UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

OR

For the fiscal year ended December 31, 20032005

OR

OR

Forfor the transition period fromto

Commission File Number: 1-14728

Lan ChileAirlines S.A.

(Exact name of registrant as specified in its charter)

Avenida Américo Vespucio Sur 901Presidente Riesco 5711 Piso 20

Comuna de Renca,Las Condes,

Santiago, Chile

(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

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’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 if the registrant is a well-known seasoned issuer, as defines in Rule 405 of the Securities Act.

Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes  ¨    No  x

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 5(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filerx            Accelerated filer¨            Non-Accelerated filer¨

Indicate by check mark which financial statement item the registrant has elected to follow:

Item 17  ¨    Item 18x

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

TABLE OF CONTENTS

i

PRESENTATION OF INFORMATION

In this annual report on Form 20-F, unless the context otherwise requires, references to “LanChile”“Lan Airlines” are to Lan ChileAirlines S.A., the unconsolidated operating entity, and references to “LAN,” “we,” “us” or the “Company” are to LanChileLan Airlines S.A. and its consolidated subsidiaries. All references to “Chile” are references to the Republic of Chile.

This annual 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 “$”, “US$”, “U.S. dollars” or “dollars” are to United States dollars, references to “pesos”, “Chilean pesos” or “Ch$” are to Chilean pesos and references to “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 published byBanco Central de Chile (which we refer to as the Central Bank of Chile) on December 30, 2003,2005, which was Ch$599.42=514.21=US$1.00. The observed exchange rate on June 8, 200415, 2006 was Ch$644.61=544.51=US$1.00. The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos. See “Key Information—Exchange Rates” under Item 3.

LanChileLan Airlines and the majority of our subsidiaries (including our main cargo subsidiary LanChileLAN Cargo S.A., which we refer to as “LanChile“LAN 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, require monetary assets and liabilities to be translated at period-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 revenue and expense accounts to be translated at the average monthly exchange rate for the month in which they are 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.

Our consolidated financial statements are prepared in accordance with Chilean GAAP, which differs 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’ equity to U.S. GAAP, see Note 2426 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 34 of this annual report.

FORWARD LOOKING STATEMENTS

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.

GLOSSARY OF TERMS

The following terms, as used in this annual report, have the meanings set forth below.

“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.take-off time.
“ton”		A metric ton, equivalent to 2,204.6 pounds.
“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 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, 2004.2005. The summary financial information at and for the three fiscal years in the period ended December 31, 20032005 has been derived from our audited consolidated financial statements. The summary financial information at and for the three months ended March 31, 2003 and March 31, 2004 has been derived from our unaudited interim consolidated financial statements filedincluded in Chile with the Chilean Superintendency of Securities and Insurance Companies.

this report.

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

Although most of our revenues and expenses are denominated in U.S. dollars, some of our expenses and cost are denominated in different currencies such as the Chilean peso. Fluctuations in foreign exchange rates could lead to changes in their value in U.S. dollars. However, the impact on our results of this change is significantly mitigated by the partial natural hedge arising from approximately 80% of our revenues and 73% of operating expenses being denominated in U.S. dollars.

In accordance with the Chilean Corporation Law, LanChilewe must pay annual cash dividends equal to at least 30% of its annual consolidated distributable net income each year (calculated in accordance with Chilean GAAP), subject to the limited exceptions set forth above.

LanChileexceptions. As of May 31, 2006, we had declared aggregate dividends of $14,271,282 with respect to income for 1999, $14,513,753 with respect to income for 2000, $1,406,760US$1.4 million with respect to income for 2001, $13,812,763US$13.8 million with respect to income for 2002, and $41,775,366 with respect to income for 2003. As of March 31, 2004 we have paid $34,999,348US$41.8 million, with respect to income for 2003. The final dividend of $6,776,0182003, US$81.8 million, with respect to income for 20032004 and US$73.3 million with respect to income for 2005. The total dividend for 2005 was divided into two interim dividends paid on September 2005 and March 2006 and a final dividend paid on May 13, 2004.17, 2006. 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.

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. For a description of our dividend policy, see “—Other Financial Information—Dividend Policy” under Item 8.

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 threetwo days prior to the day 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, 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 to holders. For a description of our dividend policy, see “—Other Financial 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 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.

Source: Central Bank of Chile

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.

Source: Central Bank of Chile

On June 8, 2004,15, 2006 the observed exchange rate was Ch$644.61=544.51 = 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,document, 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 toOur business may be adversely affected by a downturn in the September 11, 2001airline industry caused by exogenous events that affect travel behavior or increase costs, such as outbreak of disease, war or terrorist attacks.

Demand for air transportation may be adversely impacted by exogenous events, such as natural disasters, epidemics, terrorist attacks, war or political and social instability. Situations such as these in one or more of the United Statesmarkets in which we operate could have a severematerial impact on the airline industryour business, financial condition and adversely affect our revenues.results of operations. Furthermore, this type of situations could have a prolonged effect on air transportation demand and on certain cost items.

