the growth of in-flight sales and to the consolidation of LanLogistics.
Excluding LanLogistics, other revenues increased 18.7%.
Our domestic passenger revenues, which accounted for 26.5% of passenger
revenues in 2001 and for 27.8% in 2002, increased 5.1% from US$213.0 million in
2001 to US$223.8 million in 2002. Domestic passenger traffic (as measured in
RPKs) decreased 0.5%, while passenger capacity (as measured in ASKs) increased
1.5%, resulting in a 1.8 percentage point drop in our domestic passenger load
factor from 67.4% in 2001 to 65.6% in 2002. Domestic passenger yield improved
5.6% from US(cent)7.90 in 2001 to US(cent)8.35 in 2002.
Domestic cargo revenues, which accounted for 3.9% of total cargo
revenues in 2001 and for 3.6% in 2002, decreased 11.8% from US$21.3 million in
2001 to US$18.8 million in 2002. Domestic cargo traffic (as measured in RTKs)
increased 3.4%, while domestic cargo capacity increased 1.0%. This resulted in a
0.9 percentage point decrease in the domestic cargo load factor from 38.9% in
2001 to 39.8% in 2002. Domestic cargo yields decreased 14.7% from US(cent)48.20
in 2001 to US(cent)41.12 in 2002.
International passenger revenues, which accounted for 73.5% of
passenger revenues in 2001 and 72.2% in 2002, decreased 1.7%, from US$590.0
million in 2001 to US$579.9 million in 2002. International passenger traffic (as
measured in RPKs) declined 1.5%, while passenger capacity (as measured in ASKs)
increased 0.8%, resulting in a 2.3 percentage point decrease in the
international passenger load factor from 66.5% in 2001 to 65.0% in 2002. Total
international passenger yield (RPKs) remained relatively flat (it declined only
0.2% from US(cent)6.87 in 2001 to US(cent)6.86 in 2002) as weaker yields during
the first half of the year were offset by higher ones in the second semester due
to a reduction in average trip lengths and a reduction in the relative weight of
lower-yielding Argentine connecting traffic.
International cargo revenues, which accounted for 96.1% of total cargo
revenues in 2001 and 96.4% in 2002, decreased 3.1% from US$518.2 million in 2001
to US$502.0 million in 2002. International cargo traffic (as measured in RTKs)
decreased 1.2%, while our international cargo capacity increased 2.1%. This
resulted in a 3.2 percentage point decrease in the international cargo load
factor from 70.6% in 2001 to 68.3% in 2002. International cargo yields decreased
2.0% from US(cent)28.65 to US(cent)28.08, primarily due to weak demand on
southbound routes and increased competition.
Operating Expenses
Operating expenses in 2002 totaled US$1,390.4 million, a 0.9% increase
over 2001's operating expenses of US$1,378.1 million. Excluding LanLogistics, a
subsidiary that was consolidated during 2002, operating expenses decreased 1.2%.
Unit costs (measured as operating costs and capital expenses, per ATK) declined
2.8% in 2002. As a percentage of total operating revenues, consolidated
operating expenses fell from 96.5% to 95.7%.
Operating expenses for 2001 and 2002 also include the impact of the
consolidation of LanPeru. From its consolidation on August 1, 2001 until
December 31, 2001, LanPeru generated US$18.7 million in operating expenses, and
from January 1, 2002 until December 31, 2002, LanPeru generated US$63.3 million
in operating expenses.
Our wages and benefits expenses in 2002 totaled US$215.3 million, a
6.0% increase over 2001's wages and benefits expenses of US$203.0 million.
Excluding LanLogistics, wages and benefits expenses increased 0.7%, due to
increases in headcount in order to support a 1.1% increase in total capacity.
Aircraft fuel expenses in 2002 totaled US$205.5 million, a 7.6%
decrease over 2001's aircraft fuel expenses of US$222.4 million. This decrease
was primarily due to a 7.8% decrease in average fuel prices which was primarily
offset by a 0.2% increase in fuel consumption. To reflect the operational
results of the company more clearly, the gains and losses incurred due to fuel
hedging activities have been reclassified into the "Other Income (Expense)" line
of the "Other Income (Expense)" section of our financial statements. In 2002, we
recorded a US$5.5 million loss from our swap fuel contracts, compared to a
US$10.5 million loss in 2001.
Commissions to agents expenses fell 3.9% from US$200.5 million in 2001
to US$ 192.7 million in 2002 primarily due to the Company's focus on reducing
distribution costs, especially in the passenger business (for example, by
increased direct sales via the Internet and our call centers.) Results from
these efforts were partially offset by higher cargo commissions. As a percentage
of operating (passenger and cargo) revenues, commissions to agents decreased 0.4
points from 14.9% to 14.5%.
Depreciation and amortization expenses in 2002 totaled US$67.8 million,
a 30.6% increase over 2001's depreciation and amortization expenses of US$51.9
million. This increase was due to the incorporation in 2002 of new aircraft in
our fleet as well as the effect of a full year of depreciation relating to the
aircraft we incorporated into our fleet during 2001 (which we incorporated into
our fleet mainly during the fourth quarter of 2001).
Other rental and landing fees decreased 6.6% in 2002 from US$244.9
million in 2001 to US$228.7 million in 2002. This decrease resulted from a
significant decrease in the use of wet-leased aircraft and other cost reduction
initiatives, which were partially offset by increased insurance expenses
following the September 11 attacks and increased over-flight and landing fee
expenses due to increased operations.
Passenger service expenses totaled US$35.9 million in 2001 and US$32.3
million in 2002. This 9.9% decrease reflects efficiency gains given that per
passenger costs declined while maintaining product quality.
Aircraft rental expenses increased 9.1%, from US$146.4 million in 2001
to US$159.8 million in 2002. Aircraft rentals increased primarily due to the
full year impact of the aircraft that we incorporated into our fleet through
operating leases in 2001 and the lease of two Airbus A320 aircraft during 2002.
Because the aircraft that we have incorporated into our fleet under these new
leases have higher lease payments than the aircraft that we returned during
2002, aircraft rentals increased despite a reduction in the total number of
aircraft leased.
Aircraft maintenance expenses were US$95.1 million in 2002, declining
9.6% from the US$105.2 million recorded in 2001. Aircraft maintenance expenses
decreased despite a 1.1% increase in total increased operations, as measured by
system ATKs, due to the incorporation of our new Airbus fleet, streamlined
processes and a US$3.6 million net non-recurring reduction in expenses arising
from an adjustment to provisions related to the return of leased aircraft, and
the phase-out of our DC-8 freighter fleet in 2001. In 2001 we had a US$8.0
million one-time provision for the anticipated phase-out of the DC-8 freighter
fleet.
Other operating expenses increased 15.1% from US$167.8 million in 2001
to US$193.1 million in 2002. Other operating expenses include sales-related
expenses, communication, distribution and data processing costs, and banking and
non-collectable account expenses. Excluding LanLogistics, other operating
expenses increased approximately 4.1%.
Operating Income
Operating income increased 23.5%, from US$50.3 million in 2001 to
US$62.1 million in 2002. Operating margins improved 0.8 percentage points from
3.5% in 2001 to 4.3% in 2002 as a 1.7% increase in operating revenues outpaced a
1.2% increase in operating expenses. For the full year, revenues per ATK (for
passengers and cargo) declined 2.4% from US(cent)31.68 to US(cent)30.93, as
costs per ATK fell 2.8% from US(cent)31.21 to US(cent)30.35.
Non-Operating Income (Expense)
Our net non-operating expenses declined from US$38.4 million in 2001 to
US$23.8 million in 2002 (a decrease of 38.0%). This decrease was primarily the
result of a number of special items and a decrease in losses relating to fuel
price hedging arrangements. Additional non-operating income and expenses in 2002
include a US$23.6 million gain from finance-related items. In 2002, we recorded
a US$5.5 million fuel hedging loss, compared to US$10.5 million fuel hedging
loss in 2001. In 2001, we realized a non-recurring gain of US$6.0 million
related to the sale of a portion of our stake in Equant N.V., a US$5.0 million
gain from finance-related items, US$5.5 million in severance payments and
provisions and a US$3.0 million provision for losses in Argentina. Interest
expenses increased by 14.9% from US$35.5 million in 2001 to US$40.8 million in
2002 due to the additional financing related to the incorporation of new
aircraft into our fleet. In addition, our foreign exchange losses increased from
US$3.8 million in 2001 to US$4.7 million in 2002.
Income Taxes
Income tax expense for 2002 amounted to US$7.0 million. In 2001, we
recorded tax loss carry forwards of US$0.6 million. Income tax expense increased
due to an increase in our taxable income and increased tax payments by foreign
subsidiaries. For more information, see "--Taxes" above and Note 13 to our
consolidated financial statements. Our effective income tax rate in 2002 was
18.5%, compared to a positive tax benefit of 5.4% in 2001.
2001 Compared with 2000
Net Income
Our net income decreased 77.6% from US$48.4 million in 2000 to US$10.8
million in 2001. The September 11 attacks, as well as the Argentine crisis and
weaker than expected economic conditions in South America account for a
significant portion of this fall. Revenues, which had been growing at rates
exceeding 5% year-on-year through the first semester, grew 0.2% in the second
semester in 2001 when compared to 2000. In the second half of 2001, our
international passenger traffic decreased significantly due to two events.
First, the terrorist attacks of September 11 not only had dramatic impact on
traffic to and from the United States, but also affected other international
routes as well. Second, the economic and political collapse of Argentina
severely reduced Argentine originating traffic. Until August, 2001,
international traffic had increased more than 15% year on year. After the
attacks of September 11, US airspace was closed for four days. This and, more
importantly, a significant reduction in demand generated a 7% year-on-year
decline in passenger traffic in September and 14% in October. Traffic started to
recover in November when it experienced a 9% year-on-year decline. However, the
effects of the Argentine crisis impacted traffic in December and generated a 16%
year-on-year reduction. These events forced us to adjust our capacity
dramatically after September. Nevertheless, through several measures we were
able to control our operating costs, which grew 2.1% year-on-year. Consequently,
our operating income fell by 33.2%. Our non-operating expenses grew 134.4%, due
to higher interest expenses and increased provisions (as described below under
"Non Operating Income (Expense)". Finally, the Company showed a gain from tax
loss carry forwards of US$552,000 in 2001 as opposed to a loss of US$10.4
million in tax expense in 2000.
Operating Revenues
Operating revenues in 2001 totaled US$1,428.3 million, a 0.2% increase
over operating revenues of US$1,425.2 million in 2000. This increase was due
primarily to a 7.0% increase in total passenger revenues from US$750.7 million
in 2000 to US$803.0 million in 2001. Consolidated passenger traffic increased
13.6% while yields (based on RPKs) fell from US(cent)7.56 to US(cent)7.12.
Passenger revenues for 2001 include US$20.3 million generated by LanPeru, which
we began consolidating on August 1, 2001. Excluding LanPeru, revenues grew 4.3%
due to an 11.1% increase in traffic which was offset by a reduction in yield
from US(cent)7.56 to US(cent)7.10. While traffic (as measured by RPKs) increased
mainly as a result of additional capacity, yield fell as a consequence of a
weaker pricing environment, price promotions following September 11 and a weaker
Chilean peso (our domestic fares are set in Chilean pesos). Cargo revenues, on
the other hand, decreased by 9.1% primarily due to decreased traffic generated
by weak southbound demand following the depreciation of the currencies in Brazil
and Chile, and the Argentine crisis. Cargo yields (based on RTKs) increased
marginally from US(cent)29.00 to US(cent)29.11.
Our domestic passenger revenues, which accounted for 25.0% of passenger
revenues in 2000 and for 26.5% in 2001, increased 13.3% from US$188.0 million in
2000 to US$213.0 million in 2001. Domestic passenger traffic (as measured in
RPKs) increased 26.9%, while passenger capacity (as measured in ASKs) increased
22.3%, resulting in an increase of 2.4 percentage points in the domestic
passenger load factor from 65.0% in 2000 to 67.4% in 2001. Domestic passenger
yield decreased 10.7% from US(cent)8.85 in 2000 to US(cent)7.90 in 2001.
Domestic cargo revenues, which accounted for 3.6 % and 3.9% of our
total cargo revenues in 2000 and 2001, respectively, decreased 1.2% from US$21.5
million in 2000 to US$21.3 million in 2001. Domestic cargo traffic (as measured
in RTKs) increased 14.2%, while domestic cargo capacity increased 42.8%. This
resulted in a 9.7 percentage point decrease in the domestic cargo load factor
from 48.6% in 2000 to 38.9% in 2001. Domestic cargo yields decreased 13.5% from
US(cent)55.71 in 2000 to US(cent)48.20 in 2001.
International passenger revenues, which accounted for 75.0% of
passenger revenues in 2000 and 73.5% in 2001, increased 4.8% from US$562.7
million in 2000 to US$590.0 million in 2001. LanPeru has been included in
international passenger revenues since its consolidation in August 2001 and
accounted for US$20.0 million in revenues. International passenger traffic (as
measured in RPKs) increased 10.0%, while passenger capacity (as measured in
ASKs) increased 15.8%, resulting in a 3.5 percentage point decrease in the
international passenger load factor from 70.0% in 2000 to 66.5% in 2001.
Excluding LanPeru, international passenger traffic and capacity increased 6.8%
and 12.1%, respectively. International passenger yield decreased 4.7% from
US(cent)7.21 in 2000 to US(cent)6.87 in 2001, principally as a result of a weak
pricing environment and the discounted fares offered after the September 11
attacks.
International cargo revenues, which accounted for 96.4% and 96.1% of
total cargo revenues in 2000 and 2001, respectively, decreased 9.4% from
US$572.0 million in 2000 to US$518.2 million in 2001. International cargo
traffic (as measured in RTKs) decreased 9.9%, while international cargo capacity
decreased 6.5%. This resulted in a 2.7 percentage point decrease in the
international cargo load factor from 73.3% in 2000 to 70.6% in 2001.
International cargo yields increased 0.6% from US(cent)28.48 to US(cent)28.65,
primarily due the implementation of a cargo fuel surcharge during 2000 that we
incorporate into the rates that we charge our cargo customers.
Operating Expenses
Operating expenses in 2001 totaled US$1,378.1 million, a 2.1% increase
over 2000's operating expenses of US$1,349.9 million, essentially due to
increased operations. Operating expenses for 2001 include US$18.7 million
generated by LanPeru, which we began consolidating on August 1, 2001. System
ATKs increased by 2.7% while unit costs (measured as operating costs per ATK)
fell 0.2% reflecting the efforts made to control costs. As a percentage of total
operating revenues, operating expenses increased from 94.7% to 96.5%.
Wages and benefits expenses in 2001 totaled US$203.0 million, a 1.4%
increase over 2000's wages and benefits expenses of US$200.3 million. While
wages and benefits expenses and the volume of operations had been increasing in
line with operations through September, the 7.5% reduction in headcount had a
dramatic effect during the fourth quarter: wages and benefits expense grew below
the 2.7% increase in total operations (as measured by ATKs) in 2001.
Our aircraft fuel expenses in 2001 totaled US$222.4 million, a 4.4%
decrease over 2000's aircraft fuel expenses of US$232.6 million. This increase
was primarily due to a 12.2% decrease in average fuel prices and an 8.9%
increase in fuel consumption. To reflect our operational results more clearly,
the gains and losses incurred due to fuel hedging activities have been
reclassified into the "Other Income (Expense)" line of the "Other Income
(Expense)" section of our financial statements. In 2000, we recorded an US$8.1
million gain, and in 2001, we recorded a US$10.5 million loss.
Commissions to agents expenses fell 10.3% from US$223.5 million in 2000
to US$ 200.5 million in 2001 as a result of reduced cargo operations and the
Company's focus on reducing distribution costs, especially in the passenger
business. As a percentage of operating (passenger and cargo) revenues,
commissions to agents decreased 1.7 points from 16.6% to 14.9%.
Depreciation and amortization expenses in 2001 totaled US$51.9 million,
a 23.6% increase over 2000's depreciation and amortization expenses of US$42.0
million. Depreciation and amortization expenses increased due to the inclusion
of two new Boeing 767-300F freighters, two new Airbus A320 aircraft and nine
used Boeing 737-200 aircraft in our fleet and because 2001 was the first full
year reflecting the depreciation relating to the Boeing 767-300 freighter
incorporated into our fleet in 2000.
Other rental and landing fees decreased 2.8% in 2001 from US$251.8
million in 2000 to US$244.9 million in 2001. This decrease resulted from a
significant decrease in the use of wet-leased 747 jumbo jets, which was
partially offset by increased insurance expenses following the September 11
attacks and increased landing fee expenses due to increased operations.
Passenger service expenses totaled US$34.3 million in 2000 and US$35.9
million in 2001. This 4.5% increase reflects increased passenger traffic and the
addition of new in-flight entertainment systems.
Aircraft rental expenses increased 23.1%, from US$118.9 million in 2000
to US$146.4 million in 2001. Aircraft rentals increased primarily because of the
incorporation into our fleet through operating leases of four new Airbus A320
aircraft, two new Airbus A340 aircraft and one new Boeing 767-300F freighter.
Aircraft maintenance expenses were US$105.2 million in 2001, up 24.2%
from 2000's US$84.7 million. Aircraft maintenance expenses increased due to
increased passenger operations, increased provisions due to the acquisition of
Airbus aircraft and a US$8.0 million one-time provision for the anticipated
phase-out of the DC-8 freighter fleet.
Other operating expenses in 2001 totaled US$167.8 million, which
represented a 3.7% increase over 2000's other operating expenses of US$161.8
million.
Operating Income
Operating income decreased 33.2%, from US$75.3 million in 2000 to
US$50.3 million in 2001. The drop can be attributed primarily to an abrupt fall
in passenger demand following the September 11 attacks and the effects of the
Argentine crisis on our passenger and cargo operations, as well as a fall in
southbound cargo demand due to weaker economic conditions in Brazil and Chile.
Although measures were taken to adjust the Company's cost structure which
allowed it to have positive operating results in each quarter, our cost-cutting
did not fully offset the decrease in revenues we experienced in 2001. For the
full year, revenues per ATK fell 2.7% while cost per ATK was reduced 0.2%.
Non-Operating Income (Expense)
Our net non-operating expenses increased from US$16.4 million in 2000
to US$38.4 million in 2001, or 134.4%. This increase was primarily the result of
a number of items as well as fuel hedge gains and losses. Additional
non-operating income and expenses in 2001 include a non-recurring gain of US$6.0
million related to the sale of a portion of our stake in Equant N.V., a
financing transaction gain of US$5.0 million from financial transactions, US$5.5
million in severance payments and provisions and a US$3.0 million provision for
losses in Argentina. In 2000, we realized a non-recurring gain of US$9.7 million
from financial transactions. Interest expenses increased by 12.0% from US$31.7
million in 2000 to US$35.5 million in 2001 as the result of the incorporation of
new aircraft into our fleet. In addition, our foreign exchange losses decreased
from US$5.7 million in 2000 to US$3.8 million in 2001.
Income Taxes
In 2001, we recognized tax loss carry forwards of US$0.6 million as
opposed to a US$10.4 million tax expense in 2000. In 2000, the adoption of a new
accounting rule that required us to record the tax effect of timing differences
between tax and book income resulted in the inclusion of US$10.1 million in
deferred income taxes in our income statement. For more information, see
"--Taxes" above and Note 13 to the consolidated financial statements. Our
effective income tax rate was 0.4% in 1999, 17.7% in 2000 and a positive benefit
of 5.4% in 2001.
Liquidity and Capital Resources
In recent years, we have been able to meet our working capital and capital expenditure requirements through:
othrough cash from our operations;
o theoperations, proceeds of long-term bank loans;
oloans, loans from related parties;
o use of operatingparties and capital leases; and
o the gains from financial transactions.
Our cash and cash equivalents totaled US$72.4157.8 million as of December 31, 2000,2003, US$159.8 million as of December 31, 2002 and US$74.7 million as of December 31, 2001. Additionally, as of each of March 31, 2004 and December 31, 2003, we held US$61.2 million in marketable securities not considered to be cash equivalents under Chilean GAAP, which consisted mainly of bonds. While we had no such marketable securities in 2001 or 2002, in 2003 and 2004 we were able to invest a portion of our higher cash balance in such items. We hold significantly all of our cash and cash equivalents in U.S. dollars or U.S. dollar-based instruments. We generally only hold cash and cash equivalents in currencies other than dollars to fulfill short-term obligations that are denominated in local currencies. Our cash and cash equivalents totaled US$ 159.4195.4 million as of DecemberMarch 31, 2002.2004. The increase in our cash in 2002 related mainly to non-recurring,
non-operating gains resulting from financial transactions and from a new US$ 40
million securitization of credit card receivablescash equivalents in the United States. first quarter of 2004 as compared to the first quarter of 2003, as well as in 2003 as compared to 2002, was primarily due to our improved results of operations.
At December 31, 2002,2003, we had a working capital deficit (that is, our current liabilities exceeded our current assets) of US$43.419.7 million. Our working capital deficit arises mainly from our air traffic liability and accounts payable. Our air traffic liability refers to tickets that we have sold but which have not yet been used for travel. When the tickets are used, we recognize the price paid for the ticket as revenue. Except in the case of refunds, most of our air traffic liability will not result in cash outflows. Both liabilities arise in our ordinary course of business and, although they fluctuate mainly due to seasonality factors, they are generally proportional to our revenues. Our working capital deficit presents no major constraint to our operations or growth strategy. At March 31, 2004, we had positive working capital of US$37.1 million compared to a working capital deficit of US$14.0 million at March 31, 2003.
Net cash inflows from operating activities were US$134.2235.7 million in 2000,2003, US$138.8 million in 2002 and US$155.6 million in 2001, and are derived primarily from providing air passenger and cargo transportation to customers. Operating cash outflows are primarily related to the recurring expenses of operating our airline. Net cash inflows from operating activities were US$ 138.860.7 million in 2002.
the first quarter of 2004 compared to US$4.8 million in the first quarter of 2003. Net cash inflows increased for the first quarter of 2004 and for the full year 2003 mainly due to improvements in operating results.
Net cash used in investing activities was US$152.4120.4 million in 2000,2003, US$118.7 million in 2002 and US$342.9 million in 2001,2001. Cash capital expenditures were US$64.8 million in 2003, US$192.6 million in 2002 and US$ 118.5341.3 million 2002.in 2001, mainly reflecting the acquisitions of property and equipment. The 2000 amount reflects:
ocapital expenditures for 2003 included the purchase of a thirdthree spare aircraft engines and the acquisition of new office space in Santiago. Net cash used in investing activities in 2003 also includes US$68.9 million in investments of financial instruments, primarily marketable securities. The 2002 expenditures reflect the purchase of four Airbus A320 aircraft and three Boeing 767 freighter aircraft;737-200 aircraft offset by the sale of assets (including the sale and o the incorporationlease-back of our new Airbus short-haul and long-haul
fleet.two aircraft engines). The 2001 amount reflects:
oexpenditures include the purchase of two Boeing 767-300F aircraft, two Airbus A320 and nine Boeing 737-200 aircraft; and
o a loan to LanLogistics Corp.
The 2002 amount reflects:
o the purchase of four Airbus A320 aircraft and three Boeing
737-200 aircraft; and
o the sale of assets (including the sale and lease-back of two
aircraft engines).
Cash capital expenditures were US$145.6 million in 2000, US$341.3
million in 2001, and US$192.6 million in 2002, mainly reflecting the
acquisitions of property and equipment referred to above.aircraft. For more information about current and future capital expenditures, see "Information on the Company--
Capital Expenditures" under Item 4.“Capital Expenditures” below. The difference between net cash used in investing activities and cash capital expenditures during 2003 relates mainly to the investment in financial instruments, and during 2002 it relates mainly to the sale of assets referenced above.assets. Net cash used in investing activities was US$10.7 million in the first quarter of 2004 compared to US$5.2 million in the same period in 2003.
Net cash used in financing activities was US$117.1 million in 2003, compared to net cash provided by financingfinancial activities wasof US$47.264.7 million in 2000,2002 and US$189.5 million in 2001, and2001. The decrease from 2002 to 2003 is primarily explained by US$64.775.2 million in 2002.loan payments and the distribution of US$49.1 million in dividends. In 2000,2002, our net cash of
US$47.2 million was provided principallyprimarily by loans to finance the purchase of
aircraft. In 2001, net cash of US$189.5 million was also provided principally by
loans to finance the purchase of aircraft. In 2002, net cash of US$64.7 million
was provided principally by theproceeds from a US$40.0 million securitization of credit card receivables and US$163.6 million in loans to finance the purchase of aircraft, and
the repayment ofpartially offset by US$120.7 million in loan payments. In 2001, net cash was provided mainly by US$245.5 million in loans (including loansto finance the purchase of aircraft, which was partially offset by US$32.2 million in loan payments, and the distribution of US$14.5 million in dividends. Net cash used in financing activities was US$12.3 million in the assets
sold during 2002).
At December 31, 2002, our aggregate long-term debt and obligations
under capital leases totaled US$688.9 million comparedfirst quarter of 2004 (compared to US$662.523.7 million in 2001. Our total long-term debt at December 31, 2002 wasthe same period in 2003) and mainly reflected US$674.1 million
compared to US$641.612.1 million in 2001. Amounts payable under long-term debt are:
o US$61.4 million in 2003;
o US$70.0 million in 2004;
o US$63.0 million in 2005;
o US$64.2 million in 2006;
o US$67.7 million in 2007; and
o US$347.9 million from 2007 to 2014.
The increase in long-term debt during 2002 relates mainly due to the
acquisition of four Airbus A320s in 2002.
Minimum lease payments under capital leases are US$3.9 million in 2003,
US$3.9 million in 2004, and US$7.0 million in 2005. Minimum lease payments under
operating leases that have initial or remaining non-cancelable lease terms in
excess of one year as of December 31, 2002 are:
o US$143.9 million in 2003;
o US$100.7 million in 2004;
o US$85.1 million in 2005;
o US$84.3 million in 2006;
o US$74.9 million in 2007; and
o US$377.1 million from 2008 to 2017.
Lease payment obligations decreased from US$966.6 million in 2001 to
US$865.9 in 2002 due to reduction in the number of aircraft under operating
leases.
We used the proceeds of the US$60.0 million securitization in 1999 to
reduce our short-term debt, and since then we have had no short-term debt. We
used the proceeds of the US$40.0 million securitization in 2002 to improve our
liquidity. For more information about the 1999 and 2002 securitizations, see
"Information on the Company--Credit Card Receivables Securitization and Other
Matters" under Item 4. loan payments.
We have generally been able to arrange for short-term loans with domesticlocal Chilean banks in Chile when necessarywe have needed to finance our working capital expenditure needsexpenditures or to increase our liquidity. Should we need anyaccess to short-term loans in the future, we believe that we could obtain them based on our well-established relationships with various lenders. As of March 31, 2003, we maintained approximately US$119 million in short-term credit lines with both local and foreign banks. In addition, we also maintain a US$30 million medium-term stand-by credit facility that we entered into with the International Finance Corporation, which we refer to as the IFC, in 2003.
We have contractual obligations and commitments primarily related to the payment of debt, lease arrangements and for the future incorporation of aircraft to our fleet.
We have financed the acquisition of three Boeing 767-300ER passenger aircraft and five Boeing 767-300F freighters through syndicated loans provided by international financial institutions with the support of partial guarantees issued by the Export-Import Bank of the United States, or Ex-Im, with repayment profiles of either 12 or 15 years. The Ex-Im guarantees support 85% of the net purchase price and are secured with a first priority mortgage on the aircraft in favor of a security trustee on behalf of Ex-Im. The documentation for each loan follows standard market forms for this type of financing, including standard events of default. Our Ex-Im supported financings amortize on a quarterly basis, are denominated in dollars and bear interest at a floating rate linked to U.S. dollar LIBOR. Through the use of interest rate swaps, we have effectively converted almost all of our floating rate debt under the loans into fixed rate debt. At December 31, 2003, the total amount outstanding under our Ex-Im-supported financings totaled US$475.9 million. At March 31, 2004, the total amount outstanding under our Ex-Im-supported financings totaled US$468.2 million. See “Quantitative and Qualitative Disclosures About Market Risk—Risk of Fluctuations in Interest Rates” under Item 11 for more information.
In 2000, to finance our Airbus aircraft, we entered into a US$1.3 billion umbrella credit facility with a syndicate of international financial institutions under which we borrow in the form of separate loans in connection with the specific financing requirements of each Airbus aircraft (including pre-delivery and long-term payments). This umbrella facility provides for guarantees from the English, French and German Export Credit Agencies and contains customary terms for the industry, including standard events of default. Loans under the facility are denominated in U.S. dollars and bear interest at floating rates linked to LIBOR. As of March 31, 2004, we had drawn approximately US$798 million under the facility. Some of the loans drawn under the facility mature 12 years from the delivery date of the corresponding aircraft and others have longer repayment periods, maturing 18 years after the initial drawdown. In connection with the facility, we have incorporated Airbus aircraft into our fleet through operating leases, financial leases and tax leases. The financing facility covers the aircraft we are scheduled to acquire under our Airbus purchase agreements through December 31, 2006.
Our total long-term debt at December 31, 2003 was US$622.8 million compared to US$674.1 million in 2002. As of March 31, 2004, our long-term debt amounted to US$613.5 million. The decrease in long-term debt during the first quarter of 2004 and the last quarter of 2003 relates mainly to principal payments on outstanding balances. We have minimum lease payment obligations primarily associated with our aircraft leases. As of March 31, 2004, we had 32 aircraft under operating leases and we had minimum lease payment obligations of US$832.4 million. These lease obligations totaled US$869.5 at December 31, 2003 compared to US$865.9 million in 2002. This increase resulted from an increase in the number of aircraft under operating leases and the extension of several lease contracts. This was offset by a reduction in the lease rates related to a number of aircraft lease contracts in 2003. At December 31, 2003, we had 31 planes under operating leases. As of December 31, 2003, we also had minimum lease payment obligations under capital leases of US$4.4 million in 2004 and US$7.3 million in 2005. As of March 31, 2004, minimum lease payment obligations under capital leases for the remainder of 2004 amounted to US$3.3 million. At December 31, 2003, we also had purchase obligations for Airbus A319 and A340 aircraft amounting to approximately US$592.0 million. Under these contracts, we have a firm commitment to incorporate an additional fourteen aircraft.
The average interest rate of our long-term debt was 4.54% as of December 31, 2003 and 4.53% as of March 31, 2004. Approximately 88% of our long-term debt effectively accrues interest at a fixed rate (either through a stated fixed interest rate or through our use of interest rate swap agreements) or is subject to interest rate caps. However, both as of December 31, 2003 and March 31, 2004, floating interest rates under the portion of our long-term debt that is subject to the interest rate caps had not reached their capped levels. Giving effect to the caps, as of both December 31, 2003 and March 31, 2004, the highest possible average interest rate that the 88% of our long-term debt could be subject to was 5.7%.
The following table sets forth our material expected obligations and commitments as of December 31, 2003.
| Payments due by period, as of December 31, 2003 | |||||||||||||||||||||
| (in US$ millions) | |||||||||||||||||||||
| Total | 2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | |||||||||||||||
Principal debt payments | $ | 623.0 | $ | 63.2 | $ | 71.3 | $ | 64.3 | $ | 67.7 | $ | 71.1 | $ | 285.4 | |||||||
Capital leases | 11.5 | 4.4 | 7.3 | — | — | — | — | ||||||||||||||
Operating leases(1) | 869.7 | 124.4 | 116.5 | 111.1 | 93.0 | 88.8 | 335.7 | ||||||||||||||
Purchase obligations | 592.0 | 93.0 | 62.0 | 172.0 | — | 265.0 | — | ||||||||||||||
Total | $ | 2,096.2 | $ | 285.0 | $ | 257.1 | $ | 347.4 | $ | 160.7 | $ | 424.9 | $ | 621.1 | |||||||
| (1) | Includes aircraft leases and other non-cancelable leases. |
Capital Expenditures
Over the last three years our cash capital expenditures were US$341.3 million in 2001, US$192.6 million in 2002, and US$64.8 million in 2003, mainly reflecting our acquisition of aircraft and aircraft-related equipment in each year.
The following chart sets forth our estimate, as of December 31, 2003, of our future capital expenditures for 2004, 2005 and 2006:
| Expenditures by year, as of December 31, 2003 | |||||||||
| (in US$ millions) | |||||||||
| 2004 | 2005 | 2006 | |||||||
Expenditures on aircraft | $ | 93 | $ | 147 | $ | 257 | |||
Other expenditures(1) | 60 | 50 | 50 | ||||||
Total(2) | $ | 153 | $ | 197 | $ | 307 | |||
| (1) | Includes expenditures on spare engines and parts, information technology and other expenditures. |
| (2) | As of March 31, 2004, we had made a total of US$11.3 million in capital expenditures. |
We expect that cash generated from operations, short-term credit-lines and the long-term syndicated loans already negotiated with various banks will be sufficient to meet our cash requirements in the foreseeable future, although events that materially affect our operating results could also have a negative impact on our liquidity.
Credit Card Receivables Securitization
We have raised a total of US$100 million through two similar transactions involving the private placement of certificates backed by our credit card receivables. In these transactions, we sold our right to receive certain present and future U.S. dollar payment obligations, referred to as future credit card receivables, arising from the purchase of passenger tickets and related services in the United States through American Express, Diner’s Club, Discover, Visa and MasterCard to Pelican Finance Ltd. In the first transaction, completed in March 1999, we sold US$60 million of our future credit card receivables to Pelican which then issued notes to a United States trust, backed by payments received on these payment obligations, which in turn issued trust certificates, backed by payments received on the notes, to investors. In August 2002, we entered into a similar sale of future credit card receivables to Pelican for an additional US$40 million. Our sale of these payment obligations authorizes Pelican to collect payments on them until the earlier of the date the notes issued by Pelican are fully redeemed and March 2006 for the first transaction, and August 2009 for the second.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangement including any transactions, agreements or other contractual arrangements involving an unconsolidated entity under which we have:
We record payments made under operating leases as expenses, and none of our operating lease obligations are reflected on our balance sheet. The decision to finance aircraft through operating leases rather than through debt was based on an analysis of the cash flows and tax consequences of each option and a consideration of our liquidity requirements. We are responsible for all maintenance, insurance and other costs associated with operating these aircraft; however, we have not made any residual value or similar guarantees to our lessors. We have also made certain guarantees and indemnities to other unrelated parties that are not reflected on our balance sheet, although we believe these will not have a significant impact on our results of operations or financial condition. We have no other off-balance sheet arrangements. See Notes 1 and 21 to our audited consolidated financial statements for a more detailed discussion of contingencies, including guarantees.
Differences between Chilean GAAP and U.S. GAAP
Our audited consolidated financial statements are prepared in accordance with Chilean GAAP, which differs in certain significant respects from U.S. GAAP. (SeeSee Note 2524 to our audited consolidated financial statements for a discussion of these differences and their effect on our results of operations.) The principal differences between Chilean GAAP
and U.S. GAAP as they affect our consolidated financial statements for the years
ended December 31, 2000, 2001 and 2002 were:
o accounting for deferred
Our net income taxes;
o accounting for goodwill on the acquisitions of Lan Chile Cargo
S.A., Fast Air Carrier S.A., Inversiones Aereas S.A., Skyworld
International Couriers, Inc., Skybox Services Corporation and
Mas Investment Limited;
o accounting for deficits during the development period of
certain subsidiaries;
o accounting for the fair value of a derivative not considered
to be a hedge;
o the reversal of the utilization of tax-loss carry forwards in
LanPeru;
o the accrual of a liabilitydetermined under U.S. GAAP for the legal
obligation in Chile to pay a dividend in respect of each year
equal to at least 30% of our net income for the year
determined in accordance with Chilean GAAP; and
o accounting for other comprehensive loss.
Net income under U.S. GAAP waswould have been US$50.488.8 million in 2000,2003, US$34.2 million in 2002 and US$1.0 million in 2001, and US$34.2 million in 2002as compared towith net income under Chilean GAAP of US$48.483.6 million in 20002003, US$30.8 million in 2002 and US$10.8 million in 2001 and US$30.82001. These differences could be material to the financial information presented in 2002.
Net income in U.S. GAAP in 2000 was 4.1% higher thanaccordance with Chilean GAAP. The main differences affecting the correspondingdetermination of net income under Chilean GAAP due principally to:
o an adjustmentinclude the different treatment of expenses for deferred taxes under U.S. GAAP;
o the adjustmentamortization of goodwill, on the acquisition of Lan Chile
Cargo S.A.; and
o the recognition of losses of subsidiariesadjustments for differences in the development
period in net income for US GAAP purposes.
Net income in U.S. GAAP in 2001 was 90.5% lower than the corresponding
net income under Chilean GAAP due principally to:
o an adjustment for deferred taxes under U.S. GAAP;
o the adjustment of goodwill and property plant and equipment on
the acquisition of Lan Chile Cargo S.A.;
o the recognition of lossestax provision as calculated under U.S. GAAP, of several of our
subsidiariescertain expenses related to derivative instruments that are in the development period;
o the accounting for the fair value of a derivativedo not considered to be a hedge; and,
o the reversal of the utilization of tax-loss carry forwards in
LanPeru.
Net income in U.S. GAAP in 2002 was 11.15% higher than the
corresponding net income under Chilean GAAP due principally to:
o an adjustment for deferred taxes under U.S. GAAP;
o the adjustment of goodwill and property plant and equipment on
the acquisition of Lan Chile Cargo S.A.;
o the recognition of lossesqualify as hedging relationships under U.S. GAAP and the ineffectiveness of several of our
subsidiaries that arecertain derivative instruments resulted in the development period; and
o the accounting for the fair value of a derivative not
considered to be a hedge.
Shareholders'additional adjustments under Chilean GAAP.
Shareholders’ equity determined under U.S. GAAP waswould have been US$259.5323.5 million in 2000,at December 31, 2003, US$258.9 million at December 31, 2002 and US$237.3 million inat December 31, 2001, and US$258.9 million in 2002as compared to shareholders'with shareholders’ equity under Chilean GAAP of US$288.4352.6 million in 2000,at December 31, 2003, US$308.9 million at December 31, 2002 and US$288.5 million in
2001and US$308.9 million in 2002.
Shareholders' equity under U.S. GAAP was 10.0% lower in 2000, 17.7%
lower inat December 31, 2001, and 16.2% lower in 2002 than shareholders' equity under Chilean
GAAPprincipally due principally to:
oto adjustments for the provision for deferred income taxes;
o the minimum dividend requirement;
o the adjustment oftaxes, goodwill on the acquisition of Lan Chile
Cargo S.A., Fast Air Carrier S.A., Inversiones Aereas S.A.,
Skyworld International Couriers, Inc., Skybox Services
Corporationamortization, derivatives and Mas Investment Limited;
o additional depreciation of property and equipment from our acquisition in the Lan
Chile Cargo1997 of Ladeco S.A. acquisition arising from the allocation of
the purchase price of such assets;
o the adjustment for other comprehensive losses on the fair
value of cash flow hedges;
o the income tax benefit related to the items of other
comprehensive losses; and.
o the fair value of a derivative not considered to be a hedge.
, now known as LanChile Cargo.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and Senior Management
The administration of LanChile is conducted by its board of directors which, in accordance with LanChile'sLanChile’s bylaws, consists of nine directors who are elected at annual ordinary shareholders' meetings. Directors are electedevery two years for two-year terms at annual regular shareholders’ meetings, and may be re-elected. The board of directors may appoint replacements to fill any vacancies that occur during periods between elections. Scheduled meetings of the board of directors are held once a month.
Extraordinarymonth and extraordinary board of directors'directors’ meetings are called when summoned by the chairman of the board of directors and two other directors, or when requested by a majority of the directors.
Our
The current board of directors was elected in April 2004 and their two-year tenure will end in April 2006. The following are LanChile’s current directors and senior managementmanagement:
Directors | Position | |
Jorge Awad Mehech(1) | Director / Chairman | |
Boris Hirmas Said(2) | Director | |
Sebastián Piñera Echenique(3) | Director | |
Darío Calderón González | Director | |
José Cox Donoso | Director | |
Juan José Cueto Plaza(4) | Director | |
Juan Cueto Sierra(4) | Director | |
Ramón Eblen Kadis(5) | Director | |
Andrés Navarro Haeussler | Director |
Senior Management | Position | |
Enrique Cueto Plaza(4) | Chief Executive Officer | |
Luis Ernesto Videla Berguecio | President and Chief Operating Officer | |
Ignacio Cueto Plaza(4) | Senior Vice President, Passenger | |
Armando Valdivieso Montes | Senior Vice President, Cargo | |
Alejandro de la Fuente Goic | Chief Financial Officer | |
Susana Tonda Mitri | Senior Vice President, Organization and Processes | |
Carlos Prado Cánepa | Senior Vice President, Corporate Investment | |
Marco Jofré Marín | Senior Vice President, Operations, Engineering and Maintenance |
| (1) | Mr. Jorge Awad Mehech was re-elected chairman of the board of directors in April 2004. Mr. Awad had previously served as chairman of the board of directors for six years until October 2000. |
| (2) | Mr. Boris Hirmas Said is a member of the Hirmas Group (as defined in “Principal and Selling Shareholders”), one of the majority shareholders. |
| (3) | Mr. Sebastián Piñera Echenique had previously served as member of the board of directors and chairman until his resignation on July 12, 2001. Mr. Sebastián Piñera Echenique is a member of the Piñera Group (as defined in “Principal and Selling Shareholders”), one of the majority shareholders. |
| (4) | Messrs. Ignacio, Juan José and Enrique Cueto Plaza are brothers, and Mr. Juan Cueto Sierra is their father. All four are members of the Cueto Group (as defined in “Principal and Selling Shareholders”), one of the majority shareholders. |
| (5) | Mr. Ramón Eblen Kadis is a member of the Eblen Group (as defined in “Principal and Selling Shareholders”), one of the majority shareholders. |
Effective April 8, 2004, Mr. Pablo Piñera Echenique resigned from LanChile’s board of May 31, 2003 were as follows:
Directors Position
--------- --------
Jorge Awad Mehech (1)................... Chairman
Boris Hirmas Said (3)................... Director
Sebastian Pinera Echenique (2).......... Director
Dario Calderon Gonzalez................. Director
Jose Cox Donoso......................... Director
Juan Jose Cueto Plaza (4)............... Director
Juan Cueto Sierra (4)................... Director
Ramon Eblen Kadis (5)................... Director
Pablo Pinera Echenique (2).............. Director
Senior Management Position
----------------- --------
Enrique Cueto Plaza (4)................. Chief Executive Officer
Luis Ernesto Videla Berguecio........... President and Chief Operating Officer
Ignacio Cueto Plaza (4)................. Senior Vice President, Passenger
Armando Valdivieso Montes............... Senior Vice President, Cargo
Alejandro de la Fuente Goic............. Chief Financial Officer
Susana Tonda Mitri...................... Senior Vice President, Organization
and Processes
Carlos Prado Canepa..................... Senior Vice President, Corporate
Investment
Marco Jofre Marin....................... Senior Vice President, Operations,
Engineering and Maintenance
- --------------
(1) Mr. Jorge Awad Mehech was elected Chairmandirectors to become the financial director of the board on July 25, 2001.
