As filed with the Securities and Exchange Commission on April 2, 20121, 2015
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
¨ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20112013
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
¨ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 1-14728
LATAM Airlines Group S.A.
(Exact name of registrant as specified in its charter)
(Translation of registrant’s name into English)
LATAM Airlines Group S.A. | Republic of Chile | |
(Translation of registrant’s name into English) | (Jurisdiction of incorporation or organization) |
(Jurisdiction of incorporation or organization)Presidente Riesco 5711, 20th Floor
Las Condes
Santiago, Chile
|
(Address of principal executive offices)
Gisela Escobar Koch
Tel.: 56-2-565-3944— E-mail: gisela.escobar@lan.com Presidente Riesco 5711, 20th Floor Las Condes Santiago, Chile |
(Name, telephone, e-mail and/or facsimile number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class: | Name of each exchange on which registered: | |||
American Depositary Shares (as evidenced by American Depositary Receipts), each representing one share of Common Stock, without par value | New York Stock Exchange |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 340,319,431.545,558,101.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yesx 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¨ Nox
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. Yesx No¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes¨ 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 filer x Accelerated filer ¨ Non-Accelerated filer ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ¨ | International Financial Reporting Standards as issued by the International Accounting Standards Board x | Other ¨ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
Item 17¨ Item 18¨
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¨ Nox
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3 | |||||||||
PART I | |||||||||
ITEM 1. | |||||||||
ITEM 2. | |||||||||
ITEM 3. | KEY INFORMATION | ||||||||
ITEM 4. | |||||||||
ITEM 4A | |||||||||
ITEM 5. | |||||||||
ITEM 6. | |||||||||
ITEM 7. | |||||||||
ITEM 8. | FINANCIAL INFORMATION | ||||||||
ITEM 9. | |||||||||
ITEM 10. | ADDITIONAL INFORMATION | ||||||||
ITEM 11. | |||||||||
ITEM 12. | |||||||||
PART II | |||||||||
ITEM 13. | |||||||||
ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | ||||||||
ITEM 15. | |||||||||
ITEM 16. | RESERVED | ||||||||
PART III | |||||||||
ITEM 17. | FINANCIAL STATEMENTS | ||||||||
ITEM 18. | FINANCIAL STATEMENTS | ||||||||
ITEM 19. | EXHIBITS |
In this annual report on Form 20-F, unless the context otherwise requires, references to “Lan Airlines”“LATAM Airlines Group” are to LanLATAM Airlines Group S.A., the unconsolidated operating entity, and references to “LAN,“LATAM,” “we,” “us” or the “Company” are to LanLATAM Airlines Group S.A. and its consolidated subsidiaries.subsidiaries: Transporte Aéreo S.A. (which does business under the name “LAN Express”), LAN Perú S.A. (“LAN Peru”), Aerolane, Líneas Aéreas Nacionales del Ecuador S.A. (“LAN Ecuador”), LAN Argentina S.A. (“LAN Argentina,” previously Aero 2000 S.A.), Aerovías de Integración Regional, Aires S.A. (which does business under the name “LAN Colombia”), TAM S.A. (“TAM”), LAN Cargo S.A. (“LAN Cargo”) and its respective regional affiliates: Aero Transportes Mas de Carga S.A. de C.V. (“MasAir”) in Mexico, Linea Aerea Carguera de Colombia S.A. (“LANCO”) in Colombia and Aerolinhas Brasileiras S.A. (which does business under the name of “TAM Cargo” and/or “ABSA”) in Brazil, as well as Multiplus S.A. (“Multiplus”). All references to “Chile” are references to the Republic of Chile.
On June 22, 2012, LATAM was formed following the completion of the business combination between LAN Airlines S.A. and its consolidated subsidiaries (“LAN”) with TAM S.A. and its consolidated subsidiaries (“TAM”). Following the combination, LAN Airlines S.A. became “LATAM Airlines Group S.A.” and TAM continues to exist as a subsidiary of Holdco I S.A. (“Holdco I”) and a subsidiary of LATAM Airlines Group. LATAM’s consolidated financial statements for the year ended December 31, 2012 include TAM’s financial results from June 23, 2012. As LATAM Airlines Group S.A. is the owner of substantially all the economic rights in TAM, TAM and its consolidated subsidiaries are for the purposes of this annual report and LATAM’s consolidated financial statements treated as being subsidiaries of LATAM Airlines Group S.A. See “Item 4. Information on the Company—A. History and Development of the Company—Combination of LAN and TAM.”
Throughout this annual report on Form 20-F we make numerous references to “LAN”. Some references to “LAN” are to LAN Airlines S.A., currently known as LATAM Airlines Group S.A. and its consolidated subsidiaries, in connection with circumstances and facts occurring prior to June 22, 2012. Other references to “LAN”, however, are to the LAN brand which was launched in 2004 and brings together, under one internationally recognized name, all of the affiliate brands such as LAN Chile, LAN Peru, LAN Argentina, LAN Colombia, LAN Ecuador and LAN Cargo.
In this annual report on Form 20-F, unless the context otherwise requires, references to “TAM” are to TAM S.A., and its consolidated subsidiaries, including TAM Linhas Aereas S.A., the operating entity, Multiplus S.A. (“Multiplus”), Pantanal Linhas Aéreas S.A. (“Pantanal”), Fidelidade Viagens e Turismo Limited (“TAM Viagens”), and Transportes Aéreos Del Mercosur S.A. (“TAM Mercosur”).
This annual report contains conversions of certain Chilean peso and Brazilian real 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 and the Brazilian real 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$” are to Chilean pesospesos. References to “reais,” “Brazilian reais,” or “R$” are to Brazilian reais, 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 “dólar observado” or “observed” exchange rate published byBanco Central de Chile (which we refer to as the Central Bank of Chile) on December 31, 2011,2014, which was Ch$519.20=607.38 = US$1.00. The observed exchange rate on March 23, 2012,24, 2015, was Ch$487.72=627.00= US$1.00. Unless we indicate otherwise, the U.S. dollar equivalent for information in Brazilian reais is based on the “dólar observado” or “observed” exchange rate published by Banco Central do Brasil (which we refer to as the Central Bank of Brazil) on December 31, 2014, which was R$2.656 = US$1.00. The observed exchange rate on March 24, 2015, was R$3.130 =US$1.00. The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos.pesos nor Brazilian reais. See “Item 3. Key Information—Selected Financial Data—Chilean Peso Exchange Rates”. and “Item 3. Key Information—Selected Financial Data—Brazilian Exchange Rates.”
LanLATAM Airlines Group and the majority of our subsidiaries (including our main cargo subsidiary Lan Cargo S.A., or 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, Argentinean pesos, Colombian pesos or Colombian pesos.Brazilian reais. In particular, TAM maintains its accounting records and prepares its financial statements in Brazilian reais. Our audited consolidated financial statements include the results of these subsidiaries translated into U.S. dollars. International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”), require assets and liabilities to be translated at period-end exchange rates, while revenue and expense accounts are translated at each transaction date, although a monthly average rates.rate may also be used if exchange rates do not vary widely.
OurLATAM’s audited consolidated financial statements for the periods ended December 31, 2009, 2010, 2011, 2012, 2013 and 20112014 were prepared in accordance with IFRS. Prior to 2009 our audited consolidated financial statements were prepared in accordance with accounting principles generally accepted in Chile (“Chilean GAAP”). IFRS differs in certain significant respects from Chilean GAAP. As a result, our financial information presented under IFRS as of 2009 is not directly comparable to our financial information presented with respect to previous years under Chilean GAAP. Accordingly, readers should avoid such comparison.
We have rounded percentages and certain U.S. dollar, and Chilean peso and Brazilian reais 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 4 of this annual report.
This annual report contains forward-looking statements including those relating to our proposed combination with TAM S.A. (“TAM”). See “Item 3. Key Information—Risk Factors—Risks Relating to the Exchange Offer and Mergers” and “Item 4. Information on the Company—History and Development of the Company—Proposed Combination with TAM”. Such statementsthat may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” or other similar expressions. Forward-looking statements, including statements about our beliefs and expectations, are not statements of historical facts. 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:
the factors described in Item 3 under “Risk“Item 3—Key Information—Risk Factors” generally and with respect to our proposed combination with TAM in particular;
whether the holders of a sufficient number of TAM’s free float shares accept the exchange offer;
our ability to service our debt and fund our working capital requirements;
future demand for passenger and cargo air service in Chile, Brazil other countries in Latin America and the rest of the world;
the maintenance of relationships with customers;
the state of the Chilean, Brazilian, Latin American and world economies and their impact on the airline industry;
the effects of competition;
future terrorist incidents or related activities affecting the airline industry;
future outbreak of diseases, or spread of already existing diseases, affecting traveling behavior and/or exports;
natural disasters affecting traveling behavior and/or exports;
the relative value of the Chilean, Peruvian, Ecuadorian, Colombian, Brazilian, Mexican and Argentine currencies compared to other currencies;
inflation;
competitive pressures on pricing;
our capital expenditure plans;
changes in labor costs, maintenance costs, and insurance premiums;
fluctuation of crude oil prices and its effect on fuel costs;
cyclical and seasonal fluctuations in our operating results;
defects or mechanical problems with our aircraft;
our ability to successfully implement our growth strategy;
increases in interest rates; and
changes in regulations, including regulations related to access to routes in which we operate.
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 “Item 3. Key Information—Risk Factors”.
The following terms, as used in this annual report, have the meanings set forth below.
Capacity Measurements: | ||
“available seat kilometers” or “ASKs” | The number of seats made available for sale multiplied by the kilometers flown. | |
“available ton kilometers” or “ATKs” | The number of tons available for the transportation of revenue load (cargo) multiplied by the kilometers flown. |
“available seat kilometers equivalent” or “ASK equivalent” | The number of seats made available for sale plus the quotient of cargo ATKs divided by 0.095, all multiplied by the kilometers flown. | |
Traffic Measurements: | ||
“revenue passenger kilometers” or “RPKs” | The number of passengers multiplied by the number of kilometers flown. | |
“revenue ton kilometers” or “RTKs” | The load (cargo) in tons multiplied by the kilometers flown. | |
“traffic revenue” | Revenue from passenger and cargo operations. | |
Yield Measurements: | ||
“cargo yield” | Revenue from cargo operations divided by RTKs. | |
“overall yield” | Revenue from airline operations (passenger and cargo) divided by system RTKs (passenger and cargo). | |
“passenger yield” | Revenue from passenger operations divided by RPKs. | |
Load Factors: | ||
“cargo load factor” | RTKs (cargo) expressed as a percentage of ATKs (cargo). | |
“passenger load factor” | RPKs expressed as a percentage of ASKs. | |
Other: | ||
“ACMI leases” | 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.” | |
“Airbus A320-Family Aircraft” | The Airbus A318, Airbus A319, Airbus A320 and Airbus | |
“block hours” | The elapsed time between an aircraft leaving an airport gate and arriving at an airport gate. | |
“m²” | square meters. | |
“ton” | A metric ton, equivalent to 2,204.6 pounds. | |
“utilization rates” | The actual number of flight hours per aircraft per operating day. | |
“operating expenses” | Operating expenses, which are calculated in accordance with IFRS, comprise the sum of the line items “cost of sales” plus “distribution costs” plus “administrative expenses” plus “other operating expenses”, as shown on our consolidated statement of comprehensive income. These operating expenses include: wages and benefits, fuel, depreciation and amortization, commissions to agents, aircraft rentals, other rental and landing fees, passenger services, aircraft maintenance, and other operating expenses. | |
“MiSchDynamicDT” “Diio Mi” | Market Intelligence Schedule Dynamic Table. Data In Intelligence Out Market Intelligence. |
ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
Not applicable.
ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE |
Not applicable.
ITEM 3. | KEY INFORMATION |
A. Selected Financial Data
The following table presents our summary financial data. Our audited consolidated financial statements relate to the period ended December 31, 2011, and constitute the third annual audited financial statements prepared in accordance with IFRS.
Our date of transition to IFRS was January 1, 2008. Consequently, we have prepared our opening consolidated statements of financial position under IFRS as of that date. Our date of adoption of IFRS was January 1, 2009.LATAM’s Historical Financial Information
The summary consolidated annual financial information of LATAM as of December 31, 2014, 2013, 2012, 2011 2010 and 2009, and each of the three years ended December 31, 2011, 2010 and 2009 has been prepared in accordance with IFRSIFRS(*). On June 22, 2012, LATAM Airlines Group was formed through the combination of LAN and is derived from our audited consolidated annual financialTAM. Following the combination, LAN Airlines S.A. became “LATAM Airlines Group S.A.” and TAM continues to exist as a subsidiary of Holdco I and a subsidiary of LATAM Airlines Group. Financial statements included in this annual report or previous annual reports. The summary consolidated annual financial information as of December 31, 2008 and for the year ended December 31, 2008 presented in this annual report is derived from our audited consolidated annual financial statements included in a previous annual report. This financial information has been previously presented in accordance with Chilean GAAP, and has been restated under IFRS only for comparative purpose. 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.”
LATAM’s Annual Financial Information
Year ended December 31, | ||||||||||||||||
2011 | 2010 | 2009 | 2008 | |||||||||||||
(in US$ millions, except per share and capital stock data) | ||||||||||||||||
The Company(1)(3) | ||||||||||||||||
Statement of Income Data: | ||||||||||||||||
Operating revenues | ||||||||||||||||
Passenger | 4,008.9 | 3,109.8 | 2,623.6 | 2,820.8 | ||||||||||||
Cargo | 1,576.5 | 1,280.7 | 895.6 | 1,319.4 | ||||||||||||
Total operating revenues | 5,585.4 | 4,390.5 | 3,519.2 | 4,140.2 | ||||||||||||
Cost of sales | (4,078.6 | ) | (3,012.7 | ) | (2,522.8 | ) | (2,893.9 | ) | ||||||||
Gross margin | 1,506.8 | 1,377.8 | 996.4 | 1,246.3 | ||||||||||||
Other operating income(2) | 132.8 | 132.8 | 136.4 | 142.9 | ||||||||||||
Distribution costs | (479.8 | ) | (383.5 | ) | (327.0 | ) | (366.7 | ) | ||||||||
Administrative expenses | (406 | ) | (332 | ) | (270 | ) | (275 | ) | ||||||||
Other expenses | (214.4 | ) | (172.4 | ) | (100.5 | ) | (127.9 | ) | ||||||||
Other gains/(losses)(4) | (33.0 | ) | 5.4 | (11.7 | ) | (135 | ) | |||||||||
Financial income | 14.5 | 14.9 | 18.2 | 18.5 | ||||||||||||
Financial costs | (139.1 | ) | (155.3 | ) | (153.1 | ) | (125.5 | ) | ||||||||
Equity accounted earnings | 0.5 | 0.1 | 0.3 | 0.7 | ||||||||||||
Exchange rate differences | (0.3 | ) | 13.8 | (11.2 | ) | 23.4 | ||||||||||
Result of indexation units | 0.1 | 0.1 | (0.6 | ) | 1.2 | |||||||||||
Income before income taxes | 382.4 | 502.0 | 277.5 | 403.4 | ||||||||||||
Income tax | (61.8 | ) | (81.1 | ) | (44.5 | ) | (65.1 | ) | ||||||||
Net income for the period | 320.6 | 420.9 | 233.0 | 338.3 | ||||||||||||
Income attributable to the parent company’s equity holders | 320.2 | 419.7 | 231.1 | 336.5 | ||||||||||||
Income attributable to non-controlling interests | 0.4 | 1.2 | 1.9 | 1.8 | ||||||||||||
Net income for the period | 320.6 | 420.9 | 233.0 | 338.3 | ||||||||||||
Earnings per share | ||||||||||||||||
Basic earnings per share (US$)(5) | 0.94335 | 1.23882 | 0.68221 | 0.99318 | ||||||||||||
Diluted earnings per share(US$) | 0.94260 | 1.23534 | 0.68221 | 0.99318 |
At December 31, | ||||||||||||||||
2011 | 2010 | 2009 | 2008 | |||||||||||||
(in US$ millions, except per share and capital stock data) | ||||||||||||||||
Balance Sheet Data: | ||||||||||||||||
Cash, and cash equivalents | 374.4 | 631.1 | 731.5 | 401.0 | ||||||||||||
Other current assets in operation | 964.3 | 896.5 | 666.6 | 665.8 | ||||||||||||
Non- current assets and disposal groups held for sale | 4.7 | 5.5 | 10.9 | 10.4 | ||||||||||||
Total current assets | 1,343.4 | 1,533.1 | 1,409.0 | 1,077.2 | ||||||||||||
Property and equipment | 5,928.0 | 4,948.4 | 4,196.6 | 3,966.1 | ||||||||||||
Other non- current assets | 377.3 | 304.4 | 166.4 | 153.6 | ||||||||||||
Total non- current assets | 6,305.3 | 5,252.8 | 4,363.0 | 4,119.7 | ||||||||||||
Total assets | 7,648.7 | 6,785.9 | 5,772.0 | 5,196.9 | ||||||||||||
Total current liabilities | 2,322.1 | 2,144.0 | 1,523.3 | 1,551.5 | ||||||||||||
Total non-current liabilities | 3,869.2 | 3,341.8 | 3,142.7 | 2,876.8 | ||||||||||||
Total liabilities | 6,191.3 | 5,485.8 | 4,666.0 | 4,428.3 | ||||||||||||
Net equity attributable to the parent company’s equity holders | 1,445.3 | 1,296.8 | 1,098.8 | 761.8 | ||||||||||||
Minority interest | 12.0 | 3.2 | 7.1 | 6.8 | ||||||||||||
Total net equity | 1,457.3 | 1,300.1 | 1,105.9 | 768.6 |
Year ended December 31, | ||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
(in US$ millions, except per share and capital stock data) | ||||||||||||||||||||
The Company(1)(2) | ||||||||||||||||||||
Statement of Income Data: | ||||||||||||||||||||
Operating revenues | ||||||||||||||||||||
Passenger | 10,380.1 | 11,061.6 | 7,966.8 | 4,008.9 | 3,109.8 | |||||||||||||||
Cargo | 1,713.4 | 1,863.0 | 1,743.5 | 1,576.5 | 1,280.7 | |||||||||||||||
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Total operating revenues | 12,093.5 | 12,924.5 | 9,710.4 | 5,585.4 | 4,390.5 | |||||||||||||||
Cost of sales | (9,624.5 | ) | (10,054.2 | ) | (7,634.5 | ) | (4,078.6 | ) | (3,012.7 | ) | ||||||||||
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Gross margin | 2,469.0 | 2,870.4 | 2,075.9 | 1,506.8 | 1,377.8 | |||||||||||||||
Other operating income(3) | 377.6 | 341.6 | 220.2 | 132.8 | 132.8 | |||||||||||||||
Distribution costs | (957.1 | ) | (1,025.9 | ) | (803.6 | ) | (479.8 | ) | (383.5 | ) | ||||||||||
Administrative expenses | (980.7 | ) | (1,136.1 | ) | (888.7 | ) | (405.7 | ) | (331.8 | ) | ||||||||||
Other expenses | (401.0 | ) | (408.7 | ) | (311.8 | ) | (214.4 | ) | (172.4 | ) | ||||||||||
Other gains/(losses) | 33.5 | (55.4 | ) | (45.8 | ) | (33.0 | ) | 5.4 | ||||||||||||
Financial income | 90.5 | 72.8 | 77.5 | 14.5 | 14.9 | |||||||||||||||
Financial costs | (430.0 | ) | (462.5 | ) | (294.6 | ) | (139.1 | ) | (155.3 | ) | ||||||||||
Equity accounted earnings | (6.5 | ) | 2.0 | 1.0 | 0.5 | 0.1 | ||||||||||||||
Exchange rate differences | (130.2 | ) | (482.2 | ) | 66.7 | (0.3 | ) | 13.8 | ||||||||||||
Result of indexation units | 0 | 0.2 | 0 | 0.1 | 0.1 | |||||||||||||||
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Income (loss)before income taxes | 65.2 | (283.9 | ) | 96.7 | 382.4 | 502.0 | ||||||||||||||
Income (loss) tax expense/benefit | (292.4 | ) | 20.1 | (102.4 | ) | (61.8 | ) | (81.1 | ) | |||||||||||
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Net (loss) income for the period | (227,2 | ) | (263.8 | ) | (5.6 | ) | 320.6 | 420.9 | ||||||||||||
Income (loss) attributable to the parent company’s equity holders | (260,0 | ) | (281.1 | ) | 19.1 | 320.2 | 419.7 | |||||||||||||
Income (loss) attributable to non-controlling interests | 32,8 | 17.3 | 13.4 | 0.4 | 1.2 | |||||||||||||||
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Net income (loss) for the year | (227.2 | ) | (263.8 | ) | (5.6 | ) | 320.6 | 420.9 | ||||||||||||
Earnings per share | ||||||||||||||||||||
Average number of Shares | 545,547,819 | 487,930,977 | 412,267,624 | 339,424,598 | 338,790,909 | |||||||||||||||
Basic earnings (loss) per share (US$) | (0.47656 | ) | (0.57613 | ) | (0.0463 | ) | 0.94335 | 1.23882 | ||||||||||||
Diluted earnings (loss) per share(US$) | (0,47656 | ) | (0.57613 | ) | (0.0463 | ) | 0.9426 | 1.23534 |
Operational Data: ASKs (million) RPKs (million) ATKs (million) (6) RTKs (million) System ATKs (million) Balance Sheet Data: Cash, and cash equivalents Other current assets in operation Non-current assets and disposal groups held for sale Total current assets Property and equipment Other non-current assets Total non-current assets Total assets Total current liabilities Total non-current liabilities Total liabilities Issued Capital Net equity attributable to the parent company’s equity holders Non-controlling interest Total net equity Shares Outstanding At December 31, 2011 2010 2009 2008 2007 48,153.6 42,355.2 38,776.2 35,176.1 31,556.0 38,422.9 33,147.5 29,836.2 26,951.7 24,001.2 5,192.7 4,628.7 3,848.9 4,071.9 3,636.3 3,612.4 3,245.3 2,627.4 2,906.2 2,701.0 10,056.1 8,968.8 7,811.8 7,659.9 6,999.9 At December 31, 2014 2013 2012 2011 2010 (in US$ millions, except per share and capital stock data) 989.4 1,984.9 650.3 374.4 631.1 2,644.1 2,992.2 2,626.2 964.3 896.5 1.1 2.4 47.7 4.7 5.5 3,634.6 4,979.5 3,324.2 1,343.4 1,533.1 10,773.1 10,982.8 11,807.1 5,928.0 4,948.4 6,076.7 6,668.8 7,195.0 377.3 304.4 16,849.8 17,651.6 19,002.1 6,305.3 5,252.8 20,484.4 22,631.1 22,326.3 7,648.7 6,785.9 5,829.7 6,509.1 6,297.5 2,322.1 2,144.0 10,151.0 10,795.6 10,808.1 3,869.2 3,341.8 15,980.7 17,304.7 17,105.6 6,191.3 5,485.8 2,545.7 2,389.4 1,501.0 473.9 453.4 4,401.9 5,238.8 5,112.1 1,445.3 1,296.8 101,8 87.6 108.6 12.0 3.2 4,503.7 5,326.5 5,220.7 1,457.4 1,300.1 545,558,101 535,243,229 479,107,860 340,319,431 338,790,999
(1) | For more information on the subsidiaries included in this consolidated |
(2) | The addition of the items may differ from the total amount due to rounding. |
(3) | Other operating income included in this Statement of Income Data is equivalent to the sum of income derived from |
(*) In connection with the financial information as |
Although most of our revenuesDecember 31, 2014, Law No. 20,780 issued on September 29, 2014, introduced modifications to the income tax system in Chile and expensesother tax matters. On October 17, 2014 the Chilean Superintendence of Securities and Insurance (the “SVS”) issued Circular No. 856, which established that the effects of the change in the income tax rates on deferred tax assets and liabilities must be recognized directly within “Retained earnings” instead of the income statement as required by IAS 12. In order to comply with IAS 12, the financial statements for the period ended December 31, 2014 are denominated in U.S. dollars, some are denominated in different currencies, suchto those presented to the SVS as the Chilean peso. Fluctuationsaforementioned effect has been recognized within the income statement. For more information on the reconciliation of such differences see Note 2.1 and see Note 17 in foreign exchange rates could leadour audited consolidated financial statements.
The table below presents unaudited operating data of LATAM as of and for the year ended December 31, 2010, 2011 (which represents LAN’s historical unaudited operating data), as of and for the year ended December 31, 2012 (which includes TAM’s unaudited operating data since June 23, 2012), and as of and for the years ended December 31, 2013 and December 31, 2014. LATAM believes this operating data is useful to changesreport the operating performance of its business and may be used by certain investors in evaluating companies operating in the valueglobal air transportation sector. However these measures may differ from similarly titled measures reported by other companies, and should not be considered in isolation or as a substitute for measures of these itemsperformance in U.S. dollars. Nevertheless, the impact on our results stemmingaccordance with IFRS. This unaudited operating data is not included in or derived from any such fluctuations is significantly mitigated by the fact that 78.0% of our revenues and 53.0% of our operating expenses are denominated in U.S. dollars.LATAM’s financial statements.
For the year ended and as of December 31, | ||||||||||||||||||||
Operating Data: | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||
ASKs (million) | 130,200.9 | 131,690.7 | 93,319.2 | 48,153.6 | 42,355.2 | |||||||||||||||
RPKs (million) | 108,534.0 | 106,466.4 | 74,694.9 | 38,422.9 | 33,147.5 | |||||||||||||||
ATKs (million) | 7,219.7 | 7,651.9 | 6,449.6 | 5,192.7 | 4,620.2 | |||||||||||||||
RTKs (million) | 4,317.2 | 4,466.7 | 4,044.5 | 3,612.4 | 3,238.8 | |||||||||||||||
ASK Equivalent (million) | 206,197.9 | 212,236.8 | 161,209.3 | 102,813.6 | 90,988.9 |
Dividend Policy
In accordance with theLey sobre Sociedades Anónimas No. 18,046(Chilean (Chilean Corporation Act) andReglamento de Sociedades Anónimas(Regulation to the Chilean Corporation Act) (collectively, the “Chilean Corporation Law”), we must pay annual cash dividends equal to at least 30.0% of our annual consolidated distributable net income each year (calculated in accordance with IFRS), subject to limited exceptions. In 2011, we paid interim dividends related to year 2011 results totaling US$141.6 million, equivalent to 44.2% of the Company’s net income in 2011. The aforementioned dividends were paid as follows: (i) on September 15, 2011, we paid a first interim dividend of US$56.6 million related to results as of June 30, 2011, to the shareholders on record as of September 9, 2011, representing US$0.16677 per share; and (ii) on January 12, 2012, we paid a second interim dividend of US$ 85.0 million related to full year 2011 results, to shareholders on record as of January 6, 2012, representing US$0.24988 per share. The table below sets forth the cash dividends per common share and per ADS, as well as the number of common shares entitled to such dividends, for the years indicated. Dividends per common share amounts have not been adjusted for inflation and reflect common share amounts outstanding immediately prior to the distribution of such dividend. In August 2007, LAN modified the ratio of its common shares to one of its American Depositary Receipts (“ADRs”), from 5:1 to 1:1.
Dividend for year: | Payment date(s) | Total dividend payment | Number of common shares entitled to dividend | Cash dividend per common share | Cash dividend per ADS | |||||||||||||
(U.S. dollars) | (in millions) | (U.S. dollars) | (U.S. dollars) | |||||||||||||||
2007 | August 23, 2007 | 90,104,830 | 338.79 | 0.26596 | 0.26596 | |||||||||||||
January 17, 2008 | 119,894,715 | 338.79 | 0.35389 | 0.35389 | ||||||||||||||
May 8, 2008 | 5,827,204 | 338.79 | 0.01720 | 0.01720 | ||||||||||||||
2008 | August 21, 2008 | 96,785,787 | 338.79 | 0.28568 | 0.28568 | |||||||||||||
January 15, 2009 | 105,001,466 | 338.79 | 0.30993 | 0.30993 | ||||||||||||||
2009 | August 20, 2009 | 34,621,043 | 338.79 | 0.10219 | 0.10219 | |||||||||||||
January 21, 2010 | 70,000,978 | 338.79 | 0.20662 | 0.20662 |
Dividend for year: Payment date(s) 2010 2011 Total dividend
payment Number of
common
shares
entitled to
dividend Cash
dividend
per common
share Cash
dividend
per ADS (U.S. dollars) (in millions) (U.S. dollars) (U.S. dollars) May 20, 2010 10,939,558 338.79 0.03229 0.03229 August 19, 2010 74,466,242 338.79 0.21980 0.2198 January 13, 2011 125,000,294 338.79 0.36896 0.36896 April 29, 2011 10,386,295 339.31 0.03061 0.03061 September 15, 2011 56,594,769 339.36 0.16677 0.16677 January 12, 2012 85,000,207 340.16 0.24988 0.24988
OurLATAM Airlines Group’s 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 “Item 8. Financial Information—Consolidated Financial Statements and Other Financial Information—Dividend Policy”. and “Item 10. Additional Information—Dividend and Liquidation Rights.” LATAM did not pay an interim dividend regarding periods 2013 and 2014
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 two days prior to the day we first make payment to shareholders. Payments of cash dividends to holders of ADRs, if any, are made in Chilean pesos to the custodian, which converts those Chilean pesos into U.S. dollars and delivers U.S. dollars to the depositary for distribution to holders. 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 a devaluation of the Chilean currency that may occur before such dividends are converted and remitted.
LATAM’s Dividend Payments
The table below sets forth the cash dividends per common share and per ADS paid by LATAM, as well as the number of common shares entitled to such dividends, for the years indicated. Dividends per common share amounts and reflect common share amounts outstanding immediately prior to the distribution of such dividend.
Dividend for year: | Payment date(s) | Total dividend payment | Number of common shares entitled to dividend | Cash dividend per common share | Cash dividend per ADS | |||||||||||||
(U.S. dollars) | (in millions) | (U.S. dollars) | (U.S. dollars) | |||||||||||||||
2010 | August 19, 2010 | 74,466,242 | 338.79 | 0.21980 | 0.2198 | |||||||||||||
January 13, 2011 | 125,000,294 | 338.79 | 0.36896 | 0.36896 | ||||||||||||||
April 29, 2011 | 10,386,295 | 339.31 | 0.03061 | 0.03061 | ||||||||||||||
2011 | September 15, 2011 | 56,594,769 | 339.36 | 0.16677 | 0.16677 | |||||||||||||
January 12, 2012 | 85,000,207 | 340.16 | 0.24988 | 0.24988 | ||||||||||||||
May 17, 2012 | 18,461,735 | 341.00 | 0.05414 | 0.05414 | ||||||||||||||
2012 | May 17, 2013 | 3,288,125 | 483,55 | 0.00680 | 0.00680 |
Chilean Peso Exchange Rates
The following table sets forth, for the 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. On March 24th, 2015 the observed exchange rate was Ch$ 627.00= US$1.00.
Daily Observed Exchange Rate | Daily Observed Exchange Rate | |||||||||||||||||||||||||||||||
Year Ended December 31, | High | Low | Average(1) | Period-End | High | Low | Average(1) | Period-End | ||||||||||||||||||||||||
Ch$ per US$ | Ch$ per US$ | |||||||||||||||||||||||||||||||
2007 | 548.67 | 493.14 | 521.95 | 495.82 | ||||||||||||||||||||||||||||
2008 | 676.75 | 431.22 | 528.88 | 629.11 | ||||||||||||||||||||||||||||
2009 | 643.87 | 491.09 | 553.77 | 506.43 | ||||||||||||||||||||||||||||
2010 | 549.17 | 468.37 | 511.20 | 468.37 | ||||||||||||||||||||||||||||
2011 | 533.74 | 455.91 | 483.86 | 521.46 | ||||||||||||||||||||||||||||
2012 | 519.69 | 469.65 | 486.75 | 478.60 | ||||||||||||||||||||||||||||
2013 | 533.95 | 466.50 | 495.00 | 523.76 | ||||||||||||||||||||||||||||
2014 | 621.41 | 524.61 | 570.01 | 607.38 | ||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||
September | 521.85 | 460.34 | 483.69 | 515.14 | 601.66 | 585.29 | 593.47 | 601.66 | ||||||||||||||||||||||||
October | 533.74 | 492.04 | 511.74 | 492.04 | 599.22 | 576.65 | 589.98 | 576.65 | ||||||||||||||||||||||||
November | 526.83 | 490.29 | 508.44 | 524.25 | 600.37 | 576.50 | 592,46 | 598.94 | ||||||||||||||||||||||||
December | 522.62 | 508.67 | 517.17 | 521.46 | 621.41 | 605.46 | 612.92 | 607.38 | ||||||||||||||||||||||||
End of year | 533.74 | 455.91 | 483.67 | 521.46 | ||||||||||||||||||||||||||||
2012 | ||||||||||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||
January | 519.20 | 485.35 | 501.34 | 488.99 | 629.09 | 606.75 | 620.91 | 626.48 | ||||||||||||||||||||||||
February | 488.75 | 475.29 | 481.49 | 477.41 | 632.62 | 616.86 | 623.62 | 617.67 | ||||||||||||||||||||||||
March(2) | 491.57 | 476.27 | 484.59 | 491.57 | 642.18 | 617.38 | 630.19 | 627.00 |
Source: Central Bank of Chile
(1) | For each year, the average of the month-end exchange rates for the relevant year. For each month, the average daily exchange rate for the relevant month. |
(2) | Through March |
Brazilian Exchange Rates
TAM maintains its accounting records and prepares its financial statements in Brazilian reais. The following tables set forth, for the periods indicated, the high, low, average and period-end observed exchange rate for the purchase of U.S. dollars, expressed in Brazilian reais per U.S. dollar. The rates have not been restated in constant currency units. On March 23, 201224th, 2015 the observed exchange rate was Ch$487.72=R$3.1304 = US$1.00.
Daily Observed Exchange Rate | ||||||||||||||||
Year Ended December 31, | High | Low | Average(1) | Period-End | ||||||||||||
BR$ per US$ | ||||||||||||||||
2011 | 1.901 | 1.534 | 1.674 | 1.875 | ||||||||||||
2012 | 2.112 | 1.702 | 1.954 | 2.043 | ||||||||||||
2013 | 2.445 | 1.952 | 2.159 | 2.342 | ||||||||||||
2014 | 2.740 | 2.197 | 2.354 | 2.656 | ||||||||||||
September | 2.452 | 2.231 | 2.332 | 2.451 | ||||||||||||
October | 2.534 | 2.391 | 2.448 | 2.444 | ||||||||||||
November | 2.613 | 2.483 | 2.548 | 2.560 | ||||||||||||
December | 2.740 | 2.560 | 2.639 | 2.656 | ||||||||||||
2015 | ||||||||||||||||
January | 2.710 | 2.575 | 2.634 | 2.662 | ||||||||||||
February | 2.881 | 2.689 | 2.818 | 2.877 | ||||||||||||
March(2) | 3.268 | 2.865 | 3.119 | 3.1304 |
Source: Central Bank of Brazil
(1) | For each year, the average of the month-end exchange rates for the relevant year. For each month, the average daily exchange rate for the relevant month. |
(2) | Through March 24, 2015. |
B. Capitalization and IndebtnessIndebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. 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 (“SEC”) 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 ADSs 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 document, including the following risk factors.
RisksRisk Factors Relating to the Exchange Offer and Mergers involving TAM S.A.our Company
Both commencement and completion of the exchange offer are subject to many conditions precedent and if these conditions are not satisfied or waived, the proposed combination with TAM S.A. will not be completed
We and TAM S.A., a Brazilian company (“TAM”), are proposing to combine to form the leading Latin American airline group with the largest fleet of aircraft of any airline in Latin America. When the proposed combination is completed, LAN will be the holding company of the combined companies and will change its name to “LATAM Airlines Group S.A.” (“LATAM”). The proposed combination will be implemented through a delisting exchange offer to be made in the United States and in Brazil to acquire all of the outstanding voting common shares of TAM (“TAM common shares”), non-voting preferred shares of TAM (“TAM preferred shares and collectively with the TAM common shares, the “TAM shares”) and American Depositary Shares representing TAM shares (“TAM ADSs”), in each case other than any such shares owned indirectly by the TAM controlling shareholders (as defined below), and other mergers and corporate restructuring transactions described under “Item 4. Information on the Company—History and Development of the Company—Proposed Combination with TAM”, in each case pursuant to the terms and conditions of the implementation agreement and the exchange offer agreement entered into on January 18, 2011 (the “transaction agreements”) by LAN, TAM, the controlling shareholders of LAN under Chilean law (Costa Verde Aeronáutica S.A. and Inversiones Mineras del Cantábrico S.A., which we refer to individually as “Costa Verde Aeronáutica” and “Mineras del Cantábrico,” respectively and collectively as the “LAN controlling shareholders”), the controlling shareholders of TAM under Brazilian law (Noemy Almeida Oliveira Amaro, Maria Cláudia Oliveira Amaro, Maurício Rolim Amaro and João Francisco Amaro, whom we refer to collectively as the “TAM controlling shareholders”), and TAM Empreendimentos e Participações S.A., a company through which the TAM controlling shareholders held their TAM shares (as defined below) at that time ( “TEP”). The commencement of the exchange offer is subject to certain conditions set forth in the transaction agreements as described under “Item 4. Information on the Company—History and Development of the Company—The Transaction Agreements—Conditions for the Commencement of the Exchange Offer”, including receipt of all required regulatory approvals (including the required approvals from theComissão de Valores Mobiliários(“CVM”), theSuperintendencia de Valores y Seguros (the Chilean Securities and Insurance Supervisor) (“SVS”), and the SEC. In addition, approval of the proposed combination by our shareholders is subject to the rendering of a final decision by the Chilean Supreme Court on our appeal of the mitigation measures imposed by theTribunal de Defensa de la Competencia (Chilean Free Competition Defense Court) (“TDLC”) in connection to the proposed combination with TAM. The completion of the exchange offer is also subject to certain conditions set forth in the transaction agreements as described under “Item 4. Information on the Company—History and Development of the Company—The Transaction Agreements—Conditions to Completion of the Exchange Offer,” including the following:
Delisting Condition
The number of qualifying minority shares that are held by “agreeing shareholders” must be more than 66 2/3% of the total number of qualifying minority shares that are held by agreeing shareholders and disagreeing shareholders (this is the minimum threshold required to cause the deregistration of TAM as a public company in Brazil with CVM and the delisting of TAM shares from the BM&FBovespa (“Bovespa”).
A holder will be deemed to be an “agreeing shareholder” with respect to its qualifying minority shares only if such holder:
validly tenders such qualifying minority shares into the exchange offer through the US exchange agent andLATAM does not withdraw such shares from the exchange offer; or
qualifies such qualifying minority shares for participation in the auction to be held on Bovespa (the “Auction”) and:
tenders such shares into, and does not withdraw them from, the Auction; and/or
indicates on the qualification form (a copy of which will be included with the letter of transmittal mailed to holders of TAM shares in connection with the exchange offer) that it agrees with the deregistration of TAM as a public company in Brazil with CVM.
A holder will be deemed to be a “disagreeing shareholder” with respect to its qualifying minority shares only if such holder:
validly tenders such qualifying minority shares into the exchange offer through the US exchange agent and subsequently withdraws such shares from the exchange offer; or
qualifies such qualifying minority shares for participation in the Auction and:
does not tender such shares in the Auction; and/or
indicates on the qualification form (a copy of which will be included with the letter of transmittal) that it disagrees with the deregistration of TAM as a public company in Brazil with CVM.
For purposes of the delisting condition, “qualifying minority shares” mean all outstanding TAM shares not represented by TAM ADSs and all outstanding TAM ADSs, in each case that are not owned by TAM, the TAM controlling shareholders, any of their related persons (“pessoas vinculadas”) or any director or executive officer of TAM.
The delisting condition will not be waivable under Brazilian law, so if the delisting condition is not satisfied, the exchange offer will terminate and the mergers will not be completed.
Squeeze-Out Condition
The sum of (i) the number of TAM shares and TAM ADSs validly tendered into, and not withdrawn from, the exchange offer and (ii) the number of TAM shares beneficially owned by the TAM controlling shareholders (which represented approximately 46.63% of the outstanding TAM shares as of March 28, 2012), represents more than 95% of the total number of outstanding TAM shares (including those represented by TAM ADSs) (this is the minimum acquisition threshold required under applicable Brazilian law to give TAM the right to compulsorily redeem any TAM shares (including those represented by TAM ADSs) not owned by LAN or Holdco I S.A. (“Holdco I”) after completion of the exchange offer, the mergers and the other transactions described under “Item 4. Information on the Company—History and Development of the Company—The Transaction Agreements”); and
The absence of certain actions, events or circumstances that, individually or in the aggregate, have had an adverse effect on the businesses, revenues, operations or financial condition of TAM and its subsidiaries, taken as a whole, in all material respects.
Certain of these conditions may not be waived without written agreement of both LAN and the TAM controlling shareholders, and neither LAN nor the TAM controlling shareholders has any obligation to waive any conditions not satisfied on or prior to the expiration of the exchange offer. Therefore, even if we are willing to waive an unsatisfied condition, we may be unable to complete the exchange offer if the TAM controlling shareholders refuse to waive the condition. In addition, the obligation of the TAM controlling shareholders under the transaction agreements to contribute their TAM shares into the proposed combination prior to the completion of the exchange offer is subject to certain conditions relating to the operations and business of LAN and certain events outside of our control. Payment of such subscriptions is a condition to the completion of the exchange offer. If any of these conditions is not satisfied or waived, the exchange offer and mergers will not be completed.
If the squeeze-out condition is not satisfied and we waive this condition, we may be unable to fully realize the anticipated benefits of the proposed combination
If the squeeze-out condition is not satisfied and we waive this condition, TAM will not be permitted under Brazilian law to compulsorily redeem any TAM shares (including those represented by TAM ADSs) that were not acquired in the exchange offer and the mergers unless LAN later acquires a sufficient number of TAM shares (including those represented by TAM ADSs) so as to allow TAM to compulsorily redeem the remaining outstanding TAM shares and TAM ADSs pursuant to Brazilian law. Depending on the quantity of minority shareholders remaining after completion of the exchange offer and the mergers, their existence may limit LATAM’s ability to combine the businesses and operations of LAN and TAM, which could adversely affect the combined companies’ ability to realize the potential benefits and cost savings from combining these businesses. Failure to fully realize these potential benefits and any temporary or permanent delay in integrating the businesses and operations of these two companies, could adversely affect the revenues, level of expenses and operating results of the combined companies after the completion of the proposed combination.
The final decision by the Chilean Supreme Court in connection with the mitigation measures imposed by the Chilean Free Competition Defense Court may not be rendered on time
Before the proposed combination of LAN and TAM may be completed, the final decision of the Chilean Supreme Court with respect to the appeal filed by LAN seeking the amendment or elimination of three of the conditions set forth in the decision issued by the TDLC with respect to the proposed combination with TAM, has been rendered. See “Item 4. Information on the Company—History and Development of the Company—Proposed Combination with TAM” and “Item 4. Information on the Company—History and Development of the Company—The Transaction Agreements—Conditions to Commencement of the Exchange Offer”, for a discussion of the status of the Company’s appeal. A final decision by the Chilean Supreme Court with respect to the appeal is expected by the Company in the next month, but there can be no assurance that the decision will be obtained within the expected time frame, or that the decision will not prevent the transaction to go forward. If the final decision of the Chilean Supreme Court is not rendered by the expected time frame, and this situation is not waived by the parties to the transactions agreements, the exchange offer and mergers will not be completed.
Any delay in completing the proposed combination may reduce or eliminate the benefits we expect to be achieved as a result of the proposed combination
The proposed combination is subject to a number of other conditions beyond our control that may prevent, delay or otherwise materially adversely affect its completion. We cannot predict whether or when these other conditions will be satisfied. Any delay in completing the proposed combination could cause the combined companies not to realize some or all of the synergies that we expect to achieve if the proposed combination is successfully completed within its expected time frame.
Failure to complete the proposed combination could negatively impact our stock price and future business and financial results
If the proposed combination is not completed, our ongoing businesses may be adversely affected, and we would be subject to several risks, including the following:
being required to pay a termination fee to TAM of $200 million and reimburse of TAM’s expenses under certain circumstances provided in the transaction agreements;
having to pay certain costs relating to the proposed combination, such as legal, accounting, financial advisor and printing fees; and
having had our management focus on the proposed combination instead of pursuing other opportunities that could have been beneficial to us.
If the proposed combination is not completed, we cannot assure our stockholders that these risks will not materialize and will not materially adversely affect our business, financial results and stock price.
The transaction agreements contain provisions that could discourage a potential competing acquirer of LAN
The transaction agreements require our board of directors to recommend that its shareholders approve the proposed combination and does not permit our board of directors to withdraw or adversely modify those recommendations. The transaction agreements also contains “no shop” provisions that prohibit us from soliciting, initiating or encouraging any competing third party proposals, including acquisitions of our equity securities or material assets, and there are no exceptions to these provisions. In addition, if the transaction agreements are terminated under certain circumstances, we may be required to pay to TAM a termination fee of $200 million and to reimburse TAM for expenses incurred by TAM in connection with the transaction agreements and the proposed combination. See “Item 4. Information on the Company—History and Development of the Company—The Transaction Agreements” and “Item 4. Information on the Company—History and Development of the Company—The Transaction Agreements—Termination”. These provisions could discourage a potential third-party acquiror that might have an interest in acquiring all or a significant portion of LAN from considering or proposing that acquisition, even if it were prepared to pay consideration with a value per share higher than the benefits LAN shareholders may receive from the proposed combination, or might result in a potential third-party acquiror proposing to pay a lower price to the LAN shareholders than it might otherwise have proposed to pay because of the added expense of the $200 million termination fee and expense reimbursement that may become payable in certain circumstances.
The fairness opinion obtained by our board of directors from our financial advisor will not reflect changes in circumstances between signing the transaction agreements and the completion of the proposed combination
While our board of directors received an initial fairness opinion from J.P. Morgan, our financial advisor, before we entered into the transaction agreements (the “Initial JPM Opinion”), and a supplemental fairness opinion, dated November 11, 2011 (the “Supplemental JPM Opinion”), we have not obtained an updated fairness opinion as of the date of this annual report on Form 20-F. Changes in our operations and prospects and those of TAM, general market and economic conditions and other factors which may be beyond our control and on which the fairness opinions were based may alter the value of LAN or TAM and/or the prices of our common shares and/or the TAM shares by the time the proposed combination is completed. The Initial JPM Opinion and the Supplemental JPM speak only as of the date of such opinions and not as of the time the proposed combination will be completed or as of any other date. Because we do not anticipate asking our financial advisor to further update its fairness opinion, neither the Initial JPM Opinion nor the Supplemental JPM Opinion address the fairness of the exchange ratios in the exchange offer, from a financial point of view, to us at the time the proposed combination will be completed.
Resales of LAN shares issued in the mergers may cause the market price of such shares to fall
As of March 28, 2012, 340,977,309 LAN shares were issued and outstanding (of which 33.84% were beneficially owned by the LAN controlling shareholders) and 1,216,251 LAN shares were subject to issuance upon exercise of outstanding options and other rights to purchase such shares. In the mergers, LAN expects to issue a significant amount of LAN shares in the form of LAN American Depositary Shares (“LAN ADSs”) and LAN Brazilian Depositary Shares (“LAN BDSs”) to the holders of TAM shares and TAM ADSs in exchange for their TAM shares or TAM ADSs, although the actual number of LAN shares issued will depend on the extent to which holders of such TAM shares and TAM ADSs elect to tender their TAM shares and/or TAM ADSs into the exchange offer and the number of vested stock options and other rights to acquire TAM shares that are exercised before the completion of the exchange offer and the mergers. If all holders of TAM shares and TAM ADSs, other than the TAM controlling shareholders, validly tender all of their TAM shares and/or TAM ADSs into, and do not withdraw them from, the exchange offer, the TAM controlling shareholders contribute all of their TAM shares into the proposed business combination and no TAM shares (including those represented by TAM ADSs) or LAN shares (including those represented by LAN ADSs and LAN BDSs) are issued after the date of the exchange offer other than the LAN common shares to be issued pursuant to the exchange offer and the mergers which will be represented by LAN ADSs and LAN BDSs, then LAN will issue a total of 140,586,107 LAN common shares in connection with the exchange offer and the mergers and immediately after the effective time of the mergers, the issued and outstanding LAN shares (including those represented by LAN ADSs and LAN BDSs but excluding those reserved under stock option plans) will be owned approximately as follows: 13.62% of such LAN shares will be held by the TAM controlling shareholders, 15.59% of such LAN shares will be held by the holders of TAM shares and TAM ADSs other than the TAM controlling shareholders, 23.97% of such LAN shares will be held by the LAN controlling shareholders and 46.82% of such LAN shares will be held by the holders of LAN shares other than the LAN controlling shareholders. If there are substantial sales of the newly issued LAN shares shortly after the effective time of the mergers, this could adversely affect the market for, and the market price of, the LAN common shares, the LAN ADSs and the LAN BDSs.
Risks Relating to the Combination of LAN and TAM
LAN may be unable to fully realize the anticipated benefits of the proposed combination
After completion of the proposed combination, LAN will change its name to “LATAM Airlines Group S.A.” The proposed combination involves bringing together two large and complex businesses that currently operate as independent public companies. LAN will be required to devote significant management attention and resources to integrating certain aspects of the business practices and operations of LAN and TAM. The success of the proposed combination will depend, in part, on LAN’s ability to realize anticipated revenue synergies, cost savings and growth opportunities by combining the businesses of LAN and TAM. LAN hopes to generate synergies resulting from the consolidation of capabilities, rationalization of operations and headcount, greater efficiencies from increased scale and market integration, new product and service offerings and organic growth. There is a risk, however, that LAN may not be able to combine the businesses of LAN and TAM in a manner that permits LAN to realize these revenue synergies, cost savings and growth opportunities in the time, manner or amounts LAN currently expects or at all. Potential difficulties LAN may encounter as part of the integration process include, among other things:
the inability to successfully combine the businesses of LAN and TAM in a manner that permits LAN to achieve the full revenue synergies, cost savings and growth opportunities anticipated to result from the proposed combination;
complexities associated with managing the combined companies;
the need to implement, integrate and harmonize various business-specific operating procedures and systems, as well as the financial, accounting, information and other systems of LAN and TAM;
potential loss of key employees as a result of implementing the proposed combination;
the need to coordinate the existing products and customer bases of LAN and TAM; and
potential unknown liabilities and unforeseen increased expenses or delays associated with the exchange offer, the mergers and the other combination transactions, including one-time cash costs to complete and implement the proposed combination that may exceed the one-time cash costs that LAN currently anticipates.
In addition, LAN and TAM have operated and, until the completion of the exchange offer and the mergers, will continue to operate under their existing separate airline certificates. It is possible that the integration process could result in:
diversion of management’s attention from their normal areas of responsibility to address integration issues; and
the disruption of, or the loss of momentum in, each company’s ongoing businesses or inconsistencies in its standards, controls, procedures and policies,
each of which could adversely affect each company’s ability to maintain good relationships with its customers, suppliers, employees and other constituencies, or to achieve the anticipated benefits of the proposed combination, and could increase costs or reduce each company’s earnings or otherwise adversely affect the businesses, financial condition, results of operations and/or prospects of the combined companies following the completion of the exchange offer and the mergers.
Actual revenue synergies, cost savings, growth opportunities and efficiency and operational benefits that result from the proposed combination may be lower and may take a longer time to achieve than LAN currently expects.
The integration of two large companies also presents significant management challenges. In order to achieve the anticipated benefits of the proposed combination, the operations of the two companies will need to be reorganized and their resources will need to be combined in a timely and flexible manner. There can be no assurance that LAN will be able to implement these steps as anticipated or at all. If LAN fails to achieve the planned restructuring effectively within the time frame that is currently contemplated or to the extent that is currently planned, or if for any other reason the expected revenue synergies, cost savings and growth opportunities fail to materialize, the exchange offer, the mergers and the other combination transactions described in this annual report may not produce the benefits LAN currently anticipates.
LAN has and will continue to incur significant costs and expenses in connection with the proposed combination and integration of the business operations of LAN and TAM
LAN has incurred and will continue to incur substantial expenses in connection with the proposed combination and the integration of LAN and TAM. LAN incurred approximately US$15 million in non-recurring expenses in connection with the proposed combination in 2011, and expects to incur US$25 million in such expenses in 2012. Significant costs and expenses have been and are being incurred related to the exchange offer, the mergers and the other transactions. These costs and expenses include financial advisory, legal, accounting, consulting and other advisory fees and expenses, reorganization and restructuring costs, severance/employee benefit-related expenses, filing fees, printing expenses and other related charges. Some of these costs are payable by LAN and TAM depending on the nature of the expense and regardless of whether the proposed combination is completed. There are also a large number of processes, policies, procedures, operations, technologies and systems that must be integrated in connection with the proposed combination. While both LAN and TAM have assumed that a certain level of expenses would be incurred in connection with these transactions, there are many factors beyond LAN’s and TAM’s control that could affect the total amount or the timing of the integration and implementation expenses.
There may also be additional unanticipated significant costs in connection with the proposed combination that LAN may not recoup. These costs and expenses could, particularly in the near term, exceed the savings that LAN expects to achieve from the elimination of duplicative expenses and the realization of economies of scale, other efficiencies and cost savings. Although LAN expects that these savings will offset these integration and implementation costs over time, this net benefit may not be achieved in the near term or at all.
LAN will not control the voting shares or board of directors of TAM
After completionFollowing the combination of the exchange offer, the mergersLAN and the other transactions contemplated by the transaction agreements:TAM:
Holdco I will ownowns 100% of the TAM common shares that were:
contributed by the TAM controlling shareholders, or
acquired pursuant to the exchange offer,
LAN will own 100% of the TAM preferred shares that were acquired pursuant to the exchange offer or contributed by the TAM controlling shareholders,
The TAM controlling shareholders will own at least 80%Controlling Shareholders owns approximately 80.58% of the outstanding Holdco I voting shares through TEP Chile (a wholly owned Chilean entity) and LAN will own no more than 20%owns the remainder of the outstanding Holdco I voting shares, due to a Brazilian restriction that prohibits non-Brazilians to own more than 20% of a Brazilian airline, andshares.
LAN will ownLATAM owns 100% of the outstanding Holdco I non-voting shares, which will entitleentitles it to essentiallysubstantially all of the economic rights in respect of the TAM common shares held by Holdco I.I; and
As a result of this ownership structure:
the TAM controlling shareholders will, by virtue of their control of the voting shares of Holdco I and the boards of directors of each of Holdco I, TAM and each airline subsidiary of TAM, retain voting and board control of TAM and each airline subsidiary of TAM; and
LAN, by virtue of its ownership of all of the non-voting shares of Holdco I and TAM preferred shares acquired pursuant to the exchange offer and the mergers, will beLATAM is entitled to virtually all of the economic rights in TAM subject only to the rights of holders of any TAM shares not so acquired.
LAN, the TAM controlling shareholdersLATAM and TEP Chile and other parties have entered into shareholdersshareholders’ agreements that establish agreements and restrictions relating to corporate governance in an attempt to balance LAN’s interests, as the owner of substantially all of the economic rights in TAM, and the TAM controlling shareholders, as the continuing controlling shareholders of TAM under Brazilian law, by prohibiting the taking of certaingovernance. Certain specified material corporate actions and decisions without priorrequire supermajority approval, of the shareholders (5/6 of the total of the shareholders) and/or the board of directors of Holdco I or TAM. However, no assurances can be given that LAN and the TAM controlling shareholders will be able to reach an agreement with respect to such supermajority voting or board matterswhich in the future and ifturn means they do not, the businesses, financial condition, results of operations and prospects of the combined companies could be adversely affected. In addition, pursuant to these shareholder agreements, neither Holdco I, TAM nor TAM’s subsidiaries may take certain actions without the prior approval of a supermajority of the board of directors and/or the shareholders of Holdco I or TAM. As a result of these supermajority requirements, these actions will effectively require the prior approval of both LANLATAM and TEP Chile S.A. (“TEP Chile”) (which will be wholly owned by the TAM controlling shareholders). ActionsChile. Examples of actions requiring supermajority approval by the board of directors of Holdco I or TAM include, among others, entering into acquisitions or business collaborations, amending or approving budgets, business plans, financial statements and accounting policies, incurring indebtedness, encumbering assets, entering into certain agreements, making certain investments, modifying rights or claims, entering into settlements, appointing executives, creating security interests, issuing, redeeming or repurchasing securities and voting on matters as a shareholder of subsidiaries of TAM. Actions requiring supermajority shareholder approval of Holdco I or TAM include, among others, certain changes to the by-laws of Holdco I, TAM or TAM’s subsidiaries or any dissolution/liquidation, corporate reorganization, payment of dividends, issuance of securities, disposal or encumbrance of certain assets, creation of securities interestsecurity interests or entering into guarantees and agreements with related parties.
LATAM assets include a significant amount of goodwill.
The assets of the LATAM Airlines Group included US$3,313.4 million of goodwill as of December 31, 2014, US$3,168.7 million of which results from the combination with TAM. Under IFRS, goodwill is subject to an annual impairment test and may be required to be tested more frequently if events or circumstances indicate a potential impairment. Any impairment could result in the recognition of a significant charge to earnings in LATAM’s statement of income, which could materially and adversely impact our consolidated results for the period in which the impairment occurs.
Uncertainties associatedA failure to successfully implement LATAM’S strategy would harm its business and the market value of its ADSs and common shares.
LATAM has developed a new strategic plan with the proposed combination may cause a lossgoal of management personnel and other key employees that could adversely affect LAN, TAM and/or the combined companies
The successbecoming one of the proposed combination is dependent, in part, on the experience and industry knowledgebest group of their senior management and other key employees of LAN and TAM and their ability to execute their business plans. In order to be successful, LAN, TAM and the combined companies must be able to retain the senior management and other key employees and their ability to attract highly qualified personnelairlines in the future. Currentworld and prospective employees of LANrenewing our commitment to sustained profitability and TAM may experience uncertainty about their roles within LATAM following completion of the proposed combination, which may have an adverse effectsuperior returns to shareholders. We based our strategic plan on the ability of LAN, TAM or the combined companiesfive central factors: Customer Experience, Network, Efficiency and Cost Reduction, Organization Strength and Proactive Risk Management. Our new strategy requires us to retain or attract senior management and other key employees. Competition for highly qualified personnel in the various localities and business segments in which LAN and TAM operate, is intense. No assurances can be given that LAN and TAM or, after completion of the proposed combination, the combined companies will be able to retain or attract senior management and other key employees to the same extent that LAN and TAM have previously been able to do so.
The financial results of LATAM will be more exposed to currency exchange rate fluctuations as a result of the proposed combination and the resulting increase in the proportion of assets, liabilities and earningsidentify value propositions that are denominatedattractive to our clients, to find efficiencies in currencies other than US dollars
LATAM will prepare and present its consolidated financial statements in US dollars. The proposed combination will significantly increase the proportion of LAN’s consolidated net assets, revenues and income in non-US dollar currencies, primarily Chileanpesos and Brazilianreal. The consolidated financial condition and results of operations of LATAM will therefore be more sensitive to movements in exchange rates between the US dollar and other currencies. A depreciation of non-US dollar currencies relative to the US dollar could have an adverse impact on the financial condition, results ofour daily operations, and prospects of LATAM.
LATAM’s future results will suffer if it cannot effectively manage its expanded operations following completion of the proposed combination
Following the completion of the proposed combination, the size of the business of the combined companies will be significantly largerto transform ourselves into a stronger and more complex than the current business of LAN or TAM. LAN’s future success will depend, in part, on LAN’s abilityrisk resilient company. Our strategic plan also anticipates strengthening our network and requires us to manage this expanded business, which will pose substantial challenges for management, including those related to the managementidentify cities with adequate infrastructure and monitoring of new operations and associated increased costs and complexity.sufficient demand. There can be no assurances, however, that LATAMwe will be successfulable to correctly identify cities and regions in which to expand our operations, or that itwe will realizebe able to attract sufficient passengers and cargo traffic to make our operations profitable. Difficulties in implementing our strategy and expanding our operations may adversely affect our business, results of operation and the expected operating efficiencies, cost savings, revenue synergiesmarket value of our ADSs and other benefits currently anticipated bycommon shares.
A failure to successfully implement the new single brand may adversely affect LATAM business and the market value of its ADSs and common shares.
Since the combination, LAN and TAM fromhave continued to operate with their original brands. LATAM Airlines Group has begun the proposed combination.
The proposed combination could causetransition of LAN and TAM into a downgrade of LAN’s credit ratings, which could have a negative effect on LAN’s business
single brand by gradually harmonizing the product and services offered by both airlines, although tge launch date for the new brand has not yet been determined. LAN and TAM currently has a lower credit ratinghave different value propositions, and is more leveraged than LAN. As a resultthere can be no assurances that we will be able to fully transfer the value of the proposed combination, LAN’s credit rating could be downgraded by one or more credit rating agencies, which couldoriginal LAN and TAM brands to the new single brand. Difficulties in implementing our single brand may prevent us from consolidating as a customer preferred carrier and may adversely affect the financial condition,our business and results of operations and prospectsthe market value of the combined companies. If LAN’s credit rating is downgraded, it could affect LAN’s ability to finance future fleet acquisitions and/or increase LAN’s financing costs.our ADSs and common shares.
It may take time to combine the frequent flyer programs of LAN and TAM
LAN and TAM each currently runpreviously ran their own frequent flyer programs. While LAN intends to integrateLATAM has integrated these programs so that passengers can use frequent flyer miles earned with either LAN or TAM interchangeably, there is no guarantee that thisthe full integration will be completed in the near term or at all. Even if the integration occurs, the successful integration of these programs will involve some time and expense. Until LANLATAM effectively combines these programs, passengers may prefer frequent flyer programs offered by other airlines, which may adversely affect our business.
The financial results of LATAM are exposed to foreign currency fluctuations.
LATAM will have to withdraw from an existing airline alliance to which LAN or TAM belongs
LANprepares and presents its consolidated financial statements in U.S. dollars. Because of LATAM’s presence in several Latin American markets, a portion of its consolidated net assets, revenues and income is currently a member of the oneworld® airline alliance while TAM is a member of the Star Alliance airline alliance. Although LAN and TAM will continue operating under their existing separate operating certificates after the proposed combination, due to conditions imposed by thedenominated in non-U.S. dollar currencies, primarily Chilean pesos and Brazilian antitrust regulators, LANreais. In particular, the majority of TAM’s revenues are denominated in Brazilian reais, while a significant portion of its operating expenses are denominated in, or linked to, the U.S. dollar or other foreign currencies. The consolidated financial condition and TAM may not participateresults of operations of LATAM is therefore sensitive to movements in more than one airline alliance afterexchange rates between the endU.S. dollar and other currencies. A depreciation of non-U.S. dollar currencies relative to the 24-month period following completion of the proposed combination. LAN and TAM are currently evaluating and have not decided yet to which airline alliance they will belong after the completion of the proposed combination with TAM. The withdrawal from one of the alliances after the proposed combination may impede LATAM from providing customers with exactly the same benefits currently provided by LAN and TAM, such as the same travel destinations, combined reservation system, itinerary flexibility, among others. As a result, passengers may prefer alliances offered by LATAM’s competitors, and consequently decide to fly with them, which may adversely affect LATAM’s business.
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 and negative economic conditions in those countriesU.S. dollar could have an adverse impact on our business.
Passenger and cargo demand is heavily cyclical and highly dependent on global and local economic growth, economic expectations and foreign exchange rate variations, among other things. In the past, our business has been negatively affected by global economic recessionary conditions, weak economic growth in Chile, recession in Argentina and poor economic performance in certain emerging market countries in which we operate. The occurrence of similar events in the future could adversely affect our business. In fact, starting as of late 2008, and during 2009, many of the countries we serve, including Chile, experienced economic slowdowns or recessions, which translated into a substantial weakening of demand. We plan to continue to expand our operations based in Latin America and our performance will, therefore, continue to depend heavily on economic conditions in the region. Any of the following factors could adversely affect our business, financial condition, and results of operations in the countries in which we operate:and prospects of LATAM.
changes in economic or other governmental policies;
weak economic performance, including, but not limited to, low economic growth, low consumption and/or investment rates, and increased inflation rates; or
other political or economic developments over which we have no control.
Driven by the severe downturn in the global economy, including in the economies of many of the countries we serve, we began to experience weakening demand in cargo late in 2008, and this weak demand continued into 2009. However, we began to experience a recovery in cargo traffic in late 2009, which continued improving during 2010 and 2011. If the regional economic environment continues its positive performance, demand in cargo may continue to grow during the current year. No assurance can be given that capacity reductions or other steps we may take will be adequate to offset any future reduction in our cargo and/or air travel demand.
The success of our business depends upon key regulatory issues and these issues may adversely affect our business and results of operations.
Our business is highly regulated and depends substantially upon the regulatory environment in the countries in which we operate or intend to operate. For example, price controls on fares may limit our ability to effectively apply customer segmentation profit maximization techniques (“passenger revenue management”) (management techniques utilizing passenger demand forecasting and fare mix optimization techniques to maximize profit for an airline) and adjust prices to reflect cost pressures. 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. Accordingly, regulatory issues could adversely affect our business and results of operations.
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, Ecuador, Mexico, Peru, Colombia 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(“JAC”) and technical operative authorizations issued by the ChileanDirección General de Aeronáutica Civil(“DGAC”), and other corresponding local authorities of the countries in which we operate, 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.
WeLATAM’S depend on strategic alliances or commercial relationships in many of the countries in which we operateit operates and ourit business may suffer if any of ourits strategic alliances or commercial relationships terminates.
In many of the jurisdictions in which we operate, we have found it in our interest to maintain a number of alliances and other commercial relationships. These alliances or commercial relationships allow us to enhance our network and, in some cases, to offer our customers services that we could not otherwise offer. If any of our strategic alliances or commercial relationships and, in particular, with American Airlines, Iberia, Qantas oroneworldoneworld®, Japan Airlines, Korean Airlines, Cathay Pacific, Alaska Airlines deteriorates, or any of these agreements are terminated, our business, financial condition and results of operations could be negatively affected.
OurLATAM’S business and results of operation may suffer if we fail to obtain and maintain routes, suitable airport access, slots and other operating permits.
OurLATAM’S business depends upon our access to key routes and airports. Our operations could be constrained by any delay or inability to gain access to key routes or airports, including:
limitations on our ability to process more passengers;
the imposition of flight capacity restrictions;
the inability to secure or maintain route rights in local markets or under bilateral agreements; or
the inability to maintain our existing slots and obtain additional slots.
We operateLATAM operates numerous international routes, subject to bilateral agreements, and also internal flights within Chile, Peru, Brazil, Argentina, PeruEcuador, Colombia and other countries, subject to local route and airport access approvals. Bilateral aviation agreements as well as local aviation approvals frequently involve political and other considerations outside of our control. See “Item 4. Information on the Company—Business Overview—Regulation—Route Rights”.Regulation.”
There can be no assurance that existing bilateral agreements between the countries in which our companies are based and permits from 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 in certain airports, destinations or destinationsslots or the imposition of other sanctions could also have a material adverse effect. We cannot assure that aA change in a foreign government’sthe administration of current laws and regulations or that the adoption of new laws and regulations will notin any of the countries in which we operate that restricts our route, airport or other access may have a material adverse effect on our business, financial condition and results of operations.
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. 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.
A failure to successfully implement our growth strategy would harm our business and the market value of the ADSs and our common shares.
Our growth strategy involves increasing the frequency of flights to the markets we currently serve and expanding our service to new markets. In order to carry out this strategy, we must be able to identify the appropriate geographic markets upon which to focus and to gain suitable airport access and route approval in these markets. There can be no assurance that the new markets we enter or in which we are seeking to expand our operations will provide passenger and cargo traffic that is sufficient to make our operations in those new markets profitable.
The expansion of our business will also require additional skilled personnel, equipment and facilities. An inability to hire and retain skilled personnel or secure the required equipment and facilities efficiently and cost-effectively may adversely affect our ability to execute our growth strategy. Expansion of our markets and flight frequencies may also strain our existing management resources and operational, financial and management information systems to the point that they may no longer be adequate to support our operations, requiring us to make significant expenditures in these areas.
Our business may be adversely affected by a downturn in the airline industry caused by exogenous events that affect travel behavior or increase costs, such as outbreak of disease, natural disasters, 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 markets in which we operate could have a material impact on our business, financial condition and results of operations. Furthermore, these types of situations could have a prolonged effect on air transportation demand and on certain cost items.
During January 2010, bad weather affected the city of Cuzco in Peru causing important human and material damage and severely affecting this tourist destination. This affected our operations, which led us to decrease our capacity in order to improve load factors. We estimate the net impact of decreased passenger operations to have been approximately US$15.0 million.
In addition, on February 27, 2010, an earthquake struck Chile causing major damages mainly in the southern regions of the country. This earthquake damaged the terminal building at the Santiago International Airport causing the suspension of LAN’s passenger services to and from Chile until March 1, 2010. Lan Cargo’s operations suffered no impact since Lan Cargo has flexibility to redesign itineraries if and when needed. As of March 28, 2010, operations were restored to normal levels and the airport started to operate normally. As of December 31, 2010, we estimate the net impact of decreased passenger operations due to the earthquake to have been approximately US$30 million.
In 2011 the Company was also impacted by the presence of volcanic ash on certain routes which resulted in US$36.6 million losses.
Terrorist attacks may also have a severe adverse impact on the airline industry. For example, the terrorist attacks in the United States on September 11, 2001 substantially affected the airline industry, particularly foreign air carriers operating international service to and from the United States. Throughout South America, passenger traffic also decreased substantially, although the decrease was less severe than that in the United States. The airline industry 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.
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. Presently, there is a trend towards increases in jet fuel prices because of the increased demand caused by the 2010 recovery in the global economy coupled with conflicts during 2011 in Egypt and Libya that affected global fuel supply. It is impossible for us to predict if we will be able to fully protect ourselves against the volatility of fuel costs.
A significant portion of our cargo revenues comescome 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 exports of fish, and sea products and produce exportsfruits from Chile and asparagus from Peru, and exports of 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 products are sensitive to foreign exchange rates and, therefore, traffic volumes could be impacted by the appreciation or depreciation of local currencies.
In mid 2007, there was an outbreak of infectious salmon anemia virus (“ISA Virus”) in Chile, which was temporarily contained during 2008 but has continued to affect exports since then. The outbreak of ISA Virus has caused, and may continue to cause, a significant decline in salmon exports and has had, and may continue to have, an adverse impact on our cargo operations.
Our operations are subject to fluctuations in the supply and cost of jet fuel, which could negatively impact our business.
Higher jet fuel prices or a shortage in the supply of fuel could cause a reduction in our scheduled service and could have a materially negative effect on 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 approximately 34%35% of our operating expenses in 2011.2014. 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.prices as was the case during the second half of 2014. Although we have implemented measures to pass a portion of incremental fuel costs to our customers, our ability to lessen the impact of any increase using these types of mechanisms 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 increase the average hours flown 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 If an aircraft falls behind schedule, it could remain behind schedule for up to two days. Suchthe resulting delays could result incause a disruption in our operating performance, leading to customer dissatisfaction due to any resulting delays or missed connections.performance.
We fly and depend upon Airbus and Boeing aircraft, and our business is at riskcould suffer if we do not receive timely deliveries of aircraft, if aircraft from these companies becomes unavailable or if the public negatively perceives our aircraft.
As our fleet has grown, our reliance on Airbus and Boeing has also grown. As of December 31, 2011,2014, we operated a fleet of 81247 Airbus, 5473 Boeing and 147 Dash aircraft. These risksRisks relating to Airbus and Boeing include:
our failure or inability to obtain Airbus or Boeing aircraft, parts or related support services on a timely basis because of high demand or other factors;
the interruption of fleet service as a result of unscheduled or unanticipated maintenance requirements for these aircraft;
the issuance by Chilean or other aviation authorities of other directives restricting or prohibiting the use of Airbus or Boeing aircraft, or requiring time-consuming inspections and maintenance;
the adverse public perception of a manufacturer as a result of an accident or other negative publicity; or
delays between the time we realize the need for new aircraft and the time it takes us to arrange for Airbus and Boeing or from a third-party provider to deliver this aircraft.
The occurrence of any one or more of these factors could restrict our ability to use aircraft to generate profits, respond to increased demands, or could otherwise limit our operations and adversely affect our business.
We are often affected by certain factors beyondAny delays Airbus A350 aircraft could disrupt our control, including weather conditions, which can affect our operations.fleet plan.
Revenues for airlines depend onDuring 2015 LATAM Airlines expects to receive its first Airbus A350 aircraft out of an order of 27 aircraft of this model, becoming 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, reducing our revenues.
Losses and liabilitiesfirst airline in Latin America to operate this modern new technology aircraft. Any delays in the eventreception of an accident involving onethe aircraft or more of ourunanticipated operational issues with this new aircraft model could materially affect our business.
We are exposed to potential catastrophic losses in the event of an aircraft accident, terrorist incident or any other similar event. There can be no assurance that, as a result of an aircraft accident or significant incident:
we will not need to increase our insurance coverage;
our insurance premiums will not increase significantly;
our insurance coverage will fully cover all of our liability; or
we will not be forced to bear substantial losses.
Substantial claims resulting from an accident or significant 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.
High levels of competition in the airline industry may adversely affect our level of operations.fleet plan.
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 as well as low-cost carriers offering discounted fares. 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 domestic cargo and passenger businesses, as well as sea transportation for our cargo business. Competition could reduce our passenger traffic and cargo demand, forcing us to reduce our fare levels, which could have a material adverse effect on our revenues and level of operations.
Chile may open its domestic aviation industry to foreign airlines without restrictions, which may change the competitive landscape of the domestic Chilean aviation sector and affect our business and results of operations
Currently, Chilean laws and regulations permit foreign airlines to operate domestic flights in Chile. Nevertheless, the rules currently prevent foreign-based carriers from flying within Chile without setting up a Chilean subsidiary first. There are currently no foreign airlines participating in the Chilean domestic market. However, on January 18, 2012, both the Secretary of Transportation and the Secretary of Economics of Chile announced steps towards unilaterally opening the Chilean domestic skies in the near term. Chilean Domestic Unilateral Open Skies Rule may change the competitive landscape of the Domestic Chilean Aviation Sector, as it will be easier for foreign companies in the future to freely operate in the Chilean territory, which may subject us to further competition. Competition from international carriers in the Chilean market may affect the competitive dynamics of our industry by reducing our passenger traffic and cargo demands, forcing us to reduce our fare levels, which could have a material adverse effect on our revenues and level of operations.
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.
A large portion of our aircraft areis subject to long-term operating leases. Our operating leases typically run from three to twelve 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 on competitive terms 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 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 and have a negative impact on our results of operations.
Our business may be adversely affected if we are unable to meet our significant future financing requirements.
We require significant amounts of financing to meet our aircraft capital requirements and may require additional financing to fund our other business needs. We cannot guarantee that we will have access to or be able to arrange for financing in the future on favorable terms. Following the combination of LAN and TAM, Fitch Ratings Inc. and Standard and Poor’s downgraded LATAM Airline Group S.A.’s credit rating to levels that are below investment grade. These downgrades and any further securities rating
agencies downgrades could increase LATAM’s financing costs. 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 and our business negatively affected.
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 you that in the future we will be able to meet our payment obligations. 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 fulfill our operational needs and thus generate revenue.
Variations in interest rates may have adverse effects on our interest payments business, financial condition, results of operations and prospects and the trading price of our ADRs and BDRs and preferred shares.
We are exposed to the risk of interest rate variations, principally in relation to the U.S. dollar London Interbank Offer Rate (“LIBOR”). Many of our operating and financial leases are denominated in U.S. dollars and bear interest at a floating rate. Approximately 38% of LATAM’s outstanding consolidated debt as of December 31, 2014 bears interest at a floating rate. After giving effect to interest rate hedging agreements, approximately 32% of LATAM’s outstanding consolidated debt is exposed to floating rates.
Volatility in LIBOR or the TJLP could increase our periodic interest and lease payments and have an adverse effect on our total financing costs. We may be unable to adequately adjust our prices to offset any increased financing costs, which would have an adverse effect on our revenues and our results of operations.
Increases in insurance costs and/or significant reductions in coverage could harm our financial condition and results of operations.
Major events affecting the aviation insurance industry (such as terrorist attacks, hijackings or airline crashes) may result in significant increases of the airlines’ insurance premium or in significant decreases of insurance coverage, as it happenedoccurred after the 9/September 11, 2001 terrorist attacks. Increases in insurance costs and/or significant reductions in coverage could harm our financial condition and results of operations.operations and increases the risk that we experience uncovered losses.
Problems with air traffic control systems or other technical failures could interrupt our operations and have a material adverse effect on 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. 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 as well as our reputation.
Our business relies extensively on third-party service providers. Failure of these parties to perform as expected, or interruptions in our relationships with these providers or their provision of services to us, could have an adverse effect on our financial position and results of operations.
We have engaged an increasing number of third-party service providers to perform a large number of functions that are integral to our business, including regional operations, operation of customer service call centers, distribution and sale of airline seat inventory, provision of information technology infrastructure and services, provision of aircraft maintenance and repairs, provision of various utilities and performance of aircraft fueling operations, among other vital functions and services. We do not directly control these third-party service providers, although we do enter into agreements with many of them that define expected service performance. Any of these third-party service providers, however, may materially fail to meet their service performance commitments, may suffer disruptions to their systems that could impact their services, or the agreements with such providers may be terminated. For example, flight reservations booked by customers and/or travel agencies via third-party GDSs may be adversely affected by disruptions in our business relationships with GDS operators. Such disruptions, including a failure to agree upon acceptable contract terms when contracts expire or otherwise become subject to renegotiation, may cause the carriers’ flight information to be limited or unavailable for display, significantly increase fees for both us and GDS users, and impair our relationships with customers and travel agencies. The failure of any of our third-party service providers to adequately perform their service obligations, or other interruptions of services, may reduce our revenues and increase our expenses or prevent us from operating our flights and providing other services to our customers. In addition, our business, financial performance and reputation could be materially harmed if our customers believe that our services are unreliable or unsatisfactory.
Disruptions or security breaches of our information technology infrastructure could interfere with our operations, compromise passenger or employee information and expose us to liability, possibly causing our business and reputation to suffer.
A serious internal technology error or failure impacting systems hosted internally at our data centers or externally at third-party locations, or large scale external interruption in technology infrastructure we depend on, such as power, telecommunications or the internet, may disrupt our technology network. Our technology systems and related data may also be vulnerable to a variety of sources of interruption, including natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers and other security issues. While we have in place, and continue to invest in, technology security initiatives and disaster recovery plans, these measures may not be adequate or implemented properly to prevent a business disruption and its adverse financial and reputational consequences to our business.
In addition, as a part of our ordinary business operations, we collect and store sensitive data, including personal information of our passengers and employees and information of our business partners. The secure operation of the networks and systems on which this type of information is stored, processed and maintained is critical to our business operations and strategy. Unauthorized parties may attempt to gain access to our systems or information through fraud or other means of deception. Hardware or software we develop or acquire may contain defects that could unexpectedly compromise information security. The compromise of our technology systems resulting in the loss, disclosure, misappropriation of, or access to, customers’, employees’ or business partners’ information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disruption to our operations and damage to our reputation, any or all of which could adversely affect our business.
Our financial success depends on the availability and performance of key personnel, who are not subject to non-competition restrictions.
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 applicable upon termination. 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.
Approximately 49%As of ourDecember 31, 2014 approximately 67% of LATAM’s employees, including administrative personnel, 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.
PressureCollective action by employees could cause operating disruptions and negatively impact our business.
Certain employee groups such as pilots, flight attendants, mechanics and 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.
For 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,expenses, could directly impact our earnings.
Labor costs constitute a significant percentage of our total operating costs (19.6%expenses (20% in 2011),2014) and at times in our operating history we have experienced pressure to increase wages and benefits for our employees. 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 ableA failure 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.
Risks Related the Airline Industry Passenger and cargo demand is heavily cyclical and highly dependent on global and local economic growth, economic expectations and foreign exchange rate variations, among other things. Our business has been negatively affected by global economic recessionary conditions, weak economic growth in Chile, in Brazil, recession in Argentina and poor economic performance in certain emerging market countries in which we operate. The occurrence of similar events in the future could adversely affect our business. We will continue to No assurance can be given that capacity reductions or other steps we may take in response to weakened demand will be adequate to offset any future reduction in our cargo and/or air travel demand. Sustained weakened demand may adversely impact our revenues, results of operations or financial condition. Our business is highly regulated and changes in the regulatory environment in which we operate may adversely affect our business and results of operations. Our business is highly regulated and depends substantially upon the regulatory environment in the countries in which we operate or intend to operate. For example, price controls on fares may limit our ability to effectively apply customer segmentation profit maximization techniques (“passenger revenue management”) and adjust prices to reflect cost pressures. High levels of government regulation may limit the scope of our operations and our growth plans, and the possible failure of aviation authorities to maintain the required governmental authorizations or our failure to comply with applicable regulations, may adversely affect our business and results of operations. 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 similar event. There can be no assurance that, as a result of an aircraft accident or significant incident: Substantial claims resulting from an accident or significant 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 alliance partners or other airlines. 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 (and companies providing ground cargo transportation) could enter our markets and compete with us on any of these bases, including by offering lower prices, more attractive services or increasing their route capacities in an effort to gain greater market share. Chile has opened its domestic aviation industry to foreign airlines without restrictions, which may change the competitive landscape of the domestic Chilean aviation sector and affect our business and results of operations. Since November 2013, Chilean laws and regulations have permitted foreign airlines to operate domestic flights in Chile without necessarily setting up a Chilean subsidiary first. The Chilean Domestic Unilateral Open Skies Rule may change the competitive landscape of the Domestic Chilean Aviation Sector, as it will be easier for foreign companies in the future to freely operate in the Chilean territory, which may subject us to further competition. Competition from international carriers in the Chilean market may affect the competitive dynamics of our industry by reducing our passenger traffic and cargo demands, forcing us to reduce our fare levels, which could have a material adverse effect on our revenues and level of operations.FailureOur performance is heavily dependent on economic conditions in the countries in which we do business and negative economic conditions in those countries could have an adverse impact on our business.comply with applicable environmental regulationswork on operations based in Latin America and our performance will, therefore, continue to depend heavily on economic conditions in the region. Any of the following factors could adversely affect our business, financial condition and results of operations in the countries in which we operate:
The reallocation of any of our slots to other market participants could adversely affect our operations.
The Brazilian government has proposed and in some cases already implemented, regulations to reallocate existing takeoff and landing slots at major airports in Brazil from TAM and our competitor, GOL, to smaller airlines and new market entrants, in order to stimulate small airline access to airport infrastructure. In the case of the Congonhas airport in Sao Paulo, slots were increased in October 2014 and given to new entrants (Azul and Avianca Brazil); and in a second stage slots could be reallocated, if current operators don’t comply with measures regarding on-time performance and regularity of service. We rely on access to takeoff and landing slots at Congonhas airport and other airports throughout Brazil, to conduct our Brazilian passenger operations. The reallocation of any of our slots to other market participants could adversely affect our operations.
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.
The regulatory structure of Brazilian civil aviation is undergoing change and we have not yet been able to evaluate the results of this change on our business and results of operations.
Scheduled air transportation services are considered public utilities in Brazil and are subject to extensive regulation by the Brazilian government. Over recent years, the Brazilian regulatory authorities have taken a more proactive role in monitoring the development of the Brazilian civil aviation market. For example, in an effort to prevent excess supply, the authorities have established rigorous criteria for air transport companies to follow when creating new routes or increasing flight frequencies.
Operation of air transportation services, as well as airport infrastructure, is an exclusive right of the Brazilian government, which may choose to provide these services directly or through third parties by means of concessions or permits. TAM’s concession to operate public air transportation was first obtained on December 9, 1996, and is valid until December 9, 2021. We cannot assure you that we will be able to automatically renew TAM’s concession when it expires. See “Item 4. Information on the Company—Business Overview—Regulation—Brazil—Aeronautical Regulation.”
Additionally, our capacity to grow our Brazilian operations is dependent on receiving the necessary authorizations from ANAC and the Bureau of International Relations (Superintendência de Relações Internacionais, or “SRI”). We cannot assure you that we will obtain all necessary authorizations in the future and any failure to do so would require us to re-evaluate our strategies.
Our operations are subject to local, national and international environmental regulations; costs of compliance with applicable regulations, or the consequences of noncompliance, could adversely affect our results, our business or our 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 RelatedThe European Union (“EU”) had proposed a directive under which the existing emissions trading scheme (the “ETS”) in each EU member state was to Chilebe extended to all airlines. This directive would require us to submit annual emission allowances in order to operate routes to and Other Emerging Market Countriesfrom EU member states. As of the date of this Annual Report, this proposal has been postponed for evaluation in 2016 and the directive affects only intra-European flights (which are not material to LATAM’s operation but there is a possibility that the directive could be extended to all flights in the future. Currently, we operate 6 routes to and from Europe, and service additional destinations through our code-share agreements. Although it is uncertain if this directive will be approved in 2016, it is increasingly likely that we will be required to participate in some form of an international aircraft emissions program in the future, which may involve significant costs.Our business may be adversely affected by a downturn in the airline industry caused by exogenous events that affect travel behavior or increase costs, such as outbreak of disease, weather conditions and natural disasters, war or terrorist attacks.
Demand for air transportation may be adversely impacted by exogenous events, such as adverse weather conditions and natural disasters, epidemics (such as Ebola), terrorist attacks, 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. Furthermore, these types of situations could have a prolonged effect on air transportation demand and on certain cost items.
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, reducing our revenues. 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.
Developments in Latin American countries and other emerging market countries may adversely affect the Chilean economy,and Brazilian economies, 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 securitiesBrazilian economies and have a material adverse effect on our business, financial condition and results of operations. Beginning late 2008,operations and continuing during 2009, manythe market value of the countries we serve, including Chile, experienced economic slowdowns or recessions, which resulted in a substantial weakening of demand.our securities. Although economic conditions in other emerging market countries may differ significantly from economic conditions in Chile and Brazil, 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.
Changes in the Chilean corporate tax rate or tax regime could adversely affect our financial results.
On October 2014, President Bachelet’s government approved a gradual increase in the Chilean corporate tax, from 20% to 25% or 27% (depending on the tax system chosen by the Chilean corporate tax payer) from 2014 to 2018. This increase, affected the tax provision for Chilean companies, including LATAM whose corporate tax rate will increase to 27%, and has required adjustments in deferred taxes to reflect the higher tax rate. Currently LATAM has losses resulting from its investment plan, but if LATAM records net income and no longer has tax losses available, our effective tax rate could increase and our net income could decrease. For more information on taxation see Note 17 in our audited consolidated financial statements
Fluctuations in the value of the Brazilian real, Chilean peso and other currencies in the countries in which we operate may adversely affect our revenues and profitability.
Changes in the exchange rate between the Chilean peso and the U.S. dollar or other currencies in the countries in which we operate 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. Changes in the exchange rate between the U.S. dollar and the currencies in the countries in which we operate could adversely affect our business, financial condition and results of operations. Approximately 99%97% of our indebtedness at December 31, 2011 is
2014 was denominated in U.S. dollars, 22%and we are expecting than 42% of our revenues and 47%35% of our operating expenses in 2011 were2015 are denominated in currencies other than the U.S. dollar, mainly the Brazilian real and the Chilean peso. If the value of the Brazilian real, Chilean peso or of other currencies, in which revenues are denominated, declines against the U.S. dollar, we will need more pesos or other local currencya greater amount of these currencies to repay the same amount of U.S. dollars. The Brazilian Real and the Chilean peso, hasrespectively, experienced volatility in recent years, including an average nominal depreciation of 1.3%depreciations against the U.S. dollar of 16.7% and 0.7% in 2008, an average nominal depreciation of 4.7% against the U.S. dollar2012, 10.5% and 1.8% in 20092013 and an average nominal appreciation of 4.6% against the U.S. dollar9.1% and 15.2% in 2010.2014. The exchange rate of the Chilean peso, Brazilian real and other currencies against the U.S. dollar may fluctuate significantly in the future.
Changes in Chilean, Brazilian 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.
Exchange controls in Venezuela delay our ability to repatriate cash generated from operations in Venezuela. They also increase our exposure to exchange rate losses due to potential devaluations of the Venezuelan bolivarvis à vis the U.S. dollar during the period of time between the time we are paid in Venezuelan bolivares and the time we are able to repatriate such revenues in U.S. dollars. See “Item 5. OperatingDuring 2014, the company modified the exchange rate used in determining equivalence of United States Dollar in cash and Financial Reviewcash equivalents held in strong Bolivar, from 6.3 VEF/US$ to 12.0 VEF/US$, which represented a loss by foreign exchange of US$61 million on our results.
The Brazilian government has exercised, and Prospects—Year ended December 31, 2011 comparedmay continue to year ended December 31, 2010—Costexercise, significant influence over the Brazilian economy, which may have an adverse impact on our business, financial condition and results of Sales”operations.
The Brazilian economy has been characterized by the significant involvement of the Brazilian government, which often changes monetary, credit, fiscal and “—Year ended December 31, 2010 comparedother policies to year ended December 31, 2009—Costinfluence Brazil’s economy. The Brazilian government’s actions to control inflation and implement other policies have involved wage and price controls, depreciation of Sales”.the real, controls over remittance of funds abroad, intervention by the Central Bank to affect base interest rates and other measures. We have no control over, and cannot predict what measures or policies the Brazilian government may take in the future.
We are not required to disclose as much information to investors as a U.S. issuer is required to disclose and, as a result, you may receive less information about us than you would receive from a comparable U.S. company.
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 requirements applicable to foreign issuers under the Exchange Act are more limited than the disclosure requirements applicable to U.S. issuers. Publicly available information about issuers of securities listed on Chilean or Brazilian 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 and Brazilian 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 controlling shareholders may have interests that differ from those of our other shareholders.
We have two groups of major shareholders—the Cueto Group (the “LATAM Controlling Shareholders”) and the Amaro Group (the “TAM Controlling Shareholders”). As of January 31, 2012 our controlling shareholders,2015, the LATAM Controlling Shareholders, in the aggregate, beneficially owned 33.9%25.5% of our voting common shares, and the TAM Controlling Shareholders, in the aggregate, beneficially owned 12.0% of our voting common shares. The LATAM Controlling shareholdersShareholders are in a position to elect fourthree of the nine members of our board of directors and are in a position to direct our management. In addition, underthe LATAM Controlling Shareholders have entered into a shareholders agreement with the TAM Controlling Shareholders, pursuant to which these controlling shareholders have agreed to vote together to elect individuals that the TAM Controlling Shareholders nominate to our board of directors. See “Item 7. Controlling Shareholders and Related Party Transactions—Major Shareholders.”
Under the terms of the deposit agreement governing the ADSs, if holders of ADSs do not provide JP Morgan Chase Bank, N.A., 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 discretionary right to vote those common shares. The person designated by the board of directors to exercise this discretionary voting right may have interests that are aligned with our controlling shareholders, which may differ from those of our other shareholders. Historically, our board of directors has designated its chairman, who currently is Mauricio Amaro, to serve in this role.
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. Accordingly, although you are entitled to withdraw the common shares underlying the ADSs from the depositary at any time, your ability to sell the common shares underlying ADSs in the amount and at the price and time that you wish to do soof your choice may be substantially limited. 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 Chilean 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 have been subject in the past 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 required, 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. Further,Furthermore, future changes in withholding taxes could negatively affect non-Chilean residents that invest in our shares.
When we established our ADS facility as part of our initial public offering in 1997, there were foreign exchange controls in Chile. At that time, in order to allow the depositary and investors to be able to enter into foreign exchange transactions to repatriate from Chile amounts they received in connection with the deposited shares of common stock (including dividends and proceeds from the sale in Chile of the underlying shares of common stock and any rights with respect thereto), we entered into a foreign investment contract (the “Foreign Investment Contract”) with the Central Bank and the depositary. The Foreign Investment Contract guaranteed ADS investors and the depositary access to the Formal Exchange Market to convert amounts from Chilean pesos into U.S. dollars and to repatriate such amounts.
In 2001, a new Compendium of Foreign Exchange Regulations (the “New Compendium”) removed exchange controls and many other barriers to investment. However, even though there are no longer foreign exchange controls in Chile, all foreign investment contracts (including the Foreign Investment Contract), continue to remain in full force.
We cannot assure you 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. For further information, see “Item 10. Additional Information—Exchange Controls—Foreign Investment and Exchange Controls in Chile”.Chile.”
Our ADS holders may not be able to exercise preemptive rights in certain circumstances.
The Chilean Corporation Law provides 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, (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 you 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 |
A. HISTORY AND DEVELOPMENT OF THE COMPANY
General
LanLATAM Airlines Group is a publicly-held stock corporation (sociedad anónima abierta) incorporated underChilean-based airline holding company formed by the lawscombination of LAN of Chile with unlimited duration. Lanand TAM of Brazil in 2012. Following the combination, LAN Airlines isS.A. became “LATAM Airlines Group S.A.” and TAM continues to exist as a companysubsidiary of Holdco I and a subsidiary of LATAM. The Company is primarily involved in the transportation of passengers and cargo.cargo and operates as one unified, combined business enterprise with two separate brands: LAN and TAM.
TheLATAM’s airline holdings include LAN and its affiliates in Peru, Argentina, Colombia and Ecuador, and LAN Cargo and its affiliates MasAir (in Mexico) and LANCO (in Colombia), as well as TAM S.A and its subsidiaries TAM Linhas Aereas S.A, TAM Transportes Aereos del Mercosur S.A, (TAM Airlines (Paraguay)), TAM Cargo, and Multiplus. LATAM is a publicly traded corporation listed in the Santiago Stock Exchange (“SSE”), the Valparaiso Stock Exchange, the Chilean governmentElectronic Exchange, the New York Stock Exchange (“NYSE”) and the Brazilian Stock Exchange (“Bovespa”).
LAN was founded Lan Airlines (formerly Lan Chile S.A.) in 1929. Lan Airlines was a government-owned company from 1929 until its incorporation in 1983. We began international service to Buenos Aires, Argentina in 1946, toby the United States in 1958 and to Europe in 1970.Chilean government. In 1989, the Chilean government sold 51.0% of Lan Airlines’sLAN’s capital stock to Chilean investors and to Scandinavian Airlines System. In 1994, our controlling shareholders together with other major shareholders acquired 98.7% of Lan Airlines’s stock,LAN’s stocks, including the remaining stockstocks held by the Chilean government, in a series of transactions. As of February 29, 2012, our controlling shareholders held 33.9% of our capital stock. For more information about our controlling shareholders, see “Item 7. Controlling Shareholders and Related Party Transactions—Controlling Shareholders” and “Item 7. Controlling Shareholders and Related Party Transactions—Related Party Transactions”.government. In 1997, Lan AirlinesLAN was listed on the New York Stock Exchange, becoming the first Latin American airline to trade its ADRs on this financial market.
Since this Over the past decade, LAN has significantly expanded its operations in Latin America, initiating services in Peru in 1999, Argentina in 2005, Ecuador in 2009, and in Colombia in 2010 through the acquisition of our capital stock in 1994Aerovias de Integracion Regional, Aires S.A. (dba “LAN Colombia”).
TAM is a leading domestic 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, Argentina and Colombia, and cargo affiliates ininternational airline, offering flights throughout Brazil Mexico and Colombia. 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 setstrong domestic market share, international passenger services and significant cargo operations. The company was founded in 1997 (under the name CIT—Companhia de Investimentos em Transportes), for the purpose of bilateral alliancesparticipating in, managing and consolidating shareholdings in airlines. In 2002, the name was changed to TAM S.A. and its shares began to be publicly traded on Bovespa in June 2005. From 2006 until the combination with carriers such asLAN in 2012, TAM American Airlines, Iberia and Qantas, and have been a member ofDepositary Shares were was also listed on theoneworld® alliance since 2000. New York Stock Exchange.
Our principal executive offices are located at Presidente Riesco 5711, 20th20th floor, Las Condes, Santiago, Chile and our general telephone number at this location is (56-2) 565-2525. We have designated LANLATAM Airlines Group as our agent in the United States, located at 970 South Dixie Highway, Miami, Florida 33156. Our website address iswww.lan.com. www.latamairlinesgroup.net. Information obtained on, or accessible through, this website is not incorporated by reference herein and shall not be considered part of this annual report. For more information contact Gisela Escobar, Director ofSenior Vice President Corporate Controller and Investor Relations, at gisela.escobar@lan.com.
Combination of LAN and TAM
On June 22, 2012, LAN and TAM successfully completed an exchange offer resulting in the combination of the two businesses and the creation of LATAM Airlines Group.
Following the combination, on July 18, 2012, the registration of TAM as a publicly listed company in Brazil was cancelled and TAM was delisted from Bovespa.
In order to implement this combination, the TAM controlling shareholders formed four newsociedades anónimas cerradas with limited liability under the laws of Chile: TEP Chile, Holdco I, Holdco II and Sister Holdco. After the transaction was completed, Holdco II and Sister Holdco ceased to exist, and the ownership and organizational structure of LATAM Airlines Group as of December 31, 2014 was as follows:
TAM S.A., the holding company, has two significant operating subsidiaries, TAM Linhas Aéreas S.A. (“TLA”) and Multiplus S.A.
Capital Expenditures
For a description of our capital expenditures, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital Expenditures”.Expenditures.”
Proposed Combination with TAMB. BUSINESS OVERVIEW
On August 13, 2010, we jointly announced with TAM that we had entered into a non-binding Memorandum of Understanding relating to the proposed all-stock transaction that would combine the holdingsGeneral
The association of LAN and TAM created the largest passenger and cargo airline groups in South America. We are also one of the largest airline groups in the world in terms of network connections, providing passenger transport services to approximately 135 destinations in 22 countries and cargo services to approximately 144 destinations in 26 countries, with a fleet of 327 aircraft and a set of bilateral alliances. In total, LATAM Airlines Group has more than 52,000 employees. LATAM currently provide domestic and international passenger services in Chile, Peru, Ecuador, Argentina, Colombia and Brazil. LATAM carry’s out its cargo operations through the use of belly space on the passenger flights and dedicated cargo operations using freighter aircraft through the cargo airlines in Chile, Brazil, Colombia and Mexico. We also offer other services, such as ground handling, courier, logistics, and maintenance.
As of January 31, 2015, LATAM serviced 16 destinations in Chile, 16 destinations in Peru, 5 destinations in Ecuador, 14 destinations in Argentina, 20 destinations in Colombia, 40 destinations in Brazil, 11 destinations in other Latin American countries and the Caribbean, 5 destinations in the North America, 5 destinations in Europe and 3 destinations in the South Pacific. In addition, as of January 31, 2015, through the various code-share and interline agreements, LATAM offered service to 117 destinations in Latin America, 435 destinations in North America, 395 destinations in Europe, and more than 800 destinations in Asia, Pacific, Africa and Middle East
Competitive Strengths
Our strategy is to maintain LATAM Airlines Group as the leading airline group in South America and to maximize shareholder value by increasing profitability through leveraging our unique position in the airline industry. LATAM Airlines Group is the only airline group in the region with a local presence in seven markets, as well as intra-regional and long haul operations. As a result, the Company has more flexibility, as well as a proven track record of acting quickly to adapt our business to economic challenges.
Moreover, LATAM’s unique leadership position in a region with growth potential and the focus on our existing competitive strengths will allow us to continue building our business model and fuel our future growth. We believe our most important competitive strengths are:
Leading Presence in South America
Through a successful regional expansion strategy, LATAM Airlines Group has become the leading international and domestic passenger airline group in South America, as well as the largest cargo operator in Latin America. LATAM has domestic passenger operations in Chile, Brazil, Peru, Argentina, Colombia and Ecuador. These six countries are the most significant passenger markets in South America (excluding Venezuela) and represent approximately 90% of the passengers in the region. LATAM is also the largest operator of intra-regional routes, connecting the main cities in South America. Furthermore, through the significant presence in the largest hubs in South America—Lima and Sao Paulo—LATAM is able to offer the best connectivity between South America and the rest of the world. Finally, the cargo companies of LATAM Airlines Group are the largest air cargo operators within, to and from Latin America, particularly in Brazil, where we consolidated our position during 2013.
Geographically Diversified Revenue Base, including both Passenger and Cargo Operations
The operations of the LATAM Airlines Group are highly geographically diversified, including domestic operations in six different countries, as well as operations within South America and connecting South America with various international destinations. This provides resilience to external shocks that may occur in any particular market. Furthermore, we believe that one of our distinct competitive advantages is our ability to profitably integrate our scheduled passenger and cargo operations. We take into account potential cargo services when planning passenger routes, and also serve certain dedicated cargo routes using our freighter aircraft, when needed. By adding cargo revenues to our existing passenger service, we are able to increase the productivity of our assets and maximize revenue, which has historically covered fixed operating expenses per flight, lowered break-even load factors and enhanced per flight profitability. Additionally, this revenue diversification helps offset seasonal revenue fluctuations and reduces the volatility of our business over time. For the year ended December 31, 2014, passenger revenues accounted for 86% of total revenues and cargo revenues accounted for 14% of total revenues.
Modern Fleet and Optimized Fleet Strategy
The average age of our fleet is less than 7 years, making our fleet one of the most modern in Latin America and in the world. A younger fleet makes us more cost competitive because it reduces fuel consumption and maintenance costs, and enables us to enjoy a high degree of performance reliability. In addition, a modern and fuel efficient fleet reflects our strong commitment to the environment as new aircraft incorporate the industry’s latest technology, allowing for a substantial reduction in emissions, while also decreasing noise levels. Finally, a modern fleet also allows us to provide the best passenger experience.
We optimize our fleet structure through the careful selection of modern aircraft models and staggered lease maturities. We select our aircraft based on their ability to effectively and efficiently serve our short- and long-haul flight needs, while still striving to minimize the number of different aircraft types we operate.
The Company’s current fleet plan involves a short-haul fleet formed exclusively by aircraft from the A320 family, with a focus on A321s and A320neos, whose use represents a saving per ASK of around 6% in comparison to A320ceos. In 2014, LATAM incorporated 11 Airbus A321s, the largest model in this family, for use on the busiest regional routes and for some domestic routes in Chile as well as in Brazil, ending the year with 21 aircraft of this type. Additionally, the Company has placed orders for 36 A320neos, with delivery dates between 2016 and 2018.
For long-haul passenger flights, we operate the Boeing 767-300, Airbus A330, Airbus A340-300 and Boeing 777 aircraft, and the modern and efficient Boeing 787 Dreamliner. This aircraft has new technologies in aerodynamics, materials and coatings which allows us to achieve important savings on fuel consumption and also achieve sustainable expansion of our fleet (as the Dreamliner produces up to 20% less CO2 than similar aircraft), while incorporating modern technology to deliver the best travel experience for LATAM’s passengers. Our current fleet plan also includes the delivery starting in 2015, of the first of a total of 27 Airbus A350 passenger aircraft, a new aircraft type that is expected to further improve the efficiency of the existing long-haul fleet.
In 2014, the Company took out of service it’s Dash Q400s and Boeing 737s (inherited from the Aires airline in Colombia) as well as seven A330s and three A340s and expects to conclude the withdrawal of these older models by 2016.
Overall, the Company’s continuous renewal of its fleet seeks to incorporate the best technology and position LATAM as a leader in fleet efficiency.
Strong Brands Teamed with Key Global Strategic Alliances
Following the business combination, both LAN and TAM continue to operate under their existing brands. We believe that both the LAN and TAM brands are associated with superior service, aircraft and technologically-advanced operations, and are well recognized and respected in their respective markets. In 2014, LAN and TAM Airlines were recognized as the “Best Airlines in South America” in first and second places respectively by the SkyTrax World Airline Awards. The awards are considered the global barometer for customer satisfaction within the industry, thanks to their exclusive reliance on the opinion of passengers.
The strategic global alliances and existing commercial agreements provide the LATAM customers with access to more than 1700 destinations worldwide, itinerary flexibility and various other benefits, which substantially enhance our competitive position within the Latin American market. In addition, in March 2014 TAM Airlines and LAN Colombia joinedoneworld marking one of the most important steps to achieve the entry of all of the airlines of LATAM Airlines Group into oneworld. To the passengers of the carries part of LATAM Airlines Group, this means greater convenience when traveling, since they will have the same standard of high-quality customer service, regardless of their international destination.
Financial Flexibility
We have historically managed our business to maintain financial flexibility and a strong balance sheet in order to accommodate our growth objectives while having the ability to respond to changing market conditions. Our financial flexibility has allowed us to secure large aircraft orders, including an important part of our current re-fleeting program, at attractive financing rates.
Recognized Loyalty Programs
TAM Fidelidade and LANPASS together represent the leading frequent flyer programs in South America, with strong participation rates and brand recognition by our customers. Customers in each program earn points or kilometers based on distance flown and class of ticket purchased, or by using other services of partners in the program. In addition, TAM’s Multiplus program, which was launched in 2009, allows members to accumulate points not just by flying with TAM, but also by making purchases through credit cards or using services and products at partner establishments, and to redeem points for TAM flights and other products at partner establishments. Following the business combination between LAN and TAM, we have begun to harmonize the two airlines’ frequent flyer programs to make them fully fungible for our customers, and have advanced cost initiatives related to the contract renegotiations and process standardization.
We regard our frequent flyer programs as strong relationship tools and we believe that these flexible programs are attractive to customers because they do not impose restrictions on flights for which points can be redeemed or the number of seats available to members using the loyalty program for any particular flight. LANPASS and TAM Fidelidade members can also accrue and redeem points foroneworld® flights.
Business Strategy
Our mission is to connect people with safety, operational excellence and warmth, seeking to become one of the best airlines groups in the world. In order to reach our mission the principal areas in which we plan to focus our efforts going forward are as follows:
Strengthen our Network
LATAM currently intends to strengthen its route network in South America, thereby offering the best connectivity within the region at a competitive price, in order to become by far the most convenient option for our passengers.We are the only airline group in South America with a local presence in seven home markets and an international and intra-regional operation. This position is strengthened by improved infrastructure in some of our main hubs, allowing us to further strengthen our network and improve connection times. We intend to leverage our position to create a diversity of options and destinations and build a platform that will allow us to continue growing in the long term.
Brand leadership and customer experience:
We will always seek to be the preferred choice of passengers in this region. Our efforts are driven by a differentiated passenger experience, and our leveraging of mobile digital technologies. We are currently working on a single, parent entity.unified brand, culture, product and value proposition for our passengers. Additionally, we will focus on defining LATAM’s digital strategy including applications to achieve ancillary revenues, and improving the management of contingencies, so that we are able to provide information and solutions to our customers in a timely and transparent manner. We continually assess opportunities to incorporate service improvements in order to respond effectively to our customers’ needs.
Focus on Efficiency and Cost Competitiveness
We are currently working to establish a competitive cost structure to further improve our effectiveness, simplify our organization and increase flexibility and speed in decision making. The target is to reduce total costs by approximately 5% over the next 4 years (2015 to 2018). These savings are in addition to the efficiencies we expect to obtain from our new fleet technologies. Cost savings include reductions in fuel and fees, procurement, operations, overhead, and distribution costs, among others. The company has already started work on cost initiatives in all these areas. We currently are working to install behavior of austerity at all levels within the Company to continuously reduce costs.
Organizational Strength
We aspire to be a group of passionate people, working in a simple and aligned manner, with inspiring leaders making agile decisions. This will allow us to deliver a distinctive value to our customers, surpass our competitors in a consistent way and have a healthy and sustainable company.
Proactive risk management
We are working to incorporate a holistic and responsible view of risk in decision making, starting with risks that have high potential impact and low probability of occurrence, which could significantly affect LATAM’s strategic objectives.
Airline Operations and Route Network
The following tables sets forth our operating revenues by activity and point of sale for the periods indicated:
Year ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
(in US$ millions) | ||||||||||||
Total passenger revenues | 10,380.1 | 11,061.6 | 7,966.8 | |||||||||
Total cargo revenues | 1,713.4 | 1,863.0 | 1,743.5 | |||||||||
Total traffic revenues | 12,093.5 | 12,924.5 | 9,710.4 |
Year ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
(in US$ millions) | ||||||||||||
Peru | 660.1 | 646.2 | 620.3 | |||||||||
Argentina | 813.5 | 950.6 | 890.2 | |||||||||
U.S.A. | 1,224.3 | 1,290.5 | 1,268.6 | |||||||||
Europe | 935.9 | 937.5 | 738.8 | |||||||||
Colombia | 391.7 | 388.0 | 366.7 | |||||||||
Brazil | 5,361.6 | 5,572.9 | 3,334.1 | |||||||||
Ecuador | 248.6 | 273.7 | 266.3 | |||||||||
Chile | 1,589.2 | 1,698.5 | 1,525.0 | |||||||||
Asia Pacific and rest of Latin America | 868.8 | 1,166.6 | 712.2 | |||||||||
Total Operating Revenues | 12,093.5 | 12,924.5 | 9,722.2 |
Passenger Operations
General
As of December 31, 2014, both domestic and international passenger services, were operated by LAN, TAM, LAN Peru, LAN Ecuador, LAN Argentina and LAN Colombia.
The following table sets forth certain of our passenger operating statistics for international and domestic routes for the periods indicated:
Year ended and as at December 31, | ||||||||||||
2014 | 2013 | 2012(2) | ||||||||||
ASKs (million) (at period end) | ||||||||||||
International | 65,530.1 | 67,159.3 | 65,627.8 | |||||||||
SSC | 21,110.3 | 20,365.0 | 18,347.6 | |||||||||
Domestic Brazil | 43,560.5 | 44,163.5 | 48,210.6 | |||||||||
Total | 130,200.9 | 131,690.9 | 132,186.0 | |||||||||
RPKs (million) | ||||||||||||
International | 55,951.1 | 55,272.4 | 53,957.4 | |||||||||
SSC | 16,993.3 | 15,990.0 | 14,446.0 | |||||||||
Domestic Brazil | 35,589.7 | 35,193.2 | 35,482.7 | |||||||||
Total | 108,534.0 | 106,466.5 | 103,886.1 | |||||||||
Passengers (thousands) | ||||||||||||
International | 13,630 | 13,506 | 13,134 | |||||||||
SSC | 20,759 | 19,847 | 17,973 | |||||||||
Domestic Brazil | 33,468 | 33,344 | 33,571 | |||||||||
Total | 67,833 | 66,696 | 64,477 | |||||||||
Passenger RASK (passenger revenues/ASKs, in US cents) | ||||||||||||
International(3) | US¢7.6 | US¢7.9 | US¢7.9 | |||||||||
SSC(3) | US¢9.1 | US¢9.6 | US¢10.2 | |||||||||
Domestic Brazil(3) | US¢8.6 | US¢9.2 | US¢8.8 | |||||||||
Combined RASK(1) | US¢8.0 | US¢8.4 | US¢8.3 | |||||||||
Passenger load factor (%) | ||||||||||||
International | 85.4 | % | 82.3 | % | 82.2 | % | ||||||
SSC | 80.5 | % | 78.6 | % | 78.7 | % | ||||||
Domestic Brazil | 81.7 | % | 79.7 | % | 73.6 | % | ||||||
Combined load factor | 83.4 | % | 80.8 | % | 76.6 | % |
(1) | The combined RASK for LATAM is calculated by dividing passenger revenues by total passenger ASKs. |
(2) | Pro forma operating data for the year ended as of December 31, 2012 (which includes TAM’s unaudited operating data since June 23, 2012). |
(3) | RASK information for each of our business units is provided because LATAM believes that it is useful information to understand trends in each of our operations. The revenues per business unit include ticket revenue, breakage, excess baggage fee, frequent flyer program revenues and other revenues, however these measures may differ from similarly titled measures reported by other companies and should not be considered in isolation or as a substitute for measures of performance in accordance with IFRS. This unaudited operating data is not included in or derived from LATAM’s financial statements. |
International Passenger Operations
Our international network combines the international operations of the Chilean, Peruvian, Ecuadorian, Argentinean, Colombian and Brazilian subsidiaries. LATAM has operated international services out of Chile since 1946 and have greatly expanded our international services, offering flights out of Peru, Ecuador, Argentina, Colombia and Brazil. As of December 31, 2014, we now offer 24 international destinations.
Our strategy to generally expand our international network is aimed at enhancing our value proposition by offering customers more destinations and routing alternatives, and promoting tourism in South America. Our sustained development of our international network has been a crucial factor in our long-term strategy. LATAM provides long-haul services out of Santiago, Lima, Guayaquil, Buenos Aires, Bogota, Sao Paulo and Rio de Janeiro. LATAM also provides regional services from Chile, Peru, Ecuador, Argentina, Colombia and Brazil.
During year 2014, after the necessary infrastructure investments were made, we completed our move to the new Terminal 3 at Guarulhos Airport in Sao Paulo with new slotsfor takeoff and landing slots in this airport which allow us to significantly decrease our connection times. This is a key milestone in the development of our building our most important hub at Guarulhos airport. In addition, we have continued to consolidate our secondary hubs in Lima and Santiago.
The following table sets forth the international destinations served from each of the aforementioned countries as of December 31, 2014:
Country of Origin | Destination | Number of Destinations | ||
Chile | Argentina Australia | 4 1 | ||
Bolivia | 2 | |||
Brazil | 2 | |||
Colombia | 1 | |||
Ecuador | 2 | |||
Peru | 1 | |||
Uruguay | 1 | |||
Venezuela | 1 | |||
Dominican Republic | 1 | |||
Mexico | 2 | |||
United States | 3 | |||
Spain | 1 | |||
Germany | 1 | |||
New Zealand | 1 | |||
Falkland Islands | 1 | |||
French Polynesia | 1 | |||
Peru | Argentina | 3 | ||
Bolivia | 2 | |||
Brazil | 1 | |||
Chile | 1 | |||
Colombia | 3 | |||
Cuba | 1 | |||
Ecuador | 2 | |||
Venezuela | 1 | |||
Mexico | 2 | |||
United States | 3 | |||
Dominican Republic | 1 | |||
Spain | 1 | |||
Brazil | Argentina | 4 | ||
Chile | 1 | |||
Colombia | 1 | |||
Peru | 1 | |||
Uruguay | 1 | |||
Venezuela | 1 | |||
Paraguay | 2 | |||
Mexico | 2 | |||
United States | 3 | |||
France | 1 | |||
Germany | 1 | |||
United Kingdom | 1 | |||
Italy | 1 | |||
Ecuador | Argentina | 1 | ||
Chile | 1 | |||
United States | 2 | |||
Peru | 1 | |||
Spain | 1 | |||
Argentina | Brazil | 1 | ||
Chile | 1 | |||
Dominican Republic | 1 | |||
United States | 1 | |||
Colombia | Brazil | 1 | ||
Chile | 1 | |||
United States | 1 |
During 2014, LATAM received five additional Boeing 787-8 Dreamliners, ending the year with ten aircraft of this model, out of an order of 32, and expanding the aircraft’s utilization to five new routes. The incorporation of the Boeing 787-8 Dreamliners into our international fleet will allow us to achieve important savings on fuel consumption and the sustainable expansion of our fleet (as the Dreamliner produces up to 20% less CO2 than similar aircraft), while incorporating modern technology to deliver the best travel experience for our passengers. In addition, during 2014, LATAM started a process of retrofitting some of the Company’s Boeing 777 aircraft, in order to include a new business class mainly in routes from Brazil to North America and also received additional Boeing 767 aircraft with fully flat business class seat.
As part of its mission, LATAM seeks to promote tourism to South America. Due to its large network of services, visitors from around the world can experience world renowned destinations such as Cusco, Easter Island, the Galapagos Islands, Iguazu Falls in Brazil, or Patagonia in Chile and Argentina, including the cities of Punta Arenas, Ushuaia, El Calafate and Bariloche.
Chile
According to the Chilean JAC data, Chilean international air passenger traffic increased 6.1% from 2013 to 2014 as measured in passengers transported, totaling more than 7.4 million passengers in 2014. We had 62.8% of the international market share in Chile in 2014 as measured in passengers transported, which was a decrease compared to 65.3% in 2013. Our Chilean international operations can be divided into four main segments based on destination: to North America, to Europe, to other countries in Latin America, and to the Pacific. As of January 31, 2015, our main competitors on direct routes between Chile and North America included American Airlines, Delta Airlines, Avianca-Taca, Air Canada and Aeromexico. COPA also participated in the Chile-North American markets with stopovers in its Central American hub in Panama City. Our main competitors on routes between Chile and Europe were Air France-KLM and Iberia. On regional routes our main competitors included Aerolineas Argentinas, Air Canada, Avianca-Taca and GOL.
Peru
According to our internal estimates (captured through MiSchDynamicDT), Peruvian international air passenger traffic increased by 3.1% from 2013 to 2014 measured in passengers transported, totaling approximately 7.7million passengers in 2014. In Peru, we had 33.7% share of the international market as measured in passengers transported in 2014, with no variations as compared to the passengers transported in 2013. Our Peruvian international operations can be divided into three main segments based on destination: to North America, to Europe and to other countries in Latin America. As of January 31, 2015, our main competitors on direct routes between Peru and North America included American Airlines, United Airlines, Delta Airlines, Avianca-Taca, Aeromexico and Air Canada. COPA also participated in the Peru-North American markets with stopovers in its respective Central American hub. On routes to Europe, our main competitors were Air France-KLM and Iberia. On regional routes our main competitors included Avianca-Taca and Aerolineas Argentinas.
Ecuador
According to our internal estimates and travel agency statistics (captured through MiSchDynamicDT), Ecuadorian international air passenger traffic increased 7.1% from 2013 to 2014, as measured in passengers transported totaling approximately 6.3 million passengers in 2014. According to the Diio Mi we had 23.0% of the international market share as measured in ASKs in LATAM routes from Ecuador in 2014, a decrease of 9.6 percentage points compared to 32.6% in 2013. Our Ecuadorian international operations can be divided into three main segments, based on the destination: to North America, Europe to other countries in Latin America. As of January 31, 2015, our main competitors on direct routes between Ecuador and North America included American Airlines, Continental Airlines, Delta Airlines; Avianca–Taca and COPA also participate in the Ecuador-North American markets with stopovers in their respective Central American hubs. On routes to Europe, our main competitors included Iberia, KLM and Avianca-Taca. On regional routes, our main competitors included Avianca-Taca and Copa.
Argentina
According to our internal estimates (captured through MiSchDynamicDT), in 2014 the Argentinean international passenger capacity decreased by 0.5%, as compared to the previous year. LATAM Airlines had 11.8% of the international market share as measured in capacity (ASKs) in Argentina in 2014, which was a decrease as compared to 13.0% in 2013. The Argentinean international operations can be divided into two main segments based on destination: to North America and to other countries in Latin America. As of January 31, 2015, the main competitors on the Buenos Aires-Miami route included American Airlines and Aerolíneas
Argentinas. Avianca-Taca and COPA also participated in the Argentina-North American markets with stopovers in their respective hubs. The main competitors on the Buenos Aires-Dominican Republic route included COPA and American Airlines. The main competitors on the Buenos Aires-Sao Paulo route included GOL and Aerolíneas Argentinas. The main competitors on the Buenos Aires-Lima route included Avianca-Taca and Aerolíneas Argentinas. The main competitors on the Buenos Aires-Santiago route included Aerolíneas Argentinas and Air Canada and Sky Airline.
Colombia
According toAeronautica Civil (Colombian Civil Aeronautics), the Colombian international market increased 9.8% from 2013 to 2014 as measured in passengers transported, from 9.9 million passengers to approximately 10.9 million passengers in 2014. LAN (including LAN Colombia, LAN Peru and LAN Airlines) had a 7.4% share of the international market share in Colombia in 2014, as measured in RPK which is an increase of 1.0 percentage point as compared to 6.4% in the same period 2013. The international operations in Colombia can be divided in two business segments based on destination: to North America and to other countries in Latin America. As of December 31, 2014, the main competitors on direct routes between Colombia and North America included Avianca-Taca, American Airlines, United Airlines, Air Canada, Delta Airlines and Aeromexico. COPA also participated in the Colombia-North American markets with stopovers in its Central American hub. On regional routes, the main competitors included Avianca-Taca and COPA.
Brazil
According to Brazilian ANAC data, Brazilian international air passenger traffic increased 4.9% from 2013 to 2014 as measured in RPKs, totaling more than 6.4 million passengers in 2014. TAM had 84.6% of the international market share in Brazil in 2014 when considering only Brazilian airlines, which was a decrease compared to 87.5% in 2013. Our Brazilian international operations can be divided into three main segments, based on destination: to North America, to Europe and to other countries in Latin America. As of January 31, 2015, the main competitors on direct routes between Brazil and North America included American Airlines, United Airlines, Delta Airlines, Air Canada and Aeromexico. Avianca-Taca also participated in the Brazil-North American markets with stopovers in its Central American hub. On routes to Europe, the main competitors were Iberia, Air France-KLM, Lufthansa, TAP and Air Europa. On regional routes the main competitors included Aerolineas Argentinas, Avianca-Taca and GOL.
Domestic Passenger Operations
LATAM provides domestic passenger services within Chile, Peru, Ecuador, Argentina and Colombial. Said domestic passenger services are operated by LAN, LAN Express and the regional subsidiaries, including LAN Peru, LAN Ecuador, LAN Argentina and LAN Colombia. Additionally, TAM Linhas Aereas provides domestic passenger services within Brazil.
Business Model for Domestic Operations
LATAM operates on a low cost business model in all of our domestic operations. This model increases efficiency in the short-haul while encouraging increased domestic demand. A key element of this business model has been to significantly increase the utilization of the narrow body fleet, a goal that the company has been successfully achieving through modified itineraries including more point-to-point, faster turnarounds times and overnight flights. Additionally, the transition to a newer fleet has allowed decreases in unscheduled maintenance costs as well as in cost efficiencies achieved through operating fewer fleet types and in operational efficiencies, including lower fuel consumption.
Another key element of this business model is the reduction in sales and distribution costs through higher internet penetration and reduced agency commissions, and increased self-check-in service through web check-in and kiosks at airports. These initiatives, together with simplifications in back-office and support functions, will continue to allow us to expand operations while controlling fixed costs.. We have begun to pass on these operating efficiencies to consumers through significant fare reductions, which have a strong effect in stimulating new demand. We plan to continue working in the business model during 2015, as we look for ways to increase operational efficiency, encourage direct sales and self-check-in, and implement new sales strategies aimed at stimulating demand.
Operations within Chile
LAN and LAN Express, are the leading domestic passenger airline in Chile. We have operated domestic flights in Chile since LAN’s creation in 1929. During 2014, we flew to 16 destinations within Chile (including Santiago, but not including Easter Island, which we consider an international destination) as well as some seasonal destinations, with an average fleet of 28 Airbus A320-Family Aircraft. Domestic operations in Chile have been positively affected by the greater utilization of the latest-generation Airbus fleet and the retirement of the Airbus A318-100s.
According to JAC data, the Chilean domestic market as a whole transported approximately 9.8 million passengers in 2014, an increase of 3.8% from 9.5 million passengers transported in 2013. Our domestic passenger market share in Chile was 77.9% in 2014 as measured in revenue passenger kilometer (RPK). During 2014, our main competitors in the domestic market were Sky Airlines domestic passenger market shares as measured in RPKs of 20.2%.
Operations within Peru
LAN Peru started operations in 1999 with both domestic and international flights from Lima. Since then LAN Peru has expanded consistently, consolidating its domestic operations with a continuous focus on improving our excellence for service.
During 2014 LAN Peru flew to 16 destinations, with 11 Airbus A319 and 7 Airbus A320 aircraft. With this, LAN Peru has one of the most modern fleets in Latin America, which is ideal for the characteristics of Peruvian routes, as it maximizes available payload in high-altitude airports. In 2014, a total of 5.7 million passengers traveled on LAN Peru’s domestic routes, which represented an increase of 8% compared to 2013. According to data provided by the Peruvian DGAC, our domestic market share was 63,2% in 2014, compared to 63.4% in 2013, as measured in number of passengers. Our main competitors in Peru include Avianca, Peruvian Airlines and Star Perú.
Operations within Argentina
Since 2005, LAN Argentina has increased its domestic destinations to a total of 14 Argentine cities. It currently operates the domestic network through a fleet of 10 Airbus A320 aircraft.
In the domestic Argentine market, LAN Argentina operates in a regulated environment in which fares sold to Argentine passengers are subject to minimum and maximum prices that vary per route. In 2014, the floor and ceiling of the regulated price range consistently increased-, by 12% in May 2014, by 12% in August 2014 and by 12% in December 2014-.
Based on internal estimates as of December 31, 2014, the domestic market share in Argentina in terms of capacity (ASKs) was approximately 27%. During this period of time LAN Argentina transported 2.3 million passengers, increase 0.5% compared to 2013. The main competitor of LAN Argentina is Aerolíneas Argentinas, a state owned company that has approximately 70% of the total Argentinean domestic capacity as measured in ASK.
Operations within Ecuador
Since beginning operations in 2008, LAN Ecuador has greatly expanded the number of destinations and frequency of flights. As of the end of 2014, LAN Ecuador operated in 5 domestic destinations-Guayaquil, Quito, Cuenca, Baltra and San Cristobal- with a fleet of 3 Airbus A319 aircraft.
In 2014, LAN Ecuador transported 1.1 million passengers in the domestic passenger market representing a decrease of 16% in number of passengers serviced in 2013, in a market that registered a decrease of more than 8% in domestic commercial flights. However, LAN Ecuador as the leading airline with a 36.5 percent of the market, outperforming its main competitors such as the flag carrier Tame, and Avianca-Taca.
Operations within Colombia
Following the acquisition of Aires in 2010, LAN Colombia has successfully restructured the Company’s previous operations in order to achieve LATAM’s standards in terms of security, punctuality, efficiency and service quality. LAN Colombia implemented the low cost model already operating in the other affiliates domestic markets of Chile, Peru, Argentina and Ecuador, to stimulate demand on domestic flights by providing more Colombian citizens the opportunity to use air transportation.
LAN Colombia continued to expand its network inside the domestic market in 2014, flying to 20 destinations and 24 routes. Additionally, LAN Colombia continues to advance in its fleet renewal plan, with the aim of phasing out less efficient models, by gradually replacing the Boeing B737 aircraft and Bombardier Dash aircraft inherited from Aires with aircraft from the Airbus A320 family. As of December 2014, LAN Colombia serviced its domestic destinations with 14 Airbus A320 aircraft and 7 Dash-200 aircraft. The company’s fleet renewal will be completed in 2015, when we will phase out all of the remaining Dash 8-200 aircraft.
In its third year of operations LAN Colombia transported 4.4 million passengers on domestic passenger, 9.2% more than the previous year, ranking as the second largest operator in the country, with a 19% market share measured in passenger onboard , behind Avianca. Other important competitors are Satena and VivaColombia.
Operations within Brazil
TAM Linhas Aereas is the leading domestic passenger airline in Brazil.. TAM Linhas Aereas’ strategy is based on providing strong connectivity through a network based on the main Brazilian cities, offering a reliable and high quality service, and leveraging our strong brand position in Brazil and abroad. As of December 31, 2014 TAM Linhas Aereas operates flights to 40 destinations within Brazil as well as some seasonal destinations, with an average fleet of 115 aircraft of the Airbus A320 family, including 16 Airbus A321, aircraft that allows high-density routes meet greater efficiency
The domestic market in Brazil has historically suffered from overcapacity, resulting in very low load factors compared to industry standards, which has negatively impacted the financial results of domestic airlines in recent years. However, this trend began to change during 2012 and has significantly improved during the last two years, as major airlines have reduced domestic capacity, leading to general improvements in load factor and yields.
TAM has continued to make significant progress in the domestic Brazil passenger operation, improving profitability by increasing load factor and yield (in real) through the rationalization of capacity and improved revenue management through better segmentation of the market. During 2014, TAM reduced its capacity by 1.4% as measured in ASKs and increased traffic measured in RPK 1.1%, leading to an increase of 2.0 percentage points in load factors on a year-over-year basis, compared to the already high level reached by TAM in 2013, and higher than the occupancy factor of the industry which was 79.8% on average.
In 2014, TAM maintained leadership among business travelers and improved its punctuality indicators, resulting in greater customer satisfaction. In addition, TAM won - for the second consecutive year - the airline Top of Mind award.
According to ANAC, the Brazilian domestic market as a whole transported approximately 96 million passengers in 2014, an increase of 6.6% as compared to 90.0 million in 2013. As of December 31 2014, TAM Linhas Aereas lead the Brazilian domestic passenger with 38.1% of the market share as measured in RPKs. During 2014, TAM’s main competitors in the domestic market were GOL, Azul, and Avianca Brazil.
Passenger Alliances and Commercial Agreements
Prior to the combination between LAN and TAM, LAN, LAN Peru, LAN Ecuador and LAN Argentina were members ofoneworld®, and TAM was member of Star Alliance®. In March 2013, LATAM Airlines Group choseoneworld® as the global alliance for all of its airlines. As a result of this decision, LAN Colombia became a member ofoneworld® on October 1, 2013 and TAM became a member ofoneworld® in March 31, 2014. Its affiliate TAM Mercosur will join in a future date. Currently,oneworld® is a global marketing alliance comprising of LAN, LAN Peru, LAN Argentina, LAN Ecuador, LAN Colombia, TAM, Air Berlin, American Airlines, British Airways, Cathay Pacific Airlines, Finnair, Iberia, Japan Airlines, Malaysia Airlines, Qantas, Qatar, Royal Jordanian, Sri Lankan and S7. The current members of theoneworld® alliance, including LATAM, serve more than 990 destinations, 154 countries, operating 14,000 daily departures.
The following are our passenger partnerships as of January 2015:
• | American Airlines Group. Since 1997, LAN has had an agreement with American Airlines to share carrier codes for certain flights on global reservations systems, thereby enabling American Airlines passengers to purchase seats on LAN flights and vice-versa (a “code-sharing agreement”). The U.S. Department of Transportation (DOT), granted LAN Airlines SA and American Airlines immunity from antitrust regulations in October 1999 for specific areas of cooperation. For more information see “—Regulation—United States of America—Authorizations and Licenses” below. In 2005, the DOT also granted antitrust immunity to LAN Peru and American Airlines for specific areas of cooperation. In 2007, LAN Peru and American Airlines established a code-sharing agreement between Peru and the U.S. with additional destinations in both countries. In the same year, LAN Argentina and American Airlines signed a code-sharing agreement expanding the cooperation between the companies. At the end of 2011, a code-sharing agreement between LAN Ecuador and American Airlines was signed. During 2013, two new code-sharing agreements were implemented between American Airlines and the LATAM Airlines Group; one between LAN Colombia and American Airlines and the other between |
TAM and American Airlines. .LATAM is currently expanding its code-share agreements with American Airlines in order to offer more destinations within the U.S. Before the merge between American Airlines and US Airways. In April 2010, before the merger between American Airlines and US Airways, TAM initiated a code-sharing agreement with US Airways to code-share between Brazil and USA. Through this agreement, TAM can access 23 domestic cities in the U.S. from Orlando, Miami and New York. US Airways became a member ofoneworld® in March 31, 2014 after the merger with American Airlines. |
• | Iberia. In January 2001, LAN initiated a code-sharing agreement with Iberia. In 2007, LAN Ecuador and LAN Peru set up code-sharing agreements with Iberia for routes between Ecuador, Peru and Spain; as well as other additional European destinations. Currently, LAN, LAN Ecuador and LAN Peru offer 17, 11 and 14 destinations in Europe, respectively, through Iberia routes. After LAN Colombia and TAM joined the Alliance, in the second quarter of 2014, LAN Colombia and Iberia established a code-sharing agreement for Colombia’s domestic market. At the end of 2014, TAM and Iberia signed an amendment to the current code-share agreement in order to expand their code-shared routes between Brazil and Europe. |
• | Qantas. In July 2002, LAN initiated a code-sharing agreement with Qantas to operate between Santiago, Chile and Sydney, Australia with a stopover in Auckland, New Zealand. As of January 31, this code-sharing agreement includes 7 Santiago-Auckland-Sydney flights operated by LAN and 4 non-stop Santiago-Sydney flights offered by Qantas. During 2014, LAN and Qantas executed a second codeshare agreement to connect other South-American’s destinations with New Zealand and Australia. |
• | British Airways. In 2007, LAN initiated a code-sharing agreement with British Airways on LAN flights between Sao Paulo and Santiago to provide service for British Airways passengers traveling from London to Santiago through a connection in Sao Paulo. This code-sharing agreement also includes British Airways’ flights between Madrid and London. |
• | Lufthansa and Swiss Air: TAM has a code-sharing agreement with Lufthansa and Swiss Air, pursuant to which TAM offers its customers long haul flights from Brazil to Germany, inside Germany to 7 destinations and within Europe to 4 destinations operated by Lufthansa and Swiss Air. Lufthansa and Swiss Air likewise offer customers seats on TAM’s flights from Germany to Brazil, inside Brazil to 12 destinations and within South America to 3 destinations. |
• | Aeromexico. During 2004, LAN and LAN Peru signed a code-sharing agreement with Aeromexico. Currently there are code-shares between Aeromexico and LAN Peru for flights from Peru to Mexico, and to 18 domestic destinations of Mexico. In May 2012, TAM also implemented a code-sharing agreement with Aeromexico between Sao Paulo and Mexico City. This code-sharing agreement also includes 9 destinations in Brazil, and 9 destinations in México. |
• | All Nippon Airways. In October 2010, TAM initiated a code-sharing agreement with All Nippon Airways to operate between Sao Paulo and Narita, through connections in London From 30th March 2014, All Nippon Airways switches its operation to Haneda Airport, giving our passengers access to the preferred airport in Tokyo. During 2014 All Nippon Airways and TAM agreed to expand the code-sharing agreement and implement new routes from South-America to Japan via Europe and North America, subject to required governmental approvals. |
• | Cathay Pacific. In May 2010, LAN initiated a code-sharing agreement with Cathay Pacific to operate between Santiago and Hong Kong, through connections in Los Angeles, New York and Auckland, and in November 2010, LAN Peru initiated a code-sharing agreement with Cathay Pacific to operate between Lima and Hong Kong, through connections in Los Angeles and San Francisco. |
• | Japan Airlines. In September 2011, LAN initiated a code-sharing agreement with Japan Airlines to operate between Santiago and Narita, through connections in Los Angeles and New York. |
• | Other alliances and partnerships: TAM also has a code-sharing agreement in place with Air China to operate between Sao Paulo and Beijing, through connections in Madrid. LAN Peru has a code-sharing agreement with Korean Air, for flights between Los Angeles and Seoul (operated by Korean Air) and between Los Angeles and Perú (operated by LAN Peru), and LAN has a code-sharing agreement with Alaska Airlines, which permits LAN to provide customers with service between Chile and three destinations in the west coast of the U.S. and Canada. At the end of 2013 South African and TAM signed a code-sharing agreement between Sao Paulo and Johannesburg. This agreement also includes other destinations in South Africa and Brazil. |
Passenger Marketing and Sales
Since the combination between LAN and TAM in 2012, LATAM Airlines Group has operated under two brands, LAN and TAM. Within the “LAN” and “TAM” brands, we differentiate our marketing strategies between our long haul and short haul services.
Our long-haul marketing strategy emphasizes attributes valued by our international customers: a reliable, high-quality service centered on entertainment and comfort for long travel. We also highlight our extensive network covering the most important destinations in South America and the Caribbean and frequent service to major overseas gateways such as New York, Los Angeles, Miami, Orlando, London, Madrid, Paris, Frankfurt, Milan and Sydney. In a continuing effort to fulfill this promise, we continuously improve our cabins and review our service protocols. Our Business Cabin features a premium on-board service aimed to provide our customers with more time to rest. In our Economy Cabin, newly upgraded entertainment units make flying more enjoyable.
In 2014, LATAM’s long haul fleet had 10 Boeing 787 of the 32 aircraft we ordered. The Company was the first airline in the Americas, and fourth in the world, to receive this model with the latest-generation technology that was an innovation breaking point for the airline industry. The 787 airplanes will allow us to reach new destinations and boost our existing services while increasing the efficiency of our operations and reduce our carbon footprint. Following this trend, in 2015 LATAM will be the first in the Americas to receive the Airbus A350, a new generation aircraft with new standards of efficiency –with capacity of approximately 348 seats- and with new levels of passenger comfort. See “—International Passenger Operations” for a description of recent improvements to our international fleet.
Our short-haul operations are designed to fit our customers’ need: punctuality, reliability, more frequencies, modern aircraft and efficient operations. To deliver this value proposition, we have been increasing our fleet and frequencies with more point-to-point flights, improved punctuality and streamlined processes including Internet sales, web and mobile check-in and airport self-check-in.
Additionally, our short haul fleet has also been renewed by the delivery of more Airbus A320 and A321. These aircraft also enhance our domestic and our regional by providing high security standards, improvements in the interior cabin design- the upper bins have mirrors that ensure visibility of carryon luggage, among other improvements - and more comfortable and technologically–advanced seating -with leather upholstery and more in-flight entertainment screens. Moreover, these aircraft are 13 percent lighter than the aircraft they will replace, resulting in lower fuel consumption and CO2 emissions. See “—Domestic Passenger Operations” for a description of recent initiatives to improve our domestic fleet, including the introduction of modern Airbus A320-Family Aircraft in most of our domestic operations.
Our main concern is to deliver our promise to our customers. Therefore, we constantly monitor our customer satisfaction with in-flight surveys and research, and measure our performance against the highest standard levels. This commitment to excellence has paid off with several prizes and recognitions given by customers and industry experts such as Skytrax’s “2013 best staff service”, Skytrax’s “2013 Best Airlines in South America”, Business Traveler’s “2013 Best Business Class in Latin America”(LAN), 2013 “Best travel Cellars in the sky” (TAM), Skytrax’s “2014 Best Airlines in South America (LAN first place and TAM second place)”,“2014 Best staff service (LAN)” and Business “2014 Best travel Cellars in the sky (TAM)”.
Branding
The “LAN” brand was launched in 2004 and brings together, under one strong international name, all of the affiliate brands such as “LAN Chile,” “LAN Peru,” “LAN Argentina�� “LAN Colombia”, “LAN Ecuador” and “LAN Cargo.” The corporate image of LAN is based on two core concepts: reliability and warmth, which support our promise of the best travel experience to, from and within South America. We are also committed to offering our customers the best coverage to, from and within South America, and to promoting sustainable tourism, helping develop the regions where we operate. And by best, we mean providing our customers with an excellent connection network and service; being transparent and accessible; and promoting sustainable tourism in the countries where we do business.
Using a single brand enables LAN’s customers to better understand the common service and operating standards among its airlines. LAN’s unified image has improved its visibility, thereby enhancing flexibility and increasing the efficiency of its marketing efforts.
TAM launched the strategic platform for a single brand back in 2008, with TAM being the main brand that, through values, strategic positioning and language, guides other brands, services and business units, such as TAM Airlines, TAM Cargo, TAM Viagens, TAM Fidelidade, TAM nas Nuvens and others. Thus, we generate synergies among our businesses, always guided by the same values and the commitment to quality and relationships with our stakeholders.
In May 2013, TAM also launched the “A gente faz um mundo por você” (“We make a world for you”) campaign, which reinforced TAM’s focus on service. In line with this vision, TAM’s mission is to be the people’s preferred airline by using joy, creativity, respect and responsibility. Based on this strategic brand positioning, TAM seeks to offer accessibility to all of those who value an efficient, rewarding, safe and hassle-free experience.
In 2014 LAN and TAM began a process to redefine the future brand strategy. The Company plans to move towards a single brand, although the launch date for the new brand has not yet been determined.
Distribution Channels
In LAN and TAM we are aware of how important time is for our customers, which is why we are making efforts to minimize the curb to seat and seat to curb time for our customers. We are improving and optimizing our services and processes, in order to achieve a simple and digital end to end travel experience.
To support this, we have our distribution structure divided into direct and indirect distribution channels, both focused on improving their respective platforms to allow for the easiest interaction for our clients, in sales and services alike. Indirect channels currently include travel agencies, general sales agencies and also new players, such as online agencies.
Direct channels owned by LATAM are comprised of city ticket offices, contact-centers and e-Business (includes website, mobile, and smart business). These direct channels support sales and service, before and after flight if the passenger so requires. We have an extensive sales and marketing network in over thirty countries consisting of more than 300 domestic and international points-of-sale owned by LATAM.
In this regard, our e-Business channel is an integral part of our commercial, marketing and service efforts. Together with other direct sales initiatives, the website provides an important tool by bringing more benefits to our passengers and also by giving them more flexibility in the future, reducing time on queue for example. Internet-related sales have increased, reaching more than a total of US$2,500 million sales in 2014.
We have also used our websites as tools to provide value-added content and enhance communications. We are continuously improving our websites, a key element of our new short-haul model, so that the technological platform will be able to support the expected future growth. We send weekly promotional e-mails to more than 16.9 million subscribers (8.7 million for LAN and 8.2 million for TAM). Members of our frequent flyer programs received their monthly balances and other information by e-mail and can access their data and redeem awards through our websites. In addition, we have an active online marketing program which brings visitors to the website from search engines and travel –related websites.
We are also developing several multi-platforms projects to improve passenger experience, both pre-and post-flight. We are continuously improving our website in order to more efficiently communicate flight status information, including information on available alternatives in case of change of schedules or other flight alterations. Another innovation is a smartphone app that enables both flight status verification and check in, providing an accessible electronic boarding pass to the passenger. To this date the app has over 1 million downloads in 20 different countries. Introduced in 2008, e-tickets have been issued for most LATAM routes and during 2010 we completed the implementation of interline e-ticketing with all of our oneworld® partners. By the end of 2013, we introduced electronic boarding passes accessible on smartphones currently operating in 72% of LAN routes and 88% of TAM routes.
We are continuously promoting the web-based check-in service for domestic and international flights. This system allows those passengers who are not checking-in bags to go directly to the gate, and the remaining checked-in passengers to leave their bags at a special bag drop counters and proceed to the gate. In addition to web-based check-in, we have self-check kiosks in Chile, Peru, Argentina, Ecuador, Venezuela, Uruguay, Brazil, Germany and Colombia. As of December 31, 2014, the airport kiosks and web check-in have high utilization rate in domestic routes of all countries (82% in Chile, 80% in Peru,70% in Ecuador, 65% in Argentina,60% in Brazil and 58% in Colombia).
LAN.com received “eCommerce Award Latam 2014” in Tourism. Additionally, TAM received the award Top of Mind Internet – DataFolha/UOLTravelers’ Choice Favorites - TripAdvisor® and LAN received an award in the airlines category “Company with the best online reputation” by the Mercado magazine in Argentina.
Our city ticket offices support the growth of ours operations, establishing a sales and service channel. We have approximately 100 city ticket offices, 78 airport ticket offices, 9 stands and 47 kiosks. In addition TAM significantly expanded its TAM Viagens store chain through franchises in the main cities across Brazil. LAN also expanded it direct channels through 27 general franchise sales agencies. We are developing a service system with a dedicated lobby to helps us deliver a better service to our customers and to promote the self-service in ours stands. Aiming to promote the e-Business channel, in almost all countries we charge a fee to customers for sales completed through our ticket offices or call centers, leaving the Internet as the only free-of-charge distribution channel.
Our contact-centers are a multi-service channel providing support in six languages (Spanish, English, Portuguese, French, German and Italian) and handling more than 46,500 calls/contacts per day, which mainly originate from the regions where we fly (South America, North America, Europe and Australasia). We also have third-party service providers located in Santiago, Lima, Buenos Aires, Bogotá, Florianopolis and Sao Paulo.
Frequent Flyer Programs
During the year 2014, both LAN and TAM operated their loyalty independent programs, LANPASS and TAM Fidelidade, respectively, even though passengers enrolled in both programs were able to accumulate and redeem kilometers/points on any flight of the network managed by the two airlines and their associates.
Additionally, LATAM continued working on the cross recognition of these programs to offer its members similar features and benefits, in line with the process of harmonization of operations in which the company is committed in all areas. The initiatives include cross level recognition of all members, for example, by allowing LANPASS members to upgrade on TAM flights and TAM Fidelidade members to upgrade on LAN flights, in addition to having the same services at the airport, among other advances.
TAM joined theoneworld® alliance on March 31, 2014 and TAM Fidelidade customers, as LANPASS customers, are able to accrue points and redeem flights ononeworld® carrier flights.
During 2015 LANPASS and TAM Fidelidade will continue their programs harmonization efforts and will offer new cross benefits for their members.
LANPASS
LAN’s frequent Flyer Program, is a key element of LAN’s marketing and loyalty strategy. The objective of LANPASS is to reward customer loyalty, and as a consequence, generate incremental revenue and customer retention. Worldwide, as of December 31, 2014, LANPASS had 9.8 million members, an increase of 15% than last year.
LANPASS members earn LANPASS kilometers in their accounts based on distance flown, class of ticket purchased and the elite level, or by using services of other partners in the LANPASS program. Customers can redeem kilometers for free tickets or other products in an online catalogue. Under our current frequent flyer program, our passengers are grouped in four different elite levels based on their flying behavior: Premium, Premium Silver, Comodoro and Black. These different groups determine which benefits customers are eligible to receive, such as free upgrades on a space-available basis, VIP lounge access and preferred boarding and check-in. These categories have their equivalent in the OneWorld alliance: Ruby for Premium, Sapphire for Premium Silver and Emerald for both Comodoro and Black.
In 2014 LANPASS had an increase of 18% in kilometers redeemed in award tickets, and 42% kilometers redeemed in non-flight products. LANPASS has highly rated partners, including other airlines, hotels, car rental agencies, retailers, and credit card issuers from the main financial institutions in Chile, Peru, Ecuador, Argentina Uruguay, United States and Colombia, including Banco de Bogotá and Occidente, who are both members of Grupo Aval. These partnerships give our customers the opportunity to earn additional kilometers for using their services. Regarding Chile, in 2014 Santander and LANPASS renewed its exclusive co-branding agreement for 5 more years, from 2016 to 2020, continuing a union which for 20 years has allowed thousands of members to accumulate kilometers to travel to Chile and the world.
In the non-banking segment, LANPASS continues to leverage its member’s purchase behavior to partner with leading players in the markets and become the most attractive loyalty program in the home markets. In past years, LANPASS has entered into new industries, such as retail, supermarkets, automotive, real estate, drugstores and health care centers.
The LANPASS frequent flyer program aims to be the leading loyalty program in all of LAN’s home markets. In the past few years, LAN has implemented a number of marketing initiatives to increase customer’s engagement and activity with the program in all of its markets. In 2014, membership in LANPASS continued growing by 28% in Chile, 21% in Perú, 20% in Argentina, 7% in Ecuador, 10% in Colombia and 5% in the U.S.
TAM Fidelidade
TAM’s frequent flyer program, TAM Fidelidade, was the first loyalty program launched by a Brazilian airline and represents a key element in TAM’s marketing strategy. LATAM believes TAM Fidelidade, as well as LANPASS, is one of the most flexible loyalty programs in the market because it imposes no restrictions on flights or the number of seats available when members redeem accumulated points. TAM Fidelidade currently has more than 11.7 million members, which represents an increase of 8% compared to the 10.9 million members in 2013.
Similarly to LANPASS, members of TAM Fidelidade receive benefits and increased points for miles flown depending on their elite level; allowing them to accrue redeemable points for free travel more quickly. TAM Fidelidade customers are classified in four different elite levels Azul, Vermelho, Vermelho Plus and Black, being their equivalent in theoneworld® alliance: Ruby for Azul, Sapphire for Vermelho and Emerald for both Vermelho Plus and Black.
Multiplus
In 2009, TAM launched Multiplus, a company designed to create a broader network in which TAM’s customers can earn points through the TAM Fidelidade Program. Multiplus is a coalition of loyalty programs that permits the accrual of points for redemption from products and services offered by many different partner companies, not just TAM. We believe this expanded network helps to capture and retain customers and increase sales. It is attractive to our less frequent flyers because it allows them to accrue loyalty points in many ways besides flying. At the end of 2014, Multiplus had more than 400 partners and approximately 13.8 million participants that can accrue Multiplus points directly (Tam Fidelidade, cobranded cards, app, etc.) and indirectly (by transferring points from a partner program) in over 13,000 retail establishments.
Multiplus became a publicly traded company in Brazil, following its initial public offering in February 2010. TAM continues to own 72.4% of the ordinary shares of Multiplus.
On January 18, 2011, we and the LAN controlling shareholdersDecember 10th, 2009, Multiplus entered into the transaction agreementsan Operating Agreement with TAM TEP and the TAM controlling shareholders,Linhas Aéreas (TLA), which set forthestablished the terms and conditions governing the relationship with TLA and become effective as of a proposed business combinationJanuary 1st, 2010. Under the Operating Agreement, Multiplus became responsible for, among other duties, processing information on accumulating and redeeming points under the TAM Loyalty Program and delivering awards to the members of LAN and TAM. For a discussionsaid program, in accordance with the rules of how the proposed combination will be implementedTAM Loyalty Program and the terms ofMultiplus network. The Operating Agreement is valid for 15 years.
On March 1, 2013, the transaction agreements, see “—The Transaction Agreements” below.
The Transaction Agreements
This section describes the material terms of the transaction agreements. The rights and obligations of the partiescompanies approved a new amendment to the transaction agreements are governed byOperating Agreement (“11th Amendment”), effective as of June 1, 2013. This amendment extends the expresspreviously existing terms and conditions, ofbut includes a more objective procedure for setting the transaction agreements and not by this summary or any other information contained in this annual report on Form 20-F. The description in this section and elsewhere in this annual report on Form 20-F is qualified in its entirety by reference to the complete text of the transaction agreements, as amended, which are incorporated by reference into this annual report on Form 20-F. This summary does not purportticket acquisition price to be completepaid by Multiplus and may not contain allthe point price to be paid by TLA. The amendment sets a fixed price to be paid by Multiplus during the initial transition and assessment phase, lasting from June 2013 until June 2014, such price being approximately 3% higher than the average price assessed in 2012. After this transition and assessment phase, the price to be paid by Multiplus per 10.000 points is adjusted to reflect the price variation of airline tickets in the information aboutmarket, but subject to a cap and floor of 5%. In case of major changes in the transaction agreementsairline industry, the companies will have the right to negotiate in good faith a fair solution that is importanttakes into account such industry changes.
The remaining provisions established in the original Operating Agreement, including, without limitation, those relating to you. We encourage you to read the transaction agreements carefullyreciprocal exclusivity, term of effectiveness and situations for termination with or without cause, remained, in their entirety.essence, unchanged.
Explanatory Note RegardingCargo Operations
International and domestic cargo is operated by subsidiaries and affiliates under the Transaction AgreementsLAN Cargo and TAM Cargo brands, which have significant market recognition. Our cargo business generally operates on the same route network used by our passenger airline business. It includes approximately 143 destinations, of which approximately 135 are served by passenger and/or freighter aircraft and approximately 9 are served only by freighter aircraft.
The following summarytable sets forth certain of our cargo operating statistics for domestic and international routes for the periods indicated:
Year ended and as at December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
ATKs (millions) | 7,219.7 | 7,651.9 | 6,449.5 | |||||||||
RTKs (millions) | 4,317.2 | 4,446.7 | 4,044.5 | |||||||||
Weight of cargo carried (thousands of tons) | 1,102.2 | 1,146.6 | 1,154.0 | |||||||||
Total cargo yield (cargo revenues/RTKs, in US cents) | 39.7 | 41.7 | 43.2 | |||||||||
Total cargo load factor (%) | 59.8 | % | 58.4 | % | 62.7 | % |
We derive our revenues roughly equally between the transport of cargo as follows:
In the bellies of our passenger aircraft. We consider our passenger network to be a key competitive advantage due to the synergies between passenger and cargo operations and, accordingly, we have developed a strategy to increase our competitiveness by enhancing our belly offering.
In our own dedicated freighter fleet. As of December 31, 2014, our dedicated freighter fleet consisted of 11 Boeing 767-300 freighters, with a capacity for 58 structural tons (52.7 tonnes) of freight each, and four Boeing 777-200 freighters, with a capacity of 102 structural tons (102 metric tons) of freight each. The aforementioned 11 Boeing 767-300, that considers two freighters sub-leased to an operator outside of Latin America, represents a decrease of 1 such aircraft relative to December 31, 2013. An additional 767-300F was also leased to the same operator and it is includedscheduled to provide you with information regardingleave our fleet during the termsfirst quarter of 2015 as part of our freighter fleet optimization program. Under this initiative, our freighter fleet was resized according to both the strategic objective of supporting our belly business and the need to maximize profitability. In Latin America, the principal origins of our cargo are Chile, Colombia, Perú, Ecuador, Brazil and Argentina, which represent a large part of our northbound traffic. This demand is mainly concentrated in a small number of product categories, such as exports of fish, sea products and fruits from Chile and asparagus from Peru, and exports of fresh flowers from Ecuador and Colombia.
For our southbound flights, Brazil is the main import market. Southbound demand is mainly concentrated in a small number of product categories including high-tech equipment, electronics, auto parts and pharmaceuticals.
Brazil is the largest of our cargo domestic operations where TAM Cargo remains the market leader, carrying cargo for a variety of customers, including other international air carriers, freight-forwarding companies, export oriented companies and individual consumers. In order to maintain its leadership, TAM Cargo continues to invest in infrastructure, service and security in key cargo terminals.
The United States accounts for the majority of the transaction agreements.cargo traffic to and from Latin America. Besides being the main market for Latin American exports by air, the United States is also the main supplier of goods transported by air to Latin American countries.
Our international cargo operations are headquartered in Miami. This sectiongeographical location is not intendeda natural gateway for Latin American imports and exports to provide youand from the United States. During 2013, LAN Cargo signed a contract with any factual information about either TAM or LAN. Such information can be found elsewhereMiami Dade County to lease 66,000 square-feet to build a maintenance hangar with capacity to service a Boeing 777-200 freighter. Construction is underway and completion is expected for late 2015.
We transport cargo to and from six destinations in this annual report on Form 20-F,Europe: Amsterdam, Frankfurt, London, Madrid, Milan and Paris. The last five we serve via passenger aircraft, and additionally we serve Amsterdam and Frankfurt through freighter operations.
The evolution of our international cargo operations has always been affected by the flow imbalances of the Latin American cargo markets, resulting in a dramatic shift in the public filings TAMrelative weight of southbound and LAN makenorthbound cargo flows throughout the years. We have designed our operations, route network and commercial strategies with the SEC, and other relevant documents filed or that will be filed with the SECflexibility required to respond to changing conditions.
During 2014, cargo traffic decreased 3.3%, reflecting a challenging scenario in connection with the proposed business combination of LAN and TAM. Factual disclosures about TAM or LAN contained in this annual report on Form 20-F or in LAN’s or TAM’s respective public reports filed with the SEC may supplement, update or modify the factual disclosures about TAM and LAN contained in the transaction agreements. The representations, warranties and covenants made in the transaction agreements by TAM and LAN were qualified and subject to important limitations agreed to by TAM and LAN in connection with negotiating the terms of the transaction agreements. In particular, in your review of the representations and warranties contained in the transaction agreements and described in this summary, it is important to bear in mind that the representations and warranties were negotiated with the principal purposes of establishing the circumstances in which a party to the transaction agreements may have the right not to commence the exchange offer if the representations and warranties of the other party proved to be untrueLatin American cargo markets mainly due to a changedecline in circumstance or otherwise,demand on routes from the U.S to Latin America, especially Brazil, which was affected by the FIFA World Cup, uncertainty surrounding presidential elections and allocating risk betweenlower economic growth. Additionally northbound demand was affected by a significant contraction of seed exports from Chile, partially offset by strong asparagus, flowers and fresh fruit export seasons.
Competition increased in the partiesregion as international and regional carriers added idle capacity to service cargo operations. Despite this increase in competition, we have been able to maintain solid market shares through an efficient utilization of our fleet and network. Today, on Latin America-United States routes, our main competitors are Centurion, AVIANCA Cargo, Atlas Air and American Airlines. On the transaction agreements, rather than establishing matters as facts. The representationsLatin American-Europe routes, our main competitors are Cargolux, Lufthansa Cargo, Martinair, and warranties may also be subjectEmirates Airlines.
Cargo Agreements
During 2014 we signed two Enhanced Cargo Transfer and Service Agreements with Korean Air and Cathay Pacific which aim to achieve more seamless interline transfers and improved service eventually leading to a contractual standard of materiality differentlarger Asia-Latin America market share, greater customer loyalty and improved belly load factors. We also have interline, code-sharing and other commercial agreements with other Asian carriers such as JAL, China Airlines, Air China and Nippon Cargo Airlines. Under these agreements we receive space allocations to move our cargo from those generally applicablethe main gateways in Asia to shareholders and reports and documents filed with the SEC and in some cases were qualified by the matters containedhubs in the disclosure schedules that TAMUnited States—Los Angeles, New York, Miami- and LAN deliveredalso in connectionEurope where we can connect with the transaction agreements, which disclosures were not reflected in the transaction agreements. Therefore, the representations and warranties and other provisions in the transaction agreements should not be read alone but instead togetherour cargo network. In exchange, we provide these airlines with the information provided elsewhere in this annual report on Form 20-F and in the documents incorporated by reference into this annual report on Form 20-F. Moreover, information concerning the subject matter of the representations and warranties, which do not purport to be accurate as of the date of this annual report on Form 20-F, may have changed since the date of the transaction agreements and subsequent developments or new information qualifying a representation or warranty may have been included in this annual report on Form 20-F. In this annual report on Form 20-F, we refer to January 18, 2011, the date that the parties entered into the transaction agreements as the “signing date.”
Overview
To help you better understand the proposed combination and its component steps, set forth below is a description of those steps together with organizational charts that illustrate how the transaction will affect the ownership of LAN and TAM.
Current Ownership of TAM
As of March 28, 2012, TAM’s current authorized share capital was R$1,200,000,000, which consisted of 55,816,683 TAM common shares and 100,390,098 TAM preferred shares. The TAM controlling shareholders owned approximately 85.37% of the TAM common shares and 25.09% of the TAM preferred shares as of March 28, 2012 and the remaining TAM shares were held by TAM’s minority shareholders.
Current Ownership of LAN
As of March 28, 2012 LAN’s current authorized share capital was 341,000,000 common shares, which consisted of 340,977,309 LAN common shares. The LAN controlling shareholders owned approximately 33.84% of the LAN common shares as of March 5, 2012. For a description of the rights attached to LAN common shares, see “Item 10. Additional Information—Memorandum and Articles of Association.”
On the terms and subject to the conditions set forth in the transaction agreements, all or substantially all of the outstanding TAM common shares will be acquired by Holdco I and substantially all of the outstanding TAM preferred shares will be acquired by LAN through a series of transactions and corporate restructurings described below.
Subject to the terms and conditions of the transaction agreements, the proposed combination will be effected as described below:
In June 2011, the TAM controlling shareholders formed four new Chilean companies:
TEP Chile, a new Chilean corporation formed in June 2011,
Holdco I, a new Chilean corporation formed in June 2011,
Holdco II S.A., a new Chilean corporation formed in June 2011 (“Holdco II”), and
Sister Holdco S.A., a new Chilean corporation formed in June 2011 (“Sister Holdco”).
The current ownership ofspace from these four new companies is as follows:
the TAM controlling shareholders own 100% of the outstanding shares of TEP Chile,
TEP Chile owns 100% of the voting shares of Holdco I (“Holdco I voting shares”), which class of shares is entitled to essentially all of the voting rights but none of the economic rights in Holdco I,
LAN owns 100% the non-voting shares of Holdco I (“Holdco I non-voting shares”), which class of shares is entitled to essentially all of the economic rights but none of the voting rights in Holdco I,
Holdco I and LAN each own one common share of Holdco II (“Holdco II share”), which collectively represent 100% of the outstanding Holdco II shares, and
TEP Chile and its nominee each own one common share of Sister Holdco (“Sister Holdco share”), which collectively represent 100% of the outstanding Sister Holdco shares.
Holdco II will make an exchange offersame hubs in the United States and Europe to all Latin American destinations and also provide them with westbound cargo.
Since 2002, LAN Cargo and Lufthansa Cargo have operated pursuant to a block space agreement covering Europe and Latin America. As part of this agreement, we allocate space to Lufthansa Cargo on our flights between Frankfurt and Santiago, and Lufthansa Cargo allocates space to us on its flights between Frankfurt and Brazil.