TheFor example, the terrorist attacks in the United States on September 11, 2001 had a severe adverse impact on the airline 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, 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 future 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 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 or 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 Peru, 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.

Some of our cargo product are sensitive to foreign-exchange rates and, therefore, traffic volumes could be impacted by the appreciation or depreciation of local currencies.

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 17.0%27.2% of our operating expenses in 2003.2005. 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 may also limit our ability to take advantage of any decrease in fuel prices. OurAlthough we have implemented measures to pass a portion of incremental fuel costs to our customers, our ability to lessen the impact of any increase in fuel costs by increasing fares or otherwise passing on a portionusing this type of such costs to our customersmechanisms 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 liabilities 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. There can be no assurance 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 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.

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, particularly the entrance of new competitors into the markets in which we operate. Airlines compete primarily over fare levels, frequency and dependability of service, brand

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 our markets and compete with us on any of these bases. Several of our competitors are larger than us and have greater brand recognition and greater resources than we do. Competing carriers include investor-owned, government-subsidized and national flag carriers of foreign countries. The U.S.-Chile and other open skies agreements may subject us to further competition from international carriers. 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.businesses, as well as sea transportation for our cargo business. 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.

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 ability to identify and maintain strategic local partners. Additionally, fare controls may limit our ability to effectively apply revenue management techniques and adjust prices to reflect cost pressures. Also, high levels of government regulation may limit the scope of our operations and our growth plans, especially in the event of deterioration of the relations between the countries in which we operate or the public perception of foreign companies in local markets. These restrictions could materially affect our business, financial condition, result of operations and future expansion plans.

Some of our competitors may receive external support which could negatively impact our competitive position

Some of our competitors may receive support from external sources, such as their national governments, which may be unavailable to us. Support may include, among others, subsidies, financial aid or tax waivers. This support could place us at a competitive disadvantage and adversely affect our operations and financial performance.

If we are unable to incorporate leased aircraft into our fleet at acceptable rates and terms in the future, our business could be adversely affected.

The majority of our aircraft are subject to long-term operating leases. Our operating leases typically run from three to 12 years from the date of delivery. We 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 our current operating leases or to lease additional capacity required for our targeted level of operations. If we are forced to pay higher lease rates in the future to maintain our capacity and the number of aircraft in our fleet, our profitability could be adversely affected.

We fly and depend upon Airbus and Boeing aircraft, and our 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,May 31, 2006, we operated a fleet of 2026 Airbus and 3650 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.

We are incorporating various new technologies and equipment and their phase-in may have a negative impact on our service and operating standards

In recent years we have decided to incorporate a number of new aircraft, equipment and systems. The decision to incorporate these new elements has been based on their potential to enhance customer satisfaction, increase efficiency and/or streamline processes. However, the phase-in of these elements may temporarily result in lower service and operating standards which could affect how our customers perceive us.

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 and payment obligations under our aircraft operating leases compared to equity capital. In order to finance our debt, we depend in part on our cash flow from operations. We cannot assure that in the future we will be able to fully finance our 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’ 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 certain aviation authorities (among them, those from Argentina, 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 Aeronáutica Civil, which we refer to as the JAC, and technical operative authorizations issued by the ChileanDirección General de Aeronáutica Civil, 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 rules and regulations that may be adopted in the future.

We are also subject to various international bilateral air transport agreements that provide for, among other things, the exchange of air traffic rights between the countries in which our companies are based and other countries to which we provide service, and weservice. We must also obtain permission from the applicable foreign governments to provide service to foreign destinations. There can be no assurance that existing bilateral agreements between the 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’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 additional 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, which is also known as the 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.

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 effective operation of our equipment, including our aircraft, maintenance systems and reservation systems, and the commitment of our personnel.systems. 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 ability of our senior management team and key personnel to operate and manage our business effectively. Our employment agreements with key personnel do not contain any non-competition 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, our business, financial condition and results of 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 number of our administrators, cabin crews, flight attendants, pilots and maintenance technicians are members of unions and have contracts and 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.

Pressure by employees could cause operating disruptions and negatively impact our business

Certain employee groups such as pilots, flight attendants, mechanics our airport personnel have highly specialized skills. As a consequence, actions by these groups, such as strikes, walk-outs or stoppages, could severely disrupt our operations and negatively impact our operating and financial performance, as well as how our customers perceive us.

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 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

Developments in Latin American countries and other emerging market countries 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 portion of our operations in 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’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 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.