Mr. Awad had previously served as ChairmanMinistry of the Board for six years
until October 2000.
(2) Mr. Sebastian Pinera Echenique had previously served as memberPublic Works of the
board and Chairman until his resignation on July 12, 2001. Messrs.
Sebastian and Pablo Pinera Echenique are brothers and Mr. Sebastian Pinera
Exchenique is a member of the Pinera group (as defined in "Major
Shareholders and Related Party Transactions--Major Shareholders" under
Item 7).
(3) Mr. Boris Hirmas Said is a member of the Hirmas Group (as defined in
"Major Shareholders and Related Party Transactions--Major Shareholders"
under Item 7), one of the majority shareholders.
(4) Messrs. Ignacio, Juan Jose and Enrique Cueto Plaza are brothers, and Mr.
Juan Cueto Sierra is their father. All four are members of the Cueto Group
(as defined in "Major Shareholders and Related Party Transactions--Major
Shareholders" under Item 7), one of the majority shareholders.
(5) Mr. Ramon Eblen Kadis is a member of the Eblen Group (as defined in "Major
Shareholders and Related Party Transactions--Major Shareholders" under
Item 7), one of the majority shareholders.
Chile.
Biographical Information
Set forth below are brief biographical descriptions of theLanChile’s directors and senior management of the Company.
management.
Directors
Mr. Jorge Awad Mehech 57, 58 years old, was elected Chairmanhas served as chairman and member of ourLanChile’s board of directors on July 25, 2001.since April 2002. Mr. Awad'sAwad’s current term as Chairmanchairman ends in April 2005.2006. Mr. Awad had previously served as Chairmanchairman of our board of directors from 1994 to October 2000. Mr. AwadHe held the position of Senior Vice President of Fast Air from 1979 to 1993. Mr. Awad currently serves on the boards of directors of several other Chilean companies, including Banco de Chile, Edelpa,Envases del Pacifico S.A., Diario La NacionNación and Gacel.Calzados Gacel S.A. He is also a professor of economics and corporate governance at the University of Chile and UniversityUniversidad Gabriela Mistral. As of May 31, 2003,April 30, 2004, according to shareholder registration data in Chile, Mr. Awad owned, through Inversiones y Asesorías Fabiola Ltda.S.A., 64,943 common shares (.02% of LanChile'sLanChile’s outstanding shares).
Mr. Sebastian Pinera Echenique, 53Boris Hirmas Said, 41 years old, joined ourLanChile’s board of directors in October 2000 to replace his father, Mr. Boris Hirmas Rubio, who passed away on September 23, 2000. Mr. Hirmas’s term as a director ends in April 2006. Mr. Hirmas also served on the boards of directors of Fast Air and Ladeco from 1995 to 1998. In 1996, Mr. Hirmas served as Vice President of LanTours, a department of LanChile responsible for the development of tourism programs. Currently, Mr. Hirmas also serves as Chief Executive Officer of Corporate Leasing S.A. (a Mexican Corporation) and on the board of directors of Alimentos Rápidos de Mexico S.A. Mr. Hirmas is a member of the Hirmas Group (a group of major shareholders of LanChile). As of April 30, 2004, Mr. Hirmas shared in the beneficial ownership of 48,090,593 common shares of LanChile (15.1% of LanChile’s outstanding shares) held by the Hirmas Group. See “Principal and Selling Shareholders”.
Mr. Sebastián Piñera Echenique, 54 years old, joined LanChile’s board of directors in February 1999. Mr. Pinera holds a Ph.D. in Economics from Harvard
University. Mr. PineraPiñera served as Chairmanchairman of ourLanChile’s board of directors from October 2000 to April 2001. On July 12, 2001, Mr. PineraPiñera resigned as member of ourLanChile’s board of directors. OnMr. Piñera has served on LanChile’s board of directors
from April 29, 2002 at the annual shareholders meeting,2000 to present. Mr. Pinera
was elected Director. Mr. Pinera'sPiñera’s term as a director ends in April 2005.2006. In addition to being a former member of the Chilean Senate, he served as President and General Manager of Citicorp Chile from 1980 to 1987. Mr. PineraPiñera currently serves as Directordirector of the boards of directors of Bancard S.A., Editorial Los Andes S.A., Antar Chile S.A., Parque Arauco S.A., ClinicaClínica Las Condes S.A., C.M.B. S.A. and Constructora Aconcagua S.A. In addition, sincefrom May 2001 to March 2004, Mr. Pinera hasPiñera served as President of RenovacionRenovación Nacional, a Chilean political party. Mr. Pinera isPiñera holds a brother of Pablo Pinera who is a member of the board of
directors of LanChile.Ph.D. in Economics from Harvard University. Mr. PineraPiñera is also a member of the PineraPiñera Group (a group of major shareholders of LanChile). As of May 31, 2003,April 30, 2004, Mr. Pinera,Piñera shared in the beneficial ownership of 86,668,81584,424,601 common shares of LanChile (27.2%(26.5% of LanChile'sLanChile’s outstanding shares) held by the PineraPiñera Group. See "Major Shareholders“Principal and Related Party Transactions--Major Shareholders" under Item 7.
Selling Shareholders”.
Mr. Boris Hirmas Said, 40Darío Calderón González, 57 years old, joined thehas served on LanChile’s board of directors in
October 2000 to replace his father,since 1994. Mr. Boris Hirmas Rubio, who died on
September 23, 2000. Mr. Hirmas'sCalderón’s term as a director ends in April 2005.2006. Mr. Hirmas also served on the boards of directors of Fast Air and Ladeco from 1995
to 1998. In 1996, Mr. Hirmas served as Vice President, LanTours, an area of
LanChile responsible for the development of tourism programs. Currently, Mr.
Hirmas also serves as Chief Executive Officer of Corporate Leasing S.A. (Mexico)
and on the board of directors of Alimentos Rapidos de Mexico S.A. Mr. Hirmas is
a member of the Hirmas Group (a group of major shareholders of LanChile). As of
May 31, 2003, Mr. Hirmas shared in the beneficial ownership of 50,627,987 common
shares of LanChile (15.9% of LanChile's outstanding shares) held by the Hirmas
Group. See "Major Shareholders and Related Party Transactions--Major
Shareholders" under Item 7.
Dario Calderon Gonzalez, 55 years old, has served on our board of
directors since 1994. Mr. Calderon's term as a director ends in April 2005. Mr.
CalderonCalderón has been a partner in CalderonCalderón y Cia.Cía., a Chilean law firm, since 1979. Mr. CalderonCalderón currently serves on the boardsboard of directors of other Chilean companies, including Director deof Integramedica S.A., Imprenta A Molina Flores S.A., Inmobiliaria Cumbres S.A., Calzados Gino S.A. and Jucosol S.A. As of May
31, 2003,April 30, 2004, according to shareholder registration data in Chile, Mr. CalderonCalderón owned 8,635 common shares of LanChile (.003% of LanChile'sLanChile’s outstanding shares).
Mr. JoseJosé Cox Donoso 48, 49 years old, has served on ourLanChile’s board of directors from April 1994 to June 1995 and from September 1995 to the present. Mr. Cox'sCox’s term as a director ends in April 2005.2006. Mr. Cox has also served on the board of directors of Fast Air since August 1994 and as Chairmanchairman of the board of directors of Lan ChileLanChile Cargo (formerly Ladeco) since September 1995. In addition, Mr. Cox has served on the board of directors of CMB-Prime Asset Managing Corp. since September 1993. Mr. Cox is also Chairmanchairman of the Chilean Electronic Stock Exchange. As of April 30, 2004, according to shareholder registration data in Chile, Mr. Cox owned, through Inversiones Aéreas CGP Dos S.A., 2,654,324 common shares of LanChile (0.8% of LanChile’s outstanding shares).
Mr. Juan JoseJosé Cueto Plaza 42, 43 years old, has served on ourLanChile’s board of directors since 1994. Mr. Cueto'sCueto’s term as a director ends in April 2005.2006. Mr. Cueto currently serves as Executive Vice President of Inversiones Costa Verde S.A., a position he has held since 1990, and on the boards of directors of Forestal Copihue S.A. and Minera Michilla S.A. Mr. Cueto is the son of Mr. Juan Cueto Sierra, a director of LanChile, and the brother of Messrs. Enrique and Ignacio Cueto Plaza, Chief Executive Officer and Senior Vice President, Passenger of LanChile, respectively. Mr. Cueto is a member of the Cueto Group (a group of major shareholders of LanChile). As of May 31, 2003,April 30, 2004, Mr. Cueto shared in the beneficial ownership of 102,884,425101,419,931 common shares of LanChile (32.3%(31.8% of LanChile'sLanChile’s outstanding shares) held by the Cueto Group. See "Major Shareholders“Principal and Related Party Transactions--Major Shareholders" under Item 7.
Selling Shareholders”.
Mr. Juan Cueto Sierra 73, 74 years old, was one of the founders of Fast Air in 1978 and has served on ourLanChile’s board of directors since 1998. Mr. Cueto'sCueto’s term as a director ends in April 2005.2006. Mr. Cueto has wide experience in a range of business activities. Mr. Cueto is the father of Messrs. Juan Jose,José, Enrique and Ignacio Cueto Plaza, Director, Chief Executive Officer and Senior Vice President of LanChile, respectively.
Mr. RamonRamón Eblen Kadis 57, 59 years old, has served on ourLanChile’s board of directors since June 1994. Mr. Eblen'sEblen’s term as a director ends in April 2005.2006. Mr. Eblen has served as President of Comercial Los Lagos Ltda., Inversiones Santa Blanca S.A., and The Jeans Company S.A. since December 1988, April 1993 and August 1985, respectively.respectively until the present. In addition, Mr. Eblen has served on the boards of directors of Manufacturas Eblen y CompaniaCompañía Ltda. and Clemente Eblen y CompaniaCompañía Ltda., both since May 1984. Mr. Eblen is a member of the Eblen Group (a group of major shareholders of LanChile). As of May 31, 2003,April 30, 2004, Mr. Eblen shared in the beneficial ownership of 24,856,65824,889,654 common shares of LanChile (7.8% of LanChile'sLanChile’s outstanding shares) held by the Eblen Group. See "Major Shareholders“Principal and Related Party Transactions--Major Shareholders" under Item 7.
Selling Shareholders”.
Mr. Pablo Pinera Echenique, 51Andrés Navarro Haeussler, 55 years old, has served on ourjoined LanChile’s board of directors sincein April 2002.2004, Mr. Pinera'sNavarro’s term as a director ends in April 2005.2006. Mr. Pinera served as Deputy SecretaryNavarro holds a Civil Engineering degree from Universidad Católica de Chile. He is the president and founder of Finance from 1990 to 1992Sonda S.A., a leading IT services provider in Latin America, which has operations in eleven Latin American countries, including Mexico, Brazil, Argentina, Chile and asColombia. He is also the Chairman of the Board of Clínica Las Condes and of Inmobiliaria y Constructora Aconcagua S.A. and the President of Fundación Teleton, a member ofnon-profit organization, and sits on the board of other Chilean companies and institutions. Mr. Navarro also heads the Chilean Central Bank from 1992 to 2001. Between 1986
and 1990 he served as financial directordivision of Leasing Andino. Mr. Pinera currently
serves a Director of Television NacionaltheConsejo Empresario de Chile, is a member of the board of
Corporacion Latinoamericana de Investigaciones Economicas (CIEPLAN) and teaches
in a number of universities, such as Universidad Catolica, Universidad de Chile
and Instituto Torcuot Di Tella in Argentina. Mr. Pinera is a brother of Mr.
Sebastian Pinera, who is a member of our board of directors. As of May 31, 2003,
according to shareholder registration data in Chile, Mr. Pinera owned 3,109
common shares of LanChile (0.001% of LanChile's outstanding shares).
América Latina, or CEAL, an organization formed by leading Latin American businessmen.
Senior Management
Mr. Enrique Cueto Plaza, 4445 years old, is ourLanChile’s Chief Executive Officer, and has held this position since 1994. From 1993 to 1994, Mr. Cueto served on ourLanChile’s board of directors. From 1983 to 1993, Mr. Cueto was Chief Executive Officer of Fast Air. Mr. Cueto has in-depth knowledge of passenger and cargo airline management, both in commercial and operational aspects, that he gained during his eighteen years in the airline industry. Mr. Cueto currently serves on the boards of directors of Virtualia S.A. and First Financial S.A. Mr. Cueto is the son of Mr. Juan Cueto Sierra, a Directordirector of LanChile, and the brother of Messrs. Juan JoseJosé and Ignacio Cueto Plaza, Directordirector and Senior Vice President, Passenger of LanChile, respectively. Mr. Cueto is also a member of the Cueto Group (a group of major shareholders of LanChile). As of May 31, 2003,April 30, 2004, Mr. Cueto shared in the beneficial ownership of 102,884,425101,419,931 common shares of LanChile (32.3%(31.8% of LanChile'sLanChile’s outstanding shares) held by the Cueto Group. See "Major Shareholders“Principal and Related Party Transactions--Major Shareholders" under Item 7.
Selling Shareholders”.
Mr. Luis Ernesto Videla Berguecio, 42 43 years old, is ourLanChile’s President and Chief Operating Officer, a position he assumed in 1996. Prior to assuming his current position, Mr. Videla served as ourLanChile’s Vice President of Marketing and Sales from 1995 to 1996, and as ourLanChile’s Vice President of Planning and Development from 1994 to 1995. From 1989 until 1994, Mr. Videla held the position of Vice President, Planning at Fast Air. Before 1989, Mr. Videla worked at Banco de CreditoCrédito e Inversiones. As of May 31, 2003,April 30, 2004, according to shareholder registration data in Chile, Mr. Videla owned 59,704 common shares of LanChile (.02% of LanChile'sLanChile’s outstanding shares).
Mr. Ignacio Cueto Plaza, 40 41 years old, is ourLanChile’s Senior Vice President, Passenger. Mr. Cueto served on the board of directors of LanChile and Ladeco from 1995 to 1997 and from 1994 to 1997, respectively. In addition, Mr. Cueto served as Chief Executive Officer of Fast Air from 1993 to 1995 and as President of the LanCargo Group from 1995 to 1998. Between 1985 and 1993, Mr. Cueto held several positions at Fast Air, including Service Manager for the Miami sales office, Director of Sales for Chile and Vice President of Sales and Marketing. Mr. Cueto is the son of Mr. Juan Cueto Sierra, Director of LanChile, and the brother of Messrs. Juan JoseJosé and Enrique Cueto Plaza, Director and Chief Executive Officer of LanChile, respectively. Mr. Cueto is also a member of the Cueto Group (a group of major shareholders of LanChile). As of May 31, 2003,April 30, 2004, Mr. Cueto shared in the beneficial ownership of 102,884,425101,419,931 common shares of LanChile (32.3%(31.8% of LanChile'sLanChile’s outstanding shares) held by the Cueto Group. See "Major Shareholders“Principal and Related Party Transactions--Major Shareholders" under
Item 7.
Selling Shareholders”.
Mr. Alejandro de la Fuente Goic, 45 years old, is LanChile’s Chief Financial Officer, and has held this position since October 1995. Mr. de la Fuente joined LanChile in April 1995. Prior to joining LanChile, Mr. de la Fuente served as Director of Management and Finance of Chiquita Frupac Ltd., a subsidiary of Chiquita Brands Inc., beginning in 1992. As of April 30, 2004, according to shareholder registration data in Chile, Mr. de la Fuente owned 51,175 common shares of LanChile (.02% of LanChile’s outstanding shares).
Mr. Armando Valdivieso Montes, 40 41 years old, is ourLanChile’s Senior Vice President, Cargo, a position he assumed in 1997. From 1994 to 1997, Mr. Valdivieso was President of Fast Air. From 1991 to 1994, Mr. Valdivieso served as Vice President, North America of Fast Air Miami. As of May 31, 2003,April 30, 2004, according to shareholder registration data in Chile, Mr. Valdivieso owned of
59,704 common shares of LanChile (.02% of LanChile'sLanChile’s outstanding shares).
Mr. Alejandro de la Fuente Goic, 44
Ms. Susana Tonda Mitri, 49 years old, is our Chief Financial
Officer, and has held this position since October 1995. Mr. de la Fuente joined
us as Controller in April 1995. Prior to joining LanChile, Mr. de la Fuente
served as Director of Management and Finance of Chiquita Frupac Ltd., a
subsidiary of Chiquita Brands Inc., beginning in 1992. As of May 31, 2003,
according to shareholder registration data in Chile, Mr. de la Fuente owned
51,175 common shares of LanChile (.02% of LanChile's outstanding shares).
Ms. Susana Tonda Mitri, 48 years old, is ourLanChile’s Senior Vice President, Organization and Processes, a position she has held since June 2000. Prior to joining LanChile, Ms. Tonda was General Manager of Banefe, a division of Banco Santander in Chile, from 1993 to 1999. From 1985 to 1993, Ms. Tonda held several positions at Bancard S.A., a company involved in the administration and management of credit cards, including General Manager from 1992 to 1993.
Mr. Carlos Prado Canepa, Cánepa,54 years old, is ourLanChile’s Senior Vice President, Corporate Investment, and has held this position since July 1998. From 1993 to 1998, Mr. Prado served as ourLanChile’s Senior Vice President, Technical. From 1987 to 1992, he served as Chief Operating Officer of Exim Air S.A. From 1983 to 1986, Mr. Prado served as our Vice President, Cargo, and from 1981 to 1982 as our Fuel Manager. As of May 31, 2003,April 30, 2004, according to shareholder registration data in Chile, Mr. Prado owned 21,323 common shares of LanChile (.01% of LanChile'sLanChile’s outstanding shares).
Mr. Marco Jofre Marin, 39Jofré Marín, 41 years old, is ourLanChile’s Senior Vice President, Operations, Engineering and Maintenance. Mr. JofreJofré has been responsible for Operations since August 1998 and for Engineering and Maintenance since May 2002. From 1997 to 1998, Mr. JofreJofré served as Executive Vice President of Fast Air, from 1992 to 1997 as Planning Director of Fast Air and from 1990 to 1992 as Vice President Services, North America of Fast Air Miami. Currently, Mr. JofreJofré also serves as a consultant to the Academy of Aeronautical Sciences and on the boards of directors of Flight Training Center-Chile and Teisa,TEISA, the export terminal of LanChile. As of May 31, 2003,April 30, 2004, according to shareholder registration data in Chile, Mr. JofreJofré owned 25,588 common shares of LanChile (.01% of LanChile'sLanChile’s outstanding shares).
Compensation
For the year ended December 31, 2002,2003, the aggregate amount of compensation we paid to all directors, executive officers,executives and senior managers and
other executives was US$21.2 million. Each30.8 million, which included US$1.6 million in bonuses. Our variable compensation plan is based on our corporate profits, and team and individual performance.
Under Chilean law, LanChile must disclose in its annual report details of ourall compensation paid to its directors receivesduring the relevant fiscal year, including any amounts that they received from LanChile for functions or employment other than serving as a nominal,
per diem amount for attending each meetingmember of the board of directors, however,
theseincluding amounts are not material individuallyreceived as per diem stipends, bonuses and, generally, all other payments. Additionally, pursuant to regulations of theSuperintendencia de Valores y Seguros, or in the aggregate. For 2002, we
paid US$2.0 million in bonuses to seniorSVS, the annual report must also include the total compensation and severance payments received by managers and other executives. We do
not disclose to our shareholders or otherwise make available public information
as toprincipal executives, and the compensationterms of and the manner in which board members and executive officers participate in any individual. Apart from monetary remuneration, westock option plans.
LanChile’s directors are paid 24 UF per meeting (56 UF for the chairman of the board). LanChile also grantprovides certain benefits to ourits directors and executive officers, such as free and discounted airline tickets and health insurance.
As isset forth in further detail in the following table, in 2003, the members of our board of directors currently in office received fees and salaries in the aggregate amount of US$69,775.
Board Members | Fees (US$)(1) | ||
Jorge Awad Mehech | US$ | 20,917 | |
José Cox Donoso | 11,860 | ||
Ramón Eblen Kadis | 11,304 | ||
Darío Calderón González | 5,908 | ||
Juan José Cueto Plaza | 5,905 | ||
Sebastián Piñera Echenique | 5,899 | ||
Boris Hirmas Said | 4,230 | ||
Juan Cueto Sierra | 3,752 | ||
Total | US$ | 69,775 | |
| (1) | Includes fees paid to members of the board of directors’ committee, as described below. |
As required by Chilean law, we makeLanChile makes obligatory contributions to the privatized pension fund system on behalf of ourits senior managers and executives, but we doit does not maintain any separate program to provide pension, retirement or similar benefits to these or any other employees.
Board of Directors'Directors’ Committee
Pursuant to recently enacted amendmentsChilean Corporation Law, as amended by Law No. 19,705, LanChile must have a board of directors’ committee composed of no less than three board members. LanChile has established a three-person committee of its board of directors, which, among other duties, is responsible for:
Under Chilean law we are required, to the examinationextent possible, to appoint independent directors to this committee.
As of fees and compensation plans for
senior management andDecember 31, 2003, the examination of other matters defined by our board of
directors, by our shareholders at general meetings and by our corporate bylaws.
This committee operates under Chilean Law 19,705, dated December 20, 2000.
Our board of directors' committee members arewere Mr. Jorge Awad Mehech, Mr. JoseJosé Cox Donoso and Mr. RamonRamón Eblen Kadis. We pay the memberseach member of the board
of directors' committee 24 UFs each per month for their services.
month.
Employees
As of December 31, 2002,April 30, 2004, we had a total of 10,77011,851 employees, including:
o 667
Our flight operations, maintenance and customer ground operations personnel undergo training when they join us and throughout their employment with us. We invested approximately US$4.7 million in training in 2000, US$9.0 million in training in 2001, and US$7.0 million in training2002 and US$6.8 million in 2002.2003. We generally recruit our pilots from theAcademia de Ciencias Aeronauticas (Universidad TecnicaAeronáuticas (at the Universidad Técnica Federico Santa Maria)María), aeroclubs and the Chilean armed forces. FirstBefore being promoted to the position of captain, first officers must have logged at least 2,500 flight hours with us and authorization from an internal
LanChile committee composedreceived the approval of pilots witha special instructor expertise before
being promoted to the captain position.pilots’ committee. We provide ground-school training in Santiago, de Chile, and sometimesas well as in Lima and Quito for our Peruvian and Ecuadorian crews,crews. We use our own Boeing 737-200 flight simulator in Santiago and send our pilot staff to receive simulator training at several different sites in the United States at ALTEON
Training L.L.C., Pan Am International Flight Academy in Miami and United
Airlines Services in Denver, depending on aircraft type and availability. We
conduct initial and on-going flight training for Airbus fleet crews, mainly at
CAE South America Flight Training in Sao Paulo, Brazil.
Our pilots are rated for only one aircraft type by local aeronautical authorities, and they are not cross-qualified between two or more aircraft types. Chilean regulations require pilots to be licensed as commercial pilots for a first officer position and as an airline transport pilot for a captain position, with specific type, function and special ratings for each aircraft to be flown, and to be medically certified as physically fit. Licenses and medical certifications are subject to periodic reevaluation, including flight simulator recurrent training, ground recurrent training, annual emergency procedures training, safety and security training and recent flying experience. Our pilots receive a variety of training, such as lectures, simulations and gaming and computer based training.
In December 1997, LanChile and Lufthansa Technical Training GmbH created Lufthansa LanChile Technical Training S.A. in Santiago to provide ourselves and third parties with technical training services and amenities, primarily for mechanics.
As part of our plan to develop our own training center, in April 1998
we bought a Boeing 737-200 full flight simulator from Thomson Training &
Simulation. The simulator was customized to conform to our particular needs, and
is located in a specially designed building located close to our headquarters
next to the Santiago International Airport. In September 1999, LanChile and
Lufthansa Flight Training together created Flight Training Center Chile S.A. to
provide ourselves and third parties with flight training services and amenities
in Chile. We then leased the building for ten years and sold the simulator to
Flight Training Center Chile to provide these flight training services.
Aircraft mechanics and maintenance supervisory personnel must be licensed and qualified for specific aircraft by the DGAC.DGAC and other corresponding authorities in other countries in which we operate. Cabin crew must have initial and periodic competency fitness training. Since the acquisition of LanChile by our majority shareholders in 1994, we have implemented a performance-related pay structure for our administrative, management and flight personnel, including performance-based bonuses and pay scales that reward foreign language proficiency in counter, technical and administrative personnel.
We train our mechanics and maintenance supervisors in all programs required by both local (DGAC)DGAC and international (FAA, Joint Aviation Authorities, or the JAA, (Joint Aviation
Authorities) and ITTA (IndependentIndependent Travel Technology Association))Association, or the ITTA) norms and regulations, those required by aircraft manufacturers and the training needs that we detectidentify during our annual reviews. We present these programs during training daystrainings that can last for up to four days for refresher courses and for up to 54 days for Boeing 767 line and base maintenance certification.
During 2002,2003, we continued training sales and administrative personnel in areas such as service and sales quality. Also, we startedcommenced new programs aimed at improving leadership skills and started applying e-learning techniques. Overall, our personnelwe offered courses to 19,387 persons, who underwent 540,601422,051 aggregate training hours during 2002.
2003.
We have made efforts to negotiatenegotiated longer-term labor contracts with the labor unions in anticipation of their scheduled expirations, which someunder Chilean law are limited to a period of four years. In general, the expiration of our employeeslabor agreements with the several unions that represent our pilots and other personnel are members and, overstaggered in a way that we avoid being in the last
three years, we have successfully reached long-term agreements as labor
contracts have expired. In January 2001, Ladeco (now Transporte Aereo S.A.)
reached a new four-yearposition of having to renegotiate contract terms with substantially all of our pilots or other personnel at the same time.
The collective bargaining agreement withbetween our subsidiary Transporte Aéreo S.A. and its pilots’ union expires in March 2005. Four collective bargaining agreements are in place between LanChile and the unions that represent four different groups of its pilots, union,one which expires in March 2006. In April 2001, we entered intoNovember 2005, two which expire November 2006 and a five-yearfourth that expires in November 2007. LanChile Cargo is party to an employment agreement with another 90 non-unionized LanChile Cargo pilots that expires in AprilMarch 2006. In June 2001 we
LanChile has also entered into a five-year agreement with our
administrative personnel that expires in May 2006. In October 2001 we reached an
agreement with 147 LanChile pilots that expires on June 2006. In November 2001
we entered into a four-year agreement withcollective bargaining agreements covering the LanChile pilot union that expires
on November 2005. In February 2002 we signed an agreement with the
administrative personnelmajority of Transporte Aereo S.A. that expires in January 2006.
We have finalized all the union agreements with our flight attendants.
In October 2002, we signed an agreement with LanChile's Flight Attendants Union
effective until March 2006. In addition, we signed agreements with non-unionizedits flight attendants that expire in May,at various times, ranging from July 2004 to June 2007 and October 2006. Wehas entered into an
agreementcollective bargaining agreements with Lan Express Flight Attendants Union that expires in September
2006 and an agreement with Lan Express Administrative Union that expires in
January 2006. In addition, we signed an agreement with the Line Maintenance
Union that runs from April 2003 until March 2007. Finally, we will soon begin to
negotiate two agreementsits maintenance personnel that expire in November 2003.
at various time, ranging from September 2004 to October 2007.
We believe we generally have good relations with our employees and the unions, and expect to continue to enjoy good relations with our employees and the unions in the future. We also believe that we have built a solid base among our employees that will support and facilitate our growth plans. We can provide no assurance, however, that our employee compensation arrangements may not be subject to change or modification after the expiration of the contracts currently in effect.
We provide our employees with medical insurance and also grant other benefits, to all of our permanent employees, such as free and discounted airline tickets.tickets, to our permanent employees. We have never offered stock options to our employees. As required by Chilean law, we make obligatory contributions to the privatized pension fund system on behalf of our employees, but we do not maintain any separate program to provide pension, retirement or similar benefits to these or any other employees.
The following table sets forth the number of employees in various positions at LanChile, LanChile Cargo and our other subsidiaries.
As of December 31, As of December 31, As of December 31,
Employees (1) 2000 2001 2002
------------------ ------------------ ------------------
Administrative..... 1,825 2,277 2,442
Sales.............. 1,255 1,361 1,738
Maintenance........ 1,383 1,378 1,371
Operations......... 3,101 3,051 3,032
Cabin crew......... 1,161 1,443 1,520
Cockpit crew....... 581 663 667
------ -------- --------
Total.............. 9,306 10,173 10,770
- ---------------------------------
(1) In 2002, approximately 85% of our employees were deployed in Chile, 12% in
other Latin American countries and 3% in the rest of the world.
| As of December 31, | ||||||
Employees(1) | 2001 | 2002 | 2003 | |||
Administrative | 2,277 | 2,442 | 2,486 | |||
Sales | 1,361 | 1,738 | 1,845 | |||
Maintenance | 1,378 | 1,371 | 1,383 | |||
Operations | 3,051 | 3,032 | 3,294 | |||
Cabin crew | 1,443 | 1,520 | 1,448 | |||
Cockpit crew | 663 | 667 | 717 | |||
Total | 10,173 | 10,770 | 11,173 | |||
| (1) | In 2003, approximately 80% of our employees worked in Chile, 17% in other Latin American countries and 3% in the rest of the world. |
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Major Shareholders
We have four principal groups of shareholders: (i)
As of May 31, 2003,April 30, 2004, these principal groups of shareholders, whom we call the majority shareholders, owned 82.92%81.16% of our voting common shares directly. While the common shares owned by the majority shareholders do not have different voting rights than the common shares owned by our other shareholders, these majority shareholders are entitled to elect a majority of the members of our board of directors and are in a position to direct our management and to control substantially all matters that are to be decided by a vote of shareholders.
On May 31, 2003,
Under a right of first refusal agreement between the Cueto Group, Piñera Group, an entity controlled by Mr. José Cox Donoso and an entity controlled by a third party, the common shares owned by each, which in the aggregate account for approximately 59% of LanChile’s outstanding shares of common stock, are subject to reciprocal rights of first refusal in connection with any future sale to a third party.
The table below sets forth the beneficial ownership of our common shares by the majority shareholders as of April 30, 2004.
Beneficial ownership (as of April 30, 2004) | |||||
Shareholder | Number of shares of common stock beneficially owned | Percentage of beneficially owned | |||
Cueto Group | |||||
Inversiones Costa Verde Limitada y Compañía en Comandita por Acciones | 101,419,931 | 31.80 | % | ||
Total | 101,419,931 | 31.80 | % | ||
Piñera Group | |||||
Inversiones Santa Cecilia S.A. | 18,596,727 | 5.83 | % | ||
Axxion S.A. | 65,827,874 | 20.64 | % | ||
Total | 84,424,601 | 26.47 | % | ||
Hirmas Group | |||||
Tres Mares S.A. | 48,090,593 | 15.08 | % | ||
Total | 48,090,593 | 15.08 | % | ||
Eblen Group | |||||
Inversiones Santa Blanca S.A. | 1,430,175 | 0.45 | % | ||
Inversiones Santa Blanca II S.A. | 11,024,921 | 3.46 | % | ||
Comercial Los Lagos Limitada | 12,434,558 | 3.90 | % | ||
Total | 24,889,654 | 7.81 | % | ||
Others | 60,084,301 | 18.84 | % | ||
Total | 318,909,090 | 100.00 | % | ||
At April 30, 2004, investors abroadoutside of Chile held 5.4%8.0% of our capital stock in the form of ADSs, and other minority investors held 11.5%10.8% in the form of common shares. It is not practicable for us to determine the number of ADSs or common shares beneficially owned in the United States. As of May 31, 2003,At April 30, 2004, we had 1,4611,187 record holders of our common shares. It is not practicable for us to determine the portion of shares held in Chile or the number of record holders in Chile.
The following table sets forth information regarding known beneficial owners of
the 318,909,090 outstanding shares of our common stock as of May 31, 2003:
Related Party Transactions
We have engaged in a variety of transactions with our affiliates, including entities owned or controlled by certain of our majority shareholders. Set out below is a description of the material transactions between LanChile
and its affiliates. It is our policy not to engage in any transaction with or for the benefit of any shareholder or member of the board of directors, or any entity controlled by such a person or in which such a person has a substantial economic interest, unless the transaction is related to our business and the price and other terms are at least as favorable to us as those that could be obtained on an arm's-lengtharm’s-length basis from a third party. For a detailed discussion
of Chilean laws governing related party transactions, including the
circumstances under which we may enter into related party transactions, see
"Additional Information--Memorandum and Articles of Association--Directors"
under Item 10.
Transactions Related to the Purchase of Interests in ABSAAbsa and Vimalcor
To strengthen and help expand our cargo presence across Latin America, on December 5, 2001, we purchased from entities related to the majority shareholders a 73.3% stake in Aerolinheas Brasileiras S.A. (ABSA)Absa for approximately US$2.1 million. In addition, onin April 3, 2002, we purchased from entities related to the majority shareholders a 50.0% stake in Vimalcor Sociedad AnonimaAnónima for approximately US$0.4 million.
Real Estate Transactions
During the fourth quarter of 2003, LanChile acquired office space and other ancillary facilities for US$7.3 million from Inmobiliaria San Luis Dos S.A., an entity in which the Cueto Group of our majority shareholders holds a minority stake. This office space enabled us to move some of our administrative and commercial staff to a more central location in Santiago. This transaction was carried out at market prices and in accordance with Chilean law, was approved by our board of directors’ committee and was disclosed at our annual shareholders’ meeting.
Other Transactions
In addition to the transactions discussed above, we render to and receive from related companies services of various types, including freight and reservation services. Such transactions, none of which is individually material, are summarized in Note 14 on page F-25 to theour audited consolidated financial statements.
statements for the fiscal year ended December 31, 2003 and in Note 5 on page F-62 to our unaudited consolidated financial statements for the three months ended March 31, 2004.
Consolidated Financial Statements
See Item 18, "Financial Statements"“Financial Statements” and pages F-1 through F-53.
F-65.
Other Financial Information
Legal and Arbitration Proceedings
We are involved in routine litigation and other proceedings relating to the ordinary course of our business. On July 30, 1997, the Chilean Antitrust Commission finedimposed a fine on us of approximately US$345,000 in connection with a complaint filed by DAP Airlines, or DAP, alleging that we employed anti-competitive tactics by reducing our prices on certain of our routes and refusing to perform maintenance services on DAP aircraft. On January 8, 1998, DAP filed a demand for indemnification against Ladeco,LanChile Cargo, National Airlines and LanChile, jointly and severally, in the amount of approximately Ch$6.4 billion (approximately US$14.6
million)10.2 million according to the observed exchange rate as of April 30, 2004). In June 2000, the courts ruled in favor of DAP in the amount of Ch$342 million (approximately US$600,000),550,000 according to the observed exchange rate as of April 30, 2004); however, we have appealedfiled an appeal of the decision, and
the appealwhich is still pending.
At the beginning of 2000, after United Airlines and American Airlines
reduced their standard commission rate to travel agencies for sales of tickets
from 9% to 6% across Latin America, we also reduced our standard commission rate
from 9% to 6%. On January 24, 2000, the Asociacion Chilena de Empresas de
Turismo A.G. (the Chilean Association of Tourism Companies), which is known as
"ACHET", lodged an appeal against us for reducing our commission rate. In March
2000, the Court of Appeals of Santiago issued an order enjoining us from
reducing our commission rate until the appeal was decided. On November 2, 2000,
the Chilean Supreme Court ruled in our favor. Subsequently, ACHET filed another
suit against us, however, ACHET withdrew its suit upon reaching an agreement
with us. As part of this agreement, we agreed to a standard commission rate of
6% to travel agencies, and agreed to maintain this commission through March 31,
2002. In addition, as of April 1, 2002, we must provide ACHET with 60 days'
notice of any change we propose to make to the commission rate.
In 2000, the FAA determined that we had on one occasion improperly
transported oxygen generators in violation of FAA regulations, federal aviation
law and other federal regulations. After the FAA's formal review of our safety
and security procedures, on September 7, 2000 we agreed to a reduced fine of
US$199,500.
We do not believe that thesethis or any other pending proceedings against us had or are likely to have a materialsignificant adverse effect on our business or results of operations.
Dividend Policy
In accordance with the Chilean Corporation Law, welaw, LanChile must distribute cash dividends equal to at least 30% of ourits annual consolidated net income calculated in accordance with Chilean GAAP, unless otherwise decided by a unanimous vote of the
holders of all of our issued shares and unless and except to the extent that we holdit has accumulated losses. If we havethere is no net income in a given year, we mayLanChile can elect but areis not legally bound,obligated to distribute dividends out of retained earnings. The board of directors may declare provisoryinterim dividends out of profits earned during ansuch interim period. ThePursuant to LanChile’s by-laws, the annual cash dividend is approved by the shareholders at the annual shareholders'ordinary shareholders’ meeting held within the first
quarterbetween February 1 and April 30 of the year following the year with respect to which the dividend is proposed. All outstanding common shares are entitled to share equally in all approved dividends.
dividends declared by LanChile.
Holders of ADRs areADSs offered hereby will be entitled to receive dividends on the underlying common shares to the same extent as holders of common shares. TheseHolders of ADRs on the applicable record dates will be entitled to receive dividends arepaid on the common shares represented by the ADSs evidenced by such ADRs after the closing of the offering. Dividends payable to holders of ADSs will be paid by us to the depositary in Chilean pesos and remitted by the depositary to such holders net of foreign currency conversion fees and expenses of the depositary and will be subject to Chilean withholding tax which is currently imposed at a rate of 35% (subject to credits in certain cases as described under “Taxation”). Owners of the ADSs will not be charged any dividend remittance fee by the depositary with respect to cash dividends. See “Description of American Depositary Receipts—Dividends, Other Distributions and Rights” and “Taxation”.
Chilean law requires that holders of shares of Chilean companies that are not residents of Chile register as foreign investors under one of the foreign investment regimes established by Chilean law in "Additional
Information--Chilean Tax Considerations" under Item 10)order to have dividends, sale proceeds or other amounts with respect to their shares remitted outside Chile through the Formal Exchange Market (Mercado Cambiario Formal). Under theour Foreign Investment Contract, (as amended) the depositary, on behalf of ADS holders, iswill be granted access to the formal exchange market in orderFormal Exchange Market to convert cash dividends from Chilean pesopesos to U.S. dollars and to pay such U.S. dollars to ADS holders outside Chile. For more information, see "Additional
Information--Exchange Controls" under Item 10.
For more information on the amounts of dividends that we have paid in
the last five years, see Item 3.
Stock Price History
The principal trading market for our common shares is the Santiago Stock Exchange. The common shares have been listed on the Santiago Stock Exchange under the symbol “LAN” since 1989, and the ADSs have been listed on The New York Stock Exchange under the symbol “LFL” since November 7, 1997. The common shares also trade on theBolsa de Valores de Valparaísoand theBolsa Electrónica de Chile. The outstanding ADSs are identified by the CUSIP number 501723100. The following table sets forth, for the periods indicated, the high and low closing sale prices for (i) our common shares on the Santiago Stock Exchange in
Chilean pesosfor the common shares and (ii) the ADSshigh and low closing prices on theThe New York Stock Exchange in U.S. dollars.
For more information onfor the exchange rates applicable during the periods set
forth below, see "Additional Information--Exchange Rates" under Item 10.common shares represented by ADSs. The information set forth in the table below reflects actual historical amounts at
the trade dates and has not been restated in constant Chilean pesos.
Ch$ per Common Share US$ per ADR
Years ended -------------------- -----------
December 31, Low High Low High
------------ --- ---- --- ----
1997 (1)......................... 470.00 1,750.00 12.00 14.125
1998............................. 250.00 1,260.00 2.50 14.50
1999............................. 361.00 863.00 3.56 8.62
2000............................. 715.00 870.00 6.19 7.94
2001
First Quarter................. 870.00 1,017.90 7.63 8.60
Second Quarter................ 980.00 1,190.00 8.30 9.95
Third Quarter................. 800.00 1,339.90 5.80 10.14
Fourth Quarter................ 775.00 1,000.00 5.26 7.65
2002
First Quarter................. 850.00 960.00 6.30 7.30
Second Quarter................ 700.00 860.00 5.00 6.65
Third Quarter................. 535.00 730.00 3.25 5.40
Fourth Quarter................ 520.00 881.30 3.43 6.40
2003
First Quarter................. 680.00 892.00 5.15 6.20
Monthly Prices
December, 2002................ 740.00 881.30 5.29 6.40
January, 2003................. 830.00 875.00 5.65 6.20
February, 2003................ 810.00 892.00 5.25 5.80
March, 2003................... 680.00 820.50 5.15 5.56
April, 2003................... 770.00 1100.00 5.38 7.45
May, 2003.....................1000.00 1181.00 7.29 8.55
- -----------
Year ended December 31, 1999 2000 2001 2002 First Quarter Second Quarter Third Quarter Fourth Quarter 2003 First Quarter Second Quarter Third Quarter Fourth Quarter 2004 First Quarter Monthly Prices November, 2003 December, 2003 January, 2004 February, 2004 March, 2004 April, 2004 May, 2004 June, 2004(1) Ch$ per Common Share US$ per ADS Low High Low High 379.00 880.00 3.56 8.63 715.00 1,065.00 6.19 10.31 775.00 1,339.90 5.26 10.14 850.00 960.00 6.30 7.55 702.00 849.99 5.10 6.57 555.00 727.00 3.40 5.40 520.00 870.00 3.60 6.35 735.00 875.00 5.15 6.16 770.00 1,150.00 5.38 8.20 1,145.00 1,495.00 8.07 11.28 1,520.00 2,100.10 11.66 17.70 2,010.00 2,300.00 16.86 19.80 1,750.00 1,910.00 14.10 15.44 1,910.00 2,100.10 15.48 17.70 2,020.00 2,230.00 16.86 19.80 2,010.00 2,249.90 17.41 18.81 2,150.00 2,300.00 17.70 19.32 2,270.00 2,505.00 18.43 20.60 2,190.00 2,440.00 17.15 19.60 2,170.00 2,180.00 16.85 17.31
Sources: Santiago Stock Exchange and theThe New York Stock Exchange.
(1) ADR prices for 1997 correspond to transactions from November 6, 1997 to
the end
| (1) | Period through June 7, 2004. |
As of the quarter.
April 30, 2004, a total of 318,909,090 common shares were outstanding, including 25,662,710 common shares represented by ADSs.
Trading
The Chilean stock market, which is regulated by the Superintendencia de
Valores y Seguros (the Superintendency of Securities and Insurance, or the SVS)SVS under Law 18,045 of October 22, 1981, as amended, which is calledwe refer to as the Securities“Securities Market Law,Law”, is one of the most developed among emerging markets, reflecting the particular economic history and development of Chile. The Chilean government'sgovernment’s policy of privatizing state-owned companies, implemented during the 1980s, led to an expansion of private ownership of shares, resulting in an increase in the importance of stock markets. Privatization extended to the social security system, which was converted into a privately managed pension fund system. These pension funds have been allowed, subject to certain limitations, to invest in stocks and are currently major investors in the stock market. Some market participants, including pension fund administrators, are highly regulated with respect to investment and remuneration criteria, but the general market is less regulated than the U.S. market with respect to disclosure requirements and information usage.