Marketing and Sales
Our sales and marketing efforts are carried out directly where we have a local office, or through general sales agents. In Latin America we have our own offices in Brazilall key markets. In the United States, we have offices in Miami, New York and Los Angeles, and work with representatives in various other cities. In Europe, we have offices in Frankfurt, Amsterdam, Madrid and Paris and use agents in other key cities. In Asia, we added a new office in Hong Kong, and in other cities our sales efforts are conducted through general sales agents. In total, we maintain a network of more than thirty independent cargo sales agencies domestically and internationally.
Our cargo marketing strategy emphasizes the combination of our unique freighter and passenger aircraft cargo network, which offers a wide variety of reliable cargo routing possibilities with different pricing options; a strong connectivity to, acquirefrom and within Latin America and a clear focus on providing a high-quality service for our clients. Our offering allows our customers to ship large, bulky freight, as well as smaller, high-density cargo, fresh products, express shipments, and other types of cargo.
During 2014 we focused on various aspects of our value chain to improve our customer experience. We improved connectivity and reception times at several key hubs, we became more electronically integrated with customers providing more accurate and timely information and we continued to improve our customer service through consolidation of our worldwide customer care teams and continuous improvement initiatives at our contact centers. Additionally we launched and improved specific products in certain routes, such as our Pharmaceuticals offering in the European market, providing our customers with a better air cargo service.
Cargo Related Investigations
See “Item 8. Financial Information—Consolidated Financial Statements and Other Financial Information—Legal and Arbitration Proceedings.”
Fleet
General
As of December 31, 2014, we operated a fleet of 327 aircraft, comprised of 313 passenger aircraft and 13 cargo aircraft, as set forth in the following chart:
Number of aircraft in operation | Average term of | Average age (years) | ||||||||||||||||||
Total | Owned(1) | Operating Lease | lease remaining (years) | |||||||||||||||||
Passenger aircraft(2) | ||||||||||||||||||||
Airbus A320 Family Aircraft | ||||||||||||||||||||
Airbus A319-100 | 52 | 40 | 12 | 5.4 | 7.8 | |||||||||||||||
Airbus A320-200 | 158 | 95 | 63 | 3.3 | 6.7 | |||||||||||||||
Airbus A321-200 | 21 | 18 | 3 | 7.4 | 2.7 | |||||||||||||||
Airbus A340 Family Aircraft | ||||||||||||||||||||
Airbus A340-300 | 3 | 3 | 0 | 0.0 | 13.9 | |||||||||||||||
Airbus A340-500 | 0 | 0 | 0 | 0.0 | 0.0 | |||||||||||||||
Airbus A330-200 | 13 | 8 | 5 | 1.8 | 10.5 | |||||||||||||||
Boeing Aircraft | ||||||||||||||||||||
Boeing 767-300ER | 38 | 34 | 4 | 3.8 | 6.9 | |||||||||||||||
Boeing B787-800 | 10 | 6 | 4 | 11.1 | 1.1 | |||||||||||||||
Boeing B777-300ER | 10 | 4 | 6 | 4.0 | 3.7 | |||||||||||||||
Dash Aircraft | ||||||||||||||||||||
Dash 8-200 | 7 | 2 | 5 | 0.8 | 17.2 | |||||||||||||||
Total passenger aircraft | 312 | 210 | 102 | 3.9 | 6.8 | |||||||||||||||
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Cargo aircraft | ||||||||||||||||||||
Boeing 767-300 Freighter(3) | 11 | 8 | 3 | 1.9 | 10.5 | |||||||||||||||
Boeing 777-200 Freighter | 4 | 2 | 2 | 2.3 | 4.0 | |||||||||||||||
Total cargo aircraft | 15 | 10 | 5 | 2.1 | 8.5 | |||||||||||||||
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Total fleet | 327 | 220 | 107 | 3.8 | 6.9 | |||||||||||||||
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(1) | Aircraft included within property, plant and equipment. |
(2) | All passenger aircraft bellies are available for cargo. |
(3) | In 2014, two cargo aircraft Boeing 767-300 Freighter were subleased to a third party. |
The daily average hourly utilization rates of LATAM’s aircraft for each of the periods indicated are set forth below.
2014 | 2013 | 2012(1) | ||||||||||
Passenger aircraft | ||||||||||||
Airbus A340-300 | 6.7 | 5.8 | 13.9 | |||||||||
Boeing 767-300 ER | 10.5 | 10.1 | 12.1 | |||||||||
Boeing 787 | 10.5 | 5.6 | 3.7 | |||||||||
Airbus A320 Family | 9.8 | 10.3 | 10.2 | |||||||||
Boeing 777 | 12.9 | 13.6 | ||||||||||
Airbus A330 | 7.0 | 10.3 | ||||||||||
Cargo aircraft | ||||||||||||
Boeing 767-300 Freighter | 7.9 | 8.3 | 13.5 | |||||||||
Boeing 777-200 Freighter | 10.9 | 11.0 | 14.1 |
(1) | 2012 does not include aircraft used in TAM’s operations. |
We operate different aircraft types as we perform various different services ranging from short-haul domestic and regional trips to long-haul trans-continental flights. We have selected our aircraft based on the ability to effectively and efficiently serve these missions while trying to minimize the number of aircraft families we operate.
For short-haul domestic and regional flights we principally operate the Airbus A320-Family aircraft. The Airbus A320-Family has been incorporated into our fleet pursuant to operating leases or has been purchased directly from Airbus pursuant to various purchase agreements since 1999.
For long-haul passenger and cargo flights we operate the Airbus A330-200 aircraft, the Airbus A340-300 aircraft, the Boeing 767-300 passenger and cargo aircraft, the Boeing 777 passenger and cargo aircraft and, since the fourth quarter of 2012, the Boeing B787-816 aircraft.
Fleet Leasing and Financing Arrangements
LATAM’s financing and leasing methods include borrowing from financial institutions and leasing under financial leases, tax leases, sale-leaseback transactions and pure operating leases. As of December 31, 2014, LATAM had 327 aircraft, of which one each were in the redelivery process, in storage and on ground, resulting in 324 aircraft in operation. Of these aircraft, 161 are operated by LAN and 163 aircraft are operated by TAM.
As of December 31, 2014, LATAM’s operating fleet was comprised of 203 financial leases, 17 tax leases, 99 operating leases and 5 aircraft as loan guarantees. Most of the LATAM’s financial and tax leases are structured for a 12 year period. LATAM has 44 aircraft leases supported by the U.S. Export-Import Bank (“EXIM Bank”) and 80 supported by the European Export Credit Agencies (the “ECAs”). LATAM’s operating lease maturities range from 3 to 12 years.
LATAM’s aircraft debt, which is comprised of financial and tax leases, is denominated in U.S. dollars and typically has quarterly amortization payments. Both the financial leases and tax leases have a bank (or group of banks) as counterparty; however, the latter has also a third party involved. In terms of interest rate, 68.2% of our aircraft debt has fixed rate and the balance has floating rate debt based on USD LIBOR. During 2014, LATAM refinanced all of its Boeing deliveries for the issuedyear with EX-IM guaranteed bonds.
Going forward, LATAM will be the entity that takes delivery and outstanding:act as the lessee on all related leases of all aircraft for the group and has the ability to sublease them to other airlines of the group.
In order to reduce TAM’s balance sheet FX exposure to the Brazilian real, LATAM plans to transfer the majority of the TAM aircraft under financial leases up to the LATAM level. As of December 31, 2014, 33 aircraft were transferred to LATAM which helped to reduce the exposure to less than US$ 1 billion.See “Item 5—B. Liquidity and Capital Resources—Sources of financing” and “Item 5—B. Liquidity and Capital Resources—Capital Expenditures” for a description of expected sources of financing and expected expenditures on aircraft.
Maintenance
LATAM’s Maintenance
Our heavy maintenance, line maintenance and component shops are equipped and certified to service our entire fleet of Airbus, Boeing and Bombardier aircraft. Our maintenance capabilities allow us flexibility in scheduling airframe maintenance, offering us an alternative to third-party maintenance providers.
LATAM Line Maintenance
Our Line Maintenance Network operates in all the cities where LATAM operates, serviced by LATAM Maintenance staff in North and Latin America, and a mixed capacity between LATAM staff and external qualified outsourced providers in the rest of the world. LATAM Line Maintenance performs minor preventive and corrective maintenance tasks, which allows us to operate to all our destinations ensuring a safe operation of our aircraft and the compliance with local authorities’ regulation and the approved maintenance plans for each model.
Our Line Maintenance Network comprises 133 stations in South America, 40 in North America and 17 in Europe and Oceania, which produced up to 2.4 million man-hours in 2014. Throughout the Network, Santiago, Sao Paulo and Miami are among the most extensive stations servicing our passenger and cargo fleet.We rely on third party services for certain maintenance support for our aircraft and engines, where we have long term partnerships with Lufthansa Technik, International Aero Engines, CFM International, Pratt & Whitney, General Electric and Air France KLM.
In 2014, we continued with the implementation of the LEAN philosophy in our engineering and maintenance organization, achieving results in reliability, availability and productivity. As part of this effort, we introduced iPads in our Santiago operation to allow a faster resolution of technical disruptions and to optimize resource management. Also, we launched an initiative to consolidate all LATAM technical documentation in one single portal, which can be accessed by mobile devices in any of our maintenance stations, which we expect to have up and running the first half of 2016. Finally, we continued with our continuous improvement program to encourage our staff to suggest and implement ideas that result in a safer workplace and more efficient processes.
All of our maintenance operations are supervised by the local authorities around the network, such as DGAC in Chile and ANAC in Brazil.These operations are subject to several recurrent external audits from civil aviation authorities and international entities, such as FAA, The International Air Transport Association Operational Safety Audit (“IOSA”) (from the International Air Transport Association or “IATA”) and the International Civil Aviation Organization (“ICAO”), among others, in order to strictly comply with applicable regulations. The audits are conducted in connection with each country’s certification procedures and enable us to continue to perform maintenance for aircraft registered in the certificating jurisdictions. Our repair station holds FAA Part-145 certifications under these approvals.
To ensure the best capabilities in our personnel needed for safe, accurate and on-time Line Maintenance, LATAM seeks to improve the technical, aeronautic regulatory, safety and documentation skills of its personnel. This is possible through their participation in extensive training programs at Technical Training LATAM Center and specific training programs designed and dictated by our partnerships. Also, the Fleet and Engineering teams participate actively in the periodical airline Fleet Reliability meetings, where we share best industry practices and updates of the latest Line Maintenance trends and top technical issues.
LATAM MRO
LATAM MRO Business Unit is responsible for our heavy maintenance (airframe) and components shops facilities that are equipped and certified to service our fleet of Airbus and Boeing aircrafts. One two MRO facilities, one in São Carlos (Brazil) and one in Santiago (Chile), provides 75% of all heavy maintenance services the entire group of airlines demands. The services not executed internally are contracted between our extensive network of MRO partners around the globe. Both MRO facilities are FAA Part-145 certified repair stations .We occasionally perform certain heavy maintenance and component services for other airlines or OEMs. LATAM MRO is also responsible for planning and execution of aircrafts redeliveries.
In MRO São Carlos (TAM MRO) we are prepared to service up to 9 (nine) aircrafts (narrowbody and widebodies) and 2 (two) regional/turboprop aircrafts simultaneously, with a dedicated hangar for stripping and painting. In that facility we also have 22 technical components shops, including full Landing Gear repair & overhaul shop, Hydraulics, Pneumatics, Electronics (ATEC), Electrical Components, Electroplating, Composites, Wheels & Brakes, Interiors and Emergency Equipment shops. This facility is also known as “São Carlos Technological Center” and has its own total area of 400 ha and hangar area of 100,000 m², with a dedicated runway of 1,720 meters. MRO São Carlos is certified and audited by major international aeronautical authorities such as FAA (USA), EASA (Europe), ANAC Brazil, DGAC (Chile), ANAC Argentina, DGCA (Ecuador), DINAC (Paraguay), TC (Canada), among others, for Heavy Maintenance and Components Repair and Overhaul for Airbus A-320 family (A318, A319, A320 & A321) and Airbus A330, Boeing 767, ATR-42/72, and Embraer E-Jet 170/190 families. The MRO also has some minor capabilities for repair and overhaul of Airbus A340 and Boeing 777 components. MRO São Carlos includes its own support engineering capabilities, a full technical training center which develops MRO’s capabilities in terms of human skills with more than 6,000 students and 90,000 hours of training in 2014 providing 80 different basic courses, on-the-job training and special training such as structural, avionics, foreign language and leadership training and education.
In MRO Santiago, located near Comodoro Arturo Merino Benítez International Airport in Santiago, we have 2 hangars capable of servicing simultaneously 2 (two) widebody aircrafts and 1 (one) narrowbody aircraft in LAN Maintenance Base. MRO Santiago is certified and audited by FAA, ANAC Brazil, DGAC (Chile), ANAC Argentina, DGCA (Ecuador), among others for Heavy Maintenance for Airbus A320 family (A319, A320 & A321), Boeing 767 and 787. MRO Santiago has 8 (eight) shops prepared to support hangar activities, to designing and manufacture galleys, structures and composite materials. We also have the capability to retrofit aircraft interiors, including sophisticated IFE (in-flight entertainment) equipment, and blended winglets in the Boeing 767 fleet.
In 2014, we focused on the consolidation of the integration of MRO capabilities and processes started in 2013. In 2014, LATAM MRO effectively applied 2.5 million man-hours, serviced 274 aircrafts, including C, D and Special Checks for LATAM fleet and for third party customers, delivered approximately 60,000 components and performed 15 landing gear overhauls. In 2014, LATAM MRO serviced almost 100% of all LATAM’s Airbus A320 family and A330 demand for Heavy Maintenance, and 75% of demand for Components Repair & Overhaul. LATAM’s external maintenance and repair customers include Azul, Trip, Avianca, the Brazilian Air Force, Embraer, Goodrich, and Hamilton Sundstrand, among others.
In 2011, we started a turn-around process to achieve international MRO competitive standards in terms of costs, quality, reliability and time of deliveries (TAT). In 2012 we began to implement the LEAN system and other activities, including continuous process improvement culture, redesign of the production methodology in productive cells and scheduling of task through CCPM methodology (Critical Chain Project Management), development of shop-floor control systems and carry out VSM process modeling for Landing Gear shop. 2013 was the year of consolidation of these initiatives and in 2013 we accomplished a significant 7% reduction in turnaround times, increased on time performance and improved quality of our services (as measured by reductions in post-check failures and premature components failures). In 2014, we celebrated our achievement of one year without any accidents with lost days in MRO São Carlos and reduced the accidents in MRO Santiago by 40%.
LATAM Safety and Security
Our most important priority is the safety of our passengers and employees. LATAM has been working to standardize LAN and TAM’s operational indicators regarding safety, audits and emergency response. This process of identifying synergies in LAN and TAM’s operational indicators has led to opportunities to improve processes and standardize operational processes and audits.
Prior to the combination, both LAN and TAM had internal divisions in charge of the management of safety and security matters related to Flight Operations, Operative and Administrative buildings, Organization and Coordination of Emergency Response matters, Safety and Security Audits and Safety and Occupational Health. Today, the diversions that support these functions - -: Safety Management, Security Management, Emergency Response Management, Safety & Security Audit Management and Safety and Occupational Health Management– function on the basis of uniform policies and procedures.
Safety Management
We give high priority to providing safe and reliable air service. We have unified our Safety Management under a single organization that is responsible for defining the processes and procedures for the LATAM SMS and for oversight for the subsidiaries that apply and implement those processes and procedures.
LAN and TAM have documentation regarding SMS that provide clear definitions of the functions and responsibilities regarding operational safety for all persons involved, from the top to the bottom of the operational structure in the airline.
Both systems are IOSA certified and have a Safety Senior Manager who is responsible for each system implementation and for setting standardized procedures for measuring the quality and safety of services provided by companies or professional contractors that affect the operational safety of this organization.
Our corporate operational safety organization consists of three main areas:
TAM common shares,
TAM preferred shares,Technical Support, which is responsible for the maintenance of all software that is required to support the other areas, principally Flight Data and
The Risk Management division has the following organization:
TAM ADSs,Flight Data Monitoring
The Flight Data Monitoring area is responsible for the maintenance and administration of recorded flight data and safety-related databases and software.
Flight Operations Quality Assurance—“FOQA” : LATAM has a Flight Data Monitoring (“FDM”) program implemented for collecting, processing and analyzing all flights for all LATAM’s fleet in each caseall his AOCs. This program utilizes the data to produce statistical information to verify that recommended standard operational procedures are not owned bycorrectly done, and make changes if required as well as other safety-related measures. We have started the TAM controlling shareholders in exchangedevelopment of a maintenance variation for the same numberaircraft types which will monitor the engines, flight controls and general performance of Holdco II shares.the airplanes.
Maintenance Safety Coordinator
The Maintenance Safety area oversees our maintenance safety measures and investigates maintenance-related incidents using the Maintenance Error Decision Aid (“MEDA”) methodology.
Cabin Safety Coordinator
The Cabin Safety area coordinator is responsible for managing the safety of aircraft cabins, cabin safety investigations, cabin passengers and flight attendants.
Investigation & Safety Information Management Coordination
All information regarding safety-related incidents is entered into dedicated software, where it is analyzed according to potential risk. Important incidents are investigated thoroughly. Each particular incident requiring corrective actions is addressed accordingly with the assistance of the corporate operational safety directory.
LOSA—Line Operations Safety Audit Coordinator
This program is recognized by the International Civil Aviation Organization (“ICAO”) and the National Civil Aviation Agencies, both of which oversee our operations, as a necessary tool for protecting passengers and employees.
The implementation of this program has been used to improve flight safety in the Company, by recording behaviors observed during normal flights for experienced pilots and through the preparation of a mandatory checklist (form) developed by experienced pilots familiar with the program. Observations by the Threat and Error Management (“TEM”) may even propose appropriate changes to the system and processes.
Security Management
The main policy and the essential principle of the Company is to ensure adequate security protection for all of its flights, aircraft, passengers, crew members, ground personnel, airport facilities and other services related to the commercial civil aviation against any threat or unlawful action.
We have implemented corporate policies and a quality management system through the planning of audits and inspections to detect any lack of security in our operations and to prevent acts of unlawful interference. Risk analysis is used to determine different levels of security to be implemented in international and domestic operations.
Security Corporate Managers in LAN and TAM have the responsibility of evaluating, analyzing and assigning risk levels (high, medium, low) to international and domestic operations, and proposing security procedures for each scenario. The security management is controlled and audited constantly.
Emergency Response Management
The emergency response management team is responsible for the administration of the Emergency Response Plan (ERP). It has been developed for the effective management of different kinds of emergencies (aircraft accidents, natural disasters, strikes, pandemics) with the purpose of mitigating impacts of emergencies on passengers and their relatives, as well as the Company’s operations. The ERP includes, among others, Emergency Process and Procedures, Emergency control centers, Relatives & Passengers Assistance Team, Notification Team, Aircraft Recovery, and a “Go Team” which is a special team that will be dispatched in the case of an emergency and will assume the responsibility of emergency management.
Safety and Security Audit Management
The Safety and Security Audit Management area has the mission of advising senior management on issues related to plan and control, design, implementation, maintenance, documentation and observation of the improvement of the LATAM Safety and Quality Management System. An annual audit program of the operational processes is coordinated and carried out ensuring that the internal auditors follow the Quality System procedures and detect proactively the way to address any possible untreated risk.
Safety and Occupational Health Management
The main objective of the Safety and Occupational Health Management program is to ensure the safety and health of workers at work, by advising, managing and helping the company prevent occupational accidents and diseases through the identification and control of occupational hazards and medical surveillance. The foregoing objectives are satisfied through a dedicated team of professionals (engineers, doctors, risk prevention experts and paramedics), who constantly develop activities aimed at protecting LATAM employees.
Fuel Supplies
Fuel costs comprise the single largest category of our operating expenses. Over the last years, our fuel consumption and operating expenses have increased due to the significant growth in our operations. On the other hand, in the year 2014 due to the significant drop in the international price of crude oil, LATAM has seen also a drop in its Jet fuel costs. In 2014 total fuel costs represented 34.9% of our total operating expenses. The into-wing price for 2014, (average fuel price plus taxes and transportation costs, including hedge) was US$3.36 per gallon, representing a decrease of 3.4% from the 2013 into-wing average fuel price. We can neither control nor accurately predict the volatility of fuel prices. Despite the foregoing, it is possible to partially offset the price volatility risk through our hedging and fuel surcharge programs in place in both our passenger and cargo business. For more information, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Risk of Fluctuations in Jet Fuel Prices.”
The following table details our consolidated fuel consumption and operating expenses, after related hedging gains and losses (which exclude fuel costs related to charter operations because fuel expenses are covered by the entity that charters the flight) during the last three years.
Year ended December 31, (1) | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Fuel consumption (thousands of gallons) | 1,219,882.7 | 1,266,718.6 | 948,419 | |||||||||
ASKs Equivalent (millions) | 206,197.9 | 212,236.8 | 161,207.6 | |||||||||
Fuel consumption (thousands of gallons) per ASK Equivalent (millions) | 59.2 | 59.7 | 58.8 | |||||||||
Total fuel costs (US$ thousands) | 4,170,848 | 4,414,249 | 3,434,569 | |||||||||
Cost per gallon (US$) | 3.42 | 3.48 | 3.69 | |||||||||
Total fuel costs as a percentage of total operating expenses | 34.88 | % | 34.97 | % | 36.41 | % |
(1) | See “Item 5. Operating and Financial Review and Prospects—Operating Results—LATAM Airlines Group Financial Results Discussion: Year ended December 31, 2014 compared to year ended December 31, 2013”. Total fuel costs (US$ thousands) include Hedging gains/losses. |
Our fuel supply arrangements vary by airport and are distributed among 29 providers, but are mainly concentrated in Brazil (43%), Chile (13%), United States (12%) and Perú (10%). During 2014, we negotiated our fuel supply in major European, North American and South American airports. We also negotiated around 15% of our fuel supply in Santiago and most of the regions of Chile.
In 2014, we also signed a long term contract with Pure Biofuels in Lima and with Puma Aviation in Asunción, Paraguay. In North America our main airports are Miami and New York, where we signed contracts with WFS securing our supply in complex markets.
In Argentina, Brazil, Colombia, Ecuador, Mexico, Paraguay and Uruguay, we continued working with our current suppliers (including Raizen/Shell, YPF, Petrobras, Petro Peru,Repsol, Petroecuador, Terpel, Axion, among others.) regarding our fuel supply arrangements in these countries and many of these supply agreements will be negotiated during 2015.
Ground Facilities and Services
Our main operations are based at the Comodoro Arturo Merino Benítez International Airport in Santiago, Chile, where we operate hangars, aircraft parking and other airport service facilities at the Comodoro Arturo Merino Benítez International Airport pursuant to concessions granted by the DGAC. We also maintain a customs warehouse at the Comodoro Arturo Merino Benítez International Airport, additional customs warehouses in Chile (Iquique, Antofagasta and Punta Arenas) and Argentina (Aeroparque) and operate cargo warehouses at the Miami International Airport to service our cargo customers. Our facilities at Miami International Airport include corporate offices for our cargo and passenger operations and temperature-controlled and freezer space for imports and exports. We also operate from various other airports in Chile and abroad.
We also operate significant ground facilities and services through TAM’s headquarters located at Congonhas International Airport in São Paulo, Brazil. In 2013, we inaugurated two new facilities for ground handling equipment maintenance and repair at São Paulo’s Guarulhos Airport with 9,000 m² and at Rio de Janeiro’s Galeão Airport with 4,000 m².
Finally, we incur certain airport usage fees and other charges for services performed by the various airports where we operate, such as air traffic control charges, take-off and landing fees, aircraft parking fees and fees payable in connection with the use of passenger waiting rooms and check-in counter space.
Ancillary Airline Activities
In addition to our airline operations, we generate revenues from a variety of other activities, including aircraft leases (including subleases, dry-leases, wet-leases and capacity sales to certain alliance partners) and charter flights, tours, duty-free in-flight sales, other maintenance, storage and customs, handling and activities and revenues of Multiplus. In 2014, LATAM generated other revenues of US$378 million from ancillary activities.
Insurance
We maintain insurance policies as required by law and in accordance with the terms of all aircraft leasing agreements which LATAM and their affiliates and subsidiaries may own or we are responsible for or operate, including TAM and its affiliates and subsidiaries. The scope of these policies includes all risk coverage for aircraft hulls, including war risks and third party legal liability for passengers, cargo, baggage and injuries to third parties on the ground. Our current policies, which are in force through April 1, 2015 and are renewed annually, follow the best practices adopted by the international civil aviation industry.
We have negotiated common terms for Hull All Risk, Aviation Legal Liabilities and Spares coverage, together with IAG Group (British Airways, Iberia and their affiliates and franchises), which allows us to obtain premium reductions and coverage improvements. We also maintain insurance in respect of the assets against the risk of theft, fire, flood, electrical damage and similar events for equipment and buildings we own or for which we are responsible, including airport areas where we have operations. Similarly, we have contracted for vehicle insurance against the risk of robbery, theft, fire and civil liability against third parties for all vehicles we own or for which we are responsible.
Information Technology
Passenger Service Systems
As part of the Single Agenda of Transformation of the Customer Experience at LATAM, we have redefined our travel experience model and will continue to redesign our passenger service systems with the aim of providing a unified experience to our customers. Since the association between LAN and TAM was announced in 2012, a series of projects have been implemented to foster company among customers the perception that they are a single company offering equivalent services. Intense efforts have been made to standardize processes such as passenger recognition, attention at contact centers, sales offices and airports, in-flight services, e-commerce, loyalty programs, etc. However, many of these efforts are partial pending full unification of the two companies’ processes and systems, which is still ongoing.
In 2014, we redefined our travel experience model was based on the needs of our target customer, reinforcing six key elements:
Immediately before Holdco II accepts
All these elements call for the TAM sharesdevelopment of new processes with strong technological support. This, in turn, requires a robust and consistent technological model meets the new standard of service we offer to passengers and guarantees the continuity of business processes.
In order to address this challenge, we drew up an aggressive and robust three-year plan of work, with focus on the customer throughout 2015. This plan includes the design of new processes and selection of the definitive platforms that will be part of LATAM Group’s new solution. Under this plan, we will review the current status of each area of work involved in the travel experience, compare it to the desired technological end state, and establish a roadmap that is consistent with both customer perceptions and internal processes. Examples of the many areas of work to be considered include:
Implementation of many of these processes also calls for consistent work to unify customer service support systems. To this end, work has been undertaken to select the necessary end-game tools that meet the identified challenges and not withdrawn from,is compatible with our technological standards. In furtherance of this goal, we have either selected the exchange offer:best tools already available at LAN or TAM or have opted to implement new tools, in which case a selection process is launched.
The design and implementation of this plan for the TAM controlling shareholders will contribute to TEP Chile all of their TAM common shares and all of their TAM preferred shares and will receive additional shares of TEP Chile,
TEP Chile will contribute to Holdco I allnext three years form part of the TAM common shares that it received from the TAM controlling shareholders and will receive Holdco I non-voting shares, and
TEP Chile will contribute to Sister Holdco:
allso-called Single Agenda of Transformation of the Customer Experience at LATAM.
LATAM host and digital world
In the case of passenger management systems, LAN and TAM preferred shares that TEP Chile received from the TAM controlling shareholders,adopted different solutions in 2012 and 2009, respectively.
allTAM’s migration to Amadeus in 2009 included standardization of processes and solid preparation of the Holdco I non-voting sharestechnological platform for joining Star Alliance in 2010. TAM implemented a complete end-to-end solution with Amadeus, including inventory, bookings, electronic sale of tickets, mobile solutions, kiosk, check-in and loading solutions.
LAN migrated to Sabre in 2012 and similarly focused on improving processes and a robust solution. The scope of Sabre’s implementation included inventory, bookings, ticket sales, kiosk, check-in and loading. LAN’s approach differed from that TEP Chile received from Holdco I, and
6.2% of the outstanding Holdco I voting shares,
and will receive a number of Sister Holdco shares equal to the total number of TAM common sharesin that all e-commerce and TAM preferred shares that the TAM controlling shareholders contributed to TEP Chile.
After completion of the steps described in the immediately preceding bullet point, the ownership of TAM will be as follows:
mobile solutions were provided by partners or developed internally.
After Holdco II acceptsthe combination, LATAM decided to unify the Passenger Service Platform in a quest for exchange the TAM ADSsoperational and TAM shares tendered into, and not withdrawn from, the exchange offer and immediately before the settlement of the exchange offer, each of Holdco II and Sister Holdco will merge with and into LAN as a result of which:
LAN will be the surviving company of both mergers,
Holdco II and Sister Holdco will cease to exist, and
each Holdco II share (including those that would otherwise have been delivered at the settlement of the exchange offer) and each Sister Holdco share will be converted into 0.90 of a LAN common share.
Promptly after settlement of the exchange offer, LAN will:
contribute to Holdco I any TAM common shares acquired in the exchange offer in exchange for the same number of Holdco I non-voting shares, and
increase its ownership percentage of the outstanding Holdco I voting shares by converting some of its Holdco I non-voting shares into Holdco I voting shares to the percentage that will cause the product of (i) TEP Chile’s ownership percentage of the outstanding Holdco I voting shares and (ii) Holdco I’s ownership percentage of the outstanding TAM common shares to be equal to 80%.
financial synergies. As a result of this, the foregoing transactions:
Holdco I will own 100%project of migration of the TAM common shares that were:
contributed by the TAM controlling shareholders or
acquired pursuant to the exchange offer.
If the transactions described above are successfully completed, then immediately following the completion of these transactions the ownership of the issued and outstanding shares ofcurrent LAN and TAM platforms began in 2014.
This project comprises three phases. The first seeks to evaluate the technical and functional capacities of the partners with which Sabre (LAN) and Amadeus (TAM) were operated and to negotiate better commercial conditions for LATAM. Selection of the supplier will be approximately as shown below. The ownership percentages shownfollowed in the chart below were calculated assuming thatsecond phase by a draft establishing all holders of TAM sharesthe requirements and TAM ADSs other than the TAM controlling shareholders validly tender their TAM sharesimplementation plan and, TAM ADSs into, and do not withdraw them from, the exchange offer, that no TAM shares (including those represented by TAM ADSs) or LAN shares (including those represented by LAN ADSs and LAN BDSs) are issued after the dateonce this has been completed, announcement of the exchange offer prospectus other thanGo Live date. Finally, the third phase consists in the project’s implementation.
LATAM has announced that, in parallel with the migration of the passenger service platform, it will make an important investment in its digital platform as part of its strategy to improve services and its customers’ travel experience. Through innovation and best practices, the digital platform will be enhanced, focusing on the business priorities for e-commerce and mobile solutions.
Maintenance
In 2010, after a 2.5-year implementation process, LAN shares (including those representedstarted production of the MXI (Maintenix) solution for maintenance of its fleets in accordance with aviation regulation. This solution integrates Maintenance and Procurement and Logistical Management of Components (parts and spares) processes in a single IT tool.
In 2010, TAM evaluated adoption of the same solution but postponed its implementation.
In 2013, TAM began implementation of a 2.5-year Maintenix implementation project that is scheduled for completion by LAN ADSsthe end of 2015. This project includes standardization of LAN’s and LAN BDSs)TAM’s maintenance processes, permitting optimization of stocks of components and seeking to be issued pursuanttake advantage of synergies in the maintenance process, while operational safety remains the key pillar of its implementation. This solution also takes into account the specific nature of financial, accounting and tax processes in Brazil.
ERP LATAM
In January 2015, the SAP platform (ERP ECC 6.0, EHP 3.0) was implemented at TAM, adapted to Brazil’s financial and procurement needs. This project forms part of LATAM’s IT strategy, defined in 2012 and known as PMI (Post Merger Integration), which contains the roadmap for integration of all LATAM’s systems.
This project implements unification of the company’s information systems and the integration of LATAM Group’s finance and procurement processes standardizes the technological platform for these processes and consolidates the Group’s organizational structure, implying better control mechanisms and a greater analytical capacity to support decision-making.
The project is currently at the stage of stabilization and transfer of control to the exchange offer and the mergers and the TAM controlling shareholders make and pay the TEP Chile subscription by contributing to TEP Chile all TAM shares beneficially owned by them, and TEP Chile pays for the subscriptions of Holdco I shares and Sister Holdco shares by contributing to Holdco I and Sister Holdco all of the TAM shares contributed to it by the TAM controlling shareholders.
As a result of the Holdco II merger, each Holdco II share (including those shares to be issued pursuant to the exchange offer) will be converted into 0.90 of a LAN common share. Because the Holdco II merger will occur immediately before the settlement of the exchange offer, holders of TAM shares and TAM ADSs acquired in the exchange offer will receive 0.90 of a LAN common share for each TAM share or TAM ADS so acquired. Holders of TAM shares and TAM ADSs who tender into the exchange offer through the US exchange agent will receive such LAN common shares in the form of LAN ADSs,SAP team which will be evidenced by LAN ADRs. Holdersresponsible for business continuity and support.
Implementation of TAM shares who tender their TAM sharesanother PMI project also began in the Auction on Bovespa will receive such LAN common shareslast quarter of 2014. This consists in the formintegration of LAN BDSs, which willLATAM Group’s human resources processes and technological platforms. Its aim is to implement in TAM the SAP modules for Payroll, Personnel Administration, Organizational Development, Compensation, Recruitment and Selection. This project is scheduled to be evidenced by Brazilian Depositary Receipts (“LAN BDRs”).
Central IT
AsAt the level of central IT infrastructure, a resultPMI project is currently being implemented to address solutions (servers, communications, network, etc.) that permit operation of the Sister Holdco merger, each Sister Holdco share will be converted into 0.90systems which support unified business processes at the LATAM level.
Data Centers and Central Infrastructure: At present, LATAM has two data centers in Chile and two in Brazil. Design of a LAN common share. Because allconfiguration of two data centers and a DRP for LATAM is expected to be completed at the end of the Sister Holdco sharessecond quarter of 2015 and their implementation will be owned bysubsequently begin.
Communications and Telephony
In the TAM controlling shareholders indirectly through TEP Chile immediately priorcase of communications and telephony, the LATAM solution on which work began in 2013 was implemented in 2014. This solution includes links within the two countries, a high-speed Santiago-São Paulo connection, back-up solutions and fixed-line and mobile telephony. At present, LATAM’s principal suppliers are Telefónica, SITA and OI.
Regulation
Below is a brief reference to the Sister Holdco Merger, they will receivematerial effects of aeronautical and other regulations in force in each of the relevant jurisdictions in which LAN common sharesand its subsidiaries operate.
Chile
Aeronautical Regulation
Both the DGAC and the JAC oversee and regulate the Chilean aviation industry. The DGAC reports directly to the Chilean Air Force and is responsible for supervising compliance with Chilean laws and regulations relating to air navigation. The JAC is the Chilean civil aviation authority. Primarily on the basis of Decree Law No. 2,564, which regulates commercial aviation, the JAC establishes the main commercial policies for the TAM shares they contributedaviation industry in Chile, regulates the assignment of international routes, and the compliance with certain insurance requirements, and the DGAC regulates flight operations, including personnel, aircraft and security standards, air traffic control and airport management. We have obtained and maintain the necessary authority from the Chilean government to TEP Chile atconduct flight operations, including authorization certificates from the same exchange ratio asJAC and technical operative certificates from the holdersDGAC, the continuation of TAM shareswhich is subject to the ongoing compliance with applicable statutes, rules and TAM ADSs acquiredregulations pertaining to the airline industry, including any rules and regulations that may be adopted in the exchange offer.future.
If permitted by Brazilian law, TAM will compulsorily redeem all TAM shares (including those represented by TAM ADSs) that were not acquiredChile is a contracting state, as well as a permanent member, of the ICAO, an agency of the United Nations established in 1947 to assist in the exchange offer.
Ifplanning and development of international air transport. The ICAO establishes technical standards for the exchange offer is completed,international aviation industry, which Chilean authorities have incorporated into Chilean laws and regulations. In the TAM shares will be delisted automatically from Bovespa. Ifabsence of an applicable Chilean regulation concerning safety or maintenance, the TAM ADSs are no longer eligible for listing onDGAC has incorporated by reference the New York Stock Exchange (“NYSE”) and the NYSE does not delist them, then TAM intends to request, as it is required to do so by the transaction agreements, that the TAM ADSs be delisted from the NYSE as soon as is reasonably practicable following the effective time of the mergers if permitted by the rules of the NYSE. At the effective time, the LAN BDSs will be listed in Brazil on Bovespa, the LAN common shares will continue to be listed in Chile on theBolsa de Comercio de Santiago(Santiago Stock Exchange) (“SSE”) and in the United States on the NYSE in the form of LAN ADSs, and LAN’s name will be changed to “LATAM Airlines Group S.A.”
TAM Shareholders’ Meeting
At a duly called shareholders’ meeting held on January 3, 2012 (at which the requisite quorum of the qualifying minority shares was present), the holders of qualifying minority shares had the option to select, by vote of a majority of the votes cast atICAO’s technical standards. We believe that meeting, one of three recommended appraisal firmswe are in material compliance with all relevant technical standards.
Route Rights
Domestic Routes.Chilean airlines are not required to obtain permits in connection with carrying passengers or cargo on any domestic routes, but only to select Bradesco ascomply with the appraiser (the “Appraiser”)technical and to adopt asinsurance requirements established respectively by the Appraisal Report the appraisal report prepared by Bradesco valuing each of LAN and TAM as of November 23, 2011, in accordance with CVM 361/2002, which was presented at that meeting. At this meeting, the holders of qualifying minority shares unanimously approved Bradesco as the AppraiserDGAC and the appraisal report prepared by Bradesco asJAC. There are no regulatory barriers that would prevent a foreign airline from creating a Chilean subsidiary and entering the Appraisal Report. IfChilean domestic market using that subsidiary. On January 18, 2012 the holdersSecretary of qualifying minority shares had exercised their right under Brazilian law to request that TAM callTransportation and the Secretary of Economics of Chile announced a special meeting ofunilateral opening the shareholders of TAM to vote upon whether or not to request a new appraisal reportChilean domestic skies. This was confirmed on November 2013, and to appoint a new appraiser, then TAM would have been required to take all action necessary to establish a record date for, duly call, give notice of, convene and hold such a special meeting no later than 45 days after the request for such special meeting. As discussed below under “—Transaction Agreements—Conditions to Completion of the Exchange Offer” it is in force since that date.
International Routes.As an airline providing services on international routes, LAN is also subject to a condition to the completionvariety of bilateral civil air transport agreements that provide for the exchange offerof air traffic rights between Chile and various other countries. There can be no assurance that since the commencement date, no appraisal event has occurred, the holders of the qualifying minority shares shall have not requested a new appraisal reportexisting bilateral agreements between Chile and foreign governments will continue, and a new appraiser in accordance with Brazilian law and the holdersmodification, suspension or revocation of the qualifying minority shares shall no longer have the right to request a new appraisal reportone or a new appraiser. The period during which the holders of qualifying minority shares had the right to request a new appraisal report and a new appraiser under Brazilian law has expired, so the holders of qualifying minority shares no longer have the right to exercise these rights.
TAM Representations and Warranties
TAM made customary representations and warranties that are subject, in some cases, to specified exceptions and qualifications and the matters contained in the disclosure schedule delivered by TAM to LAN pursuant to the exchange offer agreement. These representations and warranties relate to, among other things:
due organization, existence, good standing and authority to carry on the businesses of TAM and its subsidiaries;
market capitalization;
ownership and the absence of encumbrances on ownership of the equity interests of its subsidiaries;
the absence of preemptive or other similar rights or any debt securities that give their holders the right to vote with its shareholders;
its corporate power and authority to enter into, and complete the transactions under, the transaction agreements and the shareholders agreements, provided that certain shareholder approvals are obtained, and the enforceability of such agreements against it;
the absence of violations of, or conflicts with, its governing documents, applicable law and certain agreements as a result of entering into and performing under the transaction agreements and the shareholders agreements;
the required governmental consents, approvals, notices and filings;
its SEC filings since December 31, 2006 and the financial statements included therein;
compliance with the Sarbanes-Oxley Act of 2002 and the listing and corporate governance rules and regulations of the NYSE;
its disclosure controls and procedures and internal controls over financial reporting;
the absence of a TAM material adverse effect (as defined below in this section) and the absence of certain other changes or events since December 31, 2009 through the signing date;
the conduct of business in accordance with the ordinary course consistent with past practice since December 31, 2009 through the signing date;
the absence of legal proceedings, investigations and governmental orders against it or its subsidiaries;
the absence of certain undisclosed liabilities;
employee benefit plans;
certain employment and labor matters;
compliance with applicable laws and regulations, governmental orders and all applicable operating certificates, air carrier obligations, airworthiness directives, aviation regulations and other similar rules and regulations, of any airline regulator applicable to it, its rights or other assets or its businesses or operations;
aircraft owned, leased and/or operated by TAM and its subsidiaries;
takeoff and landing slots, authorizations and similar rights of TAM and its subsidiaries;
environmental matters;
tax matters;
intellectual property;
the receipt of a fairness opinion from BTG Pactual;
transactions with affiliates;
information provided for inclusion in the US offering documents and Brazilian offering documents;
the absence of any undisclosed broker’s or finder’s fees; and
material contracts and the absence of any default under any material contract.
Many of TAM’s representations and warranties are qualified by, among other things, exceptions relating to the absence of a “TAM material adverse effect,” which means any change, effect, occurrence or circumstance which, individually or in the aggregate, (i) has had or would reasonably be expected tomore bilateral treaties could have a material adverse effect on our operations and financial results.
International route rights, as well as the business, financial condition, resultscorresponding landing rights, are derived from a variety of operations, assetsair transport agreements negotiated between Chile and foreign governments. Under such agreements, the government of one country grants the government of another country the right to designate one or liabilitiesmore of TAMits domestic airlines to operate scheduled services to certain destinations of the former and, its subsidiaries, taken asin certain cases, to further connect to third-country destinations. In Chile, when additional route frequencies to and from foreign cities become available, any eligible airline may apply to obtain them. If there is more than one applicant for a whole, other than (x) any such change, effect, occurrence or circumstanceroute frequency the JAC awards it through a public auction for a period of five years. The JAC grants route frequencies subject to the extent resulting from (A) any changes aftercondition that the signing daterecipient airline operate them on a permanent basis. If an airline fails to operate a route for a period of six months or more, the JAC may terminate its rights to that route. International route frequencies are freely transferable. In the past, we have generally paid only nominal amounts for international route frequencies obtained in general economic or financial market conditions, (B) any changes afteruncontested auctions.
Airfare Pricing Policy.Chilean airlines are permitted to establish their own domestic and international fares without government regulation. For more information, see “—Antitrust Regulation” below. In 1997, the signing date generally affectingAntitrust Commission approved and imposed a specific self-regulatory fare plan for our domestic operations in Chile consistent with the industries in which TAM and its subsidiaries operate, (C) changes afterAntitrust Commission’s directive to maintain a competitive environment. According to this plan, we must file notice with the signing date in IFRS or the interpretation thereof, (D) geopolitical conditions, the outbreak of a pandemic or other widespread health crisis, the outbreak or escalation of hostilities, any acts of war, sabotage or terrorism, or any escalation or worseningJAC of any such acts of war, sabotageincrease or terrorism threatened or underway as ofdecrease in standard fares on routes deemed “non-competitive” by the signing date or (E) any hurricane, tornado, flood, earthquake, volcanic eruption or natural disaster; provided, however, that the foregoing clauses (A), (B), (D)JAC and (E) shall not apply to the extent that any such change, effect, occurrence or circumstance disproportionately impacts TAM and/or its subsidiaries compared to other participants in the industries in which TAM and its subsidiaries participate, or (y) any failure, in and of itself, of TAM to meet any internal or analyst projections, forecasts or estimates of revenue or earnings or any decrease in fares on “competitive” routes at least twenty days in advance. We must file notice with the JAC of any increase in fares on “competitive” routes at least ten days in advance. In addition, the Chilean authorities now require that we justify any modification that we make to our fares on non-competitive routes. We must also ensure that our average yields on a non-competitive route are not higher than those on competitive routes of similar distance.
Registration of Aircraft.Aircraft registration in Chile is governed by the Chilean Aeronautical Code (“CAC”). In order to register or continue to be registered in Chile, an aircraft must be wholly owned by either:
Safety.The DGAC requires that all aircraft operated by Chilean airlines be registered either with the DGAC or with an equivalent supervisory body in a country other than Chile. All aircraft must have a valid certificate of airworthiness issued by either the DGAC or an equivalent non-Chilean supervisory entity. In addition, the DGAC will not issue maintenance permits to a Chilean airline until the DGAC has assessed the airline’s maintenance capabilities. The DGAC renews maintenance permits annually, and has approved our maintenance operations. Only DGAC-certified maintenance facilities or facilities certified by an equivalent non-Chilean supervisory body in the country where the aircraft is registered may maintain and repair the aircraft operated by Chilean airlines. Aircraft maintenance personnel at such facilities must also be certified either by the DGAC or an equivalent non-Chilean supervisory body before assuming any aircraft maintenance positions.
Security.The DGAC establishes and supervises the implementation of security standards and regulations for the Chilean commercial aviation industry. Such standards and regulations are based on standards developed by international commercial aviation organizations. Each airline and airport in Chile must submit an aviation security handbook to the DGAC describing its security procedures for the day-to-day operations of commercial aviation and procedures for staff security training. LAN has submitted its aviation security handbook to the DGAC. Chilean airlines that operate international routes must also adopt security measures in accordance with the requirements of applicable bilateral international agreements.
Airport Policy.The DGAC supervises and manages airports in Chile, including the supervision of take-off and landing charges. The DGAC proposes airport charges, which are approved by the JAC and are the same at all airports. Since the mid-90s, a number of Chilean airports have been privatized, including the Comodoro Arturo Merino Benítez International Airport in Santiago. At the privatized airports, the airport administration manages the facilities under the supervision of the DGAC and JAC.
Environmental and Noise Regulation.There are no material environmental regulations or controls imposed upon airlines, applicable to aircraft, or that otherwise affect us in Chile, except for environmental laws and regulations of general applicability. There is no noise restriction regulation currently applicable to aircraft in Chile. However, Chilean authorities are planning to pass a noise-related regulation governing aircraft that fly to and within Chile. The proposed regulation will require all such aircraft to comply with certain noise restrictions, referred to in the market price or trading volumeas Stage 3 standards. LAN’s fleet already complies with the proposed restrictions so we do not believe that enactment of the TAM preferred shares (butproposed standards would impose a material burden on us.
Argentina
Aeronautical Regulation
Both the exception in this clause (y) will not applyAdministración Nacional de Aviación Civil (“ANAC”) and the Secretary of Transport oversee and regulate the Argentinean aviation industry. ANAC regulates flight operations, including personnel, aircraft and security standards, air traffic control and airport management, and reports indirectly to the underlying causesMinistry of Planning and is responsible for supervising compliance with Argentinean laws and regulations relating to air navigation. The Secretary of Transport also reports to the Ministry of Planning and regulates the assignment of international routes and matters related to tariff regulation policies. We have obtained and maintain the necessary authorizations from the Argentinean government to conduct flight operations, including authorization certificates and technical operative certificates from ANAC, the continuation of which is subject to the ongoing compliance with applicable statutes, rules and regulations pertaining to the airline industry, including any such failurerules and regulations that may be adopted in the future.
Argentina is a contracting state and a permanent member of the ICAO, an agency of the United Nations established in 1947 to assist in the planning and development of international air transport. The ICAO establishes technical standards for the international aviation industry, which Argentinean authorities have incorporated into Argentinean laws and regulations. In the absence of applicable Argentinean regulation concerning safety or decreasemaintenance, the ANAC has incorporated by reference the majority of the ICAO’s technical standards. We believe that we are in material compliance with all relevant technical standards.
Route Rights
Domestic Routes. In Argentina airlines are required to obtain permits in connection with carrying passengers or preventcargo on any domestic routes, and to comply with the technical requirements established by the local authority. There are no regulatory barriers preventing a foreign airline from creating an Argentine subsidiary and entering the Argentine domestic market using that subsidiary. However, ownership of such underlying causes from being taken into accountsubsidiary by the foreign airline may not be direct, but through a subsidiary formed in determining whetherArgentina, which in turn may be directly or indirectly owned by the foreign company. However, such subsidiary should operate Argentine registered aircraft and employ Argentine aeronautical personnel.
International Routes. As an airline providing services on international routes, LAN Argentina is also subject to a TAMvariety of bilateral civil air transport agreements that provide for the exchange of air traffic rights between Argentina and various other countries. There can be no assurance that existing bilateral agreements between Argentina and foreign governments will continue. Furthermore, a modification, suspension or revocation of one or more bilateral treaties could have a material adverse effect on our operations and financial results.
International route rights, as well as the corresponding landing rights, are derived from a variety of air transport agreements negotiated between Argentina and foreign governments. Under such agreements, the government of one country grants the government of another country the right to designate one or more of its domestic airlines to operate scheduled services to certain destinations of the former and, in certain cases, to further connect to third-country destinations. In Argentina, when additional route frequencies to and from foreign cities become available, any eligible airline may apply to obtain them. ANAC grants route frequencies subject to the condition that the recipient airline operate them on a permanent basis. If an airline fails to operate a route for a period of six months or more, the ANAC may terminate its rights to that route.
Airfare Pricing Policy. Argentine airlines are permitted to establish their own international fares without government regulation, as long as they do not abuse any dominant market position they may enjoy. Yet, there are government-fixed maximum and minimum prices for domestic flights.
Registration of Aircraft. Aircraft registration in Argentina is governed by the Argentinean Aeronautical Code (“AAC”). In order to register or continue to be registered in Argentina, an aircraft must be wholly owned by either:
Safety.ANAC requires that all aircraft operated by Argentinean airlines be registered with ANAC. All aircraft must have a valid certificate of airworthiness issued by ANAC. In addition, ANAC will not issue maintenance permits to an Argentinean airline until ANAC has occurred);assessed the airline’s maintenance capabilities. ANAC renews maintenance permits periodically and approves maintenance operations once the airline initiates its operations and each time an airline changes its maintenance regime. Only ANAC-certified maintenance facilities (in Argentina or (ii) impairs or would reasonably be expected to impair in any other country) may maintain and repair the aircraft operated by Argentinean airlines. Aircraft maintenance personnel at such facilities must also be certified by ANAC before assuming any aircraft maintenance positions.
Security.ANAC establishes and supervises the implementation of security standards and regulations for the Argentinean commercial aviation industry. Such standards and regulations are based on standards developed by international commercial aviation organizations. Each airline and airport in Argentina must submit an aviation security handbook to ANAC describing its security procedures for the day-to-day operations of commercial aviation and procedures for staff security training. LAN Argentina has submitted its aviation security handbook to ANAC. Argentinean airlines that operate international routes must also adopt security measures in accordance with the requirements of applicable bilateral international agreements.
Airport Policy.The ORSNA (Organismo Regulador del Sistema Nacional de Aeropuertos) supervises and manages the airports in Argentina, including the supervision of take-off and landing charges. The ORSNA proposes airport charges, which are approved by ANAC and are the same at all airports. Nevertheless, while domestic flights are charged in local currency, international flights are charged in U.S. dollars. Since the late-90s, a number of Argentinean airports have been privatized, including Aeroparque and Aeropuerto Internacional de Ezeiza Ministro Pistarini in Buenos Aires, the two most important airports in Argentina. At the privatized airports, the airport administration manages the facilities under the supervision of ANAC and ORSNA.
Environmental and Noise Regulation.There are no material respectenvironmental regulations or controls imposed upon airlines, applicable to aircraft, or that otherwise affect us in Argentina, except for environmental laws and regulations of general applicability and noise restriction regulation currently applicable to aircraft in Argentina. Any aircraft operated by an Argentinean airline should comply with certain noise restrictions, specifically with Stage 3 standards, as set forth in chapter 91.805 of the abilityArgentinean civilian aviation regulations (Regulaciones Argentinas de Aviación Civil) referred to in the market as Stage 3 standards. LAN’s fleet already complies with the proposed restrictions so we do not believe that enactment of TAMthe proposed standards would impose a material burden on us.
Peru
Aeronautical Regulation
The Peruvian DGAC (“PDGAC”) oversees and regulates the Peruvian aviation industry. The PDGAC reports directly to complete the transactions contemplatedMinistry of Transportation and Communications and is responsible for supervising compliance with Peruvian laws and regulations relating to air navigation. In addition, the PDGAC regulates the assignment of national and international routes, and the compliance with certain insurance requirements, and it regulates flight operations, including personnel, aircraft and security standards, air traffic control and airport management. We have obtained and maintain the necessary authorizations from the Peruvian government to conduct flight operations, including authorization and technical operative certificates, the continuation of which is subject to the ongoing compliance with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future.
Peru is a contracting state and a permanent member of the ICAO. The ICAO establishes technical standards for the international aviation industry, which Peruvian authorities have incorporated into Peruvian laws and regulations. In the absence of an applicable Peruvian regulation concerning safety or maintenance, the PDGAC has incorporated by reference the majority of the ICAO’s technical standards. We believe that we are in material compliance with all relevant technical standards.
Route Rights
Domestic Routes.Peruvian airlines are required to obtain permits in connection with carrying passengers or cargo on any domestic routes and to comply with the technical requirements established by the transactionPDGAC. Non-Peruvian airlines are not permitted to provide domestic air service between destinations in Peru.
International Routes.As an airline providing services on international routes, LAN Peru is also subject to a variety of bilateral civil air transport agreements that provide for the exchange of air traffic rights between Peru and various other countries. There can be no assurance that existing bilateral agreements between Peru and foreign governments will continue, and a modification, suspension or revocation of one or more bilateral treaties could have a material adverse effect on our operations and financial results.
International route rights, as well as the corresponding landing rights, are derived from a variety of air transport agreements negotiated between Peru and foreign governments. Under such agreements, the government of one country grants the government of another country the right to performdesignate one or more of its obligations under those agreementsdomestic airlines to operate scheduled services to certain destinations of the former and, in certain cases, to further connect to third-country destinations. In Peru, when additional route frequencies to and from foreign cities become available, any eligible airline may apply to obtain them. If there is more than one applicant for a route frequency the PDGAC awards it through a public auction for a period of four years. The PDGAC grants route frequencies subject to the condition that the recipient airline operate them on a timelypermanent basis. If an airline fails to operate a route for a period of 90 days or more, the PDGAC may terminate its rights to that route, although that has never happened in practice.
Airfare Pricing Policy.Peruvian airlines are permitted to establish their own domestic and international fares without government regulation, as long as they do not abuse any dominant market position they may enjoy. For more information, see “—Antitrust Regulation” below. Airlines or other interested parties may file complaints before the Institute for Protection of Fair Competition and Consumer Rights (“Indecopi”) with respect to monopolistic or other pricing practices by other airlines that violate Peru’s antitrust laws.
Registration of Aircraft.Aircraft registration in Peru is governed by the Peruvian Civil Aviation Law. In order to own and register a Peruvian aircraft, the following conditions shall apply:
Safety. Peruvian law allows the use of aircraft that are registered either with the PDGAC or with an equivalent supervisory body in a country other than Peru. All aircraft must have a valid certificate of airworthiness issued by either the PDGAC or an equivalent non-Peruvian supervisory entity. In addition, the PDGAC will issue maintenance permits to a Peruvian airline as long as the PDGAC has assessed the airline’s maintenance capabilities. The PDGAC has approved our maintenance operations. Only PDGAC-certified maintenance facilities or facilities certified by an equivalent non-Peruvian supervisory body in the country where the aircraft is registered may maintain and repair the aircraft operated by Peruvian airlines. Aircraft maintenance personnel at such facilities must also be certified either by the PDGAC or an equivalent non-Peruvian supervisory body before be appointed to any aircraft maintenance positions.
Security.The PDGAC establishes and supervises the implementation of security standards and regulations for the Peruvian commercial aviation industry. Such standards and regulations are based on standards developed by international commercial aviation organizations. Each airline and airport in Peru must submit an aviation security handbook to the PDGAC describing its security procedures for the day-to-day operations of commercial aviation and procedures for staff security training. LAN Shareholders’ MeetingPeru has submitted its aviation security handbook to the PDGAC. Peruvian airlines that operate international routes must also adopt security measures in accordance with the requirements of applicable bilateral international agreements.
Airport Policy. CORPAC supervises and manages airports in Peru, including the supervision of take-off and landing charges. CORPAC sets airport charges for navigation facilities, which may differ from airport to airport. Since the mid-90s, a number of Peruvian airports have been privatized, including the Aeropuerto Internacional Jorge Chávez in Lima. At a meeting held on January 18, 2011, our boardthe privatized airports, the airport administration manages the facilities under the supervision of directors approved the transaction agreementsOrganismo Supervisor de la Inversión en Infraestructura de Transporte de Uso Público, (the Supervising Agency of Investment in Public Transport Infrastructure Facilities or “OSITRAN”), an independent regulatory and agreedsupervising entity.
Environmental and Noise Regulation.There are no specific material environmental regulations or controls imposed upon airlines, applicable to recommendaircraft, or that our shareholders voteotherwise materially affect us in Peru, except for environmental laws and regulations of general applicability. There are noise restriction regulations currently applicable to approveaircraft in Peru. LAN’s fleet complies with the proposed combination with TAM.restrictions so they do not impose a material burden on us.
At an Extraordinary General Shareholders’ Meeting heldEcuador
Aeronautical Regulation
There are two institutions that control commercial aviation on December 21, 2011, LAN shareholders approved the proposed combination with TAM, subject to (i) the terms and conditionsbehalf of the transaction agreements;State: (i) The National Civil Aviation Board (“CNAC”), which directs aviation policy; and (ii) the renderingGeneral Civil Aviation Bureau (“EDGAC”), which is a technical regulatory and control agency. The CNAC issues operating permits and grants operating concessions to national and international airlines. It also issues opinions on bilateral and multilateral air transportation treaties, allocates routes and traffic rights, and approves joint operating agreements such as wet leases and shared codes.
Fundamentally, the EDGAC is responsible for:
The EDGAC also must comply with the standards and recommended methods of the ICAO since Ecuador is a signatory of the 1944 Chicago Convention.
Route Rights
Domestic Routes.Airlines must obtain authorization from CNAC (an operating permit or concession) to provide air transportation. For domestic operations, only companies incorporated in Ecuador can operate locally, and only Ecuadorian-licensed aircraft and dry leases are authorized to operate domestically.
International Routes.Permits for international operations are based on air transportation treaties signed by Ecuador or, otherwise, the principle of reciprocity is applied. All airlines doing business in Latin America that are incorporated in countries that are members of theComunidad Andina de Naciones (the Andean Community, or “CAN”) obtain their traffic rights on the basis of decisions currently in force under that regime, in particular decision N°582 of 2004, which guarantee free access to markets, with no type of restriction except technical considerations.
Shared codes are allowed in Ecuador after authorization by the CNAC, but the respective airlines must have the relevant traffic rights.
Airfare Pricing Policy.On October 13, 2011, The Statutory Law of Regulation and Control of the Market Power was passed with a purpose to avoid, prevent, correct, eliminate and sanction the abuse of economic operators with market power, as well as to sanction restrictive, disloyal and agreements involving collusive practices. This Law creates a new public entity as the maximum authority of application and establishes the procedures of investigation and the applicable sanctions, which are severe. Rates are not regulated and are subject only to registration. In general, bilateral treaties regarding air transportation provide for airfares to be regulated by the regulation of the country of origin.
Registration of Aircraft.The legislation allows Ecuadorian companies to provide international air transportation services using aircraft licensed in Ecuador and aircraft with a foreign license, always provided the latter are exploited under dry leases. For domestic operations, aircraft is authorized only pursuant to dry leases and Ecuadorian registration. Aircraft interchange agreements are also allowed for international operations, provided that the aviation authority can confirm that the aircraft is under the operational control of an Ecuadorian operator. Wet leases are permitted, but very restricted.
Safety. In order to ensure aviation safety, the EDGAC requires that the airline hold an Air Operator Certificate and have Operating Specifications that are examined technically and rigorously to ensure compliance with the Civil Aviation Technical Regulations, which are essentially the same as the Federal Aviation Regulations (“FAR”) of the FAA. They cover matters of aircraft airworthiness, certification of maintenance facilities, and oversight by the EDGAC.
Security.The governing rules also apply to security in respect of the EDGAC. There are regulations, manuals and procedures on airport security overseen by the EDGAC.
Airport Policy. The international airports in Quito and Guayaquil are managed under administrative concessions, and the EDGAC merely controls air traffic. Fees for the use of airport facilities, terminal fees, landing fees, parking fees are all overseen and collected by the operator. Over-flight and approach fees are controlled and collected by the EDGAC.
Environmental and Noise Regulation.Aircraft must comply with the standards of category 3 under Ecuadorian applicable noise regulations, as set forth in Executive Decree (Decreto Ejecutivo) 1,405, enacted on October 24,2008, which provides certain technical specific criteria. Beginning in May 2010, aircraft must comply with standards of category 4 under cited regulation. Category 3 provides for compliance with ICAO regulations and technical conditions mandatory in the United States of America.
United States of America
Aeronautical Regulation
Operations to and from the United States by non-U.S. airlines, such as LAN, are subject to Title 49 of the U.S. Code, under which the Department of Transportation (“DOT”) and the FAA exercise regulatory authority. The DOT has jurisdiction over international aviation in connection with the United States, subject to review by the President of the United States. The DOT also has jurisdiction with respect to unfair practices and methods of competition by airlines and related consumer protection matters. The U.S. DOJ also has jurisdiction over airline competition matters under the U.S. federal antitrust laws. Flight operations between Chile and the United States by airlines licensed by either country are governed generally by the open skies air transport agreement that Chile and the United States signed in October 1997. Under the open skies agreement, there are no restrictions on the number of destinations or flights that either a U.S. or a Chilean airline may operate between the two countries or on the number of U.S. and Chilean airlines that may operate.
Authorizations and Licenses
LAN is authorized by the DOT to engage in scheduled and charter air transportation services, including the transportation of persons, property (cargo) and mail, or combinations thereof, between points in Chile and points in the United States and beyond (via intermediate points in other countries). LAN holds the necessary authorizations from the DOT in the form of a final decisionforeign air carrier permit, Exemption Authorizations and Statements of Authorization to conduct current operations to and from the United States. Exemptions and Statements of Authorization are temporary in nature and are subject to renewal and therefore there can be no assurance that any particular exemption or statement of authorization will be renewed. LAN’s foreign air carrier permit has no expiration date, while a renewal of the exemption authorization (which includes the open skies traffic rights) was timely filed and the Authority was automatically extended until such time as the DOT issues the renewal order. LAN intends to request the inclusion of the open skies rights into our foreign air carrier permit, which would eliminate our need to renew the exemption authority in the future.
The FAA is engaged in the regulation with respect to safety matters, including aircraft maintenance and operations, equipment, aircraft noise, ground facilities, dispatch, communications, personnel, training, weather observation and other matters affecting air safety. The FAA requires each foreign air carrier to obtain certain operations specifications that authorize it to operate to particular airports on approved international routes using specified equipment. LAN currently holds FAA operations specifications under Part 129 of the FAR in compliance in all material respects with all requirements necessary to maintain in good standing of its operations specifications issued by the Chilean SupremeFAA. The FAA can amend, suspend, revoke or terminate those specifications, or can suspend temporarily or revoke permanently our authority if an airline fails to comply with the regulations, and can assess civil penalties for such failure. A modification, suspension or revocation of any of our DOT authorizations or FAA operations specifications could have a material adverse effect on our business.
The FAA also conducts safety audits and has the power to impose fines and other sanctions for violations of airline safety regulations. We have not incurred any material fines related to operations.
Security. On November 19, 2001, the Congress of the United States passed, and the President signed into law, the Aviation and Transportation Security Act, also referred to as the Aviation Security Act. This law federalized substantially all aspects of civil aviation security and created the Transportation Security Administration (“TSA”), which took over security responsibilities previously held by the FAA. The TSA is an agency of the U.S. Department of Homeland Security. The Aviation Security Act requires, among other things, the implementation of certain security measures by airlines and airports, such as the requirement that all passenger bags be screened for explosives. Funding for airline and airport security required under the Aviation Security Act is provided in part by a US$2.50 per segment passenger security fee, subject to a US$10 per round trip cap; however, airlines are responsible for costs in excess of this fee. Implementation of the requirements of the Aviation Security Act has resulted in increased costs for airlines and their passengers. Since the events of September 11, 2001, Congress has mandated and the TSA has implemented numerous security procedures and requirements that have imposed and will continue to impose burdens on airlines, passengers and shippers.
Noise Restrictions. Under the Airport Noise and Capacity Act of 1990 (“ANCA”), and related FAA regulations, aircraft that fly to the United States must comply with certain Stage 3 noise restrictions, which are currently the most stringent FAA noise requirements. All of our aircraft that fly to the United States meet the Stage 3 requirements.
Under the direction of the ICAO, governments are considering the creation of a new and more stringent noise standard than that contained in the ANCA. The ICAO adopted new noise standards in 2001 that established more stringent noise requirements for aircraft manufactured after January 1, 2006. In the U.S., legislation known as the “Vision 100—Century of Aviation Reauthorization Act,” which was signed into law in December 2003, required the FAA to issue regulations implementing Stage 4 noise standards consistent with recommendations adopted by the ICAO. FAA regulations require all aircraft designed and certified after January 1, 2006 to comply with Stage 4 noise restrictions.
FAA regulations also require compliance with the Traffic Alert and Collision Avoidance System, approved airborne wind shear warning system and aging aircraft regulations. Our entire fleet meets these requirements.
Brazil
Aeronautical Regulation
The Brazilian aviation industry is regulated and overseen by the ANAC. The ANAC reports directly to the Civil Aviation Secretary, which is subordinated by the Federal Executive Power of this country. Primarily on the basis of Law No. 11.182/2005, ANAC was created to regulate commercial aviation, air navigation, the assignment of domestic and international routes, compliance with certain insurance requirements, flight operations, including personnel, aircraft and security standards, air traffic control, in this case sharing it activities and responsibilities with theDepartamento de Controle do Espaço Aéreo (Department of Airspace Control) (“DECEA”),which is a public secretary also subordinated to the Brazilian Defense Ministry, and airport management, in this last case sharing responsibilities with theEmpresa Brasileira de Infra-Estrutura Aeroportuária (the Brazilian Airport Infrastructure Company, or “INFRAERO”), a public company that was created by Law No. 5862/72, and is responsible for administrating, operating and exploring Brazilian airports industrially and commercially (with the exception of Guarulhos International Airport, Viracopos International Airport and Brasilia International Airport which was privatized in 2012 and are administrated by concession agreement).
We have obtained and maintain the necessary authority from the Brazilian government to conduct flight operations, including authorization and technical operative certificates from ANAC, the continuation of which is subject to ongoing compliance with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future.
ANAC is the Brazilian civil aviation authority and it is responsible for supervising compliance with Brazilian laws and regulations relating to air navigation. Brazil is a contracting state and a permanent member of the ICAO. The ICAO establishes technical standards for the international aviation industry, which Brazilian authorities, represented by the Brazilian Defense Ministry, have incorporated into Brazilian laws and regulations. In the absence of an applicable Brazilian regulation concerning safety or maintenance, ANAC has incorporated by reference the majority of the ICAO’s technical standards.
Route Rights
Domestic Routes. Brazilian airlines are not required to obtain permits in connection with domestic passenger or cargo transportation, but only to comply with the technical requirements established by ANAC. Based on the Brazilian Aeronautical Code (“CBA”) established by Law No. 7.565/86, non-Brazilian airlines are not permitted to provide domestic air service between destinations in Brazil. The same law prevents a foreign airline from creating a Brazilian subsidiary and entering the Brazilian domestic market using that subsidiary.
International Routes. Brazilian and non-Brazilian airlines providing services on international routes are also subject to a variety of bilateral civil air transport agreements that provide for the exchange of air traffic rights between Brazil and various other countries. International route rights, as well as the corresponding landing rights, are derived from a variety of air transport agreements negotiated between Brazil and foreign governments. Under such agreements, the government of one country grants the government of another country the right to designate one or more of its domestic airlines to operate scheduled services to certain destinations of the former and, in certain cases, to further connect to third-country destinations. In Brazil, when additional route frequencies to and from foreign cities become available, any eligible airline may apply to obtain them. If there is more than one applicant for a route frequency ANAC must carry out a public bid and award it to the elected airline. ANAC grants route frequencies subject to the condition that the recipient airline operate them on a permanent basis. If an airline fails to operate a route for a period of six months or more, ANAC may terminate its rights to that route. ANAC may also terminate its right if the recipient airline does not operate at least 80% of the frequency given for that specific route.
Airfare Pricing Policy. Brazilian and non-Brazilian airlines are permitted to establish their own international and domestic fares, in this last case only for Brazilian airlines, without government regulation, as long as they do not abuse any dominant market position they may enjoy. Airlines may file complaints before the Antitrust Court with respect to monopolistic or other pricing practices by other airlines that violate Brazil’s antitrust laws.
Registration of Aircraft. Aircraft registration in Brazil is managed by ANAC, which maintains the appeal filedBrazilian Aeronautical Register, as regulated by LAN seeking the amendmentCBA. The CBA allows ANAC to permit registration of aircraft belonging to Brazilian and non-Brazilian individuals.
Safety. ANAC requires that all Brazilian aircraft to have a valid certificate of airworthiness issued by ANAC. In addition, ANAC will not issue maintenance permits to a Brazilian airline until it has assessed the airline’s maintenance capabilities. ANAC renews maintenance permits annually, and has approved our maintenance operations. Only ANAC certifies aircraft maintenance services and its personnel.
Security. ANAC establishes and supervises the implementation of security standards and regulations for the Brazilian commercial aviation industry. Such standards and regulations are based on standards developed by international commercial aviation organizations. Each airline and airport in Brazil must submit an aviation security handbook to ANAC describing its security procedures for the day-to-day operations of commercial aviation and procedures for staff security training.
Brazilian Airport Policy. INFRAERO supervises and manages airports in Brazil, including the supervision of take-off and landing charges. INFRAERO proposes airport charges, which are approved by ANAC and are the same at all airports. At privatized airports, the airport administration manages the facilities under the supervision of ANAC.
Environmental and Noise Regulation. ANAC coordinates and supervises noise regulations by regulation 121, which established noise restriction applicable to aircraft in Brazil. There are no material environmental regulations or eliminationcontrols imposed specifically upon airlines companies, applicable to aircraft, other than Brazilian general environmental laws and regulations.
Colombia
Aeronautical Regulation
The governmental entity in charge of threeregulating, directing and supervising civil aviation in Colombia is the Aeronáutica Civil (“AC”), a technical agency ascribed to the Ministry of Transportation. The AC is the aeronautical authority for the entire domestic territory, in charge of regulating and supervising the Colombian air space. The AC may interpret, apply and complement all civil aviation and air transportation regulation to ensure compliance with the Colombian Aeronautical Regulations (“RAC”). The AC also grants the necessary permits for air transportation.
Route Rights
The AC grants operation permits to domestic and foreign carriers that intend to operate in, from and to Colombia. In the case of Colombian airlines, in order to obtain the operational permit the company must comply with the RAC and fulfill legal, economic and technical requirements, to later be subject to public hearings where the public convenience and necessity of the service is considered. The same process must be followed to add national or international routes, whose concession is subject to the bilateral instruments entered into by Colombia. Routes cannot be transferred under any circumstance and there is no limit to foreign investment in domestic airlines.
Airfare Pricing Policy.Since July 2007, as stated in resolution 3299 of the Aeronautical Civil entity, bottom level airfares for both international and domestic transportation were eliminated. Under resolution 904 issued in February 2012, the Aeronautical Civil entity decided to liberalize the obligation of charging a fuel surcharge for both domestic and international transportation of passengers and cargo. As of April 1, 2012, air carriers may now freely decide whether or not to charge a fuel surcharge. In the case that it is charged, the fuel surcharge must be part of the fare, but may be informed separately on the tickets, advertising or other methods of marketing used by the company.
In the same line, as of April 1, 2012 there is no longer be any restriction on top level fares published by the airlines or with respect to the obligations for air carriers to report to the Aeronautical civil entity the fares and conditions set forththe day after being published.
Administrative fares are not subject to any changes and its charge is an obligation for the transport of passengers under Aeronautical Civil Regulations.
Registration of Aircraft.The AC, through the Office of Aeronautical Registration, is in charge of handling the registration of aircraft that will be operated by Colombian airlines. Registration may be obtained by a registration process fully conducted in Colombia or through the validation in Colombia of a foreign registration. For such registration, the aircraft must be legally imported to the country and inspected by the aeronautical inspectors. This office is also in charge of property registrations, lease contracts and liens of the registered aircraft.
Safety. Aircraft registered in Colombia obtain an airworthiness certificate or a validation of the airworthiness certificate (if they operate under the approval of the foreign registration).
Security.Following the guidelines of the OACI annexes, the AC issued an airport security program that must be strictly complied with by all the aircraft operators in the decision issuedcountry as well as by airports.
Environmental and Noise Regulation.In Colombia, only aircraft that comply with category 3 noise limits may operate. There are strict regulations to control noise during takeoffs and landings of the aircraft at the El Dorado Airport in Bogotá due to its location in an urban area.
Antitrust Regulation
The Chilean antitrust authority, which we refer to as the Antitrust Court (previously the Antitrust Commission), oversees antitrust matters, which are governed by Decree Law No. 211 of 1973, as amended, or the Antitrust Law. The Antitrust Law prohibits any entity from preventing, restricting or distorting competition in any market or any part of any market. The Antitrust Law also prohibits any business or businesses that have a dominant position in any market or a substantial part of any market from abusing that dominant position. An aggrieved person may sue for damages arising from a breach of Antitrust Law and/or file a complaint with the Antitrust Court requesting an order to enjoin the violation of the Antitrust Law. The Antitrust Court has the authority to impose a variety of sanctions for violations of the Antitrust Law, including termination of contracts contrary to the Antitrust Law, dissolution of a company and imposition of fines and daily penalties on businesses. Courts may award damages and other remedies (such as an injunction) in appropriate circumstances. As described above under “—Route Rights—Airfare Pricing Policy,” in October 1997, the Antitrust Court approved a specific self-regulatory fare plan for us consistent with the Antitrust Court’s directive to maintain a competitive environment within the domestic market.
Since October 1997, LAN Airlines S.A. and LAN Express follow a self-regulatory plan, which was modified and approved by the ChileanTribunal de la Libre Competencia (the Competition Court) in July 2005, and further in September, 2011. In February 2010, the Fiscalía Nacional Economica (the National Economic Prosecutor’s Office) finalized the investigation initiated in 2007 regarding our compliance with this self-regulatory plan and no further observations were made
As a condition to the business combination between LAN and TAM in June 2012, the antitrust authorities in Chile and in Brazil each imposed certain mitigation measures as part of their approval of the combination. Furthermore, the combination was submitted to the antitrust authorities in Germany, Italy and Spain. All these jurisdictions granted unconditional clearances for this transaction. The combination was filed with the Argentinean antitrust authorities, which approval is still pending. For more information regarding these mitigation measures please see below:
Chile
On September 21, 2011, the TDLC issued the Decision with respect to the consultation procedure initiated by Conadecus, a Chilean consumer association (“Conadecus”).
LAN shareholderson January 28, 2011 in connection with the proposed combination. The TDLC, in the Decision, approved the proposed combination between LAN and TAM, subject to 14 conditions, as generally described below:
Brazil
The Brazilian Council for Economic Defense – CADE approved the LAN/TAM oncombination by unanimous decision during the proposed conditionshearing session of December 14, 2011, subject to the following conditions: (1) the new combined group (LATAM) should leave one of the two global alliances to which it was part (Star Alliance oroneworld®); and (2) the new combined group (LATAM) should offer to swap two pairs of slots in Guarulhos International Airport, to be used by an occasional third party interested in offering direct non-stop flights between São Paulo and Santiago do Chile. These impositions are in line with the mitigation measures adopted by the TDLC, in Chile.
C. ORGANIZATIONAL STRUCTURE
LATAM Airlines Group is a company primarily involved in the transportation of passengers and cargo. Our operations are carried out principally by LAN, and by a broad majority, with over 99.99%number of shares present atdifferent subsidiaries and affiliates, including TAM. As of January 31, 2015, in the meeting. The Shareholders Meeting also approved a change to the Company’s corporate name to “LATAMpassenger business we operated through seven main airlines: LATAM Airlines Group S.A.” or “LATAM” (which does business under the name “LAN Airlines”), incorporated in Chile, Transporte Aéreo S.A. (which does business under the name “LAN Express”), a Chilean subsidiary, LAN Perú S.A. (“LAN Peru”), a Peruvian subsidiary, Aerolane, an Ecuadorian subsidiary, Líneas Aéreas Nacionales del Ecuador S.A. (“LAN Ecuador”), and other necessary transactions contemplatedEcuadorian subsidiary, LAN Argentina S.A. (“LAN Argentina,” previously Aero 2000 S.A.), an Argentinian subsidiary, Aerovías de Integración Regional, Aires S.A. (which does business under the name “LAN Colombia”), a Colombian subsidiary, TAM Linhas Aereas S.A. (“TAM Linhas Aereas”) incorporated in Brazil.).
As of January 31, 2015 we held a 99.90% stake in LAN Express through direct and indirect interests, a 69.98% stake in LAN Peru through direct and indirect interests, a 79.66% indirect stake in LAN Ecuador, a 94.99% indirect stake in LAN Argentina, a 98.81% indirect stake in LAN Colombia and a 100.00% of the transaction agreements.
LAN Representationsnon-voting shares of TAM, and Warranties
LAN made customary representations19.42% of the voting shares and warranties that are subject, in some cases, to specified exceptions100% of the non-voting of Holdco I S.A., who has the 100.00% of the voting shares of TAM. For a description of the recent combination with TAM, including TAM’s operating structure, see “Item 4.History and qualifications andDevelopment of the matters contained in the disclosure schedule delivered by LAN to TAM pursuant to the exchange after agreement. These representations and warranties relate to, among other things:
due organization, existence, good standing and authority to carry on the businessCompany—Combination of LAN and its subsidiaries;TAM.”
market capitalization;
ownershipThe cargo operations are carried out by our subsidiaries and affiliates, including TAM Linhas Aereas and LAN Cargo. The cargo operations are complemented by the operations of certain related companies, such as Aero Transportes Mas de Carga S.A. de C.V. (“MasAir”) in Mexico, Aerolinhas Brasileiras S.A. (which does business under the name of “ABSA” and “TAM Cargo”) in Brazil and Linea Aérea Carguera de Colombia S.A. (“LANCO”) in Colombia. As of January 31, 2015, we indirectly held 100% of the non-voting shares and 24.99% of the voting shares of MasAir, 100% of the non-voting shares and 20% of the voting shares of ABSA, and an 90.00% stake in LANCO through direct and indirect participations. TAM holds 100% stake in ABSA. In the cargo business, LATAM markets itself primarily under the LAN Cargo brand internationally and the absenceTAM Cargo brand in Brazil.
D. PROPERTY, PLANTS AND EQUIPMENT
LAN Infrastructure Management and TAM Infrastructure Management report to the Director of encumbrancesPurchasing and Infrastructure of LATAM. Both LAN and TAM infrastructure management teams have worked together during 2012 and 2013 regarding strategic planning for infrastructure issues for the LATAM Airlines Group.
LAN’s Property, Plant and Equipment
Headquarters
Our main facilities are located on ownershipapproximately five acres of land that we own near the Comodoro Arturo Merino Benítez International Airport. The complex includes approximately 150,695 square feet of office space, 32,292 square feet of conference space and training facilities, 9,688 square feet of dining facilities and mock-up cabins used for crew instruction.
During 2003, we moved some of our executive offices into a new building in a more central location in Santiago, Chile, where we occupied a total of four floors owned by LAN. To accommodate our growth, we have, since 2005 expanded our offices. In 2005 LAN bought 3 floors, in 2007, LAN leased two floors in an adjacent building (totaling 18,298 square feet), and in 2009, LAN leased additional floors in this building (totaling 12,917 square feet). In 2010, new offices were leased east of Santiago to allow for Company growth and to implement projects such as “Host,” which involves changing our system of reservations, sales, inventory and passenger check-in. We have leased these additional offices since 2010, under a 4-year lease. These additional offices add a total of 19,913 square feet to LAN’s property.
Furthermore, during 2011 we added to our facilities a new 11,840 square feet floor at the Arrau Building located in Santiago, Chile, which we lease for the new facilities of LAN Cargo. We have leased this floor since 2011, under a 3-year lease.
Maintenance Base
Our 877,258 square feet maintenance base is located on a site that we own inside Comodoro Arturo Merino Benítez International Airport. This facility contains our aircraft hangar, warehouses, workshops and offices, as well as a 559,720 square feet aircraft parking area capable of accommodating up to seventeen short-haul aircraft. We have a 53,820 square feet office building plus a 10,000 square feet office and workshop space. We also lease from the DGAC 193,750 square feet of space inside the Comodoro Arturo Merino Benítez International Airport for operational and service purposes. Our lease has duration of 14 years.
During 2013, we began to develop a series of infrastructure projects, the most significant of which is the construction of a north platform which allows for an additional 13 new A320 aircraft parking spaces. During 2013, a significant part of this project was completed, including 5 new parking spaces for A320 aircraft. The project is expected to be finished during the third quarter of 2014. Additionally during 2013, parking capacity for vehicles was increased by 135 new spaces.
During 2014 these Facilities were completed and delivered to operation.
Miami Facilities
We occupy a 36.3-acre site at the Miami International Airport that has been leased to us by the airport under a concession agreement. Our facilities include a 48,000 square feet corporate building, a 380,000 square feet cargo warehouse (including a 10,000 square meter cooling area) and a 783,000 square feet aircraft-parking platform, which were constructed and are now leased to us under a long-term contract by a North American developer, and approximately 21,528 square feet of furnished office space. The rent we pay for the use of this space is approximately US$735,000 per month. We are currently negotiating with the local airport authority regarding its construction of a new hangar at the Miami International Airport, which we expect to lease from them when it is constructed.
During 2010, LAN signed a concession agreement with the AMB Property Corporation to add a new cargo warehouse for additional areas for future developments. Our concession has duration of 5 years at a rate of approximately US$215,000 per month.
During 2013, a new project for a Boeing B777 hangar was developed. This project finally received approval from Miami airport authorities in 2014 and should be completed during 2015.
Other Facilities
We own a building and sixteen acres of land on the west side of the equity interestsComodoro Arturo Merino Benítez International Airport that houses a flight-training center. As of its subsidiaries;
Fast Air Almacenes de Carga S.A. (“Fast Air”), one of our subsidiaries that operate import customs warehouses, utilizes an import warehouse and office building at the absenceComodoro Arturo Merino Benítez International Airport. This 172,000 square feet building was developed in conjunction with two other operators. We have leased these facilities since 2004 and we will continue to operate there until September 2015.
LAN Peru’s Property, Plant and Equipment
LAN Peru has approximately 19,000 m2 built. All facilities are leased and are distributed as follows:
Administrative Offices: 7,000 m2
Sales Offices: 2,000 m2
Concessions airports: 10,000 m2
We also own a 166,840 square feet of preemptiveland near the Lima airport, where built training facilities for flight and cabin crews of the Company, with capacity for two flight simulators (Airbus A320s and Boeing 767s), facilities for emergency evacuation practice (including pool to practice ditching) and classrooms. In addition, in 2010 we leased a piece of land and hangar inside the Lima airport for our maintenance facilities that was rented to LAN Peru for an initial period of 5 years, which may be renewed. The new maintenance facilities have approximately 3,500 m² of space, a hangar with a covered area of approximately 6,500 m² (space for three Airbus A320s or one Boeing 767) plus an out platform of approximately 3,500 m².
Finally, we are renting eight floors in a building and three floors in another building for our corporate facilities. We are also renting twenty three commercial offices around the country.
LAN Colombia’s Property, Plant and Equipment
LAN Colombia has approximately 27,500 m2 built. All facilities are leased and are distributed as follows:
Administrative Offices: 4,500 m2
Sales Offices: 1,700 m2
Concessions airports: 21,300 m2
During 2012, new administrative and operational offices were created in the Logistic center (PARQUE DEL SOL) near the El Dorado airport in Bogota, covering 11,500 square feet.
During November 2013, a new VIP lounge covering 690m2 in the El Dorado Airport in Bogotá was complete.
During 2014 there was a complete renovation of the Hangar Aircraft Parking, which now has space for three A320 aircraft.
LAN Ecuador’s Property, Plant and Equipment
LAN Ecuador has approximately 14,500 m2 built. All facilities are leased and are distributed as follows:
Administrative Offices: 1,600 m2
Sales Offices: 1,000 m2
Concessions airports: 11,900 m2
In Ecuador, the New Quito Airport was opened in 2013 and LAN Ecuador spent approximately US$4.5 million for facilities and infrastructure investments at this new airport. During the construction period, LAN Ecuador (and other similar rights or any debt securitiesairlines) were required to make significant investments for airport infrastructure in this new airport.
In 2012, LAN began the construction of new facilities for Andes, a company that give their holdersperforms ground service aircraft handling services for LAN Ecuador and acts as an airport service provider. A new facility for line maintenance and operations was also constructed. Both facilities were built on land concessioner by QUIPORT and were opened during the right to vote with its shareholders;first quarter of 2013. Further information regarding the size and amount of these investments is detailed in the table below:
Facilities | Ground (m2) | Constructions (m2) | Pavements (m2) | Investment (US$) | ||||||||||||
ANDES | 4,000 | 3,134 | 1,800 | 2,500,000 | ||||||||||||
MAINTENANCE | 15,167 | 1,300 | 6,200 | 2,000,000 |
LAN Argentina’s Property, Plant and Equipment
LAN Argentina has approximately 192,670 square feet built. All facilities are leased and are distributed as follows:
Administrative Offices: 71,042 square feet
Sales Offices: 27,986 square feet
Concessions airports: 93,646 square feet
We also have maintenance base in Argentina with a hangar of 26,900 square feet, 9,600 square feet of offices, 1,070 square feet of workshops and an exterior platform of 5,300 square feet. This facility is meant for the parking and maintenance of A320 aircraft and it is capable of providing full maintenance, including C-Checks.
On December of 2012, LAN Argentina launched its corporate powernew VIP lounge in Terminal B of the Ezeiza Airport. An area of 6,458 square feet was built to house more than 150 passengers, with areas for resting, work, entertainment, bathrooms and authorityshower services.
TAM’s Property Plant and Equipment
Headquarters
TAM’s main facilities are located in São Paulo, in hangars within the Congonhas Airport and nearby. At Congonhas Airport, TAM leases office facilities in converted hangars belonging to enter into,INFRAERO (the Local Airport Administrator). These facilities comprise 649,933 square feet.
The Service Academy is located at Rua Atica, about 2.5 km from Congonhas Airport, is a separate property which TAM owns, exclusively for the areas of Selection, Medical Service, Training, and Mock-ups, comprising 15,342 m².
Base Maintenance
At Hangars II and V in Congonhas Airport, which TAM leases for approximately R$39,510 and R$52,665 per month, TAM has 15,650 m² of offices and hangars with about 1,050 workstations. This site also houses the areas of Aircraft Maintenance, Procurement and Logistics of Aeronautical Materials, and Retrofitting.
Other Facilities
In São Paulo, TAM has other facilities such as: Commercial Headquarters, an old Pantanal office, located 7.0 km from Congonhas Airport, with 540 m² leased area and about 94 workstations; Uniform Building, with 890 m2 and about 10 workstations, exclusive use for storage and delivery of uniforms; and a Call Center Building at Rua Augusta with 110 m2 and about 150 workstations distributed in four floors.
TAM also has the following offices: Multiplus Office, located in Brooklin region, with 800 m2 leased, and approximately 150 workstations; TAM Viagens Office, with 2,800 m2 leased distributed in about 265 workstations; Two Stores of TAM Viagens, at Rua Augusta with 110 m2 leased and about 10 workstations; and at Shopping SP Market with 50 m2 leased and about 5 workstations.
In Guarulhos, TAM has a total area of approximately 12,894 m2 distributed in the Passenger Terminal, Operational Areas such as Check-in, Ticket Sales, Check Out, Operations Areas, VIP Lounges, Aircraft Maintenance, GSE, Cargo Terminal, Distribution Centers, etc. The Cargo Terminal has 164 m2 of office and 15,000 m2 of open area. The Distribution Centre Supplies has 3,030 m2.
TAM has a total of 45 online sites and 10 offline/chartering/high season sites in Brazil. Outside of Brazil, TAM has a total of 30 sites in 6,300 m², including 20 online sites and 10 offline/chartering/high season sites. TAM also has 133 franchised stores of TAM Viagens through Brazil.
New Headquarters
In 2013, TAM finished its project for a new headquarters with an area of 5,066 m², of which two and one-third floors are leased, space for 641 workstations and a total investment of R$12.0 million. The new headquarters is located at the Tower Bridge Building, located in Brooklin region.
We are building a new office with 12,195 m², LATAM will lease 12 floors, to transfer 1100 workstations, in a total investment of R$ 23.9 million. The new office is located at Espaço Empresarial Nações Unidas (EENU), in the Chacára Santo Antonio región. When this Project is finished we will terminate the contract lease of hangar 7 and hangar 8.
Building Improvements
We have approved the “Big Picture” project, which will implement a new plan of occupancy for Hangars in 2 and 5 at Congonhas Airport for approximately 5700 m² and Hangar 3 for approximately 6000 m². These improvements will receive and investment of US$18 million. This project will be completed in the second half of 2015.
New Facilities
TAM concluded several projects for new facilities in 2014, the most significant of which was a new cargo terminal in Manaus that integrates the operations of ABSA and TAM Cargo in the city and has a cargo space of about 4,700 m²; the construction of a new GSE area in Florianópolis with an area of approximately 400 m²; the construction of a new GSE area in Vitória with 255 m² and a new distribution center for supplies in Guarulhos, with an area of approximately 3,035 m². In total, TAM spent approximately R$30 million on these projects in 2014. Additionally we build TPS 3 offices in Guarulhos airport at terminal 3, with 2100 m².
Moreover, TAM has several projects for new facilities in 2014 and 2015, the most significant of which are a new cargo terminal in Guarulhos that integrates the operations of ABSA and TAM Cargo in Guarulhos, with a cargo space of about 15,434 m²; the construction of a new VIP Lounge in Guarulhos Airport with 1,900 m2; investments of R$ 20 million targeted to general
improvements of GSE facilities in all Brazilian territory and a new hangar in Guarulhos Airport for narrow and wide body aircraft maintenance. This new hangar is under study but is expected to complete projects still in 2014. The new facilities will receive an investment of R$ 50 million in 2014-2015.
Both Projects were completed and they are already in service. The VIP Lounge was delivered in October 2014 and The New Cargo terminal was delivered in January 2015
In addition, to the transactions underprojects mentioned above, some large airports in Brazil, including, like Guarulhos, Natal and Viracopos have undergone major structural reforms promoted by the transaction agreementsgovernment which required investments of R$ 8,3 for modernization of our facilities. These projects are directly related to the world cup football.
ITEM 4A | UNRESOLVED STAFF COMMENTS |
None.
ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
Operating Results
You should read the following discussion of our financial condition and results of operations together with our audited consolidated financial statements and the shareholders agreements, provided thataccompanying notes beginning on page F-1 of this annual report.
The summary consolidated annual financial information as of December 31, 2014, 2013 and 2012 and for the holdersyears ended December 31, 2012, 2013 and 2014, has been prepared in accordance with IFRS and has been derived from our audited consolidated annual financial statements included in this annual report.
Overview
We derive our revenues primarily from transporting passengers on our passenger aircraft, as well as from transporting cargo in the belly of at least two-thirdsour passenger aircraft and in our dedicated freighter aircraft. In 2014, approximately 83% of our revenues came from passenger revenues, 14% came from our cargo business, and the remaining 3% from other operating revenues. Other operating revenue consists primarily in revenues generated from tour operator services, aircraft leases, on-board sales, third-party maintenance, ground handling, customs and storage brokerage operations.
Our operating environment in 2014 was marked by continued capacity rationalization in both cargo and passenger operations compared with 2013, coupled with a generally weaker macroeconomic environment in Latin America, including slower GDP growth trends, and weaker currencies in most countries. Additionally our operations were negatively affected by reduced passenger and cargo demand during the FIFA World Cup soccer tournament held in Brazil.
Passenger Operations
In general, our passenger revenues are driven by international and country-specific political and economic conditions, competitive activity and the attractiveness of the outstanding LAN common shares vote to approvedestinations that we serve. Passenger revenues are also affected by our capacity, traffic, load factors, yield and unit revenue. Our capacity is measured in terms of available seat kilometers, or ASKs, which represents the mergers and the other transactions contemplatednumber of seats we make available for sale, multiplied by the transaction agreements atkilometers flown. We measure traffic in revenue passenger kilometers, or RPKs, as the number of passengers on our flights multiplied by the number of kilometers flown. Load factors represent RPKs (traffic) as a duly calledpercentage of ASKs (capacity), or the percentage of our capacity that is actually used by paying customers. Finally, we use yield, revenue from passenger operations divided by RPKs, to measure the average amount that one passenger pays to fly one kilometer and held meetingunit revenue, or revenue per ASK, to measure the effect of capacity on revenues. See “Item 3. Key Information—Selected Financial Data.”
Passenger demand over the shareholders of LAN, and the enforceability of such agreements against it;
the absence of violations of, or conflicts with, its governing documents, applicable law and certain agreementspast years has been affected as a result of enteringweaker economic environments in some Latin America’s countries, reflected in slower GDP trends and depreciated currencies, and increases in competition from operators to South America and within the region.
During 2014, domestic operations in the Company’s Spanish speaking countries (SSC, which include Chile, Peru, Argentina, Colombia and Ecuador) continued to show moderate growth in terms of traffic and remained very profitable, in spite of the economic slowdown in some countries. Our SSC business grew at a slower pace than 2013, as we increased capacity by only 3.7% as compared to 2013. Nonetheless, the Company was able to stimulate passenger traffic as measured in RPKs by 6.2%, allowing for an improvement of 1.9 p.p. in load factors, reaching 80.5%. However, yields in the SSC domestic markets continue to be under pressure due to the depreciation of local currencies, mainly the Chilean and Argentinian peso which depreciated an average of 15.2% and 48.2% respectively, as compared to 2013. This resulted in a 5.2% decline in revenue per ASK as compared to 2013.
Since we achieved the turnaround in the domestic Brazil passenger operations, we have had a successful and profitable operation. However, the weaker economy in Brazil, the depreciation of the Brazilian real and the impact of the FIFA World Cup in the months of June and July of 2014 have negatively impacted our results. In this context, and in line with the current dynamics of domestic industry, TAM reduced capacity by 1.4% as measured in ASK during 2014. However, even with these circumstances, we were able to increase traffic by 1.1% as measured in RPK further improving our load factor by 2.0 p.p., reaching a high 83.0%. As a result, TAM ended the year with an increase of 2.2% in our revenues per ASK in Brazilian reais as compared to 2013.
The FIFA World Cup soccer tournament took place in Brazil in June and July of 2014 and resulted in a highly complex operation due to the large number of passengers who travelled to these cities on specific dates. Despite the increase in the number of passengers, LATAM’s operating margin during the World Cup period was adversely impacted by approximately between US$ 140 million and US$160 million, mainly due to decreases in traffic and yields as a result of reduced corporate travel, as well as a reduction in leisure demand during the winter holidays, which are usually a period of high seasonal demand. Nonetheless LATAM is very satisfied to have successfully provided a customer-focused operation during this globally high profile and visible event.
In our international operations, we have continued to rationalize passenger capacity in response to a challenging competitive environment and continued pressure on yields. In terms of increased competition, we have seen a significant increase in capacity to the region from airlines from different regions, specifically from North America. Additionally, we had a significant increase in intraregional competition during the year; some operators - formerly domestic operators - strengthened their regional flights; and other operators redirected their capacity from Venezuela to other markets within the region situation. Additionally, the depreciation of some local currencies, especially the Argentinean peso, has adversely affected our international demand. Furthermore Brazilian international passenger results were also affected in July by lower corporate travel to and from Brazil during the World Cup soccer tournament. During 2014, the international business unit decreased capacity by 2.4% while traffic as measured in RPK increased 1.2%, boosting load factors by 3.1 p.p., to 85.4%, resulting in a decrease of 3.2% in the revenue per ASK (RASK).
Overall, LATAM has focused on improving our product and connectivity with international passengers. We have implemented initiatives such as the beginning reconfiguration of the cabins of the TAM B777 fleet to include a fully flat business class, the increased use of B787 aircraft on long-haul routes, and advances in the construction of the main hub of the company at Guarulhos airport in Sao Paulo, where LATAM already moved all of its operations to the new Terminal 3, and where the Company was able to substantially improve its connection times to offer a much more attractive product for its passengers. Additionally, during November 2014, LATAM inaugurated a new VIP lounge at the airport, which is currently the largest in South America and which will also be important in helping the best experience of our passengers.
Cargo Operations
Our cargo operations depend on exports from and imports to South America and are, therefore, affected by economic conditions, foreign exchange rates, changes in international trade, the health of particular industries, competition and fuel prices (which we usually pass on to our customers through a cargo fuel surcharge). Cargo revenues are also affected by our capacity, traffic, load factors and yield. Our capacity is measured in terms of available ton kilometers, or ATKs, which represents the number of tons available for the transportation of cargo, multiplied by the kilometers flown. We measure traffic in revenue ton kilometers, or RTKs, as the amount of cargo loads (measured in tons) multiplied by the number of kilometers flown. Load factors represent RTKs (traffic) as a percentage of ATKs (capacity), or the percentage of our cargo capacity that is actually used to transport cargo for our customers. Finally, we use yield, or revenue from cargo operations divided by RTKs, to measure the average amount that our customers pay to transport one ton of cargo one kilometer. See “Item 3. Key Information—Selected Financial Data.”
We have designed our operations, route network and commercial strategies with the flexibility required to respond to changing conditions. In the cargo business, it is important to differentiate between what has been our business northbound - exports from the region to North America and Europe – and our business southbound - imports to the region.
Since 2012, the environment for the freighter business, and therefore for LATAM’s cargo business unit, has been complicated. The global freight markets have remained weak, and Latin America has not been an exception. In addition, freighter and passenger’s operators, have significantly increased cargo capacity in the region. These have put significant pressure on cargo yields.
During 2014, cargo traffic decreased 3.3%, reflecting a challenging scenario in Latin American cargo markets mainly due to a decline in demand on routes from the U.SA to Latin America, especially Brazil, which was affected by the FIFA World Cup, uncertainty surrounding presidential elections and lower economic growth. Additionally northbound demand was affected by a significant contraction of seed exports from Chile, partially offset by strong asparagus, flowers and fresh fruit export seasons.
As a result, the Company continues with a rational and disciplined approach toward freighter capacity utilization, while focused on maximizing the belly utilization of the Company’s passenger fleet. In this regard, in 2014 the Company sub-leased two of its 767-300Fs to another company operating in a different market for a period of three years. An additional 767-300F was also leased to this same operator starting in January 2015. Overall, capacity decreased by 5.6% in the year, resulting in a load factor of 59.8%, which represents an improvement of 1.4 percentage points as compared to 2013. Nonetheless, the 4.8% decline in the cargo yields led to a contraction of the revenues per ATK of 2.5%.
Cost Structure
LATAM Airlines Group’s costs are driven by the size of our operations, fuel prices, fleet costs and exchange rates. Our operating expenses are calculated in accordance with IFRS and comprise the sum of the line items “cost of sales” plus “distribution costs” plus “administrative expenses” plus “other operating expenses”, as shown on our consolidated statement of comprehensive income. These operating expenses include wages and benefits, fuel, depreciation and amortization, commissions to agents, aircraft rentals, other rental and landing fees, passenger services, aircraft maintenance, and other operating expenses. The following is a discussion of the drivers of the most important costs.
As an airline, we are subject to fluctuations in costs that are outside our control, particularly fuel prices. At the end of 2013, fuel prices were high principally because of the strong signals of growth in the U.S. At the beginning of 2014, fuel followed the same trend because of the Ukraine/Russia conflict and also because of strong signals of growth in the U.S. and Europe. In the second half of 2014, fuel prices tumbled 42% as OPEC elected not to curb output in response to a supply glut produced by increased production of shale oil in the U.S., and as a result of weak demand as China, Japan and Eurozone showed an economic slowdown and deflation. Although we have implemented a number of strategies to mitigate the impact of the volatility of fuel prices, such as fuel-hedging policies and the use of pass-through mechanisms, it is unlikely that we will be able to fully protect ourselves against the volatility of fuel costs. In addition, during periods in which fuel prices decrease, as during 2014, a fuel hedging program may prevent us from realizing the full benefit of the lower fuel prices. Moreover, another important driver that affects this item cost is the amount of gallons consumed during the year, resulting from the size of our operation, the efficiency of the fleet and efficiency programs.
Personnel expenses are another significant component of our overall costs. Because a significant portion of our labor costs is denominated in Chilean pesos and in Brazilian reais, appreciation of these currencies against the dollar as well as increases in local inflation rates can result in increased costs in dollar terms and can negatively affect our results. Depreciation of local currencies results in decreases in costs in dollars. Additionally, other important drivers are average headcount and average wages.
Commissions paid to travel and cargo agents are also a significant cost to the company. We compete with other airlines over the amount of commission we pay per sale, particularly in connection with special programs and marketing efforts, and to maintain competitive incentives with travel agents.
Fleet related expenses, namely aircraft rentals and depreciation, are another significant cost, and mainly depend on the number and type of aircraft that are owned and that are under operating leases. These costs are mainly fixed and can be reduced on a per unit basis by achieving higher daily aircraft utilization rates.
Results of Operation
LATAM Airlines Group Financial Results Discussion: Year ended December 31, 2014 compared to year ended December 31, 2013.
The following table sets forth certain income statement data for LATAM Airlines Group, for the year ended December 31, 2014, and December 31, 2013. For certain operating data during these periods, see “Item 3. Key Information—Selected Financial Data.”
Year Ended December 31, | ||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014/2013 % change | ||||||||||||||||
(in US$ millions, except per share and capital stock data) | As a percentage of total operating revenues | |||||||||||||||||||
Consolidated Results of Income by Function | ||||||||||||||||||||
Operating revenues | ||||||||||||||||||||
Passenger | 10,380.1 | 11,061.6 | 85.8 | % | 85.6 | % | (6.2 | %) | ||||||||||||
Cargo | 1,713.4 | 1,863.0 | 14.2 | % | 14.4 | % | (8.0 | %) | ||||||||||||
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Total operating revenues | 12,093.5 | 12,924.5 | 100.0 | % | 100.0 | % | (6.4 | %) | ||||||||||||
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Cost of sales | (9,624.5 | ) | (10,054.2 | ) | (79.6 | )% | (77.8 | )% | 4.3 | % | ||||||||||
Gross margin | 2,469.0 | 2,870.4 | 20.4 | % | 22.2 | % | (14.0 | )% | ||||||||||||
Other operating income | 377.6 | 341.6 | 3.1 | % | 2.6 | % | 10.5 | % | ||||||||||||
Distribution costs | (957.1 | ) | (1,025.9 | ) | (7.9 | )% | (7.9 | )% | (6.7 | %) | ||||||||||
Administrative expenses | (980.7 | ) | (1,136.1 | ) | (8.1 | )% | (8.8 | )% | (13.7 | %) | ||||||||||
Other operating expenses | (401.0 | ) | (408.7 | ) | (3.3 | )% | (3.2 | )% | (1.9 | )% | ||||||||||
Financial income | 90,5 | 72.8 | 0.7 | % | 0.6 | % | 24.3 | % | ||||||||||||
Financial costs | (430.0 | ) | (462.5 | ) | (3.6 | )% | (3.6 | )% | (7.0 | %) | ||||||||||
Share of profit of investments accounted for using the equity method | (6.5 | ) | 2.0 | (0.1 | )% | 0.0 | % | (430.3 | %) | |||||||||||
Foreign exchange gains/(losses) | (130.2 | ) | (482.2 | ) | (1.1 | )% | (3.7 | )% | (73.0 | %) | ||||||||||
Result of indexation units | 0.0 | 0.2 | 0.0 | % | 0.0 | % | (96.7 | %) | ||||||||||||
Other gains/(losses) | 33.5 | (55.4 | ) | 0.3 | % | (0.4 | )% | (160.5 | %) | |||||||||||
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Income (loss) before income taxes | 65.2 | (283.9 | ) | 0.5 | % | (2.2 | )% | (123.0 | )% | |||||||||||
Income (loss) tax expense | (292.4 | ) | 20.1 | (2.4 | )% | 0.2 | % | (1,557.0 | )% | |||||||||||
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Net income (loss) for the period | (227.2 | ) | (263.8 | ) | (1.9 | )% | (2.0 | )% | (13.9 | %) | ||||||||||
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Income (loss) for the period attributable to the parent company’s equity holders | (260.0 | ) | (281.1 | ) | (2.1 | )% | (2.2 | )% | (7.5 | )% | ||||||||||
Income (loss) for the period attributable to non-controlling interests | 32.8 | 17.3 | 0.3 | % | 0.1 | % | 90.1 | % | ||||||||||||
Net income (loss) for the period | (227.2 | ) | (263.8 | ) | (1.9 | )% | (2.0 | )% | (13.9 | %) | ||||||||||
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Earnings per share | ||||||||||||||||||||
Basic earnings per share (US$) | (0.47656 | ) | (0.57613 | ) | n.a. | n.a. | (70.4 | %) | ||||||||||||
Diluted earnings per share (US$) | (0.47656 | ) | (0.57613 | ) | n.a. | n.a. | (70.4 | %) |
* | The abbreviation “n.a.” means not available. |
Net Loss
Net loss for the year ended December 31, 2014 equaled US$ 227.2 million, representing a decrease of US$ 36.6 million from a net loss of US$263.8 million in 2013. Net loss attributable to the parents of the company decreased to US$ 260.0 million in 2014 from US$281.1 million in 2013. Results for the 2014 include a US$ 112 million provision recognized during the first quarter of the year mainly related to estimated penalties for anticipated redeliveries of aircraft and other redelivery expenses expected to be incurred as a part of the Company’s fleet restructuring process. In addition, the Company recognized an accounting charge of US$ 150.2 million due to modifications made to the Chilean Tax System, consisting of a gradual increase of the corporate income tax from 20% to 27% in 2018. The Company entirely recognized the effect of the 7p.p. increase in the corporate rate during 2014.For more information see “Business strategy – Fleet restructuring plan” and “Item 10.—Taxation and Note 17 our audited consolidated financial statements.
Results were also impacted by a foreign exchange loss of US$ 130.2 million mainly resulting from the 12.5% depreciation of the Brazilian real between December 31, 2013 and December 31, 2014, as compared to a foreign exchange loss of US$482.2 million in 2013.. On the other hand, in 2013 LATAM incurred US$56.0 million in non-recurring expenses related to the combination and integration costs, whereas no costs related to integration were incurred in 2014.
Operating Revenues
Our total operating revenues decreased by 6.4% to US$ 12,093.5 million in the year ended December 31, 2014 compared to revenues of US$ 12,924.5 million in 2013. The 2014 decrease in operating revenues was attributable to a 6.2% decrease in passenger revenues, and an 8.0% decrease in cargo revenues. Passenger and cargo revenues accounted for 85.8% and 14.2% of total operating revenues in 2014, respectively.
Our consolidated passenger revenues decreased by 6.2% to US$10,380.1 million in 2014 from US$11,061.6 million in 2013, as a result of a decrease of 1.1% in our capacity (ASK) and a decrease of 5.1% in our unit revenues (RASK). The decreases in capacity was a result of a 2.4% decrease in our international operations and a 1.4% decrease in our domestic Brazil operations, reflecting our rationalization strategy in these markets, partially offset by an increase of 3.7% in capacity in our domestic capacity in our Spanish speaking countriesDecreases in RASK reflect a decrease of 7.9% in consolidated yields, resulting from the slowdown in economic activity in the region and depreciation of local currencies, the challenging competitive environment in our international operations, and the impact of the World Cup on corporate demand and leisure traffic which took place in Brazil.
Cargo revenues decreased by 8.0%, to US$1,713.4 million in 2014 from US$1,863.0 million in 2013, as a result of a decrease of 5.6% in capacity (ATK) and a decrease of 2.5% in unit revenues (RATK). Capacity decreased in our cargo operations mainly as a result of the phase out of our fleet of a Boeing 767F aircraft during the first quarter of the year and lower freighter utilization. Decreases in RATK reflect the still challenging cargo scenario in South America and mainly the weakness of the imports into the region, which have affected our cargo yields, which decreased by 4.8% in 2014 as compared to 2013.
Cost of Sales
Cost of sales decreased by 4.3% to US$9,624.5 million in the year ended December 31, 2014 from US$10,054.2 million in 2013, mainly due to lower fuel expenses in the year. As a percentage of total operating revenues, cost of sales increased from 77.8% in 2013 to 79.6% in 2014.
The table below presents cost of sales information for the fiscal year ended December 31, 2014 and performing2013.
Year Ended December 31 | ||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014/2013 % change | ||||||||||||||||
(in US$ millions, except as otherwise stated) | As a percentage of total operating revenues | |||||||||||||||||||
Revenues | 12,093.5 | 12,924.5 | 100.0 | % | 100.0 | % | (6.4 | %) | ||||||||||||
Cost of sales | (9,624.5 | ) | (10,054.2 | ) | (79.6 | )% | (77.8 | )% | (4.3 | %) | ||||||||||
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Aircraft Fuel | (4,167.0 | ) | (4,414.2 | ) | (34.5 | )% | (34.2 | )% | (5.6 | %) | ||||||||||
Wages and Benefits | (1,751.3 | (1,884.1 | ) | (14.5 | )% | (14.6 | )% | (7.0 | %) | |||||||||||
Other Rental and Landing Fees | (1,327.2 | ) | (1,373.1 | ) | (11.0 | )% | (10.6 | )% | (3.3 | %) | ||||||||||
Depreciation and Amortization | (991.3 | ) | (1,041.7 | ) | (8.2 | )% | (8.1 | )% | (4.8 | %) | ||||||||||
Aircraft Rentals | (521.4 | ) | (441.1 | ) | (4.3 | )% | (3.4 | )% | 18.2 | % | ||||||||||
Aircraft Maintenance | (452.7 | ) | (477.1 | ) | (3.7 | )% | (3.7 | )% | (5.1 | %) | ||||||||||
Passenger Services | (300.3 | ) | (331.4 | ) | (2.5 | )% | (2.6 | )% | (9.4 | %) | ||||||||||
Other Costs of Sales | (113.3 | ) | (94.5 | ) | (0.9 | )% | (0.7 | )% | (19.9 | %) |
The decrease in cost of sales was driven by lower aircraft fuel expenses, which decreased by 5.6% to US$4,167.0 million in 2014 as a result of a 3.7% decrease in fuel consumption related to the Company’s capacity adjustments and more fuel efficient fleet and a 4.9% decrease in the full year average fuel price (excluding hedge losses). In addition, LATAM recognized a net loss of US$108.8 million in fuel hedging in 2014, compared to the fuel hedge gain of US$22.1 million in 2013. The Company also recognized a US$3.8 million hedge gain related to foreign currency contracts, which were recognized in the fuel cost line.
Depreciation and amortization decreased by US$50.4 million amounting to US$991.3 million, which represents a decrease of 4.8% despite the increase in modern owned aircraft mainly as a result of the phase out of leased aircraft with the consequent decrease in maintenance depreciation and the positive impact of the depreciation of the Brazilian real in the year as compared to 2013.
Other rental and landing fees decreased by 3.3% to US$1,327.2 million in 2014 from U$1,373.1 million in 2013, mainly resulting from lower aeronautical rates related to the depreciation of local currencies..
Aircraft maintenance expenses decreased by 5.1%, from US$477.1 million in 2013 to US$452.7 million in 2014, mainly as a result of fleet renewal initiatives and reduced operations, which was partially offset with higher costs related to aircraft redeliveries as part of our fleet restructuring program.
Aircraft rentals increased by 18.2% to US$521.4 million in 2014 from US$441.1 million in 2013 despite fewer leased aircraft, as a result of the incorporation of larger and more modern aircraft under operating leases (i.e. Boeing 787s), whereas returned aircraft have mainly been older and smaller models (i.e. Airbus A319, Boeing 737, Dash8 Q400 aircraft).
Passenger service expenses decreased by 9.4%, to US$300.3 million in 2014 compared to US$331.4 million in 2013, despite the increase of 1.7% in passengers transported, mainly due to a decrease in certain variable costs per passenger resulting from better negotiations and/or certain new suppliers, a decrease in passenger compensations and the positive effect of the depreciation of the Brazilian real in suppliers.
As a result of the above, gross margin decreased by 14.0% from US$2,870.4 million in 2013 to US$2,469.0 million in 2014.
Other Consolidated Results
Other operating income increased in 2014 by 10.5%, from US$341.6 million in 2013 to US$377.6 million, mainly due to an increase of US$93.7 million in revenue from Multiplus’ breakage and non-air redemptions during the year.
Distribution costs decreased by 6.6% from US$1,025.9 million in 2013 to US$957.1 million in 2014, mainly as a result of lower commissions to agents which decreased by 10.6% from US$408.7 million to US$365.5 million, driven by reduced passenger commissions at LAN and TAM related to lower revenues, lower sales fulfillments in some countries and depreciation of local currencies..
Administrative expenses decreased by 13.7% from US$1,136.1 million in 2013 to US$980.7 million in 2014, mainly due to a decrease of 5.7% in wages and benefits mainly resulting from the positive impact of the depreciation of the Brazilian real, Chilean peso and Argentinian peso in wages denominated in those currencies.
Other operating expenses decreased by 1.9% from US$408.7 million in 2013 to US$401.0 million in 2014, mainly due to a change in the classification of certain taxes in Brazil.
Financial income increased to US$90.5 million in the year ended December 31, 2014 from US$72.8 million in 2013, mainly due to an increase in our cash held in currencies different from the US dollar which have higher interest rates during the period.
Financial costs (from non-financial activities) decreased by 7.0% to US$430.0 million in 2014 from US$462.5 million in 2013 mainly due to lower debt levels, which was partially offset by a higher average interest rate resulting in part from the securitized bond issued in November 2013. In addition, during the first quarter of the year, we recognized US$23 million in breakage costs related to the sale and leaseback of 4 of our Boeing 777 aircraft.
Exchange rate differences decreased from a loss of US$482.2 million in 2013 to a loss of US$130.2 million in 2014, mainly resulting from the reductions on TAM’s balance sheet exposure between assets denominated in Brazilian reais and liabilities denominated in US dollars, which decreased from US$2.0 billion as of December 2013 to less than US$1.0 billion as of December 2014. Under other gains (losses), the Company recorded a net gain of US$33.5 million in 2014 as compared to a net loss of US$55.4 million in 2013 as a result of mainly due to the prescription and other reversals of tax contingencies at TAM which were recognized at the time of the business combination.
Income tax expense for 2014 amounted to US$292.4 million as compared to an income tax credit of US$20.1 million in 2013. This variation includes the recognition of an accounting charge of US$150.2 million in 2014 due to modifications made to the Chilean Tax System, consisting in a gradual increase of the corporate income tax from 20% to 27% in 2018. For more information, see “—Critical Accounting Policies—Deferred Taxes” below and Note 17 to our audited consolidated financial statements.
LATAM Airlines Group Financial Results Discussion: Year ended December 31, 2013 compared to year ended December 31, 2012
The following table sets forth certain income statement data for LATAM Airlines Group, for the year ended December 31, 2013, and for LATAM Airlines Group, for the year ended December 31, 2012 (including TAM’s results from June 23, 2012). For certain operating data during these periods, see “Item 3. Key Information—Selected Financial Data.”
Year Ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2013/2012 % change | ||||||||||||||||
(in US$ millions, except per share and capital stock data) | As a percentage of total operating revenues | |||||||||||||||||||
Consolidated Results of Income by Function | ||||||||||||||||||||
Operating revenues | ||||||||||||||||||||
Passenger | 11,061.6 | 7,966.8 | 85.6 | % | 82.0 | % | 38.8 | % | ||||||||||||
Cargo | 1,863.0 | 1,743.5 | 14.4 | % | 18.0 | % | 6.9 | % | ||||||||||||
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Total operating revenues | 12,924.5 | 9,710.4 | 100.0 | % | 100.0 | % | 33.1 | % | ||||||||||||
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Cost of sales | (10,054.2 | ) | (7,634.5 | ) | (77.8 | )% | (78.6 | )% | 31.7 | % | ||||||||||
Gross margin | 2,870.4 | 2,075.9 | 22.2 | % | 21.4 | % | 38.3 | % | ||||||||||||
Other operating income | 341.6 | 220.2 | 2.6 | % | 2.3 | % | 55.1 | % | ||||||||||||
Distribution costs | (1,025.9 | ) | (803.6 | ) | (7.9 | )% | (8.3 | )% | 27.7 | % | ||||||||||
Administrative expenses | (1,136.1 | ) | (888.7 | ) | (8.8 | )% | (9.2 | )% | 27.8 | % | ||||||||||
Other operating expenses | (408.7 | ) | (311.8 | ) | (3.2 | )% | (3.2 | )% | 31.1 | % | ||||||||||
Financial income | 72.8 | 77.5 | 0.6 | % | 0.8 | % | (6.1 | )% | ||||||||||||
Financial costs (from non-financial activities) | (462.5 | ) | (294.6 | ) | (3.6 | )% | (3.0 | )% | 57.0 | % | ||||||||||
Earning on investments (equity method) | 2.0 | 1.0 | 0.0 | % | 0.0 | % | 100.0 | % | ||||||||||||
Exchange rate differences | (482.2 | ) | 66.7 | (3.7 | )% | 0.7 | % | (822.9 | )% | |||||||||||
Result of indexation units | 0.2 | 0.0 | 0.0 | % | 0.0 | % | 100.0 | % | ||||||||||||
Other gains/(losses) | (55.4 | ) | (45.8 | ) | (0.4 | )% | (0.5 | )% | 21.0 | % | ||||||||||
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Income (loss) before income taxes | (283.9 | ) | 96.7 | (2.2 | )% | 1.0 | % | (393.6 | )% | |||||||||||
Income (loss) tax expense / benefit | 20.1 | (102.4 | ) | 0.2 | % | (1.1 | )% | (119.6 | )% | |||||||||||
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Net income (loss) for the period | (263.8 | ) | (5.6 | ) | (2.0 | )% | (0.1 | )% | 4,610.7 | % | ||||||||||
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Income (loss) for the period attributable to the parent company’s equity holders | (281.1 | ) | (19.1 | ) | (2.2 | )% | (0.2 | )% | (1,372.3 | )% | ||||||||||
Income (loss) for the period attributable to non-controlling interests | 17.3 | 13.4 | 0.1 | % | 0.1 | % | 29.1 | % | ||||||||||||
Net (loss) income for the year | (263.8 | ) | (5.6 | ) | (2.0 | )% | (0.1 | )% | 4,610.7 | % | ||||||||||
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Earnings per share | ||||||||||||||||||||
Basic earnings per share (US$) | (0.57613 | ) | (0.04627 | ) | n.a. | n.a. | (1,145.1 | )% | ||||||||||||
Diluted earnings per share (US$) | (0.57613 | ) | (0.04627 | ) | n.a. | n.a. | (1,145.1 | )% |
* | The abbreviation “n.a.” means not available. |
Net Loss
Net loss for the year ended December 31, 2013 equaled US$ 263.8 million, representing an increase of US$ 258.2 million from a net loss of US$5.6 million in 2012. Net loss attributable to the parents of the company rose to US$ 281.1 million in 2013 from US$19.1 million in 2012. Results for the 2013 year were negatively impacted by a foreign exchange loss of US$ 482.2 million mainly resulting from the depreciation of the Brazilian real in the year. On the other hand, in 2012 and 2013, LATAM incurred US$47.0 and US$7.3 million, respectively, of non-recurring expenses related to the combination and integration costs, and an accounting charge of US$70 million related to the increase in the Chilean corporate tax rate from 17% to 20% during 2012.
Operating Revenues
Operating revenues increased by 33.1% to US$12,924.5 million for the year ended December 31, 2013 from US$9,710.4 million in 2012. Our consolidated passenger revenues increased by 38.8% to US$11,061.6 million in 2013 from US$7,966.8 million in 2012, primarily as a result of the consolidation of TAM’s revenue for 2012 since June 23.
Cargo revenues increased by 6.9%, to US$1,863.0 million in 2013 from US$1,743.5 million in 2012, also as a result of the consolidation of TAM’s cargo revenues for full year 2013. The slight increase in cargo revenues in spite of TAM’s cargo integration is a result of a weak global cargo scenario which has impacted both cargo traffic and yields.
Cost of Sales
Cost of sales increased by 31.7% to US$10,054.2 million in the year ended December 31, 2013 from US$7,634.5 million in 2012, mainly as a result of increased operations due to the complete consolidation of TAM’s costs for year 2013. As a percentage of total operating revenues, cost of sales decreased from 78.6% in 2012 to 77.8% in 2013.
The table below presents cost of sales information for the fiscal year ended December 31, 2013 and 2012.
Year Ended December 31 | ||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2013/2012 % change | ||||||||||||||||
(in US$ millions, except as otherwise stated) | As a percentage of total operating revenues | |||||||||||||||||||
Revenues | 12,924.5 | 9,710.4 | 100.0 | % | 100.0 | % | 33.1 | % | ||||||||||||
Cost of sales | (10,054.2 | ) | (7,634.5 | ) | (77.8 | )% | (78.6 | )% | 31.7 | % | ||||||||||
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Aircraft Fuel | (4,414.2 | ) | (3,434.6 | ) | (34.2 | )% | (35.4 | )% | 28.5 | % | ||||||||||
Wages and Benefits | (1,884.1 | ) | (1,431.2 | ) | (14.6 | )% | (14.7 | )% | 31.6 | % | ||||||||||
Other Rental and Landing Fees | (1,373.1 | ) | (1,052.6 | ) | (10.6 | )% | (10.8 | )% | 30.4 | % | ||||||||||
Depreciation and Amortization | (1,041.7 | ) | (771.1 | ) | (8.1 | )% | (7.9 | )% | 35.1 | % | ||||||||||
Aircraft Rentals | (441.1 | ) | (308.8 | ) | (3.4 | )% | (3.2 | )% | 42.8 | % | ||||||||||
Aircraft Maintenance | (477.1 | ) | (297.6 | ) | (3.7 | )% | (3.1 | )% | 60.3 | % | ||||||||||
Passenger Services | (331.4 | ) | (239.8 | ) | (2.6 | )% | (2.5 | )% | 38.2 | % | ||||||||||
Other Costs of Sales | (94.5 | ) | (98.8 | ) | (0.7 | )% | (1.0 | )% | (4.3 | )% |
The increase in cost of sales was driven by higher aircraft fuel expenses, which increased by 28.5% to US$4,414.2 million in 2013 as a result of higher fuel consumption related to the incorporation of TAM’s operations from June 23, 2012, which was partially offset by lower average fuel prices and efficiency initiatives. In addition, LATAM recognized a net gain of US$22.1 million in fuel hedging in 2013, compared to the fuel hedge gain of US$2.8 million in 2012.
Depreciation and amortization increased by US$270.6 million amounting to US$1,041.7 million, which represents an increase of 35.1% mainly due to the incorporation of all of TAM’s fleet (including new TAM fleet deliveries in 2012) starting June 23, 2012.
Other rental and landing fees increased by 30.4% to US$1,373.1 million in 2013 from U$1,052.6 million in 2012, resulting from higher fees related to a larger operation with the consolidation of TAM’s fees for full year 2013.
Aircraft maintenance expenses increased by 60.3%, from US$297.6 million in 2012 to US$477.1 million in 2013, as a result of higher costs related to a larger fleet and higher maintenance costs related to redeliveries of aircraft.
Aircraft rentals increased by 42.8% to US$441.1 million in 2013 from US$308.8 million in 2012, primarily due to the complete consolidation of TAM’s fleet for full year 2013 and the net increase of aircraft under operating leases during the year.
Passenger service expenses increased by 38.2%, to US$331.4 million in 2013 compared to US$239.8 million in 2012, mainly resulting from the increase in passengers transported after the combination of LAN and TAM.
As a result of the above, gross margin increased by 38.2% from US$2,075.9 million in 2012 to US$2,870.4 million in 2013.
Other Consolidated Results
Other operating income increased in 2013 by US$121.4 million, from US$220.2 million to US$341.6 million, due to the incorporation of TAM’s other revenues since June 22, 2012; including a US$28.7 million revenue from Multiplus’ breakage and non-air redemptions, and an income for recognizing US$11.9 million and US$ 8.2 million generated as a result of the sale and lease-back of ten Airbus A330 aircraft, and two Airbus A318 aircraft and an engine, respectively, during the second quarter of the year.
Distribution costs increased by 27.7% from US$803.6 million in 2012 to US$1,025.9 million in 2013, as a result of the consolidation of TAM’s results only starting in June 23, 2012.
Administrative expenses increased by 27.8% from US$888.7 million in 2012 to US$1,136.1 million in 2013, mainly due to an increase of 30.6% in wages and benefits resulting from the higher number of employees following the combination of LAN and TAM in 2012.
Other operating expenses increased by 31.1% from US$311.8 million in 2012 to US$408.7 million in 2013, as a result of higher sales costs, advertising and marketing expenses and costs related to tours and travel services, related to the integration of TAM’s operations from June 23, 2012.
Financial income decreased to US$72.8 million in the year ended December 31, 2013 from US$77.5 million in 2012, due to a lower average cash balance and interest rates during the period.
Financial costs (from non-financial activities) increased by 57.0% to US$462.5 million in 2013 from US$292.6 million in 2012 due to higher average long-term debt related to fleet financing mainly related to the consolidation of TAM’s fleet.
Exchange rate differences decreased from a gain of US$66.7 million in 2012 to a loss of US$482.2 million in 2013, mainly resulting from the depreciation of the Brazilian real in the period.
Under other gains (losses), the Company recorded a net loss of US$55.4 million in 2013 as compared to a net loss of US$45.8 million in 2012.
Income tax credit for 2013 amounted to US$ 20.1 million as compared to an income tax expense of US$102.4 million in 2012. For more information, see “—Critical Accounting Policies—Deferred Taxes” below and Note 17 to our audited consolidated financial statements.
Accounting impact of the business combination
The combination between LAN and TAM has been accounted for using the purchase method of accounting, with LAN treated as the acquirer of TAM.
Consideration paid was calculated, in accordance with IFRS 3, as the sum of the fair value of the LAN shares provided and the Squeeze-Out of the remaining TAM shareholders. Following this criteria, the total consideration paid as of June 22, 2012 was US$ 3,782.2 million.
As a result of the consolidation, certain TAM assets and liabilities which were accounted for at historical values were incorporated into the consolidated balance sheet at their fair value, as required by applicable accounting principles. Applicable accountings standards permit a one year measurement period, requiring fair value adjustments completed during that period to be adjusted against previously reported goodwill. As of June 30, 2013, the purchase price allocation has been completed. Previously reported goodwill has been adjusted to reflect fair value changes in this one year period. Goodwill as of June 30, 2013 amounts to US$ 3,890.2 million.
The main adjustments to the balance sheet accounts of TAM as a result of the consolidation with LATAM Airlines Group were related to the fair values of the following: (i) airport slots (Congonhas, JFK and Heathrow airports); (ii) the Multiplus loyalty program; (iii) fleet; and (iv) other provisions, including legal proceedings with a probability of loss below 50%, which are not accounted for under the transaction agreementsnormal course of business but must be accounted for under a business combination, according to applicable accounting standards (IFRS 3).
U.S. Dollar Presentation and the shareholders agreements;Price-Level Adjustments
General
Foreign currency transactions
(a) | Presentation and functional currencies |
the required governmental consents, approvals, notices and filings;
its SEC filings since December 31, 2006 andThe items included in the financial statements included therein;of LATAM are valued using the currency of the main economic environment in which the entity operates (the “functional currency”). The functional currency of LATAM is the U.S. dollar, which is also the currency of presentation of the audited consolidated financial statements of LATAM and its subsidiaries.
(b) | Transactions and balances |
complianceForeign currency transactions are translated to the functional currency using the exchange rates on the transaction dates. Foreign currency gains and losses resulting from the liquidation of these transactions and from the translation, at the closing exchange rates, of the monetary assets and liabilities denominated in foreign currency, are shown in the consolidated statement of income.
(c) | Group entities |
The results and financial position of all the LATAM entities (none of which utilizes the currency of a hyper-inflationary economy) that have a functional currency other than the currency of presentation are translated to the currency of presentation as follows:
(i) | Assets and liabilities of each consolidated statement of financial position are translated at the closing exchange rate on the date of the consolidated statement of financial position; |
(ii) | The revenues and expenses of each results account are translated at monthly average rates; and |
(iii) | All the resultant exchange differences are shown as a separate component in net equity. |
For consolidation purposes, exchange differences arising from the translation of a net investment in foreign entities (or in local entities with a functional currency different to that of the Sarbanes-Oxley Actparent), and of 2002loans and other foreign currency instruments designated as hedges for such investments, are recorded within net equity. When the investment is sold, these exchange differences are shown in the consolidated statement of income as part of the loss or gain on the sale.
Adjustments to the goodwill and fair value arising from the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated at the period-end exchange rate.
Effects of Exchange Rate Fluctuations
Our functional currency is the U.S. dollar in terms of the pricing of our products, composition of our balance sheet and effects on our results of operations. Most of our revenues (58% expected for 2015) are in U.S. dollars or in prices pegged to the U.S. dollar and a substantial portion of our expenses (65% expected for 2015) is denominated in dollars or pegged to the U.S. dollar, particularly fuel costs, landing and over flight fees, aircraft rentals, insurance and aircraft components and supplies.
A substantial majority of our liabilities are denominated in U.S. dollars (74% as of December 31, 2014), including bank loans, certain air traffic liabilities, and certain amounts payable to our suppliers. As of December 31, 2014, 54 % of our assets were denominated in U.S. dollars, principally aircraft, cash and cash equivalents, accounts receivable and other fixed assets. Substantially all of our commitments, including operating lease and purchase commitments for aircraft, are denominated in U.S. dollars.
On the other hand, balance sheet imbalance denominated in currencies other than the functional currency of the specific entity creates a foreign exchange rate exposure that impacts the foreign exchange losses and gains due to exchange rate fluctuations. We recorded net foreign exchange losses of US$482.2 million in 2013 and US$130.2 million in 2014, which are set forth in our consolidated statement of income under “Foreign Exchange gains/(losses)”. For more information, see Notes 2.3 and 28 to our audited consolidated financial statements.
IFRS/Non-IFRS Reconciliation
We use “Cost per ASK-equivalent” and “Cost per ASK-equivalent excluding fuel price variations” in analyzing operating expenses on a per unit basis. “ASKs” (available seat kilometers) measures the number of seats of capacity available for the transportation of passengers multiplied by the kilometers flown. “ASK-equivalent” includes capacity for both passenger and cargo equivalent tons multiplied by the kilometers flown. The figure is obtained by adding passenger ASKs and the listingquotient of cargo ATKs (available ton kilometers) divided by 0.095. To obtain our unit costs, which are used by our management in the analysis of our results, we divide our “total costs” by our total ASK-equivalents. “Total costs” are calculated by starting with operating expenses as defined under IFRS and corporate governance rulesmaking certain adjustments for interest costs and regulationsother revenues. The cost component is further adjusted to obtain “costs per ASK-equivalents excluding fuel price variations,” in order to remove the impact of changes in fuel prices for the NYSE;
its disclosure controlsyear. “Cost per ASK-equivalent” and procedures“Cost per ASK-equivalent excluding fuel price variations” do not have a standardized meaning, and internal controls over financial reporting;
the absenceas such may not be comparable to similarly titled measures provided by other companies. These metrics should not be considered in isolation or as a substitute for operating expenses or as indicators of performance or cash flows or as a LAN material adverse effectmeasure of liquidity.
The table below reconciles our operating expenses (as defined below)by IFRS) for 2014, 2013 and 2012 to costs used in the absencecalculation of certain other changes or events since December 31, 2009 through the signing date;
the conduct of business“Cost per ASK-equivalent” and “Cost per ASK-equivalent excluding fuel price variations” for such periods. Figures for 2012 correspond to LATAM’s consolidated audited financial statements prepared in accordance with IFRS for the ordinary courseyear ended December 31, 2012, including TAM’s consolidated costs from June 23, 2012 and TAM’s third and fourth quarter operating statistics.
2014 | 2013 | 2012 | ||||||||||
Cost per ASK-equivalent | ||||||||||||
Operating expenses (US$ thousands) | 11,957,780 | 12,622,197 | 9,625,466 | |||||||||
+ Interest expense (US$ thousands) | 430,034 | 462,524 | 294,598 | |||||||||
– Interest income (US$ thousands) | 90,500 | 72,828 | 77,489 | |||||||||
– Other operating income (US$ thousands) | 377,645 | 341,565 | 220,156 | |||||||||
ASK-equivalent operating expenses | 11,919,669 | 12,670,328 | 9,622,419 | |||||||||
Divided by system’s ASK-equivalents (thousands) | 206,197.91 | 212,236.83 | 161,209.26 | |||||||||
= Cost per ASK equivalent (US$ cents) | 5.78 | 5.97 | 5.97 | |||||||||
Cost per ASK-equivalent excluding fuel price variations | ||||||||||||
ASK-equivalent operating expenses (thousands) | 11,919,669 | 12,670,328 | 9,6222,419 | |||||||||
– Actual fuel expenses (US$ thousands) | 4,170,848 | 4,414,249 | 3,434,569 | |||||||||
+ (Gallons consumed) times (previous year’s fuel price) | 4,251,036 | 4,675,532 | 2,952,257 | |||||||||
ASK-equivalent operating expenses excluding fuel price variations | 11,999,857 | 12,931,611 | 9,140,107 | |||||||||
Divided by system’s ASK-equivalents (thousands) | 206,197.91 | 212,236.83 | 161,209.26 | |||||||||
= Cost per ASK-equivalent excluding fuel price variations (US$ cents) | 5.82 | 6.09 | 5.67 |
In addition, LATAM continues to use revenues per ASK or ATK, as applicable, in analyzing revenues on a per unit basis, which is consistent with past practice sincehow LAN analyzed its revenues before the combination. To obtain unit revenues, we divide our passenger revenues by our total ASKs and our cargo revenues by our total ATKs. We use our revenues as defined under IFRS for purposes of the calculation of this metric. Revenues per ASK or ATK, as the case may be, do not have a standardized meaning, and as such may not
be comparable to similarly titled measures provided by other companies. This metric is not an IFRS based measure of performance or liquidity. It should not be considered in isolation or as a substitute for revenues or as indicators of performance or cash flows as a measure of liquidity.
The table below shows the calculation of our revenues per ASK or ATK, as applicable, in each of the periods indicated. Figures for 2012 correspond to LATAM’s consolidated audited financial statements prepared in accordance with IFRS for the year ended December 31, 2009 through the signing date;2012, including TAM’s consolidated revenues from June 23, 2012.
2014 | 2013 | 2012 | ||||||||||
Passenger Revenues (US$ million) | 10,380.12 | 11,061.56 | 7,966.85 | |||||||||
ASK (million) | 130,200.94 | 131,690.60 | 93,318.15 | |||||||||
Passenger Revenues/ASK (US$ cents) | 7.97 | 8.40 | 8.54 | |||||||||
Cargo Revenues (US$ million) | 1,713.38 | 1,862.98 | 1,743.53 | |||||||||
ATK (million) | 7,219.71 | 7,651.88 | 6,449.50 | |||||||||
Cargo Revenues/ATK (US$ cents) | 23.73 | 24.35 | 27.03 |
the absence of legal proceedings, investigationsSeasonality
Our operating revenues are substantially dependent on overall passenger and governmental orders against it or its subsidiaries;
the absence of certain undisclosed liabilities;
employee benefit plans;
certain employment and labor matters;
compliance with applicable laws and regulations, governmental orders and all applicable operating certificates, air carrier obligations, airworthiness directives, aviation regulationscargo traffic volume, which is subject to seasonal and other rules and regulations, any airline regulator applicable to it, its similar rights or other assets or its businesses or operations;
aircraft owned, leased and/or operated by LAN and its subsidiaries;
takeoff and landing slots, authorizations and similar rights of LAN and its subsidiaries;
environmental matters;
tax matters;
intellectual property;
the receipt of a fairness opinion from J.P. Morgan Securities LLC;
transaction with affiliates;
information provided for inclusionchanges in traffic patterns. Our passenger revenues are generally higher in the US offering documentsfirst and fourth quarters of each year, during the southern hemisphere’s spring and summer. In the Brazilian offering documents;
passenger air transportation market, there is always a higher demand for air transportation services in the absencesecond half of any undisclosed broker’s or finder’s fees;the year, leaving the second quarter as the weakest one for the Company. However, the seasonality is partially mitigated by the fact of LATAM having higher than market average concentration of business travel (which is less sensitive to seasonality). Additionally, the expansion of the Company in other countries with different seasonal patterns has also moderated the overall seasonality of the passenger business.
Critical Accounting Policies
The preparation of our consolidated financial statements in accordance with IFRS requires our management to adopt accounting policies and
material contracts make estimates and judgments to develop amounts reported in our consolidated financial statements and related notes. We strive to maintain a process to review the absenceapplication of any defaultour accounting policies and to evaluate the appropriateness of the estimates that are required to prepare our consolidated financial statements. We believe that the consistent application of these policies enables us and our subsidiaries to provide readers of the financial statements with more useful and reliable information about our operating results and financial condition.
Critical accounting policies and estimates are those that are reflective of significant judgments and uncertainties, and potentially result in materially different outcomes under any material contract.
Many of LAN’s representationsdifferent assumptions and warrantiesconditions. For a discussion on these and other accounting policies, see Note 2 to our consolidated financial statements. The following are qualified by, among other things, exceptions relatingthe accounting policies that we believe are the most important to the absenceportrayal of a “LAN material adverse effect,” which means any change, effect, occurrence or circumstance which, individually or in the aggregate, (i) has had, or would reasonably be expected to have, a material adverse effect on the business,our financial condition and results of operations and require our most difficult, subjective or complex judgments.
Accounting estimates and judgments
The Company has used estimates to value and book some of the assets, or liabilities, revenues, expenses and commitments; these basically refer to:
These estimates are made on the basis of the best information available on the matters analyzed.
In any changes aftercase, it is possible that events will require them to be modified in the signing date in general economic or financial market conditions, (B) any changes after the signing date generally affecting the industriesfuture, in which LANcase the effects would be accounted for prospectively.
The management has applied judgment in determining that LATAM Airlines Group S.A. has control over TAM S.A. and its subsidiaries operate, (C) changes afterSubsidiaries for accounting purposes and therefore has consolidated their financial statements. This judgment is made on the signing datebasis that LATAM issued their ordinary shares in IFRS or the interpretation thereof, (D) geopolitical conditions, the outbreak of a pandemic or other widespread health crisis, the outbreak or escalation of hostilities, any acts of war, sabotage or terrorism, or any escalation or worsening of any such acts of war, sabotage or terrorism threatened or underway asexchange for all of the signing date or (E) any hurricane, tornado, flood, earthquake, volcanic eruption or natural disaster; provided, however,outstanding common and preferred shares of TAM, except those shareholders of TAM who did not accept exchange and which were subject of the squeeze-out entitling LATAM to substantially all of the economic benefits that will be generated by the LATAM Group and also, consequently, exposing it to substantially all the risks incidental to the operations of TAM. This exchange aligns the economic interests of LATAM and all of its shareholders, including the TAM controlling shareholders, ensuring that the foregoing clauses (A), (B), (D)shareholders and (E) shall not applydirectors of TAM will have no incentive to exercise their rights in a manner that is beneficial to TAM but detrimental to LATAM. Further, all significant actions required for the extent that any such change, effect, occurrence or circumstance disproportionately impacts LAN and/or its subsidiaries compared to other participants inoperation of the industries in which LAN and its subsidiaries participate, or (y) any failure, in andairlines require the affirmative vote of itself, of LAN to meet any internal or analyst projections, forecasts or estimates of revenue or earnings or any decrease in the market price or trading volume of LAN common shares (but the exception in this clause (y) will not apply to the underlying causes of any such failure or decrease or prevent any of such underlying causes from being taken into account in determining whether a LAN material adverse effect has occurred); or (ii) impairs or would reasonably be expected to impair in any material respect the ability of LAN to complete the transactions contemplated by the transaction agreements or to perform its obligations under those agreements on a timely basis.
Controlling Shareholder Representations and Warranties
The LAN controlling shareholders, the TEPboth LATAM and the TAM controlling shareholders made customary representationsshareholders.
Since the integration of LAN and warrantiesTAM operations, most critical airline activities in Brazil have been managed under the TAM CEO and global activities have been managed by the LATAM CEO, who is in charge of the overall operation of the LATAM Group and who reports to the other parties pursuant toLATAM board. Further, the exchange offer agreement. These representations and warranties relate to, among other things:
due organization, existence, good standing and authority to carry on their businesses, as applicable;
ownership and absence of encumbrances on their direct or indirect ownership of equity interests of TAM or LAN, as applicable;
its corporate power and authority to enter into, and completeLATAM CEO evaluates the transactions under, the transaction agreements and shareholders agreements to which they are a party, and the enforceability of such agreements against them, in the caseperformance of the TAM controlling shareholderLATAM Group executives and, together with the LAN controlling shareholders only;
LATAM board, determines compensation. Although there are restrictions on voting interests that currently may be held by foreign investors under Brazilian law, LATAM believes that the absenceeconomic substance of violationsthese arrangements satisfies the requirements established by the applicable accounting standards and that consolidation by LATAM of or conflicts with, its governing documents, applicable law and certain agreements as a result of it entering into and performing under such agreements;TAM’s operations is appropriate.
Revenue Recognition
Revenues include the required governmental consents, approvals, notices and filings;
the absence of legal proceedings and investigations against it; and
the absence of successor liability resulting from the TEP Chile subscription.
Conduct of Business Pending the Combination
Under the implementation agreement, both we and TAM have agreed that, subject to certain exceptions set forth in the implementation agreement or as required by applicable law, unless the other party gives its prior written approval between the signing date and the effective time, each of us and our subsidiaries and each of TAM and its subsidiaries will use our commercially reasonable efforts to preserve our business organizations intact and all licenses necessary for us and our respective subsidiaries to own, lease or operate our respective properties, rights and other assets and to carry on our respective business and operations conducted at the signing date and maintain, and keep available the services of our respective current officers, employees and consultants and existing relationships and goodwill with our respective customers, suppliers, employees, strategic partners and other persons with whom we conduct business.
Subject to certain exceptions set forth in the implementation agreement or as required by law, neither we nor TAM will, or will permit our subsidiaries to, take anyfair value of the following actions without the other’s written approval:
make, declare or pay any dividend, or make any other distribution, on or in respect of any of its equity securities, other than (A) dividends or distributions paid or made to such party by its wholly owned subsidiaryproceeds received or to another wholly owned subsidiarybe received on sales of such partygoods and (B) regular dividends paid to such party’s shareholders in accordance with the dividend policy approved at the last regular meeting of its shareholders in an amount not to exceed 50% (in the case of LAN) and 25% (in the case of TAM) of such party’s net income for the year in respect of which the dividends are paid;
adjust, split, combine, subdivide or reclassify any of its equity securities or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for its equity securities;
purchase, redeem or otherwise acquire any equity securities or convertible securities of such party or any of its subsidiaries or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities, subject to customary exceptions;
issue, deliver, sell, grant, pledge or otherwise encumber or subject to any lien any equity securities or convertible securities of such party or any of its subsidiaries, or any “phantom” stock, “phantom” stock rights, stock option, stock purchase or appreciation rights or stock-based performance units relating to or permitting the purchase of any such equity securities or convertible securities, subject to customary exceptions;
except as otherwise expressly contemplated in the implementation agreement, amend the by-laws of it or its subsidiaries in any way that is or would reasonably be expected to be materially adverse to such party and its subsidiaries, taken as a whole;
other thanrendering services in the ordinary course of business consistentthe Company’s business. Revenues are shown net of refunds, rebates and discounts.
(a) Rendering of services
a.1 | Passenger and cargo transport |
We recognize passenger and cargo revenues either when the transportation service is provided or when we determine that the tickets will not be used or refunded, which, in the case of passenger revenues, reduces the air traffic liability. We estimate revenue breakage based on historical breakage experience that takes into account the aging of tickets that will not be used or refunded. Commissions payable related to such unearned earnings are shown net of the air traffic liability. Other revenues, including aircraft leases, courier, logistic and ground services, duty free sales, and storage and customs brokering, are recognized when services are provided.
The amount of passenger ticket sales not yet recognized as revenue is reflected as an air traffic liability. Air traffic liability includes estimates of the amount of future refunds and exchanges, net of forfeitures for all unused tickets once the flight date has passed. We perform periodic evaluations of this estimated liability based on actual results. Any adjustments, which can be significant, are included in the results of operations for the periods in which the evaluations are completed. These adjustments relate primarily to the differences between our estimation of certain revenue transactions and the related sales price, as well as refunds, exchanges and other items for which final settlement occurs in periods subsequent to the sale of the related tickets at amounts other than the original sales price.
Actual events and circumstances may differ from historical fare sale activity and customer travel patterns and can result in refunds, exchanges or forfeited tickets differing significantly from estimates. We evaluate our estimates periodically. If actual refunds, exchanges or forfeitures fall outside of our estimated ranges, we review our estimates and assumptions and adjust air traffic liability and passenger revenues as necessary. As with past practice, directlyany estimates, actual results may vary from estimated amounts.
a.2 Frequent flyer program
The Company has a frequent flyer program for LATAM passengers called LANPASS and a frequent flyer program for TAM passengers called TAM Fidelidade. Customers can also earn points through Multiplus, a subsidiary of TAM, which permits the accrual of points for many products and services (not just airline flights) and has more than 200 partner establishments, including the TAM Fidelidade program, as of December 31, 2014.
Both frequent flyer programs’ objective is customer loyalty through the delivery of LANPASS kilometers or indirectly make,Multiplus points every time that members of the program fly with the Company or agree to directly or indirectly make, any acquisition or investmentits alliance partners, use the services of entities registered with the program or make any capital expenditures,purchases with an associated credit card. The kilometers/points earned can be exchanged for flight tickets or other than (i) capital expenditures disclosedservices of associated entities.
The consolidated financial statements include LANPASS liabilities for this concept (deferred income), according to the estimate of the valuation established for the kilometers accumulated pending use at that date, in such party’s capital plans for 2010accordance with IFRIC 13: “Customer loyalty programs.” Points earned from TAM Fidelidade members are bought from Multiplus and 2011, (ii) acquisitions of properties or assets thatseats redeemed are sold to Multiplus. Multiplus manages the points liabilities. Revenue from both programs are recognized once the purchased tickets are flown.
LANPASS Kilometers expire if they are not materialutilized over a period of three years. This period is renewable if the passenger takes a flight or meets specific requirements regarding the accumulation of kilometers through one of the partners of the program. Multiplus Points expire if they are not utilized over a period of two years, this period is not renewable.
Property, Plant and Equipment
LATAM’s land is recognized at cost less any accumulated impairment loss. The rest of the property, plant and equipment are shown, initially and subsequently, at their historic cost less the corresponding depreciation and any impairment loss.
The amount of advance payments to such partyaircraft manufacturers are capitalized by the Company under “Construction in progress” until receipt of aircraft.
Subsequent costs (replacement of components, improvements and its subsidiaries, takenextensions) are included in the value of the initial asset or shown as a whole,separate asset only when it is probable that the future economic benefits associated with the elements of Property, plant and (iii) certain other customary exceptions;
sell, lease, assign, license, grant, extend, amend, subjectequipment are going to liens, waive or modify any material rights in orflow to cancel, abandon or allow to lapse, or otherwise transfer or disposethe Company and the cost of or agree to take or permit any such action, all or any partthe element can be determined reliably. The value of its assets, rights or properties which are material, individually orthe component replaced is written-off in the aggregate, to such partybooks at the time of replacement. The rest of the repairs and its subsidiaries, taken as a whole, subject to certain exceptions;
incur any indebtedness or guarantee indebtedness of another person, other than (i) indebtedness incurred in the ordinary course of business consistent with past practice, (ii) indebtedness that does not exceed US$10 million in the aggregate and (iii) certain other exceptions;
settle or compromise any claim or action where the amount paid exceeds the amount set forth in such party’s disclosure schedule;
other than in the ordinary course of business, enter into any material contract, terminate or amend in any material respect any material contract or waive, encumber or otherwise transfer any material rights or claims thereunder;
make any material changesmaintenance are charged to the policies or work rules applicable to any groupresult of employees or labor union;
except as required by applicable law or its existing benefit plans, adopt or enter into, terminate, amend or grant any waiver or consent under any material benefit plan, or other than with respect to the hiringyear in which they are incurred.
Depreciation of any person whose annual compensation does not exceed US$500,000, any contract, plan or policy involving any current or former employee, independent consultant, officers, or directors of such party or any of its subsidiaries,property, plant and equipment is calculated using the straight-line method over their estimated useful lives; except in the ordinary coursecase of business consistentcertain technical components, which are depreciated on the basis of cycles and hours flown.
The residual value and useful life of assets is revised, and adjusted if necessary, once a year.
When the carrying amount of an asset is higher than its estimated recoverable amount, its value is reduced immediately to its recoverable amount. For more information, see Note 2.8 to our audited consolidated financial statements.
Losses and gains on the sale of property, plant and equipment are calculated by comparing the proceeds obtained with past practice with respect to employees whothe book value and are not key personnel; grant any severance or termination payment or increase compensation or benefits of any employee (except for increases in compensation of employees who are not key personnel madeincluded in the ordinary courseconsolidated statement of business consistent with past practice); remove any existing restrictionsincome.
Maintenance
The costs incurred for scheduled heavy maintenance of the aircraft’s fuselage and engines are capitalized and depreciated until the next maintenance. The depreciation rate is determined on technical grounds, according to the use of the aircraft expressed in any benefit plans; take any action to fund or secure the paymentterms of or accelerate the vesting or paymentcycles and flight hours.
In case of any compensation or benefits under any benefit plan; excepton balance sheet aircraft, these maintenance costs are capitalized as required by any existing benefit planProperty, plant and except for normal payments and increasesequipment, while in the ordinary coursecase of business consistent with past practice, increaseoff balance sheet aircraft maintenance costs are periodically provided for and recognized through profit and loss as “Cost of sales”.
Additionally, under some of our aircraft operating leases, prepayment deposits are required in order to ensure that funds are available to support the scheduled heavy maintenance of the aircraft. At the end of the lease term, any mannerunused maintenance reserves are either returned to the compensationCompany in cash or fringe benefits of any employee or pay any amount or benefit; or grant any retention or similar bonuses, payments or rightsused to any employee;
except as required by applicable law,offset amounts that we may owe the IFRS or regulatory guidelines, make any material change in its accounting methods or principles; make or change any material tax election; settle any material tax liability; amend any material tax return; enter into any material closing agreement with respect to any tax or surrender any right to claim a material tax refund; or change its current independent auditors;
enter into any new line of business that is material to such party and its subsidiaries, takenlessor as a whole,maintenance adjustment. The Company periodically reviews its maintenance reserves for each of its leased aircraft to ensure that they will be recovered, a process that requires judgment, and recognizes an expense if any such amounts are less than probable of being returned.
The unscheduled maintenance of aircraft and engines, as well as minor maintenance, are charged to results as incurred.
Derivative Financial Instruments and Hedging Activities
Derivatives are booked initially at fair value on the date the derivative contracts are signed and later they continue to be valued at their fair value. The method for booking the resultant loss or any related party agreement;gain depends on whether the derivative has been designated as a hedging instrument and, if so, the nature of the item hedged.
The Company designates certain derivatives as:
(a) | Hedge of the fair value of recognized assets (“fair value hedge”); |
authorize or adopt a plan
(b) | Hedge of a identified risk associated with a recognized liability or an expected highly probable transaction (“cash-flow hedge”); or |
(c) | Derivatives that do not qualify for hedge accounting. |
The Company documents, at the inception of complete or partial liquidation or any restructuring, recapitalization or reorganization;
enter into or amend any contract that would restrict or limiteach transaction, the ability of LAN, TAM or any of their respective subsidiariesrelationship between the hedging instrument and the hedged item, as well as its objectives for managing risk and the strategy for carrying out various hedging transactions. The Company also documents its assessment, both at the beginning and on an ongoing basis, as to engage in any business, that would reasonably be expected to prevent or materially impedewhether the commencement or the completion the exchange offer, the mergers or the other transactions contemplatedderivatives used in the implementation agreementhedging transactions are highly effective in offsetting the changes in the fair value or to adversely affect in a material respect the expected benefits (taken as a whole)cash flows of the exchange offer anditems being hedged.
The total fair value of the mergershedging derivatives is booked as an Other non-current financial asset or liability if the completionremaining maturity of those transactions would conflictthe hedging instrument is over 12 months, and as an Other current financial asset or liability if the remaining term of the hedging instrument is less than 12 months. Derivatives not booked as hedges are classified as other financial assets or liabilities, current in the case that their remaining maturity is less than 12 months and non-current in the case that it is more than 12 months.
(a) Fair value hedges
Changes in the fair value of designated derivatives that qualify as fair value hedges are shown in the consolidated statement of income, together with result in any breach or default or in any termination or modification of or acceleration under, or any change in the fair value of the asset or liability hedged that is attributable to the risk being hedged.
(b) Cash flow hedges
The effective portion of changes in the fair value of designated derivatives that qualify as cash flow hedges is shown in net equity. The loss or gain relating to the ineffective portion is recognized immediately in the consolidated statement of income under “Other gains (losses).” Amounts deferred in equity are reclassified to profit and loss when the related hedged item impacts profit and loss.
In the case of variable interest-rate hedges, this means that the amounts recognized in equity are reclassified to results within financial cost at the same time the associated debts accrue interest.
For fuel price hedges, the amounts shown in equity are reclassified to results as Cost of sales to the extent that the fuel subject to the hedge is used.
For Multiplus’ foreign currency hedges, the amounts shown in equity are reclassified to results to the extent that the deferred revenue resulting from the use of points, are recognized as income.
When hedging instruments mature or are sold or when they do not meet the requirements to be accounted for as hedges, any rightgain or obligation under,loss accumulated in net equity until that moment remains in equity and is reclassified to the consolidated statement of income when the hedged transaction is finally recognized. When it is expected that the hedged transaction is no longer going to occur, the gain or loss accumulated in net equity is taken immediately to the consolidated statement of income as “Other gains (losses).”
(c) Derivatives not booked as a hedge
The changes in fair value of any derivative instrument that is not booked as a hedge are shown immediately in the consolidated statement of income, in “Other gains (losses).”
Deferred taxes
Deferred taxes are calculated on the temporary differences arising between the tax bases of assets and liabilities and their book values. However, if the temporary differences arise from the initial recognition of a liability or an asset in a transaction other than a business combination that at the time of the transaction does not affect the accounting result or the tax gain or loss, they are not booked. The deferred tax is determined using the tax rates (and laws), that have been enacted or substantially enacted at the end of the reporting period, and are expected to apply when the related deferred tax asset is realized or the deferred tax liability is discharged.
Deferred tax assets are recognized when it is probable that there will be sufficient future tax earnings with which to compensate the temporary differences. Estimating the level of tax earnings for this purpose requires considerable judgment.
The Company does not record deferred tax on temporary differences arising on investments in any liensubsidiaries, provided that the opportunity to reverse the temporary differences is controlled by the Company and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax on any property or assettemporary differences arising on investments in associates is immaterial.
Recently Issued Accounting Pronouncements
take or fail to take any action to prevent or delay, or
(i) | IAS 27 Separate financial statements, IFRS 10 Consolidated financial statements and IFRS 12 Disclosure of interest in other entities (October 2012) |
(i) | IFRS 2 Share-based payment (Dec 2013) |
(ii) | IFRS 3 Business combinations (Dec 2013) |
(iii) | IFRS 8 Operating segments (Dec 2013) |
(iv) | IFRS 13 Fair value measurement (Dec 2013) |
(v) | IAS 16 Property, plant and equipment (Dec 2013) |
(vi) | IAS 24 Related party disclosures (Dec 2013) |
(vii) | IFRS 1 Frist-time adoption of International Finance Reporting Standards (Dec 2013) |
(viii) | IAS 40 Investment property (Dec 2013) |
(i) | IAS 19 Employee benefits (September 2014) (*) |
(ii) | IAS 34 Interim financial reporting (September 2014) (*) |
(iii) | IFRS 5 Non-current assets held for sale and discontinued operations (September 2014) (*) |
(iv) | IFRS 7 Financial instruments: Disclosures (September 2014) (*) |
(*) | Standards not yet effective. |
The Company’s management believes that would reasonably be expected to prevent or delay, the satisfaction of anyearly adoption of the conditionsstandards, amendments and interpretations described above but not yet effective would not have had a significant impact on the Company’s consolidated financial statements in the year of their first application. The Company only has early adopted the amendment to IAS 36.
B. Liquidity and Capital Resources
LATAM cash and cash equivalents totaled US$989.4 million as of December 31, 2014, US$1,984.9 million as of December 31, 2013 and US$650.3 million as of December 31, 2012. Additionally, the Company had short term marketable securities totaling US$544.4 million as of December 31, 2014, US$576.7 million as of December 31, 2013 and US$470.1 million as of December 31, 2012. In the aggregate, LATAM’s cash and marketable securities totaled US$1,533.8 million as of December 31, 2014, US$2,561.6 million as of December 31, 2013 and US$1,120.3 million as of December 31, 2012.
The US$1,027.8 million decrease in our cash and marketable securities from 2013 to 2014 was mainly due to the commencement or completionexecution of the exchange offer,deleveraging plan, the mergersnegative impact of the FIFA World Cup, and the weaker global economic scenario in Latin America. Changes in our net cash generated from operating, investing and financing activities are described below.
Cash position and liquidity
The following table provides a summary of our cash flows from operating activities, investing activities and financing activities for the years ended December 31, 2014, 2013 and 2012 and our total cash position as of December 31, 2014, 2013 and 2012.
2014 | 2013 | 2012 | ||||||||||
(in US$ millions) | ||||||||||||
Net cash flows from operating activities | 1,331.4 | 1,408.7 | 1,203.8 | |||||||||
Net cash flow from (used in) investing activities | (899.1 | ) | (1,278.8 | ) | (1,926.4 | ) | ||||||
Net cash flows from (used in) financing activities | (1,320.2 | ) | 1,205.8 | 1,005.2 | ||||||||
Effects of variation in the exchange rate on cash and cash equivalents | (107.6 | ) | (1.0 | ) | (6.7 | ) | ||||||
Cash and cash equivalents at the beginning of the year | 1,984.9 | 650.3 | 374.4 | |||||||||
Cash and cash equivalents at the end of the year | 989.4 | 1,984.9 | 650.3 |
In addition to the cash and marketable securities LATAM has access to short term credit lines. As of December 31, 2014, LATAM had working capital uncommitted credit facilities for a total amount of US$ 1,827 million, of which US$953million was drawn as of December 31, 2014, and committed credit lines with a total available amount of US$145 million, of which $0 was drawn as of December 31, 2014.
Net cash flows from operating activities
Cash from operations is derived primarily from providing air passenger and cargo transportation to customers. Operating cash outflows are primarily related to the recurring expenses of airline operations, including fuel consumption.
Net cash inflows from operating activities in 2014 decreased US$77.3 million, or 5.5%, from US$1,408.7 million, mainly due to the negative impact of the FIFA World Cup on LATAM’s operating margin, as well as a generally weaker macroeconomic scenario in Latin America, including slower GDP growth trends and weaker currencies in most countries. In addition the net cash from operations was negatively affected by fuel hedge, hedging margin guarantees and other guarantees in US$ 251.7 million (for more information see to Note 6 – Cash and Cash Equivalents of our audited consolidated financial statements). Nevertheless, the negative effect was compensated by the cash received from the renewal of the Santander and LANPASS exclusive co-branding agreement.