Fluctuations in the Chilean peso and 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 approximately 24%20% of our revenues and 27% of our operating expenses in 2005 are denominated in pesos and variouscurrencies other currencies.than the U.S. dollar, mainly the Chilean peso . If the value of the peso or of other currencies in which revenues are denominated declines against the U.S. dollar, we will need more pesos or other local currency to repay the same amount of U.S. dollars. The Chilean peso has experienced significant volatility in recent years, including a nominal decrease of approximately 9.8% against the U.S. dollar from December 31, 2001 to December 31, 2002 and a nominal increase of approximately 15.9% against the U.S. dollar from December 31, 2002 to December 31, 2003.in 2003, a nominal increase of approximately 6.6% against the U.S. dollar in 2004 and a nominal increase of approximately 8.1% against the U.S. dollar in 2005. 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.

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, 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

Our majoritycontrolling shareholders may have interests that differ from those of our other shareholders.

As of April 30, 2004, four independent groups of shareholders, whom we collectively callMay 31, 2006 our majoritycontrolling shareholders, together, beneficially owned 81.16%54.0% of our voting common shares. These majoritycontrolling shareholders are in a position to elect a majority of the members of our board of directors, direct our management and 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 ADSs, if holders of ADSs 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.

Trading of our ADSs and common shares in the securities markets is limited and could experience further illiquidity and 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 theour relatively small public float, our common shares are less 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 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.

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, a 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 or required.

Our ADS holders may not be able to exercise preemptive rights in certain circumstances.

The Chilean Corporation Act and Regulation thereof,Ley sobre Sociedades Anónimas No. 18,046and theReglamento de Sociedades Anónimas, collectively known as the Chilean Corporation Law, provide that preemptive rights shall be granted to all shareholders 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 holders of ADSs and shareholders located in the United States pursuant to the preemptive rights granted to shareholders in connection with any future issuance of shares unless a registration statement under the U.S. Securities Act of 1933, as amended, 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 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 ADS holders and shareholders located in the United States.

ITEM 4. INFORMATION ON THE COMPANY

BUSINESS

Overview and History of the Company

We are one of the leading passenger airlines in Latin America and the main provider ofcargo operator in the region. We currently provide domestic and international passenger and cargo air services in Chile and onePeru, domestic passenger services in Argentina, and international passenger services in Ecuador. We carry out our cargo operations through the use of the leadingbelly space on our passenger flights and dedicated cargo operations using freighter aircraft through our cargo airlines in Latin America. Chile, Brazil and Mexico.

As of April 30, 2004,May 31, 2006, we servicedservice 15 destinations in Chile, (plus two seasonal destinations), seven11 destinations in Peru, (six serviced only by our subsidiary Lan Perú S.A., or LanPeru), 17nine destinations (plusin Argentina, two seasonal destinations)destinations in Ecuador, ten 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 April 30, 2004,May 31, 2006, through our various code-share agreements, we offeredoffer service to 3354 additional international destinations. We provide cargo service to all our passenger destinations and to 15 additional destinations served only by freighter destinations.aircraft. We also offer other services, such as ground handling, servicescourier, logistics, and courier services through somemaintenance.

Lan Airlines S.A. is a publicly-held stock corporation (sociedad anónima abierta) incorporated under the laws of Chile. Our principal executive offices are located at Presidente Riesco 5711, Comuna de Las Condes, Santiago, Chile and our subsidiaries and, overgeneral telephone number at this location is (56-2) 565-2525.

History of the past three years, we have expanded into the logistics business and now offer logistics, small package and express door-to-door services in certain Latin American countries. We have also purchased majority and minority stakes in several regional affiliates in order to further strengthen our passenger and cargo networks.

Company

The Chilean government founded LanChileLan Airlines (formerly Lan Chile S.A.) in 1929. LanChileLan Airlines was a government-owned company from 1929 until its incorporation in 1983. LanChileLan Airlines 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’sLan Airlines’ capital stock

to Chilean investors and to Scandinavian Airlines System.System (“SAS”). In 1994, our majoritycontrolling shareholders together with other major shareholders acquired 98.7% of LanChile’sLan Airlines’ stock, including the remaining stock held by the Chilean government, in a series of transactions. As of April 30, 2004,May 31, 2006, the majoritycontrolling shareholders held 81.16%54.0% of our capital stock. For more information about our majoritycontrolling shareholders, see “Major“Controlling Shareholders and Related Party Transactions” under Item 7.

Since the majority shareholders’this 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. Additionally, we have created a comprehensive network across the region by forming, together with local partners, or acquiring, passenger affiliates in Peru, Ecuador, and the Dominican RepublicArgentina and cargo affiliates in Brazil and Mexico. In early 2004, we changed our corporate image and started using the “LAN” brand in order to better reflect the common values and attributes present in all the companies forming our network. We have complemented our own network with a set of bilateral alliances with carriers such as American Airlines, Iberia and Qantas, and have been a member of theoneworld^® 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 at this location is (56-2) 565-2525.