The Santiago Stock Exchange was established in 1893 and is a private company whose equity is held by 3548 shareholders. As of December 31, 2001, 248 companies had shares listed on the Santiago Stock Exchange. As of December 30,
2002, 249March 31, 2004, 272 companies had shares listed on the Santiago Stock Exchange. The Santiago Stock Exchange is Chile'sChile’s principal exchange and accounts for approximately 71.5%76.7% of securities traded in Chile. Approximately 27%22.8% of equity trading is conducted on the Chilean Electronic Stock Exchange, an electronic trading market created by banks and non-member brokerage houses. The remaining equity trading is conducted on the ValparaisoValparaíso Stock Exchange
Exchange.
Equities, closed-end funds, fixed-income securities, short-term and money market securities, gold and U.S. dollars are traded on the Santiago Stock Exchange. In 1991, the Santiago Stock Exchange initiated a futures market with two instruments: U.S. dollar futures and Selective Shares Price Index, or IPSA, futures. In 1994, the Santiago Stock Exchange initiated an options market with options of CompaniaCompañía de Telecomunicaciones de Chile S.A. and Empresa Nacional de Electricidad S.A. Securities are traded primarily through an open voice auction system, a firm offers system or the daily auction. Trading through the open voice system occurs on each business day between 9:30 a.m. to 4:30 p.m. The Santiago Stock Exchange has an electronic system of trade, called Telepregon,Telepregón, which operates continuously for stocks trading in high volumes from 9:30 a.m. to 4:30 p.m. The Chilean Electronic Stock Exchange operates continuously from 9:30 a.m. to 4:30 p.m. (or 5:30 p.m., depending on the period of the year) on each business day. In February 2000, the Santiago Stock Exchange Off-Shore Market began operations. In the Off-Shore Market, publicly-offeredpublicly offered foreign securities are traded and quoted in United States dollars. LanChile wasLanChile’s ADRs were the fourth Chilean ADR to be registered for trade on the Santiago Stock Exchange Off-Shore Market.
There are two principal share price indices for the Santiago Stock Exchange: TheExchange, the General Share Price Index and the IPSA. The General Share Price Index is calculated using the prices of 163 issues159 stocks and is broken into five main sectors: banks and finance, farming and forest products, mining, industrial and miscellaneous. The IPSA is a major company index, currently including the Exchange'sSantiago Stock Exchange’s 40 most active stocks. Shares included in the IPSA are weighted according to the value of shares traded and account for 61.6% of the entire market capitalization.
ITEM 10. ADDITIONAL INFORMATION
Memorandum and Articles of Association
Set forth below is certain information concerning our equityshare capital and a brief summary of certain significant provisions of our bylaws (Estatutos)by-laws and Chilean law. This summary isdescription contains all material information concerning the common shares but does not intendedpurport to be a complete description and is qualified in its entirety by reference to our bylaws,by-laws, the Chilean Corporation Law and the Securities Market Law, each referred to below. For additional information regarding the common shares, reference is made to our by-laws, a copy of which are included inas Exhibit 1.1 to this annual report on Form 20-F.
Organization and Register
LanChile is a publicly-held stock corporation (sociedad anonima
abierta)(sociedad anónima abierta) incorporated under the laws of the Republic of Chile. LanChile was incorporated by a public deed dated December 30, 1983, an abstract of which was published in the Chilean Gazette (Diario(Diario Oficial de la RepublicaRepública de Chile)Chile) No. 31.759 on December 31, 1983, and registered on page 20,341, No. 11,248 of the Chilean Real Estate and Commercial Registrar (Registro(Registro de Comercio del Conservador de Bienes Raices y Comercio de Santiago)Santiago) for the year 1983. Our corporate purpose, as stated in our bylaws,by-laws, is to provide a broad range of transportation and related services, as more fully set forth in Article Four thereof.
General
Shareholders'
Shareholders’ rights in a Chilean company are generally governed by the company's bylaws,company’s by-laws. Article 22 of the Chilean Corporation Law states that the purchaser of shares of a company implicitly accepts its by-laws and any agreements adopted at shareholders’ meetings. Additionally, the Chilean Corporation Law regulates the government and operation of corporations (“sociedades anónimas”, or S.A.) and provides for certain shareholder rights. Article 137 of the Chilean Corporation Law provides that the provisions of the Chilean Corporation Law take precedence over any contrary provision in a corporation’s by-laws. The Chilean Corporation Law and our by-laws also provide that all disputes arising among shareholders in their capacity as such or between us or our administrators and the shareholders may either be submitted to arbitration in Chile or to the courts of Chile at the election of the plaintiff initiating the action. Finally, Decree-Law 3500, which allows pension funds to invest in the stock of qualified corporations, indirectly affects corporate governance and prescribes certain rights of shareholders. The Chilean Corporation Law sets forth the rules and requirements for establishing open stockpublicly held corporations. As
defined by Article 2 of the Chilean CompaniesCorporation Law open stock (publicly held)defines publicly held corporations are thoseas corporations:
o
The framework of the Chilean securities market is regulated by the Chilean exchange entity, (Superintendencia de Valores y Seguros) ("SVS")the SVS, under the Securities Market Law and the Chilean Corporation Law, which legal framework
sets forthimposes certain disclosure requirements, restrictions onrestricts insider trading, andprohibits price manipulation prohibitions and protections ofprotects minority investors. Both the Chilean Corporation Law and the Securities Market Law state rules and requirements for establishing publicly held corporations. In particular, the Securities Market Law establishes requirements for public offerings, stock exchanges and brokers and outlines disclosure requirements for corporations that issue publicly offered securities.
Ownership Restrictions
Under Article 12 of the Securities Market Law and Circular 585 of the SVS, certain information regarding transactions in shares of publicly held corporations must be reported to the SVS and the relevantChilean stock exchanges whereon which the shares are listed. HoldersSince the ADRs are deemed to represent the shares underlying the ADSs, transactions in ADRs will be subject to those reporting requirements. Among other matters, beneficial owners of shares of
open corporations areADSs will be required to report to the SVS and the Chilean stock exchanges within two stock exchange business days:
o
In addition, majority shareholders must state in their report whether their purpose is to acquire control of the company or if they are making a financial investment.
Under Article 54 of the Securities Market Law and under SVS regulations, persons or entities intendingthat intend to acquire control, whether directly or indirectly, of an opena publicly traded company, must follow certain notice requirements, regardless of the acquisition vehicle or procedure or whether the acquisition will be made through direct subscriptions or private transactions. The potential acquiror must first send a written communication to the target corporation, any companies controlling or controlled by the target corporation, the SVS and the Chilean stock exchanges on which the securities are also required to publish an advance
notice in a Chilean newspaper detailinglisted, stating, among other things, the person or entity purchasing or selling and the price and conditions of any negotiations. Prior
The potential acquiror must also inform the public of its planned acquisition at least ten business days prior to such publication,the date on which the transaction is to close, any in any event, as soon as negotiations regarding the change of control begin (i.e., when information and documents concerning the target are delivered to the potential acquiror). Notice is made through a written communicationfiling with the SVS, the relevant Chilean stock exchanges and any companies controlling or controlled by the target corporation and through a notice published in two Chilean newspapers, and must also state, among other things, the person or entity purchasing or selling and the price and conditions of any negotiations.
In addition to such effect
mustthe foregoing, Article 54A of the Securities Market Law requires that within two business days of the completion of the transactions pursuant to which a person has acquired control of a publicly traded company, a notice shall be published in the same newspapers in which the notice referred to above was published and notices shall be sent to the same persons mentioned in the preceding paragraphs.
A beneficial owner of ADSs intending to acquire control of LanChile will be subject to the foregoing reporting requirements.
The provisions of the aforementioned articles do not apply whenever the acquisition is being made through a tender or exchange offer.
Title XXV of the Securities Market Law on tender offers and SVS regulations provide that the following transactions shall be carried out through a tender offer:
Article 200 of the Securities Market Law prohibits any shareholder that has taken control of a publicly traded company from acquiring, for a period of 12 months from the date of the transaction that granted it control of the publicly traded company, a number of shares equal to or higher than 3.0% of the outstanding issued shares of the target without making a tender offer at a price per share not lower than the price paid at the time of taking control. Should the acquisition from the other shareholders of the company be made on the floor of a stock exchange and on a pro rata basis, the controlling shareholder may purchase a higher percentage of shares, if so permitted by the regulations of the stock exchange.
Title XV of the Securities Market Law sets forth the basis for determining what constitutes a controlling power, a direct holding and a related party.
Capitalization
Under Chilean law, the shareholders of a company, acting at an extraordinary shareholders’ meeting, have the power to authorize an increase in the company’s share capital. When an investor subscribes for issued shares, the shares are registered in that investor’s name, even without payment therefor, and the investor is treated as a shareholder for all purposes except with regard to receipt of dividends and return of capital. The investor becomes eligible to receive dividends once it has paid for the shares, or, if it has paid for only a portion of such shares, it is entitled to receive a corresponding pro rata portion of the dividends declared with respect to such shares, unless the company’s by-laws provide otherwise. If an investor does not pay for shares for which it has subscribed on or prior to the date agreed upon for payment, the company is entitled under Chilean exchanges.
law to auction the shares on the appropriate stock exchange, and it has a cause of action against the investor to recover the difference between the subscription price and the price received for the sale of those shares at auction. However, until such shares are sold at auction, the investor continues to exercise all the rights of a shareholder (except the right to receive dividends and return of capital). Shares issued but not paid for within the period determined by the extraordinary shareholders’ meeting for their payment (which in any case cannot exceed three years from the date of such shareholders’ meeting which authorizes the increase in capital) will be canceled and will no longer be available for issuance by us. Fully paid shares are not subject to further calls or assessments or to liabilities of LanChile.
At April 30, 2004, our share capital consisted of 318,909,090 common shares, all of which were subscribed and fully paid. Chilean law recognizes the right to issue common and preferred shares. To date, we have issued and are authorized by our shareholders to issue only common shares.
Preemptive Rights and Increases in Share Capital
The Chilean Corporation Law requires Chilean companies to offer existing shareholders the right to purchase a sufficient number of shares to maintain their existing percentage of ownership in a company whenever that company issues new shares for cash. Under this requirement, any preemptive rights will be offered by us to the depositary as the registered owner of the common shares underlying the ADSs, but holders of ADSs and
shareholders located in the United States will not be allowed to exercise preemptive rights with respect to new issuances of shares by us unless a registration statement under the Securities Act is effective with respect to those common shares or an exemption from the registration requirements thereunder is available.
Under the procedures established by the Central Bank of Chile, a Chilean company with an existing ADR program under Chapter XXVI of the Compendium of Foreign Exchange Regulations of the Central Bank of Chile may apply to amend its foreign investment contract with such Bank so as to extend the benefits of such contract to new shares issued pursuant to preemptive rights offerings to existing ADS owners and enable them to exercise their preemptive rights. Although approval is expected to be granted upon satisfaction of certain formal requirements, any such amendment (which will be deemed to incorporate all laws and regulations applicable to international offerings in effect as of date of the amendment) will be reviewed by the Central Bank of Chile on a case-by-case basis. These procedures are expected to make it easier for Chilean companies to offer preemptive rights to ADS holders in connection with capital increases.
We intend to evaluate at the time of any preemptive rights offering the costs and potential liabilities associated with the preparation and filing of a registration statement with the Commission, as well as the indirect benefits of enabling the exercise by the holders of ADSs and shareholders located in the United States of preemptive rights and any other factors we consider appropriate at the time. No assurances can be given that any registration statement would be filed. If preemptive rights are not made available to ADS holders, the depositary may sell those holders’ preemptive rights and distribute the proceeds thereof if a secondary market for such rights exists and a premium can be recognized over the cost of such sale. See “Description of American Depositary Receipts—Dividends, Other Distributions and Rights”. In the event that the depositary does not sell such rights at a premium over the cost of any such sale, all or certain holders of ADRs may receive no value for the preemptive rights. The inability of holders of ADSs to exercise preemptive rights in respect of common shares underlying their ADSs could result in a change in their percentage ownership of common shares following a preemptive rights offering.
Under Chilean law, preemptive rights are exercisable or freely transferable by shareholders during a 30-day period commencing upon publication of the official notice announcing the start of the preemptive rights period in the newspaper designated by the shareholders. The preemptive right of the shareholders is the pro rata amount of the shares registered in their name in the shareholders’ registry as of the fifth business day prior to the date of publication of the notice announcing the start of the preemptive rights period. During such 30-day period (except for shares as to which preemptive rights have been waived), Chilean companies are not permitted to offer any newly issued common shares for sale to third parties. For an additional 30-day period, Chilean publicly held corporations are not permitted to offer any unsubscribed common shares for sale to third parties on terms that are more favorable to the purchaser than those offered to shareholders. At the end of such additional 30-day period, Chilean publicly held corporations are authorized to sell non-subscribed shares to third parties on any terms, provided they are sold on a Chilean stock exchange.
Directors
Our bylawsby-laws provide for a board of nine directors, and compensationdirectors. Compensation to be paid to directors must be approved by vote at the annual shareholders'shareholders’ meeting. We hold elections for all positions on the board of directors every two years.
Under the Chilean Corporation Law, transactions in which a director is materially interested (including a transaction in which a director proposes to borrow from the company) must be conducted on an arm's-lengtharm’s-length basis and must satisfy certain disclosure requirements. These transactions include transactions involving a director'sdirector’s spouse or close relatives, transactions involving other companies on whose board such director also serves or transactions with other companies where the director controls 10% of such company (directly or indirectly). Corporations may enter into transactions in which a director is materially interested if the transaction has been approved by the board of directors (which must be disclosed at the next shareholders'shareholders’ meeting) and is consistent with standards of fairness similar to those that normally prevail in the market. Transactions which do not meet these conditions are valid and enforceable, but each director who approved the transaction is jointly and severally liable for damages suffered by the company, the shareholders or any interested third parties, and the director who directly or indirectly benefits from the transaction must pay all benefits received from such transaction to the corporation. The directors are also subject to fines and administrative sanctions.
Whenever a transaction in which a director is materially interested exceeds 1% of the net worth of the company and exceeds the equivalent of 2,000 UF (approximately US$50,00053,000 as of the date of this annual report) or whenever such a transaction exceeds 20,000 UF, the board of directors of the company must determine whether the transaction complies with arm-length'sarm-length’s conditions similar to those prevailing in the market. If the board of directors is unable to determine those conditions, the board, without the vote of the interested director, may approve or reject the transaction or may appoint two independent experts to provide an opinion. The experts'experts’ reports must indicate the terms of the transaction and in the case of non-cash assets, must indicate the planned method of payment. Experts'Experts’ valuation reports must be made available to the shareholders and to the board of directors for a period of 20 business days. The board of directors may decide to approve or reject the proposed transaction only after this 20-day period has expired. If shareholders representing 5% of the voting shares determine, within the 20-day period, that the transaction is not favorable to the corporation'scorporation’s interests or that the reports of the experts are substantially different, those shareholders may require the board of directors to call an extraordinary shareholders'shareholders’ meeting. Approval of the transaction then requires the affirmative vote of two-thirds of the voting shares of the company.
Shareholders’ Meetings and Voting Rights preferences and restrictions attaching to common shares and ADSs
Our bylaws provide
The Chilean Corporation Law requires that an ordinary annual meeting of shareholders be held within the first four months of each year (generally they are held in April, but in any case following the preparation of our financial statements, including the report of our auditors, for the paymentprevious fiscal year). LanChile’s by-laws further provide that the ordinary annual meeting of dividends. We declare cash
dividends in U.S. dollars, but payment is made in Chilean pesos, converted from
U.S. dollarsshareholders must take place between February 1 and April 30. The shareholders at the observed exchange rate on a fixedordinary annual meeting approve the annual financial statements, including the report of our auditors, the annual report, the dividend policy and published date. If we
do not pay athe final dividend on the scheduled date,prior year’s profits, elect the amount paid is adjusted based
on the UF index on the date payment is made.board of directors (in our case, every two years or earlier if a vacancy occurs) and approve any other matter that does not require an extraordinary shareholders’ meeting. The UF is a daily indexed,
Chilean-peso denominated accounting unit based on the previous month's official
inflation rate. In addition, unpaid dividends accrue interest according to the
current interest rate for indexed transactions. There are no other circumstances
or conditions under which dividend payments are adjusted for inflation.
In the event LanChile is liquidated, the holdersmost recent ordinary annual meeting of our common shares
would share in the available assets, after payment of all creditors, in
proportion to the number of shares held.
Ownership Restrictions
Chilean law requires that at least 50% of our common stock beshareholders was held by
Chilean persons or entities in order for us to be able to register aircraft and
obtain certain Chilean licenses, consents and permits.
Shareholders' Meetings and Voting Rights
Chilean law and our bylaws require an ordinary annual shareholder's
meeting in the first quarter of each year.on April 30, 2004. Extraordinary shareholders'shareholders’ meetings may be called by the board of directors, if deemed appropriate, and ordinary or extraordinary shareholders’ meetings must be called by the board of directors when requested by shareholders representing at least 10% of the issued voting shares or by the SVS.
Notice of a shareholders'to convene the ordinary annual meeting or an extraordinary meeting is given by means of three notices which must be published in a form prescribed by law in a
newspaper that circulates in theof our corporate domicile of LanChile (currently Santiago) orSantiago de Chile) designated by the shareholders at their annual meeting and, if the shareholders fail to make such designation, the notice must be published in the Official Gazette. WeJournal pursuant to legal requirements. The first notice must be published not less than 15 days and not more than 20 days in advance of the scheduled meeting. Notice also mail noticemust be mailed not less than 15 days in advance of the meeting to each shareholder and to the SVS at least 15 days in advance of the meeting.
During the annual shareholders' meeting the shareholders discuss and
approve of the annual financial statements, the dividend policy and the final
dividend on the previous year's profits, elect the board of directors (every two
years) and consider for approval a statement of general investment directives
and limitations presented by management pursuant to Decree-Law 3500.
Shareholders registeredChilean stock exchanges. Currently, we publish our official notice in the Shareholder's Registry five days prior
to the date of a shareholders' meeting are entitled to attend and vote. A
shareholder may appoint another individual as his proxy to attend and vote on
his behalf. Every shareholder entitled to attend and vote at a shareholders'
meeting has one vote for each share of common stock. With respect to the
biannual election of the board of directors, each shareholder may allocate votes
among the different positions.
QuorumnewspaperLa Tercera.
The quorum for a shareholders'shareholders’ meeting is established by the absolutepresence, in person or by proxy, of shareholders representing a majority of our issued common shares. If a quorum is not present, the meeting can be reconvened, and at a second meeting the shareholders present are deemed to constitute a quorum regardless of the percentage of the common shares that they represent. Voting
generally requires
Only shareholders registered with us on the fifth business day prior to the date of a meeting are entitled to attend and vote their shares. A shareholder may appoint another individual (who need not be a shareholder) as his proxy to attend and vote on his behalf. Proxies addressed to us that do not designate a person to exercise the proxy are taken into account in order to determine if there is a sufficient quorum to hold the meeting, but the shares represented thereby are not entitled to vote at the meeting. Every shareholder entitled to attend and vote at a shareholders’ meeting has one vote for every share subscribed.
The following matters can only be considered at an extraordinary shareholders’ meeting:
| • | �� | granting of a security interest or a personal guarantee, unless to secure or guarantee the obligations of a subsidiary, in which case only the approval of the board of directors will suffice; and |
The matters referred to in the first four items listed above may only be approved at a meeting held before a notary public, who shall certify that the minutes are a true record of the events and resolutions of the meeting.
The by-laws establish that resolutions are passed at shareholders’ meetings by the affirmative vote of an absolute majority of the commonthose voting shares present or represented at a
meeting, however, athe meeting. However, under the Chilean Corporation Law, the vote of a two-thirds majority of ourthe outstanding commonvoting shares is required for certain acts, including:
o transformation,to approve any of the following actions:
Amendments to the by-laws that have the effect of establishing, modifying or eliminating any change that creates, amends or terminatesspecial rights pertaining to any
preferred treatment of a series of shares must be approved by arequire the consenting vote of holders of two-thirds of the outstanding shares of the affected series.
In general, Chilean law does not require a publicly held corporation to provide the level and type of information that the U.S. securities laws require a reporting company to provide to its shareholders in connection with a solicitation of proxies. However, shareholders are entitled to examine the books of the company within the 15-day period before the scheduled meeting. No later than the first notice summoning an ordinary shareholder’s meeting, the board of directors of a publicly held corporation shall send to every shareholder a copy of the annual report and the financial statements of the company. However, the SVS may authorize companies that have a large number of shareholders to limit the sending of such documents only to those shareholders who have a number of shares exceeding a certain number, and, in any case, to any shareholder that has required of the company such sending. Shareholders who do not fall into this category but who request it must be sent a copy of our annual report.
In addition to these requirements, we regularly have provided, and currently intend to continue to provide, together with the notice of shareholders’ meeting, a proposal for the final annual dividend for shareholder approval. See “—Dividend and Liquidation Rights”.
The Chilean Corporation Law provides that, whenever shareholders representing 10% or more of the issued voting shares so request, a Chilean company’s annual report must include such shareholders’ comments and proposal in relation to the company’s affairs. Similarly, the Chilean Corporation Law provides that whenever the board of directors of a publicly held corporation convenes an ordinary meeting of the shareholders and solicits proxies for that meeting, or distributes information supporting its decisions or other similar material, it is obligated to include as an annex to its annual report any pertinent comments and proposals that may have been made by shareholders owning 10% or more of the company’s voting shares who have requested that such comments and proposals be included.
Dividend and Liquidation Rights
In accordance with Chilean Law, LanChile must distribute an annual cash dividend equal to at least 30% of its annual net income calculated in accordance with Chilean GAAP, unless otherwise decided by a unanimous vote of the holders of all issued shares, and unless and except to the extent it has accumulated losses. If there is no net income in a given year, LanChile can elect but is not legally obligated to distribute dividends out of retained earnings. All outstanding common shares are entitled to share equally in all dividends declared by LanChile. See “Dividends”.
LanChile may grant an option to its shareholders to receive any dividend in excess of 30% of net income in cash, in its own shares or in shares of publicly held corporations held by it. Shareholders who do not expressly elect to receive a dividend other than in cash are legally presumed to have decided to receive the dividend in cash. A U.S. holder of ADSs may, in the absence of an effective registration statement under the Securities Act or an available exemption from the registration requirement thereunder, effectively be required to receive a dividend in cash. See “—Preemptive Rights and Increases of Share Capital”.
Dividends that are declared but not paid within the appropriate time period set forth in the Chilean Corporation Law (as to minimum dividends, 30 days after declaration; as to additional dividends, the date set for payment at the time of declaration) are adjusted to reflect the change in the value of the UF. The UF is a daily indexed, Chilean peso-denominated accounting unit designed to discount the effect of Chilean inflation and it is based on the previous month’s inflation rate as officially determined. Such dividends also accrue interest at the then-prevailing rate for UF-denominated deposits during such period. The right to receive a dividend lapses if it is not claimed within five years from the date such dividend is payable.
In the event of LanChile’s liquidation, the holders of fully paid common shares would participate pro rata in the distribution of assets remaining after payment of all creditors. Holders of shares not fully paid will participate in such distribution in proportion to the amount paid.
Approval of Financial Statements
The board of directors is required to submit our consolidated financial statements to the shareholders for their approval at the annual ordinary shareholders'shareholders’ meeting. If the shareholders reject the financial statements, the board of directors must submit new financial statements not later than 60 days from the date of that meeting. If the shareholders reject the new financial statements, the entire board of directors is deemed removed from office and a new board of
directors is elected at the same meeting. Directors who individually approved such financial statements are disqualified fromfor re-election at that meeting.
Chilean law does not require a publicly-held Chilean corporation to
provide the level and type of information that United States securities laws
require a reporting company to provide to its shareholders in connection with a
solicitation of proxies. Under Chilean law, a notice of a shareholders' meeting
listing matters to be addressed at the meeting must be mailed not fewer than 15
days prior to the date of the meeting, and, in the case of an annual ordinary
shareholders' meeting, the notice must be accompanied by an annual report of the
company's activities, which includes audited financial statements.
The Chilean Corporation Law provides that whenever shareholders
representing 10% or more of the voting shares so request, a Chilean company's
annual report must include within the materials sent by the board of directors
to all shareholders, such shareholders' comments and proposals in relation to
the company's affairs. Similarly, the Chilean Companies Law provides that
whenever the board of directors of an open corporation convenes an ordinary
meeting of shareholders and solicits proxies for that meeting or distributes
information supporting its decisions or other similar material, it is obligated
to include in the annual report any pertinent comments and proposals that may
have been made by shareholders owning 10% or more of the company's voting shares
who have requested that those comments and proposals be included.
Preemptive Rights and Increases of Share Capital
Under Chilean law, a corporation "issues" its stock as soon as the
shareholders authorize an increase in the corporation's capital. When a
shareholder subscribes shares, they are transferred to the shareholder's name,
and the shareholder is treated as a shareholder for all purposes except receipt
of dividends and return of capital, unless otherwise stipulated in the bylaws of
the corporation. The shareholder becomes eligible to receive dividends once it
has paid for the shares in full. If a shareholder does not pay for shares
subscribed on or prior the date agreed for payment, the corporation may auction
such shares on the stock exchange and may sue the shareholder for the difference
between the subscription price and the price received at auction. Until shares
are sold at auction, the shareholder retains all rights of a shareholder, with
the exception of the right to receive dividends and the right to a return of
capital. Unpaid shares within the period ending three years from the date of
issuance are deemed cancelled under Chilean law and are no longer available for
sale by the Chilean corporation. At that time, the equity is automatically
reduced by the amount not paid within thatensuing period. Fully paid shares are not
subject to further calls or assessments or to liabilities of LanChile.
Right of Dissenting Shareholders to Tender theirTheir Shares
The Chilean Corporation Law provides that, upon the adoption at a specialan extraordinary meeting of shareholders of any of the resolutions enumerated below, a dissenting shareholder hasshareholders acquire the right to withdraw from the corporation and to compel the corporationcompany to purchase therepurchase their shares, subject to the fulfillment of certain terms and conditions. For example,However, such right
shall be suspended if we are declared bankrupt or are subject to a creditor’s agreement pursuant to Title XII of the Chilean Bankruptcy Law. In the case of holders of ADRs, however, in order to exercise such rights, holders of ADRs would be required to first withdraw the common shares represented by the ADRs pursuant to the terms of the Deposit Agreement.
deposit agreement. Such holders of ADRs would need to perfect the withdrawal of the common shares on or before the fifth business day prior to the date of the meeting.
“Dissenting shareholdersshareholders” are shareholdersdefined as those who attend a shareholdershareholders’ meeting and who vote against a resolution which results in the withdrawal right, or, if absent at such a meeting, are those who state in writing to the company their opposition to such resolution within the resolution.following 30 days. Dissenting shareholders must perfect their withdrawal rights by tendering their stock to the company within 30 days after adoption of the resolution (except for shares held by
pension funds).
resolution.
The price to be paid to a dissenting shareholder of an opena publicly held corporation is in case of shares regularly traded on a stock exchange (as determined by the
SVS), the weighted average of the closing sales prices for the shares as reported on the Chilean stock exchanges on which the shares are quoted for the two-month period preceding the event giving rise to the withdrawal right or, for other companies,right. If, because of the volume, frequency, number and diversity of the buyers and sellers, the SVS determines that the shares are not shares actively traded on a stock exchange (acciones de transaccion bursatil), the price paid to the dissenting shareholder is the book value. Book value for this purpose equals paid capital plus reserves and profits, less losses, divided by the total number of subscribed shares (whether entirely or partially paid). For the purpose of making this calculation, the last annual balance sheet is used and adjusted to reflect inflation up to the date of the shares.
shareholders’ meeting that gave rise to the withdrawal right.
The type of resolutions that may result in a shareholder'sshareholder’s right to withdraw includeare the following:
o
In addition, shareholders of openpublicly held corporations have the right to withdraw if a person acquires two-thirds or more of the outstanding shares of such corporation and does not make a tender offer for the remaining shares within 30 days after acquisition.
Under Article 69(bis) of the Chilean Corporation Law, the right to withdraw also is granted to shareholders (other than pension funds that acquisition.
administer private pension plans under the national pension law), under certain terms and conditions, if a company were to become controlled by the Chilean government, directly or through any of its agencies, and if two independent rating agencies downgrade the rating of its stock from first class because of certain actions specified in Article 69(bis) undertaken by the company or the Chilean government that affect negatively and substantially the earnings of the company. Shareholders must perfect their withdrawal rights by tendering their shares to the company within 30 days of the date of the publication of the new rating by two independent rating agencies. If the withdrawal right is exercised by a shareholder invoking Article 69(bis), the price paid to the
dissenting shareholder shall be the weighted average of the sales price for the shares as reported on the stock exchanges on which the company’s shares are quoted for the six-month period preceding the publication of the new rating by two independent rating agencies. If, as previously described, the SVS determines that the shares are not actively traded on a stock exchange, the price shall be the book value calculated as described above.
There is no legal precedent as to whether a shareholder that has voted both for and against a proposal (such as the depositary) may exercise withdrawal rights with respect to the shares voted against the proposal. As such, there is doubt as to whether holders of ADRs who have not surrendered their ADRs and withdrawn common shares on or before the fifth business day prior to the shareholder meeting will be able to exercise withdrawal rights either directly or through the depositary with respect to the shares represented by ADRs. Under the provisions of the deposit agreement the depositary will not exercise these withdrawal rights.
Registration and Transfers
TheDepósito Central de Valores, or the DCV, acts as LanChile’s registration agent. In the case of jointly owned common shares, an attorney-in-fact must be appointed to represent the joint owners in dealings with us.
Material Contracts
On March 19,
In 1998, we entered into a purchase agreement with Airbus Industrie for twentyacquisition of 20 Airbus A320 aircraft, and in August 1999followed by an additional contract for seven Airbus A340s that we entered into another agreement to
purchase seven Airbus A340 aircraft (with anin 1999. Both contracts provide us with the option of purchasepurchasing additional aircraft in the future).future. As of December 31, 2002,2003, we have taken delivery of 14 Airbus A320 aircraftA320s, and four Airbus A340 aircraft.A340s and two Airbus A319s. Given the flexibility incorporated into these contracts, we have extended the delivery dates for some of the remaining aircraft until 2008. Additionally, we have changed our remaining short-haul aircraft order from the Airbus A320 model to the Airbus A319 model. The remaining estimated value of the Airbus aircraft for which we have firm commitments to take delivery under the contract is approximately US$592 million.
For more information, see "Information“Information on the Company--Fleet--FleetCompany—Fleet—Fleet Leasing and Financing Arrangements"Arrangements” under Item 4.
Foreign Investment and Exchange Controls in Chile
The Central Bank of Chile is responsible, among other things, for monetary policies and exchange controls in Chile. Equity investments, including investments in shares of stock by persons who are non-Chilean residents, are generally subject to various exchange control regulations restricting the repatriation of their investments and the earnings thereon. Registration of
foreign investments in Chile, including investments in shares of our common
stock, gives investors access to Chilean formal exchange market (Mercado
Cambiario Formal). Foreign investments can be registered with the Foreign
Investment Committee under Decree Law No. 600 of 1974, as amended or with the
Central Bank under the Central Bank Act.
On April 16, 2001, the Central Bank of Chile agreed that, effective April 19, 2001:
o
| • | a new Compendium of Foreign Exchange Regulations (Compendio de Normas de Cambios Internacionales) would be applied. |
The main objective of this change,these amendments, as declared by the Central Bank of Chile, is to facilitate movement of capital in and out of Chile and to encourage foreign investment.
In connection with the change in policy, the Central Bank of Chile eliminated the following restrictions:
o A
Under the new regulations, only the following limitations apply to these operations:
o
The Central Bank of Chile also eliminated Chapter XXVI of the Compendium of Foreign Exchange Regulations, which regulated the establishment of an ADR facility by a Chilean company. Pursuant to the new rules, it is not largerno longer necessary to seek the Central Bank'sBank of Chile’s prior approval in order to establish an ADR facility.facility nor to enter into a foreign investment contract with the Central Bank of Chile. The establishment of an ADR facility is now regarded as an ordinary foreign investment, and simply requires that the Central Bank of Chile be informed of the transaction pursuant to Chapter XIV of the Compendium of Foreign Exchange Regulations and that the transaction be conducted exclusively through the Formal Exchange Market.
Until June 26, 1998, the Compendium of Foreign Exchange Regulations
required foreign investors acquiring shares or securities in Chile
According to maintain a
mandatory reserve for one year in the form of an encaje, a non-interest bearing
U.S. dollar deposit with the Central Bank in an amount equal to 30% of the
proposed investment. Alternatively, foreign investors could satisfy the reserve
requirement by paying the Central Bank a non-refundable amount determined based
on the amount that they would have had to deposit. On June 26, 1998, the
mandatory reserve was reduced to 10%, and on September 17, 1998, it was reduced
to 0%. Despite this reduction in the encaje, the Central Bank may reinstate the
reserve at any time in an amount of up to 40% of the proposed investment, and we
cannot guarantee that the Central Bank will not do so. However, under current
Chilean law, any reinstatement would apply only to those investments for which
proceeds have been made available to the foreign investor subsequent to the time
of such reinstatement.
The ADSs representing our common shares are the subject of a Foreign
Investment Contract, dated November 3, 1997 (as amended by an Assignment
Agreement dated April 14, 2003 between Citibank, N.A. and The Bank of New York),
between the Central Bank, LanChile and the depositary, pursuant to Article 47 of
the Central Bank Act and Chapter XXVIXIV of the Compendium of Foreign Exchange Regulations, if the funds to purchase the common shares underlying the ADSs are brought into Chile, the depositary, on behalf of foreign investors, must deliver to the entity of the Formal Exchange Market participating in the transaction an annex providing information about the transaction, together with a letter instructing such participant to deliver the foreign currency or the peso equivalent thereof, on or before the date on which the foreign currency is brought into Chile. If foreign investors do not bring the funds to purchase the common shares underlying the ADSs into Chile, the depositary, on behalf of the foreign investors, must provide the same information to the Central Bank of Chile directly or through an entity of the Formal Exchange Market within 10 days following the date on which address the issuancepayment was made. Repatriation of ADSs by a Chilean
company. Without the Foreign Investment Contract, our ADS investors would not be
granted access to the formal exchange market for the purpose of converting from
Chilean pesos to U.S. dollars and repatriating amounts received with respect to deposited common shares or common shares withdrawn from deposit on surrender of ADRs (including amounts received as cash dividends and proceeds from the sale in Chile of the underlying common shares and any rights arising from them) must be made through the Formal Exchange Market. The entity of the Formal Exchange Market participating in the repatriation must provide certain information to the Central Bank of Chile on the next banking business day. In the event the payments are made outside of Chile, foreign investors must provide the relevant information to the Central Bank of Chile directly through an entity of the Formal Exchange Market within ten days following the date on which the payment was made.
Under Chapter XIV of the Compendium of the Foreign Exchange Regulations of the Central Bank of Chile, payments and remittances of funds from Chile are governed by the rules in effect at the time payment or remittance is made. Therefore, any change made to Chilean laws and regulations after the date hereof may affect foreign investors who have acquired ADSs. We cannot assure you that new regulations of the Central Bank of Chile or legislative changes to the current foreign exchange control regime in Chile will not affect our ability to remit foreign currency to make the relevant payments. For example, until June 26, 1998, the Compendium of Foreign Exchange Regulations required foreign investors acquiring shares or securities in Chile to maintain a mandatory reserve for one year in the form of anencaje, a non-interest bearing U.S. deposit with the Central Bank of Chile in an amount equal to 30% of the proposed investment. Alternatively, foreign investors could satisfy the reserve requirement by paying the Central Bank of Chile a non-refundable amount determined based on the amount that such investors would have had to deposit. On June 26, 1998, the mandatory reserve was reduced to 10%, and on September 17, 1998, it was reduced to 0%. Despite this reduction in theencaje, the Central Bank of Chile may reinstate the reserve at any time in an amount up to 40% of the proposed investment, and we cannot guarantee that the Central Bank of Chile will not do so. However, under current Chilean law, any reinstatement would apply only to those investments for which proceeds have been made available to foreign investors subsequent to the time of such reinstatement.
The ADSs representing common shares of LanChile offered under our November 6, 1997 initial public offering are subject to our Foreign Investment Contract, which guarantees ADS investors under our initial public offering access to the Formal Exchange Market to convert amounts from Chilean pesos into U.S. dollars and repatriate amounts received with respect to deposited common shares or common shares withdrawn from deposit or surrender of ADRs (including amounts received as cash dividends and proceeds from the sale in Chile of the underlying common shares and any rights arising from them). The guarantee of access to the Formal Exchange Market under the Foreign Investment Contract will be extended to the participants in the ADS offering if the following requirements are met:
The following is a summary of material provisions of the Foreign Investment Contract, a form of which was filed as an exhibit to the registration statement on Form F-1 (File No. 333-7750) that we filed on October 10, 1997 in connection with our November 6, 1997 offering. This summary is not complete and is qualified in its entirety by reference to Chapter XXVI and the Foreign Investment Contract (as
amended).
Contract.
Under Chapter XXVI and the Foreign Investment Contract, (as amended),
the Central Bank of Chile agreed to grant to the depositary, on behalf of ADR holders, and to any investor not residing or domiciled in Chile who withdraws common shares upon surrender of ADRs, access to the formal exchange marketFormal Exchange Market to convert Chilean pesos tointo U.S. dollars (and to remit those dollars outside Chile) in respect of common shares represented by ADSs or withdrawn shares, including amounts received as:
o
Chapter XXVI provides that access to the formal exchange marketFormal Exchange Market in connection with dividend payments is conditioned on our certifying to the Central Bank of Chile that a dividend payment has been made and that any applicable tax has been withheld. We agreed to provide this certification. Chapter XXVI also provides that access to the formal exchange marketFormal Exchange Market in connection with the sale of withdrawn shares, or distributionsdistribution on them, is conditioned upon receipt by the Central Bank of Chile of a certification by the depositary or custodian, as the case may be, that the common shares have been withdrawn in exchange for delivery of the appropriate ADRs and receipt of a waiver of the benefit of the Foreign Investment Contract with respect to them (except in connection with the proposed sale of the common shares) until the withdrawn shares are redeposited.
Chapter XXVI and the Foreign Investment Contract provide that a person who brings foreign currency into Chile to purchase common shares pursuant to the Foreign Investment Contract must convert that foreign currency into Chilean pesos on the date of entry into Chile, and must invest in common shares within five banking business days in order to receive the benefits of the Foreign Investment Contract. If a person does not invest in common shares within that period, that person can access the formal exchange marketFormal Exchange Market to reacquire foreign currency, provided that the request is presented to the Central Bank of Chile within seven banking business days of the initial conversion into pesos. Common shares acquired as described above may be deposited in exchange for ADRs and will receive the benefits of the Foreign Investment Contract, subject to:
o
Access to the formal exchange marketFormal Exchange Market under any of the circumstances described above is not automatic. Pursuant to Chapter XXVI, such access requiresrequired approval of the Central Bank of Chile based on a request presented through a banking institution established in Chile. The Foreign Investment Contract provides that if the Central Bank of Chile has not acted on the request within seven banking days, the request is deemed approved.
Under current Chilean law, the Foreign Investment Contract (as amended)
cannot be changed unilaterally by the Central Bank.Bank of Chile. No assurance can be given, however, that additional Chilean restrictions applicable to the holders of ADRs, the disposition of underlying common shares or the repatriation of the proceeds from their disposition will not be imposed in the future, nor can there be any assessment of the duration orof impact of any restrictions that aremight be imposed.
Voting Rights
Holders of our common shares are entitledmay instruct the depositary to one vote per share.
Subject to the terms ofshares underlying theirs ADRs. If we ask holders for instructions, the deposit agreement, thedepositary will notify such holders of the ADSs haveupcoming vote and arrange to deliver our voting materials to such holders. The materials will describe the rightmatters to be voted on and explain how holders may instruct the depositary as to the exercise of voting rights with
respect to their underlying common shares.
As soon as practicable after receipt of notice of any meeting at which
the holders of common shares are entitled to vote or solicitation of consents
or proxies from holders of commonthe shares or other deposited securities (which
are defined in the deposit agreement),underlying their ADSs as they direct by a specified date. For instructions to be valid, the depositary is required to mail
holders of ADRs a notice in English containing:
omust receive them on or before the information contained in the notice of the meeting;
o a statement that each holder of ADRs at the close of business
on a specified record date specified. The depositary will be entitled,try, as far as practical, subject to Chilean law or regulations, our bylaws and the provisions governingof our by-laws, to vote or to have its agents vote the shares or other deposited securities as holders instruct. Otherwise, holders will not be able to instructexercise their right to vote unless they withdraw the shares. However, holders may not know about the meeting far enough in advance to withdraw the shares. We will use our best efforts to request that the depositary as
to the exercisenotify holders of the voting rights, if any, pertaining to
the deposited securities underlying the ADRs;upcoming votes and o an explanation of how those instructions may be given,
including an express indication that instructions may be given
to the depositary to give a discretionary proxy to a person or
persons designated by us.
ask for their instructions.
If the depositary does not receive the notice of meeting at least 20
days prior to the meeting, the depositary will not be obligated to notify the
holders and will not vote or cause the deposited securities to be voted. Upon
the written request of a holder of ADRs on the record date, received on or
before the date established by the depositary for that purpose, the depositary
has agreed to endeavor, insofar as practicable and permitted under Chilean law,
the provisions of our bylaws and the provisions governing deposited securities,
to vote or cause to be voted (or to grant a discretionary proxy to a person or
persons designated by us to vote) the deposited securities underlying the ADRs
in accordance with any instructions set forth in that request. If the depositary
does not receive anyvoting instructions from a holder of ADRs with respect to any of
the deposited securities underlying that holder's ADRs prior to the date
established by the depositary for that purpose, the depositary shall deem thatspecified date, it will consider such holder of ADRs to have instructed the depositaryauthorized and directed it to give a discretionary proxy to a person designated by theour board of directors to vote the underlying common
shares subjectnumber of deposited securities represented by such holder’s ADSs. The depositary will give a discretionary proxy in those circumstances to certain limitations set forth invote on all questions to be voted upon unless we notify the deposit agreement. There
are no restrictionsdepositary that:
The depositary will only vote or attempt to vote as such holder instructs or as described above.
We cannot assure holders that you they receive the voting rights ofmaterials in time to ensure that they can instruct the depositary to vote their shares. This means that holders of ADRs evidencing ADSs with
respectmay not be able to the commonexercise their right to vote and there may be nothing they can do if their shares are not voted as they represent thereby under Chilean law or the
deposit agreement.
requested.
Exchange Rates
Prior to 1989, Chilean law permitted the purchase and sale of foreign exchange only in those cases explicitly authorized by the Central Bank.Bank of Chile. The
Chilean Central Bank Act liberalized the rules that govern the ability to buy and sell foreign currency. The Central Bank Act empowers the Central Bank of Chile to determine that certain purchases and sales of foreign currency specified by law must be carried out exclusively in the formal exchange market,Formal Exchange Market, which is formed
bymade up of the banks and other entities authorized by the Central Bank.Bank of Chile. All payments and distributions with respect to the ADSs must be conducted exclusively in the formal exchange market.