Net cash inflows from operating activities in 2013 increased $204.9 million, or 17.0%, from US$1,203.8 million in 2012, primarily due to an improvement in the operational margin and the turnaround of the Brazilian domestic market, mainly reflected in a stronger fourth quarter operational result.
Net cash flow from (used in) investing activities
Net cash used in investing activities in 2014 decreased US$379.7 million from US$1,278.8 million in 2013 to US$899.1 million in 2014, due to an increase in aircraft sales of US$265.8 and a decrease in Aircraft CAPEX of US$497.8 million, driven by a decrease in aircraft purchases from 20 narrow body aircraft to 9 and 4 wide body aircraft to 3. This reduction was partially offset by an increase in purchases of property, plant and equipment non related to purchase of new aircrafts of US$556.4. It is important to note that during 2014 the sale and leaseback of 4 B777 was reflected in an asset sale of US$510.5 million and a reduction of debt of US$516.6 million.
Net cash used in investing activities in 2013 decreased US$647.6 million from US$1,926.4 million in 2012 to US$1,278.8 million in 2013, primarily due to the decrease in capital expenditure and the return of PDP payments relating to the aircraft deliveries. Aircraft purchases in 2013 included 20 narrow body aircraft and 4 wide body aircraft for a total of US$1,219 million.
Net cash flows from (used in) financing activities
Net cash used in financing activities was (US$1,205.8 million), a decrease of US$2,526.0 million from the US$1,205.8 million in cash generated by financing activities in 2013. The variation resulted primarily from a liability restructuring, including an important reduction of outstanding debt and an increase in debt repayment, mainly the US dollar denominated debt of TAM S.A. of US$1,327.6 million (for more information see to Note 18-Other Financial Liabilities of our audited consolidated financial statements). The decrease in the net cash generated was also affected by the net effect of the capital increase, where US$888.6 million was accounted for in 2013 and US$156.3 million during the first quarter of 2014.
Net cash generated from financing activities increased by US$200.6 million from US$1,005.2 million to US$1,205.8 million in 2013, primarily due to LATAM’s capital increase, the increase of long term debt related to new aircraft purchases, but partially offset by the voluntary prepayment of BRL 400 million of local Brazilian bonds.
Sources of financing
Long term
We typically finance our fleet with long-term loans covering between 80% and 100% of the net purchase price. We also finance our aircraft under sale and leaseback arrangements in order to add flexibility to our fleet. For more information regarding to the fleet financing, please refer to “—F. Tabular Disclosure of Contractual Obligations.”
From time to time in the past, we have considered, and may consider in the future, other forms of financing including securitization of ticket receivables or the other transactions contemplatedsecuritization of fleet and engines or the issuance of additional debt or equity securities.
Short term
We have generally been able to arrange for short-term loans with local Chilean and international banks when we have needed to finance working capital expenditures or increase our liquidity. As of December 31, 2014, we maintained US$537 million in short-term credit lines with both local and foreign banks, including US$210 million of committed credit lines.
We have diversified our sources of short term financing to include the following: PAE (“Prestamos a Exportadores”), which are foreign currency short term loans granted to exporting parties in Chile mainly to finance working capital; Credit card advancements, a financial alternative where the bank advances to the Company the cash inflows related to the credit card sales on installments with a discount factor; and advance purchases by the implementation agreement;
cancel, terminate or amendMultiplus of kilometers for TAM flights, in an amount at any binding financing commitmenttime up to funda maximum of R$500 million.
Capital expenditures
Our capital expenditures are related to the acquisition of an aircraft, unless it is replaced by another financing agreement with substantially equivalent terms or such party and/or its subsidiaries receives equivalent value fromaircraft-related equipment, IT equipment, support infrastructure and the manufacturerfunding of the applicable aircraft;
enter into or materially amend any aircraft purchase agreement, engine purchase agreement or engine maintenance agreement that involves or is reasonably expected to involve aggregate payments in excess ofpre-delivery deposits. LATAM’s capital expenditures totaled US$251,440.4 million in any twelve-month period;
enter into, amend or terminate any alliance or brand alliance agreement, code-sharing agreement, frequent flyer participation agreement, capacity purchase or similar agreement, cooperation, joint venture, profit or revenue sharing agreement, special prorate agreement or interlining agreement with any person; or
authorize any2014, US$1,381.8 million in 2013 and US$2,389.4 million in 2012. See “—Sources of or commit, resolve, propose or agree to take any of, the foregoing actions.
Holdco Shareholders’ Meetingsfinancing” above.
The TAM controlling shareholders were required to cause Holdco II to (i) take all action necessary to establish a record datefollowing chart sets forth our estimate, as of December 31, 2014, of our future capital expenditures for, duly call, give notice of, convene2015, 2016, 2017, 2018 and hold a special meeting2019 calendar years:
Estimated capital expenditures by year, as of December 31, 2014 | ||||||||||||||||||||
2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||
(in US$ millions) | ||||||||||||||||||||
Fleet Commitments | 1,688 | 2,343 | 2,471 | 2,903 | 1,229 | |||||||||||||||
PDPs (1) | 311 | 165 | -432 | -651 | -18 | |||||||||||||||
Purchase Obligations | 1,999 | 2,508 | 2,039 | 2,252 | 1,211 | |||||||||||||||
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Other expenditures(2) | 405 | 373 | 293 | 295 | 108 | |||||||||||||||
Total | 2,404 | 2,881 | 2,332 | 2,547 | 1,319 | |||||||||||||||
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(1) | Represents pre-delivery payments made by LATAM, or inflows received by LATAM after the delivery of the aircraft is made, when the manufacturer refunds the PDPs to LATAM. |
(2) | Includes expenditures on spare engines and parts, information technology and other expenditures. |
The expenditures set out in the shareholders of Holdco II (“Holdco II shareholders’ meeting”)table above reflect payments for the purpose of voting to approve (i) the Holdco II mergerpurchases and the other transactions contemplated by the implementation agreement, (ii) the relevant audited financial statementsfleet-related items, as well as for information technology and appraisal report and (iii) the by-laws of the surviving corporation of the Holdco II merger (collectively, “Holdco II merger matters”). Under Chilean law and Holdco II’s by-laws, the Holdco II merger matters must be approved by the holders of at least two-thirds of the outstanding shares of Holdco II stock (“requisite Holdco II shareholder approval”). The requisite Holdco II shareholder approval will be expressly conditioned upon, and will become effective only upon, the completion of the mergers.
The TAM controlling shareholders were also required to cause Sister Holdco to (i) take all action necessary to establish a record date for, duly call, give notice of, convene and hold a special meeting of the shareholders of Sister Holdco (“Sister Holdco shareholders meeting”) for the purpose of voting to approve (i) the Sister Holdco merger and the other transactions contemplated by the implementation agreement, (ii) the relevant audited financial statements and appraisal report and (iii) the by-laws of the surviving corporation of the Sister Holdco merger (collectively, the “Sister Holdco merger matters”). Under Chilean Law and Sister Holdco’s by-laws, the Sister Holdco merger matters must be approved by the holders of at least two-thirds of the outstanding shares of Sister Holdco stock (“requisite Sister Holdco shareholder approval”). The requisite Sister Holdco shareholder approval will be expressly conditioned upon, and will become effective only upon, the completion of the mergers.
Both Holdco II and Sister Holdco shareholders’ meetings were held on December 21, 2011.
Further Actions; Notification
We and TAM have agreed to cooperate with each other and use (and cause our respective affiliates to use) our respective reasonable best efforts to take or cause to be taken all actions and to do or cause to be done all things reasonably necessary, proper or advisable under the transaction agreements and applicable law to satisfy the conditions to the commencement and completion of the exchange offer described below underitems. See “Item 4. Information on the Company—The Transaction Agreements—ConditionsBusiness Overview—Fleet.” We have projected our capital expenditures based on our anticipated deliveries of aircraft fleet. See “—F. Tabular Disclosure of Contractual Obligations” below for a description of our purchase obligations, borrowings and other contractual commitments as of December 31, 2014.
C. Research and Development, Patents and Licenses, etc.
LATAM has registered the trademarks “LAN,” “LAN Chile,” “LAN Peru,” “LAN Argentina” and “LAN Ecuador” with the trademark office in Chile, Peru, Argentina and Ecuador, respectively. We license certain brands, logos and trade dress under the alliance agreement with oneworld® related to LAN’s alliance. As long as LAN is a member of oneworld®, it will have the right to continue to use current logos on its aircraft.
TAM holds or has filed registration applications for 135 trademarks before the Instituto Nacional da Propriedade Industrial, or INPI, the body with jurisdiction for registering trademarks and patents in Brazil, and 105 trademarks before the bodies with jurisdiction for registering trademarks in other countries in which TAM operates. Currently, TAM is not aware of any third-party challenges to these applications.
D. Trend Information
For 2015, LATAM expects total passenger ASK growth to be between 2% and 4%. International passenger ASK growth for full year 2015 is expected to grow between 4% and 6%. TAM’s domestic passenger ASKs in the Brazilian market are expected to be flat during 2015. ASKs in Spanish-speaking countries are expected to increase by approximately 4% to 6%.
In the passenger business, we expect to continue to face increased competition, a weaker macroeconomic environment in South America, and depreciated local currencies, putting pressure on yields throughout the region for all players in the industry. Nevertheless, the Company will continue to develop initiatives to improve our operations, with special focus in customer experience and network. Moreover, LATAM’s unique leadership position in a region with growth potential will allow us to continue building our business model in the future.
Regarding cargo operations, LATAM expects cargo ATKs to increase between 1% and 3% for full year 2015, driven by increased availability in the bellies of passenger aircraft.
In the cargo business, we continue to be adversely affected by the challenging macroeconomic environment, which is directly correlated with the number of tons being transported and by the fact that weaker cargo markets globally might further drive additional competition to South America, especially Brazil. However we expect partially offset this negative impact with solid export volumes from Latin America to the United States and Europe. Also, we plan to continue to optimize the utilization of the bellies of our passenger aircraft to maximize synergies associated with the Company’s integrated passenger/cargo business model.
We continue to maintain significant flexibility to adjust the physical size of our fleet. Between 2015 and 2016, we will have 43 operating lease expirations in our passenger fleet and 2 operating lease expirations in our passenger and cargo fleet, which leases can thereafter be terminated without additional costs.
As a result, the Company has more flexibility, as well as a proven track record of acting quickly to adapt our business to economic challenges. In this context, LATAM has developed a robust strategic plan for the Commencementnext four years (2015-2018), based on three critical success factors: Customer Experience, Network, and Efficiency and Cost Reduction. This plan will improve the way we work, allowing us to become one of the Exchange Offer”best airline groups in the world, renewing our commitment to sustained profitability and “Item 4. Informationsuperior shareholder returns.
Cost savings include reductions in fuel and fees, procurement, operations, overhead, and distribution costs, among others. The company has already started work on the Company—The Transaction Agreements—Conditions to the Completion of the Exchange Offer” (collectively, the “exchange offer conditions”) and to complete as soon as reasonably practicable the exchange offer, the mergers and the other transactions contemplated by the transaction agreementscost initiatives in accordance with the terms of the transaction agreements. If any action or proceeding is instituted (or threatenedall these areas.
Regarding fuel, we expect jet fuel prices will continue to be instituted) by any person challenging any such transaction, each party is requiredvolatile in 2015, and we will continue to cooperateuse fuel hedging programs and fuel surcharge mechanisms in all respects withboth the other partiespassenger and use its respective reasonable best effortscargo businesses to contest and resist any such action or proceeding and to have vacated, lifted, reversed or overturned any decree, judgment, injunction or other order, whether temporary, preliminary or permanent, that ishelp minimize the impact of short-term movements in effect and that prohibits, prevents or restricts completion of such transaction so as to permit such completion by the fifth business day before June 30, 2012. In addition, each party is required to, at its own cost and expense, defend any such actions or proceedings against it or its affiliates in connection with the transactions contemplated by the transaction agreements.crude oil prices.
Neither we nor TAM nor any of our respective affiliates will be required to sell, transfer, dispose of, or otherwise encumber, or to hold separate pending any such action, or propose, commit or agree to any of the foregoing or to hold separate, either before or after the effective time, any assets, licenses, operations, rights, product lines, businesses or interest of either of us or any of our affiliates or to take or agree to take any other action, or agree or consent to any limitations or restrictions on freedom of actions with respect to, or our ability to own, retain or make changes in, any assets, licenses, operations, rights, product lines, businesses or interests of either of us or
any of our affiliates or our ability to receive and exercise full voting, economic and ownership rights with respect to our interests in Holdco I, TAM and its subsidiaries, subject only to the rights of the TAM controlling shareholders in respectLATAM has hedged approximately 30% of its voting shares of Holdco I and under the shareholders agreements.
Each of the parties is required to promptly advise the other parties orally and in writing if it fails to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under the transaction agreements, if any of the exchange offer conditions or the TAM controlling shareholders subscription conditions (as defined under “—Conditions to the Subscriptions”) fail or cease to be satisfied or if an appraisal event (as defined under—Conditionsestimated fuel consumption for the Commencementfirst quarter of 2015, 25% of its average estimated fuel consumption for the Exchange Offer”) occurs.second quarter of 2015, 39% of its average estimated fuel consumption for third quarter 2015, and 39% of its average estimated fuel consumption for fourth quarter 2015. The Company’s fuel hedging strategy consists of a combination of collars, swaps and call options for Brent and Jet Fuel.
No SolicitationE. Off-Balance Sheet Arrangements
EachAs of December 31, 2014 the parties has agreed to cease and immediately terminate all existing activities and discussions with any person conducted prior to the signing date with respect to an alternative proposal concerning its relevant parent entity. In this annual report on Form 20-F, we refer to LAN as the relevant parent entity of LAN and the LAN controlling shareholders, and TAM as the relevant parent entityCompany had 107 aircraft (of which 70 are obligations of TAM and the TAM controlling shareholders,37 are obligations of LAN) and we refer23 aircraft engines under operating leases. These operating leases provide us with flexibility to adjust our fleet to any demand volatility that may affect the airline industry and therefore we consider such arrangements to be of great value to our strategy and financial performance. The total future lease payments related to our operating leases as of December 31, 2014 were US$ 2,155 million, for all remaining periods through maturity (the latest of which expires in 2026). See “—F. Tabular Disclosure of Contractual Obligations.”
Under the following actionsaforementioned operating leases, LATAM is responsible for all maintenance, insurance and other costs associated with operating these aircraft. The Company has not made any residual value or any proposalsimilar guarantees to our lessors. There are certain guarantees and indemnities to other unrelated parties that are not reflected on the Company’s balance sheet, but we believe that these will not have a significant impact on our results of operations or exchange offer (including any proposal or exchange offer to or from any representativefinancial condition.
LATAM operates 17 aircraft under tax leasing structures. These methods involve the creation of special purpose entities that acquire aircraft with bank and third party financing. Under IFRS, eight of these aircraft are shown in the consolidated statement of financial position as part of “Property, plant and equipment” and the corresponding debt is shown as a liability and nine TAM tax leases are classified as operating leases for accounting purposes as of December 31, 2014.
As of December 31, 2014, we are not aware of any party) with respect to any relevant parent entity by any personevent, lawsuit, commitment, trend or group relating to, oruncertainty that could reasonably be expected to lead to, any of the following as an “alternative proposal”: (i) any direct or indirect acquisition, lease, license or outsourcing, in one transaction or a series of related transactions, of any assets, services or businesses of such relevant parent entity or any of its subsidiaries collectively representing more than 25% of the fair market value of the total assets of such relevant parent entity or collectively generating or contributing 25% or more of the total consolidated revenues or operating income of such person during the last fiscal year, (ii) any tender exchange offer or exchange offer that, if completed, wouldmay result in, any person or group beneficially owning any equity securities of such relevant parent entity, or (iii) any business combination, recapitalization, issuance or amendment of securities, liquidation, dissolution, joint venture, share exchange or similar transaction involving such relevant parent entity or any of its subsidiaries.
The parties have agreed not to, and to cause their respective directors, officers, employees, affiliates, financial advisors, attorneys, accountants or other advisors, agents and other representatives and each of the individuals who ultimately beneficially own it, which we refer to collectively as the “representatives” of a party, not to, directly or indirectly, (i) solicit, initiate or encourage any inquiries or the making or completion of any proposal or exchange offer that constitutes, or is reasonably likely to lead to, an alternative proposal with respect to its relevant parent entity, (ii) engageresult in, continue or otherwise participate in any discussions or negotiations regarding, or provide to any person any non-public information or data in connection with, or otherwise cooperate in any way with, any such alternative proposal, (iii) waive, terminate, modify or fail to enforce any provision of any “standstill” or similar obligation of any person, (iv) enter into any binding or non-binding contract with respect to any such alternative proposal, or (v) otherwise knowingly facilitate any effort or attempt to make any such alternative proposal.
The parties have also agreed to:
as promptly as practicable (and in any event within 24 hours after receipt) advise the other parties orally and in writing of the receipt of any alternative proposal relating to its relevant parent entity, the material terms and conditions of such alternative proposal (including any changes thereto) and the identity of the person making such alternative proposal;
keep the other parties fully informed in all material respects of the status and details (including any changes to the terms) of such alternative proposal; and
provide to the other parties as soon as practicable after receipt or delivery thereof copies of all correspondence and other written material sent or provided to it, such relevant parent entity or any of their respective representatives from any person that describes any of the terms or conditions of such alternative proposal.
Stockholder Actions
Both we and TAM have agreed to give the other the opportunity to participate in the defense or settlement of any stockholder action or proceeding against us and/or our directors or officers relating to the transactions contemplated by the implementation agreement and not to agree to settlement of any such action without the other party’s prior written consent.
Controlling Shareholder Covenants
Voting Agreements
The TAM controlling shareholders have agreed to adhere to the following until the termination of the transaction agreements oroperating leases. See Note 33 to our audited consolidated financial statements for a more detailed discussion of these commitments.
F. Tabular Disclosure of Contractual Obligations
We have contractual obligations and commitments primarily related to the effective timepayment of aircraft debt and lease arrangements, principal and interest on our non-aircraft long-term debt (which consists of senior notes, a securitized bond and bank loans), and short-term export-import credits for the future incorporation of aircraft to our fleet.
The Company’s debt that is secured by aircraft (including Export-Import Bank of the mergers, whichever event occurs sooner:United States (“EX-IM Bank”) Bank guaranteed bonds, Export Credit Agency (“ECA”) guaranteed loans, commercial loans, Japanese Leases with a call option (“JOLCO”)
structures and capital leases) as of December 31, 2014, was US$6,221 million. In general, LATAM’s aircraft debt has 12 year repayment profiles. However, some financing structures feature a balloon payment or a purchase option at the end of the lease. By refinancing this balloon payment, the maturity dates of a number of our aircraft financings have been extended for another 3 to 8 years. Our 2014 aircraft acquisitions are described in further detail below under “—2014 Fleet Acquisitions.”
Regarding non-aircraft debt, LATAM issued a securitized bond for an amount of US$ 450 million in November 2013 with seven years tenor and two years interest only. This bond is backed by future flows of credit card sales of LATAM Airlines in the United States and Canada. The coupon is 6.0% fixed with quarterly payments.
In addition, TAM has three series of senior notes, totaling US$1,100 million. TAM’s senior notes comprise:
cause theUS$300 million due in 2017, with a fixed coupon of 7.375% payable semi-annually, issued by TAM common sharesCapital Inc. and guaranteed on a senior unsecured basis by TAM S.A. and TAM preferred shares beneficially owned by them to be voted against any alternative proposal relating to LAN and any transaction that would reasonably be expected to result in a breach by LANLinhas Aereas. These notes are listed on the Euro MTF market of the transaction agreements;Luxembourg Stock Exchange. On December 18, 2007, TAM completed an exchange offer pursuant to which 99.2% of the holders exchanged these notes for new notes that are registered under the Securities Act and
not to transfer theUS$300 million due in 2020, with a fixed coupon of 9.5% payable semi-annually, issued by TAM common sharesCapital 2 Inc. and guaranteed on a senior unsecured basis by TAM S.A. and TAM preferred shares beneficially ownedLinhas Aereas; and
The average interest rate of all of our long term debt (which is our aircraft debt plus the senior notes issued by TAM, the LATAM securitization and bank loans) was 3.68% as of December 31, 2014. Out of the total long-term debt, 68.8%accrues interest at a fixed rate (either through a stated fixed interest rate or through the use of interest rate swap agreements) or is subject to interest rate caps.
As of December 2014, LATAM had US$1,308.3 million in current debt liabilities. Of this amount, US$552.5 million was short-term debt, which represents 42% of our total current debt liabilities. The remaining US$755.7 million is composed mainly of amounts payable within the next 12 months related to aircraft financing.
Various EX-IM Bank loans signed by LATAM for certain permitted transfers to affiliatesthe financing of Boeing 767, 777, 777 freighter and only if787 aircraft contain financial covenants and other restrictions, including restrictions in terms of its shareholder composition and disposal of assets. As of December 31, 2014, we also had purchase obligations totaling US$ 11.7 billion, with deliveries between 2015 and 2021, as set forth below:
The following table sets forth our material expected obligations and commitments as of December 31, 2014:
Payments due by period, as of December 31, 2014 | ||||||||||||||||||||
(US$ in millions) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
Long-term debt obligations(1) | US$ | 4,727 | US$ | 587 | US$ | 1,138 | US$ | 911 | US$ | 2091 | ||||||||||
Capital (finance) lease obligations | US$ | 1,629 | US$ | 350 | US$ | 611 | US$ | 413 | US$ | 256 | ||||||||||
Operating lease obligations | US$ | 2,155 | US$ | 512 | US$ | 766 | US$ | 436 | US$ | 441 | ||||||||||
Fleet Commitments(2) | US$ | 11,689 | US$ | 1,688 | US$ | 4,814 | US$ | 4,132 | US$ | 1,055 | ||||||||||
TOTAL | US$ | 20,200 | US$ | 3,137 | US$ | 7,329 | US$ | 5,892 | US$ | 3,843 | ||||||||||
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(1) | Long-term debt obligations reflect principal payments on outstanding debt obligations, including aircraft debt, senior notes issued by LAN and TAM and long term bank loans. |
(2) | Fleet commitments represents the capex equivalent of purchasing all fleet arrivals |
2014 Fleet Acquisitions
During 2014, LATAM completed the termsacquisition of the transaction agreements.following wide body aircraft:
The LAN controlling shareholders
These EX-IM Bank financial obligations have agreed to adhere to the following until the terminationa repayment profile of 12 years, with a guarantee covering 85% of the transaction agreements or the effective timenet purchase price of the mergers, whichever event occurs sooner:
vote their LAN common sharesaircraft. The EX-IM Bank guarantee is secured with a first priority mortgage on the aircraft in favor of a security trustee on behalf of EX-IM Bank. We have financed the approvalremaining 15% of the mergers,net purchase price with our own funds.
Finally, the name change2 Boeing 787-8 aircraft financed through sale and leaseback transactions have lease terms of 12 years. These leases are denominated in U.S. dollars and have monthly payments
During 2014, LATAM completed the acquisition of the following narrow body aircraft:
The commercial financing for these 9 Airbus 321-231 aircraft consists of a senior tranche financing 81.7% of the net purchase price of the aircraft. A first priority mortgage on the aircraft exists in favor of a security trustee on behalf of the senior lender. The documentation for each loan follows standard market forms for the type of financing, including standard events of default
Finally, narrow body aircraft financed through sale and leaseback transactions have lease terms of 8 years. These leases are denominated in U.S. dollars and have monthly payments.
The majority of our wide body and narrow body aircraft financings through EX-IM Bank bonds, ECA guaranteed loans or commercial loans are denominated in U.S. dollars and have quarterly amortizations with a combination of fixed and floating rates linked to USD LIBOR. A small portion of our aircraft debt has monthly or semiannual payments; nevertheless it is also denominated in US dollars and linked to U.S. dollar Libor. Through the use of interest rate swaps and fixed coupon Bond issuances in the case of Boeing aircraft, we have effectively converted a significant portion of our floating rate debt under these loans into fixed rate debt.
ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
A. Directors and Senior Management
The LATAM Airlines Group board of directors consists of nine directors who are elected every two years for two-year terms at annual regular shareholders’ meetings or, if necessary, at an extraordinary shareholders’ meeting, and may be re-elected. The board of directors may appoint replacements to fill any vacancies that occur during periods between elections. Scheduled meetings of the board of directors are held once a month and extraordinary board of directors’ meetings are called when summoned by the chairman of the board of directors and two other directors, or when requested by a majority of the directors.
The current board of directors was elected at the ordinary shareholders’ meeting held on April 29, 2014. Its term expires in April 2016. On September 2nd, 2014 Mrs. Maria Claudia Amaro (1) resigned as a member of the board of directors, which elected Mr. Henri Philippe Reichstul in her place. Mr. Reichstul’s appointment will be in effect until the next ordinary meeting of shareholders, in which the board of directors will have to be renewed and reelected in full. The entire board will be reelected in April 2015.
The following are LATAM Airlines Group’s directors:
Directors | Position | |
Mauricio Rolim Amaro(1) | Director / Chairman | |
Henri Philippe Reichstul | Director | |
Juan José Cueto Plaza(2) | Director | |
Ramón Eblen Kadis(3) | Director | |
Georges de Bourguignon Arndt | Director | |
Ricardo Caballero | Director |
Directors | Position | |
Carlos Heller Solari(4) | Director | |
Gerardo Jofré Miranda | Director | |
Francisco Luzón López | Director |
Senior Management | Position | |
Enrique Cueto Plaza(2) | CEO LATAM | |
Ignacio Cueto Plaza(2) | CEO LAN | |
Andrés Osorio Hermansen | CFO LATAM | |
Marco Antonio Bologna(6) | CEO TAM | |
Armando Valdivieso Montes | President LAN | |
Claudia Sender | President TAM | |
Cristián Ureta Larraín | Cargo President | |
Roberto Alvo Milosawlewitsch | Senior VP Planning and Network. | |
Damian Scokin (5) | Senior VP International Passenger Operations | |
Emilio del Real Sota | Senior VP Human Resources | |
Jerome Cadier | Chief Marketing Officer | |
Juan Carlos Menció | Senior VP Legal |
(1) | Mr. Mauricio Rolim Amaro and Mrs. Maria Claudia Amaro are brother and sister. Both are members of the Amaro Group, which is defined in “Item 7” as a “Major Shareholder” and are the TAM controlling shareholders. |
(2) | Messrs. Ignacio, Juan José and Enrique Cueto Plaza are brothers. All three are members of the Cueto Group, which is defined in “Item 7” as a “Major Shareholder,” and are the LATAM controlling shareholders. |
(3) | Mr. Ramón Eblen Kadis is a member of the Eblen Group, which is defined in “Item 7” as a “Major Shareholder.” |
(4) | Mr. Carlos Heller Solari is a member of the Bethia Group, which is defined in “Item 7” as a “Major Shareholder.” |
(5) | Mr. Damian Scokin held the position of LATAM’s International Unit Business Executive Vice President until September 30, 2014, date in which Mr. Scokin left the company. |
(6) | Mr. Bologna will cease to be CEO of TAM on April 1ST, 2015. |
Biographical Information
Set forth below are brief biographical descriptions of LATAM Airlines Group’s directors and senior management. All of LATAM’s directors were elected or reelected, as the case may be, in September 2012 for a two-year term, which expires in September 2014.
Directors
Mr. Mauricio Rolim Amaro, has served as member of LATAM Airlines Group’s board of directors since June 2012. He was reelected to the board of directors of LATAM in April 2014 and has served as Chairman since September 2012. Mr. Amaro’s current term as chairman ends in April 2015. Mr. Amaro has previously held various positions in the TAM Group and served as a professional pilot at TAM Linhas Aéreas S.A. and TAM Aviação Executiva S.A. Mr. Amaro has been a member of the Board of TAM S.A. since 2004, and vice-chairman of the Board since April 2007. He is also an executive officer at TAM Empreendimentos e Participações S.A. and chairman of the boards of Multiplus S.A. (subsidiary of TAM S.A.) and of TAM AviaçãoExecutiva e Taxi Aéreo S.A. As of January 31, 2015, according to shareholder registration data in Chile, Mr. Amaro shared in the beneficial ownership of 65,554,075 common shares of LATAM Airlines Group (12.02% of LATAM Airlines Group’s outstanding shares), held by TEP Chile S.A. For more information see “Item 7. Controlling Shareholders and Related Party Transactions.”
Mr. Henri Philippe Reichstul, joined LATAM’s board of directors in April 2014. Mr. Reichstul’s term as a director ends in April 2015. Mr. Reichstul has served as President of Petrobras and the other transactions contemplatedIPEA-Institute for Economic and Social Planning and Executive Vice President of Banco Inter American Express S.A. Currently, in addition to Administrative Board member of TAM and LATAM group, he is also a member of the Board of Directors of Repsol YPF, Peugeot Citroen and SEMCO Partners, among others. Mr. Reichstul is an economist with an undergraduate degree from the Faculty of Economics and Administration, University of São Paulo, and postgraduate work degrees in the same discipline - Hertford College - Oxford University.
Mr. Juan José Cueto Plaza, has served on LAN’s board of directors since 1994 and was reelected to the board of directors of LATAM in April 2014. Mr. Cueto’s term as a director ends in April 2015. Mr. Cueto currently serves as Executive Vice President of Inversiones Costa Verde S.A., a position he has held since 1990, and serves on the boards of directors of Consorcio Maderero S.A., Minera Michilla S.A., Inversiones del Buen Retiro S.A., Inmobiliaria e Inversiones Asturias S.A., Inversiones Mineras del Cantábrico S.A., Costa Verde Aeronáutica S.A., Sinergia Inmobiliaria S.A. and Valle Escondido S.A. Mr. Cueto is the brother of Messrs. Enrique
and Ignacio Cueto Plaza, LATAM Airlines Group Executive Vice-President and LAN CEO, respectively. Mr. Cueto is a member of the Cueto Group (LATAM Airlines Group’s Controlling Shareholder). As of January 31, 2015, Mr. Cueto shared in the beneficial ownership of 139,089,520 common shares of LATAM Airlines Group (25.49% of LATAM Airlines Group’s outstanding shares) held by the transaction agreements;Cueto Group. Mr. Cueto is also a member of the board of directors of Holdco II. For more information see “Item 7. Controlling Shareholders and Related Party Transactions.”
vote their LANMr. Ramón Eblen Kadis, 70 years old, has served on LAN’s board of directors since June 1994 and was reelected to the board of directors of LATAM in April 2014. Mr. Eblen’s term as a director ends in April 2015. Mr. Eblen has served as President of Comercial Los Lagos Ltda., Inversiones Santa Blanca S.A., Inversiones Andes SpA, Granja Marina Tornagaleones S.A. and TJC Chile S.A. Mr. Eblen is a member of the Eblen Group (a major shareholder of LATAM Airlines Group). As of January 31, 2015, The Eblen Group had the beneficial ownership of 27,945,199 common shares against any alternative proposal relating to LANof LATAM Airlines Group (5.12% of LATAM Airlines Group’s outstanding shares) plus a 40% ownership of Costaverde Aeronautica SpA, which owns 20.000.000 common shares of LATAM Airlines Group. For more information see “Item 7. Controlling Shareholders and any transaction that would reasonably be expected to resultRelated Party Transactions.”
Mr. Georges de Bourguignon, has served on LATAM Airlines Group’s board of directors since September 2012. Mr. de Bourguignon’s term as a director ends in April 2015. Mr. de Bourguignon has been a partner and executive director of Asset Chile S.A., a Chilean investment bank, since 1994. He is currently member of the board of directors of Asset Chile S.A. and several of its affiliates, is also an independent board member of Sal Lobos S.A., Chilean subsidiary of the German group K+S, and Salmones Austral Spa, a Chilean salmon farming company. In the past he has served in several other boards of public and private companies, as well as of boards of non profit organizations. Before co-founding Asset Chile, he was manager of the Financial Institutions Group at Citibank S.A. in Chile, and was a professor of economics at the Catholic University of Chile. He is an economist from Catholic University of Chile and a graduate of Harvard Business School. As of January 31st, 2015, Mr. de Bourguignon indirectly held 3,153 common shares of LATAM Airlines Group (0.0006%) of LATAM Airlines Group outstanding shares).
Mr. Ricardo J. Caballero, joined LATAM’s board of directors in April 2014. Mr. Caballero is the Ford International Professor of Economics and Director of the World Economic Laboratory at the Massachusetts Institute of Technology, an NBER Research Associate, and an advisor of QFR Capital Management LP. Mr. Caballero was the Chairman of MIT’s Economics Department (2008-2011) and has been a visiting scholar and consultant at many major central banks and international financial institutions. His teaching and research fields are macroeconomics, international economics, and finance. His current research looks at global capital markets, speculative episodes and financial bubbles, systemic crises prevention mechanisms, and dynamic restructuring. His policy work focuses on aggregate risk management and insurance arrangements for emerging markets and developed economies. He has also written about aggregate consumption and investment, exchange rates, externalities, growth, price rigidity, dynamic aggregation, networks and complexity. Mr. Caballero has served on the editorial board of several academic journals and has a very extensive list of publications in all major academic journals. Among his major awards, he was the winner of the 2002 Frisch Medal of the Econometric Society for “Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach”, Econometrica, 67(4), July 1999 (joint work with Eduardo Engel); and both the Smith Breeden Prize by the American Finance Association and the Emerald Management Review Citation of Excellence Award for “Collective Risk Management in a breach by LANFlight to Quality Episode”, Journal of Finance, 63(5), October 2008 (joint work with Arvind Krishnamurthy). In April 1998 Caballero was elected a Fellow of the transaction agreements;Econometric Society and
not to transfer their LAN common shares, except for certain permitted transfers to affiliates and only if the transferor continues to be, and the transferee agrees to become, bound by the terms subsequently of the transaction agreements.American Academy of Arts and Sciences in April 2010.
Carlos Heller Solari, joined the board of LAN in May 2010 and was re-elected to the Board of Directors of LATAM in April 2014. The mandate of Mr. Heller as a director ends in April 2015. The Mr. Heller has vast experience in retail (retail) through SACI Falabella in transport and logistics, agriculture, wine, Horse Riding and communications category. Mr. Heller is president of Bethia SA (“Bethia”) (parent company of Axxion SA and Betlan Two SA), Chairman of Axxion SA, Betlan Two SA, Equestrian Club of Santiago, Sotraser SA and Agricultural Ancali Ltda . also serves on the boards of SACI Falabella Falabella Retail SA, Sodimac SA, Titanium SA, Betfam SA Viña Indómita SA, Viña Santa Alicia SA, Viña Two Andes SA Blue Express SA and Aero Andina SA In addition eachhe is the principal shareholder and president of “Azul Azul” through Inversiones Limitada Alpes (first division team manager football at the LAN controlling shareholdersUniversity of Chile). At January 31, 2015, Mr. Heller indirectly held 33,367,357 ordinary shares of LATAM Airlines Group through Axxion SA and the TAM controlling shareholders have agreed that it has not entered into any voting agreement, voting trust or any other agreement, arrangement or obligations (whether or not legally binding) with respect to anyInversiones HS Spa (6.12% of the shares of capital stockLATAM Airlines Group) and 1.017.449.607 shares Naviera SA Group Companies Axxion through S.A.
Mr. Gerardo Jofré Miranda, joined LATAM’s Board of directors on May 2010 and was reelected to the board of directors of LATAM in April 2014. Mr. Jofré’s term as a director ends in April 2015. Mr. Jofré is member of the board of directors of Codelco. Mr. Jofré is member of the Real Estate Investment Council of Santander Real Estate Funds. From 2005 to 2010 he served as member of the boards of directors of Endesa Chile S.A., Viña San Pedro Tarapacá S.A., D&S S.A., Inmobiliaria Titanium S.A. Construmart S.A., Inmobiliaria Playa Amarilla S.A. and Inmobiliaria Parque del Sendero S.A. and was President of Saber Más Foundation. Mr. Jofré was Director of Insurance for America for Santander Group of Spain between the years 2004 and 2005. From 1989 to 2004 he served on Santander Group in Chile, as Vice Chairman of the Group and as CEO, member of the boards of directors and Chairman of many of the Group’s companies. As of January 31st, 2015, Mr. Jofre held49,923 common shares of LATAM Airlines Group (0.0092% of LATAM Airlines Group’s outstanding shares).
Mr. Francisco Luzón López, has served on LATAM Airlines Group’s board of directors since September 2012 and was reelected to the board of directors of LATAM in April 2014. Mr. Luzón’s term as a director ends in April 2015. He has served as a consultant of the Inter-American Development Bank (BID) and he has been Teacher “Visiting Leader” of the School of Business China-Europe (CEIBS) in Shanghai (2012-2013). He is currently a member of the board of La Haya Real Estate (September 2014) and an Independent Director at Willis Group (June 2013). Between 1999 and 2012, Mr. Luzon served as Executive Vice President for Latin America of Banco Santander. In this period, he was also Worldwide Vice President of Universia SA. Between 1991 and 1996 he was Chairman and CEO of Argentaria Bank Group. Previously, in 1987, he was appointed Director and General Manager of Banco de Vizcaya and in 1988 Counselor and General Director of Banking Group at BBV. During his career Mr. Luzon has held positions on the boards of several companies, most recently participating in the council of the global textile company Inditex-Zara from 1997 until 2012. As of January 31, 2015, Mr. Luzon held 12,200 common shares of LATAM Airlines Group (0.0022% of LATAM Airlines Group’s outstanding shares).
Senior Management1
Mr. Enrique Cueto Plaza, is LATAM Airlines Group’s Chief Executive Officer (“CEO”). From 1994 to 2012, Mr. Cueto was the CEO of LAN. From 1983 to 1993, Mr. Cueto was Chief Executive Officer of Fast Air, a Chilean Cargo airline. Mr. Cueto also served on the LAN board of directors from 1993 to 1994. Mr. Cueto has in-depth knowledge of passenger and cargo airline management, both in commercial and operational aspects, gained during his 24 years in the airline industry. Mr. Cueto is an active member of theoneworld® Alliance Governing Board, the IATA (International Air Transport Association) Board of Governors. He is also member of the Board of the Federation of Chilean Industry (SOFOFA) and of the Board of the Endeavor foundation, an organization dedicated to the promotion of entrepreneurship in Chile. Mr. Cueto is the brother of Mers. Juan José and Ignacio Cueto Plaza, member of the board and LAN CEO, respectively. Mr. Cueto is also a member of the Cueto Group (LATAM Airlines Group’s Controlling Shareholder). As of January 31, 2015, Mr. Cueto jointly shared in the beneficial ownership of 139,089,520 common shares of LATAM Airlines Group (25.49% of LATAM Airlines Group’s outstanding shares) held by the Cueto Group. For more information see “Item 7. Controlling Shareholders and Related Party Transactions.”
Mr. Ignacio Cueto Plaza, is LAN’s CEO. Mr. Cueto served as President of LAN Cargo from 1995 to 1998, as Chief Executive Officer-Passenger Business from 1999 to 2005, and as President and Chief Operating Officer of LAN since 2005 until the combination with TAM in 2012. Mr. Cueto has previously served on the board of directors of LAN (from 1995 to 1997) and Ladeco (from 1994 to 1997). In addition, Mr. Cueto served as Chief Executive Officer of Fast Air from 1993 to 1995. Between 1985 and 1993, Mr. Cueto held several positions at Fast Air, including Service Manager for the Miami sales office, Director of Sales for Chile and Vice President of Sales and Marketing. Mr. Cueto is the brother of Messrs. Juan José and Enrique Cueto Plaza, Director and LATAM’s CEO, respectively. Mr. Cueto is also a member of the Cueto Group (which is a controlling shareholder of LATAM). As of January 31, 2015, Mr. Cueto shared in the beneficial ownership of 139,089,520 common shares of LATAM (25.49% of LATAM’s outstanding shares) held by the Cueto Group. For more information see “Item 7. Controlling Shareholders and Related Party Transactions.”
Mr. Marco Bologna, is TAM’s CEO since May, 2010. He is also board member of Suzano Papel e Celulose S/A. He joined TAM controlling shareholders, Holdco I, Holdco II or Sister Holdco that it beneficially ownsin March 2001, when he was appointed Vice President for Finance and Management, and Market Relations Director. From 2004 to 2007 he served as President of TAM Linhas Aéreas, and in March 2009 he took over as President of TAM Aviação Executiva and Táxi Aéreo S.A. Since April 30, 2010 he has chaired the holding company TAM S.A., which brings together TAM Linhas Aéreas, TAM Airlines (formerly TAM Mercosur), Multiplus Fidelidade, and the maintenance unit TAM MRO. In February 2012, he was also appointed President of TAM Linhas Aéreas. Mr. Bologna has extensive experience in the aviation industry, and has worked in the financial markets for over 20 years. Mr. Bologna will cease to be CEO of TAM on April 1ST, 2015.
Mr. Armando Valdivieso Montes,is President of LAN. Between 1997 and 2005 he served as Chief Executive Officer-Cargo Business of LAN and from 2006 until 2012 he served as the General Manager-Passenger. After the combination with TAM in 2012, Mr. Valdivieso served as LATAM’s Spanish Speaking Countries Executive Vice-President, before being named to his current position. From 1994 to 1997, Mr. Valdivieso was President of Fast Air. From 1991 to 1994, Mr. Valdivieso served as Vice President, North America of Fast Air Miami. As of January 31, 2015, according to shareholder registration data in Chile, Mr. Valdivieso owned 67,359 common shares of LATAM Airlines Group (0.012% of LATAM Airlines Group’s outstanding shares).
Mrs. Claudia Sender Ramirez, has served as TAM Airlines’ President since May 2013. Mrs. Sender joined the company in December 2011, as Commercial and Marketing Vice-President. After June 2012, with the conclusion of TAM-LAN combination and the creation of LATAM Airlines Group, she became the head of Brazil Domestic Business Unit, and her functions were expanded in order to include TAM’s entire Customer Service structure. Mrs. Sender dedicated most of her career in consumer goods industry, focused in Marketing and Strategic Planning. Prior to joining TAM, she was Marketing Vice-President at Whirlpool Latin America for
1 | Mr. Damian Scokinheld the positionof LATAM’s International Unit Business Executive Vice President until September 30, 2014, date in which Mr. Scokin left the company |
seven years. She also worked as a consultant at Bain&Company, developing projects for large companies in various industries, including TAM Airlines and other players of the global aviation sector. She has a bachelor degree in Chemical Engineering from the Polytechnic School at the University of São Paulo (USP) and a MBA from Harvard Business School.
Mr. Roberto Alvo Milosawlewitsch, is LATAM’s Senior VP Planning and Network. Mr. Alvo has served in various roles within LAN since 2001, including as CFO of LAN Argentina from 2005 until 2008, as Vice-president of Development of LATAM Airlines Group from 2003 until 2005 and Vice-President of Treasury of LATAM Airlines Group from 2001 until 2003. He assumed the position of Senior Vice-President Strategic Planning and Development in 2008. Before 2001 Mr. Alvo held various positions at Sociedad Química y Minera de Chile S.A., a leading non-metallic Chilean mining company. Mr. Alvo is a civil engineer and obtained an MBA from IMD in Lausanne, Switzerland.
Mr. Jerome Cadier, is Chief Marketing Officer, a position he assumed in March 1st, 2013. Mr. Cadier has a Masters degree from the Kellogg Graduate School of Business, USA and an Industrial Engineer degree from Escola Politecnica da Universidade de Sao Paulo, Brasil. Between 1994 and 2002, Mr. Cadier worked as a management consultant for McKinsey and Co. in Sao Paulo, Brasil. In 2003 he joined Whirlpool Home Appliances where he held several positions among which are head of sales and marketing for Brazil and CEO for Whirlpool Oceania.
Mr. Juan Carlos Mencio is Senior Vice President of Legal Affairs and Compliance for LATAM Airlines Group since June 1, 2014. Mr. Mencio had previously held the position of General Counsel for North America for LATAM Airlines Group and its related companies, as well as General Counsel for its worldwide Cargo Operations, both since 1998. Prior to joining LAN, he was in private practice in New York and Florida representing various international airlines. Mr. Mencio obtained his Bachelor’s Degree in International Finance and Marketing from the School of Business at the University of Miami and his Juris Doctor Degree from Loyola University.
Mr. Andrés Osorio, is LATAM’s Chief Financial Officer (“CFO”), and has held this position since August, 2013. He holds a Business degree from the Catholic University of Chile and has over 20 years of experience leading financial areas in companies such as Cencosud, where he was CFO for 7 years, and Metrogas, among others. He has also been CEO of Empresas Indumotora, a Chilean automobile conglomerate, and was a partner at PricewaterhouseCoopers in Chile. As of January 31, 2015, Mr. Osorio owned 20,000 common shares of LATAM (0.0036% of LATAM Airlines Group’s outstanding shares).
Mr. Emilio del Real Sota, is LATAM’s HR Executive Vice-President, a position he assumed (with LAN) in August 2005. Mr. del Real has a Psychology degree from Universidad Gabriela Mistral. Between 2003 and 2005, Mr. del Real was the Human Resource Manager of D&S, a Chilean retail company. Between 1997 and 2003 Mr. del Real served in various positions in Unilever, including Human Resource Manager for Chile, and Training and Recruitment Manager and Management Development Manager for Latin America.
Mr. Cristian Ureta Larrain, is LATAM’s Cargo Executive Vice-President. From 1998 and 2002, Mr. Ureta was LAN Cargo’s Planning and Development Vice-President and in 2002 he was promoted to Production Vice President. In 2005, Mr. Ureta assumed the position of General Manager-Cargo. Mr. Ureta has an Engineering degree from Pontificia Universidad Católica and a Special Executive Program from Stanford University. Prior to that, Mr. Ureta served as General Director and Commercial Director at Mas Air, and as Service Manager for Fast Air.
B. Compensation
In 2014, the Company paid its principal executives (considering the levels of Vice- Presidents, General Managers, Senior Director and Directors as defined above) a total of US$ 44,133,566. No incentives for performance during 2014 were paid. As a result, the Company paid its principal executives total gross remunerations of US$ 44,133,566.
Under Chilean law, LATAM Airlines Group must disclose in its annual report details of all compensation paid to its directors during the relevant fiscal year, including any amounts that they received from LATAM Airlines Group for functions or employment other than serving as a member of the board of directors, including amounts received as per diem stipends, bonuses and, generally, all other payments. Additionally, pursuant to regulations of the Superintendencia de Valores y Seguros de Chile (“SVS”), the Chilean securities regulator, the annual report must also include the total compensation and severance payments received by managers and principal executives, and the terms of and the manner in which board members and executive officers participate in any stock option plans.
LATAM Airlines Group’s directors are paid 50 UF per meeting (100 UF for the chairman of the board) and 40 UF for assistance to the subcommittee of Directors meetings. LATAM Airlines Group also provides certain benefits to its directors and executive officers, such as free and discounted airline tickets and health insurance. We do not grantedhave contracts with any of our directors to provide benefits upon termination of employment.
As set forth in further detail in the following table, in 2014 the members of our board of directors currently in office received fees and salaries in the aggregate amount of US$372,913.
Board Members | Fees (US$)(2) (3) | |||
Mauricio Rolim Amaro | 53,717 | |||
Maria Claudia Amaro | 11,510 | |||
Henri Philippe Reichstul | 7,799 | |||
Ricardo J. Caballero | 27,450 | |||
Juan José Cueto Plaza | 36,508 | |||
Ramon Eblen Kadis | 63,406 | |||
Georges de Bourguignon | 62,887 | |||
José María Eyzaguirre Baeza | 5,946 | |||
Carlos Heller Solari | 18,067 | |||
Juan Gerardo Jofre Miranda | 66,039 | |||
Francisco Luzón López( | 19,585 | |||
Total | 372,913 | |||
(2) | Fees were converted from Chilean Pesos into US Dollars at a rate of CLP$600 per US Dollar. |
(3) | Includes fees paid to members of the board of directors’ committee, as described below. |
All of the above-mentioned directors were elected to the LATAM board of directors in April 2014.
As required by Chilean law, LATAM Airlines Group makes obligatory contributions to the privatized pension fund system on behalf of its senior managers and executives, but it does not maintain any separate program to provide pension, retirement or similar benefits to these or any other employees.
C. Board Practices
Our board of directors is currently comprised of nine members. The terms of each of our current directors will expire in April 2015. See “—Directors and Senior Management” above.
Committees
Board of Directors’ Committee and Audit Committee
Pursuant to Chilean Corporation Law, LATAM Airlines Group must have a proxy,board of directors’ committee composed of no less than three board members. LATAM Airlines Group has established a consent or powerthree-person committee of attorneyits board of directors, which, among other duties, is responsible for:
Under Chilean Corporation Law we are required, to the extent possible, to appoint a majority of independent directors to the Board of Directors Committee. A director is considered independent when he or she can be elected regardless of the voting of the controlling shareholders. See “Item 16. G. Corporate Governance.”
Pursuant to U.S. regulations, we are required to have an audit committee of at least three board members, which complies with the independence requirements set forth in effect.Rule 10A-3 under the Exchange Act. Given the similarity in the functions that must be performed by our Board of Directors’ Committee and the audit committee, our Board of Directors’ Committee serves as our Audit Committee for purposes of Rule 10A-3 under the Exchange Act.
As of March 31, 2015, all of the Conditions forCommencementmembers of our Board of Directors’ Committee, which also serves as our Audit Committee, were independent under Rule 10A-3 of the Exchange Offer
Mutual ConditionsOther LATAM Board Committees
LATAM’s board of directors also has established four other committees to review, discuss and make recommendations to our board of directors. These include a Strategy Committee, a Leadership Committee, a Finance Committee and a Brand, Product and Frequent Flyer Program Committee. The Strategy Committee focuses on the corporate strategy, current strategic issues and the three-year plans and budgets for the Commencementmain business units and functional areas and high-level competitive strategy reviews. The Leadership Committee focuses on, among other things, group culture, high-level organizational structure, appointment of the Exchange OfferLATAM CEO and his or her other reports, corporate compensation philosophy, compensation structures and levels for the LATAM CEO and other key executives, succession or contingency planning for the LATAM CEO and performance assessment of the LATAM CEO. The Finance Committee is responsible for financial policies and strategy, capital structure, monitoring policy compliance, tax optimization strategy and the quality and reliability of financial information. Finally, the Brand and Frequent Flyer Program Committee is responsible for brand strategies and brand building initiatives for the corporate and main business unit brands, the main characteristics of products and services for each of the main business units, frequent flyer program strategy and key program features and regular audit of brand performance.
On June, 2014 LATAM’s board of directors established a Risk Committee to oversee the creation, implementation and management of a risk matrix for the Company
Corporate Governance Practices
On March 31, 2014 LATAM Airlines Group filed the Company’s Corporate Practices Report prepared according to General Rule N° 341 of the Securities and Insurance Commission issued November 29, 2012. The reporting obligation stipulated in this rule is for practices in place as of December 31st of each year and the report must be presented no later than March 31st of the following year.
The transaction agreements contain conditionsreport provided each year to the Commission must cover the following subjects:
D. Employees
The following table sets forth the number of employees in various positions at the Company.
Employees ending the period | As of December 31, | |||||||||||
2014(1) | 2013 | 2012 | ||||||||||
Administrative | 10,077 | 9,908 | 8,980 | |||||||||
Sales | 5,246 | 5,680 | 4,858 | |||||||||
Maintenance | 6,986 | 6,925 | 6,932 | |||||||||
Operations | 17,517 | 17,054 | 18,138 | |||||||||
Cabin crew | 9,237 | 9,339 | 10,164 | |||||||||
Cockpit crew | 4,009 | 4,091 | 4,527 | |||||||||
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Total | 53,072 | 52,997 | 53,473 | |||||||||
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(1) | At December 31, 2014, approximately 24% of our employees worked in Chile, 75% in other Latin American countries and 1% in the rest of the world. |
We have a performance-related pay structure for our administrative, management and flight personnel (such as cabin crew members, airport and sales agents, call-center employees, and some back office employees) including performance-based bonuses and pay scales that reward foreign language proficiency among counter, technical and administrative personnel. During 2013, 93% of our employees were eligible to receive performance related bonus payments that are linked to personal, team and corporate performance. TAM executives participate in the same program described below. For other employees there is a profit sharing program, which is a variable pay program based on the Company’s financial performance.
We provide our employees with medical insurance complementary to the coverage of the private health system, and also grant other benefits, such as free and discounted airline tickets, to our permanent employees.
A stock option compensation plan is offered to key senior executives. For a detailed description of the stock option compensation plan, please see Note 38 to our audited consolidated financial statements for the commencementfiscal year ended December 31, 2013.
As required by Chilean law, we make obligatory contributions to the privatized pension fund system on behalf of our employees, but we do not maintain any separate program to provide pension, retirement or similar benefits to these or any other employees. However, the pilots’ collective bargaining agreement includes a clause that permits resignation with severance payment, in case a pilot reaches a certain age and is still providing services to the company. In Brazil, TAM offers a private pension plan to its executives and pilots.
Long Term Incentive Compensation Program
On December 21, 2011, the extraordinary shareholders meeting approved a capital increase of 142,355,882 shares to a total of 488,355,791 shares. The same meeting designated 4,800,000 shares for purposes of a proposed employee stock option compensation plan. Those 4,800,000 shares represented a 0.98% of the total share capital after such capital increase. The shareholders’ meeting authorized our board of directors to elaborate the compensation plan. The 2011 Compensation Plan is aimed at promoting our interests by encouraging senior management employees to contribute substantially to our success, by motivating them with stock options.
The | general features of this stock option plan are: |
(a) | The selection of the employees of the Company and its subsidiaries that were included by the Board of Directors in the compensation plan was made after a recommendation by our Executive Committee. A stock option agreement was signed with each selected employee for the number of options in connection to the acquisition of our shares to be allocated to such employee. |
(b) | Until the shares in the option are subscribed, the optionee has no economic or political rights and is not considered in the quorums of shareholders meetings. |
(c) | The options allocated to each employee are vested in parts, on the following two dates: (1) 30% on December 21, 2014; (2) 30% on December 21, 2015; and (3) 40% on June 21, 2016, subject to remaining employed by the Company. |
(d) | The period during which the employee must exercise the options will expire December 21, 2016. If the employee has not exercised or waived the options in that period, the employee will be understood, for all purposes, to have waived the options and, accordingly, all rights, powers, promises or offers in relation to the subscription of cash shares in the Company will be deemed extinguished and it will be understood that the employee has irrevocably waived all rights or powers in relation thereto, releasing us from any obligation. |
(e) | The price payable for these shares if the respective options are exercised is US$17.22 adjusted by the variation in theConsumer Price Index (“CPI”) published monthly by the U.S. Department of Labor, from the date it was set by our Board of Directors to the date of subscription and payment of the shares. Such price shall be paid in Chilean pesos, converted at the observed dollar exchange rate published in the Official Gazette on the same date as subscription and payment of the shares. |
The selection of employees for participation in the stock option plan was based on, among other criteria that the Board determined at the time of employment with the Company, the position they hold, their importance in earning profits, the responsibility of their position, the amount of equity managed, the ability to work as a team, performance, potential for development and importance within the Company given their education and experience.
As of March, 2015, Stock Option Contracts were issued by the Company to 46 employees of the Company and its subsidiaries for a total of 4,202,000 stock options. This stock option plan excludes members of the Cueto group, the LATAM Controlling Shareholder, that serve as senior management of the Company.
The Company’s shareholders approved the issuance of 1,500,000 shares at the Special Shareholders Meeting held June 11, 2013, among other matters. Those shares will be allocated to compensation plans for the employees of the Company and its subsidiaries (the “2013 Compensation Plan”).
The general features of the 2013 Compensation Plan are:
1. | The options allocated to each employee shall be exercisable entirely on November 15, 2017, provided the employee continues to work for the Company. |
2. | Employees may exercise such options, after they become exercisable on the aforesaid date, either all at once or in parts. They must subscribe and pay for those shares at once, at the time of subscription, in cash, by check, by bank check, by money transfer or by any other instrument or medium representing cash payable on demand. Partial option exercises cannot be for less than 10% of all options granted to the Employee. |
3. | The period in which employees must exercise options after they become exercisable expires June 11, 2018. If employees have not exercised or waived options in that period, they shall be deemed to have waived the options for all purposes and, accordingly, all rights, powers, promises or offers in relation to the subscription of cash shares in the company shall be deemed extinguished, the employee shall be deemed to have irrevocably waived all rights or powers in relation thereto, and the company shall be released from any obligation. |
4. | The price payable per share allocated to the 2013 Compensation Plan is US$16.40, if the respective options are exercised, adjusted by the change in the Consumer Price Index (“CPI”) published monthly by the U.S. Department of Labor, starting the first day of the preemptive option period to the date of subscription and payment of the shares. The subscription price will be paid in Chilean pesos, converted using the Observed Dollar exchange rate published in the Official Gazette on the same date as subscription and payment of shares. |
No options have been granted under the 2013 Compensation Plan.
Training
There has been no significant change in the number of company employees between 2012 and 2014. There was also no significant variation between the positions held by such employees.
As of December 31, 2014, the Company had 776 temporary employees. Approximately 48% of these temporary employees worked in Chile, 50% in other Latin American countries and 2% in the rest of the world.
As of December 31, 2014, 97% of all company employees with permanent contracts are covered by collective agreements.
Labor Relations
We believe we generally maintain good relations with our employees and the unions, and expect to continue to enjoy good relations with our employees and the unions in the future. We also believe that we have built a solid base among our employees that will support and facilitate our growth plans. We can provide no assurance, however, that our employee compensation arrangements may not be subject to change or modification after the expiration of the contracts currently in effect, or that we will not be subject to labor-related disruptions due to strikes, stoppages or walk-outs.
Chile
We usually negotiate longer-term labor contracts with the labor unions in anticipation of their scheduled expirations. Under Chilean law longer-term labor contracts are limited to a period of four years. In general, the expiration of our labor agreements with the several unions that represent our pilots and other personnel are staggered in a way that we avoid being in the position of having to renegotiate contract terms with substantially all of our pilots or other personnel at the same time.
In 2014, we renegotiated our collective bargaining agreement with LAN Express’ flight attendants union, which will be effective until 2018.
Ecuador
• | LAN:In Ecuador, three employee associations were formed in 2012: of pilots, other general but composed mostly by maintenance employees and other general but composed mostly by employees of airports/administration. |
Additionally, in 2011 a union previously exclusive to cabin crew became general. These groups maintain relations with the Company, but do not have the right to enter into or negotiate collective bargaining agreements under Ecuadorian law, because less than 50% of our employees eligible for membership are members of each union
In November 2014 the Company’s negotiation of a voluntary agreement with the association of pilots was suspended because the directive did not agree with the offer from the Company.
• | ANDES: In 2013 two unions of ground handling employees were formed in Andes. |
These groups maintain relations with the Company, but do not have the right to enter into or negotiate collective bargaining agreements under Ecuadorian law, because less than 50% of our employees eligible for membership are members of each union.
Argentina
In Argentina, the majority of LAN employees are members of sectorial unions. In December 2014, we entered into five salary agreements with unions representing LAN Argentina employees. Negotiations with the Mechanics’ Union are still ongoing. These negotiations take place annually due to need to make adjustments for inflation
Peru
LAN Peru is negotiating with the union of flight dispatchers, and is expected to conclude negotiations with a collective agreement during the first quarter of 2015. In Peru we have five other unions whose collective agreements are in favorforce until 2016 (pilots), 2017 (cabin crew, aircraft technicians) and 2018 (airport workers).
Brazil
Under Brazilian law, the validity of both LANcollective bargaining agreements is limited to two years. TAM’s collective bargaining agreements are valid for one year (for the economic clauses) and for two years (for social clauses). TAM has historically negotiated collective bargaining agreements with nine unions in Brazil— one crew flight union, which represents the functions of flying workers (pilots, copilots and flight attendants), and nine ground staff unions, which are TAM employees who exercise their duties on the ground to support TAM’s operations. In December 2013, TAM renegotiated collective bargaining agreements with nine unions, which included a wage increase of 7% for ground workers (ground handling) earning minimum wage, and an increase of 5.6% for other salaried ground workers and flying workers, and the inflation rate for the period was 5.6%. For the ground staff workers with salaries up to ten thousand dollars, the increase was 5.6% and for employees earning over R$ 10,000 the adjustment was R$ 560.0. During the negotiations there was no stoppage of employees or even strike action.
E. Share Ownership
As of January 31, 2015, the members of our Board of Directors and our executive officers as a group own 48.77% of our shares. See “Item 7. Controlling Shareholders and Related Party Transactions.”
For a description of stock options granted to our executive officers, see “—Employees—Long Term Incentive Compensation Program.”
ITEM 7. | CONTROLLING SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
A. Major Shareholders
The Cueto Group is LATAM’s controlling shareholder and it is comprised by Mr. Juan José Cueto Plaza (one of our directors), Mr. Ignacio Cueto Plaza (the CEO LAN), Mr. Enrique Cueto Plaza (the CEO LATAM) and certain other family members. As of January 31, 2015, the Cueto Group owned 25.49% of LATAM Airlines Group’s common shares. The Cueto Group is entitled to elect three of the nine members of our board of directors and is in a position to direct the management of the Company. The Cueto Group, which we also refer to as the “LATAM controlling shareholders,” have entered into a shareholder’s agreement with LATAM, TEP Chile and the TAM controlling shareholders. Consequently,See “—Shareholders’ Agreements.”
Following our combination with TAM, the Amaro Group is also a major shareholder of LATAM Airlines Group. The Amaro Group, which we also refer to as the “TAM controlling shareholders,” are controlling shareholders of TAM, through their 100% ownership of TEP Chile and majority ownership of Holdco III voting shares, which owns 100% of the common shares of TAM. The Amaro Group’s members include our chairman Mauricio Rolim Amaro and our former director Maria Claudia Amaro. As of January 31, 2015, the Amaro Group owned 12.02% of LATAM Airlines Group’s common shares. The Amaro Group has entered into a shareholder’s agreement with LATAM and the LATAM controlling shareholders. The terms of this shareholders’ agreement require the LATAM controlling shareholders to vote to elect individuals nominated by TEP Chile as members of our board of directors. See “—Shareholders’ Agreements.”
In addition to these shareholders, there are two other major shareholder groups. As of January 31, 2015, the Bethia Group, which includes our director Carlos Heller Solari, owned 6.14% of our common shares and the Eblen Group, which includes our director Ramón Eblen Cádiz, owned 5.12% of our common shares.
The table below sets forth the beneficial owners, as of January 31, 2015, of our common shares, including our controlling shareholders, other major shareholders and minority shareholders.
Beneficial ownership (as of January 31, 2015) | ||||||||
Number of shares of common stock beneficially owned | Percentage of common stock beneficially owned | |||||||
Shareholder | ||||||||
Cueto Group | 139,089,520 | 25.49 | % | |||||
Costa Verde Aeronautica S.A. | 85,772,914 | 15.72 | % | |||||
Inversiones Nueva Costa Verde Aeronautica Ltda. | 22,914,277 | 4.20 | % | |||||
Costa Verde Aeronautica SpA | 20,000,000 | 3.67 | % | |||||
Others | 10,402,326 | 1.91 | % | |||||
Amaro Group | 65,554,075 | 12.02 | % | |||||
TEP Chile S.A. | 65,554,075 | 12.01 | % | |||||
Bethia Group. | 33,367,363 | 6.12 | % | |||||
Axxion S.A. | 18,473,333 | 3.39 | % | |||||
Inversiones HS SpA. | 14,894,024 | 2.73 | % | |||||
Eblen Group. | 27.945.199 | 5.12 | % | |||||
Inversiones Andes S.A. | 17,146,529 | 3.14 | % | |||||
Inversiones PIA SpA. | 5,403,804 | 0.99 | % | |||||
All other minority shareholders | 279.601.943 | 51.25 | % | |||||
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Total | 545.558.101 | 100.00 | % | |||||
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As of January 31, 2015, 7.66% of our capital stock was held in the form of ADSs, and 0.52% in the form of BDSs. Chilean pension funds held 17.63% of our capital stock and other minority investors held 25.44% in the form of common shares. It is not permittedpracticable for us to commencedetermine the exchange offer unless allnumber of ADSs or common shares beneficially owned in the following conditions are satisfiedUnited States. As of January 31, 2015, we had 1,638 record holders of our common shares. It is not practicable for us to determine the portion of shares held in Chile or waived by both LAN and TAM controllingthe number of record holders in Chile. All of our shareholders as of the date of commencement of the exchange offer:have identical voting rights.
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This approval was obtained at LAN’s Extraordinary Shareholders Meeting held on December 21, 2011. Consequently, this condition has been satisfied. For more information about LAN’s Extraordinary
Shareholders Meeting seeAs described above under “Item 4. Information on the Company—History and Development of the Company—The Transaction Agreements—Lan Shareholders’ Meeting”. However, this approval is subject to satisfactionCombination of the conditions set forth in the transaction agreements and a final ruling for LAN from the Chilean Supreme Court on LAN’s appeal with respect to three conditions set forth in the decision of the TDLC with respect to the consultation procedure initiated on January 28, 2011 by Conadecus, a Chilean consumer association in connection with the proposed combination.
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This approval was obtained at TAM’s Shareholders Meeting held on December 21, 2011. Consequently, this condition has been satisfied. For more information about TAM Shareholders’ Meeting see “Item 4. Information on the Company—History and Development of the Company—The Transaction Agreements—TAM Shareholders’ Meeting”.
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As of March 12, 2012, no further required regulatory approvals are needed to complete the exchange offer and the mergers. All the required regulatory approvals have been obtained, as follows:
Chile
On September 21, 2011, the Chilean TDLC issued its decision (“Decision”) with respect to the consultation procedure initiated on January 28, 2011 by Conadecus in connection with the proposed combination with TAM. The persons and entities that were accepted as intervening parties in the consultation procedure, among others, are the following: Conadecus, as consultant, FNE, Sky Airline, Aerolínea Principal de Chile S.A. (“PAL”), ACHET (a Chilean travel agents association), LAN, LAN Cargo and TAM. The Decision of the TDLC approved the proposed combination with TAM with fourteen mitigating measures.
On October 3, 2011, PAL filed an appeal in order to have the Chilean Supreme Court revoke the Decision issued by the TDLC approving the proposed combination subject to certain conditions. On October 25, 2011 LAN reached an extrajudicial agreement with PAL pursuant to which (i) PAL abandoned the appeal before the Chilean Supreme Court and undertook to terminate all actions or proceedings that it initiated, as well as to desist from initiating new proceedings, aimed at blocking the proposed combination between LAN and TAM, and (ii) LAN paid PAL US$5 million.
On October 3, 2011, LAN also filed an appeal seeking the amendment or elimination, as applicable, of the following three conditions set forth in the Decision:
amendment of the seventh condition regarding mandatory prior consultation with the TDLC for the execution of certain codeshare agreements in order to eliminate the obligation to submit such agreements to the prior approval of the TDLC, replacing it with the obligation to notify the FNE of any such agreements.
elimination of the eighth condition regarding the abandonment of certain traffic frequencies and limitation on acquiring certain air traffic frequencies; and
amendment of the fourteenth condition regarding the independent consultant in order to limit and modify the intrusive and inspection powers granted to both the FNE and the consultant with respect to LAN and TAM.
Likewise, on the same date TAM L.A. filed an appeal seeking the amendment of the seventh condition of the Decision. It is expected that the Chilean Supreme Court will render a final decision with respect to the above-mentioned appeals within the next month.
If the seventh condition is not amended, LATAM’s passengers to and from Chile would be denied the benefit of the increased connectivity that would be provided by the codeshare agreements that would require prior approval of the TDLC unless and until such approval was obtained. LATAM’s ability to negotiate existing codeshares and to adapt to changes in the markets in which it has to compete could also be adversely affected because the time required to obtain the prior approval of the TDLC to amendments to those agreements could take longer than is required to adequately react to new conditions.
If the eighth condition is not eliminated, LATAM will be required to cancel or re-route certain flights out of Lima that could adversely impact connectivity of some passengers.
If the fourteenth condition is not amended, the independent consultant and the FNE will have certain inspection powers that in LAN’s opinion could increase administrative burdens and impose additional costs that would not be shared by the other airlines with which LATAM needs to compete. In addition, in LAN’s opinion this condition would undermine LAN’s constitutional rights to equality under the law, due process and protection of mail and document privacy because it would give the independent consultant and FNE intrusive and disproportionate powers solely with respect to LAN and subject LAN to a supervisory regime that would not apply to any other competitor or industry in Chile.
Brazil
On September 3, 2010, LAN and TAM submitted a merger filing before the Brazilian Antitrust System, composed of CADE, theSecretaria de Direito Econômico (Ministry of Justice) (“SDE”) and theSecretaria de Acompanhamento Econômico (Ministry of Finance) (“SEAE”). The filing was made based on the Memorandum of Understanding, executed by the parties on August 13, 2010. As per the request of the parties, the SEAE suspended its analysis of the merger filing until the parties had taken more definitive steps with respect to the proposed combination. On October 21, 2010, the parties informed SEAE of the execution of theInstrumento Particular de Ratificação de Entendimento by the parties on October 12, 2010, pursuant to which the parties agreed on a transaction structure for the proposed combination and requested that SEAE resume its analysis of the merger filing. As part of its analysis, SEAE sent a series of information requests to LAN and TAM (Official Letter Nos. 11.143/2010; 12.203/2010; 6.566/2011; 6.607/2011; 7.218/2011; 7.555/2011; and 7.866/2011) requesting information on the markets affected by the proposed combination. All of these Official Letters were duly answered by LAN and TAM. SEAE also sent information requests to the parties’ competitors, suppliers and clients. SEAE issued its report approving the merger filing without any restrictions on August 11, 2011. The case was then further examined by CADE’s Reporting Commissioner, Olavo Chinaglia, for an additional four months. CADE sent information requests to LAN and TAM (Official Letter Nos. 1830/2011; 1945/2011; 2410/2011; and 2493/2011) to complement SEAE’s analysis. On December 14, 2011, the case was adjudicated in a Plenary Session, where the board of CADE approved the transaction with the following conditions: (i) LAN and TAM cannot be members of more than one global airline alliance; (ii) LAN and TAM must swap two pairs of slots in the International Airport of Guarulhos (São Paulo/Brazil) (“Guarulhos Airport”) with one or more companies that is willing to operate non-stop flights on the São Paulo-Santiago route, granting the swapping companies the necessary infrastructure in the Guarulhos Airport; and (iii) LAN and TAM must publish the contents of the decision in newspapers widely sold in Brazil, and send letters to carriers that operate commercial flights from Guarulhos Airport, informing them of the decision. On December 30, 2011, LAN and TAM submitted a motion to clarify the decision, in which they requested that CADE clarify certain points of the decision. The motion to clarify was partially accepted
by CADE’s Plenary Board, on February 8, 2012, to establish that LAN will not be required to implement the measures imposed by CADE until the exchange offer has been completed. LAN and TAM are permitted to proceed with the implementation of the transaction, regardless of the decision on the remaining points under the motion to clarify.
Argentina
Under Argentine Law No. 25,156, notification of the exchange offer and the mergers must be filed with theComisión Nacional de Defensa de la Competencia (the national antitrust commission of Argentina) (“CNDC”) (i) prior to the perfection or closing of the transaction, or (ii) within one week after the date (a) on which the transaction is closed, (b) the announcement of the commencement of a tender or exchange offer, or (c) the acquisition of a controlling stake, whichever event occurs sooner. The notification to the CNDC is not required in order to complete the exchange offer or the mergers.
On April 4, 2011, the CNDC initiated an investigation to determine whether the transaction would require a filing with the CNDC. LAN filed its response on May 18, 2011, enclosing the information and documentation requested by the CNDC. In its response, LAN stated that none of the conditions for filing the notification as set forth by the Argentinian antitrust regulations were met as of that time, and thus LAN would send the notification to the CNDC at the time required by those regulations.
Argentine law does not prohibit the consummation of the exchange offer or the mergers before the CNDC has granted its approval of the exchange offer and the mergers.
E.U.
LAN and TAM conduct business in a number of countries outside Latin America. In connection with the proposed combination, LAN and TAM identified two jurisdictions in the European Union, Germany and Spain, where a merger control filing is required and where clearance is needed prior to completion of the exchange offer. Filings have been made and unconditional clearances have been secured in Germany in July 2011, and Spain in October 2011. A merger control filing was also made in Italy, and unconditional approval of the Italian competition authority has been obtained in August 2011, although such approval is not required in order to complete the exchange offer and the mergers.
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As of March 12, 2012, no restraining orders have been issued.
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As of March 12, 2012, no adverse actions have been commenced.
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As of March 12, 2012, CVM has not yet granted the registrations of LAN and the LAN BDRs representing the LAN common shares to be issued in the mergers on the Bovespa.
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As of March 12, 2012, we have not yet obtained all of the required listings.
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On November 15, 2011, the Company filed a registration statement on Form F-4 with the SEC in connection with the exchange offer as part of the proposed combination with TAM. On December 12, 2011, the Company received comments on the Form F-4 in a letter from the staff of the SEC (the “Staff”) to which the Company responded by filing a response letter and Amendment No. 1 to the Form F-4 on February 9, 2012. On February 28, 2012, the Company received additional comments in a second letter from the Staff to which the Company responded by filing a second response letter and Amendment No. 2 to the Form F-4 on March 12, 2012. As of March 13, 2012 the aforementioned registration statement has not been declared effective.
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As of March 12, 2012, each of the formation and restructuring transactions and all corporate actions required under applicable law and the terms of the transaction agreements have been completed with the exception of the restructuring of TEP.
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As of March 12, 2012, no appraisal events have occurred and the rights of shareholders of TAM under Brazilian law to request a new appraiser or a new appraisal report have expired.
LAN intends to commence the exchange offer immediately after the conditions for the commencement of the exchange offer have been satisfied. The Company expects that to happen within the next month.
LAN Conditions for the Commencement of the Exchange Offer
The transaction agreements contain conditions for the commencement of the exchange offer in favor of LAN. Consequently, Holdco II is not permitted to commence the exchange offer unless all of the following conditions are satisfied by TAM controlling shareholders or waived by LAN as of the date of commencement of the exchange offer:
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At Extraordinary General Shareholders’ Meetings held on December 21, 2011, the shareholders of Holdco II and Sister Holdco approved the merger of Holdco II and Sister Holdco, respectively, with LAN. No further shareholder approvals are required. As a result, this condition has been satisfied.
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On January 23, 2012, the Company announced that shareholders representing 7,237 LAN common shares exercised their appraisal rights as a result of the agreements reached at the December 21, 2011 Extraordinary General Shareholders’ Meeting. As of February 29, 2012, this represented only 0.00212% of LAN shareholders. As a result, this condition has been satisfied.
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On January 25, 2012, TAM, the TAM controlling shareholders, the LAN controlling shareholders and Holdco I, as applicable, entered into the shareholders agreements. As a result, this condition has been satisfied.
TAM Controlling Shareholders Conditions for the Commencement of the Exchange Offer
The transaction agreements contain conditions for the commencement of the exchange offer in favor of TAM controlling shareholders. Consequently, Holdco II is not permitted to commence the exchange offer unless all of the following conditions are satisfied by LAN or waived by TAM controlling shareholders as of the date of commencement of the exchange offer:
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On January 25, 2012, TAM, the TAM controlling shareholders, the LAN controlling shareholders and Holdco I, as applicable, entered into the shareholders agreements. As a result, this condition has been satisfied.
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Conditions to Completion of the Exchange Offer
The only conditions to the completion of the exchange offer are the exchange offer conditions set forth below:
Mutual Conditions to the Completion of the Exchange Offer
Holdco II is not permitted to complete the exchange offer unless all of the following conditions are satisfied or waived by LAN (in the case of LAN’s conditions) or both LAN and the TAM controlling shareholders (in the case of the mutual conditions):
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A holder will be deemed to be an “agreeing shareholder” with respect to its qualifying minority shares only if such holder:
validly tenders such qualifying minority shares into the exchange offer through the US exchange agent and does not withdraw such shares from the exchange offer; or
qualifies such qualifying minority shares for participation in the Auction and:
tenders such shares into, and does not withdraw them from, the Auction; and/or
indicates on the qualification form (a copy of which will be included with the letter of transmittal) that it agrees with the deregistration of TAM as a public company in Brazil with CVM.
A holder will be deemed to be an “disagreeing shareholder” with respect to its qualifying minority shares only if such holder:
validly tenders such qualifying minority shares into the exchange offer through the US exchange agent and subsequently withdraws such shares from the exchange offer; or
qualifies such qualifying minority shares for participation in the Auction and:
does not tender such shares in the Auction; and/or
indicates on the qualification form (a copy of which will be included with the letter of transmittal) that it disagrees with the deregistration of TAM as a public company in Brazil with CVM.
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LAN Conditions to the Completion of the Exchange Offer
Holdco II is not obligated to, and will not, purchase or pay for any of the TAM shares or TAM ADSs validly tendered and not withdrawn pursuant to the exchange offer unless all of such conditions are satisfied or waived by LAN:
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Conditions to the Subscriptions
The obligations of the TAM controlling shareholders to make and pay the TEP Chile subscription and for TEP Chile to pay the Holdco subscriptions are subject to the following conditions (the “subscription conditions”):
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Pre-Commencement Closing; Commencement of the Exchange Offer
The parties will attend a meeting (the “pre-commencement closing”) on the first business day (“pre-commencement closing date”) following the first day on which all of the commencement conditions are satisfied or waived in accordance with the exchange offer agreement (other than any such conditions that by their nature are to be satisfied at the pre-commencement closing, but subject to the satisfaction or waiver of those conditions) (the “condition date”). Holdco II is required to commence the exchange offer as promptly as practicable on the first business day after the pre-commencement closing date by publishing the Edital relating to the exchange offer (the “Edital”) in Brazil in accordance with Brazilian law. We refer to the date and time at which such publication occurs as the “commencement date.”
Actions on the Auction Date; Completion of the Exchange Offer
The Auction will be held on the Bovespa in Brazil in which the holders of TAM shares who decide to tender into the exchange offer will tender their TAM shares and receive such LAN common shares in the form of LAN BDSs (each of which represents one LAN common share), which will be evidenced by LAN BDRs.
The exchange offer and withdrawal rights for tenders of TAM ADSs and TAM shares will expire at 5:00 p.m. Eastern time (6:00 p.m. São Paulo time) (the “expiration time”) on the date (the “expiration date”) immediately preceding the date on which the auction on Bovespa will occur (the “Auction date”).
The transaction agreements describe the schedule of events to occur after the expiration time on the expiration date as follows:
no later than the Tender Certification Time (which is 6:00 a.m. Eastern time (8:00 a.m. São Paulo time)) on the Auction date, Itaú will certify to Bovespa, Holdco II, LAN and the TAM controlling shareholders the total number of TAM shares (including those represented by TAM ADSs) that the US exchange agent has certified to Itaú have been validly tendered into the exchange offer through the US exchange agent and not withdrawn from the exchange offer as of the expiration time;
at 8:00 a.m. Eastern time (9:00 a.m. São Paulo time) on the Auction date, Bovespa will inform LAN, Holdco II and the TAM controlling shareholders whether or not the minimum conditions (taking into account the TAM shares and TAM ADSs tendered through the US exchange agent) have been satisfied;
promptly after receiving that notice (but no later than 8:10 a.m. Eastern time (9:10 a.m. São Paulo time) on the Auction date), LAN will notify the TAM controlling shareholders in writing as to whether or not all of the exchange offer conditions waivable by LAN (other than the condition relating to the TEP Chile subscription and the Holdco subscriptions) have been satisfied or irrevocably waived by LAN;
if the LAN condition notice states that all exchange offer conditions have been satisfied or waived, then promptly after receiving LAN’s notice (but no later than 8:20 a.m. Eastern time (9:20 a.m. São Paulo time) on the Auction date), the TAM controlling shareholders will inform LAN in writing whether or not all of the exchange offer conditions waivable by them and the subscription conditions have been satisfied or irrevocably waived by them, and if all such conditions have been satisfied or waived by them, then promptly after sending that notice (but no later than 8:30 a.m. Eastern time (9:30 a.m. São Paulo time) on the Auction date), the TAM controlling shareholders will subscribe and pay for a number of shares of TEP
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before the date of this annual report on Form 20-F, TEP Chile subscribed for non-voting shares of Holdco I in exchange for all of the TAM common shares to be contributed by the TAM controlling shareholders to TEP Chile and subscribed for Sister Holdco shares in exchange for all of the non-voting shares of Holdco I, 6.2% of the voting shares of Holdco I and all of the TAM preferred shares to be contributed by the TAM controlling shareholders to TEP Chile. Immediately after subscription and payment of the TEP Chile subscription, TEP Chile will pay for these subscriptions by paying Holdco I with all of the TAM common shares contributed to it by the TAM controlling shareholders and pay Sister Holdco with all of the non-voting shares of Holdco I, 6.2% of the voting shares of Holdco I and all of the TAM preferred shares contributed to it by the TAM controlling shareholders (which we refer to as the “Holdco subscriptions” and the “Sister Holdco Subscriptions,” respectively, and which we refer to collectively with the TEP Chile subscriptions as the “subscriptions”);
promptly after payment of the subscriptions (but no later than 8:40 a.m. Eastern time (9:40 a.m. São Paulo time) on the Auction date), LAN and the TAM controlling shareholders will issue a press release announcing that all of the exchange offer conditions have been satisfied or irrevocably waived; and
if all the exchange offer conditions are so satisfied or waived, the auction (which we refer to as the “Auction”) will commence at the Auction time, which is 9:00 a.m. Eastern time (10:00 a.m. São Paulo time) (or such other time as Bovespa may determine) on the Auction date, and the TAM controlling shareholders will cause Holdco II to complete the exchange offer on the Auction date by accepting for exchange and exchanging (with LAN ADSs and LAN BDSs issuable in the mergers) all TAM shares validly tendered into, and not withdrawn from, the exchange offer through the Auction and all TAM shares and TAM ADSs validly tendered, and not withdrawn from, the exchange offer through the US exchange agent that Holdco II is obligated to acquire for exchange pursuant to the terms of the exchange offer. The completion of the exchange offer will be deemed to be the acquisitions of TAM shares tendered pursuant to the Auction and the acquisitions of TAM shares and TAM ADSs tendered through the US exchange agent, and such purchases will be settled on the third business day following the Auction date in accordance with the applicable procedures of Bovespa and the SEC.
However, if (x) either LAN or the TAM controlling shareholders do not state that all of the conditions described above have been satisfied or irrevocably waived or (y) the subscriptions or any of the payments required pursuant to the subscriptions are not made in full when required by the transaction agreements, then the Auction will not occur and the exchange offer will expire without the purchase of any TAM shares or TAM ADSs.
Notwithstanding the foregoing, if the Auction commences at any time other than 9:00 a.m. Eastern time (10:00 a.m. São Paulo time) on the Auction date, then each of the times specified above (except for the last time that a withdrawal may be made) will be adjusted by the same amount that the actual time of the commencement of the Auction differs from 9:00 a.m. Eastern time (10:00 a.m. São Paulo time).
Extensions and Amendments
The exchange offer will initially expire on the date provided in the Edital. However, if all of the exchange offer conditions are not satisfied at, or waived by the parties prior to, the scheduled expiration time for the exchange offer, then LAN or the TAM controlling shareholders (if they are entitled to the benefit of the unsatisfied condition) may cause Holdco II to request permission from the CVM to extend the expiration time for the exchange offer in maximum increments of three days to no later than 28 days after the commencement date. If both LAN and the TAM controlling shareholders agree to request a modification to the terms and conditions of the exchange offer or revocation of the exchange offer, the TAM controlling shareholders are required to cause Holdco II to request permission from the CVM to modify the terms and conditions of the exchange offer or to revoke the exchange offer. LAN and the TAM controlling shareholders have agreed to cause Holdco II to request permission from the CVM to revoke the exchange offer if the transaction agreements terminate in accordance with their terms.
Delistings
Each of the TAM controlling shareholders and TAM are required to use its or their commercially reasonable efforts to cause (i) the TAM shares to be delisted from Bovespa if the delisting condition is satisfied with respect to either class of TAM stock and (ii) the TAM ADSs to be delisted from the NYSE as soon as practicable after the effective time.
Completion Board Meeting
LAN is required to convene a special meeting of the LAN board of directors prior to the settlement of the acquisitions to be made pursuant to the exchange offer to give effect to the delivery of the required LAN common shares issuable pursuant to the mergers as soon as practicable, but not later than two business days following, the completion of the exchange offer.
The Mergers; Directors and Officers; By-laws
Holdco II Merger
The implementation agreement provides for the merger of Holdco II with and into LAN after the completion of the exchange offer and prior to the settlement of the purchases made pursuant to the exchange offer. As the surviving corporation, we will continue to exist following the Holdco II merger. Pursuant to the Holdco II merger, each share of Holdco II stock (including those issuable pursuant to the settlement of the purchases made pursuant to the Auction) will be converted into a LAN common share at a ratio of 0.9 of a LAN common share per share of Holdco II stock (the “Holdco II exchange ratio”). Holders of TAM preferred shares (including those represented by TAM ADSs) will receive, by virtue of the Holdco II merger, LAN common shares in the following form in exchange for their TAM shares or TAM ADSs tendered and accepted for exchange in the exchange offer, depending on the form of TAM preferred shares tendered in the exchange offer:
holders of TAM ADSs that are tendered and accepted for exchange in the exchange offer will receive LAN ADRs issued pursuant to the deposit agreement, dated as of October 28, 2011, among LAN, the LAN depositary, and the record holders and beneficial owners of LAN ADRs from time to time;
holders of TAM shares registered under Resolution No. 2,689/00 of January 26, 2000 enacted by the CMN that are tendered and accepted for exchange in the exchange offer will receive LAN common shares in the form of LAN BDRs or LAN ADRs, as permitted by applicable law; and
holders of all other TAM shares tendered and accepted for exchange in the exchange offer will receive LAN common shares in the form of BDRs representing such shares to be issued pursuant to a deposit agreement in customary form among LAN, a depositary agent to be selected by LAN and reasonably acceptable to TAM and the holders of LAN BDRs from time to time.
We are required to pay or cause to be paid all deposit fees and other expenses payable in connection with the issuance of such LAN ADRs and LAN BDRs.
Immediately after the completion of the Holdco II merger, we will contribute any TAM common shares beneficially owned by Holdco II immediately prior to such merger to Holdco I in exchange for new non-voting shares of Holdco I on a one-for-one basis. After this contribution, we will increase our ownership percentage of the outstanding voting shares of Holdco I by converting our non-voting shares of Holdco I into voting shares of Holdco I to (A) 100% minus (B) 80% divided by the percentage of the outstanding TAM common shares owned by Holdco I determined on a primary basis after giving effect to such contribution.
Voting shares of Holdco I have the exclusive right to vote on, approve or consent to all matters that are subject to any vote of or approval by the shareholders of Holdco I under the applicable law of Chile or otherwise (other than the limited voting rights of the non-voting shares of Holdco I) and have no economic rights other than the right to receive a nominal dividend (we refer to these rights as the “dividend rights”). Non-voting shares of Holdco I have the exclusive right to receive all dividends, distributions or other amounts payable by Holdco I in respect of any shares of its capital stock other than the dividend rights and have no right to vote on or approve any matter that is subject to any vote of or approval by the shareholders of Holdco I under applicable law of Chile or otherwise other than the rights to vote on and approve the matters requiring the approval of the holders of such shares under the applicable law of Chile or otherwise.
Sister Holdco Mergers
The implementation agreement also provides for the merger of Sister Holdco with and into LAN after the completion of the exchange offer and prior to the settlement of the purchases made pursuant to the exchange offer. As the surviving corporation, LAN will continue to exist following the Sister Holdco merger. We refer to the time that the mergers become effective as the “effective time.”
Pursuant to the Sister Holdco merger, each share of Sister Holdco stock will be converted into 0.90 of a LAN common share at a ratio of 0.9 of a LAN common share per share of Sister Holdco stock (the “Sister Holdco exchange ratio”). We will pay or cause to be paid all deposit fees and other expenses payable in connection with the issuance of such LAN common shares.
By-Laws
The parties are required to take all necessary action so that immediately following the effective time of the mergers the by-laws of Holdco I, Sister Holdco and Holdco II shall be in the forms attached to the exchange offer agreement.
Directors
We and the TAM controlling shareholders are required to discuss in good faith and agree upon the individuals who will be directors of LAN, Holdco I, TAM and their subsidiaries as of the effective time and to take all necessary action to ensure that immediately following, and on the same day as, the effective time of the mergers, the individuals selected for election to the board of directors of LAN, Holdco I, TAM and their subsidiaries by each of us and TEP Chile pursuant to the Holdco I shareholders agreement, by each of us and TEP Chile pursuant to the TAM shareholders agreement and by each of the LAN controlling shareholders and TEP Chile pursuant to the control group shareholders agreement shall be the directors of LAN, Holdco I, TAM and their subsidiaries. For a discussion of the parties rights to elect the directors of LAN, Holdco I, TAM and their subsidiaries, see the “Item 4. Information on the Company—History and Development of the Company—Shareholders Agreements—Voting Agreements.”
Effects of the Mergers
Capital Increase
When the shareholders of LAN approved the mergers, the share capital of LAN was increased by an aggregate amount equal to the sum of the share capital of Holdco II and the share capital of Sister Holdco at such time which amounts to US$ 1,417.6 million (the “initial capital increase”). After the completion of the mergers, the share capital of LAN will be increased a second time by the amount by which the net asset value of the TAM shares contributed pursuant to the subscriptions exceeds, or will be decreased by the amount by which such net asset value is less than, the initial capital increase (which we refer to as the “second capital increase”). The second capital increase of LAN will not change the number of issued and outstanding LAN common shares (including those represented by LAN ADSs and LAN BDSs).
Treatment of Holdco II and Sister Holdco Stock
At the effective time, each share of Holdco II stock issued and outstanding immediately prior to the effective time will be exchanged for 0.90 of a validly issued, fully paid and nonassessable LAN common share, which is the Holdco II exchange ratio less applicable withholding tax. Each share of Sister Holdco stock issued and outstanding immediately prior to the effective time will be exchanged for 0.90 of a validly issued, fully paid and nonassessable LAN common share, which is the Sister Holdco exchange ratio less applicable withholding tax.
TAM Options
TAM and the TAM board of directors, as applicable, were required prior to the commencement of the exchange offer to adopt any resolutions and take any actions necessary to ensure that (a) from and after the effective time of the mergers each TAM stock option outstanding immediately prior to the effective time, whether vested or unvested, will be exercisable only when vested and only for an amount in cash equal to the product of (i) the total number of shares of TAM stock in respect of which such TAM stock option is exercisable, and (ii) the amount (if any) by which (x) the product of the Holdco II exchange ratio and the closing price of the LAN common shares on the SSE on the last business day prior to the date on which such TAM stock option was exercised exceeds (y) the exercise price per share of TAM stock under such TAM stock option, less any applicable taxes required to be withheld with respect to such payment, and (b) none of execution, delivery or performance of the implementation agreement or the completion of the mergers or any other transactions contemplated by implementation agreement will, directly or indirectly, cause or result in any acceleration of the vesting of any TAM stock options, whether prior to, on or after the effective time.
Exchange Fund
Prior to the effective time, we will deposit or cause to be deposited with the US exchange agent, for the benefit of the holders of Holdco II stock and Sister Holdco stock, certificates or, at our option, evidence of shares in book-entry form, representing LAN common shares, including any cash to be paid in lieu of fractional LAN common shares, as discussed below in this section. We refer to such certificates or evidence of book-entry form, as the case may be, for LAN common shares and such cash paid in lieu of fractional shares collectively as the “exchange fund.” Any interest or income produced from investments of the exchange fund by the US exchange agent will not be deemed part of the exchange fund and will be payable to us.
Fractional Shares
No certificates or scrip representing fractional LAN common shares will be issued in the mergers or pursuant to the statutory squeeze-out and such fractional shares will not entitle the owner thereof to vote or to any rights of a shareholder of LAN. In lieu of fractional shares, we will pay each holder of a fractional LAN common share an amount in cash in US dollars equal to the product of (a) the fractional LAN common shares to which such holder would otherwise be entitled after taking into account all shares of Holdco II Stock or Sister Holdco stock owned of record by such holder immediately prior to the effective time, and (b) the closing price of the LAN common shares on the SSE on the last trading day immediately preceding the date on which the Auction on Bovespa occurs (the “Auction date”) (as reported inwww.bolsadesantiago.comor, if not reported therein, by another authoritative source), converted into US dollars using the “dólar observado” or “observed” exchange rate applicable on the Auction date as published by theBanco Central de Chile (“Central Bank of Chile”). This exchange rate (the “Chilean observed exchange rate”) is the average exchange rate of the previous business day’s transactions in the Formal Exchange Market (banks and other entities authorized by the Central Bank of Chile) and is published in theDiario Oficial (Official Gazette) by the Central Bank of Chile pursuant to number 6 of Chapter I of its Compendium of Foreign Exchange Rules on the date it applies, and is also made available atwww.bcentral.clat or around 6:00 P.M. (Santiago time) on the preceding day.
Statutory Squeeze-Out
After the completion of the exchange offer, if permitted under applicable Brazilian law, TAM will compulsorily redeem any TAM shares (including those represented as TAM ADSs) that did not accept the exchange offer, other
than those beneficially owned by the TAM controlling shareholders (the “non-tendered shares”). In this redemption, the holders of non-tendered shares will have the right to receive cash in an amount equal to the product of (i) the number of LAN ADSs or LAN BDSs that they would have received pursuant to the exchange offer in respect of its non-tendered shares (assuming they could have received fractional LAN common shares), and (ii) the closing price of the LAN common shares on the SSE on the last trading day immediately preceding the Auction date (as reported on the SSE’s website, www.bolsadesantiago.com or, if unavailable, as reported by another authoritative source), as converted into US dollars using the Chilean observed exchange rate applicable on the Auction date as published by the Central Bank of Chile, duly adjusted by the Central Bank of Brazil’s overnight lending rate. After TAM redeems all remaining TAM shares (including those represented by TAM ADSs), LAN will (i) contribute all voting ordinary shares of TAM acquired in the exchange offer to Holdco I in exchange for non-voting shares of Holdco I, and (ii) increase its ownership percentage of the outstanding voting shares of Holdco I to 20% by converting its non-voting shares of Holdco I into voting shares of Holdco I.
Delistings
Each of the TAM controlling shareholder and TAM are required to use its or their commercially reasonable efforts to cause (i) the TAM preferred shares to be delisted from the Bovespa if the delisting condition is satisfied with respect to such class of TAM stock and (ii) the TAM ADSs to be delisted from the NYSE as soon as practicable after the effective time.
Termination
The transaction agreements will terminate automatically if and when (i) the exchange offer expires in accordance with its terms or is revoked with the permission of CVM without the purchase of any TAM shares or (ii) if the product of 0.90 and the high end of the range of economic value of LAN per LAN common share as determined by the Appraiser at any time is less than the low end of the range of economic value of TAM per TAM share of stock as determined by the Appraiser at such time. In addition, LAN and the TAM controlling shareholders may terminate the transaction agreements by mutual written consent.
The transaction agreements may also be terminated and the exchange offer and the mergers may be abandoned at any time prior to the commencement of the exchange offer as follows, whether before or after receipt of any requisite shareholder approvals:
by either LAN or the TAM controlling shareholders:
if the exchange offer has not commenced by June 30, 2012 (the “outside date”);
if any governmental entity of competent jurisdiction refuses to grant any required approval (other than any approval required from CVM with respect to the inclusion in the Edital of any of the LAN’s conditions to the completion of the exchange offer) and such refusal has become final and nonappealable or any governmental entity of competent jurisdiction has enacted, issued, promulgated, enforced or entered any restraining order that has become final and non-appealable, and such event would give rise to the failure of the condition relating to receipt of all required approvals or absence of restraining order;
however, none of the termination rights described in the preceding bullet points will be available to any party whose material breach of a representation, warranty or covenant in any transaction agreement has been a principal cause of the failure of the exchange offer to commence by the outside date or the failure of the condition giving rise to such termination right, as applicable.
by LAN:
if TAM, TEP or the TAM controlling shareholders has breached or failed to perform any of its representations, warranties, covenants or agreements set forth in the transaction agreements or any of such representations and warranties becomes untrue as of any date after the signing date, which breach
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prior to the commencement of the exchange offer if CVM has refused to grant its approval to the inclusion in the Edital of any of the LAN’s conditions to the completion of the exchange offer; or
if (i) the TAM board of directors or any committee thereof (x) withholds, withdraws or modifies or qualifies in any manner adverse to LAN either of the recommendations of the board of directors of TAM in support of the proposed combination, (y) approves, adopts, or recommends any alternative proposal, or (z) makes, causes to be made or resolves to make or cause to be made any public statement proposing or announcing an intention to take any of the preceding actions (which we refer to as a “TAM board recommendation change”); or (iii) in any such case all of the directors designated for election to the TAM board of directors by the TAM controlling shareholder and/or the Amaro family do not vote against the TAM board recommendation change;
by the TAM controlling shareholders:
if LAN or the LAN controlling shareholders has breached or failed to perform any of its representations, warranties, covenants or agreements set forth in the transaction agreements or any of such representations and warranties becomes untrue as of any date after the signing date, which breach or failure to perform or untruth (i) would give rise to the failure of the condition relating to accuracy of the representations and warranties of LAN and the LAN controlling shareholders or compliance by any of them with their obligations under the transaction agreements and (ii) is not capable of being cured or, if capable of being cured, is not cured by LAN or the LAN controlling shareholders, as applicable, by the earlier of (A) the day before the outside date and (B) the 30th calendar day following receipt of written notice of such breach or failure to perform from TAM; or
if (i) the LAN board of directors or any committee thereof (x) withholds, withdraws or modifies or qualifies in any manner adverse to TAM either of the LAN board recommendations in support of the proposed combination, (y) approves, adopts, or recommends any alternative proposal, or (z) makes, causes to be made or resolves to make or cause to be made any public statement proposing or announcing an intention to take any of the preceding actions (which we refer to collectively as, a “LAN board recommendation change”) or (iii) in either such case all of the directors designated for election to the LAN board of directors by the LAN controlling shareholders did not vote against the LAN board recommendation change.
Termination Fees
TAM is required to pay us a fee equal to US$200 million (“TAM termination fee”) and reimburse LAN for all documented out-of-pocket expenses incurred by it or any of its subsidiaries in connection with the transaction agreements and the transactions contemplated by the transaction agreements up to a maximum amount of $25 million (no later than the second business day after TAM receives documentation for reimbursement) if:
LAN terminates the transaction agreements because the board of directors of TAM or any committee thereof (x) withholds, withdraws or modifies or qualifies in any manner adverse to LAN either of the recommendations of the board of directors of TAM in support of the proposed combination, (y) approves, adopts, or recommends any alternative proposal, or (z) makes, causes to be made or resolves to make or cause to be made any public statement proposing or announcing an intention to take any of the foregoing actions; or within 12 months after the date that a competing proposal termination occurs, TAM or any of its subsidiaries completes any transaction that constitutes a competing proposal with the person that made the
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A “competing proposal termination” occurs if:
In each case, the transaction agreements automatically terminate solely because either of the minimum conditions is not satisfied or because an appraisal event occurs.
We are required to pay TAM a fee equal to $200 million (“LAN termination fee”) and reimburse TAM for all documented out-of-pocket expenses incurred by it or any of its subsidiaries in connection with the transaction agreements and the transactions contemplated by the transaction agreements up to a maximum amount of $25 million (no later than the second business day after we receive documentation for reimbursement) if:
the TAM controlling shareholders terminate the transaction agreements because the board of directors of LAN or any committee thereof (x) withholds, withdraws or modifies or qualifies in any manner adverse to TAM either of the recommendations of the board of directors of LAN in support of the proposed combination, (y) approves, adopts, or recommends any alternative proposal, or (z) makes, causes to be made or resolves to make or cause to be made any public statement proposing or announcing an intention to take any of the foregoing actions; or within 12 months after the date that a competing proposal termination occurs, LAN or any of its subsidiaries complete any transaction that constitutes a competing proposal with the person that made the competing proposal or any of its affiliates, enter into any binding or non-binding agreement with such person or any of its affiliates providing for a transaction that constitutes a competing proposal or LAN’s board of directors approves or recommends to its shareholders or does not oppose any competing proposal made by such person or any of its affiliates (in each case regardless of whether such competing proposal was made or announced or became publicly known before or after termination of the transaction agreements and in any such case the LAN termination fee is payable on the date that is the first to occur of the event(s) referred to in this paragraph).
Remedies
If either we or TAM fails promptly to pay the amount due to the other party as a result of the termination of the transaction agreements under certain circumstances and, in order to obtain such payment, the other party commences a suit that results in a judgment against us or TAM for all or a portion of the TAM termination fee or the LAN termination fee, as applicable, such party is required to pay to the other party its costs and expenses (including reasonable attorneys’ fees and expenses) in connection with such suit, together with interest on the amount of the TAM termination fee or the LAN termination fee, as applicable, accruing from the date such payment was required to be made pursuant to the implementation agreement until the date of payment at the six-month LIBOR rate in effect on the date such payment was required to be made plus 3%. The right to receive the fees and expenses payable described above under “—Termination Fees” will be in addition to, and not in lieu of, any other remedies a party may have at law or in equity with respect to breaches of the implementation agreement by the other party.
Indemnification
Indemnification by LAN
We are required to indemnify, defend and hold the TAM controlling shareholders, its affiliates and their respective directors, officers, employees and shareholders harmless from and against any and all damages, losses, charges, liabilities, claims, demands, actions, suits, proceedings, payments, judgments, settlements, assessments, deficiencies, taxes, interest, penalties, and costs and expenses (including reasonable attorneys’ fees and disbursement), which we refer to collectively as “indemnifiable losses,” incurred by any of them (whether or not involving a claim by any third party) arising out of or resulting from (i) the failure of the exchange offer to be completed solely as a result of any failure by LAN to confirm in writing to the controlling shareholders of TAM on the expiration date that any exchange offer condition waivable only by LAN (other than the squeeze-out condition) was satisfied if (but only if) such condition was in fact satisfied or (ii) any failure of the exchange offer to be completed after the controlling shareholders of TAM has paid for the TEP Chile subscription.
Indemnification by the TAM Controlling Shareholders
The controlling shareholders of TAM, jointly and severally, are required to indemnify, defend and hold us, our affiliates and our respective directors, officers, employees and shareholders harmless from and against any and all indemnifiable losses incurred by any of us (whether or not involving a claim by a third party) arising out of or resulting from any failure by the controlling shareholders of TAM to confirm in writing to us on the expiration date that any of the subscription conditions was satisfied if (but only if) such condition was in fact satisfied.
Access
Subject to certain exceptions, both we and TAM will, upon reasonable prior written notice, afford the other and its authorized representatives reasonable access to it and furnish the other information concerning its business, properties and personnel as may reasonably be requested until the completion of the exchange offer or termination of the transaction agreements, whichever occurs sooner.
Amendment
The parties are not permitted to amend transaction agreements after the commencement of the exchange offer.
Expenses
Except for the termination fees described above, each party is required to pay its own fees and expenses that it incurs in connection with the transaction agreements, the mergers and the other transactions contemplated by the transaction agreements, regardless of whether the exchange offer is commenced or the exchange offer and the mergers are completed, except that expenses incurred in connection with the printing and mailing of the exchange offer prospectus and the filing fee for the Form F-4 will be shared equally by LAN, on the one hand, and TAM controlling shareholders, on the other hand.
Choice of Law and Jurisdiction
The transaction agreements are governed by New York law with regard to all matters other than the authorization and execution of the transaction agreements, which are governed by the laws of each party’s jurisdiction of incorporation.
Shareholders Agreements
As discussed above under the section “—The Transaction Agreements”, following the combination of LAN and TAM in June 2012, TAM will continueS.A. continues to exist as a subsidiary of Holdco I (andand a subsidiary of LATAM, and LAN Airlines S.A. has been redesignated as an affiliate of LAN) and our name will be changed to “LATAM Airlines Group S.A.” or “LATAM.” On January 25, 2012 we
Prior to the consummation of the business combination, LATAM Airlines Group and the LANLATAM controlling shareholders entered into several shareholdersshareholders’ agreements with TAM, the TAM controlling shareholders (acting through TEP Chile) and Holdco I that establish agreements and TEP Chilerestrictions relating to corporate governance in an attempt to balance LATAM Airlines Group’s interests, as the owner of substantially all of the economic rights in TAM, and the TAM controlling shareholders, as the continuing controlling shareholders of TAM under Brazilian law, by prohibiting the taking of certain specified material corporate actions and decisions without prior supermajority approval of the shareholders and/or the board of directors of Holdco I or TAM. These shareholders’ agreements also set forth our
the parties’ agreement with respect toregarding the governance management and operation of LAN, Holdco I, TAM and their respective subsidiaries (collectively, the “LATAM Group.”) following the effective time. The shareholders agreements set forth an extensive set of principles that will apply to the corporate governance and organizationmanagement of the LATAM Airlines Group following the effective time, which are summarized below. Pursuant to their terms, the shareholders agreements will become effective only if and at the time that Holdco I becomes a holder of at least 80%consummation of the outstanding TAM common shares.business combination of LAN and TAM.
Governance and Management of LATAM Group
The control group shareholders agreement and the LAN-TEP shareholders agreement set forth the parties’ agreement on the governance and management of the LATAM Group following the effective time. We refer to the shareholdersshareholders’ agreement among the LANLATAM controlling shareholders and TEP Chile, which sets forth the parties’ agreement concerning the governance, management and operation of the LATAM Group, and voting and transfer of their respective LANLATAM Airlines Group common shares and TEP Chile’s voting shares of Holdco I, following the effective time as the “control group shareholdersshareholders’ agreement.” We refer to the shareholdersshareholders’ agreement between us and TEP Chile, which sets forth our agreement concerning the governance, management and operation of the LATAM Group as the “LATAM Airlines Group-TEP shareholders’ agreement.” The control group shareholders’ agreement and the LATAM Airlines Group-TEP shareholders’ agreement set forth the parties’ agreement on the governance and management of the LATAM Group following the effective time as the “LAN-TEP shareholders agreement.”time.
This section describes the key provisions of the control group shareholdersshareholders’ agreement and the LAN-TEP shareholdersLATAM Airlines Group-TEP shareholders’ agreement. The rights and obligations of the parties to the control group shareholders agreement and the LAN-TEP shareholders agreement are governed by the express terms and conditions of the aforementioned shareholders agreements and not by this summary or any other information contained in this annual report on Form 20-F. The description of these control group shareholdersshareholders’ agreement and the LAN-TEP shareholdersLATAM Airlines Group-TEP shareholders’ agreement summarized below and elsewhere in this annual report on Form 20-F are qualified in their entirety by reference to the full text of the aforementioned shareholdersshareholders’ agreements, which are incorporated by reference intohave been filed as exhibits to this annual report on Form 20-F. For a full understanding of these agreements, we advise you to read these agreements carefully and in their entirety.
Composition of the LATAM Airlines Group Board
LAN expects that Mr. Maurício Rolim Amaro and Maria Cláudia Oliveira Amaro will be electedwas reelected to the LATAM Airlines Group board of directors at a special meeting of the shareholders of LATAM to be held after the effective time in which the entire LATAM board of directors will be replaced. Mr. Maurício Rolim Amaro will be the chairman of LATAM’s board of directors for the first two years following the effective time.April 2014. If Mr. Amaro vacates this position for any reason within that two-year period, TEP Chile has the right to select a replacement to complete his term. Thereafter, LATAM’sLATAM Airlines Group’s board of directors will appoint any of its members as the chairman of LATAM’sLATAM Airlines Group’s board of directors, from time to time, in accordance with LATAM’sLATAM Airlines Group’s by-laws.
Mrs. Maria Cláudia Oliveira Amaro was elected to the LATAM Board Committees
Promptly afterAirlines Group board of directors in June 2012, and resigned this position in September 2014. Also in September 2014, accordingly with Chilean law, Mr. Henri Philippe Reichstul was appointed by the effective time, ourboard to fill her seat until the next general shareholders meeting. Mr. Reichstul will serve in this position until the next ordinary meeting of shareholders, in which the board of directors will establish four committeeshave to review, discussbe renewed and make recommendations to our board of directors. These include a Strategy Committee, a Leadership Committee, a Finance Committee and a Brand, Product and Frequent Flyer Program Committee. The Strategy Committee will focus on the corporate strategy, current strategic issues and the three-year plans and budgets for the main business units and functional areas and high-level competitive strategy reviews. The Leadership Committee will focus on, among other things, group culture, high-level organizational structure, appointment of the chief executive officer (Vice Presidente Ejecutivo), LATAM CEO of the LATAM Group (“LATAM CEO”) and his or her other reports, corporate compensation philosophy, compensation structures and levels for the LATAM CEO and other key executives, succession or contingency planning for the LATAM CEO and performance assessment of the LATAM CEO. The Finance Committee will be responsible for financial policies and strategy, capital structure, monitoring policy compliance, tax optimization strategy and the quality and reliability of financial information. Finally, the Brand and Frequent Flyer Program Committee will be responsible for brand strategies and brand building initiatives for the corporate and main business unit brands, the main characteristics of products and services for each of the main business units, frequent flyer program strategy and key program features and regular audit of brand performance.
Management of the LATAM Group
Mr. Enrique Cueto Plaza currently ourhas served as CEO will be theof LATAM (“CEO following the effective time.LATAM”) since June 2012. The CEO LATAM CEO will beis the highest ranked officer of the LATAM Airlines Group and will reportreports directly to the LATAM board of directors. The CEO LATAM CEO will beis charged with the general supervision, direction and control of the business of the LATAM Airlines Group and certain other responsibilities set forth in the LAN-TEP shareholdersLATAM Airlines Group-TEP shareholders’ agreement. After any departure of the current CEO LATAM, CEO, our board of directors will select his or her successor after receiving the recommendation of the Leadership Committee.
Mr. Ignacio Cueto Plaza currently our president and chief operating officer (Gerente General), or the “COO”, will be the COOhas served as CEO of LATAM, or the “LATAM COO,” following the effective time.LAN (“CEO LAN”) since June 2012. The LATAM COO will reportCEO LAN reports directly to the CEO LATAM CEO and will havehas general supervision, direction and control of the passenger and cargo operations of the LATAM Group, excluding those conducted by Holdco I, TAM and its subsidiaries, and the international passenger business of the LATAM Group. The LATAM COO,CEO LAN, together with Mr. Marco Antonia Bologna, the current the CEO of TAM Group (“CEO will recommendTAM”), are responsible for recommending a candidate to the CEO LATAM CEO to serve as the head of the international passenger business of the LATAM Group (including both long haul and regional operations), who shall report jointly to the LATAM COOCEO LAN and the TAM Group CEO.CEO TAM. The key executives of the LATAM Group (other than the CEO LATAM CEO and those in the TAM Group) will be appointed by, and will report, directly or indirectly, to the LATAM CEO.CEO LATAM.
The head office of the LATAM Airlines Group will continuecontinues to be located in Santiago, Chile following the effective time.Chile.
Governance and Management of Holdco I and TAM
The Holdco I shareholders agreement and the TAM shareholders agreement set forth the parties’ agreement on the governance and management of Holdco I, TAM and its subsidiaries (collectively, the “TAM Group”) following the effective time. We refer to the shareholdersshareholders’ agreement between us, Holdco I and TEP Chile, which sets forth our agreement concerning the governance, management and operation of Holdco I, and voting and transfer of voting shares of Holdco I, following the effective time as the “Holdco I shareholdersshareholders’ agreement” and to the shareholdersshareholders’ agreement between us, Holdco I, TAM and TEP Chile, which sets forth our agreement concerning the governance, management and operation of TAM and its subsidiaries following the effective time as the “TAM shareholdersshareholders’ agreement.” The Holdco I shareholders’ agreement and the TAM shareholders’ agreement set forth the parties’ agreement on the governance and management of Holdco I, TAM and its subsidiaries (collectively, the “TAM Group”) following the business combination of LAN and TAM.
This section describes the key provisions of the Holdco I shareholdersshareholders’ agreement and the TAM shareholdersshareholders’ agreement. The rights and obligations of the parties to the Holdco I shareholders agreement and the TAM shareholders agreement are governed by the express terms and conditions of the aforementioned shareholders agreements and not by this summary or any other information contained in this annual report on Form 20-F. The description of these Holdco I shareholdersshareholders’ agreement and the TAM shareholdersshareholders’ agreement summarized below and elsewhere in this annual report on Form 20-F are qualified in their entirety by reference to the full text of the aforementioned shareholdersshareholders’ agreements, which are incorporated by reference intohave been filed as exhibits to this annual report on Form 20-F. For a full understanding of these agreements, we advise you to read these agreements carefully and in their entirety.
Composition of the Holdco I and TAM Boards
The Holdco I shareholdersshareholders’ agreement and TAM shareholdersshareholders’ agreement generally provide for identical boards of directors and the same chief executive officer at Holdco I and TAM, with usLATAM appointing two directors and TEP Chile appointing four directors (including the chairman of the board of directors). For the first two years after the effective time, the chairmanOn April 30, 2014 Mr. Marco Antonio Bologna was named President of the Holdco I andBoard of Directors of TAM boards of directors will beS.A. replacing Mrs. Maria Cláudia Oliveira Amaro.Amaro and on September 8th, 2014 Mrs. Maria Cláudia Oliveira Amaro resigned to her position as director of Holdco I. In her place, the board of directors appointed Mr. Henri Philippe Reichstul as a member of the board until the next general ordinary meeting of shareholders. A full renovation of the Board of Directors will take place no later than April 2015.
The control group shareholdersshareholders’ agreement provides that the persons elected by or on behalf of the LANLATAM controlling shareholders or the TAM controlling shareholder of TAMshareholders to our board of directors must also serve on the boards of directors of both Holdco I and TAM.
Management of Holdco I and TAM
The day-to-day business and affairs of Holdco I will be managed by the TAM Group CEO under the oversight of the board of directors of Holdco I. The day-to-day business and affairs of TAM will be managed by theTAM Diretoria under the oversight of the board of directors of TAM. The “TAM Diretoria” will be comprised of the TAM Group CEO, the TAM CFO, the TAM COO and the TAM CCO. Marco Bologna, currently the CEO of TAM, will be the initial CEO of Holdco I and TAM, or the “TAM Group CEO” and any successor CEO will be selected by usLATAM from three candidates proposed by TEP Chile. The TAM Group CEO will have general supervision, direction and control of the business and operations of the TAM Group (other than the international passenger business of the LATAM Group) and will carry out all orders and resolutions of the board of directors of TAM. The initial chief financial officer of TAM, or the “TAM CFO,” will behas been jointly selected by usLATAM and TEP Chile and any successor CFO will be selected by TEP Chile from three candidates proposed by us.LATAM The chief operating officer of TAM, or the “TAM COO,” and chief commercial officer of TAM, or the “TAM CCO,” will be jointly selected and recommended to the TAM board of directors by the TAM Group CEO and TAM CFO and approved by the TAM board of directors. These shareholdersshareholders’ agreements also regulate the composition of the boards of directors of subsidiaries of TAM.
Following the combination, TAM will continuecontinues to be headquartered in São Paulo, Brazil following the effective time of the mergers.Brazil.
Supermajority Actions
Certain actions by Holdco I or TAM require supermajority approval by the board of directors or the shareholders of Holdco I or TAM which effectively require the approval of both usLATAM and TEP Chile before the specified actions can be taken. Actions that require supermajority approval of the Holdco I board of directors or the TAM board of directors include, as applicable:
to approve the annual budget and business plan and the multi-year business (which we refer to collectively as the “approved plans”), as well as any amendments to these plans;
to take or agree to take any action which causes, or will reasonably cause, individually, or in the aggregate, any capital, operating or other expense of any TAM Company and its subsidiaries to be greater than (i) the lesser of 1% of revenue or 10% of profit under the approved plans, with respect to actions affecting the profit and loss statement, or (ii) the lesser of 2% of assets or 10% of cash and cash equivalents (as defined by IFRS) as set forth in the approved plan then in effect , with respect to actions affecting the cash flow statement;
to create, dispose of or admit new shareholders to any subsidiary of the relevant company, except to the extent expressly contemplated in the approved plans;
to approve the acquisition, disposal, modification or encumbrance by any TAM company of any asset greater than $15 million or of any equity securities or securities convertible into equity securities of any TAM Company or other company, except to the extent expressly contemplated in the approved plans;
to approve any investment in assets not related to the corporate purpose of any TAM Company,company, except to the extent expressly contemplated in the approved plans;
to enter into any agreement in an amount greater than $15 million, except to the extent expressly contemplated in the approved plans;
to enter into any agreement related to profit sharing, joint ventures, business collaborations, alliance memberships, code sharing arrangements, except as approved by the business plans and budget then in effect, except to the extent expressly contemplated in the approved plans;
to terminate, modify or waive any rights or claims of a relevant company or its subsidiaries under any arrangement in any amount greater than $15 million, except to the extent expressly contemplated in the approved plans;
to commence, participate in, compromise or settle any material action with respect to any litigation or proceeding in an amount greater than $15 million, relating to the relevant company, except to the extent expressly permitted in the approved plans;
to approve the execution, amendment, termination or ratification of agreements with related parties, except to the extent expressly contemplated in the approved plans;
to approve any financial statements, amendments, or to any accounting, dividend or tax policy of the relevant company;
to approve the grant of any security interest or guarantee to secure obligations of third parties;
to appoint executives other than the Holdco I CEO or the TAM Diretoria or to re-elect the then current TAM CEO or TAM CFO; and
to approve any vote to be cast by the relevant company or its subsidiaries in its capacity as a shareholder.
Actions requiring supermajority shareholder approval include:
to approve any amendments to the by-laws of any relevant company or its subsidiaries in respect to the following matters: (i) corporate purpose, (ii) corporate capital; (iii) the rights inherent to each class of shares and its shareholders; (iv) the attributions of shareholder regular meetings or limitations to attributions of the board of directors; (v) changes in the number of directors or officers; (vi) the term; (vii) the change in the corporate headquarters of a relevant company; (viii) the composition, attributions and liabilities of management of any relevant company; and (ix) dividends and other distributions;
to approve the dissolution, liquidation, winding up of a relevant company;
to approve the transformation, merger, spin-up or any kind of corporate re-organization of a relevant company;
to pay or distribute dividends or any other kind of distribution to the shareholders;
to approve the issuance, redemption or amortization of any debt securities, equity securities or convertible securities;
to approve a plan or the disposal by sale, encumbrance or otherwise of 50% or more of the assets, as determined by the balance sheet of the previous year, of Holdco I;
to approve the disposal by sale, encumbrance of otherwise of 50% or more of the assets of a subsidiary of Holdco I representing at least 20% of Holdco I or to approve the sale, encumbrance or disposition of equity securities such that Holdco I loses control;
to approve the grant of any security interest or guarantee to secure obligations in excess of 50% of the assets of the relevant company; and
to approve the execution, amendment, termination or ratification of acts or agreement with related parties but only if applicable law requires approval of such matters.
Voting Agreements, Transfers and Other Arrangements
Voting Agreements
The LANLATAM controlling shareholders and TEP Chile have agreed in the control group shareholders agreement to vote their respective LANLATAM Airlines Group common shares as follows after the effective time:follows:
until such time as TEP Chile sells any of its LAN common shares (other than the exempted shares as defined below held by TEP Chile), the LANLATAM Airlines Group controlling shareholders will vote their LANLATAM Airlines Group common shares to elect to the LATAM Airlines Group board of directors any individual designated by TEP Chile unless TEP Chile beneficially owns enough LANLATAM Airlines Group common shares to directly elect two directors to the LATAM Airlines Group board of directors;
the parties agree to vote their LANLATAM Airlines Group common shares to assist the other parties in removing and replacing the directors such other parties elected to the LATAM Airlines Group board of directors;
the parties agree to consult with one another and use their good faith efforts to reach an agreement and act jointly on all actions (other than actions requiring supermajority approval under Chilean law) to be taken by the LATAM Airlines Group board of directors or the LANLATAM Airlines Group shareholders;
the parties agree to maintain the size of the LATAM Airlines Group board of directors at a total of nine directors and to maintain the quorum required for action by the LATAM Airlines Group board of directors at a majority of the total number of directors of the LATAM Airlines Group board of directors; and
if, after good faith efforts to reach an agreement with respect to any action that requires supermajority approval under Chilean law and a mediation period, the parties do not reach such an agreement then TEP Chile has agreed to vote its shares on such supermajority matter as directed by the LANLATAM Airlines Group controlling shareholders, which we refer to as a “directed vote.”
The number of “exempted shares” of TEP Chile means that number of LANLATAM Airlines Group common shares which TEP Chile owns immediately after the effective time in excess of 12.5% of the outstanding LANLATAM Airlines Group common shares at such time as determined on a fully diluted basis.
The parties to the Holdco I shareholders agreement and TAM shareholders agreement have agreed to vote their voting shares of Holdco I and shares of TAM so as to give effect to the agreements with respect to representation on the TAM board of directors discussed above.
Transfer Restrictions
Pursuant to the control group shareholdersshareholders’ agreement, the LANLATAM Airlines Group controlling shareholders and TEP Chile are subject to certain restrictions on sales, transfers and pledges of the LANLATAM Airlines Group common shares and (in the case of TEP Chile only) the voting shares of Holdco I beneficially owned by them. Except for a limited amount of LANLATAM Airlines Group common shares, neither the LANLATAM Airlines Group controlling shareholders nor TEP Chile may sell any of its LANLATAM Airlines Group common shares, and TEP Chile may not sell its voting shares of Holdco I, until the third anniversary of the effective time.June 2015. Thereafter, sales of LANLATAM Airlines Group common shares by either party are permitted, subject to (i) certain limitations on the volume and frequency of such sales and (ii) in the case of TEP Chile only, TEP Chile satisfying certain minimum ownership requirements. After the tenth anniversary of the effective time,June 2022, TEP Chile may sell all of its LANLATAM Airlines Group common shares and voting shares of Holdco I as a block, subject to (x) approval of the transferee by the LATAM board of directors, (y) the condition that the sale not have an adverse effect and (z) a right of first offer in favor of the LANLATAM Airlines Group controlling shareholders, which we refer to collectively as “block sale provisions.” An “adverse effect” is defined in the control group shareholders agreement to mean a material adverse effect on our and Holdco I’s ability to own or receive the full benefits of ownership of TAM and its subsidiaries or the ability of TAM and its subsidiaries to operate their airline businesses worldwide. The LANLATAM Airlines Group controlling shareholders have agreed to transfer any voting shares of Holdco I acquired pursuant to such right of first offer to usLATAM for the same consideration paid for such shares.
In addition, TEP Chile may sell all LANLATAM Airlines Group common shares and voting shares of Holdco I beneficially owned by it as a block, subject to satisfaction of the block sale provisions, after the third anniversary of the effective timeJune 2015 if a release event (as described below) occurs or if TEP Chile is required to make two or more directed votes during any 24-month period at two meetings (consecutive or not) of the shareholders of LANLATAM Airlines Group held at least 12 months apart and LANLATAM Airlines Group has not yet fully exercised its conversion option described below. A “release event” will occur if (i) a capital increase of LATAM Airlines Group occurs, (ii) TEP Chile does not fully exercise the preemptive rights granted to it under applicable law in Chile with respect to such capital increase in respect of all of its restricted LANLATAM Airlines Group common shares, and (iii) after such capital increase is completed, the individual designated by TEP Chile for election to the board of directors of LATAM Airlines Group with the assistance of the LANLATAM Airlines Group controlling shareholders is not elected to the board of directors of LATAM.LATAM Airlines Group.
In addition, after the tenth anniversary of the effective timeJune 2022 and after the occurrence of the full ownership trigger date (as described below under the “—Conversion Option” section), TEP Chile may sell all or any portion of its LANLATAM Airlines Group common shares, subject to (x) a right of first offer in favor of the LANLATAM Airlines Group controlling shareholders and (y) the restrictions on sales of LANLATAM Airlines Group common shares more than once in a 12-month period.
The control group shareholders agreement provides certain exceptions to these restrictions on transfer for certain pledges of LANLATAM Airlines Group common shares made by the parties and for transfers to affiliates, in each case under certain limited circumstances.
In addition, TEP Chile agreed in the Holdco I shareholders agreement not to vote its voting shares of Holdco I, or to take any other action, in support of any transfer by Holdco I of any equity securities or convertible securities issued by it or by any of TAM or its subsidiaries without our prior written consent.
Restriction on transfer of TAM shares
WeLATAM agreed in the Holdco I shareholdersshareholders’ agreement not to sell or transfer any shares of TAM stock to any person (other than our affiliates) at any time when TEP Chile owns any voting shares of Holdco I. However, weLATAM will have the right to effect such a sale or transfer if, at the same time as such sale or transfer, weLATAM (or ourits assignee) acquires all the voting shares of Holdco I beneficially owned by TEP Chile for an amount equal to TEP Chile’s then current tax basis in such shares and any costs TEP Chile is required to incur to effect such sale or transfer. TEP Chile has irrevocably granted us the assignable right to purchase all of the voting shares of Holdco I beneficially owned by TEP Chile in connection with any such sale.
Conversion OptionAeronautica Civil
Pursuant (Colombian Civil Aeronautics), the Colombian international market increased 9.8% from 2013 to 2014 as measured in passengers transported, from 9.9 million passengers to approximately 10.9 million passengers in 2014. LAN (including LAN Colombia, LAN Peru and LAN Airlines) had a 7.4% share of the control group shareholders agreement andinternational market share in Colombia in 2014, as measured in RPK which is an increase of 1.0 percentage point as compared to 6.4% in the Holdco I shareholders agreement, we have the unilateral rightsame period 2013. The international operations in Colombia can be divided in two business segments based on destination: to convert our shares of non-voting stock of Holdco I into shares of voting stock of Holdco I to the maximum extent allowed under lawNorth America and to increase our representationother countries in Latin America. As of December 31, 2014, the main competitors on direct routes between Colombia and North America included Avianca-Taca, American Airlines, United Airlines, Air Canada, Delta Airlines and Aeromexico. COPA also participated in the Colombia-North American markets with stopovers in its Central American hub. On regional routes, the main competitors included Avianca-Taca and COPA.
Brazil
According to Brazilian ANAC data, Brazilian international air passenger traffic increased 4.9% from 2013 to 2014 as measured in RPKs, totaling more than 6.4 million passengers in 2014. TAM and Holdco I boardshad 84.6% of directors if and when permitted in accordance with foreign ownership control lawsthe international market share in Brazil in 2014 when considering only Brazilian airlines, which was a decrease compared to 87.5% in 2013. Our Brazilian international operations can be divided into three main segments, based on destination: to North America, to Europe and to other applicable laws ifcountries in Latin America. As of January 31, 2015, the conversion would not have an adverse effect (as defined above under the “—Transfer Restrictions” section).
On or after the tenth anniversary of the effective time and after we have fully converted all of our shares of non-voting stock of Holdco I into shares of voting stock of Holdco I as permitted by Brazilian law and other applicable laws, we will have the right to purchase all of the voting shares of Holdco I held by the controlling shareholders of TAM for an amount equal to their then current tax basis in such shares and any costs incurred by them to effect such sale, which amount we refer to as the “sale consideration.” If we do not timely exercise our right to purchase these shares or if, after the tenth anniversary of the effective time, we have the right under applicable law inmain competitors on direct routes between Brazil and other applicable lawNorth America included American Airlines, United Airlines, Delta Airlines, Air Canada and Aeromexico. Avianca-Taca also participated in the Brazil-North American markets with stopovers in its Central American hub. On routes to fully convert all the shares of non-voting stock of Holdco I beneficially owned by us into shares of voting stock of Holdco I and such conversion would not have an adverse effect but we have not fully exercised such right within a specified period, then the controlling shareholders of TAM will have the right to put their shares of voting stock of Holdco I to us for an amount equal to the sale consideration.
Acquisitions of TAM Stock
The parties have agreed that all acquisitions of TAM common shares by any member of the LATAM Group from and after the effective time will be made by Holdco I.
B. BUSINESS OVERVIEW
General
We are one of the leading passenger airlines in Latin America andEurope, the main air cargo operator incompetitors were Iberia, Air France-KLM, Lufthansa, TAP and Air Europa. On regional routes the region. We currently providemain competitors included Aerolineas Argentinas, Avianca-Taca and GOL.
Domestic Passenger Operations
LATAM provides domestic and international passenger services inwithin Chile, Peru, Ecuador, Argentina and Colombial. Said domestic passenger services are operated by LAN, LAN Express and the regional subsidiaries, including LAN Peru, LAN Ecuador, LAN Argentina and LAN Colombia. We carry out our cargo operations through the use of belly space on ourAdditionally, TAM Linhas Aereas provides domestic passenger flights and dedicated cargo operations using freighter aircraft through our cargo airlines in Chile, Brazil, Colombia and Mexico. In 2007, we initiated a strategy for stimulating demand for air travel in our domestic markets by offering lower-fare options to travelers, lowering our costs and increasing the aircraft utilization rates and efficiency of operations. For more information about our short-haul operations see “—Business of the Company—Passenger Operations—services within Brazil.
Business Model for Domestic Operations” below.Operations
As of February 29, 2012, we serviced 15 destinations in Chile, 14 destinations in Peru, 4 destinations in Ecuador, 17 destinations in Argentina, 23 destinations in Colombia, 15 destinations in other Latin American countries and the Caribbean, 5 destinations in the United States, 2 destinations in Europe and 4 destinations in the South Pacific. In addition, as of February 29, 2012, through our various code-share agreements, we offer service to 29 additional destinations in North America, 17 additional destinations in Europe, 29 additional destinations in Latin America and the Caribbean (including Mexico) and 2 destinations in Asia. We provide cargo service to all our passenger destinations and to approximately 20 additional destinations served only by freighter aircraft. We also offer other services, such as ground handling, courier, logistics, and maintenance.
Competitive Strengths
Our strategy is to maximize shareholder value by increasing revenues and profitability through leveraging the operational efficiencies between our cargo and passenger divisions, thoroughly planning for our expansion efforts and carefully controlling costs. We plan to accomplish these goals by both focusingLATAM operates on our existing competitive strengths and implementing new strategies to fuel our future growth. We believe our most important competitive strengths are:
Leading Presence in Key South American Markets
We are one of the main international and domestic passenger airlines in Latin America, as well as the largest cargo operator in Chile and most of the South American markets that we serve. We hold the largest market share of passenger traffic to and from Chile, Peru and Ecuador, as well as the largest market share of domestic passenger traffic in both Chile and Peru. More recently, we have also achieved a solid and growing position in the Argentine domestic market through Lan Argentina and in the Argentine international market through Lan Argentina and our other passenger airlines. We are also strengthening our presence in the Ecuadorian market, where we began domestic passenger operations on April 6, 2009. We entered the Colombian domestic and international market through the acquisition of Aires on November 26, 2010. During 2011 we worked on restructuring the company in order to achieve LAN’s standards. As a result, at the end 2011, we rebranded the company to Lan Colombia. We are also the leading air cargo operator within, to and from South America, and we are consolidating our leadership through new cargo operations in Colombia and in the Brazilian domestic market, as well as through an increased presence in routes between South America and Europe. Our international and domestic passenger and cargo operations have increased substantially over the past five years in terms of capacity, traffic and revenue. Between 2005 and 2011, our passenger capacity grew 82.8% and our cargo capacity grew 50.0%.
Diversified Revenue Base from both Passenger and Cargo Operations
We believe that one of our distinct competitive advantages is our ability to profitably integrate our scheduled passenger and cargo operations. We take into account potential cargo services when planning passenger routes, and also serve certain dedicated cargo routes using our freight aircraft, when needed. By adding cargo revenues to our existing passenger service, we are able to increase the productivity of our assets and maximize revenue, which has historically covered fixed operating expenses per flight, lowered break-even load factors and enhanced per flight profitability. Additionally, this revenue diversification helps offset seasonal revenue fluctuations and reduces the volatility of our business over time. As of December 2011, passenger revenues accounted for 70.1% of total revenues and cargo revenues accounted for 27.6% of total revenues.
Attractive Cost Structure with High Utilization of our Assets and Productive Personnel
We believe that we have a highly competitivelow cost structure with a cost per ATK of 51.4 cents in 2011. Our cost advantage arises mainly from our productive and committed employees, high aircraft utilization, modern and fuel-efficient fleet and cost-conscious culture. Our wages and labor costs accounted for approximately 19.6% of total costs in 2011, which we believe is a lower percentage than that of many other U.S. and European carriers.
Furthermore, our itineraries and aircraft rotations are designed to maximize aircraft utilization. During 2011, our long-haul aircraft (Boeing 767-300 passenger and Airbus A340-300s) operated an average of approximately thirteen hours per day. We also implemented a new business model for short-haul operations in 2007; as a result, by the end of 2011 we increased the utilization of our narrow body aircraft to reach 9.5 hours per day. In May 2008, we completed the phase-out of the Boeing B737-200 from our fleet. Our short haul fleet is now entirely composed of Airbus A320-Family Aircraft with the exception of Lan Colombia’s fleet.
In addition, during 2009 we continued with the implementation of LEAN, a system that seeks to improve our processes by eliminating activities that do not add value (thus increasing the value of each activity and suppressing those that are superfluous), which reduces costs, improves efficiency and increases customer satisfaction. The adoption of this system constituted a redesigning of processes that permits solving problems that may occur during the execution of any process, such as aircraft maintenance. The foregoing renders the daily tasks and processes carried out within the Company more efficient. Due to its implementation, during 2011 we achieved a 40% decrease in maintenance delays and a 40% reduction in the turn-around time in certain checks in Chile and Peru. LEAN also allowed us in 2011 to support the Company’s high growth, by streamlining the pilot training process, which resulted in more pilots trained during that year. Finally, it allowed the Company to reduce CO2 emissions, by redesigning processes in various areas that result in a decrease of more than 10 million gallons of fuel consumption. In addition, by establishing clear roles, challenges and achievements, the implementation of LEAN has had an important benefit in terms of employee motivation. See “Item 4. Information on the Company—Business of the Company—Maintenance.”
Strong Brand Teamed with Key Global Strategic Alliances
In March 2004 we launched the “LAN” brand, under which we operate all of our international passenger airlines. Brand uniformity enables our customers to better identify us with the high standards of service and safety that are common to all of our airlines.domestic operations. This corporate image has also improved the cost effectiveness andmodel increases efficiency of our marketing efforts as we continue to expand in our existing and new markets. Additionally, LAN and our entire passenger affiliates (with the exception of Lan Colombia) are a member of theoneworld® alliance. We have also entered into bilateral agreements with strategic partners such as American Airlines, Iberia and Qantas, among others, whose leading presence in their respective markets creates a truly global reach for our passengers. Our passenger alliances and commercial agreements provide our customers with approximately 800 travel destinations, a combined reservations system, itinerary flexibility and various other benefits, which substantially enhance our competitive position within the Latin American market.
Optimized Fleet Strategy
We make optimal use of our fleet structure through a combination of minimal aircraft types, modern aircraft and staggered lease maturities. We carefully select our aircraft based on their ability to effectively and efficiently serve our short- and long-haul flight needs, while still striving to minimize the number of aircraft types we operate. For short-haul flights we operate the Airbus A320-Family Aircraft and the recently acquired Lan Colombia’s fleet in the Colombian market. Asshort-haul while encouraging increased domestic demand. A key element of May 18, 2008, we stopped using Boeing 737-200 aircraft in our Chilean domestic operations. For long-haul passenger flights we operate the Boeing 767-300 passenger aircraft and for long-haul cargo flights we operate the Boeing 767-300 freighters. For ultra long-haul service, such as between Santiago and Madrid and between Santiago and Auckland, we use the Airbus A340-300 aircraft. Having a fleet with minimal aircraft types reduces inventory costs, as fewer spare parts are required, and reduces the need to train our pilots to operate different types of aircraft. LAN’s strategic fleet renewal plan involves the sale of five Airbus A318 aircraft that took place in 2011, plus the sale of other five in 2012 and five in 2013.
The average age of our fleet as of February 29, 2012 was 6.1 years (6.9 years including Lan Colombia’s fleet), making our fleet one of the most modern in Latin America. The phasing out of our Boeing 737-200s, our oldest aircraft, which was completed in May 2008, contributed to reducing the average age of our fleet. Additionally, we expect that our purchase of additional aircraft, to be delivered between 2012 and 2018 will further reduce the average age of our fleet. Having a younger fleet makes us more cost competitive because it reduces fuel consumption and maintenance costs, and enables us to enjoy a high degree of performance reliability. In addition, a modern and fuel efficient fleet reflects our strong commitment to the environment as new aircraft incorporate the industry’s latest technology, allowing for a substantial reduction in emissions, while also decreasing noise levels.
Additionally, 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 flexibility 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.
Strong Financial Position with Track Record of Growth and Profitability
We have historically managed our business to maintain financial flexibility and a strong balance sheet in order to accommodate our growth objectives while being able to respond to changing market conditions. We are one of the few investment-grade rated airlines in the world and we maintained this status during 2011. We have built our strong financial position by preserving our financial liquidity and continuing to structure long-term financing for newly acquired aircraft. Our financial flexibility has allowed us to secure large aircraft orders, including an important part of our current re-fleeting program at attractive financing rates. We also monitor and seek opportunities to reduce financial risks associated with currency, interest rate and jet fuel price fluctuations. Over the last five years, while much of the airline industry has faced significant competitive and liquidity crises, we have remained consistently profitable.
Business Strategy
The principal areas in which we plan to focus our efforts going forward are as follows:
Continue to Grow Both our Passenger and Cargo Networks
We currently intend to continue to expand our capacity over the next several years to accommodate robust long-term growth in both passenger and cargo demand in the markets we target. We plan on expanding our operations not only in the markets we currently serve but also into new South American markets where we believe demand exists for our combination of passenger and cargo services. To meet this growth, as of February 29, 2012, we had an order book of 89 latest generation Airbus A320-Family Aircraft to be delivered between 2012 and 2018 and 13 Boeing 767-300 wide body passenger aircraft to be delivered between 2012 and 2013; as of February 29, 2012, we had orders for two Boeing 777-200 freighter aircraft to be delivered in 2012; and as of February 29, 2012 we also have outstanding orders for 32 Boeing 787 Dreamliner passenger aircraft, currently expected to start to be delivered in 2012.
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.
Enhance the Profitability of our Short-Haul Operations
We plan to continue implementing the business model launched in 2007 to increase the efficiency of our domestic and short-haul operations, specifically in the domestic markets in Chile and Peru. This model is also being applied in the domestic markets in Ecuador and Argentina, as well as in our recently acquired passenger operations in Colombia. In Argentina, the implementation of the model is subject to certain regulatory restrictions as a result of the fare bands in place in the Argentinean domestic market. In addition, we are evaluating the application of these initiatives on certain regional routes within Latin America. A key objective of this program has been to significantly increase the utilization of ourthe narrow body fleet, a goal that the company has been successfully achieving through modified itineraries that includeincluding more point-to-point, faster turnarounds times and overnight flights and faster turnaround times. Our Boeing 737-200flights. Additionally, the transition to a newer fleet was completely phased outhas allowed decreases in May 2008 in favor of the new Airbus A320-Family Aircraft, which we currently operate on all domestic and regional routes except those served by Lan Colombia. These initiatives have increased efficiency and improved the margins of our short-haul operations. In addition, our modern fleet allows for lower unscheduled maintenance costs lower fuel consumption, and operational andas well as in cost efficiencies achieved through operating fewer fleet types. Othertypes and in operational efficiencies, including lower fuel consumption.
Another key objectiveselement of this business model include ais the reduction in sales and distribution costs through increased Internethigher internet penetration and reduced agency commissions, and increased self check-inself-check-in service through web check-in and airport kiosks. We expect that thesekiosks at airports. These initiatives, together with simplifications in back-office and support functions, will continue to helpallow us to expand operations while controlling fixed costs, spurring a reduction in overhead costs per ASK.costs.. We have begun to pass on a portion of these operating efficiencies to consumers through significant fare reductions, which have a strong effect in stimulating new demand. We plan to continue working in the business model during 2015, as we look for ways to increase operational efficiency, encourage direct sales and self-check-in, and implement new sales strategies aimed at stimulating demand.
Operations within Chile
LAN and LAN Express, are the leading domestic passenger airline in Chile. We have operated domestic flights in Chile since LAN’s creation in 1929. During 2014, we flew to 16 destinations within Chile (including Santiago, but not including Easter Island, which we consider an international destination) as well as some seasonal destinations, with an average fleet of 28 Airbus A320-Family Aircraft. Domestic operations in Chile have been positively affected by the greater utilization of the latest-generation Airbus fleet and the retirement of the Airbus A318-100s.
According to JAC data, the Chilean domestic market as a whole transported approximately 9.8 million passengers in 2014, an increase of 3.8% from 9.5 million passengers transported in 2013. Our domestic passenger market share in Chile was 77.9% in 2014 as measured in revenue passenger kilometer (RPK). During 2014, our main competitors in the domestic market were Sky Airlines domestic passenger market shares as measured in RPKs of 20.2%.
Operations within Peru
LAN Peru started operations in 1999 with both domestic and international flights from Lima. Since then LAN Peru has stimulated additional demandexpanded consistently, consolidating its domestic operations with a continuous focus on improving our excellence for service.
During 2014 LAN Peru flew to 16 destinations, with 11 Airbus A319 and enhanced7 Airbus A320 aircraft. With this, LAN Peru has one of the most modern fleets in Latin America, which is ideal for the characteristics of Peruvian routes, as it maximizes available payload in high-altitude airports. In 2014, a total of 5.7 million passengers traveled on LAN Peru’s domestic routes, which represented an increase of 8% compared to 2013. According to data provided by the Peruvian DGAC, our overall profitability.domestic market share was 63,2% in 2014, compared to 63.4% in 2013, as measured in number of passengers. Our main competitors in Peru include Avianca, Peruvian Airlines and Star Perú.
Maintain Excellent Customer SatisfactionOperations within Argentina
Since 2005, LAN Argentina has increased its domestic destinations to a total of 14 Argentine cities. It currently operates the domestic network through a fleet of 10 Airbus A320 aircraft.
In boththe domestic Argentine market, LAN Argentina operates in a regulated environment in which fares sold to Argentine passengers are subject to minimum and maximum prices that vary per route. In 2014, the floor and ceiling of the regulated price range consistently increased-, by 12% in May 2014, by 12% in August 2014 and by 12% in December 2014-.
Based on internal estimates as of December 31, 2014, the domestic market share in Argentina in terms of capacity (ASKs) was approximately 27%. During this period of time LAN Argentina transported 2.3 million passengers, increase 0.5% compared to 2013. The main competitor of LAN Argentina is Aerolíneas Argentinas, a state owned company that has approximately 70% of the total Argentinean domestic capacity as measured in ASK.
Operations within Ecuador
Since beginning operations in 2008, LAN Ecuador has greatly expanded the number of destinations and frequency of flights. As of the end of 2014, LAN Ecuador operated in 5 domestic destinations-Guayaquil, Quito, Cuenca, Baltra and San Cristobal- with a fleet of 3 Airbus A319 aircraft.
In 2014, LAN Ecuador transported 1.1 million passengers in the domestic passenger market representing a decrease of 16% in number of passengers serviced in 2013, in a market that registered a decrease of more than 8% in domestic commercial flights. However, LAN Ecuador as the leading airline with a 36.5 percent of the market, outperforming its main competitors such as the flag carrier Tame, and Avianca-Taca.
Operations within Colombia
Following the acquisition of Aires in 2010, LAN Colombia has successfully restructured the Company’s previous operations in order to achieve LATAM’s standards in terms of security, punctuality, efficiency and service quality. LAN Colombia implemented the low cost model already operating in the other affiliates domestic markets of Chile, Peru, Argentina and Ecuador, to stimulate demand on domestic flights by providing more Colombian citizens the opportunity to use air transportation.
LAN Colombia continued to expand its network inside the domestic market in 2014, flying to 20 destinations and 24 routes. Additionally, LAN Colombia continues to advance in its fleet renewal plan, with the aim of phasing out less efficient models, by gradually replacing the Boeing B737 aircraft and Bombardier Dash aircraft inherited from Aires with aircraft from the Airbus A320 family. As of December 2014, LAN Colombia serviced its domestic destinations with 14 Airbus A320 aircraft and 7 Dash-200 aircraft. The company’s fleet renewal will be completed in 2015, when we will phase out all of the remaining Dash 8-200 aircraft.
In its third year of operations LAN Colombia transported 4.4 million passengers on domestic passenger, 9.2% more than the previous year, ranking as the second largest operator in the country, with a 19% market share measured in passenger onboard , behind Avianca. Other important competitors are Satena and VivaColombia.
Operations within Brazil
TAM Linhas Aereas is the leading domestic passenger airline in Brazil.. TAM Linhas Aereas’ strategy is based on providing strong connectivity through a network based on the main Brazilian cities, offering a reliable and high quality service, and leveraging our strong brand position in Brazil and abroad. As of December 31, 2014 TAM Linhas Aereas operates flights to 40 destinations within Brazil as well as some seasonal destinations, with an average fleet of 115 aircraft of the Airbus A320 family, including 16 Airbus A321, aircraft that allows high-density routes meet greater efficiency
The domestic market in Brazil has historically suffered from overcapacity, resulting in very low load factors compared to industry standards, which has negatively impacted the financial results of domestic airlines in recent years. However, this trend began to change during 2012 and has significantly improved during the last two years, as major airlines have reduced domestic capacity, leading to general improvements in load factor and yields.
TAM has continued to make significant progress in the domestic Brazil passenger operation, improving profitability by increasing load factor and yield (in real) through the rationalization of capacity and improved revenue management through better segmentation of the market. During 2014, TAM reduced its capacity by 1.4% as measured in ASKs and increased traffic measured in RPK 1.1%, leading to an increase of 2.0 percentage points in load factors on a year-over-year basis, compared to the already high level reached by TAM in 2013, and higher than the occupancy factor of the industry which was 79.8% on average.
In 2014, TAM maintained leadership among business travelers and improved its punctuality indicators, resulting in greater customer satisfaction. In addition, TAM won - for the second consecutive year - the airline Top of Mind award.
According to ANAC, the Brazilian domestic market as a whole transported approximately 96 million passengers in 2014, an increase of 6.6% as compared to 90.0 million in 2013. As of December 31 2014, TAM Linhas Aereas lead the Brazilian domestic passenger with 38.1% of the market share as measured in RPKs. During 2014, TAM’s main competitors in the domestic market were GOL, Azul, and Avianca Brazil.
Passenger Alliances and Commercial Agreements
Prior to the combination between LAN and TAM, LAN, LAN Peru, LAN Ecuador and LAN Argentina were members ofoneworld®, and TAM was member of Star Alliance®. In March 2013, LATAM Airlines Group choseoneworld® as the global alliance for all of its airlines. As a result of this decision, LAN Colombia became a member ofoneworld® on October 1, 2013 and TAM became a member ofoneworld® in March 31, 2014. Its affiliate TAM Mercosur will join in a future date. Currently,oneworld® is a global marketing alliance comprising of LAN, LAN Peru, LAN Argentina, LAN Ecuador, LAN Colombia, TAM, Air Berlin, American Airlines, British Airways, Cathay Pacific Airlines, Finnair, Iberia, Japan Airlines, Malaysia Airlines, Qantas, Qatar, Royal Jordanian, Sri Lankan and S7. The current members of theoneworld® alliance, including LATAM, serve more than 990 destinations, 154 countries, operating 14,000 daily departures.
The following are our passenger partnerships as of January 2015:
• | American Airlines Group. Since 1997, LAN has had an agreement with American Airlines to share carrier codes for certain flights on global reservations systems, thereby enabling American Airlines passengers to purchase seats on LAN flights and vice-versa (a “code-sharing agreement”). The U.S. Department of Transportation (DOT), granted LAN Airlines SA and American Airlines immunity from antitrust regulations in October 1999 for specific areas of cooperation. For more information see “—Regulation—United States of America—Authorizations and Licenses” below. In 2005, the DOT also granted antitrust immunity to LAN Peru and American Airlines for specific areas of cooperation. In 2007, LAN Peru and American Airlines established a code-sharing agreement between Peru and the U.S. with additional destinations in both countries. In the same year, LAN Argentina and American Airlines signed a code-sharing agreement expanding the cooperation between the companies. At the end of 2011, a code-sharing agreement between LAN Ecuador and American Airlines was signed. During 2013, two new code-sharing agreements were implemented between American Airlines and the LATAM Airlines Group; one between LAN Colombia and American Airlines and the other between |
TAM and American Airlines. .LATAM is currently expanding its code-share agreements with American Airlines in order to offer more destinations within the U.S. Before the merge between American Airlines and US Airways. In April 2010, before the merger between American Airlines and US Airways, TAM initiated a code-sharing agreement with US Airways to code-share between Brazil and USA. Through this agreement, TAM can access 23 domestic cities in the U.S. from Orlando, Miami and New York. US Airways became a member ofoneworld® in March 31, 2014 after the merger with American Airlines. |
• | Iberia. In January 2001, LAN initiated a code-sharing agreement with Iberia. In 2007, LAN Ecuador and LAN Peru set up code-sharing agreements with Iberia for routes between Ecuador, Peru and Spain; as well as other additional European destinations. Currently, LAN, LAN Ecuador and LAN Peru offer 17, 11 and 14 destinations in Europe, respectively, through Iberia routes. After LAN Colombia and TAM joined the Alliance, in the second quarter of 2014, LAN Colombia and Iberia established a code-sharing agreement for Colombia’s domestic market. At the end of 2014, TAM and Iberia signed an amendment to the current code-share agreement in order to expand their code-shared routes between Brazil and Europe. |
• | Qantas. In July 2002, LAN initiated a code-sharing agreement with Qantas to operate between Santiago, Chile and Sydney, Australia with a stopover in Auckland, New Zealand. As of January 31, this code-sharing agreement includes 7 Santiago-Auckland-Sydney flights operated by LAN and 4 non-stop Santiago-Sydney flights offered by Qantas. During 2014, LAN and Qantas executed a second codeshare agreement to connect other South-American’s destinations with New Zealand and Australia. |
• | British Airways. In 2007, LAN initiated a code-sharing agreement with British Airways on LAN flights between Sao Paulo and Santiago to provide service for British Airways passengers traveling from London to Santiago through a connection in Sao Paulo. This code-sharing agreement also includes British Airways’ flights between Madrid and London. |
• | Lufthansa and Swiss Air: TAM has a code-sharing agreement with Lufthansa and Swiss Air, pursuant to which TAM offers its customers long haul flights from Brazil to Germany, inside Germany to 7 destinations and within Europe to 4 destinations operated by Lufthansa and Swiss Air. Lufthansa and Swiss Air likewise offer customers seats on TAM’s flights from Germany to Brazil, inside Brazil to 12 destinations and within South America to 3 destinations. |
• | Aeromexico. During 2004, LAN and LAN Peru signed a code-sharing agreement with Aeromexico. Currently there are code-shares between Aeromexico and LAN Peru for flights from Peru to Mexico, and to 18 domestic destinations of Mexico. In May 2012, TAM also implemented a code-sharing agreement with Aeromexico between Sao Paulo and Mexico City. This code-sharing agreement also includes 9 destinations in Brazil, and 9 destinations in México. |
• | All Nippon Airways. In October 2010, TAM initiated a code-sharing agreement with All Nippon Airways to operate between Sao Paulo and Narita, through connections in London From 30th March 2014, All Nippon Airways switches its operation to Haneda Airport, giving our passengers access to the preferred airport in Tokyo. During 2014 All Nippon Airways and TAM agreed to expand the code-sharing agreement and implement new routes from South-America to Japan via Europe and North America, subject to required governmental approvals. |
• | Cathay Pacific. In May 2010, LAN initiated a code-sharing agreement with Cathay Pacific to operate between Santiago and Hong Kong, through connections in Los Angeles, New York and Auckland, and in November 2010, LAN Peru initiated a code-sharing agreement with Cathay Pacific to operate between Lima and Hong Kong, through connections in Los Angeles and San Francisco. |
• | Japan Airlines. In September 2011, LAN initiated a code-sharing agreement with Japan Airlines to operate between Santiago and Narita, through connections in Los Angeles and New York. |
• | Other alliances and partnerships: TAM also has a code-sharing agreement in place with Air China to operate between Sao Paulo and Beijing, through connections in Madrid. LAN Peru has a code-sharing agreement with Korean Air, for flights between Los Angeles and Seoul (operated by Korean Air) and between Los Angeles and Perú (operated by LAN Peru), and LAN has a code-sharing agreement with Alaska Airlines, which permits LAN to provide customers with service between Chile and three destinations in the west coast of the U.S. and Canada. At the end of 2013 South African and TAM signed a code-sharing agreement between Sao Paulo and Johannesburg. This agreement also includes other destinations in South Africa and Brazil. |
Passenger Marketing and cargo businesses,Sales
Since the combination between LAN and TAM in 2012, LATAM Airlines Group has operated under two brands, LAN and TAM. Within the “LAN” and “TAM” brands, we focus on delivering high quality services that aredifferentiate our marketing strategies between our long haul and short haul services.
Our long-haul marketing strategy emphasizes attributes valued by our customers.international customers: a reliable, high-quality service centered on entertainment and comfort for long travel. We also highlight our extensive network covering the most important destinations in South America and the Caribbean and frequent service to major overseas gateways such as New York, Los Angeles, Miami, Orlando, London, Madrid, Paris, Frankfurt, Milan and Sydney. In a continuing effort to fulfill this promise, we continuously improve our cabins and review our service protocols. Our Business Cabin features a premium on-board service aimed to provide our customers with more time to rest. In our Economy Cabin, newly upgraded entertainment units make flying more enjoyable.
In 2014, LATAM’s long haul fleet had 10 Boeing 787 of the 32 aircraft we ordered. The Company was the first airline in the Americas, and fourth in the world, to receive this model with the latest-generation technology that was an innovation breaking point for the airline industry. The 787 airplanes will allow us to reach new destinations and boost our existing services while increasing the efficiency of our operations and reduce our carbon footprint. Following this trend, in 2015 LATAM will be the first in the Americas to receive the Airbus A350, a new generation aircraft with new standards of efficiency –with capacity of approximately 348 seats- and with new levels of passenger comfort. See “—International Passenger Operations” for a description of recent improvements to our international fleet.
Our short-haul operations are designed to fit our customers’ need: punctuality, reliability, more frequencies, modern aircraft and efficient operations. To deliver this value proposition, we have been increasing our fleet and frequencies with more point-to-point flights, improved punctuality and streamlined processes including Internet sales, web and mobile check-in and airport self-check-in.
Additionally, our short haul fleet has also been renewed by the delivery of more Airbus A320 and A321. These aircraft also enhance our domestic and our regional by providing high security standards, improvements in the interior cabin design- the upper bins have mirrors that ensure visibility of carryon luggage, among other improvements - and more comfortable and technologically–advanced seating -with leather upholstery and more in-flight entertainment screens. Moreover, these aircraft are 13 percent lighter than the aircraft they will replace, resulting in lower fuel consumption and CO2 emissions. See “—Domestic Passenger Operations” for a description of recent initiatives to improve our domestic fleet, including the introduction of modern Airbus A320-Family Aircraft in most of our domestic operations.
Our main concern is to deliver our promise to our customers. Therefore, we constantly monitor our customer satisfaction with in-flight surveys and research, and measure our performance against the highest standard levels. This commitment to excellence has paid off with several prizes and recognitions given by customers and industry experts such as Skytrax’s “2013 best staff service”, Skytrax’s “2013 Best Airlines in South America”, Business Traveler’s “2013 Best Business Class in Latin America”(LAN), 2013 “Best travel Cellars in the sky” (TAM), Skytrax’s “2014 Best Airlines in South America (LAN first place and TAM second place)”,“2014 Best staff service (LAN)” and Business “2014 Best travel Cellars in the sky (TAM)”.
Branding
The “LAN” brand was launched in 2004 and brings together, under one strong international name, all of the affiliate brands such as “LAN Chile,” “LAN Peru,” “LAN Argentina�� “LAN Colombia”, “LAN Ecuador” and “LAN Cargo.” The corporate image of LAN is based on two core concepts: reliability and warmth, which support our promise of the best travel experience to, from and within South America. We are also committed to offering our customers the best coverage to, from and within South America, and to promoting sustainable tourism, helping develop the regions where we operate. And by best, we mean providing our customers with an excellent connection network and service; being transparent and accessible; and promoting sustainable tourism in the countries where we do business.
Using a single brand enables LAN’s customers to better understand the common service and operating standards among its airlines. LAN’s unified image has improved its visibility, thereby enhancing flexibility and increasing the efficiency of its marketing efforts.
TAM launched the strategic platform for a single brand back in 2008, with TAM being the main brand that, through values, strategic positioning and language, guides other brands, services and business units, such as TAM Airlines, TAM Cargo, TAM Viagens, TAM Fidelidade, TAM nas Nuvens and others. Thus, we generate synergies among our businesses, always guided by the same values and the commitment to quality and relationships with our stakeholders.
In May 2013, TAM also launched the “A gente faz um mundo por você” (“We make a world for you”) campaign, which reinforced TAM’s focus on service. In line with this vision, TAM’s mission is to be the people’s preferred airline by using joy, creativity, respect and responsibility. Based on this strategic brand positioning, TAM seeks to offer accessibility to all of those who value an efficient, rewarding, safe and hassle-free experience.
In 2014 LAN and TAM began a process to redefine the future brand strategy. The Company plans to move towards a single brand, although the launch date for the new brand has not yet been determined.
Distribution Channels
In LAN and TAM we striveare aware of how important time is for our customers, which is why we are making efforts to minimize the curb to seat and seat to curb time for our customers. We are improving and optimizing our services and processes, in order to achieve high on-time performance, world-class on-boarda simple and digital end to end travel experience.
To support this, we have our distribution structure divided into direct and indirect distribution channels, both focused on improving their respective platforms to allow for the easiest interaction for our clients, in sales and services alike. Indirect channels currently include travel agencies, general sales agencies and also new players, such as online agencies.
Direct channels owned by LATAM are comprised of city ticket offices, contact-centers and e-Business (includes website, mobile, and smart business). These direct channels support sales and service, before and after flight if the passenger so requires. We have an extensive sales and marketing network in over thirty countries consisting of more than 300 domestic and international points-of-sale owned by LATAM.
In this regard, our e-Business channel is an integral part of our commercial, marketing and service efforts. Together with other direct sales initiatives, the website provides an important tool by bringing more benefits to our passengers and also by giving them more flexibility in the future, reducing time on long-haul flights, attractivequeue for example. Internet-related sales have increased, reaching more than a total of US$2,500 million sales in 2014.
We have also used our websites as tools to provide value-added content and convenient pricingenhance communications. We are continuously improving our websites, a key element of our new short-haul model, so that the technological platform will be able to support the expected future growth. We send weekly promotional e-mails to more than 16.9 million subscribers (8.7 million for LAN and quick check-in8.2 million for short-haul flights,TAM). Members of our frequent flyer programs received their monthly balances and other information by e-mail and can access their data and redeem awards through our websites. In addition, we have an active online marketing program which brings visitors to the comfort afforded bywebsite from search engines and travel –related websites.
We are also developing several multi-platforms projects to improve passenger experience, both pre-and post-flight. We are continuously improving our website in order to more efficiently communicate flight status information, including information on available alternatives in case of change of schedules or other flight alterations. Another innovation is a modern fleet. Duringsmartphone app that enables both flight status verification and check in, providing an accessible electronic boarding pass to the first half of 2009passenger. To this date the app has over 1 million downloads in 20 different countries. Introduced in 2008, e-tickets have been issued for most LATAM routes and during 2010 we completed the reconfigurationimplementation of interline e-ticketing with all of our oneworld® partners. By the end of 2013, we introduced electronic boarding passes accessible on smartphones currently operating in 72% of LAN routes and 88% of TAM routes.
We are continuously promoting the web-based check-in service for domestic and international flights. This system allows those passengers who are not checking-in bags to go directly to the gate, and the remaining checked-in passengers to leave their bags at a special bag drop counters and proceed to the gate. In addition to web-based check-in, we have self-check kiosks in Chile, Peru, Argentina, Ecuador, Venezuela, Uruguay, Brazil, Germany and Colombia. As of December 31, 2014, the airport kiosks and web check-in have high utilization rate in domestic routes of all countries (82% in Chile, 80% in Peru,70% in Ecuador, 65% in Argentina,60% in Brazil and 58% in Colombia).