Organizational Structure

LanChileLAN is a company primarily involved in the transportation of passengers and cargo. Our operations are carried out principally by LanChileLan Airlines and also by a number of different subsidiaries. InAs of May 31, 2006, in the passenger business we operateoperated through five main airlines: LanChile,Lan Airlines, Transporte Aéreo S.A. (which does business under the name “Lan Express”), or LanExpress, LanPeru,Lan Peru S.A. (“LanPeru”), Aerolane Líneas Aéreas Nacionales del Ecuador S.A. (“LanEcuador”), or LanEcuador, and Línea Aérea de Navegación DominicanaLan Argentina S.A. (“LanArgentina”, or LanDominicana. previously Aero 2000 S.A.).

In the passenger business we market our sales primarily under the LAN brand. LanChile holdsAs of May 31, 2006, we held a 100%99.9% stake in LanExpress through direct and indirect interests, a 70.0% stake in LanPeru through direct and indirect interests, a 45.0% indirect stake in LanEcuador and a 49.0% indirect stake in LanDominicana.LanArgentina. For more information, see “—Business of the Company—Regional Expansion” below.

Our cargo operations are carried out by a number of companies, including LanChileLan Airlines and LanChileLAN Cargo and are complemented by the operations of certain subsidiaries, such as Aero Transportes Mas de Carga S.A. de C.V., or MasAir, in Mexico and Aerolinhas Brasileiras S.A., or Absa, in Brazil. In the cargo business, we market ourselves primarily under the LanCargoLAN Cargo brand.

In addition to our mainair transportation activities, we provide a series of ancillary services through various subsidiaries. As such, weservices. We offer handling services, through certain of our subsidiaries, courier services through our subsidiary LanCourier S.A., or LanCourier, and logistics, small package and express door-to-door services through LanLogistics.Lan Airlines and various subsidiaries.

Competitive Strengths

Our strategy is to maximize shareholder value by increasing revenues and profitability by improving ourleveraging the operational efficiencies between cargo and passenger air travel,divisions, thoroughly planning for our expansion efforts and carefully controlling costs. We plan to accomplish this goalthese goals 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 Key South AmericaAmerican Markets

We are a market 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 connectmarkets to and from Chile, with the United States, Europe, the South PacificPeru and other Latin American countries.Ecuador. Within Chile and Peru, we continue to have the leading market share of domestic passenger traffic. We have also achieved a solid and growing position on the Argentine domestic market through LanArgentina and in the international market through our other passenger airlines.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.

UniqueDistinct 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. OurThe cargo operations as a percentagebusiness contributes significantly to our total revenue mix, amounting to 36.3% of total revenues of 36.7% in 2003 are2005. This share is 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, therefore lowering our break-even load factors, maximizing our profitability and loweringreducing 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, Argentina, Brazil, Mexico and the Dominican Republic.Mexico. This varied and extensive network allows us to diversify our revenue mix and maximize our daily fleet utilization, an important factor in our low cost structure. In addition, the recent launchuse of the unified LAN brand will provide our customers with an integratedenhances customers’ perception of a seamless and consistent travel experience both within Chileour domestic markets and on all of our international routes.

Attractive Cost Structure

We believe we have a highly competitive cost structure with a low operating cost of 31.8 cents per ATK of 38.8 cents in 2003.2005. 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 2003,2005, a lower percentage than that of other mainline international carriers. Our itineraries and aircraft rotations are designed to maximize aircraft utilization. During 2003,2005, our Boeing 767long-haul aircraft (Boeing 767-300ERs and Airbus A340 aircraftA340-300s) operated an average of more than 15 hours per day. OurWe are undergoing a re-fleeting plan that will enable us to modernize aircraft our short and long-haul fleet has an average agefleets, as well as to reduce the number of 6.5 years, andaircraft families that we periodically renovate aircraft in our short-haul fleet.operate. Finally, our corporate culture promotes constant process streamlining and productivity enhancement.

Strong Strategic Alliances

We are a 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 passengers. Our passenger alliances and commercial agreements provide our customers with over 570approximately 600 travel destinations, a combined reservations system, itinerary flexibility and attractive schedule flexibility,various other benefits, which

substantially enhance our competitive position within the Latin American transcontinental markets.market. Our strong cargo network is also bolstered by alliances and commercial agreements with partners such as Lufthansa Cargo in Europe, American Airlines in the United States, and Lufthansa CargoTAM in Europe.

Brazil.

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 long- 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 flexible 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%36.3% of our total operating revenues in 2003,2005, and we expect that they will beare 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. We will continue to focus on efficiency by increasing our aircraft utilization, streamlining our operations, and reducing commercial costs. Additionally, we plan to increase the efficiency of revenue generation by continuing to use advanced revenue and yield management systems.

Maintain Customer Satisfaction

In both our passenger and cargo businesses, we focus on delivering high quality services that are valued by our customers. In the passenger businesses we focus on high punctuality rates, reliable operations, world-class on-board service on long-haul flights, quick check-in for short-haul flights and a modern fleet, and world-class on-board service.fleet. In the cargo business, we focus on providing reliable service, taking advantage of our ability to handle different types of cargo as well as significant cargo volumes, and leveraging our new facilities in key gateways, such as Miami, to ensure optimal handling of our customerscustomers’ needs.