Formal Exchange Market.
For purposes of the operation of the formal exchange market,Formal Exchange Market, the Central Bank of Chile sets a reference exchange rate (dolar acuerdo)(dólar acuerdo). The Central Bank of Chile resets the reference exchange rate monthly, taking internal and external inflation into account, and adjusts the reference exchange rate daily to reflect variations in parities between the Chilean peso, and the U.S. dollar, the Japanese yen and the European euro.
The observed exchange rate is the average exchange rate at which transactions were actually carried out in the formal exchange marketFormal Exchange Market on a particular day, as certified by the Central Bank of Chile on the next banking day.
Prior to September 3, 1999, the Central Bank of Chile was authorized to buy or sell dollars in the formal exchange marketFormal Exchange Market to maintain the observed exchange rate within a specified range above or below the reference exchange rate. On September 3, 1999, the Central Bank of Chile eliminated the exchange band. As a result, the Central Bank of Chile may buy and sell foreign exchange in the formal exchange marketFormal Exchange Market in order to maintain the observed exchange rate at a level the Central Bank of Chile determines.
Purchases and sales of foreign exchange may be effected outside the formal exchange marketFormal Exchange Market through the non-formal exchange market, (MercadoInformal Exchange Market, (Mercado Cambiario Informal)Informal) established by the Central Bank in 1990. There are no limits on the extent to which the rate of exchange in the informal exchange marketInformal Exchange Market can fluctuate above or below the observed exchange rate.
Although our results of operations have not been significantly affected by fluctuations in the exchange rates between the peso and the U.S. dollar because our functional currency is the U.S. dollar, we are exposed to foreign exchange losses and gains due to exchange rate fluctuations. Even though the majority of our revenues are denominated in or pegged to the U.S. dollar, the Chilean government'sgovernment’s economic policies affecting foreign exchange and future fluctuations in the value of the peso against the U.S. dollar could adversely affect our results of operations and an investor'sinvestor’s return on an investment in ADSs.
Chilean Tax Considerations
Taxation
The following discussion relates to Chilean income tax laws presently in force, including Ruling No. 324 of January 29, 1990 of the Chilean Internal Revenue Service and other applicable regulations and rulings in effect on the date of this Annual Report,prospectus, all of which are subject to change. The discussion summarizes the principal Chilean income tax consequences of an investment in the ADSs or common shares by a person who is neither domiciled in, nor a resident of, Chile or by a legal entity that is not organized under the laws of Chile and does not have a permanent establishment located in Chile (any such(such an individual or entity is referred to herein as a "Foreign Holder")Foreign Holder). For purposes of Chilean tax law, an individual holder is a resident of Chile if such person has resided in Chile for more than six consecutive months in one calendar year or for a total of six months, whether consecutive or not, in two consecutive tax years. The discussion is not intended as tax advice to any particular investor, which can be rendered only in light of that investor'sinvestor’s particular tax situation. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX ADVISERS ABOUT THE CHILEAN TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR SHARES.
Under Chilean law, provisions contained in statutes such as tax rates applicable to foreign investors, the computation of taxable income for Chilean purposes and the manner in which Chilean taxes are imposed and collected may only be amended by another statute. In addition, the Chilean tax authorities enact rulings and regulations of either general or specific application and interpret the provisions of Chilean tax law. Chilean tax may not be assessed retroactively against taxpayers who act in good faith relying on such rulings, regulations and interpretations, but Chilean tax authorities may change these rulings, regulations and interpretations prospectively. There is no income tax treaty in force between Chile and the United States.
Cash Dividends and Other Distributions.
Cash dividends we pay with respect to the ADSs or common shares held by a Foreign Holder will be subject to a 35% Chilean withholding tax, which we withhold and pay over to the Chilean tax authorities (the "Withholding Tax").and which we refer to as the Withholding Tax. A credit against the Withholding Tax is available based on the level of corporate income tax we actually pay on the income to be distributed (the "First(referred to herein as the First Category Tax")Tax); however, this credit does not reduce the Withholding Tax on a one-for-one basis because it also increases the base on which the Withholding Tax is imposed. If we register net income but taxable losses, no credit against the Withholding Tax
will be available. In addition, if we distribute less than all of our distributable income, the credit for First-CategoryFirst Category Tax we pay is proportionately reduced. Presently, the First Category Tax rate is 16.5%17%. TheIn general, the example below illustrates the effective Chilean Withholding Tax burden on a cash dividend received by a Foreign Holder, assuming a Withholding Tax rate of 35%, an effective First-CategoryFirst Category Tax rate of 16.5%17% the actual payment of such First Category Tax at that 17% rate and a distribution of 30% of the consolidated net income of the Company distributable after payment of the First-Category Tax:
The Company's taxable income........................................ 100.0
First Category Tax (16.5% of Ch$100)................................ (16.50)
Net distributable income............................................ 83.50
Dividend distributed (30% of net distributable income).............. 25.05
Withholding Tax (35% of the sum of Ch$25.05 dividend plus
Ch$4.63 First Category Tax paid)................................... (10.39)
Credit for 30% of First-Category Tax................................ 4.63
Net additional tax withheld......................................... (5.76)
Net dividend received............................................... 19.29
Effective dividend withholding rate................................. 22.98%
Tax:
The Company’s taxable income | 100.00 | ||
First Category Tax (17% of Ch$100) | (17 | ) | |
Net distributable income | 83.00 | ||
Dividend distributed (30% of net distributable income) | 24.9 | ||
Withholding Tax (35% of the sum of Ch$24.9 dividend plus Ch$5.1 First Category Tax paid) | (10.5 | ) | |
Credit for 30% of First Category Tax | 5.1 | ||
Net tax withheld | (5.4 | ) | |
Net dividend received | 19.5 | ||
Effective dividend withholding rate | 21.69 | % |
In general, the effective dividend Withholding Tax rate, after giving effect to the credit for the First-CategoryFirst Category Tax, can be calculated using the following formula:
(Withholding Tax rate) - (First Category Tax effective rate)
1 - (First Category Tax effective rate)
(Withholding Tax rate)–(First Category Tax effective rate) |
| 1–(First Category Tax effective rate) |
Under Chilean income tax law, dividends generally are assumed to have been paid out of our oldest retained profits for purposes of determining the level of First-CategoryFirst Category Tax that the we paid. For information as to our retained
earnings for tax purposes and the tax credit available on the distribution of
such retained earnings, see Note 24 to the Audited Consolidated Financial
Statements. The effective rate of Withholding Tax to be imposed on dividends we paidpay will vary depending upon the amount of First Category Tax we paid on the earnings to which the dividends are attributed. The effective withholding tax rate for dividends attributed to earnings from 1991 until 2001, for which the First Category Tax rate was 15%, generally waswill be 23.5%. For 2002, the First Category Tax rate was 16.0%, which resultedresults in an effective rate of Withholding Tax of 22.60%22.62%. In 2003, the First Category Tax rate will bewas 16.5%, which results in an effective rate of Withholding Tax of 22.98%22.16%, and from 2004 onwards, the First Category Tax rate will beis 17%, which results in an effective rate of Withholding Tax of 23.30%21.69%.
For dividends attributable to our profits during years when the First-CategoryFirst Category Tax was 10% (before 1991), the effective dividend Withholding Tax
rate will be 27.8%. However, whether the First-CategoryFirst Category Tax is 10%, 15%, 16%, 16.5% or 16.5%17%, the effective overall combined tax rate imposed on our distributed profits will be 35%. In the event that profits from previous years are not sufficient to cover a particular dividend, and the dividend is attributable to the current year, we will generally withhold tax from the dividend at the full 35% rate. If the withholding is determined to be excessive taking into account First Category Tax, holders may file for a refund.
Dividend distributions made in property would be subject to the same Chilean tax rules as cash dividends based on the fair market value of such property. Stock dividends and the distribution of preemptive rights are not subject to Chilean taxation.
Capital Gains
Gain from the sale or other disposition by a Foreign Holder of ADSs (or
ADRs evidencing ADSs)ADSs outside Chile will not be subject to Chilean taxation. The deposit and withdrawal of Sharescommon shares in exchange for ADRs will not be subject to any Chilean taxes.
Gain recognized on a sale or exchange of Sharescommon shares (as distinguished from sales or exchanges of ADRs evidencing ADSs representing such Shares)common shares) may be subject to both the First-CategoryFirst Category Tax and the Withholding Tax (the former being creditable against the latter) if:
o
In all other cases, gain on the disposition of common shares will be subject only to a capital gains tax which is assessed at the same rate as the First Category Tax (currently imposed at a rate of 16.5%17%). Gain recognized in the transfer of Commoncommon shares that have a high presence in the stock exchange, however, is not subject to capital gains tax in Chile, provided that the Commoncommon shares are transferred in a local stock exchange, in other authorized stock exchanges (up to this date, the New York Stock Exchange, the London Stock
Exchange and the Madrid Stock Exchange have been authorized for these purposes), or within the process of a public tender of common shares governed by the Chilean Securities Market Act.Law. The Commoncommon shares must also have been acquired either in a stock exchange, within the referred process of a public tender of common shares governed by the Chilean Securities Market Act,Law, in an initial public offer of common shares resulting from the formation of a corporation or a capital increase of the same, or in an exchange of convertible bonds. Common
sharesShares are considered to have a high presence in the stock exchange when they:
o
To calculate the adjusted presence of a particular Share,share, the aforementioned regulation states that,first requires a determination of the number of days in which the operations regarding the stock exceeded, in Chilean pesos, the equivalent of 200 Unidades de Fomento (approximately US$4,800)5,400 as of March 31, 2004) within the previous 180 business days of the stock market. That number must then be divided by 180, multiplied by 100, and expressed in a percentage value. The referredThis tax regime does not apply if the transaction involves an amount of Common shares that would allow the acquirer to take control of the publicly traded corporation, in which case the ordinary tax regime referred to in the previous paragraph will apply, unless the transfer is part of a tender offer governed by the Chilean Securities Market ActLaw or the transfer is done inon a Chilean stock exchange, without substantially exceeding the market price.
As of June 19, 2001, capital
Capital gains obtained in the sale of common
shares that are publicly traded and have a high presence in a stock exchange are also exempt from capital gains tax in Chile when the sale is made by "foreign“foreign institutional investors"investors” such as mutual funds and pension funds, provided that the sale is made in a stock exchange or in accordance with the provisions of the Securities Market Law, (Law No.18,045, of October 22, 1981), or in any other form authorized by the SVS. To qualify as a foreign institutional investor, the referred entitiesan entity must be formed outside of Chile, not have a domicile in Chile, and they must be at least one of the following:
o An
| • | any other foreign institutional investor that complies with the requirements set forth in general regulations for each category of investor or prior information from the SVS and the Chilean tax authority, theServicio de Impuestos Internos, or the SII. |
The foreign institutional investor must not directly or indirectly participate in the control of the corporations issuing the common shares it invests in, nor possess or participate in 10% or more of the capital or the profits of such corporations.
Other requirements
Another requirement for the exemption to apply areis that the referred
foreign institutional investorsinvestor must execute a written contract with a bank or a stock broker incorporated in Chile. In this contract, the bank or stock broker must undertake to performexecute purchase and sale orders, verify the applicability of the tax exemption and inform the SII of the investors it works with and the transactions it performs. Finally, the foreign institutional investor must register with the SII by means of a sworn statement issued by the entity
referred to above (thesuch bank or stock broker).
broker.
The tax basis of common shares received in exchange for ADRs will be the acquisition value of the common shares on the date of exchange. The valuation procedure set forth in the Deposit Agreement,deposit agreement, which values common shares which are being exchanged at the highest price at which they trade on the Santiago Stock Exchange on the date of the exchange, will determine the acquisition value for this purpose. Consequently, the surrender of ADRs for common shares and the immediate sale of the common shares for the value established under the Deposit Agreement will not generate a capital gain subject to taxation in Chile.
The exercise of preemptive rights relating to the common shares will not be subject to Chilean taxation. Any gain on the sale of preemptive rights relating to the common shares will be subject to both the First-CategoryFirst Category Tax and the Withholding Tax (the former being creditable against the latter).
Other Chilean Taxes
There are no Chilean inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of ADSs by a Foreign Holder, but such taxes generally will apply to the transfer at death or by gift of the common shares by a Foreign Holder. There are no Chilean stamp, issue, registration or similar taxes or duties payable by Foreign Holders of ADSs or common shares.
Withholding Tax Certificates
Upon request, the Companywe will provide to Foreign Holders appropriate documentation evidencing the payment of the Chilean Withholding Tax (net of the applicable First Category Tax).
United States Federal Income Tax Considerations
The following is a summary of the material U.S. federal income tax considerations that are likely to be relevant to the purchase, ownership and disposition of our common shares and ADSs toby a beneficial holder of a common
share or ADS of the Companyowner that is a citizen or resident of the United States or a U.S. domestic corporation or that otherwise will be subject to U.S. federal income taxation on a net income basis in respect of such common shares or ADSs. In this annual report on Form 20-F,prospectus, we callrefer to these holders "U.S.owners of common shares and ADSs as U.S. Holders." This summary is not a comprehensive discussion of all of the tax considerations that may be relevant to your decision to purchase ADSs or common shares. In particular, this discussion is directed only to U.S. Holders that will hold ADSs or common shares as capital assets and it does not address any special United States tax consequences that may be applicable to U.S. Holders that are subject to special treatment under the United States Internal Revenue Code of 1986, as amended, which we callcommonly referred to as the "Code",Code, such as dealers in securities or currencies, traders in securities electing to mark to market, financial institutions, life insurance companies, tax exempt entities, holders of 10 percent or more of our voting common shares, persons holding common shares or ADSs as part of a hedging or conversion transaction or a straddle or persons whose functional currency is not the U.S. dollar. Prospective purchasers who are U.S. Holders are advised to satisfy themselves as to the overall United StatesU.S. federal, state and local tax consequences of their ownership of ADRs and the underlying common shares by consulting their own tax advisors.
The statements of United States tax laws set out below are based on the laws in force as of the date this annual reportprospectus was filed and may be subject to changes in United States law occurring after that date, including changes that may have retroactive effect.
ADRs
In general, if you are a U.S. Holder of ADRs evidencing our ADSs, you will be treated, for United StatesU.S. federal income tax purposes, as the beneficial owner of the underlying common shares that are represented by those ADSs and evidenced by those ADRs.
Taxation of Dividends
If you are a U.S. Holder, distributions of cash dividendsor property (other than common stock, if any, distributed pro rata to all of our shareholders, including holders of ADSs) paid out of our current or accumulated earnings and our profits (as determined for United States federal income tax purposes) with respect to common shares or ADSs, including the net amount of the Chilean Withholding Tax withheld on the distribution (after taking into account the credit for the First Category Tax), will be includible in your gross income as ordinary income on the day on which you receive the dividends, in the case of common shares, or the date the depositary receives the dividends, in the case of common shares represented by ADSs, and will not be eligible for the dividends received deduction allowed to corporations under the Code. If you are a U.S. Holder, dividends paid in pesos generally will be includible in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day you receive the dividends, in the case of common shares, or the date the depositary receives the dividends, in the case of common shares represented by ADSs. U.S. Holders should consult their own tax advisors regarding the treatment of foreign currency gain or loss, if any, on any pesos received which are converted into U.S. dollars after they are received. Under new rules applicableTo the extent that the amount of any distribution exceeds our current and accumulated earnings and profits as determined for U.S. federal income tax purposes, a U.S. Holder’s pro rata share of such excess amounts will be treated first as a nontaxable return of capital to dividends receivedthe extent of such U.S. Holder’s tax basis in respect of ourthe common shares or ADSs after December 31, 2002 and, beforethereafter, as capital gain.
Subject to certain exceptions for short-term (60 days or less) and hedged positions, the U.S. dollar amount of dividends received by an individual prior to January 1, 2009 an individual
U.S. holder generallywith respect to the ADSs will be subject to taxation at a maximum rate of 15% if the dividends are “qualified dividends”. ThisDividends paid on the ADSs will be treated as qualified dividends if:
In addition, the Internal Revenue Service, or IRS, is expected to issue certification procedures in 2004 whereby a non-U.S. corporation will have to certify as to the eligibility of its dividends for the reduced rate doesU.S. federal income tax rate. The ADSs are listed on the New York Stock Exchange, and will qualify as readily tradable on an established securities market in the United States so long as they are so listed. Moreover, based on our audited financial statements and relevant market and shareholder data, we believe that we were not applytreated as a PFIC, FPHC or FIC for U.S. federal income tax purposes with respect to our 2003 taxable year. In addition, based on our audited financial statements and our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market and shareholder data, we do not anticipate becoming a PFIC, FPHC or FIC for our 2004 taxable year. Therefore, this disclosure assumes that we are not a PFIC, FPHC or FIC. Based on existing guidance, it is not clear whether dividends paid inreceived with respect of certain short-term
(60 days or less) or hedged positions. Youto the common shares will be treated as qualified dividends, because the common shares are not themselves listed on a U.S. exchange. Holders should consult yourtheir own tax adviseradvisers regarding the availability of the reduced dividend tax rate in the light of yourtheir own particular circumstances.
Subject to generally applicable limitations and conditions under the Code, the Chilean Withholding Tax withheld from dividends (after taking into account the credit for the First Category Tax)Tax, when it is available) will be
treated as a foreign income tax eligible for credit against a U.S. Holder'sHolder’s U.S. federal income tax liability. If the amount of Chilean Withholding Tax initially withheld from a dividend is determined to be excessive, however (as described above under “Taxation—Chilean Taxation—Dividends and Other Distributions), the excess tax will not be creditable. For purposes of calculating the foreign tax credit, dividends paid on the common shares will generally constitute foreign source "passive income"“passive income” or, in the case of certain U.S. Holders, "financial“financial services income."income”. U.S. Holders are not be allowed foreign tax credits for withholding taxes imposed in respect of certain short-term or hedged positions in securities or in respect of arrangements in which their expected economic profit is insubstantial. U.S. Holders should consult their own advisors concerning the implications of these rules in light of their particular circumstances.
U.S. Holders that receive distributions of additional common shares or rights to subscribe for common shares as part of a pro rata distribution to all our shareholders generally will not be subject to United States federal income
tax. The basis of the new common shares or rights received will be determined by
allocating the U.S. Holder's basis in the old common shares between the old
common shares and the new common shares or rights received, based on their
relative fair market values on the date of distribution. The basis of the rights
will be zero, however, if (i) the fair market value of the rights is less than
15 percent of the fair market value of the old common shares at the time of the
distribution (unless the U.S. Holder nonetheless elects, in the U.S. Holder's federal income tax return forin respect of the taxable year in which the rights are received,
to make the allocation described above) or (ii) the rights expire without
benefit to the U.S. Holder.
distributions.
A "Non-U.S. Holder," or a holder of ADSs or common shares that is a foreign corporation or a non-resident alien individual generally will not be subject to United StatesU.S. federal income or withholding tax on dividends received on ADSs or common shares, unless that income is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States.
Taxation of Capital Gains or Losses
If you realize gain or loss on the sale, exchange or other disposition of ADSs or common shares, that gain or loss will be capital gain or loss and generally will be long-term capital gain or loss if the ADS or common shares have been held for more than one year. Long-term capital gain realized by a U.S. Holder that is an individual generally is subject to a reduced tax rate. The net amountdeductibility of long-term capital gain
recognized by an individual after May 5, 2003 and before January 1, 2009
generallylosses is subject to taxation at a maximum rate of 15%. The net long-term
capital gain recognized by an individual before May 6, 2003 generally is subject
to taxation at a maximum rate of 20%.
A U.S. Holder that sells the preemptive rights received in respect of
ADSs or common shares prior to exercise of those rights will recognizesignificant limitations.
Any gain or loss equal to the difference between the proceeds on the sale and the U.S.
Holder's basis, if any, in the rights sold. The gain or loss would be
characterized as capital gain or loss at the time of sale. If, however, a U.S.
Holder does not exercise the rights it receives in respect of ADSs or common
shares before those rights lapse, the U.S. Holder will not recognize gain or
loss on the expiration, and no adjustment will be made to the basis of the ADSs
or common shares the U.S. Holder owns.
Any gain a U.S. Holder realizes on such a sale, exchange, or other disposition will generally be treated as United
StatesU.S. source income or loss for United StatesU.S. foreign tax credit purposes. Consequently, in the case of a disposition of common shares (which, unlike a disposition of ADSs, would be taxable in Chile), a U.S. Holder generally would not be able to utilize foreign tax credits in respect of any Chilean tax imposed on the disposition (see “Taxation — Chilean Taxation — Capital Gains) unless the U.S. Holder has other income from foreign sources, in the appropriate category, for purposes of the foreign tax credit limitation rules. U.S. Holders should consult their own tax advisors regarding the application of the foreign tax credit limitation rules to their investment in, and disposition of, the ADSs and common shares.
Deposits and withdrawals of common shares by U.S. Holders in exchange for ADSs will not result in the realization of gain or loss for United StatesU.S. federal income tax purposes.
A Non-U.S. Holderholder of ADSs or common shares that is a foreign corporation or a non-resident alien individual generally will not be subject to United StatesU.S. federal income tax on a gain from the sale or other disposition of ADSs or common shares unless (i) unless:
Backup Withholding and Information Reporting
Dividends paid on, and proceeds from the sale or other disposition of, the ADSs or common shares to a U.S. Holder generally may be subject to the information reporting requirements of the Code and may be subject to backup withholding unless the U.S. Holder provides an accurate taxpayer identification number and makes any other required certification or otherwise establishes an exemption. Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder's United StatesHolder’s U.S. federal income tax liability and may entitle the U.S. Holder to a refund, provided that certain required information is furnished to the Internal Revenue Service.
IRS.
A Non-U.S. Holderholder that is a foreign corporation or a non-resident alien individual may be required to comply with certification and identification procedures in order to establish its exemption from information reporting and backup withholding.
HOLDERS OF ADSs OR COMMON SHARES SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE CHILEAN, U.S. OR OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR COMMON SHARES, INCLUDING, IN PARTICULAR, THE EFFECT OF ANY FOREIGN, STATE OR LOCAL TAX LAWS.
Documents on Display
We are subject to the information requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file reports, including annual reports on Form 20-F and other information with the SEC. These materials, including this annual report and the exhibits hereto, may be inspected and copied at the SEC'sSEC’s public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. In addition, some of our SEC filings, including those filed on and after November 4, 2002, are also available to the public through the SEC'sSEC’s website at www.sec.gov.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We face market risk exposuresexposure in three main areas:
o
We periodically review our exposure to risks arising from these fluctuations and determine at ourthe level of senior management level how to hedge these risks. We manage jet fuel price fluctuation risk through hedging transactions in the foreign derivatives market. We have also entered into hedging transactions with respect to interest rate risksrates and exchange rates in order to reducecontrol our exposure to fluctuations in interest rates and the impactrelative values of exchange
rate fluctuations.foreign currencies, respectively. We do not enter into forward contracts, swaps, collars or other derivatives for speculative purposes. The derivative instruments we hold are not leveraged, and we hold them only for purposes of offsetting market exposures.
exposure.
Risk of Fluctuations in Jet Fuel Prices
Jet fuel price fluctuations are largely dependent on supply and demand for crude oil in the world, OPEC decisions, refinery capacities, stock levels of crude oil and global political factors. In order to minimize the risk of jet fuel price fluctuations, we enter into hedging contracts in the jet fuel market or in the West Texas Intermediate, (WTI)or WTI, market. Our decision to enter into these contracts, whether in the jet fuel market or in the WTI market, depends on the relative price of each commodity at the trade date.
The type of hedging contracts we
We enter into are call and put options in
order to predetermine a band (costless collar) in which the price we pay for jet
fuel will be limited by a minimum and maximum price, and swap contracts to hedge our exposure to fluctuations in orderfuel prices that allow us to fix the price of future jet fuel purchases. We also employ call options, which allow us to purchase fuel at a predetermined price. Additionally, we use combinations of call and put options that allow us to establish a range of prices, also known as a costless collar, in which the price that we pay for jet fuel is limited by a minimum and maximum price.
Under costless collar contracts, for any price that is above the predetermined ceiling price, we receive the difference between the market price and the ceiling price for a given quantity of jet fuel. For any price below the pre-determinedpredetermined floor price, we pay the difference between the market price and the floor price. Pursuant to swap contracts, we pay or receive, depending on the case, the difference between the agreed fixed price and the floating market price calculated on the notional amounts of such contracts.
We are exposed to fuel hedging transaction losses inif the event of
nonperformance by counterparties.other parties to our hedging contracts fail to perform. To manage this credit risk, we select counterparties based on their credit ratings and limit our exposure to any oneeach counterparty underbased on defined guidelines andguidelines. We also monitor our relative market position with each counterparty.
counterparty periodically.
During 2000, 2001, 2002 and 20022003, we entered into a mix of costless collar contracts, call option contracts and jet fuel swap contracts with investment banks and other financial entities for notional fuel purchases of 78.0 million gallons, 137.0 million gallons, 123.0 million gallons and 123.8134.0 million gallons, respectively (which represents 34.7%represent 55.9%, 55.9%50.4% and 50.4%46.0%, respectively, of our total fuel consumption). The result of suchthese contracts was a gain of approximately US$8.1 million in 2000, a loss of approximately US$10.5 million in 2001, and a loss of approximately US$5.5 million in 2002. At December 31, 2000 the2002 and a gain of approximately US$12.8 million in 2003. The fair value of the outstanding swap contracts
was estimated at positive US$2.5 million, for which there is no associated cost.
At December 31, 2001 the fair value of theour outstanding swap contracts was estimated at negative US$15.3 million for which there is no associated cost. Atat December 31, 2001, positive US$5.3 million at December 31, 2002 and positive US$ 15.4 million at December 31, 2003. Based on market jet fuel price data as of December 31, 2003, we estimate that a one cent increase or decrease in jet fuel prices would have a positive or negative impact, respectively, on our results of US$1.0 million for 2004 and US$0.4 million for 2005.
The result of our fuel hedging contracts for the first quarter of 2004 was a gain of approximately US$7.3 million as compared to a gain of approximately $US6.9 million in the first quarter of 2003. The fair value of theour outstanding swap contracts was estimated at positive US$5.27916.3 million for which there is no associated cost.
at March 31, 2004.
Gains and losses on the hedging contracts referred to above are recognized as a non-operating item (on the miscellaneous net line) in our income statement when the underlying fuel being hedged is consumed. Premiums paid to enter into hedging contracts are recorded as prepaid expenses and are amortized toand included in our results of operations over the respective contract periods.
According to Chilean GAAP, the positive fair value of these jet fuel derivatives is reflected in the balance sheet as other long-term assets and the negative fair of these operations value is reflected in other long-term liabilities.
Risk of Fluctuations in Interest Rates
As of December 31, 2002, approximately 26% of our interest-bearing debt
(including our long-term, short-term and dollar-denominated debt), was exposed
to interest rate risks.
The major interest rate risk we face is a rise in the London Interbank Offered Rate, or LIBOR, because we had, as of December 31, 2002,2003, US$689622 million in principal amount of LIBOR-based interest-bearing debt outstanding. As of March 31, 2004, we had US$613 in principal amount of LIBOR-based interest-bearing debt outstanding. As of both December 31, 2003 and March 31, 2004, approximately 12% of our banking debt (including our long-term, short-term and dollar-denominated debt) was exposed to interest rate risks.
In order to reduce the impact of interest rate fluctuations on our debt obligations, in May 1999, we entered into an interest rate swap contract with a financial institution for a notional amount of approximately US$50 million, in
order to fixwhich fixes the LIBOR base rate for a period of five years. Based on current interest rates, the fair value of this contract at December 31, 2002 was estimated to be at negative US$1.9 million. There is no associated cost to this
contract. In 2002, we paid approximately US$1.60.4 million relating to our position
under this contract.as of both December 31, 2003 and March 31, 2004. In May 2001, we also entered into six swap contracts in order to hedge our floating rate-exposure on US$329 million of our debt. Pursuant to these contracts, we pay or receive, depending on the case, the difference between the agreed fixed rate and the floating rate, calculated on the notional amount of each contract. There is no associated cost to these contracts. In 2002, we paid
approximately US$12.3 million relating to our position under these contracts.
The fair value of these contracts as of December 31, 20022003 was estimated to be at negative US$32.722.8 million and the fair value as of March 31, 2004 was estimated to be at negative US$25.9 million.
According to Chilean GAAP, the positive fair value of these interest rate swaps is reflected in the balance sheet as other long-term assets and the negative fair value of these agreements is reflected as other long-term liabilities.
During 2002, we entered into a Treasury rate locktreasury rate-lock contract in order to hedge theour exposure ofto changes toin the five-year treasury rate before entering into thea US$40.0 million securitization tranche of credit card receivables in the United States. For more information, see "Information on the Company--Credit“Operating and Financial Review and Prospects—Credit Card Receivables Securitization and Other Matters" inSecuritization” under Item 4. The gains or losses on such contracts are recognized as a component of interest expensesexpense in our financial statements amortized over the life of the securitization. ThisWe settled this operation was settled the day
that we issuedcompleted the securitization, and it involved a total payment of US$3.4 million, of which we recognized US$200,000480,000 as interest expense in 2002. As of December 31, 2002, we recognized a loss of approximately
US$0.2 million related to this contract. Since this operation had already been
settled, as of December 31, 2002, there2003. There was no fair value associated with this operation as of December 31, 2003 since we had already settled the operation.
During 2003 we entered into interest rate call option contracts in order to it.
hedge US$190 million in debt. These contracts allow us to limit our exposure to LIBOR at a predetermined value. During 2003, we paid a total of US$5 million in premiums on these contracts. As of December 31, 2003, the fair value of these contracts was estimated to be at US$3.7 million and as of March 31, 2004, the fair value has estimated to be at US$3.1 million.
The following table summarizes our principal payment obligations on our interest-bearing debt as of December 31, 20022003 and the related average interest rates. The average interest raterates for U.S. dollar liabilities are calculated based on the prevailing interest rate on December 31, 20022003 for each loan.
Principal payment obligations by year of expected maturity(1) | |||||||||||||||
| (in US$ millions) | |||||||||||||||
Liabilities | Average interest rate(2) | 2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | ||||||||
U.S. dollars | 4.54 | % | 63.2 | 71.3 | 64.2 | 67.7 | 71.1 | 285.4 | |||||||
| (1) | At cost, which approximates market value. |
| (2) | Average |
Risk of Variation in Foreign Currency Exchange Rates
Because in 2003 approximately 89%76% of our operating revenues and approximately 80%73% of our operating expenses are denominated in U.S. dollars, our revenues and expenses create a partial natural hedge with each other. However, because we conduct business in local currencies in twelve countries, we face the risk of variation in foreign currency exchange rates. For more information, see Note 2524 to our consolidated financial statements. A depreciation of the Chilean peso, the Brazilian real, the Argentine peso, the Mexican nuevo peso, the Peruvian nuevo sol or the European euro against the U.S. dollar could have a material adverse effect on us because we have revenues and receivables denominated in those currencies. As a part of our risk management policy, we regularly monitor our exposure to variations in the exchange rates of these different currencies. In order to reduce the impact of foreign exchange rate fluctuations, we enter into foreign exchange hedging contracts from time to time. As of December 31, 2002,2003 and March 31, 2004, we had noUS$13.4 million and US$14.1 million, respectively, in foreign exchange hedging contracts outstanding.
Our foreign currency exchange exposure pertaining to our balance sheet as of December 31, 20022003 was as follows:
US dollars | % of total | Chilean pesos | % of total | Other currencies | % of total | Total | |||||||||||
Current assets | 370,506 | 76.12 | % | 78.338 | 16.23 | % | 37.868 | 7.65 | % | 486,712 | |||||||
Other assets | 1,133,617 | 99.28 | % | 7.974 | 0.70 | % | 211 | 0.02 | % | 1,141,802 | |||||||
Total assets | 1,504,112 | 92.36 | % | 86,981 | 5.34 | % | 37,421 | 2.30 | % | 1,628,514 | |||||||
Current liabilities | 465,324 | 91.89 | % | 32,728 | 6.46 | % | 8,360 | 1.65 | % | 506,412 | |||||||
Long-term liabilities | 763,334 | 99.72 | % | 970 | 0.13 | % | 1.125 | 0.15 | % | 765,429 | |||||||
Total liabilities and shareholders’ equity | 1,584,531 | 97.30 | % | 34,498 | 2.12 | % | 9.485 | 0.58 | % | 1,628,514 | |||||||
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, we carried out an evaluation under the supervision and with the participation of our management, including theour Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon and as of the date of the our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required.
There werehas been no significant changeschange in our internal controlscontrol over financial reporting during 2003 or during the first quarter of 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that Mr. José Cox Donoso, qualifies as an “audit committee financial expert within the meaning of Item 16A of Form 20-F under the Exchange Act.”
We have adopted a code of ethics, as defined in Item 16B of Form 20-F under the Exchange Act. Our code of ethics applies to our senior management, including our chief executive officer, our chief financial officer and our chief accounting officer, as well as to other factors that could significantly affect these controls subsequentemployees. Upon request, in writing or orally, by telephone or by e-mail, to the datefollowing address: Lan Chile S.A., Investor Relations Department, attention: Andres Bianchi, Av. Presidente Riesco 5711, Piso 20, Comuna Las Condes, Santiago, Chile, telephone (56-2) 565-3947, email: abianchiu@lanchile.cl, we will provide any person with a copy of their evaluation.
our code of ethics without charge. If we amend the provisions of our code of ethics that apply to our senior management or to other persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our website atwww.lan.com.
ITEM 16.
16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit and Non-Audit Fees
The following table sets forth the fees billed to us by our independent auditors, PricewaterhouseCoopers, during the fiscal years ended December 31, 2002 and 2003:
| Year ended December 31, | ||||
| 2002 | 2003 | |||
| (Ch$ Millions) | ||||
Audit fees | 280.6 | 298.0 | ||
Audit-related fees | 0.0 | 0.0 | ||
Tax fees | 23.4 | 14.4 | ||
Other fees | 1.1 | 2.3 | ||
Total fees | 305.1 | 314.7 | ||
Audit fees in the above table are the aggregate fees billed by PricewaterhouseCoopers in connection with the audit of our annual consolidated financial statements, as well as the review of other filings.
Tax fees in the above table are fees billed by PricewaterhouseCoopers for tax advice and tax planning services.
Other fees in the above table are fees billed by PricewaterhouseCoopers primarily for salary surveys and services related to human resources.
Board of Directors’ Committee Pre-Approval Policies and Procedures
Since May 2003, foreign private issuers have been subject to “pre-approval” requirements under which all audit and non-audit services provided by the independent auditor must be pre-approved by an audit committee. Our board of directors’ committee approves all audit, audit-related services, tax services and other services provided by PricewaterhouseCoopers. Any services provided by PricewaterhouseCoopers that are not specifically included within the scope of the audit must be pre-approved by the board of directors’ committee prior to any engagement.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not applicable.
Our financial statements have been prepared in accordance with Item 18 hereof.
See pages F-1 through F-54,F-65, incorporated herein by reference. The following is an index of the financial statements in the referenced pages.
Consolidated Financial Statements for Lan Chile S.A. and Subsidiaries
Page
Reports of independent accountants..................................... F-1
Consolidated balance sheet............................................. F-2
Consolidated statement of income....................................... F-4
Consolidated statement of cash flows................................... F-5
Notes to consolidated financial statements............................. F-7
| Page | ||
Audited Consolidated Financial Statements | ||
Reports of Independent Auditors | F–2 | |
Consolidated Balance Sheets at December 31, 2003 | F–3 | |
Consolidated Statement of Income for the years ended December 31, 2001, 2002 and 2003 | F–5 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2002 and 2003 | F–6 | |
Reconciliation of Net Income to Net Cash Provided by Operating Activities for the years ended December 31, 2001, 2002 and 2003 | F-7 | |
Notes to Consolidated Financial Statements at December 31, 2003 | F–8 | |
Unaudited Consolidated Financial Statements for the three Months Ended March 31, 2004 | ||
Condensed Consolidated Balance Sheets at March 31, 2003 and 2004 | F-54 | |
Condensed Consolidated Statements of Income for the three months ended March 31, 2003 and 2004 | F-56 | |
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2004 | F-57 | |
Reconciliation of Net Income to Net Cash Provided by Operating Activities for the three months | F-58 | |
Notes to the consolidated Financial Statements at March 31, 2004 | F-59 | |
ITEM 19. EXHIBITS
Documents filed as exhibits to this annual report:
1.1 Bylaws (Estatutos) of Lan Chile S.A. (together with an English
translation)*.
2.1 Deposit Agreement, dated as of November 1, 1997, among LanChile, Citibank,
N.A. as depositary, and the holders from time of the American Depositary
Receipts issued thereunder, to which is attached the form of American
Depositary Receipt**.
2.2 Foreign Investment Contract, dated November 3, 1997, between the Central
Bank, LanChile and Citibank, N.A. as Depositary+.
4.1 Purchase Agreement between Lan Chile S.A. and Airbus Industrie, dated
August 1999, regarding the purchase of seven Airbus A340 series
aircraft++.
8.1 Subsidiaries.
99.0 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ------------------
* Incorporated by reference to annual report No. 001-14728 on Form 20-F.
** Incorporated by reference to registration statement No. 001-14728 on Form
8-A.
+ Incorporated by reference to registration statement No. 333-7750 on Form
F-1.
++ Incorporated by reference to our annual report on Form 20-F for the fiscal
year ended December 31, 1999. Portions of Exhibit 4.1 have been omitted
pursuant to a request for confidential treatment. Such omitted portions
have been filed separately with the Securities and Exchange Commission.
| Documents filed as exhibits to this annual report: | ||
| 1.1 | By-laws of Lan Chile (together with an English translation) (incorporated by reference to Exhibit 1.1 to our annual report on Form 20-F, File No. 001-14728, for the fiscal year ended December 31, 2001). | |
| 2.1 | Amended and Restated Deposit Agreement, dated as of March 25, 2003, among LanChile, The Bank of New York, as depositary, and Owners and Beneficial of American Depositary Receipts. | |
| 2.2 | Foreign Investment Contract, dated November 1, 1997, among the Central Bank of Chile, LanChile and Citibank, N.A., as depositary, relating to the foreign exchange treatment of holders of ADSs. | |
| 2.3 | Foreign Investment Contract Assignment Agreement, dated as of April 17, 2003, among the Central Bank of Chile, LanChile, Citibank N.A., as assignor, and The Bank of New York, as assignee, relating to the foreign exchange treatment of holders of ADSs. | |
| 2.4 | Right of First Refusal Agreement, dated as of December 14, 2000, among Inversiones Santa Cecilia S.A., Bancard S.A., Inversiones Costa Verde, S.A., Inmobiliaria e Inversiones Asturias S.A., Inversiones Aéreas CGP DOS S.A. | |
| 4.1 | Purchase Agreements between Lan Chile S.A. and Airbus Industrie, dated March 1998 and August 1999, relating to Airbus A320-family aircraft and Airbus A340 series aircraft.+ | |
| 8.1 | List of Significant Subsidiaries. | |
| 12.1 | Officer Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 12.2 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 12.3 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| + | Incorporated by reference to our annual report on Form 20-F, File No. 000-14728, for the fiscal year ended December 31, 2000 and our annual report on Form 20-F, File No. 000-14728, for the fiscal year ended December 31, 2000. Portions of Exhibit 4.1 have been omitted pursuant to a request for confidential treatment. Such omitted portions have been filed separately with the SEC. |
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Lan Chile S.A.
/s/ ALEJANDRO DE LA FUENTE GOIC
-------------------------------
Alejandro de la Fuente Goic
Chief Financial Officer
| Lan Chile S.A. |
/s/ ALEJANDRO DE LA FUENTE GOIC |
Name: Alejandro de la Fuente Goic |
Title: Chief Financial Officer |
Date: June 30, 2003
Certification Required
by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Enrique Cueto Plaza, certify that:
1. I have reviewed this annual report on Form 20-F of Lan Chile S.A.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: June 30, 2003
/s/ ENRIQUE CUETO PLAZA
-----------------------
Enrique Cueto Plaza
Chief Executive Officer
Certification Required
by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Alejandro de la Fuente Goic, certify that:
1. I have reviewed this annual report on Form 20-F of Lan Chile S.A.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
d. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
e. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
f. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
c. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
d. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ ALEJANDRO DE LA FUENTE GOIC
-------------------------------
Alejandro de la Fuente Goic
Chief Financial Officer
Date: June 30, 2003
LAN CHILE S.A.
Consolidated financial statements
December 31, 2002
CONTENTS
Consolidated balance sheet
Consolidated statement of income
Consolidated statement of cash flows
Notes to the consolidated financial statements
Ch$ - Chilean pesos
US$ - United States dollars
ThUS$ - Thousands of United States dollars
UF - The UF is a Chilean inflation-indexed, peso-denominated monetary
unit which is set daily in advance based on the previous month's
inflation rate
PriceWaterHouseCoopers logo
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements | ||
Report of Independent Auditors | F-2 | |
Consolidated Balance Sheets at December 31, 2002 and 2003 | F-3 | |
Consolidated Statements of Income for the years ended December 31, 2001, 2002 and 2003 | F-5 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2002 and 2003 | F-6 | |
Reconciliation of Net Income to Net Cash Provided by Operating Activities for the years ended | F-7 | |
Notes to the Consolidated Financial Statements at December 31, 2003 | F-8 | |
Unaudited Consolidated Financial Statements for the Three Months Ended March 31, 2004: | ||
Condensed Consolidated Balance Sheets at March 31, 2003 and 2004 | F-54 | |
Condensed Consolidated Statements of Income for the three months ended March 31, 2003 and 2004 | F-56 | |
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2003 | F-57 | |
Reconciliation of Net Income to Net Cash Provided by Operating Activities for the three months ended March 31, 2003 and 2004 | F-58 | |
Notes to the Consolidated Financial Statements at March 31, 2004 | F-59 | |
REPORT OF INDEPENDENT ACCOUNTANTS
AUDITORS
To the Board of Directors and Shareholders of
Lan Chile S.A.
We have audited the accompanying consolidated balance sheets of Lan Chile S.A. and its subsidiaries (the "Company"“Company”) as of December 31, 20012003 and 2002 and the related consolidated statements of income and of cash flows for each of the three years in the period ended December 31, 2002,2003, all expressed in thousands of United States dollars. These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the statements of
income and of cash flows for the year ended December 31, 2000 of Lan Chile Cargo
S.A., a consolidated subsidiary, which statements reflect total operating
revenues representing 20.45% of consolidated total revenues for the year ended
December 31, 2000. These statements were audited by other auditors whose report
thereon have been furnished to us and our opinion, insofar as it relates to the
amounts included for Lan Chile Cargo S.A., is based solely on the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing standards in both Chile and of the United States of America.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits, and the report of the other auditors in
2000, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lan Chile S.A. and its subsidiaries at December 31, 20012003 and 2002 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002,2003, in conformity with accounting principles generally accepted in Chile.