LAN.com received “eCommerce Award Latam 2014” in Tourism. Additionally, TAM received the award Top of Mind Internet – DataFolha/UOLTravelers’ Choice Favorites - TripAdvisor® and LAN received an award in the airlines category “Company with the best online reputation” by the Mercado magazine in Argentina.
Our city ticket offices support the growth of ours operations, establishing a sales and service channel. We have approximately 100 city ticket offices, 78 airport ticket offices, 9 stands and 47 kiosks. In addition TAM significantly expanded its TAM Viagens store chain through franchises in the main cities across Brazil. LAN also expanded it direct channels through 27 general franchise sales agencies. We are developing a service system with a dedicated lobby to helps us deliver a better service to our customers and to promote the self-service in ours stands. Aiming to promote the e-Business channel, in almost all countries we charge a fee to customers for sales completed through our ticket offices or call centers, leaving the Internet as the only free-of-charge distribution channel.
Our contact-centers are a multi-service channel providing support in six languages (Spanish, English, Portuguese, French, German and Italian) and handling more than 46,500 calls/contacts per day, which mainly originate from the regions where we fly (South America, North America, Europe and Australasia). We also have third-party service providers located in Santiago, Lima, Buenos Aires, Bogotá, Florianopolis and Sao Paulo.
Frequent Flyer Programs
During the year 2014, both LAN and TAM operated their loyalty independent programs, LANPASS and TAM Fidelidade, respectively, even though passengers enrolled in both programs were able to accumulate and redeem kilometers/points on any flight of the cabinsnetwork managed by the two airlines and their associates.
Additionally, LATAM continued working on the cross recognition of these programs to offer its members similar features and benefits, in line with the process of harmonization of operations in which the company is committed in all areas. The initiatives include cross level recognition of all our long-haul aircraft, including bothmembers, for example, by allowing LANPASS members to upgrade on TAM flights and TAM Fidelidade members to upgrade on LAN flights, in addition to having the Boeing 767same services at the airport, among other advances.
TAM joined theoneworld® alliance on March 31, 2014 and TAM Fidelidade customers, as LANPASS customers, are able to accrue points and redeem flights ononeworld® carrier flights.
During 2015 LANPASS and TAM Fidelidade will continue their programs harmonization efforts and will offer new cross benefits for their members.
LANPASS
LAN’s frequent Flyer Program, is a key element of LAN’s marketing and loyalty strategy. The objective of LANPASS is to reward customer loyalty, and as a consequence, generate incremental revenue and customer retention. Worldwide, as of December 31, 2014, LANPASS had 9.8 million members, an increase of 15% than last year.
LANPASS members earn LANPASS kilometers in their accounts based on distance flown, class of ticket purchased and the Airbus A340 passenger aircraft,elite level, or by using services of other partners in order to incorporatethe LANPASS program. Customers can redeem kilometers for free tickets or other products in an online catalogue. Under our new Premium Business Class including full-flat seats, as well as improvements in economy class which include a state-of-the-art on-board entertainment system. Ourcurrent frequent flyer program, LANPASS, provides travelour passengers are grouped in four different elite levels based on their flying behavior: Premium, Premium Silver, Comodoro and Black. These different groups determine which benefits and rewardscustomers are eligible to almost 5.8 million loyal customers in Chile, Argentina, Peru and Ecuador as well as in other countries where we operate. 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 facilities in key gateways,receive, such as Miami, to ensure optimal handlingfree upgrades on a space-available basis, VIP lounge access and preferred boarding and check-in. These categories have their equivalent in the OneWorld alliance: Ruby for Premium, Sapphire for Premium Silver and Emerald for both Comodoro and Black.
In 2014 LANPASS had an increase of our customers’ needs. We continually assess opportunities to incorporate service improvements18% in order to respond effectively to our customers’ needs.
Continued Emphasis on Safety
Our top priority is safety,kilometers redeemed in award tickets, and we have structured our operations42% kilometers redeemed in non-flight products. LANPASS has highly rated partners, including other airlines, hotels, car rental agencies, retailers, and maintenance to focus on safe flying. Our main maintenance facilities are certified by the Federal Aviation Administration (“FAA”), DGAC and other civil aviation authorities. Our flight and maintenance safety procedures are certified under ISO 9001-2000 standards. We have programs in place to train our crews and mechanics to world-class standards both at facilities abroad or at our training centers, which we have developed in association with high-quality partners.
Focus on Efficiency and Sustainability
We are increasingly concerned with improving efficiency through a series of fleet initiatives that seek to reduce fuel consumption. The most significant is our ongoing fleet renewal and growth plan, through which we expect to incorporate 136 new aircraft between 2012 and 2018. As an example, we estimate that the Boeing 787 Dreamliner operates with costs per ASK that are approximately 12% lower than other long haul passenger aircraft, while the new Boeing 777 freighter operates with costs per ASK that are approximately 17% lower than the Boeing 767
freighter. In addition, we continue with the installation of winglets on all of our Boeing 767 aircraft, achieving fuel efficiencies of approximately 5% per aircraft. In order to mitigate the environmental impact of our operations we seek to operate in a sustainable manner by reducing our fuel consumption and related emissions. We also continue to focus on adjusting the configuration of our aircraft to market demand by, for example, adjusting the configuration of four Boeing 767s that operate on long-haul routescredit card issuers from Ecuador by reducing the number of Premium Business seats and increasing the number of Economy class seats. Other long-term projects that aim at improving our cost structure include implementing the LEAN operating processes in our maintenance operations, as well as investing in new inventory and reservations systems provided by Sabre.
Airline Operations and Route Network
We are one of the main air transport operators in Latin America. As of February 29, 2012, we operated passenger airlinesfinancial institutions in Chile, Peru, Ecuador, Argentina Uruguay, United States and Colombia. WeColombia, including Banco de Bogotá and Occidente, who are alsoboth members of Grupo Aval. These partnerships give our customers the largest air cargo operatoropportunity to earn additional kilometers for using their services. Regarding Chile, in 2014 Santander and LANPASS renewed its exclusive co-branding agreement for 5 more years, from 2016 to 2020, continuing a union which for 20 years has allowed thousands of members to accumulate kilometers to travel to Chile and the world.
In the non-banking segment, LANPASS continues to leverage its member’s purchase behavior to partner with leading players in the region.markets and become the most attractive loyalty program in the home markets. In past years, LANPASS has entered into new industries, such as retail, supermarkets, automotive, real estate, drugstores and health care centers.
The LANPASS frequent flyer program aims to be the leading loyalty program in all of LAN’s home markets. In the past few years, LAN has implemented a number of marketing initiatives to increase customer’s engagement and activity with the program in all of its markets. In 2014, membership in LANPASS continued growing by 28% in Chile, 21% in Perú, 20% in Argentina, 7% in Ecuador, 10% in Colombia and 5% in the U.S.
TAM Fidelidade
TAM’s frequent flyer program, TAM Fidelidade, was the first loyalty program launched by a Brazilian airline and represents a key element in TAM’s marketing strategy. LATAM believes TAM Fidelidade, as well as LANPASS, is one of the most flexible loyalty programs in the market because it imposes no restrictions on flights or the number of seats available when members redeem accumulated points. TAM Fidelidade currently has more than 11.7 million members, which represents an increase of 8% compared to the 10.9 million members in 2013.
Similarly to LANPASS, members of TAM Fidelidade receive benefits and increased points for miles flown depending on their elite level; allowing them to accrue redeemable points for free travel more quickly. TAM Fidelidade customers are classified in four different elite levels Azul, Vermelho, Vermelho Plus and Black, being their equivalent in theoneworld® alliance: Ruby for Azul, Sapphire for Vermelho and Emerald for both Vermelho Plus and Black.
Multiplus
In 2009, TAM launched Multiplus, a company designed to create a broader network in which TAM’s customers can earn points through the TAM Fidelidade Program. Multiplus is a coalition of loyalty programs that permits the accrual of points for redemption from products and services offered by many different partner companies, not just TAM. We believe this expanded network helps to capture and retain customers and increase sales. It is attractive to our less frequent flyers because it allows them to accrue loyalty points in many ways besides flying. At the end of 2014, Multiplus had more than 400 partners and approximately 13.8 million participants that can accrue Multiplus points directly (Tam Fidelidade, cobranded cards, app, etc.) and indirectly (by transferring points from a partner program) in over 13,000 retail establishments.
Multiplus became a publicly traded company in Brazil, following tableits initial public offering in February 2010. TAM continues to own 72.4% of the ordinary shares of Multiplus.
On December 10th, 2009, Multiplus entered into an Operating Agreement with TAM Linhas Aéreas (TLA), which established the terms and conditions governing the relationship with TLA and become effective as of January 1st, 2010. Under the Operating Agreement, Multiplus became responsible for, among other duties, processing information on accumulating and redeeming points under the TAM Loyalty Program and delivering awards to the members of said program, in accordance with the rules of the TAM Loyalty Program and the Multiplus network. The Operating Agreement is valid for 15 years.
On March 1, 2013, the companies approved a new amendment to the Operating Agreement (“11th Amendment”), effective as of June 1, 2013. This amendment extends the previously existing terms and conditions, but includes a more objective procedure for setting the ticket acquisition price to be paid by Multiplus and the point price to be paid by TLA. The amendment sets forth our operating revenuesa fixed price to be paid by activityMultiplus during the initial transition and assessment phase, lasting from June 2013 until June 2014, such price being approximately 3% higher than the average price assessed in 2012. After this transition and assessment phase, the price to be paid by Multiplus per 10.000 points is adjusted to reflect the price variation of airline tickets in the market, but subject to a cap and floor of 5%. In case of major changes in the airline industry, the companies will have the right to negotiate in good faith a fair solution that takes into account such industry changes.
The remaining provisions established in the original Operating Agreement, including, without limitation, those relating to reciprocal exclusivity, term of effectiveness and situations for termination with or without cause, remained, in their essence, unchanged.
Cargo Operations
International and domestic cargo is operated by subsidiaries and affiliates under the periods indicated:
Year ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(in US$ millions) | ||||||||||||
The Company(1) | ||||||||||||
Total passenger revenues | 4,008.9 | 3,109.8 | 2,623.6 | |||||||||
Total cargo revenues | 1,576.5 | 1,280.7 | 895.6 | |||||||||
Total traffic revenues | 5,585.4 | 4,390.5 | 3,519.2 |
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Passenger Operations
General
As of February 29, 2012,LAN Cargo and TAM Cargo brands, which have significant market recognition. Our cargo business generally operates on the same route network used by our passenger operations were performed through airlines in Chile, Peru, Ecuador, Argentinaairline business. It includes approximately 143 destinations, of which approximately 135 are served by passenger and/or freighter aircraft and Colombia where we operate both domestic and international services.
As of February 29, 2012, our network consisted of 15 destinations in Chile, 14 destinations in Peru, five destinations in Ecuador, 17 destinations in Argentina, 23 destinations in Colombia, 14 destinations in other Latin American countries and the Caribbean, five 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, Fort Lauderdale, Frankfurt, Los Angeles, Madrid, Miami, New York, Papeete (Tahiti), San Francisco, and Sydney. In addition, as of February 29, 2012, through our various code-share agreements, we offer service to 29 additional destinations in North America, 17 additional destinations in Europe, 29 additional destinations in Latin America and the Caribbean (including Mexico), and two destinations in Asia.approximately 9 are served only by freighter aircraft.
The following table sets forth certain of our passengercargo operating statistics for internationaldomestic and domesticinternational routes for the periods indicated.indicated:
Year ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
The Company(1) (2) | ||||||||||||
ASKs (million) | ||||||||||||
International | 32,086.7 | 29,582.8 | 26,797.10 | |||||||||
Domestic | 16,052.9 | 12,772.4 | 11,979.10 | |||||||||
Total | 48,139.6 | 42,355.2 | 38,776.20 |
Year ended and as at December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
ATKs (millions) | 7,219.7 | 7,651.9 | 6,449.5 | |||||||||
RTKs (millions) | 4,317.2 | 4,446.7 | 4,044.5 | |||||||||
Weight of cargo carried (thousands of tons) | 1,102.2 | 1,146.6 | 1,154.0 | |||||||||
Total cargo yield (cargo revenues/RTKs, in US cents) | 39.7 | 41.7 | 43.2 | |||||||||
Total cargo load factor (%) | 59.8 | % | 58.4 | % | 62.7 | % |
We derive our revenues roughly equally between the transport of cargo as follows:
RPKs (million) International Domestic Total Passengers (thousands) International Domestic Total Passenger yield (passenger revenues/RPKs, in US cents) International Domestic Combined yield(3) Passenger load factor (%) International Domestic Combined load factor(4)In the bellies of our passenger aircraft. We consider our passenger network to be a key competitive advantage due to the synergies between passenger and cargo operations and, accordingly, we have developed a strategy to increase our competitiveness by enhancing our belly offering. Year ended December 31, 2011 2010 2009 25,935.6 23,226.4 20,861.20 12,487.3 9,921.1 8,975.00 38,422.9 33,147.5 29,836.20 7,076.2 6,302 5,676 15,514.7 10,991 9,730 22,509.9 17,293 15,406 US¢ 9.5 US¢ 8.7 US¢ 8.0 US¢ 12.3 US¢ 10.8 US¢ 10.4 US¢ 10.4 US¢ 9.4 US¢ 8.8 80.8 % 78.5 % 77.8 % 77.8 % 77.7 % 74.9 % 79.8 % 78.3 % 76.9 %
In our own dedicated freighter fleet. As of December 31, 2014, our dedicated freighter fleet consisted of 11 Boeing 767-300 freighters, with a capacity for 58 structural tons (52.7 tonnes) of freight each, and four Boeing 777-200 freighters, with a capacity of 102 structural tons (102 metric tons) of freight each. The aforementioned 11 Boeing 767-300, that considers two freighters sub-leased to an operator outside of Latin America, represents a decrease of 1 such aircraft relative to December 31, 2013. An additional 767-300F was also leased to the same operator and it is scheduled to leave our fleet during the first quarter of 2015 as part of our freighter fleet optimization program. Under this initiative, our freighter fleet was resized according to both the strategic objective of supporting our belly business and the need to maximize profitability. In Latin America, the principal origins of our cargo are Chile, Colombia, Perú, Ecuador, Brazil and Argentina, which represent a large part of our northbound traffic. This demand is mainly concentrated in a small number of product categories, such as exports of fish, sea products and fruits from Chile and asparagus from Peru, and exports of fresh flowers from Ecuador and Colombia.
For our southbound flights, Brazil is the main import market. Southbound demand is mainly concentrated in a small number of product categories including high-tech equipment, electronics, auto parts and pharmaceuticals.
Brazil is the largest of our cargo domestic operations where TAM Cargo remains the market leader, carrying cargo for a variety of customers, including other international air carriers, freight-forwarding companies, export oriented companies and individual consumers. In order to maintain its leadership, TAM Cargo continues to invest in infrastructure, service and security in key cargo terminals.
The United States accounts for the majority of the cargo traffic to and from Latin America. Besides being the main market for Latin American exports by air, the United States is also the main supplier of goods transported by air to Latin American countries.
Our international cargo operations are headquartered in Miami. This geographical location is a natural gateway for Latin American imports and exports to and from the United States. During 2013, LAN Cargo signed a contract with Miami Dade County to lease 66,000 square-feet to build a maintenance hangar with capacity to service a Boeing 777-200 freighter. Construction is underway and completion is expected for late 2015.
We transport cargo to and from six destinations in Europe: Amsterdam, Frankfurt, London, Madrid, Milan and Paris. The last five we serve via passenger aircraft, and additionally we serve Amsterdam and Frankfurt through freighter operations.
The evolution of our international cargo operations has always been affected by the flow imbalances of the Latin American cargo markets, resulting in a dramatic shift in the relative weight of southbound and northbound cargo flows throughout the years. We have designed our operations, route network and commercial strategies with the flexibility required to respond to changing conditions.
During 2014, cargo traffic decreased 3.3%, reflecting a challenging scenario in Latin American cargo markets mainly due to a decline in demand on routes from the U.S to Latin America, especially Brazil, which was affected by the FIFA World Cup, uncertainty surrounding presidential elections and lower economic growth. Additionally northbound demand was affected by a significant contraction of seed exports from Chile, partially offset by strong asparagus, flowers and fresh fruit export seasons.
Competition increased in the region as international and regional carriers added idle capacity to service cargo operations. Despite this increase in competition, we have been able to maintain solid market shares through an efficient utilization of our fleet and network. Today, on Latin America-United States routes, our main competitors are Centurion, AVIANCA Cargo, Atlas Air and American Airlines. On the Latin American-Europe routes, our main competitors are Cargolux, Lufthansa Cargo, Martinair, and Emirates Airlines.
Cargo Agreements
During 2014 we signed two Enhanced Cargo Transfer and Service Agreements with Korean Air and Cathay Pacific which aim to achieve more seamless interline transfers and improved service eventually leading to a larger Asia-Latin America market share, greater customer loyalty and improved belly load factors. We also have interline, code-sharing and other commercial agreements with other Asian carriers such as JAL, China Airlines, Air China and Nippon Cargo Airlines. Under these agreements we receive space allocations to move our cargo from the main gateways in Asia to hubs in the United States—Los Angeles, New York, Miami- and also in Europe where we can connect with our cargo network. In exchange, we provide these airlines with space from these same hubs in the United States and Europe to all Latin American destinations and also provide them with westbound cargo.
Since 2002, LAN Cargo and Lufthansa Cargo have operated pursuant to a block space agreement covering Europe and Latin America. As part of this agreement, we allocate space to Lufthansa Cargo on our flights between Frankfurt and Santiago, and Lufthansa Cargo allocates space to us on its flights between Frankfurt and Brazil.
Marketing and Sales
Our sales and marketing efforts are carried out directly where we have a local office, or through general sales agents. In Latin America we have our own offices in all key markets. In the United States, we have offices in Miami, New York and Los Angeles, and work with representatives in various other cities. In Europe, we have offices in Frankfurt, Amsterdam, Madrid and Paris and use agents in other key cities. In Asia, we added a new office in Hong Kong, and in other cities our sales efforts are conducted through general sales agents. In total, we maintain a network of more than thirty independent cargo sales agencies domestically and internationally.
Our cargo marketing strategy emphasizes the combination of our unique freighter and passenger aircraft cargo network, which offers a wide variety of reliable cargo routing possibilities with different pricing options; a strong connectivity to, from and within Latin America and a clear focus on providing a high-quality service for our clients. Our offering allows our customers to ship large, bulky freight, as well as smaller, high-density cargo, fresh products, express shipments, and other types of cargo.
During 2014 we focused on various aspects of our value chain to improve our customer experience. We improved connectivity and reception times at several key hubs, we became more electronically integrated with customers providing more accurate and timely information and we continued to improve our customer service through consolidation of our worldwide customer care teams and continuous improvement initiatives at our contact centers. Additionally we launched and improved specific products in certain routes, such as our Pharmaceuticals offering in the European market, providing our customers with a better air cargo service.
Cargo Related Investigations
See “Item 8. Financial Information—Consolidated Financial Statements and Other Financial Information—Legal and Arbitration Proceedings.”
Fleet
General
As of December 31, 2014, we operated a fleet of 327 aircraft, comprised of 313 passenger aircraft and 13 cargo aircraft, as set forth in the following chart:
Number of aircraft in operation | Average term of | Average age (years) | ||||||||||||||||||
Total | Owned(1) | Operating Lease | lease remaining (years) | |||||||||||||||||
Passenger aircraft(2) | ||||||||||||||||||||
Airbus A320 Family Aircraft | ||||||||||||||||||||
Airbus A319-100 | 52 | 40 | 12 | 5.4 | 7.8 | |||||||||||||||
Airbus A320-200 | 158 | 95 | 63 | 3.3 | 6.7 | |||||||||||||||
Airbus A321-200 | 21 | 18 | 3 | 7.4 | 2.7 | |||||||||||||||
Airbus A340 Family Aircraft | ||||||||||||||||||||
Airbus A340-300 | 3 | 3 | 0 | 0.0 | 13.9 | |||||||||||||||
Airbus A340-500 | 0 | 0 | 0 | 0.0 | 0.0 | |||||||||||||||
Airbus A330-200 | 13 | 8 | 5 | 1.8 | 10.5 | |||||||||||||||
Boeing Aircraft | ||||||||||||||||||||
Boeing 767-300ER | 38 | 34 | 4 | 3.8 | 6.9 | |||||||||||||||
Boeing B787-800 | 10 | 6 | 4 | 11.1 | 1.1 | |||||||||||||||
Boeing B777-300ER | 10 | 4 | 6 | 4.0 | 3.7 | |||||||||||||||
Dash Aircraft | ||||||||||||||||||||
Dash 8-200 | 7 | 2 | 5 | 0.8 | 17.2 | |||||||||||||||
Total passenger aircraft | 312 | 210 | 102 | 3.9 | 6.8 | |||||||||||||||
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Cargo aircraft | ||||||||||||||||||||
Boeing 767-300 Freighter(3) | 11 | 8 | 3 | 1.9 | 10.5 | |||||||||||||||
Boeing 777-200 Freighter | 4 | 2 | 2 | 2.3 | 4.0 | |||||||||||||||
Total cargo aircraft | 15 | 10 | 5 | 2.1 | 8.5 | |||||||||||||||
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Total fleet | 327 | 220 | 107 | 3.8 | 6.9 | |||||||||||||||
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(1) |
(2) |
(3) |
The daily average hourly utilization rates of LATAM’s aircraft for each of the periods indicated are set forth below.
2014 | 2013 | 2012(1) | ||||||||||
Passenger aircraft | ||||||||||||
Airbus A340-300 | 6.7 | 5.8 | 13.9 | |||||||||
Boeing 767-300 ER | 10.5 | 10.1 | 12.1 | |||||||||
Boeing 787 | 10.5 | 5.6 | 3.7 | |||||||||
Airbus A320 Family | 9.8 | 10.3 | 10.2 | |||||||||
Boeing 777 | 12.9 | 13.6 | ||||||||||
Airbus A330 | 7.0 | 10.3 | ||||||||||
Cargo aircraft | ||||||||||||
Boeing 767-300 Freighter | 7.9 | 8.3 | 13.5 | |||||||||
Boeing 777-200 Freighter | 10.9 | 11.0 | 14.1 |
(1) | 2012 does not include aircraft used in TAM’s operations. |
We operate different aircraft types as we perform various different services ranging from short-haul domestic and regional trips to long-haul trans-continental flights. We have selected our aircraft based on the ability to effectively and efficiently serve these missions while trying to minimize the number of aircraft families we operate.
For short-haul domestic and regional flights we principally operate the Airbus A320-Family aircraft. The Airbus A320-Family has been incorporated into our fleet pursuant to operating leases or has been purchased directly from Airbus pursuant to various purchase agreements since 1999.
For long-haul passenger and cargo flights we operate the Airbus A330-200 aircraft, the Airbus A340-300 aircraft, the Boeing 767-300 passenger and cargo aircraft, the Boeing 777 passenger and cargo aircraft and, since the fourth quarter of 2012, the Boeing B787-816 aircraft.
International Passenger OperationsFleet Leasing and Financing Arrangements
LATAM’s financing and leasing methods include borrowing from financial institutions and leasing under financial leases, tax leases, sale-leaseback transactions and pure operating leases. As of December 31, 2014, LATAM had 327 aircraft, of which one each were in the redelivery process, in storage and on ground, resulting in 324 aircraft in operation. Of these aircraft, 161 are operated by LAN and 163 aircraft are operated by TAM.
As of February 29,December 31, 2014, LATAM’s operating fleet was comprised of 203 financial leases, 17 tax leases, 99 operating leases and 5 aircraft as loan guarantees. Most of the LATAM’s financial and tax leases are structured for a 12 year period. LATAM has 44 aircraft leases supported by the U.S. Export-Import Bank (“EXIM Bank”) and 80 supported by the European Export Credit Agencies (the “ECAs”). LATAM’s operating lease maturities range from 3 to 12 years.
LATAM’s aircraft debt, which is comprised of financial and tax leases, is denominated in U.S. dollars and typically has quarterly amortization payments. Both the financial leases and tax leases have a bank (or group of banks) as counterparty; however, the latter has also a third party involved. In terms of interest rate, 68.2% of our aircraft debt has fixed rate and the balance has floating rate debt based on USD LIBOR. During 2014, LATAM refinanced all of its Boeing deliveries for the year with EX-IM guaranteed bonds.
Going forward, LATAM will be the entity that takes delivery and act as the lessee on all related leases of all aircraft for the group and has the ability to sublease them to other airlines of the group.
In order to reduce TAM’s balance sheet FX exposure to the Brazilian real, LATAM plans to transfer the majority of the TAM aircraft under financial leases up to the LATAM level. As of December 31, 2014, 33 aircraft were transferred to LATAM which helped to reduce the exposure to less than US$ 1 billion.See “Item 5—B. Liquidity and Capital Resources—Sources of financing” and “Item 5—B. Liquidity and Capital Resources—Capital Expenditures” for a description of expected sources of financing and expected expenditures on aircraft.
Maintenance
LATAM’s Maintenance
Our heavy maintenance, line maintenance and component shops are equipped and certified to service our entire fleet of Airbus, Boeing and Bombardier aircraft. Our maintenance capabilities allow us flexibility in scheduling airframe maintenance, offering us an alternative to third-party maintenance providers.
LATAM Line Maintenance
Our Line Maintenance Network operates in all the cities where LATAM operates, serviced by LATAM Maintenance staff in North and Latin America, and a mixed capacity between LATAM staff and external qualified outsourced providers in the rest of the world. LATAM Line Maintenance performs minor preventive and corrective maintenance tasks, which allows us to operate to all our destinations ensuring a safe operation of our aircraft and the compliance with local authorities’ regulation and the approved maintenance plans for each model.
Our Line Maintenance Network comprises 133 stations in South America, 40 in North America and 17 in Europe and Oceania, which produced up to 2.4 million man-hours in 2014. Throughout the Network, Santiago, Sao Paulo and Miami are among the most extensive stations servicing our passenger and cargo fleet.We rely on third party services for certain maintenance support for our aircraft and engines, where we have long term partnerships with Lufthansa Technik, International Aero Engines, CFM International, Pratt & Whitney, General Electric and Air France KLM.
In 2014, we continued with the implementation of the LEAN philosophy in our engineering and maintenance organization, achieving results in reliability, availability and productivity. As part of this effort, we introduced iPads in our Santiago operation to allow a faster resolution of technical disruptions and to optimize resource management. Also, we launched an initiative to consolidate all LATAM technical documentation in one single portal, which can be accessed by mobile devices in any of our maintenance stations, which we expect to have up and running the first half of 2016. Finally, we continued with our continuous improvement program to encourage our staff to suggest and implement ideas that result in a safer workplace and more efficient processes.
All of our maintenance operations are supervised by the local authorities around the network, such as DGAC in Chile and ANAC in Brazil.These operations are subject to several recurrent external audits from civil aviation authorities and international entities, such as FAA, The International Air Transport Association Operational Safety Audit (“IOSA”) (from the International Air Transport Association or “IATA”) and the International Civil Aviation Organization (“ICAO”), among others, in order to strictly comply with applicable regulations. The audits are conducted in connection with each country’s certification procedures and enable us to continue to perform maintenance for aircraft registered in the certificating jurisdictions. Our repair station holds FAA Part-145 certifications under these approvals.
To ensure the best capabilities in our personnel needed for safe, accurate and on-time Line Maintenance, LATAM seeks to improve the technical, aeronautic regulatory, safety and documentation skills of its personnel. This is possible through their participation in extensive training programs at Technical Training LATAM Center and specific training programs designed and dictated by our partnerships. Also, the Fleet and Engineering teams participate actively in the periodical airline Fleet Reliability meetings, where we share best industry practices and updates of the latest Line Maintenance trends and top technical issues.
LATAM MRO
LATAM MRO Business Unit is responsible for our heavy maintenance (airframe) and components shops facilities that are equipped and certified to service our fleet of Airbus and Boeing aircrafts. One two MRO facilities, one in São Carlos (Brazil) and one in Santiago (Chile), provides 75% of all heavy maintenance services the entire group of airlines demands. The services not executed internally are contracted between our extensive network of MRO partners around the globe. Both MRO facilities are FAA Part-145 certified repair stations .We occasionally perform certain heavy maintenance and component services for other airlines or OEMs. LATAM MRO is also responsible for planning and execution of aircrafts redeliveries.
In MRO São Carlos (TAM MRO) we are prepared to service up to 9 (nine) aircrafts (narrowbody and widebodies) and 2 (two) regional/turboprop aircrafts simultaneously, with a dedicated hangar for stripping and painting. In that facility we also have 22 technical components shops, including full Landing Gear repair & overhaul shop, Hydraulics, Pneumatics, Electronics (ATEC), Electrical Components, Electroplating, Composites, Wheels & Brakes, Interiors and Emergency Equipment shops. This facility is also known as “São Carlos Technological Center” and has its own total area of 400 ha and hangar area of 100,000 m², with a dedicated runway of 1,720 meters. MRO São Carlos is certified and audited by major international aeronautical authorities such as FAA (USA), EASA (Europe), ANAC Brazil, DGAC (Chile), ANAC Argentina, DGCA (Ecuador), DINAC (Paraguay), TC (Canada), among others, for Heavy Maintenance and Components Repair and Overhaul for Airbus A-320 family (A318, A319, A320 & A321) and Airbus A330, Boeing 767, ATR-42/72, and Embraer E-Jet 170/190 families. The MRO also has some minor capabilities for repair and overhaul of Airbus A340 and Boeing 777 components. MRO São Carlos includes its own support engineering capabilities, a full technical training center which develops MRO’s capabilities in terms of human skills with more than 6,000 students and 90,000 hours of training in 2014 providing 80 different basic courses, on-the-job training and special training such as structural, avionics, foreign language and leadership training and education.
In MRO Santiago, located near Comodoro Arturo Merino Benítez International Airport in Santiago, we have 2 hangars capable of servicing simultaneously 2 (two) widebody aircrafts and 1 (one) narrowbody aircraft in LAN Maintenance Base. MRO Santiago is certified and audited by FAA, ANAC Brazil, DGAC (Chile), ANAC Argentina, DGCA (Ecuador), among others for Heavy Maintenance for Airbus A320 family (A319, A320 & A321), Boeing 767 and 787. MRO Santiago has 8 (eight) shops prepared to support hangar activities, to designing and manufacture galleys, structures and composite materials. We also have the capability to retrofit aircraft interiors, including sophisticated IFE (in-flight entertainment) equipment, and blended winglets in the Boeing 767 fleet.
In 2014, we focused on the consolidation of the integration of MRO capabilities and processes started in 2013. In 2014, LATAM MRO effectively applied 2.5 million man-hours, serviced 274 aircrafts, including C, D and Special Checks for LATAM fleet and for third party customers, delivered approximately 60,000 components and performed 15 landing gear overhauls. In 2014, LATAM MRO serviced almost 100% of all LATAM’s Airbus A320 family and A330 demand for Heavy Maintenance, and 75% of demand for Components Repair & Overhaul. LATAM’s external maintenance and repair customers include Azul, Trip, Avianca, the Brazilian Air Force, Embraer, Goodrich, and Hamilton Sundstrand, among others.
In 2011, we started a turn-around process to achieve international MRO competitive standards in terms of costs, quality, reliability and time of deliveries (TAT). In 2012 we began to implement the LEAN system and other activities, including continuous process improvement culture, redesign of the production methodology in productive cells and scheduling of task through CCPM methodology (Critical Chain Project Management), development of shop-floor control systems and carry out VSM process modeling for Landing Gear shop. 2013 was the year of consolidation of these initiatives and in 2013 we accomplished a significant 7% reduction in turnaround times, increased on time performance and improved quality of our services (as measured by reductions in post-check failures and premature components failures). In 2014, we celebrated our achievement of one year without any accidents with lost days in MRO São Carlos and reduced the accidents in MRO Santiago by 40%.
LATAM Safety and Security
Our most important priority is the safety of our passengers and employees. LATAM has been working to standardize LAN and TAM’s operational indicators regarding safety, audits and emergency response. This process of identifying synergies in LAN and TAM’s operational indicators has led to opportunities to improve processes and standardize operational processes and audits.
Prior to the combination, both LAN and TAM had internal divisions in charge of the management of safety and security matters related to Flight Operations, Operative and Administrative buildings, Organization and Coordination of Emergency Response matters, Safety and Security Audits and Safety and Occupational Health. Today, the diversions that support these functions - -: Safety Management, Security Management, Emergency Response Management, Safety & Security Audit Management and Safety and Occupational Health Management– function on the basis of uniform policies and procedures.
Safety Management
We give high priority to providing safe and reliable air service. We have unified our Safety Management under a single organization that is responsible for defining the processes and procedures for the LATAM SMS and for oversight for the subsidiaries that apply and implement those processes and procedures.
LAN and TAM have documentation regarding SMS that provide clear definitions of the functions and responsibilities regarding operational safety for all persons involved, from the top to the bottom of the operational structure in the airline.
Both systems are IOSA certified and have a Safety Senior Manager who is responsible for each system implementation and for setting standardized procedures for measuring the quality and safety of services provided by companies or professional contractors that affect the operational safety of this organization.
Our corporate operational safety organization consists of three main areas:
The Risk Management division has the following organization:
Flight Data Monitoring
The Flight Data Monitoring area is responsible for the maintenance and administration of recorded flight data and safety-related databases and software.
Flight Operations Quality Assurance—“FOQA” : LATAM has a Flight Data Monitoring (“FDM”) program implemented for collecting, processing and analyzing all flights for all LATAM’s fleet in all his AOCs. This program utilizes the data to produce statistical information to verify that recommended standard operational procedures are correctly done, and make changes if required as well as other safety-related measures. We have started the development of a maintenance variation for the same aircraft types which will monitor the engines, flight controls and general performance of the airplanes.
Maintenance Safety Coordinator
The Maintenance Safety area oversees our maintenance safety measures and investigates maintenance-related incidents using the Maintenance Error Decision Aid (“MEDA”) methodology.
Cabin Safety Coordinator
The Cabin Safety area coordinator is responsible for managing the safety of aircraft cabins, cabin safety investigations, cabin passengers and flight attendants.
Investigation & Safety Information Management Coordination
All information regarding safety-related incidents is entered into dedicated software, where it is analyzed according to potential risk. Important incidents are investigated thoroughly. Each particular incident requiring corrective actions is addressed accordingly with the assistance of the corporate operational safety directory.
LOSA—Line Operations Safety Audit Coordinator
This program is recognized by the International Civil Aviation Organization (“ICAO”) and the National Civil Aviation Agencies, both of which oversee our operations, as a necessary tool for protecting passengers and employees.
The implementation of this program has been used to improve flight safety in the Company, by recording behaviors observed during normal flights for experienced pilots and through the preparation of a mandatory checklist (form) developed by experienced pilots familiar with the program. Observations by the Threat and Error Management (“TEM”) may even propose appropriate changes to the system and processes.
Security Management
The main policy and the essential principle of the Company is to ensure adequate security protection for all of its flights, aircraft, passengers, crew members, ground personnel, airport facilities and other services related to the commercial civil aviation against any threat or unlawful action.
We have implemented corporate policies and a quality management system through the planning of audits and inspections to detect any lack of security in our operations and to prevent acts of unlawful interference. Risk analysis is used to determine different levels of security to be implemented in international and domestic operations.
Security Corporate Managers in LAN and TAM have the responsibility of evaluating, analyzing and assigning risk levels (high, medium, low) to international and domestic operations, and proposing security procedures for each scenario. The security management is controlled and audited constantly.
Emergency Response Management
The emergency response management team is responsible for the administration of the Emergency Response Plan (ERP). It has been developed for the effective management of different kinds of emergencies (aircraft accidents, natural disasters, strikes, pandemics) with the purpose of mitigating impacts of emergencies on passengers and their relatives, as well as the Company’s operations. The ERP includes, among others, Emergency Process and Procedures, Emergency control centers, Relatives & Passengers Assistance Team, Notification Team, Aircraft Recovery, and a “Go Team” which is a special team that will be dispatched in the case of an emergency and will assume the responsibility of emergency management.
Safety and Security Audit Management
The Safety and Security Audit Management area has the mission of advising senior management on issues related to plan and control, design, implementation, maintenance, documentation and observation of the improvement of the LATAM Safety and Quality Management System. An annual audit program of the operational processes is coordinated and carried out ensuring that the internal auditors follow the Quality System procedures and detect proactively the way to address any possible untreated risk.
Safety and Occupational Health Management
The main objective of the Safety and Occupational Health Management program is to ensure the safety and health of workers at work, by advising, managing and helping the company prevent occupational accidents and diseases through the identification and control of occupational hazards and medical surveillance. The foregoing objectives are satisfied through a dedicated team of professionals (engineers, doctors, risk prevention experts and paramedics), who constantly develop activities aimed at protecting LATAM employees.
Fuel Supplies
Fuel costs comprise the single largest category of our operating expenses. Over the last years, our fuel consumption and operating expenses have increased due to the significant growth in our operations. On the other hand, in the year 2014 due to the significant drop in the international price of crude oil, LATAM has seen also a drop in its Jet fuel costs. In 2014 total fuel costs represented 34.9% of our total operating expenses. The into-wing price for 2014, (average fuel price plus taxes and transportation costs, including hedge) was US$3.36 per gallon, representing a decrease of 3.4% from the 2013 into-wing average fuel price. We can neither control nor accurately predict the volatility of fuel prices. Despite the foregoing, it is possible to partially offset the price volatility risk through our hedging and fuel surcharge programs in place in both our passenger and cargo business. For more information, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Risk of Fluctuations in Jet Fuel Prices.”
The following table details our consolidated fuel consumption and operating expenses, after related hedging gains and losses (which exclude fuel costs related to charter operations because fuel expenses are covered by the entity that charters the flight) during the last three years.
Year ended December 31, (1) | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Fuel consumption (thousands of gallons) | 1,219,882.7 | 1,266,718.6 | 948,419 | |||||||||
ASKs Equivalent (millions) | 206,197.9 | 212,236.8 | 161,207.6 | |||||||||
Fuel consumption (thousands of gallons) per ASK Equivalent (millions) | 59.2 | 59.7 | 58.8 | |||||||||
Total fuel costs (US$ thousands) | 4,170,848 | 4,414,249 | 3,434,569 | |||||||||
Cost per gallon (US$) | 3.42 | 3.48 | 3.69 | |||||||||
Total fuel costs as a percentage of total operating expenses | 34.88 | % | 34.97 | % | 36.41 | % |
(1) | See “Item 5. Operating and Financial Review and Prospects—Operating Results—LATAM Airlines Group Financial Results Discussion: Year ended December 31, 2014 compared to year ended December 31, 2013”. Total fuel costs (US$ thousands) include Hedging gains/losses. |
Our fuel supply arrangements vary by airport and are distributed among 29 providers, but are mainly concentrated in Brazil (43%), Chile (13%), United States (12%) and Perú (10%). During 2014, we negotiated our fuel supply in major European, North American and South American airports. We also negotiated around 15% of our fuel supply in Santiago and most of the regions of Chile.
In 2014, we also signed a long term contract with Pure Biofuels in Lima and with Puma Aviation in Asunción, Paraguay. In North America our main airports are Miami and New York, where we signed contracts with WFS securing our supply in complex markets.
In Argentina, Brazil, Colombia, Ecuador, Mexico, Paraguay and Uruguay, we continued working with our current suppliers (including Raizen/Shell, YPF, Petrobras, Petro Peru,Repsol, Petroecuador, Terpel, Axion, among others.) regarding our fuel supply arrangements in these countries and many of these supply agreements will be negotiated during 2015.
Ground Facilities and Services
Our main operations are based at the Comodoro Arturo Merino Benítez International Airport in Santiago, Chile, where we operate hangars, aircraft parking and other airport service facilities at the Comodoro Arturo Merino Benítez International Airport pursuant to concessions granted by the DGAC. We also maintain a customs warehouse at the Comodoro Arturo Merino Benítez International Airport, additional customs warehouses in Chile (Iquique, Antofagasta and Punta Arenas) and Argentina (Aeroparque) and operate cargo warehouses at the Miami International Airport to service our cargo customers. Our facilities at Miami International Airport include corporate offices for our cargo and passenger operations and temperature-controlled and freezer space for imports and exports. We also operate from various other airports in Chile and abroad.
We also operate significant ground facilities and services through TAM’s headquarters located at Congonhas International Airport in São Paulo, Brazil. In 2013, we inaugurated two new facilities for ground handling equipment maintenance and repair at São Paulo’s Guarulhos Airport with 9,000 m² and at Rio de Janeiro’s Galeão Airport with 4,000 m².
Finally, we incur certain airport usage fees and other charges for services performed by the various airports where we operate, such as air traffic control charges, take-off and landing fees, aircraft parking fees and fees payable in connection with the use of passenger waiting rooms and check-in counter space.
Ancillary Airline Activities
In addition to our airline operations, we generate revenues from a variety of other activities, including aircraft leases (including subleases, dry-leases, wet-leases and capacity sales to certain alliance partners) and charter flights, tours, duty-free in-flight sales, other maintenance, storage and customs, handling and activities and revenues of Multiplus. In 2014, LATAM generated other revenues of US$378 million from ancillary activities.
Insurance
We maintain insurance policies as required by law and in accordance with the terms of all aircraft leasing agreements which LATAM and their affiliates and subsidiaries may own or we are responsible for or operate, including TAM and its affiliates and subsidiaries. The scope of these policies includes all risk coverage for aircraft hulls, including war risks and third party legal liability for passengers, cargo, baggage and injuries to third parties on the ground. Our current policies, which are in force through April 1, 2015 and are renewed annually, follow the best practices adopted by the international civil aviation industry.
We have negotiated common terms for Hull All Risk, Aviation Legal Liabilities and Spares coverage, together with IAG Group (British Airways, Iberia and their affiliates and franchises), which allows us to obtain premium reductions and coverage improvements. We also maintain insurance in respect of the assets against the risk of theft, fire, flood, electrical damage and similar events for equipment and buildings we own or for which we are responsible, including airport areas where we have operations. Similarly, we have contracted for vehicle insurance against the risk of robbery, theft, fire and civil liability against third parties for all vehicles we own or for which we are responsible.
Information Technology
Passenger Service Systems
As part of the Single Agenda of Transformation of the Customer Experience at LATAM, we have redefined our travel experience model and will continue to redesign our passenger service systems with the aim of providing a unified experience to our customers. Since the association between LAN and TAM was announced in 2012, a series of projects have been implemented to foster company among customers the perception that they are a single company offering equivalent services. Intense efforts have been made to standardize processes such as passenger recognition, attention at contact centers, sales offices and airports, in-flight services, e-commerce, loyalty programs, etc. However, many of these efforts are partial pending full unification of the two companies’ processes and systems, which is still ongoing.
In 2014, we redefined our travel experience model was based on the needs of our target customer, reinforcing six key elements:
All these elements call for the development of new processes with strong technological support. This, in turn, requires a robust and consistent technological model meets the new standard of service we offer to passengers and guarantees the continuity of business processes.
In order to address this challenge, we drew up an aggressive and robust three-year plan of work, with focus on the customer throughout 2015. This plan includes the design of new processes and selection of the definitive platforms that will be part of LATAM Group’s new solution. Under this plan, we will review the current status of each area of work involved in the travel experience, compare it to the desired technological end state, and establish a roadmap that is consistent with both customer perceptions and internal processes. Examples of the many areas of work to be considered include:
Implementation of many of these processes also calls for consistent work to unify customer service support systems. To this end, work has been undertaken to select the necessary end-game tools that meet the identified challenges and is compatible with our technological standards. In furtherance of this goal, we have either selected the best tools already available at LAN or TAM or have opted to implement new tools, in which case a selection process is launched.
The design and implementation of this plan for the next three years form part of the so-called Single Agenda of Transformation of the Customer Experience at LATAM.
LATAM host and digital world
In the case of passenger management systems, LAN and TAM adopted different solutions in 2012 and 2009, respectively.
TAM’s migration to Amadeus in 2009 included standardization of processes and solid preparation of the technological platform for joining Star Alliance in 2010. TAM implemented a complete end-to-end solution with Amadeus, including inventory, bookings, electronic sale of tickets, mobile solutions, kiosk, check-in and loading solutions.
LAN migrated to Sabre in 2012 and similarly focused on improving processes and a robust solution. The scope of Sabre’s implementation included inventory, bookings, ticket sales, kiosk, check-in and loading. LAN’s approach differed from that of TAM in that all e-commerce and mobile solutions were provided by partners or developed internally.
After the combination, LATAM decided to unify the Passenger Service Platform in a quest for operational and financial synergies. As a result of this, the project of migration of the current LAN and TAM platforms began in 2014.
This project comprises three phases. The first seeks to evaluate the technical and functional capacities of the partners with which Sabre (LAN) and Amadeus (TAM) were operated and to negotiate better commercial conditions for LATAM. Selection of the supplier will be followed in the second phase by a draft establishing all the requirements and the implementation plan and, once this has been completed, announcement of the Go Live date. Finally, the third phase consists in the project’s implementation.
LATAM has announced that, in parallel with the migration of the passenger service platform, it will make an important investment in its digital platform as part of its strategy to improve services and its customers’ travel experience. Through innovation and best practices, the digital platform will be enhanced, focusing on the business priorities for e-commerce and mobile solutions.
Maintenance
In 2010, after a 2.5-year implementation process, LAN started production of the MXI (Maintenix) solution for maintenance of its fleets in accordance with aviation regulation. This solution integrates Maintenance and Procurement and Logistical Management of Components (parts and spares) processes in a single IT tool.
In 2010, TAM evaluated adoption of the same solution but postponed its implementation.
In 2013, TAM began implementation of a 2.5-year Maintenix implementation project that is scheduled for completion by the end of 2015. This project includes standardization of LAN’s and TAM’s maintenance processes, permitting optimization of stocks of components and seeking to take advantage of synergies in the maintenance process, while operational safety remains the key pillar of its implementation. This solution also takes into account the specific nature of financial, accounting and tax processes in Brazil.
ERP LATAM
In January 2015, the SAP platform (ERP ECC 6.0, EHP 3.0) was implemented at TAM, adapted to Brazil’s financial and procurement needs. This project forms part of LATAM’s IT strategy, defined in 2012 and known as PMI (Post Merger Integration), which contains the roadmap for integration of all LATAM’s systems.
This project implements unification of the company’s information systems and the integration of LATAM Group’s finance and procurement processes standardizes the technological platform for these processes and consolidates the Group’s organizational structure, implying better control mechanisms and a greater analytical capacity to support decision-making.
The project is currently at the stage of stabilization and transfer of control to the SAP team which will be responsible for business continuity and support.
Implementation of another PMI project also began in the last quarter of 2014. This consists in the integration of LATAM Group’s human resources processes and technological platforms. Its aim is to implement in TAM the SAP modules for Payroll, Personnel Administration, Organizational Development, Compensation, Recruitment and Selection. This project is scheduled to be in operation in the second quarter of 2016.
Central IT
At the level of central IT infrastructure, a PMI project is currently being implemented to address solutions (servers, communications, network, etc.) that permit operation of the systems which support unified business processes at the LATAM level.
Data Centers and Central Infrastructure: At present, LATAM has two data centers in Chile and two in Brazil. Design of a configuration of two data centers and a DRP for LATAM is expected to be completed at the end of the second quarter of 2015 and their implementation will subsequently begin.
Communications and Telephony
In the case of communications and telephony, the LATAM solution on which work began in 2013 was implemented in 2014. This solution includes links within the two countries, a high-speed Santiago-São Paulo connection, back-up solutions and fixed-line and mobile telephony. At present, LATAM’s principal suppliers are Telefónica, SITA and OI.
Regulation
Below is a brief reference to the material effects of aeronautical and other regulations in force in each of the relevant jurisdictions in which LAN and its subsidiaries operate.
Chile
Aeronautical Regulation
Both the DGAC and the JAC oversee and regulate the Chilean aviation industry. The DGAC reports directly to the Chilean Air Force and is responsible for supervising compliance with Chilean laws and regulations relating to air navigation. The JAC is the Chilean civil aviation authority. Primarily on the basis of Decree Law No. 2,564, which regulates commercial aviation, the JAC establishes the main commercial policies for the aviation industry in Chile, regulates the assignment of international routes, and the compliance with certain insurance requirements, and the DGAC regulates flight operations, including personnel, aircraft and security standards, air traffic control and airport management. We have obtained and maintain the necessary authority from the Chilean government to conduct flight operations, including authorization certificates from the JAC and technical operative certificates from the DGAC, the continuation of which is subject to the ongoing compliance with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future.
Chile is a contracting state, as well as a permanent member, of the ICAO, an agency of the United Nations established in 1947 to assist in the planning and development of international air transport. The ICAO establishes technical standards for the international aviation industry, which Chilean authorities have incorporated into Chilean laws and regulations. In the absence of an applicable Chilean regulation concerning safety or maintenance, the DGAC has incorporated by reference the majority of the ICAO’s technical standards. We believe that we are in material compliance with all relevant technical standards.
Route Rights
Domestic Routes.Chilean airlines are not required to obtain permits in connection with carrying passengers or cargo on any domestic routes, but only to comply with the technical and insurance requirements established respectively by the DGAC and the JAC. 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. On January 18, 2012 the Secretary of Transportation and the Secretary of Economics of Chile announced a unilateral opening the Chilean domestic skies. This was confirmed on November 2013, and it is in force since that date.
International Routes.As an airline providing services on international routes, LAN is also subject to a variety of bilateral civil air transport agreements that provide for the exchange of air traffic rights between Chile and various other countries. There can be no assurance that existing bilateral agreements between Chile and foreign governments will continue, and a modification, suspension or revocation of one or more bilateral treaties could have a material adverse effect on our operations and financial results.
International route rights, as well as the corresponding landing rights, are derived from a variety of air transport agreements negotiated between Chile Peru, Ecuador,and foreign governments. Under such agreements, the government of one country grants the government of another country the right to designate one or more of its domestic airlines to operate scheduled services to certain destinations of the former and, in certain cases, to further connect to third-country destinations. In Chile, when additional route frequencies to and from foreign cities become available, any eligible airline may apply to obtain them. If there is more than one applicant for a route frequency the JAC awards it through a public auction for a period of five years. The JAC grants route frequencies subject to the condition that the recipient airline operate them on a permanent basis. If an airline fails to operate a route for a period of six months or more, the JAC may terminate its rights to that route. International route frequencies are freely transferable. In the past, we have generally paid only nominal amounts for international route frequencies obtained in uncontested auctions.
Airfare Pricing Policy.Chilean airlines are permitted to establish their own domestic and international fares without government regulation. For more information, see “—Antitrust Regulation” below. In 1997, the Antitrust Commission approved and imposed a specific self-regulatory fare plan for our domestic operations in Chile consistent with the Antitrust Commission’s directive to maintain a competitive environment. According to this plan, we must file notice with the JAC of any increase or decrease in standard fares on routes deemed “non-competitive” by the JAC and any decrease in fares on “competitive” routes at least twenty days in advance. We must file notice with the JAC of any increase in fares on “competitive” routes at least ten days in advance. In addition, the Chilean authorities now require that we justify any modification that we make to our fares on non-competitive routes. We must also ensure that our average yields on a non-competitive route are not higher than those on competitive routes of similar distance.
Registration of Aircraft.Aircraft registration in Chile is governed by the Chilean Aeronautical Code (“CAC”). In order to register or continue to be registered in Chile, an aircraft must be wholly owned by either:
Safety.The DGAC requires that all aircraft operated by Chilean airlines be registered either with the DGAC or with an equivalent supervisory body in a country other than Chile. All aircraft must have a valid certificate of airworthiness issued by either the DGAC or an equivalent non-Chilean supervisory entity. In addition, the DGAC will not issue maintenance permits to a Chilean airline until the DGAC has assessed the airline’s maintenance capabilities. The DGAC renews maintenance permits annually, and has approved our maintenance operations. Only DGAC-certified maintenance facilities or facilities certified by an equivalent non-Chilean supervisory body in the country where the aircraft is registered may maintain and repair the aircraft operated by Chilean airlines. Aircraft maintenance personnel at such facilities must also be certified either by the DGAC or an equivalent non-Chilean supervisory body before assuming any aircraft maintenance positions.
Security.The DGAC establishes and supervises the implementation of security standards and regulations for the Chilean commercial aviation industry. Such standards and regulations are based on standards developed by international commercial aviation organizations. Each airline and airport in Chile must submit an aviation security handbook to the DGAC describing its security procedures for the day-to-day operations of commercial aviation and procedures for staff security training. LAN has submitted its aviation security handbook to the DGAC. Chilean airlines that operate international routes must also adopt security measures in accordance with the requirements of applicable bilateral international agreements.
Airport Policy.The DGAC supervises and manages airports in Chile, including the supervision of take-off and landing charges. The DGAC proposes airport charges, which are approved by the JAC and are the same at all airports. Since the mid-90s, a number of Chilean airports have been privatized, including the Comodoro Arturo Merino Benítez International Airport in Santiago. At the privatized airports, the airport administration manages the facilities under the supervision of the DGAC and JAC.
Environmental and Noise Regulation.There are no material environmental regulations or controls imposed upon airlines, applicable to aircraft, or that otherwise affect us in Chile, except for environmental laws and regulations of general applicability. There is no noise restriction regulation currently applicable to aircraft in Chile. However, Chilean authorities are planning to pass a noise-related regulation governing aircraft that fly to and within Chile. The proposed regulation will require all such aircraft to comply with certain noise restrictions, referred to in the market as Stage 3 standards. LAN’s fleet already complies with the proposed restrictions so we do not believe that enactment of the proposed standards would impose a material burden on us.
Argentina
Aeronautical Regulation
Both theAdministración Nacional de Aviación Civil (“ANAC”) and the Secretary of Transport oversee and regulate the Argentinean aviation industry. ANAC regulates flight operations, including personnel, aircraft and security standards, air traffic control and airport management, and reports indirectly to the Ministry of Planning and is responsible for supervising compliance with Argentinean laws and regulations relating to air navigation. The Secretary of Transport also reports to the Ministry of Planning and regulates the assignment of international routes and matters related to tariff regulation policies. We have obtained and maintain the necessary authorizations from the Argentinean government to conduct flight operations, including authorization certificates and technical operative certificates from ANAC, the continuation of which is subject to the ongoing compliance with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future.
Argentina is a contracting state and a permanent member of the ICAO, an agency of the United Nations established in 1947 to assist in the planning and development of international air transport. The ICAO establishes technical standards for the international aviation industry, which Argentinean authorities have incorporated into Argentinean laws and regulations. In the absence of applicable Argentinean regulation concerning safety or maintenance, the ANAC has incorporated by reference the majority of the ICAO’s technical standards. We believe that we are in material compliance with all relevant technical standards.
Route Rights
Domestic Routes. In Argentina airlines are required to obtain permits in connection with carrying passengers or cargo on any domestic routes, and to comply with the technical requirements established by the local authority. There are no regulatory barriers preventing a foreign airline from creating an Argentine subsidiary and entering the Argentine domestic market using that subsidiary. However, ownership of such subsidiary by the foreign airline may not be direct, but through a subsidiary formed in Argentina, which in turn may be directly or indirectly owned by the foreign company. However, such subsidiary should operate Argentine registered aircraft and employ Argentine aeronautical personnel.
International Routes. As an airline providing services on international routes, LAN Argentina is also subject to a variety of bilateral civil air transport agreements that provide for the exchange of air traffic rights between Argentina and Colombia through Lan Airlines; Lan Expressvarious other countries. There can be no assurance that existing bilateral agreements between Argentina and foreign governments will continue. Furthermore, a modification, suspension or revocation of one or more bilateral treaties could have a material adverse effect on our operations and financial results.
International route rights, as well as the corresponding landing rights, are derived from a variety of air transport agreements negotiated between Argentina and foreign governments. Under such agreements, the government of one country grants the government of another country the right to designate one or more of its domestic airlines to operate scheduled services to certain destinations of the former and, in Chile; Lan Perucertain cases, to further connect to third-country destinations. In Argentina, when additional route frequencies to and from foreign cities become available, any eligible airline may apply to obtain them. ANAC grants route frequencies subject to the condition that the recipient airline operate them on a permanent basis. If an airline fails to operate a route for a period of six months or more, the ANAC may terminate its rights to that route.
Airfare Pricing Policy. Argentine airlines are permitted to establish their own international fares without government regulation, as long as they do not abuse any dominant market position they may enjoy. Yet, there are government-fixed maximum and minimum prices for domestic flights.
Registration of Aircraft. Aircraft registration in Peru; Lan EcuadorArgentina is governed by the Argentinean Aeronautical Code (“AAC”). In order to register or continue to be registered in Ecuador; Lan Argentina, an aircraft must be wholly owned by either:
Safety.ANAC requires that all aircraft operated by Argentinean airlines be registered with ANAC. All aircraft must have a valid certificate of years dueairworthiness issued by ANAC. In addition, ANAC will not issue maintenance permits to demand growth,an Argentinean airline until ANAC has assessed the airline’s maintenance capabilities. ANAC renews maintenance permits periodically and approves maintenance operations once the airline initiates its operations and each time an airline changes its maintenance regime. Only ANAC-certified maintenance facilities (in Argentina or in any other country) may maintain and repair the aircraft operated by Argentinean airlines. Aircraft maintenance personnel at such facilities must also be certified by ANAC before assuming any aircraft maintenance positions.
Security.ANAC establishes and supervises the implementation of security standards and regulations for the Argentinean commercial aviation industry. Such standards and regulations are based on standards developed by international commercial aviation organizations. Each airline and airport in Argentina must submit an aviation security handbook to ANAC describing its security procedures for the day-to-day operations of commercial aviation and procedures for staff security training. LAN Argentina has submitted its aviation security handbook to ANAC. Argentinean airlines that operate international routes must also adopt security measures in accordance with the requirements of applicable bilateral international agreements.
Airport Policy.The ORSNA (Organismo Regulador del Sistema Nacional de Aeropuertos) supervises and manages the airports in Argentina, including the supervision of take-off and landing charges. The ORSNA proposes airport charges, which are approved by ANAC and are the same at all airports. Nevertheless, while domestic flights are charged in local currency, international flights are charged in U.S. dollars. Since the late-90s, a number of Argentinean airports have been privatized, including Aeroparque and Aeropuerto Internacional de Ezeiza Ministro Pistarini in Buenos Aires, the two most important airports in Argentina. At the privatized airports, the airport administration manages the facilities under the supervision of ANAC and ORSNA.
Environmental and Noise Regulation.There are no material environmental regulations or controls imposed upon airlines, applicable to aircraft, or that otherwise affect us in Argentina, except for environmental laws and regulations of general applicability and noise restriction regulation currently applicable to aircraft in Argentina. Any aircraft operated by an Argentinean airline should comply with certain noise restrictions, specifically with Stage 3 standards, as set forth in chapter 91.805 of the Argentinean civilian aviation regulations (Regulaciones Argentinas de Aviación Civil) referred to in the market share gains, increased connectingas Stage 3 standards. LAN’s fleet already complies with the proposed restrictions so we do not believe that enactment of the proposed standards would impose a material burden on us.
Peru
Aeronautical Regulation
The Peruvian DGAC (“PDGAC”) oversees and regulates the Peruvian aviation industry. The PDGAC reports directly to the Ministry of Transportation and Communications and is responsible for supervising compliance with Peruvian laws and regulations relating to air navigation. In addition, the PDGAC regulates the assignment of national and international routes, and the compliance with certain insurance requirements, and it regulates flight operations, including personnel, aircraft and security standards, air traffic control and airport management. We have obtained and maintain the necessary authorizations from the Peruvian government to conduct flight operations, including authorization and technical operative certificates, the continuation of which is subject to the ongoing compliance with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future.
Peru is a contracting state and a permanent member of the ICAO. The ICAO establishes technical standards for the international aviation industry, which Peruvian authorities have incorporated into Peruvian laws and regulations. In the absence of an applicable Peruvian regulation concerning safety or maintenance, the PDGAC has incorporated by reference the majority of the ICAO’s technical standards. We believe that we are in material compliance with all relevant technical standards.
Route Rights
Domestic Routes.Peruvian airlines are required to obtain permits in connection with carrying passengers or cargo on any domestic routes and to comply with the technical requirements established by the PDGAC. Non-Peruvian airlines are not permitted to provide domestic air service between destinations in Peru.
International Routes.As an airline providing services on international routes, LAN Peru is also subject to a variety of bilateral civil air transport agreements that provide for the exchange of air traffic rights between Peru and various other countries. There can be no assurance that existing bilateral agreements between Peru and foreign governments will continue, and a modification, suspension or revocation of one or more bilateral treaties could have a material adverse effect on our operations and financial results.
International route rights, as well as the corresponding landing rights, are derived from a variety of air transport agreements negotiated between Peru and foreign governments. Under such agreements, the government of one country grants the government of another country the right to designate one or more of its domestic airlines to operate scheduled services to certain destinations of the former and, in certain cases, to further connect to third-country destinations. In Peru, when additional route frequencies to and from foreign cities become available, any eligible airline may apply to obtain them. If there is more than one applicant for a route frequency the PDGAC awards it through a public auction for a period of four years. The PDGAC grants route frequencies subject to the condition that the recipient airline operate them on a permanent basis. If an airline fails to operate a route for a period of 90 days or more, the PDGAC may terminate its rights to that route, although that has never happened in practice.
Airfare Pricing Policy.Peruvian airlines are permitted to establish their own domestic and international fares without government regulation, as long as they do not abuse any dominant market position they may enjoy. For more information, see “—Antitrust Regulation” below. Airlines or other Latin American countries,interested parties may file complaints before the launchInstitute for Protection of newFair Competition and Consumer Rights (“Indecopi”) with respect to monopolistic or other pricing practices by other airlines that violate Peru’s antitrust laws.
Registration of Aircraft.Aircraft registration in Peru is governed by the Peruvian Civil Aviation Law. In order to own and register a Peruvian aircraft, the following conditions shall apply:
Safety. Peruvian law allows the use of aircraft that are registered either with the PDGAC or with an equivalent supervisory body in a country other than Peru. All aircraft must have a valid certificate of airworthiness issued by either the PDGAC or an equivalent non-Peruvian supervisory entity. In addition, the PDGAC will issue maintenance permits to a Peruvian airline as long as the PDGAC has assessed the airline’s maintenance capabilities. The PDGAC has approved our maintenance operations. Only PDGAC-certified maintenance facilities or facilities certified by an equivalent non-Peruvian supervisory body in the country where the aircraft is registered may maintain and repair the aircraft operated by Peruvian airlines. Aircraft maintenance personnel at such facilities must also be certified either by the PDGAC or an equivalent non-Peruvian supervisory body before be appointed to any aircraft maintenance positions.
Security.The PDGAC establishes and supervises the implementation of security standards and regulations for the Peruvian commercial aviation industry. Such standards and regulations are based on standards developed by international commercial aviation organizations. Each airline and airport in Peru must submit an aviation security handbook to the PDGAC describing its security procedures for the day-to-day operations of commercial aviation and procedures for staff security training. LAN Peru has submitted its aviation security handbook to the PDGAC. Peruvian airlines that operate international routes must also adopt security measures in accordance with the requirements of applicable bilateral international agreements.
Airport Policy. CORPAC supervises and manages airports in Peru, including the supervision of take-off and landing charges. CORPAC sets airport charges for navigation facilities, which may differ from airport to airport. Since the mid-90s, a number of Peruvian airports have been privatized, including the Aeropuerto Internacional Jorge Chávez in Lima. At the privatized airports, the airport administration manages the facilities under the supervision of theOrganismo Supervisor de la Inversión en Infraestructura de Transporte de Uso Público, (the Supervising Agency of Investment in Public Transport Infrastructure Facilities or “OSITRAN”), an independent regulatory and supervising entity.
Environmental and Noise Regulation.There are no specific material environmental regulations or controls imposed upon airlines, applicable to aircraft, or that otherwise materially affect us in Peru, except for environmental laws and regulations of general applicability. There are noise restriction regulations currently applicable to aircraft in Peru. LAN’s fleet complies with the proposed restrictions so they do not impose a material burden on us.
Ecuador
Aeronautical Regulation
There are two institutions that control commercial aviation on behalf of the State: (i) The National Civil Aviation Board (“CNAC”), which directs aviation policy; and (ii) the General Civil Aviation Bureau (“EDGAC”), which is a technical regulatory and control agency. The CNAC issues operating permits and grants operating concessions to national and international airlines. It also issues opinions on bilateral and multilateral air transportation treaties, allocates routes and additional frequenciestraffic rights, and approves joint operating agreements such as wet leases and shared codes.
Fundamentally, the EDGAC is responsible for:
The EDGAC also must comply with the standards and recommended methods of the ICAO since Ecuador is a signatory of the 1944 Chicago Convention.
Route Rights
Domestic Routes.Airlines must obtain authorization from CNAC (an operating permit or concession) to provide air transportation. For domestic operations, only companies incorporated in Ecuador can operate locally, and only Ecuadorian-licensed aircraft and dry leases are authorized to operate domestically.
International Routes.Permits for international operations are based on air transportation treaties signed by Ecuador or, otherwise, the principle of reciprocity is applied. All airlines doing business in Latin America that are incorporated in countries that are members of theComunidad Andina de Naciones (the Andean Community, or “CAN”) obtain their traffic rights on the basis of decisions currently in force under that regime, in particular decision N°582 of 2004, which guarantee free access to markets, with no type of restriction except technical considerations.
Shared codes are allowed in Ecuador after authorization by the CNAC, but the respective airlines must have the relevant traffic rights.
Airfare Pricing Policy.On October 13, 2011, The Statutory Law of Regulation and Control of the Market Power was passed with a purpose to avoid, prevent, correct, eliminate and sanction the abuse of economic operators with market power, as well as to sanction restrictive, disloyal and agreements involving collusive practices. This Law creates a new public entity as the maximum authority of application and establishes the procedures of investigation and the applicable sanctions, which are severe. Rates are not regulated and are subject only to registration. In general, bilateral treaties regarding air transportation provide for airfares to be regulated by the regulation of the country of origin.
Registration of Aircraft.The legislation allows Ecuadorian companies to provide international air transportation services using aircraft licensed in Ecuador and aircraft with a foreign license, always provided the latter are exploited under dry leases. For domestic operations, aircraft is authorized only pursuant to dry leases and Ecuadorian registration. Aircraft interchange agreements are also allowed for international operations, provided that the aviation authority can confirm that the aircraft is under the operational control of an Ecuadorian operator. Wet leases are permitted, but very restricted.
Safety. In order to ensure aviation safety, the EDGAC requires that the airline hold an Air Operator Certificate and have Operating Specifications that are examined technically and rigorously to ensure compliance with the Civil Aviation Technical Regulations, which are essentially the same as the Federal Aviation Regulations (“FAR”) of the FAA. They cover matters of aircraft airworthiness, certification of maintenance facilities, and oversight by the EDGAC.
Security.The governing rules also apply to security in respect of the EDGAC. There are regulations, manuals and procedures on airport security overseen by the EDGAC.
Airport Policy. The international airports in Quito and Guayaquil are managed under administrative concessions, and the EDGAC merely controls air traffic. Fees for the use of airport facilities, terminal fees, landing fees, parking fees are all overseen and collected by the operator. Over-flight and approach fees are controlled and collected by the EDGAC.
Environmental and Noise Regulation.Aircraft must comply with the standards of category 3 under Ecuadorian applicable noise regulations, as set forth in Executive Decree (Decreto Ejecutivo) 1,405, enacted on October 24,2008, which provides certain technical specific criteria. Beginning in May 2010, aircraft must comply with standards of category 4 under cited regulation. Category 3 provides for compliance with ICAO regulations and technical conditions mandatory in the United States of America.
United States of America
Aeronautical Regulation
Operations to and from the United States by non-U.S. airlines, such as LAN, are subject to Title 49 of the U.S. Code, under which the Department of Transportation (“DOT”) and the FAA exercise regulatory authority. The DOT has jurisdiction over international aviation in connection with the United States, subject to review by the President of the United States. The DOT also has jurisdiction with respect to unfair practices and methods of competition by airlines and related consumer protection matters. The U.S. DOJ also has jurisdiction over airline competition matters under the U.S. federal antitrust laws. Flight operations between Chile and the United States by airlines licensed by either country are governed generally by the open skies air transport agreement that Chile and the United States signed in October 1997. Under the open skies agreement, there are no restrictions on the number of destinations or flights that either a U.S. or a Chilean airline may operate between the two countries or on the number of U.S. and Chilean airlines that may operate.
Authorizations and Licenses
LAN is authorized by the DOT to engage in scheduled and charter air transportation services, including the transportation of persons, property (cargo) and mail, or combinations thereof, between points in Chile and points in the United States and beyond (via intermediate points in other countries). LAN holds the necessary authorizations from the DOT in the form of a foreign air carrier permit, Exemption Authorizations and Statements of Authorization to conduct current operations to and from the United States. Exemptions and Statements of Authorization are temporary in nature and are subject to renewal and therefore there can be no assurance that any particular exemption or statement of authorization will be renewed. LAN’s foreign air carrier permit has no expiration date, while a renewal of the exemption authorization (which includes the open skies traffic rights) was timely filed and the Authority was automatically extended until such time as the DOT issues the renewal order. LAN intends to request the inclusion of the open skies rights into our foreign air carrier permit, which would eliminate our need to renew the exemption authority in the future.
The FAA is engaged in the regulation with respect to safety matters, including aircraft maintenance and operations, equipment, aircraft noise, ground facilities, dispatch, communications, personnel, training, weather observation and other matters affecting air safety. The FAA requires each foreign air carrier to obtain certain operations specifications that authorize it to operate to particular airports on approved international routes using specified equipment. LAN currently holds FAA operations specifications under Part 129 of the FAR in compliance in all material respects with all requirements necessary to maintain in good standing of its operations specifications issued by the FAA. The FAA can amend, suspend, revoke or terminate those specifications, or can suspend temporarily or revoke permanently our authority if an airline fails to comply with the regulations, and expansion into new markets.can assess civil penalties for such failure. A modification, suspension or revocation of any of our DOT authorizations or FAA operations specifications could have a material adverse effect on our business.
Our international network combines our Chilean, Peruvian, Ecuadorian, ArgentineanThe FAA also conducts safety audits and Colombian affiliates.has the power to impose fines and other sanctions for violations of airline safety regulations. We have operated international services outnot incurred any material fines related to operations.
Security. On November 19, 2001, the Congress of Chile since 1946,the United States passed, and we greatly expandedthe President signed into law, the Aviation and Transportation Security Act, also referred to as the Aviation Security Act. This law federalized substantially all aspects of civil aviation security and created the Transportation Security Administration (“TSA”), which took over security responsibilities previously held by the FAA. The TSA is an agency of the U.S. Department of Homeland Security. The Aviation Security Act requires, among other things, the implementation of certain security measures by airlines and airports, such as the requirement that all passenger bags be screened for explosives. Funding for airline and airport security required under the Aviation Security Act is provided in part by a US$2.50 per segment passenger security fee, subject to a US$10 per round trip cap; however, airlines are responsible for costs in excess of this fee. Implementation of the requirements of the Aviation Security Act has resulted in increased costs for airlines and their passengers. Since the events of September 11, 2001, Congress has mandated and the TSA has implemented numerous security procedures and requirements that have imposed and will continue to impose burdens on airlines, passengers and shippers.
Noise Restrictions. Under the Airport Noise and Capacity Act of 1990 (“ANCA”), and related FAA regulations, aircraft that fly to the United States must comply with certain Stage 3 noise restrictions, which are currently the most stringent FAA noise requirements. All of our flights outaircraft that fly to the United States meet the Stage 3 requirements.
Under the direction of Peru withthe ICAO, governments are considering the creation of Lana new and more stringent noise standard than that contained in the ANCA. The ICAO adopted new noise standards in 2001 that established more stringent noise requirements for aircraft manufactured after January 1, 2006. In the U.S., legislation known as the “Vision 100—Century of Aviation Reauthorization Act,” which was signed into law in December 2003, required the FAA to issue regulations implementing Stage 4 noise standards consistent with recommendations adopted by the ICAO. FAA regulations require all aircraft designed and certified after January 1, 2006 to comply with Stage 4 noise restrictions.
FAA regulations also require compliance with the Traffic Alert and Collision Avoidance System, approved airborne wind shear warning system and aging aircraft regulations. Our entire fleet meets these requirements.
Brazil
Aeronautical Regulation
The Brazilian aviation industry is regulated and overseen by the ANAC. The ANAC reports directly to the Civil Aviation Secretary, which is subordinated by the Federal Executive Power of this country. Primarily on the basis of Law No. 11.182/2005, ANAC was created to regulate commercial aviation, air navigation, the assignment of domestic and international routes, compliance with certain insurance requirements, flight operations, including personnel, aircraft and security standards, air traffic control, in this case sharing it activities and responsibilities with theDepartamento de Controle do Espaço Aéreo (Department of Airspace Control) (“DECEA”),which is a public secretary also subordinated to the Brazilian Defense Ministry, and airport management, in this last case sharing responsibilities with theEmpresa Brasileira de Infra-Estrutura Aeroportuária (the Brazilian Airport Infrastructure Company, or “INFRAERO”), a public company that was created by Law No. 5862/72, and is responsible for administrating, operating and exploring Brazilian airports industrially and commercially (with the exception of Guarulhos International Airport, Viracopos International Airport and Brasilia International Airport which was privatized in 2012 and are administrated by concession agreement).
We have obtained and maintain the necessary authority from the Brazilian government to conduct flight operations, including authorization and technical operative certificates from ANAC, the continuation of which is subject to ongoing compliance with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future.
ANAC is the Brazilian civil aviation authority and it is responsible for supervising compliance with Brazilian laws and regulations relating to air navigation. Brazil is a contracting state and a permanent member of the ICAO. The ICAO establishes technical standards for the international aviation industry, which Brazilian authorities, represented by the Brazilian Defense Ministry, have incorporated into Brazilian laws and regulations. In the absence of an applicable Brazilian regulation concerning safety or maintenance, ANAC has incorporated by reference the majority of the ICAO’s technical standards.
Route Rights
Domestic Routes. Brazilian airlines are not required to obtain permits in connection with domestic passenger or cargo transportation, but only to comply with the technical requirements established by ANAC. Based on the Brazilian Aeronautical Code (“CBA”) established by Law No. 7.565/86, non-Brazilian airlines are not permitted to provide domestic air service between destinations in Brazil. The same law prevents a foreign airline from creating a Brazilian subsidiary and entering the Brazilian domestic market using that subsidiary.
International Routes. Brazilian and non-Brazilian airlines providing services on international routes are also subject to a variety of bilateral civil air transport agreements that provide for the exchange of air traffic rights between Brazil and various other countries. International route rights, as well as the corresponding landing rights, are derived from a variety of air transport agreements negotiated between Brazil and foreign governments. Under such agreements, the government of one country grants the government of another country the right to designate one or more of its domestic airlines to operate scheduled services to certain destinations of the former and, in certain cases, to further connect to third-country destinations. In Brazil, when additional route frequencies to and from foreign cities become available, any eligible airline may apply to obtain them. If there is more than one applicant for a route frequency ANAC must carry out a public bid and award it to the elected airline. ANAC grants route frequencies subject to the condition that the recipient airline operate them on a permanent basis. If an airline fails to operate a route for a period of six months or more, ANAC may terminate its rights to that route. ANAC may also terminate its right if the recipient airline does not operate at least 80% of the frequency given for that specific route.
Airfare Pricing Policy. Brazilian and non-Brazilian airlines are permitted to establish their own international and domestic fares, in this last case only for Brazilian airlines, without government regulation, as long as they do not abuse any dominant market position they may enjoy. Airlines may file complaints before the Antitrust Court with respect to monopolistic or other pricing practices by other airlines that violate Brazil’s antitrust laws.
Registration of Aircraft. Aircraft registration in Brazil is managed by ANAC, which maintains the Brazilian Aeronautical Register, as regulated by the CBA. The CBA allows ANAC to permit registration of aircraft belonging to Brazilian and non-Brazilian individuals.
Safety. ANAC requires that all Brazilian aircraft to have a valid certificate of airworthiness issued by ANAC. In addition, ANAC will not issue maintenance permits to a Brazilian airline until it has assessed the airline’s maintenance capabilities. ANAC renews maintenance permits annually, and has approved our maintenance operations. Only ANAC certifies aircraft maintenance services and its personnel.
Security. ANAC establishes and supervises the implementation of security standards and regulations for the Brazilian commercial aviation industry. Such standards and regulations are based on standards developed by international commercial aviation organizations. Each airline and airport in Brazil must submit an aviation security handbook to ANAC describing its security procedures for the day-to-day operations of commercial aviation and procedures for staff security training.
Brazilian Airport Policy. INFRAERO supervises and manages airports in Brazil, including the supervision of take-off and landing charges. INFRAERO proposes airport charges, which are approved by ANAC and are the same at all airports. At privatized airports, the airport administration manages the facilities under the supervision of ANAC.
Environmental and Noise Regulation. ANAC coordinates and supervises noise regulations by regulation 121, which established noise restriction applicable to aircraft in Brazil. There are no material environmental regulations or controls imposed specifically upon airlines companies, applicable to aircraft, other than Brazilian general environmental laws and regulations.
Colombia
Aeronautical Regulation
The governmental entity in charge of regulating, directing and supervising civil aviation in Colombia is the Aeronáutica Civil (“AC”), a technical agency ascribed to the Ministry of Transportation. The AC is the aeronautical authority for the entire domestic territory, in charge of regulating and supervising the Colombian air space. The AC may interpret, apply and complement all civil aviation and air transportation regulation to ensure compliance with the Colombian Aeronautical Regulations (“RAC”). The AC also grants the necessary permits for air transportation.
Route Rights
The AC grants operation permits to domestic and foreign carriers that intend to operate in, from and to Colombia. In the case of Colombian airlines, in order to obtain the operational permit the company must comply with the RAC and fulfill legal, economic and technical requirements, to later be subject to public hearings where the public convenience and necessity of the service is considered. The same process must be followed to add national or international routes, whose concession is subject to the bilateral instruments entered into by Colombia. Routes cannot be transferred under any circumstance and there is no limit to foreign investment in domestic airlines.
Airfare Pricing Policy.Since July 2007, as stated in resolution 3299 of the Aeronautical Civil entity, bottom level airfares for both international and domestic transportation were eliminated. Under resolution 904 issued in February 2012, the Aeronautical Civil entity decided to liberalize the obligation of charging a fuel surcharge for both domestic and international transportation of passengers and cargo. As of April 1, 2012, air carriers may now freely decide whether or not to charge a fuel surcharge. In the case that it is charged, the fuel surcharge must be part of the fare, but may be informed separately on the tickets, advertising or other methods of marketing used by the company.
In the same line, as of April 1, 2012 there is no longer be any restriction on top level fares published by the airlines or with respect to the obligations for air carriers to report to the Aeronautical civil entity the fares and conditions the day after being published.
Administrative fares are not subject to any changes and its charge is an obligation for the transport of passengers under Aeronautical Civil Regulations.
Registration of Aircraft.The AC, through the Office of Aeronautical Registration, is in charge of handling the registration of aircraft that will be operated by Colombian airlines. Registration may be obtained by a registration process fully conducted in Colombia or through the validation in Colombia of a foreign registration. For such registration, the aircraft must be legally imported to the country and inspected by the aeronautical inspectors. This office is also in charge of property registrations, lease contracts and liens of the registered aircraft.
Safety. Aircraft registered in Colombia obtain an airworthiness certificate or a validation of the airworthiness certificate (if they operate under the approval of the foreign registration).
Security.Following the guidelines of the OACI annexes, the AC issued an airport security program that must be strictly complied with by all the aircraft operators in the country as well as by airports.
Environmental and Noise Regulation.In Colombia, only aircraft that comply with category 3 noise limits may operate. There are strict regulations to control noise during takeoffs and landings of the aircraft at the El Dorado Airport in Bogotá due to its location in an urban area.
Antitrust Regulation
The Chilean antitrust authority, which we refer to as the Antitrust Court (previously the Antitrust Commission), oversees antitrust matters, which are governed by Decree Law No. 211 of 1973, as amended, or the Antitrust Law. The Antitrust Law prohibits any entity from preventing, restricting or distorting competition in any market or any part of any market. The Antitrust Law also prohibits any business or businesses that have a dominant position in any market or a substantial part of any market from abusing that dominant position. An aggrieved person may sue for damages arising from a breach of Antitrust Law and/or file a complaint with the Antitrust Court requesting an order to enjoin the violation of the Antitrust Law. The Antitrust Court has the authority to impose a variety of sanctions for violations of the Antitrust Law, including termination of contracts contrary to the Antitrust Law, dissolution of a company and imposition of fines and daily penalties on businesses. Courts may award damages and other remedies (such as an injunction) in appropriate circumstances. As described above under “—Route Rights—Airfare Pricing Policy,” in October 1997, the Antitrust Court approved a specific self-regulatory fare plan for us consistent with the Antitrust Court’s directive to maintain a competitive environment within the domestic market.
Since October 1997, LAN Airlines S.A. and LAN Express follow a self-regulatory plan, which was modified and approved by the Tribunal de la Libre Competencia (the Competition Court) in July 2005, and further in September, 2011. In February 2010, the Fiscalía Nacional Economica (the National Economic Prosecutor’s Office) finalized the investigation initiated in 2007 regarding our compliance with this self-regulatory plan and no further observations were made
As a condition to the business combination between LAN and TAM in June 2012, the antitrust authorities in Chile and in Brazil each imposed certain mitigation measures as part of their approval of the combination. Furthermore, the combination was submitted to the antitrust authorities in Germany, Italy and Spain. All these jurisdictions granted unconditional clearances for this transaction. The combination was filed with the Argentinean antitrust authorities, which approval is still pending. For more information regarding these mitigation measures please see below:
Chile
On September 21, 2011, the TDLC issued the Decision with respect to the consultation procedure initiated on January 28, 2011 in connection with the proposed combination. The TDLC, in the Decision, approved the proposed combination between LAN and TAM, subject to 14 conditions, as generally described below:
Brazil
The Brazilian Council for Economic Defense – CADE approved the LAN/TAM combination by unanimous decision during the hearing session of December 14, 2011, subject to the following conditions: (1) the new combined group (LATAM) should leave one of the two global alliances to which it was part (Star Alliance oroneworld®); and (2) the new combined group (LATAM) should offer to swap two pairs of slots in Guarulhos International Airport, to be used by an occasional third party interested in offering direct non-stop flights between São Paulo and Santiago do Chile. These impositions are in line with the mitigation measures adopted by the TDLC, in Chile.
C. ORGANIZATIONAL STRUCTURE
LATAM Airlines Group is a company primarily involved in the transportation of passengers and cargo. Our operations are carried out principally by LAN, and by a number of different subsidiaries and affiliates, including TAM. As of January 31, 2015, in the passenger business we operated through seven main airlines: LATAM Airlines Group S.A. (which does business under the name “LAN Airlines”), incorporated in Chile, Transporte Aéreo S.A. (which does business under the name “LAN Express”), a Chilean subsidiary, LAN Perú S.A. (“LAN Peru”), a Peruvian subsidiary, Aerolane, an Ecuadorian subsidiary, Líneas Aéreas Nacionales del Ecuador S.A. (“LAN Ecuador”), and Ecuadorian subsidiary, LAN Argentina S.A. (“LAN Argentina,” previously Aero 2000 S.A.), an Argentinian subsidiary, Aerovías de Integración Regional, Aires S.A. (which does business under the name “LAN Colombia”), a Colombian subsidiary, TAM Linhas Aereas S.A. (“TAM Linhas Aereas”) incorporated in Brazil.).
As of January 31, 2015 we held a 99.90% stake in LAN Express through direct and indirect interests, a 69.98% stake in LAN Peru through direct and indirect interests, a 79.66% indirect stake in 1999LAN Ecuador, a 94.99% indirect stake in LAN Argentina, a 98.81% indirect stake in LAN Colombia and a 100.00% of the non-voting shares of TAM, and 19.42% of the voting shares and 100% of the non-voting of Holdco I S.A., who has the 100.00% of the voting shares of TAM. For a description of the recent combination with TAM, including TAM’s operating structure, see “Item 4.History and Development of the Company—Combination of LAN and TAM.”
The cargo operations are carried out by our subsidiaries and affiliates, including TAM Linhas Aereas and LAN Cargo. The cargo operations are complemented by the operations of certain related companies, such as Aero Transportes Mas de Carga S.A. de C.V. (“MasAir”) in Mexico, Aerolinhas Brasileiras S.A. (which does business under the name of “ABSA” and “TAM Cargo”) in Brazil and Linea Aérea Carguera de Colombia S.A. (“LANCO”) in Colombia. As of January 31, 2015, we indirectly held 100% of the non-voting shares and 24.99% of the voting shares of MasAir, 100% of the non-voting shares and 20% of the voting shares of ABSA, and an 90.00% stake in LANCO through direct and indirect participations. TAM holds 100% stake in ABSA. In the cargo business, LATAM markets itself primarily under the LAN Cargo brand internationally and the TAM Cargo brand in Brazil.
D. PROPERTY, PLANTS AND EQUIPMENT
LAN Infrastructure Management and TAM Infrastructure Management report to the Director of Purchasing and Infrastructure of LATAM. Both LAN and TAM infrastructure management teams have worked together during 2012 and 2013 regarding strategic planning for infrastructure issues for the LATAM Airlines Group.
LAN’s Property, Plant and Equipment
Headquarters
Our main facilities are located on approximately five acres of land that we own near the Comodoro Arturo Merino Benítez International Airport. The complex includes approximately 150,695 square feet of office space, 32,292 square feet of conference space and training facilities, 9,688 square feet of dining facilities and mock-up cabins used for crew instruction.
During 2003, we moved some of our executive offices into a new building in a more central location in Santiago, Chile, where we occupied a total of four floors owned by LAN. To accommodate our growth, we have, since 2005 expanded our offices. In 2005 LAN bought 3 floors, in 2007, LAN leased two floors in an adjacent building (totaling 18,298 square feet), and in 2009, LAN leased additional floors in this building (totaling 12,917 square feet). In 2010, new offices were leased east of Santiago to allow for Company growth and to implement projects such as “Host,” which involves changing our system of reservations, sales, inventory and passenger check-in. We have leased these additional offices since 2010, under a 4-year lease. These additional offices add a total of 19,913 square feet to LAN’s property.
Furthermore, during 2011 we added to our facilities a new 11,840 square feet floor at the Arrau Building located in Santiago, Chile, which we lease for the new facilities of LAN Cargo. We have leased this floor since 2011, under a 3-year lease.
Maintenance Base
Our 877,258 square feet maintenance base is located on a site that we own inside Comodoro Arturo Merino Benítez International Airport. This facility contains our aircraft hangar, warehouses, workshops and offices, as well as a 559,720 square feet aircraft parking area capable of accommodating up to seventeen short-haul aircraft. We have a 53,820 square feet office building plus a 10,000 square feet office and workshop space. We also lease from the DGAC 193,750 square feet of space inside the Comodoro Arturo Merino Benítez International Airport for operational and service purposes. Our lease has duration of 14 years.
During 2013, we began to develop a series of infrastructure projects, the most significant of which is the construction of a north platform which allows for an additional 13 new A320 aircraft parking spaces. During 2013, a significant part of this project was completed, including 5 new parking spaces for A320 aircraft. The project is expected to be finished during the third quarter of 2014. Additionally during 2013, parking capacity for vehicles was increased by 135 new spaces.
During 2014 these Facilities were completed and delivered to operation.
Miami Facilities
We occupy a 36.3-acre site at the Miami International Airport that has been leased to us by the airport under a concession agreement. Our facilities include a 48,000 square feet corporate building, a 380,000 square feet cargo warehouse (including a 10,000 square meter cooling area) and a 783,000 square feet aircraft-parking platform, which were constructed and are now leased to us under a long-term contract by a North American developer, and approximately 21,528 square feet of furnished office space. The rent we pay for the use of this space is approximately US$735,000 per month. We are currently negotiating with the local airport authority regarding its construction of a new hangar at the Miami International Airport, which we expect to lease from them when it is constructed.
During 2010, LAN signed a concession agreement with the AMB Property Corporation to add a new cargo warehouse for additional areas for future developments. Our concession has duration of 5 years at a rate of approximately US$215,000 per month.
During 2013, a new project for a Boeing B777 hangar was developed. This project finally received approval from Miami airport authorities in 2014 and should be completed during 2015.
Other Facilities
We own a building and sixteen acres of land on the west side of the Comodoro Arturo Merino Benítez International Airport that houses a flight-training center. As of February 28, 2014, this facility features three full-flight simulators for Boeing 767, Airbus A320 and Boeing 737 aircraft.
Fast Air Almacenes de Carga S.A. (“Fast Air”), one of our subsidiaries that operate import customs warehouses, utilizes an import warehouse and office building at the Comodoro Arturo Merino Benítez International Airport. This 172,000 square feet building was developed in conjunction with two other operators. We have leased these facilities since 2004 and we will continue to operate there until September 2015.
LAN Peru’s Property, Plant and Equipment
LAN Peru has approximately 19,000 m2 built. All facilities are leased and are distributed as follows:
Administrative Offices: 7,000 m2
Sales Offices: 2,000 m2
Concessions airports: 10,000 m2
We also own a 166,840 square feet of land near the Lima airport, where built training facilities for flight and cabin crews of the Company, with capacity for two flight simulators (Airbus A320s and Boeing 767s), facilities for emergency evacuation practice (including pool to practice ditching) and classrooms. In addition, in 2010 we leased a piece of land and hangar inside the Lima airport for our maintenance facilities that was rented to LAN Peru for an initial period of 5 years, which may be renewed. The new maintenance facilities have approximately 3,500 m² of space, a hangar with a covered area of approximately 6,500 m² (space for three Airbus A320s or one Boeing 767) plus an out platform of approximately 3,500 m².
Finally, we are renting eight floors in a building and three floors in another building for our corporate facilities. We are also renting twenty three commercial offices around the country.
LAN Colombia’s Property, Plant and Equipment
LAN Colombia has approximately 27,500 m2 built. All facilities are leased and are distributed as follows:
Administrative Offices: 4,500 m2
Sales Offices: 1,700 m2
Concessions airports: 21,300 m2
During 2012, new administrative and operational offices were created in the Logistic center (PARQUE DEL SOL) near the El Dorado airport in Bogota, covering 11,500 square feet.
During November 2013, a new VIP lounge covering 690m2 in the El Dorado Airport in Bogotá was complete.
During 2014 there was a complete renovation of the Hangar Aircraft Parking, which now has space for three A320 aircraft.
LAN Ecuador’s Property, Plant and Equipment
LAN Ecuador has approximately 14,500 m2 built. All facilities are leased and are distributed as follows:
Administrative Offices: 1,600 m2
Sales Offices: 1,000 m2
Concessions airports: 11,900 m2
In Ecuador, the New Quito Airport was opened in 2013 and LAN Ecuador spent approximately US$4.5 million for facilities and infrastructure investments at this new airport. During the construction period, LAN Ecuador (and other airlines) were required to make significant investments for airport infrastructure in this new airport.
In 2012, LAN began the construction of new facilities for Andes, a company that performs ground service aircraft handling services for LAN Ecuador and acts as an airport service provider. A new facility for line maintenance and operations was also constructed. Both facilities were built on land concessioner by QUIPORT and were opened during the first quarter of 2013. Further information regarding the size and amount of these investments is detailed in the table below:
Facilities | Ground (m2) | Constructions (m2) | Pavements (m2) | Investment (US$) | ||||||||||||
ANDES | 4,000 | 3,134 | 1,800 | 2,500,000 | ||||||||||||
MAINTENANCE | 15,167 | 1,300 | 6,200 | 2,000,000 |
LAN Argentina’s Property, Plant and Equipment
LAN Argentina has approximately 192,670 square feet built. All facilities are leased and are distributed as follows:
Administrative Offices: 71,042 square feet
Sales Offices: 27,986 square feet
Concessions airports: 93,646 square feet
We also have maintenance base in Argentina with a hangar of 26,900 square feet, 9,600 square feet of offices, 1,070 square feet of workshops and an exterior platform of 5,300 square feet. This facility is meant for the parking and maintenance of A320 aircraft and it is capable of providing full maintenance, including C-Checks.
On December of 2012, LAN Argentina launched its new VIP lounge in Terminal B of the Ezeiza Airport. An area of 6,458 square feet was built to house more than 150 passengers, with areas for resting, work, entertainment, bathrooms and shower services.
TAM’s Property Plant and Equipment
Headquarters
TAM’s main facilities are located in São Paulo, in hangars within the Congonhas Airport and nearby. At Congonhas Airport, TAM leases office facilities in converted hangars belonging to INFRAERO (the Local Airport Administrator). These facilities comprise 649,933 square feet.
The Service Academy is located at Rua Atica, about 2.5 km from Congonhas Airport, is a separate property which TAM owns, exclusively for the areas of Selection, Medical Service, Training, and Mock-ups, comprising 15,342 m².
Base Maintenance
At Hangars II and V in Congonhas Airport, which TAM leases for approximately R$39,510 and R$52,665 per month, TAM has 15,650 m² of offices and hangars with about 1,050 workstations. This site also houses the areas of Aircraft Maintenance, Procurement and Logistics of Aeronautical Materials, and Retrofitting.
Other Facilities
In São Paulo, TAM has other facilities such as: Commercial Headquarters, an old Pantanal office, located 7.0 km from Congonhas Airport, with 540 m² leased area and about 94 workstations; Uniform Building, with 890 m2 and about 10 workstations, exclusive use for storage and delivery of uniforms; and a Call Center Building at Rua Augusta with 110 m2 and about 150 workstations distributed in four floors.
TAM also has the following offices: Multiplus Office, located in Brooklin region, with 800 m2 leased, and approximately 150 workstations; TAM Viagens Office, with 2,800 m2 leased distributed in about 265 workstations; Two Stores of TAM Viagens, at Rua Augusta with 110 m2 leased and about 10 workstations; and at Shopping SP Market with 50 m2 leased and about 5 workstations.
In Guarulhos, TAM has a total area of approximately 12,894 m2 distributed in the Passenger Terminal, Operational Areas such as Check-in, Ticket Sales, Check Out, Operations Areas, VIP Lounges, Aircraft Maintenance, GSE, Cargo Terminal, Distribution Centers, etc. The Cargo Terminal has 164 m2 of office and 15,000 m2 of open area. The Distribution Centre Supplies has 3,030 m2.
TAM has a total of 45 online sites and 10 offline/chartering/high season sites in Brazil. Outside of Brazil, TAM has a total of 30 sites in 6,300 m², including 20 online sites and 10 offline/chartering/high season sites. TAM also has 133 franchised stores of TAM Viagens through Lan EcuadorBrazil.
New Headquarters
In 2013, TAM finished its project for a new headquarters with an area of 5,066 m², of which two and one-third floors are leased, space for 641 workstations and a total investment of R$12.0 million. The new headquarters is located at the Tower Bridge Building, located in 2003.Brooklin region.
We are building a new office with 12,195 m², LATAM will lease 12 floors, to transfer 1100 workstations, in a total investment of R$ 23.9 million. The new office is located at Espaço Empresarial Nações Unidas (EENU), in the Chacára Santo Antonio región. When this Project is finished we will terminate the contract lease of hangar 7 and hangar 8.
Building Improvements
We have approved the “Big Picture” project, which will implement a new plan of occupancy for Hangars in 2 and 5 at Congonhas Airport for approximately 5700 m² and Hangar 3 for approximately 6000 m². These improvements will receive and investment of US$18 million. This project will be completed in the second half of 2015.
New Facilities
TAM concluded several projects for new facilities in 2014, the most significant of which was a new cargo terminal in Manaus that integrates the operations of ABSA and TAM Cargo in the city and has a cargo space of about 4,700 m²; the construction of a new GSE area in Florianópolis with an area of approximately 400 m²; the construction of a new GSE area in Vitória with 255 m² and a new distribution center for supplies in Guarulhos, with an area of approximately 3,035 m². In August 2006,total, TAM spent approximately R$30 million on these projects in 2014. Additionally we expandedbuild TPS 3 offices in Guarulhos airport at terminal 3, with 2100 m².
Moreover, TAM has several projects for new facilities in 2014 and 2015, the most significant of which are a new cargo terminal in Guarulhos that integrates the operations of ABSA and TAM Cargo in Guarulhos, with a cargo space of about 15,434 m²; the construction of a new VIP Lounge in Guarulhos Airport with 1,900 m2; investments of R$ 20 million targeted to general
improvements of GSE facilities in all Brazilian territory and a new hangar in Guarulhos Airport for narrow and wide body aircraft maintenance. This new hangar is under study but is expected to complete projects still in 2014. The new facilities will receive an investment of R$ 50 million in 2014-2015.
Both Projects were completed and they are already in service. The VIP Lounge was delivered in October 2014 and The New Cargo terminal was delivered in January 2015
In addition, to the projects mentioned above, some large airports in Brazil, including, like Guarulhos, Natal and Viracopos have undergone major structural reforms promoted by the government which required investments of R$ 8,3 for modernization of our facilities. These projects are directly related to the world cup football.
ITEM 4A | UNRESOLVED STAFF COMMENTS |
None.
ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
Operating Results
You should read the following discussion of our financial condition and results of operations together with our audited consolidated financial statements and the accompanying notes beginning on page F-1 of this annual report.
The summary consolidated annual financial information as of December 31, 2014, 2013 and 2012 and for the years ended December 31, 2012, 2013 and 2014, has been prepared in accordance with IFRS and has been derived from our audited consolidated annual financial statements included in this annual report.
Overview
We derive our revenues primarily from transporting passengers on our passenger aircraft, as well as from transporting cargo in the belly of our passenger aircraft and in our dedicated freighter aircraft. In 2014, approximately 83% of our revenues came from passenger revenues, 14% came from our cargo business, and the remaining 3% from other operating revenues. Other operating revenue consists primarily in revenues generated from tour operator services, aircraft leases, on-board sales, third-party maintenance, ground handling, customs and storage brokerage operations.
Our operating environment in 2014 was marked by continued capacity rationalization in both cargo and passenger operations compared with 2013, coupled with a generally weaker macroeconomic environment in Latin America, including slower GDP growth trends, and weaker currencies in most countries. Additionally our operations were negatively affected by reduced passenger and cargo demand during the FIFA World Cup soccer tournament held in Brazil.
Passenger Operations
In general, our passenger revenues are driven by international and country-specific political and economic conditions, competitive activity and the attractiveness of the destinations that we serve. Passenger revenues are also affected by our capacity, traffic, load factors, yield and unit revenue. Our capacity is measured in terms of available seat kilometers, or ASKs, which represents the number of seats we make available for sale, multiplied by the kilometers flown. We measure traffic in revenue passenger kilometers, or RPKs, as the number of passengers on our flights multiplied by the number of kilometers flown. Load factors represent RPKs (traffic) as a percentage of ASKs (capacity), or the percentage of our capacity that is actually used by paying customers. Finally, we use yield, revenue from passenger operations divided by RPKs, to measure the average amount that one passenger pays to fly one kilometer and unit revenue, or revenue per ASK, to measure the effect of capacity on revenues. See “Item 3. Key Information—Selected Financial Data.”
Passenger demand over the past years has been affected as a result of weaker economic environments in some Latin America’s countries, reflected in slower GDP trends and depreciated currencies, and increases in competition from operators to South America and within the region.
During 2014, domestic operations in the Company’s Spanish speaking countries (SSC, which include Chile, Peru, Argentina, Colombia and Ecuador) continued to show moderate growth in terms of traffic and remained very profitable, in spite of the economic slowdown in some countries. Our SSC business grew at a slower pace than 2013, as we increased capacity by only 3.7% as compared to 2013. Nonetheless, the Company was able to stimulate passenger traffic as measured in RPKs by 6.2%, allowing for an improvement of 1.9 p.p. in load factors, reaching 80.5%. However, yields in the SSC domestic markets continue to be under pressure due to the depreciation of local currencies, mainly the Chilean and Argentinian peso which depreciated an average of 15.2% and 48.2% respectively, as compared to 2013. This resulted in a 5.2% decline in revenue per ASK as compared to 2013.
Since we achieved the turnaround in the domestic Brazil passenger operations, we have had a successful and profitable operation. However, the weaker economy in Brazil, the depreciation of the Brazilian real and the impact of the FIFA World Cup in the months of June and July of 2014 have negatively impacted our results. In this context, and in line with the current dynamics of domestic industry, TAM reduced capacity by 1.4% as measured in ASK during 2014. However, even with these circumstances, we were able to increase traffic by 1.1% as measured in RPK further improving our load factor by 2.0 p.p., reaching a high 83.0%. As a result, TAM ended the year with an increase of 2.2% in our revenues per ASK in Brazilian reais as compared to 2013.
The FIFA World Cup soccer tournament took place in Brazil in June and July of 2014 and resulted in a highly complex operation due to the large number of passengers who travelled to these cities on specific dates. Despite the increase in the number of passengers, LATAM’s operating margin during the World Cup period was adversely impacted by approximately between US$ 140 million and US$160 million, mainly due to decreases in traffic and yields as a result of reduced corporate travel, as well as a reduction in leisure demand during the winter holidays, which are usually a period of high seasonal demand. Nonetheless LATAM is very satisfied to have successfully provided a customer-focused operation during this globally high profile and visible event.
In our international operations, through Lan Argentina, which until thenwe have continued to rationalize passenger capacity in response to a challenging competitive environment and continued pressure on yields. In terms of increased competition, we have seen a significant increase in capacity to the region from airlines from different regions, specifically from North America. Additionally, we had only been offeringa significant increase in intraregional competition during the year; some operators - formerly domestic flights. The international operationsoperators - strengthened their regional flights; and other operators redirected their capacity from Venezuela to other markets within the region situation. Additionally, the depreciation of Lan Colombia, however, are being reduced since its acquisition in 2010. This strategy to generally expandsome local currencies, especially the Argentinean peso, has adversely affected our international demand. Furthermore Brazilian international passenger results were also affected in July by lower corporate travel to and from Brazil during the World Cup soccer tournament. During 2014, the international business unit decreased capacity by 2.4% while traffic as measured in RPK increased 1.2%, boosting load factors by 3.1 p.p., to 85.4%, resulting in a decrease of 3.2% in the revenue per ASK (RASK).
Overall, LATAM has focused on improving our product and connectivity with international passengers. We have implemented initiatives such as the beginning reconfiguration of the cabins of the TAM B777 fleet to include a fully flat business class, the increased use of B787 aircraft on long-haul routes, and advances in the construction of the main hub of the company at Guarulhos airport in Sao Paulo, where LATAM already moved all of its operations to the new Terminal 3, and where the Company was able to substantially improve its connection times to offer a much more attractive product for its passengers. Additionally, during November 2014, LATAM inaugurated a new VIP lounge at the airport, which is currently the largest in South America and which will also be important in helping the best experience of our passengers.
Cargo Operations
Our cargo operations depend on exports from and imports to South America and are, therefore, affected by economic conditions, foreign exchange rates, changes in international trade, the health of particular industries, competition and fuel prices (which we usually pass on to our customers through a cargo fuel surcharge). Cargo revenues are also affected by our capacity, traffic, load factors and yield. Our capacity is measured in terms of available ton kilometers, or ATKs, which represents the number of tons available for the transportation of cargo, multiplied by the kilometers flown. We measure traffic in revenue ton kilometers, or RTKs, as the amount of cargo loads (measured in tons) multiplied by the number of kilometers flown. Load factors represent RTKs (traffic) as a percentage of ATKs (capacity), or the percentage of our cargo capacity that is actually used to transport cargo for our customers. Finally, we use yield, or revenue from cargo operations divided by RTKs, to measure the average amount that our customers pay to transport one ton of cargo one kilometer. See “Item 3. Key Information—Selected Financial Data.”
We have designed our operations, route network and commercial strategies with the flexibility required to respond to changing conditions. In the cargo business, it is aimed at enhancingimportant to differentiate between what has been our value propositionbusiness northbound - exports from the region to North America and Europe – and our business southbound - imports to the region.
Since 2012, the environment for the freighter business, and therefore for LATAM’s cargo business unit, has been complicated. The global freight markets have remained weak, and Latin America has not been an exception. In addition, freighter and passenger’s operators, have significantly increased cargo capacity in the region. These have put significant pressure on cargo yields.
During 2014, cargo traffic decreased 3.3%, reflecting a challenging scenario in Latin American cargo markets mainly due to a decline in demand on routes from the U.SA to Latin America, especially Brazil, which was affected by offering customers more destinationsthe FIFA World Cup, uncertainty surrounding presidential elections and routing alternatives,lower economic growth. Additionally northbound demand was affected by a significant contraction of seed exports from Chile, partially offset by strong asparagus, flowers and fresh fruit export seasons.
As a result, the Company continues with a rational and disciplined approach toward freighter capacity utilization, while focused on maximizing the belly utilization of the Company’s passenger fleet. In this regard, in 2014 the Company sub-leased two of its 767-300Fs to another company operating in a different market for a period of three years. An additional 767-300F was also leased to this same operator starting in January 2015. Overall, capacity decreased by 5.6% in the year, resulting in a load factor of 59.8%, which represents an improvement of 1.4 percentage points as compared to 2013. Nonetheless, the 4.8% decline in the cargo yields led to a contraction of the revenues per ATK of 2.5%.
Cost Structure
LATAM Airlines Group’s costs are driven by the size of our operations, fuel prices, fleet costs and exchange rates. Our operating expenses are calculated in accordance with IFRS and comprise the sum of the line items “cost of sales” plus “distribution costs” plus “administrative expenses” plus “other operating expenses”, as shown on our consolidated statement of comprehensive income. These operating expenses include wages and benefits, fuel, depreciation and amortization, commissions to agents, aircraft rentals, other rental and landing fees, passenger services, aircraft maintenance, and other operating expenses. The following is a discussion of the drivers of the most important costs.
As an airline, we are subject to fluctuations in costs that are outside our control, particularly fuel prices. At the end of 2013, fuel prices were high principally because of the strong signals of growth in the U.S. At the beginning of 2014, fuel followed the same trend because of the Ukraine/Russia conflict and also because of strong signals of growth in the U.S. and Europe. In the second half of 2014, fuel prices tumbled 42% as OPEC elected not to curb output in response to a supply glut produced by increased production of shale oil in the U.S., and as a result of weak demand as China, Japan and Eurozone showed an economic slowdown and deflation. Although we have implemented a number of strategies to mitigate the impact of the volatility of fuel prices, such as fuel-hedging policies and the use of pass-through mechanisms, it is unlikely that we will be able to fully protect ourselves against the volatility of fuel costs. In addition, during periods in which fuel prices decrease, as during 2014, a fuel hedging program may prevent us from realizing the full benefit of the lower fuel prices. Moreover, another important driver that affects this item cost is the amount of gallons consumed during the year, resulting from the size of our operation, the efficiency of the fleet and efficiency programs.
Personnel expenses are another significant component of our overall costs. Because a significant portion of our labor costs is denominated in Chilean pesos and in Brazilian reais, appreciation of these currencies against the dollar as well as increases in local inflation rates can result in increased costs in dollar terms and can negatively affect our results. Depreciation of local currencies results in decreases in costs in dollars. Additionally, other important drivers are average headcount and average wages.
Commissions paid to travel and cargo agents are also a significant cost to the company. We compete with other airlines over the amount of commission we pay per sale, particularly in connection with special programs and marketing efforts, and to maintain competitive incentives with travel agents.
Fleet related expenses, namely aircraft rentals and depreciation, are another significant cost, and mainly depend on the number and type of aircraft that are owned and that are under operating leases. These costs are mainly fixed and can be reduced on a per unit basis by achieving higher daily aircraft utilization increasing load factors, leveraging complementary seasonal patterns, and optimizing our commercial efforts. We provide long-haul services outrates.
Results of our five main hubs in Santiago, Lima, Guayaquil, Buenos Aires and Bogota. We also provide regional services from Chile, Peru, Ecuador, Argentina and Colombia. Since 2004, we have grown our intra-Latin American operations out of LimaOperation
LATAM Airlines Group Financial Results Discussion: Year ended December 31, 2014 compared to position it as our main regional hub.year ended December 31, 2013.
The following table sets forth certain income statement data for LATAM Airlines Group, for the destinations servedyear ended December 31, 2014, and December 31, 2013. For certain operating data during these periods, see “Item 3. Key Information—Selected Financial Data.”
Year Ended December 31, | ||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014/2013 % change | ||||||||||||||||
(in US$ millions, except per share and capital stock data) | As a percentage of total operating revenues | |||||||||||||||||||
Consolidated Results of Income by Function | ||||||||||||||||||||
Operating revenues | ||||||||||||||||||||
Passenger | 10,380.1 | 11,061.6 | 85.8 | % | 85.6 | % | (6.2 | %) | ||||||||||||
Cargo | 1,713.4 | 1,863.0 | 14.2 | % | 14.4 | % | (8.0 | %) | ||||||||||||
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Total operating revenues | 12,093.5 | 12,924.5 | 100.0 | % | 100.0 | % | (6.4 | %) | ||||||||||||
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Cost of sales | (9,624.5 | ) | (10,054.2 | ) | (79.6 | )% | (77.8 | )% | 4.3 | % | ||||||||||
Gross margin | 2,469.0 | 2,870.4 | 20.4 | % | 22.2 | % | (14.0 | )% | ||||||||||||
Other operating income | 377.6 | 341.6 | 3.1 | % | 2.6 | % | 10.5 | % | ||||||||||||
Distribution costs | (957.1 | ) | (1,025.9 | ) | (7.9 | )% | (7.9 | )% | (6.7 | %) | ||||||||||
Administrative expenses | (980.7 | ) | (1,136.1 | ) | (8.1 | )% | (8.8 | )% | (13.7 | %) | ||||||||||
Other operating expenses | (401.0 | ) | (408.7 | ) | (3.3 | )% | (3.2 | )% | (1.9 | )% | ||||||||||
Financial income | 90,5 | 72.8 | 0.7 | % | 0.6 | % | 24.3 | % | ||||||||||||
Financial costs | (430.0 | ) | (462.5 | ) | (3.6 | )% | (3.6 | )% | (7.0 | %) | ||||||||||
Share of profit of investments accounted for using the equity method | (6.5 | ) | 2.0 | (0.1 | )% | 0.0 | % | (430.3 | %) | |||||||||||
Foreign exchange gains/(losses) | (130.2 | ) | (482.2 | ) | (1.1 | )% | (3.7 | )% | (73.0 | %) | ||||||||||
Result of indexation units | 0.0 | 0.2 | 0.0 | % | 0.0 | % | (96.7 | %) | ||||||||||||
Other gains/(losses) | 33.5 | (55.4 | ) | 0.3 | % | (0.4 | )% | (160.5 | %) | |||||||||||
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Income (loss) before income taxes | 65.2 | (283.9 | ) | 0.5 | % | (2.2 | )% | (123.0 | )% | |||||||||||
Income (loss) tax expense | (292.4 | ) | 20.1 | (2.4 | )% | 0.2 | % | (1,557.0 | )% | |||||||||||
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Net income (loss) for the period | (227.2 | ) | (263.8 | ) | (1.9 | )% | (2.0 | )% | (13.9 | %) | ||||||||||
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Income (loss) for the period attributable to the parent company’s equity holders | (260.0 | ) | (281.1 | ) | (2.1 | )% | (2.2 | )% | (7.5 | )% | ||||||||||
Income (loss) for the period attributable to non-controlling interests | 32.8 | 17.3 | 0.3 | % | 0.1 | % | 90.1 | % | ||||||||||||
Net income (loss) for the period | (227.2 | ) | (263.8 | ) | (1.9 | )% | (2.0 | )% | (13.9 | %) | ||||||||||
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Earnings per share | ||||||||||||||||||||
Basic earnings per share (US$) | (0.47656 | ) | (0.57613 | ) | n.a. | n.a. | (70.4 | %) | ||||||||||||
Diluted earnings per share (US$) | (0.47656 | ) | (0.57613 | ) | n.a. | n.a. | (70.4 | %) |
* | The abbreviation “n.a.” means not available. |
Net Loss
Net loss for the year ended December 31, 2014 equaled US$ 227.2 million, representing a decrease of US$ 36.6 million from a net loss of US$263.8 million in 2013. Net loss attributable to the parents of the company decreased to US$ 260.0 million in 2014 from US$281.1 million in 2013. Results for the 2014 include a US$ 112 million provision recognized during the first quarter of the year mainly related to estimated penalties for anticipated redeliveries of aircraft and other redelivery expenses expected to be incurred as a part of the Company’s fleet restructuring process. In addition, the Company recognized an accounting charge of US$ 150.2 million due to modifications made to the Chilean Tax System, consisting of a gradual increase of the corporate income tax from 20% to 27% in 2018. The Company entirely recognized the effect of the 7p.p. increase in the corporate rate during 2014.For more information see “Business strategy – Fleet restructuring plan” and “Item 10.—Taxation and Note 17 our audited consolidated financial statements.
Results were also impacted by a foreign exchange loss of US$ 130.2 million mainly resulting from the 12.5% depreciation of the Brazilian real between December 31, 2013 and December 31, 2014, as compared to a foreign exchange loss of US$482.2 million in 2013.. On the other hand, in 2013 LATAM incurred US$56.0 million in non-recurring expenses related to the combination and integration costs, whereas no costs related to integration were incurred in 2014.
Operating Revenues
Our total operating revenues decreased by 6.4% to US$ 12,093.5 million in the year ended December 31, 2014 compared to revenues of US$ 12,924.5 million in 2013. The 2014 decrease in operating revenues was attributable to a 6.2% decrease in passenger revenues, and an 8.0% decrease in cargo revenues. Passenger and cargo revenues accounted for 85.8% and 14.2% of total operating revenues in 2014, respectively.
Our consolidated passenger revenues decreased by 6.2% to US$10,380.1 million in 2014 from US$11,061.6 million in 2013, as a result of a decrease of 1.1% in our capacity (ASK) and a decrease of 5.1% in our unit revenues (RASK). The decreases in capacity was a result of a 2.4% decrease in our international operations and a 1.4% decrease in our domestic Brazil operations, reflecting our rationalization strategy in these markets, partially offset by an increase of 3.7% in capacity in our domestic capacity in our Spanish speaking countriesDecreases in RASK reflect a decrease of 7.9% in consolidated yields, resulting from the slowdown in economic activity in the region and depreciation of local currencies, the challenging competitive environment in our international operations, and the impact of the World Cup on corporate demand and leisure traffic which took place in Brazil.
Cargo revenues decreased by 8.0%, to US$1,713.4 million in 2014 from US$1,863.0 million in 2013, as a result of a decrease of 5.6% in capacity (ATK) and a decrease of 2.5% in unit revenues (RATK). Capacity decreased in our cargo operations mainly as a result of the phase out of our fleet of a Boeing 767F aircraft during the first quarter of the year and lower freighter utilization. Decreases in RATK reflect the still challenging cargo scenario in South America and mainly the weakness of the imports into the region, which have affected our cargo yields, which decreased by 4.8% in 2014 as compared to 2013.
Cost of Sales
Cost of sales decreased by 4.3% to US$9,624.5 million in the year ended December 31, 2014 from US$10,054.2 million in 2013, mainly due to lower fuel expenses in the year. As a percentage of total operating revenues, cost of sales increased from 77.8% in 2013 to 79.6% in 2014.
The table below presents cost of sales information for the fiscal year ended December 31, 2014 and 2013.
Year Ended December 31 | ||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014/2013 % change | ||||||||||||||||
(in US$ millions, except as otherwise stated) | As a percentage of total operating revenues | |||||||||||||||||||
Revenues | 12,093.5 | 12,924.5 | 100.0 | % | 100.0 | % | (6.4 | %) | ||||||||||||
Cost of sales | (9,624.5 | ) | (10,054.2 | ) | (79.6 | )% | (77.8 | )% | (4.3 | %) | ||||||||||
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Aircraft Fuel | (4,167.0 | ) | (4,414.2 | ) | (34.5 | )% | (34.2 | )% | (5.6 | %) | ||||||||||
Wages and Benefits | (1,751.3 | (1,884.1 | ) | (14.5 | )% | (14.6 | )% | (7.0 | %) | |||||||||||
Other Rental and Landing Fees | (1,327.2 | ) | (1,373.1 | ) | (11.0 | )% | (10.6 | )% | (3.3 | %) | ||||||||||
Depreciation and Amortization | (991.3 | ) | (1,041.7 | ) | (8.2 | )% | (8.1 | )% | (4.8 | %) | ||||||||||
Aircraft Rentals | (521.4 | ) | (441.1 | ) | (4.3 | )% | (3.4 | )% | 18.2 | % | ||||||||||
Aircraft Maintenance | (452.7 | ) | (477.1 | ) | (3.7 | )% | (3.7 | )% | (5.1 | %) | ||||||||||
Passenger Services | (300.3 | ) | (331.4 | ) | (2.5 | )% | (2.6 | )% | (9.4 | %) | ||||||||||
Other Costs of Sales | (113.3 | ) | (94.5 | ) | (0.9 | )% | (0.7 | )% | (19.9 | %) |
The decrease in cost of sales was driven by lower aircraft fuel expenses, which decreased by 5.6% to US$4,167.0 million in 2014 as a result of a 3.7% decrease in fuel consumption related to the Company’s capacity adjustments and more fuel efficient fleet and a 4.9% decrease in the full year average fuel price (excluding hedge losses). In addition, LATAM recognized a net loss of US$108.8 million in fuel hedging in 2014, compared to the fuel hedge gain of US$22.1 million in 2013. The Company also recognized a US$3.8 million hedge gain related to foreign currency contracts, which were recognized in the fuel cost line.
Depreciation and amortization decreased by US$50.4 million amounting to US$991.3 million, which represents a decrease of 4.8% despite the increase in modern owned aircraft mainly as a result of the phase out of leased aircraft with the consequent decrease in maintenance depreciation and the positive impact of the depreciation of the Brazilian real in the year as compared to 2013.
Other rental and landing fees decreased by 3.3% to US$1,327.2 million in 2014 from U$1,373.1 million in 2013, mainly resulting from lower aeronautical rates related to the depreciation of local currencies..
Aircraft maintenance expenses decreased by 5.1%, from US$477.1 million in 2013 to US$452.7 million in 2014, mainly as a result of fleet renewal initiatives and reduced operations, which was partially offset with higher costs related to aircraft redeliveries as part of our fleet restructuring program.
Aircraft rentals increased by 18.2% to US$521.4 million in 2014 from US$441.1 million in 2013 despite fewer leased aircraft, as a result of the incorporation of larger and more modern aircraft under operating leases (i.e. Boeing 787s), whereas returned aircraft have mainly been older and smaller models (i.e. Airbus A319, Boeing 737, Dash8 Q400 aircraft).
Passenger service expenses decreased by 9.4%, to US$300.3 million in 2014 compared to US$331.4 million in 2013, despite the increase of 1.7% in passengers transported, mainly due to a decrease in certain variable costs per passenger resulting from better negotiations and/or certain new suppliers, a decrease in passenger compensations and the positive effect of the depreciation of the Brazilian real in suppliers.
As a result of the above, gross margin decreased by 14.0% from US$2,870.4 million in 2013 to US$2,469.0 million in 2014.
Other Consolidated Results
Other operating income increased in 2014 by 10.5%, from US$341.6 million in 2013 to US$377.6 million, mainly due to an increase of US$93.7 million in revenue from Multiplus’ breakage and non-air redemptions during the year.
Distribution costs decreased by 6.6% from US$1,025.9 million in 2013 to US$957.1 million in 2014, mainly as a result of lower commissions to agents which decreased by 10.6% from US$408.7 million to US$365.5 million, driven by reduced passenger commissions at LAN and TAM related to lower revenues, lower sales fulfillments in some countries and depreciation of local currencies..
Administrative expenses decreased by 13.7% from US$1,136.1 million in 2013 to US$980.7 million in 2014, mainly due to a decrease of 5.7% in wages and benefits mainly resulting from the positive impact of the depreciation of the Brazilian real, Chilean peso and Argentinian peso in wages denominated in those currencies.
Other operating expenses decreased by 1.9% from US$408.7 million in 2013 to US$401.0 million in 2014, mainly due to a change in the classification of certain taxes in Brazil.
Financial income increased to US$90.5 million in the year ended December 31, 2014 from US$72.8 million in 2013, mainly due to an increase in our cash held in currencies different from the US dollar which have higher interest rates during the period.
Financial costs (from non-financial activities) decreased by 7.0% to US$430.0 million in 2014 from US$462.5 million in 2013 mainly due to lower debt levels, which was partially offset by a higher average interest rate resulting in part from the securitized bond issued in November 2013. In addition, during the first quarter of the year, we recognized US$23 million in breakage costs related to the sale and leaseback of 4 of our Boeing 777 aircraft.
Exchange rate differences decreased from a loss of US$482.2 million in 2013 to a loss of US$130.2 million in 2014, mainly resulting from the reductions on TAM’s balance sheet exposure between assets denominated in Brazilian reais and liabilities denominated in US dollars, which decreased from US$2.0 billion as of December 2013 to less than US$1.0 billion as of December 2014. Under other gains (losses), the Company recorded a net gain of US$33.5 million in 2014 as compared to a net loss of US$55.4 million in 2013 as a result of mainly due to the prescription and other reversals of tax contingencies at TAM which were recognized at the time of the business combination.
Income tax expense for 2014 amounted to US$292.4 million as compared to an income tax credit of US$20.1 million in 2013. This variation includes the recognition of an accounting charge of US$150.2 million in 2014 due to modifications made to the Chilean Tax System, consisting in a gradual increase of the corporate income tax from 20% to 27% in 2018. For more information, see “—Critical Accounting Policies—Deferred Taxes” below and Note 17 to our audited consolidated financial statements.
LATAM Airlines Group Financial Results Discussion: Year ended December 31, 2013 compared to year ended December 31, 2012
The following table sets forth certain income statement data for LATAM Airlines Group, for the year ended December 31, 2013, and for LATAM Airlines Group, for the year ended December 31, 2012 (including TAM’s results from June 23, 2012). For certain operating data during these periods, see “Item 3. Key Information—Selected Financial Data.”
Year Ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2013/2012 % change | ||||||||||||||||
(in US$ millions, except per share and capital stock data) | As a percentage of total operating revenues | |||||||||||||||||||
Consolidated Results of Income by Function | ||||||||||||||||||||
Operating revenues | ||||||||||||||||||||
Passenger | 11,061.6 | 7,966.8 | 85.6 | % | 82.0 | % | 38.8 | % | ||||||||||||
Cargo | 1,863.0 | 1,743.5 | 14.4 | % | 18.0 | % | 6.9 | % | ||||||||||||
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Total operating revenues | 12,924.5 | 9,710.4 | 100.0 | % | 100.0 | % | 33.1 | % | ||||||||||||
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Cost of sales | (10,054.2 | ) | (7,634.5 | ) | (77.8 | )% | (78.6 | )% | 31.7 | % | ||||||||||
Gross margin | 2,870.4 | 2,075.9 | 22.2 | % | 21.4 | % | 38.3 | % | ||||||||||||
Other operating income | 341.6 | 220.2 | 2.6 | % | 2.3 | % | 55.1 | % | ||||||||||||
Distribution costs | (1,025.9 | ) | (803.6 | ) | (7.9 | )% | (8.3 | )% | 27.7 | % | ||||||||||
Administrative expenses | (1,136.1 | ) | (888.7 | ) | (8.8 | )% | (9.2 | )% | 27.8 | % | ||||||||||
Other operating expenses | (408.7 | ) | (311.8 | ) | (3.2 | )% | (3.2 | )% | 31.1 | % | ||||||||||
Financial income | 72.8 | 77.5 | 0.6 | % | 0.8 | % | (6.1 | )% | ||||||||||||
Financial costs (from non-financial activities) | (462.5 | ) | (294.6 | ) | (3.6 | )% | (3.0 | )% | 57.0 | % | ||||||||||
Earning on investments (equity method) | 2.0 | 1.0 | 0.0 | % | 0.0 | % | 100.0 | % | ||||||||||||
Exchange rate differences | (482.2 | ) | 66.7 | (3.7 | )% | 0.7 | % | (822.9 | )% | |||||||||||
Result of indexation units | 0.2 | 0.0 | 0.0 | % | 0.0 | % | 100.0 | % | ||||||||||||
Other gains/(losses) | (55.4 | ) | (45.8 | ) | (0.4 | )% | (0.5 | )% | 21.0 | % | ||||||||||
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Income (loss) before income taxes | (283.9 | ) | 96.7 | (2.2 | )% | 1.0 | % | (393.6 | )% | |||||||||||
Income (loss) tax expense / benefit | 20.1 | (102.4 | ) | 0.2 | % | (1.1 | )% | (119.6 | )% | |||||||||||
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Net income (loss) for the period | (263.8 | ) | (5.6 | ) | (2.0 | )% | (0.1 | )% | 4,610.7 | % | ||||||||||
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Income (loss) for the period attributable to the parent company’s equity holders | (281.1 | ) | (19.1 | ) | (2.2 | )% | (0.2 | )% | (1,372.3 | )% | ||||||||||
Income (loss) for the period attributable to non-controlling interests | 17.3 | 13.4 | 0.1 | % | 0.1 | % | 29.1 | % | ||||||||||||
Net (loss) income for the year | (263.8 | ) | (5.6 | ) | (2.0 | )% | (0.1 | )% | 4,610.7 | % | ||||||||||
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Earnings per share | ||||||||||||||||||||
Basic earnings per share (US$) | (0.57613 | ) | (0.04627 | ) | n.a. | n.a. | (1,145.1 | )% | ||||||||||||
Diluted earnings per share (US$) | (0.57613 | ) | (0.04627 | ) | n.a. | n.a. | (1,145.1 | )% |
* | The abbreviation “n.a.” means not available. |
Net Loss
Net loss for the year ended December 31, 2013 equaled US$ 263.8 million, representing an increase of US$ 258.2 million from a net loss of US$5.6 million in 2012. Net loss attributable to the parents of the company rose to US$ 281.1 million in 2013 from US$19.1 million in 2012. Results for the 2013 year were negatively impacted by a foreign exchange loss of US$ 482.2 million mainly resulting from the depreciation of the Brazilian real in the year. On the other hand, in 2012 and 2013, LATAM incurred US$47.0 and US$7.3 million, respectively, of non-recurring expenses related to the combination and integration costs, and an accounting charge of US$70 million related to the increase in the Chilean corporate tax rate from 17% to 20% during 2012.
Operating Revenues
Operating revenues increased by 33.1% to US$12,924.5 million for the year ended December 31, 2013 from US$9,710.4 million in 2012. Our consolidated passenger revenues increased by 38.8% to US$11,061.6 million in 2013 from US$7,966.8 million in 2012, primarily as a result of the consolidation of TAM’s revenue for 2012 since June 23.
Cargo revenues increased by 6.9%, to US$1,863.0 million in 2013 from US$1,743.5 million in 2012, also as a result of the consolidation of TAM’s cargo revenues for full year 2013. The slight increase in cargo revenues in spite of TAM’s cargo integration is a result of a weak global cargo scenario which has impacted both cargo traffic and yields.
Cost of Sales
Cost of sales increased by 31.7% to US$10,054.2 million in the year ended December 31, 2013 from US$7,634.5 million in 2012, mainly as a result of increased operations due to the complete consolidation of TAM’s costs for year 2013. As a percentage of total operating revenues, cost of sales decreased from 78.6% in 2012 to 77.8% in 2013.
The table below presents cost of sales information for the fiscal year ended December 31, 2013 and 2012.
Year Ended December 31 | ||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2013/2012 % change | ||||||||||||||||
(in US$ millions, except as otherwise stated) | As a percentage of total operating revenues | |||||||||||||||||||
Revenues | 12,924.5 | 9,710.4 | 100.0 | % | 100.0 | % | 33.1 | % | ||||||||||||
Cost of sales | (10,054.2 | ) | (7,634.5 | ) | (77.8 | )% | (78.6 | )% | 31.7 | % | ||||||||||
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Aircraft Fuel | (4,414.2 | ) | (3,434.6 | ) | (34.2 | )% | (35.4 | )% | 28.5 | % | ||||||||||
Wages and Benefits | (1,884.1 | ) | (1,431.2 | ) | (14.6 | )% | (14.7 | )% | 31.6 | % | ||||||||||
Other Rental and Landing Fees | (1,373.1 | ) | (1,052.6 | ) | (10.6 | )% | (10.8 | )% | 30.4 | % | ||||||||||
Depreciation and Amortization | (1,041.7 | ) | (771.1 | ) | (8.1 | )% | (7.9 | )% | 35.1 | % | ||||||||||
Aircraft Rentals | (441.1 | ) | (308.8 | ) | (3.4 | )% | (3.2 | )% | 42.8 | % | ||||||||||
Aircraft Maintenance | (477.1 | ) | (297.6 | ) | (3.7 | )% | (3.1 | )% | 60.3 | % | ||||||||||
Passenger Services | (331.4 | ) | (239.8 | ) | (2.6 | )% | (2.5 | )% | 38.2 | % | ||||||||||
Other Costs of Sales | (94.5 | ) | (98.8 | ) | (0.7 | )% | (1.0 | )% | (4.3 | )% |
The increase in cost of sales was driven by higher aircraft fuel expenses, which increased by 28.5% to US$4,414.2 million in 2013 as a result of higher fuel consumption related to the incorporation of TAM’s operations from June 23, 2012, which was partially offset by lower average fuel prices and efficiency initiatives. In addition, LATAM recognized a net gain of US$22.1 million in fuel hedging in 2013, compared to the fuel hedge gain of US$2.8 million in 2012.
Depreciation and amortization increased by US$270.6 million amounting to US$1,041.7 million, which represents an increase of 35.1% mainly due to the incorporation of all of TAM’s fleet (including new TAM fleet deliveries in 2012) starting June 23, 2012.
Other rental and landing fees increased by 30.4% to US$1,373.1 million in 2013 from U$1,052.6 million in 2012, resulting from higher fees related to a larger operation with the consolidation of TAM’s fees for full year 2013.
Aircraft maintenance expenses increased by 60.3%, from US$297.6 million in 2012 to US$477.1 million in 2013, as a result of higher costs related to a larger fleet and higher maintenance costs related to redeliveries of aircraft.
Aircraft rentals increased by 42.8% to US$441.1 million in 2013 from US$308.8 million in 2012, primarily due to the complete consolidation of TAM’s fleet for full year 2013 and the net increase of aircraft under operating leases during the year.
Passenger service expenses increased by 38.2%, to US$331.4 million in 2013 compared to US$239.8 million in 2012, mainly resulting from the increase in passengers transported after the combination of LAN and TAM.
As a result of the above, gross margin increased by 38.2% from US$2,075.9 million in 2012 to US$2,870.4 million in 2013.
Other Consolidated Results
Other operating income increased in 2013 by US$121.4 million, from US$220.2 million to US$341.6 million, due to the incorporation of TAM’s other revenues since June 22, 2012; including a US$28.7 million revenue from Multiplus’ breakage and non-air redemptions, and an income for recognizing US$11.9 million and US$ 8.2 million generated as a result of the sale and lease-back of ten Airbus A330 aircraft, and two Airbus A318 aircraft and an engine, respectively, during the second quarter of the year.
Distribution costs increased by 27.7% from US$803.6 million in 2012 to US$1,025.9 million in 2013, as a result of the consolidation of TAM’s results only starting in June 23, 2012.
Administrative expenses increased by 27.8% from US$888.7 million in 2012 to US$1,136.1 million in 2013, mainly due to an increase of 30.6% in wages and benefits resulting from the higher number of employees following the combination of LAN and TAM in 2012.
Other operating expenses increased by 31.1% from US$311.8 million in 2012 to US$408.7 million in 2013, as a result of higher sales costs, advertising and marketing expenses and costs related to tours and travel services, related to the integration of TAM’s operations from June 23, 2012.
Financial income decreased to US$72.8 million in the year ended December 31, 2013 from US$77.5 million in 2012, due to a lower average cash balance and interest rates during the period.
Financial costs (from non-financial activities) increased by 57.0% to US$462.5 million in 2013 from US$292.6 million in 2012 due to higher average long-term debt related to fleet financing mainly related to the consolidation of TAM’s fleet.
Exchange rate differences decreased from a gain of US$66.7 million in 2012 to a loss of US$482.2 million in 2013, mainly resulting from the depreciation of the Brazilian real in the period.
Under other gains (losses), the Company recorded a net loss of US$55.4 million in 2013 as compared to a net loss of US$45.8 million in 2012.
Income tax credit for 2013 amounted to US$ 20.1 million as compared to an income tax expense of US$102.4 million in 2012. For more information, see “—Critical Accounting Policies—Deferred Taxes” below and Note 17 to our audited consolidated financial statements.
Accounting impact of the business combination
The combination between LAN and TAM has been accounted for using the purchase method of accounting, with LAN treated as the acquirer of TAM.
Consideration paid was calculated, in accordance with IFRS 3, as the sum of the fair value of the LAN shares provided and the Squeeze-Out of the remaining TAM shareholders. Following this criteria, the total consideration paid as of June 22, 2012 was US$ 3,782.2 million.
As a result of the consolidation, certain TAM assets and liabilities which were accounted for at historical values were incorporated into the consolidated balance sheet at their fair value, as required by applicable accounting principles. Applicable accountings standards permit a one year measurement period, requiring fair value adjustments completed during that period to be adjusted against previously reported goodwill. As of June 30, 2013, the purchase price allocation has been completed. Previously reported goodwill has been adjusted to reflect fair value changes in this one year period. Goodwill as of June 30, 2013 amounts to US$ 3,890.2 million.
The main adjustments to the balance sheet accounts of TAM as a result of the consolidation with LATAM Airlines Group were related to the fair values of the following: (i) airport slots (Congonhas, JFK and Heathrow airports); (ii) the Multiplus loyalty program; (iii) fleet; and (iv) other provisions, including legal proceedings with a probability of loss below 50%, which are not accounted for under the normal course of business but must be accounted for under a business combination, according to applicable accounting standards (IFRS 3).
U.S. Dollar Presentation and Price-Level Adjustments
General
Foreign currency transactions
(a) | Presentation and functional currencies |
The items included in the financial statements of LATAM are valued using the currency of the main economic environment in which the entity operates (the “functional currency”). The functional currency of LATAM is the U.S. dollar, which is also the currency of presentation of the audited consolidated financial statements of LATAM and its subsidiaries.
(b) | Transactions and balances |
Foreign currency transactions are translated to the functional currency using the exchange rates on the transaction dates. Foreign currency gains and losses resulting from the liquidation of these transactions and from the translation, at the closing exchange rates, of the monetary assets and liabilities denominated in foreign currency, are shown in the consolidated statement of income.
(c) | Group entities |
The results and financial position of all the LATAM entities (none of which utilizes the currency of a hyper-inflationary economy) that have a functional currency other than the currency of presentation are translated to the currency of presentation as follows:
(i) | Assets and liabilities of each consolidated statement of financial position are translated at the closing exchange rate on the date of the consolidated statement of financial position; |
(ii) | The revenues and expenses of each results account are translated at monthly average rates; and |
(iii) | All the resultant exchange differences are shown as a separate component in net equity. |
For consolidation purposes, exchange differences arising from the translation of a net investment in foreign entities (or in local entities with a functional currency different to that of the parent), and of loans and other foreign currency instruments designated as hedges for such investments, are recorded within net equity. When the investment is sold, these exchange differences are shown in the consolidated statement of income as part of the loss or gain on the sale.
Adjustments to the goodwill and fair value arising from the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated at the period-end exchange rate.
Effects of Exchange Rate Fluctuations
Our functional currency is the U.S. dollar in terms of the pricing of our products, composition of our balance sheet and effects on our results of operations. Most of our revenues (58% expected for 2015) are in U.S. dollars or in prices pegged to the U.S. dollar and a substantial portion of our expenses (65% expected for 2015) is denominated in dollars or pegged to the U.S. dollar, particularly fuel costs, landing and over flight fees, aircraft rentals, insurance and aircraft components and supplies.
A substantial majority of our liabilities are denominated in U.S. dollars (74% as of December 31, 2014), including bank loans, certain air traffic liabilities, and certain amounts payable to our suppliers. As of December 31, 2014, 54 % of our assets were denominated in U.S. dollars, principally aircraft, cash and cash equivalents, accounts receivable and other fixed assets. Substantially all of our commitments, including operating lease and purchase commitments for aircraft, are denominated in U.S. dollars.
On the other hand, balance sheet imbalance denominated in currencies other than the functional currency of the specific entity creates a foreign exchange rate exposure that impacts the foreign exchange losses and gains due to exchange rate fluctuations. We recorded net foreign exchange losses of US$482.2 million in 2013 and US$130.2 million in 2014, which are set forth in our consolidated statement of income under “Foreign Exchange gains/(losses)”. For more information, see Notes 2.3 and 28 to our audited consolidated financial statements.
IFRS/Non-IFRS Reconciliation
We use “Cost per ASK-equivalent” and “Cost per ASK-equivalent excluding fuel price variations” in analyzing operating expenses on a per unit basis. “ASKs” (available seat kilometers) measures the number of seats of capacity available for the transportation of passengers multiplied by the kilometers flown. “ASK-equivalent” includes capacity for both passenger and cargo equivalent tons multiplied by the kilometers flown. The figure is obtained by adding passenger ASKs and the quotient of cargo ATKs (available ton kilometers) divided by 0.095. To obtain our unit costs, which are used by our management in the analysis of our results, we divide our “total costs” by our total ASK-equivalents. “Total costs” are calculated by starting with operating expenses as defined under IFRS and making certain adjustments for interest costs and other revenues. The cost component is further adjusted to obtain “costs per ASK-equivalents excluding fuel price variations,” in order to remove the impact of changes in fuel prices for the year. “Cost per ASK-equivalent” and “Cost per ASK-equivalent excluding fuel price variations” do not have a standardized meaning, and as such may not be comparable to similarly titled measures provided by other companies. These metrics should not be considered in isolation or as a substitute for operating expenses or as indicators of performance or cash flows or as a measure of liquidity.
The table below reconciles our operating expenses (as defined by IFRS) for 2014, 2013 and 2012 to costs used in the calculation of “Cost per ASK-equivalent” and “Cost per ASK-equivalent excluding fuel price variations” for such periods. Figures for 2012 correspond to LATAM’s consolidated audited financial statements prepared in accordance with IFRS for the year ended December 31, 2012, including TAM’s consolidated costs from June 23, 2012 and TAM’s third and fourth quarter operating statistics.
2014 | 2013 | 2012 | ||||||||||
Cost per ASK-equivalent | ||||||||||||
Operating expenses (US$ thousands) | 11,957,780 | 12,622,197 | 9,625,466 | |||||||||
+ Interest expense (US$ thousands) | 430,034 | 462,524 | 294,598 | |||||||||
– Interest income (US$ thousands) | 90,500 | 72,828 | 77,489 | |||||||||
– Other operating income (US$ thousands) | 377,645 | 341,565 | 220,156 | |||||||||
ASK-equivalent operating expenses | 11,919,669 | 12,670,328 | 9,622,419 | |||||||||
Divided by system’s ASK-equivalents (thousands) | 206,197.91 | 212,236.83 | 161,209.26 | |||||||||
= Cost per ASK equivalent (US$ cents) | 5.78 | 5.97 | 5.97 | |||||||||
Cost per ASK-equivalent excluding fuel price variations | ||||||||||||
ASK-equivalent operating expenses (thousands) | 11,919,669 | 12,670,328 | 9,6222,419 | |||||||||
– Actual fuel expenses (US$ thousands) | 4,170,848 | 4,414,249 | 3,434,569 | |||||||||
+ (Gallons consumed) times (previous year’s fuel price) | 4,251,036 | 4,675,532 | 2,952,257 | |||||||||
ASK-equivalent operating expenses excluding fuel price variations | 11,999,857 | 12,931,611 | 9,140,107 | |||||||||
Divided by system’s ASK-equivalents (thousands) | 206,197.91 | 212,236.83 | 161,209.26 | |||||||||
= Cost per ASK-equivalent excluding fuel price variations (US$ cents) | 5.82 | 6.09 | 5.67 |
In addition, LATAM continues to use revenues per ASK or ATK, as applicable, in analyzing revenues on a per unit basis, which is consistent with how LAN analyzed its revenues before the combination. To obtain unit revenues, we divide our passenger revenues by our total ASKs and our cargo revenues by our total ATKs. We use our revenues as defined under IFRS for purposes of the calculation of this metric. Revenues per ASK or ATK, as the case may be, do not have a standardized meaning, and as such may not
be comparable to similarly titled measures provided by other companies. This metric is not an IFRS based measure of performance or liquidity. It should not be considered in isolation or as a substitute for revenues or as indicators of performance or cash flows as a measure of liquidity.
The table below shows the calculation of our revenues per ASK or ATK, as applicable, in each of the aforementionedperiods indicated. Figures for 2012 correspond to LATAM’s consolidated audited financial statements prepared in accordance with IFRS for the year ended December 31, 2012, including TAM’s consolidated revenues from June 23, 2012.
2014 | 2013 | 2012 | ||||||||||
Passenger Revenues (US$ million) | 10,380.12 | 11,061.56 | 7,966.85 | |||||||||
ASK (million) | 130,200.94 | 131,690.60 | 93,318.15 | |||||||||
Passenger Revenues/ASK (US$ cents) | 7.97 | 8.40 | 8.54 | |||||||||
Cargo Revenues (US$ million) | 1,713.38 | 1,862.98 | 1,743.53 | |||||||||
ATK (million) | 7,219.71 | 7,651.88 | 6,449.50 | |||||||||
Cargo Revenues/ATK (US$ cents) | 23.73 | 24.35 | 27.03 |
Seasonality
Our operating revenues are substantially dependent on overall passenger and cargo traffic volume, which is subject to seasonal and other changes in traffic patterns. Our passenger revenues are generally higher in the first and fourth quarters of each year, during the southern hemisphere’s spring and summer. In the Brazilian passenger air transportation market, there is always a higher demand for air transportation services in the second half of the year, leaving the second quarter as the weakest one for the Company. However, the seasonality is partially mitigated by the fact of LATAM having higher than market average concentration of business travel (which is less sensitive to seasonality). Additionally, the expansion of the Company in other countries with different seasonal patterns has also moderated the overall seasonality of the passenger business.
Critical Accounting Policies
The preparation of our consolidated financial statements in accordance with IFRS requires our management to adopt accounting policies and make estimates and judgments to develop amounts reported in our consolidated financial statements and related notes. We strive to maintain a process to review the application of our accounting policies and to evaluate the appropriateness of the estimates that are required to prepare our consolidated financial statements. We believe that the consistent application of these policies enables us and our subsidiaries to provide readers of the financial statements with more useful and reliable information about our operating results and financial condition.
Critical accounting policies and estimates are those that are reflective of significant judgments and uncertainties, and potentially result in materially different outcomes under different assumptions and conditions. For a discussion on these and other accounting policies, see Note 2 to our consolidated financial statements. The following are the accounting policies that we believe are the most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective or complex judgments.
Accounting estimates and judgments
The Company has used estimates to value and book some of the assets, liabilities, revenues, expenses and commitments; these basically refer to:
These estimates are made on the basis of the best information available on the matters analyzed.
In any case, it is possible that events will require them to be modified in the future, in which case the effects would be accounted for prospectively.
The management has applied judgment in determining that LATAM Airlines Group S.A. has control over TAM S.A. and Subsidiaries for accounting purposes and therefore has consolidated their financial statements. This judgment is made on the basis that LATAM issued their ordinary shares in exchange for all of the outstanding common and preferred shares of TAM, except those shareholders of TAM who did not accept exchange and which were subject of the squeeze-out entitling LATAM to substantially all of the economic benefits that will be generated by the LATAM Group and also, consequently, exposing it to substantially all the risks incidental to the operations of TAM. This exchange aligns the economic interests of LATAM and all of its shareholders, including the TAM controlling shareholders, ensuring that the shareholders and directors of TAM will have no incentive to exercise their rights in a manner that is beneficial to TAM but detrimental to LATAM. Further, all significant actions required for the operation of the airlines require the affirmative vote of both LATAM and the TAM controlling shareholders.
Since the integration of LAN and TAM operations, most critical airline activities in Brazil have been managed under the TAM CEO and global activities have been managed by the LATAM CEO, who is in charge of the overall operation of the LATAM Group and who reports to the LATAM board. Further, the LATAM CEO evaluates the performance of the LATAM Group executives and, together with the LATAM board, determines compensation. Although there are restrictions on voting interests that currently may be held by foreign investors under Brazilian law, LATAM believes that the economic substance of these arrangements satisfies the requirements established by the applicable accounting standards and that consolidation by LATAM of TAM’s operations is appropriate.
Revenue Recognition
Revenues include the fair value of the proceeds received or to be received on sales of goods and rendering services in the ordinary course of the Company’s business. Revenues are shown net of refunds, rebates and discounts.
(a) Rendering of services
a.1 | Passenger and cargo transport |
We recognize passenger and cargo revenues either when the transportation service is provided or when we determine that the tickets will not be used or refunded, which, in the case of passenger revenues, reduces the air traffic liability. We estimate revenue breakage based on historical breakage experience that takes into account the aging of tickets that will not be used or refunded. Commissions payable related to such unearned earnings are shown net of the air traffic liability. Other revenues, including aircraft leases, courier, logistic and ground services, duty free sales, and storage and customs brokering, are recognized when services are provided.
The amount of passenger ticket sales not yet recognized as revenue is reflected as an air traffic liability. Air traffic liability includes estimates of the amount of future refunds and exchanges, net of forfeitures for all unused tickets once the flight date has passed. We perform periodic evaluations of this estimated liability based on actual results. Any adjustments, which can be significant, are included in the results of operations for the periods in which the evaluations are completed. These adjustments relate primarily to the differences between our estimation of certain revenue transactions and the related sales price, as well as refunds, exchanges and other items for which final settlement occurs in periods subsequent to the sale of the related tickets at amounts other than the original sales price.
Actual events and circumstances may differ from historical fare sale activity and customer travel patterns and can result in refunds, exchanges or forfeited tickets differing significantly from estimates. We evaluate our estimates periodically. If actual refunds, exchanges or forfeitures fall outside of our estimated ranges, we review our estimates and assumptions and adjust air traffic liability and passenger revenues as necessary. As with any estimates, actual results may vary from estimated amounts.
a.2 Frequent flyer program
The Company has a frequent flyer program for LATAM passengers called LANPASS and a frequent flyer program for TAM passengers called TAM Fidelidade. Customers can also earn points through Multiplus, a subsidiary of TAM, which permits the accrual of points for many products and services (not just airline flights) and has more than 200 partner establishments, including the TAM Fidelidade program, as of December 31, 2014.
Both frequent flyer programs’ objective is customer loyalty through the delivery of LANPASS kilometers or Multiplus points every time that members of the program fly with the Company or its alliance partners, use the services of entities registered with the program or make purchases with an associated credit card. The kilometers/points earned can be exchanged for flight tickets or other services of associated entities.
The consolidated financial statements include LANPASS liabilities for this concept (deferred income), according to the estimate of the valuation established for the kilometers accumulated pending use at that date, in accordance with IFRIC 13: “Customer loyalty programs.” Points earned from TAM Fidelidade members are bought from Multiplus and seats redeemed are sold to Multiplus. Multiplus manages the points liabilities. Revenue from both programs are recognized once the purchased tickets are flown.
LANPASS Kilometers expire if they are not utilized over a period of three years. This period is renewable if the passenger takes a flight or meets specific requirements regarding the accumulation of kilometers through one of the partners of the program. Multiplus Points expire if they are not utilized over a period of two years, this period is not renewable.
Property, Plant and Equipment
LATAM’s land is recognized at cost less any accumulated impairment loss. The rest of the property, plant and equipment are shown, initially and subsequently, at their historic cost less the corresponding depreciation and any impairment loss.
The amount of advance payments to aircraft manufacturers are capitalized by the Company under “Construction in progress” until receipt of aircraft.
Subsequent costs (replacement of components, improvements and extensions) are included in the value of the initial asset or shown as a separate asset only when it is probable that the future economic benefits associated with the elements of Property, plant and equipment are going to flow to the Company and the cost of the element can be determined reliably. The value of the component replaced is written-off in the books at the time of replacement. The rest of the repairs and maintenance are charged to the result of the year in which they are incurred.
Depreciation of property, plant and equipment is calculated using the straight-line method over their estimated useful lives; except in the case of certain technical components, which are depreciated on the basis of cycles and hours flown.
The residual value and useful life of assets is revised, and adjusted if necessary, once a year.
When the carrying amount of an asset is higher than its estimated recoverable amount, its value is reduced immediately to its recoverable amount. For more information, see Note 2.8 to our audited consolidated financial statements.
Losses and gains on the sale of property, plant and equipment are calculated by comparing the proceeds obtained with the book value and are included in the consolidated statement of income.
Maintenance
The costs incurred for scheduled heavy maintenance of the aircraft’s fuselage and engines are capitalized and depreciated until the next maintenance. The depreciation rate is determined on technical grounds, according to the use of the aircraft expressed in terms of cycles and flight hours.
In case of on balance sheet aircraft, these maintenance costs are capitalized as Property, plant and equipment, while in the case of off balance sheet aircraft maintenance costs are periodically provided for and recognized through profit and loss as “Cost of sales”.
Additionally, under some of our aircraft operating leases, prepayment deposits are required in order to ensure that funds are available to support the scheduled heavy maintenance of the aircraft. At the end of the lease term, any unused maintenance reserves are either returned to the Company in cash or used to offset amounts that we may owe the lessor as a maintenance adjustment. The Company periodically reviews its maintenance reserves for each of its leased aircraft to ensure that they will be recovered, a process that requires judgment, and recognizes an expense if any such amounts are less than probable of being returned.
The unscheduled maintenance of aircraft and engines, as well as minor maintenance, are charged to results as incurred.
Derivative Financial Instruments and Hedging Activities
Derivatives are booked initially at fair value on the date the derivative contracts are signed and later they continue to be valued at their fair value. The method for booking the resultant loss or gain depends on whether the derivative has been designated as a hedging instrument and, if so, the nature of the item hedged.
The Company designates certain derivatives as:
(a) | Hedge of the fair value of recognized assets (“fair value hedge”); |
(b) | Hedge of a identified risk associated with a recognized liability or an expected highly probable transaction (“cash-flow hedge”); or |
(c) | Derivatives that do not qualify for hedge accounting. |
The Company documents, at the inception of each transaction, the relationship between the hedging instrument and the hedged item, as well as its objectives for managing risk and the strategy for carrying out various hedging transactions. The Company also documents its assessment, both at the beginning and on an ongoing basis, as to whether the derivatives used in the hedging transactions are highly effective in offsetting the changes in the fair value or cash flows of the items being hedged.
The total fair value of the hedging derivatives is booked as an Other non-current financial asset or liability if the remaining maturity of the hedging instrument is over 12 months, and as an Other current financial asset or liability if the remaining term of the hedging instrument is less than 12 months. Derivatives not booked as hedges are classified as other financial assets or liabilities, current in the case that their remaining maturity is less than 12 months and non-current in the case that it is more than 12 months.
(a) Fair value hedges
Changes in the fair value of designated derivatives that qualify as fair value hedges are shown in the consolidated statement of income, together with any change in the fair value of the asset or liability hedged that is attributable to the risk being hedged.
(b) Cash flow hedges
The effective portion of changes in the fair value of designated derivatives that qualify as cash flow hedges is shown in net equity. The loss or gain relating to the ineffective portion is recognized immediately in the consolidated statement of income under “Other gains (losses).” Amounts deferred in equity are reclassified to profit and loss when the related hedged item impacts profit and loss.
In the case of variable interest-rate hedges, this means that the amounts recognized in equity are reclassified to results within financial cost at the same time the associated debts accrue interest.
For fuel price hedges, the amounts shown in equity are reclassified to results as Cost of sales to the extent that the fuel subject to the hedge is used.
For Multiplus’ foreign currency hedges, the amounts shown in equity are reclassified to results to the extent that the deferred revenue resulting from the use of points, are recognized as income.
When hedging instruments mature or are sold or when they do not meet the requirements to be accounted for as hedges, any gain or loss accumulated in net equity until that moment remains in equity and is reclassified to the consolidated statement of income when the hedged transaction is finally recognized. When it is expected that the hedged transaction is no longer going to occur, the gain or loss accumulated in net equity is taken immediately to the consolidated statement of income as “Other gains (losses).”
(c) Derivatives not booked as a hedge
The changes in fair value of any derivative instrument that is not booked as a hedge are shown immediately in the consolidated statement of income, in “Other gains (losses).”
Deferred taxes
Deferred taxes are calculated on the temporary differences arising between the tax bases of assets and liabilities and their book values. However, if the temporary differences arise from the initial recognition of a liability or an asset in a transaction other than a business combination that at the time of the transaction does not affect the accounting result or the tax gain or loss, they are not booked. The deferred tax is determined using the tax rates (and laws), that have been enacted or substantially enacted at the end of the reporting period, and are expected to apply when the related deferred tax asset is realized or the deferred tax liability is discharged.
Deferred tax assets are recognized when it is probable that there will be sufficient future tax earnings with which to compensate the temporary differences. Estimating the level of tax earnings for this purpose requires considerable judgment.
The Company does not record deferred tax on temporary differences arising on investments in subsidiaries, provided that the opportunity to reverse the temporary differences is controlled by the Company and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax on temporary differences arising on investments in associates is immaterial.
Recently Issued Accounting Pronouncements
(i) | IAS 27 Separate financial statements, IFRS 10 Consolidated financial statements and IFRS 12 Disclosure of interest in other entities (October 2012) |
(i) | IFRS 2 Share-based payment (Dec 2013) |
(ii) | IFRS 3 Business combinations (Dec 2013) |
(iii) | IFRS 8 Operating segments (Dec 2013) |
(iv) | IFRS 13 Fair value measurement (Dec 2013) |
(v) | IAS 16 Property, plant and equipment (Dec 2013) |
(vi) | IAS 24 Related party disclosures (Dec 2013) |
(vii) | IFRS 1 Frist-time adoption of International Finance Reporting Standards (Dec 2013) |
(viii) | IAS 40 Investment property (Dec 2013) |
(i) | IAS 19 Employee benefits (September 2014) (*) |
(ii) | IAS 34 Interim financial reporting (September 2014) (*) |
(iii) | IFRS 5 Non-current assets held for sale and discontinued operations (September 2014) (*) |
(iv) | IFRS 7 Financial instruments: Disclosures (September 2014) (*) |
(*) | Standards not yet effective. |
The Company’s management believes that the early adoption of the standards, amendments and interpretations described above but not yet effective would not have had a significant impact on the Company’s consolidated financial statements in the year of their first application. The Company only has early adopted the amendment to IAS 36.
B. Liquidity and Capital Resources
LATAM cash and cash equivalents totaled US$989.4 million as of December 31, 2014, US$1,984.9 million as of December 31, 2013 and US$650.3 million as of December 31, 2012. Additionally, the Company had short term marketable securities totaling US$544.4 million as of December 31, 2014, US$576.7 million as of December 31, 2013 and US$470.1 million as of December 31, 2012. In the aggregate, LATAM’s cash and marketable securities totaled US$1,533.8 million as of December 31, 2014, US$2,561.6 million as of December 31, 2013 and US$1,120.3 million as of December 31, 2012.
The US$1,027.8 million decrease in our cash and marketable securities from 2013 to 2014 was mainly due to the execution of the deleveraging plan, the negative impact of the FIFA World Cup, and the weaker global economic scenario in Latin America. Changes in our net cash generated from operating, investing and financing activities are described below.
Cash position and liquidity
The following table provides a summary of our cash flows from operating activities, investing activities and financing activities for the years ended December 31, 2014, 2013 and 2012 and our total cash position as of December 31, 2014, 2013 and 2012.
2014 | 2013 | 2012 | ||||||||||
(in US$ millions) | ||||||||||||
Net cash flows from operating activities | 1,331.4 | 1,408.7 | 1,203.8 | |||||||||
Net cash flow from (used in) investing activities | (899.1 | ) | (1,278.8 | ) | (1,926.4 | ) | ||||||
Net cash flows from (used in) financing activities | (1,320.2 | ) | 1,205.8 | 1,005.2 | ||||||||
Effects of variation in the exchange rate on cash and cash equivalents | (107.6 | ) | (1.0 | ) | (6.7 | ) | ||||||
Cash and cash equivalents at the beginning of the year | 1,984.9 | 650.3 | 374.4 | |||||||||
Cash and cash equivalents at the end of the year | 989.4 | 1,984.9 | 650.3 |
In addition to the cash and marketable securities LATAM has access to short term credit lines. As of December 31, 2014, LATAM had working capital uncommitted credit facilities for a total amount of US$ 1,827 million, of which US$953million was drawn as of December 31, 2014, and committed credit lines with a total available amount of US$145 million, of which $0 was drawn as of December 31, 2014.
Net cash flows from operating activities
Cash from operations is derived primarily from providing air passenger and cargo transportation to customers. Operating cash outflows are primarily related to the recurring expenses of airline operations, including fuel consumption.
Net cash inflows from operating activities in 2014 decreased US$77.3 million, or 5.5%, from US$1,408.7 million, mainly due to the negative impact of the FIFA World Cup on LATAM’s operating margin, as well as a generally weaker macroeconomic scenario in Latin America, including slower GDP growth trends and weaker currencies in most countries. In addition the net cash from operations was negatively affected by fuel hedge, hedging margin guarantees and other guarantees in US$ 251.7 million (for more information see to Note 6 – Cash and Cash Equivalents of our audited consolidated financial statements). Nevertheless, the negative effect was compensated by the cash received from the renewal of the Santander and LANPASS exclusive co-branding agreement.
Net cash inflows from operating activities in 2013 increased $204.9 million, or 17.0%, from US$1,203.8 million in 2012, primarily due to an improvement in the operational margin and the turnaround of the Brazilian domestic market, mainly reflected in a stronger fourth quarter operational result.
Net cash flow from (used in) investing activities
Net cash used in investing activities in 2014 decreased US$379.7 million from US$1,278.8 million in 2013 to US$899.1 million in 2014, due to an increase in aircraft sales of US$265.8 and a decrease in Aircraft CAPEX of US$497.8 million, driven by a decrease in aircraft purchases from 20 narrow body aircraft to 9 and 4 wide body aircraft to 3. This reduction was partially offset by an increase in purchases of property, plant and equipment non related to purchase of new aircrafts of US$556.4. It is important to note that during 2014 the sale and leaseback of 4 B777 was reflected in an asset sale of US$510.5 million and a reduction of debt of US$516.6 million.
Net cash used in investing activities in 2013 decreased US$647.6 million from US$1,926.4 million in 2012 to US$1,278.8 million in 2013, primarily due to the decrease in capital expenditure and the return of PDP payments relating to the aircraft deliveries. Aircraft purchases in 2013 included 20 narrow body aircraft and 4 wide body aircraft for a total of US$1,219 million.
Net cash flows from (used in) financing activities
Net cash used in financing activities was (US$1,205.8 million), a decrease of US$2,526.0 million from the US$1,205.8 million in cash generated by financing activities in 2013. The variation resulted primarily from a liability restructuring, including an important reduction of outstanding debt and an increase in debt repayment, mainly the US dollar denominated debt of TAM S.A. of US$1,327.6 million (for more information see to Note 18-Other Financial Liabilities of our audited consolidated financial statements). The decrease in the net cash generated was also affected by the net effect of the capital increase, where US$888.6 million was accounted for in 2013 and US$156.3 million during the first quarter of 2014.
Net cash generated from financing activities increased by US$200.6 million from US$1,005.2 million to US$1,205.8 million in 2013, primarily due to LATAM’s capital increase, the increase of long term debt related to new aircraft purchases, but partially offset by the voluntary prepayment of BRL 400 million of local Brazilian bonds.
Sources of financing
Long term
We typically finance our fleet with long-term loans covering between 80% and 100% of the net purchase price. We also finance our aircraft under sale and leaseback arrangements in order to add flexibility to our fleet. For more information regarding to the fleet financing, please refer to “—F. Tabular Disclosure of Contractual Obligations.”
From time to time in the past, we have considered, and may consider in the future, other forms of financing including securitization of ticket receivables or the securitization of fleet and engines or the issuance of additional debt or equity securities.
Short term
We have generally been able to arrange for short-term loans with local Chilean and international banks when we have needed to finance working capital expenditures or increase our liquidity. As of December 31, 2014, we maintained US$537 million in short-term credit lines with both local and foreign banks, including US$210 million of committed credit lines.