We continually assess opportunities to incorporate service improvements in order to respond effectively to our customers’ needs.

Enhance the Value of the LAN Brand

In March 2004, we created the LAN brand and launched our new corporate image, under which allimage. 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 marketing.under this brand. By uniting all companies under the LAN alliance concept, we seek to 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 involveinvolved the use of new paint schemes on our aircraft. We estimate that thisThis process will bewas completed by mid-2005.during the first half of 2006.

Build a Comprehensive Network

We are in the process of developing a broad network across the region. In the passenger business, the LAN alliance comprisesconsists of companies in Chile, Peru, Ecuador and the Dominican Republic,Argentina, 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 complementary traffic flows and 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, JAA, 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 crews and mechanics at a high levelto world-class standards both at facilities abroad or at the training centers we have developed in association with world-classhigh-quality partners.

Maintain a Solid Financial Position

We are one of the few investment-grade rated airlines in the world. We seek to maintain our strong financial position by preserving our financial liquidity and continuing 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 the CompanyBUSINESS OF THE COMPANY

Airline Operations and Route Network

We are the main provider of international and domestic passenger and cargo air services in Chile and one of the main air transport operators in Latin America. As of May 31, 2006, we operated leading passenger airlines in Latin America.Chile, Peru, Ecuador and Argentina. We are also the largest cargo operator in the region. Our international and domestic passenger and cargo operations and services have increased substantially over the past five years in terms of capacity, traffic and revenue.

In 2003, according to the JAC, the official Chilean civil aviation authority, we held market shares of:

The following table sets forth the number of passengers we carried and our gross traffic revenues by activity for the periods indicated.

Passenger Operations

The following table sets forth certainAs of May 31, 2006, our passenger operating statistics foroperations were performed through airlines in Chile, Peru, Ecuador and Argentina. We operate international services out of Chile, Peru and Ecuador, as well as domestic routes forflights in Chile, Peru and Argentina. Between June 2003 and May 2004, we also operated international services to and from the periods indicated.Dominican Republic through LanDominicana, which were subsequently suspended due to market conditions.

International Passenger Air Service

Our internationalAs of May 31, 2006, our network comprises sevenconsisted of 15 destinations in Chile, 11 destinations in Peru, 17two destinations (plus two seasonal destinations)in Ecuador, nine destinations in Argentina, ten 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. Within Latin America we have routes to and from Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, the Dominican Republic, Ecuador, Mexico, Peru, Uruguay and Venezuela. We also fly to a variety of international destinations outside Latin America, including Auckland, Frankfurt, Los Angeles, Madrid, Miami, New York, Papeete (Tahiti) and Sydney. In addition, as of April 30, 2004,May 31, 2006, through our various code-share agreements, we offeredoffer service to 22 additional destinations in North America, ten11 additional destinations in Europe, 20 additional destinations in Latin America and the Caribbean (including Mexico), and one additional destination in Latin America. International passengers accounted for approximately 57% of our total passengers in 2003.Asia.

The following table sets forth our market share, in ordercertain of our weekly frequencies of service,passenger operating statistics for international flightsand domestic routes for the periods indicated. Domestic operations in 2003.Chile are classified as “Domestic”, while domestic operations in Peru and Argentina are included in the “International” item.

Source: JAC data

International Passenger Operations

OurAs of May 2006, we operated scheduled international services from Chile, Peru and Ecuador through Lan Airlines, Lan Express, LanPeru and LanEcuador. International passenger traffic grew 34% between 1999 and 2003, from 7,639.9 million RPKs in 1999 to 10,271.5 million RPKs in 2003, primarilyhas grown

significantly due to trade liberalization,demand growth, market share gains, increased connecting traffic to and from other Latin American countries, the launch of new routes and expansion into new market and routes.

Our international network combines our Chilean, Peruvian and Ecuadorian affiliates. We have operated international services out of Chile since 1946, and we greatly expanded our flights out of Peru and Ecuador with the consolidationcreation of LanPeru in 2001 and LanEcuador in 1999 and LanDominicana in 2003.

During the second half of 20012003, respectively. This strategy is aimed at enhancing our value proposition by offering customers more destinations and the first half of 2002, our international passenger traffic decreased significantly due to two events. The September 11, 2001 terrorist attacks in the United States not only had a dramatic impact on traffic torouting alternatives, maximizing aircraft utilization, increasing load-factors, leveraging complementary seasonal patterns, and from the United States, but also affected other international routes as well. Additionally, the economic and political crisis in Argentina severely reduced traffic originating in that country. This reduction not only affected Argentina-Chile routes, but also long-haul routes, as we carried a significant number 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, in each case, as compared to the same quarter in 2001.