Accounting principles generally accepted in Chile vary in certain significant respects from accounting principles generally accepted in the United States of America and as allowed by Item 18 to Form 20-F. The application of the latter
would have affected the determination of consolidated net income for the years
ended December 31, 2000, 2001 and 2002 and the determination of shareholders'
equity and consolidated financial position at December 31, 2001 and 2002America. Information relating to the extent summarizednature and effect of such differences is presented in Note 2524 to the consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS
/s/ PricewaterhouseCoopers
Santiago, Chile
February 27, 2003
LAN CHILE S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
At December 31,
ASSETS 2001 2002
------ ---- ----
(In thousands of US$)
CURRENT ASSETS
Cash ................................................................. 6,903 3,326
Time deposits......................................................... 66,528 125,476
Marketable securities................................................. - 30,619
Accounts receivable- trade and other, net (Note 4).................... 164,593 160,349
Notes and accounts receivable from related companies (Note 14)........ 9,813 4,665
Inventories, net (Note 5)............................................. 33,697 35,385
Prepaid and recoverable taxes......................................... 10,736 8,674
Prepaid expenses (Note 6)............................................. 31,896 28,338
Deferred income tax assets (Note 13).................................. 5,198 5,215
Other current assets (Note 7)......................................... 5,654 13,792
---------- ----------
Total current assets............................................. 335,018 415,839
---------- ----------
PROPERTY AND EQUIPMENT (net) (Note 8)..................................... 985,764 1,026,434
---------- ----------
OTHER ASSETS
Investments (Note 9).................................................. 2,111 2,419
Goodwill and negative goodwill (Note 9)............................... 41,938 47,870
Notes and accounts receivable from related companies (Note 14)........ 14,706 281
Long-term accounts receivable......................................... 6,362 9,438
Advances for purchases of aircraft and other deposits (Note 10)....... 39,418 41,507
Other (Note 11)....................................................... 10,194 41,652
---------- ----------
Total other assets............................................... 114,729 143,167
---------- ----------
Total assets..................................................... 1,435,511 1,585,440
========== ==========
| At December 31, | ||||
| 2003 | 2002 | |||
| (In thousands of US$) | ||||
ASSETS | ||||
CURRENT ASSETS | ||||
Cash | 4,988 | 3,326 | ||
Time deposits | 128,950 | 125,476 | ||
Marketable securities (Note 3) | 85,025 | 30,619 | ||
Trade accounts receivable and other, net (Note 4) | 168,245 | 160,349 | ||
Notes and accounts receivable from related companies (Note 14) | 417 | 4,665 | ||
Inventories (Note 5) | 33,391 | 35,385 | ||
Prepaid and recoverable taxes | 15,317 | 8,674 | ||
Prepaid expenses (Note 6) | 24,080 | 28,338 | ||
Deferred income tax assets (Note 13) | 8,038 | 5,215 | ||
Other current assets (Note 7) | 18,261 | 13,792 | ||
Total current assets | 486,712 | 415,839 | ||
PROPERTY AND EQUIPMENT (net) (Note 8) | 1,009,507 | 1,026,434 | ||
OTHER ASSETS | ||||
Investments in related companies (Note 9) | 1,621 | 2,419 | ||
Goodwill (Note 9) | 45,071 | 47,870 | ||
Notes and accounts receivable from related companies (Note 14) | 262 | 281 | ||
Long-term accounts receivable | 7,912 | 9,438 | ||
Advances for purchases of aircraft and other deposits (Note 10) | 41,778 | 40,693 | ||
Other (Note 11) | 35,651 | 42,466 | ||
Total other assets | 132,295 | 143,167 | ||
Total assets | 1,628,514 | 1,585,440 | ||
The accompanying Notes 1 to 2524 form an integral part of these consolidated financial statements.
F - 2
LAN CHILE S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
At December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2002
- ------------------------------------ ---- ----
(In thousands of US$)
CURRENT LIABILITIES
Current portion of long-term loans from financial institutions
(Note 15)........................................................... 52,154 61,373
Current portion of long-term leasing obligations (Note 17)............ 20,544 3,909
Securitization obligation (Note 16)................................... 10,538 11,275
Dividends payable..................................................... - 8,958
Accounts payable ..................................................... 153,468 158,294
Notes payable......................................................... 7 81
Notes and accounts payable to related companies (Note 14)............. 101 235
Air traffic liability ................................................ 93,361 113,784
Other current liabilities (Note 12)................................... 92,420 101,287
---------- ----------
Total current liabilities........................................ 422,593 459,196
---------- ----------
LONG-TERM LIABILITIES
Loans from financial institutions (Note 15)........................... 589,468 612,730
Securitization obligation (Note 16)................................... 39,613 68,338
Other creditors....................................................... 98 35,693
Notes and accounts payable to related companies (Note 14)............. 854 1,269
Provisions (Note 12).................................................. 77,113 62,173
Obligations under capital leases (Note 17)............................ 337 10,854
Deferred income tax liabilities (Note 13)............................. 14,702 22,399
---------- ----------
Total long-term liabilities...................................... 722,185 813,456
---------- ----------
MINORITY INTEREST......................................................... 2,201 3,926
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 21)................................... - -
---------- ----------
SHAREHOLDERS' EQUITY (Note 18)
Common stock (318,909,090 shares)..................................... 134,303 134,303
Reserves.............................................................. 2,620 2,620
Retained earnings..................................................... 151,609 171,939
---------- ----------
Total shareholders' equity....................................... 288,532 308,862
---------- ----------
Total liabilities and shareholders' equity....................... 1,435,511 1,585,440
========== ==========
| At December 31, | ||||
| 2003 | 2002 | |||
| (In thousands of US$) | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||
CURRENT LIABILITIES | ||||
Current portion of long-term loans from financial institutions (Note 15) | 63,155 | 61,373 | ||
Current portion of long-term leasing obligations (Note 17) | 3,995 | 3,909 | ||
Securitization obligation (Note 16) | 12,064 | 11,275 | ||
Dividends payable | 83 | 8,958 | ||
Accounts payable | 172,488 | 158,294 | ||
Notes payable | — | 81 | ||
Notes and accounts payable to related companies (Note 14) | 363 | 235 | ||
Air traffic liability | 145,691 | 113,784 | ||
Other current liabilities (Note 12) | 108,573 | 101,287 | ||
Total current liabilities | 506,412 | 459,196 | ||
LONG-TERM LIABILITIES | ||||
Loans from financial institutions (Note 15) | 559,669 | 612,730 | ||
Securitization obligation (Note 16) | 56,274 | 68,338 | ||
Other creditors | 24,420 | 35,693 | ||
Notes and accounts payable to related companies (Note 14) | 1,025 | 1,269 | ||
Provisions (Note 12) | 74,939 | 62,173 | ||
Obligations under capital leases (Note 17) | 7,084 | 10,854 | ||
Deferred income tax liabilities (Note 13) | 42,018 | 22,399 | ||
Total long-term liabilities | 765,429 | 813,456 | ||
MINORITY INTEREST | 4,109 | 3,926 | ||
COMMITMENTS AND CONTINGENCIES (Note 21) | ||||
SHAREHOLDERS’ EQUITY (Note 18) | ||||
Common stock (318,909,090 shares) | 134,303 | 134,303 | ||
Reserves | 2,620 | 2,620 | ||
Retained earnings | 215,641 | 171,939 | ||
Total shareholders’ equity | 352,564 | 308,862 | ||
Total liabilities and shareholders’ equity | 1,628,514 | 1,585,440 | ||
The accompanying Notes 1 to 2524 form an integral part of these consolidated financial statements.
F - 3
LAN CHILE S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended
December 31,
---------------------------------------
2000 2001 2002
---- ---- ----
(In thousands of US$)
REVENUES
Passenger................................................. 750,679 803,014 803,718
Cargo..................................................... 593,518 539,485 520,791
Other..................................................... 80,957 85,842 127,925
--------- --------- ---------
Total operating revenues (Note 24)................... 1,425,154 1,428,341 1,452,434
--------- --------- ---------
EXPENSES
Wages and benefits (Note 19).............................. 200,260 203,021 215,278
Aircraft fuel............................................. 232,612 222,402 205,524
Commissions to agents..................................... 223,456 200,533 192,686
Depreciation and amortization............................. 42,035 51,936 67,817
Passenger services........................................ 34,321 35,867 32,308
Aircraft rentals.......................................... 118,913 146,438 159,793
Aircraft maintenance...................................... 84,689 105,209 95,144
Other rentals and landing fees............................ 251,789 244,865 228,736
Other operating expenses (Note 19)........................ 161,801 167,818 193,085
--------- --------- ---------
Total operating expenses............................. 1,349,876 1,378,089 1,390,371
--------- --------- ---------
Operating income..................................... 75,278 50,252 62,063
--------- --------- ---------
OTHER INCOME AND EXPENSES
Interest income........................................... 5,261 5,476 3,757
Interest expense.......................................... (31,669) (35,463) (40,758)
Other income (expense) - net (Note 20).................... 10,039 (8,382) 13,186
--------- --------- ---------
Total other income (expense)......................... (16,369) (38,369) (23,815)
--------- --------- ---------
Income before minority interest............................... 58,909 11,883 38,248
Minority interest............................................. (116) (1,593) (434)
--------- --------- ---------
Income before income taxes........................... 58,793 10,290 37,814
Income taxes (Note 13)........................................ (10,407) 552 (7,006)
--------- --------- ---------
NET INCOME.................................................... 48,386 10,842 30,808
========= ========= =========
For the years ended December 31, | |||||||||
| 2003 | 2002 | 2001 | |||||||
| (In thousands of US$) | |||||||||
REVENUES | |||||||||
Passenger | 918,370 | 803,718 | 803,014 | ||||||
Cargo | 602,038 | 520,791 | 539,485 | ||||||
Other | 118,392 | 127,925 | 85,842 | ||||||
Total operating revenues (Note 23) | 1,638,800 | 1,452,434 | 1,428,341 | ||||||
EXPENSES | |||||||||
Wages and benefits (Note 19) | (240,924 | ) | (215,278 | ) | (203,021 | ) | |||
Aircraft fuel | (259,566 | ) | (205,524 | ) | (222,402 | ) | |||
Commissions to agents | (223,974 | ) | (192,686 | ) | (200,533 | ) | |||
Depreciation and amortization | (72,631 | ) | (67,817 | ) | (51,936 | ) | |||
Passenger services | (36,206 | ) | (32,308 | ) | (35,867 | ) | |||
Aircraft rentals | (139,138 | ) | (159,793 | ) | (146,438 | ) | |||
Aircraft maintenance | (97,862 | ) | (95,144 | ) | (105,209 | ) | |||
Other rentals and landing fees | (258,495 | ) | (228,736 | ) | (244,865 | ) | |||
Other operating expenses (Note 19) | (198,287 | ) | (193,085 | ) | (167,818 | ) | |||
Total operating expenses | (1,527,083 | ) | (1,390,371 | ) | (1,378,089 | ) | |||
Operating income | 111,717 | 62,063 | 50,252 | ||||||
OTHER INCOME AND EXPENSES | |||||||||
Interest income | 6,277 | 3,757 | 5,476 | ||||||
Interest expense | (39,350 | ) | (40,758 | ) | (35,463 | ) | |||
Other income (expense)—net (Note 20) | 24,123 | 13,186 | (8,382 | ) | |||||
Total other income (expense) | (8,950 | ) | (23,815 | ) | (38,369 | ) | |||
Income before minority interest | 102,767 | 38,248 | 11,883 | ||||||
Minority interest | (870 | ) | (434 | ) | (1,593 | ) | |||
Income before income taxes | 101,897 | 37,814 | 10,290 | ||||||
Income taxes (Note 13) | (18,342 | ) | (7,006 | ) | 552 | ||||
NET INCOME | 83,555 | 30,808 | 10,842 | ||||||
The accompanying Notes 1 to 2524 form an integral part of these consolidated financial statements.
F - 4
LAN CHILE S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended
December 31,
---------------------------------------
2000 2001 2002
---- ---- ----
(In thousands of US$)
CASH FLOWS FROM OPERATING ACTIVITIES
Collection of trade accounts receivable................... 1,452,095 1,451,906 1,514,977
Interest income........................................... 2,378 2,649 1,343
Other income received..................................... 10,617 7,327 30,102
Payments to suppliers and personnel....................... (1,276,101) (1,248,404) (1,338,368)
Interest paid............................................. (37,365) (32,271) (39,363)
Income tax paid........................................... (102) (120) (1,087)
Other expenses paid....................................... (479) (5,762) (12,262)
Value-added tax and similar payments ..................... (16,826) (19,768) (16,517)
--------- --------- ---------
Net cash provided by operating activities............ 134,217 155,557 138,825
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans obtained............................................ 88,133 245,475 163,551
Securitization proceeds................................... - - 40,000
Other loans from related companies........................ - 669 -
Dividend payments......................................... (10,447) (14,539) (1,454)
Loans repaid.............................................. (30,309) (32,246) (120,646)
Other .................................................... (177) (9,849) (16,788)
--------- --------- ---------
Net cash provided by financing activities............ 47,200 189,510 64,663
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of property and equipment.................... (145,566) (341,271) (192,627)
Proceeds from sales of property and equipment............. 4,231 7,218 81,842
Loans to related companies................................ (677) (12,227) -
Collection of loans from related companies................ - 1,900 -
Sale of investments ...................................... - 6,044 -
Investments made.......................................... (6,462) (4,433) (4,139)
Other..................................................... (3,940) (83) (3,796)
--------- --------- ---------
Net cash used in investing activities................ (152,414) (342,852) (118,720)
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS..................... 29,003 2,215 84,768
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................ 43,435 72,438 74,653
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR...................... 72,438 74,653 159,421
========= ========= =========
F - 5
For the years ended December 31, | |||||||||
| 2003 | 2002 | 2001 | |||||||
| (In thousands of US$) | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||
Collection of trade accounts receivable | 1,663,149 | 1,514,977 | 1,451,906 | ||||||
Interest income | 3,885 | 1,343 | 2,649 | ||||||
Other income received | 13,821 | 30,102 | 7,327 | ||||||
Payments to suppliers and personnel | (1,377,257 | ) | (1,338,368 | ) | (1,248,404 | ) | |||
Interest paid | (44,522 | ) | (39,363 | ) | (32,271 | ) | |||
Income tax paid | (337 | ) | (1,087 | ) | (120 | ) | |||
Other expenses paid | (3,984 | ) | (12,262 | ) | (5,762 | ) | |||
Value-added tax and similar payments | (19,021 | ) | (16,517 | ) | (19,768 | ) | |||
Net cash provided by operating activities | 235,734 | 138,825 | 155,557 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||
Loans obtained | 11,088 | 163,551 | 245,475 | ||||||
Securitization proceeds | (54 | ) | 40,000 | — | |||||
Other loans from related companies | 10,417 | — | 669 | ||||||
Dividend payments | (49,101 | ) | (1,454 | ) | (14,539 | ) | |||
Loans repaid | (75,178 | ) | (120,646 | ) | (32,246 | ) | |||
Other | (14,222 | ) | (16,788 | ) | (9,849 | ) | |||
Net cash (used in) provided by financing activities | (117,050 | ) | 64,663 | 189,510 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||
Acquisitions of property and equipment | (64,756 | ) | (192,627 | ) | (341,271 | ) | |||
Proceeds from sales of property and equipment | 7,612 | 81,842 | 7,218 | ||||||
Loans to related companies | — | — | (12,227 | ) | |||||
Collection of loans from related companies | — | — | 1,900 | ||||||
Sale of investments | 8,693 | — | 6,044 | ||||||
Other investments | (829 | ) | (4,139 | ) | (4,433 | ) | |||
Investments in financial instruments | (68,946 | ) | (8 | ) | — | ||||
Other | (2,127 | ) | (3,788 | ) | (83 | ) | |||
Net cash (used in) investing activities | (120,353 | ) | (118,720 | ) | (342,852 | ) | |||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (1,669 | ) | 84,768 | 2,215 | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 159,421 | 74,653 | 72,438 | ||||||
CASH AND CASH EQUIVALENTS AT END OF YEAR | 157,752 | 159,421 | 74,653 | ||||||
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
For the years ended
December 31,
---------------------------------------
2000 2001 2002
---- ---- ----
(In thousands of US$)
NET INCOME FOR THE YEAR....................................... 48,386 10,842 30,808
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation.............................................. 39,702 49,022 64,094
Gain on sales of investments.............................. - (5,997) -
Gain on sales and retirements of property and equipment... (174) (539) (762)
Proportional share of results of equity method investments 2,686 490 355
Amortization of goodwill.................................. 2,083 2,417 3,148
Minority interest......................................... 116 1,593 434
Write-offs and provisions................................. 6,492 8,493 11,768
Foreign exchange losses................................... 5,667 3,816 4,699
Other..................................................... (646) (4,470) (295)
CHANGES IN ASSETS AND LIABILITIES
Decrease (increase) in accounts receivable - trade........ (32,226) 36,098 (15,045)
Decrease (increase) in inventories........................ (483) (7,957) (1,824)
Decrease (increase) in other assets....................... (20,242) (8,169) (32,277)
Increase (decrease) in accounts payable................... 71,041 63,272 65,048
(Decrease) increase in other liabilities.................. 11,815 6,646 8,674
------- ------- -------
Net cash provided by operating activities............ 134,217 155,557 138,825
======= ======= =======
The accompanying Notes 1 to 25 form an integral part of these consolidated
financial statements.
F - 6
For the years ended December 31, | |||||||||
| 2003 | 2002 | 2001 | |||||||
| (In thousands of US$) | |||||||||
NET INCOME FOR THE YEAR | 83,555 | 30,808 | 10,842 | ||||||
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES | |||||||||
Depreciation | 67,750 | 64,094 | 49,022 | ||||||
Gain on sales of investments | (122 | ) | — | (5,997 | ) | ||||
Gain on sales and retirements of property and equipment | (4,017 | ) | (762 | ) | (539 | ) | |||
Proportional share of results of equity method investments | 676 | 355 | 490 | ||||||
Amortization of goodwill | 3,267 | 3,148 | 2,417 | ||||||
Minority interest | 870 | 434 | 1,593 | ||||||
Write-offs and provisions | 7,202 | 11,768 | 8,493 | ||||||
Foreign exchange losses/(gains) | (12,103 | ) | 4,699 | 3,816 | |||||
Other | (208 | ) | (295 | ) | (4,470 | ) | |||
CHANGES IN ASSETS AND LIABILITIES | |||||||||
Decrease (increase) in accounts receivable—trade | 7,474 | (15,045 | ) | 36,098 | |||||
Decrease (increase) in inventories | 1,958 | (1,824 | ) | (7,957 | ) | ||||
Decrease (increase) in other assets | 40,730 | (32,277 | ) | (8,169 | ) | ||||
Increase in accounts payable | 23,745 | 65,048 | 63,272 | ||||||
Increase in other liabilities | 14,957 | 8,674 | 6,646 | ||||||
Net cash provided by operating activities | 235,734 | 138,825 | 155,557 | ||||||
The accompanying Notes 1 to 24 form an integral part of these consolidated financial statements.
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2002
2003
NOTE 1 - 1—THE COMPANY
Lan Chile S.A. ("Lan Chile" or the "Company"and certain subsidiaries (the “Company”) is the largest domestic and international passenger/cargo air carrier in Chile and one of the leadinglargest airlines in Latin America. Together with its code-share arrangements and affiliated airlines, the Company serves 15fifteen destinations in Chile, 8seven destinations in Peru, 17Perú, two in Ecuador, and in addition, eighteen destinations in Latin America, 25twenty five destinations in North America, 8ten destinations in Europe and 4four in the South Pacific. Currently, the Company operates 46forty eight passenger aircraft and 10seven cargo freighters. Lan ChileThe Company has alliances with American Airlines, Alaska Airlines, AeroMexico, British Airways, Iberia, Lufthansa Cargo, Qantas and TAM and is an official member of the oneworldTMoneworldTM global alliance.
The Company is an Open Chilean Corporation ("(“Sociedad Anonima Abierta"Anónima Abierta”) whose common stock is listed on the Santiago Stock Exchange and the Chilean Electronic Stock Exchange and whose American Depositary Receipts are traded on the New York Stock Exchange. Accordingly, the Company is subject to the regulations of both the Chilean Superintendency of Securities and Insurance (the "Superintendency"“Superintendency”) and the U.S. Securities and Exchange Commission.
NOTE 2 - 2—SUMMARY OF ACCOUNTING POLICIES
a) Presentation
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Chile, which include the accounting standards of the Superintendency. The preparation of financial statements in accordance with generally accepted accounting principles in Chile ("(“Chilean GAAP"GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
The Company has issued its statutory consolidated financial statements in Spanish and in conformity with accounting principles generally accepted in Chile, which include certain notes and additional information required by the Superintendency for statutory purposes. Management believes that these additional notes and information are not essential for the complete understanding of the consolidated financial statements and, accordingly, these notes and additional information have been excluded from the accompanying financial statements.
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
b) Consolidation
The consolidated financial statements for the years 2000, 2001, 2002 and 20022003 include the following subsidiaries:
| December 31, | ||||||
| 2003 | 2002 | 2001 | ||||
Percentage of direct and indirect ownership: | ||||||
Lan Chile Investments Limited and subsidiaries | 100.00 | 100.00 | — | |||
Lan Perú S.A. | 70.00 | 70.00 | 70.00 | |||
Inversiones Lan S.A. and subsidiaries | 97.71 | 99.71 | 99.71 | |||
Lan Chile Cargo S.A. (formerly Ladeco S.A.) and subsidiaries | 99.85 | 99.85 | 99.85 | |||
Inmobiliaria Aeronáutica S.A. | 100.00 | 100.00 | 100.00 | |||
Comercial Masterhouse S.A. | 100.00 | 100.00 | 100.00 | |||
Sistemas de Distribución Amadeus Chile S.A. | 100.00 | 100.00 | 100.00 | |||
Lan Courier S.A. and subsidiary | 100.00 | 100.00 | 100.00 | |||
Lan Card S.A. | 100.00 | 100.00 | 100.00 | |||
Lan Pax Group S.A. and subsidiary | 100.00 | 100.00 | 100.00 | |||
Lan Cargo Group S.A. | 100.00 | 100.00 | 100.00 | |||
Línea Aérea Nacional Chile S.A. | 100.00 | 100.00 | 100.00 | |||
The effects of significant transactions between the subsidiaries and subsidiaries with the holding company have been eliminated in the consolidation and the participation of minority shareholders is shown in these financial statements under Minorityas minority interest in the consolidated balance sheetsConsolidated Balance Sheets and statementsConsolidated Statements of income.
Lan Chile Cargo S.A. (formerly Ladeco S.A.) and subsidiaries
Lan Logistics, Corp. (formerly Lan Express Inc.), a wholly-owned subsidiary of
Lan Chile Cargo S.A., was not consolidated for Chilean GAAP purposes at December
31, 2001 and 2000 because it was in the development stage. In 2002 the
development phase of this subsidiary was completed.
On September 25, 2002, LanLogistics, Corp acquired the remaining 40% ownership
in its affiliate Skyworld International Couriers, Inc. LanLogistics paid for
this increase by providing services valued at ThUS$ 618 and by transferring its
75% ownership interest in SkyPost, Inc to Skyworld.
On July 31, 2002, LanLogistics, Corp. paid ThUS$ 2,280 to increase its ownership
interest in Lan Box, Inc. from 60% to 75%.
On April 3, 2002, a subsidiary of Lan Chile Cargo S.A. paid Th$US 400 for 550,00
shares of Vimalcor S.A. which amounted to 50% of the company.
On March 28, 2002, Mas Investment Limited (Bahamas) paid ThUS$ 2,250 for 302,980
shares of Promotora Aerea Latinoamericana S.A.
Lan Peru S.A.
During July 2001, a susidiary of Lan Chile Cargo S.A. acquired an additional 21%
ownership interest in Lan Peru S.A. increasing its total ownership from 49% to
70%. As a result, Lan Peru S.A. (which was previously an equity method investee)
became a consolidated subsidiary beginning in August 2001.
F - 8
c) Use of estimates
The preparation of ourthe consolidated financial statements in conformity with
generally accepted accounting principles requires management to makethe use of estimates and assumptions that effectaffect the reported amounts of assets and liabilities, and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses duringand the reporting period.disclosure of contingent liabilities. Management makes its best estimate of the ultimate outcome for these items based on historical trends and other information available when the financial statements are prepared. Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available to management. Areas where the nature of the estimate makes it reasonably possible that actual results could materially differ from amounts estimated include: impairment assessments on long-lived assets (including goodwill), inventory obsolescence, incomeengine overhaul provisions, tax liabilities and the associated deferred tax effects, contingent liabilities and other liabilities.
d) Price-level restatements
The financial statements of certain subsidiaries have been restated through the application of monetary correction rules in accordance with Chilean GAAP to show the effects of changes in the purchasing power of the Chilean peso, using indicators published by the National Institute of Statistics.
e) Foreign currency transactions
Lan Chile S.A. and certain subsidiaries are authorized to maintain their accounting records and prepare their financial statements in US dollars. Because the US dollar is the functional and reporting currency, monetary assets and
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
liabilities denominated in other currencies are translatedremeasured to US dollars at the exchange rates prevailing on December 31 of each year. The income statement accountsyear except for inventory, property and equipment, other assets and air traffic liability, which are shownremeasured at historical exchange rates. Revenues and expenses are generally translated
into US dollars at the exchange rates on the dates of the transactions.
Foreign currency transaction gains and losses are included in the Consolidated Statements of incomeIncome in Other non-operating expenses (net lossesincome (expense) — net. The Company recorded a net foreign currency gain of ThUS$ 5,667 in 2000,12,103, net loss of ThUS$
3,816 in(4,699) and net loss of ThUS$(3,816) for the years ended 2003, 2002 and 2001, and ThUS$ 4,699 in 2002).
respectively.
f) Time deposits
Time deposits are stated at cost plus accrued interest at year-end.
g) Marketable securities
Marketable securities include investments in bonds, government securities and mutual funds. Bonds and government securities are stated at the lower of cost or market value plus accrued interest and mutual funds are stated at market value based on year-end quoted values.
h) Allowance for bad debts
The Company maintains an allowance for bad debts based on an analysis of the aging of the outstanding balances as well as other relevant information.
h)
i) Inventories
Inventories includerepresent spare parts and materials that willare expected to be consumed and used in third-party maintenance services within one year. TheyInventories are stated at the lower of cost (determined by the average cost method) or market.
F - 9
i)
j) Other current assets
Items included herein
Other current assets are comprised mainly correspond to repurchase agreementsof restricted funds associated with maturities
not exceeding 90 daysaircraft leases and securitypurchases and deposits with terms not exceeding one year.
They are shown at their initial value plus accrued interest. Deposits which are
to be refunded after one year are includedon derivative contracts in Other assets.
j)an unrealized loss position.
k) Property and equipment
Property and equipment are stated at cost and are depreciated by the straight-line method based on the estimated useful lives of the assets, with the
exception ofassets. Aircraft and engines are depreciated based on estimated useful life ranging from 10 to 20 years. Prior to January 1, 2003, aircraft and engines owned by the Company, which arewere depreciated based on
the basis of hours flown. This change, including the cumulative effect, was not material to the financial statements for any of the years presented.
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
The residual values and basis of depreciation used for the principal asset classifications are:
Asset classification Residual Value Basis of depreciation
-------------------- -------------- ---------------------
%
Boeing 767-300 F aircraft 36 Hours flown
Boeing 767-300 ER aircraft 36 Hours flown
Boeing 737-200 ADV aircraft 36 Hours flown
Boeing 767-200 ER aircraft 36 Hours flown
DC-8 61-F 36 Hours flown
Airbus A-320 36 Hours flown
Engines 767 36 Hours flown for engines
and useful life for
rotating parts (10-18
years)
Engines 737 15 Hours flown for engines
and useful life for
rotating parts (10-15
years)
Engines Airbus A-320 36 Hours flown
Engines Airbus A-340 36 Hours flown
Rotating parts 15 Useful life (10-18 years)
Buildings - Useful life (10-50 years)
Communications and computer equipment - Useful life (5-10 years)
Furniture and office equipment - Useful life (3-10 years)
Asset classification | Residual Value (%) | Basis of depreciation | ||||||
Boeing 767-300 F aircraft | 36 | Useful life (15 years) | ||||||
Boeing 767-300 ER aircraft | 36 | Useful life (15 years) | ||||||
Boeing 737-200 ADV aircraft | 15 | Useful life (until December 31, 2008) | ||||||
Boeing 767-200 ER aircraft | 36 | Useful life (15 years) | ||||||
DC-8 61-F | — | Useful life (until December 31, 2004) | ||||||
Airbus A-320 | 20 | Useful life (20 years) | ||||||
Engines 767 | 36 | Useful life (15 years) | ||||||
Engines 737 | 15 | Useful life (until December 31, 2008) | ||||||
Engines Airbus A-320 | 20 | Useful life (20 years) | ||||||
Engines Airbus A-340 | 36 | Useful life (15 years) | ||||||
Rotating parts | 20 | Useful life (15 years) | ||||||
Buildings | — | Useful life (10-50 years) | ||||||
Communications and computer equipment | — | Useful life (5-10 years) | ||||||
Furniture and office equipment | — | Useful life (3-10 years) |
Property and equipment include the revaluation increment arising from the technical appraisals of certain assets carried out in prior years in accordance with instructions issued by the Superintendency.
Inventories of materials and spare parts, net of provisions for obsolescence, which are included under Otherother fixed assets within Property and equipment, are stated at their average cost.
The Company has entered into capital lease agreements relatingrelated to an aircraft and certain buildings and equipment which have bargain purchase options at the end of each contract. These assets are not the legal property of the Company, because it cannot dispose of them until the purchase option is exercised. The assets are recorded at their fair value on the date of the lease agreement, which is determined by discounting the amounts payable in installments and the purchase option at the interest rate implicit, or explicit, in the contract.
The corresponding leasing obligations are presented under long-term liabilities and under the current portion of long-term leasing obligations, net of the
corresponding deferred interest.
F - 10
Purchased computer software is capitalized in Other assets and the cost is
amortized over a maximum period of four years in accordance with the
instructions of the Superintendency.
F - 11
Disbursements for the development of internal use software are charged to the results of operations as incurred. External direct costs of materials and services rendered in developing an enterprise resource planning system (an SAP R/3 system) and interest costs incurred during development are capitalized. Payroll related costs were not significant and have been expensed. Training costs and data conversion costs are expensed as incurred.
Impairment losses on long-lived assets used in operations are recorded when events and circumstances indicate that the assets may be impaired and the undiscounted future cash flows estimated to be generated by these assets are less than the assets'assets’ net book value. If an impairment occurs, the loss is measured by comparing the fair value of the asset to its carrying amount. Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable.
k)
l) Investments in related companies
Investments in related companies are included in Other assets using the equity method when they represent between 10% and 50% of the voting stock of the investee. Accordingly, the Company'sCompany’s proportional share in the
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
net income (or loss) of each investee is recognized in the Non-operating income or expense
classification of the statements of income on an accrual basis, after eliminating any unrealized profits or losses from transactions with the investees.
l)investees in Other income (expense) — net in the Consolidated Statements of Income.
m) Goodwill and negative goodwill
Under Chilean GAAP, goodwill arises from the excess of the purchase price of companies acquired over their net book value; negative goodwill arises when net book value exceeds the purchase price of companies acquired. Goodwill and negative goodwill also arise from the purchase of investments accounted for by the equity method.
Goodwill and negative goodwill are amortized over 20 years considering the expected period of return of the investment. The Company evaluates the recoverability of goodwill on a periodic basis.
m)
n) Sale leaseback
Gains and losses on sale leaseback transactions are deferred and recognized over the terms of the lease agreements.
n)
o) Air traffic liability and revenue
Passenger ticket sales are recorded as a current liability when sold as air traffic liability in the consolidated balance sheet.Consolidated Balance Sheets. Passenger and cargo revenues are recognized when the transportation service is provided, which in the case of passenger revenues reduces the air traffic liability. Commissions payableexpenses related to such unearned revenues are shown deducted fromnet of the air traffic liability.
o)liability until the transportation service is provided.
p) Aircraft and engine maintenance costs
Minor and other unscheduled maintenance costs of aircraft and engines are charged to income as incurred. Costs of major programmed maintenance are accrued based on the use of the aircraft and engines (flying hours).
F - 12
p) and are included in Other current liabilities and long-term Provisions in the Consolidated Balance Sheets.
q) Deferred income tax
Effective January 1, 2000, the effects of deferred income taxes arising from temporary differences between the basis of assets and liabilities for tax and financial statement purposes are recorded in accordance with Technical Bulletin No. 60 of the Chilean Institute of Accountants.Accountants and based on the enacted income tax rate which will be in effect when the temporary differences reverse. The effects of deferred income taxes at January 1, 2000 which were not previously recorded are recognized in income beginning in 2000 as the temporary differences reverse.
q)
In order to mitigate the effects of recording deferred income taxes that under the prior income tax accounting standard were not expected to be realized, Technical Bulletin No. 60 provided for a period of transition. Under this transition period, the full effect of using the liability method is not recorded in income at the same time the deferred taxes are recorded in the balance sheet. Under this transitional provision, a contra asset or liability account (“complementary accounts”) have been recorded offsetting the effects of the deferred tax assets and liabilities not recorded prior to January 1, 2000. Such complementary accounts are amortized to income over the estimated average reversal periods corresponding to underlying temporary differences to which the deferred tax asset or liability relates.
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
Deferred income tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The valuation allowance should be sufficient to reduce the deferred income tax asset to an amount that is more likely than not to be realized.
r) Lan Pass awards and Lan Corporate
The estimated incremental cost of providing free travel awards under the Lan Pass and Lan Corporate programs are accrued based on the accumulated kilometers for each passenger at the end of each year and by the conditions established by the program.
r)program and are included in Other current liabilities in the Consolidated Balance Sheets.
s) Employee vacations
The cost of employee vacations is recognized as an expense on an accrual basis as the vacations are earned by employees.
s)employees and are included in Other current liabilities in the Consolidated Balance Sheets.
t) Derivative instruments
These relate to
The Company enters into hedging contracts whichincluding interest rate swap agreements, interest rate cap agreements, forward exchange contracts, jet fuel swap agreements, and jet fuel options. The contracts are accounted for in accordance with Technical Bulletin No. 57, “Accounting for Derivative Contracts” (“TB 57”) of the Company recordsChilean Institute of Accountants. Under TB 57 all derivative instruments are recognized on the balance sheet at their fair value. Derivative instruments are accounted for as follows:
Hedge Forecasted transactions:
The derivative instrument is stated at its fair value on the balance sheet and any change in the fair value is recognized on the balance sheet as assetsan unrealized gain or loss in Other current liabilities or in Other assets. When the contract is settled, the unrealized gain or loss on the instrument is recognized in earnings in Other income (expense) — net in the Consolidated Statements of Income.
Firm commitments hedging contracts:
The hedged item and derivative instrument are measured at fair value. Changesvalue on the balance sheet. Unrealized gains and losses are recorded in fair value are
presentedearnings in Other income (expense) — net in the balance sheet as unrealizedConsolidated Statements of Income if the net effect is a loss and deferred and recognized when the contract is settled if it is a gain. The unrecognized gains or losses. When contracts are
closed,associated with the unrealized gains or losses on thederivative instrument are recognizedincluded in earnings.
t)Other current liabilities in the Consolidated Balance Sheets.
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
u) Cash and cash equivalents
The Company considers all short-term, highly liquidhighly-liquid investment securities with original maturities of three months or less to be cash equivalents for purposes of the statementConsolidated Statement of cash flows:
At December 31,
2001 2002
---- ----
(In thousands of US$)
Cash ........................................... 6,903 3,326
Time deposits....................................... 66,528 125,476
Marketable securites................................ - 30,619
Repurchase agreements (Note 7)...................... 1,222 -
------- --------
Total...................................... 74,653 159,421
======= ========
u)Flows:
| At December 31, | ||||||
| 2003 | 2002 | 2001 | ||||
| (In thousands of US$) | ||||||
Cash | 4,988 | 3,326 | 6,903 | |||
Time deposits | 128,950 | 125,476 | 66,528 | |||
Marketable securities (see Note 3) | 23,814 | 30,619 | — | |||
Repurchase agreements | — | — | 1,222 | |||
Total | 157,752 | 159,421 | 74,653 | |||
v) Capitalized interest
Interest paid on fundsborrowings used to acquire new aircraft is capitalized as an additional cost of the related assets.assets until the aircraft is received. Interest is capitalized based on the Company's weighted averageCompany’s weighted-average interest rate on long-term debt, or if applicable, the interest rate related to specific borrowings. Interest capitalization ends when the property or equipment is ready for service or its intended use. Interest capitalized totaled ThUS$ 2,926,—, ThUS$ 1,3133,162 and ThUS$ 3,1621,313 during 2000,2003, 2002 and 2001, and 2002, respectively.
F - 13
v)
w) Advertising costs
The Company expenses advertising costs as Other operating expenses in the period incurred. Advertising expense totaled ThUS$ 14,608 in 2000,11,550, ThUS$9,001 and ThUS$13,693 induring 2003, 2002 and 2001, respectively.
x) Reclassifications
Certain 2001 and ThUS$ 9,001 in 2002.
w) Reclassifications
Certain 2000 and 20012002 amounts in the accompanying financial statements have been reclassified to conform to the 20022003 presentation. The reclassifications had no material effect on the previously reported presentation of assets and liabilities, net income, cash flows or shareholders'shareholders’ equity.
NOTE 3 - CHANGES IN ACCOUNTING POLICIES
There were no changes in accounting policies that affect3—MARKETABLE SECURITIES
Marketable securities include the comparability of
these consolidated financial statements for all periods presented.
following:
| At December 31, | ||||
| 2003 | 2002 | |||
| (In thousands of US$) | ||||
Bonds | 60,117 | 20,510 | ||
Defined-term mutual funds | 23,814 | 10,109 | ||
Government securities and others | 1,094 | — | ||
Total | 85,025 | 30,619 | ||
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
Bonds recorded at December 31, 2003 are summarized as follows:
| Date of | At December 31, 2003 | |||||||||
| Purchase | Maturity | Interest rate | Carrying amount | Market value | ||||||
| % | (In thousands of US$) | |||||||||
Chilean bonds | 02/28/2003 | 03/31/2004 | 6.519 | 19,322 | 19,372 | |||||
Foreign bonds | 04/30/2003 | 01/31/2005 | 5.619 | 40,795 | 40,822 | |||||
Total | 60,117 | 60,194 | ||||||||
NOTE 4 - 4—ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
At December 31,
2001 2002
---- ----
(In thousands of US$)
Accounts receivable - passenger services............... 77,011 77,033
Accounts receivable - cargo services................... 51,736 58,956
Other accounts receivable.............................. 35,846 24,360
------- --------
Total......................................... 164,593 160,349
======= ========
| At December 31, | ||||
| 2003 | 2002 | |||
| (In thousands of US$) | ||||
Accounts receivable—passenger services | 75,858 | 77,033 | ||
Accounts receivable—cargo services | 60,927 | 58,956 | ||
Other accounts receivable | 31,460 | 24,360 | ||
Total | 168,245 | 160,349 | ||
Accounts receivable are shown net of an allowance for bad debts of ThUS$ 16,28722,506 at December 31, 20012003 and ThUS$21,916 at December 31, 2002.
NOTE 5 - 5—INVENTORIES
Inventories are summarized as follows:
At December 31,
2001 2002
---- ----
(In thousands of US$)
Expendable spare parts and materials................... 32,619 33,437
Duty-free inventories.................................. 1,078 1,948
------- --------
Total......................................... 33,697 35,385
======= ========
F - 14
| At December 31, | ||||
| 2003 | 2002 | |||
| (In thousands of US$) | ||||
Spare parts and materials used for third party maintenance | 31,100 | 33,437 | ||
Duty-free inventories | 2,291 | 1,948 | ||
Total | 33,391 | 35,385 | ||
NOTE 6 - 6—PREPAID EXPENSES
Prepaid expenses include the following:
At December
| At December 31, | ||||
| 2003 | 2002 | |||
| (In thousands of US$) | ||||
Prepaid insurance on aircraft | 14,113 | 16,230 | ||
Prepaid rentals on aircraft and costs of returning leased aircraft | 3,300 | 5,179 | ||
Prepaid advertising services | 1,274 | 894 | ||
Other | 5,393 | 6,035 | ||
Total | 24,080 | 28,338 | ||
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2001 2002
---- ----
(In thousands of US$)
Prepaid insurance on aircraft.......................... 20,822 16,230
Prepaid rentals on aircraft and costs of
returning leased aircraft........................... 6,479 5,179
Prepaid advertising services........................... 924 894
Other .............................................. 3,671 6,035
------- -------
Total......................................... 31,896 28,338
======= =======
2003
NOTE 7 - 7—OTHER CURRENT ASSETS
Other current assets consist of the following:
At December 31,
2001 2002
---- ----
(In thousands of US$)
Aircraft lease and other deposits...................... 1,443 2,750
Repurchase agreements.................................. 1,222 -
Deposits on derivative contracts....................... - 7,682
Other .............................................. 2,989 3,360
------- -------
Total......................................... 5,654 13,792
======= =======
Aircraft lease deposits are given to lessors to ensure performance under such
contracts. Repurchase agreements outstanding at December 31, 2001 had terms of
five days.
F - 15
| At December 31, | ||||
| 2003 | 2002 | |||
| (In thousands of US$) | ||||
Restricted funds associated with aircraft leases and purchases and other deposits | 6,681 | 2,750 | ||
Deposits on derivative contracts in a net unrealized loss position | 113 | 7,682 | ||
Fair value of jet fuel derivative contracts and others | 11,467 | 3,360 | ||
Total | 18,261 | 13,792 | ||
NOTE 8 - 8—PROPERTY AND EQUIPMENT AND FLEET COMPOSITION
a) Property and equipment
Property and equipment are summarized as follows:
At December
| At December 31, | ||||||
| 2003 | 2002 | |||||
| (In thousands of US$) | ||||||
Flight equipment: | ||||||
Boeing 767-200ER aircraft under capital lease | 70,574 | 70,574 | ||||
Boeing 737-200ADV aircraft | 50,963 | 50,161 | ||||
Boeing 767-300ER aircraft | 239,436 | 238,051 | ||||
Boeing 767-300F freighter aircraft | 428,133 | 428,133 | ||||
Airbus A-320 aircraft | 142,469 | 141,398 | ||||
DC-8 aircraft | 3,483 | 1,466 | ||||
Engines and rotating parts | 168,356 | 156,790 | ||||
Spare parts | 5,586 | 6,123 | ||||
Other | 34,260 | 29,552 | ||||
Land and buildings: | ||||||
Land | 9,597 | 9,597 | ||||
Buildings | 52,710 | 52,788 | ||||
Other installations | 18,087 | 16,729 | ||||
Construction in progress | 14,136 | 554 | ||||
Other fixed assets: | ||||||
Communication and computer equipment | 64,494 | 58,903 | ||||
Furniture and office equipment | 15,423 | 15,574 | ||||
Equipment under capital leases | 849 | 1,122 | ||||
Other | 10,584 | 10,526 | ||||
Incremental value arising from technical appraisals of owned assets | 437 | 437 | ||||
Property and equipment (gross) | 1,329,577 | 1,288,478 | ||||
Less: Accumulated depreciation | (320,070 | ) | (262,044 | ) | ||
Property and equipment (net) | 1,009,507 | 1,026,434 | ||||
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2001 2002
---- ----
(In thousands of US$)
Flight equipment:
Boeing 767 - 200ER aircraft under capital lease.. 76,422 70,574
Boeing 737 - 200ADV aircraft..................... 45,868 50,161
Boeing 767 - 300ER aircraft...................... 226,612 238,051
Boeing 767 - 300F Freighter aircraft............. 428,133 428,133
Airbus A-320 aircraft............................ 69,751 141,398
DC-8 aircraft.................................... 1,271 1,466
Engines and rotating parts....................... 155,043 156,790
Spare parts...................................... 9,084 6,123
Other............................................ 25,872 29,552
Land and buildings:
Land............................................. 9,597 9,597
Buildings........................................ 50,932 52,788
Other installations.............................. 13,549 16,729
Construction in progress......................... 3,273 554
Other fixed assets:
Communication and computer equipment............. 50,491 58,903
Furniture and office equipment................... 12,867 15,574
Equipment under capital leases................... 1,346 1,122
Other............................................ 10,691 10,526
Incremental value arising from technical appraisals
of Owned assets.................................. 437 437
Property and equipment (gross)........................ 1,191,239 1,288,478
Less: Accumulated depreciation .................. (205,475) (262,044)
--------- ----------
Property and equipment (net).......................... 985,764 1,026,434
========= ==========
2003
Included in property and equipment at December 31, 20012003 and 2002 are ThUS$79,43571,423 and ThUS$71,696 of equipment under capital leases with accumulated depreciation aggregating ThUS$ 43,04344,821 and ThUS$41,665, respectively.