We have diversified our sources of short term financing to include the following: PAE (“Prestamos a Exportadores”), which are foreign currency short term loans granted to exporting parties in Chile mainly to finance working capital; Credit card advancements, a financial alternative where the bank advances to the Company the cash inflows related to the credit card sales on installments with a discount factor; and advance purchases by Multiplus of kilometers for TAM flights, in an amount at any time up to a maximum of R$500 million.
Capital expenditures
Our capital expenditures are related to the acquisition of aircraft, aircraft-related equipment, IT equipment, support infrastructure and the funding of pre-delivery deposits. LATAM’s capital expenditures totaled US$1,440.4 million in 2014, US$1,381.8 million in 2013 and US$2,389.4 million in 2012. See “—Sources of financing” above.
The following chart sets forth our estimate, as of December 31, 2014, of our future capital expenditures for, 2015, 2016, 2017, 2018 and 2019 calendar years:
Estimated capital expenditures by year, as of December 31, 2014 | ||||||||||||||||||||
2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||
(in US$ millions) | ||||||||||||||||||||
Fleet Commitments | 1,688 | 2,343 | 2,471 | 2,903 | 1,229 | |||||||||||||||
PDPs (1) | 311 | 165 | -432 | -651 | -18 | |||||||||||||||
Purchase Obligations | 1,999 | 2,508 | 2,039 | 2,252 | 1,211 | |||||||||||||||
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Other expenditures(2) | 405 | 373 | 293 | 295 | 108 | |||||||||||||||
Total | 2,404 | 2,881 | 2,332 | 2,547 | 1,319 | |||||||||||||||
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(1) | Represents pre-delivery payments made by LATAM, or inflows received by LATAM after the delivery of the aircraft is made, when the manufacturer refunds the PDPs to LATAM. |
(2) | Includes expenditures on spare engines and parts, information technology and other expenditures. |
The expenditures set out in the table above reflect payments for purchases and other fleet-related items, as well as for information technology and other items. See “Item 4. Information on the Company—Business Overview—Fleet.” We have projected our capital expenditures based on our anticipated deliveries of aircraft fleet. See “—F. Tabular Disclosure of Contractual Obligations” below for a description of our purchase obligations, borrowings and other contractual commitments as of December 31, 2014.
C. Research and Development, Patents and Licenses, etc.
LATAM has registered the trademarks “LAN,” “LAN Chile,” “LAN Peru,” “LAN Argentina” and “LAN Ecuador” with the trademark office in Chile, Peru, Argentina and Ecuador, respectively. We license certain brands, logos and trade dress under the alliance agreement with oneworld® related to LAN’s alliance. As long as LAN is a member of oneworld®, it will have the right to continue to use current logos on its aircraft.
TAM holds or has filed registration applications for 135 trademarks before the Instituto Nacional da Propriedade Industrial, or INPI, the body with jurisdiction for registering trademarks and patents in Brazil, and 105 trademarks before the bodies with jurisdiction for registering trademarks in other countries in which TAM operates. Currently, TAM is not aware of any third-party challenges to these applications.
D. Trend Information
For 2015, LATAM expects total passenger ASK growth to be between 2% and 4%. International passenger ASK growth for full year 2015 is expected to grow between 4% and 6%. TAM’s domestic passenger ASKs in the Brazilian market are expected to be flat during 2015. ASKs in Spanish-speaking countries are expected to increase by approximately 4% to 6%.
In the passenger business, we expect to continue to face increased competition, a weaker macroeconomic environment in South America, and depreciated local currencies, putting pressure on yields throughout the region for all players in the industry. Nevertheless, the Company will continue to develop initiatives to improve our operations, with special focus in customer experience and network. Moreover, LATAM’s unique leadership position in a region with growth potential will allow us to continue building our business model in the future.
Regarding cargo operations, LATAM expects cargo ATKs to increase between 1% and 3% for full year 2015, driven by increased availability in the bellies of passenger aircraft.
In the cargo business, we continue to be adversely affected by the challenging macroeconomic environment, which is directly correlated with the number of tons being transported and by the fact that weaker cargo markets globally might further drive additional competition to South America, especially Brazil. However we expect partially offset this negative impact with solid export volumes from Latin America to the United States and Europe. Also, we plan to continue to optimize the utilization of the bellies of our passenger aircraft to maximize synergies associated with the Company’s integrated passenger/cargo business model.
We continue to maintain significant flexibility to adjust the physical size of our fleet. Between 2015 and 2016, we will have 43 operating lease expirations in our passenger fleet and 2 operating lease expirations in our passenger and cargo fleet, which leases can thereafter be terminated without additional costs.
As a result, the Company has more flexibility, as well as a proven track record of acting quickly to adapt our business to economic challenges. In this context, LATAM has developed a robust strategic plan for the next four years (2015-2018), based on three critical success factors: Customer Experience, Network, and Efficiency and Cost Reduction. This plan will improve the way we work, allowing us to become one of the best airline groups in the world, renewing our commitment to sustained profitability and superior shareholder returns.
Cost savings include reductions in fuel and fees, procurement, operations, overhead, and distribution costs, among others. The company has already started work on cost initiatives in all these areas.
Regarding fuel, we expect jet fuel prices will continue to be volatile in 2015, and we will continue to use fuel hedging programs and fuel surcharge mechanisms in both the passenger and cargo businesses to help minimize the impact of short-term movements in crude oil prices.
LATAM has hedged approximately 30% of its estimated fuel consumption for the first quarter of 2015, 25% of its average estimated fuel consumption for the second quarter of 2015, 39% of its average estimated fuel consumption for third quarter 2015, and 39% of its average estimated fuel consumption for fourth quarter 2015. The Company’s fuel hedging strategy consists of a combination of collars, swaps and call options for Brent and Jet Fuel.
E. Off-Balance Sheet Arrangements
As of December 31, 2014 the Company had 107 aircraft (of which 70 are obligations of TAM and 37 are obligations of LAN) and 23 aircraft engines under operating leases. These operating leases provide us with flexibility to adjust our fleet to any demand volatility that may affect the airline industry and therefore we consider such arrangements to be of great value to our strategy and financial performance. The total future lease payments related to our operating leases as of December 31, 2014 were US$ 2,155 million, for all remaining periods through maturity (the latest of which expires in 2026). See “—F. Tabular Disclosure of Contractual Obligations.”
Under the aforementioned operating leases, LATAM is responsible for all maintenance, insurance and other costs associated with operating these aircraft. The Company has not made any residual value or similar guarantees to our lessors. There are certain guarantees and indemnities to other unrelated parties that are not reflected on the Company’s balance sheet, but we believe that these will not have a significant impact on our results of operations or financial condition.
LATAM operates 17 aircraft under tax leasing structures. These methods involve the creation of special purpose entities that acquire aircraft with bank and third party financing. Under IFRS, eight of these aircraft are shown in the consolidated statement of financial position as part of “Property, plant and equipment” and the corresponding debt is shown as a liability and nine TAM tax leases are classified as operating leases for accounting purposes as of December 31, 2014.
As of December 31, 2014, we are not aware of any event, lawsuit, commitment, trend or uncertainty that may result in, or is reasonably likely to result in, the termination of the operating leases. See Note 33 to our audited consolidated financial statements for a more detailed discussion of these commitments.
F. Tabular Disclosure of Contractual Obligations
We have contractual obligations and commitments primarily related to the payment of aircraft debt and lease arrangements, principal and interest on our non-aircraft long-term debt (which consists of senior notes, a securitized bond and bank loans), and short-term export-import credits for the future incorporation of aircraft to our fleet.
The Company’s debt that is secured by aircraft (including Export-Import Bank of the United States (“EX-IM Bank”) Bank guaranteed bonds, Export Credit Agency (“ECA”) guaranteed loans, commercial loans, Japanese Leases with a call option (“JOLCO”)
structures and capital leases) as of December 31, 2014, was US$6,221 million. In general, LATAM’s aircraft debt has 12 year repayment profiles. However, some financing structures feature a balloon payment or a purchase option at the end of the lease. By refinancing this balloon payment, the maturity dates of a number of our aircraft financings have been extended for another 3 to 8 years. Our 2014 aircraft acquisitions are described in further detail below under “—2014 Fleet Acquisitions.”
Regarding non-aircraft debt, LATAM issued a securitized bond for an amount of US$ 450 million in November 2013 with seven years tenor and two years interest only. This bond is backed by future flows of credit card sales of LATAM Airlines in the United States and Canada. The coupon is 6.0% fixed with quarterly payments.
In addition, TAM has three series of senior notes, totaling US$1,100 million. TAM’s senior notes comprise:
The average interest rate of all of our long term debt (which is our aircraft debt plus the senior notes issued by TAM, the LATAM securitization and bank loans) was 3.68% as of December 31, 2014. Out of the total long-term debt, 68.8%accrues interest at a fixed rate (either through a stated fixed interest rate or through the use of interest rate swap agreements) or is subject to interest rate caps.
As of December 2014, LATAM had US$1,308.3 million in current debt liabilities. Of this amount, US$552.5 million was short-term debt, which represents 42% of our total current debt liabilities. The remaining US$755.7 million is composed mainly of amounts payable within the next 12 months related to aircraft financing.
Various EX-IM Bank loans signed by LATAM for the financing of Boeing 767, 777, 777 freighter and 787 aircraft contain financial covenants and other restrictions, including restrictions in terms of its shareholder composition and disposal of assets. As of December 31, 2014, we also had purchase obligations totaling US$ 11.7 billion, with deliveries between 2015 and 2021, as set forth below:
The following table sets forth our material expected obligations and commitments as of December 31, 2014:
Payments due by period, as of December 31, 2014 | ||||||||||||||||||||
(US$ in millions) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
Long-term debt obligations(1) | US$ | 4,727 | US$ | 587 | US$ | 1,138 | US$ | 911 | US$ | 2091 | ||||||||||
Capital (finance) lease obligations | US$ | 1,629 | US$ | 350 | US$ | 611 | US$ | 413 | US$ | 256 | ||||||||||
Operating lease obligations | US$ | 2,155 | US$ | 512 | US$ | 766 | US$ | 436 | US$ | 441 | ||||||||||
Fleet Commitments(2) | US$ | 11,689 | US$ | 1,688 | US$ | 4,814 | US$ | 4,132 | US$ | 1,055 | ||||||||||
TOTAL | US$ | 20,200 | US$ | 3,137 | US$ | 7,329 | US$ | 5,892 | US$ | 3,843 | ||||||||||
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(1) | Long-term debt obligations reflect principal payments on outstanding debt obligations, including aircraft debt, senior notes issued by LAN and TAM and long term bank loans. |
(2) | Fleet commitments represents the capex equivalent of purchasing all fleet arrivals |
2014 Fleet Acquisitions
During 2014, LATAM completed the acquisition of the following wide body aircraft:
These EX-IM Bank financial obligations have a repayment profile of 12 years, with a guarantee covering 85% of the net purchase price of the aircraft. The EX-IM Bank guarantee is secured with a first priority mortgage on the aircraft in favor of a security trustee on behalf of EX-IM Bank. We have financed the remaining 15% of the net purchase price with our own funds.
Finally, the 2 Boeing 787-8 aircraft financed through sale and leaseback transactions have lease terms of 12 years. These leases are denominated in U.S. dollars and have monthly payments
During 2014, LATAM completed the acquisition of the following narrow body aircraft:
The commercial financing for these 9 Airbus 321-231 aircraft consists of a senior tranche financing 81.7% of the net purchase price of the aircraft. A first priority mortgage on the aircraft exists in favor of a security trustee on behalf of the senior lender. The documentation for each loan follows standard market forms for the type of financing, including standard events of default
Finally, narrow body aircraft financed through sale and leaseback transactions have lease terms of 8 years. These leases are denominated in U.S. dollars and have monthly payments.
The majority of our wide body and narrow body aircraft financings through EX-IM Bank bonds, ECA guaranteed loans or commercial loans are denominated in U.S. dollars and have quarterly amortizations with a combination of fixed and floating rates linked to USD LIBOR. A small portion of our aircraft debt has monthly or semiannual payments; nevertheless it is also denominated in US dollars and linked to U.S. dollar Libor. Through the use of interest rate swaps and fixed coupon Bond issuances in the case of Boeing aircraft, we have effectively converted a significant portion of our floating rate debt under these loans into fixed rate debt.
ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
A. Directors and Senior Management
The LATAM Airlines Group board of directors consists of nine directors who are elected every two years for two-year terms at annual regular shareholders’ meetings or, if necessary, at an extraordinary shareholders’ meeting, and may be re-elected. The board of directors may appoint replacements to fill any vacancies that occur during periods between elections. Scheduled meetings of the board of directors are held once a month and extraordinary board of directors’ meetings are called when summoned by the chairman of the board of directors and two other directors, or when requested by a majority of the directors.
The current board of directors was elected at the ordinary shareholders’ meeting held on April 29, 2014. Its term expires in April 2016. On September 2nd, 2014 Mrs. Maria Claudia Amaro (1) resigned as a member of the board of directors, which elected Mr. Henri Philippe Reichstul in her place. Mr. Reichstul’s appointment will be in effect until the next ordinary meeting of shareholders, in which the board of directors will have to be renewed and reelected in full. The entire board will be reelected in April 2015.
The following are LATAM Airlines Group’s directors:
Directors | Position | |
Mauricio Rolim Amaro(1) | Director / Chairman | |
Henri Philippe Reichstul | Director | |
Juan José Cueto Plaza(2) | Director | |
Ramón Eblen Kadis(3) | Director | |
Georges de Bourguignon Arndt | Director | |
Ricardo Caballero | Director |
Directors | Position | |
Carlos Heller Solari(4) | Director | |
Gerardo Jofré Miranda | Director | |
Francisco Luzón López | Director |
Senior Management | Position | |
Enrique Cueto Plaza(2) | CEO LATAM | |
Ignacio Cueto Plaza(2) | CEO LAN | |
Andrés Osorio Hermansen | CFO LATAM | |
Marco Antonio Bologna(6) | CEO TAM | |
Armando Valdivieso Montes | President LAN | |
Claudia Sender | President TAM | |
Cristián Ureta Larraín | Cargo President | |
Roberto Alvo Milosawlewitsch | Senior VP Planning and Network. | |
Damian Scokin (5) | Senior VP International Passenger Operations | |
Emilio del Real Sota | Senior VP Human Resources | |
Jerome Cadier | Chief Marketing Officer | |
Juan Carlos Menció | Senior VP Legal |
(1) | Mr. Mauricio Rolim Amaro and Mrs. Maria Claudia Amaro are brother and sister. Both are members of the Amaro Group, which is defined in “Item 7” as a “Major Shareholder” and are the TAM controlling shareholders. |
(2) | Messrs. Ignacio, Juan José and Enrique Cueto Plaza are brothers. All three are members of the Cueto Group, which is defined in “Item 7” as a “Major Shareholder,” and are the LATAM controlling shareholders. |
(3) | Mr. Ramón Eblen Kadis is a member of the Eblen Group, which is defined in “Item 7” as a “Major Shareholder.” |
(4) | Mr. Carlos Heller Solari is a member of the Bethia Group, which is defined in “Item 7” as a “Major Shareholder.” |
(5) | Mr. Damian Scokin held the position of LATAM’s International Unit Business Executive Vice President until September 30, 2014, date in which Mr. Scokin left the company. |
(6) | Mr. Bologna will cease to be CEO of TAM on April 1ST, 2015. |
Biographical Information
Set forth below are brief biographical descriptions of LATAM Airlines Group’s directors and senior management. All of LATAM’s directors were elected or reelected, as the case may be, in September 2012 for a two-year term, which expires in September 2014.
Directors
Mr. Mauricio Rolim Amaro, has served as member of LATAM Airlines Group’s board of directors since June 2012. He was reelected to the board of directors of LATAM in April 2014 and has served as Chairman since September 2012. Mr. Amaro’s current term as chairman ends in April 2015. Mr. Amaro has previously held various positions in the TAM Group and served as a professional pilot at TAM Linhas Aéreas S.A. and TAM Aviação Executiva S.A. Mr. Amaro has been a member of the Board of TAM S.A. since 2004, and vice-chairman of the Board since April 2007. He is also an executive officer at TAM Empreendimentos e Participações S.A. and chairman of the boards of Multiplus S.A. (subsidiary of TAM S.A.) and of TAM AviaçãoExecutiva e Taxi Aéreo S.A. As of January 31, 2015, according to shareholder registration data in Chile, Mr. Amaro shared in the beneficial ownership of 65,554,075 common shares of LATAM Airlines Group (12.02% of LATAM Airlines Group’s outstanding shares), held by TEP Chile S.A. For more information see “Item 7. Controlling Shareholders and Related Party Transactions.”
Mr. Henri Philippe Reichstul, joined LATAM’s board of directors in April 2014. Mr. Reichstul’s term as a director ends in April 2015. Mr. Reichstul has served as President of Petrobras and the IPEA-Institute for Economic and Social Planning and Executive Vice President of Banco Inter American Express S.A. Currently, in addition to Administrative Board member of TAM and LATAM group, he is also a member of the Board of Directors of Repsol YPF, Peugeot Citroen and SEMCO Partners, among others. Mr. Reichstul is an economist with an undergraduate degree from the Faculty of Economics and Administration, University of São Paulo, and postgraduate work degrees in the same discipline - Hertford College - Oxford University.
Mr. Juan José Cueto Plaza, has served on LAN’s board of directors since 1994 and was reelected to the board of directors of LATAM in April 2014. Mr. Cueto’s term as a director ends in April 2015. Mr. Cueto currently serves as Executive Vice President of Inversiones Costa Verde S.A., a position he has held since 1990, and serves on the boards of directors of Consorcio Maderero S.A., Minera Michilla S.A., Inversiones del Buen Retiro S.A., Inmobiliaria e Inversiones Asturias S.A., Inversiones Mineras del Cantábrico S.A., Costa Verde Aeronáutica S.A., Sinergia Inmobiliaria S.A. and Valle Escondido S.A. Mr. Cueto is the brother of Messrs. Enrique
and Ignacio Cueto Plaza, LATAM Airlines Group Executive Vice-President and LAN CEO, respectively. Mr. Cueto is a member of the Cueto Group (LATAM Airlines Group’s Controlling Shareholder). As of January 31, 2015, Mr. Cueto shared in the beneficial ownership of 139,089,520 common shares of LATAM Airlines Group (25.49% of LATAM Airlines Group’s outstanding shares) held by the Cueto Group. Mr. Cueto is also a member of the board of directors of Holdco II. For more information see “Item 7. Controlling Shareholders and Related Party Transactions.”
Mr. Ramón Eblen Kadis, 70 years old, has served on LAN’s board of directors since June 1994 and was reelected to the board of directors of LATAM in April 2014. Mr. Eblen’s term as a director ends in April 2015. Mr. Eblen has served as President of Comercial Los Lagos Ltda., Inversiones Santa Blanca S.A., Inversiones Andes SpA, Granja Marina Tornagaleones S.A. and TJC Chile S.A. Mr. Eblen is a member of the Eblen Group (a major shareholder of LATAM Airlines Group). As of January 31, 2015, The Eblen Group had the beneficial ownership of 27,945,199 common shares of LATAM Airlines Group (5.12% of LATAM Airlines Group’s outstanding shares) plus a 40% ownership of Costaverde Aeronautica SpA, which owns 20.000.000 common shares of LATAM Airlines Group. For more information see “Item 7. Controlling Shareholders and Related Party Transactions.”
Mr. Georges de Bourguignon, has served on LATAM Airlines Group’s board of directors since September 2012. Mr. de Bourguignon’s term as a director ends in April 2015. Mr. de Bourguignon has been a partner and executive director of Asset Chile S.A., a Chilean investment bank, since 1994. He is currently member of the board of directors of Asset Chile S.A. and several of its affiliates, is also an independent board member of Sal Lobos S.A., Chilean subsidiary of the German group K+S, and Salmones Austral Spa, a Chilean salmon farming company. In the past he has served in several other boards of public and private companies, as well as of boards of non profit organizations. Before co-founding Asset Chile, he was manager of the Financial Institutions Group at Citibank S.A. in Chile, and was a professor of economics at the Catholic University of Chile. He is an economist from Catholic University of Chile and a graduate of Harvard Business School. As of January 31st, 2015, Mr. de Bourguignon indirectly held 3,153 common shares of LATAM Airlines Group (0.0006%) of LATAM Airlines Group outstanding shares).
Mr. Ricardo J. Caballero, joined LATAM’s board of directors in April 2014. Mr. Caballero is the Ford International Professor of Economics and Director of the World Economic Laboratory at the Massachusetts Institute of Technology, an NBER Research Associate, and an advisor of QFR Capital Management LP. Mr. Caballero was the Chairman of MIT’s Economics Department (2008-2011) and has been a visiting scholar and consultant at many major central banks and international financial institutions. His teaching and research fields are macroeconomics, international economics, and finance. His current research looks at global capital markets, speculative episodes and financial bubbles, systemic crises prevention mechanisms, and dynamic restructuring. His policy work focuses on aggregate risk management and insurance arrangements for emerging markets and developed economies. He has also written about aggregate consumption and investment, exchange rates, externalities, growth, price rigidity, dynamic aggregation, networks and complexity. Mr. Caballero has served on the editorial board of several academic journals and has a very extensive list of publications in all major academic journals. Among his major awards, he was the winner of the 2002 Frisch Medal of the Econometric Society for “Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach”, Econometrica, 67(4), July 1999 (joint work with Eduardo Engel); and both the Smith Breeden Prize by the American Finance Association and the Emerald Management Review Citation of Excellence Award for “Collective Risk Management in a Flight to Quality Episode”, Journal of Finance, 63(5), October 2008 (joint work with Arvind Krishnamurthy). In April 1998 Caballero was elected a Fellow of the Econometric Society and subsequently of the American Academy of Arts and Sciences in April 2010.
Carlos Heller Solari, joined the board of LAN in May 2010 and was re-elected to the Board of Directors of LATAM in April 2014. The mandate of Mr. Heller as a director ends in April 2015. The Mr. Heller has vast experience in retail (retail) through SACI Falabella in transport and logistics, agriculture, wine, Horse Riding and communications category. Mr. Heller is president of Bethia SA (“Bethia”) (parent company of Axxion SA and Betlan Two SA), Chairman of Axxion SA, Betlan Two SA, Equestrian Club of Santiago, Sotraser SA and Agricultural Ancali Ltda . also serves on the boards of SACI Falabella Falabella Retail SA, Sodimac SA, Titanium SA, Betfam SA Viña Indómita SA, Viña Santa Alicia SA, Viña Two Andes SA Blue Express SA and Aero Andina SA In addition he is the principal shareholder and president of “Azul Azul” through Inversiones Limitada Alpes (first division team manager football at the University of Chile). At January 31, 2015, Mr. Heller indirectly held 33,367,357 ordinary shares of LATAM Airlines Group through Axxion SA and Inversiones HS Spa (6.12% of the shares of LATAM Airlines Group) and 1.017.449.607 shares Naviera SA Group Companies Axxion through S.A.
Mr. Gerardo Jofré Miranda, joined LATAM’s Board of directors on May 2010 and was reelected to the board of directors of LATAM in April 2014. Mr. Jofré’s term as a director ends in April 2015. Mr. Jofré is member of the board of directors of Codelco. Mr. Jofré is member of the Real Estate Investment Council of Santander Real Estate Funds. From 2005 to 2010 he served as member of the boards of directors of Endesa Chile S.A., Viña San Pedro Tarapacá S.A., D&S S.A., Inmobiliaria Titanium S.A. Construmart S.A., Inmobiliaria Playa Amarilla S.A. and Inmobiliaria Parque del Sendero S.A. and was President of Saber Más Foundation. Mr. Jofré was Director of Insurance for America for Santander Group of Spain between the years 2004 and 2005. From 1989 to 2004 he served on Santander Group in Chile, as Vice Chairman of the Group and as CEO, member of the boards of directors and Chairman of many of the Group’s companies. As of January 31st, 2015, Mr. Jofre held49,923 common shares of LATAM Airlines Group (0.0092% of LATAM Airlines Group’s outstanding shares).
Mr. Francisco Luzón López, has served on LATAM Airlines Group’s board of directors since September 2012 and was reelected to the board of directors of LATAM in April 2014. Mr. Luzón’s term as a director ends in April 2015. He has served as a consultant of the Inter-American Development Bank (BID) and he has been Teacher “Visiting Leader” of the School of Business China-Europe (CEIBS) in Shanghai (2012-2013). He is currently a member of the board of La Haya Real Estate (September 2014) and an Independent Director at Willis Group (June 2013). Between 1999 and 2012, Mr. Luzon served as Executive Vice President for Latin America of Banco Santander. In this period, he was also Worldwide Vice President of Universia SA. Between 1991 and 1996 he was Chairman and CEO of Argentaria Bank Group. Previously, in 1987, he was appointed Director and General Manager of Banco de Vizcaya and in 1988 Counselor and General Director of Banking Group at BBV. During his career Mr. Luzon has held positions on the boards of several companies, most recently participating in the council of the global textile company Inditex-Zara from 1997 until 2012. As of January 31, 2015, Mr. Luzon held 12,200 common shares of LATAM Airlines Group (0.0022% of LATAM Airlines Group’s outstanding shares).
Senior Management1
Mr. Enrique Cueto Plaza, is LATAM Airlines Group’s Chief Executive Officer (“CEO”). From 1994 to 2012, Mr. Cueto was the CEO of LAN. From 1983 to 1993, Mr. Cueto was Chief Executive Officer of Fast Air, a Chilean Cargo airline. Mr. Cueto also served on the LAN board of directors from 1993 to 1994. Mr. Cueto has in-depth knowledge of passenger and cargo airline management, both in commercial and operational aspects, gained during his 24 years in the airline industry. Mr. Cueto is an active member of theoneworld® Alliance Governing Board, the IATA (International Air Transport Association) Board of Governors. He is also member of the Board of the Federation of Chilean Industry (SOFOFA) and of the Board of the Endeavor foundation, an organization dedicated to the promotion of entrepreneurship in Chile. Mr. Cueto is the brother of Mers. Juan José and Ignacio Cueto Plaza, member of the board and LAN CEO, respectively. Mr. Cueto is also a member of the Cueto Group (LATAM Airlines Group’s Controlling Shareholder). As of January 31, 2015, Mr. Cueto jointly shared in the beneficial ownership of 139,089,520 common shares of LATAM Airlines Group (25.49% of LATAM Airlines Group’s outstanding shares) held by the Cueto Group. For more information see “Item 7. Controlling Shareholders and Related Party Transactions.”
Mr. Ignacio Cueto Plaza, is LAN’s CEO. Mr. Cueto served as President of LAN Cargo from 1995 to 1998, as Chief Executive Officer-Passenger Business from 1999 to 2005, and as President and Chief Operating Officer of LAN since 2005 until the combination with TAM in 2012. Mr. Cueto has previously served on the board of directors of LAN (from 1995 to 1997) and Ladeco (from 1994 to 1997). In addition, Mr. Cueto served as Chief Executive Officer of Fast Air from 1993 to 1995. Between 1985 and 1993, Mr. Cueto held several positions at Fast Air, including Service Manager for the Miami sales office, Director of Sales for Chile and Vice President of Sales and Marketing. Mr. Cueto is the brother of Messrs. Juan José and Enrique Cueto Plaza, Director and LATAM’s CEO, respectively. Mr. Cueto is also a member of the Cueto Group (which is a controlling shareholder of LATAM). As of January 31, 2015, Mr. Cueto shared in the beneficial ownership of 139,089,520 common shares of LATAM (25.49% of LATAM’s outstanding shares) held by the Cueto Group. For more information see “Item 7. Controlling Shareholders and Related Party Transactions.”
Mr. Marco Bologna, is TAM’s CEO since May, 2010. He is also board member of Suzano Papel e Celulose S/A. He joined TAM in March 2001, when he was appointed Vice President for Finance and Management, and Market Relations Director. From 2004 to 2007 he served as President of TAM Linhas Aéreas, and in March 2009 he took over as President of TAM Aviação Executiva and Táxi Aéreo S.A. Since April 30, 2010 he has chaired the holding company TAM S.A., which brings together TAM Linhas Aéreas, TAM Airlines (formerly TAM Mercosur), Multiplus Fidelidade, and the maintenance unit TAM MRO. In February 29, 2012:2012, he was also appointed President of TAM Linhas Aéreas. Mr. Bologna has extensive experience in the aviation industry, and has worked in the financial markets for over 20 years. Mr. Bologna will cease to be CEO of TAM on April 1ST, 2015.
Mr. Armando Valdivieso Montes,is President of LAN. Between 1997 and 2005 he served as Chief Executive Officer-Cargo Business of LAN and from 2006 until 2012 he served as the General Manager-Passenger. After the combination with TAM in 2012, Mr. Valdivieso served as LATAM’s Spanish Speaking Countries Executive Vice-President, before being named to his current position. From 1994 to 1997, Mr. Valdivieso was President of Fast Air. From 1991 to 1994, Mr. Valdivieso served as Vice President, North America of Fast Air Miami. As of January 31, 2015, according to shareholder registration data in Chile, Mr. Valdivieso owned 67,359 common shares of LATAM Airlines Group (0.012% of LATAM Airlines Group’s outstanding shares).
Mrs. Claudia Sender Ramirez, has served as TAM Airlines’ President since May 2013. Mrs. Sender joined the company in December 2011, as Commercial and Marketing Vice-President. After June 2012, with the conclusion of TAM-LAN combination and the creation of LATAM Airlines Group, she became the head of Brazil Domestic Business Unit, and her functions were expanded in order to include TAM’s entire Customer Service structure. Mrs. Sender dedicated most of her career in consumer goods industry, focused in Marketing and Strategic Planning. Prior to joining TAM, she was Marketing Vice-President at Whirlpool Latin America for
1 | Mr. Damian Scokinheld the positionof LATAM’s International Unit Business Executive Vice President until September 30, 2014, date in which Mr. Scokin left the company |
seven years. She also worked as a consultant at Bain&Company, developing projects for large companies in various industries, including TAM Airlines and other players of the global aviation sector. She has a bachelor degree in Chemical Engineering from the Polytechnic School at the University of São Paulo (USP) and a MBA from Harvard Business School.
Mr. Roberto Alvo Milosawlewitsch, is LATAM’s Senior VP Planning and Network. Mr. Alvo has served in various roles within LAN since 2001, including as CFO of LAN Argentina from 2005 until 2008, as Vice-president of Development of LATAM Airlines Group from 2003 until 2005 and Vice-President of Treasury of LATAM Airlines Group from 2001 until 2003. He assumed the position of Senior Vice-President Strategic Planning and Development in 2008. Before 2001 Mr. Alvo held various positions at Sociedad Química y Minera de Chile S.A., a leading non-metallic Chilean mining company. Mr. Alvo is a civil engineer and obtained an MBA from IMD in Lausanne, Switzerland.
Mr. Jerome Cadier, is Chief Marketing Officer, a position he assumed in March 1st, 2013. Mr. Cadier has a Masters degree from the Kellogg Graduate School of Business, USA and an Industrial Engineer degree from Escola Politecnica da Universidade de Sao Paulo, Brasil. Between 1994 and 2002, Mr. Cadier worked as a management consultant for McKinsey and Co. in Sao Paulo, Brasil. In 2003 he joined Whirlpool Home Appliances where he held several positions among which are head of sales and marketing for Brazil and CEO for Whirlpool Oceania.
Mr. Juan Carlos Mencio is Senior Vice President of Legal Affairs and Compliance for LATAM Airlines Group since June 1, 2014. Mr. Mencio had previously held the position of General Counsel for North America for LATAM Airlines Group and its related companies, as well as General Counsel for its worldwide Cargo Operations, both since 1998. Prior to joining LAN, he was in private practice in New York and Florida representing various international airlines. Mr. Mencio obtained his Bachelor’s Degree in International Finance and Marketing from the School of Business at the University of Miami and his Juris Doctor Degree from Loyola University.
Mr. Andrés Osorio, is LATAM’s Chief Financial Officer (“CFO”), and has held this position since August, 2013. He holds a Business degree from the Catholic University of Chile and has over 20 years of experience leading financial areas in companies such as Cencosud, where he was CFO for 7 years, and Metrogas, among others. He has also been CEO of Empresas Indumotora, a Chilean automobile conglomerate, and was a partner at PricewaterhouseCoopers in Chile. As of January 31, 2015, Mr. Osorio owned 20,000 common shares of LATAM (0.0036% of LATAM Airlines Group’s outstanding shares).
Mr. Emilio del Real Sota, is LATAM’s HR Executive Vice-President, a position he assumed (with LAN) in August 2005. Mr. del Real has a Psychology degree from Universidad Gabriela Mistral. Between 2003 and 2005, Mr. del Real was the Human Resource Manager of D&S, a Chilean retail company. Between 1997 and 2003 Mr. del Real served in various positions in Unilever, including Human Resource Manager for Chile, and Training and Recruitment Manager and Management Development Manager for Latin America.
Mr. Cristian Ureta Larrain, is LATAM’s Cargo Executive Vice-President. From 1998 and 2002, Mr. Ureta was LAN Cargo’s Planning and Development Vice-President and in 2002 he was promoted to Production Vice President. In 2005, Mr. Ureta assumed the position of General Manager-Cargo. Mr. Ureta has an Engineering degree from Pontificia Universidad Católica and a Special Executive Program from Stanford University. Prior to that, Mr. Ureta served as General Director and Commercial Director at Mas Air, and as Service Manager for Fast Air.
B. Compensation
In 2014, the Company paid its principal executives (considering the levels of Vice- Presidents, General Managers, Senior Director and Directors as defined above) a total of US$ 44,133,566. No incentives for performance during 2014 were paid. As a result, the Company paid its principal executives total gross remunerations of US$ 44,133,566.
Under Chilean law, LATAM Airlines Group must disclose in its annual report details of all compensation paid to its directors during the relevant fiscal year, including any amounts that they received from LATAM Airlines Group for functions or employment other than serving as a member of the board of directors, including amounts received as per diem stipends, bonuses and, generally, all other payments. Additionally, pursuant to regulations of the Superintendencia de Valores y Seguros de Chile (“SVS”), the Chilean securities regulator, the annual report must also include the total compensation and severance payments received by managers and principal executives, and the terms of and the manner in which board members and executive officers participate in any stock option plans.
LATAM Airlines Group’s directors are paid 50 UF per meeting (100 UF for the chairman of the board) and 40 UF for assistance to the subcommittee of Directors meetings. LATAM Airlines Group also provides certain benefits to its directors and executive officers, such as free and discounted airline tickets and health insurance. We do not have contracts with any of our directors to provide benefits upon termination of employment.
As set forth in further detail in the following table, in 2014 the members of our board of directors currently in office received fees and salaries in the aggregate amount of US$372,913.
| Fees (US$)(2) (3) | |||
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53,717 | ||||
| 11,510 | |||
| 7,799 | |||
Ricardo J. Caballero | 27,450 | |||
Juan José Cueto Plaza | 36,508 | |||
Ramon Eblen Kadis | 63,406 | |||
Georges de Bourguignon | 62,887 | |||
José María Eyzaguirre Baeza | 5,946 | |||
Carlos Heller Solari | 18,067 | |||
Juan Gerardo Jofre Miranda | 66,039 | |||
Francisco Luzón López( | 19,585 | |||
Total | 372,913 | |||
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Fees were converted from Chilean Pesos into US Dollars at a rate of CLP$600 per US Dollar. |
(3) | Includes fees paid to members of the board of directors’ committee, as described below. |
All of the above-mentioned directors were elected to the LATAM board of directors in April 2014.
As required by Chilean law, LATAM Airlines Group makes obligatory contributions to the privatized pension fund system on behalf of its senior managers and executives, but it does not maintain any separate program to provide pension, retirement or similar benefits to these or any other employees.
C. Board Practices
Our board of directors is currently comprised of nine members. The terms of each of our current directors will expire in April 2015. See “—Directors and Senior Management” above.
Committees
Board of Directors’ Committee and Audit Committee
Pursuant to Chilean Corporation Law, LATAM Airlines Group must have a board of directors’ committee composed of no less than three board members. LATAM Airlines Group has established a three-person committee of its board of directors, which, among other duties, is responsible for:
Under Chilean Corporation Law we are required, to the extent possible, to appoint a majority of independent directors to the Board of Directors Committee. A director is considered independent when he or she can be elected regardless of the voting of the controlling shareholders. See “Item 16. G. Corporate Governance.”
Pursuant to U.S. regulations, we are required to have an audit committee of at least three board members, which complies with the independence requirements set forth in Rule 10A-3 under the Exchange Act. Given the similarity in the functions that must be performed by our Board of Directors’ Committee and the audit committee, our Board of Directors’ Committee serves as our Audit Committee for purposes of Rule 10A-3 under the Exchange Act.
As of March 31, 2015, all of the members of our Board of Directors’ Committee, which also serves as our Audit Committee, were independent under Rule 10A-3 of the Exchange Act. As of March 31, 2015, the committee members were Mr. Gerardo Jofré Miranda, Mr. Ramón Eblen Kadis and Mr. Georges de Bourguignon Arndt. We pay each member of the committee 67 UFs per monthly assistance to meetings.
Other LATAM Board Committees
LATAM’s board of directors also has established four other committees to review, discuss and make recommendations to our board of directors. These include a Strategy Committee, a Leadership Committee, a Finance Committee and a Brand, Product and Frequent Flyer Program Committee. The Strategy Committee focuses on the corporate strategy, current strategic issues and the three-year plans and budgets for the main business units and functional areas and high-level competitive strategy reviews. The Leadership Committee focuses on, among other things, group culture, high-level organizational structure, appointment of the LATAM CEO and his or her other reports, corporate compensation philosophy, compensation structures and levels for the LATAM CEO and other key executives, succession or contingency planning for the LATAM CEO and performance assessment of the LATAM CEO. The Finance Committee is responsible for financial policies and strategy, capital structure, monitoring policy compliance, tax optimization strategy and the quality and reliability of financial information. Finally, the Brand and Frequent Flyer Program Committee is responsible for brand strategies and brand building initiatives for the corporate and main business unit brands, the main characteristics of products and services for each of the main business units, frequent flyer program strategy and key program features and regular audit of brand performance.
On June, 2014 LATAM’s board of directors established a Risk Committee to oversee the creation, implementation and management of a risk matrix for the Company
Corporate Governance Practices
On March 31, 2014 LATAM Airlines Group filed the Company’s Corporate Practices Report prepared according to General Rule N° 341 of the Securities and Insurance Commission issued November 29, 2012. The reporting obligation stipulated in this rule is for practices in place as of December 31st of each year and the report must be presented no later than March 31st of the following year.
The report provided each year to the Commission must cover the following subjects:
D. Employees
The following table sets forth the number of employees in various positions at the Company.
Employees ending the period | As of December 31, | |||||||||||
2014(1) | 2013 | 2012 | ||||||||||
Administrative | 10,077 | 9,908 | 8,980 | |||||||||
Sales | 5,246 | 5,680 | 4,858 | |||||||||
Maintenance | 6,986 | 6,925 | 6,932 | |||||||||
Operations | 17,517 | 17,054 | 18,138 | |||||||||
Cabin crew | 9,237 | 9,339 | 10,164 | |||||||||
Cockpit crew | 4,009 | 4,091 | 4,527 | |||||||||
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Total | 53,072 | 52,997 | 53,473 | |||||||||
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(1) | At December 31, 2014, approximately 24% of our employees worked in Chile, 75% in other Latin American countries and 1% in the rest of the world. |
We have a performance-related pay structure for our administrative, management and flight personnel (such as cabin crew members, airport and sales agents, call-center employees, and some back office employees) including performance-based bonuses and pay scales that reward foreign language proficiency among counter, technical and administrative personnel. During 2013, 93% of our employees were eligible to receive performance related bonus payments that are linked to personal, team and corporate performance. TAM executives participate in the same program described below. For other employees there is a profit sharing program, which is a variable pay program based on the Company’s financial performance.
We provide our employees with medical insurance complementary to the coverage of the private health system, and also grant other benefits, such as free and discounted airline tickets, to our permanent employees.
A stock option compensation plan is offered to key senior executives. For a detailed description of the stock option compensation plan, please see Note 38 to our audited consolidated financial statements for the fiscal year ended December 31, 2013.
As required by Chilean law, we make obligatory contributions to the privatized pension fund system on behalf of our employees, but we do not maintain any separate program to provide pension, retirement or similar benefits to these or any other employees. However, the pilots’ collective bargaining agreement includes a clause that permits resignation with severance payment, in case a pilot reaches a certain age and is still providing services to the company. In Brazil, TAM offers a private pension plan to its executives and pilots.
Long Term Incentive Compensation Program
On December 21, 2011, the extraordinary shareholders meeting approved a capital increase of 142,355,882 shares to a total of 488,355,791 shares. The same meeting designated 4,800,000 shares for purposes of a proposed employee stock option compensation plan. Those 4,800,000 shares represented a 0.98% of the total share capital after such capital increase. The shareholders’ meeting authorized our board of directors to elaborate the compensation plan. The 2011 Compensation Plan is aimed at promoting our interests by encouraging senior management employees to contribute substantially to our success, by motivating them with stock options.
| general features of this stock option plan are: |
The selection of the employees of the Company and its subsidiaries that were included by the Board of Directors in the compensation plan was made after a recommendation by our Executive Committee. A stock option agreement was signed with each selected employee for the number of options in connection to the acquisition of our shares to be allocated to such employee. |
| Until the shares in the option are subscribed, the optionee has no economic or political rights and is not considered in the quorums of shareholders meetings. |
The options allocated to each employee are vested in parts, on the following two dates: (1) 30% on December 21, 2014; (2) 30% on December 21, 2015; and (3) 40% on June 21, 2016, subject to remaining employed by the Company. |
| The period during which the employee must exercise the options will expire December 21, 2016. If the employee has not exercised or waived the options in that period, the employee will be understood, for all purposes, to have waived the options and, accordingly, all rights, powers, promises or offers in relation to the subscription of cash shares in the Company will be deemed extinguished and it will be understood that the employee has irrevocably waived all rights or powers in relation thereto, releasing us from any obligation. |
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In line with our long-standing commitment to provide customers with superior service andThe selection of employees for participation in the best productsstock option plan was based on, among other criteria that the market, in May 2009 LAN completedBoard determined at the retrofittime of all its long-haul fleet (including its Boeing 767 and Airbus A340 passenger aircraft)employment with the new Premium Business classCompany, the position they hold, their importance in earning profits, the responsibility of their position, the amount of equity managed, the ability to work as a team, performance, potential for development and improved Economy class. Combiningimportance within the bestCompany given their education and experience.
As of March, 2015, Stock Option Contracts were issued by the Company to 46 employees of the Company and its subsidiaries for a total of 4,202,000 stock options. This stock option plan excludes members of the Cueto group, the LATAM Controlling Shareholder, that serve as senior management of the Company.
The Company’s shareholders approved the issuance of 1,500,000 shares at the Special Shareholders Meeting held June 11, 2013, among other matters. Those shares will be allocated to compensation plans for the employees of the Company and its subsidiaries (the “2013 Compensation Plan”).
The general features of the traditional First2013 Compensation Plan are:
1. | The options allocated to each employee shall be exercisable entirely on November 15, 2017, provided the employee continues to work for the Company. |
2. | Employees may exercise such options, after they become exercisable on the aforesaid date, either all at once or in parts. They must subscribe and pay for those shares at once, at the time of subscription, in cash, by check, by bank check, by money transfer or by any other instrument or medium representing cash payable on demand. Partial option exercises cannot be for less than 10% of all options granted to the Employee. |
3. | The period in which employees must exercise options after they become exercisable expires June 11, 2018. If employees have not exercised or waived options in that period, they shall be deemed to have waived the options for all purposes and, accordingly, all rights, powers, promises or offers in relation to the subscription of cash shares in the company shall be deemed extinguished, the employee shall be deemed to have irrevocably waived all rights or powers in relation thereto, and the company shall be released from any obligation. |
4. | The price payable per share allocated to the 2013 Compensation Plan is US$16.40, if the respective options are exercised, adjusted by the change in the Consumer Price Index (“CPI”) published monthly by the U.S. Department of Labor, starting the first day of the preemptive option period to the date of subscription and payment of the shares. The subscription price will be paid in Chilean pesos, converted using the Observed Dollar exchange rate published in the Official Gazette on the same date as subscription and payment of shares. |
No options have been granted under the 2013 Compensation Plan.
Training
There has been no significant change in the number of company employees between 2012 and Business classes,2014. There was also no significant variation between the new Premium Business includes 180 degrees recline full-flat seats which allow passengerspositions held by such employees.
As of December 31, 2014, the Company had 776 temporary employees. Approximately 48% of these temporary employees worked in Chile, 50% in other Latin American countries and 2% in the rest of the world.
As of December 31, 2014, 97% of all company employees with permanent contracts are covered by collective agreements.
Labor Relations
We believe we generally maintain good relations with our employees and the unions, and expect to sleepcontinue to enjoy good relations with our employees and the unions in the future. We also believe that we have built a solid base among our employees that will support and facilitate our growth plans. We can provide no assurance, however, that our employee compensation arrangements may not be subject to change or modification after the expiration of the contracts currently in effect, or that we will not be subject to labor-related disruptions due to strikes, stoppages or walk-outs.
Chile
We usually negotiate longer-term labor contracts with the maximum comfortlabor unions in anticipation of their scheduled expirations. Under Chilean law longer-term labor contracts are limited to a period of four years. In general, the expiration of our labor agreements with the several unions that represent our pilots and privacy. Premium Business also includes top-level personalized in-flight service. Changesother personnel are staggered in Economy class include new seatsa way that we avoid being in the position of having to renegotiate contract terms with substantially all of our pilots or other personnel at the same time.
In 2014, we renegotiated our collective bargaining agreement with LAN Express’ flight attendants union, which will be effective until 2018.
Ecuador
• | LAN:In Ecuador, three employee associations were formed in 2012: of pilots, other general but composed mostly by maintenance employees and other general but composed mostly by employees of airports/administration. |
Additionally, in 2011 a union previously exclusive to cabin crew became general. These groups maintain relations with the Company, but do not have the right to enter into or negotiate collective bargaining agreements under Ecuadorian law, because less than 50% of our employees eligible for membership are members of each union
In November 2014 the Company’s negotiation of a voluntary agreement with the association of pilots was suspended because the directive did not agree with the offer from the Company.
• | ANDES: In 2013 two unions of ground handling employees were formed in Andes. |
These groups maintain relations with the Company, but do not have the right to enter into or negotiate collective bargaining agreements under Ecuadorian law, because less than 50% of our employees eligible for membership are members of each union.
Argentina
In Argentina, the majority of LAN employees are members of sectorial unions. In December 2014, we entered into five salary agreements with unions representing LAN Argentina employees. Negotiations with the Mechanics’ Union are still ongoing. These negotiations take place annually due to need to make adjustments for inflation
Peru
LAN Peru is negotiating with the union of flight dispatchers, and is expected to conclude negotiations with a greater recline angle,collective agreement during the first quarter of 2015. In Peru we have five other unions whose collective agreements are in force until 2016 (pilots), 2017 (cabin crew, aircraft technicians) and 2018 (airport workers).
Brazil
Under Brazilian law, the validity of collective bargaining agreements is limited to two years. TAM’s collective bargaining agreements are valid for one year (for the economic clauses) and for two years (for social clauses). TAM has historically negotiated collective bargaining agreements with nine unions in Brazil— one crew flight union, which represents the functions of flying workers (pilots, copilots and flight attendants), and nine ground staff unions, which are TAM employees who exercise their duties on the ground to support TAM’s operations. In December 2013, TAM renegotiated collective bargaining agreements with nine unions, which included a cushion that slides forwardwage increase of 7% for increased comfortground workers (ground handling) earning minimum wage, and convenience,an increase of 5.6% for other salaried ground workers and larger individual video monitorsflying workers, and the inflation rate for each seat.the period was 5.6%. For the ground staff workers with salaries up to ten thousand dollars, the increase was 5.6% and for employees earning over R$ 10,000 the adjustment was R$ 560.0. During the negotiations there was no stoppage of employees or even strike action.
E. Share Ownership
As of January 31, 2015, the members of our Board of Directors and our executive officers as a group own 48.77% of our shares. See “Item 7. Controlling Shareholders and Related Party Transactions.”
For a description of stock options granted to our executive officers, see “—Employees—Long Term Incentive Compensation Program.”
ITEM 7. | CONTROLLING SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
A. Major Shareholders
The Cueto Group is LATAM’s controlling shareholder and it is comprised by Mr. Juan José Cueto Plaza (one of our directors), Mr. Ignacio Cueto Plaza (the CEO LAN), Mr. Enrique Cueto Plaza (the CEO LATAM) and certain other family members. As of January 31, 2015, the Cueto Group owned 25.49% of LATAM Airlines Group’s common shares. The Cueto Group is entitled to elect three of the nine members of our board of directors and is in a position to direct the management of the Company. The Cueto Group, which we also refer to as the “LATAM controlling shareholders,” have entered into a shareholder’s agreement with LATAM, TEP Chile and the TAM controlling shareholders. See “—Shareholders’ Agreements.”
Following our combination with TAM, the Amaro Group is also a major shareholder of LATAM Airlines Group. The Amaro Group, which we also refer to as the “TAM controlling shareholders,” are controlling shareholders of TAM, through their 100% ownership of TEP Chile and majority ownership of Holdco I voting shares, which owns 100% of the common shares of TAM. The Amaro Group’s members include our chairman Mauricio Rolim Amaro and our former director Maria Claudia Amaro. As of January 31, 2015, the Amaro Group owned 12.02% of LATAM Airlines Group’s common shares. The Amaro Group has entered into a shareholder’s agreement with LATAM and the LATAM controlling shareholders. The terms of this shareholders’ agreement require the LATAM controlling shareholders to vote to elect individuals nominated by TEP Chile as members of our board of directors. See “—Shareholders’ Agreements.”
In addition to these shareholders, there are two other major shareholder groups. As of January 31, 2015, the Bethia Group, which includes our director Carlos Heller Solari, owned 6.14% of our common shares and the Eblen Group, which includes our director Ramón Eblen Cádiz, owned 5.12% of our common shares.
LAN’s sustained developmentThe table below sets forth the beneficial owners, as of January 31, 2015, of our common shares, including our controlling shareholders, other major shareholders and minority shareholders.
Beneficial ownership (as of January 31, 2015) | ||||||||
Number of shares of common stock beneficially owned | Percentage of common stock beneficially owned | |||||||
Shareholder | ||||||||
Cueto Group | 139,089,520 | 25.49 | % | |||||
Costa Verde Aeronautica S.A. | 85,772,914 | 15.72 | % | |||||
Inversiones Nueva Costa Verde Aeronautica Ltda. | 22,914,277 | 4.20 | % | |||||
Costa Verde Aeronautica SpA | 20,000,000 | 3.67 | % | |||||
Others | 10,402,326 | 1.91 | % | |||||
Amaro Group | 65,554,075 | 12.02 | % | |||||
TEP Chile S.A. | 65,554,075 | 12.01 | % | |||||
Bethia Group. | 33,367,363 | 6.12 | % | |||||
Axxion S.A. | 18,473,333 | 3.39 | % | |||||
Inversiones HS SpA. | 14,894,024 | 2.73 | % | |||||
Eblen Group. | 27.945.199 | 5.12 | % | |||||
Inversiones Andes S.A. | 17,146,529 | 3.14 | % | |||||
Inversiones PIA SpA. | 5,403,804 | 0.99 | % | |||||
All other minority shareholders | 279.601.943 | 51.25 | % | |||||
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Total | 545.558.101 | 100.00 | % | |||||
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As of January 31, 2015, 7.66% of our capital stock was held in the form of ADSs, and 0.52% in the form of BDSs. Chilean pension funds held 17.63% of our capital stock and other minority investors held 25.44% in the form of common shares. It is not practicable for us to determine the number of ADSs or common shares beneficially owned in the United States. As of January 31, 2015, we had 1,638 record holders of our common shares. It is not practicable for us to determine the portion of shares held in Chile or the number of record holders in Chile. All of our shareholders have identical voting rights.
Shareholders’ Agreements
As described above under “Item 4. Information on the Company—History and Development of the Company—Combination of LAN and TAM,” following the combination of LAN and TAM in June 2012, TAM S.A. continues to exist as a subsidiary of Holdco I and a subsidiary of LATAM, and LAN Airlines S.A. has been redesignated as “LATAM Airlines Group S.A.”
Prior to the consummation of the business combination, LATAM Airlines Group and the LATAM controlling shareholders entered into several shareholders’ agreements with TAM, the TAM controlling shareholders (acting through TEP Chile) and Holdco I that establish agreements and restrictions relating to corporate governance in an attempt to balance LATAM Airlines Group’s interests, as the owner of substantially all of the economic rights in TAM, and the TAM controlling shareholders, as the continuing controlling shareholders of TAM under Brazilian law, by prohibiting the taking of certain specified material corporate actions and decisions without prior supermajority approval of the shareholders and/or the board of directors of Holdco I or TAM. These shareholders’ agreements also set forth the parties’ agreement regarding the governance and management of the LATAM Airlines Group following the consummation of the business combination of LAN and TAM.
Governance and Management of LATAM Group
We refer to the shareholders’ agreement among the LATAM controlling shareholders and TEP Chile, which sets forth the parties’ agreement concerning the governance, management and operation of the LATAM Group, and voting and transfer of their respective LATAM Airlines Group common shares and TEP Chile’s voting shares of Holdco I, as the “control group shareholders’ agreement.” We refer to the shareholders’ agreement between us and TEP Chile, which sets forth our agreement concerning the governance, management and operation of the LATAM Group as the “LATAM Airlines Group-TEP shareholders’ agreement.” The control group shareholders’ agreement and the LATAM Airlines Group-TEP shareholders’ agreement set forth the parties’ agreement on the governance and management of the LATAM Group following the effective time.
This section describes the key provisions of the control group shareholders’ agreement and the LATAM Airlines Group-TEP shareholders’ agreement. The description of these control group shareholders’ agreement and the LATAM Airlines Group-TEP shareholders’ agreement summarized below and elsewhere in this annual report on Form 20-F are qualified in their entirety by reference to the full text of the aforementioned shareholders’ agreements, which have been filed as exhibits to this annual report on Form 20-F.
Composition of the LATAM Airlines Group Board
Mr. Maurício Rolim Amaro was reelected to the LATAM Airlines Group board of directors in April 2014. If Mr. Amaro vacates this position for any reason within that two-year period, TEP Chile has the right to select a replacement to complete his term. Thereafter, LATAM Airlines Group’s board of directors will appoint any of its coverage has been a crucial factor in its growth and 2011 was no exception. New routes were added along with flight increases in some key existing routes in order to offer more and better alternatives to both business and tourist travelers. In 2011, the Company continued to consolidate its hub in Lima, which servesmembers as the centerchairman of its Latin American network and also complements its intercontinental network, by opening new routes and increasing flights on existing routes.
As partLATAM Airlines Group’s board of its mission, LAN seeksdirectors, from time to promote tourism to South America. Due to its large network of services, visitors from around the world can experience world renowned destinations such as Cusco, Easter Island, the Galapagos Islands, or Patagoniatime, in Chile and Argentina, including the cities of Punta Arenas, Ushuaia, El Calafate and Bariloche.
Accordingaccordance with LATAM Airlines Group’s by-laws. Mrs. Maria Cláudia Oliveira Amaro was elected to the LATAM Airlines Group board of directors in June 2012, and resigned this position in September 2014. Also in September 2014, accordingly with Chilean JAC data, Chileanlaw, Mr. Henri Philippe Reichstul was appointed by the board to fill her seat until the next general shareholders meeting. Mr. Reichstul will serve in this position until the next ordinary meeting of shareholders, in which the board of directors will have to be renewed and reelected in full.
Management of the LATAM Group
Mr. Enrique Cueto Plaza has served as CEO of LATAM (“CEO LATAM”) since June 2012. The CEO LATAM is the highest ranked officer of the LATAM Airlines Group and reports directly to the LATAM board of directors. The CEO LATAM is charged with the general supervision, direction and control of the business of the LATAM Airlines Group and certain other responsibilities set forth in the LATAM Airlines Group-TEP shareholders’ agreement. After any departure of the current CEO LATAM, our board of directors will select his or her successor after receiving the recommendation of the Leadership Committee.
Mr. Ignacio Cueto Plaza has served as CEO of LAN (“CEO LAN”) since June 2012. The CEO LAN reports directly to the CEO LATAM and has general supervision, direction and control of the passenger and cargo operations of the LATAM Group, excluding those conducted by Holdco I, TAM and its subsidiaries, and the international air passenger traffic increased 17.2% from 2010business of the LATAM Group. The CEO LAN, together with Mr. Marco Antonia Bologna, the current the CEO of TAM (“CEO TAM”), are responsible for recommending a candidate to 2011, totaling approximately 6.0 million passengers,the CEO LATAM to serve as measured in RPK. We had 51.3%the head of the international market sharepassenger business of the LATAM Group (including both long haul and regional operations), who shall report jointly to the CEO LAN and the CEO TAM. The key executives of the LATAM Group (other than the CEO LATAM and those in the TAM Group) will be appointed by, and will report, directly or indirectly, to the CEO LATAM.
The head office of the LATAM Airlines Group continues to be located in Santiago, Chile.
Governance and Management of Holdco I and TAM
We refer to the shareholders’ agreement between us, Holdco I and TEP Chile, which sets forth our agreement concerning the governance, management and operation of Holdco I, and voting and transfer of voting shares of Holdco I, as the “Holdco I shareholders’ agreement” and to the shareholders’ agreement between us, Holdco I, TAM and TEP Chile, which sets forth our agreement concerning the governance, management and operation of TAM and its subsidiaries following the effective time as the “TAM shareholders’ agreement.” The Holdco I shareholders’ agreement and the TAM shareholders’ agreement set forth the parties’ agreement on the governance and management of Holdco I, TAM and its subsidiaries (collectively, the “TAM Group”) following the business combination of LAN and TAM.
This section describes the key provisions of the Holdco I shareholders’ agreement and the TAM shareholders’ agreement. The description of these Holdco I shareholders’ agreement and the TAM shareholders’ agreement summarized below and elsewhere in 2011,this annual report on Form 20-F are qualified in their entirety by reference to the full text of the aforementioned shareholders’ agreements, which have been filed as exhibits to this annual report on Form 20-F.
Composition of the Holdco I and TAM Boards
The Holdco I shareholders’ agreement and TAM shareholders’ agreement generally provide for identical boards of directors and the same chief executive officer at Holdco I and TAM, with LATAM appointing two directors and TEP Chile appointing four directors (including the chairman of the board of directors). On April 30, 2014 Mr. Marco Antonio Bologna was named President of the Board of Directors of TAM S.A. replacing Mrs. Maria Cláudia Oliveira Amaro and on September 8th, 2014 Mrs. Maria Cláudia Oliveira Amaro resigned to her position as director of Holdco I. In her place, the board of directors appointed Mr. Henri Philippe Reichstul as a decrease comparedmember of the board until the next general ordinary meeting of shareholders. A full renovation of the Board of Directors will take place no later than April 2015.
The control group shareholders’ agreement provides that the persons elected by or on behalf of the LATAM controlling shareholders or the TAM controlling shareholders to 52.8%our board of directors must also serve on the boards of directors of both Holdco I and TAM.
Management of Holdco I and TAM
The day-to-day business and affairs of Holdco I will be managed by the TAM Group CEO under the oversight of the board of directors of Holdco I. The day-to-day business and affairs of TAM will be managed by theTAM Diretoria under the oversight of the board of directors of TAM. The TAM Diretoria will be comprised of the TAM Group CEO, the TAM CFO, the TAM COO and the TAM CCO. Marco Bologna, currently the CEO of TAM, will be the initial CEO of Holdco I and TAM, or the “TAM Group CEO” and any successor CEO will be selected by LATAM from three candidates proposed by TEP Chile. The TAM Group CEO will have general supervision, direction and control of the business and operations of the TAM Group (other than the international passenger business of the LATAM Group) and will carry out all orders and resolutions of the board of directors of TAM. The initial chief financial officer of TAM, or the “TAM CFO,” has been jointly selected by LATAM and TEP Chile and any successor CFO will be selected by TEP Chile from three candidates proposed by LATAM The chief operating officer of TAM, or the “TAM COO,” and chief commercial officer of TAM, or the “TAM CCO,” will be jointly selected and recommended to the TAM board of directors by the TAM Group CEO and TAM CFO and approved by the TAM board of directors. These shareholders’ agreements also regulate the composition of the boards of directors of subsidiaries of TAM.
Following the combination, TAM continues to be headquartered in 2010. Our Chilean international operationsSão Paulo, Brazil.
Supermajority Actions
Certain actions by Holdco I or TAM require supermajority approval by the board of directors or the shareholders of Holdco I or TAM which effectively require the approval of both LATAM and TEP Chile before the specified actions can be divided into four main segments, based ontaken. Actions that require supermajority approval of the destination: Holdco I board of directors or the TAM board of directors include, as applicable:
Actions requiring supermajority shareholder approval include:
According to Peruvian DGAC data, Peruvian international air passenger traffic increased 14.3% from 2010 to 2011, totaling approximately 5.8 million passengers, as measured byboard of directors; (v) changes in the number of passengers. We had 46.3%directors or officers; (vi) the term; (vii) the change in the corporate headquarters of a relevant company; (viii) the composition, attributions and liabilities of management of any relevant company; and (ix) dividends and other distributions;
Voting Agreements, Transfers and Other Arrangements
Voting Agreements
The LATAM controlling shareholders and TEP Chile have agreed in 2011,the control group shareholders agreement to vote their respective LATAM Airlines Group common shares as follows:
The number of “exempted shares” of TEP Chile means that number of LATAM Airlines Group common shares which TEP Chile owns immediately after the effective time in 2010. Our Peruvian international operations can be divided into three main segments, basedexcess of 12.5% of the outstanding LATAM Airlines Group common shares at such time as determined on a fully diluted basis.
The parties to the Holdco I shareholders agreement and TAM shareholders agreement have agreed to vote their voting shares of Holdco I and shares of TAM so as to give effect to the agreements with respect to representation on the destination:TAM board of directors discussed above.
Transfer Restrictions
Pursuant to North America, Europethe control group shareholders’ agreement, the LATAM Airlines Group controlling shareholders and TEP Chile are subject to certain restrictions on sales, transfers and pledges of the restLATAM Airlines Group common shares and (in the case of Latin America. AsTEP Chile only) the voting shares of February 29, 2012, our main competitorsHoldco I beneficially owned by them. Except for a limited amount of LATAM Airlines Group common shares, neither the LATAM Airlines Group controlling shareholders nor TEP Chile may sell any of its LATAM Airlines Group common shares, and TEP Chile may not sell its voting shares of Holdco I, until June 2015. Thereafter, sales of LATAM Airlines Group common shares by either party are permitted, subject to (i) certain limitations on direct routes between Peruthe volume and North America included American Airlines, United Airlines, Delta Airlines, Spirit Airlines, Air Canadafrequency of such sales and Aeromexico. TACA and COPA also participated(ii) in the Peru-North American markets with stopovers in their respective Central American hubs. On routescase of TEP Chile only, TEP Chile satisfying certain minimum ownership requirements. After June 2022, TEP Chile may sell all of its LATAM Airlines Group common shares and voting shares of Holdco I as a block, subject to Europe, our main competitors were Iberia, Air Europa and Air France-KLM. On regional routes our main competitors included included Aerolineas Argentinas, TACA, TAM, Avianca and GOL.
According to our internal estimates and travel agency statistics (captured through IATA Billing Settlement Plan or “BSP”), Ecuadorian international air passenger traffic increased 6.0% from 2010 to 2011, totaling approximately 3.0 million passengers. We had 31.0%(x) approval of the international market sharetransferee by the LATAM board of directors, (y) the condition that the sale not have an adverse effect and (z) a right of first offer in Ecuador in 2011,favor of the LATAM Airlines Group controlling shareholders, which was an increase comparedwe refer to 28.7% in 2010. Our Ecuadorian international operations can be divided into three main segments, based on the destination: to North America, Europe and the rest of Latin America. As of February 29, 2012, our main competitors on direct routes between Ecuador and North America included American Airlines, Continental Airlines, Delta Airlines and Aerogal. TACA and COPA also participatecollectively as “block sale provisions.” An “adverse effect” is defined in the Ecuador-North American markets with stopovers incontrol group shareholders agreement to mean a material adverse effect on our and Holdco I’s ability to own or receive the full benefits of ownership of TAM and its subsidiaries or the ability of TAM and its subsidiaries to operate their respective Central American hubs. On routesairline businesses worldwide. The LATAM Airlines Group controlling shareholders have agreed to Europe, our main competitors included Air Comet, Iberia,transfer any voting shares of Holdco I acquired pursuant to such right of first offer to LATAM for the same consideration paid for such shares.
In addition, TEP Chile may sell all LATAM Airlines Group common shares and Air France-KLM. On regional routes, our main competitors included TACA, COPA and Avianca.
Accordingvoting shares of Holdco I beneficially owned by it as a block, subject to our internal estimates and travel agency statistics (captured through BSP), Argentinean international air passenger traffic increased 9.0% from 2010 to 2011, totaling approximately 9.9 million passengers. We had 19.4%satisfaction of the international market shareblock sale provisions, after June 2015 if a release event (as described below) occurs or if TEP Chile is required to make two or more directed votes during any 24-month period at two meetings (consecutive or not) of the shareholders of LATAM Airlines Group held at least 12 months apart and LATAM Airlines Group has not yet fully exercised its conversion option described below. A “release event” will occur if (i) a capital increase of LATAM Airlines Group occurs, (ii) TEP Chile does not fully exercise the preemptive rights granted to it under applicable law in ArgentinaChile with respect to such capital increase in 2011, which was anrespect of all of its restricted LATAM Airlines Group common shares, and (iii) after such capital increase comparedis completed, the individual designated by TEP Chile for election to 16.5%the board of directors of LATAM Airlines Group with the assistance of the LATAM Airlines Group controlling shareholders is not elected to the board of directors of LATAM Airlines Group.
In addition, after June 2022 and after the occurrence of the full ownership trigger date (as described below under the “—Conversion Option” section), TEP Chile may sell all or any portion of its LATAM Airlines Group common shares, subject to (x) a right of first offer in 2010. Our Argentinean international operations can be divided into two main segments, basedfavor of the LATAM Airlines Group controlling shareholders and (y) the restrictions on sales of LATAM Airlines Group common shares more than once in a 12-month period.
The control group shareholders agreement provides certain exceptions to these restrictions on transfer for certain pledges of LATAM Airlines Group common shares made by the destination:parties and for transfers to North America and the rest of Latin America. As of February 29, 2012, our main competitors on the Buenos Aires-Miami route included American Airlines and Aerolíneas Argentinas. TAM, TACA and COPA also participatedaffiliates, in each case under certain limited circumstances.
In addition, TEP Chile agreed in the Argentina-North American marketsHoldco I shareholders agreement not to vote its voting shares of Holdco I, or to take any other action, in support of any transfer by Holdco I of any equity securities or convertible securities issued by it or by any of TAM or its subsidiaries without our prior written consent.
Restriction on transfer of TAM shares
LATAM agreed in the Holdco I shareholders’ agreement not to sell or transfer any shares of TAM stock to any person (other than our affiliates) at any time when TEP Chile owns any voting shares of Holdco I. However, LATAM will have the right to effect such a sale or transfer if, at the same time as such sale or transfer, LATAM (or its assignee) acquires all the voting shares of Holdco I beneficially owned by TEP Chile for an amount equal to TEP Chile’s then current tax basis in such shares and any costs TEP Chile is required to incur to effect such sale or transfer. TEP Chile has irrevocably granted us the assignable right to purchase all of the voting shares of Holdco I beneficially owned by TEP Chile in connection with stopovers in their respective hubs. Our main competitors on the Buenos Aires-Dominican Republic route included COPA and American Airlines. Our main competitors on the Buenos Aires-Sao Paulo route included TAM, GOL and Aerolíneas Argentinas. Our main competitors on the Buenos Aires-Lima route included TACA and Aerolíneas Argentinas. Our main competitors on the Buenos Aires-Santiago route included Aerolíneas Argentinas and Air Canada.
According toAeronautica Civil(Colombian (Colombian Civil Aeronautics), the Colombian international market increased 12.8%9.8% from October 31, 20102013 to October 31, 2011, totaling approximately 5.7 million passengers,2014 as measured in RPK. The international passenger marketpassengers transported, from 9.9 million passengers to approximately 10.9 million passengers in 2014. LAN (including LAN Colombia, for the full year 2010 was 6.2 million passengers. WeLAN Peru and LAN Airlines) had 4.6%a 7.4% share of the international market share in Colombia in 2014, as measured in RPK which is an increase of October 31, 2011, which was a decline1.0 percentage point as compared to 6.0% as of October 31, 2010 (including Aires figures, before its acquisition by LAN). Our6.4% in the same period 2013. The international operations in Colombia can be divided in two business segments based on destination: to North America and the rest ofto other countries in Latin America. As of February 29, 2012, ourDecember 31, 2014, the main competitors on direct routes between Colombia and North America included Avianca,Avianca-Taca, American Airlines, United Airlines, Air Canada, Delta Airlines and Aerogal.Aeromexico. COPA also participated in the Colombia-North American markets with stopovers in its Central American hub. On regional routes, ourthe main competitors included TACA, COPAAvianca-Taca and Avianca.COPA.
Brazil
According to Brazilian ANAC data, Brazilian international air passenger traffic increased 4.9% from 2013 to 2014 as measured in RPKs, totaling more than 6.4 million passengers in 2014. TAM had 84.6% of the international market share in Brazil in 2014 when considering only Brazilian airlines, which was a decrease compared to 87.5% in 2013. Our Brazilian international operations can be divided into three main segments, based on destination: to North America, to Europe and to other countries in Latin America. As of January 31, 2015, the main competitors on direct routes between Brazil and North America included American Airlines, United Airlines, Delta Airlines, Air Canada and Aeromexico. Avianca-Taca also participated in the Brazil-North American markets with stopovers in its Central American hub. On routes to Europe, the main competitors were Iberia, Air France-KLM, Lufthansa, TAP and Air Europa. On regional routes the main competitors included Aerolineas Argentinas, Avianca-Taca and GOL.
Domestic Passenger Operations
LATAM provides domestic passenger services within Chile, Peru, Ecuador, Argentina and Colombial. Said domestic passenger services are operated by LAN, LAN Express and the regional subsidiaries, including LAN Peru, LAN Ecuador, LAN Argentina and LAN Colombia. Additionally, TAM Linhas Aereas provides domestic passenger services within Brazil.
Business Model for Domestic Operations
In 2007 we initiated an important project to redesignLATAM operates on a low cost business model in all of our domestic business operations with the goal of increasingoperations. This model increases efficiency and improving the margins of LAN’s short-haul operations, specifically with respect to our domestic operations in Chile and Peru. The new business model was first tested in the last quarter of 2006.short-haul while encouraging increased domestic demand. A key element of this projectbusiness model has been to significantly increase the utilization of ourthe narrow body fleet, which we havea goal that the company has been successfully achieving through modified itineraries including more point-to-point, faster turnarounds times and overnight flights. We removedAdditionally, the Boeing 737-200 aircraft from our fleet in favor of the new more efficient Airbus A320-Family Aircraft. The Airbus A320-Family Aircraft fleet utilization reached approximately 9.84 block hours per day in 2011. The transition to a newer fleet allows for lowerhas allowed decreases in unscheduled maintenance costs as well as in cost efficiencies achieved through operating fewer fleet types and in operational efficiencies, including lower fuel consumption.
OtherAnother key elementselement of our newthis business model areis the reduction in sales and distribution costs through higher Internetinternet penetration and reduced agency commissions, a faster turnaround time, and increased self-check-in service through web check-in and kiosks at airports. These initiatives, together with simplifications in back-office and support functions, will continue to allow us to expand operations while controlling fixed costs, spurring a reduction in overhead costs.costs.. We have begun to pass on these operating efficiencies to consumers through significant fare reductions, which we expect will have a strong effect ofin stimulating new demand.
In 2007, we implemented all aspects of this new business model in the Chilean and Peruvian domestic markets. We launched our new short-haul business model on all domestic routes in Chile in April 2007, after a marketing campaign that began in March 2007. We launched the new model in all domestic Peruvian routes in January 2007.
As a result of the implementation of this model, we increased the number of passengers transported in all domestic markets. Between 2006 and 2011, the number of passengers transported increased significantly:
112% (from 2.5 million to 5.3 million) in Chile,
123% (from 1.7 million to 3.9 million) in Peru,
200% (from 0.6 million to 1.9 million) in Argentina, and
with a minor effect in Ecuador as we just started domestic operations during 2009.
Over the past three years we have sustained constant growth in each of our domestic passenger operations, and between 2010 and 2011 we achieved an increase in domestic transported passengers at 11% which include operations within Chile, Argentina, Peru and Ecuador.
We plan to continue withworking in the implementation of this business model during 2012 and we are evaluating its implementation in some regional routes,2015, as we look for ways to increase operational efficiency, encourage direct sales and self check-in,self-check-in, and implement new sales strategies aimed at stimulating demand.
Operations within Chile
Through Lan AirlinesLAN and LanLAN Express, we are the leading domestic passenger airline in Chile. We have operated domestic flights in Chile since the Company’sLAN’s creation in 1929. As of February 29, 2012,During 2014, we flew to 1316 destinations within Chile (including Santiago, but not including Easter Island, which we consider an international destination even though it is a part of Chile, because we serve it with long-haul aircraft)destination) as well as some seasonal destinations. Lan Airlines and Lan Express have integrated passenger operations, including operations 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. Our strategy is based on providing frequent service to Chile’s main destinations, offering a reliable and high quality service, and leveraging our strong brand position in Chile and abroad. We evaluate our network of domestic routes on an ongoing basis in order to achieve optimal operational efficiency and profitability. Our strategic objective is to maintain our leadership position in our domestic routes.
During 2011 we operatedwith an average fleet of 2128 Airbus A320-Family Aircraft in the Chilean domestic market, and we plan to operate an average fleet of 24 Airbus A320-Family Aircraft in 2012.Aircraft. Domestic operations in Chile werehave been positively affected by the greater utilization of the latest-generation Airbus fleet and the retirement of the Boeing 737-200s. Nowadays, LAN’s fleet has an average age of 3 years.Airbus A318-100s.
The new business model was launched nationwide within Chile in April 2007. We reduced sales costs by increasing direct sales to 80% in 2011 (with 63% of our 2011 sales done through the Internet) and by reducing agency commissions from 6% to 1% in February 2007. We also increased fleet utilization, crew productivity and the average flight leg through schedule changes. Additionally, we simplified our processes, which helped to increase the self check-in rate from 81.5% in 2010 to 82.7% in 2011. Finally, we utilized the greater efficiency of the Airbus aircraft to reach operational efficiencies such as reducing the turn-around time, increasing our punctuality (which reached 87.5% in 2010 and 87% in 2011) and lowering fuel consumption. As of December 31, 2011, we operated 100% of our ASKs with our Airbus A320-Family Aircraft fleet.
According to JAC data, the Chilean domestic market as a whole transported approximately 7.09.8 million passengers in 2011 and it had2014, an increase of 17.6%3.8% from 9.5 million passengers transported in terms of passengers from 5.9 million in 2010.2013. Our domestic passenger market share in Chile was 76.4% for 2011.77.9% in 2014 as measured in revenue passenger kilometer (RPK). During 2011,2014, our main competitors in the domestic market were Sky Airlines and PAL Airlines, which began operationsdomestic passenger market shares as measured in June 2009. Sky Airlines currently operates a fleetRPKs of 13 Boeing 737-200 aircraft and flies to 12 destinations. PAL Airlines currently operates a fleet of 5 Boeing 737-200 aircraft and flies to 4 destinations.20.2%.
There are currently no foreign airlines participating in the Chilean domestic market. Chile permits foreign airlines to operate in Chile. Additionally, there are no regulatory barriers that prevent a foreign airline from creating a Chilean subsidiary and entering the Chilean domestic market using that subsidiary.
Operations within Peru
LanLAN Peru started operations in 1999 with both domestic and international flights from Lima. During the past ten years, LanSince then LAN Peru has expanded consistently, consolidating its domestic operations and coverage of relevant markets with a continuous focus on improving our excellence for service.
Regarding the domestic market,During 2014 LAN Peru has tremendous potential comparedflew to other Latin American markets based on per capita travel ratios. In 2011 the domestic market reached 5.9 million passengers16 destinations, with 11 Airbus A319 and 6.3 million passengers are expected for 2012.
Lan7 Airbus A320 aircraft. With this, LAN Peru has one of the most modern fleets in Latin America, operating 22 Airbus A319 aircraft, with 14 for domestic operations and 8 for regional operations. This fleetwhich is ideal for the characteristics of Peruvian routes, as it maximizes available payload in high-altitude airports. In terms2014, a total of efficiency, a uniform fleet also allows for low maintenance costs, high crew productivity and operational flexibility.
Compared to 2010, Lan5.7 million passengers traveled on LAN Peru’s domestic operations in Peru showedroutes, which represented an expansionincrease of 3% (as measured in RPKs) during 2011, despite the aggressive plans from competitors.8% compared to 2013. According to data provided by the Peruvian DGAC, our domestic market share was 63,2% in Peru was 62% for 2007, 73% for 2008, 80% for 2009, 70% for 2010 and 64% for 20112014, compared to 63.4% in 2013, as measured in number of passengers.
A total of 3.9 million passengers traveled on Lan Peru’s domestic Peruvian routes Our main competitors in 2011, which represented an increase of 3% compared to 2010. As of February 29, 2012, competitors includedPeru include Avianca, Peruvian Airlines TACA (which began new flights to Arequipa in August 2011 and Puerto Maldonado in January 2012 in addition to its existing frequencies to Cusco, Juliaca, Tarapoto and Trujillo), Star Peru and LCPeru (which is a small airline previously known as LC BUSRE)Perú.
Lan Peru expects to increase the connections between cities within the country. Cusco, the country’s most important tourist destination, accounts for most of Lan Peru’s domestic operations and is served by 17 flights each day. Lan Peru flies at least three times daily to each of its 13 destinations from Lima with Tumbes as an exception (2 flights daily).
Regarding airport services, Lan Peru has over 103 domestic daily arrivals and departures. Self-check levels have grown steadily in the past years, reaching 79% for domestic routes at the end of 2011.
Operations within Argentina
LanSince 2005, LAN Argentina initiated services in June 2005, covering two Argentine domestic destinations from Buenos Aires, Cordoba and Mendoza. Between 2005 and 2007, Lan Argentinahas increased the number of Argentineits domestic destinations to nine adding Bariloche, Iguazu, Comodoro Rivadavia, Rio Gallegos, Ushuaia, Calafate and Salta. In June 2008, Lan Argentina initiated services to Neuquen and in September 2008 to San Juan. In April 2009, Lan Argentina initiated services to Tucuman.
From June to November 2006, Lan Argentina replaced its Boeing B737-200a total of 14 Argentine cities. It currently operates the domestic network through a fleet which consisted of five aircraft, four of which were10 Airbus A320 aircraft. We use these aircraft in both domestic and regional operations. The replacement of these aircraft enabled Lan Argentina to increase the scope, size and efficiency of its operations. By the end of December 2011, we operated a fleet of nine Airbus A320 aircraft in our domestic operations.
In the domestic Argentine market, LanLAN Argentina operates in a regulated environment in which fares sold to Argentine passengers are subject to minimum and maximum prices that vary per route. In August 2006, by presidential decree, both2014, the floor and ceiling of the regulated price range were increasedconsistently increased-, by 20%. The decree liberalized foreign ownership of Argentinean airlines, previously capped at 49%. Since this decree, the floor and ceiling of the regulated price range have been consistently increased as follows: by 18% in April 2008, by 18%12% in May 2008,2014, by 20%12% in 2009, by 15% in June 2010August 2014 and by 10%12% in November 2010.December 2014-.
Our domestic market share in Argentina, basedBased on our internal estimates as of December 31, 2011 amounted2014, the domestic market share in Argentina in terms of capacity (ASKs) was approximately 27%. During this period of time LAN Argentina transported 2.3 million passengers, increase 0.5% compared to 30%. Our competitors in the Argentinean market during 2011 were2013. The main competitor of LAN Argentina is Aerolíneas Argentinas, and its affiliate Austral Líneas Aéreas. Together, these two companies held substantially the entire remaining sharea state owned company that has approximately 70% of the total Argentinean domestic Argentine market.capacity as measured in ASK.
Operations within Ecuador
AtSince beginning operations in 2008, LAN Ecuador has greatly expanded the number of destinations and frequency of flights. As of the end of 2008, the Civil Aviation National Board authorized us to operate domestic flights in Ecuador. In April 2009, we initiated the operations between Quito and Guayaquil.
In December 2009,2014, LAN Ecuador operated 49 weekly flights betweenin 5 domestic destinations-Guayaquil, Quito, Cuenca, Baltra and Guayaquil, oneSan Cristobal- with a fleet of Latin America’s major routes. In September 2010, the Company started daily flights to the Galapagos Islands. In November 2011, LAN Ecuador added two more weekly flights to the airport of San Cristobal in the Galapagos Islands. As of February 29, 2012, LAN Ecuador operated 63 weekly flights between Quito and Guayaquil. The Company also began daily flights between Cuenca and Quito.3 Airbus A319 aircraft.
In 2011,2014, LAN Ecuador transported 1.01.1 million passengers in the domestic passenger market achievingrepresenting a load factordecrease of 77% with a growth of 63%16% in number of passengers serviced in 2013, in a market that registered a decrease of more than 8% in domestic commercial flights. However, LAN Ecuador as the leading airline with respect to 2010a 36.5 percent of the market, outperforming its main competitors such as the flag carrier Tame, and a national market of 25.6%.Avianca-Taca.
In Ecuador, the company’s principal competitors are TAME, Aerogal and Icaro.
Operations within Colombia
On November 26,Following the acquisition of Aires in 2010, LAN acquired Colombian airline Aires (rebranded as Lan Colombia in 2011), for US$12 million in cash, in addition to assuming net liabilities of US$87 million. The Colombian market is the second largest market in South America with over 14 million annual domestic passengers and represents a key market in LAN’s consolidation as a leading airline within the region.
At the time of the acquisition, Lan Colombia was the second largest operator in Colombia’s domestic market with approximately 20% of the market share as of December 31, 2010. This predominant position has been maintained by Lan Colombia, by holding 19.1% of the domestic market share as of December 31, 2011 (based onsuccessfully restructured the Company’s internal estimations). Lanprevious operations in order to achieve LATAM’s standards in terms of security, punctuality, efficiency and service quality. LAN Colombia operates 22 domestic destinations. Nowadays, Lan Colombia’s fleet consisted of 9 B737-700s, 3 Airbus A 320, 10 Q200 and 4 Q400, all of which are operating leases.
LAN’s strategy through this acquisition is to replicate LAN’s “low cost”implemented the low cost model already operating in the other affiliates domestic markets of Chile, Peru, Argentina Chile,and Ecuador, and Peru, stimulatingto stimulate demand on domestic flights by providing more Colombian citizens the opportunity to use air transportation.
During 2011LAN Colombia continued to expand its network inside the Company was focuseddomestic market in 2014, flying to 20 destinations and 24 routes. Additionally, LAN Colombia continues to advance in its fleet renewal plan, with the aim of phasing out less efficient models, by gradually replacing the Boeing B737 aircraft and Bombardier Dash aircraft inherited from Aires with aircraft from the Airbus A320 family. As of December 2014, LAN Colombia serviced its domestic destinations with 14 Airbus A320 aircraft and 7 Dash-200 aircraft. The company’s fleet renewal will be completed in 2015, when we will phase out all of the remaining Dash 8-200 aircraft.
In its third year of operations LAN Colombia transported 4.4 million passengers on ensuring thatdomestic passenger, 9.2% more than the safety, on time performance and service quality standards of its new affiliate were consistent with LAN’s own high standards. To this end, Lan Colombia was successfully certified by IATA Operational Safety Audit (IOSA) in November 2011.
In December 2011,previous year, ranking as the Company launched the LAN brand in Colombia, a significant stepsecond largest operator in the successful turnaroundcountry, with a 19% market share measured in passenger onboard , behind Avianca. Other important competitors are Satena and VivaColombia.
Operations within Brazil
TAM Linhas Aereas is the leading domestic passenger airline in Brazil.. TAM Linhas Aereas’ strategy is based on providing strong connectivity through a network based on the main Brazilian cities, offering a reliable and high quality service, and leveraging our strong brand position in Brazil and abroad. As of December 31, 2014 TAM Linhas Aereas operates flights to 40 destinations within Brazil as well as some seasonal destinations, with an average fleet of 115 aircraft of the ColombianAirbus A320 family, including 16 Airbus A321, aircraft that allows high-density routes meet greater efficiency
The domestic market in Brazil has historically suffered from overcapacity, resulting in very low load factors compared to industry standards, which has negatively impacted the financial results of domestic airlines in recent years. However, this trend began to change during 2012 and has significantly improved during the last two years, as major airlines have reduced domestic capacity, leading to general improvements in load factor and yields.
TAM has continued to make significant progress in the domestic Brazil passenger operations.operation, improving profitability by increasing load factor and yield (in real) through the rationalization of capacity and improved revenue management through better segmentation of the market. During 2011 the Company recognized US$52 million operating loss from2014, TAM reduced its Colombian passenger operations. This loss includes significant costs relatedcapacity by 1.4% as measured in ASKs and increased traffic measured in RPK 1.1%, leading to the rebranding process, marketing initiatives aimed at integrating Colombia into LAN’s regional network, migration of Lan Colombia to LAN’s IT systems, the early termination of contracts with third party suppliers.
A total of 3 million passengers traveled on Lan Colombia domestic routes in 2011, which represented an increase of 12%2.0 percentage points in load factors on a year-over-year basis, compared to 2010.the already high level reached by TAM in 2013, and higher than the occupancy factor of the industry which was 79.8% on average.
In 2014, TAM maintained leadership among business travelers and improved its punctuality indicators, resulting in greater customer satisfaction. In addition, TAM won - for the second consecutive year - the airline Top of Mind award.
According to ANAC, the Brazilian domestic market as a whole transported approximately 96 million passengers in 2014, an increase of 6.6% as compared to 90.0 million in 2013. As we look ahead to 2012, we expect to further benefit fromof December 31 2014, TAM Linhas Aereas lead the turnaround process that took place during 2011. By continuingBrazilian domestic passenger with 38.1% of the improvement of Lan Colombia’s standardsmarket share as measured in RPKs. During 2014, TAM’s main competitors in the domestic market were GOL, Azul, and by working along with travel agencies in Colombia, we aim to approach the Colombian corporate segment. Furthermore, we expect to phase out during 2012 the first 3 Boeing 737-700s passenger aircraft operated by Lan Colombia and replace them with LAN’s Airbus A320s. Through these initiatives, and by consolidating LAN’s presence in Colombia, we expect to reach break-even for our Colombian passenger operations by the end of 2012.Avianca Brazil.
Nowadays, Lan Colombia has seven weekly frequencies to Miami, being that its only international destination. In the medium term, Lan Colombia will evaluate the expansion of international passenger operations and the advantages of any synergies it may obtain from LAN Cargo’s affiliate in Colombia, Lanco, launched in March 2009.
Passenger Alliances and Commercial Agreements
Prior to the combination between LAN and TAM, LAN, LAN Peru, LAN Ecuador and LAN Argentina were members ofoneworld®, and TAM was member of Star Alliance®. In March 2013, LATAM Airlines Group choseoneworld® as the global alliance for all of its airlines. As a result of this decision, LAN Colombia became a member ofoneworld® on October 1, 2013 and TAM became a member ofoneworld® in March 31, 2014. Its affiliate TAM Mercosur will join in a future date. Currently,oneworld® is a global marketing alliance comprising of LAN, LAN Peru, LAN Argentina, LAN Ecuador, LAN Colombia, TAM, Air Berlin, American Airlines, British Airways, Cathay Pacific Airlines, Finnair, Iberia, Japan Airlines, Malaysia Airlines, Qantas, Qatar, Royal Jordanian, Sri Lankan and S7. The current members of theoneworld® alliance, including LATAM, serve more than 990 destinations, 154 countries, operating 14,000 daily departures.
The following are our passenger alliances and partnerships as of February 29, 2012:January 2015:
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TAM and American Airlines. .LATAM is currently expanding its code-share agreements with American Airlines in order to offer more destinations within the U.S. Before the merge between American Airlines |
• | Iberia. In January 2001, |
• | Qantas. In July 2002, |
• | British Airways. In 2007, |
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• | All Nippon Airways. In October 2010, TAM initiated a code-sharing agreement with All Nippon Airways to operate between Sao Paulo and Narita, through connections in London From 30th March 2014, All Nippon Airways switches its operation to Haneda Airport, giving our passengers access to the preferred airport in Tokyo. During 2014 All Nippon Airways and TAM agreed to expand the code-sharing agreement and implement new routes from South-America to Japan via Europe and North America, subject to required governmental approvals. |
• | Cathay Pacific. In May 2010, |
• | Japan Airlines. In September 2011, |
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Other alliances and partnerships: |
Passenger Marketing and Sales
Even though we market our servicesSince the combination between LAN and TAM in 2012, LATAM Airlines Group has operated under two brands, LAN and TAM. Within the common “LAN” brand,and “TAM” brands, we differentiate our marketing strategies between our long-haullong haul and short-haulshort haul services.
Our long-haul marketing strategy emphasizes attributes valued by our international customers, including reliability, high quality on-boardcustomers: a reliable, high-quality service centered on entertainment and ground service, comfort comprehensive coverage of keyfor long travel. We also highlight our extensive network covering the most important destinations in South American marketsAmerica and the Caribbean and frequent service to major overseas gateways such as New York, Los Angeles, San Francisco, Miami, Orlando, London, Madrid, Paris, Frankfurt, Milan and Sydney. In ordera continuing effort to strengthenfulfill this promise, we continuously improve our market position, we have continued improving our passenger cabins and review our service and constantly monitor our corporate image. As such, in December 2008 and May 2009 we completedprotocols. Our Business Cabin features a retrofit program for our Boeing 767-300 and for our Airbus A340-300 fleet respectively, merging the Business and First Classes cabins into a Premium Business Class featuring full-flat seats, new entertainment units for both Premium Business and Economy cabins, together with a new on-board service. We invested US$124 million in this retrofit program for all our long haul passenger aircraft, which aims to give our passengers a sense of a “shorter” and more pleasant flight. For our Business passengers, our cabin features anpremium on-board service aimed at providing the passengerto provide our customers with more time to rest, and forrest. In our Economy Class passengers, ourCabin, newly upgraded entertainment units aim to make the flight aflying more enjoyable one. enjoyable.
In October 2010 LAN decided to renew the seat configuration of its2014, LATAM’s long haul fleet had 10 Boeing 767-300, which included improvements that increased the capacity of each airplane from 221 to 238 seats. The original configuration had 191 seats in the Economy cabin and 30 seats in the Premium Business cabin. The new seat configuration increases the number of seats in the Economy cabin to 220 and decreases the number of seats in the Premium Business cabin to 18. This seat configuration will be used in those markets with a higher tourism demand and/or lower corporate travel demand. This strategy allows us to obtain higher revenues and a more efficient cost management
Our long-haul fleet plan includes the incorporation787 of the 32 new Boeing 787 in the second half of 2012. LAN will beaircraft we ordered. The Company was the first airline in Latin America,the Americas, and one of the firstfourth in the world, to receive this model whosewith the latest-generation technology and cabin innovations represent a revolution inthat was an innovation breaking point for the airline industry. Passengers will experience the Boeing 787’s advantages in the form of higher cabin humidity and increased comfort. The acquisition of these Boeing 787s787 airplanes will allow us to reach new destinations and boost LAN’sour existing services while also continuing to increaseincreasing the efficiency of our operations and reduce our carbon footprint. Following this trend, in 2015 LATAM will be the first in the Americas to receive the Airbus A350, a new generation aircraft with new standards of efficiency –with capacity of approximately 348 seats- and with new levels of passenger comfort. See “—International Passenger Operations” for a description of recent improvements to our international fleet.
Our short-haul operations are designed to better match thefit our customers’ needs in those routes, which areneed: punctuality, reliability, highermore frequencies, modern aircraft and efficient operations. As such, these routes now feature modern planes, with leather seats, increasedTo deliver this value proposition, we have been increasing our fleet and frequencies with more point-to-point flights, improved punctuality and streamlined processes including Internet sales, web and mobile check-in and airport self-check-in. We completed
Additionally, our short haul fleet has also been renewed by the phase-outdelivery of our Boeing B737-200 fleet in 2008more Airbus A320 and replaced it with modern Airbus Family Aircraft such as A320, A319 and A318. Nowadays, allA321. These aircraft also enhance our domestic operations (which include Argentina, Chile, Peru, Ecuador and Colombia) follow the same business model, which aims to make air travel accessible to more people through low fares supportedour regional by a low-cost operation based on the efficient use of our resources.
Our short-haul fleet is also growing and will continue being renewed during the next six years with the acquisition of 89 additional Airbus 320 family aircraft. These aircraft have the latestproviding high security standards, in the industry, as well as improvements in the interior cabin designdesign- the upper bins have mirrors that ensure visibility of carryon luggage, among other improvements - and new seat technology. Theymore comfortable and technologically–advanced seating -with leather upholstery and more in-flight entertainment screens. Moreover, these aircraft are 13.0%13 percent lighter than the current models sold by Airbus, and thereforeaircraft they allowwill replace, resulting in lower fuel consumption and CO2 emissions. These aircraft are also are more comfortableSee “—Domestic Passenger Operations” for passengers since they have leather seats with integrated foam and more in-flight entertainment screens. In addition to this, the upper bins include mirrors that ensure visibilitya description of carry-on luggage among other improvements of interior design. All changes in these aircraft were designedrecent initiatives to improve our domestic fleet, including the travel experience forintroduction of modern Airbus A320-Family Aircraft in most of our passengers on domestic operations.
Our main concern is to deliver our promise to our customers. Therefore, we constantly monitor our customer satisfaction with in-flight surveys and regional flights.
On November 26, 2010, LAN acquired Aires (rebranded as Lan Colombia in 2011), a Colombian carrier, which holds an average of 19.0% ofresearch, and measure our performance against the domestic market share as of December 31, 2011.highest standard levels. This important additioncommitment to the LAN group made it possible for LAN to start operating within Colombia, adding 22 domestic destinations to the already existing international operation.
We are constantly focused on delivering the servicesexcellence has paid off with several prizes and flight items valuedrecognitions given by customers and industry experts such as Skytrax’s “2013 best staff service”, Skytrax’s “2013 Best Airlines in order to maintain high levels of customer satisfactionSouth America”, Business Traveler’s “2013 Best Business Class in Latin America”(LAN), 2013 “Best travel Cellars in the sky” (TAM), Skytrax’s “2014 Best Airlines in South America (LAN first place and we continuously monitor our customers’ preferences through surveysTAM second place)”,“2014 Best staff service (LAN)” and perception studies. As a result, we createdBusiness “2014 Best travel Cellars in the new Premium Economy class on some regional routes in response to comments made by our business travelers. The Premium Economy program grants our customers preferential check-in and boarding, access to our VIP lounges, priority baggage claim, exclusive cabins with only twelve passengers, and personalized attention by our cabin attendants, among other benefits.
As mentioned above, we have been implementing a new business model in all our domestic operations (which include Argentina, Chile, Peru, Ecuador and Colombia) that seeks to make air travel accessible to more people through low fares supported by a low-cost operation based on the efficient use of our resources. During 2011 LAN received several awards solidifying the Company’s market position. These awards included Airline of the Year 2010 (AirFinance Journal) and Best E-commerce Website 2010 (E-commerce LATAM)sky (TAM)”.
Branding
In March 2004, we launched our newThe “LAN” brand to bringwas launched in 2004 and brings together, under one strong international name, all our localof the affiliate brands such as “LAN Chile,” “LAN Peru,” “LAN Argentina”Argentina�� “LAN Colombia”, “LAN Ecuador” and “LAN Ecuador.Cargo.” We developed our new brand andThe corporate image after an extensive process supported by a leading global branding agency.
Our corporate imageof LAN is based on two core concepts: reliability and warmth, which support our promise of the best travel experience to, from and within South America. We are also committed to offeroffering our customers with the best coverage to, from and within South America, and to promotepromoting sustainable tourism, helping develop the regions where we operate.
During 2005 And by best, we mean providing our customers with an excellent connection network and 2006, we focused on advancing the transition to our new brand image. This included the gradual repainting of our fleet, which was completedservice; being transparent and accessible; and promoting sustainable tourism in the second quarter of 2006. Our commercial strategy, centered on exploiting the LAN alliance concept, has been widely recognized, as exemplified by Airline Business magazine’s recognition of us in 2004 with its “Airline Strategy Award, Marketing.”countries where we do business.
Using a single brand enabled ourenables LAN’s customers to better understand the common service and operating standards among our airlines, and our newits airlines. LAN’s unified image has improved ourits visibility, which enhancedthereby enhancing flexibility and increased the efficiency of our marketing efforts. It also provided a platform for the strategic use in mature markets of the following three powerful sub-brands, all related to the LAN root:
the www.lan.com website for the convenience of our web booking engine and services platform;
LANPASS for our frequent flyer program; and
LANTOURS, a sub-brand through which we offer travel packages, hotels and other ancillary products, as well as promote tourism activities to and from the regions in which we operate. LANTOURS took hold first in Chile and is gradually being introduced into other key markets.
In December of 2011, we successfully finished the rebranding process of Aires as LAN, which required the painting of around 70.0% of its fleet; changing the image of all its sales offices and personnel to LAN; and most importantly, transforming Aires’ service to comply with LAN standards, thus fully incorporating Colombia’s operation to our current brand architecture.
Our regular brand tracking and marketing effectiveness measurements show outstanding results in brand consistency and recognition, improving year after year, with marketing investments managed at healthily stable rates. As the corporate values behind our umbrella brand encompass attributes applicable to both operations, long haul and short haul, a single brand strategy has resulted in significant savings, as we only have to promote one master brand, thereby increasing the efficiency of ourits marketing efforts.
TAM launched the strategic platform for a single brand back in 2008, with TAM being the main brand that, through values, strategic positioning and language, guides other brands, services and business units, such as TAM Airlines, TAM Cargo, TAM Viagens, TAM Fidelidade, TAM nas Nuvens and others. Thus, we generate synergies among our businesses, always guided by the same values and the commitment to quality and relationships with our stakeholders.
In May 2013, TAM also launched the “A gente faz um mundo por você” (“We make a world for you”) campaign, which reinforced TAM’s focus on service. In line with this vision, TAM’s mission is to be the people’s preferred airline by using joy, creativity, respect and responsibility. Based on this strategic brand positioning, TAM seeks to offer accessibility to all of those who value an efficient, rewarding, safe and hassle-free experience.
In 2014 LAN and TAM began a process to redefine the future brand strategy. The Company plans to move towards a single brand, although the launch date for the new brand has not yet been determined.
Distribution Channels
In LAN and TAM we are aware of how important time is for our customers, which is why we are making efforts to minimize the curb to seat and seat to curb time for our customers. We useare improving and optimizing our services and processes, in order to achieve a simple and digital end to end travel experience.
To support this, we have our distribution structure divided into direct and indirect distribution channels. In the past few years, we havechannels, both focused on streamliningimproving their respective platforms to allow for the easiest interaction for our distribution strategyclients, 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 that accounted for approximately 43.0% of passengers during 2011. We paid these travel agents standard commissions ranging from 0% to 7.0% depending on the market and the ticket region type (domestic / international). Consistent with our efforts to reduce commission costs, and in line with current market practices, in recent years we have reduced standard commissions in several markets. However, we are now charging a fee to customers for sales done through our own ticket offices or call centers in most countries, leaving the Internet as the only free-of-charge distribution channel.
Travel agents obtain airline travel information and issue airline tickets through Global Distribution Systems, or GDSs, that enable them to make reservations on flights from a large number of airlines. We participate actively in all major international 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. As part of its continued commitment to its passengers, in late 2009, LAN signed a series of agreements with Sabre, one of the major suppliers of IT solutions in the global airline industry. Through these agreements, Sabre will provide the Company with the most advanced technology in reservation and distribution systems, optimization of routes and operational planning. The process of implementing the new system platforms comprises a period of adjustment and migration that will last between two and three years until its full implementation. These agreements represent a major step in terms of innovation by implementing the industry’s most advanced technology to streamline business and operational processes involved in the service the Company provides to its customers. These agreements will serve to provide itineraries that best fit the needs of passengers and to provide simpler, agile and efficient services in airports and in the sales and distributionservices alike. Indirect channels improving LAN’s services in each of the stages of thecurrently include travel experience.agencies, general sales agencies and also new players, such as online agencies.
Direct channels refer to salesowned by our ownLATAM are comprised of city ticket offices, contact-centers and website. In 2011,e-Business (includes website, mobile, and smart business). These direct bookings accounted for approximately 57.0% of all our passengers.
channels support sales and service, before and after flight if the passenger so requires. We have an extensive sales and marketing network in over thirty countries consisting of more than 155300 domestic and international points-of-sale owned by us and approximately 45 general sales agents.LATAM.
Our contact-centers support the growth ofIn this regard, our operations constituting a sales and a multi-service channel. During 2011, we continued to grow and develop new services to match the increasing expectations of our clients and the growth of our direct sales channels, in particular the www.lan.com website. Our main contact-center located in Santiago accounts for 781 agents (of which 276 are home-based) and 284 agents in Lima. We complement our contact-center’s operations with third-party service providers that add approximately 600 agents who are located in Santiago, Lima and Buenos Aires. In total, all the centers handle more than 30,000 calls/contacts per day, which mainly originate from the regions where we fly (South America, North America, Europe and Australasia) and cover four languages (Spanish, English, Portuguese, French and German). We have continually upgraded our systems by incorporating technological advances to enhance efficiency and customer service.
Our website, www.lan.com,e-Business channel is an integral part of our commercial, marketing and service efforts. Together with other direct sales initiatives, ourthe website provides us with an important tool by bringing more benefits to reduce our distribution costs. Ourpassengers and also by giving them more flexibility in the future, reducing time on queue for example. Internet-related sales have increased, significantlyreaching more than a total of US$2,500 million sales in recent years, by 21.9% in 2009 compared2014.
We have also used our websites as tools to 2008, 22.0% in 2010 compared to 2009,provide value-added content and 22.6% 2011 compared to 2010, which amounted to US$796.4 million in 2011.enhance communications. We are continuallycontinuously improving our website,websites, a key element of our new short-haul model, so that the technological platform canwill be able to support the expected future growth.
Besides serving as a sales channel, we have utilized our website as a tool to provide value-added services and enhance communications. We send weekly promotional e-mails to more than 4.816.9 million subscribers.subscribers (8.7 million for LAN and 8.2 million for TAM). Members of our frequent flyer program receiveprograms received their monthly balances and other information by e-mail and can access thetheir data and redeem awards through our website. Wewebsites. In addition, we have an active online marketing program which brings visitors to the website from search engines and travel-relatedtravel –related websites.
During 2009We are also developing several multi-platforms projects to improve passenger experience, both pre-and post-flight. We are continuously improving our website in order to more efficiently communicate flight status information, including information on available alternatives in case of change of schedules or other flight alterations. Another innovation is a smartphone app that enables both flight status verification and check in, providing an accessible electronic boarding pass to the passenger. To this date the app has over 1 million downloads in 20 different countries. Introduced in 2008, e-tickets have been issued for most LATAM routes and during 2010 we improved several servicescompleted the implementation of interline e-ticketing with all of our oneworld® partners. By the end of 2013, we introduced electronic boarding passes accessible on the website. smartphones currently operating in 72% of LAN routes and 88% of TAM routes.
We introducedare continuously promoting the flexible award redemption service, which enables LANPASS members to obtain flights with their kilometers at any time of year. We also updated our Flight Information System to ensure accurate, real time information. In addition, we continued to promote our web-based check-in service for domestic and international flights. This system allows those passengers who are not checking-in bags to go directly to the gate, and the remaining checked-in passengers to leave their bags at a special bag drop countercounters and proceed to the gate. In addition to web-based check-in, we have self-check kiosks in 13 airports in Chile, seven airports in Peru, three airports in Argentina; three airports inArgentina, Ecuador, Venezuela, Uruguay, Brazil, Germany and eight in Colombia. As of December 31, 2011,2014, the kioskairport kiosks and web check-in have high utilization rate increased to 83.0% forin domestic routes of all countries (82% in Chile, 80.0% for domestic routes80% in Peru, 54.0% for domestic routesPeru,70% in ArgentinaEcuador, 65% in Argentina,60% in Brazil and 50.0% for domestic routes58% in Ecuador. AlsoColombia).
LAN.com received “eCommerce Award Latam 2014” in 2010 we launched our LAN.com MobileTourism. Additionally, TAM received the award Top of Mind Internet – DataFolha/UOLTravelers’ Choice Favorites - TripAdvisor® and LAN received an award in the airlines category “Company with the best online reputation” by the Mercado magazine in Argentina.
Our city ticket offices support the growth of ours operations, establishing a sales and service enablingchannel. We have approximately 100 city ticket offices, 78 airport ticket offices, 9 stands and 47 kiosks. In addition TAM significantly expanded its TAM Viagens store chain through franchises in the main cities across Brazil. LAN also expanded it direct channels through 27 general franchise sales agencies. We are developing a service system with a dedicated lobby to helps us deliver a better service to our customers and to check-in, verify their flight status and other itineraries using their internet-enabled mobile phones.
In 2010 LAN was recognizedpromote the self-service in ours stands. Aiming to promote the e-Business channel, in almost all countries we charge a fee to customers for sales completed through our ticket offices or call centers, leaving the Internet as the “Latin American E-commerce Companyonly free-of-charge distribution channel.
Our contact-centers are a multi-service channel providing support in six languages (Spanish, English, Portuguese, French, German and Italian) and handling more than 46,500 calls/contacts per day, which mainly originate from the regions where we fly (South America, North America, Europe and Australasia). We also have third-party service providers located in Santiago, Lima, Buenos Aires, Bogotá, Florianopolis and Sao Paulo.
Frequent Flyer Programs
During the year 2014, both LAN and TAM operated their loyalty independent programs, LANPASS and TAM Fidelidade, respectively, even though passengers enrolled in both programs were able to accumulate and redeem kilometers/points on any flight of the Year”network managed by the Latin American e-Commerce Institute.two airlines and their associates.
Electronic TicketingAdditionally, LATAM continued working on the cross recognition of these programs to offer its members similar features and benefits, in line with the process of harmonization of operations in which the company is committed in all areas. The initiatives include cross level recognition of all members, for example, by allowing LANPASS members to upgrade on TAM flights and TAM Fidelidade members to upgrade on LAN flights, in addition to having the same services at the airport, among other advances.
In 1997, we introduced electronic tickets, commonly referred
TAM joined theoneworld® alliance on March 31, 2014 and TAM Fidelidade customers, as LANPASS customers, are able to as e-tickets,accrue points and have since worked to increaseredeem flights ononeworld® carrier flights.
During 2015 LANPASS and TAM Fidelidade will continue their use. E-tickets areprograms harmonization efforts and will offer new cross benefits for their members.
LANPASS
LAN’s frequent Flyer Program, is a key element of our sales efforts through the InternetLAN’s marketing and our call centers and they also produce important simplifications in our back-office, enabling us to significantly reduce distribution costs. Since 2008, the Company has reached a 100% penetration of e-ticketing on all LAN routes.
Also, during 2010 we completed the implementation of interline e-ticketing with all of ourloyalty strategyoneworld.® partners.
Advertising and Promotional Activities
Our advertisement and promotional efforts are aimed at enhancing our brand positioning and supporting specific aspects of our commercial efforts. These activities include the use of television, print, outdoors and radio advertisements as well as direct and online marketing.
During 2011, our campaigns where mainly focused on continuing stimulating demand by implementing a pricing strategy that has made flying more accessible in our domestic markets and within South America to those traveling especially for tourism. To this end, we are proud of having entered into partnerships with tour operators and tourism government agencies across the region (SERNATUR in Chile, PROMPERU in Peru, ProExport Colombia among others), which allowed us to reach new customers and to promote local and regional tourism in the markets where we operate. This is supported by the unique coverage and travel experience that we offer to those passengers traveling to, from and within South America.
We have also innovated our demand-generating advertising by promoting pre-low seasons special offers, thus making our demand curves more stable and making it possible for us to offer to our customers all our destinations at very accessible prices throughout the year.
Frequent Flyer Program
Our frequent flyer program is called LANPASS. The objective of LANPASS is to reward customer loyalty, and as a consequence, generate incremental revenue and customer retention through customer loyalty and targeted marketing.retention. Worldwide, as of February 29, 2012,December 31, 2014, LANPASS has approximately 5.8had 9.8 million members.members, an increase of 15% than last year.
CustomersLANPASS members earn LANPASS kilometers in their LANPASS accounts based on distance flown, and class of ticket purchased and the elite level, or by using services of other participantspartners in the LANPASS program. Based on an award schedule, customersCustomers can redeem kilometers for free tickets upgrades or other products.products in an online catalogue. Under our current frequent flyer program, our passengers are grouped into one standard level and threein four different elite levels based on each passenger’stheir flying behavior.behavior: Premium, Premium Silver, Comodoro and Black. These different groups determine which benefits customers are eligible to receive, such as free upgrades on a space-available basis, VIP lounge access and preferred boarding and check-in. These categories have their equivalent in the OneWorld alliance: Ruby for Premium, Sapphire for Premium Silver and Emerald for both Comodoro and Black.
Aiming to increase redemption levels and expand redemption alternatives, in 2011In 2014 LANPASS increased the number of price levels for the redemption of tickets from three up to 14 (allowing the increase of number of seats available for redemption of kilometers), in order to give a better availability and flexibility for the customers. These new redemption price offers resulted inhad an increase of 28.0%18% in kilometers redeemed and 32.0% in award tickets, and 42% kilometers redeemed by LANPASS’ members in 2011.
non-flight products. LANPASS has highly rated partners, including other airlines, hotels, car rental agencies, retailers, and credit card issuers from the main financial institutions in Chile, Peru, Ecuador, Argentina Uruguay, United States and starting from 2012, also in Colombia.Colombia, including Banco de Bogotá and Occidente, who are both members of Grupo Aval. These partnerships give our customers the opportunity to accrueearn additional kilometers for using their services.
Through the incorporation of additional partners Regarding Chile, in 2011, LAN customers accrued 43.0% more kilometers than in 2010, by using other services different from the services offered by LAN2014 Santander and other airlines. In the banking segment, during 2010, LANPASS renewed its partnership with Santanderexclusive co-branding agreement for 5 more years, from 2016 to 2020, continuing a union which for 20 years has allowed thousands of members to accumulate kilometers to travel to Chile for another five years, spreading LANPASS accrual from credit/debit card to all retail banking offering. LANPASS also launched a new partnership with BBVA, a leading bank in Argentina, began to issue credit cards inand the United States with U.S. Bank, and increased our offering in redemption catalogs in Brazil with Banco Itau.world.
In the non bankingnon-banking segment, LANPASS continues to leverage its member’s purchase behavior to partner with leading players in the markets and become the most attractive loyalty program in the home markets. In the past two years, LANPASS has entered into new industries, such as retail, supermarkets, automotive, real estate, drugstores and health care centers. As an active member of theoneworld® alliance, we have reciprocal frequent-flyer agreements with alloneworld® carriers. In addition to this, we have reciprocal agreements with other carriers, such as Alaska Airlines, Aeromexico and TAM. These agreements allow LANPASS members to accrue and redeem LANPASS kilometers ononeworld® flights.
The LANPASS frequent flyer program aims to be the leading loyalty program in all of LAN’s home markets. In the past couple offew years, we haveLAN has implemented a number of marketing initiatives to increase customer’s engagement and activity with the program outside Chile.in all of its markets. In 2011,2014, membership in LANPASS grew 32.0%continued growing by 28% in Peru, 27.0%Chile, 21% in Perú, 20% in Argentina, 7% in Ecuador, 10% in Colombia and 32.0%5% in Argentina. Furthermore,the U.S.
TAM Fidelidade
TAM’s frequent flyer program, TAM Fidelidade, was the first loyalty program launched by a Brazilian airline and represents a key element in TAM’s marketing strategy. LATAM believes TAM Fidelidade, as well as LANPASS, is one of the most flexible loyalty programs in the market because it imposes no restrictions on flights or the number of passengers flying with LAN, who areseats available when members redeem accumulated points. TAM Fidelidade currently has more than 11.7 million members, which represents an increase of 8% compared to the 10.9 million members in 2013.
Similarly to LANPASS, members of TAM Fidelidade receive benefits and increased points for miles flown depending on their elite level; allowing them to accrue redeemable points for free travel more quickly. TAM Fidelidade customers are classified in four different elite levels Azul, Vermelho, Vermelho Plus and Black, being their equivalent in theoneworld® alliance: Ruby for Azul, Sapphire for Vermelho and Emerald for both Vermelho Plus and Black.
Multiplus
In 2009, TAM launched Multiplus, a company designed to create a broader network in which TAM’s customers can earn points through the TAM Fidelidade Program. Multiplus is a coalition of loyalty programs that permits the accrual of points for redemption from products and services offered by many different partner companies, not just TAM. We believe this expanded network helps to capture and retain customers and increase sales. It is attractive to our LANPASSless frequent flyer program, grew 7% during 2011.flyers because it allows them to accrue loyalty points in many ways besides flying. At the end of 2014, Multiplus had more than 400 partners and approximately 13.8 million participants that can accrue Multiplus points directly (Tam Fidelidade, cobranded cards, app, etc.) and indirectly (by transferring points from a partner program) in over 13,000 retail establishments.
Multiplus became a publicly traded company in Brazil, following its initial public offering in February 2010. TAM continues to own 72.4% of the ordinary shares of Multiplus.
On December 10th, 2009, Multiplus entered into an Operating Agreement with TAM Linhas Aéreas (TLA), which established the terms and conditions governing the relationship with TLA and become effective as of January 1st, 2010. Under the Operating Agreement, Multiplus became responsible for, among other duties, processing information on accumulating and redeeming points under the TAM Loyalty Program and delivering awards to the members of said program, in accordance with the rules of the TAM Loyalty Program and the Multiplus network. The Operating Agreement is valid for 15 years.
On March 1, 2013, the companies approved a new amendment to the Operating Agreement (“11th Amendment”), effective as of June 1, 2013. This amendment extends the previously existing terms and conditions, but includes a more objective procedure for setting the ticket acquisition price to be paid by Multiplus and the point price to be paid by TLA. The amendment sets a fixed price to be paid by Multiplus during the initial transition and assessment phase, lasting from June 2013 until June 2014, such price being approximately 3% higher than the average price assessed in 2012. After this transition and assessment phase, the price to be paid by Multiplus per 10.000 points is adjusted to reflect the price variation of airline tickets in the market, but subject to a cap and floor of 5%. In case of major changes in the airline industry, the companies will have the right to negotiate in good faith a fair solution that takes into account such industry changes.
The remaining provisions established in the original Operating Agreement, including, without limitation, those relating to reciprocal exclusivity, term of effectiveness and situations for termination with or without cause, remained, in their essence, unchanged.
Cargo Operations
GeneralInternational and domestic cargo is operated by subsidiaries and affiliates under the LAN Cargo and TAM Cargo brands, which have significant market recognition. Our cargo business generally operates on the same route network used by our passenger airline business. It includes approximately 143 destinations, of which approximately 135 are served by passenger and/or freighter aircraft and approximately 9 are served only by freighter aircraft.
The following table sets forth certain of our cargo operating statistics for domestic and international routes for the periods indicated:
Year ended December 31, | Year ended and as at December 31, | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
The Company | ||||||||||||||||||||||||
ATKs (millions) | 7,219.7 | 7,651.9 | 6,449.5 | |||||||||||||||||||||
Total | 5,192.7 | 4,628.7 | 3,848.9 | |||||||||||||||||||||
RTKs (millions) | 4,317.2 | 4,446.7 | 4,044.5 | |||||||||||||||||||||
Total | 3,612.4 | 3,245.3 | 2,627.4 | |||||||||||||||||||||
Weight of cargo carried (thousands of tons) | 1,102.2 | 1,146.6 | 1,154.0 | |||||||||||||||||||||
Total | 874.9 | 780.8 | 649.3 | |||||||||||||||||||||
Total cargo yield (cargo revenues/RTKs, in US cents) | 43.6 | 39.5 | 34.1 | 39.7 | 41.7 | 43.2 | ||||||||||||||||||
Total cargo load factor (%) | 69.6 | % | 70.1 | % | 68.3 | % | 59.8 | % | 58.4 | % | 62.7 | % |
OurWe derive our revenues roughly equally between the transport of cargo business generated revenues of US$1,280.7 million in 2010 and US$1,576.5 million in 2011. This represented 28.3% and 27.6%as follows:
In the bellies of our total revenues, respectively. Cargo revenues declined 32.1% between 2008 and 2009 primarilypassenger aircraft. We consider our passenger network to be a key competitive advantage due to the global economic crisissynergies between passenger and cargo operations and, accordingly, we have developed a strategy to increase our competitiveness by enhancing our belly offering.
In our own dedicated freighter fleet. As of December 31, 2014, our dedicated freighter fleet consisted of 11 Boeing 767-300 freighters, with a capacity for 58 structural tons (52.7 tonnes) of freight each, and four Boeing 777-200 freighters, with a capacity of 102 structural tons (102 metric tons) of freight each. The aforementioned 11 Boeing 767-300, that affectedconsiders two freighters sub-leased to an operator outside of Latin America, represents a decrease of 1 such aircraft relative to December 31, 2013. An additional 767-300F was also leased to the industrysame operator and it is scheduled to leave our fleet during the first quarter of 2015 as part of our freighter fleet optimization program. Under this initiative, our freighter fleet was resized according to both the strategic objective of supporting our belly business and the declineneed to maximize profitability. In Latin America, the principal origins of our cargo are Chile, Colombia, Perú, Ecuador, Brazil and Argentina, which represent a large part of our northbound traffic. This demand is mainly concentrated in salmona small number of product categories, such as exports of fish, sea products and fruits from Chile due toand asparagus from Peru, and exports of fresh flowers from Ecuador and Colombia.
For our southbound flights, Brazil is the ISA virus. Nevertheless, during 2010main import market. Southbound demand is mainly concentrated in a small number of product categories including high-tech equipment, electronics, auto parts and 2011 revenues increased 43.0% and 23.1%, respectively, on a year-over-year basis as we took advantagepharmaceuticals.
Brazil is the largest of our cargo domestic operations where TAM Cargo remains the recovery of world cargo markets.
Our cargo business generally operates on the same route network used by our passenger airline business, which is supplemented by freighter-only operations. Overall, it includes approximately 86 destinations (over 66 are operated by passenger and/or freighter aircraft and approximately 20 operated only by freighter aircraft). We complement our own international operations through coordination with our regional affiliates, MasAir in Mexico, ABSA in Brazil and Lanco in Colombia. ABSA also operates in the Brazilian domestic market since March 2009. We carryleader, carrying cargo for a variety of customers, including other international air carriers, freight-forwarding companies, export oriented companies and individual consumers. For information about our fleet, see “—Fleet—General” below.In order to maintain its leadership, TAM Cargo continues to invest in infrastructure, service and security in key cargo terminals.
We transport cargo in four ways: (i) in the bellies of our passenger aircraft, (ii) in our own dedicated freighter fleet, (iii) in belly space that we purchase from other airlines and, (iv) in aircraft that we charter or lease pursuant to ACMI contracts (Aircraft, Crew, Maintenance and Insurance). Under the latter, which are also known as “wet-leases,” the lessor operates the aircraft and provides the aircraft, crew, maintenance and insurance pursuant to short- and medium-term contracts.
Our international cargo operations are headquartered in Miami, whose geographical location positions it as the natural gateway for Latin American imports and exports to and from the United States. Since 2001 we have operated in our 380,000 square-foot facilities within the Miami International Airport. In 2010 we upgraded this facility to enhance our ability to handle perishables and we leased an additional 117,000 square-foot warehouse close to our main facilities. The United States accounts for the majority of the cargo traffic to and from Latin America. Besides being the main market for Latin American exports by air, the United States is also the main supplier of goods such as high-tech equipment or spare parts, transported by air to Latin American countries.
Our international cargo operations are headquartered in Miami. This geographical location is a natural gateway for Latin American imports and exports to and from the United States. During 2013, LAN Cargo signed a contract with Miami Dade County to lease 66,000 square-feet to build a maintenance hangar with capacity to service a Boeing 777-200 freighter. Construction is underway and completion is expected for late 2015.
We operatetransport cargo to threeand from six destinations in Europe: toAmsterdam, Frankfurt, London, Madrid, whichMilan and Paris. The last five we serve via passenger aircraft, (using our flights from Santiago, Lima and Guayaquil),additionally we serve Amsterdam and Frankfurt (through both passenger flights andthrough freighter operations since October 2002, when we signed our partnership with Lufthansa Cargo (for more information on this agreement see “—Cargo Agreements” below), and Amsterdam (through freighter operations since October 2005).
In Latin America, the principal origins of our cargo are Colombia, Chile, Ecuador, Peru, Argentina and Brazil, which represent a large part of our northbound traffic. And for our southbound flights, Brazil is the main import market.
In general terms, cargo flows are unidirectional. This characteristic is a key determinant in the structure of cargo operations as well as in the commercial conditions in the cargo business. This is especially relevant in markets featuring structural imbalances between inbound and outbound flows or during specific periods of such disequilibrium. Lack of demand in one particular direction may force airlines to rely on different markets in order to maximize loads on return flights. Furthermore, demand weakness in one direction may limit the capacity that is profitable to allocate to some routes, therefore creating pressure on fares in order to compensate for weaker revenues in one particular direction. The evolution of our international cargo operations has always been affected by the flow imbalances of the Latin American cargo markets, resulting in a dramatic shift in the relative weight of southbound and northbound cargo flows throughout the years. For example, from 2002 to 2003 our international operations were characterized by very strong export traffic out of Latin America, but gradual increases in import demand, as well as the deceleration of export growth, led to more balanced cargo flows during 2004. Further extension of this trend led to excess demand on southbound routes since 2005.
We have designed our operations, route network and commercial strategies with the flexibility required to respond to changing conditions. As such, during 2003 we allocated additional capacity
During 2014, cargo traffic decreased 3.3%, reflecting a challenging scenario in Latin American cargo markets mainly due to northbounda decline in demand on routes and adjusted fares on northbound routes in responsefrom the U.S to excess demand. During 2004 we gradually adjusted our operations to leverage a more balanced demand environment by performing an increased number of direct roundtrips between key export and import markets. However, weakness in exports since 2005 has driven us to support the northbound segment of certain routes with stopovers in additional export markets, to reduce northbound fares to stimulate demand and to raise southbound fares.
The flexibility that this business model allows based on adaptation to changes in market trends was key for LAN’s operations in 2009 when the businessLatin America, especially Brazil, which was affected by the FIFA World Cup, uncertainty surrounding presidential elections and lower economic growth. Additionally northbound demand was affected by a significant contraction of import and export markets in response to the global economic crisis. In addition LAN Cargo saw a sharp drop in salmonseed exports from Chile, as a result of an outbreak of the ISA virus. Such flexibility has also been a key element in the recuperationpartially offset by strong asparagus, flowers and growth experienced by LAN Cargo since 2010.fresh fruit export seasons.
The sharp contraction of LAN’s traditional markets in 2009 - imports into the region and exports from the region – followed by the rapid recovery of demand in 2010 required the Company to fully lever the flexibility of its business model. During 2009 the Company implemented of a series of measures such as the adjustment of its capacity through a reduction in the number of planes rented under Aircraft, Crew, Maintenance & Insurance (“ACMI”) agreements and adjustments in the operations of its own cargo fleet of Boeing 767F freighters. This process was also reinforced by the incorporation of two new Boeing 777-200F, the most modern and efficient cargo aircraft of their type in the world, with a capacity of 104tons of freight and a range of 9,045 kilometers when carrying its maximum payload. This significant investment allowed LAN to consolidate its regional competitiveness by positioning it as the first airlineCompetition increased in the region and only the second internationally, to use these latest-generation cargo planes.
The Company also achieved a significant regional expansion in 2009. In March, LAN Cargo launched Lanco, a subsidiary in Colombia, which began operations after successfully obtaining the necessary operational and technical certification. It launched its services with two Boeing 767-300Fs, with a capacity for 54 tons of freight, connecting the cities of Bogotá and Medellín with Miami. It is important to note that Colombia is Latin America’s largest market for exports by air to the United States reaching an estimated 200,000 tons annually.
In addition, in March 2009, the Company’s cargo subsidiary in Brazil, ABSA, began operations in that country’s domestic market, with one flight daily, from Monday through Friday, between the cities of Sao Paulo and Manaus. On this route, ABSA operates an advanced-technology Boeing 767-300F with a capacity of 54 tons. This route accounts for a large part of Brazil’s airfreight traffic. Manaus is the country’s fourth largest city in terms of GDP, with a large number of companies, principally part of the electronics sector, in its industrial pole. The special tax incentives offered by the Amazon capital of Manaus as part of efforts to promote the area’s development, make it an attractive alternative for exporterinternational and importer clients.
During 2010, revenue growth in the cargo business continued to reflect the Company’s ability to exploit the expansion in global cargo flows, as well as the development of key strategic initiatives. Active capacity management, with the purpose of optimizing capacity assignation coupled with new revenue management tools to manage cargo rates in response to demand, enabled LAN Cargo to benefit from the growth trends seen in import markets to Latin America, especially to Brazil. The expansion of operations to Europe utilizing the new Boeing 777-200 freighter fleet strengthened the Company’s competitive position and further diversified its revenue base. Additionally, through its Brazilian affiliate, ABSA, the Company continued to strengthen domestic cargo operations in Brazil. During 2010, ABSA launched operations from Sao Paulo to Recife and Fortaleza and added a second daily flight from Sao Paulo to Manaus. The Company also added capacity by securing three leased Boeing 767-300F, two of which were incorporated in late 2010 and one in early 2011. Furthermore, the Company continues to successfully optimize the capacity of the bellies of passenger aircraft to transport cargo, maximizing the synergies of the Company’s integrated passenger and cargo operation.
During 2011, cargo revenues grew 23.1%, reflecting the increase in traffic, with a growth of 11.5% of RTK. Capacity, measured in ATKs, increased 12.4% during 2011, resulting in a decrease of 0.5 points in load factors compared to 2010, reaching 69.6% in 2011. Yields increased 10.4% compared to 2010, driven by continuous improvement in revenue management tools, route optimization and higher transfer of costs through the surcharge fuel, increasing revenue per ATK in 9.5%.
The Company continues to increase selectively its capacity in order to meet demand in major markets where it operates. The growth of import flows in Latin America continues, but the weakening of cargo markets around the world has stimulated competition in South America, especially Brazil, where carriers from other regions have started operations. On the other hand, export volumes are recovering, partly driven by a gradual resurgence of exports of salmon in Chile. This capacity growth is being primarily fulfilled by the Company with the use of three Boeing 767-300F freighters, delivered to the Company between November 2010 and January 2011 with the purpose to increase its capacity on routes from Latin America to North America and Europe and routes between United States and Mexico. Furthermore, the Company continues to optimize its cargo capacity by using the bellies of passenger aircraft for cargo purposes, maximizing in this way the synergies of integrating the operations of both businesses.
During the last six years, we also improved our competitive position as key operators reduced their operations, and competitors such as UPS and FedEx either downsized their operations or exited some markets. Since mid-2004, competition increased as regional carriers added idle capacity but despiteto service cargo operations. Despite this increase in competition, we have been able to maintain solid market shares in large part because of thethrough an efficient utilization of our fleet and network. Today, on Latin America-United States routes, our main competitors are Centurion, Transportes Aéreos Mercantiles Panamericanos S.A., or TAMPA, and PolarAVIANCA Cargo, Atlas Air and onAmerican Airlines. On the Latin American-Europe routes, our main competitors are Cargolux, Lufthansa Cargo, Martinair, Air France-KLM, and recently Emirates Airlines.
Cargo Agreements
During 2014 we signed two Enhanced Cargo Transfer and Service Agreements with Korean Air and Cathay Pacific which aim to achieve more seamless interline transfers and improved service eventually leading to a larger Asia-Latin America market share, greater customer loyalty and improved belly load factors. We also have interline, code-sharing and other commercial agreements with other Asian carriers such as JAL, China Airlines, Air China and Nippon Cargo Airlines. Under these agreements we receive space allocations to move our cargo from the main gateways in Asia to hubs in the United States—Los Angeles, New York, Miami- and also in Europe where we can connect with our cargo network. In exchange, we provide these airlines with space from these same hubs in the United States and Europe to all Latin American destinations and also provide them with westbound cargo.
Since 2002, LanLAN Cargo and Lufthansa Cargo have hadoperated pursuant to a block space agreement betweencovering Europe and Latin America. As part of this agreement, Lan Cargo allocateswe allocate space to Lufthansa Cargo on itsour flights between selected cities in Latin AmericaFrankfurt and Europe,Santiago, and Lufthansa Cargo allocates space to Lan Cargous on its flights between EuropeFrankfurt and Brazil and Argentina.Brazil.
We also have agreements with Asian carriers such as Korean Airlines, JAL, China Airlines, Air China and Cathay Pacific through which Lan Cargo receives space allocations from these airlines to move our cargo from Seoul, Tokyo, Taipei, Shanghai and Hong Kong to Los Angeles and Miami connecting with our network. In exchange, Lan Cargo provides them with space from these same two hubs in the United States to all Latin American destinations and also feeds them with westbound cargo.
Marketing and Sales
Our sales and marketing efforts are carried out either directly whenwhere we have a local office, or through general sales agents. In Latin America we have our own offices in all key markets. In the United States, we have our own offices in Miami, New York and Los Angeles, and work with representatives in various other cities. In Europe, we have offices in Frankfurt, Amsterdam, Madrid and MadridParis and use agents in other key cities. Finally,In Asia, we added a new office in Asia allHong Kong, and in other cities our sales efforts are doneconducted through general sales agents. In total, we maintain a network of more than fortythirty independent cargo sales agencies domestically and internationally.
Our cargo marketing strategy emphasizes ourthe combination of our unique freighter and passenger aircraft cargo capacity,network, which offers a wide variety of reliable cargo routing possibilities with different pricing options; a strong connectivity to, from and within Latin America and a clear focus on providing a high-quality service for our clients. Our offering allows our customers to ship large, bulky freight, as well as smaller, high-density cargo, fresh products, express shipments, and other types of cargo. Our cargo marketing strategy also emphasizes
During 2014 we focused on various aspects of our high-quality services, scheduling flexibilityvalue chain to improve our customer experience. We improved connectivity and punctuality. On somereception times at several key hubs, we became more electronically integrated with customers providing more accurate and timely information and we continued to improve our customer service through consolidation of our worldwide customer care teams and continuous improvement initiatives at our contact centers. Additionally we launched and improved specific products in certain routes, Lan Cargo offers special, value-added products such as Positive Flight Specific or FS, which enables the customer to choose a specific passenger flight to transport its goods. During 2010 we also launched the first phase of a new revenue management project aimed at optimizing yields. In 2011, we obtained the first benefits of a better capacity and overbooking administration, and better pricing practices.
Cargo-Related Investigations
In February 2006 the European Commission (“EC”), in conjunction with the Department of Justice of the United States (“DOJ”), initiated a global investigation of a large number of international cargo airlines (among them Lan Cargo, LAN’s cargo subsidiary) for possible price fixing of cargo fuel surcharges and other feesour Pharmaceuticals offering in the European and United Statesmarket, providing our customers with a better air cargo markets. On December 26, 2007, the European competition authorities notified Lan service.
Cargo Related Investigations
See “Item 8. Financial Information—Consolidated Financial Statements and LAN of the initiation of proceedings against twenty-five cargo airlines, among them Lan Cargo, for allegations of anti-competitive behavior in the airfreight business.
On January 21, 2009, Lan Cargo announced that it had reached a plea agreement with the DOJ in relation to the DOJ’s ongoing investigation regarding price fixing of fuel surchargesOther Financial Information—Legal and other fees for cargo shipments. Under the plea agreement, Lan Cargo agreed to pay a fine of US$88 million. In addition, ABSA also reached a plea agreement with the DOJ and agreed to pay a fine of US$21 million. These amounts were stipulated to be paid over a five-year payment schedule starting in 2009. As of December 31, 2012, the pending amount to be paid during the next four years is approximately US$54 million and has been recorded within “Other Accounts Payable.Arbitration Proceedings.”
On November 9, 2010 the EC imposed fines to 11 air carriers for a total amount of €800 million (equivalent to approximately US$1.1 billion). The fine imposed against Lan Cargo and its parent company, LAN Airlines, totaled €8.2 million (equivalent to approximately US$10.9 million). The Company provisioned US$25 million during the fourth quarter of 2007 for such fines, and maintained this provision until the fine was imposed in 2010. This was the lowest fine applied by the EC, which includes a significant reduction due to the Company’s cooperation with the Commission during the course of the investigation. In accordance with European Union law, on January 24, 2011 this administrative decision was appealed by Lan Cargo and Lan Airlines to the Fleet
General Court in Luxembourg. Any judgment by the General Court may also be appealed to the Court of Justice of the European Union.
As of December 31, 2010 the Company recorded a US$14.1 million gain (pre-tax) due to the reversal of a portion of the provision related to the investigation in the cargo business carried out by the European Commission. This was as a result of the fine announced in November 2010, which was lower than the amount provided for. This reversal is recorded in Other gains/(losses).
The investigation by the DOJ prompted the filing of numerous civil class actions by freight forwarding and shipping companies against many airlines, including Lan Cargo and Lan Airlines, including fifty-four in the United States. The cases filed in the United States were consolidated in the United States District Court, Eastern District of New York and the original complaint was subsequently amended to include additional airlines, including ABSA. On May 11, 2011, Lan Cargo announced that it had reached a settlement agreement with the class action plaintiffs in relation to this litigation. As per the settlement agreement, Lan Cargo agreed to pay US$59.7 million. Furthermore, ABSA also reached a settlement agreement with class action plaintiffs and agreed to pay US$6.3 million. The amounts were paid to plaintiffs’ counsel escrow account in 2011.
In February 2006 the Canadian Competition Bureau (“CCB”), in conjunction with the DOJ, initiated a global investigation of a large number of international cargo airlines (among them Lan Cargo) for possible price fixing of cargo fuel surcharges and other fees in the Canadian air cargo markets. Given the current stage of the proceeding, it is not possible at this time to anticipate with any precision the outcome of the investigation. The CCB’s investigation prompted the filing of four separate civil class actions by freight forwarding and shipping companies against many
airlines, including Lan Cargo and Lan Airlines in Canada. . On January 31, 2012, the respective Board of Directors of Lan Airlines and Lan Cargo approved a settlement agreement with the class actions plaintiffs. As per the settlement agreement, Lan Airlines and Lan Cargo agreed to pay the amount of CAD$700,000 (Canadian Dollars). The settlement agreement and payment are pending court approval.
On April 5, 2008, Brazilian authorities notified ABSA of the initiation of administrative proceedings before theConselho Administrativo de Defesa Econômica (the Brazilian Antitrust Authority) against several cargo airlines and airline officers, among them ABSA, for allegations of anticompetitive practices regarding fuel surcharges in the air cargo business. Given the current stage of the proceedings, it is not possible at this time to anticipate with any precision the outcome of the civil actions filed against Lan Cargo, although it is expected to be a lengthy process.
In June 2008, the Korean Fair Trade Commission notified LAN of an investigation into the air cargo industry and its non-compliance with the Monopoly Regulation and Fair Trade Act and has requested information and documentation from LAN, which LAN duly submitted. On May 26, 2010 the Korean Fair Trade Commission announced the imposition of penalties against 29 other airlines and excluded LAN from further investigation.
The New Zealand Commerce Commission also initiated an investigation into potential anti-competitive activities in the international air cargo markets and requested information and documentation from LAN, which LAN duly submitted. On December 15, 2008, the New Zealand Commerce Commission announced it would focus its investigation on ten airlines and excluded LAN from further investigation.
Fleet
General
As of February 29, 2012,2014, we operated a fleet of 150327 aircraft, comprised of 136313 passenger aircraft and 1413 cargo aircraft, as set forth in the following chart:
Number of aircraft in operation | Average term of lease remaining (years) | Average age (years) | Number of aircraft in operation | Average term of | Average age (years) | |||||||||||||||||||||||||||||||||||
Total | Owned(1) | Operating Lease | Total | Owned(1) | Operating Lease | lease remaining (years) | ||||||||||||||||||||||||||||||||||
Passenger aircraft | ||||||||||||||||||||||||||||||||||||||||
Airbus A318-100 | 10 | 10 | — | — | 3.7 | |||||||||||||||||||||||||||||||||||
Passenger aircraft(2) | ||||||||||||||||||||||||||||||||||||||||
Airbus A320 Family Aircraft | ||||||||||||||||||||||||||||||||||||||||
Airbus A319-100 | 25 | 25 | — | — | 4.6 | 52 | 40 | 12 | 5.4 | 7.8 | ||||||||||||||||||||||||||||||
Airbus A320-200 | 42 | 33 | 9 | 5.4 | 4.7 | 158 | 95 | 63 | 3.3 | 6.7 | ||||||||||||||||||||||||||||||
Boeing 737-700 | 9 | 0 | 9 | 1.6 | 9.4 | |||||||||||||||||||||||||||||||||||
Airbus A321-200 | 21 | 18 | 3 | 7.4 | 2.7 | |||||||||||||||||||||||||||||||||||
Airbus A340 Family Aircraft | ||||||||||||||||||||||||||||||||||||||||
Airbus A340-300 | 3 | 3 | 0 | 0.0 | 13.9 | |||||||||||||||||||||||||||||||||||
Airbus A340-500 | 0 | 0 | 0 | 0.0 | 0.0 | |||||||||||||||||||||||||||||||||||
Airbus A330-200 | 13 | 8 | 5 | 1.8 | 10.5 | |||||||||||||||||||||||||||||||||||
Boeing Aircraft | ||||||||||||||||||||||||||||||||||||||||
Boeing 767-300ER | 38 | 34 | 4 | 3.8 | 6.9 | |||||||||||||||||||||||||||||||||||
Boeing B787-800 | 10 | 6 | 4 | 11.1 | 1.1 | |||||||||||||||||||||||||||||||||||
Boeing B777-300ER | 10 | 4 | 6 | 4.0 | 3.7 | |||||||||||||||||||||||||||||||||||
Dash Aircraft | ||||||||||||||||||||||||||||||||||||||||
Dash 8-200 | 10 | 0 | 10 | 3.6 | 14.6 | 7 | 2 | 5 | 0.8 | 17.2 | ||||||||||||||||||||||||||||||
Dash 8-400 | 4 | 0 | 4 | 8.4 | 5.8 | |||||||||||||||||||||||||||||||||||
Boeing 767-700 | 31 | 21 | 10 | 2.1 | 8.6 | |||||||||||||||||||||||||||||||||||
Airbus A340-300 | 5 | 4 | 1 | 0.89 | 11.7 | |||||||||||||||||||||||||||||||||||
Total passenger aircraft | 136 | 93 | 40 | 3.6 | 6.8 | 312 | 210 | 102 | 3.9 | 6.8 | ||||||||||||||||||||||||||||||
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Cargo aircraft | ||||||||||||||||||||||||||||||||||||||||
Boeing 767-300 Freighter | 12 | 8 | 4 | 4.0 | 8.4 | |||||||||||||||||||||||||||||||||||
Boeing 767-300 Freighter(3) | 11 | 8 | 3 | 1.9 | 10.5 | |||||||||||||||||||||||||||||||||||
Boeing 777-200 Freighter | 2 | 0 | 2 | 5.1 | 2.8 | 4 | 2 | 2 | 2.3 | 4.0 | ||||||||||||||||||||||||||||||
Total cargo aircraft | 14 | 8 | 6 | 4.4 | 7.6 | 15 | 10 | 5 | 2.1 | 8.5 | ||||||||||||||||||||||||||||||
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Total fleet(2) | 150 | 101 | 49 | 3.7 | 6.9 | |||||||||||||||||||||||||||||||||||
Total fleet | 327 | 220 | 107 | 3.8 | 6.9 | |||||||||||||||||||||||||||||||||||
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(1) | Aircraft included within property, plant and equipment. |
(2) |
(3) | In 2014, two cargo aircraft Boeing 767-300 Freighter were subleased to |
LAN’s strategic fleet renewal plan involves the sale of five Airbus A318 aircraft during 2011, five during 2012 and five during 2013.
The daily average hourly utilization rates of ourLATAM’s aircraft for each of the periods indicated are set forth below.
Year ended December 31, | ||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||
(measured in hours) | 2014 | 2013 | 2012(1) | |||||||||||||||||||||||||
Passenger aircraft | ||||||||||||||||||||||||||||
Airbus A340-300 | 14.2 | 14.6 | 14.5 | 14.6 | 6.7 | 5.8 | 13.9 | |||||||||||||||||||||
Boeing 767-300 ER | 12.8 | 13.5 | 13.2 | 13.6 | 10.5 | 10.1 | 12.1 | |||||||||||||||||||||
Airbus A320-Family Aircraft | 9.5 | 10.8 | 10.3 | 10.4 | ||||||||||||||||||||||||
Boeing 787 | 10.5 | 5.6 | 3.7 | |||||||||||||||||||||||||
Airbus A320 Family | 9.8 | 10.3 | 10.2 | |||||||||||||||||||||||||
Boeing 777 | 12.9 | 13.6 | ||||||||||||||||||||||||||
Airbus A330 | 7.0 | 10.3 | ||||||||||||||||||||||||||
Cargo aircraft | ||||||||||||||||||||||||||||
Boeing 767-300 Freighter | 14.8 | 15.4 | 14.7 | 16.7 | 7.9 | 8.3 | 13.5 | |||||||||||||||||||||
Boeing 777-200 Freighter | 14.3 | 14.2 | 10.6 | — | 10.9 | 11.0 | 14.1 |
(1) | 2012 does not include aircraft used in TAM’s operations. |
We operate different aircraft types as we perform various different missionsservices ranging from short-haul domestic and regional trips to long-haul trans-continental flights. We have selected our aircraft based on the ability to effectively and efficiently serve these missions while trying to minimize the number of aircraft families we operate.
For short-haul domestic and regional flights we principally operate the Airbus A320-Family aircraft and, since the acquisition of Aires (rebranded as LAN Colombia in 2011), we also operate the Boeing 737-700 aircraft, the Dash 8-200 aircraft, and the Dash 8-400 aircraft. The Airbus A320 Family that we currently operateA320-Family has been incorporated into our fleet pursuant to operating leases or havehas been purchased directly from Airbus pursuant to various purchase agreements since 1999. The last purchase was made in June 2011, where we ordered 20 A320 NEO aircraft. Consequently, as of February 29, 2012 we had outstanding orders for seven Airbus A319 aircraft, 52 Airbus A320 aircraft, 10 Airbus A321 aircraft for delivery between 2012 and 2016 and 20 Airbus A320 NEO aircraft for delivery between 2017 and 2018. Our purchase contracts with Airbus provide for some flexibility with regard to future changes in aircraft types and delivery dates. We believe that our fleet of A320-Family Aircraft will allow us to provide broader service across Latin America as well as the domestic markets that we serve given their longer range. We also believe that they will enable us to increase efficiency levels through reduced fuel consumption and maintenance costs.
For long-haul passenger and cargo flights we operate the Airbus A330-200 aircraft, the Airbus A340-300 aircraft, the Boeing 767-300 passenger and cargo aircraft, andthe Boeing 777 Freighter aircraft. The Boeing 767-300 aircraft’s size and range provides an optimal alternative for most of our long-haul passenger and cargo routes. Additionally,aircraft and, since the commonality between the passenger and dedicated cargo versions allows us to leverage the ensuing economies of scale. We believe that these aircraft provide a key efficiency advantage over our peers, especially in the cargo business. The Boeing 767-300 aircraft that we currently operate have been incorporated into our fleet pursuant to operating leases or have been purchased directly from Boeing pursuant to various purchase orders since 1997. As of February 29, 2012 we had outstanding orders for 13 Boeing 767-300 aircraft. We also operate five Airbus A340-300 aircraft for long-haul routes. Given their range and four-engine configuration, these aircraft are well suited to perform trans-Atlantic and trans-Pacific missions out of Santiago. In the future, we will operate Boeing 787 aircraft for our long-haul fleet, for which we have placed 26 orders and committed six operating leases. We expect to receive our first Boeing 787 in 2012. For our cargo operations, we operate 12 Boeing 767 freighter and 2 Boeing 777 freighter. We expect to receive two Boeing 777 freighter aircraft during 2012. For more information, see “Item 10. Additional Information—Material Contracts”.
During the firstfourth quarter of 2009, we initiated2012, the process of incorporation of winglets, advanced technology devices, in all our passenger and Freighter Boeing 767-300B787-816 aircraft. Winglets are placed on the wings of an aircraft causing an approximate 5% reduction in fuel consumption. The total investment in this project amounts to approximately US$100 million. As of February 29, 2012, 43 aircraft have been modified and US$76 million of the total investment has been disbursed. We expect to continue with the implementation of this project during 2012 as we continue to receive Boeing 767s.
Fleet Leasing and Financing Arrangements
OurLATAM’s financing and leasing methods include borrowing from financial institutions and leasing under financial leases, tax leases, sale-leaseback transactions and pure operating leases.
In 2000, to finance Airbus As of December 31, 2014, LATAM had 327 aircraft, LAN entered into a US$1.3 billion umbrella credit facility with a syndicate of international financial institutions under which the Company borrowedone each were in the formredelivery process, in storage and on ground, resulting in 324 aircraft in operation. Of these aircraft, 161 are operated by LAN and 163 aircraft are operated by TAM.
As of separate loans in connection withDecember 31, 2014, LATAM’s operating fleet was comprised of 203 financial leases, 17 tax leases, 99 operating leases and 5 aircraft as loan guarantees. Most of the specific financing requirements of each AirbusLATAM’s financial and tax leases are structured for a 12 year period. LATAM has 44 aircraft (including pre-delivery and long-term financing). This umbrella facility was guaranteedleases supported by the English, French and German Export Credit Agencies. The repayment profile for each aircraft financed under the facility was for a period of up to eighteen years. Under this financing package LAN incorporated Airbus aircraft into its fleet through operating leases, financial leases and tax leases. Even though this facility covered the aircraft scheduled to be delivered under our 1998/9 Airbus purchase agreements through December 31, 2006, the Company decided to fund the 2006 deliveries with a new facility negotiated in 2006. This new facility financed the acquisition of
eight Airbus A319 delivered in 2006;
five A318 and two A320 delivered in 2007;
ten A318, two A319 and two A320 delivered in 2008; and
three A319 delivered in the first quarter of 2009.
This new US$920 million facility is similar to the previous one as there are separate loans drawn in connection with the specific financing requirements of each Airbus aircraft and is also based on support guarantees from the European Export Credit Agencies namely Compagnie Francaise d’Assurance pour le Commerce Exterieur (Coface), Euler Hermes Kreditversicherungs-AG (Euler Hermes) and the Secretary of State of Her Britannic Majesty’s Government acting by the Export Credits Guarantee Department (ECGD). Under this financing package LAN incorporated into its fleet Airbus aircraft through financial leases. The facility covered 85.0% of the purchase price of each aircraft plus the associated export credit agencies premium. The remaining 15.0% was funded directly by the Company. There is no remaining drawdown availability under this facility.
Between 2004 and 2006, LAN ordered 15 Boeing 767-300 passenger aircraft and freighters for delivery between 2005 and 2008. In 2004 the Company structured a new syndicated facility for US$260 million to finance the entire cost of the two Boeing 767-300 freighters delivered in 2005 and the first Boeing 767-300 passenger aircraft delivered in 2006. In 2005, LAN finalized the syndicated facility to fund the purchase of four Boeing 767-300 passenger and freighter aircraft for delivery in 2006. Between 2005 and 2006, LAN also finalized two additional syndicated facilities to fund the purchase of the remaining eight Boeing 767-300 Passenger aircraft. Three of these aircraft were delivered in 2007, and five were delivered in 2008. Each loan with respect to these aircraft is guaranteed by theU.S. Export-Import Bank of the United States (“Ex-ImEXIM Bank”) with a twelve-year profile for the financing of 85.0% of the aircraft value.
In June 12, 2005, LAN finished the payments with respect to a Boeing 767-200 aircraft that was held under a financial lease. This aircraft was subleased to a third party at market rate until December 2011. As of February 29, 2012, the aforementioned aircraft was in process of being returned by the third party to LAN.
In 2006, LAN also ordered three additional Boeing 767-300 passenger aircraft for delivery between 2009 and 2010. The first aircraft, which was delivered in November 2009, was financed through the issuance of an Ex-Im-Bank guaranteed bond and through LAN’s own funds (85.0% and 15.0%, respectively). The remaining two aircraft were financed through a new Ex-Im Bank guaranteed facility and through LAN’s own funds (85.0% and 15.0%, respectively).
In April 2007, LAN entered into two lease agreements with GE Commercial Aviation Services for the lease of two Boeing 777-200LR freighters, for delivery in 2009. In October 2007, we signed a purchase agreement with the Boeing Company for two additional Boeing 777-200LR freighters to be delivered in 2011 and 2012. In March 2010, LAN and the Boeing Company agreed to switch the first Boeing 777-200LR freighter for two Boeing 767-300 passenger aircraft to be delivered in 2011.
In the second half of 2007, the Company decided to acquire thirty-two new Boeing 787 Dreamliner aircraft with deliveries initially scheduled between 2011 and 2016. The Company entered into a purchase agreement with the Boeing Company for 26 of these aircraft and entered into a leasing agreement with theInternational Lease Finance Corporation for the remaining six aircraft.
In November 2008, the Company entered into a purchase agreement for four additional Boeing 767-300 passenger aircraft to be delivered in 2012. In March 2010, LAN decided to replace three of these passenger aircraft with three Boeing 767-300 freighters to be delivered between 2013 and 2014. The fourth aircraft was rescheduled to be delivered in 2011. During the last quarter of 2010, LAN decided to exchange the three Boeing 767 Freighters with three Boeing passenger 767-300 aircraft with deliveries in 2012. As part of this same contract, LAN also ordered a Boeing 777 Aircraft to be delivered in 2012.
During 2008, LAN decided to exercise 15 options to acquire A320-Family Aircraft. Six of these aircraft were delivered in 2010 and the remaining nine were delivered in 2011. In March 2010, LAN entered into a credit facility to finance the entire pre-delivery payments attached to these 15 aircraft. In April 2010, LAN entered into an agreement to finance the purchase of these 15 aircraft partially guaranteed80 supported by the European Export Credit Agencies (the “ECAs”). LATAM’s operating lease maturities range from 3 to 12 years.
LATAM’s aircraft debt, which is comprised of financial and partially throughtax leases, is denominated in U.S. dollars and typically has quarterly amortization payments. Both the financial leases and tax leases have a bank (or group of banks) as counterparty; however, the latter has also a third party involved. In terms of interest rate, 68.2% of our aircraft debt has fixed rate and the balance has floating rate debt based on USD LIBOR. During 2014, LATAM refinanced all of its own funds (85.0%Boeing deliveries for the year with EX-IM guaranteed bonds.
Going forward, LATAM will be the entity that takes delivery and 15.0%, respectively).act as the lessee on all related leases of all aircraft for the group and has the ability to sublease them to other airlines of the group.
In order to reduce TAM’s balance sheet FX exposure to the third quarter of 2010, LAN entered into three lease agreements with GE Commercial Aviation Services forBrazilian real, LATAM plans to transfer the six year lease of Boeing 767-300 Freighters already delivered in November 2010, December 2010 and January 2011.
In December 2009, LAN entered into a purchase agreement with Airbus for 30 aircraftmajority of the A320 family to be delivered between 2011 and 2014.
In July 2010, LAN entered into a purchase agreement with Airbus for an additional 50 aircraft of the A320 family to be delivered between 2012 and 2016.
In September 2010, LAN entered into two new six-year operating lease agreements with AerCap for 2 A320 aircraft for our operations in Colombia.
In January 2011, LAN entered into a seven-year lease agreement with the Bank of China Aviation Pte. Ltd. for one A320 aircraft.
In February, 2011, LAN increased its long haul aircraft orders by three Boeing 767-300 passenger aircraft with deliveries in the second half of 2012. In May 2011, LAN ordered five additional Boeing 767-300 passenger aircraft to be delivered between the last quarter of 2012 and the third quarter of 2013.
In June 2011, LAN signed a purchase agreement with Airbus for 20 A320 of the NEO Aircraft family, from which 10 of them are expected to be delivered in 2017 and the other half in 2018.
As of February 29, 2012, and as a result of the aircraft purchase agreements entered into with Airbus in 2009, 2010 and 2011, LAN has 89 Airbus passenger aircraft of the A320 family expected to be delivered between 2012 and 2018.
During the last quarter of 2011, LAN signed a purchase agreement for two Boeing 767-300 passenger aircraft with deliveries in the third and fourth quarter of 2012.
Regarding our Boeing fleet, nine Boeing 767-300 passenger aircraft are expected to be delivered in 2012 and four in 2013. We expect 32 Boeing 787-8/9 passenger aircraft to be delivered between 2012 and 2018 and two Boeing 777-freighter to be delivered in 2012.
As of February 29, 2012, we held 49TAM aircraft under operatingfinancial leases compared to 46 as of February 29, 2011. Twenty three of these aircraft are related to Lan Colombia domestic operations which consist of 9 Boeing 737-700, 10 Dash 8-200 and 4 Dash 8-400 aircraft. Under the terms of our operating leases, we are required to return the aircraft in an agreed upon condition at the end of the lease. Although the titleup to the aircraft remains with the lessor, we are responsible during the lease term for the maintenance, servicing, insurance, repair and overhaul of the aircraft.
LATAM level. As of December 31, 2011, aggregate future minimum lease payments required under our2014, 33 aircraft operating leases were US$705 million. Our operating leases have terms ranging from three monthstransferred to twelve years fromLATAM which helped to reduce the dateexposure to less than US$ 1 billion.See “Item 5—B. Liquidity and Capital Resources—Sources of delivery of the aircraft. For more information, see Note 2.21 to our audited consolidated financial statements. For more information on our expected future capital expenditures in connection with aircraft purchases seefinancing” and “Item 5. Operating and Financial Review and Prospects—5—B. Liquidity and Capital Resources—Capital Expenditures”. for a description of expected sources of financing and expected expenditures on aircraft.
Maintenance
LATAM’s Maintenance
Our heavy maintenance, line maintenance and component shopshops are equipped and certified to service our entire fleet of Airbus, Boeing and Bombardier aircraft. Our maintenance capabilities allow us flexibility in scheduling airframe maintenance, offering us an alternative to third-party maintenance providers.
LAN facilities at Comodoro Arturo Merino Benítez International AirportLATAM Line Maintenance
Our Line Maintenance Network operates in all the cities where LATAM operates, serviced by LATAM Maintenance staff in North and Latin America, and a mixed capacity between LATAM staff and external qualified outsourced providers in the rest of the world. LATAM Line Maintenance performs minor preventive and corrective maintenance tasks, which allows us to operate to all our destinations ensuring a safe operation of our aircraft and the compliance with local authorities’ regulation and the approved maintenance plans for each model.
Our Line Maintenance Network comprises 133 stations in South America, 40 in North America and 17 in Europe and Oceania, which produced up to 2.4 million man-hours in 2014. Throughout the Network, Santiago, ChileSao Paulo and Miami are among the most extensive stations servicing our passenger and cargo fleet.We rely on third party services for certain maintenance support for our aircraft and engines, where we have long term partnerships with Lufthansa Technik, International Aero Engines, CFM International, Pratt & Whitney, General Electric and Air France KLM.
In 2014, we continued with the implementation of the LEAN philosophy in Latin America and have been certified according to IOSA standards and as a FAA approved repair station. Our hangars and components shops at our Santiago repair station can service the Boeing 767, Boeing 777, Airbus 340 and Airbus 320 Family Aircraft fleet, as well as designing and manufacturing galleys, structures and composite materials. We also have the capability to retrofit aircraft interiors, including sophisticated in-flight entertainment equipment, and blended winglets in the Boeing 767 fleet. LAN facilities at El Dorado International Airport in Bogotá, Colombia can service the Boeing 737 and the Dash 8 Q200 - Q400 fleet.
Our engineering and maintenance division isorganization, achieving results in reliability, availability and productivity. As part of this effort, we introduced iPads in our Santiago operation to allow a faster resolution of technical disruptions and to optimize resource management. Also, we launched an initiative to consolidate all LATAM technical documentation in one single portal, which can be accessed by mobile devices in any of our maintenance stations, which we expect to have up and running the first half of 2016. Finally, we continued with our continuous improvement program to encourage our staff to suggest and implement ideas that result in a safer workplace and more efficient processes.
All of our maintenance operations are supervised by the local authorities around the network, such as DGAC in Chile and it is subjectedANAC in Brazil.These operations are subject to several recurrent external audits from civil aviation authorities and international entities, such as the FAA, the ArgentineDirección Nacional de Aeronavegabilidad (the National Directorate of Airworthiness) (“DNA”), the BrazilianAgencia Nacional de Aviacao Civil (“ANAC”), the EcuadorianDirección General de Aeronáutica Civil (“DGAC Ecuador”), the PeruvianDirección General de Aeronáutica Civil (“DGAC Peru”), the ColombianUnidad Administrativa Especial de Aeronáutica Civil (the UAEAC), theThe International Air Transport Association Operational Safety Audit (“IOSA”) (from the International Air Transport Association or “IATA”) and the International Civil Aviation Organization (“ICAO”), among others, in order to strictly comply with applicable regulations. The audits are conducted in connection with each country’s certification procedures and enable us to continue to perform maintenance for aircraft registered in the certificating jurisdictions. Our repair station holds FAA Part-145 certifications under these approvals.
We also rely on third partiesTo ensure the best capabilities in our personnel needed for certain maintenance support for our aircraftsafe, accurate and engines. Lufthansa Technik provides our Airbus A320-Family Aircrafton-time Line Maintenance, LATAM seeks to improve the technical, aeronautic regulatory, safety and A340 Aircraft component support on a power-by-the-hour basis under a long-term contract, which runs until 2019. International Aero Engines and CFM International provides the A320 and A319 engine support on a power-by-the-hour contract, which runs for twelve years once each enginedocumentation skills of its personnel. This is received. Pratt and Whitney provides the A318 engine support on a power-by-the-hour basis contract, which runs for ten years once an engine is received. General Electric provides the maintenance of our Airbus A340 engines under a similar contract, which runs for twelve years once an engine is received. In addition, General Electric provides for the maintenance of most of our Boeing 767 engines under a contract effective until 2013. Third parties also provide certain additional engine maintenance services. Air France-KLM, which services have been contracted until 2015, provides the maintenance of our Boeing 777 engines and components and to our Boeing 767-300 components.
We occasionally perform certain maintenance services for other airlines.
Our aircraft maintenance personnel participatespossible through their participation in extensive training programs at the jointly operated Lufthansa LAN Technical Training S.A., locatedLATAM Center and specific training programs designed and dictated by our partnerships. Also, the Fleet and Engineering teams participate actively in the periodical airline Fleet Reliability meetings, where we share best industry practices and updates of the latest Line Maintenance trends and top technical issues.
LATAM MRO
LATAM MRO Business Unit is responsible for our heavy maintenance (airframe) and components shops facilities that are equipped and certified to service our fleet of Airbus and Boeing aircrafts. One two MRO facilities, one in São Carlos (Brazil) and one in Santiago Chile.(Chile), provides 75% of all heavy maintenance services the entire group of airlines demands. The services not executed internally are contracted between our extensive network of MRO partners around the globe. Both MRO facilities are FAA Part-145 certified repair stations .We occasionally perform certain heavy maintenance and component services for other airlines or OEMs. LATAM MRO is also responsible for planning and execution of aircrafts redeliveries.