In order to minimize losses related to the September 11, 2001 attacks and the Argentine crisis, we adjusted our operations by reducing capacity on some routes. We reallocated this capacity to other routes and intensifiedoptimizing our commercial effortsefforts. We provide long-haul services out of our three main hubs in other countries, such asSantiago, Lima and Guayaquil. We also provide regional services from Chile, Peru and Ecuador. Additionally,Since 2004, we continuously adjustedhave grown our itinerariesintra-Latin American operations out of Lima 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 Alliances and Commercial Agreements” below). These efforts enabledposition it as our passenger traffic to 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 grew 10.6% in the first quarter, 22.9% in the second quarter, 23.8% in the third quarter and 28.7% in the fourth quarter, in each case as compared to the same quarter in 2002. International yields remained flat in 2003, as lower yields due to an increase in average trip lengths (longer flights generally have lower yields) were offset by higher average fares due to improved segmentation.

International Passenger Market

main regional hub. The following table sets forth estimated total Chilean international air passenger service to orthe destinations served from Chile and Chilean GDP foreach of the periods set forth below.aforementioned countries as of May 31, 2006:

Source: JAC data

According to JAC data, Chilean international air passenger traffic increased 6.7%9.8% in 20032005 as compared to 2002,2004, to approximately 15,211.417,937.4 million RPKs. Approximately 20 carriers currently operate international flights to and from Chile. We had a 49.4%50.0% market share in 2003,2005, based on RPKs.RPKs, compared to 49.6% in 2004. Our international operations out of Chile can be divided into four main segments: to North America, to Europe, to the rest of Latin America, and to the Pacific. As of DecemberMay 31, 2003,2006, the other principal carriers that transport passengers tobetween Chile and from ChileNorth America included American Airlines, Aerolineas Argentinas, AeroMexico, Air France, COPA, Delta Airlines, Iberia, Lufthansa, TACA and Varig.

The market for scheduled passenger air travelAir Canada. Our main competitors on routes 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 main competitors on the Chile-United States passenger routesEurope were American Airlines and Delta Airlines.

On Chile-Europe routes, our main competitors are Lufthansa, Air France, Iberia, Air Madrid 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).

Swiss. On Latin American regional routes our main competitors arewere Aerolineas Argentinas, AeroContinente, AeroMexico, Avianca, COPA, TACA, Peru (a subsidiary of the Central American airline TACA), COPATAM, and Varig. As of December 31, 2003, we held a market share of approximately 68.8% inWe were the Santiago-Buenos Aires route and a market share of approximately 43.5% of the routesonly airline operating between Chile and Brazil.

the South Pacific.

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 acrossBased on the region. Overinformation provided by the past several years, we have developed, together with local partners, new operations in Peru, Ecuador and 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, LanPeruinternational traffic to and from Peru grew 17.6% between 2004 and 2005 to approximately 3,027.6 thousand passengers. We had a 24%29% international market share in 2005, based on RPKs, compared to 25% in 2004. Our Peruvian international operations can be divided into two main segments: to North America and to the rest of Latin America. As of May 31, 2006, our main competitors on routes to North America included American Airlines, Continental Airlines, and Delta Airlines. The other principal carriers operating between Peru and the rest of Latin America as of that date included Aerolineas Argentinas, AeroMexico, Avianca, COPA, and TACA.

The Ecuadorian international market (using bookings by IATA travel agencies as proxy for total Peruvian domestic market (31% on the routes it operates). In addition, LanPeru carried 104,844 internationalsize) increased 12.0% to 503.6 thousand passengers between 2004 and 2005. According to travel agency statistics, we had a 31%21% market share of the Lima-Miami route.

LanEcuador

Over the pastEcuadorian international market in 2005 compared to 22% in 2004. Our Ecuadorian international operations can be divided into 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 referredmain segments: to as the DOT, authorized LanEcuadorNorth America, to start serviceEurope and 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).rest of Latin America. As of April 30, 2004, LanEcuador offered serviceMay 31, 2006, on routes to four international destinations. LanEcuador operates Boeing 767-300North America, our main competitors were American Airlines, Continental Airlines and Airbus A320 aircraft.

LanDominicana

LanDominicana is based in the Dominican RepublicDelta Airlines. On routes to Europe, our main competitors were Air Madrid, Air Plus, Iberia, and was started in 1999 as a newKLM. On regional venture. LanDominicana was granted its operations certificate by the Dominican Republic authorities in June 2002routes, our main competitors were TACA, COPA 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.

Avianca.

Domestic Passenger Air ServiceOperations in Chile

Through the companies LanChileLan Airlines and LanExpress we are the leading domestic passenger airline in Chile. We have operated domestic flights in Chile accounting for an aggregate of 88.7% of RPKs forsince the domestic Chilean market during 2001, 94.6% during 2002 and 83.4% during 2003.Company’s creation in 1929. As of April 30, 2004,May 31, 2006, 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. LanChiledestinations. Lan Airlines 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, Our strategy is based on RPKs, for domestic flightsproviding frequent service to Chile’s main destinations, offering a reliable and high quality service, and leveraging our strong brand position in 2003.