Depreciation expense for the year amountsyears ended December 31, 2003, 2002 and 2001 amounted to ThUS$ 39,702 in 2000,67,750, ThUS$ 49,022
in 200164,094 and ThUS$ 64,094 in 2002.
49,022, respectively.
The balance of spare parts are shownis presented net of a provision for obsolescence amounting to ThUS$ 11,426 in 2002 (ThUS$ 9,086,13,893 at December 31, 2001).
Rotable parts are included under Engines2003 and rotating parts. Spare parts
expected to be utilized during periods exceeding one year are included under
Other fixed assets.
F- 16
In 2002, the Company entered into a sale-leaseback transaction. Under the arrangement, engines were sold for US$13,100,000 and leased backed over a 7-year operating lease agreement. The gain on sale of ThUS$6,833 is being amortized over the terms of the operating lease agreement.
b) Fleet composition
At December 31, 2002,2003, the fleet of the Company consists of 5859 aircraft, of which 2728 aircraft are owned by the Company and 31 aircraft are leased under operating leases.
Aircraft owned by the Company:
Aircraft Model Use 2001 2002
-------- ----- --- ---- ----
Boeing 737 (*) 200ADV Passenger/Freight 10 13
Boeing 767 300ER Passenger/Freight 3 3
Boeing 767 300F Freight 5 5
Boeing 767 (**) 200ER Passenger/Freight 1 1
Airbus A-320 200 Passenger/Freight 2 4
DC-8 61-F Freight 1 1
--- ---
Total owned 22 27
=== ===
(*) One aircraft is currently leased under capital lease to Southern Winds, Inc.
(**) This aircraft is currently subleased to Aerovias de Mexico
Aircraft | Model | Use | 2003 | 2002 | ||||
Boeing 737* | 200ADV | Passenger/Freight | 13 | 13 | ||||
Boeing 767 | 300ER | Passenger/Freight | 3 | 3 | ||||
Boeing 767 | 300F | Freight | 5 | 5 | ||||
Boeing 767** | 200ER | Passenger/Freight | 1 | 1 | ||||
Airbus A-320 | 200 | Passenger/Freight | 4 | 4 | ||||
DC-8 | 71-F | Freight | 1 | — | ||||
DC-8 | 61-F | Freight | 1 | 1 | ||||
Total owned | 28 | 27 | ||||||
| * | One of these aircraft is leased to Southern Winds S.A. under a contract beginning October, 2002. |
| ** | Acquired under a capital lease and subleased to Aerovías de México S.A. under a 9-year contract beginning June 16, 1996 and expiring in the year 2005. |
Leased aircraft:
Aircraft | Model | Use | 2003 | 2002 | ||||
Boeing 767 | 300ER | Passenger/Freight | 8 | 7 | ||||
Boeing 767 | 300F | Freight | 1 | 1 | ||||
Boeing 737 | 200ADV | Passenger/Freight | 6 | 7 | ||||
Airbus A 319 | 100 | Passenger/Freight | 2 | — | ||||
Airbus A 320 | 200 | Passenger/Freight | 10 | 10 | ||||
Airbus A 340 | 300 | Passenger/Freight | 4 | 4 | ||||
DC-8 | 71F | Freight | — | 2 | ||||
Total leased | 31 | 31 | ||||||
Total owned and leased | 59 | 58 | ||||||
LAN CHILE S.A. Leased aircraft:
Aircraft Model Use 2001 2002
-------- ----- --- ---- ----
Boeing 767 300ER Passenger/Freight 8 7
Boeing 767 300F Freight 1 1
Boeing 737 200ADV Passenger/Freight 13 7
Boeing 737 200ADV Freight 1 -
Airbus A 320 200 Passenger/Freight 8 10
Airbus A 340 300 Passenger/Freight 4 4
DC-8 71F Freight 4 2
---- ----
Total leased 39AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, ==== ====
Total owned and leased 61 58
==== ====
In 2002, the Company entered into a sale leaseback transaction. Under the
arrangement, engines were sold for US$ 13,100,000 and leaseback over a 7-year
operating lease term. The Company recognized a gain on sale of ThUS$ 6,833 which
is being amortized over the terms of the operating lease.
F - 17
NOTE 9 - 9—INVESTMENT AND GOODWILL
a) Investments in related companies
Investments in related companies accounted for by the equity method are summarized as follows:
Percentage of ownership | Book value of investment | Proportional Share of income (loss) | (Deficit) during development stage | ||||||||||||||||||||||||
Company | 2003 | 2002 | 2001 | 2003 | 2002 | 2003 | 2002 | 2001 | 2003 | 2002 | 2001 | ||||||||||||||||
| % | % | % | (In thousands of US$) | ||||||||||||||||||||||||
Concesionaria Chucumata S.A. | 16.70 | 16.70 | 16.67 | 359 | 356 | 70 | 64 | 107 | — | — | — | ||||||||||||||||
Flight Training Center Chile S.A. | — | 49.00 | 49.00 | — | 445 | (446 | ) | (42 | ) | (88 | ) | — | — | — | |||||||||||||
Lufthansa Lan Chile Technical Training S.A. | 50.00 | 50.00 | 50.00 | 394 | 504 | 30 | 59 | 73 | — | — | — | ||||||||||||||||
Austral Sociedad Concesionaria S.A. | 20.00 | 20.00 | 20.00 | 796 | 637 | 17 | 2 | 6 | — | — | — | ||||||||||||||||
LanLogistics, Corp. (formerly Lan Express Inc.)(1)(3) | — | — | 100.00 | — | — | — | — | — | — | — | (6,153 | ) | |||||||||||||||
Aerotransportes Mas de Carga S.A. de C.V. | — | 25.00 | 25.00 | — | — | — | (80 | ) | (540 | ) | — | — | — | ||||||||||||||
Florida West International Airways Inc.(2) | 25.00 | 25.00 | 25.00 | — | — | 158 | (202 | ) | 10 | — | — | — | |||||||||||||||
Lan Perú S.A.(4) | — | — | — | — | — | — | — | (58 | ) | — | — | — | |||||||||||||||
Skypost, Inc. | 25.00 | 25.00 | — | — | — | (139 | ) | (139 | ) | — | — | — | — | ||||||||||||||
Choice Air Courier del Perú S.A. | 50.00 | 50.00 | — | 72 | 77 | (5 | ) | (17 | ) | — | — | — | — | ||||||||||||||
Líneas Aéreas Nacionales del Ecuador S.A.(1)(3) | — | 100.00 | — | — | 400 | — | — | — | — | (112 | ) | — | |||||||||||||||
Puerto Montt Holding S.A.(1)(2)(3) | — | 100.00 | — | — | — | — | — | — | — | (1 | ) | — | |||||||||||||||
Skynet London, Ltd.(5) | — | — | — | — | — | (29 | ) | — | — | — | — | — | |||||||||||||||
SkyBox Internacional de Venezuela(5) | — | — | — | — | — | (167 | ) | — | — | — | — | — | |||||||||||||||
SkyBox Soluciones Logísticas S.A.(5) | — | — | — | — | — | (46 | ) | — | — | — | — | — | |||||||||||||||
Skynet Worldwide Express of California L.C.(5) | — | — | — | — | — | (119 | ) | — | — | — | — | — | |||||||||||||||
Total | 1,621 | 2,419 | (676 | ) | (355 | ) | (490 | ) | — | (113 | ) | (6,153 | ) | ||||||||||||||
| (1) | In accordance with Circular 981 of |
| (2) | The Company has recorded a provision for investments in related companies with negative equity at year-end totaling ThUS$335 at December 31, 2003 and ThUS$427 at December 31, 2002 which is included in Long-term provisions (See note 12). |
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
| (3) | For the periods indicated, the Company was in the development stage |
| (4) | Due to an increase in ownership, this entity was consolidated during 2001. |
| (5) | During 2003, this entity was sold or the operations were dissolved. |
b) Goodwill and negative goodwill
The changes in Goodwill and negative goodwill during the years 20012003 and 2002 were as follows:
Company | Balance January 1, 2003 | Additions | Amortization | Balance December 31, 2003 | ||||||||
| (In thousands of US$) | ||||||||||||
Goodwill on purchase of: | ||||||||||||
Lan Chile Cargo S.A. | 26,610 | — | (2,054 | ) | 24,556 | |||||||
Prime Airport Service Inc. | 545 | — | (35 | ) | 510 | |||||||
Mas Investment Limited | 3,070 | 191 | (177 | ) | 3,084 | |||||||
Air Cargo Limited | 769 | — | (43 | ) | 726 | |||||||
Promotora Aérea Latinoamericana S.A. | 1,632 | — | (84 | ) | 1,548 | |||||||
Vimalcor S.A. | 303 | — | (15 | ) | 288 | |||||||
Inversiones Aéreas S.A. (purchase of interest in Lan Perú S.A.) | 5,472 | — | (295 | ) | 5,177 | |||||||
Aerolinheas Brasileiras S.A. | 2,731 | — | (144 | ) | 2,587 | |||||||
Skyworld International Couriers, Inc. | 4,870 | — | (284 | ) | 4,586 | |||||||
Lan Box, Inc. | 1,081 | 310 | (87 | ) | 1,304 | |||||||
SkyBox Services Corp. | 857 | — | (53 | ) | 804 | |||||||
Skyworld Internacional Courier S.A. | 12 | — | — | 12 | ||||||||
H.G.A. Rampas y Servicios A. de Guayaquil S.A. | — | 41 | (1 | ) | 40 | |||||||
H.G.A. Rampas del Ecuador S.A. | — | 40 | — | 40 | ||||||||
| 47,952 | 582 | (3,272 | ) | 45,262 | ||||||||
Negative goodwill on purchase of: | ||||||||||||
Choice Air Courier del Perú S.A | (82 | ) | — | 5 | (77 | ) | ||||||
Americonsult de Guatemala S.A. | — | (114 | ) | — | (114 | ) | ||||||
| (82 | ) | (114 | ) | 5 | (191 | ) | ||||||
Total | 47,870 | 468 | (3,267 | ) | 45,071 | |||||||
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
Company | Balance January 1, 2002 | Additions | Amortization | Balance December 31, 2002 | |||||||
| (In thousands of US$) | |||||||||||
Goodwill on purchase of: | |||||||||||
Lan Chile Cargo S.A. | 28,664 | — | (2,054 | ) | 26,610 | ||||||
Prime Airport Service Inc. | 580 | — | (35 | ) | 545 | ||||||
Mas Investment Limited | 3,241 | — | (171 | ) | 3,070 | ||||||
Air Cargo Limited | 812 | — | (43 | ) | 769 | ||||||
Promotora Aérea Latinoamericana S.A. | — | 1,688 | (56 | ) | 1,632 | ||||||
Vimalcor S.A. | — | 310 | (7 | ) | 303 | ||||||
Inversiones Aéreas S.A. (purchase of interest in Lan Perú S.A.) | 5,766 | — | (294 | ) | 5,472 | ||||||
Aerolinheas Brasileiras S.A. | 2,875 | — | (144 | ) | 2,731 | ||||||
Skyworld International Couriers, Inc. | — | 5,117 | (247 | ) | 4,870 | ||||||
Lan Box, Inc. | — | 1,134 | (53 | ) | 1,081 | ||||||
Skyworld Internacional Courier S.A. | — | 12 | — | 12 | |||||||
SkyBox Services Corp. | — | 903 | (46 | ) | 857 | ||||||
| 41,938 | 9,164 | (3,150 | ) | 47,952 | |||||||
Negative goodwill on purchase of: | |||||||||||
Choice Air Courier del Perú S.A. | — | (84 | ) | 2 | (82 | ) | |||||
Total | — | (84 | ) | 2 | (82 | ) | |||||
Total | 41,938 | 9,080 | (3,148 | ) | 47,870 | ||||||
c) Acquisitions
LanLogistics, Corp.
On September 25, 2002, the subsidiary LanLogistics, Corp., acquired an additional 40% ownership in its affiliate Skyworld International Couriers, Inc., thereby increasing its participation to 100%. This acquisition was made through a service credit of ThUS$618 and the transfer of its 75% interest in SkyPost, Inc. The Company recorded goodwill associated with this transaction amounting to ThUS$5,117.
On July 31, and October 31, 2002, the subsidiary LanLogistics, Corp., paid ThUS$2,280 and ThUS$1,138, respectively, increase its ownership interest in its affiliate Lan Box, Inc. from 60% to 80%. The Company recorded goodwill associated with these transactions amounting to ThUS$1,134 in 2002 and ThUS$310 in 2003.
On February 20, 2001, LanLogistics, Corp., through its wholly-owned subsidiary Lan Box, Inc., acquired 100% ownership of SkyBox Services Corporation. This acquisition was made through a capital investment of ThUS$1,800 and the transferring of its 40% interest in Lan Box, Inc. The Company recorded goodwill associated with this transaction amounting to ThUS$903 in 2002.
Mas Investment Limited (Bahamas)
During January 2003, Mas Investment Limited (Bahamas), a wholly-owned subsidiary of Lan Cargo Overseas Limited (a subsidiary of Lan Chile Cargo S.A.), purchased 788,240 shares in Aerotransportes Mas de Carga S.A. for ThUS$788, increasing its ownership interest from 25% to 39.51%. Mas Investment Limited
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
(Bahamas) recorded goodwill amounting to ThUS$191 with this purchase. On March 28, 2002, Mas Investment Limited (Bahamas), took part in the share increase offering of its partner Aerotransportes Mas de Carga S.A. It invested ThUS$753 for 678,751 shares, maintaining its current ownership percentage of 25%.
In the same offering, Promotora Aérea Latinoamericana S.A., which is a consolidated subsidiary of Mas Investment Limited (Bahamas), took part in the share increase offering of the company Aerotransportes Mas de Carga S.A. in which it owns 75%. In order to maintain its ownership, it acquired 2,036,249 shares for ThUS$2,250.
On March 28, 2002, Mas Investment Limited (Bahamas), a subsidiary of Lan Cargo Overseas Limited, acquired 302,980 shares of Promotora Aérea Latinoamericana S.A. for ThUS$2,250. This transaction resulted in goodwill of ThUS$1,688.
Lan Cargo Overseas Limited
On April 3, 2002, Lan Cargo Overseas Limited purchased 550,000 shares of Vimalcor S.A., which is incorporated in the Oriental Republic of Uruguay for ThUS$400 representing a 50% ownership interest. Lan Cargo Overseas Limited recorded goodwill amounting to ThUS$310 with this purchase.
NOTE 10 - 10—ADVANCES FOR PURCHASES OF AIRCRAFT AND OTHER DEPOSITS
The advances for purchases of aircraft and other deposits are summarized as follows:
| At December 31, | ||||
| 2003 | 2002 | |||
| (In thousands of US$) | ||||
Advances for purchases of Boeing 767 and lease of Airbus aircraft | 36,125 | 34,804 | ||
Deposits on aircraft leases | 4,250 | 4,716 | ||
Other deposits | 1,403 | 1,173 | ||
Total | 41,778 | 40,693 | ||
NOTE 11 - 11—OTHER ASSETS
Other assets are summarized as follows:
At December
| At December 31, | ||||
| 2003 | 2002 | |||
| (In thousands of US$) | ||||
Unrealized losses on derivative contracts(1) | 24,851 | 29,056 | ||
Loans to employees | 1,514 | 2,380 | ||
Deposits related to aircraft to be purchased or leased and others | 9,286 | 11,030 | ||
Total | 35,651 | 42,466 | ||
| (1) | The corresponding fair value derivative contract liability is recorded in Other current liabilities and in Other creditors long term. |
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2001 2002
---- ----
(In thousands of US$)
Unrealized losses on derivative contracts (1).......... - 29,056
Loans to employees..................................... 3,341 2,380
Other.................................................. 6,853 10,216
------ ------
Total........................................ 10,194 41,652
====== ======
(1) The corresponding derivative liability is recorded as a long-term
liability due to Other creditors.
2003
NOTE 12 - 12—OTHER LIABILITIES AND PROVISIONS
Other liabilities are summarized as follows:
a) Other current liabilities
At December 31
2001 2002
---- ----
(In thousands of US$)
Engine overhaul provision.............................. 51,701 61,106
Withholdings on employee salaries...................... 17,666 15,897
Employee vacations..................................... 5,765 5,795
Lan Pass and Lan Corporate liability
(frequent flyer mileage)............................. 5,256 4,947
Accumulated losses in Florida West International
Airways, Inc......................................... 361 427
Income taxes payable................................... 179 16
Others .............................................. 11,492 13,099
------ -------
Total......................................... 92,420 101,287
====== =======
| At December 31, | ||||
| 2003 | 2002 | |||
| (In thousands of US$) | ||||
Engine overhaul provision | 56,302 | 61,106 | ||
Withholdings on employee salaries | 28,740 | 15,897 | ||
Employee vacations | 7,755 | 5,795 | ||
Lan Pass awards and Lan Corporate liability (frequent flyer mileage) | 5,582 | 4,947 | ||
Accumulated losses in Florida West International Airways, Inc. and Puerto Montt Holding S.A. (See Note 9) | 335 | 427 | ||
Income taxes payable | 35 | 16 | ||
Others | 9,824 | 13,099 | ||
Total | 108,573 | 101,287 | ||
b) Provisions (long-term)
At December
| At December 31, | ||||
| 2003 | 2002 | |||
| (In thousands of US$) | ||||
Engine overhaul provision | 65,420 | 54,342 | ||
Employee vacations | 5,331 | 4,241 | ||
Employee severance | 4,188 | 3,590 | ||
Total | 74,939 | 62,173 | ||
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2001 2002
---- ----
(In thousands of US$)
Engine overhaul provision ............................ 63,927 54,342
Accumulated losses in LanLogistics, Corp. ............ 7,078 -
Employee vacations.................................... 3,651 4,241
Employee severance.................................... 2,457 3,590
------ ------
Total........................................ 77,113 62,173
====== ======
F - 20
NOTE 13 - 13—INCOME TAX
a) Except for charges Charges arising from certain subsidiaries ofincome tax amounts to ThUS$ 283,481, ThUS$ 68116 and ThUS$ 11668 in 2000,2003, 2002 and 2001, respectively, and 2002, respectively, the Company did not
provide for income taxeshas been determined based on current local tax legislation because the
Parent company and certain subsidiaries generated tax losses.
legislation.
b) Deferred Income Taxes
Effective January 1, 2000,income taxes
At December 31, 2003, the Company began applying Technical Bulletin
No. 60 of the Chilean Institute of Accountants regardingaccumulated balances from deferred income
taxes.
taxes originating from temporary differences were as follows:
| Deferred tax Assets | Deferred tax Liabilities | |||||||||
| Short-term | Long-term | Short-term | Long-term | |||||||
| (In thousands of US$) | ||||||||||
Allowance for doubtful accounts | 3,431 | — | — | — | ||||||
Provision for obsolescence of spare parts | 2,499 | — | — | — | ||||||
Provision for vacations | 1,144 | 850 | — | — | ||||||
Tax loss carryforwards | 765 | 61,770 | — | — | ||||||
Others | 4,315 | 639 | — | — | ||||||
Gross deferred tax assets | 12,154 | 63,259 | — | — | ||||||
Prepaid expenses | — | — | 3,901 | 1,355 | ||||||
Unearned income | — | — | — | 6,401 | ||||||
Property and equipment | — | 226 | 202 | 99,842 | ||||||
Others | — | — | 13 | 3,563 | ||||||
Gross deferred tax liabilities | — | 226 | 4,116 | 111,161 | ||||||
Less: Complementary accounts | — | (7,391 | ) | — | (20,547 | ) | ||||
Deferred tax assets valuation allowance | — | (7,498 | ) | — | — | |||||
Total | 12,154 | 48,596 | 4,116 | 90,614 | ||||||
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
At December 31, 2002, the accumulated balances from deferred taxes originating from temporary differences were as follows:
| Deferred tax Assets | Deferred tax Liabilities | |||||||||
| Short-term | Long-term | Short-term | Long-term | |||||||
| (In thousands of US$) | ||||||||||
Allowance for doubtful accounts | 3,704 | — | — | — | ||||||
Provision for obsolescence of spare parts | 1,744 | — | — | — | ||||||
Provision for vacations | 1,714 | — | — | — | ||||||
Tax loss carryforwards | — | 56,047 | — | — | ||||||
Others | 2,139 | 681 | — | — | ||||||
Gross deferred tax assets | 9,301 | 56,728 | — | — | ||||||
Prepaid expenses | — | — | 3,970 | 467 | ||||||
Unearned income | — | — | — | 4,084 | ||||||
Property and equipment | — | — | 69 | 78,581 | ||||||
Others | — | — | 47 | 3,949 | ||||||
Gross deferred tax liabilities | — | — | 4,086 | 87,081 | ||||||
Less: Complementary accounts | — | (7,481 | ) | — | (20,880 | ) | ||||
Deferred tax assets valuation allowance | — | (5,445 | ) | — | — | |||||
Total | 9,301 | 43,802 | 4,086 | 66,201 | ||||||
c) Effect on results
For the year ended December
| For the year ended December 31, | |||||||||
| 2003 | 2002 | 2001 | |||||||
| (In thousands of US$) | |||||||||
Current income tax expense | (481 | ) | (116 | ) | (68 | ) | |||
Deferred income tax expense | (17,861 | ) | (6,890 | ) | 620 | ||||
Total | (18,342 | ) | (7,006 | ) | 552 | ||||
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2000 2001 2002
---- ---- ----
(In thousands of US$)
Current income tax expense.............. (283) (68) (116)
Deferred income tax expense............. (10,124) 620 (6,890)
-------- ----- -------
Total.......................... (10,407) 552 (7,006)
======== ===== =======
F - 22
NOTE 14 - 14—BALANCES AND TRANSACTIONS WITH RELATED COMPANIES
a) Accounts receivable and payable with related parties are summarized as follows:
Current assets
- --------------
Notes and accounts receivable from related companies:
Company | Relationship | At December 31, | ||||
| 2003 | 2002 | |||||
| (In thousands of US$) | ||||||
San Alberto S.A. and subsidiaries | Common ownership | 189 | 189 | |||
Ultramar Agencia Marítima Ltda. | Common ownership | 16 | 8 | |||
Florida West International Airways Inc. | Equity method investee | — | 4,276 | |||
Lufthansa Lan Chile Technical Training S.A. | Equity method investee | 212 | — | |||
Lan Chile Investments Limited and subsidiaries(1) | Equity method investee | — | 87 | |||
Flight Training Center Chile S.A. | Equity method investee | — | 105 | |||
Total | 417 | 4,665 | ||||
Current liabilities
- -------------------
Notes and accounts payable to related companies:
At December 31,
Company Relationship 2001 2002
------- ------------ ---- ----
(In thousands of US$)
Flight Training Center Chile S.A. Equity method investee 50 -
Lufthansa Lan Chile Technical Training S.A. Equity method investee 51 71
Lineas Aereas Nacionales del Ecuador S.A. Equity method investee - 164
------ ------
Total 101 235
====== ======
Long-term assets
- ----------------
Notes and accounts receivable from related companies:
At December 31,
Company Relationship 2001 2002
------- ------------ ---- ----
(In thousands of US$)
Choice Air Courier del Peru S.A. Equity method investee - 64
Florida West International Airways Inc. Equity method investee - 217
LanLogistics, Corp. and subsidiaries (1) Common ownership 14,706 -
------ ------
Total 14,706 281
====== ======
(1) Consolidated in 2002, see Note 2 (b).
Notes and accounts payable to related companies:
| At December 31, | ||||||
Company | Relationship | 2003 | 2002 | |||
| (In thousands of US$) | ||||||
Lufthansa Lan Chile Technical Training S.A. | Equity method investee | — | 71 | |||
Lan Chile Investments Limited and subsidiaries(1) | Equity method investee | — | 164 | |||
Concesionaria Chucumata S.A. | Equity method investee | 8 | — | |||
Austral Sociedad Concesionaria S.A. | Equity method investee | 8 | — | |||
Florida West International Airways Inc. | Equity method investee | 347 | — | |||
Total | 363 | 235 | ||||
| (1) | Consolidated in 2003. |
Long-term assets
Notes and accounts receivable from related companies:
| At December 31, | ||||||
Company | Relationship | 2003 | 2002 | |||
| (In thousands of US$) | ||||||
Choice Air Courier del Perú S.A. | Equity method investee | 262 | 64 | |||
Florida West International Airways Inc. | Equity method investee | — | 217 | |||
Total | 262 | 281 | ||||
| �� | ||||||
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
Long-term liabilities
Notes and accounts payable to related companies:
| At December 31, | ||||||
Company | Relationship | 2003 | 2002 | |||
| (In thousands of US$) | ||||||
Ultramar Agencia Marítima Ltda. | Common ownership | 573 | 684 | |||
Skypost, Inc. | Equity method investee | 447 | 585 | |||
Florida West International Airways Inc. | Equity method investee | 5 | — | |||
| 1,025 | 1,269 | |||||
b) The main transactions with related entities are summarized as follows:
Company | Relationship | Description of transaction | Amount | |||||||
| 2003 | 2002 | 2001 | ||||||||
| (In thousands of US$) | ||||||||||
LanLogistics, Corp and subsidiaries | Common ownership | Services provided Loans granted | — — | — — | 2,609 10,327 | |||||
Florida West International Airways Inc. | Equity method investee | Services provided Services received Jet fuel payments Interline collection | 32,677 21,097 9,733 3,702 | 21,565 22,910 — — | 10,736 26,638 — — | |||||
Aerotransportes Mas de Carga S.A. de C.V. | Equity method investee | Services provided Services received | — — | 9,586 9,166 | 24,424 14,303 | |||||
Inversiones | Common ownership | Purchase of investments | — | — | 2,100 | |||||
San Alberto | Common ownership | Services provided Services received Loans granted | — — — | — — — | 6,495 4,992 1,900 | |||||
Luis Ignacio Sierra Arriola | Common ownership | Purchase of | — | 2,250 | — | |||||
Inmobiliaria Parque San Luis Dos S.A. | Common ownership | Real estate transaction | 7,270 | — | — | |||||
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
NOTE 15 - 15—LOANS FROM FINANCIAL INSTITUTIONS (LONG-TERM)
Long-term loans from financial institutions are summarized as follows:
Payable during the years | Interest rate at | At December 31, | ||||||
| 2003 | 2002 | |||||||
| % | (In thousands of US$) | |||||||
Loan in US dollars | 2000-2011 (quarterly) | LIBOR+0.2219 | 251,237 | 277,458 | ||||
Loan in US dollars | 2000-2005 (biannually) | LIBOR+1.4 | 3,000 | 4,499 | ||||
Loan in US dollars | 2001-2012 (quarterly) | LIBOR+0.2219 | 66,095 | 71,317 | ||||
Loan in US dollars | 2001-2013 (quarterly) | LIBOR+0.2538 | 158,660 | 168,584 | ||||
Loan in US dollars | 2002-2014 (quarterly) | LIBOR+0.9645 | 133,595 | 139,069 | ||||
Loan in US dollars | 2002-2003 (quarterly) | LIBOR+1.6 | 9,327 | 9,872 | ||||
Loan in US dollars | 2001-2003 (monthly) | 8.66 | — | 92 | ||||
Loan in US dollars | 2002-2004 (biannually) | 1.81 | 910 | 2,736 | ||||
Loan in US dollars | 2005 | 6.5 | — | 476 | ||||
Total | 622,824 | 674,103 | ||||||
Less—current portion | 63,155 | 61,373 | ||||||
Long-term portion | 559,669 | 612,730 | ||||||
Scheduled payments of long-term loans from financial institutions at December 31, 20022003 are as follows:
Payments during the years
Ended December 31, (In thousands of US$)
------------------ ---------------------
2004 70,005
2005 62,966
2006 64,245
2007 67,660
2008 - 2012 296,411
2013 - 2014 51,443
--------
Total 612,730
========
Payments during the years ended December 31, | (In thousands of US$) | |
2005 | 71,269 | |
2006 | 64,245 | |
2007 | 67,660 | |
2008 | 71,081 | |
2009-2012 | 254,494 | |
2013-2014 | 30,920 | |
Total | 559,669 | |
NOTE 16 - 16—SECURITIZATION OBLIGATION
Effective March 30, 1999, the Company signed a contract with Pelican Finance Ltd. for the securitization of future credit card receivables aggregating ThUS$60,000 originating from certain ticket agents in the United States. At December 31, 1999, the Company had received the entire proceeds of ThUS$60,000 which were reported as a securitization obligation on the balance sheet. The interest
rate applicable toterms of this contract are for the proceeds from the agreement is 6.82% onyears 2001 and 2006 with an annual basis.
financial cost of 6.82%.
On August 22, 2002, the Company signed a new securitization contract with Pelican Finance Ltd. The contract securitizes future credit card receivables aggregating ThUS$40,000. The terms of this contract are for the years 2006 throughand 2009 with an annual financial cost of 6.69%6.96%. At December 31, 2002, the Company had received the entire proceeds of ThUS$40,000 which arewere reported as a securitization obligation on the balance sheet.
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
The principal is payable as follows:
Payments during the years
Ended December 31, (In thousands of US$)
------------------ ---------------------
2004 12,064
2005 12,908
2006 11,817
2007 11,971
2008-2009 19,578
--------
Subtotal 68,338
Current portion 11,275
--------
Total 79,613
========
F - 25
Payments during the years Ended December 31, | (In thousands of US$) | |
2005 | 12,908 | |
2006 | 11,817 | |
2007 | 11,971 | |
2008 | 12,826 | |
2009 | 6,752 | |
Subtotal | 56,274 | |
Current portion—2004 | 12,064 | |
Total | 68,338 | |
NOTE 17 - 17—LEASING OBLIGATIONS
As indicated in Note 8, at December 31, 2002,2003, the Company had 31financed thirty-one jet aircraft underpursuant to operating leases.leases and one jet aircraft pursuant to a capital lease. The Company also leases maintenance facilities, other airport facilities, computer equipment and vehicles underpursuant to capital leases.
The future minimum lease payments required under capital leases, together with the present value of such net minimum lease payments and future minimum lease payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2002,2003, were as follows:
Operating Capital
Payable during the year ending leases leases
December
Payable during the year ending December 31, | Operating (aircraft) | Capital leases | |||
| (In thousands of US$) | |||||
2004 | 124,362 | 4,360 | |||
2005 | 116,485 | 7,267 | |||
2006 | 111,148 | — | |||
2007 | 93,043 | — | |||
2008 | 88,771 | — | |||
2009-2013 | 325,093 | — | |||
2014-2018 | 10,607 | — | |||
Total minimum lease payments | 869,509 | 11,627 | |||
Less: Amount representing interest | (548 | ) | |||
Present value of minimum lease payments | 11,079 | ||||
Less: Current portion of obligation | (3,995 | ) | |||
Long-term portion of leasing obligations | 7,084 | ||||
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, (aircraft) (aircraft)
- ------------------------------ -------- --------
(In thousands of US$)
2003 143,942 3,943
2004 100,702 3,918
2005 85,060 6,953
2006 84,295 -
2007 74,872 -
2008 - 2012 345,369 -
2013 - 2017 31,694 -
-------- -------
Total minimum lease payments 865,934 14,814
-------- -------
Less: Amount representing interest (51) -
Present value of minimum lease payments - 14,763
Less: Current portion of obligation - (3,909)
-------- -------
Long-term portion of leasing obligations - 10,854
======== =======
F - 26
NOTE 18 - SHAREHOLDERS'18—SHAREHOLDERS’ EQUITY
a) Changes in Shareholders'Shareholders’ equity
The changes in shareholders'shareholders’ equity during 2000, 2001, 2002 and 20022003 were as follows:
| Retained earnings | |||||||||||||||||||||
Number of shares | Common stock | Reserves | (Deficit) in development period of subsidiary | Accumulated earnings | Interim dividends | Net income for the year | Total | ||||||||||||||
| (In thousands of US$ except Number of shares) | |||||||||||||||||||||
Balances at December 31, 2000 | 318,909,090 | 134,303 | 2,620 | (872 | ) | 113,919 | (9,998 | ) | 48,386 | 288,358 | |||||||||||
Transfer to accumulated earnings | — | — | — | — | 38,388 | 9,998 | (48,386 | ) | — | ||||||||||||
Final dividends paid | — | — | — | — | (4,515 | ) | — | — | (4,515 | ) | |||||||||||
Deficit in development period of subsidiary | — | — | — | (6,153 | ) | — | — | — | (6,153 | ) | |||||||||||
Net income for the year 2001 | — | — | — | — | — | — | 10,842 | 10,842 | |||||||||||||
Balances at December 31, 2001 | 318,909,090 | 134,303 | 2,620 | (7,025 | ) | 147,792 | — | 10,842 | 288,532 | ||||||||||||
Transfer to accumulated earnings | — | — | — | — | 10,842 | — | (10,842 | ) | — | ||||||||||||
Final dividends paid | — | — | — | — | (1,407 | ) | — | — | (1,407 | ) | |||||||||||
Deficit in development period of subsidiary | — | — | — | (113 | ) | — | — | — | (113 | ) | |||||||||||
Interim dividends | — | — | — | — | — | (8,958 | ) | — | (8,958 | ) | |||||||||||
Net income for the year 2002 | — | — | — | — | — | — | 30,808 | 30,808 | |||||||||||||
Balances at December 31, 2002 | 318,909,090 | 134,303 | 2,620 | (7,138 | ) | 157,227 | (8,958 | ) | 30,808 | 308,862 | |||||||||||
Transfer to accumulated earnings | — | — | — | 7,138 | 14,712 | 8,958 | (30,808 | ) | — | ||||||||||||
Final dividends paid | — | — | — | — | (4,854 | ) | — | — | (4,854 | ) | |||||||||||
Interim dividends | — | — | — | — | — | (34,999 | ) | — | (34,999 | ) | |||||||||||
Net income for the year 2003 | — | — | — | — | — | — | 83,555 | 83,555 | |||||||||||||
Balances at December 31, 2003 | 318,909,090 | 134,303 | 2,620 | — | 167,085 | (34,999 | ) | 83,555 | 352,564 | ||||||||||||
b) Capital
The authorized and paid-in capital of the Company is ThUS$134,303 at both December 31, 20012002 and 20022003 and corresponds to 318,909,090 shares without nominalpar value.
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
c) Other reserves
Reserves at December 31 of each year were as follows:
At December 31,
2001 2002
---- ----
(In thousands of US$)
Reserve for adjustment of value of fixed assets...... 2,556 2,556
Reserve for adjustment of leased fixed assets........ 64 64
----- -----
Total....................................... 2,620 2,620
===== =====
| At December 31, | ||||
| 2003 | 2002 | |||
| (In thousands of US$) | ||||
Reserve for adjustment of the value of fixed assets | 2,556 | 2,556 | ||
Reserve for adjustment of the value of leased fixed assets | 64 | 64 | ||
Total | 2,620 | 2,620 | ||
These reserves are not distributable and may only be used for capitalization of the Company.
F - 27
d) Dividends
At the Annual General Meeting held on April 28, 2000, the shareholders agreed to
distribute a final dividend of ThUS$ 10,387 (US$ 0.032257 per share) with
respect to net income for 1999.
At a meeting of the Board of Directors held on December 26, 2000, the directors
agreed to distribute an interim dividend of ThUS$ 9,998 (US$ 0.03135 per share)
with respect to net income for 2000. These dividends were paid on January 19,
2001.
At the Annual General Meeting held on April 26, 2001, the shareholders agreed to distribute a final dividend of ThUS$4,515 (US$0.01416 per share) with respect to net income for 2000.
At the Annual Shareholders'Shareholders’ Meeting held on April 26, 2002, the shareholders agreed to distribute a final dividend of ThUS$1,407 (US$0.00442 per share) with respect to net income for 2001.
At a meeting of the Board of Directors held on December 26, 2002, the directors agreed to distribute an interim dividend of ThUS$8,958 (US$0.02809 per share) with respect to net income for 2002.
At the Annual General Meeting held on April 25, 2003, the shareholders agreed to distribute a final dividend of ThUS$13,812 (US$0.043309 per share) with respect to net income for 2002, considering an interim dividend of ThUS$8,958 (US$0.028099 per share). These dividends of ThUS$4,854 (US$0.01521 per share) were paid during May, 2003.
At an extraordinary meeting of the Board of Directors held on August 1, 2003, the directors agreed to distribute an interim dividend of ThUS$11,583 (US$0.03632 per share) with respect to net income for 2003.
At a meeting of the Board of Directors held on October 26, 2003, the directors agreed to distribute an interim dividend of ThUS$23,416 (US$0.073425 per share) with respect to net income for 2003.
e) Majority shareholders
The Majority Shareholdersmajority shareholders of the Company at December 31, 2002,2003, were as follows:
Percentage of
Ownership
-------------
%
Inversiones Costa Verde Ltda. 32.00
| Percentage of Ownership | ||
| % | ||
Inversiones Costa Verde Ltda. y Comandita por acciones | 31.80 | |
Axxion S.A. | 20.64 | |
Tres Mares S.A. | 15.05 | |
Inversiones Santa Cecilia S.A. | 5.83 | |
Inversiones Santa Blanca S.A. | 3.91 | |
Comercial Los Lagos Limitada | 3.90 | |
Total | 81.13 | |
LAN CHILE S.A. 20.64
Tres Mares S.A. 15.87
Inversiones Santa Cecilia S.A. 7.15
Inversiones Santa Blanca S.A. 3.90
Comercial Los Lagos Limitada 3.90
Inmobiliaria e Inversiones Asturias S.A. 0.30
-----
Total 83.76
=====
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
NOTE 19 - 19—OPERATING EXPENSES
Wages and benefits are summarized as follows:
At December 31,
-------------------------------
2000 2001 2002
---- ---- ----
(In thousands of US$)
Flight personnel............................ 54,196 55,325 58,611
Maintenance personnel....................... 25,396 23,808 23,980
Ground personnel............................ 49,292 50,731 49,043
Administrative and corporate employees...... 71,376 73,157 83,644
------- ------- -------
Total.............................. 200,260 203,021 215,278
======= ======= =======
F - 28
| At December 31, | ||||||
| 2003 | 2002 | 2001 | ||||
| (In thousands of US$) | ||||||
Flight personnel | 66,418 | 58,611 | 55,325 | |||
Maintenance personnel | 26,702 | 23,980 | 23,808 | |||
Ground personnel | 53,873 | 49,043 | 50,731 | |||
Administrative and corporate employees | 93,931 | 83,644 | 73,157 | |||
Total | 240,924 | 215,278 | 203,021 | |||
Other operating expenses include general and administrative expenses of ThUS$
62,40181,173 in 2000,2003, ThUS$88,132 in 2002 and ThUS$65,006 in 2001 and ThUS$ 88,132 in 2002.
2001.
Other operating expenses also include advertising, promotional, and marketing expenses of ThUS$ 14,60811,550 in 2000,2003, ThUS$9,001 in 2002 and ThUS$13,693 in 2001 and ThUS$ 9,001 in 2002.
2001.
NOTE 20 - 20—OTHER INCOME (EXPENSE) - —NET
Other income (expense) - —net for each year are summarized as follows:
| For the year ended December 31, | |||||||||
| 2003 | 2002 | 2001 | |||||||
| (In thousands of US$) | |||||||||
Non-operating income: | |||||||||
Swap fuel contracts | 12,302 | — | — | ||||||
Foreign currency transactions (net) | 12,103 | — | — | ||||||
Earnings on investments (equity method) | 275 | 125 | 196 | ||||||
Proportionate share of gain on sale of shares by SITA Foundation | — | — | 5,997 | ||||||
Income from financial advisory services and others | 485 | 23,555 | 5,001 | ||||||
Other | 6,534 | 4,139 | 4,043 | ||||||
Total | 31,699 | 27,819 | 15,237 | ||||||
| For the year ended December 31, | |||||||||
| 2003 | 2002 | 2001 | |||||||
| (In thousands of US$) | |||||||||
Non-operating expenses: | |||||||||
Swap fuel contracts | — | (5,454 | ) | (10,526 | ) | ||||
Amortization of goodwill | (3,272 | ) | (3,150 | ) | (2,417 | ) | |||
Foreign currency transactions (net) | — | (4,699 | ) | (3,816 | ) | ||||
Losses on investments (equity method) | (951 | ) | (480 | ) | (686 | ) | |||
Non-recurring indemnities paid to employees | (1,121 | ) | — | (5,540 | ) | ||||
Other | (2,232 | ) | (850 | ) | (634 | ) | |||
Total | (7,576 | ) | (14,633 | ) | (23,619 | ) | |||
Other income (expense)—net | 24,123 | 13,186 | (8,382 | ) | |||||
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
During 2001, the Company made the decision to reduce its operations by approximately 10%, with the most substantial reduction being in flights to the United States due to the aftermath of the September 11 terrorist attacks. In connection with the reduction in service, the Company reduced its workforce by approximately 7%, resulting in Non-operatingnon-operating expenses of ThUS$5,540 due to the payment of indemnities to terminated employees during 2001. These costs include
ThUS$ 5,105 fromrepresent the termination of 750761 maintenance, cabin crew and administrative employees during the year. The remaining ThUS$ 435 relatesAdditional payments, due to a
provision recorded by the Company in Accounts payable at December 31, 2001 and
is related to the termination of an additional 11 administrative and corporate
employees whoemployee claims resulting from these actions were notified of their termination prior to year end.
paid during 2003.
The Company is a member of the SITA Foundation, whose principal asset was its equity interest in Equant, N.V., an international data network services company.