In MRO São Carlos (TAM MRO) we are prepared to service up to 9 (nine) aircrafts (narrowbody and widebodies) and 2 (two) regional/turboprop aircrafts simultaneously, with a dedicated hangar for stripping and painting. In that facility we also have 22 technical components shops, including full Landing Gear repair & overhaul shop, Hydraulics, Pneumatics, Electronics (ATEC), Electrical Components, Electroplating, Composites, Wheels & Brakes, Interiors and Emergency Equipment shops. This facility is also known as “São Carlos Technological Center” and has its own total area of 400 ha and hangar area of 100,000 m², with a dedicated runway of 1,720 meters. MRO São Carlos is certified and audited by major international aeronautical authorities such as FAA (USA), EASA (Europe), ANAC Brazil, DGAC (Chile), ANAC Argentina, DGCA (Ecuador), DINAC (Paraguay), TC (Canada), among others, for Heavy Maintenance and Components Repair and Overhaul for Airbus A-320 family (A318, A319, A320 & A321) and Airbus A330, Boeing 767, ATR-42/72, and Embraer E-Jet 170/190 families. The MRO also has some minor capabilities for repair and overhaul of Airbus A340 and Boeing 777 components. MRO São Carlos includes its own support engineering capabilities, a full technical training center which develops MRO’s capabilities in terms of human skills with more than 6,000 students and 90,000 hours of training in 2014 providing 80 different basic courses, on-the-job training and special training such as structural, avionics, foreign language and leadership training and education.
In MRO Santiago, located near Comodoro Arturo Merino Benítez International Airport in Santiago, we have 2 hangars capable of servicing simultaneously 2 (two) widebody aircrafts and 1 (one) narrowbody aircraft in LAN Maintenance Base. MRO Santiago is certified and audited by FAA, ANAC Brazil, DGAC (Chile), ANAC Argentina, DGCA (Ecuador), among others for Heavy Maintenance for Airbus A320 family (A319, A320 & A321), Boeing 767 and 787. MRO Santiago has 8 (eight) shops prepared to support hangar activities, to designing and manufacture galleys, structures and composite materials. We also have the capability to retrofit aircraft interiors, including sophisticated IFE (in-flight entertainment) equipment, and blended winglets in the Boeing 767 fleet.
In 2014, we focused on the consolidation of the integration of MRO capabilities and processes started in 2013. In 2014, LATAM MRO effectively applied 2.5 million man-hours, serviced 274 aircrafts, including C, D and Special Checks for LATAM fleet and for third party customers, delivered approximately 60,000 components and performed 15 landing gear overhauls. In 2014, LATAM MRO serviced almost 100% of all LATAM’s Airbus A320 family and A330 demand for Heavy Maintenance, and 75% of demand for Components Repair & Overhaul. LATAM’s external maintenance and repair customers include Azul, Trip, Avianca, the Brazilian Air Force, Embraer, Goodrich, and Hamilton Sundstrand, among others.
In 2011, LAN continued implementing the management system known as LEANwe started a turn-around process to achieve international MRO competitive standards in an effortterms of costs, quality, reliability and time of deliveries (TAT). In 2012 we began to increase efficiency throughout its maintenance network. The adoption of this system constituted a redesigning of processes which detect problems during aircraft maintenance and offer a solution. The foregoing renders the daily tasks and processes carried out within the Company more efficient. Internationally,implement the LEAN system and other activities, including continuous process improvement culture, redesign of the production methodology in productive cells and scheduling of task through CCPM methodology (Critical Chain Project Management), development of shop-floor control systems and carry out VSM process modeling for Landing Gear shop. 2013 was the year of consolidation of these initiatives and in 2013 we accomplished a significant 7% reduction in turnaround times, increased on time performance and improved quality of our services (as measured by reductions in post-check failures and premature components failures). In 2014, we celebrated our achievement of one year without any accidents with lost days in MRO São Carlos and reduced the accidents in MRO Santiago by 40%.
LATAM Safety and Security
Our most important priority is the safety of our passengers and employees. LATAM has been defined as a methodology for achieving excellenceworking to standardize LAN and continuous improvement. It seeksTAM’s operational indicators regarding safety, audits and emergency response. This process of identifying synergies in LAN and TAM’s operational indicators has led to eliminate activities that do not add valueopportunities to processes, and suppressing those activities that are superfluous, thereby allowing companies to reduce costs, improve processes and increase customer satisfaction.standardize operational processes and audits.
DuringPrior to the last year,combination, both LAN continued to benefit from the implementation of LEAN in heavy and line maintenance. Heavy maintenance is performed approximately every 12–18 months or a specific amount of actual flight hours as defined by the manufacturer, while line maintenance is performed on a daily basis. In 2011, we achieved approximately a 30.0% reduction in the time an aircraft remains in the hangar. Moreover, we achieved a 30.0% to 50.0% reduction in the time for some of the most demanding tasks in line maintenance and a 15.0% increase on workers’ productivity. Other benefits of LEAN include a reduction of approximately 64.0% in labor accidents in heavy maintenance areas, a reduction of 80.0% on delays deliveries of aircraft from programmed maintenance, and a considerable improvement on dispatch reliability. Furthermore, by establishing clear roles, challenges and achievements, the implementation of LEAN hasTAM had an important benefit in terms of employee motivation.
Safety and Security Corporate Direction
The Safety and Security Corporate Direction (“SSCD”) is an internal divisiondivisions in charge of the management of safety and security matters related to flight operations, operativeFlight Operations, Operative and administrativeAdministrative buildings, organizationOrganization and coordinationCoordination of emergency responseEmergency Response matters, safetySafety and security auditsSecurity Audits and safetySafety and occupational health.
The SSCD reports directly to LAN’s Chief Executive Officer (“CEO”), which reflectsOccupational Health. Today, the firm commitmentdiversions that the Company’s senior management has with its employees. The SSCD is comprised of five independent reporting management areas: safety management, security management, emergency response management,support these functions - -: Safety Management, Security Management, Emergency Response Management, Safety & Security Audit managementManagement and Safety and Occupational Health Management.Management– function on the basis of uniform policies and procedures.
Safety Management
We give high priority to providing safe and reliable air service, as itservice. We have unified our Safety Management under a single organization that is considered a fundamental asset to responsible for defining the processes and procedures for the LATAM SMS and for oversight for the subsidiaries that apply and implement those processes and procedures.
LAN and one of the basic pillars for the development of our Company. WeTAM have uniform safety standards and safety-related training programsdocumentation regarding SMS that cover all of our operations. LAN has implemented a Safety and Quality Management System (“SMS”) throughout the operational areas of the Company, which is certified by the Chilean DGAC and IOSA System. The SMS providesprovide clear definitions of the functions and responsibilities regarding operational safety for all persons involved, from the top to the bottom of the operational structure ofin the airline. It strengthens the commitment
Both systems are IOSA certified and knowledge required from everyone in the Company regarding any and all actions that could affect safety.
The Operationalhave a Safety Director (“OSD”)Senior Manager who is responsible for each system implementation and for setting standardized procedures for measuring the Operational Safety Oversightquality and safety of services provided by companies or professional contractors that affect the implementationoperational safety of the SMS. The OSD supervises a staff of approximately twenty-one safety specialists of different backgrounds, including pilots, aeronautical engineers, aircraft maintenance engineers, a psychologist, and dangerous goods and ground handling safety specialists.this organization.
Our corporate operational safety organization consists of fourthree main areas:
Flight Safety Management: The Flight Safety Area overseesRisk Management, which is responsible for identifying hazards, assessing the risks involved and audits ourcoordinating with operational safety measures, investigates major incidentsareas (flight, maintenance, and programsground and controlscargo operations). Risk Management operates the hazard identifying tools implemented in LATAM Airlines Group (Reports, Investigations, Change Management, Audits, LOSA and FOQA Programs (as defined below). The Flight Safety Area also oversees and audits safety measures related to ground handling and cargo areas and investigates related incidents.
Maintenance Safety Management: Assurance and Safety Promotion, which is responsible for managing all Safety Indicators for visualizing the performance of operational areas regarding Safety, and for promoting a Safety Culture through communication and training.
The Maintenance Safety Area oversees and audits our maintenance safety measures and investigates maintenance-related incidents.
Flight Data Monitoring Management:
The Flight Data Monitoring Areaarea is responsible for the maintenance and administration of the recorded flight data and safety-related databases and software.
Flight Operations Quality Assurance—“FOQA” : LATAM has a Flight Data Monitoring (“FDM”) program implemented for collecting, processing and analyzing all flights for all LATAM’s fleet in all his AOCs. This program utilizes the data to produce statistical information to verify that recommended standard operational procedures are correctly done, and make changes if required as well as other safety-related measures. We have started the development of a maintenance variation for the same aircraft types which will monitor the engines, flight controls and general performance of the airplanes.
Maintenance Safety Coordinator
The mainMaintenance Safety area oversees our maintenance safety programs, elementsmeasures and procedures include:investigates maintenance-related incidents using the Maintenance Error Decision Aid (“MEDA”) methodology.
Cabin Safety Coordinator
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The Cabin Safety area coordinator is responsible for managing the safety of aircraft cabins, cabin safety investigations, cabin passengers and flight attendants.
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Investigation & Safety Information Management Coordination
All information regarding safety-related incidents is entered into dedicated software, where it is analyzed according to potential risk. Important incidents are investigated thoroughly. Each particular incident requiring corrective actions is addressed accordingly with the assistance of the corporate |
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We also have an operational safety committee, composeddirectory.
LOSA—Line Operations Safety Audit Coordinator
This program is recognized by the International Civil Aviation Organization (“ICAO”) and the National Civil Aviation Agencies, both of senior executiveswhich oversee our operations, as a necessary tool for protecting passengers and key operational managers, responsibleemployees.
The implementation of this program has been used to improve flight safety in the Company, by recording behaviors observed during normal flights for experienced pilots and through the initiationpreparation of safety-related actions.
All of our Boeing 767, A320, A340a mandatory checklist (form) developed by experienced pilots familiar with the program. Observations by the Threat and Boeing 777 fleets are equipped with an enhanced ground proximity warning system, a traffic collision avoidance system, a wind shear detectionError Management (“TEM”) may even propose appropriate changes to the system and reduced vertical separation minimum capabilities.processes.
Since 1991, we have had no accidents involving major injury to passengers, crew or aircraft.
Security Management
The main policy and the essential principle of the Company is to ensure an adequate security protection tofor all of its flights, aircraft, passengers, crew members, ground personnel, airport facilities and other services related to the commercial civil aviation against any threat or unlawful action.
The Company hasWe have implemented corporate policies and a quality management system through the operational systemplanning of audits and inspections to detect any lack of security in its operations. Auditsour operations and assessments areto prevent acts of unlawful interference. Risk analysis is used to assigndetermine different levels of security to be implemented in international and domestic operations.
TheSecurity Corporate Security Manager (“CSM”) hasManagers in LAN and TAM have the responsibility to evaluate, analyzeof evaluating, analyzing and assign threatassigning risk levels (high, medium, low) to international and domestic operations, and proposing security procedures for each scenario. The CSM leads an organization of five security managersmanagement is controlled and approximately fifteen security specialists. The current CSM is a former police officer with more than 25 years of experience in the civil aviation.audited constantly.
The corporate security organization has five main areas:
Domestic Security Operations: that report to a former police officer with more than 20 years of experience in civil aviation.
International Security Operations: that report to a former police officer, with more than 20 years of experience in civil aviation.
North America, Caribbean and Europe Security Operations: that report to a security specialist, with more than 18 years of experience in civil aviation.
Argentinean Security Operations: that report to a security specialist, with more than 30 years of experience in civil aviation.
Peruvian Security Operations: that report to a security specialist, with more than 19 years of experience in civil aviation.
Each of the five areas is subdivided in internal investigations, fraud, training, cargo and passengers’ security, security of facilities and quality control.
Since 2002, the Company’s Corporate Security Manual unified international and domestic security procedures:
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Airport Security Plan or Airport Security Program. Approved by the DGAC for each country in which we have operations. It includes procedures to prevent unlawful conduct and procedures for a bomb threat or hijacking drill.
Corporate Security Training Program. It includes the contents and definitions regarding security training for all areas involved in acceptance of aircraft, baggage, cargo and passengers.
Airport Security Inspection Program. It has the contents and definitions regarding airport inspections and identification of security issues and corrective action plans for non-compliance.
Emergency Response Management
The emergency response areamanagement team is responsible for the administration of the Emergency Response Plan (ERP). It has been developed for the effective management of different kinds of emergencies (aircraft accidents, and serious incidentsnatural disasters, strikes, pandemics) with the purpose of mitigating any impacts of emergencies on the passengerpassengers and their relatives, andas well as the Company’s operations.
The ERP consists mainly of:
includes, among others, Emergency Procedures. They are widely advertised inside the Company, approved by the DGACProcess and covered by theProcedures, Emergency Administration Manual.
Emergency Response Centre (ERC). The ERC includes three principal areas: the Emergency Strategy Committee, the Emergency Resolution Committee and the Public Relations Monitoring Area. Those areas are located at Santiago, Chile. Most of them have meetings rooms, computers, satellite TV, conference call systems, video conference facilities, kitchens and rest rooms.
Specialcontrol centers, Relatives & Passengers Assistance Team, (SAT). We haveNotification Team, Aircraft Recovery, and a humanitarian assistance program that we deploy for family and passenger assistance. We have about 1,200 total active volunteers distributed as follows: Santiago (700 volunteers), Miami (120 volunteers), Lima (210 volunteers), Ecuador (110 volunteers), and Buenos Aires (90 volunteers). Our SAT“Go Team” which is complemented by service vendors.
Telephone Inquiry Center. It is located in Santiago, Chile, at our call-center office and has 500 agents. There are 18 toll free lines activated for family member calls and are published through the company web site and the media, in case of emergencies.
Go Team. We have a special team that iswill be dispatched to emergencies involving LAN aircraft. The Go Team includes a director, a SAT leader, a field investigation team (FIT) leaderin the case of an emergency and other representatives fromwill assume the general support, an Informatics & Telecommunication (IT) team, and security, finance, legal and maintenance departments.
Logistic Area. It is activated and deployed in our head quarters and at the locationresponsibility of the accident.emergency management.
Safety and Security Audit Management
The Safety and Security Audit Management reports directly to the Corporate Director. This area has the mission to adviseof advising senior management on issues relatingrelated to planningplan and control, design, documentation, implementation, maintenance, documentation and observation of the improvement of the SMS of LANLATAM Safety and its subsidiaries.
Functions and Responsibilities
Administration of Internal Evaluation Program by conducting organization-wide audits in all operational areas.
Advise to senior management regarding the fulfillment of IOSA and ISAGO standards.
Report to senior management the status of the SMS and Corporate Quality Management Area.
Coordination of the implementation of the IOSA and ISAGO external audits with the Audit Organization.
Participation in the ISAGO IATA Audit Pool.
Creation of guidelines for the quality assuranceSystem. An annual audit program of the operational areas of Lan Airlines, Lan Expressprocesses is coordinated and Lan Cargo,carried out ensuring that the internal auditors follow the Quality System procedures and quality coordinators ofdetect proactively the LAN subsidiaries.
Implementation of the Internal Audit Plan and ISAGO and IOSA audits including operational processes relatingway to safety and security, quality objectives, status of corrective and prevented actions, and customer complains.
Coordination of corrective and preventive actions arising from the implementation of the SMS and corporate quality.
Establishing the IOSA and ISAGO Training and Qualification Auditors Procedure.
Establishing a corporate system to evaluate and control the external suppliers, in case of outsourcing services.
Safety and Occupational Health Management
The main objective of the Safety and Occupational Health Management program is to ensure the safety and health of workers at work, by advising, managing and helping the company prevent occupational accidents and diseases through the identification and control of occupational hazards and medical surveillance.
The forgoingforegoing objectives are satisfied through a dedicated team of professionals (engineers, doctors, risk prevention experts and paramedics), who constantly develop activities aimed at protecting LANLATAM employees.
Functions and Responsibilities
Implementation and control of the preventive management systems.
Development of training programs.
Promotion and dissemination of safety and occupational guidelines,
Assessment of risk of work place.
Medical assistance to all injured employees.
Investigation of all accidents.
Preemployment medical assessment.
Compliance with legal regulations regarding occupational health, safety and environmental issues.
Checking of the emergency systems installed in the facilities.
Fuel Supplies
Fuel costs comprise the single largest category of our operating expenses. Over the last years, our fuel consumption and operating expenses have increased due to the significant growth in our operations andoperations. On the other hand, in the year 2014 due to the increase in fuel prices as a result of economic and political factors. In 2011, the foregoing trend was affected by geopolitical instabilitysignificant drop in the Middle East and theinternational price of crude oil, LATAM has seen also a drop in its Jet fuel costs. In 2014 total fuel costs represented 33.8%34.9% of our total operating expenses. The into-wing (fuelprice for 2014, (average fuel price plus taxes and transportation costs) 2011 average final pricecosts, including hedge) was US$3.113.36 per gallon, representing a 34.2% increasedecrease of 3.4% from the 2010 average.2013 into-wing average fuel price. We can neither control nor accurately predict the volatility of fuel prices. Despite the foregoing, it is possible to partially offset the price volatility risk through our hedging and fuel surcharge programs in place in both our passenger and cargo business. For more information, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Risk of Fluctuations in Jet Fuel Prices”.Prices.”
The following table details our consolidated fuel consumption and operating costsexpenses, after related hedging gains and losses (which exclude fuel costs related to charter operations in whichbecause fuel expenses are covered by the entity that charters the flight) during the last three years.
Year ended December 31, | Year ended December 31, (1) | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
Fuel consumption (thousands of gallons) | 562,346.0 | 501,098.2 | 452,708.5 | 1,219,882.7 | 1,266,718.6 | 948,419 | ||||||||||||||||||
ATKs (millions) | 10,056.1 | 8,968.8 | 7,811.8 | |||||||||||||||||||||
Fuel consumption (thousands of gallons) per ATKs (millions) | 55.9 | 55.9 | 58.0 | |||||||||||||||||||||
ASKs Equivalent (millions) | 206,197.9 | 212,236.8 | 161,207.6 | |||||||||||||||||||||
Fuel consumption (thousands of gallons) per ASK Equivalent (millions) | 59.2 | 59.7 | 58.8 | |||||||||||||||||||||
Total fuel costs (US$ thousands) | 1,750,052 | 1,161,927 | 959,608 | 4,170,848 | 4,414,249 | 3,434,569 | ||||||||||||||||||
Cost per gallon (US$) | 3.11 | 2.32 | 2.12 | 3.42 | 3.48 | 3.69 | ||||||||||||||||||
Total fuel costs as a percentage of total operating costs | 33.79 | % | 29.79 | % | 29.80 | % | ||||||||||||||||||
Total fuel costs as a percentage of total operating expenses | 34.88 | % | 34.97 | % | 36.41 | % |
(1) | See “Item 5. Operating and Financial Review and Prospects—Operating Results—LATAM Airlines Group Financial Results Discussion: Year ended December 31, 2014 compared to year ended December 31, 2013”. Total fuel costs (US$ thousands) include Hedging gains/losses. |
Our fuel supply arrangements vary by airport and are distributed among 29 providers, but are mainly concentrated in Brazil (43%), Chile (13%), United States (12%) and Perú (10%). During 2014, we negotiated our fuel supply in major European, North American and South American airports. We also negotiated around 15% of our fuel supply in Santiago and most of the regions of Chile.
We have entered into fuelIn 2014, we also signed a long term contract with Pure Biofuels in Lima and with Puma Aviation in Asunción, Paraguay. In North America our main airports are Miami and New York, where we signed contracts to serve operations to more than sixty internationalwith WFS securing our supply in complex markets.
In Argentina, Brazil, Colombia, Ecuador, Mexico, Paraguay and domestic destinations around the world. Contractual terms and conditions vary for each location depending on market conditions, logistics network, volume, economic and political factors,Uruguay, we continued working with our current suppliers (including Raizen/Shell, YPF, Petrobras, Petro Peru,Repsol, Petroecuador, Terpel, Axion, among others. In 2010, approximately 24.7%) regarding our fuel supply arrangements in these countries and many of our total fuel consumption was originated in Chile where we maintain a long-term commercial relationship with a joint venture between Air BP and Copec, and where we have entered into specificthese supply contracts with Petrobras Aviation and Enex Aviation. We have more than twenty additional suppliers in our network such as Repsol YPF, Cepsa, Petroperu, Chevron, Air Total, Q8 Aviation and Exxon Mobil. In our secondary hubs we have the following fuel suppliers: WFS (Miami), Exxon Mobil and Petroperu (Lima), Exxon Mobil, Repsol YPF and Shell (Buenos Aires) and PetroEcuador (Guayaquil).agreements will be negotiated during 2015.
Ground Facilities and Services
Our main operations are based at the Comodoro Arturo Merino Benítez International Airport in Santiago, Chile. We also operate from various other airports in Chile, and abroad. Wewhere we operate hangars, aircraft parking and other airport service facilities at the Comodoro Arturo Merino Benítez International Airport and other airports throughout Chile pursuant to concessions granted by the DGAC. We also maintain onea customs warehouse at the Comodoro Arturo Merino Benítez International Airport, additional customs warehouses in Chile (Iquique, Antofagasta and Punta Arenas) and Argentina (Aeroparque) and operate cargo warehouses at the Miami International Airport to service our cargo customers. Our facilities at Miami International Airport include corporate offices for our cargo and passenger operations and temperature-controlled and freezer space for imports and exports. We also operate from various other airports in Chile and abroad.
We have VIP loungesalso operate significant ground facilities and services through TAM’s headquarters located at the Comodoro Arturo Merino BenítezCongonhas International Airport. The 7,500 square feet Neruda lounge, which represented an investment of approximately US$550,000Airport in 2001, has been widely acclaimed.São Paulo, Brazil. In 2005,Latin Trade magazine selected it as the “Best Airline Lounge” in Latin America. In the same airport2013, we also have the 4,300 square feet Mistral lounge.inaugurated two new facilities for ground handling equipment maintenance and repair at São Paulo’s Guarulhos Airport with 9,000 m² and at Rio de Janeiro’s Galeão Airport with 4,000 m².
Finally, we incur certain airport usage fees and other charges for services performed by the various airports where we operate, such as air traffic control charges, take-off and landing fees, aircraft parking fees and fees payable in connection with the use of passenger waiting rooms and check-in counter space.
During 2010, APV’s (“In-flight Service Supplier”) new 1,650 square meter facilities were completed in the Comodoro Arturo Merino Benitez International Airport.
The development of the new building for the facilities of Andes Airports Services (“Andes,” which performs ground handling services) is in process which is scheduled to be delivered during the second half of 2012.
Ancillary Airline Activities
In addition to our airline operations, we generate revenues from a variety of other activities. In 2011, LAN generated other revenues of US$132.8 million from ancillary activities.
Our total revenue fromactivities, including aircraft leases (including subleases, dry-leases, wet-leases and capacity sales to certain alliance partners) and charter flights, amounted to US$12.7 million in 2011.
On January 25, 2011 Lan Cargo S.A. and Inversiones Lan S.A., subsidiaries of LAN Airlines, signed a promise to sell to Bethia S.A. (“Bethia”) 100% of the capital in the LAN subsidiaries Blue Express Intl. Servicios de Transporte Limitada and Blue Express S.A. (together referred to as “Blue Express”), companies engaged in ground courier services, operating brands and certain computer programs.
The price stated in the promissory contract was US$54 million subject to any adjustments that might arise as a result of a due diligence to be conducted by Bethia. The transaction closed on April 6, 2011, with the execution by Lan Cargo S.A. e Inversiones Lan S.A. as sellers, and Servicios de Transporte Limitada and Inversiones Betmin SpA (subsidiaries of Bethia) as purchasers, of the respective contracts for the sale of 100% of the social capital of Blue Express in the terms agreed in the purchase promise. The final sale value of Blue Express was US$53.5 million. Since Blue Express’ book value was US$9.1 million, the sale generated a non-operational profit of approximately US$44.5 million, which was reflected on LAN’s 2011 results.
As a consequence of the sale of Blue Express in 2011, the Company’s courier business revenues fell from US$36.8 million in 2010 to US$11.0 million in 2011.
During 2011, we had revenues of US$44.0 million from tours, and US$16.9 million for duty-free in-flight sales. The balance of our operating revenues, US$48.3 million in 2011, was generated bysales, other maintenance, storage and customs, handling and others.activities and revenues of Multiplus. In 2014, LATAM generated other revenues of US$378 million from ancillary activities.
Insurance
We carry hullmaintain insurance thatpolicies as required by law and in accordance with the terms of all aircraft leasing agreements which LATAM and their affiliates and subsidiaries may own or we are responsible for or operate, including TAM and its affiliates and subsidiaries. The scope of these policies includes among otherall risk coverage “all risk,”for aircraft hulls, including war risks and allied risks, spares andthird party legal liability for passengers, cargo, mail, baggage and injuries to third parties. We renew our insurance coverage yearly,parties on the ground. Our current policies, which are in force through April 1, 2015 and are subject to deductibles that vary depending onrenewed annually, follow the coverage type andbest practices adopted by the loss type. Our deductibles are US$1,250 for loss or damage per occurrence associated with passengers’ baggage liabilities, US$10,000 per occurrence for loss or damage associated with cargo liabilities and between US$500,000 and US$1.0 million per occurrence for hull “all risk” insurance (depending on the aircraft type). Additionally, we have hull deductible coverage to reduce the net hull deductible to US$100,000 per occurrence (aircraft and/or engine).international civil aviation industry.
Since December 2006, weWe have negotiated common terms for Hull All Risk, Aviation Legal Liabilities and Spares coverage, together with BritishIAG Group (British Airways, Aer LingusIberia and their affiliates and franchisesfranchises), which allows us to obtain premium reductions and coverage improvements. We also maintain insurance in respect of the assets against the risk of theft, fire, flood, electrical damage and similar events for equipment and buildings we own or for which we are responsible, including airport areas where we have operations. Similarly, we have contracted for vehicle insurance against the risk of robbery, theft, fire and civil liability against third parties for all vehicles we own or for which we are responsible.
Information Technology
Passenger Service Systems
As part of the Single Agenda of Transformation of the Customer Experience at LATAM, we have redefined our travel experience model and will continue to redesign our passenger service systems with the aim of providing a unified experience to our customers. Since the association between LAN and TAM was announced in 2012, a series of projects have been implemented to foster company among customers the perception that they are a single company offering equivalent services. Intense efforts have been made to standardize processes such as passenger recognition, attention at contact centers, sales offices and airports, in-flight services, e-commerce, loyalty programs, etc. However, many of these efforts are partial pending full unification of the two companies’ processes and systems, which is still ongoing.
In April 2011, Iberia, Air Nostrum and Vueling also joined to such group.
Our insurance coverage has a one-year term starting in April of each year. The aggregate cost2014, we redefined our travel experience model was based on the needs of our insurance coverage for the 2011 calendar year was US$16.3 million, excluding insurance relating to Aires, which represents a 4.6% increase in insurance expenses and a 17.2% decrease in average insurance rates compared to the 2010 calendar year.
Aires was covered under a separate insurance policy until October 1, 2011, when it was integrated under LAN’s policy. Its annual cost was US$7.9 million (US$7.3 million from January to October and US$0.6 million from October to December).
Information Technology
General
We use information technology in almost every aspect of our business.
Our reservations, departure control (check-in), inventory, flight planning and baggage tracing systems are operated by Amadeus, Sabre, Iberia and SITA, and we operate our internal systems from two data center facilities in Santiago, Chile. In 2006, we implemented a Disaster Recovery Plan between those two sites in order to ensure the functionality of our critical systems, with a recovery time objective of four days. The line of business infrastructure currently has an average recovery time of two hours for 80% of our systems and two days for the remaining 20%.
Third-party suppliers provide us with the following technical infrastructuretarget customer, reinforcing six key elements:
wide-area data network (provided mainly by SITA and Telefónica); and
data centers
All these elements call for the development of new processes with strong technological support. This, in turn, requires a robust and desktop operationsconsistent technological model meets the new standard of service we offer to passengers and support (providedguarantees the continuity of business processes.
In order to address this challenge, we drew up an aggressive and robust three-year plan of work, with focus on the customer throughout 2015. This plan includes the design of new processes and selection of the definitive platforms that will be part of LATAM Group’s new solution. Under this plan, we will review the current status of each area of work involved in the travel experience, compare it to the desired technological end state, and establish a roadmap that is consistent with both customer perceptions and internal processes. Examples of the many areas of work to be considered include:
Basic Infrastructure Operation
Since early 2010,
Implementation of many of these processes also calls for consistent work to unify customer service support systems. To this end, work has been undertaken to select the necessary end-game tools that meet the identified challenges and is compatible with our technological standards. In furtherance of this goal, we have outsourced oureither selected the best tools already available at LAN or TAM or have opted to implement new tools, in which case a selection process is launched.
The design and implementation of this plan for the next three years form part of the so-called Single Agenda of Transformation of the Customer Experience at LATAM.
LATAM host and digital world
In the case of passenger management systems, LAN and TAM adopted different solutions in 2012 and 2009, respectively.
TAM’s migration to Amadeus in 2009 included standardization of processes and solid preparation of the technological platform for joining Star Alliance in 2010. TAM implemented a complete end-to-end solution with Amadeus, including inventory, bookings, electronic sale of tickets, mobile solutions, kiosk, check-in and loading solutions.
LAN migrated to Sabre in 2012 and similarly focused on improving processes and a robust solution. The scope of Sabre’s implementation included inventory, bookings, ticket sales, kiosk, check-in and loading. LAN’s approach differed from that of TAM in that all e-commerce and mobile solutions were provided by partners or developed internally.
After the combination, LATAM decided to unify the Passenger Service Platform in a quest for operational and financial synergies. As a result of this, the project of migration of the current LAN and TAM platforms began in 2014.
This project comprises three phases. The first seeks to evaluate the technical and functional capacities of the partners with which Sabre (LAN) and Amadeus (TAM) were operated and to negotiate better commercial conditions for LATAM. Selection of the supplier will be followed in the second phase by a draft establishing all the requirements and the implementation plan and, once this has been completed, announcement of the Go Live date. Finally, the third phase consists in the project’s implementation.
LATAM has announced that, in parallel with the migration of the passenger service platform, it will make an important investment in its digital platform as part of its strategy to improve services and its customers’ travel experience. Through innovation and best practices, the digital platform will be enhanced, focusing on the business priorities for e-commerce and mobile solutions.
Maintenance
In 2010, after a 2.5-year implementation process, LAN started production of the MXI (Maintenix) solution for maintenance of its fleets in accordance with aviation regulation. This solution integrates Maintenance and Procurement and Logistical Management of Components (parts and spares) processes in a single IT infrastructure with Accenturetool.
In 2010, TAM evaluated adoption of the same solution but postponed its implementation.
In 2013, TAM began implementation of a 2.5-year Maintenix implementation project that is scheduled for completion by the end of 2015. This project includes standardization of LAN’s and IBM worldwide. During 2011 IBM managedTAM’s maintenance processes, permitting optimization of stocks of components and seeking to take advantage of synergies in the data centermaintenance process, while operational safety remains the key pillar of its implementation. This solution also takes into account the specific nature of financial, accounting and Accenture handled our desktop equipment. tax processes in Brazil.
ERP LATAM
In January 2015, the SAP platform (ERP ECC 6.0, EHP 3.0) was implemented at TAM, adapted to Brazil’s financial and procurement needs. This project forms part of LATAM’s IT strategy, defined in 2012 we will changeand known as PMI (Post Merger Integration), which contains the managerroadmap for integration of our data center from IBM to HP. all LATAM’s systems.
This outsourcing allows us to:
deliverproject implements unification of the company’s information systems and the integration of LATAM Group’s finance and procurement processes standardizes the technological platform for these processes and consolidates the Group’s organizational structure, implying better control mechanisms and a standard world-class service;
increase the efficiency of our IT operations;
convert fixed costs into variable costs;
guarantee that the service standards (such as up-time and response time) required by critical processes of our business are fulfilled;
accelerate critical infrastructure projects while significantly reducing the resources required;
increase the efficiency of our personnel; and
focus internal IT efforts on business functions, rather than basic hardware and software issues.
Telecommunications
We have used the latest technology available with regard to our global telecommunications network. Our network has thegreater analytical capacity to transport voice, data,support decision-making.
The project is currently at the stage of stabilization and video withtransfer of control to the quality required bySAP team which will be responsible for business continuity and support.
Implementation of another PMI project also began in the Company, combining traditional private data channels with virtual private networks throughlast quarter of 2014. This consists in the Internet.
Front-End Systems
During 2002, we deployed new systemsintegration of LATAM Group’s human resources processes and technological platforms. Its aim is to support our sales personnel. These systems provideimplement in TAM the employees who have a direct contact with our customers with additional tools to improve service, enhance customer informationSAP modules for Payroll, Personnel Administration, Organizational Development, Compensation, Recruitment and increase efficiency. During 2004 and 2005, we implemented these systems at our airport counters and our call centers.
Since 2005, we have favored a strategy of encouraging and facilitating self service alternatives for customers, through improving the functionality of the www.lan.com website as well as implementing self check-in kiosks in airports.
During 2009, we deployed a new online system in order to provide the processes that our engineering, maintenance and materials areas develop, with technological solutions.Selection. This project has allowed usis scheduled to establish and automate simple and integrated processes, standardize processes for the Company (including our subsidiaries and related companies), facilitate handling of materials and maintenance, make relevant information availablebe in a full, unique and consistent way to all users, and optimize distribution and execution (planned and non planned), among other benefits.
Enterprise Resource Planning
In 2002, we purchased an enterprise resource planning (“ERP”) system from SAP. This system was fully implementedoperation in the second quarter of 2004 for Lan Airlines and almost all2016.
Central IT
At the level of its subsidiaries. This ERP system includes modules covering areas such as: finance, accounting, inventory management, human resources, business warehouse, as well ascentral IT infrastructure, a user-friendly portal. We arePMI project is currently working on optimizing and simplifying this system, and in leveraging itbeing implemented to increase the efficiency of our back-office processes.
Development and Maintenance System
With respect to new development needs, our first choice is to acquire existing packaged software, but we outsource this service when such software is not available in the market. Since early 2007, we have outsourced our IT system development to three principal vendors: TATA Consultancy Services, Everis, Accenture and Indra. Thanks to this outsourcing initiative, we have achieved:
a decrease in project delays;
an increase in systems reliability; and
a shift in the effortsaddress solutions (servers, communications, network, etc.) that permit operation of the internal IT department tosystems which support unified business processes at the LATAM level.
Data Centers and Central Infrastructure: At present, LATAM has two data centers in Chile and two in Brazil. Design of a more business oriented perspective.
New initiatives
We are implementingconfiguration of two data centers and a new host (“Host”). A Host change is one of the most important decisionsDRP for the passenger business division in an airline in terms of process and technology. It consists in replacing the PSS, or Passenger Service System, that contains the reservation, inventory and departure control systems of an airline. This decision permits the understanding of the software from an aviation industry provider in ASP mode, adherence to standard processes and best industry practices and the integration of multiple legacy applications that complement the needs of the processes model for the airline business. For LAN, the Host change implies going from two suppliers (Amadeus and Resiber) currently covering the role of the complete PSS, to a single supplier (Sabre). This project represents an investment of approximately US$79.4 million, andLATAM is expected to provide immediate savingsbe completed at the end of 75% per passengerthe second quarter of 2015 and their implementation will subsequently begin.
Communications and Telephony
In the case of communications and telephony, the LATAM solution on which work began in reservation transaction costs and is estimated to be2013 was implemented in place during June 2012.
The IT department expects to implement2014. This solution includes links within the two countries, a Technology Refreshing Project between 2010 and 2012, to move to the platforms that will host our applications and services for the next five years. During 2010, Lan Airlines will define the Technology Refreshing Project and all the platforms, software,high-speed Santiago-São Paulo connection, back-up solutions and services that it will use to support its business. These hardwarefixed-line and software solutions will be gradually implemented between 2011mobile telephony. At present, LATAM’s principal suppliers are Telefónica, SITA and 2012.OI.
We are also buying new airplanes, namely, Boeing 787 aircraft. The Boeing 787 Dreamliner is Boeing’s most fuel-efficient aircraft and is the world’s first e-Enabled commercial airplane.
The Boeing 787 combines the integrated information and communications systems to drive operational efficiency and streamline airplane maintenance. The e-Enabled tools on the 787 will be a significant change from any other commercial airplane previously operated. The extensive e-Enabling on the 787 increases the need for network connectivity, hardware and software improvements, and systems management practices.
Regulation
Below is a brief reference to the material effects of aeronautical and other regulations in force in each of the relevant jurisdictions in which LAN and its subsidiaries operate.
Chile
Aeronautical Regulation
Both the DGAC and the JAC oversee and regulate the Chilean aviation industry. The DGAC reports directly to the Chilean Air Force and is responsible for supervising compliance with Chilean laws and regulations relating to air navigation. The JAC is the Chilean civil aviation authority. Primarily on the basis of Decree Law No. 2,564, which regulates commercial aviation, the JAC establishes the main commercial policies for the aviation industry in Chile, regulates the assignment of international routes, and the compliance with certain insurance requirements, and the DGAC regulates flight operations, including personnel, aircraft and security standards, air traffic control and airport management. We have obtained and maintain the necessary authority from the Chilean government to conduct flight operations, including authorization certificates from the JAC and technical operative certificates from the DGAC, the continuation of which is subject to the ongoing compliance with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future.
Chile is a contracting state, as well as a permanent member, of the ICAO, an agency of the United Nations established in 1947 to assist in the planning and development of international air transport. The ICAO establishes technical standards for the international aviation industry, which Chilean authorities have incorporated into Chilean laws and regulations. In the absence of an applicable Chilean regulation concerning safety or maintenance, the DGAC has incorporated by reference the majority of the ICAO’s technical standards. We believe that we are in material compliance with all relevant technical standards.
Route Rights
Domestic Routes.Chilean airlines are not required to obtain permits in connection with carrying passengers or cargo on any domestic routes, but only to comply with the technical and insurance requirements established respectively by the DGAC and the JAC. 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. On January 18, 2012 the Secretary of Transportation and the Secretary of Economics of Chile announced steps towards unilaterallya unilateral opening the Chilean domestic skiesskies. This was confirmed on November 2013, and it is in the near term.force since that date.
International Routes.As an airline providing services on international routes, Lan AirlinesLAN is also subject to a variety of bilateral civil air transport agreements that provide for the exchange of air traffic rights between Chile and various other countries. There can be no assurance that existing bilateral agreements between Chile and foreign governments will continue, and a modification, suspension or revocation of one or more bilateral treaties could have a material adverse effect on our operations and financial results.
International route rights, as well as the corresponding landing rights, are derived from a variety of air transport agreements negotiated between Chile and foreign governments. Under such agreements, the government of one country grants the government of another country the right to designate one or more of its domestic airlines to operate scheduled services to certain destinations of the former and, in certain cases, to further connect to third-country destinations. In Chile, when additional route frequencies to and from foreign cities become available, any eligible airline may apply to obtain them. If there is more than one applicant for a route frequency the JAC awards it through a public auction for a period of five years. The JAC grants route frequencies subject to the condition that the recipient airline operate them on a permanent basis. If an airline fails to operate a route for a period of six months or more, the JAC may terminate its rights to that route. International route frequencies are freely transferable. In the past, we have generally paid only nominal amounts for international route frequencies obtained in uncontested auctions.
Airfare Pricing Policy.Chilean airlines are permitted to establish their own domestic and international fares without government regulation, as long as they do not abuse any dominant market position they may enjoy.regulation. For more information, see “–“—Antitrust Regulation” below. Airlines may file complaints before the Antitrust Court with respect to monopolistic or other pricing practices by other airlines that violate Chile’s antitrust laws. In 1997, the Antitrust Commission approved and imposed a specific self-regulatory fare plan for our domestic operations in Chile consistent with the Antitrust Commission’s directive to maintain a competitive environment. According to this plan, we must file notice with the JAC of any increase or decrease in standard fares on routes deemed “non-competitive” by the JAC and any decrease in fares on “competitive” routes at least twenty days in advance. We must file notice with the JAC of any increase in fares on “competitive” routes at least ten days in advance. In addition, the Chilean authorities now require that we justify any modification that we make to our fares on non-competitive routes. We must also ensure that our average yields on a non-competitive route are not higher than those on competitive routes of similar distance.
Registration of Aircraft.Aircraft registration in Chile is governed by the Chilean Aeronautical Code (“CAC”). In order to register or continue to be registered in Chile, an aircraft must be wholly owned by either:
a natural person who is a Chilean citizen; or
a legal entity incorporated in and having its domicile and principal place of business in Chile and a majority of the capital stock of which is owned by Chilean nationals, among other requirements established in article 38 of the CAC.
The Aeronautical Code expressly allows the DGAC to permit registration of aircraft belonging to non-Chilean individuals or entities with a permanent place of business in Chile. Aircraft owned by non-Chileans, but operated by Chileans or by an airline which is affiliated with a Chilean aviation entity, may also be registered in Chile. Registration of any aircraft can be cancelled if it is not in compliance with the requirements for registration and, in particular, if:
the ownership requirements are not met; or
the aircraft does not comply with any applicable safety requirements specified by the DGAC.
Safety.The DGAC requires that all aircraft operated by Chilean airlines be registered either with the DGAC or with an equivalent supervisory body in a country other than Chile. All aircraft must have a valid certificate of airworthiness issued by either the DGAC or an equivalent non-Chilean supervisory entity. In addition, the DGAC will not issue maintenance permits to a Chilean airline until the DGAC has assessed the airline’s maintenance capabilities. The DGAC renews maintenance permits annually, and has approved our maintenance operations. Only DGAC-certified maintenance facilities or facilities certified by an equivalent non-Chilean supervisory body in the country where the aircraft is registered may maintain and repair the aircraft operated by Chilean airlines. Aircraft maintenance personnel at such facilities must also be certified either by the DGAC or an equivalent non-Chilean supervisory body before assuming any aircraft maintenance positions.
Security.The DGAC establishes and supervises the implementation of security standards and regulations for the Chilean commercial aviation industry. Such standards and regulations are based on standards developed by international commercial aviation organizations. Each airline and airport in Chile must submit an aviation security handbook to the DGAC describing its security procedures for the day-to-day operations of commercial aviation and procedures for staff security training. Lan AirlinesLAN has submitted its aviation security handbook to the DGAC. Chilean airlines that operate international routes must also adopt security measures in accordance with the requirements of applicable bilateral international agreements.
Airport Policy.The DGAC supervises and manages airports in Chile, including the supervision of take-off and landing charges. The DGAC proposes airport charges, which are approved by the JAC and are the same at all airports. Since the mid-90s, a number of Chilean airports have been privatized, including the Comodoro Arturo Merino Benítez International Airport in Santiago. At the privatized airports, the airport administration manages the facilities under the supervision of the DGAC and JAC.
Environmental and Noise Regulation.There are no material environmental regulations or controls imposed upon airlines, applicable to aircraft, or that otherwise affect us in Chile, except for environmental laws and regulations of general applicability. There is no noise restriction regulation currently applicable to aircraft in Chile. However, Chilean authorities are planning to pass a noise-related regulation governing aircraft that fly to and within Chile. The proposed regulation will require all such aircraft to comply with certain noise restrictions, referred to in the market as Stage 3 standards. LAN’s fleet already complies with the proposed restrictions so we do not believe that enactment of the proposed standards would impose a material burden on us.
Argentina
Aeronautical Regulation
Both theAdministración Nacional de Aviación Civil (“ANACI”ANAC”) and the Secretary of Transport oversee and regulate the Argentinean aviation industry. ANACIANAC regulates flight operations, including personnel, aircraft and security standards, air traffic control and airport management, and reports indirectly to the Ministry of Planning and is responsible for supervising compliance with Argentinean laws and regulations relating to air navigation. The Secretary of Transport also reports to the Ministry of Planning and regulates the assignment of international routes
and matters related to tariff regulation policies. We have obtained and maintain the necessary authorizations from the Argentinean government to conduct flight operations, including authorization certificates and technical operative certificates from ANACI,ANAC, the continuation of which is subject to the ongoing compliance with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future.
Argentina is a contracting state and a permanent member of the ICAO, an agency of the United Nations established in 1947 to assist in the planning and development of international air transport. The ICAO establishes technical standards for the international aviation industry, which Argentinean authorities have incorporated into Argentinean laws and regulations. In the absence of applicable Argentinean regulation concerning safety or maintenance, the ANACIANAC has incorporated by reference the majority of the ICAO’s technical standards. We believe that we are in material compliance with all relevant technical standards.
Route Rights
Domestic Routes. In Argentina airlines are required to obtain permits in connection with carrying passengers or cargo on any domestic routes, and to comply with the technical requirements established by the local authority. There are no regulatory barriers preventing a foreign airline from creating an Argentine subsidiary and entering the Argentine domestic market using that subsidiary. However, ownership of such subsidiary by the foreign airline may not be direct, but through a subsidiary formed in Argentina, which in turn may be directly or indirectly owned by the foreign company. However, such subsidiary should operate Argentine registered aircraft and employ Argentine aeronautical personnel.
International Routes. As an airline providing services on international routes, LanLAN Argentina is also subject to a variety of bilateral civil air transport agreements that provide for the exchange of air traffic rights between Argentina and various other countries. There can be no assurance that existing bilateral agreements between Argentina and foreign governments will continue. Furthermore, a modification, suspension or revocation of one or more bilateral treaties could have a material adverse effect on our operations and financial results.
International route rights, as well as the corresponding landing rights, are derived from a variety of air transport agreements negotiated between Argentina and foreign governments. Under such agreements, the government of one country grants the government of another country the right to designate one or more of its domestic airlines to operate scheduled services to certain destinations of the former and, in certain cases, to further connect to third-country destinations. In Argentina, when additional route frequencies to and from foreign cities become available, any eligible airline may apply to obtain them. ANACIANAC grants route frequencies subject to the condition that the recipient airline operate them on a permanent basis. If an airline fails to operate a route for a period of six months or more, the ANACIANAC may terminate its rights to that route.
Airfare Pricing Policy. Argentine airlines are permitted to establish their own international fares without government regulation, as long as they do not abuse any dominant market position they may enjoy. Yet, there are government-fixed maximum and minimum prices for domestic flights.
Registration of Aircraft. Aircraft registration in Argentina is governed by the Argentinean Aeronautical Code (“AAC”). In order to register or continue to be registered in Argentina, an aircraft must be wholly owned by either:
a natural person who is an Argentinean citizen; or
a legal entity incorporated in and having its domicile and principal place of business in Argentina and a majority of the capital stock of which is owned, directly or indirectly, by Argentinean nationals, among other requirements established in the AAC.
Safety.ANACIANAC requires that all aircraft operated by Argentinean airlines be registered with ANACI.ANAC. All aircraft must have a valid certificate of airworthiness issued by ANACI.ANAC. In addition, ANACIANAC will not issue maintenance permits to an Argentinean airline until ANACIANAC has assessed the airline’s maintenance capabilities. ANACIANAC renews maintenance permits periodically and approves maintenance operations once the airline initiates its operations and
each time an airline changes its maintenance regime. Only ANACI-certifiedANAC-certified maintenance facilities (in Argentina or in any other country) may maintain and repair the aircraft operated by Argentinean airlines. Aircraft maintenance personnel at such facilities must also be certified by ANACIANAC before assuming any aircraft maintenance positions.
Security.ANACIANAC establishes and supervises the implementation of security standards and regulations for the Argentinean commercial aviation industry. Such standards and regulations are based on standards developed by international commercial aviation organizations. Each airline and airport in Argentina must submit an aviation security handbook to ANACIANAC describing its security procedures for the day-to-day operations of commercial aviation and procedures for staff security training. LanLAN Argentina has submitted its aviation security handbook to ANACI.ANAC. Argentinean airlines that operate international routes must also adopt security measures in accordance with the requirements of applicable bilateral international agreements.
Airport Policy.The ORSNA (Organismo Regulador del Sistema Nacional de Aeropuertos) supervises and manages the airports in Argentina, including the supervision of take-off and landing charges. The ORSNA proposes airport charges, which are approved by ANACIANAC and are the same at all airports. Nevertheless, while domestic flights are charged in local currency, international flights are charged in U.S. dollars. Since the late-90s, a number of Argentinean airports have been privatized, including Aeroparque and Aeropuerto Internacional de Ezeiza Ministro Pistarini in Buenos Aires, the two most important airports in Argentina. At the privatized airports, the airport administration manages the facilities under the supervision of ANACIANAC and ORSNA.
Environmental and Noise Regulation.There are no material environmental regulations or controls imposed upon airlines, applicable to aircraft, or that otherwise affect us in Argentina, except for environmental laws and regulations of general applicability and noise restriction regulation currently applicable to aircraft in Argentina. Any aircraft operated by an Argentinean airline should comply with certain noise restrictions, specifically with Stage 3 standards, as set forth in chapter 91.805 of the Argentinean civilian aviation regulations (Regulaciones Argentinas de Aviación Civil) referred to in the market as Stage 3 standards. LAN’s fleet already complies with the proposed restrictions so we do not believe that enactment of the proposed standards would impose a material burden on us.
Peru
Aeronautical Regulation
The Peruvian DGAC (“PDGAC”) oversees and regulates the Peruvian aviation industry. The PDGAC reports directly to the Ministry of Transportation and Communications and is responsible for supervising compliance with Peruvian laws and regulations relating to air navigation. In addition, the PDGAC regulates the assignment of national and international routes, and the compliance with certain insurance requirements, and it regulates flight operations, including personnel, aircraft and security standards, air traffic control and airport management. We have obtained and maintain the necessary authorizations from the Peruvian government to conduct flight operations, including authorization and technical operative certificates, the continuation of which is subject to the ongoing compliance with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future.
Peru is a contracting state and a permanent member of the ICAO. The ICAO establishes technical standards for the international aviation industry, which Peruvian authorities have incorporated into Peruvian laws and regulations. In the absence of an applicable Peruvian regulation concerning safety or maintenance, the PDGAC has incorporated by reference the majority of the ICAO’s technical standards. We believe that we are in material compliance with all relevant technical standards.
Route Rights
Domestic Routes.Peruvian airlines are required to obtain permits in connection with carrying passengers or cargo on any domestic routes and to comply with the technical requirements established by the PDGAC. Non-Peruvian airlines are not permitted to provide domestic air service between destinations in Peru.
International Routes.As an airline providing services on international routes, LanLAN Peru is also subject to a variety of bilateral civil air transport agreements that provide for the exchange of air traffic rights between Peru and various other countries. There can be no assurance that existing bilateral agreements between Peru and foreign governments will continue, and a modification, suspension or revocation of one or more bilateral treaties could have a material adverse effect on our operations and financial results.
International route rights, as well as the corresponding landing rights, are derived from a variety of air transport agreements negotiated between Peru and foreign governments. Under such agreements, the government of one country grants the government of another country the right to designate one or more of its domestic airlines to operate scheduled services to certain destinations of the former and, in certain cases, to further connect to third-country destinations. In Peru, when additional route frequencies to and from foreign cities become available, any eligible airline may apply to obtain them. If there is more than one applicant for a route frequency the PDGAC awards it through a public auction for a period of four years. The PDGAC grants route frequencies subject to the condition that the recipient airline operate them on a permanent basis. If an airline fails to operate a route for a period of 90 days or more, the PDGAC may terminate its rights to that route, although that has never happened in practice.
Airfare Pricing Policy.Peruvian airlines are permitted to establish their own domestic and international fares without government regulation, as long as they do not abuse any dominant market position they may enjoy. For more information, see “–“—Antitrust Regulation” below. Airlines or other interested parties may file complaints before the Institute for Protection of Fair Competition and Consumer Rights (“Indecopi”) with respect to monopolistic or other pricing practices by other airlines that violate Peru’s antitrust laws.
Registration of Aircraft.Aircraft registration in Peru is governed by the Peruvian Civil Aviation Law. In order to own and register a Peruvian aircraft, the following conditions shall apply:
In case of a natural person, the owner shall be a Peruvian citizen; or in case of a foreign person, the owner shall be permanently domiciled in Peru; or
In case of a legal entity, it shall be incorporated in and having its domicile and principal place of business in Peru among other requirements established in article 47 of the Peruvian Civil Aviation Law.
Aircraft owned by non-Peruvians citizens or entities with domicile in Peru may also be registered in Peru but only if the aircraft is used for general, not commercial aviation. Registration of any aircraft can be cancelled if it is not in compliance with the requirements for registration mentioned above and, in particular, if the aircraft does not comply with any applicable safety requirements specified by the PDGAC.
Safety. Peruvian law allows the use of aircraft that are registered either with the PDGAC or with an equivalent supervisory body in a country other than Peru. All aircraft must have a valid certificate of airworthiness issued by either the PDGAC or an equivalent non-Peruvian supervisory entity. In addition, the PDGAC will issue maintenance permits to a Peruvian airline as long as the PDGAC has assessed the airline’s maintenance capabilities. The PDGAC has approved our maintenance operations. Only PDGAC-certified maintenance facilities or facilities certified by an equivalent non-Peruvian supervisory body in the country where the aircraft is registered may maintain and repair the aircraft operated by Peruvian airlines. Aircraft maintenance personnel at such facilities must also be certified either by the PDGAC or an equivalent non-Peruvian supervisory body before be appointed to any aircraft maintenance positions.
Security.The PDGAC establishes and supervises the implementation of security standards and regulations for the Peruvian commercial aviation industry. Such standards and regulations are based on standards developed by international commercial aviation organizations. Each airline and airport in Peru must submit an aviation security handbook to the PDGAC describing its security procedures for the day-to-day operations of commercial aviation and procedures for staff security training. LanLAN Peru has submitted its aviation security handbook to the PDGAC. Peruvian airlines that operate international routes must also adopt security measures in accordance with the requirements of applicable bilateral international agreements.
Airport Policy. CORPAC supervises and manages airports in Peru, including the supervision of take-off and landing charges. CORPAC sets airport charges for navigation facilities, which may differ from airport to airport. Since the mid-90s, a number of Peruvian airports have been privatized, including the Aeropuerto Internacional Jorge Chávez in Lima. At the privatized airports, the airport administration manages the facilities under the supervision of theOrganismo Supervisor de la Inversión en Infraestructura de Transporte de Uso Público, (the Supervising Agency of Investment in Public Transport Infrastructure Facilities or “OSITRAN”), an independent regulatory and supervising entity.
Environmental and Noise Regulation.There are no specific material environmental regulations or controls imposed upon airlines, applicable to aircraft, or that otherwise materially affect us in Peru, except for environmental laws and regulations of general applicability. There are noise restriction regulations currently applicable to aircraft in Peru. LAN’s fleet complies with the proposed restrictions so they do not impose a material burden on us.
Ecuador
Aeronautical Regulation
There are two institutions that control commercial aviation on behalf of the State: (i) The National Civil Aviation Board (“CNAC”), which directs aviation policy; and (ii) the General Civil Aviation Bureau (“EDGAC”), which is a technical regulatory and control agency. The CNAC issues operating permits and grants operating concessions to national and international airlines. It also issues opinions on bilateral and multilateral air transportation treaties, allocates routes and traffic rights, and approves joint operating agreements such as wet leases and shared codes.
Fundamentally, the EDGAC is responsible for:
ensuring that the national standards and technical regulations and international ICAO standards and regulations are observed;
keeping records on insurance, airworthiness and licenses of Ecuadorian civil aircraft;
maintaining the National Aircraft Registry;
issuing licenses to crews; and
controlling air traffic control inside domestic air space.
The EDGAC also must comply with the standards and recommended methods of the ICAO since Ecuador is a signatory of the 1944 Chicago Convention.
Route Rights
Domestic Routes.Airlines must obtain authorization from CNAC (an operating permit or concession) to provide air transportation. For domestic operations, only companies incorporated in Ecuador can operate locally, and only Ecuadorian-licensed aircraft and dry leases are authorized to operate domestically.
International Routes.Permits for international operations are based on air transportation treaties signed by Ecuador or, otherwise, the principle of reciprocity is applied. All airlines doing business in Latin America that are incorporated in countries that are members of theComunidad Andina de Naciones (the Andean Community, or “CAN”) obtain their traffic rights on the basis of decisions currently in force under that regime, in particular decision N°582 of 2004, which guarantee free access to markets, with no type of restriction except technical considerations.
Shared codes are allowed in Ecuador after authorization by the CNAC, but the respective airlines must have the relevant traffic rights.
Airfare Pricing Policy.On October 13, 2011, The Statutory Law of Regulation and Control of the Market Power was passed with a purpose to avoid, prevent, correct, eliminate and sanction the abuse of economic operators with market power, as well as to sanction restrictive, disloyal and agreements involving collusive practices. This Law creates a new public entity as the maximum authority of application and establishes the procedures of investigation and the applicable sanctions, which are severe. Rates are not regulated and are subject only to registration. In general, bilateral treaties regarding air transportation provide for airfares to be regulated by the regulation of the country of origin.
Registration of Aircraft.The legislation allows Ecuadorian companies to provide international air transportation services using aircraft licensed in Ecuador and aircraft with a foreign license, always provided the latter are exploited under dry leases. For domestic operations, aircraft is authorized only pursuant to dry leases and Ecuadorian registration. Aircraft interchange agreements are also allowed for international operations, provided that the aviation authority can confirm that the aircraft is under the operational control of an Ecuadorian operator. Wet leases are permitted, but very restricted.
Safety. In order to ensure aviation safety, the EDGAC requires that the airline hold an Air Operator Certificate and have Operating Specifications that are examined technically and rigorously to ensure compliance with the Civil Aviation Technical Regulations, which are essentially the same as the Federal Aviation Regulations (“FAR”) of the FAA. They cover matters of aircraft airworthiness, certification of maintenance facilities, and oversight by the EDGAC.
Security.The governing rules also apply to security in respect of the EDGAC. There are regulations, manuals and procedures on airport security overseen by the EDGAC.
Airport Policy. The international airports in Quito and Guayaquil are managed under administrative concessions, and the EDGAC merely controls air traffic. Fees for the use of airport facilities, terminal fees, landing fees, parking fees are all overseen and collected by the operator. Over-flight and approach fees are controlled and collected by the EDGAC.
Environmental and Noise Regulation.Aircraft must comply with the standards of category 3 under Ecuadorian applicable noise regulations, as set forth in Executive Decree (Decreto Ejecutivo) 1,405, enacted on October 24,2008, which provides certain technical specific criteria. Beginning in May 2010, aircraft must comply with standards of category 4 under cited regulation. Category 3 provides for compliance with ICAO regulations and technical conditions mandatory in the United States of America.
United States of America
Aeronautical Regulation
Operations to and from the United States by non-U.S. airlines, such as Lan Airlines,LAN, are subject to Title 49 of the U.S. Code, under which the Department of Transportation (“DOT”) and the FAA exercise regulatory authority. The DOT has jurisdiction over international aviation in connection with the United States, subject to review by the President of the United States. The DOT also has jurisdiction with respect to unfair practices and methods of competition by airlines and related consumer protection matters. The U.S. DOJ also has jurisdiction over airline competition matters under the U.S. federal antitrust laws. Flight operations between Chile and the United States by airlines licensed by either country are governed generally by the open skies air transport agreement that Chile and the United States signed in October 1997. Under the open skies agreement, there are no restrictions on the number of destinations or flights that either a U.S. or a Chilean airline may operate between the two countries or on the number of U.S. and Chilean airlines that may operate.
Authorizations and Licenses
Lan AirlinesLAN is authorized by the DOT to engage in scheduled and charter air transportation services, including the transportation of persons, property (cargo) and mail, or combinations thereof, between points in Chile and points in the United States and beyond (via intermediate points in other countries). Lan AirlinesLAN holds the necessary
authorizations from the DOT in the form of a foreign air carrier permit, Exemption Authorizations and Statements of Authorization to conduct current operations to and from the United States. Exemptions and Statements of Authorization are temporary in nature and are subject to renewal and therefore there can be no assurance that any particular exemption or statement of authorization will be renewed. Lan Airlines’LAN’s foreign air carrier permit has no expiration date, while a renewal of the exemption authorization (which includes the open skies traffic rights) was timely filed and the Authority was automatically extended until such time as the DOT issues the renewal order. Lan AirlinesLAN intends to request the inclusion of the open skies rights into our foreign air carrier permit, which would eliminate our need to renew the exemption authority in the future.
The FAA is engaged in the regulation with respect to safety matters, including aircraft maintenance and operations, equipment, aircraft noise, ground facilities, dispatch, communications, personnel, training, weather observation and other matters affecting air safety. The FAA requires each foreign air carrier to obtain certain operations specifications that authorize it to operate to particular airports on approved international routes using specified equipment. Lan AirlinesLAN currently holds FAA operations specifications under Part 129 of the FAR in compliance in all material respects with all requirements necessary to maintain in good standing of its operations specifications issued by the FAA. The FAA can amend, suspend, revoke or terminate those specifications, or can suspend temporarily or revoke permanently our authority if an airline fails to comply with the regulations, and can assess civil penalties for such failure. A modification, suspension or revocation of any of our DOT authorizations or FAA operations specifications could have a material adverse effect on our business.
The FAA also conducts safety audits and has the power to impose fines and other sanctions for violations of airline safety regulations. We have not incurred any material fines related to operations.
Certain Regulatory Authorizations in Connection with Strategic Alliances
The alliance between Lan Airlines and American Airlines includes three major components: a frequent flyer agreement, a reciprocal code-share agreement and the coordination of pricing, scheduling and other functions. The last two of these items required the approval of regulatory authorities in both Chile and the United States. With respect to the code-share agreement, the open skies agreement between Chile and the United States expressly permits code-sharing operations by U.S. and Chilean airlines. With regard to the coordination of pricing and scheduling, Lan Airlines and American Airlines filed a joint application with the DOT in December 1997, requesting approval of their alliance agreement and immunity from the application of all U.S. antitrust laws pursuant to Title 49 of the U.S. Code. Lan Airlines and American Airlines received approval and antitrust immunity from the DOT in September 1999, and implemented the code-share agreement in October 1999. In accordance with the terms of the DOT’s 1999 approval, Lan Airlines and American Airlines were required to resubmit their alliance agreement to the DOT for review within three years after the DOT’s grant of approval. Lan Airlines and American Airlines resubmitted the agreement in September 2002 and did not receive any comments from the DOT.
Lan Peru was granted antitrust immunity by the DOT on October 13, 2005 with respect to the alliance agreements and other agreements incorporated therein (i.e., the reciprocal code-share agreements, among others) with Lan Airlines and American Airlines. In accordance with the terms of the DOT’s 2005 approval, Lan Airlines, Lan Peru and American Airlines resubmitted their alliance agreement to the DOT for review in October 2010.
Security. On November 19, 2001, the Congress of the United States passed, and the President signed into law, the Aviation and Transportation Security Act, also referred to as the Aviation Security Act. This law federalized substantially all aspects of civil aviation security and created the Transportation Security Administration (“TSA”), which took over security responsibilities previously held by the FAA. The TSA is an agency of the U.S. Department of Homeland Security. The Aviation Security Act requires, among other things, the implementation of certain security measures by airlines and airports, such as the requirement that all passenger bags be screened for explosives. Funding for airline and airport security required under the Aviation Security Act is provided in part by a US$2.50 per segment passenger security fee, subject to a US$10 per roundtripround trip cap; however, airlines are responsible for costs in excess of this fee. Implementation of the requirements of the Aviation Security Act has resulted in increased costs for airlines and their passengers. Since the events of September 11, 2001, Congress has mandated and the TSA has implemented numerous security procedures and requirements that have imposed and will continue to impose burdens on airlines, passengers and shippers.
Noise Restrictions. Under the Airport Noise and Capacity Act of 1990 (“ANCA”), and related FAA regulations, aircraft that fly to the United States must comply with certain Stage 3 noise restrictions, which are currently the most stringent FAA noise requirements. All of our aircraft that fly to the United States meet the Stage 3 requirements.
Under the direction of the ICAO, governments are considering the creation of a new and more stringent noise standard than that contained in the ANCA. The ICAO adopted new noise standards in 2001 that established more stringent noise requirements for aircraft manufactured after January 1, 2006. In the U.S., legislation known as the “Vision 100—Century of Aviation Reauthorization Act,” which was signed into law in December 2003, required the FAA to issue regulations implementing Stage 4 noise standards consistent with recommendations adopted by the ICAO. FAA regulations require all aircraft designed and certified after January 1, 2006 to comply with Stage 4 noise restrictions.
FAA regulations also require compliance with the Traffic Alert and Collision Avoidance System, approved airborne wind shear warning system and aging aircraft regulations. Our entire fleet meets these requirements.
Brazil
Aeronautical Regulation
The Brazilian aviation industry is regulated and overseen by the ANAC. The ANAC reports directly to the Civil Aviation Secretary, which is subordinated by the Federal Executive Power of this country. Primarily on the basis of Law No. 11.182/2005, ANAC was created to regulate commercial aviation, air navigation, the assignment of domestic and international routes, compliance with certain insurance requirements, flight operations, including personnel, aircraft and security standards, air traffic control, in this case sharing it activities and responsibilities with theDepartamento de Controle do Espaço Aéreo (Department of Airspace Control) (“DECEA”),which is a public secretary also subordinated to the Brazilian Defense Ministry, and airport management, in this last case sharing responsibilities with theEmpresa Brasileira de Infra-Estrutura Aeroportuária (the Brazilian Airport Infrastructure Company, or “INFRAERO”), a public company that was created by Law No. 5862/72, and is responsible for administrating, operating and exploring Brazilian airports industrially and commercially.commercially (with the exception of Guarulhos International Airport, Viracopos International Airport and Brasilia International Airport which was privatized in 2012 and are administrated by concession agreement).
We have obtained and maintain the necessary authority from the Brazilian government to conduct flight operations, including authorization and technical operative certificates from ANAC, the continuation of which is subject to ongoing compliance with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future.
ANAC is the Brazilian civil aviation authority and it is responsible for supervising compliance with Brazilian laws and regulations relating to air navigation. Brazil is a contracting state and a permanent member of the ICAO. The ICAO establishes technical standards for the international aviation industry, which Brazilian authorities, represented by the Brazilian Defense Ministry, have incorporated into Brazilian laws and regulations. In the absence of an applicable Brazilian regulation concerning safety or maintenance, ANAC has incorporated by reference the majority of the ICAO’s technical standards.
Route Rights
Domestic Routes. Brazilian airlines are not required to obtain permits in connection with domestic passenger or cargo transportation, but only to comply with the technical requirements established by ANAC. Based on the Brazilian Aeronautical Code (“CBA”) established by Law No. 7.565/86, non-Brazilian airlines are not permitted to provide domestic air service between destinations in Brazil. The same law prevents a foreign airline from creating a Brazilian subsidiary and entering the Brazilian domestic market using that subsidiary.
International Routes. Brazilian and non-Brazilian airlines providing services on international routes are also subject to a variety of bilateral civil air transport agreements that provide for the exchange of air traffic rights between Brazil and various other countries. International route rights, as well as the corresponding landing rights, are derived from a variety of air transport agreements negotiated between Brazil and foreign governments. Under such agreements, the government of one country grants the government of another country the right to designate one
or more of its domestic airlines to operate scheduled services to certain destinations of the former and, in certain cases, to further connect to third-country destinations. In Brazil, when additional route frequencies to and from foreign cities become available, any eligible airline may apply to obtain them. If there is more than one applicant for a route frequency ANAC must carry out a public bid and award it to the elected airline. ANAC grants route frequencies subject to the condition that the recipient airline operate them on a permanent basis. If an airline fails to operate a route for a period of six months or more, ANAC may terminate its rights to that route. ANAC may also terminate its right if the recipient airline does not operate at least 80% of the frequency given for that specific route.
Airfare Pricing Policy. Brazilian and non-Brazilian airlines are permitted to establish their own international and domestic fares, in this last case only for Brazilian airlines, without government regulation, as long as they do not abuse any dominant market position they may enjoy. Airlines may file complaints before the Antitrust Court with respect to monopolistic or other pricing practices by other airlines that violate Brazil’s antitrust laws.
Registration of Aircraft. Aircraft registration in Brazil is managed by ANAC, which maintains the Brazilian Aeronautical Register, as regulated by the CBA. The CBA allows ANAC to permit registration of aircraft belonging to Brazilian and non-Brazilian individuals.
Safety. ANAC requires that all Brazilian aircraft mustto have a valid certificate of airworthiness issued by ANAC. In addition, ANAC will not issue maintenance permits to a Brazilian airline until it has assessed the airline’s maintenance capabilities. ANAC renews maintenance permits annually, and has approved our maintenance operations. Only ANAC certifies aircraft maintenance services and its personnel.
Security. ANAC establishes and supervises the implementation of security standards and regulations for the Brazilian commercial aviation industry. Such standards and regulations are based on standards developed by international commercial aviation organizations. Each airline and airport in Brazil must submit an aviation security handbook to ANAC describing its security procedures for the day-to-day operations of commercial aviation and procedures for staff security training.
Brazilian Airport Policy. INFRAERO supervises and manages airports in Brazil, including the supervision of take-off and landing charges. INFRAERO proposes airport charges, which are approved by ANAC and are the same at all airports. At privatized airports, the airport administration manages the facilities under the supervision of ANAC.
Environmental and Noise Regulation. ANAC coordinates and supervises noise regulations by regulation 121, which established noise restriction applicable to aircraft in Brazil. There are no material environmental regulations or controls imposed specifically upon airlines companies, applicable to aircraft, other than Brazilian general environmental laws and regulations.
Colombia
Aeronautical Regulation
The governmental entity in charge of regulating, directing and supervising the civil aviation in Colombia is the Aeronáutica Civil (“AC”), a technical agency ascribed to the Ministry of Transportation. The AC is the aeronautical authority for the entire domestic territory, in charge of regulating and supervising the Colombian air space. The AC may interpret, apply and complement all civil aviation and air transportation regulation to ensure compliance with the Colombian Aeronautical Regulations (“RAC”). The AC also grants the necessary permits for air transportation.
Route Rights
The AC grants operation permits to domestic and foreign carriercarriers that intend to operate in, from and to Colombia. In the case of Colombian airlines, in order to obtain the operational permit the company must comply with the RAC and fulfill legal, economic and technical requirements, to later be subject to public hearings where the public convenience and necessity of the service is considered. The same process must be followed to add national or international routes, whose concession is subject to the bilateral instruments entered into by Colombia. Routes cannot be transferred under any circumstance and there is no limit to foreign investment in domestic airlines.
Airfare Pricing Policy.Since July 2007, as stated in resolution 3299 of the Aeronautical Civil entity, bottom level airfares for both international and domestic transportation were eliminated. Under resolution 904 issued in February 2012, the Aeronautical Civil entity decided to liberalize the obligation of charging a fuel surcharge for both domestic and international transportation of passengers and cargo. As of April 1, 2012, air carriers may now freely decide whether or not to charge a fuel surcharge. In the case that it is charged, the fuel surcharge must be part of the fare, but may be informed separately on the tickets, advertising or other methods of marketing used by the company.
In the same line, beginning onas of April 1, 2012 there willis no longer be any restriction on top level fares published by the airlines or with respect to the obligations for air carriers to report to the Aeronautical civil entity the fares and conditions the day after being published.
Administrative fares are not subject to any changes and its charge is an obligation for the transport of passengers under Aeronautical Civil Regulations.
Registration of Aircraft.The AC, through the Office of Aeronautical Registration, is in charge of handling the registration of aircraft that will be operated by Colombian airlines. Registration may be obtained by a registration process fully conducted in Colombia or through the validation in Colombia of a foreign registration. For such registration, the aircraft must be legally imported to the country and inspected by the aeronautical inspectors. This office is also in charge of property registrations, lease contracts and liens of the registered aircraft.
Safety. Aircraft registered in Colombia obtain an airworthiness certificate or a validation of the airworthiness certificate (if they operate under the approval of the foreign registration).
Security.Following the guidelines of the OACI annexes, the AC issued an airport security program that must be strictly complied with by all the aircraft operators in the country as well as by airports.
Environmental and Noise Regulation.In Colombia, only aircraft that comply with category 3 noise limits may operate. There are strict regulations to control noise during takeoffs and landings of the aircraft at the El Dorado Airport in Bogotá due to its location in an urban area.
Antitrust Regulation
The Chilean antitrust authority, which we refer to as the Antitrust Court (previously the Antitrust Commission), oversees antitrust matters, which are governed by Decree Law No. 211 of 1973, as amended, or the Antitrust Law. The Antitrust Law prohibits any entity from preventing, restricting or distorting competition in any market or any part of any market. The Antitrust Law also prohibits any business or businesses that have a dominant position in any market or a substantial part of any market from abusing that dominant position. An aggrieved person may sue for damages arising from a breach of Antitrust Law and/or file a complaint with the Antitrust Court requesting an order to enjoin the violation of the Antitrust Law. The Antitrust Court has the authority to impose a variety of sanctions for violations of the Antitrust Law, including termination of contracts contrary to the Antitrust Law, dissolution of a company and imposition of fines and daily penalties on businesses. Courts may award damages and other remedies (such as an injunction) in appropriate circumstances. Lan Airlines, Lan Express and Lan Cargo must comply with Chilean Antitrust Law that prohibits a carrier from abusing a dominant position in the market. As described above under “Route“—Route Rights—Air FareAirfare Pricing Policy,” in October 1997, the Antitrust Court approved a specific self-regulatory fare plan for us consistent with the Antitrust Court’s directive to maintain a competitive environment within the domestic market.
Since October 1997, LanLAN Airlines S.A. and LanLAN Express follow a self-regulatory plan, which was modified and approved by the Tribunal de la Libre Competencia (the Competition Court) in July 2005.2005, and further in September, 2011. In February 2010, the Fiscalía Nacional Economica (the National Economic Prosecutor’s Office) finalized the investigation initiated in 2007 regarding our compliance with this self-regulatory plan and no further observations were made.made
As a condition to the business combination between LAN and TAM in June 2012, the antitrust authorities in Chile and in Brazil each imposed certain mitigation measures as part of their approval of the combination. Furthermore, the combination was submitted to the antitrust authorities in Germany, Italy and Spain. All these jurisdictions granted unconditional clearances for this transaction. The combination was filed with the Argentinean antitrust authorities, which approval is still pending. For more information regarding these mitigation measures please see below:
Chile
On September 21, 2011, the TDLC issued the Decision with respect to the consultation procedure initiated on January 28, 2011 in connection with the proposed combination. The TDLC, in the Decision, approved the proposed combination between LAN and TAM, subject to 14 conditions, as generally described below:
Brazil
The Brazilian Council for Economic Defense – CADE approved the LAN/TAM combination by unanimous decision during the hearing session of December 14, 2011, subject to the following conditions: (1) the new combined group (LATAM) should leave one of the two global alliances to which it was part (Star Alliance oroneworld®); and (2) the new combined group (LATAM) should offer to swap two pairs of slots in Guarulhos International Airport, to be used by an occasional third party interested in offering direct non-stop flights between São Paulo and Santiago do Chile. These impositions are in line with the mitigation measures adopted by the TDLC, in Chile.
For more recent information regarding regulatory proceedings see “Item 8. Financial Information—Consolidated Financial Statements and Other Financial Information—Legal and Arbitration Proceedings”.
C. ORGANIZATIONAL STRUCTURE
LANLATAM Airlines Group is a company primarily involved in the transportation of passengers and cargo. Our operations are carried out principally by Lan AirlinesLAN, and also by a number of different subsidiaries.subsidiaries and affiliates, including TAM. As of February 29, 2012,January 31, 2015, in the passenger business we operated through sixseven main airlines: LanLATAM Airlines Group S.A. (which does business under the name “LAN Airlines”), incorporated in Chile, Transporte Aéreo S.A. (which does business under the name “Lan“LAN Express”), Lana Chilean subsidiary, LAN Perú S.A. (“LanLAN Peru”), a Peruvian subsidiary, Aerolane, an Ecuadorian subsidiary, Líneas Aéreas Nacionales del Ecuador S.A. (“LanLAN Ecuador”), Lanand Ecuadorian subsidiary, LAN Argentina S.A. (“LanLAN Argentina,” previously Aero 2000 S.A.) and Lan Colombia S.A. (“Lan Colombia”) previously denominated, an Argentinian subsidiary, Aerovías de Integración Regional, Aires S.A. (which does business under the name “LAN Colombia”), a Colombian subsidiary, TAM Linhas Aereas S.A. (“Aires”TAM Linhas Aereas”) incorporated in Brazil.).
In the passenger business we market our sales primarily under the “LAN” brand”. As of February 29, 2012January 31, 2015 we held a 99.90% stake in LanLAN Express through direct and indirect interests, a 69.98% stake in LanLAN Peru through direct and indirect interests, a 71.95%79.66% indirect stake in LanLAN Ecuador, a 94.99% indirect stake in LanLAN Argentina, and a 98.21%98.81% indirect stake in Lan Colombia.LAN Colombia and a 100.00% of the non-voting shares of TAM, and 19.42% of the voting shares and 100% of the non-voting of Holdco I S.A., who has the 100.00% of the voting shares of TAM. For a description of the recent combination with TAM, including TAM’s operating structure, see “Item 4.History and Development of the Company—Combination of LAN and TAM.”
OurThe cargo operations are carried out by a number of companies,our subsidiaries and affiliates, including Lan AirlinesTAM Linhas Aereas and LanLAN Cargo. Lan Airlines and Lan CargoThe cargo operations are complemented by the operations of certain related companies, such as Aero Transportes Mas de Carga S.A. de C.V. (“MasAir”), in Mexico, Aerolinhas Brasileiras S.A. (“ABSA”(which does business under the name of “ABSA” and “TAM Cargo”), in Brazil and Linea Aérea Carguera de Colombia S.A. (“Lanco”LANCO”), in Colombia. As of February 29, 2012,January 31, 2015, we indirectly held a 69.08% stake in100% of the non-voting shares and 24.99% of the voting shares of MasAir, through direct100% of the non-voting shares and indirect participations, a 73.26% stake in20% of the voting shares of ABSA, through direct and indirect participations, and a 89.90%an 90.00% stake in LANCO through direct and indirect participations. TAM holds 100% stake in ABSA. In the cargo business, we market ourselvesLATAM markets itself primarily under the LanLAN Cargo brand.brand internationally and the TAM Cargo brand in Brazil.
In addition to our air transportation activities, we provide a series of ancillary services. We offer handling services, courier services and logistics, small package and express door-to-door services through Lan Airlines and various subsidiaries.
D. PROPERTY, PLANTS AND EQUIPMENT
LAN Infrastructure Management and TAM Infrastructure Management report to the Director of Purchasing and Infrastructure of LATAM. Both LAN and TAM infrastructure management teams have worked together during 2012 and 2013 regarding strategic planning for infrastructure issues for the LATAM Airlines Group.
LAN’s Property, Plant and Equipment
Headquarters
Our main facilities are located on approximately five acres of land that we own near the Comodoro Arturo Merino Benítez International Airport. The complex includes approximately 150,695 square feet of office space, 32,292 square feet of conference space and training facilities, 9,688 square feet of dining facilities and mock-up cabins used for crew instruction. In 2004, we adapted part of this building to meet our expanding training needs. This process included developing new rooms for technical instruction, in-flight and airport services.
During the fourth quarter of 2003, we moved some of our executive offices into a new building in a more central location in Santiago, Chile, where we initially occupied a total of four floors owned by LAN. In the first half of 2005 we added three more floors toTo accommodate our growth, requirements. Thesewe have, since 2005 expanded our offices. In 2005 LAN bought 3 floors, are also owned by LAN. Inin 2007, in order to accommodate the Company’s growth, LAN leased two floors in an adjacent building (totaling 18,298 square feet), where some ofand in 2009, LAN staff moved in February 2008. We have leased these additional floors since 2007, under a 5-year lease at a rate of approximately US$46,400 per month. In 2009, to respond to the Company’s growth, LAN leased two additional floors in this building (totaling 12,917 square feet). We have leased these additional floors since 2009, under a 3-year lease at a rate of approximately US$26,800 per month. In 2010, new offices were leased east of Santiago to allow for Company growth and to implement projects such as “Host,” which involves changing our system of reservations, sales, inventory and passenger check-in. We have leased these additional offices since 2010, under a 4-year lease at a rate of approximately US$35,000 per month.lease. These additional offices add a total of 19,913 square feet to LAN’s property.
Furthermore, during 2011 we added to our facilities a new 11,840 square feet floor at the Arrau Building located in Santiago, Chile, which we lease for the new facilities of LAN Cargo. We have leased this floor since 2011, under a 3-year lease at a rate of approximately US$29,600 per month.
Maintenance Base
Our 877,258 square feet maintenance base is located on a site that we own inside the grounds of the Comodoro Arturo Merino Benítez International Airport. This facility contains our aircraft hangar, warehouses, workshops and offices, as well as a 559,720 square feet aircraft parking area capable of accommodating up to seventeen short-haul aircraft. We have a five-floor, 53,820 square feet office building plus a 10,000 square feet office and workshop space. This facility is certified by several civil aviation authorities, including the United States’ FAA. As such, we are permitted to perform maintenance work for third parties at the facility. The FAA periodically inspects the facility to ensure its compliance with FAA standards. In 2005, we finalized the construction of an additional hangar, as well as 75,000 square feet of aircraft parking space, for US$2.1 million. During 2006 we started a new investment plan at this facility that included building 64,580 square feet of additional aircraft parking space, a new 15,340 square feet building for offices and maintenance shops, a new 16,680 square feet engine shop and storage facility, and additional warehousing and external work space. The plan also included the upgrade of some of the current facilities, increasing parking space and building a new access road. Furthermore, in 2006 we completed the construction of an engine workshop with eight workstations and capacity for 36 engines, for a total investment of US$820,000. We also lease from the DGAC 193,750 square feet of space inside the Comodoro Arturo Merino Benítez International Airport for operational and service purposes. Our lease has a duration of 14 years atyears.
During 2013, we began to develop a rateseries of approximately US$42,000 per month.
In 2007, LAN approved a two-year capital expenditures plan earmarking approximately US$7.0 million for preparing our buildings and plants forinfrastructure projects, the future growthmost significant of the Company and of its fleet.
During 2008, LAN finalizedwhich is the construction of a 4,300 square feet warehouse especially designednorth platform which allows for an additional 13 new A320 aircraft parking spaces. During 2013, a significant part of this project was completed, including 5 new parking spaces for A320 aircraft. The project is expected to be finished during the storagethird quarter of oil and flammable supplies, which complies with all the security standards required2014. Additionally during 2013, parking capacity for its operation. We also upgraded some facilities such as bathrooms and dressing rooms in our maintenance base increasing the total area in 15,000 square feet.vehicles was increased by 135 new spaces.
During 2009, LAN finalized the construction of a new five-story building located in our maintenance base, which has a total surface of 49,500 square feet2014 these Facilities were completed and represented an investment of US$5.8 million. This building has new workshops, a new food court with capacity for over 2,500 people in different shifts, two floors of new offices and meeting rooms.delivered to operation.
Also, during 2009, LAN finalized the extension of the engine workshop, which added 900 square feet and represented an investment of US$0.5 million. This extension will be used mainly for the Boeing 777’s engine maintenance.
During 2010, LAN remodeled portions of the administrative offices in the Mario Bontempi Building and the Luis Ernesto Videla Building, which are located within the Company’s maintenance base on the ground of the Comodoro Arturo Merino Benitez International Airport.
Miami Facilities
We occupy a 36.3-acre site at the Miami International Airport that has been leased to us by the airport under a concession agreement. Our facilities include a 48,000 square feet corporate building, a 380,000 square feet cargo warehouse (including a 10,000 square meter cooling area) and a 783,000 square feet aircraft-parking platform, which were constructed and are now leased to us under a long-term contract by a North American developer. We began using these new facilities in September 2001 for our passengerdeveloper, and cargo offices (with the exception of our reservations and ticket offices). We convertedapproximately 21,528 square feet of the warehouse into fully furnished offices during 2004.office space. The considerationrent we pay for the use of this space is approximately US$735,000 per month.
During 2009, LAN began We are currently negotiating with the extensionlocal airport authority regarding its construction of a new hangar at the cooling area in the cargo warehouse. This extension added 30,000 square feet and represented an investment of US$4.0 million. This extension was inaugurated on April 20, 2010.Miami International Airport, which we expect to lease from them when it is constructed.
During 2010, LAN signed a concession agreement with the AMB Property Corporation to add a new cargo warehouse for additional areas for future developments. Our concession has a duration of 5 years at a rate of approximately US$215,000 per month.
During 2013, a new project for a Boeing B777 hangar was developed. This project finally received approval from Miami airport authorities in 2014 and should be completed during 2015.
Other Facilities
We own a building and sixteen acres of land on the west side of the Comodoro Arturo Merino Benítez International Airport that houses a flight-training center. As of February 29, 2011,28, 2014, this facility features three full-flight simulators for Boeing 767, Airbus A320 and Boeing 737 aircraft. We leased this flight-training center under a long-term lease to CAE Inc. (a leading Canadian company in the flight training business) at a rate of approximately US$18,000 per month. These full-flight simulators were expanded during the second semester of 2011. We own a 661,980-square feet warehouse in Santiago, which includes 91,493 square feet of space for offices and other administrative facilities and 45,000 square feet distribution center. LAN currently leases the property to Blue Express, former subsidiaries of LAN that were sold on April 6, 2011 to Bethia.
In 2004, Fast Air Almacenes de Carga S.A. (“Fast Air”), one of our subsidiaries that operate import customs warehouses, began utilizingutilizes an import warehouse and office building at the Comodoro Arturo Merino Benítez International Airport. This 172,000 square feet building was developed in conjunction with two other operators. We have leased these facilities fromsince 2004 under a 9-year lease at a rate ofand we will continue to operate there until September 2015.
LAN Peru’s Property, Plant and Equipment
LAN Peru has approximately US$200,000 per month.19,000 m2 built. All facilities are leased and are distributed as follows:
Administrative Offices: 7,000 m2
Sales Offices: 2,000 m2
Concessions airports: 10,000 m2
We have also developedown a recreational facility for our employees with Airbus’ support. The facility, denominated “Parque LAN,” is located in land that we own near the Comodoro Arturo Merino Benítez International Airport. Parque LAN includes amenities such as a gymnasium, synthetic fields for multiple uses and swimming pools.
During 2008, we acquired a 43,000166,840 square feet piece of land in Chile, which represented a US$12 million investment, for the purpose of constructing our new corporate building.
During 2008, we acquired a 161,000 square feet piece of land near the Lima airport, which will host newwhere built training facilities for flight and cabin crews of the Company. Currently,Company, with capacity for two flight simulators (Airbus A320s and Boeing 767s), facilities for emergency evacuation practice (including pool to practice ditching) and classrooms. In addition, in 2010 we leased a piece of land and hangar inside the Lima airport for our maintenance facilities that was rented to LAN Peru for an initial period of 5 years, which may be renewed. The new maintenance facilities have approximately 3,500 m² of space, a hangar with a covered area of approximately 6,500 m² (space for three Airbus A320s or one Boeing 767) plus an out platform of approximately 3,500 m².
Finally, we are renting eight floors in a building and three floors in another building for our corporate facilities. We are also renting twenty three commercial offices around the country.
LAN Colombia’s Property, Plant and Equipment
LAN Colombia has approximately 27,500 m2 built. All facilities are leased and are distributed as follows:
Administrative Offices: 4,500 m2
Sales Offices: 1,700 m2
Concessions airports: 21,300 m2
During 2012, new administrative and operational offices were created in the Logistic center (PARQUE DEL SOL) near the El Dorado airport in Bogota, covering 11,500 square feet.
During November 2013, a new VIP lounge covering 690m2 in the El Dorado Airport in Bogotá was complete.
During 2014 there was a complete renovation of the Hangar Aircraft Parking, which now has space for three A320 aircraft.
LAN Ecuador’s Property, Plant and Equipment
LAN Ecuador has approximately 14,500 m2 built. All facilities are leased and are distributed as follows:
Administrative Offices: 1,600 m2
Sales Offices: 1,000 m2
Concessions airports: 11,900 m2
In Ecuador, the New Quito Airport was opened in 2013 and LAN Ecuador spent approximately US$4.5 million for facilities and infrastructure investments at this new airport. During the construction ofperiod, LAN Ecuador (and other airlines) were required to make significant investments for airport infrastructure in this building is on-hold. new airport.
In March 2009, we2012, LAN began the construction of new facilities for Andes, a company that performs ground service aircraft handling services for LAN Ecuador and acts as an airport service provider. A new facility for line maintenance and operations was also constructed. Both facilities were built on land concessioner by QUIPORT and were opened during the first quarter of 2013. Further information regarding the size and amount of these investments is detailed in the table below:
Facilities | Ground (m2) | Constructions (m2) | Pavements (m2) | Investment (US$) | ||||||||||||
ANDES | 4,000 | 3,134 | 1,800 | 2,500,000 | ||||||||||||
MAINTENANCE | 15,167 | 1,300 | 6,200 | 2,000,000 |
LAN Argentina’s Property, Plant and Equipment
LAN Argentina has approximately 192,670 square feet built. All facilities are leased and are distributed as follows:
Administrative Offices: 71,042 square feet
Sales Offices: 27,986 square feet
Concessions airports: 93,646 square feet
We also have maintenance base in Argentina. The project includedArgentina with a new hangar of 26,900 square feet, with 9,600 square feet of offices, 1,070 square feet of workshops and an exterior platform of 5,300 square feet. This facility is meant for the parking and maintenance of A320 aircraft and it is capable of providing full maintenance, including C-Checks.
On December of 2012, LAN Argentina launched its new VIP lounge in Terminal B of the Ezeiza Airport. An area of 6,458 square feet was built to house more than 150 passengers, with areas for resting, work, entertainment, bathrooms and shower services.
TAM’s Property Plant and Equipment
Headquarters
TAM’s main facilities are located in São Paulo, in hangars within the Congonhas Airport and nearby. At Congonhas Airport, TAM leases office facilities in converted hangars belonging to INFRAERO (the Local Airport Administrator). These facilities comprise 649,933 square feet.
The Service Academy is located at Rua Atica, about 2.5 km from Congonhas Airport, is a separate property which TAM owns, exclusively for the areas of Selection, Medical Service, Training, and Mock-ups, comprising 15,342 m².
Base Maintenance
At Hangars II and V in Congonhas Airport, which TAM leases for approximately R$39,510 and R$52,665 per month, TAM has 15,650 m² of offices and hangars with about 1,050 workstations. This site also houses the areas of Aircraft Maintenance, Procurement and Logistics of Aeronautical Materials, and Retrofitting.
Other Facilities
In São Paulo, TAM has other facilities such as: Commercial Headquarters, an old Pantanal office, located 7.0 km from Congonhas Airport, with 540 m² leased area and about 94 workstations; Uniform Building, with 890 m2 and about 10 workstations, exclusive use for storage and delivery of uniforms; and a Call Center Building at Rua Augusta with 110 m2 and about 150 workstations distributed in four floors.
TAM also has the following offices: Multiplus Office, located in Brooklin region, with 800 m2 leased, and approximately 150 workstations; TAM Viagens Office, with 2,800 m2 leased distributed in about 265 workstations; Two Stores of TAM Viagens, at Rua Augusta with 110 m2 leased and about 10 workstations; and at Shopping SP Market with 50 m2 leased and about 5 workstations.
In Guarulhos, TAM has a total area of approximately 12,894 m2 distributed in the Passenger Terminal, Operational Areas such as Check-in, Ticket Sales, Check Out, Operations Areas, VIP Lounges, Aircraft Maintenance, GSE, Cargo Terminal, Distribution Centers, etc. The Cargo Terminal has 164 m2 of office and 15,000 m2 of open area. The Distribution Centre Supplies has 3,030 m2.
TAM has a total of 45 online sites and 10 offline/chartering/high season sites in Brazil. Outside of Brazil, TAM has a total of 30 sites in 6,300 m², including 20 online sites and 10 offline/chartering/high season sites. TAM also has 133 franchised stores of TAM Viagens through Brazil.
New Headquarters
In 2013, TAM finished its project comprisedfor a US$3.2 millionnew headquarters with an area of 5,066 m², of which two and one-third floors are leased, space for 641 workstations and a total investment of R$12.0 million. The new headquarters is located at the Tower Bridge Building, located in Brooklin region.
We are building a new office with 12,195 m², LATAM will lease 12 floors, to transfer 1100 workstations, in a total investment of R$ 23.9 million. The new office is located at Espaço Empresarial Nações Unidas (EENU), in the Chacára Santo Antonio región. When this Project is finished we will terminate the contract lease of hangar 7 and washangar 8.
Building Improvements
We have approved the “Big Picture” project, which will implement a new plan of occupancy for Hangars in 2 and 5 at Congonhas Airport for approximately 5700 m² and Hangar 3 for approximately 6000 m². These improvements will receive and investment of US$18 million. This project will be completed in 2009.the second half of 2015.
New Facilities
TAM concluded several projects for new facilities in 2014, the most significant of which was a new cargo terminal in Manaus that integrates the operations of ABSA and TAM Cargo in the city and has a cargo space of about 4,700 m²; the construction of a new GSE area in Florianópolis with an area of approximately 400 m²; the construction of a new GSE area in Vitória with 255 m² and a new distribution center for supplies in Guarulhos, with an area of approximately 3,035 m². In total, TAM spent approximately R$30 million on these projects in 2014. Additionally we build TPS 3 offices in Guarulhos airport at terminal 3, with 2100 m².
Moreover, TAM has several projects for new facilities in 2014 and 2015, the most significant of which are a new cargo terminal in Guarulhos that integrates the operations of ABSA and TAM Cargo in Guarulhos, with a cargo space of about 15,434 m²; the construction of a new VIP Lounge in Guarulhos Airport with 1,900 m2; investments of R$ 20 million targeted to general
improvements of GSE facilities in all Brazilian territory and a new hangar in Guarulhos Airport for narrow and wide body aircraft maintenance. This new hangar is under study but is expected to complete projects still in 2014. The new facilities will receive an investment of R$ 50 million in 2014-2015.
Both Projects were completed and they are already in service. The VIP Lounge was delivered in October 2014 and The New Cargo terminal was delivered in January 2015
In addition, to the projects mentioned above, some large airports in Brazil, including, like Guarulhos, Natal and Viracopos have undergone major structural reforms promoted by the government which required investments of R$ 8,3 for modernization of our facilities. These projects are directly related to the world cup football.
ITEM 4A | UNRESOLVED STAFF COMMENTS |
None.
ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
A. Operating Results
You should read the following discussion of our financial condition and results of operations together with our audited consolidated financial statements and the accompanying notes beginning on page F-13F-1 of this annual report.
The summary consolidated annual financial information as of December 31, 2009, 20102014, 2013 and 20112012 and for the years ended December 31, 2009, 20102012, 2013 and 2011,2014, has been prepared in accordance with IFRS and has been derived from our audited consolidated annual financial statements included in this annual report.
Overview
The principal and most distinctive aspectWe derive our revenues primarily from transporting passengers on our passenger aircraft, as well as from transporting cargo in the belly of our business model is the way in which we integrate our passenger and cargo activities. Our sophisticated service-oriented approach to combining passenger and cargo traffic enables us to better utilize our aircraft reduce our break-even load factors on passenger flights, and diversify our revenue streams. Furthermore, the geographically diversified nature of the passenger and cargo networks of LAN and its subsidiaries provide additional diversification in our operations and reduce exposure to any single market. These benefits have helped us maintain strong profitability and expand our operations consistently in recent years, despite volatile macroeconomic conditions and various external shocks that have affected the airline industry over the years.
Approximately 98%dedicated freighter aircraft. In 2014, approximately 83% of our revenues arecame from passenger revenues, 14% came from our cargo business, and the remaining 3% from other operating revenues. Other operating revenue consists primarily in revenues generated by our air transport activities. We generate the balance of our operating revenues from tour operator services, aircraft leases, on-board sales, third-party maintenance, ground handling, customs and storage brokerage operations and the divested courier unit which was sold in April 2011.operations.
Our operating environment in 20112014 was marked by continued growthcapacity rationalization in both cargo and passenger operations compared with 2010,2013, coupled with fuel price increases which impacted our operating costsa generally weaker macroeconomic environment in Latin America, including slower GDP growth trends, and to a lesser extent influenced the increaseweaker currencies in yields. The Company demonstrated its ability to manage higher fuel prices through its fuel surcharge policy and financial hedging strategy in addition to tactical capacity adjustments on certain routes.most countries. Additionally our operations were impactednegatively affected by the volcanic ash cloud resulting from the eruption of the Puyehue volcano in the south of Chile that took place from the second quarter 2011 and appeared in a discontinuous manner throughout the remaining part of the year. Costs were also impacted by the consolidation of LAN’s Colombian operations starting in January 2011, and one-time costs related to the startup and turnaround of Aires’ operations, which generated an operating loss of US$51.7 million in 2011.
During 2011, growth in passenger demand was driven by growth in both domestic and international markets in the region. Latin America continues to show strong traffic growth on international and domestic routes, supported by robust economic conditions in LAN’s home markets. Similarly during this period, cargo demand in the region showed solid growth as a result of continued trade activity mainly supported by markets such as Brazil, in which currency appreciation has a positive impact on trade imports. While competition on bothreduced passenger and cargo routes has grown gradually since 2006,demand during this period the growth of import flows to Latin America continued. Weaker cargo markets globally have driven additional competition to South America, especially Brazil, and have also resultedFIFA World Cup soccer tournament held in higher competitive activity within the region. On the other hand, export volumes in Chile have recovered, partly driven by the gradual resurgence of salmon exports. Changes in competitive conditions in specific markets still generate opportunities for us to expand. Certain factors outside of our control, such as fuel prices that have risen consistently since 2002, and reached historically record-high levels in mid-2008, have also generated significant cost pressures. During 2011, fuel prices again increased as compared to 2010.Brazil.
Our results for the period between 2010 and 2011 reflect our efforts in recent years to expand and diversify our revenue base while maintaining an efficient cost base. We have aimed to effectively respond to the opportunities and challenges presented by the expansion and diversification of our revenue base. This process included continuing the
expansion of our domestic passenger operations in Chile, Peru, Argentina and Ecuador and starting passenger operations in Colombia through the purchase of Aires in November 2010. As a result, we have significantly increased our passenger capacity and redeployed our assets in response to specific opportunities. In the cargo business, we have adjusted our routes and our capacity mix to adapt to changing cargo flows and we have expanded cargo operations within the region and on long haul routes to take advantage of existing opportunities. We have also launched initiatives to enhance customer preference and increase efficiency. These initiatives have enabled us to maintain a solid market position and to develop new mechanisms to sustain high levels of profitability despite facing unprecedented high fuel prices during 2008, the negative effects of the global economic crisis during 2009, and natural disasters such as the earthquake and volcano eruption in Chile during 2010 and 2011, respectively. As a result, net income amounted to US$336.5 million in 2008, US$231.1 million in 2009, US$419.7 million in 2010 and US$320.2 million in 2011.
Our operating results during 2011 evidenced our ability to leverage continued growth opportunities in both cargo and passenger markets, enhancing our leadership position in Latin America and reflecting our ability to face and mitigate impacts of adverse scenarios such as fuel price volatility and natural disasters. Based on our diversified, solid and flexible business model, as well as our consistent track record and solid balance sheet, we are continuously improving the Company’s long-term strategic position by addressing opportunities, strengthening our market presence and increasing competitiveness.
Passenger Operations
In general, our passenger revenues are driven by international and country-specific political and economic conditions, competitive activity and the attractiveness of the destinations that we serve,serve. Passenger revenues are also affected by our capacity, traffic, load factors, yield and unit revenue. Our capacity is measured in terms of available seat kilometers, or ASKs, which represents the number of seats we make available for sale, multiplied by the kilometers flown. We measure traffic in revenue passenger kilometers, or RPKs, as the number of passengers on our flights multiplied by the number of kilometers flown. Load factors represent RPKs (traffic) as a percentage of ASKs (capacity), or the percentage of our capacity that is actually used by paying customers. Finally, we allocate among our different routes.use yield, revenue from passenger operations divided by RPKs, to measure the average amount that one passenger pays to fly one kilometer and unit revenue, or revenue per ASK, to measure the effect of capacity on revenues. See “Item 3. Key Information—Selected Financial Data.”
Passenger demand over the past years has grownbeen affected as a result of weaker economic environments in some Latin America’s countries, reflected in slower GDP trends and depreciated currencies, and increases in competition from operators to South America and within the region.
During 2014, domestic operations in the last years, driven by positive economic conditions in Latin America. Economic growth and improved customer confidence have led to an expansion in both business and leisure traffic to and from Latin America. Increased interest in travel into South America from Europe and the United States has been another factor positively impacting overall passenger traffic. As a consequence, passenger volumes in markets such asCompany’s Spanish speaking countries (SSC, which include Chile, Peru, Argentina, Colombia and EcuadorEcuador) continued to show moderate growth in terms of traffic and remained very profitable, in spite of the economic slowdown in some countries. Our SSC business grew significantly between 2010at a slower pace than 2013, as we increased capacity by only 3.7% as compared to 2013. Nonetheless, the Company was able to stimulate passenger traffic as measured in RPKs by 6.2%, allowing for an improvement of 1.9 p.p. in load factors, reaching 80.5%. However, yields in the SSC domestic markets continue to be under pressure due to the depreciation of local currencies, mainly the Chilean and 2011. LAN’s traffic growth during 2011,Argentinian peso which reached 15.9%, was also based ondepreciated an average of 15.2% and 48.2% respectively, as compared to 2013. This resulted in a capacity expansion plan driven by5.2% decline in revenue per ASK as compared to 2013.
Since we achieved the net delivery of eighteen new passenger aircraft during the year plus the incorporation of Colombian operations through the Aires acquisition, which contributed approximately 4.5% to our total capacity measured by ASKs.
Competitive activity on both our domestic and international passenger routes has also varied over the last several years. On our international routes, competition gradually increased as both incumbent and new competitors expanded their operations. Nevertheless, we have maintained our market share in most of our international markets since 2005 and have gradually increased our presenceturnaround in the domestic marketsBrazil passenger operations, we have had a successful and profitable operation. However, the weaker economy in Brazil, the depreciation of Chilethe Brazilian real and Argentina, as well asthe impact of the FIFA World Cup in international routes. We also initiated domestic operations in Ecuador in April 2009the months of June and in Colombia, through the acquisitionJuly of Aires in November 2010.2014 have negatively impacted our results. In December 2011 Aires was rebranded as LAN Colombia.
During 2011 the combined yield for the internationalthis context, and domestic passenger businesses increased 11.2%, reflecting the strong demand and increase in fuel surcharges, in line with the current dynamics of domestic industry, TAM reduced capacity by 1.4% as measured in ASK during 2014. However, even with these circumstances, we were able to increase traffic by 1.1% as measured in RPK further improving our load factor by 2.0 p.p., reaching a high 83.0%. As a result, TAM ended the year with an increase of WTI prices2.2% in our revenues per ASK in Brazilian reais as compared to 2013.
The FIFA World Cup soccer tournament took place in Brazil in June and July of 2014 and resulted in a highly complex operation due to the crack spread. The growth rateslarge number of passengers who travelled to these cities on specific dates. Despite the increase in the number of passengers, LATAM’s operating margin during the World Cup period was adversely impacted by approximately between US$ 140 million and US$160 million, mainly due to decreases in traffic and capacity in 2011 included inorganic growth resulting from the inclusion of LAN Colombia’s domestic and international operations, partially offset by the volcanic ash cloud that disrupted air traffic throughout the region.
During 2010 the combined yield for the international and domestic passenger businesses experienced a 6.8% increase, reflecting the recovery and growth in demand experienced in 2010 against 2009 when yields experienced a 16.2% decrease compared with 2008, as a result of the economic crisis that affected passenger demand for air flights in 2009 and a high comparison base in 2008 as fuel surcharges incorporated in the yields drove the increase in fuel prices during that year.
Overall, despite adverse and uncontrollable factors such as fuel prices increase and natural disasters, market conditions on the passenger business provided us with opportunities to advance on our strategic development plans and expand our operations. We addressed these by taking advantage of our integrated business model, efficient operations, continued customer focus, and flexible capacity management. Customer focus has provided a key tool to address competitive challengesreduced corporate travel, as well as a reduction in leisure demand during the winter holidays, which are usually a period of high seasonal demand. Nonetheless LATAM is very satisfied to have successfully enter new markets.
We also took advantage ofIn our flexibilityinternational operations, we have continued to adaptrationalize passenger capacity quickly in response to demand shocks or market opportunities. We actively managea challenging competitive environment and continued pressure on yields. In terms of increased competition, we have seen a significant increase in capacity to the region from airlines from different regions, specifically from North America. Additionally, we had a significant increase in intraregional competition during the year; some operators - formerly domestic operators - strengthened their regional flights; and other operators redirected their capacity from Venezuela to other markets within the region situation. Additionally, the depreciation of some local currencies, especially the Argentinean peso, has adversely affected our international demand. Furthermore Brazilian international passenger results were also affected in July by lower corporate travel to and from Brazil during the World Cup soccer tournament. During 2014, the international business unit decreased capacity by transferring capacity between routes or adding new aircraft when necessary. This enabled us2.4% while traffic as measured in RPK increased 1.2%, boosting load factors by 3.1 p.p., to rapidly respond by adding capacity85.4%, resulting in a decrease of 3.2% in the Peruvian domestic market during 2004revenue per ASK (RASK).
Overall, LATAM has focused on improving our product and supporting the launch of LAN Argentina’s domestic operations in 2005, as well as launching the latter’sconnectivity with international operations in October 2006, launching domestic operations in Ecuador in April 2009 and launching Colombian domestic operations in November 2010.
These opportunistic actions fit in with our long-term development strategy, which is aimed at consolidating LANpassengers. We have implemented initiatives such as the preferred carrier in South America. This plan incorporates developmentbeginning reconfiguration of domestic, regionalthe cabins of the TAM B777 fleet to include a fully flat business class, the increased use of B787 aircraft on long-haul routes, and intercontinental routesadvances in the markets we serve. Continuous monitoringconstruction of demand trends and competitive activity has allowed us to identify opportunities and, as a consequence, additional capacity has also been allocated tothe main hub of the company at Guarulhos airport in Sao Paulo, where LATAM already moved all of its operations to the new Terminal 3, and where the Company was able to substantially improve its connection times to offer a much more attractive product for its passengers. Additionally, during November 2014, LATAM inaugurated a new VIP lounge at the airport, which is currently the largest in South Pacific, EuropeAmerica and which will also be important in helping the United States, as well as to specific regional routes. We also shifted capacity among our routes in order to better match seasonal patterns in flights to the United States and to other destinations. Further refinements to our itineraries were also implemented in order to improve connectivity between our operations and thosebest experience of our partners.passengers.
During 2011 we experienced a significant operating impact due to the presence of volcanic ash resulting from the eruption of the Puyehue volcano in southern Chile during the month of June. The displacement of ashes periodically affected operations in Argentina, southern Chile and our South Pacific route to Australia and New Zealand. Although the volcanic activity has been reduced, it is highly unpredictable. Our focus during this emergency was to maintain the safety of our operations, resulting in tactical cancellations on the affected routes based on available information. In addition, our commercial policies have focused on providing maximum flexibility for rescheduling flights, in order to avoid an impact on demand. Overall, we estimate a negative impact of US$36.6 million dollars as a result of decreased revenue, passenger compensations and higher fuel costs due to itinerary changes.
LAN’s flexibility and broad passenger network also allowed us to manage the negative impact of the catastrophic earthquake that struck Chile in February 2010, causing significant damage to the terminal building at the Santiago International Airport and affecting all air travel in and out of the country. With no alternative airport in the Santiago Metropolitan Region, commercial passenger operations were suspended for three days, and were re-launched on March 2, 2010 with provisional facilities. LAN operated with reduced capacity out of Santiago until the terminal building was fully operational on March 28, 2010. LAN estimates the net impact of decreased passenger operations due to the earthquake were approximately US$30 million in 2010. Cargo operations were not materially affected by the earthquake, nor were the passenger operations of LAN or its subsidiaries in Peru, Ecuador and Argentina.
We have also enhanced our regional network by selectively adding new destinations and launching new routes. Since 2004, we have been developing an intra-regional hub in Lima. We have launched several routes that enable us to effectively use Lima as a connecting point for passengers traveling between Mexico City, Bogotá, Caracas, Guayaquil, Quito, Buenos Aires, La Paz, Santa Cruz, Sao Paulo and Santiago de Chile. In 2007, we began direct service between Lima and Madrid; in 2008, we began service to Medellín, Colombia (with one stop in Quito); and in 2009, we began service from Lima to Cali via Quito and from Lima to Punta Cana, Cancun and Cordoba. Regarding long-haul operations, in July 2010, LAN Peru launched four weekly frequencies between Lima and San Francisco, with connections from Sao Paulo, Santiago and Buenos Aires. During the first half of 2010 the Company implemented various new passenger destinations. We plan to continue growing our operation in Lima by increasing the number of flight frequencies we operate on these routes as we did during 2011 with Miami and Bogota and also by adding new destinations.
On May 10, 2010, LAN Argentina launched three daily flights between Santiago and Aeroparque airport in Buenos Aires and in June 2010 it launched services between Aeroparque and Sao Paulo, among others. In December 2011, LAN Argentina’s permits for regional flights from Aeroparque were cancelled by the Argentinean Aeronautical Authority, while the affected flight Buenos Aires – Santiago was reassigned to Ezeiza Airport. In both the Chilean and Peruvian domestic markets, total domestic traffic increased during 2011, driven mainly by the positive macroeconomic scenarios in both markets and by attractive fare structures in line with the model for short-haul operations that we implemented in 2007.
Between 2005 and 2011, LAN Argentina increased the number of Argentine domestic destinations from six to fifteen and, based on internal estimates, our market share was approximately 30% as of December 2011.
By the end of 2008, Ecuador’s aeronautical authority, CNAC, granted LAN Ecuador permission to operate domestic flights within the country. These operations started in April 2009 with flights between the cities of Quito and Guayaquil. As of December 2011, LAN Ecuador was operating sixty-three flights a week between Guayaquil and Quito, one of the most heavily traveled routes in Latin America, as well as fourteen flights a week from Quito to Cuenca and seven flights a week from Guayaquil to Cuenca. In September 2010, LAN Ecuador launched regular service to the Galapagos Islands, offering a daily flight from both Quito and Guayaquil. Finally, in November 2011, LAN Ecuador incorporated two additional weekly flights to the airport of San Cristobal in the Galapagos Islands. LAN Ecuador had 25.6% market share in the domestic market of Ecuador as of December 2011.
Cargo Operations
Our cargo operations depend on exports from and imports to South America and are, therefore, affected by economic conditions, foreign exchange rates, changes in international trade, the health of particular industries, competition and fuel prices (which we usually pass on to our customers through a cargo fuel surcharge). Cargo revenues are also affected by our capacity, traffic, load factors and yield. Our capacity is measured in terms of available ton kilometers, or ATKs, which represents the number of tons available for the transportation of cargo, multiplied by the kilometers flown. We measure traffic in revenue ton kilometers, or RTKs, as the amount of cargo loads (measured in tons) multiplied by the number of kilometers flown. Load factors represent RTKs (traffic) as a percentage of ATKs (capacity), or the percentage of our cargo capacity that is actually used to transport cargo for our customers. Finally, we use yield, or revenue from cargo operations divided by RTKs, to measure the average amount that our customers pay to transport one ton of cargo one kilometer. See “Item 3. Key Information—Selected Financial Data.”
We have designed our operations, route network and commercial strategies with the flexibility required to respond to changing conditions. In the cargo business, it is important to differentiate between what has been our business northbound - exports from the region to North America and Europe – and our business southbound - imports to the region.
Since 2012, the environment for the freighter business, and therefore for LATAM’s cargo business unit, has been complicated. The relative size of inboundglobal freight markets have remained weak, and outbound flowsLatin America has not been an exception. In addition, freighter and passenger’s operators, have significantly increased cargo capacity in the region. These have put significant pressure on cargo yields.
During 2014, cargo traffic decreased 3.3%, reflecting a challenging scenario in Latin American cargo markets mainly due to a particular market or route is a key elementdecline in cargo operations asdemand on routes from the unidirectional nature of freight flows requires airlinesU.SA to create routes that combine origin-destination pairs that feature complementary freight flows. Changes in macroeconomic conditions may lead to major fluctuations in cargo flows to and from Latin America, therefore requiring continuous route and capacity adjustments.
The flexibility that this business model allows based on adaptation to changes in market trends was key for LAN’s operations in 2009 when the businessespecially Brazil, which was affected by the FIFA World Cup, uncertainty surrounding presidential elections and lower economic growth. Additionally northbound demand was affected by a significant contraction of import and export markets in response to the global economic crisis. In addition, LAN Cargo saw a sharp drop in salmonseed exports from Chile, as a result of an outbreak of the ISA virus. During 2009 LAN received two Boeing 777 freighters at a time where there was a decrease in demand in cargo operations. These aircraft were utilized to increase capacity, mainly on routes between South Americapartially offset by strong asparagus, flowers and Europe. Not only did the incorporation of these cargo planes increase capacity, but they also helped the company expand its coverage beyond the region and strengthen its cargo services to Europe; LAN currently operates routes between Frankfurt and Brazil, Argentina and Chile, Ecuador and Colombia and Amsterdam and Frankfurt.fresh fruit export seasons.
During 2009 the Company achieved an important step in regional expansion. Colombia is Latin America’s largest market for exports by air transport to the United States, exporting an estimated 167,000 tons annually. In March 2009, LAN Cargo launched LANCO, after successfully obtaining the necessary operational and technical certification. It launched its services with two latest-generation Boeing 767-300Fs, with a capacity for 54 tons of freight, connecting the cities of Bogotá and Medellin with Miami.
In addition, in March 2009, the Company’s cargo subsidiary in Brazil, ABSA, began operations in the country’s domestic market, with one flight daily - from Monday to Friday - between the cities of Sao Paulo and Manaus. On this route, ABSA operates an advanced-technology Boeing 767-300F with a capacity of 54 tons. This route accounts for a large part of Brazil’s airfreight traffic. Manaus is the country’s fourth largest city in terms of GDP, with a large number of companies, principally in the electronics sector, in its industrial pole. The special tax incentives offered by the Amazon capital of Manaus as part of efforts to promote the area’s development, make it an attractive alternative for exporter and importer clients. During 2010, the Company opened a route between Sao Paulo and Fortaleza and Sao Paulo and Recife. During 2011 the Company added a route between Sao Paulo, Belem and Manaus.
Regarding the cargo fleet, during 2012, the Company expects delivery of 2 Boeing 777F freighter aircraft during the second half of the year.
As the economy started to recover at the end of 2009, and continuing through 2010 and 2011, LAN was able to take advantage of the new capacity and growth opportunities in various markets; as a result, the cargo business played an important roleCompany continues with a rational and disciplined approach toward freighter capacity utilization, while focused on maximizing the belly utilization of the Company’s passenger fleet. In this regard, in driving LAN’s revenue growth2014 the Company sub-leased two of its 767-300Fs to another company operating in 2010 and 2011.
Cargo traffic increased 11.5% between 2010 and 2011, from 3,239 milliona different market for a period of three years. An additional 767-300F was also leased to this same operator starting in cargo revenue ton kilometersJanuary 2015. Overall, capacity decreased by 5.6% in 2010 to 3,612 million cargo revenue ton kilometers in 2011. This improvement was positive compared to the 0.8% decrease experienced by the international air cargo industry, while the Latin-American cargo segment experienced a 1.5% growth. The Company increased its capacity by approximately 12.4%,year, resulting in a 0.5 point decrease in its load factor to 69.6%. The increase in capacity was mainly driven by LAN’s incorporation of two new Boeing 767-300F freighters in December 2010 and January 2011. These aircraft were assigned to boost growth in the Latin American, United States West Coast and Mexican markets, as well as by higher utilization59.8%, which represents an improvement of the freighter fleet. LAN Cargo transported 875 thousand tons of freight in 2011, an increase of 12.2%1.4 percentage points as compared to 2010.
In 2011, LAN’s2013. Nonetheless, the 4.8% decline in the cargo revenues rose in 23.1%yields led to US$1.577 million, representing 27.6%a contraction of the Company’s total annual revenues. The growth in revenues also reflects the 10.4% increase in cargo yields that year.per ATK of 2.5%.
Cost Structure
LAN’sLATAM Airlines Group’s costs are generally driven by the size of our operations, fuel prices, fleet costs and exchange rates. Our operating expenses are calculated in accordance with IFRS and comprise the sum of the line items “cost of sales” plus “distribution costs” plus “administrative expenses” plus “other operating expenses”, as shown on our consolidated statement of comprehensive income. These operating expenses include wages and benefits, fuel, depreciation and amortization, commissions to agents, aircraft rentals, other rental and landing fees, passenger services, aircraft maintenance, and other operating expenses. The following is a discussion of the drivers of the most important costs.
As an airline, we are subject to fluctuations in costs that are outside our control, particularly fuel prices and exchange rates. However, we manage partprices. At the end of our exposure to changes in2013, fuel prices throughwere high principally because of the strong signals of growth in the U.S. At the beginning of 2014, fuel followed the same trend because of the Ukraine/Russia conflict and also because of strong signals of growth in the U.S. and Europe. In the second half of 2014, fuel prices tumbled 42% as OPEC elected not to curb output in response to a supply glut produced by increased production of shale oil in the U.S., and as a result of weak demand as China, Japan and Eurozone showed an economic slowdown and deflation. Although we have implemented a number of strategies to mitigate the impact of the volatility of fuel prices, such as fuel-hedging policypolicies and the use of pass-through mechanisms, on bothit is unlikely that we will be able to fully protect ourselves against the passengervolatility of fuel costs. In addition, during periods in which fuel prices decrease, as during 2014, a fuel hedging program may prevent us from realizing the full benefit of the lower fuel prices. Moreover, another important driver that affects this item cost is the amount of gallons consumed during the year, resulting from the size of our operation, the efficiency of the fleet and cargo businesses. For more information see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Risk of Fluctuations in Jet Fuel Prices”. efficiency programs.
Personnel expenses are another significant component of our overall costs. Because a significant portion of our labor costs is denominated in Chilean pesos and in Brazilian reais, appreciation of the pesothese currencies against the dollar as well as increases in local inflation rates can result in increased costs in dollar terms and can negatively affect our results. However, this cost pressure is mitigated by the partial natural hedge between theDepreciation of local currencies of denomination of our total operating revenuesresults in decreases in costs in dollars. Additionally, other important drivers are average headcount and expenses.average wages.
CommissionCommissions paid to travel and cargo agents are also compose a significant cost to us.the company. We compete with other airlines over the amount of commission we pay per sale, particularly in connection with special programs and marketing efforts, and to maintain competitive incentives with travel agents. In February 2007 we reduced commission paid to agents in Chile for economy class ticket sales from 6% to 1%. Between 2007 and 2008, commissions were also reduced to 1% in Ecuador, Argentina and Peru.
Fleet related expenses, namely aircraft rentals and depreciation, are another significant cost.cost, and mainly depend on the number and type of aircraft that are owned and that are under operating leases. These costs are mainly fixed and can be reduced on a per unit basis by achieving higher daily aircraft utilization rates.
During 2011, LAN’s operating costs increased in 35.4%, mainly impacted by an increase
Results of 28.8% in fuel prices which led to US$588.1 million in increased fuel expenses and contributed to a 18.0% increase in cost per ATK (a key industry metric). Excluding fuel costs, the increase in cost per ATK over this period was 10.6%. In addition, the Company recognized a US$39.9 million fuel hedge gainOperation
LATAM Airlines Group Financial Results Discussion: Year ended December 31, 2014 compared to a US$1.0 million fuel hedge gain in 2010.
Apart from higher expenditure on fuel, the Company paid higher wages and salaries due to a higher average headcount that is in-line with the Company’s operational expansion, and the impact of the appreciation of Latin American currencies in 2011.
We have launched various efficiency-related initiatives aimed at reducing fuel consumption and increasingly incorporating efficient aircraft into the fleet.
Higher aircraft utilization has been an important source of improved efficiency. Our long-haul passenger and cargo aircraft are used, on average, over 13.0 hours per day (Boeing 767-300 12.8 hrs per day and Airbus A340 14.2 hours per day). Our utilization strategy in 2011 was mostly designed in concert with the addition of new routes to
our network, which enabled us to leverage our human and physical assets for increased efficiency as well as increasing frequencies. In domestic operations we have also worked consistently to improve our cost structure. This process has included initiatives such as the modification of short-haul service standards, which were implemented in late 2005 and modified further in 2007 as a result of the new business model on domestic routes, enabling us to reduce passenger service expenses. The key elements of this new business model have been a reduction in sales and distribution costs through higher Internet penetration and reduced agency commission, a faster turnaround time, and increased self check-in service through web check-in and kiosks at airports.
In addition, during 2009 we implemented LEAN, a system for improving our processes by eliminating activities that do not add value to processes (thus increasing the value of each activity and suppressing those that are superfluous), thereby allowing us to reduce costs, and increase customer satisfaction. In addition, during 2011 we continued to install winglets on our Boeing 767 aircraft fleet, achieving fuel efficiencies of approximately 5% per aircraft. To mitigate the environmental impact of our operations we strive to operate in a sustainable manner by reducing our fuel consumption and related emissions.
Outlook
Our long-term strategy is aimed at consolidating LAN’s position as the main passenger and cargo airline in South America. We will continue to expand our network by further developing our existing routes, adding new destinations, developing new alliances, and entering new markets. We expect our brand recognition and a continuous effort to improve service standards to drive increased customer preference, ultimately leading to strong market shares in the markets we serve. Our product and service design is aimed at providing passengers and cargo customers with differentiated offerings that provide valuable solutions to the needs of each of our customer types. We also aim to have products and services that evolve together with changes in technology, market conditions and competitive actions. We plan to maintain a highly competitive cost structure by leveraging our cost-conscious culture, incorporating new technologies and practices, and by identifying and implementing adequate cost-reduction and efficiency-related initiatives. We believe that a focus on flexibility will enable us to adequately react to changing market conditions. Finally, a healthy financial structure will allow us to effectively fund our growth, enhance our strategic development and reinforce our customer appeal.
Our results will be mainly determined by the expansion of our current network, the evolution of our market share in our main markets, our level of success in entering new markets, the continued implementation of new efficiency-related programs, the continued implementation of our business model for short-haul operations, and fuel price levels.
We plan to increase frequencies on long-haul flights out of Chile, Peru, Ecuador and Argentina, and eventually add new destinations in the United States and Europe. We plan to reinforce our regional network through the addition of new frequencies on our current routes and the addition of new destinations. We plan in a next step to expand international operations through LAN Colombia. As of February 29, 2012, LAN Colombia operates only one international route from El Dorado airport in Bogotá to Miami. We will also seek to enter into new alliances in both the passenger and cargo business, especially to build up our presence in new markets.
Competitive activity in key markets has increased gradually in recent years, and we expect it to continue doing so in the future. Nevertheless, we expect to maintain solid market shares based on offering attractive value propositions that combine broad international and domestic networks, a strong customer focus and a competitive cost base.
We are also working on increasing efficiency by streamlining our support processes, reducing commercial costs, and by continuing with the implementation of our new business model on short-haul operations. Further enhancements should arise from economies of scale, especially as solid growth in the passenger business accompanied by controlled fixed costs will serve to dilute our fixed costs base. In both the passenger and the cargo business, efficiencies are also expected to come from the replacement of older aircraft with new and more fuel-efficient Boeing 787 and Boeing 777 models and from efficiency-related initiatives such as installing winglets on the B767 fleet as well as continuing to adjust aircraft configuration to market demand.
Our financial performance will also be highly dependent on jet fuel prices. These prices rose significantly until mid-2008, which led to a sharp rise in our fuel expenditures, but significantly declined in 2009. Presently, there is a trend towards increases in jet fuel prices because of the increased demand caused by the 2010 recovery in the global economy coupled with geopolitical conflicts that affected global fuel supply in the last year. Although we have implemented a number of strategies to mitigate the impact of the volatility of fuel prices, including financial hedging, the use of fuel surcharges, and tactical reduction of capacity, it is unlikely that we will be able to fully protect ourselves against the volatility of fuel costs.
Overall, we believe that these initiatives will enable us to successfully respond to growth opportunities, maintain a solid competitive position, and enhance our distinct cost performance.
Results of Operationyear ended December 31, 2013.
The following table sets forth certain income statement data for Lan Airlines.LATAM Airlines Group, for the year ended December 31, 2014, and December 31, 2013. For certain operating data during these periods, see “Item 3. Key Information—Selected Financial Data.”
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 11/10 | 10/09 | 2014 | 2013 | 2014 | 2013 | 2014/2013 % change | ||||||||||||||||||||||||||||||||||||||||
(in US$ millions, except per share and capital stock data) | As a percentage of total operating revenues | % change | (in US$ millions, except per share and capital stock data) | As a percentage of total operating revenues | ||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated Results of Income by Function | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating revenues | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Passenger | 4,008.9 | 3,109.8 | 2,623.6 | 71.8 | 70.8 | 74.6 | 28.9 | 18.5 | 10,380.1 | 11,061.6 | 85.8 | % | 85.6 | % | (6.2 | %) | ||||||||||||||||||||||||||||||||||||
Cargo | 1,576.5 | 1,280.7 | 895.6 | 28.2 | 29.2 | 25.4 | 23.1 | 43.0 | 1,713.4 | 1,863.0 | 14.2 | % | 14.4 | % | (8.0 | %) | ||||||||||||||||||||||||||||||||||||
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Total operating revenues | 5,585.4 | 4,390.5 | 3,519.2 | 100.0 | 100.0 | 100.0 | 27.2 | 24.8 | 12,093.5 | 12,924.5 | 100.0 | % | 100.0 | % | (6.4 | %) | ||||||||||||||||||||||||||||||||||||
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Cost of sales | (4,078.6 | ) | (3,012.7 | ) | (2,522.8 | ) | (73.0 | ) | (68.6 | ) | (71.7 | ) | 35.4 | 19.4 | (9,624.5 | ) | (10,054.2 | ) | (79.6 | )% | (77.8 | )% | 4.3 | % | ||||||||||||||||||||||||||||
Gross margin | 1,506.8 | 1,377.8 | 996.4 | 27.0 | 31.4 | 28.3 | 9.4 | 38.3 | 2,469.0 | 2,870.4 | 20.4 | % | 22.2 | % | (14.0 | )% | ||||||||||||||||||||||||||||||||||||
Other operating income | 132.8 | 132.8 | 136.4 | 2.4 | 3.0 | 3.9 | 0.0 | (2.6 | ) | 377.6 | 341.6 | 3.1 | % | 2.6 | % | 10.5 | % | |||||||||||||||||||||||||||||||||||
Distribution costs | (479.8 | ) | (383.5 | ) | (327.0 | ) | (8.6 | ) | (8.7 | ) | (9.3 | ) | 25.1 | 17.3 | (957.1 | ) | (1,025.9 | ) | (7.9 | )% | (7.9 | )% | (6.7 | %) | ||||||||||||||||||||||||||||
Administrative expenses | (405.7 | ) | (331.8 | ) | (269.6 | ) | (7.3 | ) | (7.6 | ) | (7.7 | ) | 22.3 | 23.1 | (980.7 | ) | (1,136.1 | ) | (8.1 | )% | (8.8 | )% | (13.7 | %) | ||||||||||||||||||||||||||||
Other operating expenses | (214.4 | ) | (172.4 | ) | (100.5 | ) | (3.8 | ) | (3.9 | ) | (2.9 | ) | 24.4 | 71.5 | (401.0 | ) | (408.7 | ) | (3.3 | )% | (3.2 | )% | (1.9 | )% | ||||||||||||||||||||||||||||
Financial Income | 14.5 | 14.9 | 18.2 | 0.3 | (0.3 | ) | (0.5 | ) | (2.7 | ) | (18.1 | ) | ||||||||||||||||||||||||||||||||||||||||
Financial costs (from non-financial activities) | (139.1 | ) | (155.3 | ) | (153.1 | ) | (2.5 | ) | (3.5 | ) | (4.4 | ) | (10.4 | ) | 1.4 | |||||||||||||||||||||||||||||||||||||
Earning on investments (equity method) | 0.5 | 0.1 | 0.3 | 0.0 | 0.0 | 0.0 | 400.0 | (66.7 | ) | |||||||||||||||||||||||||||||||||||||||||||
Exchange rate differences | (0.3 | ) | 13.8 | (11.2 | ) | 0.0 | 0.3 | (0.3 | ) | (102.2 | ) | (223.2 | )- | |||||||||||||||||||||||||||||||||||||||
Financial income | 90,5 | 72.8 | 0.7 | % | 0.6 | % | 24.3 | % | ||||||||||||||||||||||||||||||||||||||||||||
Financial costs | (430.0 | ) | (462.5 | ) | (3.6 | )% | (3.6 | )% | (7.0 | %) | ||||||||||||||||||||||||||||||||||||||||||
Share of profit of investments accounted for using the equity method | (6.5 | ) | 2.0 | (0.1 | )% | 0.0 | % | (430.3 | %) | |||||||||||||||||||||||||||||||||||||||||||
Foreign exchange gains/(losses) | (130.2 | ) | (482.2 | ) | (1.1 | )% | (3.7 | )% | (73.0 | %) | ||||||||||||||||||||||||||||||||||||||||||
Result of indexation units | 0.1 | 0.1 | (0.6 | ) | 0.0 | 0.0 | 0.0 | 0.0 | (116.7 | )- | 0.0 | 0.2 | 0.0 | % | 0.0 | % | (96.7 | %) | ||||||||||||||||||||||||||||||||||
Negative goodwill | — | — | — | — | 0.0 | 0.0 | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Other net earnings (losses) | (33.0 | ) | 5.4 | (11.7 | ) | (0.6 | ) | 1.0 | (0.3 | ) | (711.1 | ) | (146.2 | )- | ||||||||||||||||||||||||||||||||||||||
Other gains/(losses) | 33.5 | (55.4 | ) | 0.3 | % | (0.4 | )% | (160.5 | %) | |||||||||||||||||||||||||||||||||||||||||||
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Income before income taxes | 382.4 | 502.0 | 277.5 | 6.8 | 11.4 | 7.9 | (23.8 | ) | 80.9 | |||||||||||||||||||||||||||||||||||||||||||
Income tax | (61.8 | ) | (81.1 | ) | (44.5 | ) | (1.1 | ) | (1.8 | ) | (1.3 | ) | (23.8 | ) | 82.2 | |||||||||||||||||||||||||||||||||||||
Income (loss) before income taxes | 65.2 | (283.9 | ) | 0.5 | % | (2.2 | )% | (123.0 | )% | |||||||||||||||||||||||||||||||||||||||||||
Income (loss) tax expense | (292.4 | ) | 20.1 | (2.4 | )% | 0.2 | % | (1,557.0 | )% | |||||||||||||||||||||||||||||||||||||||||||
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Net income for the period | 320.6 | 420.9 | 233.0 | 5.7 | 9.6 | 6.6 | (23.8 | ) | 80.6 | |||||||||||||||||||||||||||||||||||||||||||
Net income (loss) for the period | (227.2 | ) | (263.8 | ) | (1.9 | )% | (2.0 | )% | (13.9 | %) | ||||||||||||||||||||||||||||||||||||||||||
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Income for the period attributable to the parent company’s equity holders | 320.2 | 419.7 | 231.1 | 5.7 | 9.6 | 6.6 | (23.7 | ) | 80.6 | |||||||||||||||||||||||||||||||||||||||||||
Income (loss) for the period attributable to the parent company’s equity holders | (260.0 | ) | (281.1 | ) | (2.1 | )% | (2.2 | )% | (7.5 | )% | ||||||||||||||||||||||||||||||||||||||||||
Income for the period attributable to non-controlling interest | 0.4 | 1.2 | 1.9 | 0.0 | 0.1 | 0.1 | (66.7 | ) | (36.8 | ) | ||||||||||||||||||||||||||||||||||||||||||
Income (loss) for the period attributable to non-controlling interests | 32.8 | 17.3 | 0.3 | % | 0.1 | % | 90.1 | % | ||||||||||||||||||||||||||||||||||||||||||||
Net income for the period | 320.6 | 420.9 | 233.0 | 5.7 | 9.6 | 6.6 | (23.8 | ) | 81.6 | |||||||||||||||||||||||||||||||||||||||||||
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Net income (loss) for the period | (227.2 | ) | (263.8 | ) | (1.9 | )% | (2.0 | )% | (13.9 | %) | ||||||||||||||||||||||||||||||||||||||||||
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Earnings per share | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Basic earnings per share (US$) | 0.9434 | 1.2388 | 0.6822 | (0.47656 | ) | (0.57613 | ) | n.a. | n.a. | (70.4 | %) | |||||||||||||||||||||||||||||||||||||||||
Diluted earnings per share (US$) | 0.9426 | 1.2353 | 0.6822 | (0.47656 | ) | (0.57613 | ) | n.a. | n.a. | (70.4 | %) |
* | The abbreviation “n.a.” means not available. |
Net Loss
Net loss for the year ended December 31, 2014 equaled US$ 227.2 million, representing a decrease of US$ 36.6 million from a net loss of US$263.8 million in 2013. Net loss attributable to the parents of the company decreased to US$ 260.0 million in 2014 from US$281.1 million in 2013. Results for the 2014 include a US$ 112 million provision recognized during the first quarter of the year mainly related to estimated penalties for anticipated redeliveries of aircraft and other redelivery expenses expected to be incurred as a part of the Company’s fleet restructuring process. In addition, the Company recognized an accounting charge of US$ 150.2 million due to modifications made to the Chilean Tax System, consisting of a gradual increase of the corporate income tax from 20% to 27% in 2018. The Company entirely recognized the effect of the 7p.p. increase in the corporate rate during 2014.For more information see “Business strategy – Fleet restructuring plan” and “Item 10.—Taxation and Note 17 our audited consolidated financial statements.
Results were also impacted by a foreign exchange loss of US$ 130.2 million mainly resulting from the 12.5% depreciation of the Brazilian real between December 31, 2013 and December 31, 2014, as compared to a foreign exchange loss of US$482.2 million in 2013.. On the other hand, in 2013 LATAM incurred US$56.0 million in non-recurring expenses related to the combination and integration costs, whereas no costs related to integration were incurred in 2014.
Operating Revenues
Our total operating revenues decreased by 6.4% to US$ 12,093.5 million in the year ended December 31, 2014 compared to revenues of US$ 12,924.5 million in 2013. The 2014 decrease in operating revenues was attributable to a 6.2% decrease in passenger revenues, and an 8.0% decrease in cargo revenues. Passenger and cargo revenues accounted for 85.8% and 14.2% of total operating revenues in 2014, respectively.
Our consolidated passenger revenues decreased by 6.2% to US$10,380.1 million in 2014 from US$11,061.6 million in 2013, as a result of a decrease of 1.1% in our capacity (ASK) and a decrease of 5.1% in our unit revenues (RASK). The decreases in capacity was a result of a 2.4% decrease in our international operations and a 1.4% decrease in our domestic Brazil operations, reflecting our rationalization strategy in these markets, partially offset by an increase of 3.7% in capacity in our domestic capacity in our Spanish speaking countriesDecreases in RASK reflect a decrease of 7.9% in consolidated yields, resulting from the slowdown in economic activity in the region and depreciation of local currencies, the challenging competitive environment in our international operations, and the impact of the World Cup on corporate demand and leisure traffic which took place in Brazil.
Cargo revenues decreased by 8.0%, to US$1,713.4 million in 2014 from US$1,863.0 million in 2013, as a result of a decrease of 5.6% in capacity (ATK) and a decrease of 2.5% in unit revenues (RATK). Capacity decreased in our cargo operations mainly as a result of the phase out of our fleet of a Boeing 767F aircraft during the first quarter of the year and lower freighter utilization. Decreases in RATK reflect the still challenging cargo scenario in South America and mainly the weakness of the imports into the region, which have affected our cargo yields, which decreased by 4.8% in 2014 as compared to 2013.
Cost of Sales
Cost of sales decreased by 4.3% to US$9,624.5 million in the year ended December 31, 2014 from US$10,054.2 million in 2013, mainly due to lower fuel expenses in the year. As a percentage of total operating revenues, cost of sales increased from 77.8% in 2013 to 79.6% in 2014.
The table below presents cost of sales information for the fiscal year ended December 31, 2014 and 2013.
Year Ended December 31 | ||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014/2013 % change | ||||||||||||||||
(in US$ millions, except as otherwise stated) | As a percentage of total operating revenues | |||||||||||||||||||
Revenues | 12,093.5 | 12,924.5 | 100.0 | % | 100.0 | % | (6.4 | %) | ||||||||||||
Cost of sales | (9,624.5 | ) | (10,054.2 | ) | (79.6 | )% | (77.8 | )% | (4.3 | %) | ||||||||||
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Aircraft Fuel | (4,167.0 | ) | (4,414.2 | ) | (34.5 | )% | (34.2 | )% | (5.6 | %) | ||||||||||
Wages and Benefits | (1,751.3 | (1,884.1 | ) | (14.5 | )% | (14.6 | )% | (7.0 | %) | |||||||||||
Other Rental and Landing Fees | (1,327.2 | ) | (1,373.1 | ) | (11.0 | )% | (10.6 | )% | (3.3 | %) | ||||||||||
Depreciation and Amortization | (991.3 | ) | (1,041.7 | ) | (8.2 | )% | (8.1 | )% | (4.8 | %) | ||||||||||
Aircraft Rentals | (521.4 | ) | (441.1 | ) | (4.3 | )% | (3.4 | )% | 18.2 | % | ||||||||||
Aircraft Maintenance | (452.7 | ) | (477.1 | ) | (3.7 | )% | (3.7 | )% | (5.1 | %) | ||||||||||
Passenger Services | (300.3 | ) | (331.4 | ) | (2.5 | )% | (2.6 | )% | (9.4 | %) | ||||||||||
Other Costs of Sales | (113.3 | ) | (94.5 | ) | (0.9 | )% | (0.7 | )% | (19.9 | %) |
The decrease in cost of sales was driven by lower aircraft fuel expenses, which decreased by 5.6% to US$4,167.0 million in 2014 as a result of a 3.7% decrease in fuel consumption related to the Company’s capacity adjustments and more fuel efficient fleet and a 4.9% decrease in the full year average fuel price (excluding hedge losses). In addition, LATAM recognized a net loss of US$108.8 million in fuel hedging in 2014, compared to the fuel hedge gain of US$22.1 million in 2013. The Company also recognized a US$3.8 million hedge gain related to foreign currency contracts, which were recognized in the fuel cost line.
Depreciation and amortization decreased by US$50.4 million amounting to US$991.3 million, which represents a decrease of 4.8% despite the increase in modern owned aircraft mainly as a result of the phase out of leased aircraft with the consequent decrease in maintenance depreciation and the positive impact of the depreciation of the Brazilian real in the year as compared to 2013.
Other rental and landing fees decreased by 3.3% to US$1,327.2 million in 2014 from U$1,373.1 million in 2013, mainly resulting from lower aeronautical rates related to the depreciation of local currencies..
Aircraft maintenance expenses decreased by 5.1%, from US$477.1 million in 2013 to US$452.7 million in 2014, mainly as a result of fleet renewal initiatives and reduced operations, which was partially offset with higher costs related to aircraft redeliveries as part of our fleet restructuring program.
Aircraft rentals increased by 18.2% to US$521.4 million in 2014 from US$441.1 million in 2013 despite fewer leased aircraft, as a result of the incorporation of larger and more modern aircraft under operating leases (i.e. Boeing 787s), whereas returned aircraft have mainly been older and smaller models (i.e. Airbus A319, Boeing 737, Dash8 Q400 aircraft).
Passenger service expenses decreased by 9.4%, to US$300.3 million in 2014 compared to US$331.4 million in 2013, despite the increase of 1.7% in passengers transported, mainly due to a decrease in certain variable costs per passenger resulting from better negotiations and/or certain new suppliers, a decrease in passenger compensations and the positive effect of the depreciation of the Brazilian real in suppliers.
As a result of the above, gross margin decreased by 14.0% from US$2,870.4 million in 2013 to US$2,469.0 million in 2014.
Other Consolidated Results
Other operating income increased in 2014 by 10.5%, from US$341.6 million in 2013 to US$377.6 million, mainly due to an increase of US$93.7 million in revenue from Multiplus’ breakage and non-air redemptions during the year.
Distribution costs decreased by 6.6% from US$1,025.9 million in 2013 to US$957.1 million in 2014, mainly as a result of lower commissions to agents which decreased by 10.6% from US$408.7 million to US$365.5 million, driven by reduced passenger commissions at LAN and TAM related to lower revenues, lower sales fulfillments in some countries and depreciation of local currencies..
Administrative expenses decreased by 13.7% from US$1,136.1 million in 2013 to US$980.7 million in 2014, mainly due to a decrease of 5.7% in wages and benefits mainly resulting from the positive impact of the depreciation of the Brazilian real, Chilean peso and Argentinian peso in wages denominated in those currencies.
Other operating expenses decreased by 1.9% from US$408.7 million in 2013 to US$401.0 million in 2014, mainly due to a change in the classification of certain taxes in Brazil.
Financial income increased to US$90.5 million in the year ended December 31, 2014 from US$72.8 million in 2013, mainly due to an increase in our cash held in currencies different from the US dollar which have higher interest rates during the period.
Financial costs (from non-financial activities) decreased by 7.0% to US$430.0 million in 2014 from US$462.5 million in 2013 mainly due to lower debt levels, which was partially offset by a higher average interest rate resulting in part from the securitized bond issued in November 2013. In addition, during the first quarter of the year, we recognized US$23 million in breakage costs related to the sale and leaseback of 4 of our Boeing 777 aircraft.
Exchange rate differences decreased from a loss of US$482.2 million in 2013 to a loss of US$130.2 million in 2014, mainly resulting from the reductions on TAM’s balance sheet exposure between assets denominated in Brazilian reais and liabilities denominated in US dollars, which decreased from US$2.0 billion as of December 2013 to less than US$1.0 billion as of December 2014. Under other gains (losses), the Company recorded a net gain of US$33.5 million in 2014 as compared to a net loss of US$55.4 million in 2013 as a result of mainly due to the prescription and other reversals of tax contingencies at TAM which were recognized at the time of the business combination.
Income tax expense for 2014 amounted to US$292.4 million as compared to an income tax credit of US$20.1 million in 2013. This variation includes the recognition of an accounting charge of US$150.2 million in 2014 due to modifications made to the Chilean Tax System, consisting in a gradual increase of the corporate income tax from 20% to 27% in 2018. For more information, see “—Critical Accounting Policies—Deferred Taxes” below and Note 17 to our audited consolidated financial statements.
LATAM Airlines Group Financial Results Discussion: Year ended December 31, 20112013 compared to year ended December 31, 20102012
The following table sets forth certain income statement data for LATAM Airlines Group, for the year ended December 31, 2013, and for LATAM Airlines Group, for the year ended December 31, 2012 (including TAM’s results from June 23, 2012). For certain operating data during these periods, see “Item 3. Key Information—Selected Financial Data.”
Year Ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2013/2012 % change | ||||||||||||||||
(in US$ millions, except per share and capital stock data) | As a percentage of total operating revenues | |||||||||||||||||||
Consolidated Results of Income by Function | ||||||||||||||||||||
Operating revenues | ||||||||||||||||||||
Passenger | 11,061.6 | 7,966.8 | 85.6 | % | 82.0 | % | 38.8 | % | ||||||||||||
Cargo | 1,863.0 | 1,743.5 | 14.4 | % | 18.0 | % | 6.9 | % | ||||||||||||
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Total operating revenues | 12,924.5 | 9,710.4 | 100.0 | % | 100.0 | % | 33.1 | % | ||||||||||||
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Cost of sales | (10,054.2 | ) | (7,634.5 | ) | (77.8 | )% | (78.6 | )% | 31.7 | % | ||||||||||
Gross margin | 2,870.4 | 2,075.9 | 22.2 | % | 21.4 | % | 38.3 | % | ||||||||||||
Other operating income | 341.6 | 220.2 | 2.6 | % | 2.3 | % | 55.1 | % | ||||||||||||
Distribution costs | (1,025.9 | ) | (803.6 | ) | (7.9 | )% | (8.3 | )% | 27.7 | % | ||||||||||
Administrative expenses | (1,136.1 | ) | (888.7 | ) | (8.8 | )% | (9.2 | )% | 27.8 | % | ||||||||||
Other operating expenses | (408.7 | ) | (311.8 | ) | (3.2 | )% | (3.2 | )% | 31.1 | % | ||||||||||
Financial income | 72.8 | 77.5 | 0.6 | % | 0.8 | % | (6.1 | )% | ||||||||||||
Financial costs (from non-financial activities) | (462.5 | ) | (294.6 | ) | (3.6 | )% | (3.0 | )% | 57.0 | % | ||||||||||
Earning on investments (equity method) | 2.0 | 1.0 | 0.0 | % | 0.0 | % | 100.0 | % | ||||||||||||
Exchange rate differences | (482.2 | ) | 66.7 | (3.7 | )% | 0.7 | % | (822.9 | )% | |||||||||||
Result of indexation units | 0.2 | 0.0 | 0.0 | % | 0.0 | % | 100.0 | % | ||||||||||||
Other gains/(losses) | (55.4 | ) | (45.8 | ) | (0.4 | )% | (0.5 | )% | 21.0 | % | ||||||||||
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Income (loss) before income taxes | (283.9 | ) | 96.7 | (2.2 | )% | 1.0 | % | (393.6 | )% | |||||||||||
Income (loss) tax expense / benefit | 20.1 | (102.4 | ) | 0.2 | % | (1.1 | )% | (119.6 | )% | |||||||||||
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Net income (loss) for the period | (263.8 | ) | (5.6 | ) | (2.0 | )% | (0.1 | )% | 4,610.7 | % | ||||||||||
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Income (loss) for the period attributable to the parent company’s equity holders | (281.1 | ) | (19.1 | ) | (2.2 | )% | (0.2 | )% | (1,372.3 | )% | ||||||||||
Income (loss) for the period attributable to non-controlling interests | 17.3 | 13.4 | 0.1 | % | 0.1 | % | 29.1 | % | ||||||||||||
Net (loss) income for the year | (263.8 | ) | (5.6 | ) | (2.0 | )% | (0.1 | )% | 4,610.7 | % | ||||||||||
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Earnings per share | ||||||||||||||||||||
Basic earnings per share (US$) | (0.57613 | ) | (0.04627 | ) | n.a. | n.a. | (1,145.1 | )% | ||||||||||||
Diluted earnings per share (US$) | (0.57613 | ) | (0.04627 | ) | n.a. | n.a. | (1,145.1 | )% |
* | The abbreviation “n.a.” means not available. |
Net IncomeLoss
Net incomeloss for the period decreased 23.8%year ended December 31, 2013 equaled US$ 263.8 million, representing an increase of US$ 258.2 million from a net loss of US$420.95.6 million in 2010 to US$320.6 million in 2011.2012. Net incomeloss attributable to the parent company’s equity holders decreased 23.7%parents of the company rose to US$ 281.1 million in 2013 from US$419.719.1 million in 20102012. Results for the 2013 year were negatively impacted by a foreign exchange loss of US$ 482.2 million mainly resulting from the depreciation of the Brazilian real in the year. On the other hand, in 2012 and 2013, LATAM incurred US$47.0 and US$7.3 million, respectively, of non-recurring expenses related to the combination and integration costs, and an accounting charge of US$70 million related to the increase in the Chilean corporate tax rate from 17% to 20% during 2012.
Operating Revenues
Operating revenues increased by 33.1% to US$320.212,924.5 million for the year ended December 31, 2013 from US$9,710.4 million in 2011, mainly due2012. Our consolidated passenger revenues increased by 38.8% to the impactUS$11,061.6 million in 2013 from US$7,966.8 million in 2012, primarily as a result of the startupconsolidation of LAN’s operationsTAM’s revenue for 2012 since June 23.
Cargo revenues increased by 6.9%, to US$1,863.0 million in Colombia and2013 from US$1,743.5 million in 2012, also as a result of the volcanic ash cloud that disrupted air traffic throughout the region, which amounted to approximately US$51.7 million and US$36.6 million respectively, as well as 34.2% higher fuel prices, a portionconsolidation of which was not recovered via the fuel surcharge mechanism.
The revenue increase during 2011 continues to reflect solid demand trends in both passenger and cargo operations. Passenger andTAM’s cargo revenues accounted for 71.8%full year 2013. The slight increase in cargo revenues in spite of TAM’s cargo integration is a result of a weak global cargo scenario which has impacted both cargo traffic and 28.2%yields.
Cost of total operating revenues, respectively. Passenger yieldsSales
Cost of sales increased by 31.7% to US$10,054.2 million in the year ended December 31, 2013 from US$7,634.5 million in 2012, mainly as a result of an increase in fuel surcharges, in line with the increase of WTI prices and the crack spread.
Passenger traffic and capacity in 2011 included LAN Colombia’s domestic and international operations. Capacity increases focused mainly on domestic routes within Chile, regional routes within Latin America, and long-haul routesincreased operations due to the United States. This expansion was partially offset by decreased capacity on long haul routes to Europe as a result of itinerary changes implemented in 2011, mainly the cancellation of the route between Madrid and Paris in July, 2011.
Operating costs increased mainly due to higher fuel costs of US$454.7 million, reflecting increased consumption of 12.2%, a 28.8% increase after hedges in fuel prices, higher wages and salaries driven by the appreciation of Latin America currencies, and higher headcount resulting from thecomplete consolidation of Aires.
Operating Revenues
Operating revenues in 2011 totaled US$5,585.4 million, a 27.2% increase as compared to total operating revenues of US$4,390.5 million in 2010. Our consolidated passenger revenues increased 28.9% to US$4,008.9 million in 2011 from US$3,109.8 million in 2010, due to a 11.2% increase in yields (from US¢9.4 to US¢10.4), and passenger load factors, which increased from 78.3% in 2010 to 79.8% in 2011 as the 15.9% increase in traffic outpaced the 13.7% capacity increase. Overall, revenues per ASK increased 13.4%. Traffic grew as a result of a 23.7% increase in domestic traffic (including domestic operations by LAN and its affiliates in Chile, Argentina, Peru and Ecuador), and a 12.6% increase in international traffic. International traffic accountedTAM’s costs for approximately 68.1% of our total passenger traffic during 2011. At system level, yields increased 11.9% as a result of solid demand trends in both passenger and cargo operations that were also affected by fuel surcharges.
Domestic passenger revenues in Chile, Peru, Argentina, Ecuador and Colombia which accounted for approximately 39% of our total passenger revenues in 2011 as compared to approximately 35% in 2010, increased 42.2% to US$1,540.8 million in 2011 from US$1,093.0 million in 2010. Domestic passenger traffic (as measured in RPKs) increased 23.7%, while domestic passenger capacity (as measured in ASKs) increased 23.5%, resulting in a increase in load factor from 77.7% in 2010 to 77.8% in 2011. Domestic passenger yield increased 17.6% from US¢10.8 in 2010 to US¢12.7 in 2011, mainly due to strong increases in traffic and to a lesser extent fuel surcharges.
International passenger revenues, which accounted for approximately 61% of total passenger revenues in 2011 as compared to approximately 65% of passenger revenues in 2010, increased 21.7% to US$2,454.4 million in 2011 from US$2,016.9 million in 2010. International passenger traffic (as measured in RPKs) increased 12.6%, while passenger capacity (as measured in ASKs) increased 9.4% in 2011, resulting in an improvement in load factor from 78.5% in 2010 to 80.8% in 2011. Total international passenger yield (based on RPKs) increased 8.1% to US¢9.4 in 2011 from US¢8.7 in 2010, driven by the inclusion of fuel surcharges and solid demand.
Cargo revenues increased 23.1%, to US$1,576.5 million in 2011 from US$1,280.7 million in 2010, mainly driven by a 10.4% increase in yields (US¢43.6 in 2011 from US¢39.5 in 2010), and coupled with an 11.5% increase in traffic. In 2011, cargo traffic was driven by solid demand in the region reflected in growth in Latin American cargo markets, as well as improved revenue management practices and itinerary optimization. On the other hand capacity increased 12.4% during 2011. As a consequence, load factors decreased from 70.1% in 2010 to 69.6% in 2011, while revenues per ATK increased 9.5% as compared to 2010.
Cost of Sales
Cost of sales in 2011 totaled US$4,078.6 million, representing a 35.4 % increase as compared to cost of sales of US$3,012.7 million in 2010.year 2013. As a percentage of total operating revenues, cost of sales increaseddecreased from 68.6%78.6% in 20102012 to 73.0 %77.8% in 2011, mainly as a result2013.
The table below presents cost of higher fuel prices compared to 2010sales information for the fiscal year ended December 31, 2013 and higher costs related to the consolidation of LAN’s Colombian operations.2012.
Year Ended December 31 | ||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2013/2012 % change | ||||||||||||||||
(in US$ millions, except as otherwise stated) | As a percentage of total operating revenues | |||||||||||||||||||
Revenues | 12,924.5 | 9,710.4 | 100.0 | % | 100.0 | % | 33.1 | % | ||||||||||||
Cost of sales | (10,054.2 | ) | (7,634.5 | ) | (77.8 | )% | (78.6 | )% | 31.7 | % | ||||||||||
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Aircraft Fuel | (4,414.2 | ) | (3,434.6 | ) | (34.2 | )% | (35.4 | )% | 28.5 | % | ||||||||||
Wages and Benefits | (1,884.1 | ) | (1,431.2 | ) | (14.6 | )% | (14.7 | )% | 31.6 | % | ||||||||||
Other Rental and Landing Fees | (1,373.1 | ) | (1,052.6 | ) | (10.6 | )% | (10.8 | )% | 30.4 | % | ||||||||||
Depreciation and Amortization | (1,041.7 | ) | (771.1 | ) | (8.1 | )% | (7.9 | )% | 35.1 | % | ||||||||||
Aircraft Rentals | (441.1 | ) | (308.8 | ) | (3.4 | )% | (3.2 | )% | 42.8 | % | ||||||||||
Aircraft Maintenance | (477.1 | ) | (297.6 | ) | (3.7 | )% | (3.1 | )% | 60.3 | % | ||||||||||
Passenger Services | (331.4 | ) | (239.8 | ) | (2.6 | )% | (2.5 | )% | 38.2 | % | ||||||||||
Other Costs of Sales | (94.5 | ) | (98.8 | ) | (0.7 | )% | (1.0 | )% | (4.3 | )% |
The increase in cost of sales was driven by higher aircraft fuel expenses, which totaledincreased by 28.5% to US$1,750.14,414.2 million in 2011, a 50.6% increase as compared to aircraft fuel expenses of US$1,161.9 million in 2010. Fuel expenses increased mainly due to a 37.2% increase in unhedged jet fuel prices (34.2% in the hedged price), coupled with a 12.2% increase in consumption. However, the Company recognized a US$39.9 million fuel hedge gain, compared to a US$1.0 million fuel hedge gain in 2010, resulting in a 28.8% increase in fuel prices after hedges.
Fuel costs comprise the single largest category of our operating expenses. Over the last few years, our fuel consumption and operating expenses have increased due to the significant growth in our operations and to the increase in fuel prices2013 as a result of economichigher fuel consumption related to the incorporation of TAM’s operations from June 23, 2012, which was partially offset by lower average fuel prices and political factors.efficiency initiatives. In 2011,addition, LATAM recognized a net gain of US$22.1 million in fuel hedging in 2013, compared to the foregoing trend was affected by geopolitical instabilityfuel hedge gain of US$2.8 million in the Middle East and the total fuel costs represented 33.8% of our total operating expenses. The into-wing (fuel price plus taxes and transportation costs) 2011 average final price was US$3.11 per gallon, representing a 34.2% increase from the 2010 average.2012.
Depreciation and amortization increased 17.8%by US$270.6 million amounting to US$1,041.7 million, which represents an increase of 35.1% mainly due to the incorporation of all of TAM’s fleet (including new TAM fleet deliveries in 2011 under property, plant2012) starting June 23, 2012.
Other rental and equipmentslanding fees increased by 30.4% to US$1,373.1 million in 2013 from U$1,052.6 million in 2012, resulting from higher fees related to a larger operation with the consolidation of four new Airbus A319, 9 new Airbus A320s, and three Boeing 767-300s and the incorporation of additional aircrafts under operating leases.TAM’s fees for full year 2013.
Aircraft maintenance expenses increased by 51.2%60.3%, from US$120.7297.6 million in 20102012 to US$182.4477.1 million in 2011 mainly2013, as a result of higher costs related to a larger fleet and higher maintenance costs related to redeliveries of aircraft.
Aircraft rentals increased by 42.8% to US$441.1 million in 2013 from US$308.8 million in 2012, primarily due to the incorporationcomplete consolidation of the LAN Colombia´sTAM’s fleet for full year 2013 and the delivery of four Airbus A319 and 13 Airbus A320 passenger aircraft, three Boeing 767-300 passenger aircraft and one Boeing 767-300F freighter. The unscheduled maintenancenet increase of aircraft and engines, as well as minor maintenance, are charged to results as incurred.
Aircraft Rentals increased 76.7% due tounder operating leases during the incorporation of LAN Colombia’s fleet, consisting of nine Boeing 737-700s, 10 Dash 8-200s and four Dash 8-Q400s. Additionally, this increase considered the incorporation in 2011 of six leased Airbus A320s, and one leased Boeing 767-300F freighter.year.
Passenger service expenses totaledincreased by 38.2%, to US$136.0331.4 million in 20112013 compared to US$114.2239.8 million in 2010. This represented a 19.1% increase that was driven by a 30.6%2012, mainly resulting from the increase in the number of passengers transported duringafter the year, as well as higher compensation paid to passengers during this period.combination of LAN and TAM.
As a result of the above, gross margin increased 9.4%by 38.2% from US$1,377.82,075.9 million in 20102012 to US$1,506.82,870.4 million in 2011.2013.
Other Consolidated Results
Other operating income remained stable atincreased in 2013 by US$121.4 million, from US$220.2 million to US$132.8341.6 million, in 2010 and 2011, where growth in revenues from tours and travel services, duty free sales and maintenance services were offset by the exclusion of revenues from Blue Express, LAN’s logistic and courier subsidiary sold in early April 2011.
Interest income decreased by 2.7% to US$14.5 million in 2011 from US$14.9 million in 2010, due to the incorporation of TAM’s other revenues since June 22, 2012; including a lower average cash balanceUS$28.7 million revenue from Multiplus’ breakage and non-air redemptions, and an income for recognizing US$11.9 million and US$ 8.2 million generated as a result of the sale and lease-back of ten Airbus A330 aircraft, and two Airbus A318 aircraft and an engine, respectively, during the period.second quarter of the year.
Distribution costs increased 25.1%by 27.7% from US$383.5803.6 million in 20102012 to US$479.81,025.9 million in 2011. This increase was caused by higher overall commissions to agents (related to both passenger and cargo sales), which increased 20.7% to US$209.3 million2013, as a result of the consolidation of TAM’s results only starting in 2011 from US$173.4 million in 2010, and by a. 27.2% increase in traffic revenues (passenger and cargo), partially offset by a 0.2 point reduction in average commissions. This reduction was mainly related to lower commissions in the cargo business.June 23, 2012.
Administrative expenses increased 22.3%by 27.8% from US$331.8888.7 million in 20102012 to US$405.71,136.1 million in 20112013, mainly due to an increase of 30.6% in wages and benefits resulting from the higher wagesnumber of administrative personnelemployees following the combination of LAN and higher asset (non aircraft) depreciation, as a result of additionsTAM in 2010 and 2011.2012.
Other operating expenses increased 24.4%by 31.1% from US$172.4311.8 million in 20102012 to US$214.4408.7 million in 2011,2013, as a result of higher sales costs, advertising and marketing expenses and costs related to tours and travel services.services, related to the integration of TAM’s operations from June 23, 2012.
Financial income decreased to US$72.8 million in the year ended December 31, 2013 from US$77.5 million in 2012, due to a lower average cash balance and interest rates during the period.
Financial costs (from non-financial activities) decreasedincreased by 10.4%57.0% to US$139.1462.5 million in 20112013 from US$155.3292.6 million in 20102012 due to the fact that higher average long-term debt related to fleet financing was offset by the recognition of interestmainly related to the financingconsolidation of pre-delivery payments (PDPs), in line with the accounting policy regarding these payments (IFRS).TAM’s fleet.