Source: JAC data

Chile and abroad. We evaluate our network of domestic routes on an ongoing basis in order to achieve optimal operatingoperational 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 As of May 31, 2006 we operate eight Airbus A319/A320 aircraft and 16 Boeing 737-200 aircraft in the Chilean domestic air passenger service and Chilean GDP for the periods set forth below.

Source: JAC data

market.

According to JAC data, Chilean domestic air passenger traffic (including traffic on our domestic flightsmarket share in Chile was 83.7% for 2004 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 declined76.0% for 2005. Our main competitors 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 andare Sky Airline. In 2003, LanChile and LanExpress together hadAirline with a 83.4%18.0% market share based on RPKs,in 2005 and Sky Airline hadAerolineas de Sur with a 16.5%5.5% market share. Other airlines have a 0.1% market share.

The competitive structure of the domestic passenger market has experienced significant changesshare 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 2002,2005. 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 anda fleet of six Boeing 737-200 aircraft on its domestic operations.

and flies to eleven destinations. Aerolineas del Sur, which entered the market in December 2004, is affiliated with Aerolineas Argentina, and operates to six destinations with four Boeing 737-200 aircraft.

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.

Domestic Operations in Peru

Through LanPeru we are the leading domestic passenger airline in Peru. We have operated domestic flights in Peru since the creation of LanPeru in 1999. As of May 31, 2006, we flew to 11 destinations within Peru. In 2004, we were forced to suspend operations following an injunction issued by a Peruvian judge at the request of a former competitor. The suspension lasted approximately 14 hours until we were authorized by a higher court to reinitiate service. Also in 2004, in response to changes in the competitive structure of the domestic market, we expanded our operations considerably and thereby expanded our presence in the Peruvian market. Specifically, we added service to four new destinations and incorporated five Airbus A320 aircraft to our domestic operations in Peru. Our strategy is based on delivering high quality service in Peru and providing intensive and convenient service to Peru’s main destinations while gradually expanding into new markets. As of May 31, 2006, LanPeru operated with a fleet of seven Airbus A320 aircraft. During the second half of 2006 we plan to gradually replace LanPeru’s Airbus A320s for A319s.

According to CORPAC data, our domestic market share in Peru was 42% for 2004 and 66% for 2005. Our main competitors in the Peruvian market during 2005 were Tans, Star Peru, AeroCondor and Taca Peru. AeroContinente ceased operations in July 2004 and in response, LanPeru and a number of smaller airlines expanded their operations. As a result of this expansion, our market share increased significantly from one year to the other. As of May 31, 2006, our main competitors were the same with the addition of one new operator, Wayra Peru.

Domestic Operations in Argentina

LanArgentina initiated service in June 2005. During its first year, Lan Argentina has focused on domestic services. Lan Argentina grew significantly during 2005 as it added more aircraft and new destinations. As of May 31, 2006 LanArgentina operated five Boeing 737-200s. Its itinerary included routes between Buenos Aires and six other domestic destinations. LanArgentina operates in a regulated environment in which fares sold to Argentine passengers are subject to minimum and maximum prices.

In June 2006, LanArgentina initiated the replacement of its Boeing 737 aircraft for Airbus A320 aircraft. This replacement plan is expected to enable LanArgentina to increase the scope, size and efficiency of its operations.

Our domestic market share in Argentina (using bookings by IATA travel agencies as proxy for total market size) for the June-December 2005 period amounted to 11.1%. Our market share grew consistently throughout this period, starting at 6.1% in June and ending at 13.9% in December 2005. Our competitors in the Argentinean market during 2005 were Aerolineas Argentinas and its affiliate Austral. Together, these two companies held substantially all of the remaining share of the domestic Argentine market.

Passenger Alliances and Commercial Agreements

The following are our passenger alliances and partnerships as of April 30, 2004:May 31, 2006:

•

Alaska Airlines.Since 1999, LanChileLan Airlines has been in an alliance with Alaska Airlines Inc. which currently permits us to provide customers with service between Chile and the Westwest coast of the United States and Canada. As part of this code-share agreement, we offer our customers service on Alaska Airlines’ flights to four destinations in the United States and Canada.

Passenger Marketing and Sales

Our international and domestic marketing strategy stresses punctuality, convenient flight departure schedulesreliability, attentive service, a customer-focused product, comprehensive coverage of key South American markets, and frequent service to major international destinationsoverseas gateways such as New York, Los Angeles, Miami, Madrid, Sydney, Buenos Aires and Sao Paulo.Sydney. 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” below.

Although we significantlyhave reduced costs during 2002,in recent years, we did not reducehave focused on delivering on the qualityattributes valued by customers in order to maintain high levels of our service. As a result, we were ablecustomer satisfaction. The latter are continuously monitored by surveys and perception studies that encompassed approximately 700,000 people in 2005. In order to continue providing the service that has always distinguished LanChile. Additionally,maintain competitive leadership, we have continued to upgrade our aircraft seats and cabins and the in-flight amenities that we provide.