F - 29
In June 2001, SITA exchanged the total amount of its outstanding shares in Equant for shares in France Telecom. In July 2001, SITA sold its interest in France Telecom and distributed the proceeds on a pro ratapro-rata basis to members, resulting in a distribution to the Company of ThUS$6,044, of which ThUS$5,997 was recorded as a non-operating gain for the year ended December 31, 2001. The Company'sCompany’s contribution to SITA is recorded at cost and is not material.
significant.
NOTE 21 - 21—COMMITMENTS AND CONTINGENCIES
At December 31, 20012002 and 2002,2003, the Company had granted the following mortgages, liens and guarantees:
Direct Guarantees (In thousands of US$):
Amount outstanding at
Type of Assets Pledged as Balance sheet date
Guarantee Collateral Type Book Value 2001 2002
--------- ----------------- ---------- ---- ----
Mortgage and Pledge Aircraft and Motors 717,086 693,483 656,428
Mortgage Building 9,775 10,627 9,873
Pledge Motors 7,067 6,001 4,499
Pledge Spare parts 975 - -
Pledge Rental sublease contract - 138,488 114,220
Co-signer Rental contract - 119,324 3,500
Pledge Rental contract - 69,446 139,068
Type of Guarantee | Assets Pledged as Collateral | Amount outstanding at Balance sheet date | ||||||
| Type | Book Value | 2003 | 2002 | |||||
Mortgage and pledge | Aircraft and motors | 687,900 | 609,587 | 656,428 | ||||
Mortgage | Building | 9,594 | 9,327 | 9,873 | ||||
Pledge | Motors | 6,916 | 3,000 | 4,499 | ||||
Pledge | Spare parts | 559 | — | — | ||||
Pledge | Rental sublease contract | — | 103,438 | 114,220 | ||||
Co-signer | Rental contract | — | 3,500 | 3,500 | ||||
Pledge | Rental contract | — | 133,595 | 139,068 | ||||
Indirect Guarantees:
The Company guaranteed a ThUS$3,500 letter of credit dated April 26, 2001, granted in favor of Alcyone FSC Corporation ("Alcyone"(“Alcyone”) due to an Aircraft Lease Agreement ("Lease"(“Lease”) between Lan Chile Cargo S.A. ("(“Lan Cargo"Cargo”) and Alcyone. The Company guarantee is valid until the lease expiration date (November 1, 2006).
The guarantee arose as a result of the support of the Company to its subsidiary
(Lan Cargo) as a requirement of and was required by Alcyone, the owner of the aircraft (Alcyone) for leasing
thereof.aircraft. As a result, the Company would be liable for repayment of such letter of credit, should Lan Cargo not fulfill its obligation under the lease. No liability is carried on the balance sheet for the Company'sCompany’s obligation under the guarantee.
Commitments
On August 23, 1999,March 19, 1998, the Company signedentered into a purchase commitmentagreement for the acquisition
of 7twenty Airbus A-340A320 aircraft at a maximum cost of ThUS$ 700,000. The Company also
has a call(with the option to purchase an additional 14twenty aircraft). The estimated cost of these twenty aircraft is
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
ThUS$840,000. This agreement was subsequently amended to require the delivery of A319 aircraft instead of A320 aircraft. In August 1999, the Company entered into another agreement to purchase seven Airbus A-340A340 aircraft (with an option to purchase an additional fourteen aircraft in the future). Theestimated maximum cost for these seven aircraft is ThUS$700,000. At December 31, 2003, the remaining commitment for the purchase of four A319 and three A340 aircraft amounted to ThUS$468,000.
During November 2003, Lan Chile S.A. agreed with Airbus Industries and a bank syndicate led by Credit Lyonnais to cancel the delivery of one Airbus A340 aircraft which was scheduled for 2004. At the same time, Lan Chile S.A. exercised call options for three Airbus A319 aircraft.
In order to guarantee its obligations related to the leasing and maintenance of aircraft, Lan Chile Cargo S.A. has issued stand-by letters of credit for ThUS$
13,2506,250 with expiration dates ranging from April 2004 to December 2003.
October 2004.
Contingencies
At December 31, 2002,2003, the Company was a defendant in five labor disputes filed by the Pilots'Pilots’ Union and the Cabin Crew Union, requesting the payment of bonuses for the years ended December 31, 1999, 2000, 2001, and 2001.2002. The Company has made no provision for these amounts because management believes that the outcome of the suits will be favorable to the Company and any losses incurred will not be material.
F - 30
At December 31, 2002,2003, the Company was a defendant in a number of commercial lawsuits of the type normally associated with the Company'sCompany’s business and involving claims for damages for insignificant amounts. The Company has made no provision for these amounts because management believes that most of the resulting judgments will be favorable and any losses incurred will not result in any material liability to the Company.
Covenants
As a result of the various contracts entered into by Lan Chile to finance the Boeing 767 aircraft that are backedfinanced by the Export - ImportExport-Import Bank of the United States, the Company is required to maintaincomply with certain financial ratios. The
financing contracts also contain restrictions regarding shareholder composition and disposal of assets.
As a result of the contracts with Pelican Finance Ltd. for the securitization of
future credit card receivables, the proceeds from credit card receivables in the
United States must be ceded to Pelican Finance Ltd. during the period from March
2001 to June 2009.
The loan agreements with Dresdner Bank Lateinamerika A.G. and BBVA - Banco Bhif placehave placed restrictions on the Company'sCompany’s ability to dispose of certain of its Fixedfixed assets.
As a result of the various contracts entered into by Lan Chile S.A.the Company to finance the Airbus A320 aircraft that are guaranteed by various European export credit agencies, the Company is required to maintaincomply with certain financial ratios. The
financing agreements also place restrictions on the Company regarding shareholder composition and disposal of assets.
As of December 31, 2002,2003, the Company was in compliance with all covenants.
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
NOTE 22 - 22—FOREIGN CURRENCIES
Foreign currency assets and liabilities at December 31 of each year are summarized as follows:
At December 31,
2001 2002
---- ----
(In thousands of US$)
Balances receivable in:
Chilean pesos......................... 68,549 65,567
Other currencies...................... 31,524 20,608
------- -------
Total 100,073 86,175
======= =======
Balances payable in:
Chilean pesos......................... 31,089 41,276
Other currencies...................... 6,986 7,618
------- -------
Total............................. 38,075 48,894
======= =======
F - 31
| At December 31, | ||||
| 2003 | 2002 | |||
| (In thousands of US$) | ||||
Assets denominated in: | ||||
Chilean pesos | 86,981 | 65,567 | ||
Other currencies | 37,421 | 20,608 | ||
Total | 124,402 | 86,175 | ||
Liabilities denominated in: | ||||
Chilean pesos | 33,698 | 41,276 | ||
Other currencies | 9,485 | 7,618 | ||
Total | 43,183 | 48,894 | ||
NOTE 23 - DIRECTORS' REMUNERATION
In23—SEGMENT REPORTING
The Company reports segment information in accordance with the Company's bylaws, directors received the following
amounts with respect to attendance fees and fees for other services:
Attendance Other
Year fees fees Total
- ---- ---- ---- -----
(In thousands of US$)
2000 74 13 87
2001 76 - 76
2002 85 - 85
NOTE 24 - SEGMENT REPORTING
In 1998, Lan Chile adopted Statement of Financial Accounting Standards No.131,
"DisclosuresStandard No. 131, “Disclosures About Segments of an Enterprise and Related Information."Information” (“SFAS 131”). SFAS 131 establishes standards for reporting information about operating segments in annual financial statements as well as related disclosures about products and services, geographic areas and major customers. Operating segments are defined as components of an enterprise about which separate financial statement information is available that is evaluated regularly by the chief operating decision maker in making decisions about allocating resources and assessing performance. The Company considers that it has one reportable segment. Lan
Chile'sThe Company’s operating revenues by geographic region are summarized below:
Year ended December 31,
----------------------------
2000 2001 2002
---- ---- ----
(In thousands of US$)
Domestic .................................. 221,016 248,613 278,040
North America.............................. 866,459 818,521 816,060
South America (excluding Chile)............ 105,743 114,477 89,446
Europe .................................. 203,661 203,038 182,796
Pacific .................................. 28,275 23,696 30,480
Lan Peru .................................. - 19,996 55,613
--------- --------- ---------
Total............................. 1,425,154 1,428,341 1,452,434
========= ========= =========
| Year ended December 31, | ||||||
| 2003 | 2002 | 2001 | ||||
| (In thousands of US$) | ||||||
Domestic (Chile) | 294,076 | 278,040 | 248,613 | |||
North America | 831,832 | 816,060 | 818,521 | |||
South America (excluding Chile) | 342,223 | 145,058 | 134,473 | |||
Europe | 134,177 | 182,796 | 203,038 | |||
Pacific | 36,492 | 30,480 | 23,696 | |||
Total | 1,638,800 | 1,452,434 | 1,428,341 | |||
The Company attributes operating revenues to the geographical area in which the relevant overseas point of the flight lies. The Company'sCompany’s tangible assets consist primarily of flight equipment which is mobile across geographic markets and, therefore, has not been allocated.
F - 32
NOTE 25 - 24—DIFFERENCES BETWEEN CHILEAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
Accounting principles generally accepted in Chile ("(“Chilean GAAP"GAAP”) vary in certain important respects from accounting principles generally accepted in the United States ("(“US GAAP"GAAP”),. Such differences involve
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
certain methods for measuring the amounts shown in the financial statements, as well as additional disclosures required by US GAAP.
1
1. Differences in measurement methods
The principal methods applied in the preparation of the accompanying financial statements, which have resulted in amounts which differ from those that would have otherwise been determined under US GAAP, are as follows:
a) Deferred income tax
As discussed in Note 13, effective January 1, 2000, the Company began applying Technical Bulletin No. 60 of the Chilean Institute of Accountants concerning deferred income taxes. Technical Bulletin No. 60 requires the recognition of deferred income taxes for all temporary differences arising after January 1, 2000, whether recurring or not, using an asset and liability approach. For US GAAP purposes, the Company has always applied SFASStatement of Financial Accounting Standard (“SFAS”) No. 109, "Accounting“Accounting for Income Taxes"Taxes”, whereby income taxes are also recognized using substantially the same asset and liability approach. Deferred income tax assets and liabilities established for temporary differences between the financial reporting basis and tax basis of the Company'sCompany’s assets and liabilities are based on enacted rates at the dates that the temporary differences are expected to reverse. The effect of changes in tax rates is included in income for the period that includes the enactment date.
After the year ended December 31, 1999, Chilean GAAP and US GAAP differ due to the recognition for US GAAP purposes of the reversal of deferred income taxes included in the US GAAP reconciliations in years prior to 2000.
Prior to the implementation of Technical Bulletin No. 60, no deferred income taxes were recorded under Chilean GAAP if the related timing differences were expected to be offset in the year that they were projected to reverse by new timing differences of a similar nature.
Furthermore, deferred income tax assets under both Chilean and US GAAP should be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The valuation allowance should be sufficient to reduce the deferred income tax asset to an amount that is more likely than not to be realized.
The effect of providing for deferred income taxes for the differences between the amounts shown for assets and liabilities in the balance sheet and the tax bases of those assets and liabilities is included in paragraph 1 m)n) below and certain disclosures required under FAS 109 are set forth under paragraph 2 b) below.
F - 33
b) Goodwill
Under Chilean GAAP, the excess of cost over the net book value of a purchased company is recorded as goodwill (the book value purchase method), which is then amortized to income over a maximum period of twenty years. Amortization of goodwill may be accelerated if the acquired company generates sufficient income to absorb the additional amortization in any given year. The excess of net book value over the cost of an investment is considered to be negative goodwill under Chilean GAAP and is also amortized to income over a maximum period of twenty years. The amortization of negative goodwill may be accelerated if the acquired company sustains losses.
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
Under US GAAP, goodwill and other intangibles are accounted for under SFAS No. 141, "Business Combinations"“Business Combinations” and SFAS No. 142, "Goodwill“Goodwill and Other Intangible Assets"Assets”. SFAS No. 141 requires the purchase method of accounting be used for all business combinations initiated after June 30, 2001;2001 and prohibits the use of the pooling-of-interests method of accounting is prohibited after this date. With respect to the purchase method of accounting, the cost of an investment is assigned to the tangible and identified intangible assets acquired and liabilities assumed on the basis of their fair values at the date of acquisition. AnAny excess of cost over the fair value of net assets acquired is recorded as goodwill. If an excess of acquired net assets over cost arises, the excess is allocated to reduce proportionally the values assigned to noncurrent assets (except long-term investments in marketable securities) in determining their fair values. If the allocation reduces the noncurrent assets to zero value, the remainder of the excess over cost (negative goodwill) is written off immediately as an extraordinary gain. SFAS No. 141 establishes specific criteria for the recognition of intangible assets separately from goodwill and requires unallocated negative goodwill to be written off immediately as an extraordinary gain (instead of being deferred and amortized).
SFAS No. 142, "Goodwill“Goodwill and Other Intangible Assets"Assets” establishes the following:
o
SFAS No. 142 became effective for years beginning after December 15, 2001. Accordingly, no goodwill amortization expense was recordedceased for US GAAP purposes beginning in 2002.
F - 34
During
As discussed in Note 9, the company made a number of acquisitions in 2002 the Company acquired the remaining ownership interest of SkyNet
Woldwide Express necessary to obtain 100% control. During 2001, the Company
acquired a 60% ownership interest in SkyNet Worldwide Express, a 100% ownership
interest in SkyBox Services Corp., an additional 21% ownership interest in Lan
Peru S.A. and 73% of the outstanding shares of Aerolinheas Brasileiras S.A.
These2003, these acquisitions were recorded underpursuant to the book value purchase method for Chilean GAAP purposes. For the acquisitions in 2002 and the purchase method for US GAAP reconciliation purposes.
However,2003, there were no significant differences in the allocation of the purchase price or the determination of goodwill in these transactions between the two
methods.book value purchase method in accordance with Chilean GAAP and the purchase accounting method required pursuant to SFAS No. 141 in accordance with US GAAP. The companies acquired are not material to the consolidated financial position of the Company and therefore, pro forma financial statements showing the effect on operations as if the acquisitions had been completed at the beginning of the period are not disclosed.
presented.
For US GAAP purposes, the reversal of amortization of goodwill from the purchases made by the Company and the effectspurchase accounting adjustments of conforming these transactionsbusiness acquisitions prior to June 30, 2001 to US GAAP are shown in paragraph 1 m)n) below. As a result of the annual impairment testtests performed by the Company, no adjustment to the currentbook value of goodwill was deemed necessary.
Under Chilean GAAP, the cost of an equity method investment is separated into an investment component (based on the purchase of the proportionate share of equity according to book values) and a goodwill component (based
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
(based on the difference between the amount paid and the proportional book value of the investment). Under US GAAP, these components are combined in one balance sheet caption as an investment, although theand goodwill is allocated to the results of operations over
the yearsdetermined in a manner similar to a consolidated subsidiary.
subsidiary based on proportionate ownership. No disclosure has been presented of the effect of the reclassification between goodwill as determined under Chilean GAAP for equity method investments and goodwill determined under US GAAP as the effect of this reclassification is not significant.
The effects of reclassifying negative goodwill for the acquisitions in 2003 and 2002 as determined under Chilean GAAP to proportionately reduce the values assigned to the non-current assets acquired in accordance with US GAAP are not significant.
c) Revaluation of property and equipment
As mentioned in Note 2 j)k), certain property and equipment are reportedvalued in the financial statements at amounts determined in accordance with a technical appraisal. The revaluation of property and equipment is an accounting principle that is not generally accepted in the United States. The effects of the reversal of this revaluation, as well as of the related accumulated depreciation and depreciation expense for each year, are shown below under paragraph 1 m)n).
d) Minimum dividend
As required by the Chilean Companies Act, unless otherwise decided by the unanimous vote of the issued and subscribed shares, an open stock corporation must distribute a cash dividend in an amount equal to at least 30% of the company'scompany’s net income for each year adjusted for the deficit under developing period as determined in accordance with Chilean GAAP. Since the payment of the 30% dividend out of each year'syear’s income is a legal requirement in Chile, provision has been made in the accompanying US GAAP reconciliation in 1 m)n) below to recognize the corresponding decrease in net equity at December 31 of each year for the difference between 30% of net incomethe minimum dividend and interim dividends paid during the year. Under Chilean GAAP, even though the minimum dividend is a legal requirement, the dividend is not recorded until it is declared by the Company. For 2003, the full amount of the required dividend was declared as an interim dividend and recorded by the Company.
e) Development stage results of operations
For Chilean GAAP purposes, investments in majority-owned subsidiaries in the development stage are recorded by the equity method and the investor'sinvestor’s proportional share of the subsidiary'ssubsidiary’s results of operations are taken torecorded as a reserve which forms part of the investor's shareholders'shareholders’ equity. For US GAAP purposes, majority-owned subsidiaries in the development stage are consolidated and the results of their operations are charged directly to income. The difference between charging development stage results to equity under Chilean GAAP and to income under US GAAP has been included in the reconciliation of net income under paragraph 1 m)n) below. No disclosure of the effect of consolidation of such subsidiaries has been made because the effects are not material.
F - 35
f) Equity method of accounting
As mentioned in Note 21), for Chilean GAAP purposes, investments in related companies are accounted for pursuant to the equity method when the company’s investment represents between 10% and 50% of the voting
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
stock of the investee. For US GAAP purposes prior to February 1, 2003, investments in related companies required the use of the equity method of accounting for investments which give the investor the ability to exercise significant influence over operating and financial policies of the investee. For those companies which were determined to be controlled through the Company’s investment (generally, ownership of over 50% of the outstanding voting shares), US GAAP required consolidation. Subsequent to February 1, 2003, US GAAP requires the determination of whether an entity should be consolidated in accordance with FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 is discussed in more detail under paragraph 2g) below.
Relative to the Company’s investments in related companies, there are no differences in the application of the equity method or consolidation between Chilean GAAP and US GAAP.
g) Monetary correction of subsidiaries
As indicated in Note 2 d), the Chilean peso financial statements of certain of the Company'sCompany’s Chilean subsidiaries are restated through the application of price-level restatements in accordance with Chilean GAAP to show the effects of changes in the purchasing power of the Chilean peso, using indicators published by the National Institute of Statistics. The financial statements of such Chilean subsidiaries are then remeasured to US dollars at the exchange rates prevailing on December 31 of each year.
The inclusion of price-level restatements when the US dollar is the reporting currency is not permitted under US GAAP. However, in the case of the Company, the effects of including price-level restatement at the subsidiary level are not materialsignificant and accordingly the effects of reversing the price-level restatement are not included in the reconciliation of net income and net equity accounts to US GAAP in paragraph 1 m)n) below.
g)
h) Investment securities
Under Chilean GAAP, investments in bonds held by the Company are carried at the lower of cost plus accrued interest or market value and government securities. Under Chilean GAAP, mutual funds are stated at market value based on year-end quoted values and unrealized gains and losses are recorded in the current year Consolidated Statement of Income. Under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, investment securities, which include debt and certain equity securities, are accounted for as follows:
The Company’s investments in bonds and government securities are classified as available for sale securities for the purposes of SFAS No. 115. The effect of the difference between Chilean GAAP and US GAAP in accounting for the Company’s investment in bonds and government securities is included in the reconciliation
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
of reported Net income to Comprehensive income (loss) in accordance with US GAAP in paragraph 1 n) below. There is no difference between Chilean GAAP and US GAAP for the Company’s investments in mutual funds as they are classified as trading securities for the purpose of SFAS No. 115.
i) Presentation in Statement of cash flows
Under Chilean GAAP, payments of leasing obligations subsequent to the date of purchase are treated in the Consolidated Statement of cash flowsCash Flows as additions of property and equipment and classified as cash outflows from investing activities. Under US GAAP, incurring directly relateddirectly-related debt to the seller of property and equipment is a financing transaction and subsequent payments of principal on that debt are thus considered to be cash outflows from financing activities.
As a result of these differences, the Consolidated Statement of cash flowsCash Flows under Chilean GAAP would have to be adjusted as follows to present the statement in accordance with US GAAP:
| Increase (decrease) in cash flow | |||||||||
| 2003 | 2002 | 2001 | |||||||
| (In thousands of US$) | |||||||||
Net cash (used in) provided by financing activities under Chilean GAAP | (117,050 | ) | 64,663 | 189,510 | |||||
Loans repaid | (3,899 | ) | (22,869 | ) | (9,089 | ) | |||
Net cash (used in) provided by financing activities under US GAAP | (120,949 | ) | 41,794 | 180,421 | |||||
Net cash (used in) investing activities under Chilean GAAP | (120,353 | ) | (118,720 | ) | (342,852 | ) | |||
Acquisitions of property and equipment | 3,899 | 22,869 | 9,089 | ||||||
Net cash (used in) investing activities under US GAAP | (116,454 | ) | (95,851 | ) | (333,763 | ) | |||
j) Classification of income and expenses
Under Chilean GAAP, the following income and expenses arising during the years
2000, 2001 and 2002 are classified as Non-operating income and expenses whereas
under US GAAP they would be classified as Operating income and expenses:
Year ended December 31,
---------------------------------------
2000 2001 2002
---- ---- ----
(In thousands of US$)
Non-operating income:
Swap fuel contracts...................................... 8,111 - -
----- ------ -----
8,111 - -
===== ====== =====
Non-operating expenses:
Swap fuel contracts...................................... - 10,526 5,454
Amortization of goodwill................................. 2,091 2,417 3,150
Non-recurring indemnities paid to employees.............. - 5,540 -
----- ------ -----
2,091 18,483 8,604
===== ====== =====
Under Chilean GAAP, consolidated financial statements, the Company recorded a single provision
of ThUS$ 2,999 which is included in Accounts payable, with a corresponding
charge tofollowing income which is included inand expenses arising during the caption Foreign currency transactionsyears 2003, 2002 and 2001 are classified as Other income (expense) — net whereas under US GAAP they would be classified as a Non-operating expense. The Company also recorded a deferred tax benefitcomponent of ThUS$ 499 arising from the tax effect of the provision.
ForOperating income and would not be expensed under US GAAP purposes, the provision for exchange losses must be applied to the
individual asset and liabilities to which the net loss relates. The following is
the effect that the allocation of the provision would have on the various
captions of the consolidated balance sheet at DecemberGAAP:
| Year ended December 31, | ||||||
| 2003 | 2002 | 2001 | ||||
| (In thousands of US$) | ||||||
Non-operating income: | ||||||
Swap fuel contracts | 12,302 | — | — | |||
| 12,302 | — | — | ||||
Non-operating expenses: | ||||||
Swap fuel contracts | — | 5,454 | 10,526 | |||
Non-recurring indemnities paid to employees | 1,121 | — | 5,540 | |||
| 11,181 | 5,454 | 16,066 | ||||
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2001:
(In thousands of US$)
---------------------
Decrease in assets:
Cash (272)
Time deposits (41)
Accounts receivable - trade and other (3,352)
Prepaid and recoverable taxes (365)
Other current assets (16)
Property and equipment (71)
Decrease in liabilities:
Accounts payable 380
Other current liabilities 477
Provisions 261
------
Total decrease in accounts payable (2,999)
=======
j)2003
k) Internal use software
As mentioned in Note 2 j)k), under Chilean GAAP all disbursements for the development of internal use software are charged to the results of operations as incurred. Under US GAAP, certain costs related to internal use software are capitalized while others are charged to the results of operations. External direct costs of materials and services consumed in developing or obtaining internal use computer software, payroll and payroll-related costs for employees who are directly associated with and who devote time to the internal use computer software project and interest costs incurred while developing internal use computer software are capitalized. Maintenance, training, data conversion and reengineering costs are charged to the results of operations as incurred. However, in the case of the Company, the costs relating to internal use software are not materialsignificant and accordingly, these costs are not included in the reconciliation to US GAAP of net income and net equity accounts in paragraph 1 m)n) below.
k)
l) Recognition of tax loss carryforwards
At December 31, 2000, Lan PeruPerú had tax loss carryforwards of ThUS$7,590 resulting in a deferred tax asset of ThUS$2,326. A valuation allowance of ThUS$2,326 was provided to offset the entire deferred tax asset because at that time it appeared unlikely that these tax losses would be utilized in future years. Lan PeruPerú was an equity method investee at December 31, 2000 but as discussed in
Note 2 b),and during 2001 the Company acquired an additional 21% ownership interest and Lan PeruPerú became a consolidated subsidiary. No deferred tax asset was recognized under Chilean GAAP on the date of purchase. During 2001, Lan PeruPerú had taxable income and utilized ThUS$1,673 of the deferred tax asset, leaving a balance of ThUS$653 which is now expected to be realized in future years.
F - 37
m)n) below includes an adjustment to decrease goodwill on the purchase of Lan PeruPerú in 2001 by ThUS$488 and increase the current income provision by the same amount. The adjustment is based on the acquired ownership interest of 21% applied to the deferred tax asset of ThUS$2,326 recognized in 2001.
l)
m) Derivative financial instruments
The Company uses interest rate swapsswap and cap agreements to convertreduce its exposure from variable interest bearing liabilities and commitments, and has entered into a portiontreasury rate lock contract in order to hedge exposure of its variable-rate
debt to fixed-rate debt.changes in the treasury rate. It also enters into jetcommodity (jet fuel priceand West Texas intermediate) swap and call contracts to fix the price for a given quantity of fuelthe aforementioned commodity, and “costless collars” which are a combination of call and put options so as from 2001 reduces its exposure
to variations inensure a price range for jet fuel. In order to reduce the impact of foreign exchange rates forrate fluctuations, the Company enters into foreign currencies through the use of
forwardexchange hedge contracts.
Under Chilean GAAP, derivatives are accounted for in accordance with Technical Bulletin 57, "Accounting“Accounting for Derivative Contracts"Contracts” (TB 57). Under TB 57, all derivative financial instruments should be recognized on the balance sheet at their fair value. In addition, TB 57 requires that derivative financial instruments be classified as Non-hedgingnon-hedging (investment) instruments and Hedginghedging instruments, the latter further divided into those covering existing
transactionsrecognized assets or liabilities or an unrecognized firm commitment and those covering anticipatedforecasted transactions.
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
Contracts to cover existing transactions hedgerecognized assets or liabilities or an unrecognized firm commitment act as hedging instruments against the risk of a change in the fair value of a hedged item. The differences resulting from the changes in the fair value of both the hedged item and the derivative instrument should be accounted for as follows:
a. If the net effect is a loss, it should be recognized in earnings in
the period of change.
b. If the net effect is a gain, it should be recognized when the contract
is closed and accordingly deferred on the balance sheet.
c. If the net effect is a gain and net losses were recorded on the
transaction in prior years, a gain should be recognized in earnings in
the current period up to the amount of net losses recorded previously.
d. If the effect is a net loss and net gains were recorded (as a deferred
revenue) on the transaction in prior years, the gain should be
utilized to offset the net loss before recording the remaining loss in
the results of operations for the year.
| a. | If the net effect is a loss, it should be recognized in earnings in the period of change. |
| b. | If the net effect is a gain, it should be recognized when the contract is closed and accordingly deferred on the balance sheet. |
| c. | If the net effect is a gain and net losses were recorded on the transaction in prior years, a gain should be recognized in earnings in the current period up to the amount of net losses recorded previously. |
| d. | If the effect is a net loss and net gains were recorded (as a deferred revenue) on the transaction in prior years, the gain should be utilized to offset the net loss before recording the remaining loss in the results of operations for the year. |
Contracts to cover anticipatedforecasted transactions are those that have the objective of protecting cash flow risks of a transaction expected to occur in the future (cash(a cash flow hedge). The hedging instrument should be recorded at its fair value and the changes in fair value should be stated on the balance sheet as unrealized gains or losses. When the contract is closed, the unrealized gains or losses on the derivative instrument should be recognized in earnings without affecting the cost or sales price of the asset acquired or sold in the transaction. However, probable losses arising from purchase commitments should not be deferred.
Non-hedging (investment) instruments should also be presented at their fair value, with changes in fair value reflected in the earnings of the period in which the change in fair value occurs.
F - 38
For US GAAP reconciliation purposes only, as of January 1, 2001, the Company has adopted FASSFAS No. 133 "Accounting“Accounting for Derivative Instruments and Hedging Activities,"Activities”, as amended by FASSFAS 137 and FASSFAS 138 on the same matter (collectively referred to herein as "FAS 133"“SFAS 133”). FASSFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivativesderivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of
financial positionConsolidated Balance Sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction or to the variability of the cash flows that are to be received or paid in connection with a recognized asset or liability or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, a foreign-currency-denominated forecasted transaction or a recognized asset or liability.
As indicated below in paragraph 2 e)f), the accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.
Prior to the issuance of FAS 133, there was no single authoritative source of
accounting guidance for derivative financial instruments. The accounting for
derivatives was influenced by the company's motivation, the risks being managed,
products being used, and the type of market for the product.
There were two basic methods of accounting for derivatives: mark-to-market
accounting and accrual (or deferral) accounting. Generally, derivatives were
required to be marked-to-market unless they qualified for hedge accounting or
synthetic instrument accounting. Consequently, accrual (or deferral) accounting
for derivatives was in most cases applicable only in situations in which
derivatives were linked to a specific asset, liability, firm commitment or, in
some cases, an anticipated transaction.
The Company's practice for Chilean GAAP purposes has generally been to recognize
the results of its derivative contracts at the termination date of each contract
instead of its fair value at each closing balance sheet date. This is because
the gains and losses on the contracts are shown as deferred assets or
liabilities under Chilean GAAP and the fair value of the contracts has not been
considered to be material in relation to total assets.
Prior to the adoption of FAS 133, no recognition was given to the fair value of
the fuel contracts in the Company's US GAAP reconciliation because derivative
gains and losses from hedges of forecasted transactions were deferred as
liabilities or assets in the balance sheet under FAS 52 (Foreign Currency
Translation) and FAS 80 (Accounting for futures contracts), amended and
superseded by FAS 133, respectively. In addition, the effect of recording such
liabilities and assets was not considered to be material in relation to total
assets of the Company.
The interest rate swaps also were not recognized in the US GAAP reconciliation
of the Company prior to the adoption of FAS 133 because there was no specific
requirement that they be recognized under then existing US GAAP and the amounts
involved were not considered to be significant.
With the adoption of FAS 133, the fair value of all open derivative contracts is
being recognized for US GAAP reconciliation purposes at each balance sheet date.
The effect of the differences in accounting for derivative financial instruments under Chilean and US GAAP is included in paragraph 1 m)n) below. Additional information concerning derivative financial instruments that is required to be disclosed under FASSFAS 133 is set forth below in paragraph 2 e)f).
F - 39
m)
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
n) Effects of conforming to US GAAP
The adjustments to reported net income required to conform with US GAAP are as follows:
| For the year ended December 31, | |||||||||
| 2003 | 2002 | 2001 | |||||||
| (In thousands of US$) | |||||||||
Net income in accordance with Chilean GAAP financial statements | 83,555 | 30,808 | 10,842 | ||||||
Deferred income tax provision (par. 1 a) | (18 | ) | 305 | (1,040 | ) | ||||
Purchase accounting adjustments of property and equipment on Lan Chile Cargo S.A acquisition (par. 1 b) | (64 | ) | (64 | ) | (1,622 | ) | |||
Reversal of depreciation of the revaluation from technical appraisal of property and equipment (par. 1 c) | 30 | 6 | 17 | ||||||
Deficit during development period of certain subsidiaries (par. 1 e) | — | (113 | ) | (6,153 | ) | ||||
Reversal of utilization of tax loss carryovers in Lan Perú (par. 1 l) | — | — | (488 | ) | |||||
Fair value of derivative not considered to be a hedge (par. 1 m and par. 2 f) | 1,531 | 381 | (2,326 | ) | |||||
Ineffectiveness of cash flow hedges of forecasted jet fuel purchases (par. 1 m and par. 2 f) | 453 | 156 | (156 | ) | |||||
Ineffectiveness of cash flow hedges of forecasted securitization (net of amortization) (par. 1 m and par. 2 f) | 59 | (383 | ) | — | |||||
Effect of goodwill adjustments and reversal of amortization (par. 1 b) | 3,267 | 3,148 | 1,951 | ||||||
Net income in accordance with US GAAP | 88,813 | 34,244 | 1,025 | ||||||
Comprehensive income (loss): | |||||||||
Fair value of cash flow hedges: | |||||||||
Interest rate swaps (par. 1 m and par. 2 f) | 8,298 | (21,517 | ) | (10,873 | ) | ||||
Jet fuel swaps (par. 1 m and par. 2 f) | 9,719 | 20,169 | (14,890 | ) | |||||
Treasury rate lock (par. 1 m and par. 2 f) | 471 | (3,063 | ) | — | |||||
Unrealized gain on investment | 77 | — | — | ||||||
Other comprehensive income (loss) before taxes | 18,565 | (4,411 | ) | (25,763 | ) | ||||
Income tax benefit related to items of other comprehensive income | (3,156 | ) | 905 | 4,225 | |||||
Comprehensive income (loss) in accordance with US GAAP | 104,222 | 30,738 | (20,513 | ) | |||||
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
The adjustments required to conform Total Shareholders’ equity to US GAAP are as follows:
| For the year ended December 31, | |||||||||
| 2003 | 2002 | 2001 | |||||||
| (In thousands of US$) | |||||||||
Total Shareholders’ Equity in accordance with Chilean GAAP financial statements | 352,564 | 308,862 | 288,532 | ||||||
Deferred income tax provision (par. 1 a) | (13,086 | ) | (13,068 | ) | (13,373 | ) | |||
Purchase accounting adjustments of property and equipment arising from Lan Chile Cargo S.A. acquisition (par. 1 b) | 620 | 684 | 748 | ||||||
Reversal of the revaluation of property and equipment (par. 1 c) | — | (30 | ) | (36 | ) | ||||
Minimum dividend required by law, determined in accordance with Chilean GAAP (par. 1 d) | — | (250 | ) | (1,407 | ) | ||||
Reversal of utilization of tax loss carryovers in Perú (par. 1 l) | (488 | ) | (488 | ) | (488 | ) | |||
Fair value of derivative not considered to be a hedge (par. 1 m and par. 2 f) | (414 | ) | (1,945 | ) | (2,326 | ) | |||
Ineffectiveness of cash flow hedges of forecasted jet fuel purchases (par. 1 m and par. 2 f) | 453 | — | (156 | ) | |||||
Ineffectiveness of cash flow hedge of forecasted securitization (net of amortization) (par. 1 m and par. 2 f) | (324 | ) | (383 | ) | — | ||||
Effect of goodwill adjustments and reversal of amortization (par. 1 b) | (6,198 | ) | (9,465 | ) | (12,613 | ) | |||
Total Shareholders’ Equity in accordance with US GAAP | 333,127 | 283,917 | 258,881 | ||||||
Accumulated other comprehensive income (loss) | (25,044 | ) | (21,538 | ) | — | ||||
Other comprehensive income (loss) | 15,409 | (3,506 | ) | (21,538 | ) | ||||
Accumulated other comprehensive income (loss) in accordance with | (9,635 | ) | (25,044 | ) | (21,538 | ) | |||
Total shareholder’s equity in accordance with US GAAP including accumulated other comprehensive income (loss) | 323,492 | 258,873 | 237,343 | ||||||
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
The changes in Total Shareholders’ equity determined under US GAAP are summarized as follows:
| In thousands of US$ | |||
Balance at December 31, | 259,538 | ||
Reversal of | 4,240 | ||
Distribution of | (4,515 | ) | |
Accrued minimum dividend at December 31, 2001 | (1,407 | ) | |
Other comprehensive loss: | |||
Loss from | (25,763 | ) | |
Income tax benefit related to items of other comprehensive loss | 4,225 |
Net income for the year | 1,025 | ||
Balance at December 31, | 237,343 | ||
Balance at December 31, 2001 | 237,343 | ||
Reversal of accrued minimum dividend at December 31, 2001 | 1,407 | ||
Distribution of final | (1,407 | ) | |
Distribution of interim 2002 dividend | (8,958 | ) | |
Accrued minimum dividend at December 31, | (250 | ) | |
Other comprehensive loss: | |||
Loss from fair value of cash flow hedges | (4,411 | ) | |
Income tax benefit related to items of other comprehensive loss | 905 | ||
Net income for the year | 34,244 | ||
Balance at December 31, | 258,873 | ||
Balance at December 31, | 258,873 | ||
Reversal of accrued minimum dividend at December 31, | 250 | ||
Distribution of final | (4,854 | ) | |
Distribution of interim | (34,999 | ) | |
Other comprehensive loss: | |||
Loss from fair value of cash flow hedges | 18,488 | ||
Unrealized gain on investment | 77 | ||
Income tax benefit related to items of other comprehensive loss | (3,156 | ) | |
Net income for the year | 88,813 | ||
Balance at December 31, | 323,492 | ||
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
2. Additional US GAAP disclosure requirements
The information set forth below is required under US GAAP but not under Chilean GAAP.
a) Earnings per share
The following disclosure of earnings per share information is not generally required for presentation in financial statements under Chilean GAAP but is required under US GAAP:
Year ended December 31,
-------------------------
2000 2001 2002
---- ---- ----
(In thousands of US$)
Basic earnings per share under Chilean GAAP 0.15 0.03 0.10
Basic earnings per share under US GAAP 0.16 0.00 0.11
Weighted average number of shares of common stock
Outstanding (in thousands) 318,909 318,909 318,909
======= ======= =======
| Year ended December 31, | ||||||
| 2003 | 2002 | 2001 | ||||
| (In thousands of US$) | ||||||
Earnings per share under Chilean GAAP | 0.26 | 0.10 | 0.03 | |||
Basic and diluted earnings per share under US GAAP | 0.28 | 0.11 | 0.00 | |||
Weighted-average number of shares of common stock outstanding for basic and diluted earnings per share (in thousands) | 318,909 | 318,909 | 318,909 | |||
The earnings per share data shown above is determined by dividing net income for both Chilean GAAP and US GAAP purposes by the weighted averageweighted-average number of shares of common stock outstanding during each year.
F - 42
b) Investment securities
Shown below are the cost, gross unrealized gain and losses and approximate fair value of marketable securities under USGAAP (see paragraph 1g):
Cost 2003 | Gross 2003 | Gross 2003 | Fair 2003 | |||||
| (In thousands of US$) | ||||||||
Bonds | 60,117 | — | 77 | 60,194 | ||||
Government securities | 494 | — | — | 494 | ||||
Total securities available for sale | 60,611 | — | 77 | 60,688 | ||||
At December 31, 2002, the Company had investment in bonds with an amortize cost amounting to ThUS$20,510. There was no difference between amortize cost and fair value at December 31, 2002.
c) Income tax
The provision for income taxes charged to the results of operations under US GAAP was as follows:
| Year ended December 31, | |||||||||
| 2003 | 2002 | 2001 | |||||||
| (In thousands of US$) | |||||||||
Current income tax expense | (481 | ) | (116 | ) | (68 | ) | |||
Deferred income tax expense | (17,879 | ) | (6,585 | ) | (420 | ) | |||
Total provision under US GAAP | (18,360 | ) | (6,701 | ) | (488 | ) | |||
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
Deferred tax assets (liabilities) are summarized as follows:
| Year ended December 31, | |||||||||
| 2003 | 2002 | 2001 | |||||||
| (In thousands of US$) | |||||||||
Unearned income | (6,414 | ) | (4,129 | ) | (3,252 | ) | |||
Prepaid expenses | (5,256 | ) | (4,437 | ) | (3,716 | ) | |||
Property and equipment | (100,044 | ) | (78,650 | ) | (58,074 | ) | |||
Others | (3,563 | ) | (3,951 | ) | (1,011 | ) | |||
Gross deferred tax liabilities | (115,277 | ) | (91,167 | ) | (66,053 | ) | |||
Allowance for doubtful accounts | 3,431 | 3,704 | 2,788 | ||||||
Tax loss carryforwards | 62,535 | 56,134 | 37,749 | ||||||
Provision for vacations | 1,994 | 1,714 | 1,482 | ||||||
Provisions for obsolescence of spare parts | 2,499 | 1,744 | 3,016 | ||||||
Other | 5,180 | 2,733 | 2,015 | ||||||
Gross deferred tax assets | 75,639 | 66,029 | 47,050 | ||||||
Deferred tax assets valuation allowance | (7,498 | ) | (5,445 | ) | (4,271 | ) | |||
Net deferred tax liabilities | (47,136 | ) | (30,583 | ) | (23,274 | ) | |||
The provision for income taxes differs from the amount of income tax determined by applying the applicable Chilean statutory income tax rates of 15% (2000)16.5% (2003), 16% (2001)(2002) and 16.5% (2002)15% (2001) to pretax accounting income on a US GAAP basis as a result of the following differences:
| Year ended December 31, | |||||||||
| 2003 | 2002 | 2001 | |||||||
| (In thousands of US$) | |||||||||
Provision for income taxes at statutory Chilean tax rate | (17,683 | ) | (6,612 | ) | (228 | ) | |||
Increase (decrease) in rates resulting from: | |||||||||
Non-taxable income | 923 | 559 | 340 | ||||||
Non-deductible items | (258 | ) | (365 | ) | (914 | ) | |||
Change in valuation allowance | (2,053 | ) | (1,359 | ) | (775 | ) | |||
International income tax differences | 800 | 1,484 | 1,255 | ||||||
Increase in Chilean tax rates (effect on deferred income tax) | (225 | ) | (405 | ) | (217 | ) | |||
Other | 136 | (3 | ) | 51 | |||||
Provision for income taxes at effective tax rates | (18,360 | ) | (6,701 | ) | (488 | ) | |||
In accordance with Chilean law, the Company and each of its subsidiaries compute and pay taxes on a separate return basis and not on a consolidated basis.
The Company and certain of the Chilean subsidiaries (principally Lan Chile Cargo S.A.) have tax loss carryforwards aggregating ThUS$ 288,200318,005 at December 31, 20022003 which have no expiration date. These tax losses have resulted in a deferred tax asset at that date of ThUS$ 48,994.
53,889.
Lan PeruPerú has tax loss carryforwards aggregating ThUS$ 1,066188 at December 31, 20022003 which have an expiration date of four years beginning in the first year that a loss is incurred. The loss was first incurred in 2000 and the subsidiary had taxable income in 2001. The related deferred tax asset was ThUS$ 28751 at December 31, 2002.
2003.
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
LanLogistics, Corp. and its subsidiaries have tax loss carryforwards aggregating ThUS$ 12,97513,549 at December 31, 20022003 which have expiration dates of seven years after the year of the loss. The related deferred tax asset is ThUS$ 4,4124,593 and a 100% valuation allowance has been provided because at the present time it appears unlikely that these tax losses will be utilized in future years.
Lan Chile Investment Limited and its subsidiaries have tax loss carryforwards aggregating ThUS$7,612 at December 31, 2003 which have expiration dates between three and five years after the year of the loss. The followingrelated deferred tax asset is ThUS$1,903 and a 100% valuation allowance has been provided because at the detail ofpresent time it appears unlikely that these tax losses:
Year of loss Amount of loss
------------ --------------
(In thousands of US$)
2002 3,178
2001 4,681
2000 1,504
1999 2,282
1998 213
1997 572
1996 545
------
Total 12,975
======
F - 44
Aerolinheas Brasileiras has tax loss carryforwards aggregating ThUS$ 3,0382,947 at December 31, 20022003 which have no expiration date. However, a 100% valuation allowance has been provided against the related deferred tax asset of ThUS$
1,0331,002 because at the present time it appears unlikely that these tax losses will be utilized in future years.