Exchange rate differences decreased from a gain of US$13.866.7 million in 20102012 to an expensea loss of US$0.3482.2 million in 2011. The 2010 amount was a result of a recognized US$5.4 million gain that2013, mainly stemmedresulting from foreign exchange variations during the period; partdepreciation of the exchange gain was a result of remittances from LAN’s operations in Venezuela. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Risk of Variation in Foreign Currency Exchange Rates”, for a discussion of LAN’s hedging program for currency fluctuations. On December 31, 2011, the Company held US$25.9 million in assets located in Venezuela, of which over 92.0% constituted cash equivalents. On a consolidated basis, the Company’s assets related to its operations in Venezuela represented 0.4% of the total assets of the Company. For the year 2011, operating revenues of the Venezuelan regional office represented 1.2% of the Company’s consolidated revenues. In Venezuela, effective 2003, the authorities decreed that all remittances abroad should be approved by the Currency Management Commission (CADIVI). Despite having free availability of bolivares in Venezuela, the Company has certain restrictions for freely remitting these funds outside Venezuela. Since January 2010, exchange rate for Venezuelan Bolivars (VEF) is fixed to 4.3 VEF/US$ .The Company’s operations in Venezuela are carried out through an agency that, from an accounting perspective, is considered an extension of the Company. Therefore, the functional currency is the US dollar and hyperinflationary accounting is not required.
As of December 31, 2010 the Company recorded a US$14.1 million gain (pre-tax) due to the reversal of a portion of the provision related to the investigationBrazilian real in the cargo business carried out by the European Commission. This was as a result of the fine announced in November 2010, which was lower than the amount provided for. This reversal is recorded in Other gains/(losses). (See “Item 4. Information on the Company—Business Overview—Cargo Operations—Cargo-Related Investigations”).period.
Under other net earningsgains (losses), the Company recorded a net loss of US$33.055.4 million in 2013 as compared to a net loss reflecting theof US$6645.8 million charge related to the civil class action in the cargo business, partially offset by the US$45 million gain from the sale of Blue Express. This loss also included a one-time charge of UF 116,091 (US$5.0 million) resulting from a settlement agreement with Chilean airline PAL regarding the pending legal proceeding before the TDLC and their appeal before the Chilean Supreme Court in connection with the merger process between LAN and TAM.2012.
Income tax expenses decreased by 23.8%, amountingcredit for 2013 amounted to US$61.8 20.1 million in 2011 as compared to an income tax expense of US$81.1102.4 million in 2010. This decrease was primarily the result of a 23.8% decrease in pre-tax income,2012. For more information, see “—Critical Accounting Policies—Deferred Taxes” below and Note 19 to our audited consolidated financial statements.
Year ended December 31, 2010 compared to year ended December 31, 2009
Net Income
Net income for the period increased 80.6% from US$233.0 million in 2009 to US$420.9 million in 2010. Net income attributable to the parent company’s equity holders increased 81.6% from US$231.1 million in 2009 to US$419.7 million in 2010.
The revenue increase during 2010 was driven by the recovery of the world economy and the strong capacity expansion in both the passenger and cargo businesses. In addition, the traffic increased strongly, driving yields and load factors higher.
Operating costs increased mainly due to higher fuel prices, higher wages and salaries driven by the appreciation of Latin America currencies, as well as higher costs related to ACMI leases in the cargo business.
Operating Revenues
Operating revenues in 2010 totaled US$4,390.5 million, a 24.8% increase as compared to total operating revenues of US$3,519.2 million in 2009. Our consolidated passenger revenues increased 18,5% to US$3,109.8
million in 2010 from US$2,623.6 million in 2009, due to a 6.8% increase in yields (from US¢8.8 to US¢9.4), and passenger load factors, which increased from 76.9% in 2009 to 78.3% in 2010 as the 11.2% increase in traffic outpaced the 9.2% capacity increase. Overall, revenues per ASK increased 8.5%. Traffic grew as a result of a 10.6% increase in domestic traffic (including domestic operations by LAN and its affiliates in Chile, Argentina, Peru and Ecuador), and an 11.3% increase in international traffic. International traffic accounted for approximately 70% of our total passenger traffic during 2010. Yields increased 6.8% as a result of a stronger demand environment driven by world economy recovery during the year.
Domestic passenger revenues in Chile, Peru, Argentina and Ecuador, which accounted for approximately 35% of our total passenger revenues in 2010 as compared to approximately 36% in 2009, increased 14.7% to US$1,072.4 million in 2010 from US$934.9 million in 2009. Domestic passenger traffic (as measured in RPKs) increased 10.5%, while domestic passenger capacity (as measured in ASKs) increased 6.6%, resulting in a increase in load factor from 74.9% in 2009 to 77.7% in 2010. Domestic passenger yield increased 3.7% from US¢10.4 in 2009 to US¢10.8 in 2010, mainly due to strong increases in traffic.
International passenger revenues, which accounted for approximately 65% of total passenger revenues in 2010 as compared to approximately 64% of passenger revenues in 2009, increased 20.7% to US$2,018.2 million in 2010 from US$1,672.0 million in 2009. International passenger traffic (as measured in RPKs) increased 11.3%, while passenger capacity (as measured in ASKs) increased 10.4% in 2010, resulting in an improvement in load factor from 77.8% in 2009 to 78.5% in 2010. Total international passenger yield (based on RPKs) increased 8.7% to US¢8.7 in 2010 from US¢8.0 in 2009, driven by strong world economy recovery.
Cargo revenues increased 43.0%, to US$1,280.7 million in 2010 from US$895.6 million in 2009, mainly driven by a 24.8% increase in yields (US¢41.6 in 2010 from US¢35.7 in 2009), and coupled with a 23.5% increase in traffic. In 2010, cargo traffic was driven by a strong recovery and growth in the global cargo markets, as well as better revenue management practices capacity increased 20.5% during 2010. As a consequence, load factors increased from 68.4% in 2009 to 70.1% in 2010. Revenues per ATK also increased 18.7% as compared to 2009.
Cost of Sales
Cost of sales in 2010 totaled US$3,012.7 million, representing a 19.4% increase as compared to cost of sales of US$2,522.8 million in 2009. As a percentage of total revenues, cost of sales decreased from 71.7% in 2009 to 68.6% in 2010, as a result of higher traffic and yields compared to 2009.
The increase in cost of sales was driven by higher aircraft fuel expenses, which totaled US$1,161.9 million in 2010, a 21.1% increase as compared to aircraft fuel expenses of US$959.6 million in 2009. Fuel expenses increased 21.1% mainly due to a 26.4% increase in unhedged jet fuel prices (9.4% in the hedged price), coupled with a 10.7% increase in consumption. However, the Company recognized a US$1.0 million fuel hedge gain, compared to a US$128.7 million fuel hedge loss in 2009.
In addition, the Company recorded higher ACMI leases in the cargo business due to the expansion in the cargo business. Depreciation expenses increased mainly due to the incorporation of one new Boeing 767-300 passenger aircraft in February 2010 and eight new Airbus A320 aircraft between July and December 2010. For further information on depreciation policies, please refer to “Critical Accounting Policies” below, and Note 2 to our audited consolidated financial statements.
Aircraft maintenance expenses decreased by 0.3%, from US$121.0 million in 2009 to US$120.6 million in 2010, due to lower maintenance payments to third parties, which offset the effects of a larger fleet. Aircraft rental expenses increased mainly due to an increase in the average rental cost due to the delivery of two leased Boeing 777 freighters in April and May 2009, two leased Airbus A320s in September 2010 and two leased Boeing 767-300 freighters in November and December 2010. Wages and benefits expenses increased mainly because of a higher average headcount, which is in-line with the Company’s operational expansion, an appreciation of Latin American currencies, and an increase in variable bonus payments, which were in line with higher profits obtained in 2010.
Passenger service expenses totaled US$114.2 million in 2010 compared to US$92.8 million in 2009. This represented a 23.1% increase that was driven by a 12.3% increase in the number of passengers transported during the year, as well as higher compensation paid to passengers during this period.
As a result of the above, gross margin increased 38.3% from US$996.4 million in 2009 to US$1,377.8 million in 2010.
Other operating income decreased by 2.6% to US$132.8 million in 2010 from US$136.4 million in 2009, mainly because of a decrease in tour and travel services and lower revenues from aircraft leases, which were partially offset by higher revenues from storage and custom services to third parties. Interest income decreased by 18.1% to US$14.9 million in 2010 from US$18.2 million in 2009, mainly due to lower average interest rates.
Distribution costs increased 17.3% from US$327.0 million in 2009 to US$383.5 million in 2010. This increase was caused by higher overall commissions to agents (related to both passenger and cargo sales), which increased by 20.5% to US$173.4 million in 2010 from US$143.9 million in 2009, and by a 24.8% increase in traffic revenues (for both passenger and cargo revenues); this increase was partially offset by a 0.1 point reduction in the average commission paid. This reduction was mainly related to a decrease in the commission rate paid to agents in the passenger business.
Administrative expenses increased 23.1% from US$269.6 million in 2009 to US$331.8 million in 2010 due to the higher wages of administrative personnel and higher asset (non aircraft) depreciation, as a result of additions in 2009 and 2010.
Other operating expenses increased 71.5% from US$100.5 million in 2009 to US$172.4 million in 2010, as a result of higher sales costs, advertising and marketing expenses and costs related to tours and travel services.
Financial costs (from non-financial activities) increased by 1.4% to US$155.3 million in 2010 from US$153.1 million in 2009 due to higher debt related to fleet financing, but was partially offset by lower average interest rates.
Exchange rate differences increased from an expense of US$11.2 million in 2009 to a gain of US$13.8 million in 2010 as a result of a recognized US$5.4 million gain that mainly stemmed from foreign exchange variations during the period; part of the exchange gain was a result of remittances from LAN’s operations in Venezuela. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Risk of Variation in Foreign Currency Exchange Rates”, for a discussion of LAN’s hedging program for currency fluctuations. During 2009 the devaluation of the Venezuelan currency impacted the Company’s operations in that country and the Company recognized a US$28.0 million charge related to it.
On December 31, 2010, the Company held US$36.0 million in assets located in Venezuela, of which over 74.0% constituted cash equivalents. On a consolidated basis, the Company’s assets related to its operations in Venezuela represented less than 0.5% of the total assets of the Company. For the year 2010, operating revenues of the Venezuelan regional office represented 1.7% of the Company’s consolidated revenues. The Company’s operations in Venezuela are carried out through an agency that, from an accounting perspective, is considered an extension of the Company. Therefore, the functional currency is the US dollar and hyperinflationary accounting is not required.
As of December 31, 2010 the Company recorded a US$14.1 million gain (pre-tax) due to the reversal of a portion of the provision related to the investigation in the cargo business carried out by the European Commission. This was as a result of the fine announced in November 2010, which was lower than the amount provided for. This reversal is recorded in Other gains/(losses). (See “Item 4. Information on the Company—Business of the Company—Cargo Operations—Cargo-Related Investigations”).
Income tax expenses increased by 82.2%, amounting to US$81.1 million in 2010 as compared to US$44.5 million in 2009. This increase was primarily the result of an 80.9% increase in pre-tax income, coupled with a 0.1% increase in the average tax rate (currently 16.2%) in 2010. For more information, see “—Critical Accounting Policies—Deferred Taxes” below and Note 1917 to our audited consolidated financial statements.
Accounting impact of the business combination
The combination between LAN and TAM has been accounted for using the purchase method of accounting, with LAN treated as the acquirer of TAM.
Consideration paid was calculated, in accordance with IFRS 3, as the sum of the fair value of the LAN shares provided and the Squeeze-Out of the remaining TAM shareholders. Following this criteria, the total consideration paid as of June 22, 2012 was US$ 3,782.2 million.
As a result of the consolidation, certain TAM assets and liabilities which were accounted for at historical values were incorporated into the consolidated balance sheet at their fair value, as required by applicable accounting principles. Applicable accountings standards permit a one year measurement period, requiring fair value adjustments completed during that period to be adjusted against previously reported goodwill. As of June 30, 2013, the purchase price allocation has been completed. Previously reported goodwill has been adjusted to reflect fair value changes in this one year period. Goodwill as of June 30, 2013 amounts to US$ 3,890.2 million.
The main adjustments to the balance sheet accounts of TAM as a result of the consolidation with LATAM Airlines Group were related to the fair values of the following: (i) airport slots (Congonhas, JFK and Heathrow airports); (ii) the Multiplus loyalty program; (iii) fleet; and (iv) other provisions, including legal proceedings with a probability of loss below 50%, which are not accounted for under the normal course of business but must be accounted for under a business combination, according to applicable accounting standards (IFRS 3).
U.S. Dollar Presentation and Price-Level Adjustments
General
Foreign currency transactions
(a) | Presentation and functional currencies |
The items included in the financial statements of each of Lan Airlines and its consolidated subsidiariesLATAM are valued using the currency of the main economic environment in which the entity operates (the “functional currency”). The functional currency of Lan AirlinesLATAM is the U.S. dollar, which is also the currency of presentation of the audited consolidated financial statements of Lan AirlinesLATAM and its subsidiaries.
(b) | Transactions and balances |
Foreign currency transactions are translated to the functional currency using the exchange rates on the transaction dates. Foreign currency gains and losses resulting from the liquidation of these transactions and from the translation, at the closing exchange rates, of the monetary assets and liabilities denominated in foreign currency, are shown in the consolidated statement of income.
(c) | Group entities |
The results and financial position of all the LANLATAM entities (none of which utilizes the currency of a hyper-inflationary economy) that have a functional currency other than the currency of presentation are translated to the currency of presentation as follows:
(i) | Assets and liabilities of each consolidated statement of financial position are translated at the closing exchange rate on the date of the consolidated statement of financial position; |
(ii) | The revenues and expenses of each results account are translated at monthly average rates; and |
(iii) | All the resultant exchange differences are shown as a separate component in net equity. |
For consolidation purposes, exchange differences arising from the translation of a net investment in foreign entities (or in local entities with a functional currency different to that of the parent), and of loans and other foreign currency instruments designated as hedges for such investments, are recorded within net equity. When the investment is sold, these exchange differences are shown in the consolidated statement of income as part of the loss or gain on the sale.
Adjustments to the goodwill and fair value arising from the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated at the period-end exchange rate.
Effects of Exchange Rate Fluctuations
Our functional currency is the U.S. dollar in terms of the pricing of our products, composition of our balance sheet and effects on our results of operations. Most of our revenues (78% in 2011)(58% expected for 2015) are in U.S. dollars or in prices pegged to the U.S. dollar and a substantial portion of our expenses (53% in 2011)(65% expected for 2015) is denominated in dollars or pegged to the U.S. dollar, particularly fuel costs, landing and over flight fees, aircraft rentals, insurance and aircraft components and supplies. Almost all
A substantial majority of our liabilities are denominated in U.S. dollars (93%(74% as of December 31, 2011)2014), including bank loans, certain air traffic liabilities, and certain amounts payable to our suppliers. As of December 31, 2011, 91%2014, 54 % of our assets were denominated in U.S. dollars, principally aircraft, cash and cash equivalents, accounts receivable and other fixed assets. Substantially all of our commitments, including operating leaseslease and purchase commitments for aircraft, are denominated in U.S. dollars.
Although we generally maintain our international passenger fares and cargo pricesOn the other hand, balance sheet imbalance denominated in U.S. dollars or at prices pegged tocurrencies other than the U.S. dollar, we are exposed tofunctional currency of the specific entity creates a foreign exchange rate exposure that impacts the foreign exchange losses and gains due to exchange rate fluctuations. We recorded a net foreign exchange profitlosses of US$13.8482.2 million in 20102013 and a net foreign exchange loss of US$0.3130.2 million in 2011,2014, which are set forth in our consolidated statement of income under “Exchange rates differences.“Foreign Exchange gains/(losses)”. For more information, see Notes 2.3(a)2.3 and 3128 to our audited consolidated financial statements. The profit incurred in 2010 was mainly related to the appreciation of the Latin American currencies against the U.S. dollar.
IFRS/Non-IFRS Reconciliation
We use “Cost per ATK”ASK-equivalent” and “Cost per ATKASK-equivalent excluding fuel price variations” in analyzing operating costsexpenses on a per unit basis. “ATKs”“ASKs” (available tonseat kilometers) measuremeasures the number of tonsseats of capacity available for the transportation of revenue load (passengers and/or cargo)passengers multiplied by the kilometers flown. “ASK-equivalent” includes capacity for both passenger and cargo equivalent tons multiplied by the kilometers flown. The figure is obtained by adding passenger ASKs and the quotient of cargo ATKs (available ton kilometers) divided by 0.095. To obtain our unit costs, which are used by our management in the analysis of our results, we divide our “total costs” by our total ATKs.ASK-equivalents. “Total costs” are calculated by starting with operating costsexpenses as defined under IFRS and making certain adjustments for interest costs and other revenues. The cost component is further adjusted to obtain “costs per ATKsASK-equivalents excluding fuel price variations,” in order to remove the impact of changes in fuel prices for the year. “Cost per ATK”ASK-equivalent” and “Cost per ATKASK-equivalent excluding fuel price variations” do not have a standardized meaning, and as such may not be comparable to similarly titled measures provided by other companies. These metrics should not be considered in isolation or as a substitute for operating costsexpenses or as indicators of performance or cash flows or as a measure of liquidity.
The table below reconciles our operating costs asexpenses (as defined by IFRSIFRS) for 2014, 2013 and 2012 to costs used in the calculation of “Cost per ATK”ASK-equivalent” and “Cost per ATKASK-equivalent excluding fuel price variations.”variations” for such periods. Figures for 2012 correspond to LATAM’s consolidated audited financial statements prepared in accordance with IFRS for the year ended December 31, 2012, including TAM’s consolidated costs from June 23, 2012 and TAM’s third and fourth quarter operating statistics.
2011 | 2010 | 2009 | ||||||||||
Cost per ATK | ||||||||||||
Operating cost (US$ thousands) | 5,178,554 | 3,900,474 | 3,219,813 | |||||||||
+ Interest expense (US$ thousands) | 139,077 | 155,279 | 153,109 | |||||||||
– Interest income (US$ thousands) | 14,453 | 14,946 | 18,183 | |||||||||
– Other operating income (US$ thousands) | 132,804 | 132,826 | 136,351 | |||||||||
ATK operating costs | 5,170,374 | 3,907,981 | 3,218,388 | |||||||||
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Divided by system’s ATKs (thousands) | 10,056,142 | 8,968,792 | 7,811,750 | |||||||||
= Cost per ATK (US$ cents) | 51.42 | 43.57 | 41.20 | |||||||||
Cost per ATK excluding fuel price variations | ||||||||||||
ATK operating costs (thousands) | 5,170,374 | 3,907,981 | 3,218,388 | |||||||||
– Actual fuel expenses (US$ thousands) | 1,750,052 | 1,161,927 | 959,608 | |||||||||
+ (Gallons consumed) times (previous year’s fuel price) | 1,303,946 | 1,062,179 | 1,410,767 | |||||||||
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ATK operating costs excluding fuel price variations | 4,724,268 | 3,808,233 | 3,669,547 | |||||||||
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Divided by system’s ATKs (thousands) | 10,056,142 | 8,968,792 | 7,811,750 | |||||||||
= Cost per ATK excluding fuel price variations (US$ cents) | 46.98 | 42.46 | 46.97 |
2014 | 2013 | 2012 | ||||||||||
Cost per ASK-equivalent | ||||||||||||
Operating expenses (US$ thousands) | 11,957,780 | 12,622,197 | 9,625,466 | |||||||||
+ Interest expense (US$ thousands) | 430,034 | 462,524 | 294,598 | |||||||||
– Interest income (US$ thousands) | 90,500 | 72,828 | 77,489 | |||||||||
– Other operating income (US$ thousands) | 377,645 | 341,565 | 220,156 | |||||||||
ASK-equivalent operating expenses | 11,919,669 | 12,670,328 | 9,622,419 | |||||||||
Divided by system’s ASK-equivalents (thousands) | 206,197.91 | 212,236.83 | 161,209.26 | |||||||||
= Cost per ASK equivalent (US$ cents) | 5.78 | 5.97 | 5.97 | |||||||||
Cost per ASK-equivalent excluding fuel price variations | ||||||||||||
ASK-equivalent operating expenses (thousands) | 11,919,669 | 12,670,328 | 9,6222,419 | |||||||||
– Actual fuel expenses (US$ thousands) | 4,170,848 | 4,414,249 | 3,434,569 | |||||||||
+ (Gallons consumed) times (previous year’s fuel price) | 4,251,036 | 4,675,532 | 2,952,257 | |||||||||
ASK-equivalent operating expenses excluding fuel price variations | 11,999,857 | 12,931,611 | 9,140,107 | |||||||||
Divided by system’s ASK-equivalents (thousands) | 206,197.91 | 212,236.83 | 161,209.26 | |||||||||
= Cost per ASK-equivalent excluding fuel price variations (US$ cents) | 5.82 | 6.09 | 5.67 |
In addition, weLATAM continues to use revenues per ASK or ATK, as applicable, in analyzing revenues on a per unit basis.basis, which is consistent with how LAN analyzed its revenues before the combination. To obtain our unit revenues, which are used by our management in the analysis of our results, we divide our passenger revenues by our total ASKs and our cargo revenues by our total ATKs. We use our revenues as defined under IFRS for purposes of the calculation of this metric. Revenues per ASK or ATK, as the case may be, do not have a standardized meaning, and as such may not
be comparable to similarly titled measures provided by other companies. ItThis metric is not an IFRS based measure of performance or liquidity. This metricIt should not be considered in isolation or as a substitute for revenues or as indicators of performance or cash flows as a measure of liquidity.
The table below shows the calculation of our revenues per ASK or ATK, as applicable, in each of the periods indicated:indicated. Figures for 2012 correspond to LATAM’s consolidated audited financial statements prepared in accordance with IFRS for the year ended December 31, 2012, including TAM’s consolidated revenues from June 23, 2012.
2011 | 2010 | 2009 | ||||||||||
Passenger Revenues (US$ million) | 4,008.91 | 3,109.80 | 2,623.61 | |||||||||
ASK (million) | 48,153.58 | 42,355.20 | 38,776.20 | |||||||||
Passenger Revenues/ASK (US$ cents) | 8.3 | 7.3 | 6.8 | |||||||||
Cargo Revenues (US$ million) | 1,576.53 | 1,280.71 | 895.55 | |||||||||
ATK (million) | 5,192.74 | 4,628.73 | 3,848.89 | |||||||||
Cargo Revenues/ATK (US$ cents) | 30.4 | 27.7 | 23.3 |
2014 | 2013 | 2012 | ||||||||||
Passenger Revenues (US$ million) | 10,380.12 | 11,061.56 | 7,966.85 | |||||||||
ASK (million) | 130,200.94 | 131,690.60 | 93,318.15 | |||||||||
Passenger Revenues/ASK (US$ cents) | 7.97 | 8.40 | 8.54 | |||||||||
Cargo Revenues (US$ million) | 1,713.38 | 1,862.98 | 1,743.53 | |||||||||
ATK (million) | 7,219.71 | 7,651.88 | 6,449.50 | |||||||||
Cargo Revenues/ATK (US$ cents) | 23.73 | 24.35 | 27.03 |
Seasonality
Our operating revenues are substantially dependent on overall passenger and cargo traffic volume, which is subject to seasonal and other changes in traffic patterns. Our passenger revenues are generally higher in the first and fourth quarters of each year, during the southern hemisphere’s (Chile and Argentina) spring and summer, thansummer. In the Brazilian passenger air transportation market, there is always a higher demand for air transportation services in the second and third quarters. Since Peru, Ecuador and Colombia havehalf of the year, leaving the second quarter as the weakest one for the Company. However, the seasonality is partially mitigated by the fact of LATAM having higher than market average concentration of business travel (which is less sensitive to seasonality). Additionally, the expansion of the Company in other countries with different seasonal patterns the expansion into those markets has led to stronger passenger revenues in the second and third quarters, therefore moderatingalso moderated the overall seasonality of ourthe passenger business. Our cargo revenues generally are higher in the fourth quarter, which correspond to the harvest season in the southern hemisphere.
Critical Accounting Policies
The preparation of our consolidated financial statements in accordance with IFRS requires our management to adopt accounting policies and make estimates and judgments to develop amounts reported in our consolidated financial statements and related notes. We strive to maintain a process to review the application of our accounting policies and to evaluate the appropriateness of the estimates that are required to prepare our consolidated financial statements. We believe that the consistent application of these policies enables us and our subsidiaries to provide readers of the financial statements with more useful and reliable information about our operating results and financial condition.
Critical accounting policies and estimates are those that are reflective of significant judgments and uncertainties, and potentially result in materially different outcomes under different assumptions and conditions. For a discussion on these and other accounting policies, see Note 2 to our consolidated financial statements. The following are the accounting policies that we believe are the most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective or complex judgments.
Accounting estimates and judgments
The Company has used estimates to value and book some of the assets, liabilities, revenues, expenses and commitments; these basically refer to:
The evaluation of possible impairment loss for certain assets.
The useful life and residual value of fixed assets and intangible assets.
The criteria employed in the valuation of certain assets.
Air tickets sold that are not actually used.
The calculation of deferred income at the period-end corresponding to the valuation of kilometers or points credited to holders of the LANPASS loyalty cardprograms which have not yet been used.
The need for provisioning and where required the determination of their values.
The recoverability of deferred tax assets.
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These estimates are made on the basis of the best information available on the matters analyzed.
In any case, it is possible that events will require them to be modified in the future, in which case the effects would be accounted for prospectively.
The management has applied judgment in determining that LATAM Airlines Group S.A. has control over TAM S.A. and Subsidiaries for accounting purposes and therefore has consolidated their financial statements. This judgment is made on the basis that LATAM issued their ordinary shares in exchange for all of the outstanding common and preferred shares of TAM, except those shareholders of TAM who did not accept exchange and which were subject of the squeeze-out entitling LATAM to substantially all of the economic benefits that will be generated by the LATAM Group and also, consequently, exposing it to substantially all the risks incidental to the operations of TAM. This exchange aligns the economic interests of LATAM and all of its shareholders, including the TAM controlling shareholders, ensuring that the shareholders and directors of TAM will have no incentive to exercise their rights in a manner that is beneficial to TAM but detrimental to LATAM. Further, all significant actions required for the operation of the airlines require the affirmative vote of both LATAM and the TAM controlling shareholders.
Since the integration of LAN and TAM operations, most critical airline activities in Brazil have been managed under the TAM CEO and global activities have been managed by the LATAM CEO, who is in charge of the overall operation of the LATAM Group and who reports to the LATAM board. Further, the LATAM CEO evaluates the performance of the LATAM Group executives and, together with the LATAM board, determines compensation. Although there are restrictions on voting interests that currently may be held by foreign investors under Brazilian law, LATAM believes that the economic substance of these arrangements satisfies the requirements established by the applicable accounting standards and that consolidation by LATAM of TAM’s operations is appropriate.
Revenue Recognition
Revenues include the fair value of the proceeds received or to be received on sales of goods and rendering services in the ordinary course of the Company’s business. Revenues are shown net of refunds, rebates and discounts.
(a) Rendering of services
a.1 | Passenger and cargo transport |
We recognize passenger and cargo revenues either when the transportation service is provided or when we determine that the tickets will not be used or refunded, which, in the case of passenger revenues, reduces the air traffic liability. We estimate revenue breakage based on historical breakage experience that takes into account the aging of tickets that will not be used or refunded. Commissions payable related to such unearned earnings are shown net of the air traffic liability. Other revenues, including aircraft leases, courier, logistic and ground services, duty free sales, and storage and customs brokering, are recognized when services are provided.
The amount of passenger ticket sales not yet recognized as revenue is reflected as an air traffic liability. Air traffic liability includes estimates of the amount of future refunds and exchanges, net of forfeitures for all unused tickets once the flight date has passed. We perform periodic evaluations of this estimated liability based on actual results. Any adjustments, which can be significant, are included in the results of operations for the periods in which the evaluations are completed. These adjustments relate primarily to the differences between our estimation of certain revenue transactions and the related sales price, as well as refunds, exchanges and other items for which final settlement occurs in periods subsequent to the sale of the related tickets at amounts other than the original sales price.
Actual events and circumstances may differ from historical fare sale activity and customer travel patterns and can result in refunds, exchanges or forfeited tickets differing significantly from estimates. We evaluate our estimates periodically. If actual refunds, exchanges or forfeitures fall outside of our estimated ranges, we review our estimates and assumptions and adjust air traffic liability and passenger revenues as necessary. As with any estimates, actual results may vary from estimated amounts.
a.2 Frequent flyer program
The Company has a frequent flyer program for LATAM passengers called LANPASS whoseand a frequent flyer program for TAM passengers called TAM Fidelidade. Customers can also earn points through Multiplus, a subsidiary of TAM, which permits the accrual of points for many products and services (not just airline flights) and has more than 200 partner establishments, including the TAM Fidelidade program, as of December 31, 2014.
Both frequent flyer programs’ objective is customer loyalty through the delivery of LANPASS kilometers or Multiplus points every time that members of the program fly with the Company or its alliance partners, use the services of entities registered with the program or make purchases with an associated credit card. The kilometerskilometers/points earned can be exchanged for flightsflight tickets or other services of associated entities.
The consolidated financial statements include LANPASS liabilities for this concept (deferred income), according to the estimate of the valuation established for the kilometers accumulated pending use at that date, in accordance with IFRIC 13: “Customer loyalty programs”.programs.” Points earned from TAM Fidelidade members are bought from Multiplus and seats redeemed are sold to Multiplus. Multiplus manages the points liabilities. Revenue from both programs are recognized once the purchased tickets are flown.
LANPASS Kilometers expire if they are not utilized over a period of three years. This period is renewable if the passenger takes a flight or meets specific requirements regarding the accumulation of kilometers through one of the partners of the program. Multiplus Points expire if they are not utilized over a period of two years, this period is not renewable.
Property, Plant and Equipment
TheLATAM’s land of Lan Airlines and Subsidiaries is recognized at cost less any accumulated impairment loss.
The rest of the property, plant and equipment are shown, initially and subsequently, at their historic cost less the corresponding depreciation and any impairment loss, except for certain land and minor equipment that are reassessed at first adoption, according to IFRS.loss.
The amount of advance payments to aircraft manufacturers are capitalized by the Company under “Construction in progress” until receipt of aircraft.
Subsequent costs (replacement of components, improvements and extensions) are included in the value of the initial asset or shown as a separate asset only when it is probable that the future economic benefits associated with the elements of property,Property, plant and equipment are going to flow to the Company and the cost of suchthe element can be determined reliably. The value of the component replaced is written-off in the books.books at the time of replacement. The rest of the repairs and maintenance are charged to the result of the year in which they are incurred.
Depreciation of property, plant and equipment is calculated using the straight-line method over their estimated useful lives; except in the case of certain technical components, which are depreciated on the basis of cycles and hours flown.
The residual value and useful life of assets is revised, and adjusted if necessary, once a year.
When the carrying amount of an asset is higher than its estimated recoverable amount, its value is reduced immediately to its recoverable amount. For more information, see Note 2.8 to our audited consolidated financial statements.
Losses and gains on the sale of property, plant and equipment are calculated by comparing the proceeds obtained with the book value and are included in the consolidated statement of income.
Maintenance
The costs incurred for scheduled majorheavy maintenance of the aircraft’s fuselage and engines are capitalized and depreciated until the next maintenance. The depreciation rate is determined on technical grounds, according to itsthe use of the aircraft expressed based onin terms of cycles and flight hours. Unscheduled maintenances
In case of on balance sheet aircraft, these maintenance costs are capitalized as Property, plant and equipment, while in the case of off balance sheet aircraft maintenance costs are periodically provided for and recognized through profit and loss as “Cost of sales”.
Additionally, under some of our aircraft operating leases, prepayment deposits are required in order to ensure that funds are available to support the scheduled heavy maintenance of the aircraft. At the end of the lease term, any unused maintenance reserves are either returned to the Company in cash or used to offset amounts that we may owe the lessor as a maintenance adjustment. The Company periodically reviews its maintenance reserves for each of its leased aircraft to ensure that they will be recovered, a process that requires judgment, and recognizes an expense if any such amounts are less than probable of being returned.
The unscheduled maintenance of aircraft and engines, as well as minor maintenance, are charged to incomeresults as incurred.
Derivative Financial Instruments and Hedging Activities
Derivatives are booked initially at fair value on the date the derivative contracts are signed and later they continue to be valued at their fair value. The method for booking the resultant loss or gain depends on whether the derivative has been designated as a hedging instrument and, if so, the nature of the item hedged.
The Company designates certain derivatives as:
(a) | Hedge of the fair value of recognized assets (“fair value hedge”); |
(b) | Hedge of a identified risk associated with a recognized liability or an expected highly probable transaction (“cash-flow hedge”); or |
(c) | Derivatives that do not qualify for hedge accounting. |
The Company documents, at the inception of each transaction, the relationship between the hedging instrument and the hedged item, as well as its objectives for managing risk and the strategy for carrying out various hedging transactions. The Company also documents its assessment, both at the beginning and on an ongoing basis, as to whether the derivatives used in the hedging transactions are highly effective in offsetting the changes in the fair value or cash flows of the items being hedged.
The total fair value of the hedging derivatives is booked as an otherOther non-current financial asset or liability if the remaining maturity of the hedging instrument is over 12 months, and as an otherOther current financial asset or liability if the remaining term of the hedging instrument is less than 12 months. Derivatives not booked as hedges are classified as other financial assets or liabilities, current in the case that their remaining maturity is less than 12 months and non-current in the case that it is more than 12 months.
(a) Fair value hedges
Changes in the fair value of designated derivatives that qualify as fair value hedges are shown in the consolidated statement of income, together with any change in the fair value of the asset or liability hedged that is attributable to the risk being hedged.
(b) Cash flow hedges
The effective portion of changes in the fair value of designated derivatives that qualify as cash flow hedges is shown in net equity. The loss or gain relating to the ineffective portion is recognized immediately in the consolidated statement of income under “Other gains (losses).” Amounts deferred in equity are reclassified to profit and loss when the related hedged item impacts profit and loss.
In the case of variable interest-rate hedges, this means that the amounts recognized in equity are reclassified to results within financial cost at the same time the associated debts accrue interest.
For fuel price hedges, the amounts shown in equity are reclassified to results as Cost of sales to the extent that the fuel subject to the hedge is used.
For Multiplus’ foreign currency hedges, the amounts shown in equity are reclassified to results to the extent that the deferred revenue resulting from the use of points, are recognized as income.
When hedging instruments mature or are sold or when they do not meet the requirements to be accounted for as hedges, any gain or loss accumulated in net equity until that moment remains in equity and is reclassified to the consolidated statement of income when the hedged transaction is finally recognized. When it is expected that the hedged transaction is no longer going to occur, the gain or loss accumulated in net equity is taken immediately to the consolidated statement of income as “Other gains (losses).”
(c) Derivatives not booked as a hedge
Certain derivatives are not booked as a hedge. The changes in fair value of any derivative instrument that is not booked as a hedge are shown immediately in the consolidated statement of income, in “Other gains (losses).”
Deferred taxes
Deferred taxes are calculated according to the balance-sheet method, on the temporary differences arising between the tax bases of assets and liabilities and their book values. However, if the temporary differences arise from the initial recognition of a liability or an asset in a transaction different fromother than a business combination that at the time of the transaction does not affect the accounting result or the tax gain or loss, they are not booked. The deferred tax is determined using the tax rates (and laws), that have been enacted or substantially enacted at the end of the reporting period, and are expected to apply when the related deferred tax asset is realized or the deferred tax liability is discharged.
Deferred tax assets are recognized when it is probable that there will be sufficient future tax earnings with which to compensate the temporary differences. Estimating the level of tax earnings for this purpose requires considerable judgment.
Deferred incomeThe Company does not record deferred tax is provided on temporary differences arising on investments in subsidiaries, and associates, except for deferred income tax liability where timing ofprovided that the reversal ofopportunity to reverse the temporary differences is controlled by the groupCompany and it is probable that the temporary differencedifferences will not reverse in the foreseeable future. Deferred tax on temporary differences arising on investments in associates is immaterial.
Recently Issued Accounting Pronouncements
IAS 12 Income taxes (Amendment)
IAS 1 Presentation of financial statements (Amendment)
IAS 28 Investments16 Property, plant and equipment (Amendment issued in associatesMay 2014 and joint ventures
IFRS 11 Joint arrangements
(Amendment issued in May 2014) (*)
IFRS 12 Disclosures of interests in other entities
(issued in December 2014) (*)
IFRS 13 Fair value measurement
IAS 19 Employee benefits (Amendment)
(i) | IAS 27 Separate financial statements, IFRS 10 Consolidated financial statements and IFRS 12 Disclosure of interest in other entities (October 2012) |
IFRS 9 Financial instruments
(i) | IFRS 2 Share-based payment (Dec 2013) |
(ii) | IFRS 3 Business combinations (Dec 2013) |
(iii) | IFRS 8 Operating segments (Dec 2013) |
(iv) | IFRS 13 Fair value measurement (Dec 2013) |
(v) | IAS 16 Property, plant and equipment (Dec 2013) |
(vi) | IAS 24 Related party disclosures (Dec 2013) |
(vii) | IFRS 1 Frist-time adoption of International Finance Reporting Standards (Dec 2013) |
(viii) | IAS 40 Investment property (Dec 2013) |
(i) | IAS 19 Employee benefits (September 2014) (*) |
(ii) | IAS 34 Interim financial reporting (September 2014) (*) |
(iii) | IFRS 5 Non-current assets held for sale and discontinued operations (September 2014) (*) |
(iv) | IFRS 7 Financial instruments: Disclosures (September 2014) (*) |
(*) | Standards not yet effective. |
The Company’s management believes that the early adoption of the standards, amendments and interpretations described above but not yet effective would not have had a significant impact on the Company’s consolidated financial statements in the year of their first application. The Company only has not early adopted any of the above standards.amendment to IAS 36.
B. Liquidity and Capital Resources
OurLATAM cash and cash equivalents totaled US$374.4989.4 million as of December 31, 2011,2014, US$631.11,984.9 million as of December 31, 20102013 and US$731.5650.3 million as of December 31, 2009. 2012. Additionally, the Company had short term marketable securities totaling US$544.4 million as of December 31, 2014, US$576.7 million as of December 31, 2013 and US$470.1 million as of December 31, 2012. In the aggregate, LATAM’s cash and marketable securities totaled US$1,533.8 million as of December 31, 2014, US$2,561.6 million as of December 31, 2013 and US$1,120.3 million as of December 31, 2012.
The US$1,027.8 million decrease in our cash and cash equivalentsmarketable securities from 20102013 to 20112014 was mainly due to higher investment activities related to a higher numberthe execution of aircraft incorporationsthe deleveraging plan, the negative impact of the FIFA World Cup, and the weaker global economic scenario in Latin America. Changes in our fleet. net cash generated from operating, investing and financing activities are described below.
Cash position and liquidity
The following table provides a summary of our cash flows from operating activities, investing activities and financing activities for the years ended December 31, 2014, 2013 and 2012 and our total cash position as of December 31, 2014, 2013 and 2012.
2014 | 2013 | 2012 | ||||||||||
(in US$ millions) | ||||||||||||
Net cash flows from operating activities | 1,331.4 | 1,408.7 | 1,203.8 | |||||||||
Net cash flow from (used in) investing activities | (899.1 | ) | (1,278.8 | ) | (1,926.4 | ) | ||||||
Net cash flows from (used in) financing activities | (1,320.2 | ) | 1,205.8 | 1,005.2 | ||||||||
Effects of variation in the exchange rate on cash and cash equivalents | (107.6 | ) | (1.0 | ) | (6.7 | ) | ||||||
Cash and cash equivalents at the beginning of the year | 1,984.9 | 650.3 | 374.4 | |||||||||
Cash and cash equivalents at the end of the year | 989.4 | 1,984.9 | 650.3 |
In addition to the cash and marketable securities LATAM has access to short term credit lines. As of December 31, 2014, LATAM had working capital uncommitted credit facilities for a total amount of US$ 1,827 million, of which US$953million was drawn as of December 31, 2014, and committed credit lines with a total available amount of US$145 million, of which $0 was drawn as of December 31, 2014.
Net cash flows from operating activities
Cash from operations derivesis derived primarily from providing air passenger and cargo transportation to customers. Operating cash outflows are primarily related to the recurring expenses of airline operations. operations, including fuel consumption.
Net cash inflows from operating activities werein 2014 decreased US$762.677.3 million, or 5.5%, from US$1,408.7 million, mainly due to the negative impact of the FIFA World Cup on LATAM’s operating margin, as well as a generally weaker macroeconomic scenario in 2011, US$1,125.3 millionLatin America, including slower GDP growth trends and weaker currencies in 2010 and US$845.8 million in 2009. The main reasons formost countries. In addition the 32.2% decrease in 2011 from 2010 in net cash flowsfrom operations was negatively affected by fuel hedge, hedging margin guarantees and other guarantees in US$ 251.7 million (for more information see to Note 6 – Cash and Cash Equivalents of our audited consolidated financial statements). Nevertheless, the negative effect was compensated by the cash received from the renewal of the Santander and LANPASS exclusive co-branding agreement.
Net cash inflows from operating activities werein 2013 increased $204.9 million, or 17.0%, from US$1,203.8 million in 2012, primarily due to an improvement in the 37.2% increaseoperational margin and the turnaround of the Brazilian domestic market, mainly reflected in fuel prices during the period, as well asa stronger fourth quarter operational result.
Net cash flow from (used in) investing activities
Net cash used in investing activities in 2014 decreased US$379.7 million from US$1,278.8 million in 2013 to US$899.1 million in 2014, due to an increase in wagesaircraft sales of US$265.8 and benefits as a resultdecrease in Aircraft CAPEX of the consolidation as of January 2011 of Colombian airline Aires, the ongoing effects of the volcanic ash cloud on domestic operationsUS$497.8 million, driven by a decrease in Chileaircraft purchases from 20 narrow body aircraft to 9 and Argentina and the appreciation of local currencies in Latin America. Fuel prices and exchange rate fluctuations may continue4 wide body aircraft to impact LAN’s operating cash flow generation in the future. Nevertheless, LAN continued to show solid traffic growth and yield increases in both passenger and cargo operations. The main reasons for the 33.0% increase in 2010 from 2009 in net cash flows from operating activities were the increase in passenger and cargo revenues as a result of traffic growth and yield increases, which outpaced the growth in operating costs and expenses.
In recent years, we have been able to meet our working capital and capital expenditure requirements through cash from our operations. Given the nature of our business, the Company generally benefits from having a positive working capital, i.e. actual cash flow movement (cash inflows).
Our working capital position at year-end 2011, and in previous year-ends,3. This reduction was negative. However, the Company has consistently generated cash inflows as a result of changes in working capital since current liabilities increased more than current assets during those periods. This occurs mainly as a result of advance ticket sales (i.e., services that are paid in advance before they are delivered and suppliers are paid), which are recognized as deferred revenues and constitute a distinctive characteristic of accounting of passenger revenue in the airline industry.
During 2011, the Company generated cash for US$114.0 million, as compared with US$326.7 million in 2010 and US$3.4 million in 2009, benefiting frompartially offset by an increase in its negative workingpurchases of property, plant and equipment non related to purchase of new aircrafts of US$556.4. It is important to note that during 2014 the sale and leaseback of 4 B777 was reflected in an asset sale of US$510.5 million and a reduction of debt of US$516.6 million.
Net cash used in investing activities in 2013 decreased US$647.6 million from US$1,926.4 million in 2012 to US$1,278.8 million in 2013, primarily due to the decrease in capital position. We expect to continue generating positive working capital movements through our operations. However, we cannot predict whether current trendsexpenditure and conditions will continue, or how the effectsreturn of competition or other factors that are beyond our control could affect us.
Below please find a table providing a detailed calculation of our working capital position and working capital movements for the period 2009 through 2011:
2009 | 2010 | 2011 | ||||||||||
(in US$ thousands) | ||||||||||||
Current assets | ||||||||||||
Trade and other accounts receivable | 423,739 | 481,350 | 537,406 | |||||||||
Accounts receivable from related entities | 38 | 50 | 838 | |||||||||
Inventories | 46,563 | 53,193 | 72,787 | |||||||||
Current liabilities | ||||||||||||
Trade and other accounts payable | 476,597 | 645,571 | 645,086 | |||||||||
Accounts payable to related entities | 297 | 184 | 367 | |||||||||
Deferred Revenues | 493,034 | 721,042 | 868,557 | |||||||||
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Working capital year-end position | (499,585 | ) | (832,204 | ) | (902,979 | ) | ||||||
Working capital movement | ||||||||||||
Cash inflows/(cash outflows) | 3,426 | 332,616 | 70,775 |
As of December 31, 2011, the cash pledged to financial institutionsPDP payments relating to margin calls on derivative positions wasthe aircraft deliveries. Aircraft purchases in 2013 included 20 narrow body aircraft and 4 wide body aircraft for a total of US$117.21,219 million.
Net cash flows from (used in) financing activities
Net cash used in investingfinancing activities was (US$1,205.8 million), a decrease of US$1,238.32,526.0 million from the US$1,205.8 million in 2011,cash generated by financing activities in 2013. The variation resulted primarily from a liability restructuring, including an important reduction of outstanding debt and an increase in debt repayment, mainly the US dollar denominated debt of TAM S.A. of US$1,100.41,327.6 million (for more information see to Note 18-Other Financial Liabilities of our audited consolidated financial statements). The decrease in the net cash generated was also affected by the net effect of the capital increase, where US$888.6 million was accounted for in 2013 and US$156.3 million during the first quarter of 2014.
Net cash generated from financing activities increased by US$200.6 million from US$1,005.2 million to US$1,205.8 million in 2010 and US$589.7 million in 2009. Cash capital expenditures were US$1,367.0 million in 2011, US$1,029.2 million in 2010 and US$538.6 million in 2009. The increase in capital expenditures in 2011 was2013, primarily due to LATAM’s capital increase, the acquisitionincrease of higher number of aircraft and the required investmentslong term debt related to them.new aircraft purchases, but partially offset by the voluntary prepayment of BRL 400 million of local Brazilian bonds.
Our capital expenditures for 2011 were mainly composed of:Sources of financing
Long term
cash contributions for pre-delivery deposits relatedWe typically finance our fleet with long-term loans covering between 80% and 100% of the net purchase price. We also finance our aircraft under sale and leaseback arrangements in order to aircraft with deliveries in 2011, 2012 and 2013;
the acquisition of 13 Airbus A320 Passenger aircraft and three Boeing B767-300 Passenger aircraft; and
the acquisition of aircraft spare parts and spare engines.
Our capital expenditures for 2010 were mainly composed of:
cash contributions for pre-delivery deposits relatedadd flexibility to aircraft with deliveries in 2010, 2011 and 2012;
the acquisition of eight Airbus A320 Passenger aircraft and one Boeing B767-300 Passenger aircraft; and
the acquisition of aircraft spare parts and spare engines.
Our capital expenditures for 2009 were mainly composed of:
cash contributions for pre-delivery deposits related to aircraft with deliveries in 2009, 2010 and 2011;
the acquisition of three Airbus A319 Passenger aircraft and three Boeing B767-300 Passenger aircraft; and
the acquisition of aircraft spare parts and spare engines.
our fleet. For more information about currentregarding to the fleet financing, please refer to “—F. Tabular Disclosure of Contractual Obligations.”
From time to time in the past, we have considered, and may consider in the future, other forms of financing including securitization of ticket receivables or the securitization of fleet and engines or the issuance of additional debt or equity securities.
Short term
We have generally been able to arrange for short-term loans with local Chilean and international banks when we have needed to finance working capital expenditures see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital Expenditures”. The difference between net cash used in investing activities and cash capital expenditures during 2011, relates mainly to the investment in financial instruments, the saleor increase our liquidity. As of five A318 passenger aircraft and the sale of Blue Express which was a subsidiary dedicated to ground courier services.
Net cash inflows from financing activities wereDecember 31, 2014, we maintained US$219.1537 million in 2011, compared to net cash outflows ofshort-term credit lines with both local and foreign banks, including US$124.7 million in 2010 and US$99.2210 million of cash inflows in 2009. Such variance was duecommitted credit lines.
We have diversified our sources of short term financing to new issuance of shares, inflows frominclude the following: PAE (“Prestamos a Exportadores”), which are foreign currency short term loans granted to exporting parties in Chile mainly to finance working capital; Credit card advancements, a financial alternative where the bank advances to the Company the cash inflows related to the credit card sales on installments with a discount factor; and the reductionadvance purchases by Multiplus of kilometers for TAM flights, in interest payments duean amount at any time up to changes in loans structures and floating rate debt. In 2011, our main usesa maximum of cash were US$883.4 million for loan payments, US$192.1 million for dividends payments and US$119.1 million for interest payments. In 2010, our main uses of cash were US$554.5 million for loan payments, US$155.4 million for dividends payments and US$128.7 million for interest payments. In 2009, our main uses of cash were US$261.7 million for loan payments, US$139.9 million for dividend payments and US$129.3 million for interest payments.R$500 million.
Our cash and cash equivalents including investment funds and domestic and foreign bonds are mainly held in U.S. dollars or U.S. dollar-based instruments. A fraction (around 22%) of our cash position is held in currencies other than U.S. dollars to fulfill short-term obligations denominated in local currencies.
Capital Expendituresexpenditures
Our capital expenditures are related to the acquisition of aircraft, aircraft-related equipment, IT equipment, support infrastructure and the funding of pre-delivery deposits. OurLATAM’s capital expenditures totaled US$1,367.01,440.4 million in 2011,2014, US$1,029.21,381.8 million in 20102013 and US$538.62,389.4 million in 2009. The increase in capital expenditure is explained by a higher number2012. See “—Sources of aircraft acquired during 2011.financing” above.
The following chart sets forth our estimate, as of JanuaryDecember 31, 2012,2014, of our future capital expenditures for, 2012, 2013, 2014, 2015, 2016, 2017, 2018 and 2016:2019 calendar years:
Expenditures��by year, as of January 31, 2012 | Estimated capital expenditures by year, as of December 31, 2014 | |||||||||||||||||||||||||||||||||||||||
2012 | 2013 | 2014 | 2015 | 2016 | 2015 | 2016 | 2017 | 2018 | 2019 | |||||||||||||||||||||||||||||||
(in US$ millions) | (in US$ millions) | |||||||||||||||||||||||||||||||||||||||
Expenditures on aircraft | 1,688 | 1,332 | 1,568 | 1,032 | 1,067 | |||||||||||||||||||||||||||||||||||
Fleet Commitments | 1,688 | 2,343 | 2,471 | 2,903 | 1,229 | |||||||||||||||||||||||||||||||||||
PDPs (1) | (310 | ) | (127 | ) | (213 | ) | 18 | (8 | ) | 311 | 165 | -432 | -651 | -18 | ||||||||||||||||||||||||||
Purchase Obligations | 1,378 | 1,208 | 1,355 | 1,050 | 1,059 | 1,999 | 2,508 | 2,039 | 2,252 | 1,211 | ||||||||||||||||||||||||||||||
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Other expenditures(2) | 209 | 214 | 226 | 239 | 239 | 405 | 373 | 293 | 295 | 108 | ||||||||||||||||||||||||||||||
Total | 1,587 | 1,422 | 1,581 | 1,289 | 1,298 | 2,404 | 2,881 | 2,332 | 2,547 | 1,319 | ||||||||||||||||||||||||||||||
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(2) | Includes expenditures on spare engines and parts, information technology and other expenditures. |
The expenditures set out in the table above reflect payments for purchases and other fleet-related items, as well as for information technology and other items. See “Item 4. Information on the Company—Business Overview—Fleet”. Principally, weFleet.” We have projected our capital expenditures based on:
the delivery of 12 Airbus A320-Family Aircraft in 2012, 14 in 2013, 17 in 2014, 15 in 2015, 12 in 2016, 10 in 2017 and 10 in 2018;
the delivery of nine Boeing B767-300 Passenger aircraft in 2012 and four in 2013;
the delivery of two Boeing 777 Freighter aircraft in 2012;
the delivery of two Boeing 787-8 passenger aircraft in 2012, three in 2013 and seventeen between 2014 and 2018;
the delivery of four Boeing 787-9 passenger aircraft in 2015;
the implementation of a new host system as a part of a three year capital expenditure plan, totaling approximately US$70 million; and
Costs related to the startup of new operations in the region under LAN’s standards.
We expect that cash generated from operations, short-term credit-lines and long-term syndicated loans with various banks will be sufficient to meet our cash requirements in the foreseeable future, although events that materially affect our operating results could also have a negative impact on our liquidity.anticipated deliveries of aircraft fleet. See “—F. Tabular Disclosure of Contractual Obligations” below for a description of our purchase obligations, borrowings and other contractual commitments as of December 31, 2014.
C. Research and Development, Patents and Licenses, etc.
We believe that the LAN brandLATAM has strong value and it is synonymous of superior service in the Latin American and International airline industry. In March 2004, we launched our new “LAN” brand to bring together, under one strong international name, all our local brands such as “LAN Chile,” “LAN Peru,” “LAN Argentina” and “LAN Ecuador.” We developed our new brand and corporate image after an extensive process supported by a leading global branding agency.
We have registered the trademarks “LAN”,“LAN,” “LAN Chile,” “LAN Peru,” “LAN Argentina” and “LAN Ecuador” with the trademark office in Chile, Peru, Argentina and Ecuador, respectively. We license certain brands, logos and trade dress under the alliance agreement withoneworld® related to ourLAN’s alliance. WeAs long as LAN is a member of oneworld®, it will have the right to continue to useoneworld® current logos on our aircraft while LANits aircraft.
TAM holds or has filed registration applications for 135 trademarks before the Instituto Nacional da Propriedade Industrial, or INPI, the body with jurisdiction for registering trademarks and patents in Brazil, and 105 trademarks before the bodies with jurisdiction for registering trademarks in other countries in which TAM operates. Currently, TAM is a membernot aware of such alliance.any third-party challenges to these applications.
D. Trend Information
During 2012,For 2015, LATAM expects total passenger ASK growth to be between 2% and 4%. International passenger ASK growth for full year 2015 is expected to grow between 4% and 6%. TAM’s domestic passenger ASKs in the Brazilian market are expected to be flat during 2015. ASKs in Spanish-speaking countries are expected to increase by approximately 4% to 6%.
In the passenger business, we expect to continue seeing positive trendsto face increased competition, a weaker macroeconomic environment in both passengerSouth America, and depreciated local currencies, putting pressure on yields throughout the region for all players in the industry. Nevertheless, the Company will continue to develop initiatives to improve our operations, with special focus in customer experience and network. Moreover, LATAM’s unique leadership position in a region with growth potential will allow us to continue building our business model in the future.
Regarding cargo operations, where we see significant growth opportunities in domesticLATAM expects cargo ATKs to increase between 1% and international markets in Latin America. Regarding fuel prices, they have remained relatively stable. Nevertheless, geopolitical instability, which affects the supply of fuel, is a potential risk since fuel supply is key to our business, as it represents approximately 30% of our operating costs. We can address increases in fuel prices through our fuel-hedging policy and the use of pass-through mechanisms3% for both the passenger and cargo operations. However, these strategies are never completely effective and margins are negatively impactedfull year 2015, driven by a higher fuel price scenario. Specifically, we expect to face:
revenue growthincreased availability in the bellies of passenger operations, caused by capacity expansion inline with traffic growth. During January and February 2012, passenger traffic increased 13.6% compared with the same period in 2011, driven mainly by solid growth on domestic operations, which increased 19.1% as compared to 2011, as well as 10.9% growth in international operations. During such period, total passenger capacity increased 12.8%, leading to a 0.6 points increase in load factors from 82.5% to 83.1%. Capacity increases focused mainly on domestic routes within Chile, regional routes within Latin America, and long-haul routes to the United States. This expansion was partially offset by decreased capacity on long haul routes to Europe as a result of itinerary changes implemented in early 2011; and
growth in the cargo operations is expected to be driven by continued increase in imports to Latin America, mainly to Brazil, and continued recovery of export volumes, partly driven by further recovery of salmon exports. During January and February 2012, cargo demand, as measured in RTKs, increased 0.7%, while capacity increased by 3.1%. In turn, the cargo load factor decreased 1.5 points to 65.3%.
In 2012, we expect to continue expanding and diversifying our revenue base through the expansion of our network, namely, by further developing our existing routes, adding new destinations, developing new alliances, and entering new markets. During 2012, we expect to receive 12 Airbus A320 family aircraft to operate domestic and regional routes, as well as nine Boeing 767-300 and the first two Boeing 787-8 Dreamliners for long-haul routes. We also expect the sale of five Airbus A318 aircraft and the return of two leased Boeing 767-300, while also returning three Boeing 737-700s operated by LAN Colombia.aircraft.
In the cargo business, we will continue adding capacity in response to demand in our core markets. We expectbe adversely affected by the growthchallenging macroeconomic environment, which is directly correlated with the number of import flows to Latin America to continue, buttons being transported and by the fact that weaker cargo markets globally might further drive additional competition to South America, especially Brazil. We will continueHowever we expect partially offset this negative impact with solid export volumes from Latin America to monitor the cargo market trends on a weekly basis in order to react as soon as possible if necessary.United States and Europe. Also, we plan to continue optimizingto optimize the utilization of the bellies of our passenger aircraft to maximize synergies associated with the Company’s integrated passenger/cargo business model. Cargo capacity growth in 2012 will be driven by the delivery of 2 Boeing 777 freighters in the second half of the year.
We continue to maintain significant flexibility to adjust the physical size of our fleet. Between 20122015 and 2014,2016, we will have 1343 operating lease expirations (including Japanese operating leases) in our wide-body passenger fleet and 2 operating lease expirations in our passenger and cargo fleet, which leases can thereafter be terminated without cost. Startingadditional costs.
As a result, the Company has more flexibility, as well as a proven track record of acting quickly to adapt our business to economic challenges. In this context, LATAM has developed a robust strategic plan for the next four years (2015-2018), based on three critical success factors: Customer Experience, Network, and Efficiency and Cost Reduction. This plan will improve the way we work, allowing us to become one of the best airline groups in 2010, part ofthe world, renewing our Boeing 767 fleetcommitment to sustained profitability and superior shareholder returns.
Cost savings include reductions in fuel and fees, procurement, operations, overhead, and distribution costs, among others. The company has been fully paid, providing us with additional financial flexibility.already started work on cost initiatives in all these areas.
We also intendRegarding fuel, we expect jet fuel prices will continue to make our cost structure more efficient and to offset potential decreasesbe volatile in demand with more efficient asset utilization,2015, and we aim to enhance efficiency by streamlining our support processes, reducing commercial costs, continuing to develop our low-cost type business model for short-haul operations, and further developing the LEAN system in our processes.
We expect more stable fuel prices for 2012, but will continue usingto use fuel hedging programs and fuel surcharge mechanisms in both the passenger and cargo businesses to help minimize the impact of short-term movements in crude oil prices. For instance, as of March 15, 2012 we have
LATAM has hedged approximately 58%30% of ourits estimated fuel requirementsconsumption for the first quarter of 2015, 25% of its average estimated fuel consumption for the second quarter 2012, 27%of 2015, 39% of its average estimated fuel consumption for the third quarter 2015, and 8%39% of its average estimated fuel consumption for the fourth quarter. Thesequarter 2015. The Company’s fuel hedging instruments are comprisedstrategy consists of a combination of collars, swaps and swaps. Swaps are at an average price of US$92.2 dollars per barrel while collars are in average between US$71.6call options for Brent and US$95.7 dollars per barrel.Jet Fuel.
E. Off-Balance Sheet Arrangements
As of December 31, 20112014 the Company had 107 aircraft (of which 70 are obligations of TAM and 37 are obligations of LAN) and 23 aircraft engines under operating leases. These operating leases provide us with great flexibility to adjust our fleet to any demand volatility that may affect the airline industry and therefore we consider such arrangements to be of great value.value to our strategy and financial performance. The total future lease payments related to our operating leases as of December 31, 2014 were US$ 2,155 million, for all remaining periods through maturity (the latest of which expires in 2026). See “—F. Tabular Disclosure of Contractual Obligations.”
Under the aforementioned operating leases, LANLATAM is responsible for all maintenance, insurance and other costs associated with operating these aircraft. The Company has not made any residual value or similar guarantees to our lessors. There are certain guarantees and indemnities to other unrelated parties that are not reflected on the Company’s balance sheet, but we believe that these will not have a significant impact on our results of operations or financial condition.
The CompanyLATAM operates 17 aircraft under a financing structure called Japanese Operating Lease (“JOL”). This method involvestax leasing structures. These methods involve the creation of a special purpose entityentities that acquiresacquire aircraft with bank and third party financing. Under IFRS, eight of these aircraft are shown in the consolidated statement of financial position as part of “Property, plant and equipment” and the corresponding debt is shown as a liability.liability and nine TAM tax leases are classified as operating leases for accounting purposes as of December 31, 2014.
As of February 29, 2012December 31, 2014, we are not aware of any event, lawsuit, commitment, trend or uncertainty that may result in, or is reasonably likely to result in, the termination of the operating leases. See Note 33 to our audited consolidated financial statements for a more detailed discussion of these commitments.
F. Tabular Disclosure of Contractual Obligations
We have contractual obligations and commitments primarily related to the payment of aircraft debt and lease arrangements, principal and interest on our non-aircraft long-term debt (which consists of senior notes, a securitized bond and bank loans), and short-term export-import credits for the future incorporation of aircraft to our fleet.
The Company’s debt that is secured by aircraft (including Export-Import Bank of the United States (“EX-IM Bank”) Bank guaranteed bonds, Export Credit Agency (“ECA”) guaranteed loans, commercial loans, Japanese Leases with a call option (“JOLCO”)
structures and capital leases) as of December 31, 2014, was US$6,221 million. In general, LATAM’s aircraft debt has 12 year repayment profiles. However, some financing structures feature a balloon payment or a purchase option at the end of the lease. By refinancing this balloon payment, the maturity dates of a number of our aircraft financings have been extended for another 3 to 8 years. Our 2014 aircraft acquisitions are described in further detail below under “—2014 Fleet Acquisitions.”
Regarding non-aircraft debt, LATAM issued a securitized bond for an amount of US$ 450 million in November 2013 with seven years tenor and two years interest only. This bond is backed by future flows of credit card sales of LATAM Airlines in the United States and Canada. The coupon is 6.0% fixed with quarterly payments.
In addition, TAM has three series of senior notes, totaling US$1,100 million. TAM’s senior notes comprise:
The average interest rate of all of our long term debt (which is our aircraft debt plus the senior notes issued by TAM, the LATAM securitization and bank loans) was 3.68% as of December 31, 2014. Out of the total long-term debt, 68.8%accrues interest at a fixed rate (either through a stated fixed interest rate or through the use of interest rate swap agreements) or is subject to interest rate caps.
As of December 2014, LATAM had US$1,308.3 million in current debt liabilities. Of this amount, US$552.5 million was short-term debt, which represents 42% of our total current debt liabilities. The remaining US$755.7 million is composed mainly of amounts payable within the next 12 months related to aircraft financing.
Various EX-IM Bank loans signed by LATAM for the financing of Boeing 767, 777, 777 freighter and 787 aircraft contain financial covenants and other restrictions, including restrictions in terms of its shareholder composition and disposal of assets. As of December 31, 20112014, we have financedalso had purchase obligations totaling US$ 11.7 billion, with deliveries between 2015 and 2021, as set forth below:
The following table sets forth our material expected obligations and commitments as of December 31, 2014:
Payments due by period, as of December 31, 2014 | ||||||||||||||||||||
(US$ in millions) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
Long-term debt obligations(1) | US$ | 4,727 | US$ | 587 | US$ | 1,138 | US$ | 911 | US$ | 2091 | ||||||||||
Capital (finance) lease obligations | US$ | 1,629 | US$ | 350 | US$ | 611 | US$ | 413 | US$ | 256 | ||||||||||
Operating lease obligations | US$ | 2,155 | US$ | 512 | US$ | 766 | US$ | 436 | US$ | 441 | ||||||||||
Fleet Commitments(2) | US$ | 11,689 | US$ | 1,688 | US$ | 4,814 | US$ | 4,132 | US$ | 1,055 | ||||||||||
TOTAL | US$ | 20,200 | US$ | 3,137 | US$ | 7,329 | US$ | 5,892 | US$ | 3,843 | ||||||||||
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(1) | Long-term debt obligations reflect principal payments on outstanding debt obligations, including aircraft debt, senior notes issued by LAN and TAM and long term bank loans. |
(2) | Fleet commitments represents the capex equivalent of purchasing all fleet arrivals |
2014 Fleet Acquisitions
During 2014, LATAM completed the acquisition of 21the following wide body aircraft:
These EX-IM Bank financial institutionsobligations have a repayment profile of 12 years, with the support of partial guarantees issued by the Ex-Im Bank with repayment profiles of either 12 or 15 years. The Ex-Im Bank guarantees supporta guarantee covering 85% of the net purchase price and areof the aircraft. The EX-IM Bank guarantee is secured with a first priority mortgage on the aircraft in favor of a security trustee on behalf of Ex-ImEX-IM Bank. The documentation for each loan follows standard market forms for this type of financing, including standard events of default. We have financed the remaining 15% of the net purchase price with our own funds.
Finally, the 2 Boeing 787-8 aircraft financed through sale and leaseback transactions have lease terms of 12 years. These leases are denominated in U.S. dollars and have monthly payments
During 2014, LATAM completed the acquisition of the following narrow body aircraft:
The commercial financing for these 9 Airbus 321-231 aircraft consists of a senior tranche financing 81.7% of the net purchase price of the aircraft. A first priority mortgage on the aircraft exists in favor of a security trustee on behalf of the senior lender. The documentation for each loan follows standard market forms for the type of financing, including standard events of default
Finally, narrow body aircraft financed through sale and leaseback transactions have lease terms of 8 years. These leases are denominated in U.S. dollars and have monthly payments.
The majority of our wide body and narrow body aircraft financings through EX-IM Bank bonds, ECA guaranteed loans or with our own funds. Our Ex-Im Bank supported financingscommercial loans are denominated in U.S. dollars and have quarterly amortizations with a combination of fixed and floating rates linked to USD LIBOR. A small portion of our aircraft debt has monthly or semiannual payments; nevertheless it is also denominated in US dollars and linked to U.S. dollar LIBOR.Libor. Through the use of interest rate swaps and fixed coupon Bond issuances in the case of Boeing aircraft, we
have effectively converted a significant portion of our floating rate debt under these loans into fixed rate debt. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Risk of Fluctuations in Interest Rates”, for more information. Between 2004 and 2009, LAN sold its ownership in the entities borrowing some of these loans and they were therefore reclassified as financial leases. As of December 31, 2011, the total amount outstanding under our Ex-Im Bank-supported financings totaled US$1,259.2 million.
In April 2010, LAN entered into an agreement to finance the purchase of 15 aircraft partially guaranteed by the European Export Credit Agencies and partially through its own funds (85% and 15%, respectively) where six of them were delivered in 2010 and the remaining nine in 2011. These loans have a 12 years maturity profile and quarterly payments. During the second half of 2010 LAN financed eight additional A320 family aircraft supported by the European Export Credit Agencies and partially through its own funds (85% and 15% respectively).
During the year 2011 LAN continued financing its A320 family aircraft fleet supported by the European Export Credit Agencies totaling 13 additional aircraft. These aircraft were financed 80% by loans guaranteed by the European Export Credit Agencies and the remaining portion (20%) by LAN’s own funds.
In the first quarter 2011, LAN entered into a sale and lease back agreement to finance eight of its A320 family aircraft. Four of them were delivered in the third quarter of 2011 and the remaining four are expected to be delivered between April and July 2012.
Our total debt (including capital leases) as of December 31, 2011, was US$3,788.3 million compared to US$3,259.7 million in 2010 and US$3,074.4 million in 2009. The increase in long-term debt during 2011 relates to the incorporation of debt-financed fixed assets. We have minimum lease payment obligations primarily associated with our aircraft leases. As of December 31, 2011, we had 49 aircraft under operating leases (23 which correspond to recent acquired Aires total fleet), and we had minimum lease payment obligations of US$705 million compared to US$700 million as of December 31, 2010 and US$444 million as of December 31, 2009. The average interest rate of our long-term debt was 4.5% as of December 31, 2011. Of the total debt amount, 82.3% accrues interest at a fixed rate (either through a stated fixed interest rate or through our use of interest rate swap agreements) or is subject to interest rate caps. As of February 29, 2012, we also had purchase obligations for:
Seven Airbus A319, 52 Airbus A320, 10 Airbus A321, 20 Airbus A320 NEO;
13 Boeing 767-300 Passenger aircraft;
Two Boeing 777-200 Freighter aircraft; and
26 Boeing 787 Passenger aircraft;
The purchase obligations amount to a combined total of US$8,645.6 million, with delivery between 2012 and 2018.
LAN has practically no short term debt, while its long term debt is mainly related to aircraft financing and has 12 to 15 year repayment profiles. As of December 2011, LAN had US$537.3 million in bank loans under current liabilities. Of this amount, US$153.8 million was short term debt, which represents only 6.6% of total current liabilities. The remaining US$383.6 million is composed mainly of long term debt related to aircraft financing, which is payable within the next 12 months.
The following table sets forth our material expected obligations and commitments as of January 31, 2012:
Payments due by period, as of January 31, 2012 | ||||||||||||||||||||||||||||
Total | 2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | ||||||||||||||||||||||
(in US$ millions) | ||||||||||||||||||||||||||||
Principal debt payments | 2,538.2 | 273.4 | 288.8 | 270.4 | 271.9 | 275.6 | 1,158.2 | |||||||||||||||||||||
Interest debt payments | 341.0 | 68.2 | 64.1 | 54.7 | 46.2 | 37.5 | 70.2 | |||||||||||||||||||||
Capital leases(1) | 338.1 | 60.7 | 63.8 | 60.3 | 49.6 | 44.6 | 59.1 | |||||||||||||||||||||
Operating leases(2) | 689.0 | 150.0 | 157.7 | 121.4 | 92.3 | 77.1 | 90.4 |
Purchase obligations Total Payments due by period, as of January 31, 2012 Total 2012 2013 2014 2015 2016 Thereafter (in US$ millions) 8,646.7 1,687.8 1,331.9 1,567.6 1,031.5 1,067.0 1,960.8 12,553.0 2,240.1 1,906.3 2,074.4 1,491.5 1,501.8 3,338.7
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ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
A. Directors and Senior Management
The management of LanLATAM Airlines is conducted by itsGroup board of directors which, in accordance with Lan Airlines’ by-laws, consists of nine directors who are elected every two years for two-year terms at annual regular shareholders’ meetings or, if necessary, at an extraordinary shareholders’ meeting, and may be re-elected. The board of directors may appoint replacements to fill any vacancies that occur during periods between elections. Scheduled meetings of the board of directors are held once a month and extraordinary board of directors’ meetings are called when summoned by the chairman of the board of directors and two other directors, or when requested by a majority of the directors.
The current board of directors was elected at the annualordinary shareholders’ meeting held on April 29, 2010.2014. Its term expires in April 2012. 2016. On September 2nd, 2014 Mrs. Maria Claudia Amaro (1) resigned as a member of the board of directors, which elected Mr. Henri Philippe Reichstul in her place. Mr. Reichstul’s appointment will be in effect until the next ordinary meeting of shareholders, in which the board of directors will have to be renewed and reelected in full. The entire board will be reelected in April 2015.
The following are Lan Airlines’ directors and senior management:LATAM Airlines Group’s directors:
Directors | Position | |
Director / Chairman | ||
Director | ||
Juan José | Director | |
Director | ||
Director | ||
Director |
Directors | Position | |
Carlos Heller Solari(4) | Director | |
Gerardo Jofré Miranda | Director | |
Francisco Luzón López | Director |
Senior Management | Position | |
Enrique Cueto Plaza(2) | ||
Ignacio Cueto Plaza(2) | ||
Marco Antonio Bologna(6) | CEO TAM | |
Armando Valdivieso Montes | ||
Claudia Sender | President TAM | |
Cristián Ureta Larraín | ||
Roberto Alvo Milosawlewitsch | Senior | |
Senior | ||
Emilio del Real Sota | Senior | |
Chief Marketing Officer | ||
Juan Carlos Menció | Senior |
(1) | Mr. |
(2) | Messrs. Ignacio, Juan José and Enrique Cueto Plaza are |
(3) | Mr. Ramón Eblen Kadis is a member of the Eblen Group, which is defined in “Item 7” as a “Major Shareholder.” |
(4) | Mr. Carlos Heller Solari is a member of the Bethia Group, which is defined in “Item 7” as a “Major Shareholder.” |
(5) | Mr. Damian Scokin held the position of LATAM’s International Unit Business Executive Vice President until September 30, 2014, date in which Mr. Scokin left the company. |
(6) | Mr. Bologna will cease to be CEO of TAM on April 1ST, 2015. |
Biographical Information
Set forth below are brief biographical descriptions of Lan Airlines’LATAM Airlines Group’s directors and senior management. All of LATAM’s directors were elected or reelected, as the case may be, in September 2012 for a two-year term, which expires in September 2014.
Directors
Mr. Jorge Awad MehechMauricio Rolim Amaro, 66 years old, has served as chairman and member of Lan Airlines’LATAM Airlines Group’s board of directors since July 2001. Mr. Awad had previously served as chairman of ourJune 2012. He was reelected to the board of directors from 1994 to October 2000.of LATAM in April 2014 and has served as Chairman since September 2012. Mr. Awad’sAmaro’s current term as chairman ends onin April 2015. Mr. Amaro has previously held various positions in the date of the annual shareholders’ meeting to be held in 2012. He held the position of Senior Vice President of Fast Air from 1979 to 1993.TAM Group and served as a professional pilot at TAM Linhas Aéreas S.A. and TAM Aviação Executiva S.A. Mr. Awad is the Chairman of the Chilean Association of Banks and Financial Institutions andAmaro has been a member of the CouncilBoard of TAM S.A. since 2004, and vice-chairman of the Television Corporation of the Pontifical Catholic University of Valparaíso. Additionally Mr. Awad serves on the board of directors of Banco de Chile.Board since April 2007. He is also a board memberan executive officer at TAM Empreendimentos e Participações S.A. and chairman of ICARE (Instituto Chileno de Administración Racional de Empresasthe boards of Multiplus S.A. (subsidiary of TAM S.A.), a Chilean organization seeking to promote private enterprise, and Prohumana, a Chilean organization that promotes corporate social responsibility within Chilean corporations.of TAM AviaçãoExecutiva e Taxi Aéreo S.A. As of February 29, 2012,January 31, 2015, according to shareholder registration data in Chile, Mr. AwadAmaro shared in the beneficial ownership of Lan Airlines, through Inversiones y Asesorías Fabiola S.A., of 201,78465,554,075 common shares (0.06% of Lan Airlines’LATAM Airlines Group (12.02% of LATAM Airlines Group’s outstanding shares)., held by TEP Chile S.A. For more information see “Item 7. Controlling Shareholders and Related Party Transactions.”
Mr. Darío Calderón González,Henri Philippe Reichstul 65 years old, has served on Lan Airlines’, joined LATAM’s board of directors since 1994.in April 2014. Mr. Calderón’sReichstul’s term as a director ends onin April 2015. Mr. Reichstul has served as President of Petrobras and the dateIPEA-Institute for Economic and Social Planning and Executive Vice President of Banco Inter American Express S.A. Currently, in addition to Administrative Board member of TAM and LATAM group, he is also a member of the annual shareholders’ meetingBoard of Directors of Repsol YPF, Peugeot Citroen and SEMCO Partners, among others. Mr. Reichstul is an economist with an undergraduate degree from the Faculty of Economics and Administration, University of São Paulo, and postgraduate work degrees in the same discipline - Hertford College - Oxford University.
Mr. Juan José Cueto Plaza, has served on LAN’s board of directors since 1994 and was reelected to be held in 2012. Mr. Calderón has been a partner in Calderón y Cía, a Chilean law firm, since 1970. Mr. Calderón currently serves on the board of directors of other Chilean companies, including Integramédica S.A., Imprenta A Molina Flores S.A., Enjoy S.A., and Datanet S.A. Mr. Calderón is also a board member and chairman of Nutrechile A.G., a non-profit organization organized by all the concessionaries of theJunta de Auxilio Escolar y Becas (Board of Students Aid and Scholarships) of the Chilean Ministry of Education.
Mr. José Cox Donoso, 57 years old, has served on Lan Airlines’ board of directors fromLATAM in April 1994 to June 1995 and from September 1995 to the present. Mr. Cox’s term as a director ends on the date of the annual shareholders’ meeting to be held in 2012. Mr. Cox has also served as chairman of the board of directors of Lan Cargo since September 1995. In addition, Mr. Cox serves on the board of directors of CMB-Prime Administradora de Fondos S.A., Socovesa S.A., Puerto Coronel S.A., Puerto Angamos S.A., Kaufmann S.A., Asesorías e Inversiones Ilihue S.A. and Inversiones Tricahue S.A. As of February 29, 2012, Mr. Cox shared in the beneficial ownership of Lan Airlines, through Asesorías e Inversiones Ilihue Limitada, 2,654,324 common shares of Lan Airlines (0.78% of Lan Airlines’ outstanding shares).
Mr. Juan José Cueto Plaza,51 years old, has served on Lan Airlines’ board of directors since 1994.2014. Mr. Cueto’s term as a director ends on the date of the annual shareholders’ meeting to be held in 2012.April 2015. Mr. Cueto currently serves as Executive Vice President of Inversiones Costa Verde S.A., a position he has held since 1990, and serves on the boards of directors of Consorcio Maderero S.A., Minera Michilla S.A., Inversiones del Buen Retiro S.A., Inmobiliaria e Inversiones Asturias S.A., Inversiones Mineras del Cantábrico S.A., Costa Verde Aeronáutica S.A., Sinergia Inmobiliaria S.A. and Valle Escondido S.A. Mr. Cueto is the son of Mr. Juan Cueto Sierra, a director of Lan Airlines, and the brother of Messrs. Enrique
and Ignacio Cueto Plaza, ChiefLATAM Airlines Group Executive OfficerVice-President and Chief Operating Officer of Lan Airlines,LAN CEO, respectively. Mr. Cueto is a member of the Cueto Group (one of Lan Airlines’(LATAM Airlines Group’s Controlling Shareholders)Shareholder). As of February 29, 2012,January 31, 2015, Mr. Cueto shared in the beneficial ownership of 115,399,502139,089,520 common shares of LanLATAM Airlines (33.90%Group (25.49% of Lan Airlines’LATAM Airlines Group’s outstanding shares) held by the Cueto Group. Mr. Cueto is also a member of the board of directors of Holdco II. For more information see “Item 7. Controlling Shareholders and Related Party Transactions”.Transactions.”
Mr. Juan Cueto Sierra,Ramón Eblen Kadis 82, 70 years old, was one of the founders of Fast Air in 1978 and has served on Lan Airlines’LAN’s board of directors since 1998. Mr. Cueto’s term as a director ends on the date of the annual shareholders’ meetingJune 1994 and was reelected to be held in 2012. Mr. Cueto has wide experience in a range of business activities. Mr. Cueto is the father of Messrs. Juan José, Enrique and Ignacio Cueto Plaza, Director, Chief Executive Officer and Chief Operating Officer of Lan Airlines, respectively. Mr. Cueto currently serves on the board of directors of Costa Verde Aeronáutica S.A.
Mr. Ramón Eblen Kadis, 67 years old, has served on Lan Airlines’ board of directors since June 1994.LATAM in April 2014. Mr. Eblen’s term as a director ends on the date of the annual shareholders’ meeting to be held in 2012.April 2015. Mr. Eblen has served as President of Comercial Los Lagos Ltda., Inversiones Santa Blanca S.A., Inversiones Andes SpA, Granja Marina Tornagaleones S.A. and TJC Chile S.A. Mr. Eblen is a member of the Eblen Group (a major shareholder of Lan Airlines)LATAM Airlines Group). As of February 29, 2012, Mr.January 31, 2015, The Eblen shared inGroup had the beneficial ownership of 31,778,04927,945,199 common shares of LanLATAM Airlines (approximately 9.34%Group (5.12% of Lan Airlines’LATAM Airlines Group’s outstanding shares) held by the Eblenplus a 40% ownership of Costaverde Aeronautica SpA, which owns 20.000.000 common shares of LATAM Airlines Group. For more information see “Item 7. Controlling Shareholders and Related Party Transactions”.Transactions.”
Mr. Bernardo Fontaine Talavera,Georges de Bourguignon 47 years old,, has served on Lan Airlines’LATAM Airlines Group’s board of directors since September 2012. Mr. de Bourguignon’s term as a director ends in April 2005.2015. Mr. Fontaine’s term ends on the date of the annual shareholders’ meeting to be held in 2012.Mr. Fontaine was head of the financial services branch of Falabella,de Bourguignon has been a major Chilean retailer,partner and served as executive director of CMR FalabellaAsset Chile S.A., a Chilean investment bank, since 1994. He is currently member of the board of directors of Asset Chile S.A. and Vice-Chairmanseveral of its affiliates, is also an independent board member of Sal Lobos S.A., Chilean subsidiary of the German group K+S, and Salmones Austral Spa, a Chilean salmon farming company. In the past he has served in several other boards of public and private companies, as well as of boards of non profit organizations. Before co-founding Asset Chile, he was manager of the Financial Institutions Group at Citibank S.A. in Chile, and was a professor of economics at the Catholic University of Chile. He is an economist from Catholic University of Chile and a graduate of Harvard Business School. As of January 31st, 2015, Mr. de Bourguignon indirectly held 3,153 common shares of LATAM Airlines Group (0.0006%) of LATAM Airlines Group outstanding shares).
Mr. Ricardo J. Caballero, joined LATAM’s board of directors in April 2014. Mr. Caballero is the Ford International Professor of Economics and Director of the World Economic Laboratory at the Massachusetts Institute of Technology, an NBER Research Associate, and an advisor of QFR Capital Management LP. Mr. Caballero was the Chairman of MIT’s Economics Department (2008-2011) and has been a visiting scholar and consultant at many major central banks and international financial institutions. His teaching and research fields are macroeconomics, international economics, and finance. His current research looks at global capital markets, speculative episodes and financial bubbles, systemic crises prevention mechanisms, and dynamic restructuring. His policy work focuses on aggregate risk management and insurance arrangements for emerging markets and developed economies. He has also written about aggregate consumption and investment, exchange rates, externalities, growth, price rigidity, dynamic aggregation, networks and complexity. Mr. Caballero has served on the editorial board of several academic journals and has a very extensive list of publications in all major academic journals. Among his major awards, he was the winner of the 2002 Frisch Medal of the Econometric Society for “Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach”, Econometrica, 67(4), July 1999 (joint work with Eduardo Engel); and both the Smith Breeden Prize by the American Finance Association and the Emerald Management Review Citation of Excellence Award for “Collective Risk Management in a Flight to Quality Episode”, Journal of Finance, 63(5), October 2008 (joint work with Arvind Krishnamurthy). In April 1998 Caballero was elected a Fellow of the Econometric Society and subsequently of the American Academy of Arts and Sciences in April 2010.
Carlos Heller Solari, joined the board of LAN in May 2010 and was re-elected to the Board of Banco Falabella.Directors of LATAM in April 2014. The mandate of Mr. FontaineHeller as a director ends in April 2015. The Mr. Heller has vast experience in retail (retail) through SACI Falabella in transport and logistics, agriculture, wine, Horse Riding and communications category. Mr. Heller is president of Bethia SA (“Bethia”) (parent company of Axxion SA and Betlan Two SA), Chairman of Axxion SA, Betlan Two SA, Equestrian Club of Santiago, Sotraser SA and Agricultural Ancali Ltda . also served as head of the M&A Corporate Finance division of Citicorp-Citibank Chile. Mr. Fontaine currently serves on the boards of Deutsche Bank Chile, Metro S.A., Bicecorp S.A., Banco Bice, Bice Vida S.A., Embonor S.A., Aquamont S.A., South-Am S.A., Fundación el Buen Samaritano, Place Vendome S.A. and Loginsa S.A., Fundación El Buen Samaritano and Fundación Convivir. He is also the general manager of Tres Mares S.A., Indigo S.A. and Sarlat S.A., which owned, together, as of February 29, 2012,1,980,408 shares of Lan Airlines S.A. (0.58% of Lan Airlines’ outstanding shares).
Mr. Carlos Heller Solari, 50 years old, joined Lan Airline’s board of directors in May 2010. Mr. Heller’s term as a director ends on the date of the annual shareholders’ meeting to be held in 2012. Mr. Heller has a vast experience in the retail, transports and agriculture sectors. Mr. Heller is Vice President of Bethia S.A. (“Bethia”) (holding company and owner of Axxion S.A. and Axxdos S.A.), Chairman of Axxion S.A., Club Hípico de Santiago, Sotraser S.A. and Agrícola Ancali. He also participates as a board of directors’ member of SACI Falabella S.A., Falabella Retail S.A.,SA, Sodimac S.A. ,SA, Titanium S.A.,SA, Betfam SA Viña Indómita S.A.,SA, Viña Santa Alicia S.A.,SA, Viña Two Andes SA Blue Express S.A.SA and Aero Andina S.A. AdditionallySA In addition he is the majorprincipal shareholder and Vice Presidentpresident of “Azul Azul” (Universidad de Chile’s firstthrough Inversiones Limitada Alpes (first division soccer team administrator)manager football at the University of Chile). As of February 29, 2012,At January 31, 2015, Mr. Heller directlyindirectly held 48,900 common33,367,357 ordinary shares of LanLATAM Airlines (0.01%Group through Axxion SA and Inversiones HS Spa (6.12% of Lan Airlines’ outstanding shares) and indirectly held 27,103,273 commonthe shares of LanLATAM Airlines Group) and 1.017.449.607 shares Naviera SA Group Companies Axxion through Axxion (7.96% of Lan Airlines’ outstanding shares).S.A.
Mr. Gerardo Jofré Miranda, 62 years old, has joined Lan Airlines’LATAM’s Board of directors on May 2010.2010 and was reelected to the board of directors of LATAM in April 2014. Mr. Jofré’s term as a director ends on the date of the annual shareholders’ meeting to be held in 2012.April 2015. Mr. Jofré is Chairman of Codelco and member of the boardsboard of directors of Construmart S.A., Andromeda S.A., Inmobiliaria Playa Amarilla S.A. and Air Life Chile S.A.Codelco. Mr. Jofré is President of Saber Más Foundation and member of the Real Estate Investment Council of Santander Real Estate Funds. From 2005 to 2010 he served as member of the boards of directors of Endesa Chile S.A., Viña San Pedro Tarapacá S.A., D&S S.A., Inmobiliaria Titanium S.A. Construmart S.A., Inmobiliaria Playa Amarilla S.A. and Inmobiliaria Parque del Sendero S.A. and was President of Saber Más Foundation. Mr. Jofré was Director of Insurance for America for Santander Group of Spain between the years 2004 and 2005. From 1989 to 2004 he served on Santander Group in Chile, as Vice Chairman of the Group and as CEO, member of the boards of directors and Chairman of many of the Group’s companies. As of January 31st, 2015, Mr. Jofre held49,923 common shares of LATAM Airlines Group (0.0092% of LATAM Airlines Group’s outstanding shares).
Mr. Francisco Luzón López, has served on LATAM Airlines Group’s board of directors since September 2012 and was reelected to the board of directors of LATAM in April 2014. Mr. Luzón’s term as a director ends in April 2015. He has served as a consultant of the Inter-American Development Bank (BID) and he has been Teacher “Visiting Leader” of the School of Business China-Europe (CEIBS) in Shanghai (2012-2013). He is currently a member of the board of La Haya Real Estate (September 2014) and an Independent Director at Willis Group (June 2013). Between 1999 and 2012, Mr. Luzon served as Executive Vice President for Latin America of Banco Santander. In this period, he was also Worldwide Vice President of Universia SA. Between 1991 and 1996 he was Chairman and CEO of Argentaria Bank Group. Previously, in 1987, he was appointed Director and General Manager of Banco de Vizcaya and in 1988 Counselor and General Director of Banking Group at BBV. During his career Mr. Luzon has held positions on the boards of several companies, most recently participating in the council of the global textile company Inditex-Zara from 1997 until 2012. As of January 31, 2015, Mr. Luzon held 12,200 common shares of LATAM Airlines Group (0.0022% of LATAM Airlines Group’s outstanding shares). Senior Management1
Mr. Enrique Cueto Plaza, 53 years old, is Lan Airlines’LATAM Airlines Group’s Chief Executive Officer and has held this position since 1994.(“CEO”). From 19931994 to 1994,2012, Mr. Cueto served on Lan Airlines’ boardwas the CEO of directors.LAN. From 1983 to 1993, Mr. Cueto was Chief Executive Officer of Fast Air, a Chilean Cargo airline. Mr. Cueto also served on the LAN board of directors from 1993 to 1994. Mr. Cueto has in-depth knowledge of passenger and cargo airline management, both in commercial and operational aspects, gained during his 2324 years in the airline industry. Mr. Cueto is an active member of theoneworldoneworld® Alliance Governing Board, the IATA (International Air Transport Association) Board of Governors. He is also member of the Board of the Federation of Chilean Industry (SOFOFA) and of the Board of the Endeavor foundation, an organization dedicated to the promotion of entrepreneurship in Chile. Mr. Cueto is the son of Mr. Juan Cueto Sierra, a member of the board of Lan Airlines, and the brother of Messrs.Mers. Juan José and Ignacio Cueto Plaza, member of the board and President and Chief Operating Officer of Lan Airlines,LAN CEO, respectively. Mr. Cueto is also a member of the Cueto Group (one of Lan Airlines’(LATAM Airlines Group’s Controlling Shareholders)Shareholder). As of February 29, 2012,January 31, 2015, Mr. Cueto jointly shared in the beneficial ownership of 115,399,502139,089,520 common shares of LanLATAM Airlines (33.90%Group (25.49% of Lan Airlines’LATAM Airlines Group’s outstanding shares) held by the Cueto Group. For more information see “Item 7. Controlling Shareholders and Related Party Transactions”.
Mr. Ignacio Cueto Plaza, 48 years old, is Lan Airlines’ President and Chief Operating Officer. Until being promoted to his current position in 2005,LAN’s CEO. Mr. Cueto served as President of LAN Cargo from 1995 to 1998, as Chief Executive Officer-Passenger Business a position he assumedfrom 1999 to 2005, and as President and Chief Operating Officer of LAN since 2005 until the combination with TAM in 1999.2012. Mr. Cueto has previously served on the board of directors of Lan AirlinesLAN (from 1995 to 1997) and Ladeco from 1995 to 1997 and from(from 1994 to 1997, respectively.1997). In addition, Mr. Cueto served as Chief Executive Officer of Fast Air from 1993 to 1995 and as President of the LAN Cargo Group from 1995 to 1998.1995. Between 1985 and 1993, Mr. Cueto held several positions at Fast Air, including Service Manager for the Miami sales office, Director of Sales for Chile and Vice President of Sales and Marketing. Mr. Cueto is the son of Mr. Juan Cueto Sierra, director of Lan Airlines, and the brother of Messrs. Juan José and Enrique Cueto Plaza, Director and Chief Executive Officer of Lan Airlines,LATAM’s CEO, respectively. Mr. Cueto is also a member of the Cueto Group (one(which is a controlling shareholder of Lan Airlines’ Controlling Shareholders)LATAM). As of February 29, 2012,January 31, 2015, Mr. Cueto shared in the beneficial ownership of 115,399,502139,089,520 common shares of Lan Airlines (33.90%LATAM (25.49% of Lan Airlines’LATAM’s outstanding shares) held by the Cueto Group. For more information see “Item 7. Controlling Shareholders and Related Party Transactions”.Transactions.”
Mr. Alejandro de la Fuente Goic,Marco Bologna,52 years old, is Lan Airlines’ Chief Financial Officer,TAM’s CEO since May, 2010. He is also board member of Suzano Papel e Celulose S/A. He joined TAM in March 2001, when he was appointed Vice President for Finance and Management, and Market Relations Director. From 2004 to 2007 he served as President of TAM Linhas Aéreas, and in March 2009 he took over as President of TAM Aviação Executiva and Táxi Aéreo S.A. Since April 30, 2010 he has chaired the holding company TAM S.A., which brings together TAM Linhas Aéreas, TAM Airlines (formerly TAM Mercosur), Multiplus Fidelidade, and the maintenance unit TAM MRO. In February 2012, he was also appointed President of TAM Linhas Aéreas. Mr. Bologna has extensive experience in the aviation industry, and has held this position since October 1995.worked in the financial markets for over 20 years. Mr. de la Fuente joined Lan Airlines inBologna will cease to be CEO of TAM on April 1995. Prior to joining Lan Airlines, Mr. de la Fuente served as Chief Financial Officer of Chiquita Frupac Ltd.1ST, a subsidiary of Chiquita Brands Inc., beginning in 1992. As of February 29, 2012, Mr. de la Fuente owned 37,383 common shares of Lan Airlines (0.01% of Lan Airlines’ outstanding shares).2015.
Mr. Armando Valdivieso Montes,49 years old, is Lan Airlines’ General Manager-Passenger, a position he assumed in 2006.President of LAN. Between 1997 and 2005 he served as Chief Executive Officer-Cargo Business.Business of LAN and from 2006 until 2012 he served as the General Manager-Passenger. After the combination with TAM in 2012, Mr. Valdivieso served as LATAM’s Spanish Speaking Countries Executive Vice-President, before being named to his current position. From 1994 to 1997, Mr. Valdivieso was President of Fast Air. From 1991 to 1994, Mr. Valdivieso served as Vice President, North America of Fast Air Miami. As of February 29, 2012,January 31, 2015, according to shareholder registration data in Chile, Mr. Valdivieso owned 59,70467,359 common shares of LanLATAM Airlines (0.02%Group (0.012% of Lan Airlines’LATAM Airlines Group’s outstanding shares).
Mr. Cristian Ureta Larrain,Mrs. Claudia Sender Ramirez, 49 years old, is Lanhas served as TAM Airlines’ General Manager-Cargo,President since May 2013. Mrs. Sender joined the company in December 2011, as Commercial and Marketing Vice-President. After June 2012, with the conclusion of TAM-LAN combination and the creation of LATAM Airlines Group, she became the head of Brazil Domestic Business Unit, and her functions were expanded in order to include TAM’s entire Customer Service structure. Mrs. Sender dedicated most of her career in consumer goods industry, focused in Marketing and Strategic Planning. Prior to joining TAM, she was Marketing Vice-President at Whirlpool Latin America for
1 | Mr. Damian Scokinheld the positionof LATAM’s International Unit Business Executive Vice President until September 30, 2014, date in which Mr. Scokin left the company |
seven years. She also worked as a position he assumedconsultant at Bain&Company, developing projects for large companies in 2005. Mr. Uretavarious industries, including TAM Airlines and other players of the global aviation sector. She has ana bachelor degree in Chemical Engineering degree from Pontificia Universidad Católicathe Polytechnic School at the University of São Paulo (USP) and a Special Executive ProgramMBA from Stanford University. Between 2002 and 2005 Mr. Ureta served as Production Vice President for Lan Cargo. Between 1998 and 2002 he was Lan Cargo’s Planning and Development Vice President. Prior to that, Mr. Ureta served as General Director and Commercial Director at MAS Air, and as Service Manager for Fast Air.Harvard Business School.
Mr. Roberto Alvo Milosawlewitsch, 43 years old, is Lan Airlines’LATAM’s Senior Vice-president StrategicVP Planning and Development, a position he assumed in 2008. Prior to holding his current position,Network. Mr. Alvo has served in various roles within LAN since 2001, including as CFO of LanLAN Argentina from 2005 until 2008, as Vice-president of Development of LanLATAM Airlines Group from 2003 until 2005 and Vice-presidentVice-President of Treasury of LanLATAM Airlines Group from 2001 until 2003. He assumed the position of Senior Vice-President Strategic Planning and Development in 2008. Before 2001 Mr. Alvo held various positions at Sociedad Química y Minera de Chile S.A., a leading non-metallic Chilean mining company. Mr. Alvo is a civil engineer and obtained an MBA from IMD in Lausanne, Switzerland.
Mr. Cristian Toro Cañas,Jerome Cadier41 years old,, is Lan Airlines’ Senior Vice President, Legal,Chief Marketing Officer, a position he assumed in January 2008.March 1st, 2013. Mr. ToroCadier has a lawMasters degree from Pontificia Universidad Católicathe Kellogg Graduate School of Business, USA and an Industrial Engineer degree from Escola Politecnica da Universidade de Chile (1993), as wellSao Paulo, Brasil. Between 1994 and 2002, Mr. Cadier worked as a master’s law degree (MCJ 97’) from New York University. Prior to joining Lanmanagement consultant for McKinsey and Co. in Sao Paulo, Brasil. In 2003 he joined Whirlpool Home Appliances where he held several positions among which are head of sales and marketing for Brazil and CEO for Whirlpool Oceania.
Mr. Juan Carlos Mencio is Senior Vice President of Legal Affairs and Compliance for LATAM Airlines Group since June 1, 2014. Mr. Toro servedMencio had previously held the position of General Counsel for North America for LATAM Airlines Group and its related companies, as well as General Counsel for Citibank Chile, whereits worldwide Cargo Operations, both since 1998. Prior to joining LAN, he worked and held various positions from 1997 until 2007. He also worked as an international trainee at Shearman & Sterlingwas in private practice in New York (1999).and Florida representing various international airlines. Mr. Mencio obtained his Bachelor’s Degree in International Finance and Marketing from the School of Business at the University of Miami and his Juris Doctor Degree from Loyola University.
Mr. Enrique Elsaca Hirmas,Andrés Osorio 44, is LATAM’s Chief Financial Officer (“CFO”), and has held this position since August, 2013. He holds a Business degree from the Catholic University of Chile and has over 20 years old, is Lan Airlines’ General Manager-Chile,of experience leading financial areas in companies such as Cencosud, where he was CFO for 7 years, and Metrogas, among others. He has also been CEO of Empresas Indumotora, a position he assumedChilean automobile conglomerate, and was a partner at PricewaterhouseCoopers in 2008. Between 2004 and 2008,Chile. As of January 31, 2015, Mr. Elsaca served as Senior Vice President, Strategic Planning. Mr. Elsaca has a degree in industrial engineering from Pontificia Universidad Católica de Chile, as well as a Master in Business Administration from Massachusetts InstituteOsorio owned 20,000 common shares of Technology. Prior to joining LanLATAM (0.0036% of LATAM Airlines Mr. Elsaca served as Real Estate and Development Manager of Cencosud, Chile’s second largest retail group. From 1997 to 1999, Mr. Elsaca worked at Booz Allen & Hamilton in Latin America, and from 1991 to 1995; Mr. Elsaca held various positions in Esso Chile, a subsidiary of Exxon.Group’s outstanding shares).
Mr. Emilio del Real Sota 46 years old,, is Lan Airlines’ Senior Vice President, Human Resources,LATAM’s HR Executive Vice-President, a position he assumed (with LAN) in August 2005. Mr. del Real has a Psychology degree from Universidad Gabriela Mistral. Between 2003 and 2005, Mr. del Real was the Human Resource Manager of D&S, a Chilean retail company. Between 1997 and 2003 Mr. del Real served in various positions in Unilever, including Human Resource Manager for Chile, and Training and Recruitment Manager and Management Development Manager for Latin America.
Mr. Pablo Querol GrinsteinCristian Ureta Larrain,, 35 years old, is LAN’s SeniorLATAM’s Cargo Executive Vice-President. From 1998 and 2002, Mr. Ureta was LAN Cargo’s Planning and Development Vice-President and in 2002 he was promoted to Production Vice PresidentPresident. In 2005, Mr. Ureta assumed the position of Corporate Affairs, a position he assumed in May 2011, replacing Rene Muga.General Manager-Cargo. Mr. Querol holds a degree in communications from the Universidad de Ciencias Empresariales y Sociales and holds a managementUreta has an Engineering degree from an IAE Business School. Since 2004Pontificia Universidad Católica and a Special Executive Program from Stanford University. Prior to that, Mr. Querol actedUreta served as Corporate AffairsGeneral Director and Commercial Director at Mas Air, and as Service Manager for LAN Argentina, where he servedFast Air.
B. Compensation
In 2014, the Company paid its principal executives (considering the levels of Vice- Presidents, General Managers, Senior Director and Directors as main spokesman to media communications and governmental authorities. Previously, between 1995 and 2004, he was editordefined above) a total of US$ 44,133,566. No incentives for performance during 2014 were paid. As a result, the newspaperLa Nación and consultant to numerous companies related to the tourism and real estate industry. Since 2007, he has been directorCompany paid its principal executives total gross remunerations of the Argentinean Chamber of Tourism and the entity that promotes tourism, Destination Argentina. In addition, he is a permanent member of the Professional Council of Public Relations in Argentina, the Chilean-Argentinean Chamber and founder partner of the Buenos Aires Convention and Visitor Bureau.
B. Compensation
For the year ended December 31, 2011, the aggregate amount of compensation we paid to all executives and senior managers was US$90.6 million, which did not include US$20.1 million paid as bonuses. Our variable compensation plan is based on our corporate profits, and team and individual performance. 44,133,566.
Under Chilean law, LanLATAM Airlines Group must disclose in its annual report details of all compensation paid to its directors during the relevant fiscal year, including any amounts that they received from LanLATAM Airlines Group for functions or employment other than serving as a member of the board of directors, including amounts received as per diem stipends, bonuses and, generally, all other payments. Additionally, pursuant to regulations of the SVS,Superintendencia de Valores y Seguros de Chile (“SVS”), the Chilean securities regulator, the annual report must also include the total compensation and severance payments received by managers and principal executives, and the terms of and the manner in which board members and executive officers participate in any stock option plans.
Lan Airlines’LATAM Airlines Group’s directors are paid 2450 UF per meeting (56(100 UF for the chairman of the board). Lan and 40 UF for assistance to the subcommittee of Directors meetings. LATAM Airlines Group also provides certain benefits to its directors and executive officers, such as free and discounted airline tickets and health insurance. We do not have contracts with any of our directors to provide benefits upon termination of employment.
As set forth in further detail in the following table, in 20112014 the members of our board of directors currently in office received fees and salaries in the aggregate amount of US$184,639.69.372,913.
Board Members | Fees (US$) | |||
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Ricardo J. Caballero | 27,450 | |||
Juan José Cueto Plaza | ||||
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Ramon Eblen Kadis | ||||
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José María Eyzaguirre Baeza | 5,946 | |||
Carlos Heller Solari | ||||
Juan Gerardo Jofre Miranda | ||||
Francisco Luzón López( | 19,585 | |||
Total | ||||
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Fees were converted from Chilean Pesos into US Dollars at a rate of CLP$600 per US Dollar. |
(3) | Includes fees paid to members of the board of directors’ committee, as described below. |
All of the above-mentioned directors were elected to the LATAM board of directors in April 2014.
As required by Chilean law, LanLATAM Airlines Group makes obligatory contributions to the privatized pension fund system on behalf of its senior managers and executives, but it does not maintain any separate program to provide pension, retirement or similar benefits to these or any other employees.
C. Board Practices
Currently our BoardOur board of Directorsdirectors is currently comprised of nine members. The terms of each of our current Directorsdirectors will expire in April 2012.2015. See “—Directors and Senior Management”
Committees
Board of Directors’ Committee and Audit Committee
Pursuant to Chilean Corporation Law, as amended by Law No. 19,705, LanLATAM Airlines Group must have a board of directors’ committee composed of no less than three board members. LanLATAM Airlines Group has established a three-person committee of its board of directors, which, among other duties, is responsible for:
examining the reports of Lan Airlines’LATAM Airlines Group’s external auditors, the balance sheets and other financial statements submitted by Lan Airlines’LATAM Airlines Group’s administrators to the shareholders, and issuing an opinion with respect thereto prior to their presentation to the shareholders for their approval;
proposing external auditors and rating agencies to the board of directors;
evaluating and proposing external auditors and rating agencies;
reviewing internal control reports pertaining to related party transactions;
examining and reporting on all related-party transactions; and
reviewing the pay scale of Lan Airlines’LATAM Airlines Group’s senior management.
Under Chilean lawCorporation Law we are required, to the extent possible, to appoint a majority of independent directors to the Board of Directors Committee. The corresponding independence requirements are set forth in Chilean Corporation Law, as amended by Law No. 19,705, and relate to the relationship between the directors and the shareholders that control a corporation. A director is considered independent when he or she can be elected regardless of the voting of the controlling shareholders. See “Item 16A.16. G. Corporate Governance.”
Pursuant to U.S. regulations, we are required to have an audit committee of at least three board members, which complies with the independence requirements set forth in Rule 10A-3 under the Exchange Act. Given the similarity in the functions that must be performed by our Board of Directors’ Committee and the audit committee, our Board of Directors’ Committee serves as our Audit Committee for purposes of Rule 10A-3 under the Exchange Act.
As of February 29, 2012,March 31, 2015, all of the members of our Board of Directors’ Committee, which also serves as our Audit Committee, were independent under Rule 10A-3 of the Exchange Act. As of February 29, 2012,March 31, 2015, the committee members were Mr. Jorge Awad Mehech, Mr. Gerardo Jofré Miranda, and Mr. Ramón Eblen Kadis.Kadis and Mr. Georges de Bourguignon Arndt. We pay each member of the committee 3267 UFs per meeting.monthly assistance to meetings.
Other LATAM Board Committees
LATAM’s board of directors also has established four other committees to review, discuss and make recommendations to our board of directors. These include a Strategy Committee, a Leadership Committee, a Finance Committee and a Brand, Product and Frequent Flyer Program Committee. The Strategy Committee focuses on the corporate strategy, current strategic issues and the three-year plans and budgets for the main business units and functional areas and high-level competitive strategy reviews. The Leadership Committee focuses on, among other things, group culture, high-level organizational structure, appointment of the LATAM CEO and his or her other reports, corporate compensation philosophy, compensation structures and levels for the LATAM CEO and other key executives, succession or contingency planning for the LATAM CEO and performance assessment of the LATAM CEO. The Finance Committee is responsible for financial policies and strategy, capital structure, monitoring policy compliance, tax optimization strategy and the quality and reliability of financial information. Finally, the Brand and Frequent Flyer Program Committee is responsible for brand strategies and brand building initiatives for the corporate and main business unit brands, the main characteristics of products and services for each of the main business units, frequent flyer program strategy and key program features and regular audit of brand performance.
On June, 2014 LATAM’s board of directors established a Risk Committee to oversee the creation, implementation and management of a risk matrix for the Company
Corporate Governance Practices
On March 31, 2014 LATAM Airlines Group filed the Company’s Corporate Practices Report prepared according to General Rule N° 341 of the Securities and Insurance Commission issued November 29, 2012. The reporting obligation stipulated in this rule is for practices in place as of December 31st of each year and the report must be presented no later than March 31st of the following year.
The report provided each year to the Commission must cover the following subjects:
D. Employees
The following table sets forth the number of employees in various positions at the Company.
Employees | As of December 31, 2011 | |||||||||||||||||||||||
Employees ending the period | As of December 31, | |||||||||||||||||||||||
2011(2) | 2010(1) | 2009 | 2014(1) | 2013 | 2012 | |||||||||||||||||||
Administrative | 4,170 | 3,940 | 3,106 | 10,077 | 9,908 | 8,980 | ||||||||||||||||||
Sales | 2,750 | 2,643 | 2,352 | 5,246 | 5,680 | 4,858 | ||||||||||||||||||
Maintenance | 2,918 | 2,576 | 2,264 | 6,986 | 6,925 | 6,932 | ||||||||||||||||||
Operations | 6,194 | 5,730 | 4,852 | 17,517 | 17,054 | 18,138 | ||||||||||||||||||
Cabin crew | 3,837 | 3,561 | 2,890 | 9,237 | 9,339 | 10,164 | ||||||||||||||||||
Cockpit crew | 1,969 | 1,835 | 1,380 | 4,009 | 4,091 | 4,527 | ||||||||||||||||||
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Total | 21,838 | 20,285 | 16,844 | 53,072 | 52,997 | 53,473 | ||||||||||||||||||
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(1) |
We have a performance-related pay structure for our administrative, management and flight personnel (such as cabin crew members, airport and sales agents, call-center employees, and some back office employees) including performance-based bonuses and pay scales that reward foreign language proficiency among counter, technical and administrative personnel. During 2011, over 92%2013, 93% of our employees were eligible to receive performance related bonus payments that are linked to personal, team and corporate performance. TAM executives participate in the same program described below. For other employees there is a profit sharing program, which is a variable pay program based on the Company’s financial performance.
We provide our employees with medical insurance complementary to the coverage of the private health system, and also grant other benefits, such as free and discounted airline tickets, to our permanent employees.
A stock option compensation plan is offered to key senior executives. For a detailed description of the stock option compensation plan, please see Note 3638 to our audited consolidated financial statements for the fiscal year ended December 31, 2011.2013.
As required by Chilean law, we make obligatory contributions to the privatized pension fund system on behalf of our employees, but we do not maintain any separate program to provide pension, retirement or similar benefits to these or any other employees. However, the pilots’ collective bargaining agreement includes a clause that permits resignation with severance payment, in case a pilot reaches a certain age and is still providing services to the company. In Brazil, TAM offers a private pension plan to its executives and pilots.
Long Term Incentive Compensation Program
On April 5, 2007,December 21, 2011, the extraordinary shareholders meeting approved a capital increase of 22,090,910142,355,882 shares to a total of 341,000,000488,355,791 shares. The same meeting designated 10% of the approved capital increase (2,209,091 shares)4,800,000 shares for purposes of a proposed employee stock option compensation plan. Those 2,209,0914,800,000 shares representrepresented a 0.65%0.98% of the total share capital after such capital increase. The shareholders’ meeting authorized our board of directors to elaborate the compensation plan. For more detailed information, please see Note 36 to our audited consolidated financial statements. This incentive compensation programThe 2011 Compensation Plan is aimed at promoting our interests by encouraging senior management employees to contribute substantially to our success, by motivating them with stock options.
The general features of this stock option plan are:
The | general features of this stock option plan are: |
(a) | The selection of the employees of the Company and its subsidiaries that were included by the Board of Directors in the compensation plan was made after a recommendation by our Executive Committee. A stock option agreement was signed with each selected employee for the number of options in connection to the acquisition of our shares to be allocated to such employee. |
(b) | Until the shares in the option are subscribed, the optionee has no economic or political rights and is not considered in the quorums of shareholders meetings. |
(c) | The options allocated to each employee are vested in parts, on the following two dates: (1) 30% on |
(d) | The period during which the employee must exercise the options will expire |
(e) | The price payable for these shares if the respective options are exercised is |
The selection of the employees that participatedfor participation in the stock option plan was based on, among other criteria that the Board determined at the time of employment with the Company, the position they hold, their importance in earning profits, the responsibility of thetheir position, they hold, the amount of equity managed, the ability to work as a team, and performance, and the potential for development and importance within the Company given their education and experience.
The original termsAs of March, 2015, Stock Option Contracts were issued by the plan were most recently amended on October 25, 2011 when a new expiration date was established.
Training
SomeCompany to 46 employees of our employees, such as the flight operations, maintenance and customer ground operations personnel undergo training when they join the Company and throughout their employment with us. For this training, we invested US$12.5 million in 2009, US$13.5 million in 2010its subsidiaries for a total of 4,202,000 stock options. This stock option plan excludes members of the Cueto group, the LATAM Controlling Shareholder, that serve as senior management of the Company.
The Company’s shareholders approved the issuance of 1,500,000 shares at the Special Shareholders Meeting held June 11, 2013, among other matters. Those shares will be allocated to compensation plans for the employees of the Company and US$ 20.6 million in 2011. We generally recruit our pilots fromits subsidiaries (the “2013 Compensation Plan”).
The general features of theAcademia de Ciencias Aeronáuticas (at 2013 Compensation Plan are:
1. | The options allocated to each employee shall be exercisable entirely on November 15, 2017, provided the employee continues to work for the Company. |
2. | Employees may exercise such options, after they become exercisable on the aforesaid date, either all at once or in parts. They must subscribe and pay for those shares at once, at the time of subscription, in cash, by check, by bank check, by money transfer or by any other instrument or medium representing cash payable on demand. Partial option exercises cannot be for less than 10% of all options granted to the Employee. |
3. | The period in which employees must exercise options after they become exercisable expires June 11, 2018. If employees have not exercised or waived options in that period, they shall be deemed to have waived the options for all purposes and, accordingly, all rights, powers, promises or offers in relation to the subscription of cash shares in the company shall be deemed extinguished, the employee shall be deemed to have irrevocably waived all rights or powers in relation thereto, and the company shall be released from any obligation. |
4. | The price payable per share allocated to the 2013 Compensation Plan is US$16.40, if the respective options are exercised, adjusted by the change in the Consumer Price Index (“CPI”) published monthly by the U.S. Department of Labor, starting the first day of the preemptive option period to the date of subscription and payment of the shares. The subscription price will be paid in Chilean pesos, converted using the Observed Dollar exchange rate published in the Official Gazette on the same date as subscription and payment of shares. |
No options have been granted under theUniversidad Técnica Federico Santa María), aeroclubs and the armed forces. Before being promoted to the position of captain, first officers must have logged at least 4,000 flight hours and received the approval of a special pilots’ committee. We provide ground-school training in Santiago, as well as in Lima and Quito for our Peruvian and Ecuadorian crews. We maintain an agreement with CAE (a Canadian firm specializing in flight simulators and training centers) to develop a pilot training center in Santiago de Chile. This training center includes two Airbus A320 and one Boeing 767 Full Flight simulators plus 1 MFTD A320/340 simulator. Our pilot staff also receives simulator training at sites 2013 Compensation Plan.
Training
There has been no significant change in the United Statesnumber of company employees between 2012 and Brazil.2014. There was also no significant variation between the positions held by such employees.
Our pilots are rated for only one aircraft type by local aeronautical authorities, and they are not cross-qualified between two or more aircraft types. Chilean regulations require pilots to be licensed as commercial pilots for a first officer position and as an airline transport pilot for a captain position, with specific type, function and special ratings for each aircraft to be flown, and to be medically certified as physically fit. Licenses and medical certifications are subject to periodic reevaluation, including flight simulator recurrent training, ground recurrent training, annual emergency procedures training, safety and security training and recent flying experience. Our pilots receive a varietyAs of training, such as lectures, simulations and gaming and computer based training. Cabin crew must have initial and periodic competency fitness training.
Aircraft mechanics and maintenance supervisory personnel must be licensed byDecember 31, 2014, the DGAC and other corresponding authoritiesCompany had 776 temporary employees. Approximately 48% of these temporary employees worked in Chile, 50% in other Latin American countries in which we operate. We train our technicians (Mechanics, Specialists, Inspectors and Maintenance Supervisors) in all programs required by both local authority (DGAC) and international authorities and aviation associations, such as the FAA, the European Aviation Safety Agency (“EASA”), IATA rules and regulations, those required by aircraft manufacturers and the training needs that we identify during our annual reviews. The program of study contains initial and continuing training. Initial training is level III ATA SPEC 104 and lasts forty to fifty days depending on the aircraft types and continuing training lasts up to five to six days.
During 2011, we continued training sales and administrative personnel in areas such as service and sales quality. We also continued delivering learning programs to develop leadership skills and others with different methodologies including e-learning.
Labor Relations
We have negotiated longer-term labor contracts with the labor unions in anticipation of their scheduled expirations, which under Chilean law are limited to a period of four years. In general, the expiration of our labor agreements with the several unions that represent our pilots and other personnel are staggered in a way that we avoid being2% in the positionrest of having to renegotiate contract termsthe world.
As of December 31, 2014, 97% of all company employees with substantially all of our pilots or other personnel at the same time.
Two collectivepermanent contracts are in place between Lan Airlines and its pilots, both through the pilots’ union. Non-unionized pilots (less than 5% of the pilot corps), have the same benefits, through direct extension of the union’scovered by collective agreement. These contracts were negotiated in February 2009 and expire between August 2012 and January 2013. Lan Cargo is also a party to an employment agreement with its pilots that expires in November 2012. Finally, Lan Express has two collective agreements with its pilots, both unionized and non-unionized. Those contracts expire between September and December 2012.agreements.
Lan Airlines and its affiliates have also entered into collective bargaining agreements (CBAs) with many of their employees:
Lan Airlines renewed the CBAs with its maintenance personnel in June 2008 for a period of four years. On March 30, 2011, the collective bargaining agreement with maintenance personnel working for Lan Express, one of LAN’s Chilean subsidiaries, was renewed until March 31, 2015.
LAN’s CBA with the union representing our administrative personnel has been renewed in Februrary 2012, and expires in December 2015, and the CBA with Lan Express administrative personnel expires in April 2013.
The majority of Lan Argentina’s employees belong to industry-wide unions. Currently, labor relations are stable. In 2005, Lan Argentina hired employees from another airline and agreed to maintain their employment conditions and labor stability during a three-year period. The conditions and labor relations that Lan Argentina had to maintain expired on September 2008, a situation that did not generate any conflict for the company. In December 2009, salary agreements were finalized with the five unions in Lan Argentina. These agreements expired on September 2010 and were renewed in September 2011 for one year. In Lan Peru and Lan Ecuador, meanwhile, the employment relationship is smooth and stable. With respect to Lan Ecuador, there is a collective agreement in force since October 2010 with Pilots (non-union), whose duration is 3 years and 6 months. The only union that exists in this country is the Cabin Crew. It still has no legal authority to negotiate collective agreements with the Company. Notwithstanding the foregoing, the Company maintains a relationship with the union continuing to address issues of common interest and welfare. Lan Peru negotiated in 2010 a collective agreement with the union of technical and mechanical, with a duration of 4 years. The next collective bargaining with the union will occur in June 2012.Labor Relations
We believe we generally maintain good relations with our employees and the unions, and expect to continue to enjoy good relations with our employees and the unions in the future. We also believe that we have built a solid base among our employees that will support and facilitate our growth plans. We can provide no assurance, however, that our employee compensation arrangements may not be subject to change or modification after the expiration of the contracts currently in effect, or that we will not be subject to labor-related disruptions due to strikes, stoppages or walk-outs.
Chile
We usually negotiate longer-term labor contracts with the labor unions in anticipation of their scheduled expirations. Under Chilean law longer-term labor contracts are limited to a period of four years. In general, the expiration of our labor agreements with the several unions that represent our pilots and other personnel are staggered in a way that we avoid being in the position of having to renegotiate contract terms with substantially all of our pilots or other personnel at the same time.
In 2014, we renegotiated our collective bargaining agreement with LAN Express’ flight attendants union, which will be effective until 2018.
Ecuador
• | LAN:In Ecuador, three employee associations were formed in 2012: of pilots, other general but composed mostly by maintenance employees and other general but composed mostly by employees of airports/administration. |
Additionally, in 2011 a union previously exclusive to cabin crew became general. These groups maintain relations with the Company, but do not have the right to enter into or negotiate collective bargaining agreements under Ecuadorian law, because less than 50% of our employees eligible for membership are members of each union
In November 2014 the Company’s negotiation of a voluntary agreement with the association of pilots was suspended because the directive did not agree with the offer from the Company.
• | ANDES: In 2013 two unions of ground handling employees were formed in Andes. |
These groups maintain relations with the Company, but do not have the right to enter into or negotiate collective bargaining agreements under Ecuadorian law, because less than 50% of our employees eligible for membership are members of each union.
Argentina
In Argentina, the majority of LAN employees are members of sectorial unions. In December 2014, we entered into five salary agreements with unions representing LAN Argentina employees. Negotiations with the Mechanics’ Union are still ongoing. These negotiations take place annually due to need to make adjustments for inflation
Peru
LAN Peru is negotiating with the union of flight dispatchers, and is expected to conclude negotiations with a collective agreement during the first quarter of 2015. In Peru we have five other unions whose collective agreements are in force until 2016 (pilots), 2017 (cabin crew, aircraft technicians) and 2018 (airport workers).
Brazil
Under Brazilian law, the validity of collective bargaining agreements is limited to two years. TAM’s collective bargaining agreements are valid for one year (for the economic clauses) and for two years (for social clauses). TAM has historically negotiated collective bargaining agreements with nine unions in Brazil— one crew flight union, which represents the functions of flying workers (pilots, copilots and flight attendants), and nine ground staff unions, which are TAM employees who exercise their duties on the ground to support TAM’s operations. In December 2013, TAM renegotiated collective bargaining agreements with nine unions, which included a wage increase of 7% for ground workers (ground handling) earning minimum wage, and an increase of 5.6% for other salaried ground workers and flying workers, and the inflation rate for the period was 5.6%. For the ground staff workers with salaries up to ten thousand dollars, the increase was 5.6% and for employees earning over R$ 10,000 the adjustment was R$ 560.0. During the negotiations there was no stoppage of employees or even strike action.
E. Share Ownership
As of February 29, 2012,January 31, 2015, the members of our Board of Directors and our executive officers as a group own 51.43%48.77% of our shares. See “Item 7. Controlling Shareholders and Related Party Transactions.”
For a description of stock options granted to our Board of Directors and our executive officers, see “—Compensation—Employees—Long Term Incentive Compensation Program”.Program.”
ITEM 7. | CONTROLLING SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
A. Major Shareholders
As of February 29, 2012, theThe Cueto Group controlled the Company. The Cueto Groupis LATAM’s controlling shareholder and it is comprised by Mr. Juan Cueto Sierra, Mr. Juan José Cueto Plaza (one of our directors), Mr. Ignacio Cueto Plaza (the CEO LAN), Mr. Enrique Cueto Plaza (the CEO LATAM) and certain other family members.
Beginning in the first quarter of 2010, the Piñera Group (which was comprised by Mr. Sebastián Piñera Echenique and certain members of his family), which owned 26.3% of the voting common shares as of December 31, 2009, commenced to sell its ownership of the Company after Mr. Sebastián Piñera Echenique was elected as the new president of Chile.
On March 9, 2010, the Cueto Group acquired an 8.6% stake of the Company from the Piñera Group. As a result of this transaction, the shareholders agreement between the two groups was terminated.
In addition, the Piñera Group sold 9.8% of the Company through two auctions in the SSE, which took place on February 25, 2010 and on March 25, 2010, respectively.
Finally, on March 24, 2010, the Piñera Group signed an agreement to sell an additional 8.0% stake in the Company to Bethia S.A.
As a result of the above, the Cueto Group controls the Company. As of February 29, 2012,January 31, 2015, the Cueto Group owned 33.90%25.49% of the votingLATAM Airlines Group’s common shares. This Controlling ShareholderThe Cueto Group is entitled to elect fourthree of the nine members of our board of directors and is in a position to direct the management of the Company. The Cueto Group, which we also refer to as the “LATAM controlling shareholders,” have entered into a shareholder’s agreement with LATAM, TEP Chile and the TAM controlling shareholders. See “—Shareholders’ Agreements.”
Following our combination with TAM, the Amaro Group is also a major shareholder of LATAM Airlines Group. The Amaro Group, which we also refer to as the “TAM controlling shareholders,” are controlling shareholders of TAM, through their 100% ownership of TEP Chile and majority ownership of Holdco I voting shares, which owns 100% of the common shares of TAM. The Amaro Group’s members include our chairman Mauricio Rolim Amaro and our former director Maria Claudia Amaro. As of February 29, 2012,January 31, 2015, the Amaro Group owned 12.02% of LATAM Airlines Group’s common shares. The Amaro Group has entered into a second shareholder group, which includes our director Ramón Eblen Cádiz, owned 9.34%shareholder’s agreement with LATAM and the LATAM controlling shareholders. The terms of this shareholders’ agreement require the LATAM controlling shareholders to vote to elect individuals nominated by TEP Chile as members of our common shares. Alsoboard of directors. See “—Shareholders’ Agreements.”
In addition to these shareholders, there are two other major shareholder groups. As of January 31, 2015, the Bethia Group, which includes our director Carlos Heller Solari, owned 7.96%6.14% of LAN’sour common shares and the Eblen Group, which includes our director Ramón Eblen Cádiz, owned 5.12% of our common shares.
The table below sets forth the beneficial ownershipowners, as of January 31, 2015, of our common shares, as of February 29, 2012, broken down betweenincluding our Controlling Shareholders,controlling shareholders, other major shareholders (beneficial owners of more than 5% of the Company) and minority shareholders.
Beneficial ownership (as of February 29, 2012) | ||||||||
Number of shares of common stock beneficially owned | Percentage of common stock beneficially owned | |||||||
Shareholder | ||||||||
Cueto Group | 115,399,502 | 33.87 | % | |||||
Costa Verde Aeronáutica S.A. | 90.575.407 | 26.58 | % | |||||
Inversiones Mineras del Cantábrico S.A. | 7,079,095 | 2.08 | % | |||||
Inversiones Nueva Costa Verde Aeronautica Limitada | 17.745.000 | 5.21 | % | |||||
Eblen Group | 31,778,049 | 9.33 | % | |||||
Inversiones Andes S.A. | 22.288.695 | 6.54 | % | |||||
Other | 9,489,354 | 2.78 | % | |||||
Bethia Group(1) | 27.103.273 | 7.95 | % | |||||
Axxion S.A. | 13.551.637 | 3.98 | % | |||||
Axxdos S.A. | 13.551.636 | 3.98 | % | |||||
Others | 166,456,825 | 48.85 | % | |||||
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Total | 340,737,649 | 100.00 | % | |||||
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On July 6, 2007, the SVS fined Juan José Cueto Plaza 1,620 UF (approximately US$74,000) in connection with the purchase of Shares that he carried out through Inversiones Mineras del Cantábrico on July 24, 2006. The SVS considered that such purchase had breached an obligation not to acquire Shares until the financial statements of the company became publicly available, in alleged violation of Article 165, paragraph 1 of Law No.18,045 of October 22, 1981. The SVS ruled that, although Mr. Cueto had not used any privileged information, LAN’s financial statements should be considered to be privileged information per se, and thus, created a duty to abstain from trading the securities prior to the disclosure of the financial statements. On July 26, 2007 Juan José Cueto filed an appeal of this fine before the 27° Civil Court of Santiago, which was dismissed on January 8, 2009. The defense of Mr. Cueto filed two legal recourses against the first dismissal, which were rejected by the Court of Appeals of Santiago on March 8, 2010. Against this second dismissal Juan José Cueto filed two additional and separate legal recourses, which as of this date are pending before the Supreme Court of Chile. A final decision is pending.
Shareholder Cueto Group Costa Verde Aeronautica S.A. Inversiones Nueva Costa Verde Aeronautica Ltda. Costa Verde Aeronautica SpA Others Amaro Group TEP Chile S.A. Bethia Group. Axxion S.A. Inversiones HS SpA. Eblen Group. Inversiones Andes S.A. Inversiones PIA SpA. All other minority shareholders Total Beneficial ownership
(as of January 31, 2015) Number of shares
of common stock
beneficially owned Percentage of
common stock
beneficially owned 139,089,520 25.49 % 85,772,914 15.72 % 22,914,277 4.20 % 20,000,000 3.67 % 10,402,326 1.91 % 65,554,075 12.02 % 65,554,075 12.01 % 33,367,363 6.12 % 18,473,333 3.39 % 14,894,024 2.73 % 27.945.199 5.12 % 17,146,529 3.14 % 5,403,804 0.99 % 279.601.943 51.25 % 545.558.101 100.00 %
As of February 29, 2012, investors outside of Chile held 3.02%January 31, 2015, 7.66% of our capital stock was held in the form of ADSs, and 0.52% in the form of BDSs. Chilean pension funds held 15.06%17.63% of our capital stock and other minority investors held 30.78%25.44% in the form of common shares. It is not practicable for us to determine the number of ADSs or common shares beneficially owned in the United States. As of February 29, 2012,January 31, 2015, we had 1,6721,638 record holders of our common shares. It is not practicable for us to determine the portion of shares held in Chile or the number of record holders in Chile.
All of our shareholders have identical voting rights.
Shareholders’ AgreementAgreements
As described above under “Item 4. Information on the Company—History and Development of the Company—Combination of LAN and TAM,” following the combination of LAN and TAM in June 2012, TAM S.A. continues to exist as a subsidiary of Holdco I and a subsidiary of LATAM, and LAN Airlines S.A. has been redesignated as “LATAM Airlines Group S.A.”
Prior to the consummation of the business combination, LATAM Airlines Group and the LATAM controlling shareholders entered into several shareholders’ agreements with TAM, the TAM controlling shareholders (acting through TEP Chile) and other parties have entered into shareholders agreementsHoldco I that establish agreements and restrictions relating to corporate governance in an attempt to balance LAN’sLATAM Airlines Group’s interests, as the owner of substantially all of the economic rights in TAM, and the TAM controlling shareholders, as the continuing controlling shareholders of TAM under Brazilian law, by prohibiting the taking of certain specified material corporate actions and decisions without prior supermajority approval of the shareholders and/or the board of directors of Holdco I or TAM. These shareholders’ agreements also set forth the parties’ agreement regarding the governance and management of the LATAM Airlines Group following the consummation of the business combination of LAN and TAM.
Governance and Management of LATAM Group
We refer to the shareholders’ agreement among the LATAM controlling shareholders and TEP Chile, which sets forth the parties’ agreement concerning the governance, management and operation of the LATAM Group, and voting and transfer of their respective LATAM Airlines Group common shares and TEP Chile’s voting shares of Holdco I, as the “control group shareholders’ agreement.” We refer to the shareholders’ agreement between us and TEP Chile, which sets forth our agreement concerning the governance, management and operation of the LATAM Group as the “LATAM Airlines Group-TEP shareholders’ agreement.” The control group shareholders’ agreement and the LATAM Airlines Group-TEP shareholders’ agreement set forth the parties’ agreement on the governance and management of the LATAM Group following the effective time.
This section describes the key provisions of the control group shareholders’ agreement and the LATAM Airlines Group-TEP shareholders’ agreement. The description of these control group shareholders’ agreement and the LATAM Airlines Group-TEP shareholders’ agreement summarized below and elsewhere in this annual report on Form 20-F are qualified in their entirety by reference to the full text of the aforementioned shareholders’ agreements, which have been filed as exhibits to this annual report on Form 20-F.
Composition of the LATAM Airlines Group Board
Mr. Maurício Rolim Amaro was reelected to the LATAM Airlines Group board of directors in April 2014. If Mr. Amaro vacates this position for any reason within that two-year period, TEP Chile has the right to select a replacement to complete his term. Thereafter, LATAM Airlines Group’s board of directors will appoint any of its members as the chairman of LATAM Airlines Group’s board of directors, from time to time, in accordance with LATAM Airlines Group’s by-laws. Mrs. Maria Cláudia Oliveira Amaro was elected to the LATAM Airlines Group board of directors in June 2012, and resigned this position in September 2014. Also in September 2014, accordingly with Chilean law, Mr. Henri Philippe Reichstul was appointed by the board to fill her seat until the next general shareholders meeting. Mr. Reichstul will serve in this position until the next ordinary meeting of shareholders, in which the board of directors will have to be renewed and reelected in full.
Management of the LATAM Group
Mr. Enrique Cueto Plaza has served as CEO of LATAM (“CEO LATAM”) since June 2012. The CEO LATAM is the highest ranked officer of the LATAM Airlines Group and reports directly to the LATAM board of directors. The CEO LATAM is charged with the general supervision, direction and control of the business of the LATAM Airlines Group and certain other responsibilities set forth in the LATAM Airlines Group-TEP shareholders’ agreement. After any departure of the current CEO LATAM, our board of directors will select his or her successor after receiving the recommendation of the Leadership Committee.
Mr. Ignacio Cueto Plaza has served as CEO of LAN (“CEO LAN”) since June 2012. The CEO LAN reports directly to the CEO LATAM and has general supervision, direction and control of the passenger and cargo operations of the LATAM Group, excluding those conducted by Holdco I, TAM and its subsidiaries, and the international passenger business of the LATAM Group. The CEO LAN, together with Mr. Marco Antonia Bologna, the current the CEO of TAM (“CEO TAM”), are responsible for recommending a candidate to the CEO LATAM to serve as the head of the international passenger business of the LATAM Group (including both long haul and regional operations), who shall report jointly to the CEO LAN and the CEO TAM. The key executives of the LATAM Group (other than the CEO LATAM and those in the TAM Group) will be appointed by, and will report, directly or indirectly, to the CEO LATAM.
The head office of the LATAM Airlines Group continues to be located in Santiago, Chile.
Governance and Management of Holdco I and TAM
We refer to the shareholders’ agreement between us, Holdco I and TEP Chile, which sets forth our agreement concerning the governance, management and operation of Holdco I, and voting and transfer of voting shares of Holdco I, as the “Holdco I shareholders’ agreement” and to the shareholders’ agreement between us, Holdco I, TAM and TEP Chile, which sets forth our agreement concerning the governance, management and operation of TAM and its subsidiaries following the effective time as the “TAM shareholders’ agreement.” The Holdco I shareholders’ agreement and the TAM shareholders’ agreement set forth the parties’ agreement on the governance and management of Holdco I, TAM and its subsidiaries (collectively, the “TAM Group”) following the business combination of LAN and TAM.
This section describes the key provisions of the Holdco I shareholders’ agreement and the TAM shareholders’ agreement. The description of these Holdco I shareholders’ agreement and the TAM shareholders’ agreement summarized below and elsewhere in this annual report on Form 20-F are qualified in their entirety by reference to the full text of the aforementioned shareholders’ agreements, which have been filed as exhibits to this annual report on Form 20-F.
Composition of the Holdco I and TAM Boards
The Holdco I shareholders’ agreement and TAM shareholders’ agreement generally provide for identical boards of directors and the same chief executive officer at Holdco I and TAM, with LATAM appointing two directors and TEP Chile appointing four directors (including the chairman of the board of directors). On April 30, 2014 Mr. Marco Antonio Bologna was named President of the Board of Directors of TAM S.A. replacing Mrs. Maria Cláudia Oliveira Amaro and on September 8th, 2014 Mrs. Maria Cláudia Oliveira Amaro resigned to her position as director of Holdco I. In her place, the board of directors appointed Mr. Henri Philippe Reichstul as a member of the board until the next general ordinary meeting of shareholders. A full renovation of the Board of Directors will take place no later than April 2015.
The control group shareholders’ agreement provides that the persons elected by or on behalf of the LATAM controlling shareholders or the TAM controlling shareholders to our board of directors must also serve on the boards of directors of both Holdco I and TAM.
Management of Holdco I and TAM
The day-to-day business and affairs of Holdco I will be managed by the TAM Group CEO under the oversight of the board of directors of Holdco I. The day-to-day business and affairs of TAM will be managed by theTAM Diretoria under the oversight of the board of directors of TAM. The TAM Diretoria will be comprised of the TAM Group CEO, the TAM CFO, the TAM COO and the TAM CCO. Marco Bologna, currently the CEO of TAM, will be the initial CEO of Holdco I and TAM, or the “TAM Group CEO” and any successor CEO will be selected by LATAM from three candidates proposed by TEP Chile. The TAM Group CEO will have general supervision, direction and control of the business and operations of the TAM Group (other than the international passenger business of the LATAM Group) and will carry out all orders and resolutions of the board of directors of TAM. The initial chief financial officer of TAM, or the “TAM CFO,” has been jointly selected by LATAM and TEP Chile and any successor CFO will be selected by TEP Chile from three candidates proposed by LATAM The chief operating officer of TAM, or the “TAM COO,” and chief commercial officer of TAM, or the “TAM CCO,” will be jointly selected and recommended to the TAM board of directors by the TAM Group CEO and TAM CFO and approved by the TAM board of directors. These shareholders’ agreements also regulate the composition of the boards of directors of subsidiaries of TAM.
Following the combination, TAM continues to be headquartered in São Paulo, Brazil.
Supermajority Actions requiring
Certain actions by Holdco I or TAM require supermajority approval by the board of directors or the shareholders of Holdco I or TAM which effectively require the approval of both LATAM and TEP Chile before the specified actions can be taken. Actions that require supermajority approval of the Holdco I board of directors or the TAM board of directors include, among others, enteringas applicable:
Actions requiring supermajority shareholder approval include:
Voting Agreements, Transfers and Other Arrangements
Voting Agreements
The LATAM controlling shareholders and TEP Chile have agreed in the control group shareholders agreement to vote their respective LATAM Airlines Group common shares as follows:
The number of “exempted shares” of TEP Chile means that number of LATAM Airlines Group common shares which TEP Chile owns immediately after the effective time in excess of 12.5% of the outstanding LATAM Airlines Group common shares at such time as determined on a fully diluted basis.
The parties to the Holdco I shareholders agreement and TAM shareholders agreement have agreed to vote their voting shares of Holdco I and shares of TAM so as to give effect to the agreements with respect to representation on the TAM board of directors discussed above.
Transfer Restrictions
Pursuant to the control group shareholders’ agreement, the LATAM Airlines Group controlling shareholders and TEP Chile are subject to certain restrictions on sales, transfers and pledges of the LATAM Airlines Group common shares and (in the case of TEP Chile only) the voting shares of Holdco I beneficially owned by them. Except for a limited amount of LATAM Airlines Group common shares, neither the LATAM Airlines Group controlling shareholders nor TEP Chile may sell any of its LATAM Airlines Group common shares, and TEP Chile may not sell its voting shares of Holdco I, until June 2015. Thereafter, sales of LATAM Airlines Group common shares by either party are permitted, subject to (i) certain limitations on the volume and frequency of such sales and (ii) in the case of TEP Chile only, TEP Chile satisfying certain minimum ownership requirements. After June 2022, TEP Chile may sell all of its LATAM Airlines Group common shares and voting shares of Holdco I as a block, subject to (x) approval of the transferee by the LATAM board of directors, (y) the condition that the sale not have an adverse effect and (z) a right of first offer in favor of the LATAM Airlines Group controlling shareholders, which we refer to collectively as “block sale provisions.” An “adverse effect” is defined in the control group shareholders agreement to mean a material adverse effect on our and Holdco I’s ability to own or receive the full benefits of ownership of TAM and its subsidiaries or the ability of TAM and its subsidiaries to operate their airline businesses worldwide. The LATAM Airlines Group controlling shareholders have agreed to transfer any voting shares of Holdco I acquired pursuant to such right of first offer to LATAM for the same consideration paid for such shares.
In addition, TEP Chile may sell all LATAM Airlines Group common shares and voting shares of Holdco I beneficially owned by it as a block, subject to satisfaction of the block sale provisions, after June 2015 if a release event (as described below) occurs or if TEP Chile is required to make two or more directed votes during any 24-month period at two meetings (consecutive or not) of the shareholders of LATAM Airlines Group held at least 12 months apart and LATAM Airlines Group has not yet fully exercised its conversion option described below. A “release event” will occur if (i) a capital increase of LATAM Airlines Group occurs, (ii) TEP Chile does not fully exercise the preemptive rights granted to it under applicable law in Chile with respect to such capital increase in respect of all of its restricted LATAM Airlines Group common shares, and (iii) after such capital increase is completed, the individual designated by TEP Chile for election to the board of directors of LATAM Airlines Group with the assistance of the LATAM Airlines Group controlling shareholders is not elected to the board of directors of LATAM Airlines Group.
In addition, after June 2022 and after the occurrence of the full ownership trigger date (as described below under the “—Conversion Option” section), TEP Chile may sell all or any portion of its LATAM Airlines Group common shares, subject to (x) a right of first offer in favor of the LATAM Airlines Group controlling shareholders and (y) the restrictions on sales of LATAM Airlines Group common shares more than once in a 12-month period.
The control group shareholders agreement provides certain exceptions to these restrictions on transfer for certain pledges of LATAM Airlines Group common shares made by the parties and for transfers to affiliates, in each case under certain limited circumstances.
In addition, TEP Chile agreed in the Holdco I shareholders agreement not to vote its voting shares of Holdco I, or to take any other action, in support of any transfer by Holdco I of any equity securities or convertible securities issued by it or by any of TAM or its subsidiaries without our prior written consent.
Restriction on transfer of TAM shares
LATAM agreed in the Holdco I shareholders’ agreement not to sell or transfer any shares of TAM stock to any person (other than our affiliates) at any time when TEP Chile owns any voting shares of Holdco I. However, LATAM will have the right to effect such a sale or transfer if, at the same time as such sale or transfer, LATAM (or its assignee) acquires all the voting shares of Holdco I beneficially owned by TEP Chile for an amount equal to TEP Chile’s then current tax basis in such shares and any costs TEP Chile is required to incur to effect such sale or transfer. TEP Chile has irrevocably granted us the assignable right to purchase all of the voting shares of Holdco I beneficially owned by TEP Chile in connection with any such sale.
Conversion Option
Pursuant to the control group shareholders’ agreement and the Holdco I shareholders’ agreement, we have the unilateral right to convert our shares of non-voting stock of Holdco I into shares of voting stock of Holdco I to the maximum extent allowed under law and to increase our representation on the TAM and Holdco I boards of directors if and when permitted in accordance with foreign ownership control laws in Brazil and other applicable laws if the conversion would not have an adverse effect (as defined above under the “—Transfer Restrictions” section).
On or after June 2022, and after we have fully converted all of our shares of non-voting stock of Holdco I into shares of voting stock of Holdco I as permitted by Brazilian law and other applicable laws, we will have the right to purchase all of the voting shares of Holdco I held by the controlling shareholders of TAM for an amount equal to their then current tax basis in such shares and any costs incurred by them to effect such sale, which amount we refer to as the “sale consideration.” If we do not timely exercise our right to purchase these shares or if, after June 2022, we have the right under applicable law in Brazil and other applicable law to fully convert all the shares of non-voting stock of Holdco I beneficially owned by us into shares of voting stock of Holdco I and such conversion would not have an adverse effect but we have not fully exercised such right within a specified period, then the controlling shareholders of TAM will have the right to put their shares of voting stock of Holdco I to us for an amount equal to the sale consideration.
Acquisitions of TAM Stock
The parties have agreed that all acquisitions of TAM common shares by LATAM Airlines Group, Holdco I, TAM or TAM’sany of their respective subsidiaries or any dissolution/liquidation, corporate reorganization, payment of dividends, issuance of securities, disposal or encumbrance of certain assets, creation of securities interest or entering into guaranteesfrom and agreements with related parties. Please see “Item 4.—Informationafter the effective time of the Company—The Transaction Agreements—Shareholders Agreements” for more information.business combination will be made by Holdco I.
B. Related Party Transactions
General
We have engaged in a variety of transactions with our affiliates, including entities owned or controlled by certain of our controlling shareholders. In the ordinary course of our business we render to and receive from related companies services of various types, including aircraft leases, aircraft interchanges, freight transportation and reservation services.
It is our policy not to engage in any transaction with or for the benefit of any shareholder or member of the board of directors, or any entity controlled by such a person or in which such a person has a substantial economic interest, unless the transaction is related to our business and the price and other terms are at least as favorable to us as those that could be obtained on an arm’s-length basis from a third party, suchparty. Such transactions, none of which is individually material, are summarized in Note 35 to our audited consolidated financial statements for the fiscal year ended December 31, 2011.
Sale of Blue Express
On January 25, 2011 Lan Cargo S.A. and Inversiones Lan S.A., subsidiaries of LAN Airlines, signed a promise to sell in favor of Bethia S.A. (“Bethia”) 100% of the capital in the LAN subsidiaries Blue Express Intl. Servicios de Transporte Limitada and Blue Express S.A. (together referred to as “Blue Express”), companies engaged in ground courier services, operating brands and certain computer programs. The price stated in the promissory contract was US$54 million subject to any adjustments that might arise as a result of a due diligence to be conducted by Bethia.
On April 6, 2011, LAN Cargo S.A. and Inversiones LAN S.A, as sellers, and Servicios de Transporte Limitada and Inversiones Betmin SpA (subsidiary of Bethia S.A.), as buyer, executed: (i) an Assignment of Social Rights; and (ii) a Share Purchase Agreement for the transfer of 100% of the capital in the LAN subsidiaries Blue Express Intl. Servicios de Transporte Limitada and Blue Express S.A., respectively. The final sale value of Blue Express was US$53.5 million.
Bethia S.A. is a related party to LAN in the terms of article 100 (c) of the Securities Market Law 18,045, as it is controlled by Mr. Carlos Heller, member of LAN’s Board of Directors.2014.
ITEM 8. | FINANCIAL INFORMATION |
A. Consolidated Financial Statements and Other Financial Information
See “Item 3. Key Information—Selected Financial Data”,Data,” “Item 18. Financial Statements” and pages F-1 through F-129].F-194.
Legal and Arbitration Proceedings
We are involved in routine litigation and other proceedings relating to the ordinary course of our business.
In February 2006 the EC, in conjunction withEuropean Commission (“EC”), the DOJ,Department of Justice of the United States (“DOJ”), the Canadian Competition Bureau (“CCB”), and Conselho Administrativo de Defesa Econômica (CADE), among others, initiated a global investigation of a large number of international cargo airlines (among them Lan Cargo, LAN’s cargo subsidiary)LAN Cargo) for possible price fixing of cargo fuel surcharges and other fees in the European and United States air cargo markets. On December 26, 2007, the European competition authorities notified LanAs previously announced, LAN Cargo and LAN of the initiation of proceedings against twenty-five cargo airlines, among them Lan Cargo, for allegations of anti-competitive behavior in the airfreight business.
On January 21, 2009, Lan Cargo announced that it had reached a plea agreement with the DOJ in relation to the DOJ’s ongoing investigation regarding price fixing of fuel surcharges and other fees for cargo shipments. Under the plea agreement, Lan Cargo agreed to pay a fine of US$88 million. In addition, ABSA also reached a plea agreementagreements with the DOJ and agreedthe CCB, which included the payment of fines, in relation to pay a fine of US$21 million. These amounts were stipulated to be paid over a five-year payment schedule starting in 2009. As of December 31, 2011, the pending amount to be paid during the next three years is approximately US$54 million and has been recorded within “Other Accounts Payable.”such investigation.
On November 9, 2010, the EC imposed fines toon 11 air carriers for a total amount of €800 million (equivalent to approximately US$1.1 billion). The fine imposed against LanLAN Cargo and its parent company, LAN, Airlines, totaled €8.2 million (equivalent to approximately US$11.010.9 million). The CompanyLAN provisioned US$25 million during the fourth quarter of 2007 for such fines, and maintained this provision until the fine was imposed in 2010. In 2010, LAN recorded a US$14.1 million gain (pre-tax) from the reversal of a portion of this provision. This was the lowest fine applied by the European Commission,EC, which includes a significant reduction due to the Company’sLAN’s cooperation with the Commission during the course of the investigation. In accordance with European Union law, on January 24, 2011 this administrative decision was appealed by LanLAN Cargo and Lan AirlinesLAN to the General Court in Luxembourg. The appeal is still ongoing. Any judgment by the General Court may also be appealed to the Court of Justice of the European Union.
As On September 3, 2013, CADE published its decision to impose a fine of December 31, 2010 the Company recorded a US$14.151.020 million gain (pre-tax) due to the reversal of a portion of the provision related to theagainst ABSA, after an investigation commenced in the cargo business carried out by the European Commission. This was as a result of the fine announced in November 2010, which was lower than the amount provided for. This reversal is recorded in Other gains/(losses).
The investigation by the DOJ prompted the filing of numerous civil class actions by freight forwarding and shipping companies against many airlines, including Lan Cargo and Lan Airlines, including fifty-four in the United States. The cases filed in the United States were consolidated in the United States District Court, Eastern District of New York and the original complaint was subsequently amended to include additional airlines, including ABSA. On May 11, 2011, Lan Cargo announced that it had reached a settlement agreement with the class action plaintiffs in
relation to this litigation. As per the settlement agreement, Lan Cargo agreed to pay US$59.7 million. In addition, ABSA also reached a settlement agreement with class action plaintiffs and agreed to pay US$6.3 million. The amounts were paid to the plaintiffs’ counsel escrow account in 2011.
In February 2006, the CCB, in conjunction with the DOJ, initiated a global investigation of a large number of international cargo airlines (among them Lan Cargo) for possible price fixing of cargo fuel surcharges and other fees in the Canadian air cargo markets. Given the current stage of the proceeding, it is not possible at this time to anticipate with any precision the outcome of the investigation. The CCB’s investigation prompted the filing of four separate civil class actions by freight forwarding and shipping companies against many airlines, including Lan Cargo and Lan Airlines in Canada. On January 31, 2012, the respective Board of Directors of Lan Airlines and Lan Cargo approved a settlement agreement with the class actions plaintiffs. As per the settlement agreement, Lan Airlines and Lan Cargo agreed to pay the amount of CAD$700,000 (approximately US$701,192 as of March 28, 2012). The settlement agreement and payment are pending court approval.
On April 5, 2008, Brazilian authorities notified ABSA of the initiation of administrative proceedings before theConselho Administrativo de Defesa Econômica (the Brazilian Antitrust Authority) against several cargo airlines and airlineairlines officers among them ABSA, forover allegations of anticompetitive practices regarding fuel surcharges in the air cargo business. GivenCADE also imposed fines upon a former Director and two former employees in the current stageamounts of US$1.020 million and US$510,000.00 respectively. On December 5, 2013 ABSA filed its application for Administrative Reconsideration before CADE. On December 19, 2014, CADE issued a new decision which reduced the proceedings, itfine against ABSA to US$ 12,580,835 (based on an exchange rate of US$ 1 = R$ 2.6). CADE also reduced the fines against ABSA’s Director and employees to US$ 251,616 and US$ 125,800, respectively. ABSA is not possibleevaluating its option of a formal judicial appeal proceeding. Because ABSA continues to evaluate this judicial process, we cannot predict the ultimate outcome of this matter at this time to anticipate with any precisiontime.
The investigations by the outcomeDOJ, CCB and the EC prompted the filing of the civil actions filedand claims by freight forwarding and shipping companies against Lanmany airlines, including LAN Cargo although it is expected to beand LATAM Airlines Group. As previously announced, LAN Cargo and ABSA reached a lengthy process.
In June 2008, the Korean Fair Trade Commission notified LAN of an investigation into the air cargo industry and its non-compliancesettlement agreement with the Monopoly Regulation and Fair Trade Act and has requested information and documentation from LAN, which LAN duly submitted. On May 26, 2010 the Korean Fair Trade Commission announced the imposition of penalties against 29 other airlines and excluded LAN from further investigation.
The New Zealand Commerce Commission also initiated an investigation into potential anti-competitive activities in the international air cargo markets and requested information and documentation from LAN, which LAN duly submitted. On December 15, 2008, the New Zealand Commerce Commission announced it would focus its investigation on ten airlines and excluded LAN from further investigation.
In January 2007, we announced that we had provided, through our wholly owned subsidiary, Atlantic Aviation Investments LLC (“AAI”), a total of US$17.1 million in financing to Brazilian company VRG LINHAS AEREAS S.A. (“New Varig”), convertible into shares of New Varig. On March 28, 2007, GOL announced that it was acquiring 100% of the equity participation in New Varig. Pursuant to the terms of the relevant loan agreements, upon the sale of New Varig to GOL, we sought repayment of the principal of the loans plus interest from Varig Logística S.A. (“VarigLog”), the parent company of New Varig. VarigLog failed to respond to our demands for repayment and we subsequently filed a lawsuit in New York State court on August 29, 2007, seeking repayment of the outstanding principal plus interest. On October 10, 2008, the Court granted summary judgment in our favor for the full principal amount of the loans, US$17.1 million and entered a final judgment on December 1, 2008. The Court also held that AAI was entitled to collect the interest due under the loan agreement along with reasonable attorneys’ fees. After a hearing, a special referee appointed by the Court to decide the issue recommended that AAI recover US$1.9 million in accrued interest and attorneys’ fees, and the Court approved that recommendation. VarigLog appealed that decision, and the decision was upheld. On March 3, 2009, VarigLog filed an insolvency proceeding (recuperação judicial) before the bankruptcy court in Brazil, and on March 31, 2009, VarigLog filed a Chapter 15 petition in bankruptcy court in Florida seeking recognition of its Brazilian filing. The Florida court has entered an order, based upon AAI’s stipulation with VarigLog pursuant to which there would be no stay against the continuation and commencement of legal actions by AAI against VarigLog and any of its affiliates but AAI would not be able to take anyclass action against two discrete VarigLog assets locatedplaintiffs / non-class action claimants in the United States and in Canada.
Civil actions have also been initiated against many airlines, including LAN Cargo and LATAM Airlines Group, in various European countries (Great Britain, Norway, Holland and Germany). The activity and progress of said civil actions is limited, in that they are directly contingent upon the pending appeal before the General Court in Luxembourg. Given the pending decision of the General Court and a potential subsequent appeal to the Court of Justice of the European Union, we cannot predict the ultimate outcome of these cases at this time.
Authorities in Chile and the United States continue to investigate payments by LATAM Airlines Group S.A. (formerly LAN Airlines S.A.) in 2006-2007, to a consultant who assisted in the resolution of labor issues in Argentina. In connection with the above, the Company has hired lawyers in Chile and the United States, and in June 2011 voluntarily reported this situation to the Securities and Exchange Commission and the Justice Department of the United States. AAIThe Company continues to cooperate with the Chilean and U.S. investigations, including the review by the U.S. authorities of any potential violations of applicable U.S. laws and regulations. Presently the Company cannot predict the results in the matter, nor estimate or range the potential losses or risks that may eventually result from the way in which these investigations are finally resolved.
Legal proceedings involving TAM
TAM Linhas Aéreas is party to one action filed by relatives of victims of an accident that occurred in October 1996 involving one of its enforcement effortsFokker 100 aircraft which crashed during departure, in addition to recover22 actions filed by residents of the amounts owedregion of where the accident occurred, who are claiming pain and suffering, and a class action related to itthis crash. Any damages resulting from the aforementioned legal claims are covered by VarigLog under the loan agreements.
In July 2009,civil liability guarantee provided for in TAM’s insurance policy with ItaúUnibancoSeguros S.A. We believe that the cap of US $400 million in that insurance policy is sufficient to cover any potential penalties and judicial or extrajudicial agreements arising as a result of VarigLog’s continued failure to repay the amount owed to AAI, we instituted a second lawsuit in New York State court against MatlinPatterson Global Advisers LLC, MatlinPatterson Global Opportunities Partners II LP, MatlinPatterson Global Opportunities (Cayman) II LP and Volo Logistics LLC (collectively, the “MP Entities”), seeking to hold them liable as thealter egos of VarigLog and asserting separate contract-based claims related to AAI’s loans to VarigLog. If AAI succeeds in itsalter ego claim, the MP Entities would be liable for VarigLog’s debts, and obligated to repay what VarigLogthis matter.
Insurance coverage has been adjudgedsufficient to owe AAIcover the liabilities arising from an accident that occurred in July 2007 involving an Airbus A320 aircraft from TAM Linhas Aereas. Settlements have been made directly between the insurance company and the victims’ families. As of December 31, 2013, approximately 196 settlements have occurred and others are under negotiation between the insurance company and victims’ families. Management believes that the insurance coverage is adequate and that TAM will not incur any expenses that were not contemplated by the
prior decisions scope of the New York courts. The Court deniedinsurance policy that would result in large part the MP Entities motionTAM’s obligation to dismiss AAI’s complaint on April 23, 2010. Thereafter, the MP Entities answered AAI’s complaint andpay damages.
TAM Linhas Aereas filed counter-claims against AAI and its direct and indirect parents, LAN Pax Group S.A. (“LAX Pax”) and LAN Airlines S.A. (“LAN Airlines”), seeking declaratoryan ordinary action with a request for injunctive relief and damages for breach of contract and tortious interference with contract. AAI and LAN Airlines moved to dismiss allnon-payment of the counterclaims. AAI also moved for summaryAirline Workers Fund, a tax charged monthly at the rate of 2.5% of an airline’s total payroll. Payment of the tax credit is suspended by virtue of the injunctive relief granted in TAM’s favor. Currently, judgment is pending on one of its breach of contract claims in September 2010. In May 2011,an appeal that TAM lodged challenging the Court granted summary judgmentinitial decision (which was ruled in favor of AAIthe INSS). In 2004 and 2011, the INSS issued an assessment notice tolling the Statute of Limitations of the social security credit as toa result of TAM Linhas Aereas’ non-payment of the MP Entities’ liability for breachAirline Workers Fund. The administrative proceedings have been suspended until completion of contract.the judicial process. The approximate adjusted value of this proceeding as of December 31, 2012 was R$ 271 million. In the same decision,opinion of our legal advisors, the Court dismissedchance of losing in this proceeding is possible. Assuming payment of this tax is required by law, we have established a provision in the majorityamount of R$271 million pending the final outcome of the MP Entities’ counterclaims.matter.
TAM Linhas Aereas is a plaintiff in an action filed against the Brazilian government in 1993 seeking damages for the break-up of an air transport concession agreement that resulted in the freezing of TAM’s prices from 1988 to September 1993 in order to maintain operations with the prices set by the Brazilian government during that period. The MP Entities have separately appealed bothprocess is currently being heard before the Court’s decision granting AAI summaryFederal Regional Court and judgment and the decision to dismiss the majorityis pending an appeal by TAM requesting clarification of the MP Entities’ counterclaims. In February 2012,initial decision. The estimated value of the Appellateaction is R$245 million, based on a calculation made by an expert witness of the court. This sum is subject to delinquent interest since September 1993 and inflation adjustment since November 1994. Based on the opinion of TAM’s legal advisors, and recent rulings handed down by the Brazilian Supreme Court unanimously affirmed the lower Court’s grant of summary judgmentJustice in favor of AAIairlines in similar cases (specifically, actions filed by Transbrasil and Varig), we believe that TAM’s likelihood of success is probable. We have not recognized these credits in our financial statements and will only do so if and when the aforementioned decision is final.
TAM Linhas Aereas filed an ordinary claim, with a request for early judgment, in relation to a dispute concerning the legality of charging theAdicional das Tarifas Aeroportuárias (“Additional Airport Tariffs,” or “ATAERO”), which are charged at a rate of 50% on the issuevalue of liability.tariffs and airport tariffs. The MP Entities are seeking permissiontotal amount involved, adjusted for inflation, as of December 31, 2012 totaled R$1,146 million.
In addition, one administrative proceeding had been filed against TAM Linhas Aéreas concerning the alleged failure to pay an Industrialized Products Tax (“IPI”) and Import Tax (“II”) due on imported aircraft. In response, we filed the appropriate challenges on the basis that no federal tax should be payable on the imported aircraft because it is leased aircraft. The total amount involved in this administrative proceeding is R$770 million. In April 2013, the Conselho Administrativo de Recursos Fiscais (“CARF”) ruled the case in our favor and definitively released TAM from paying the Court to further appeal that decision. If the Appellate Court's affirmance of the lower Court's grant of summary judgment is undisturbed, AAI will resume proceedings before the lower Court to fix the amount of damages the MP Entities owe AAI.initial debt.
Dividend Policy
In accordance with the Chilean Corporation Law, Lan AirlinesLATAM must distribute cash dividends equal to at least 30% of its annual consolidated net income calculated in accordance with IFRS unless otherwise decided by a unanimous vote of the holders of all issued shares and unless and exceptsubject to the extent it has accumulated losses.terms ofOficio Circular No. 856 issued on October 17, 2014 by the Chilean Superintendency of Securities and Insurance. If there is no net income in a given year, Lan AirlinesLATAM can elect but is not legally obligated to distribute dividends out of retained earnings. The board of directors may declare interim dividends out of profits earned during such interim period. Pursuant to Lan Airlines’LATAM’s by-laws, the annual cash dividend is approved by the shareholders at the annual ordinary shareholders’ meeting held between February 1 and April 30 of the year following the year with respect to which the dividend is proposed. All outstanding common shares are entitled to share equally in all dividends declared by Lan Airlines,LATAM, unless the shares have not been fully paid by the shareholder after being subscribed.
Holders of ADSs will be entitled to receive dividends on the underlying common shares to the same extent as holders of common shares. Holders of ADRs on the applicable record dates will be entitled to receive dividends paid on the common shares represented by the ADSs evidenced by such ADRs. Dividends payable to holders of ADSs will be paid by us to the depositary in Chilean pesos and remitted by the depositary to such holders net of foreign currency conversion fees and expenses of the depositary and will be subject to Chilean withholding tax currently imposed at a rate of 35% (subject to credits in certain cases as described under “Item 10. Additional Information—Taxation—Cash Dividends and Other Distributions”). Owners of the ADSs will not be charged any dividend remittance fee by the depositary with respect to cash dividends.