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 ofsuch as “LanChile”, “LanPeru”, and “LanEcuador”. Our new brand and “LanDominicana”. As part of this marketing program, we are also in the process of changing our corporate image includingwere developed after an extensive process supported by a leading global branding agency. Our corporate image is based on two core concepts: reliability and warmth. We expect that using a single, common brand will enable our logocustomers to better understand the common service and aircraft paint schemes. The majority ofoperating standards that exist between our fleet will be painted with the new image by the end of 2004. We expectairlines. Additionally, we believe our new image to enhancewill improve 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 brand, although the

This marketing program involved changing our corporate image, including our logo and aircraft operated bypaint schemes. As a result, all of our LanExpress fleet will featuremarketing efforts are now done using audiovisual elements based on the LAN paint scheme.

brand. During 2005, we focused on advancing the transition to our new brand. This included the gradual repainting of our fleet, which was completed in the second quarter of 2006. Our commercial strategy, centered on exploiting the LAN alliance concept, has been widely recognized, as exemplified by the decision of Airline Business magazine to recognize us in 2004 with its “Airline Strategy Award, Marketing”.

Distribution Channels

We use direct and indirect distribution channels. We have focused on streamlining our distribution strategy in order to reduce costs and enhance the effectiveness of our commercial efforts. This effort has resulted in efficiency gains, and we believe it should lead to further benefits in the future.

Travel agents conduct indirect sales and accounted for approximately 66%67% of passengers during 2003.2005. We paid these travel agents standard commissions ranging from 0% to 9%8% depending on the market. Consistent with our efforts to reduce commission costs and in line with current market practices, in recent years we have reduced standard commissions. For example, during 2003 we eliminated standard commissions in the United States and reduced them in Spain from 8% to 3%.several markets. 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 ReservationGlobal Distribution Systems or CRSs,(“GDS”) that enable them to make reservations on flights from a large number of airlines. CRSsGDSs are also used by travel agents to make hotel and car rental reservations. We participate actively in all major international CRSs,GDSs, including Sabre, Amadeus, Galileo and 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 Distribución Amadeus Chile S.A., which had a market share of approximately 53% as of December 2003 (based on the number of reservations booked through travel agents in Chile).

Direct channels refer to sales by our own ticket offices, call-centers and website. In 2003,2005, direct bookings accounted for approximately 34%33% of all of our passengers. We have an extensive sales and marketing network consisting of more than 150200 domestic and international ticket offices and general sales agentspoints of sale in more than 3830 countries.

In order to increase the volume of direct sales,Our call-centers support the growth of our international operations and provide improved service to our customers, we have developedby combining a call-center network.remote sales channel with personalized service. Our main call-center is located in Santiago and wehandles calls originated in Chile as well as those in foreign markets such as the United States, Uruguay, Europe, and Mexico. We have additional call-centers in Argentina, the United StatesPeru, Ecuador and Peru.Brazil. These call-centers are complemented by over 180 home-based agents. We planhave continuously upgraded our systems incorporating technological advances 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,enhance efficiency and customer service. For example, during 2005 we designed a plan to modernize our call centers. This plan will be implemented during 2004 and encompasses several initiatives, such as the incorporation ofincorporated 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.

technology.

Since September 2000, we have worked intensively to make ourOur website is an integral part of our commercial, marketing and marketingservice efforts. SinceIn March 2004, we replaced our previousthe different country-specific sites (such aslanchile.cl orlanperu.com.pe) with a unified one,www.lan.com as part of, to better reflect 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. InternetOur internet –related sales have increased significantly: they increased 71%significantly in 2003recent years, rising 87% in 2005 compared to 2002,2004, and 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. 90 million in 2005.

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 350,000850,000 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 20032005 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. ThroughIn December 2003, more than 12%2005, around 13% of our domestic passengers were using this system.

As part During April 2006 16.3% 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 directly 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.

passenger used this system.

Electronic Ticketing

In 1997, we introduced electronic tickets, commonly referred to as e-tickets, and have since worked in increasingto increase their penetration. E-tickets are a key element inof our sales efforts through the Internet and our call centers and therefore enablethey also produce important simplifications in our back-office, enabling us to significantly reduce distribution costs. E-tickets, which accounted for approximately 57%80% of tickets sold during 2003,2005, are currently available in more than 95%97% of LanChileLAN routes. InSince 2003, we implemented them on LanPeru’s domestic routes and we are currently working onhave advanced in 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,in line with this effort, in mid-2005 we also launched interline e-ticketscompleted the implementation of this feature with American Airlines, and we expect to implement similar agreements with otherall of ouroneworld^® partners in 2004. partners. We continue developing interline e-ticket agreements with most of our interline partners.