South Florida Air Cargo Inc. has tax loss carryforwards of ThUS$ 4,1413,227 at December 31, 20022003 which have expiration dates of seven years after the year of the loss. The related deferred tax asset was ThUS$ 1,4081,097 at December 31, 2002.
c)2003.
d) Fair value of financial instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments at December 31, 20012002 and 20022003 for which it is practicable to estimate that value.
Cash, Time deposits and cash equivalents:
Marketable securities:
Cash, time deposits and money market funds included in marketable securities and
considered to be cash equivalents are stated at their carrying amount, which is equivalent to fair value.
Other marketable securities:
The fair value of marketable securities (other than money market funds) is based
on the quoted market prices of the common stock or other securities held.
Other current assets:
Other current assets (principally deposits) are stated at carrying amount, which is equivalent to fair value.
Other assets:
The fair value of long-term accounts receivable included within Other assets was estimated using the interest rate the Company would pay for similar credit.
Short and long-term debt:
The fair value of short and long-term debt was based on rates currently available to the Company for debt with similar terms and remaining maturities.
Financial instruments:
The fair value of swap and range swap fuel contracts (used in hedging of fuel prices) is the estimated amount that the Company would receive or pay to terminate the agreements at the balance sheet date taking into account current fuel prices and the current creditworthiness of the counterparties.
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
The fair value of the interest rate swap agreements is based on estimated mid-market valuations. Such mid-market values attempt to approximate the economic value at the balance sheet date of a position using prices and rates at the average of the estimated bid and offer for the respective underlying assets or reference rates and/or mathematical models, as deemed appropriate by the Company. In the absence of sufficient or meaningful market information, such valuations or components thereof may be theoretical in whole or in part.
F - 45
The estimated fair values of the Company'sCompany’s financial instruments on a US GAAP basis (including the consolidation of LanLogistics, Corp.) are as follows:
| At December 31, 2003 | At December 31, 2002 | |||||||||||
US GAAP Carrying amount | Fair Value | US GAAP Carrying amount | Fair Value | |||||||||
| (In thousands of US$) | ||||||||||||
Cash | 4,988 | 4,988 | 3,326 | 3,326 | ||||||||
Time deposits | 128,950 | 128,950 | 125,476 | 125,476 | ||||||||
Marketable securities | 85,025 | 85,102 | 30,619 | 30,619 | ||||||||
Other current assets | 113 | 113 | 7,682 | 7,682 | ||||||||
Current portion of long-term loans | 63,155 | 77,853 | 61,373 | 61,373 | ||||||||
Current portion of other long-term obligations | 16,059 | 16,059 | 15,184 | 15,184 | ||||||||
Bank loans (long-term) | 559,669 | 509,691 | 612,730 | 412,461 | ||||||||
Other liabilities (long-term) | 63,358 | 63,358 | 79,152 | 79,152 | ||||||||
Financial instruments: | ||||||||||||
Interest rate swaps | (24,506 | ) | (24,506 | ) | (34,335 | ) | (34,335 | ) | ||||
Swap fuel contracts | 15,451 | 15,451 | 5,279 | 5,279 | ||||||||
e) Concentration of credit risk
The Company's AccountsCompany’s accounts receivable are generated primarily from airline ticket and cargo service sales to individuals and various commercial enterprises that are economically and geographically dispersed, and the Accountsaccounts receivable are generally short-term in duration. Accordingly, the Company does not believe that it is subject to any significant concentration of credit risk.
e)
f) Financial instruments
Adoption of FAS 133
As previously indicated, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", on January 1, 2001.
Since the Company did not designate any of the derivative instruments in effect
at December 31, 2000 as a hedge upon the adoption of FAS 133, there was no
cumulative effect adjustment in either earnings or other comprehensive income
during 2001.
F - 46
Accounting for Derivatives and Hedging Activities
All derivatives are recognized on the balance sheet at their fair value. On the date that the Company enters into a derivative contract, it designates the derivative as (1) a hedge of (a) the fair value of a recognized asset or liability or (b) an unrecognized firm commitment (a "fair value"“fair value” hedge); (2) a hedge of (a) a forecasted transaction or (b) the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a "cash flow"“cash flow” hedge); (3) a foreign currency fair value or cash flow hedge (a "foreign currency"“foreign currency” hedge); (4) a hedge of a net investment in a foreign operation; or (5) an instrument that is held for trading or non-hedging purposes (a "trading"“trading” or "non-hedging"“non-hedging” instrument). Changes in the fair value of a derivative that is highly effective as, and that is designated and qualifies as, a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including changes that reflect losses or gains on firm commitments), are recorded in current period earnings. Changes in the fair value of a derivative that is highly effective as, and that is designated and qualifies as, a cash flow hedge, to the extent that the hedge is effective, are recorded in other comprehensive income, until earnings are affected by the variability of cash flows of the hedged transaction (e.g., until periodic settlements of a variable rate asset or liability are recorded in
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
earnings). Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative exceed the variability in the cash flows of the forecasted transaction) is recorded in current period earnings. Changes in the fair value of a derivative that is highly effective as, and that is designated and qualifies as, a foreign currency hedge is recorded in either current period earnings or other comprehensive income, depending on whether the hedging relationship satisfies the criteria for a fair value or cash flow hedge. If, however, a derivative is used as a hedge of a net investment in a foreign operation, the changes in the derivative'sderivative’s fair value, to the extent that the derivative is effective as a hedge, are recorded in the cumulative translation adjustment account within other comprehensive income. Changes in the fair value of derivative trading and non-hedging instruments are reported in current period earnings.
Upon purchasing a financial instrument, the Company must determine whether a derivative instrument is "embedded"“embedded” therein and if so, it must assess the economic characteristics of the embedded derivative to determine if they are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as either (1) a fair value, cash flow, or foreign currency hedge or (2) a trading or non-hedging derivative instrument. However, if the entire contract were to be measured at fair value, with changes in fair value reported in current earnings, or if the Company could not reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract, the entire contract would be carried on the balance sheet at fair value and not be designated as a hedging instrument.
The Company documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value, cash flow, or foreign currency hedges to (1) specific assets and liabilities on the balance sheet or (2) specific firm commitments or forecasted transactions. The Company also formally assesses (both at the hedge'shedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods.
F - 47
The Company discontinues hedge accounting prospectively when (1) it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur; (4) a hedged firm commitment no longer meets the definition of a firm commitment; or (5) management determines that designating the derivative as a hedging instrument is no longer appropriate.
Derivative instruments and hedging activities
The Company'sCompany’s activities expose it to a variety of market risks, including risks related to the effects of changes in foreign-currency exchange rates, interest rates, and commodity prices. These financial exposures are monitored and managed by the Company as an integral part of its overall risk management program. The Company'sCompany’s risk management program focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
Financial instruments: fuel price risk management
Jet fuel price fluctuations are largely dependent on supply and demand for crude oil in the world, OPEC decisions, refinery capacities, stock levels of crude and global political factors. In order to minimize the risk of jet fuel price fluctuations, the Company enters into swapderivative and option contracts in the jet fuel market or the West Texas intermediate (WTI) market or the heating oil market. The decision to enter into hedge contracts in the jet fuel WTI or heating oilWTI market depends on the relative price of each commodity at the supposed trade date.
The Company enters into jet price swap, call and put option contracts in order to fix or limit (depending on the jet fuelcase) the price at a certain level for a given quantity of jet fuel.the above mentioned commodities. Pursuant to such contracts, the Company pays or receives, depending on the case, the difference between the agreed fixed price and the floating market price calculated on the notional amounts of such contracts. These contracts are classified as cash flow hedges for US GAAP purposes and as anticipatedforecasted transactions for Chilean GAAP purposes.
As of December 31, 20022003, the Company had nosome ineffectiveness with regard to its cash flow hedges of forecasted purchases of jet fuel outstanding as of year end. This ineffectiveness was calculated as a correlation of the underlying asset prices against the average price of the total fuel purchases made by the company. As of December 31, 2001, the Company had recognized a net loss of2003, this ineffectiveness amounted to ThUS$ 156453, and was recorded in earnings for this concept. All components of the derivative's gain or loss were includedUS GAAP purposes in the assessment of hedge effectiveness.
2003.
The Company's jet fuelCompany’s swap, call and put contracts with banks and other entities hedged notional fuel purchases of 134.0 million gallons in 2003, 123.0 million gallons in 2002 and 137.0 million gallons in 2001 and 78.0 million gallons in 2000.2001. The realized results on such contracts waswere a net gain in 2003 of ThUS$12,302, a loss in 2002 of ThUS$5,454, and a loss in 2001 of ThUS$ 10,526 and a gain in
2000 of ThUS$ 8,111.10,526. The fair value of the outstanding jet fuel price swap
contracts was estimated to be aan unrecognized gain of ThUS$ 5,27915,451 at December 31, 2002
(included2003 is included in Other comprehensive income (loss) for US GAAP purposes), a loss of ThUS$
15,046 at December 31, 2001purposes and an unrecognized gain of ThUS$ 2,5275,279 at December 31, 2000.
2002, and a loss of ThUS$15,046 at December 31, 2001.
For Chilean GAAP purposes, gains and losses on the hedging contracts referred to above are recognized as a component of Other income (expense) — net when the underlying fuel being hedged is consumed. For US GAAP purposes, such gains and losses would be classified as Operating expenses under the caption Aircraft fuel when the fuel being hedged is consumed.
F - 48
Financial instruments: Interest rate risk management
In May 1999, the Company entered ininto an interest rate swap contract with a financial institution for a nationalnotional amount of approximately ThUS$50,000 to convert from floating rate (Libor(LIBOR based) to fixed rate for a period of 5five years. Pursuant to the contract, the Company pays or receives, depending on the case, the difference between the agreed fixed rate and the floating rate calculated on the nationalnotional amount of the contract. The gainloss on the contract during 20002003 was ThUS$ 2421,531 and the fair value at December 31, 20002003, was estimated at ThUS$ 195.
The fair valuea loss of the contract was recorded during 2000 in Other current
liabilities.
Upon the adoption of FAS 133, thisThUS$414. This swap wasis not considered to qualify for a hedge relationship and accordingly wasis not designated as a hedge. Therefore, the fair value of the swap at December 31, 20022003, of ThUS$ 1,945(414) (ThUS$ 2,326(1,945) at December 31, 2001)2002) was takencharged to the results of operations for US GAAP
reconciliation purposes instead of as a charge to Other comprehensive income (loss) (see paragraph 1 m)n).
In May 2001, the Company also entered into six additional receive-floating, pay-fixed interest rate swap contracts in order to hedge the variable interest payments on existing debt of US$330,608,000. Pursuant to these
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
contracts, the Company pays or receives, depending on the case, the difference between the agreed fixed rate of interest and the floating rate calculated on the notional amount of each contract. There is no associated cost to these contracts. The critical terms of these swap contracts, namely notional amounts and dates, have been negotiated to match the terms of the designated variable-rate debt. Thus,debt; therefore, there is no ineffectiveness. The fair value of these contracts as of December 31, 20022003, was estimated at a loss of ThUS$
32,39022,840 (a loss of ThUS$ 10,87332,390 as of December 31, 2001)2002) which was taken torecorded into Other comprehensive income for US GAAP reconciliation purposes.
During 2002,
For the period ended December 31, 2003, the Company also realized a loss of ThUS$ 12,21212,837 (a loss of ThUS$
4,81812,212 during 2001)2002) on these swap contracts which is included in Interestinterest expense for both Chilean and US GAAP purposes.
During July 2003, the company entered into four interest rate cap contracts for a total notional amount of ThUS$127,753. The premium on three of these Caps was paid up-front in the amount of ThUS$4,930. The premium on the fourth cap will be paid in 16 quarterly payments. These caps are intended to limit the Company’s exposure arising from variable-rate debt. Under Chilean and US GAAP, these contracts qualify as cash flow hedges with no ineffectiveness associated to them due to the fact that all critical terms of the debt and the caps match perfectly. The fair value of these contracts has been estimated at a loss of ThUS$1,150, has been recorded in Other comprehensive income (loss) in 2003 for US GAAP purposes.
During the same month, the Company entered into an additional two interest rate cap contracts. These caps are intended to limit the exposure of LIBOR-linked operational lease payments on two aircraft received during the year. The fair value of these contracts at year end amounted to a loss of ThUS$102 and is recorded in Other comprehensive income (loss) in 2003 for US GAAP purposes. Under FAS 133, these derivatives qualify as cash flow hedges even though some ineffectiveness exists as the notional amount over which the caps are calculated is different from the one used to determine the lease payments on the aircraft. However, this ineffectiveness is not recorded in earnings because it was not considered to be significant. Under Chilean GAAP, the caps are accounted for as cash flow hedges and no ineffectiveness was determined. The premium on the caps will be paid in 12 and 16 quarterly payments.
At December 31, 2003, the Company had not received payment from any of the six aforementioned caps. The premium on the caps is being amortized throughout the term of each contract for Chilean and US GAAP purposes. For the year ended December 31, 2003, the Company amortized ThUS$199.
In April 2002, the Company entered into a Treasury rate lock for a notional amount of ThUS$45,000 in order to "lock in"“lock in” a desired interest rate and hedge the variability in the cash proceeds attributable to changes in the benchmark interest rate to be received from the forecasted securitization of future credit card receivables originating from certain ticket agents in the United States, as described in Note 16 to these financial statements. The contract was classified as a cash flow hedge of a forecasted transaction for US GAAP purposes and as a hedge of an anticipatedforecasted transaction for Chilean GAAP purposes.
The forecasted transaction referred to above occurred on August 22, 2002. At that time the Company recognized a deferred loss of ThUS$3,622 under Chilean GAAP for the settlement of the Treasury rate lock contract. ForDuring 2002 and for US GAAP purposes, the Company recognized a net loss of ThUS$402, which represented the total ineffectiveness of the cash flow hedge of the forecasted securitization and debited Other comprehensive income for the remaining ThUS$3,219, which areis being amortized over the life of the securitization contract (82 months). As of December 31, 20022003, the Company recognized an amortization charge for this concept amounting to ThUS$ 157471 under US GAAP (ThUS$ 176 under Chilean GAAP)157 during 2002). F - 49
For Chilean GAAP purposes, theThe deferred loss on the
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
hedging contract referred to above is included in the balance sheet under the captions Prepaid expenses and Other assets (current and non-current portions, respectively) and the corresponding amortization is included in Interest expense both for Chilean and US GAAP purposes. The effect of recording the ineffectiveness of cash flow hedge (net of amortization) in accordance with US GAAP is included in paragraph l m)n) above.
Risk of variation in
Financial instruments: foreign currency exchange rates
The company conducts business in local currencies in twelveseveral countries and accordingly faces the risk of variation in foreign currency exchange rates. A depreciation of the Chilean peso, the Brazilian real, Argentine peso, Mexican nuevo peso, Peruvian nuevo sol or the European euro against the U.S. dollar could have a material adverse effect on the Company because it has revenues and receivables denominated in those currencies. As a part of its risk management policy, the Company regularly monitors its exposure to variations in the exchange rates of these different currencies. In order to reduce the impact of the foreign exchange rate fluctuations, the Company enters into foreign exchange hedging contracts. Under these forward contracts, for any rate above or below the fixed rate, the Company receives or pays the difference between the spot rate and the fixed rate for the given amount at the settlement date.
During 2001,
At December 31, 2003, the Company entered into ahas two outstanding Argentine peso/U.S. dollarUS$ forward contractcontracts for a notional amount of ThUS$ 500 and3,500 each in order to hedge receivables denominated in that currency. In order to hedge exposure arising from Euro denominated investments, the Company entered into four Chilean peso/U.S.
dollarEuro/US$ forward contracts for a total notional amount of ThUS$ 25,0006,400.
The aforementioned contracts qualify as fair value hedges under Chilean and US GAAP accounting principles and no ineffectiveness has been determined to exist. The fair value of the contracts amounts to a loss of ThUS$289 and has been recorded in order to
hedge part of its exposureearnings at year end in Argentina and Chile, respectively.
All of these contracts had been closed by December 31, 2001 and accordingly, no
foreign currency positions were being hedged at that date. The realized loss on
the Argentine peso/US dollar forward contract during 2001 was ThUS$ 15 and the
realized gain on theaccordance with Chilean peso/US dollar contracts for the year was
approximately ThUS$ 1,099. All realized gains and losses are classified as Other
income in the Chilean GAAP consolidated financial statements.
As of December 31, 2002 the Company had no foreign currency forward contracts
outstanding.
GAAP.
Other information on derivative instruments
By using derivative financial instruments to hedge exposures to changes in exchange rates, interest rates, and jet fuel prices, the Company exposes itself to credit risk and market risk.
Credit risk is the risk that the counterparty might fail to fulfill its performance obligations under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates repayment risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, does not assume repayment risk. The Company minimizes its credit (or repayment) risk in derivative instruments by (1) entering into transactions with high-quality counterparties (2) limiting the amount of its exposure to each counterparty, and (3) monitoring the financial condition of its counterparties. The Company also maintains a policy of requiring that derivative contracts be governed by an International Swaps and Derivatives AssociationISDA Master Agreement. Market risk is the risk that the value of a financial instrument might be adversely affected by a change in interest rates, currency exchange rates, or jet fuel prices. The Company manages the market risk associated with interest rate, jet fuel price, and foreign-exchange contracts by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
F - 50
As of December 31, 2002, approximately ThUS$ 3,058 of deferred net gains on
derivative instruments included in other comprehensive income are expected to be
reclassified as earnings during the next twelve months. Transactions and events
that (1) are expected to occur over the next twelve months and (2) will
necessitate reclassifying the derivative gains as earnings include (a) the
repricing of variable rate debt, (b) the consumption of jet fuel previously
hedged as forecasted purchases and (c) the amortization of the deferred loss
generated in the prehedge of the securitization transaction. The maximum term
over which the Company is hedging exposures to the variability of cash flows for
all forecasted purchases of jet fuel is twelve months.
For the year ended December 31, 2001 the Company recognized a net loss of ThUS$
459 (reported as a Non-operating expense in the consolidated statement of
income), which represented the total ineffectiveness of all cash flow hedges of
forecasted purchases of jet fuel that started and ended in the year. No
ineffectiveness was accounted for in 2002.
f)
g) Comprehensive income (loss)
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standard (FAS) No, 130, "Reporting Comprehensive Income", which establishes
standards for the reporting of comprehensive income and its components.
Comprehensive income (loss) is the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonownernon-owner sources. The fair value of cash flow hedges
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT DECEMBER 31, 2003
were considered to be Other comprehensive income during 2002. There2003, 2002 and 2001 and the unrealized gain on available for sale securities has been included in 2003. Before 2001, the Company did not designate any of the derivative instruments as a hedge and therefore there were no items of Othercumulative effect adjustments in either earnings or other comprehensive income during 2000 andprior to 2001. See paragraph 1 m)1.n above for the effects included in the US GAAP reconciliation.
g)
h) Recent accounting pronouncements
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". FAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes the
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, the entity either settles the obligation for the
amount recorded or incurs a gain or loss. FAS No. 143 is effective for fiscal
years beginning after June 15, 2002. AlthoughAccounting Pronouncements
Effective January 1, 2003, the Company is evaluating the
effects of this Statement on its financial position and results of operations,
management does not consider that the adoption of this Statement will have a
material impact on the results of its operations.
In June 2002, the FASB issuedadopted SFAS No. 146, "Accounting“Accounting for Costs Associated with Exit or Disposal Activities" (FASActivities” (SFAS 146). This statement supercedes, which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability“Liability Recognition for Certain EmployeeEmployees Termination Benefits and Other Costscosts to Exit an Activity (including Certain Costs Incurred in a Restructuring)"”. FASThe adoption of SFAS No. 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF 94-3, a liability is recognized at the date an
entity commits to an exit plan. FAS 146 also establishes that the liability
should initially be measured and recorded at fair value. The provisions of FAS
146 will be effective for any exit and disposal activities initiated after
December 31, 2002. The Company is evaluating the effect of this statement on its
financial position and results of operations, however, we dodid not expect that the
adoption will have a material impacteffect on ourthe Company’s consolidated financial position, results of operationsoperation or financial
position.
F - 51
In November 2002,cash flows.
Effective January 1, 2003, the FASB issuedCompany adopted FASB Interpretation No. 45, "Guarantor's“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45)Others” (“FIN 45”). FIN 45 requires that upon issuance of a guarantee, a guarantorthe Company must disclose and may be required to recognize a liability for the fair value of anthe obligation assumedit assumes under athat guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. InitialThe initial recognition and measurement provisionsrequirement of FIN 45 are applicable on a prospective
basis tois effective for guarantees issued or modified. We are evaluating the impact of the new
interpretation, however, we do not expect that themodified after December 31, 2002. The adoption of FIN 45 willdid not have a material impacteffect on ourthe Company’s consolidated financial position, results of operationsoperation or financial position.
cash flows.
Effective February 1, 2003, the Company adopted FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 addresses consolidation by business enterprises of variable interest entities. Under this interpretation, certain entities known as Variable Interest Entities (“VIEs”) must be consolidated by the primary beneficiary of the entity. The primary beneficiary is generally defined as having the majority of the risks and rewards arising from the VIE. For VIEs in which a significant (but not majority) variable interest is held, certain disclosures are required. FIN 46, as revised by FIN 46R, was effective on February 1, 2003 for new transactions and is effective for reporting periods after March 15, 2004 for transactions entered into prior to February 1, 2003. The Company has not entered into any new transactions subject to FIN 46 since February 1, 2003.
In JanuaryApril 2003, the FASB issued Interpretation 46, "ConsolidationSFAS No. 149, “Amendment of Variable
Interest Entities" ("FIN 46")Statement 133 on Derivative Instruments and Hedging Activities”. FIN 46 requires that companies that control
another entity through interestsThis Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other than voting interests should consolidatecontracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities”. The Company adopted the controlled entity. FIN 46 applies to variable interest entities created
after January 31,provisions of SFAS No. 149 on July 1, 2003, and to variable interest entities in which an enterprise
obtains an interest in after that date. The related disclosure requirements are
effective immediately. We have evaluated the impact of the new interpretation,
and the adoption doesdid not have a material impacteffect on ourthe Company’s consolidated financial position, results of operationsoperation or cash flows.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This Statement establishes standards of how an issuer classifies and measures certain financial position.
Finstruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective July 1, 2003. The Company adopted the provisions of SFAS No. 150 on July 1, 2003, which did not have a material effect on the Company’s consolidated financial position, results of operation or cash flows.
LAN CHILE S.A. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| At March 31, | ||||
| 2004 | 2003 | |||
| (In thousands of US$) | ||||
ASSETS | ||||
CURRENT ASSETS | ||||
Cash | 5,238 | 3,467 | ||
Time deposits | 158,701 | 100,602 | ||
Marketable securities | 92,596 | 31,260 | ||
Trade accounts receivable and other, net (Note 2) | 159,287 | 147,216 | ||
Notes and accounts receivable from related companies (Note 5) | 1,718 | 2,166 | ||
Inventories (Note 3) | 34,251 | 33,904 | ||
Prepaid and recoverable taxes | 12,608 | 8,641 | ||
Prepaid expenses | 23,562 | 22,566 | ||
Deferred income tax assets | 8,050 | 5,282 | ||
Other current assets | 16,270 | 16,467 | ||
Total current assets | 512,281 | 371,571 | ||
PROPERTY AND EQUIPMENT (net) (Note 4) | 997,372 | 1,014,900 | ||
OTHER ASSETS | ||||
Investments in related companies | 1,662 | 2,113 | ||
Goodwill | 44,256 | 47,055 | ||
Notes and accounts receivable from related companies (Note 5) | 343 | 462 | ||
Long-term accounts receivable | 8,323 | 9,417 | ||
Advances for purchases of aircraft and other deposits | 42,473 | 39,215 | ||
Other | 39,964 | 40,301 | ||
Total other assets | 137,021 | 138,563 | ||
Total assets | 1,646,674 | 1,525,034 | ||
The accompanying Notes 1-6 are an integral part of these financial statements.
LAN CHILE S.A. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| At March 31, | ||||
| 2004 | 2003 | |||
| (In thousands of US$) | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||
CURRENT LIABILITIES | ||||
Current portion of long-term loans from financial institutions | 63,710 | 61,690 | ||
Current portion of long-term leasing obligations | 4,021 | 3,964 | ||
Securitization obligation | 12,270 | 11,468 | ||
Dividends payable | 208 | 19 | ||
Accounts payable | 157,435 | 123,643 | ||
Notes payable | 36 | 52 | ||
Notes and accounts payable to related companies (Note 5) | 9 | 310 | ||
Air traffic liability | 119,219 | 91,558 | ||
Other current liabilities | 118,276 | 92,821 | ||
Total current liabilities | 475,184 | 385,525 | ||
LONG-TERM LIABILITIES | ||||
Loans from financial institutions | 549,777 | 600,653 | ||
Securitization obligation | 53,128 | 65,398 | ||
Other creditors | 29,338 | 34,575 | ||
Notes and accounts payable to related companies (Note 5) | 921 | 1,164 | ||
Provisions | 74,440 | 66,677 | ||
Obligations under capital leases | 6,091 | 9,926 | ||
Deferred income tax liabilities | 53,376 | 27,101 | ||
Total long-term liabilities | 767,071 | 805,494 | ||
MINORITY INTEREST | 3,733 | 3,585 | ||
COMMITMENTS AND CONTINGENCIES (Note 6) | ||||
SHAREHOLDERS’ EQUITY | ||||
Common stock (318,909,090 shares) | 134,303 | 134,303 | ||
Reserves | 2,620 | 2,620 | ||
Retained earnings | 263,763 | 193,507 | ||
Total shareholders’ equity | 400,686 | 330,430 | ||
Total liabilities and shareholders’ equity | 1,646,674 | 1,525,034 | ||
The accompanying Notes 1-6 are an integral part of these financial statements.
LAN CHILE S.A. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
For the three months ended March 31, | ||||||
| 2004 | 2003 | |||||
| (In thousands of US$) | ||||||
OPERATING RESULTS | ||||||
Operating revenues | 491,900 | 395,846 | ||||
Operating expenses | (428,927 | ) | (369,582 | ) | ||
Operating income | 62,973 | 26,263 | ||||
OTHER INCOME AND EXPENSES | ||||||
Interest income | 2,192 | 1,263 | ||||
Interest expense | (9,393 | ) | (10,056 | ) | ||
Other income (expense)—net | 2,806 | 8,595 | ||||
Total other income (expense) | (4,395 | ) | (198 | ) | ||
Income before minority interest | 58,578 | 26,065 | ||||
Minority interest | 210 | 185 | ||||
Income before income taxes | 58,788 | 26,250 | ||||
Income taxes | (10,666 | ) | (4,639 | ) | ||
NET INCOME | 48,122 | 21,611 | ||||
The accompanying Notes 1-6 are an integral part of these financial statements.
LAN CHILE S.A. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the three months ended March 31, | ||||||
| 2004 | 2003 | |||||
| (In thousands of US$) | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||
Collection of trade accounts receivable | 465,755 | 362,441 | ||||
Interest income | 2,218 | 334 | ||||
Other income received | 7,072 | 6,518 | ||||
Payments to suppliers and personnel | (397,658 | ) | (347,565 | ) | ||
Interest paid | (8,911 | ) | (10,416 | ) | ||
Income tax paid | (22 | ) | (200 | ) | ||
Other expenses paid | (619 | ) | (2,149 | ) | ||
Value-added tax and similar payments | (7,177 | ) | (4,125 | ) | ||
Net cash provided by operating activities | 60,658 | 4,838 | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||
Loans obtained | 2,817 | 11,088 | ||||
Dividend payments | (7 | ) | (8,984 | ) | ||
Loans repaid | (12,100 | ) | (22,106 | ) | ||
Other | (3,024 | ) | (3,696 | ) | ||
Net cash used in financing activities | (12,314 | ) | (23,698 | ) | ||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||
Acquisitions of property and equipment | (11,272 | ) | (12,639 | ) | ||
Proceeds from sales of property and equipment | 751 | 6,789 | ||||
Sale of investments | 11,952 | 928 | ||||
Other | (12,162 | ) | (290 | ) | ||
Net cash used in investing activities | (10,731 | ) | (5,212 | ) | ||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 37,613 | (24,072 | ) | |||
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD | 157,752 | 159,401 | ||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | 195,365 | 135,329 | ||||
The accompanying Notes 1-6 are an integral part of these financial statements.
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
(unaudited)
| For the three months ended March 31, | ||||||
| 2004 | 2003 | |||||
| (In thousands of US$) | ||||||
NET INCOME | 48,122 | 21,611 | ||||
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES | ||||||
Depreciation | 16,841 | 17,753 | ||||
Gain on sales of investments | — | (62 | ) | |||
Gain on sales and retirements of property and equipment | (243 | ) | (3,431 | ) | ||
Proportional share of results of equity method investments | (33 | ) | 1 | |||
Amortization of goodwill | 816 | 817 | ||||
Minority interest | (210 | ) | (185 | ) | ||
Write-offs and provisions | 5,182 | 3,659 | ||||
Foreign exchange losses/(gains) | 3,353 | 278 | ||||
Other | 139 | 59 | ||||
CHANGES IN ASSETS AND LIABILITIES | ||||||
Decrease (increase) in accounts receivable—trade | 2,990 | (134,622 | ) | |||
(Increase) decrease in inventories | (876 | ) | 1,452 | |||
(Increase) decrease in other assets | (3,976 | ) | 3,598 | |||
Increase (decrease) in accounts payable | (25,202 | ) | 91,525 | |||
Increase in other liabilities | 13,755 | 2,385 | ||||
Net cash provided by operating activities | 60,658 | 4,838 | ||||
The accompanying Notes 1-6 are an integral part of these financial statements.
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AT MARCH 31, 2004
(unaudited)
NOTE 1—THE COMPANY
Management of Lan Chile S.A. and certain subsidiaries (the “Company”) has prepared the accompanying condensed consolidated financial statements as of and for the three months ended March 31, 2004 and 2003 pursuant to the rules and regulations of the Chilean Superintendency of Securities and Insurance (the “Superintendency”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in Chile have been condensed or omitted. The following discussion should be read in conjunction with the Company’s Consolidated Financial Statements as of and for the year ended December 31, 2003.
In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the Company’s condensed consolidated financial position as of March 31, 2004 and 2003, and condensed consolidated statement of income and cash flow for the three months ended March 31, 2004 and 2003.
The preparation of financial statements in accordance with accounting principles generally accepted in Chile requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates.
NOTE 2—ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
| At March 31, | ||||
| 2004 | 2003 | |||
| (In thousands of US$) | ||||
Accounts receivable | 133,421 | 119,672 | ||
Notes receivable | 5,253 | 4,670 | ||
Sundry debtors | 20,613 | 22,874 | ||
Total | 159,287 | 147,216 | ||
Accounts receivable are shown net of an allowance for bad debts of ThUS$23,157 at March 31, 2004 and ThUS$24,379 at March 31, 2003.
NOTE 3—INVENTORIES
Inventories are summarized as follows:
| At March 31, | ||||
| 2004 | 2003 | |||
| (In thousands of US$) | ||||
Spare parts and materials used for third party maintenance | 32,352 | 32,322 | ||
Duty-free inventories | 1,899 | 1,582 | ||
Total | 34,251 | 33,904 | ||
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT MARCH 31, 2004
(unaudited)
NOTE 4—PROPERTY AND EQUIPMENT AND FLEET COMPOSITION
a) Property and equipment
Property and equipment are summarized as follows:
| At March 31, | ||||||
| 2004 | 2003 | |||||
| (In thousands of US$) | ||||||
Flight equipment: | ||||||
Boeing 767-200ER aircraft under capital lease | 70,574 | 70,574 | ||||
Boeing 737-200ADV aircraft | 50,963 | 50,865 | ||||
Boeing 767-300ER aircraft | 239,436 | 238,051 | ||||
Boeing 767-300F freighter aircraft | 428,133 | 428,133 | ||||
Airbus A-320 aircraft | 142,469 | 141,888 | ||||
DC-8 aircraft | 3,408 | 3,551 | ||||
Engines and rotating parts | 165,376 | 156,312 | ||||
Spare parts | 5,264 | 6,026 | ||||
Other | 37,912 | 29,105 | ||||
Land and buildings: | ||||||
Land | 10,739 | 9,597 | ||||
Buildings | 57,051 | 52,761 | ||||
Other installations | 20,336 | 16,790 | ||||
Construction in progress | 1,839 | 779 | ||||
Other fixed assets: | ||||||
Communication and computer equipment | 69,464 | 61,279 | ||||
Furniture and office equipment | 13,806 | 15,471 | ||||
Equipment under capital leases | 795 | 1,100 | ||||
Other | 8,961 | 10,853 | ||||
Incremental value arising from technical appraisals of owned assets | — | 437 | ||||
Property and equipment (gross) | 1,326,526 | 1,293,572 | ||||
Less: Accumulated depreciation | (329,154 | ) | (278,672 | ) | ||
Property and equipment (net) | 997,372 | 1,014,900 | ||||
Included in property and equipment at March 31, 2004 and 2003 are ThUS$71,369 and ThUS$71,674 of equipment under capital leases with accumulated depreciation aggregating ThUS$45,647 and ThUS$42,540, respectively.
Depreciation expense for the three months ended March 31, 2004, 2003 and 2002 amounted to ThUS$16,841, ThUS$17,753 and ThUS$15,074, respectively.
The balance of spare parts is presented net of a provision for obsolescence amounting to ThUS$15,837 at March 31, 2004 and ThUS$11,522 at March 31, 2003.
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT MARCH 31, 2004
(unaudited)
b) Fleet composition
At March 31, 2004, the fleet of the Company consists of 60 aircraft, of which 28 aircraft are owned by the Company and 32 aircraft are leased under operating leases.
Aircraft owned by the Company:
| At March 31, | ||||||||
Aircraft | Model | Use | 2004 | 2003 | ||||
Boeing 737* | 200ADV | Passenger/Freight | 12 | 13 | ||||
Boeing 737 | 200ADV | Freight | 1 | 0 | ||||
Boeing 767 | 300ER | Passenger/Freight | 3 | 3 | ||||
Boeing 767 | 300F | Freight | 5 | 5 | ||||
Boeing 767** | 200ER | Passenger/Freight | 1 | 1 | ||||
Airbus A-320 | 200 | Passenger/Freight | 4 | 4 | ||||
DC-8 | 71-F | Freight | 1 | 1 | ||||
DC-8 | 61-F | Freight | 1 | 1 | ||||
Total owned | 28 | 28 | ||||||
| * | One of these aircraft is leased to Southern Winds S.A. under a contract beginning October, 2002. |
| ** | Acquired under a capital lease and subleased to Aerovías de México S.A. under a 9-year contract beginning June 16, 1996 and expiring in the year 2005. |
Leased aircraft:
| At March 31, | ||||||||
Aircraft | Model | Use | 2004 | 2003 | ||||
Boeing 767 | 300ER | Passenger/Freight | 9 | 7 | ||||
Boeing 767 | 300F | Freight | 1 | 1 | ||||
Boeing 737 | 200ADV | Passenger/Freight | 6 | 7 | ||||
Airbus A 319 | 100 | Passenger/Freight | 2 | — | ||||
Airbus A 320 | 200 | Passenger/Freight | 10 | 10 | ||||
Airbus A 340 | 300 | Passenger/Freight | 4 | 4 | ||||
Total leased | 32 | 29 | ||||||
Total owned and leased | 60 | 57 | ||||||
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT MARCH 31, 2004
(unaudited)
NOTE 5—BALANCES AND TRANSACTIONS WITH RELATED COMPANIES
a) Accounts receivable and payable with related parties are summarized as follows:
Current assets
Notes and accounts receivable from related companies:
| At March 31, | ||||||
Company | Relationship | 2004 | 2003 | |||
| (In thousands of US$) | ||||||
San Alberto S.A. and subsidiaries | Common ownership | 189 | 189 | |||
Ultramar Agencia Marítima Ltda. | Common ownership | 16 | 6 | |||
Choice Air Courier del Perú S.A. | Equity method investee | — | 22 | |||
Florida West International Airways Inc. | Equity method investee | 1,202 | 1,561 | |||
Lufthansa Lan Chile Technical Training S.A. | Equity method investee | 311 | 56 | |||
Lan Chile Investments | Equity method investee | — | 320 | |||
Flight Training Center Chile S.A. | Equity method investee | — | 12 | |||
Total | 1,718 | 2,166 | ||||
Current liabilities
Notes and accounts payable to related companies:
| At March 31, | ||||||
Company | Relationship | 2004 | 2003 | |||
| (In thousands of US$) | ||||||
Lan Chile Investments | Equity method investee | — | 310 | |||
Concesionaria Chucumata S.A. | Equity method investee | 1 | — | |||
Austral Sociedad Concesionaria S.A. | Equity method investee | 5 | — | |||
Choice Air Courier del Perú S.A. | Equity method investee | 3 | — | |||
Total | 9 | 310 | ||||
Long-term assets
Notes and accounts receivable from related companies:
| At March 31, | ||||||
Company | Relationship | 2004 | 2003 | |||
| (In thousands of US$) | ||||||
Choice Air Courier del Perú S.A. | Equity method investee | 343 | — | |||
Florida West International Airways Inc. | Equity method investee | — | 462 | |||
Total | 343 | 462 | ||||
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT MARCH 31, 2004
(unaudited)
Long-term liabilities
a) Notes and accounts payable to related companies:
| At March 31, | ||||||
Company | Relationship | 2004 | 2003 | |||
| (In thousands of US$) | ||||||
Ultramar Agencia Marítima Ltda. | Common ownership | 468 | 594 | |||
Skypost, Inc. | Equity method investee | 445 | 570 | |||
Florida West International Airways Inc. | Equity method investee | 8 | — | |||
| 921 | 1,164 | |||||
b) The main transactions with related entities are summarized as follows:
| Amount | ||||||||||
Company | Relationship | Description of transaction | 2004 | 2003 | 2002 | |||||
| (In thousands of US$) | ||||||||||
LanLogistics, Corp and subsidiaries | Common ownership | Loans granted | — | — | 1,528 | |||||
Florida West International Airways Inc. | Equity method investee | Services provided | 5,300 | 5,278 | 4,551 | |||||
| Services received | 4,692 | 7,322 | 5,396 | |||||||
| Jet fuel payments | 275 | 1,348 | — | |||||||
| Other payments | 2,736 | 1,358 | 1,434 | |||||||
Aerotransportes Mas de Carga S.A. de C.V. | Equity method investee | Services provided | — | — | 6,050 | |||||
| Services received | — | — | 3,777 | |||||||
Inmobiliaria Parque San Luis Dos S.A. | Common ownership | Real estate transaction | 7,270 | — | — | |||||
NOTE 6—COMMITMENTS AND CONTINGENCIES
At March 31, 2004 and 2003, the Company had granted the following mortgages, liens and guarantees:
Direct Guarantees (In thousands of US$):
Type of Assets Pledged as Collateral | Amount outstanding at | |||||||
Guarantee | Type | Book Value | 2004 | 2003 | ||||
Mortgage and pledge | Aircraft and motors | 680,066 | 600,359 | 644,789 | ||||
Mortgage | Building | 9,548 | 9,193 | 9,735 | ||||
Pledge | Motors | 6,871 | 3,020 | 4,531 | ||||
Pledge | Spare parts | 514 | — | — | ||||
Pledge | Rental sublease contract | — | 103,438 | 114,220 | ||||
Co-signer | Rental contract | — | 3,500 | 3,500 | ||||
Pledge | Rental contract | — | 133,595 | 139,068 | ||||
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT MARCH 31, 2004
(unaudited)
Indirect Guarantees:
The Company guaranteed a ThUS$3,500 letter of credit dated April 26, 2001, granted in favor of Alcyone FSC Corporation (“Alcyone”) due to an Aircraft Lease Agreement (“Lease”) between Lan Chile Cargo S.A. (“Lan Cargo”) and Alcyone. The Company guarantee is valid until the lease expiration date (November 1, 2006) and was required by Alcyone, the owner of the aircraft. As a result, the Company would be liable for repayment of such letter of credit, should Lan Cargo not fulfill its obligation under the lease. No liability is carried on the balance sheet for the Company’s obligation under the guarantee.
Commitments
On March 19, 1998, the Company entered into a purchase agreement for twenty Airbus A320 aircraft (with the option to purchase an additional twenty aircraft). The estimated cost of these twenty aircraft is ThUS$840,000. This agreement was subsequently amended to require the delivery of A319 aircraft instead of A320 aircraft. In August 1999, the Company entered into another agreement to purchase seven Airbus A340 aircraft (with an option to purchase an additional fourteen aircraft in the future). The estimated maximum cost for these seven aircraft is ThUS$700,000. At March 31, 2004, the remaining commitment for the purchase of four A319 and three A340 aircraft amounted to ThUS$468,000.
During November 2003, Lan Chile S.A. agreed with Airbus Industries and a bank syndicate led by Credit Lyonnais to cancel the delivery of one Airbus A340 aircraft which was scheduled for 2004. At the same time, Lan Chile S.A. exercised call options for three Airbus A319 aircraft.
In order to guarantee its obligations related to the leasing and maintenance of aircraft, Lan Chile Cargo S.A. has issued stand-by letters of credit for ThUS$6,250 with expiration dates ranging from April 2004 to October 2004.
Contingencies
At March 31, 2004, the Company was a defendant in a suit filed by the Administrative Authority of Rio de Janeiro, Brazil, requesting the payment of value added tax (VAT) regarding a Boeing 767 aircraft which was imported to the country. The Company has made no provision for this suit as management believes that the outcome of the claim will be favorable to the Company and any losses incurred will not be material.
At March 31, 2004, the Company was a defendant in five labor disputes filed by the Pilots’ Union and the Cabin Crew Union, requesting the payment of bonuses for the years ended December 31, 1999, 2000, 2001, and 2002. The Company has made no provision for these amounts because management believes that the outcome of the suits will be favorable to the Company and any losses incurred will not be material.
At March 31, 2004, the Company was a defendant in a number of commercial lawsuits of the type normally associated with the Company’s business and involving claims for damages for insignificant amounts. The Company has made no provision for these amounts because management believes that most of the resulting judgments will be favorable and any losses incurred will not result in any material liability to the Company.
LAN CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AT MARCH 31, 2004
(unaudited)
Covenants
As a result of the various contracts entered into by Lan Chile to finance the Boeing 767 aircraft that are financed by the Export - 52
Import Bank of the United States, the Company is required to comply with certain restrictions regarding shareholder composition and disposal of assets.
The loan agreements with Dresdner Bank Lateinamerika A.G. and BBVA — Banco Bhif have placed restrictions on the Company’s ability to dispose of certain of its fixed assets.
As a result of the various contracts entered into by Lan Chile S.A. to finance the Airbus A320 aircraft that are guaranteed by various European export credit agencies, the Company is required to comply with certain restrictions regarding shareholder composition and disposal of assets.
As of March 31, 2004, the Company was in compliance with all covenants.
F-65