Chilean law requires that holders of shares of Chilean companies that are not residents of Chile register as foreign investors under one of the foreign investment regimes established by Chilean law in order to have dividends, sale proceeds or other amounts with respect to their shares remitted outside Chile through the Formal Exchange Market (Mercado Cambiario Formal). Under our Foreign Investment Contract, the depositary, on behalf of ADS holders, will be granted access to the Formal Exchange Market to convert cash dividends from pesos to U.S. dollars and to pay such U.S. dollars to ADS holders outside Chile.
B. Significant Changes
None.
ITEM 9. | THE OFFER AND LISTING |
A. Offer and Listing Details
The principal trading market for our common shares is the SEE.SSE. The common shares have been listed on the SEESSE under the symbol “LAN” since 1989, and the ADSs have been listed on the NYSE under the symbol “LFL” since November 7, 1997. The common shares also trade on theBolsa de Valores de Valparaísoand theBolsa Electrónica de Chile. On June 22nd, 2012 the common shares additionally started to be traded on the Brazilian Stock Exchange (“Bovespa”) under the symbol LATM11. The outstanding ADSs are identified by the CUSIP number 501723100. The following table sets forth, for the periods indicated, the high and low closing sale prices on the SEESSE for the common shares and the high and low closing prices on the NYSE for the common shares represented by ADSs. The information set forth in the table below reflects actual historical amounts and has not been restated in constant Chilean pesos.
Period 2007(1) 2008 2009 2010 Quarters: First Quarter Second Quarter Third Quarter Fourth Quarter Annual: Annual 2010 2011 Quarters: First Second Third Fourth Months: September 2011 October 2011 November 2011 December 2011 Annual: Annual 2011 2012 Months: January 2012 February 2012 March 2012 (through March 28, 2012) Ch$ per Common Share US$ per ADS Low High Low High 5,839.90 8,997.00 13.03 84.15 4,350.00 7,110.00 6.90 14.87 7,798.10 8,664.30 15.77 16.90 8,120.00 9,470.00 15.60 18.36 9,200.00 10,550.00 16.65 20.00 10,000.00 15,900.00 18.74 30.50 14,200.00 15,600.00 29.07 32.68 14,790.00 15,600.00 30.79 32.68 11,755.00 15,150.00 24.30 31.39 9,200.00 10,550.00 25.15 29.57 10,000.00 15,900.00 20.56 31.91 14,200.00 15,600.00 18.65 25.98 10,960,00 13,600.00 20.56 29.45 14,200.00 15,238.00 18.65 25.98 15,600.00 14,500.00 21.45 25.34 11,970.00 12,490.00 22.83 24.49 14,790.00 15,600.00 18.65 31.91 13,250.00 15,150.00 23.18 25.34 12,000.00 14,730.00 25.13 27.92 12,948.00 14,300.00 26.25 29.34
Period | Ch$ per Common Share | US$ per ADS | R$ per BDR | |||||||||||||||||||||
Low | High | Low | High | Low | High | |||||||||||||||||||
2010 | 14,790.00 | 15,600.0 | 30.79 | 32.68 | ||||||||||||||||||||
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2011 | 14,790.00 | 15,600.0 | 18.65 | 31.91 | ||||||||||||||||||||
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2012(*) | 10,577.3 | 14,360.7 | 22.10 | 29.40 | 45.33 | 53.35 | ||||||||||||||||||
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2013 | ||||||||||||||||||||||||
Quarters: | ||||||||||||||||||||||||
First | 10,112.5 | 11,755.4 | 21.53 | 24.84 | 42.38 | 49.00 | ||||||||||||||||||
Second | 7,800.9 | 10,100.6 | 15.17 | 21.22 | 31.73 | 42.30 | ||||||||||||||||||
Third | 5,967.3 | 8,313.9 | 11.62 | 16.45 | 26.53 | 35.16 | ||||||||||||||||||
Fourth | 7,388.0 | 8,726.6 | 14.91 | 16.86 | 32.94 | 38.59 | ||||||||||||||||||
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Annual: | ||||||||||||||||||||||||
Annual 2013 | 5,967.3 | 11,755.4 | 11.62 | 24.84 | 26.53 | 49.00 | ||||||||||||||||||
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2014 | ||||||||||||||||||||||||
Quarters: | ||||||||||||||||||||||||
First | 7,517.5 | 8,791.6 | 13.46 | 16.36 | 31.01 | 38.00 | ||||||||||||||||||
Second | 7,444.2 | 8,742.5 | 13.36 | 15.62 | 30.80 | 35.60 | ||||||||||||||||||
Third | 6,697.0 | 7,694.1 | 11.32 | 13.69 | 25.00 | 30.47 | ||||||||||||||||||
Fourth | 6,533.3 | 7,359.6 | 10.60 | 12.30 | 26.00 | 32.00 | ||||||||||||||||||
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Months: | ||||||||||||||||||||||||
September | 6,860.6 | 7,694.1 | 11.32 | 13.03 | 26.49 | 30.47 | ||||||||||||||||||
October | 6,533.3 | 7,024.9 | 10.99 | 12.20 | 26.00 | 29.40 | ||||||||||||||||||
November | 6,840.1 | 7,359.6 | 11.31 | 12.30 | 28.00 | 30.49 | ||||||||||||||||||
December | 6,675.6 | 7,301.6 | 10.60 | 11.98 | 28.50 | 32.00 | ||||||||||||||||||
Annual: | ||||||||||||||||||||||||
Annual 2014 | 6,533.3 | 7,359.6 | 10.60 | 16.36 | 25.00 | 38.00 | ||||||||||||||||||
2015 | ||||||||||||||||||||||||
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January | 6,684.5 | 7,198.3 | 10.37 | 11.82 | 27.71 | 29.50 | ||||||||||||||||||
February | 6,545.3 | 6942.4 | 10.49 | 11.05 | 31.01 | 36,00 | ||||||||||||||||||
March | 5,286.8 | 6,513.4 | 8,27 | 10,44 | 26,35 | 28,00 |
Source: Santiago Stock Exchange, and the New York Stock Exchange and the Bovespa
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(1) | As of March 25, 2015. |
As of February 29, 2012,January 31, 2015, a total of 340,737,649545,558,101 million common shares were outstanding, including 10,283,898 common shares represented by ADSs.
B. Plan of Distribution
Not applicable.
C. Markets
Trading
Chile
The Chilean stock market, which is regulated by the SVS under Law 18,045 of October 22, 1981, as amended, which we refer to as the Securities Market Law, is one of the most developed among emerging markets, reflecting the particular economic history and development of Chile. The Chilean government’s policy of privatizing state-owned companies, implemented during the 1980s, led to an expansion of private ownership of shares, resulting in an increase in the importance of stock markets. Privatization extended to the social security system, which was
converted into a privately managed pension fund system. These pension funds have been allowed, subject to certain limitations, to invest in stocks and are currently major investors in the stock market. Some market participants, including pension fund administrators, are highly regulated with respect to investment and remuneration criteria, but the general market is less regulated than the U.S. market with respect to disclosure requirements and information usage.
The SSE is Chile’s principal exchange and accounts for approximately 86.87% of securities traded in Chile. Approximately 12.91% of equity trading is conducted on the Chilean Electronic Stock Exchange, an electronic trading market created by banks and non-member brokerage houses. The remaining equity trading is conducted on the Valparaíso Stock Exchange.
Equities, closed-end funds, fixed-income securities, short-term and money market securities, gold and U.S. dollars are traded on the SSE. In 1991, the SSE initiated a futures market with two instruments: U.S. dollar futures and Selective Shares Price Index, or IPSA, futures. Securities are traded primarily through an open voice auction system; a firm offers system or daily auctions. Trading through the open voice system occurs on each business day between 9:30 a.m. to 4:30 p.m. The SSE has an electronic system of trade, calledTelepregón HT, which operates continuously for stocks trading in high volumes from 9:30 a.m. to 4:00 p.m. (or 5:00 p.m., depending on the period of the year). The Chilean Electronic Stock Exchange operates continuously from 9:30 a.m. to 4:30 p.m. (or 5:30 p.m., depending on the period of the year) on each business day. In February 2000, the SSE Off-Shore Market began operations. In the Off-Shore Market, publicly offered foreign securities are traded and quoted in U.S. dollars.
Brazil
Bovespa is a Brazilian publicly-held company, created in 2008, through the integration between the São Paulo Stock Exchange (Bolsa de Valores de São Paulo) and the Brazilian Mercantile & Futures Exchange (Bolsa de Mercadorias e Futuros).
Bovespa is the most important Brazilian institution to intermediate equity market transactions and the only securities, commodities and futures exchange in Brazil. Trading on such exchanges is limited to member brokerage firms and to limited number of authorized non-members. LATAM’s common shares are listed on the Bovespa.
Although the Brazilian equity market is Latin America’s largest in terms of market capitalization, it is smaller and less liquid than major U.S. and European securities markets. Any of the outstanding shares of a listed company may trade on a Brazilian stock exchange, but in most cases fewer than half of the listed shares are actually available for trading by the public, the remainder being held by small groups of controlling persons, governmental entities or one principal shareholder.
The Brazilian securities markets are principally governed by Law No. 6,385, of December 7, 1976, and Brazilian corporation law, each as amended and supplemented, and by regulations issued by the CVM, which has authority over stock exchanges and the securities markets generally; the National Monetary Council; and the Central Bank, which has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions.
Trading through Bovespa occurs on each business day between 10:00 a.m. to 4:20 pm (Brazilian local time).
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. | ADDITIONAL INFORMATION |
This Item reflects recent legal amendments effected by Chilean Law No. 20,382 on Corporate Governance, which was enacted on October 20, 2009, and came into effect on January 1, 2010, and Chilean Law No. 20,552, which modernize and encourage competition in the financial system, enacted on November 6, 2011 and into effect on December 17, 2011.
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Set forth below is information concerning our share capital and a brief summary of certain significant provisions of our by-laws and Chilean law. This description contains all material information concerning the common shares but does not purport to be complete and is qualified in its entirety by reference to our by-laws, the Chilean Corporation Law and the Securities Market Law, each referred to below. For additional information regarding the common shares, reference is made to our by-laws, a copy of which is included as Exhibit 1.1 to this annual report on Form 20-F.
Organization and Register
LanLATAM Airlines Group is a publicly held stock corporation (sociedad anónima abierta) incorporated under the laws of Chile. LanLATAM Airlines Group was incorporated by a public deed dated December 30, 1983, an abstract of which was published in the Chilean Official Gazette (Diario Oficial de la República de Chile) No. 31.759 on December 31, 1983, and registered on page 20,341, No. 11,248 of the Chilean Real Estate and Commercial Registrar (Registro de Comercio del Conservador de Bienes Raices y Comercio de Santiago) for the year 1983. Our corporate purpose, as stated in our by-laws, is to provide a broad range of transportation and related services, as more fully set forth in Article Four thereof.
General
Shareholders’ rights in a Chilean company are generally governed by the company’s by-laws and the Chilean Corporation Law. Article 22 of the Chilean Corporation Law states that the purchaser of shares of a company implicitly accepts its by-laws and any prior agreements adopted at shareholders’ meetings. Additionally, the Chilean Corporation Law regulates the government and operation of corporations (“sociedades anónimas,” or S.A.) and provides for certain shareholder rights. Article 137 of the Chilean Corporation Law provides that the provisions of the Chilean Corporation Law take precedence over any contrary provision in a corporation’s by-laws. The Chilean Corporation Law and our by-laws also provide that all disputes arising among shareholders in their capacity as such or between us or our administrators and the shareholders may either be submitted to arbitration in Chile or to the courts of Chile at the election of the plaintiff initiating the action. Despite the foregoing, a recent legal amendment has forbidden certain individuals (directors, senior managers, administrators and main executives of the corporation, and any shareholder that directly or indirectly holds shares whose book or market value exceed 5,000 UF at the moment of filing of the action) from submitting such action before the ordinary courts, thus obligating them to proceed with arbitration in all situations. Finally, Decree-Law No. 3,500 on Pension Fund Administrators, which allows pension funds to invest in the stock of qualified corporations, indirectly affects corporate governance and prescribes certain rights of shareholders. The Chilean Corporation Law sets forth the rules and requirements under which a corporation is deemed to be “publicly held.” Article 2 of the Chilean Corporation Law defines publicly held corporations as corporations that register their shares with theRegistro de Valores (Securities Registry) of the SVS, either voluntarily or pursuant to a legal obligation. In addition, Article 5 of the Chilean Securities Market Law indicates which corporation’s shares must be registered with the Securities Registry:
one with 500 or more shareholders; and
one in which 100 or more shareholders own at least 10% of the subscribed capital (excluding any direct or indirect individual holdings exceeding 10%).
The framework of the Chilean securities market is regulated by the SVS under the Securities Market Law and the Chilean Corporation Law, which imposes certain disclosure requirements, restricts insider trading, prohibits price manipulation and protects minority investors. In particular, the Securities Market Law establishes requirements for public offerings, stock exchanges and brokers and outlines disclosure requirements for corporations that issue publicly offered securities.
Ownership Restrictions
Under Articles 12 and 20 of the Securities Market Law and Circular 289General Rule 269 issued by the SVS in 2009, certain information regarding transactions in shares of publicly held corporations must be reported to the SVS and the Chilean stock exchanges on which the shares are listed. Since the ADRs are deemed to represent the shares underlying the ADSs, transactions in ADRs will be subject to those reporting requirements. Among other matters, the beneficial owners of ADSs that directly or indirectly hold 10% or more of the subscribed capital of LanLATAM Airlines Group, or that reach or exceed such percentage through an acquisition, are required to report to the SVS and the Chilean stock exchanges, the day following the event:
any acquisition or sale of shares; and
any acquisition or sale of contracts or securities the price or performance of which depends on the price variation of the Lan Airlines’LATAM Airlines Group’s shares.
These obligations are extended (i) to certain individuals (immediate family, next of kin and others) if the ADSsADS holder is a natural person; (ii) to any entity controlled by the holder, if the ADSsADS is ana legal entity,;entity; and (iii) to groups, if a holder has any joint action agreement with other holders and the group reaches or exceeds the cited threshold.
In addition, majority shareholders must state in their report whether their purpose is to acquire control of the company or if they are making a financial investment.
Under Article 54 of the Securities Market Law and under SVS regulations, persons or entities that intend to acquire control, whether directly or indirectly, of a publicly traded company, must follow certain notice requirements, regardless of the acquisition vehicle or procedure or whether the acquisition will be made through direct subscriptions or private transactions. In the first place, the potential acquiroracquirer must send a written communication to the target corporation, any companies controlling or controlled by the target corporation, the SVS and the Chilean stock exchanges on which the target’s securities are listed, stating, among other things, the person or entity purchasing or selling and the price and conditions of any negotiations. Subsequently, the potential acquiroracquirer must also inform the public of its planned acquisition by means of a publication in two Chilean newspapers with national distribution and by uploading such notice to the acquiror’sacquirer’s website, if available. Both requirements shall be met at least ten business days prior to the date on which the acquisition transaction is to close, and in any event, as soon as negotiations regarding the change of control have been formalized or when confidential information or documents concerning the target are delivered to the potential acquiror.acquirer. The notices must state, among other things, the person or entity purchasing or selling and the price and conditions of any negotiations.
In addition to the foregoing, Article 54A of the Securities Market Law requires that within two business days of the completion of the transactions pursuant to which a person has acquired control of a publicly traded company, a notice shall be published in the same newspapers in which the notice referred to above was published and notices shall be sent to the same persons mentioned in the preceding paragraphs.
Consequently, a beneficial owner of ADSs intending to acquire control of LanLATAM Airlines Group will be subject to the foregoing reporting requirements.
The provisions of the aforementioned articles do not apply whenever the acquisition is being made through a tender or exchange offer.
Title XXV of the Securities Market Law on tender offers and SVS regulations provide that the following transactions shall be carried out through a tender offer:
an offer which allows to take control of a publicly traded company, unless the shares are being sold by a controlling shareholder of such company at a price in cash which is not substantially higher than the market price and the shares of such company are actively traded on a stock exchange;
an offer for all the outstanding shares of a publicly traded company upon acquiring two-thirds or more of its voting shares (this offer must be made at a price not lower than the price at which appraisal rights may be exercised, that is, book value if the shares of the company are not actively traded or, if the shares of the company are actively traded, the weighted average price at which the stock has been traded during the two months immediately preceding the acquisition); and
an offer for a controlling percentage of the shares of a publicly traded company if the acquiroracquirer intends to take control of the company (whether publicly-traded or privately held) controlling such publicly traded company, to the extent that the latter represents 75.0% or more of the consolidated net assets of the former.
Article 200 of the Securities Market Law prohibits any shareholder that has taken control of a publicly traded company from acquiring, for a period of twelve months from the date of the transaction that granted it control of the
publicly traded company, a number of shares equal to or higher than 3.0% of the outstanding issued shares of the target without making a tender offer at a price per share not lower than the price paid at the time of taking control. Should the acquisition from the other shareholders of the company be made on the floor of a stock exchange and on a pro rata basis, the controlling shareholder may purchase a higher percentage of shares, if so permitted by the regulations of the stock exchange.
Title XV of the Securities Market Law sets forth the basis for determining what constitutes a controlling power, a direct holding and a related party.
Capitalization
Under Chilean law, the shareholders of a company, acting at an extraordinary shareholders’ meeting, have the power to authorize an increase in the company’s share capital. When an investor subscribes issued shares, the shares are registered in that investor’s name even without payment, and the investor is treated as a shareholder for all purposes except with regard to receipt of dividends and return of capital, provided that the shareholders may, by amending the by-laws, also grant the right to receive dividends of distribution of capital despite not having paid for the subscribed shares. The investor becomes eligible to receive dividends once it has paid for the shares, or, if it has paid for only a portion of such shares, it is entitled to receive a corresponding pro rata portion of the dividends declared with respect to such shares, unless the company’s by-laws provide otherwise. If an investor does not pay for shares for which it has subscribed on or prior to the date agreed upon for payment, the company is entitled under Chilean law to auction the shares on the appropriate stock exchange, and it has a cause of action against the investor to recover the difference between the subscription price and the price received for the sale of those shares at auction. However, until such shares are sold at auction, the investor continues to exercise all the rights of a shareholder (except the right to receive dividends and return of capital, as noted above). Regarding shares issued but not paid for within the period determined by the extraordinary shareholders’ meeting for their payment (which period cannot exceed three years from the date of such shareholders’ meeting), until January 1, 2010 they were canceled and no longer available for issuance by us. As of January 1, 2010, the board of directors of LanLATAM Airlines Group has a legal obligation to initiate the necessary legal actions to collect the unpaid amounts, unless the shareholders’ meeting which authorized the capital increase, allowed the board to abstain from taking such action by a vote of two thirds of the issued shares, in which case the former rule still applies. Once the foregoing legal actions are exhausted, the board of directors shall propose to the shareholders’ meeting the appropriate capital adjustment measures, to be decided by simple majority. Fully paid shares are not subject to further calls or assessments or to liabilities of Lan Airlines.LATAM Airlines Group.
As of February, 29, 2012,28, 2015, our share capital consisted of 340.381.831545,558,101 common shares, all of which were subscribed and fully paid. Chilean law recognizes the right of corporations to issue common and preferred shares. To date, we have issued and are authorized by our shareholders to issue only common shares. Each share of stock is entitled to one vote. Pursuant to antwo employee compensation planplans: (i) 2011: approved by extraordinary shareholders’ meetings dated April 5, 2007held on December 21, 2011 and October 29, 2009,September 4, 2012, the issuance of certainthe shares for this compensation plan has been authorized but that has not been made effective, in full, as such issuance is subject to the exercising of rights granted to certain employees that expire on March 31, 2012.December 21, 2016; and (ii) 2013: approved by extraordinary shareholders’ meeting held on June 11, 2013, the issuance of the shares for this compensation plan has been authorized but has not been made effective, as such issuance is subject to the exercising of rights granted to certain employees that expire on November 15, 2017.
Preemptive Rights and Increases in Share Capital
The Chilean Corporation Law requires Chilean companies to offer existing shareholders the right to purchase a sufficient number of shares to maintain their existing percentage of ownership in a company whenever that company issues new shares for cash, except for up to 10% of the capital increase which may be destineddesignated to employee compensation pursuant to article 24 of the Corporation Law. Under this requirement, any preemptive rights will be offered by us to the depositary as the registered owner of the common shares underlying the ADSs, but holders of ADSs and shareholders located in the United States will not be allowed to exercise preemptive rights with respect to new issuances of shares by us unless a registration statement under the Securities Act is effective with respect to those common shares or an exemption from the registration requirements thereunder is available.
We intend to evaluate at the time of any preemptive rights offering the costs and potential liabilities associated with the preparation and filing of a registration statement with the SEC, as well as the indirect benefits of enabling the exercise by the holders of ADSs and shareholders located in the United States of preemptive rights and any other
factors we consider appropriate at the time. No assurances can be given that any registration statement would be filed. If preemptive rights are not made available to ADS holders, the depositary may sell those holders’ preemptive rights and distribute the proceeds thereof if a secondary market for such rights exists and a premium can be recognized over the cost of such sale. In the event that the depositary does not sell such rights at a premium over the cost of any such sale, all or certain holders of ADRs may receive no value for the preemptive rights. The inability of holders of ADSs to exercise preemptive rights in respect of common shares underlying their ADSs could result in a change in their percentage ownership of common shares following a preemptive rights offering.
Under Chilean law, preemptive rights are freely exercisable, transferable or waived by shareholders during a thirty-day period commencing upon publication of the official notice announcing the start of the preemptive rights period in the newspaper designated by the shareholders’ meeting. The preemptive right of the shareholders is the pro rata amount of the shares registered in their name in the shareholders’ registry of LanLATAM Airlines Group as of the fifth business day prior to the date of publication of the notice announcing the start of the preemptive rights period. During such thirty-day period (except for shares as to which preemptive rights have been waived), Chilean companies are not permitted to offer any newly issued common shares for sale to third parties. For that thirty-day period and an additional thirty-day period, Chilean publicly held corporations are not permitted to offer any unsubscribed common shares for sale to third parties on terms that are more favorable to the purchaser than those offered to shareholders. At the end of such additional thirty-day period, Chilean publicly held corporations are authorized to sell non-subscribed shares to third-parties on any terms, provided they are sold on a Chilean stock exchange.
Directors
Our by-laws provide for a board of nine directors. Compensation to be paid to directors must be approved by vote at the annual shareholders’ meeting. We hold elections for all positions on the board of directors every two years. Under our by-laws, directors are elected by cumulative voting. Each shareholder has one vote per share and may cast all of his or her votes in favor of one nominee or may apportion his or her votes among any number of nominees. These voting provisions currently ensure that a shareholder owning more than 10% of our outstanding shares is able to elect at least one representative to our board of directors.
Under the Chilean Corporation Law, transactions of a publicly-traded company with a “related” party must be conducted on an arm’s-length basis and must satisfy certain approval and disclosure requirements which are different from the ones that apply to a privately-held company. The conditions apply to the publicly-traded company and to all of its subsidiaries.
These transactions include any negotiation, act, contract or operation in which the publicly-traded company intervenes together with either (i) parties which are legally deemed related pursuant to article 100 of the Chilean Securities Market Law, (ii) a director, senior manager, administrator, main executive or liquidator of the company, either on their own behalf or on behalf of a third party, including those individuals’ spouses or close relatives, (iii) companies in which the foregoing individuals own at least 10% (directly or indirectly), or in which they serve as directors, senior managers, administrators or main executives (iv) parties indicated as such in the publicly-traded company’s by-laws, or identified by the directors’ committee, or (v) those who have served as directors, senior managers, administrators, main executives or liquidators of the counterparty in the last eighteen months and are now serving in one of those positions at the publicly-traded company.
Corporations may enter into transactions with related parties if (i) the transaction is in the interest of the corporation, (ii) the transaction is made on an arm’s-length basis at market conditions, (iii) the individuals involved in the transactions report them immediately to the board, (iv) the transaction is approved after a reasoned explanation by the majority of the board, excluding those directors or liquidators that are involved in the transaction (who shall, nonetheless, render an opinion on the matter if required by the board), (v) the decisions of the board is disclosed at the next shareholders’ meeting, and (vi) in case the majority of the board is disqualified to vote, the majority of the non-involved directors have approved the transaction, or two thirds of the voting shares have approved the transaction).
If as noted in clause (vi) above,of the preceding paragraph, the transaction is to be approved by the shareholder’s meeting, the following additional rules apply: (i) the board shall appoint an independent appraiser that shall report to the shareholders on the
transaction; (ii) the director’s committee or the non-involved directors may appoint a second independent appraiser; (iii) the appraiser’s reports shall be made available for fifteen days; (iv) the receipt and availability of the reports shall be disclosed as a material fact; (iv) directors shall render an opinion on the transaction within five business days after receiving the reports.
Transactions which do not meet the foregoing requirements are valid and enforceable, but neither the corporation nor its shareholders shall have a cause of action to sue the infringing party for reimbursement on behalf of the corporation, for a total of the benefits reported to the interested party, in addition to indemnification for the damages caused. In such proceedings, the defendant shall prove that the transaction met the legal requirements.
The Chilean Corporation Law sets forth a number of exceptions to the foregoing rules. In the following situations, transactions with related parties may be carried out without complying with the foregoing rules: (i) if a transaction does not involve a substantial amount (if it does not exceed 1.0% of the net worth of the company and does not exceed the equivalent of 2,000 UF or approximately US$92,00096,554 as of the date of this annual report on Form 20F) unless such a transaction exceeds 20,000 UF (for this calculation all similar transactions carried out within a consecutive 12-month period between the same parties or for the same subject matter, shall be deemed as a single transaction), (ii) transactions which according to the policies determined by the board of directors, are deemed to be within the ordinary course of business (the determination of such policies shall be disclosed as a material fact and made available to shareholders), and (iii) if the counterparty is an entity in which the publicly-traded company has, directly or indirectly, at least a 95.0% ownership. As per the exemption indicated in (ii) above, on December 29, 2009, the Board of Directors of LAN determined the citedLATAM Airlines Group established policies setting forth the transactions that fall within the ordinary course of business. That determination was publicly disclosed on the same day and is currently available on LAN’sLATAM Airlines Group’s website under the “Corporate Governance” section.”
Shareholders’ Meetings and Voting Rights
The Chilean Corporation Law requires that an ordinary annual meeting of shareholders be held within the first four months of each year after being called by the board of directors (generally they are held in April, but in any case following the preparation of our financial statements, including the report of our auditors, for the previous fiscal year). Lan Airlines’LATAM Airlines Group’s by-laws further provide that the ordinary annual meeting of shareholders must take place between February 1 and April 30. The shareholders at the ordinary annual meeting approve the annual financial statements, including the report of our auditors, the annual report, the dividend policy and the final dividend on the prior year’s profits, elect the board of directors (in our case, every two years or earlier if a vacancy occurs) and approve any other matter that does not require an extraordinary shareholders’ meeting. The most recent extraordinary meeting of our shareholders was held on December 21, 2011,June 11, 2013, and the most recent ordinary annual meeting of our shareholders was held on April 29, 2011.2013.
Extraordinary shareholders’ meetings may be called by the board of directors, if deemed appropriate, and ordinary or extraordinary shareholders’ meetings must be called by the board of directors when requested by shareholders representing at least 10.0% of the issued voting shares or by the SVS. In addition, as from January 1, 2010 there are two new rules in this regard: (i) the SVS may directly call for an extraordinary shareholders’ meeting in case of a publicly-traded companies, and (ii) any kind of shareholders’ meeting may be self-convened and take place if all voting shares attend, regardless of the fulfillment of the notice and other type of procedural requirements.
Notice to convene the ordinary annual meeting or an extraordinary meeting is given by means of three notices which must be published in a newspaper of our corporate domicile (currently Santiago, Chile) designated by the shareholders at their annual meeting and, if the shareholders fail to make such designation, the notice must be published in the Chilean Official Gazette pursuant to legal requirements. The first notice must be published not less than fifteen days and not more than twenty days in advance of the scheduled meeting. Notice also must be mailed not less than fifteen days in advance of the meeting to each shareholder and to the SVS and the Chilean stock exchanges. Currently, we publish our official notices in the newspaperLa Tercera(available online at www.latercera.com).
The quorum for a shareholders’ meeting is established by the presence, in person or by proxy, of shareholders representing a majority of our issued common shares. If that quorum is not reached, the meeting can be reconvened within forty-five days, and at the second meeting the shareholders present are deemed to constitute a quorum regardless of the percentage of the common shares that they represent.
Only shareholders registered with us on the fifth business day prior to the date of a meeting are entitled to attend and vote their shares. A shareholder may appoint another individual (who need not be a shareholder) as his or her proxy to attend and vote on his or her behalf. Proxies addressed to us that do not designate a person to exercise the proxy are taken into account in order to determine if there is a sufficient quorum to hold the meeting, but the shares represented thereby are not entitled to vote at the meeting. The proxies must fulfill the requirements set forth by the Chilean Corporation Law and its regulatory norms. Every shareholder entitled to attend and vote at a shareholders’ meeting has one vote for every share subscribed.
The following matters can only be considered at an extraordinary shareholders’ meeting:
our dissolution;
a merger, transformation, division or other change in our corporate form or the amendment of our by-laws;
the issuance of bonds or debentures convertible into shares;
the conveyance of 50% or more of our assets (whether or not it includes our liabilities);
the adoption or amendment of any business plan which contemplates the conveyance of assets in excess of the foregoing percentage;
the conveyance of 50% or more of the assets of a subsidiary, if the latter represents at least 20% of our assets;
the conveyance of shares of a subsidiary which entails the transfer of control;
granting of a security interest or a personal guarantee in each case to secure the obligations of third parties, unless to secure or guarantee the obligations of a subsidiary, in which case only the approval of the board of directors will suffice; and
other matters that require shareholder approval according to Chilean law or the by-laws.
The matters referred to in the first seven items listed above may only be approved at a meeting held before a notary public, who shall certify that the minutes are a true record of the events and resolutions of the meeting.
The by-laws establish that resolutions are passed at shareholders’ meetings by the affirmative vote of an absolute majority of those voting shares present or represented at the meeting. However, under the Chilean Corporation Law, the vote of a two-thirds majority of the outstanding voting shares is required to approve any of the following actions:
a change in our corporate form, division or merger with another entity;
amendment to our term of existence, if any;
our early dissolution;
change in our corporate domicile;
decrease of our capital stock;
approval of contributions and the assessment thereof whenever consisting of assets other than money;
any modification of the authority reserved for the shareholders’ meetings or limitations on the powers of the board of directors;
decrease in the number of members of the board of directors;
the conveyance of 50% or more our assets (whether or not it includes our liabilities);
the adoption or amendment of any business plan which contemplates the conveyance of assets in excess of the foregoing percentage;
the conveyance of 50% or more of the assets of a subsidiary, if the latter represents at least 20% of our assets;
the conveyance of shares of a subsidiary which entails the transfer of control;
the form that dividends are paid in;
granting a security interest or a personal guarantee in each case to secure obligations of third parties that exceeds 50% of our assets, unless to secure or guarantee the obligations of a subsidiary, in which case only approval of the board of directors will suffice;
the acquisition of our own shares, when, and on the terms and conditions, permitted by law;
all other matters provided for in the by-laws; and
the correction of any formal defect in our incorporation or any amendment to our by-laws that refers to any of the matters indicated in the first thirteen items listed above;
the institution of the right of the controlling shareholder who has purchases at least 95% of the shares, to purchase shares of the outstanding minority shareholders pursuant to the procedure set forth in article 71 bis of the Corporation Law;
the approval or ratification of transactions with related parties, as per article 147 of the Corporation Law (described above).
Amendments to the by-laws that have the effect of establishing, modifying or eliminating any special rights pertaining to any series of shares require the consenting vote of holders of two-thirds of the shares of the affected series. As noted above, LanLATAM Airlines Group does not have special series of shares.
In general, Chilean law does not require a publicly held corporation to provide the level and type of information that the U.S. securities laws require a reporting company to provide to its shareholders in connection with a solicitation of proxies. However, shareholders are entitled to examine the books of the company and its subsidiaries within the fifteen-day period before thea scheduled meeting. No later than the first notice summoning an ordinary shareholder’s meeting, the board of directors of a publicly held corporation shallis required to send to every shareholder notice by regular mail, a notice containing a reference to the issues that will be discussed, together with instructions to obtain all the appropriate documentation regarding those issues, in additionand publish such notice on its website. The board is also required to being obligated to publish them in our website, and alsoprovide a copy of the annual report and the financial statements of the company. However, the SVS may authorize companies that have a large number of shareholders to limit the sending of such documents only to those shareholders who have a number of shares exceeding a certain number, and, in any case, to any shareholder thatwho has required of the company such sending.requested a written notice. Shareholders who do not fall into this category but who request it must be sent a copy of our annual report. In addition to these requirements, we regularly have provided, and currently intend to continue to provide, together with the notice of shareholders’ meeting, a proposal for the final annual dividend for shareholder approval. See “—Dividend and Liquidation Rights” below.
The Chilean Corporation Law provides that, whenever shareholders representing 10% or more of the issued voting shares so request, a Chilean company’s annual report must include such shareholders’ comments and proposal in relation to the company’s affairs, together with the comments and proposals set forth by the directors’ committee. Similarly, the Chilean Corporation Law provides that whenever the board of directors of a publicly held corporation convenes an ordinary meeting of the shareholders and solicits proxies for that meeting, or distributes information supporting its decisions or other similar material, it is obligated to include as an annex to its annual report any pertinent comments and proposals that may have been made by shareholders owning 10% or more of the company’s voting shares who have requested that such comments and proposals be included, together with the comments and proposals set forth by the directors’ committee.
Dividend and Liquidation Rights
In accordance with the Chilean Corporation Law, LanLATAM Airlines Group must distribute an annual cash dividend equal to at least 30% of its annual net income calculated in accordance with IFRS, unless otherwise decided by a unanimous vote of the holders of all issued shares, and unless and except to the extent it has accumulated losses. If there is no net income in a given year, LanLATAM Airlines Group can elect but is not legally obligated to distribute dividends out of retained earnings. All outstanding common shares are entitled to share equally in all dividends declared by LanLATAM Airlines Group, unless the shares have not been fully paid by the shareholder after being subscribed.
For all dividend distributions agreed by the board of directors in excess of the mandatory minimum of 30% noted in the preceding paragraph, LanLATAM Airlines Group may grant an option to its shareholders to receive those dividends in cash, or in shares issued by either LanLATAM Airlines Group or other corporations. Shareholders who do not expressly elect to receive a dividend other than in cash are legally presumed to have decided to receive the dividend in cash. A U.S. holder of ADSs may, in the absence of an effective registration statement under the Securities Act or an available exemption from the registration requirement thereunder, effectively be required to receive a dividend in cash. See “—Preemptive Rights and Increases in Share Capital” above.
Dividends that are declared but not paid within the appropriate time period set forth in the Chilean Corporation Law (as to minimum dividends, thirty days after declaration; as to additional dividends, the date set for payment at the time of declaration) are adjusted to reflect the change in the value of the UF. The UF is a daily indexed, Chilean peso-denominated accounting unit designed to discount the effect of Chilean inflation and it is based on the previous month’s inflation rate as officially determined. Such dividends also accrue interest at the then-prevailing rate for UF-denominated deposits during such period. The right to receive a dividend lapses if it is not claimed within five years from the date such dividend is payable. After that period, the amount not claimed is given to a non-profit organization, theJunta Nacional de Cuerpos de Bomberos de Chile(the National Corporation of Firefighters).
In the event of Lan Airlines’LATAM Airlines Group’s liquidation, the holders of fully paid common shares would participate pro rata in the distribution of assets remaining after payment of all creditors. Holders of shares not fully paid will participate in such distribution in proportion to the amount paid.
Approval of Financial Statements
The board of directors is required to submit our consolidated financial statements to the shareholders for their approval at the annual ordinary shareholders’ meeting. If the shareholders reject the financial statements, the board of directors must submit new financial statements not later than sixty days from the date of that meeting. If the shareholders reject the new financial statements, the entire board of directors is deemed removed from office and a new board is to be elected at the same meeting. Directors who approved such financial statements are disqualified for re-election for the ensuing period.
Right of Dissenting Shareholders to Tender Their Shares
The Chilean Corporation Law provides that, upon the adoption at an extraordinary meeting of shareholders of any of the resolutions or if it takes place any of the situations enumerated below, dissenting or affected shareholders acquire the right to withdraw and to compel the company to repurchase their shares, subject to the fulfillment of certain terms and conditions. However, such right shall be suspended if we are declared bankrupt or are subject to a
creditor’s agreement pursuant to Title XII of Book IV of the Commerce Code. In the case of holders of ADRs, however, in order to exercise such rights, holders of ADRs would be required to first withdraw the common shares represented by the ADRs pursuant to the terms of the deposit agreement. Such holders of ADRs would need to perfect the withdrawal of the common shares on or before the fifth business day prior to the date of the meeting.
“Dissenting shareholders” are defined as those who attend a shareholders’ meeting and vote against a resolution which results in the withdrawal right, or, if absent at such a meeting, those who state in writing to the company their opposition to such resolution within the following thirty days. Dissenting shareholders must perfect their withdrawal rights by tendering their stock to the company within thirty days after adoption of the resolution.
The price paid to a dissenting shareholder of a publicly held corporation is the weighted average of the sales prices for the shares as reported on the Chilean stock exchanges on which the shares are quoted for the two-month period preceding the event giving rise to the withdrawal right. If, because of the volume, frequency, number and diversity of the buyers and sellers, the SVS determines that the shares are not shares actively traded on a stock exchange (acciones de transacción bursátil), the price paid to the dissenting shareholder is the book value. Book value for this purpose equals paid capital plus reserves and profits, less losses, divided by the total number of subscribed shares (whether entirely or partially paid). For the purpose of making this calculation, the last annual balance sheet is used and adjusted to reflect inflation up to the date of the shareholders’ meeting that gave rise to the withdrawal right.
The resolutions and situations that result in a shareholder’s right to withdraw are the following:
the transformation of the company into an entity that is not a publicly held corporation governed by the Chilean Corporation Law;
the merger of the company with or into another company;
the conveyance of 50% or more of the assets of the company, whether or not such sale includes the company’s liabilities;
the adoption or amendment of any business plan which contemplates the conveyance of assets in excess of the foregoing percentage;
the conveyance of 50% or more of the assets of a subsidiary, if the latter represents at least 20% of our assets;
the conveyance of shares of a subsidiary which entails the transfer of control;
the creation of preferential rights for a class of shares or an extension, amendment or reduction to those already existing, in which case the right to withdraw only accrues to the dissenting shareholders of the class or classes of shares adversely affected;
the correction of any formal defect in the incorporation of the company or any amendment to the company’s by-laws that grants the right to withdraw;
the granting of security interests or personal guarantees to secure or guarantee third parties’ obligations exceeding 50% of the company’s assets, except with regard to subsidiaries;
resolutions of the shareholders’ meeting approving the decision to make private a public corporation in the case the requirements set forth in “—General” cease to be met;
if a publicly-traded company ceases to be obligated to register its shares in the Securities Registry of the SVS, and an extraordinary shareholders’ meeting agrees to de-register the shares and finalize its disclosure obligations mandated by the Corporation Law;
if the controlling shareholder of a publicly-traded company reaches over 95% of the shares (in such case, the right must be exercised within 30 days of the date in which the threshold is reached, circumstance that must be communicated by means of a publication); and
such other causes as may be established by the company’s by-laws (no such additional resolutions currently are specified in our by-laws).
In addition, shareholders of publicly held corporations have the right to withdraw if a person acquires two-thirds or more of the outstanding shares of such corporation with the right to vote (except as a result of other shareholders not having subscribed and paid a capital increase) and does not make a tender offer for the remaining shares within thirty days after acquisition.
Under Article 69(bis) of the Chilean Corporation Law, the right to withdraw also is granted to shareholders (other than pension funds that administer private pension plans under the national pension law), under certain terms and conditions, if a company were to become controlled by the Chilean government, directly or through any of its agencies, and if two independent rating agencies downgrade the rating of its stock from first class because of certain actions specified in Article 69(bis) undertaken by the company or the Chilean government that affect negatively and substantially the earnings of the company. Shareholders must perfect their withdrawal rights by tendering their shares to the company within thirty days of the date of the publication of the new rating by two independent rating agencies. If the withdrawal right is exercised by a shareholder invoking Article 69(bis), the price paid to the dissenting shareholder shall be the weighted average of the sales price for the shares as reported on the stock exchanges on which the company’s shares are quoted for the six-month period preceding the publication of the new rating by two independent rating agencies. If, as previously described, the SVS determines that the shares are not actively traded on a stock exchange, the price shall be the book value calculated as described above.
There is no legal precedent as to whether a shareholder that has voted both for and against a proposal (such as the depositary) may exercise withdrawal rights with respect to the shares voted against the proposal. As such, there is doubt as to whether holders of ADRs who have not surrendered their ADRs and withdrawn common shares on or before the fifth business day prior to the shareholder meeting will be able to exercise withdrawal rights either directly or through the depositary with respect to the shares represented by ADRs. Under the provisions of the deposit agreement the depositary will not exercise these withdrawal rights.
The circumstance indicated above regarding ownership in excess of 95% by the controlling shareholder creates not only a withdrawal right for the remaining minority shareholders, but as of January 1, 2010, it also creates a “squeeze out” right by the controlling shareholder with respect to those same shareholders (granting a call option by means of which the controlling shareholder may buy-out the existing ownership participations pursuant to the provisions of article 71 bis of the Corporation Law).
Registration and Transfers
TheDepósito Central de Valores, (“DCV”), acts as Lan Airlines’LATAM Airlines Group’s registration agent. In the case of jointly owned common shares, an attorney-in-fact must be appointed to represent the joint owners in dealings with us.
C. Material Contracts
Boeing
Boeing 767-300 Fleet
On May 9, 1997, we entered into the Aircraft General Terms Agreement with The Boeing Company (“AGTA”), applicable to all Boeing aircraft contracted for purchase from The Boeing Company.
On January 30, 1998, we entered into Purchase Agreement No. 2126 with The Boeing Company (“Purchase Agreement No. 2126”) to acquire two Boeing 767-300 passenger aircraft.
On November 11, 2004, we entered into supplemental agreement No. 16 to the Purchase Agreement No. 2126 to acquire one additional Boeing 767-300 freighter aircraft and three Boeing 767-300 passenger aircraft. The estimated gross value (at list prices) of these aircraft was US$140,000,000.
On April 28, 2005, we entered into supplemental agreement No. 20 to the Purchase Agreement No. 2126 to acquire two additional Boeing 767-300 freighter aircraft and one Boeing 767-300 passenger aircraft. The estimated gross value (at list prices) of these aircraft was US$300,000,000.
On July 20, 2005, we entered into supplemental agreement No. 21 to the Purchase Agreement No. 2126 to acquire three Boeing 767-300 passenger aircraft. The estimated gross value (at list prices) of these aircraft was US$410,000,000.
On March 31, 2006, we entered into supplemental agreement No. 22 to the Purchase Agreement No. 2126 to acquire three Boeing 767-300 aircraft. Furthermore, we converted two Boeing 767-300 freighter aircraft to two Boeing 767-300 passenger aircraft. The estimated gross value (at list prices) of these aircraft was US$430,000,000.
On December 14, 2006, we entered into supplemental agreement No. 23 to the Purchase Agreement No. 2126 to acquire three additional Boeing 767-300 passenger aircraft. The estimated gross value (at list prices) of these aircraft was US$460,000,000.
On November 10, 2008, we entered into supplemental agreement No. 24 to the Purchase Agreement No. 2126 to acquire four additional Boeing 767-300 passenger aircraft and two purchase rights for Boeing 767-300 aircraft. Two of these aircraft were delivered in 2011, while the other two aircraft have a scheduled delivery date in 2012. The estimated gross value (at list prices) of these aircraft was US$636 million.
On March 22, 2010, we entered into supplemental agreement No. 28 to the Purchase Agreement No. 2126, whereby we agreed to accelerate the delivery of ten 787-8 aircraft, substitute four aircraft from 787-916 to 787-816 and substitute three 767-316ER to 767-316F freighter aircraft. Moreover, on November 10, 2010, we entered into supplemental agreement No. 29 to the Purchase Agreement No. 2126, whereby we agreed to accelerate the delivery of three Aircraft and substitute those three aircraft from 767-316F to 767-316ER.
On February 15, 2011, we entered into supplemental agreement No. 30No.30 to the Purchase Agreement No. 2126No.2126 to acquire three additional Boeing 767-300 passenger aircraft. Delivery is scheduled to take place in 2012. The estimated gross value (at list prices) of these aircraft was US$510 million.
On May 10, 2011, we entered into supplemental agreement No. 31No.31 to the Purchase Agreement No. 2126No.2126 to acquire five additional Boeing 767-300 passenger aircraft and four purchase rights for Boeing 767-300 passenger aircraft. Delivery is scheduled to take place in 2012. The estimated gross value (at list prices) of these aircraft was US$870 million.
On December 22, 2011 we entered into supplemental agreement No. 32No.32 to the Purchase Agreement No. 2126No.2126 to exercise two purchase options for two additional Boeing 767-300 passenger aircraft, while the remaining purchase options were deleted. Delivery is scheduled to take place in 2012. The estimated gross value (at list prices) of these aircraft was US$340 million.
Boeing 787-8/9 Fleet
On October 29, 2007, we entered into Purchase Agreement No. 3256 with the Boeing Company (“Purchase Agreement No. 3256”) to acquire eighteen18 Boeing 787-8 aircraft and eight Boeing 787-9 aircraft to be delivered between 2012 and 2016. This purchase agreement provides us with the option of purchasing fifteen additional aircraft to be delivered in 2017 and 2018. The estimated gross value (at list prices) of the Boeing aircraft for which we had firm commitments to take delivery under this contract is US$3.2 billion.
On March 22, 2010, we entered into supplemental agreement No. 1 to the Purchase Agreement No. 3256 to advance the schedule delivery date of ten Boeing 787-8 aircraft and substitute four Boeing 787-9 aircraft into four Boeing 787-8 aircraft.
On July 8, 2010, we entered into supplemental agreement No. 2 to the Purchase Agreement No. 3256 to advance the schedule delivery date of two Boeing 787-8 aircraft.
On August 24, 2012, we entered into supplemental agreement No. 3 to the Purchase Agreement No. 3256 to replace two Boeing 787-8 aircraft with two Boeing 787-8 aircraft with a later delivery.
On September 16, 2013, we entered into a delay settlement agreement with respect to Purchase Agreement No. 3256, whereby we agreed to update delivery dates, settle consequences of the currently known delays and convert several future deliveries of B787-8 aircraft to B787-9 aircraft.
Boeing 777 Freighter Fleet
On July 3, 2007, we entered into Purchase Agreement No. 3194 with the Boeing Company (“Purchase Agreement No. 3194”) to acquire two Boeing 777 freighter aircraft with schedule deliveries dates in 2011 and 2012. The estimated gross value (at list prices) of the Boeing aircraft for which we had firm commitments to take delivery under this contract was US$545 million.
On March 22, 2010, we entered into letter agreement 6-1162-KSW-6454R2 to the Purchase Agreement No. 3194 to transfer two purchase rights from Purchase Agreement No. 2126 to Purchase Agreement No. 3194.
On November 2, 2010, we entered into supplemental agreement No. 2 to the Purchase Agreement No. 3194, to exercise one of the two options for a Boeing 777 freighter aircraft with schedule delivery date in 2012. The estimated gross value (at list prices) of this aircraft was US$280 million.
On September 22, 2011, we entered into supplemental agreement No. 3 to the Purchase Agreement No. 3194 to advance the schedule delivery date of one firm Boeing 777 freighter aircraft during 2012.
On August 9, 2012, we entered into supplemental agreement No. 4 to the Purchase Agreement No. 3194 to reflect the configuration of the aircraft covered under such Purchase Agreement.
Airbus A320 Family Fleet
On March 20, 1998, we entered into the Second A320 FamilyA320-Family Purchase Agreement with Airbus S.A.S. (“Second A320 FamilyA320-Family Purchase Agreement”) to acquire five Airbus 320 family aircraft.
On November 14, 2003, we entered into amendment No. 1 to the Second A320 FamilyA320-Family Purchase Agreement to exercise three purchase rights for Airbus 319 aircraft, among other things.
On October 4, 2005, we entered into amendment No. 2 to the Second A320 FamilyA320-Family Purchase Agreement to acquire twenty five additional Airbus 320 family aircraft and fifteen purchase rights for Airbus A320 familyA320-Family aircraft.
On March 6, 2007, we entered into amendment No. 3 to the Second A320 FamilyA320-Family Purchase Agreement to exercise fifteen purchase rights for fifteen Airbus A320 familyA320-Family aircraft.
On December 23, 2009, we entered into amendment No. 5 to the Second A320 FamilyA320-Family Purchase Agreement to acquire thirty additional Airbus A320 familyA320-Family aircraft. The estimated gross value (at list prices) of these aircraft was US$2.0 billion.
According to clause 12.2 of the Second A320 Family Purchase Agreement, applicable to all subsequent amendments, in case of a failure, as defined in such agreement, a service life policy for a period of 12 years after delivery of any given aircraft shall apply.
On May 10, 2010, we entered into amendment No. 6 to the Second A320 FamilyA320-Family Purchase Agreement to convert the aircraft type of three aircraft and advancereschedule the scheduled delivery date of thirteen aircraft.
On May 19, 2010, we entered into amendment No. 7 to the Second A320 FamilyA320-Family Purchase Agreement to advancereschedule the scheduled delivery date of three aircraft.
On September 23, 2010, we entered into amendment No. 8 to the Second A320 FamilyA320-Family Purchase Agreement to convert the aircraft type of one aircraft and advancereschedule the scheduled delivery date of four aircraft.
On December 21, 2010, we entered into amendment No. 9 to the Second A320 FamilyA320-Family Purchase Agreement to acquire fifty additional Airbus A320 familyA320-Family aircraft. The estimated gross value (at list prices) of these aircraft was US$2,600,000,000.
On June 10, 2011, we entered into amendment No. 10 to the Second A320 FamilyA320-Family Purchase Agreement to convert the aircraft type of three aircraft, to select sharklets for some aircraft and to notify delivery dates for some aircraft.
On November 3, 2011, we entered into amendment No. 11 to the Second A320 FamilyA320-Family Purchase Agreement to convert the aircraft type of three aircraft and deferreschedule the schedule delivery date of four aircraft.
On November 19, 2012, we entered into amendment No. 12 to the Second A320-Family Purchase Agreement to convert the aircraft type of three aircraft, identify certain Aircraft as Sharklet Installed Aircraft and others as Sharklet Capable Aircraft, as those are defined in such Purchase Agreement, and notify the scheduled delivery month for certain aircraft.
On August 19, 2013, we entered into amendment No. 13 to the Second A320-Family Purchase Agreement to convert several A320 aircraft to A321 aircraft and to reschedule the scheduled delivery dates of several aircraft.
On 31 March, 2014, we entered into amendment No. 14 to the Second A320-Family Purchase Agreement covering the rescheduling of the scheduled delivery date of one Aircraft.
On May 16, 2014, we entered into amendment No. 15 to the Second A320 Family Purchase Agreement covering the rescheduling of the scheduled delivery month of certain Aircraft.
On July 15, 2014, we entered into amendment No. 16 to the Second A320 Family Purchase Agreement July 15th 2014 covering substitution of certain Aircraft.
On October 30, 2014, we entered into a novation agreement covering the novation of the original TAM A320/A330 Family Purchase Agreement from TAM to LATAM.
On December 11, 2014, we entered into amendment No. 17 to the Second A320 Family Purchase Agreement covering the substitution of certain Aircraft.
Between April and August 2011, we entered into Buyback Agreements No. 3001, 3030, 3062, 3214 and 3216 with Airbus Financial Services for the sale of five A318 aircraft.
Between August 2012 and January 2013, we entered into Buyback Agreements No. 3371, 3390, 3438, 3469 and 3509 with Airbus Financial Services for the sale of five A318 aircraft.
Airbus A320NEO Family Fleet
On June 22, 2011, we entered into A320 NEO Purchase Agreement (“A320 NEO Purchase Agreement”) to acquire twenty Airbus 320 NEO family aircraft with schedule delivery dates in 2017 and 2018. The estimated gross value (at list prices) of these aircraft is US$1.7 billion.
Between April and August 2011,On February 27, 2014, we entered into Buyback Agreementsamendment No. 3001, 3030, 3062, 32141 to the A320 NEO Purchase Agreement covering the advancement of the date by which the LATAM selects the propulsion systems.
On July 15, 2014, we entered into amendment No. 2 to the A320 NEO Purchase Agreement covering the order of incremental A320 NEO Aircraft.
On December 11, 2014, we entered into amendment No. 3 the A320 NEO Purchase Agreement covering the order of incremental A320 NEO Aircraft and 3216A321 NEO Aircraft.
Aercap Holdings N.V.
On May 28, 2013, we entered into a framework deed with Airbus Financial ServicesAercap Holdings N.V. for the sale and leaseback of five A318several A330-200 aircraft already in fleet and several new aircraft to be received from the manufacturer including A350-00, B787-8 and B787-9 aircraft. The estimated gross value (at list prices) of these aircraft is US$3.0 billion.
Aircastle Holding Corporation Limited
On February 21, 2014, we entered into a framework deed with Aircastle Holding Corporation Limited for approximatelythe lease of four B777-300ER already in fleet. The four aircrafts were manufactured in 2012 and the estimated market value (at list prices) of these aircraft is US$107580 million. The average term of the leases is 60 months.
For more information, see “Item 4. Information on the Company—Fleet—Fleet Leasing and Financing Arrangements”.
GE Commercial Aviation
On April 30, 2007, we also entered into an Aircraft Lease Common Terms Agreement with GE Commercial Aviation Services Limited and two Aircraft Lease Agreements with Wells Fargo Bank Northwest N.A., as owner trustee, for the lease of two Boeing B777-200LRF aircraft. These aircraft were delivered in 2009 and the leases shall remain in place for a term of 96 months.
For more information, see “Item 4. Information on the Company—Fleet—Fleet Leasing and Financing Arrangements”.
GE Engine Services LLC
On December 17, 2010,June 12, 2014, we (and TAM Linhas Aereas S,A) entered into a Digital Services Agreementengine services agreement with GE Engine Services, LLC and GE Celma Ltda. for the provision of operational analysis, performance and maintenance services of aircraft engines.CF6-80C2B6F engines (which powers our B767 fleet) during 200 shop visits or 10 years, whichever occur first.
CFM International
On December 17, 2010, we entered into General Terms Agreement No. CFM-1-2377460475 (the “GTA”) and Letter Agreement No. 1 to GTA with CFM International, Inc. (“CFM”) for the sale and support by CFM of CFM56-5B engines to power 70 A320
family aircraft and up to 14 CFM56-5B spare engines, related equipment and spare parts. Moreover, on December 17, 2010,engines. On the same date, we entered into a Rate Per Flight Hour Engine Shop Maintenance Services Agreement with CFM for the provision by CMFCFM of maintenance services over our aircraftfor the abovementioned installed and spare engines.
General Electric Company
On July 11, 2011December 31, 2014, we entered Letter Agreement No. 2 to GTA with CFM International, Inc. (“CFM”) for the sale and support by CFM of CFM56-5B engines to power 20 A320 family aircraft and 1 spare engine.
PW1100G-JM Engine Maintenance Agreement
In February 2014, we entered into Letter Agreementan engine support and maintenance agreement with United Technologies Internation Corporation, Pratt & Whitney Division (“PW”) for the sale, support and maintenance by PW of PW1100G-JM engines to power 42 A320NEO family aircraft and 9 spare engines. It is also a rate per engine flight hour contract agreement, which includes cost control mechanisms for LATAM.
Sabre Contract
In November 2009, we entered into a master agreement with Sabre Inc., pursuant to which LATAM was granted with access and use of certain reservation systems and other Sabre software solutions. This agreement will remain in force for five years or until the expiration of all Work Orders to the agreement. In addition, LATAM has distribution agreements in place with Sabre as well as with other distribution providers.
TAM Material Contracts
A320/A330 Family Purchase Agreements
In November 2006, TAM entered into a purchase agreement with Airbus S.A.S. for the purchase of 31 A320-Family Aircraft and 6 A330-200 aircraft, with deliveries between 2007 and 2010.
In January 2008, TAM entered into a new purchase agreement for 20 A320-Family Aircraft and 4 A330-200 aircraft, with deliveries between 2007 and 2014.
In July 2010, TAM entered a purchase agreement for 20 A320-Family Aircraft with deliveries between 2014 and 2015.
In October 2011, TAM entered into a new purchase agreement for 10 A320-Family Aircraft with deliveries between 2016 and 2017, plus 22 A320 NEO Family Aircraft with deliveries between 2016 and 2018.
In January 2012, TAM entered into Amendment No. 12 to the General Terms AgreementsA320/A330 Purchase Agreement to reschedule the delivery dates of certain aircraft.
In November 2012, TAM entered into Amendment No. 6-957613 to the A320/A330 Purchase Agreement to convert the aircraft type of A320 family aircraft.
In December 2012, TAM entered into Amendment No. 14 to the A320/A330 Purchase Agreement to convert the aircraft type of an A320 family aircraft and reschedule the delivery date of such aircraft.
In February 2013, TAM entered into Amendment No. 15 to the A320/A330 Purchase Agreement to make some changes to the scheduled delivery month of certain A320 Family Aircraft.
In February 2013, TAM entered into Amendment No. 16 to the A320/A330 Purchase Agreement to make a change to the aircraft type of certain A320 Family Aircraft, to the scheduled delivery month/quarter of certain A320 Family Aircraft and to make certain changes to the dates by which TAM will select the propulsion systems and NEO propulsion systems for certain Aircraft.
In August 2013, TAM entered into Amendment No. 17 to the A320/A330 Purchase Agreement to make a change to the scheduled delivery month of a certain A320 Family Aircraft and to make the selection of the propulsion systems and NEO propulsion systems for certain Aircraft.
In December 2014, TAM entered into Amendment No. 19 to the A320/A330 Purchase Agreement to reschedule and substitute certain A321 Aircraft.
A350 Family Purchase Agreement
In January 2008, TAM entered into a purchase agreement with General Electric CompanyAirbus S.A.S. for the purchase of 22 A350 aircraft.
In July 2010, TAM entered into amendment No. 1 to the A350 purchase agreement to purchase five additional A350 XWB.
In July 2014, TAM entered into amendment No. 2 to the A350 purchase agreement to reschedule the delivery of certain A350-900XWB and to amend certain provisions to reflect the latest aircraft specification.
In July 2014, TAM, LATAM and Airbus entered into a novation agreement novating the A350 purchase agreement from TAM to LATAM.
In October 2014, we entered into amendment No. 3 to the A350 purchase agreement to reschedule the schedule delivery month of a certain A350-900XWB aircraft.
Boeing 777 Purchase Agreement
In February 2007, TAM entered into a purchase agreement with Boeing for the purchase of four new CF6 80CB6F engines with delivery on 2013 and one purchase right for a CF6 80CB6F engine.Boeing 777-32WER.
Pratt & Whitney Engine Leasing
On July 28, 2011, weIn August 2007, TAM entered into Used PW6122A Fivesupplemental agreement No. 1 to the 777 Purchase Agreement to exercise four option aircraft and to define certain aircraft configuration.
In March 2008, TAM entered into supplemental agreement No. 2 to the 777 Purchase Agreement to document its agreement on the descriptions and pricing of some options and master changes related to certain aircraft.
In December 2008, TAM entered into supplemental agreement No. 3 to the 777 Purchase Agreement for the purchase of 2 incremental 777 aircraft.
In July 2010, TAM entered into supplemental agreement No. 5 to the 777 Purchase Agreement to reschedule the delivery of certain aircraft.
In February 2011, TAM entered into supplemental agreement No. 6 to the 777 Purchase Agreement for the purchase of 2 incremental 777 aircraft.
In May 2014, TAM entered into supplemental agreement No. 7 to the 777 purchase agreement to substitute two 777-300ER Aircraft originally scheduled for delivery in 2014 for two 777-F aircraft for scheduled delivery in 2017.
CFM56-5B Engine PurchaseMaintenance Contract
In March 2006, TAM entered into a services agreement with GE Celma, a Brazilian subsidiary of General Electric Engine Services division, for the maintenance by GE Celma of CFM56-5B engines to power 25 A320 family aircraft and 4 spare engines.
In March 2007 TAM entered into the Amendment 1 to the abovementioned services agreement with GE Celma, extending the maintenance services to the engines powering additional 16 A320 family aircraft and 2 spare engines.
V2500-A5 Engine Maintenance Agreement
In 2000, TAM entered into an engine maintenance contract with MTU Motoren-und Turbinen-Union München GmbH, or MTU, pursuant to which MTU agreed to provide certain maintenance, refurbishment, repair and modification services with respect to approximately 105 TAY650-15 aircraft engines. This contract is complemented by a novation and amendment agreement between us and Rolls-Royce Brazil Ltda. pursuant to which Rolls-Royce Brazil Ltda., replaced MTU as contract counterparty. This agreement terminates on June 30, 2015.
PW4168 Engine Maintenance Agreement
In June 2007, TAM Linhas Aéreas S.A. entered into an purchase and support agreement engine sale, support and maintenance services agreement with Pratt & Whitney Engine Leasing, LLCcovering 20 engines contained in TAM’s A330-200 fleet 6 aircraft plus 2 spares. It is also a rate per engine flight hour contract agreement, which includes cost control mechanisms for the sale of five PW6122A engines.
Proposed Merger Agreements
On January 18, 2011, we and Costa Verde Aeronáutica and Mineras del Cantábrico (we refer to these entities together as the “LAN controlling shareholders”) entered into an implementation agreement and an exchange offer agreement (we refer to these agreements together as the “transaction agreements”) withSabre Contract
In October 2003, TAM S.A., TAM Empreendimentos e Participações S.A. (we refer to this entity as the “TAM controlling shareholder”) and Maria Cláudia Oliveira Amaro, Maurício Rolim Amaro, Noemy Almeida Oliveira Amaro and João Francisco Amaro (we refer to these individuals together as the “Amaro family”), which set forth the terms and conditions of a proposed business combination of LAN and TAM. For more information, see “Item 4. Information on the Company—The Transaction Agreements”. On January 12, 2012 the transaction agreements were extended until June 30, 2012.
On January 25, 2012, the Company, LAN controlling shareholders Costa Verde Aeronáutica S.A. and Mineras del Cantábrico S.A., and TEP Chile S.A. entered into a Shareholders Agreement,general services agreement with Sabre Travel International Limited, pursuant to which sets forthTAM was granted a license (relating to the parties’ agreement concerning the governance, managementprovision of maintenance services) for electronic reservation technology and operationdatabase backup. The term of the LATAM Group,agreement was tacitly and votingautomatically extended to cover all Work Orders currently in force under the agreement and transfer of their respective LAN common shares and TEP Chile’s voting shares of Holdco I, followingwill expire at the effectivesame time with the expiration of the proposed combinationlast Work Order. In addition, TAM has distribution agreements in place with TAM.Sabre as well as with other distribution providers.
On January 25, 2012, we
Amadeus Contract
In July 2009, TAM entered into a Shareholders Agreementgeneral services agreement with TEP ChileAmadeus IT Group S.A., pursuant to which sets forth ourTAM was granted a license (relating to the provision of maintenance services) for electronic reservation technology and database backup. This agreement concerning the governance, management and operation of the LATAM Group following the effective time of the proposed combinationwill remain in force for ten years, unless cancelled early by either party. In addition, TAM has distribution agreements in place with TAM.Amadeus as well as with other distribution providers.
On January 25, 2012, the Company, TEP Chile and Holdco I S.A. entered into a Shareholders Agreement, which sets forth our agreement concerning the governance, management and operation of Holdco I, and voting and transfer of voting shares of Holdco I, following the effective time of the proposed combination with TAM.
On January 25, 2012, the Company, TAM S.A., TEP Chile S.A. and Holdco I S.A. entered into a Shareholders Agreement, which sets forth our agreement concerning the governance, management and operation of TAM and its subsidiaries following the effective time of the proposed combination with TAM.
For more information, see “Item 4. Information on the Company—Shareholders Agreements”.
Sale of Blue Express
On January 25, 2011 Lan Cargo S.A. and Inversiones Lan S.A., subsidiaries of LAN Airlines, signed a promise to sell in favor of Bethia S.A. (“Bethia”) 100% of the capital in the LAN subsidiaries Blue Express Intl. Servicios de Transporte Limitada and Blue Express S.A. (together referred to as “Blue Express”), companies engaged in ground courier services, operating brands and certain computer programs. The price stated in the promissory contract was US$ 54 million subject to any adjustments that might arise as a result of a due diligence to be conducted by Bethia.
On April 6, 2011, LAN Cargo S.A. and Inversiones LAN S.A, as sellers, and Servicios de Transporte Limitada and Inversiones Betmin SpA (subsidiary of Bethia S.A.), as buyer, executed: (i) an Assignment of Social Rights; and (ii) a Share Purchase Agreement for the transfer of 100% of the capital in the LAN subsidiaries Blue Express Intl. Servicios de Transporte Limitada and Blue Express S.A., respectively. The final sale value of Blue Express was approximately US$53.5 million.
D. Exchange Controls
Foreign Investment and Exchange Controls in Chile
The Central Bank of Chile is responsible, among other things, for monetary policies and exchange controls in Chile. Equity investments, including investments in shares of stock by persons who are non-Chilean residents, have been generally subject in the past to various exchange control regulations restricting the repatriation of their investments and the earnings thereon.
Article 47 of the Central Bank Act and former Chapter XXVI of the Central Bank Foreign Exchange Regulations regulated the foreign exchange aspects of the issuance of ADSs by a Chilean company until April 2001. According to former Chapter XXVI, the Central Bank of Chile and the depositary had to enter into an agreement in order to gain access to the formal exchange market. The issuers of the shares underlying the ADSs and the custodian could also be parties to these agreements and we are party to such agreement.agreements.
On April 16, 2001, the Central Bank of Chile agreed that, effective April 19, 2001:
prior foreign exchange restrictions would be eliminated: and
• | a new Compendium of Foreign Exchange Regulations (Compendio de Normas de Cambios Internacionales) would be applied. |
The main objective of these amendments, as declared by the Central Bank of Chile, is to facilitate movement of capital in and out of Chile and to encourage foreign investment.
In connection with the change in policy, the Central Bank of Chile eliminated the following restrictions:
a reserve requirement with the Central Bank of Chile for a period of one year (this mandatory reserve was imposed on foreign loans and funds brought into Chile to purchase shares other than those acquired in the establishment of a new company or in the capital increase of the issuing company; the reserve requirement was gradually decreased from 30% of the proposed investment to 0%);
the requirement of prior approval by the Central Bank of Chile for certain operations;
mandatory return of foreign currency to Chile; and
mandatory conversion of foreign currency into Chilean pesos.
Under the new regulations, only the following limitations apply to these operations:
the Central Bank of Chile must be provided with information related to certain operations; and
certain operations must be conducted with the Formal Exchange Market.
The Central Bank of Chile also eliminated Chapter XXVI of the Compendium of Foreign Exchange Regulations, which regulated the establishment of an ADR facility by a Chilean company. Pursuant to the new rules, it is no longer necessary to seek the Central Bank of Chile’s prior approval in order to establish an ADR facility nor to enter into a foreign investment contract with the Central Bank of Chile. The establishment of an ADR facility is now regarded as an ordinary foreign investment, and simply requires that the Central Bank of Chile be informed of the transaction pursuant to Chapter XIV of the amended Compendium of Foreign Exchange Regulations and that the foreign currency transactions related thereby be conducted through the Formal Exchange Market.
However, all contracts executed under the provisions of former Chapter XXVI (including the foreign investment contract among LanLATAM Airlines Group, the Central Bank of Chile and the ADS depositary, or the “Foreign Investment Contract”), remainremained in full force and effect and continuecontinued to be governed by the provisions, and continuecontinued to be subject to the restrictions, set forth in former Chapter XXVI at the time of its abrogation. Our Foreign Investment Contract guaranteesguaranteed ADS investors access to the Formal Exchange Market to convert amounts from Chilean pesos into U.S. dollars and repatriate amounts received with respect to deposited common shares or common shares withdrawn from deposit or surrender of ADRs (including amounts received as cash dividends and proceeds from the sale in Chile of the underlying common shares and any rights arising from them).
The guarantee of access to the Formal Exchange Market under the Foreign Investment Contract requires compliance of the following conditions:
the funds to purchase the common shares underlying the ADSs are brought into Chile and converted into Chilean pesos through the Formal Exchange Market;
the purchase of the underlying common shares is made on a Chilean stock exchange; and
within five business days from conversion of the funds into Chilean pesos, the Central Bank of Chile is informed that the conversion funds were used to purchase the underlying common shares.
The following is a summary of material provisions of the Foreign Investment Contract, a form of which was filed as an exhibit to the registration statement on Form F-1 (File No. 333-7750) that we filed on October 10, 1997 in connection with our November 6, 1997 offering. This summary is not complete and is qualified in its entirety by reference to former Chapter XXVI and the Foreign Investment Contract.
Under former Chapter XXVI and the Foreign Investment Contract, the Central Bank of Chile agreed to grant to the depositary, on behalf of ADR holders, and to any investor not residing or domiciled in Chile who withdraws common shares upon surrender of ADRs, access to the Formal Exchange Market to convert Chilean pesos into U.S. dollars (and to remit those dollars outside Chile) in respect of common shares represented by ADSs or withdrawn shares, including amounts received as:
cash dividends;
proceeds from the sale in Chile of withdrawn shares or from shares distributed as a result of a liquidation, merger or consolidation of Lan Airlines (subject to receipt by the Central Bank of Chile of a certificate from the holder of the withdrawn shares or the distributed shares (or from an institution authorized by the Central Bank of Chile) that the holder’s residence and domicile are outside of Chile, and a certificate from a Chilean stock exchange (or from a brokerage or securities firm established in Chile) that the withdrawn shares or the distributed shares were sold on a Chilean stock exchange);
proceeds from the sale in Chile of preemptive rights to subscribe for additional common shares;
proceeds from the liquidation, merger or consolidation of Lan Airlines;
proceeds from the sale in Chile of common shares received as a dividend; and
other distributions, including those in respect of any recapitalization resulting from holding common shares represented by ADSs or withdrawn shares.
Former Chapter XXVI provided that access to the Formal Exchange Market in connection with dividend payments is conditioned on our certifying to the Central Bank of Chile that a dividend payment has been made and that any applicable tax has been withheld. We agreed to provide this certification. former Chapter XXVI also provides that access to the Formal Exchange Market in connection with the sale of withdrawn shares, or distribution on them, is conditioned upon receipt by the Central Bank of Chile of a certification by the depositary or custodian, as the case may be, that the common shares have been withdrawn in exchange for delivery of the appropriate ADRs and receipt of a waiver of the benefit of the Foreign Investment Contract with respect to them (except in connection with the proposed sale of the common shares) until the withdrawn shares are redeposited.
Former Chapter XXVI and the Foreign Investment Contract provided that a person who brings foreign currency into Chile to purchase common shares pursuant to the Foreign Investment Contract must convert that foreign currency into Chilean pesos on the date of entry into Chile, and must invest in common shares within five banking business days in order to receive the benefits of the Foreign Investment Contract. If a person does not invest in common shares within that period, that person can access the Formal Exchange Market to reacquire foreign currency, provided that the request is presented to the Central Bank of Chile within seven banking business days of the initial conversion into pesos. Common shares acquired as described above may be deposited in exchange for ADRs and will receive the benefits of the Foreign Investment Contract, subject to:
receipt by the Central Bank of Chile of a certificate from the depositary that the common shares have been deposited and that the related ADRs have been issued; and
receipt by the custodian of a declaration from the person making the deposit waiving the benefits of the Foreign Investment Contract with respect to the deposited common shares.
Access to the Formal Exchange Market under any of the circumstances described above is not automatic. Pursuant to former Chapter XXVI, such access required approval of the Central Bank of Chile based on a request presented through a banking institution established in Chile. The Foreign Investment Contract provides that if the Central Bank of Chile has not acted on the request within seven banking days, the request is deemed approved.
Under current Chilean law, the Foreign Investment Contract cannot be changed unilaterally by the Central Bank of Chile. We cannot guarantee, however, 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. On May 10, 2007, the Council of the Central Bank of Chile agreed to grant the Chilean companies that increased their capital stock between the date of the agreement and August 31, 2007 the option to request, on a one-time only basis, the application of Chapter XXVI to those shares issued and actually paid before August 31, 2008 (assuming prior fulfillment of the requirements of the Central Bank of Chile).
On May 10, 2007, the Board of the Central Bank of Chile resolved to interpret the regulations regarding the former Chapter XXVI in connection with the access granted to the Formal Exchange Market. These regulations allowed entities that carry out capital increases by means of the issuance of cash shares before August 31, 2007 to apply the aforementioned regulation to their capital increases, but only once and only if those shares can be fully subscribed and paid by August 31, 2008, among other conditions. Consequently, capital increases carried out after August 31, 2007 will have no guaranteed access to the Formal Exchange Market. Furthermore, there is no assurance that (i) additional Chilean restrictions may be inapplicable to the holders of ADRs, (ii) the disposition of underlying shares or the repatriation of the proceeds from such disposition will be subject to restrictions in the future, and (iii) we cannot assess the duration or impact of such restrictions if imposed. Furthermore,
On October 17, 2012, the Central Bank of Chile, interpreted in December 9, 2004, that new shares issued by Chilean banking institutions in connection with a merger of an issuer of ADSs that has previously executed a Foreign Investment Contract with the Central Bank of Chile with another company, are not covered by the terms of such Foreign Investment Contract. The Central Bank of Chile granted to Chilean banking institutions onlydepositary and for a term of 90-days from December 9, 2004, the option to subject to the Foreign Investment Contract any shares issued as a result of a merger after the execution of such contract.
Therefore, any shares to be issued by LAN pursuant to the exchange offer and the mergers will not be covered by the Foreign Investment Contract. Based on the foregoing, and in order for all ADS to be subject to the same exchange control regime, LAN’s Board of Directors has resolved to enterLATAM Airlines Group entered into a termination agreement within respect to the Foreign Investment Contract.of LATAM’s existing foreign investment contract. ADR holders will bewere notified about this termination in accordance towith Section 16 of the depositary agreement. See item 3. “D Risks Relating to Exchange Offer and Mergers involving TAM S.A.” for a description of the exchange offer and the mergers.
Deposit Agreement. Upon termination of the Foreign Investment Contract,foreign investment contract, holders of ADSs and the ADR program will bedepositary no longer have guaranteed access to the Formal Exchange Market. Currently, the ADS facility is governed by Chapter XIV of the Compendium on “Regulations applicable to Credits, Deposits, Investments and Capital Contributions from Abroad”.Abroad.” According to Chapter XIV, the establishment or maintenance of an ADR programADS facility is regarded as an ordinary foreign investment, and it is not necessary to seek the Central Bank of Chile’s prior approval in order to establish an ADRADS facility. The establishment or maintenance of an ADRADS facility only requires that the Central Bank of Chile be informed of the transaction, and that the foreign currency transactions related thereby be conducted through the Formal Exchange Market.
Investment in Our Shares and ADRs after the mergersbusiness combination with TAM
InvestmentsAs a result of the combination with TAM, investments made in shares of our common stock after the mergers will beare subject to the following requirements:
any foreign investor acquiring shares of our common stock who brought funds into Chile for that purpose must bring those funds through an entity participating in the Formal Exchange Market;
any foreign investor acquiring shares of our common stock to be converted into ADSs or deposited into an ADR program who brought funds into Chile for that purpose must bring those funds through an entity participating in the Formal Exchange Market;
in both cases, the entity of the Formal Exchange Market through which the funds are brought into Chile must report such investment to the Central Bank of Chile;
all remittances of funds from Chile to the foreign investor upon the sale of the acquired shares of our common stock or from dividends or other distributions made in connection therewith must be made through the Formal Exchange Market;
all remittances of funds from Chile to the foreign investor upon the sale of shares underlying ADSs or from dividends or other distributions made in connection therewith must be made through the Formal Exchange Market; and
all remittances of funds made to the foreign investor must be reported to the Central Bank of Chile by the intervening entity of the Formal Exchange Market.
When funds are brought into Chile for a purpose other than to acquire shares to convert them into ADSs or deposit them into an ADR program and subsequently such funds are used to acquire shares to be converted into ADSs or deposited into an ADR program such investment must be reported to the Central Bank of Chile by the custodian within 10 days following the end of each month within which the custodian is obligated to deliver periodic reports to the Central Bank of Chile.
When funds to acquire shares of our common stock or to acquire shares to convert them into ADSs or deposit them into an ADR program are received by us abroad (i.e., outside of Chile), such investment must be reported to the Central Bank of Chile directly by the foreign investor or by an entity participating in the Formal Exchange Market within ten days following the end of the month in which the investment was made.
All payments in foreign currency in connection with our shares of common stock or ADSs made from Chile through the Formal Exchange Market must be reported to the Central Bank of Chile by the entity participating in the transaction. In the event there are payments made outside of Chile, the foreign investor must provide the relevant information to the Central Bank of Chile directly or through an entity of the Formal Exchange Market within the first ten calendar days of the month following the date on which the payment was made.
There can be no assurance that additional Chilean restrictions applicable to the holders of ADSs, the disposition of shares of our common shares underlying ADSs or the conversion or repatriation of the proceeds from such disposition will not be imposed in the future, nor can we assess the duration or impact of such restriction if imposed.
This summary does not purport to be complete and is qualified by reference to Chapter XIV of the Central Bank of Chile’s Foreign Exchange Regulations, a copy of which is available in Spanish and English versions at the Central Bank’s website at www.bcentral.cl.
Voting Rights
Holders of our ADSs, which represent common shares, may instruct the depositary to vote the shares underlying their ADRs. If we ask holders for instructions, the depositary will notify such holders of the upcoming vote and arrange to deliver our voting materials to such holders. The materials will describe the matters to be voted on and explain how holders may instruct the depositary
to vote the shares or other deposited securities underlying their ADSs as they direct by a specified date. For instructions to be valid, the depositary must receive them on or before the date specified as “Vote Cut-Off Date.” The depositary will try, as far as practical, subject to Chilean law and the provisions of our by-laws, to vote or to have its agents vote the shares or other deposited securities as holders instruct. Otherwise, holders will not be able to exercise their right to vote unless they withdraw the shares. However, holders may not know about the meeting far enough in advance to withdraw the shares. We will use our best efforts to request that the depositary notify holders of upcoming votes and ask for their instructions.
If the depositary does not receive voting instructions from a holder by the specified date, it will consider such holder to have authorized and directed it to give a discretionary proxy to a person designated by our board of directors to vote the number of deposited securities represented by such holder’s ADSs. The depositary will give a discretionary proxy in those circumstances to vote on all questions to be voted upon unless we notify the depositary that:
we do not wish to receive a discretionary proxy;
we think there is substantial shareholder opposition to the particular question; or
we think the particular question would have an adverse impact on our shareholders.
The depositary will only vote or attempt to vote as such holder instructs or as described above.
We cannot assure holders that they receive the voting materials in time to ensure that they can instruct the depositary to vote their shares. This means that holders may not be able to exercise their right to vote and there may be nothing they can do if their shares are not voted as they requested.
Exchange Rates
Prior to 1989, Chilean law permitted the purchase and sale of foreign exchange only in those cases explicitly authorized by the Central Bank of Chile. The Central Bank Act liberalized the rules that govern the ability to buy and sell foreign currency. The Central Bank Act empowers the Central Bank of Chile to determine that certain purchases and sales of foreign currency specified by law must be carried out exclusively in the Formal Exchange Market, which is made up of the banks and other entities authorized by the Central Bank of Chile. All payments and distributions with respect to the ADSs must be conducted exclusively in the Formal Exchange Market.
For purposes of the operation of the Formal Exchange Market, the Central Bank of Chile sets a reference exchange rate (dólar acuerdo). The Central Bank of Chile resets the reference exchange rate monthly, taking internal and external inflation into account, and adjusts the reference exchange rate daily to reflect variations in parities between the Chilean peso, the U.S. dollar, the Japanese yen and the European euro.
The observed exchange rate (dólar observado) is the average exchange rate at which transactions were actually carried out in the Formal Exchange Market on a particular day, as certified by the Central Bank of Chile on the next banking day.
Prior to September 3, 1999, the Central Bank of Chile was authorized to buy or sell dollars in the Formal Exchange Market to maintain the observed exchange rate within a specified range above or below the reference exchange rate. On September 3, 1999, the Central Bank of Chile eliminated the exchange band. As a result, the Central Bank of Chile may buy and sell foreign exchange in the Formal Exchange Market in order to maintain the observed exchange rate at a level the Central Bank of Chile determines.
Purchases and sales of foreign exchange may be effected outside the Formal Exchange Market through the Informal Exchange Market (Mercado Cambiario Informal) established by the Central Bank in 1990. There are no limits on the extent to which the rate of exchange in the Informal Exchange Market can fluctuate above or below the observed exchange rate.
Although our results of operations have not been significantly affected by fluctuations in the exchange rates between the peso and the U.S. dollar because our functional currency is the U.S. dollar, we are exposed to foreign exchange losses and gains due to exchange rate fluctuations. Even though the majority of our revenues are denominated in or pegged to the U.S. dollar, the Chilean government’s economic policies affecting foreign exchange and future fluctuations in the value of the peso against the U.S. dollar could adversely affect our results of operations and an investor’s return on an investment in ADSs.
E. Taxation
Chilean Tax
The following discussion relates to Chilean income tax laws presently in force, including Ruling No. 324 of January 29, 1990 of the Chilean Internal Revenue Service (“Chilean IRS”) and other applicable regulations and rulings, all of which are subject to change. The discussion summarizes the principal Chilean income tax consequences of an investment in the ADSs or common shares by a person who is neither domiciled in, nor a resident of, Chile or by a legal entity that is not organized under the laws of Chile and does not have a branch or a permanent establishment located in Chile (such an individual or entity is referred to herein as a Foreign
Holder). For purposes of Chilean tax law, an individual holder is a resident of Chile if such person has resided in Chile for more than six consecutive months in one calendar year or for a total of six months, whether consecutive or not, in two consecutive tax years. In addition, an individual is considered domiciled in Chile in case he or she resides in Chile with the actual or presumptive intent of staying in the country. The discussion is not intended as tax advice to any particular investor, which can be rendered only in light of that investor’s particular tax situation.
Under Chilean law, provisions contained in statutes such as tax rates applicable to foreign investors, the computation of taxable income for Chilean purposes and the manner in which Chilean taxes are imposed and collected may only be amended by another statute. In addition, the Chilean tax authorities enact rulings and regulations of either general or specific application and interpret the provisions of Chilean tax law. Chilean tax may not be assessed retroactively against taxpayers who act in good faith relying on such rulings, regulations and
interpretations, but Chilean tax authorities may change these rulings, regulations and interpretations prospectively. On February 4, 2010, representatives of the governments of the United States and Chile signed an income tax treaty. The new treaty will have to be approved by the U.S. Senate.
On September 29, 2014, Chile enacted Law No. 20,780 (the “Tax Reform Act”). The Tax Reform Act introduced changes to the corporate tax rate, mandating a gradual increase of the rate from 20% to 25% or 27% in certain cases, the rules regarding minimum capitalization, and the taxation of Chilean investments abroad (the controlled-foreign-corporation rules), among others. The new rules are set to come into effect gradually, with the implementation process having commenced on October 1, 2014 and set to be completed by January 1, 2018.
Cash Dividends and Other Distributions
Cash dividends we pay with respect to the ADSs or common shares held by a Foreign Holder will be subject to a 35% Chilean withholding tax, which we withhold and pay over to the Chilean tax authorities and which we refer to as the Withholding Tax. A credit against the Withholding Tax is available based on the level of corporate income tax we actually paid on the income to be distributed (referred to herein as the First Category Tax); however, this credit does not reduce the Withholding Tax on a one-for-one basis because it also increases the base on which the Withholding Tax is imposed. If we register net income but taxable losses, no credit against the Withholding Tax will be available. In addition, if we distribute less than all of our distributable income, the credit for First Category Tax we pay is proportionately reduced. In 2011 the First Category Tax rate was 20%., and 18.5% for fiscal year 2012. From 2013 onwards,2014, Law 20.780 modified the provisional rate of First Category Tax will revert backthe first category tax from 20% to 17%21%.
In general, the example below illustrates the effective Withholding Tax burden on a cash dividend received by a Foreign Holder, assuming a Withholding Tax rate of 35%, ana First Category Tax rate of 17%21%, and a distribution of 30% of the consolidated net income of the Company after payment of the First Category Tax:
The Company’s taxable income | 100.00 | |||
First Category Tax | ( | ) | ||
Net distributable income | ||||
Dividend distributed (30% of net distributable income) | ||||
First category increase | ||||
Withholding Tax (35% of the sum of Ch$ | ( | ) | ||
Credit for | ||||
Net tax withheld | ( | ) | ||
Net dividend received | ||||
Effective dividend withholding rate | % |
In general, the effective dividend Withholding Tax rate, after giving effect to the credit for the First Category Tax, can be calculated using the following formula:
(Withholding Tax rate) – (First Category Tax effective rate)
1 – (First Category Tax effective rate)
Under Chilean income tax law, dividends generally are assumed to have been paid out of our oldest retained profits for purposes of determining the level of First Category Tax that we paid. The effective rate of Withholding Tax to be imposed on dividends we pay will vary depending upon the amount of First Category Tax we paid (if any) on the earnings to which the dividends are attributed, according to the Company’s Taxable Profit Fund. The Effective Withholding Tax rate for dividends attributed to earnings from 1991 until 2001, for which the First Category Tax rate was 15%, which resultresults in aan effective rate of 23.5%. For 2002, the First Category Tax rate was 16.0%, which results in an effective rate of 22.62%. In 2003, the First Category Tax rate was 16.5%, which results in an effective rate of 22.16%, from 2004 until 2010, the First Category Tax rate was 17%, which results in an effective rate of Withholding
Tax of 21.69%, In 2011 the First category Tax rate was 20%, which results in aan effective rate of Withholding Tax of 18,75%18.75%. In 2012 the First category Tax rate will be 18,5%was 20%, which results in aan effective rate of Withholding Tax of 20,25%18.75%. FromIn 2013 onwards the First category Tax rate will be 17%was 20%, which results in aan effective rate of Withholding Tax of 21,69%18.75%. In 2014 the First category Tax rate was 21%, which results in an effective rate of Withholding Tax of 17.72%.
For dividends attributable to our profits during years when the First Category Tax was 10% (before 1991), the effective rate will be 27.8%. However, whether the First Category Tax is 10%, 15%, 16%, 16.5%, 17% or 17%,20% the effective overall combined tax rate imposed on our distributed profits will be 35%. In the event that profits from previous years are not sufficient to cover a particular dividend, and the dividend is attributable to the current year, we will generally withhold tax from the dividend at the full 35% rate. If as of December 31 of the year in which the dividend is paid, the withholding is determined to be excessive taking into account First Category Tax, holders may file for a refund.
Dividend distributions made in property would be subject to the same Chilean tax rules as cash dividends based on the fair market value of such property. Stock dividends and the distribution of preemptive rights are not subject to Chilean taxation.
Capital Gains
Gain from the sale or other disposition by a Foreign Holder of ADRs evidencing ADSs outside Chile will not be subject to Chilean taxation. The deposit and withdrawal of common shares in exchange for ADRs will not be subject to any Chilean taxes.
Gain recognized on a sale or disposition of common shares (as distinguished from sales or exchanges of ADRs evidencing ADSs representing such common shares) may be subject to both the First Category Tax and the Withholding Tax (the former being creditable against the latter) if:
the Foreign Holder has held the common shares for less than one year since exchanging ADSs for the Shares;
the Foreign Holder acquired and disposed of the common shares in the ordinary course of its business or as a habitual trader of shares; or
the Foreign Holder and the purchaser of the common shares are “related parties” or has an interest in the latter within the meaning of Article 17, Number 8, of the Chilean Income Tax Law.
In all other cases, gain on the disposition of common shares will be subject only to a flat capital gains tax which is assessed at the same rate as the First Category Tax as sole income tax (currently imposed at a rate 20% for 2011, 18.5% for 2012 and 17% from 2013 onwards)21% in 2014, ) and no withholding tax will apply. The sale of shares of common stock by a Foreign Holder to an individual or entity resident or domiciled in Chile is subject to a provisional withholding. Such a provisional withholding will be equal to (i) 5%the difference between Withholding Tax rate and First Category Tax rate of the total (sale price) amount, without any deduction, paid to, credited to, account for, put at the disposal of, or corresponding to, the Foreign Holder if the transaction is subject to the First Category Tax as a sole tax.too. Unless the gain subject to taxation can be determined, case in which the withholding is equal to 17%, 20% or 18,5%, whichever is applicable, on the gain, or (ii) 20% of the total amount (the sale price without any deduction), paid to, credited to, account for, put at the disposal of, or corresponding to, the Foreign Holder if the transaction is subject to the general tax regime, that is, the First Category Tax, and the Withholding Tax, with a credit of the First Category Tax already paid.35%. The Foreign Holder would be entitled to request a tax refund for any amounts withheld in excess of the taxes actually due, in April of the following year upon filing its corresponding tax return. Gain recognized in the transfer of common shares that have a high presence in the stock exchange, however, is not subject to capital gains tax in Chile, provided that the common shares are transferred in a local stock exchange, in other authorized stock exchanges or within the process of a public tender of common shares governed by the Securities Market Law.
Chile’s Internal Revenue Service Ruling Nº224 (issued on January 30, 2008) confirmed that capital gains stemming from the sale of shares with high stock-market presence acquired through the exchange of American Depositary Receipts (ADRs) for shares is not subject to capital gains tax in Chile. Such exemption is applicable provided that the purchase of such ADR certificates has been made at stock exchanges duly authorized by SVS (which includes the New York Stock Exchange).
The common shares must also have been acquired either in a stock exchange, within the process of a public tender of common shares governed by the Securities Market Law, in an initial public offer of common shares resulting from the formation of a corporation or a capital increase of the same, or in an exchange of convertible bonds. Shares are considered to have a high presence in the stock exchange when they:
are registered in the Securities Registry;
are registered in a Chilean Stock exchange; and
have an adjusted presence equal to or above 25%.
To calculate the adjusted presence of a particular share, the aforementioned regulation first requires a determination of the number of days in which the operations regarding the stock exceeded, in Chilean pesos, the equivalent of 2001,000 UF (US$9,21940,588 as of March 28, 2012)December 31, 2014) within the previous 180 business days of the stock market. That number must then be divided by 180, multiplied by 100, and expressed in a percentage value. This tax regime does not apply if the transaction involves an amount of shares that would allow the acquirer to take control of the publicly traded corporation, in which case the ordinary tax regime referred to in the previous paragraph will apply, unless the transfer is part of a tender offer governed by the Securities Market Law or the transfer is done on a Chilean stock exchange, without substantially exceeding the market price.
Capital gains obtained in the sale of shares that are publicly traded and have a high presence in a stock exchange are also exempt from capital gains tax in Chile when the sale is made by “foreign institutional investors” such as mutual funds and pension funds, provided that the sale is made in a stock exchange or in accordance with the provisions of the Securities Market Law, or in any other form authorized by the SVS. To qualify as a foreign institutional investor, an entity must be formed outside of Chile, not have a domicile in Chile, and must be at least one of the following:
a fund that offers its common shares or quotas publicly in a country with investment grade public debt, according to a classification performed by an international risk classification entity registered with the SVS;
a fund registered with a regulatory agency or authority from a country with investment grade public debt, according to a classification performed by an international risk classification entity registered with the SVS, provided that its investments in Chile constitute less than 30% of the share value of the fund, including deeds issued abroad representing Chilean securities, such as ADRs of Chilean companies;
a fund whose investments in Chile represent less than 30% of the share value of the fund, including deeds issued abroad representing Chilean securities, such as ADRs of Chilean companies, provided that not more than 10% of the share value of the fund is directly or indirectly owned by Chilean residents;
a pension fund that is formed exclusively by natural persons that receive pensions out of an accumulated capital in the fund;
a Foreign Capital Investment Fund, as defined in Law No. 18,657, in which case all quota holders shall be Chilean residents or domestic institutional investors; or
any other foreign institutional investor that complies with the requirements set forth in general regulations for each category of investor or prior information from the SVS and the Chilean IRS.
The foreign institutional investor must not directly or indirectly participate in the control of the corporations issuing the shares it invests in, nor possess or participate in 10% or more of the capital or the profits of such corporations.
Another requirement for the exemption is that the foreign institutional investor must execute a written contract with a bank or a stock broker incorporated in Chile. In this contract, the bank or stock broker must undertake to execute purchase and sale orders, verify the applicability of the tax exemption or tax withholding and inform the Chilean IRS of the investors it works with and the transactions it performs. Finally, the foreign institutional investor must register with the Chilean IRS by means of a sworn statement issued by such bank or stock broker.
The tax basis of common shares received in exchange for ADRs will be the acquisition value of the common shares on the date of exchange duly adjusted for local inflation. The valuation procedure set forth in the deposit agreement, which values common shares which are being exchanged at the highest price at which they trade on the SSE on the date of the exchange, will determine the acquisition value for this purpose. Consequently, the surrender of ADRs for common shares and the immediate sale of the common shares for the value established under the
Deposit Agreement will not generate a capital gain subject to taxation in Chile, provided that the sale of the common shares is made on the same date on which the exchange of ADRs for common shares is recorded, or if the price of the common shares at the exchange date, as determined above, is higher than the price at which the common shares are sold.
The exercise of preemptive rights relating to the common shares will not be subject to Chilean taxation. Any gain on the sale of preemptive rights relating to the common shares will be subject to both the First Category Tax and the Withholding Tax (the former being creditable against the latter).
Other Chilean Taxes
There are no Chilean inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of ADSs by a Foreign Holder, but such taxes generally will apply to the transfer at death or by gift of the common shares by a Foreign Holder. There are no Chilean stamp, issue, registration or similar taxes or duties payable by Foreign Holders of ADSs or common shares.
Withholding Tax Certificates
Upon request, we will provide to Foreign Holders appropriate documentation evidencing the payment of the Withholding Tax (net of the applicable First Category Tax).
United States Federal Income Tax Considerations
The following is a summary of certain U.S. federal income tax considerations that may be relevant toThis section describes the purchase, ownership and disposition of our common shares and ADSs by a beneficial owner that is: (i) an individual citizen or resident of the United States; (ii) a corporation, or other entity taxable as a corporation, created or organized in or under the laws of thematerial United States any state thereof or the District of Columbia; (iii) a trust if (a) a United States court is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust or (b) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person or (iv) an estate that is subject to U.S. federal income tax on its income regardless of its source. For purposes of this discussion, we refer to these owners of common shares and ADSs as U.S. Holders.
This summary is not a comprehensive discussion of all of the tax considerations that may be relevant to your decision to purchase ADSs or common shares. In particular, this discussion is directed only to U.S. Holders that will hold ADSs or common shares as capital assets and it does not address any special U.S. federal income tax consequences that may be applicable to a U.S. Holders thatholder (as defined below) of owning common shares or ADSs. It applies to you only if you hold your common shares or ADSs as capital assets for tax purposes. This section does not apply to you if you are a member of a special class of holders subject to special treatment underrules, including:
This section is based on the Internal Revenue Code of 1986, as amended, (the “Code”), including, but not limited to banks or other financial institutions, regulated investment companies, entities that are treated for U.S. federal income tax purposes as partnerships or other pass-through entities, tax-exempt organizations, insurance companies, brokers or dealers in securities or foreign currencies, traders in securities electing to mark to market, holders that own or are treated as owning 10% or more of our voting common stock, holders that acquired ADSs or common shares pursuant to the exercise of an employee stock option or otherwise as compensation, persons holding ADSs or common shares as part of a hedging or conversion transaction or a straddle, or persons whose functional currency is not the U.S. dollar. If a partnership holds ADSs or common shares, the tax treatment of a partner will generally depend upon the status of the partner and upon the activities of the partnership. A prospective investor who is a partner of a partnership holding our ADSs or common shares should consult its own tax advisor.
The discussion below is based upon the provisions of the Code, its legislative history, existing and proposed U.S. treasury regulations, published rulings and court decisions, all as of the date hereof, and such authorities may be repealed, revoked or modified (with possiblecurrently in effect. These laws are subject to change, possibly on a retroactive effect) so as to result in U.S. federalbasis. There is currently no comprehensive income tax consequences different from those discussed below.treaty in effect between the United States and the Republic of Chile. In addition, this section is based in part upon the representations of the depositaryDepositary and the assumption that each obligation in the deposit agreements relating to the ADRsDeposit Agreement and any related agreementsagreement will be performed in accordance with theirits terms.
If a partnership holds the common shares or ADSs, the United States federal income tax treatment of a partner will generally depend on the status of the partner and the tax treatment of the partnership. A partner in a partnership holding the common shares or ADSs should consult its tax advisor with regard to the United States federal income tax treatment of an investment in the common shares or ADSs.
HOLDERS AND/OR PROSPECTIVE PURCHASERS OF ADSs OR COMMON SHARES SHOULD CONSULT THEIR OWN TAX ADVISERS AS TO THE CHILEAN,You are a U.S. FEDERAL INCOME OR OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR COMMON SHARES, INCLUDING, IN PARTICULAR, THE EFFECT OF ANY NON-U.S., STATE OR LOCAL TAX LAWS.
The following summary assumes thatholder if you are a beneficial owner of common shares or ADSs and you are:
You should consult your own tax advisor regarding the United States federal, state and local and the Chilean and other tax consequences of owning and disposing of common shares areand ADSs in your particular circumstances.
ADSs
In general, and taking into account the earlier assumptions, for United States federal income tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of the common shares represented by those ADRs. Exchanges of common shares for ADRs, and ADRs for common shares, generally will not stockbe subject to United States federal income tax.
Taxation of aDividends
Under the United States federal income tax laws, and subject to the passive foreign investment company (“PFIC”) for U.S. federal income tax purposes. Based on our audited financial statements and relevant market and shareholder data, we believe that we were not treated as a PFIC for U.S. federal income tax purposes with respect to our 2010 or 2011 taxable year. In addition, based on our audited financial statements and our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market and shareholder data, we do not anticipate becoming a PFIC for our 2012 taxable year. However, there can be no assurance in this regard because the PFIC determination is made annually and is based on the portion of our assets and income that is characterized as passive under the PFIC rules.
ADRs
In general,rules discussed below, if you are a U.S. Holderholder, the gross amount of ADRs evidencing our ADSs, you will be treated, for U.S. federal income tax purposes, as the beneficial owner of the underlying common shares that are represented by those ADSs and evidenced by those ADRs.
Taxation of Dividends
Distributions of cash or property (other than common stock, if any distributed pro rata to all of our shareholders, including holders of ADSs) paiddividend we pay out of our current or accumulated earnings and profits (as determined for U.S.United States federal income tax purposes) with respectis subject to ADSs or common shares, including the net amount of the Chilean Withholding Tax withheld on the distribution (after taking into account the credit for the First Category Tax), will be included in a U.S. holder’s gross income as ordinary income on the date on which you receive the dividends, in the case of common shares, or the date the depositary receives the dividends, in the case of common shares represented by ADSs, and will not be eligible for the dividends-received deduction allowed to corporations under the Code. Dividends paid in Chilean pesos generally will be included in a U.S. holder’s gross income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date the U.S. Holder receives the dividends, in the case of common shares, or the date the depositary receives the dividends, in the case of common shares represented by ADSs. U.S. Holders are encouraged to consult their own tax advisers regarding the treatment of foreign currency gain or loss, if any, on any Chilean pesos received which are converted into U.S. dollars after they are received. To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits as determined for U.S.United States federal income tax purposes, such excess amounts will be treated first as a nontaxable return of capital to the extent of such U.S. Holder’s tax basis in the ADSs or common shares and, thereafter, as capital gain.taxation.
We do not maintain calculations of earnings and profits under U.S. federal income tax principles. Accordingly, U.S. Holders should assume that any distribution made by us (other than common stock distributed pro rata to all our shareholders, as discussed above) will be treated as a dividend for U.S. federal income tax purposes.
Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received byIf you are a noncorporate U.S. Holder in taxable years before January 1, 2013 with respect toholder, dividends paid on the ADSs that constitute qualified dividend income will be subjecttaxable to taxationyou at a maximum rate of 15%the preferential rates applicable to long-term capital gains if you hold the dividends are “qualified dividends.”ADSs for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meet other holding period requirements. Dividends paid on the ADSs will be treated as qualified dividendsdividend income if:
the ADSs are readily tradable on an established securities market in the United States; and
we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a PFIC.
The ADSs are listed on the New York Stock Exchange, and will qualify as readily tradable on an established securities market in the United States so long as they are so listed. Accordingly, we expect that dividends we pay with respect to the ADSs will be qualified dividend income. Because our common shares are not expected to be listed on any U.S.United States securities market, it is unclear whether dividends we pay with respect to the common shares will also be qualified dividend income. If dividends we pay with respect to our common shares are not qualified dividend income, then the U.S. dollar amount of such dividends received with respect to our common sharesby a U.S holder (including dividends received by a noncorporate U.S. Holder in taxable years beginning before January 1, 2013)holder) will be subject to taxation at ordinary income tax rates.
You must include any Chilean tax withheld from the dividend payment in this gross amount even though you do not in fact receive it. The dividend is taxable to you when you, in the case of common shares, or the Depositary, in the case of ADSs, receive the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. The amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the Chilean pesos payments made, determined at the spot Chilean pesos/U.S. dollar rate on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a non-taxable return of capital to the extent of your basis in the common shares or ADSs and thereafter as capital gain. However, we do not expect to calculate earnings and profits in accordance with United States federal income tax principles. Accordingly, you should expect to generally treat distributions we make as dividends.
Subject to generally applicable limitations and conditions under the Internal Revenue Code, Chilean Withholding Tax withheld from dividendsand paid over to the Chilean tax authorities (after taking into account the credit for the First Category Tax, when it is available) will be treated as a foreign source income tax eligible for creditcreditable or deductible against a U.S. Holder’s U.S.your United States federal income tax liability or for deductionliability. Special rules apply in computing such U.S. Holder’s U.S. federal taxable income. Ifdetermining the foreign tax credit limitation with respect to dividends that are subject to the preferential tax rates. To the extent a refund of the tax withheld is available to you under Chilean law, as is the case if the amount of Chilean Withholding Tax initially withheld from a dividend is determined to be excessive however (asas described above under “—Taxation—Chilean Taxation—Tax—Cash Dividends and Other Distributions”),Distributions,” the excessamount of tax withheld that is refundable will not be creditableeligible for credit against your United States federal income tax liability.
Dividends will generally be income from sources outside the United States and will, depending on your circumstances, be either “passive” or deductible. For“general” income for purposes of calculatingcomputing the foreign tax credit dividends paid on the common shares will generally constitute foreign source “passive income.” U.S. Holders are not allowed foreign tax credits for withholding taxes imposed in respect of certain short-term or hedged positions in securities and may not be allowed foreign tax credits in respect of arrangements in which their expected economic profit is insubstantial. U.S. Holders are encouragedallowable to consult their tax advisers with regard to the availability of foreign tax credits and the application of the foreign tax credit limitations in light of their particular circumstances.you.
U.S. Holders that receive distributions of additional common shares or rights to subscribe for common shares as part of a pro rata distribution to all our shareholders generally will not be subject to U.S. federal income tax in respect of the distributions.
Taxation of Capital Gains or Losses
IfSubject to the PFIC rules discussed below, if you are a U.S. Holder, gainholder and you sell or loss realized on the sale, exchange or other taxable dispositionotherwise dispose of ADSs oryour common shares generallyor ADSs, you will berecognize capital gain or loss for United States federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and generally will be long-term capital gain or loss if the ADSs oryour tax basis, determined in U.S. dollars, in your common shares have beenor ADSs. Capital gain of a noncorporate U.S. holder is generally taxed at preferential rates where the property is held for more than one year. Long-term capital gain realized by a noncorporate U.S. Holder generally is subject to preferential tax rates. The deductibility of capital losses is subject to significant limitations.
Any gain or loss recognized by a U.S. Holder on such a sale, exchange or other taxable disposition will generally be treated as U.S. source gainincome or loss from sources within the United States for U.S. foreign tax credit limitation purposes. Accordingly, in the case of a disposition of common shares (which, unlike a disposition of ADSs, could be taxable in Chile), a U.S. HolderConsequently, you may not be able to use the foreign tax credit arising from any Chilean tax imposed on the disposition of the common shares (see “—Taxation—Chilean Taxation—Capital Gains”) unless such credit can be applied (subject to applicable limitations) against tax due on other income treated as derived from foreign sources in the appropriate incomelimitation category. The calculation
PFIC Rules
We believe that commons shares and availability of foreign tax credits and, in the caseADSs should not be treated as stock of a U.S. Holder that elects to deduct foreign income taxes, the availability of deductions, involves the application of complex rules that depend on a U.S. Holder’s particular circumstances. U.S. Holders are encouraged to consult their own tax advisors with regard to the availability of foreign tax credits and the application of the foreign tax credit limitations in light of their particular situation.
Deposits and withdrawals of common shares by U.S. Holders in exchangePFIC for ADSs will not result in the realization of gain or loss for U.S.United States federal income tax purposes.purposes, but this conclusion is a factual determination that is made annually and thus may be subject to change. If we were to be treated as a PFIC, unless you elect to be taxed annually on a mark-to-market basis with respect to your common shares or ADSs, gain realized on the sale or other disposition of your commons shares or ADSs would in general not be treated as capital gain. Instead, if you are a U.S. holder, you would be treated as if you had realized such gain and certain “excess distributions” ratably over your holding period for the commons shares or ADSs and would be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together with an interest charge in respect of the tax attributable to each such year. With certain exceptions, your commons shares or ADSs will be treated as stock in a PFIC if we were a PFIC at any time during your holding period in your commons shares or ADSs. Dividends that you receive from us will not be eligible for the special tax rates applicable to qualified dividend income if we are treated as a PFIC with respect to you either in the taxable year of the distribution or the preceding taxable year, but instead will be taxable at rates applicable to ordinary income.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to the information requirements of the Exchange Act, as amended. In accordance with these requirements, we file reports, including annual reports on Form 20-F and other information with the SEC. These materials, including this annual report and the exhibits hereto, may be inspected and copied at the SEC’s public reference rooms in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. In addition, some of our SEC filings, including those filed on and after February 19, 2002, are also available to the public through the SEC’s website atwww.sec.gov. www.sec.gov.
As a foreign private issuer, we are not subject to the same disclosure requirements as a domestic U.S. registrant under the Exchange Act. For example, we are not required to prepare and issue quarterly reports. However, we furnish our shareholders with annual reports containing financial statements audited by our independent auditors and make available to our shareholders quarterly reports containing unaudited financial data for the first three quarters of each fiscal year. We file such quarterly reports with the SEC within two months of each quarter of our fiscal year, and we file annual reports on Form 20-F within the time period required by the SEC, which is currently six months from December 31, the end of our fiscal year.
I. Subsidiary Information
Not applicable.
ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK General |
General
Given the nature of its business, LANLATAM is exposed mainly to three types of market risks:risk:
Jet fuelFuel price fluctuations;
Interest rateForeign exchange fluctuations; and
ExchangeInterest rate fluctuations.
TheManagement assesses the level of our exposure to these risks is periodically assessed to determine the extent to which LANwe should hedge against them and the most effective mechanisms to implement the hedge. LANLATAM purchases derivative instruments in foreign markets to offset market risk exposure, typically utilizing a mixturemix of call options, collar structuresfinancial and fixed price swaps agreements. LANcommodity derivatives. LATAM does not enter into or hold derivative contracts for trading purposes.
Risk of Fluctuations in Jet Fuel Prices
Jet fuel price fluctuations are largely dependent on supply and demand for crude oil, OPEC decisions, refinery capacities, stock levels of crude oil and geopolitical factors. In order to minimize
Individually, LAN and TAM fuel consumption for 2014 of 597.2 million and 632.1 million gallons, respectively. Since the riskcombination of jettheir business operations, LATAM has been managing the fuel price fluctuations,hedging program for both LAN hedges against such risk using derivative instruments.
Because jetand TAM, based on an approved policy. LATAM forecasted fuel is not traded in organized futures exchanges, there are limited optionsconsumption for 2015 was 1.252 million gallons. This policy aims to hedge against jetapproximately 20-60% of our aggregate fuel price fluctuations. However, LAN deems financialconsumption, using commodity derivatives for the expected fuel consumption from 12-24 months.
Jet Fuel isn’t the only underlying asset that LATAM may use for hedging purposes. It may also consider derivative instruments in other commoditiesunderlying commodity assets such as crude oil (Brent) or heating oil, useful for decreasing its exposure to jetoil.
To keep the Company competitive, a portion of the fuel price increases.
LAN uses swaps, calls and collars to hedge againstconsumption is not hedged, as a drop in fuel prices fluctuations. Swap contracts allow us to eliminatepositively affects the volatility risk by fixing the price. InCompany through a typical swap contract, LAN is compensated if the market price is above the fixed price at certain predetermined dates or needs to make disbursements if the market price is below the fixed pricereduction in those dates. Call options give us protection against rise in prices. Call option are only exercised when the market price is above the predetermined strike price thus providing LAN with protection with no downside risk. Collars are a combination of call and put options that limit the range of possible positive or negative outcomes to a specific price range. Above the predetermined ceiling price, LAN is compensated for the difference between the market price and the ceiling price. For any price below the predetermined floor price, LAN has to disburse the difference between the market price and the floor price.
We aremay be exposed to fuel hedging transaction losses if theour counterparties default.default (when LATAM has a positive Mark To Market). To manage this credit risk, we select counterparties based on their credit ratings and monitor our relative market position on a daily basis. For more information see “Item 3. Key Information—Risk Factors—Risks Related to Our Operations and the Airline Industry—Our operations are subject to fluctuations in the supply and cost of jet fuel, which could materiallynegatively impact our business” .
During 2011, 20102014, 2013 and 20092012 we entered into a mix of swaps calls, zero cost collars and collars option contracts on WTIBRENT and JET FUEL 54 USGC with investment grade banks and other financial entities for notional fuel purchases. In 2011, 397.8 million gallons were purchased, which represented 69.8%purchases (non delivery forward). Details of our total annualthe fuel consumption; in 2010, 282.7 million gallons were purchased, which represented 55.5% of our fuel consumption; and in 2009, 205.2 million gallons were purchased, which represented 45.7% of our total fuel consumption. The combined result of these contracts was a gain of US$39.9 million in 2011, compared to a gain of US$1 million in 2010 and a loss of US$128.7 million in 2009. hedging program are shown below:
LATAM Fuel Hedging Year ended December 31, | ||||||||||||
2014 LATAM | 2013 LATAM | 2012 LATAM(1) | ||||||||||
(millions of US$) | ||||||||||||
Gallons Purchased | 684.3 | 823.7 | 598.4 | |||||||||
% Total Annual Fuel Consumption | 55.6 | % | 65.0 | % | 44.7 | % | ||||||
Combined Result of Hedges (in US$) | –108.7 | +19.8 | –3.8 |
(1) | Includes TAM’s fuel hedging from June 23, 2012. |
As of December 31, 2011,2014, the fair value of our outstanding fuel related derivative contracts was estimated to be US$30.6157.2 million (asset)(negative).
Fair value by quarter, as of December 31, 2011 | ||||||||
1Q12 | 2Q12 | 3Q12 | Total | |||||
(in US$ millions) | ||||||||
Fair value of outstanding fuel derivative contracts | 10.5 | 12.5 | 7.6 | 30.6 |
Gains and losses on the hedging contracts outlined above are recognized as a cost of sales in the income statement when the fuel subject to the hedge is consumed. Premiums paid related to fuel derivative contracts are recorded as prepaid expenses (current assets) and amortized overrecorded as an expense at the respectivetime the contract periods.expires.
Under IFRS, the fair value of the hedging derivatives is booked as a non-current asset or liability if the remaining maturity of the item is hedged is overfor more than 12 months, and as a current asset or liability if the remaining term of the item is hedged isfor less than 12 months. The fair value of the derivative contracts is deferred within an equity reserve account. Please see Note 2.10 to our audited consolidated financial statements.
Sensitivity analysis
In order to protect the Company from increases in fuel prices, a portion of the fuel consumption is hedged using a mixture of protective instruments (call, collars) and fixing instruments (swaps). To keep the Company competitive, a portion of the fuel consumption is not hedged, as a drop in fuel prices affects the Company through a reduction in costs.
As the current positions do not represent changes in cash flows but a variation in the exposure to the market value, the Company’s current hedge positions have no impact on income (theyincome; they are booked as cash flow hedge contracts, so a variation in fuel prices has an impact on the Company’s net equity).equity.
The following table shows the sensitivity analysis of the financial instruments reflectingour hedging contracts to reasonable changes in fuel prices and their effect on equity. The term used for the projection was December 31, 2012,2015, the finallast maturity date of the lastour current fuel hedge contract.contracts. The calculations were made considering a parallel movement of US$5 per barrel in the curve of the WTIBRENT and JET crude futures benchmark price at the end of December 2011, 20102014, 2013 and 2009.
The Company seeks to reduce the risk of increases in fuel price in order to maintain its competitivity, therefore hedging instruments like swaps, options and collars are used to partially hedge against these fuel price fluctuations.2012.
Position as of December 31 (effect on equity), | ||||||||||||
WTI benchmark price | 2011 | 2010 | 2009 | |||||||||
(US$ per barrel) | (millions of US$) | |||||||||||
+5 | +16.5 | +16.7 | +14.6 | |||||||||
-5 | -13.8 | -15.7 | -13.6 |
BRENT or JET benchmark price +5 –5 LATAM fuel price sensitivity (effect on equity)
Position as of December 31, 2014
LATAM 2013
LATAM 2012
LATAM (millions of US$ per barrel) +24.9 +24.6 +12.6 –25.1 –19.1 –11.3
During the periods presented, the Company has not recorded amounts for ineffectiveness in the consolidated income statement pursuant to IAS 39 (IFRS principlesIFRS (Principles for recognizing and measuring financial instruments).
Given the fuel hedge structure as of December 31, 2011,2014, which considersreflects only a hedge-free portion,partial hedge of our expected fuel consumption, a vertical fall by US$5 in the WTIBRENT and JET benchmark price (the monthly daily average) for each month would have meant savings of approximately US$42.5 90.2 million in the cost of the Company’s total fuel consumption. A vertical increase by US$5 in the WTIJET and BRENT benchmark price (the monthly daily average) for each month would have meant an additional cost of approximately US$39.5 88.1 million of the Company’s total fuel consumption.
Risk of Fluctuations in Interest Rates
As of December 31, 2011, LAN’s debt amounted to2014, LATAM had US$3,516 8,793 million in outstanding interest bearing loans. LANLATAM uses swaps and capsinterest rate derivatives to reduce the impact of an increase of interest rates. As68% of LATAM outstanding debt as of December 31, 2011, 82% of our outstanding debt31,2014 was effectively at a fixed rate, either as fixed rate loans or variable rate loans hedged using a floating to fixfixed rate derivative instrument.
GivenLATAM’s interest bearing loans can be classified by: variable interest rate debt, fixed interest rate debt and interest rate hedged debt. LATAM’s variable interest rate debt amounts to US$2,799 million from which 83.3% is assigned to aircraft financing and 16.7% to non-aircraft financing. The fixed interest rate debt amounts are US$ 5,994 million from which 64.9% is assigned to aircraft financing and 35.1% to non-aircraft financing. The interest rate hedged debt amounts to US$ 486 million from which 97.1% is assigned to interest rate swaps and 2.9% to interest rate caps.
Under IFRS, the percentagepositive fair value of our outstanding debt thatthese interest rate swaps is hedgedreflected in the balance sheet as hedging assets and the instruments that we use to hedge, an increase in interest rates has no material impact on LAN’s costs. Under an interest rate swap contract, givennegative fair value of these agreements is reflected as hedging liabilities. As of December 31, 2014, the casefair value of decreases in interest rates, LAN has to pay compensation equal to the difference between the fixed and floating rate times the outstanding debt under the specific contract. However, under such contractsall the interest rate has a floor preventing LAN from incurring major financial losses.swaps was estimated to be US$60.7 million (negative).
In May 2001, we entered into six swap contracts in order to hedge our floating rate-exposure on US$331 million of our debt. Pursuant to these contracts, we pay or receive, depending on the case, the difference between the agreed fixed rate and the floating rate, calculated on the notional amount of each contract. In October 2005, the Company entered into twoThe interest rate swap contracts in order to hedge the LIBOR exposure of the financing of two Airbus A319 aircraft delivered in 2005.
In July 2003, we purchased four interest rate cap contracts for a total notional amount of US$127.7 million. These caps are intended to limit the Company’s exposure arising from variable-rate debt. These contracts qualify as cash flow hedges with no ineffectiveness associated to them due to the fact that all critical terms of the debt and the caps match perfectly.are matched. As of December 31, 2011,2014, the fair value of these contracts has beenwas estimated at US$9.7 thousand.to be close to zero.
The premiums paid on the cap contracts were allocated to individual caplets and recognized in the income statement throughout the term of each contract. Under IAS 39IFRS these derivatives qualify as cash flow hedges even though some ineffectiveness exists as the notional amount over which some caps are calculated is different from the one used to determine the interest and lease payments on the aircraft. For IFRS purposes, there was no amount of ineffectiveness recorded in earnings because the change in fair value of the perfect hypothetical option was greater than the change in the fair value of the Company’s option.
In the first half of 2006, the Company also entered into ten fixed-floating interest rate swap contracts in order to hedge the variable interest payments on the unhedged portion of existing debt of approximately US$46.7 million. Additionally, in May 2006 the Company entered into thirty-two forward starting interest rate swap contracts in order to hedge the LIBOR exposure of the financing of thirty-two A320-Family Aircraft to be delivered between 2006 and 2009. Out of these thirty-two contracts, twenty-five were contracted directly with the debt provider, while the remaining seven swaps were contracted with a different institution. In 2009 all of the thirty-two aircraft were delivered to the Company. Out of the thirty-two abovementioned contracts, twenty-five were converted into fixed interest rate debt.
In June 2006 the Company entered into eleven forward starting interest rate swap contracts in order to hedge the LIBOR exposure of the financing of 11 Boeing 767-300 ER aircraft to be delivered between 2006 and 2009. All of those aircraft have already been delivered to the Company, and the corresponding swap and loan were restructured into fixed rate debt.
In August 2007 the Company entered into three forward starting interest rate swaps contracts in order to hedge the LIBOR exposure of the debt financing of three Boeing 767-300 ER aircraft to be delivered in 2009. This debt allows for conversion of the variable interest rate loan into fixed interest rate debt by capital markets financing after the arrival of the aircraft. As of December 31, 2011, the three aircraft had been delivered to the Company. The first aircraft was refinanced through a fixed interest rate bond issued in December 2009, the second was refinanced through a fixed interest rate bond issued in June 2010 and the third was refinanced through a fixed interest rate bond issued in April 2010. In September 2007, the Company entered into another three forward starting interest rate swaps contracts in order to hedge the LIBOR exposure of the financing of three Airbus A320-Family Aircraft to be delivered in 2010.
In June 2008, the Company entered into 14 forward starting interest rate swaps contracts in order to hedge the LIBOR exposure of the financing of 12 A320-Family Aircraft that were delivered in 2010 and 2011, two Boeing 767-300 aircraft that were delivered in 2011 and two Boeing 787-8 to be delivered in 2012.
As of December 31, 2011, the fair value of all the aforementioned interest rate swaps was estimated to be a negative US$159.4 million.
Under IFRS, the positive fair value of these interest rate swaps is reflected in the balance sheet as hedging assets and the negative fair value of these agreements is reflected as hedging liabilities.
The utilizationuse of the aforementioned hedging instruments, combined with fixed interest rate financing for two Boeing 767-300 Four aircraft delivered in 2001, 17 Boeing 767-300 Passenger and Freighter aircraft delivered in 2005, 2006, 2007, 2008 and 2009 and 32 Airbus A320-Family Aircraft delivered in 2006, 2007, 2008 and 2009,financing has enabled the Company to have a predictable interest rate costs, reducing the cash volatility.
As of December 2011,31 2014, the average interest rate of our entire outstanding interest-bearing long-term debt rate was 4.5%3.8%.
The following table summarizes our principal payment obligations on all of our interest-bearing long-term debt and capital leases as of December 31, 20112014 and the related average interest rates.rate for such debt. The average interest rates for U.S. dollar liabilities arerate has been calculated based on the prevailing interest rate on December 31, 20112014 for each loan.
Principal payment obligations by year of expected maturity(1) | ||||||||||||||||||||||||||||
Average interest rate(2) | 2012 | 2013 | 2014 | 2015 | 2016 | Thereafter 2017 | ||||||||||||||||||||||
(in US$ millions) | ||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||
U.S. dollars | 4.5 | % | 509.7 | 840.6 | 342.2 | 323.0 | 317.7 | 1215.2 |
LATAM’s principal payment obligations by year of expected maturity(1) | ||||||||||||||||||||||||||||
Average interest rate(2) | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 and thereafter | ||||||||||||||||||||||
(millions of US$) | ||||||||||||||||||||||||||||
Interest-bearing liabilities | 3.8 | % | 1,308.3 | 1,451 | 1,200 | 765 | 717 | 3,367 |
(1) | At cost. |
(2) | Average interest rate means the average prevailing interest rate on December 31, |
The following table shows the sensitivity of changes in financial obligationsour long-term interest bearing liabilities and capital leases that are not hedged against interest-rate variations. These changes are considered reasonably possible based on current market conditions.
Position as of December 31 (effect on pre-tax earnings) | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(in US$ millions) | ||||||||||||
Increase (decrease) in Libor | ||||||||||||
+100 basis points | -3.06 | -1.18 | -0.87 | |||||||||
-100 basis points | +3.06 | +1.18 | +0.87 |
LATAM’s interest rate sensitivity (effect on pre-tax earnings) Position as of December 31 | ||||||||||||
2014 LATAM | 2013 LATAM | 2012 LATAM | ||||||||||
(millions of US$) | ||||||||||||
Increase (decrease) in LIBOR | ||||||||||||
+100 basis points | –27.5 | –29.7 | –33.6 | |||||||||
–100 basis points | +27.5 | +29.7 | +33.6 |
Changes in market conditions produce a change in the valuation of current financial instruments hedging against fluctuations in interest rates, causing an effect on the Company’s equity (because they are booked as cash-flow hedges). These changes are considered reasonably possible based on current market conditions. The calculations were made verticallyby increasing (decreasing) 100 basis points of the three-month Libor futures curve.
Position as of December 31 (effect on equity) | LATAM’s interest rate sensitivity (effect on equity) Position as of December 31 | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2014 LATAM | 2013 LATAM | 2012 LATAM | |||||||||||||||||||
(millions of US$) | (millions of US$) | |||||||||||||||||||||||
Increase (decrease) in three month Libor | ||||||||||||||||||||||||
Increase (decrease) in three month LIBOR | ||||||||||||||||||||||||
Future rates | ||||||||||||||||||||||||
+100 basis points | +40.70 | +42.39 | +49.64 | +15.3 | +23.3 | +33.6 | ||||||||||||||||||
-100 basis points | -43.20 | -45.35 | -53.23 | |||||||||||||||||||||
–100 basis points | –15.9 | –24.5 | –35.5 |
During the periods presented, the company has not recorded amounts for ineffectiveness in the consolidated income statement pursuant to IAS 39.IFRS.
There are market-related limitations in the method used for the sensitivity analysis. These limitations derive from the fact that the levels indicated by the futures curves may not be necessarily met and may change in each period.
Risk of Variation in Foreign Currency Exchange Rates
LANLATAM sells most of its services in U.S. dollars (or at prices equivalent to thebased on an amount of U.S. dollar), and adollars). A large part of its expenses are denominated inor based on U.S. dollars, (or its equivalents), particularly fuel costs, aeronautic charges, aircraft leases, insurance and aircraft components and accessories. Of the TotalLATAM’s total expenses, the main item denominated in local currencies is Remunerations. During 2011, 78% of our operating revenues and 53% of our operating expenses were denominated in U.S. dollars. However, becauseemployee remuneration.
Because we conduct business in local currencies in several countries, we face the risk of variations in multiple foreign currency exchange rates. A depreciation of the Chilean peso, the Brazilian real, the Argentine peso, the Mexican peso, the Peruvian nuevo sol, the Venezuelan bolivar or the euroDepreciation on these currencies against the U.S. dollarDollar could have an adverse effect on us asthe cash flow projections because part of our revenues and receivables are denominated in those currencies. LANThe Company may enter into FX derivative contracts to protect its foreign exchange risk exposure.
Balance sheet exposure of LATAM to the Brazilian Real is related to the functional currency of TAM and its balance sheet currency mismatch, as more of TAM’s debt is denominated in U.S. Dollars as compared to its assets denominated in U.S. Dollars. When the balance sheet denominated in U.S. Dollars is translated to Brazilian Real, the financial results of TAM may fluctuate and therefore could impact LATAM’s financial results.
The exposure to the Brazilian real on TAM’s balance sheet has enteredconstantly been reduced from over US$4.0 billion since the combination in June 2012 to less than US$ 1.0 billion of December 31, 2014. The Company continues working to mitigate this exposure through the execution of the fleet transfer from TAM to LATAM and payment of TAM’s short term debt denominated in USD.
The following table shows the sensitivity of LATAM’s financial results to changes in the R$/US$ exchange rate:
TAM exchange rate sensitivity Position effect on pre-tax earnings as of December 31 | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
LATAM | LATAM | LATAM | ||||||||||
(millions of US$) | ||||||||||||
Appreciation (depreciation) of R$/US$ | ||||||||||||
–10% | +69.8 | +197.8 | +404.2 | |||||||||
+10% | –69.8 | –197.8 | –404.2 |
Additionally, one of LATAM’s financing sources is the receipt of future flows related dividends and capital distributions that subsidiaries will distribute. These future cash flows vary depending on the evolution of the foreign currency exchange rate compared to the U.S. dollar. The greatest exposure to future cash flows is mainly presented by the subsidiary TAM S.A. and the R$/US$ volatility. In the case of TAM S.A., the earnings are expressed in large proportion in R$, which a large portion of its costs are in US$.
To hedge the investment in subsidiaries and reduce the cash flow volatility, the Company may enter into derivative contracts to mitigate currency forward contracts inappreciation or depreciation against the LATAM functional currency.
In order to convert its deposit in Chilean pesos to U.S. dollars. reduce the operational monthly cash flow exposures for 2015, caused by Brazilian real depreciation and ensure economic margin, LATAM hedges the foreign exchange risk using FX derivatives.
As of December 31, 2011 we had foreign exchange forward contracts2014, the Company has FX derivative for a notional amount of US$110100 million (notional) with a market negative value of US$0.3 million. 0.1 million (negative).
During
If the first half of 2009,Brazilian Real depreciates against the Company entered into cross currency swaps forU.S. dollar, it could adversely affect the Company’s results by increasing costs to LATAM denominated in U.S dollars. However, a notional amount of US$ 171 million, in order to hedge significant variationdepreciation of the Brazilian Real would positively affect the value of these derivative positions.
Because changes in the values of existing positions do not represent changes in cash flows associated toflow, but a variation in the current interest rate andexposure of market value, the dolar-pesooutstanding hedging positions do not impact results (they are registered as cash flow hedges under IFRS, therefore, a change in the exchange rate has an impact on the equity of the bank loan. AsCompany).
The following table shows the sensitivity of December 31, 2011 these contracts ceasedfinancial instruments according to exist.reasonable changes in the exchange rates and its effect on equity. The term projection is defined until the end of the last hedging contract in force:
LATAM foreign exchange sensitivity Position as of December 31 | ||
2014 | ||
Appreciation (depreciation) of R$/US$ | (Millions of US$) | |
-10% | -9.9 | |
+10% | +9.9 |
Our foreign currency exchange exposure pertaining to our balance sheet as of December 31, 20112014 was as followsfollows:
LATAM foreign currency exchange exposure | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
US dollars MUS$ | % of total | Chilean pesos MUS$ | % of total | Other currencies $ MUS$ | % of total | Total MUS$ | US dollars MUS$ | % of total | Brazilian real MUS$ | % of total | Chilean pesos MUS$ | % of total | Other currencies MUS$ | % of total | Total MUS$ | |||||||||||||||||||||||||||||||||||||||||||||||||
Current assets | 868,113 | 64.62 | % | 230,279 | 17.14 | % | 244,959 | 18.23 | % | 1,343,351 | 1,452,356 | 39.9 | % | 1,301,648 | 35.8 | % | 233,271 | 6.4 | % | 647,349 | 17.8 | % | 3,634,624 | |||||||||||||||||||||||||||||||||||||||||
Other assets | 6,123,678 | 97.12 | % | 8,412 | 0.13 | % | 173,218 | 2.75 | % | 6,305,308 | 9,660,175 | 57.3 | % | 6,930,158 | 41.1 | % | 12,361 | 0.1 | % | 247,112 | 1.5 | % | 16,849,806 | |||||||||||||||||||||||||||||||||||||||||
Total assets | 6,991,791 | 91.41 | % | 238,691 | 3.12 | % | 418,177 | 5.47 | % | 7,648,659 | 11,112,531 | 54.3 | % | 8,231,806 | 40.2 | % | 245,632 | 1.2 | % | 894,461 | 4.4 | % | 20,484,430 | |||||||||||||||||||||||||||||||||||||||||
Current liabilities | 1,980,849 | 85.30 | % | 80,937 | 3.49 | % | 260,293 | 11.21 | % | 2,322,079 | 3,617,951 | 62.1 | % | 1,726,492 | 29.6 | % | 117,528 | 2.0 | % | 367,761 | 6.3 | % | 5,829,732 | |||||||||||||||||||||||||||||||||||||||||
Long-term liabilities | 3,834,840 | 99.11 | % | 6,684 | 0.17 | % | 27,684 | 0.72 | % | 3,869,208 | 8,228,109 | 81.1 | % | 1,767,873 | 17.4 | % | 136,978 | 1.4 | % | 18,043 | 0.2 | % | 10,151,003 | |||||||||||||||||||||||||||||||||||||||||
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Total liabilities and shareholders’ equity | 7,244,983 | 94.72 | % | 98,739 | 1.29 | % | 304,937 | 3.99 | % | 7,648,659 | 16,349,755 | 79,8 | % | 3,494,365 | 17.1 | % | 254,506 | 1.2 | % | 385,804 | 1.9 | % | 20,484,430 | |||||||||||||||||||||||||||||||||||||||||
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For more information on Market Risk, see Note 3 “Financial Risk Management” to our audited consolidated financial statements.
ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
In the United States, our common shares trade in the form of ADS. Since August 2007, each ADS represents one common share, issued by The Bank of New York Mellon, as Depositary pursuant to a Deposit Agreement. ADSs commenced trading on the NYSE in 1997. In October 2011 our Depositary bank changed from The Bank of New York Mellon to JP Morgan Chase Bank, N.A. (“JP Morgan”).
Fees and Charges for ADR Holders
The Bank of New York Mellon, and since October 2011 JP Morgan, as depositary, collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of the distributable property to pay the fees. The depositary may also collect its annual fee for depositary services by deductions from cash distributions, by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
Persons depositing or withdrawing shares must pay: | For: | |||
US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) |
| • Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property | ||
| • Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates | |||
US$.02 (or less) per ADS | • Any cash distribution to ADS registered holders | |||
A fee equivalent to the fee that would be payable if securities distributed had been shares and the shares had been deposited for issuance of ADSs | • Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS registered holders | |||
US$.02 (or less) per ADSs per calendar year | • Depositary services | |||
Registration or transfer fees | • Transfer and registration of shares on the depositary’s share register to or from the name of the depositary or its agent when investors deposit or withdraw shares | |||
Expenses of the depositary | • Cable, telex and facsimile transmissions | |||
• Conversion of foreign currencies into U.S. dollars | ||||
Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, such as stock transfer taxes, stamp duty or withholding taxes | • As necessary | |||
Any charges incurred by the depositary or its agents for servicing the deposited securities | • As necessary |
Fees and Direct and Indirect Payments Made by the Depositary to the Foreign Issuer
Past Fees and Payments
During 2011,2013, the Company received from the depositary $766,020 forUS972,327for continuing annual stock exchange listing fees, standard out-of-pocket maintenance costs for the ADRs (consisting of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls), payments related to applicable performance indicators relating to the ADR facility, underwriting fees and legal fees.
Future Fees and Payments
JP Morgan, as the new depositary bank, has agreed to reimburse the Company for certain of our reasonable expenses related to our ADS program and incur by us in connection with the program. The reimbursements include direct payments (legal and accounting fees incurred in connection with preparation of Form 20-F and ongoing SEC compliance and listing requirements, listing fees, investor relations expenses, advertising and public relations expenses and fees payable to service providers for the distribution of hard copy materials to beneficial ADR holders in the Depositary Trust Company, such as information related to shareholders’ meetings and related voting instruction cards); and indirect payments (third-party expenses paid directly and fees waived).
ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
None.
ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
None.
ITEM 15. | CONTROLS AND PROCEDURES |
Controls and Procedures
WeManagement carried out an evaluation under the supervision and with the participation of our management, including ourthe chief executive officer and chief financial officer, of the effectiveness of the design and operation of ourthe Company’s disclosure controls and procedures as of December 31, 2011.2014. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon oursuch evaluation, ourmanagement, with the participation of the chief executive officer and chief financial officer concluded that the disclosure controls and procedures, as of December 31, 2011,2014, were effective in providing reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act, as amended, is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management including our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.
Management’s annual report on internal control over financial reporting
The management of the Company, including the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as amended.
The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control to future periods are subject to the risk that controls may become inadequate because of changes in conditions, and that the degree of compliance with the policies or procedures may deteriorate. Lan Airlines’LATAM Airlines Group S.A.’s management, including the Chief Executive Officer and the Chief Financial Officer, has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 20112014 based on the criteria established in Internal“Internal Control - “Integrated Framework”Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and, based on such criteria, Lan Airlines’LATAM Airlines Group S.A.’s management has concluded that, as of December 31, 2011,2014, the Company’s internal control over financial reporting is effective. The Company’scompany’s internal control over financial reporting effectiveness as of December 31, 20112014 has been audited by PricewaterhouseCoopers Consultores, Auditores y Companía Limitada, an independent registered public accounting firm, as stated in their report included herein.
(c)Attestation report of the registered public accounting firm. See page F-2F-156 of our audited consolidated financial statements.
(d)Changes in internal control over financial reporting.reporting. There has been no significant change in our internal control over financial reporting during 2011 that2014. None of the changes has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16. | RESERVED |
A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has designated Jorge Awad Mehech,Georges de Bourguignon Arndt, as an “audit committee financial expert” within the meaning of this Item 16A.16. A. Mr. de Bourguignon is independent within the meaning of Rule 10A-3 under the Exchange Act. See “Item 6. Directors, Senior Management and Employees—Directors”.Directors and Senior Management.”
B. CODE OF ETHICS
We have adopted a code of ethics and conduct, as defined in Item 16B of Form 20-F under the Exchange Act. Our code of ethics applies to our senior management, including our chief executive officer, our chief financial officer and our chief accounting officer, as
well as to other employees. Our code is freely available online at our website, www.lan.com, under the heading “Corporate Governance” in the Investor Relations page. In addition, upon written request, by regular mail, to the following address: LanLAN Airlines S.A., Investor Relations Department, attention: Investor Relations, Av. Presidente Riesco 5711, Piso 20, Comuna Las Condes, Santiago, Chile, or by e-mail atinvestor.relations@lan.com we will provide any person with a copy of it without charge. If we amend the provisions of our code of ethics that apply to our senior management or to other persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our website.
C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit and Non-Audit Fees
The following table sets forth the fees billedpaid to us by our independent auditors,registered public accounting firm, PricewaterhouseCoopers, during the fiscal years ended December 31, 2009, 20102014 and 2011:2013:
2014 | 2013 | |||||||||||||||||||
2011 | 2010 | 2009 | USD (in thousands) | |||||||||||||||||
Audit fees | 1,823.0 | 1,478.0 | 1,431.4 | 2,146 | 5,930 | |||||||||||||||
Audit-related fees | 0 | 427.0 | 0.0 | 12 | 73 | |||||||||||||||
Tax fees | 229.0 | 149.0 | 0.0 | 29 | 90 | |||||||||||||||
Other fees | 590.0 | 14.0 | 37.7 | |||||||||||||||||
All Other fees | 135 | 42 | ||||||||||||||||||
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Total fees | 2,642.0 | 2,068.0 | 1,469.1 | 2,322 | 6,135 | |||||||||||||||
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Audit-related fees in the above table are the aggregate fees billed by PricewaterhouseCoopers for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements or that are traditionally performed by the external auditor, including due diligence and other audit related services. Fees in 2014 include attestation services related with revenues in Argentina. Fees in 2013 include payments to PricewaterhouseCoopers Brazil since the business combination with TAM.
Other fees in the above table are fees billed by PricewaterhouseCoopers as of December 31, 2014 primarily for survey salary and salary special studies in Peru, review of the reporting process for the business intelligence program in Chile and entity management risk consulting. Other fees in 2013 include training services in IFRS. During 2011 these fees increased due to additional services related toIFRS and the preparationreview of pro forma financial statements that were included in the F4 Form, proformas, and others.2013 annual report.
Board of Directors’ Committee Pre-Approval Policies and Procedures
Since January 2004, LAN compliesLATAM has complied with the SEC regulationregulations regarding whatthe type of additional services PricewaterhouseCoopers isour independent auditors are authorized to offer to us. In addition, to this, our Board of Directors’ Committee (which serves as our Audit Committee) has decided to automatically authorize thoseany such accepted services for an amount of up to 10% of the fees charged by the auditing firm, and for an amount of up to 50% when adding all thosesuch services together. In caseprovided by the auditing firm in the aggregate. If the amount of any services is larger than that, then it will need thethese thresholds, approval ofby the Board of Directors’ Committee.
D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
None.
G. CORPORATE GOVERNANCE
New York Stock Exchange Corporate Governance Comparison
Pursuant to Section 303A.11 of the Listed Company Manual of the NYSE, we are required to provide a summary of the significant ways in which our corporate governance practices differ from those required for U.S. companies under the NYSE listing standards. We are a Chilean corporation with shares listed on the SSE, the Chilean Electronic Exchange and the Valparaiso Stock Exchange, andour ADSs listed on the NYSE.NYSE and our BDRs listed on Bovespa. Our corporate governance practices are governed by our bylaws, the Chilean Corporation Law and the Securities Market Law.
The table below discloses the significant differences between our corporate governance practices and the NYSE standards.
NYSE Standards | Our Corporate Governance Practice | |
Director Independence.Majority of board of directors must be independent. §303A.01 | Under Chilean law, we are not required to have a majority of independent directors on our board. | |
Our board of directors’ committee (all of whom are members of our board of directors) is composed of three directors, two of whom must be independent if we have a sufficient number of independent directors on our board. | ||
The definition of independence applicable to us pursuant to the Chilean Corporation Law differs in certain respects from the definition applicable to U.S. issuers under the NYSE rules. | ||
Pursuant to Law No. 20,382 on Corporate Governance, which came into effect on January 1, 2010, we are also required to have at least one independent director.
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Starting on January 1, 2010, directors are deemed to be independent if they have not fallen within any of the following categories during the 18 months prior to their election: (i) had a relevant relationship, interest or dependence on us, our subsidiaries, controlling shareholders, main executives, or had served any of the foregoing in a senior position; (ii) had a close family relationship with any of the individuals indicated in (i); (iii) had served in a non-profit organization which received significant funds from the individuals indicated in (i); (iv) had been a partner or shareholder (with a direct or indirect participation in excess of 10%) in, or had a senior position at a company which has rendered significant services to, the individuals indicated in (i); (v) had been a partner or shareholder (with a direct or indirect participation in excess of 10%) in, or had a senior position at, our main competitors, suppliers or clients. In addition, the election of such an independent director is subject to a procedure set forth by the cited Corporation Law. | ||
Executive Sessions.Non-management directors must meet regularly in executive sessions without management. Independent directors should meet alone in an executive session at least once a year. §303A.03 | There is no similar requirement under our bylaws or under applicable Chilean law. | |
Audit committee.Audit committee satisfying the independence and other requirements of Rule 10A-3 under the Exchange Act, as amended, and the more stringent requirements under the NYSE standards is required. §§303A.06, 303A.07 | We are in compliance with Rule 10A-3. We are not required to satisfy the NYSE independence and other audit committee standards that are not prescribed by Rule 10A-3. | |
Nominating/corporate governance committee.Nominating/corporate governance committee of independent directors is required. The committee must have a charter specifying the purpose, duties and evaluation procedures of the committee. | We are not required to have, and do not have, a nominating/corporate governance committee. | |
Compensation committee.Compensation committee of independent directors is required, which must approve executive officer compensation. The committee must have a charter specifying the purpose, duties and evaluation procedures of the committee. §303A.05 | We are not required to have a compensation committee. Pursuant to the Chilean Corporation Law, our board of directors’ committee must approve our senior management and employee’s compensation. | |
Equity compensation plans.Equity compensation plans require shareholder approval, subject to limited exemptions. | Under the Chilean Corporation Law, equity compensation plans require shareholder approval. |
NYSE Standards | Our Corporate Governance Practice | |
Code of | We have adopted a code of ethics and conduct applicable to our senior management, including our chief executive officer, our chief financial officer and our chief accounting officer, as well as to other employees. Our code is freely available online at our website, |
Governance” in the Investor Relations informational page. In addition, upon written request, by regular mail to |
The disclosure of the significant ways in which our corporate governance practices differ from those required for U.S. companies under the NYSE listing standards is also posted on our website and can be accessed at www.lan.com.www.latamairlinesgroup.net
H. Mine Safety Disclosure
Not applicable.
ITEM 17. | FINANCIAL STATEMENTS |
See “Item 18. Financial Statements”.Statements.”
ITEM 18. | FINANCIAL STATEMENTS |
See our consolidated Financial Statements beginning on page F-1. The following is an index of the financial statements.
Consolidated Financial Statements for LanLATAM Airlines Group and its Subsidiaries
Page | ||||
Consolidated Statements of Financial Position at December 31, | ||||
Consolidated Statement of Income by Function for the years ended December 31, 2014, 2013 and 2012 | F-6 | |||
Notes to Consolidated Financial Statements at December 31, | ||||
F-156 |
ITEM 19. | EXHIBITS |
Documents filed as exhibits to this annual report:
Exhibit | Description | |
1.1 | Amended By-laws of | |
2.1 | Second Amended and Restated Deposit Agreement, dated as of October 28, 2011, between the Company and JPMorgan Chase Bank, N.A. (incorporated by reference to our amended registration statement on Form F-4 (File No. 333-177984) filed on November 15, 2011). | |
4.1 | Second | |
4.1.1 | Amendment No. 1 dated as of November 14, 2003 and Amendment No. 2 dated as of October 4, 2005, to the Second A320-Family Purchase Agreement dated as of March 20, 1998, as amended and restated, between the Company and Airbus S.A.S. (as successor to Airbus | |
4.1.2 | Amendment No. 3 dated as of March 6, 2007, to the Second A320-Family Purchase Agreement dated as of March 20, 1998, as amended and restated, between the Company and Airbus S.A.S. (incorporated by reference to our amended annual report on Form 20-F (File No. 001-14728) filed on June 30, 2006 and portions of which have been omitted pursuant to a request for confidential treatment). |
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4.1.3 | Amendment No. 5 dated as of December 23, 2009, to the Second A320-Family Purchase Agreement dated as of March 20, 1998, as amended and restated, between the Company and Airbus S.A.S. (incorporated by reference to our amended annual report on Form 20-F (File No. 001-14728) filed on June 29, 2010 and portions of which have been omitted pursuant to a request for confidential treatment). |
Exhibit | Description | |
4.1.4 | Amendments No. 6, 7, 8 and 9 (dated as of May 10, 2010, May 19, 2010, September 23, 2010 and December 21, 2010, respectively), to the Second A320-Family Purchase Agreement dated as of March 20, 1998, as amended and restated, between the Company and Airbus S.A.S. (incorporated by reference to our amended annual report on Form 20-F (File No. 001-14728) filed on May 5, 2011 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.1.5 | Amendments No. 10 and 11 (dated as of June 10, 2011 and November 8, 2011, respectively), to the Second A320-Family Purchase Agreement dated as of March 20, 1998, as amended and restated, between the Company and Airbus S.A.S. (incorporated by reference to our annual report on Form 20-F (File No. 001-14728) filed on April 2, 2012 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.1.6 | Amendment No. 12 (dated as of November 19, 2012), to the Second A320-Family Purchase Agreement dated as of March 20, 1998, as amended and restated, between the Company and Airbus S.A.S. (incorporated by reference to our annual report on Form 20-F (File No. 001-14728) filed on April 30, 2013 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.1.7 | Amendment No. 13 (dated as of August 19, 2013), to the Second A320-Family Purchase Agreement dated as of March 20, 1998, as amended and restated, between the Company and Airbus S.A.S, (incorporated by reference to our annual report on Form 20-F (File No. 001-14728) filed on April 30, 2014 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.1.8* | Amendments No. 14, 15, 16 and 17 (dated as of March 31, 2014, May 16, 2014, July 15, 2015 and December 11, 2014, respectively), to the Second A320-Family Purchase Agreement dated as of March 20, 1998, as amended and restated, between the Company and Airbus S.A.S. Portions of these documents have been omitted pursuant to a request for confidential treatment. Such omitted portions have been filed separately with the Securities and Exchange Commission | |
4.1.9* | Novation Agreement (dated as of October 30, 2014) between TAM Linhas Aereas S.A., LATAM Airlines Group S.A. and Airbus S.A.S., relating to the A320 Family/A330 purchase agreement dated November 14, 2006, as amended and restated, between Airbus S.A.S. and TAM Linhas Aereas S.A. Portions of this document have been omitted pursuant to a request for confidential treatment. Such omitted portions have been filed separately with the Securities and Exchange Commission. | |
4.2 | Purchase Agreement No. 2126 dated as of January 30, 1998, between the Company and The Boeing Company as amended and supplemented, relating to Model 767-316ER, Model 767-38EF, and Model 767-316F Aircraft (incorporated by reference to our amended annual report on Form 20-F (File No. 001-14728) filed on December 21, 2004 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.2.1 | Supplemental Agreements No. 16, 19, 20, 21 and 22 (dated as of November 11, 2004, | |
4.2.2 | Supplemental Agreement No. 23 dated as of | |
4.2.3 | Supplemental Agreement No. 24 dated as of November 10, 2008, to the Purchase Agreement No. 2126, dated as of January 30, 1998, between the Company and The Boeing Company. Portions of this document have been omitted pursuant to a request for confidential | |
Supplemental Agreements No. 28 and 29 (dated as of March 22, 2010 and November 10, 2010, respectively), to the Purchase Agreement No. 2126, dated as of January 30, 1998, between the Company and The Boeing Company. Portions of these documents have been omitted pursuant to a request for confidential | ||
4.2.5 | Supplemental Agreements No. 30, 31 and 32 (dated as of February 15, 2011, May 10, 2011 and December 22, 2011, respectively), to the Purchase Agreement No. 2126, dated as of January 30, 1998, between the Company and The Boeing |
Exhibit | Description | |
4.3 | Aircraft Lease Common Terms Agreement between GE Commercial Aviation Services Limited and |
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4.4 | Purchase Agreement | |
4.4.1 | Supplemental Agreement No. 2 dated as of November 2, 2010, to the Purchase Agreement | |
4.4.2 | Supplemental Agreement No. 3 dated as of September | |
4.4.3 | Supplemental Agreement No. 4 dated as of August 9, 2012, to the Purchase Agreement No. 3194 between the Company and The Boeing Company, dated as of July 3, 2007 (incorporated by reference to our annual report on Form 20-F (File No. 001-14728) filed on April 30, 2013 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.5 | Purchase Agreement No. 3256 between the Company and The Boeing Company relating to Boeing Model 787-8 and 787-9 aircraft dated as of October 29, 2007 (incorporated by reference to our amended annual report on Form 20-F (File No. 001-14728) filed on June 25, 2008 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.5.1 | Supplemental Agreements No. 1 and 2 (dated March 22, 2010 and July 8, 2010, respectively) to the Purchase Agreement No. 3256 dated October 29, 2007, as amended, between the Company and The Boeing Company (incorporated by reference to our amended annual report on Form 20-F (File No. 001-14728) filed on May 5, 2011 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.5.2 | Supplemental Agreement No. 3 dated as of August 24, 2012, to the Purchase Agreement No. 3256, as amended, between the Company and The Boeing Company, dated as of October 29, 2007 (incorporated by reference to our annual report on Form 20-F (File No. 001-14728) filed on April 30, 2013 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.5.3 | Delay Settlement Agreement, dated as of September 16, 2013, to the Purchase Agreement No. 3256, as amended, between the Company and The Boeing Company, dated as of October 29, 2007, (incorporated by reference to our annual report on Form 20-F (File No. 001-14728) filed on April 30, 2014 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.6 | General Terms Agreement No. CFM-1-2377460475 and Letter Agreement No. 1 to General Terms Agreement No. CFM-1-2377460475 between the Company and CFM International, Inc., both dated December 17, 2010 (incorporated by reference to our amended annual report on Form 20-F (File No. 001-14728) filed on May 5, 2011 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.7 | Rate Per Flight Hour Engine Shop Maintenance Services Agreement between the Company and CFM International, Inc., dated December 17, 2010 (incorporated by reference to our amended annual report on Form 20-F (File No. 001-14728) filed on May 5, 2011 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.9 | Implementation Agreement, dated as of January 18, 2011, among the Company, Costa Verde Aeronáutica S.A., |
Exhibit | Description | |
4.9.1 | Extension Letter to the Implementation Agreement and Exchange Offer Agreement dated January 12, 2012 among the Company, Costa Verde Aeronáutica S.A., InversionesMineras del Cantábrico S.A., TAM S.A., TAM Empreedimentos e Participações S.A. and Maria Cláudia Oliveira Amaro, MaurícioRolimAmaro, Noemy Almeida Oliveira Amaro and João Francisco Amaro (incorporated by reference to our amended registration statement on Form F-4 (File No. 333-177984) filed on November 15, 2011). | |
4.10 | Exchange Offer Agreement, dated as of January 18, 2011, among LAN Airlines S.A., Costa Verde Aeronáutica S.A., InversionesMineras del Cantábrico S.A., TAM S.A., TAM Empreedimentos e Participações S.A. and Maria Cláudia Oliveira Amaro, MaurícioRolimAmaro, Noemy Almeida Oliveira Amaro and João Francisco Amaro (incorporated by reference to our amended annual report on Form 20-F (File No. 001-14728) filed on May 5, 2011). | |
4.11 | Shareholders Agreement, dated as of January 25, 2012, among Costa Verde Aeronáutica S.A., |
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4.12 | Shareholders Agreement, dated as of January 25, 2012, between the Company and TEP Chile S.A. (incorporated by reference to our amended registration statement on Form F-4 (File No. 333-177984) filed on November 15, 2011). | |
4.13 | Shareholders Agreement, dated as of January 25, 2012, among the Company, TEP Chile S.A. and Holdco I S.A. (incorporated by reference to our amended registration statement on Form F-4 (File No. 333-177984) filed on November 15, 2011). | |
4.14 | Shareholders Agreement, dated as of January 25, 2012, among the Company, TEP Chile S.A., Holdco I S.A. and TAM S.A. (incorporated by reference to our amended registration statement on Form F-4 (File No. 333-177984) filed on November 15, 2011). | |
4.15 | Letter Agreement No. 12 (GTA No. 6-9576), dated July 11, 2011, between the Company and the General Electric | |
4.20 | A320 NEO Purchase Agreement, dated as of June 22, 2011, between the Company and Airbus S.A.S. (incorporated by reference to our annual report on Form 20-F (File No. 001-14728) filed on April 2, 2012 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.20.1* | Amendments No. 1, 2 and 3 (dated as of February 27, 2013, July 15, 2014 and December 11, 2014, respectively), to the A320 NEO Purchase Agreement dated as of June 22, 2011, between the Company and Airbus S.A. Portions of these documents have been omitted pursuant to a request for confidential treatment. Such omitted portions have been filed separately with the Securities and Exchange Commission. | |
4.21 | Buyback Agreement No. 3001 relating to One (1) Airbus A318-100 Aircraft MSN 3001, dated as of April 14, 2011, between the Company and Airbus Financial Services (incorporated by reference to our annual report on Form 20-F (File No. 001-14728) filed on April 2, 2012 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.22 | Buyback Agreement No. 3030 relating to One (1) Airbus A318-100 Aircraft MSN 3003, dated as of August 10, 2011, between the Company and Airbus Financial Services (incorporated by reference to our annual report on Form 20-F (File No. 001-14728) filed on April 2, 2012 and portions of which have been omitted pursuant to a request for confidential treatment). |
Exhibit | Description | |
4.23 | Buyback Agreement No. 3062, to One (1) Airbus A318-100 Aircraft MSN 3062, dated as of May 13, 2011, between the Company and Airbus Financial Services (incorporated by reference to our annual report on Form 20-F (File No. 001-14728) filed on April 2, 2012 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.24 | Buyback Agreement No. 3214, to One (1) Airbus A318-100 Aircraft MSN 3214, dated as of June 9, 2011, between the Company and Airbus Financial Services (incorporated by reference to our annual report on Form 20-F (File No. 001-14728) filed on April 2, 2012 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.25 | Buyback Agreement No. 3216, to One (1) Airbus A318-100 Aircraft MSN 3216, dated as of July 13, 2011, between the Company and Airbus Financial Services (incorporated by reference to our annual report on Form 20-F (File No. 001-14728) filed on April 2, 2012 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.26 | Aircraft General Terms Agreement Number AGTA-LAN, dated May 9, 1997, between the Company and The Boeing Company (incorporated by reference to our annual report on Form 20-F (File No. 001-14728) filed on April 2, 2012 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.27 | Buyback Agreement No. 3371 dated as of July 25, 2012, between the Company and Airbus Financial Services. Portions of this document have been omitted pursuant to a request for confidential treatment (incorporated by reference to our annual report on Form 20-F (File No. 001-14728) filed on April 30, 2013 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.28 | Buyback Agreement No. 3390, dated as of October 26, 2012, between the Company and Airbus Financial Services. Portions of this document have been omitted pursuant to a request for confidential treatment (incorporated by reference to our annual report on Form 20-F (File No. 001-14728) filed on April 30, 2013 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.29 | Buyback Agreement No. 3438, dated as of December 5, 2012, between the Company and Airbus Financial Services. Portions of this document have been omitted pursuant to a request for confidential treatment (incorporated by reference to our annual report on Form 20-F (File No. 001-14728) filed on April 30, 2013 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.30 | Buyback Agreement No. 3469, dated as of January 4, 2013, between the Company and Airbus Financial Services. Portions of this document have been omitted pursuant to a request for confidential treatment (incorporated by reference to our annual report on Form 20-F (File No. 001-14728) filed on April 30, 2013 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.31 | Buyback Agreement No. 3509, dated as of February 20, 2013, between the Company and Airbus Financial Services. Portions of this document have been omitted pursuant to a request for confidential treatment (incorporated by reference to our annual report on Form 20-F (File No. 001-14728) filed on April 30, 2013 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.32 | A320 Family Purchase Agreement, dated March 19, 1998, between Airbus S.A.S. (formerly known as Airbus Industrie GIE) and TAM Linhas Aéreas S.A. (formerly known as TAM Transportes Aéreas Meridionais S.A. and as successor in interest in TAM-Transportes Aéreas Regionais S.A.), incorporated herein by reference from our sixth pre-effective amendment to our Registration Statement on Form F-1, filed March 2, 2006, File No. 333-131938. | |
4.32.1 | Amendments No. 12, 13 and 14 (dated as of January 27, 2012 and November 30, 2012 and December 14, 2012, respectively), to the Second A320-Family Purchase Agreement dated as of March 20, 1998, as amended and restated, between the Company and Airbus S.A.S. (incorporated by reference to our annual report on Form 20-F (File No. 001-14728) filed on April 30, 2013 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.33 | A350 Family Purchase Agreement, dated December 20, 2005, between Airbus S.A.S. and TAM Linhas Aéreas S.A., incorporated herein by reference from our sixth pre-effective amendment to our Registration Statement on Form F-1, filed March 2, 2006, File No. 333-131938. | |
4.33.1* | A350 Family Purchase Agreement, dated December 20, 2005, as amended and restated on January 21, 2008, between Airbus S.A.S. and TAM Linhas Aereas S.A. Portions of this document have been omitted pursuant to a request for confidential treatment. Such omitted portions have been filed separately with the Securities and Exchange Commission. | |
4.33.2* | Amendments No. 1, 2 and 3 (dated July 28, 2010, July 15, 2014 and October 30, 2014, respectively) to the A350 Purchase Agreement, dated December 20, 2005, as amended and restated on January 21, 2008, between Airbus S.A.S. and TAM Linhas Aereas S.A. Portions of these documents have been omitted pursuant to a request for confidential treatment. Such omitted portions have been filed separately with the Securities and Exchange Commission. | |
Exhibit | Description | |
4.34 | V2500 Maintenance Agreement, dated September 14, 2000, between TAM Transportes Aéreos Regionais S.A. (incorporated by TAM Linhas Aéreas S.A.) and MTU Maintenance Hannover GmbH (MTU), incorporated herein by reference from our sixth pre-effective amendment to our Registration Statement on Form F-1, filed March 2, 2006, File No. 333-131938. | |
4.36 | PW1100G-JM Engine Support and Maintenance Agreement, dated February 26, 2014, between LATAM Airlines Group S.A. and Pratt & Whitney Division, (incorporated by reference to our annual report on Form 20-F (File No. 001-14728) filed on April 30, 2014 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.37 | Framework Deed, dated May 28, 2013, between LATAM Airlines Group S.A. and Aercap Holdings N.V, (incorporated by reference to our annual report on Form 20-F (File No. 001-14728) filed on April 30, 2014 and portions of which have been omitted pursuant to a request for confidential treatment). | |
4.38* | A320 Family/A330 Purchase Agreement (dated as of November 14, 2006) between Airbus S.A.S. and TAM – Linhas Aereas S.A. Portions of this document have been omitted pursuant to a request for confidential treatment. Such omitted portions have been filed separately with the Securities and Exchange Commission. | |
4.38.1* | Amendments No. 15, 16, 17, 18, and 19 (dated as of February 18, 2013, February 27, 2013, August 19, 2013, July 15, 2014 and December 11, 2014, respectively) to the A320 Family/A330 Purchase Agreement (dated as of November 14, 2006) between Airbus S.A.S. and TAM – Linhas Aereas S.A. Portions of these documents have been omitted pursuant to a request for confidential treatment. Such omitted portions have been filed separately with the Securities and Exchange Commission. | |
4.39* | Supplemental Agreement No. 7 (dated as of May 2014) to the Boeing 777-32WER Purchase Agreement (dated as of February 2007) between TAM – Linhas Aereas S.A. and The Boeing Company. Portions of this document have been omitted pursuant to a request for confidential treatment. Such omitted portions have been filed separately with the Securities and Exchange Commission. | |
8.1 | List of subsidiaries of the | |
12.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
12.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
13.1 | Certifications of Chief Financial Officer and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | ||
LANLATAM AIRLINES GROUP S.A. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 20112014
CONTENTS
Management’s Report on Internal Control over Financial Reporting
The management of the Company, including the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as amended.
The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control to future periods are subject to the risk that controls may become inadequate because of changes in conditions, and that the degree of compliance with the policies or procedures may deteriorate. Lan Airlines’ management, including the Chief Executive Officer and the Chief Financial Officer, has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011 based on the criteria established in Internal Control—“Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and, based on such criteria, Lan Airlines’ management has concluded that, as of December 31, 2011, the Company’s internal control over financial reporting is effective. The company’s internal control over financial reporting effectiveness as of December 31, 2011 has been audited by PricewaterhouseCoopers Consultores, Auditores y Companía Limitada, an independent registered public accounting firm, as stated in their report included herein.CONTENTS
F-8 | |||||
F-11 | |||||
F-12 |
February 14, 2012
CLP | — | CHILEAN PESO | ||
ARS | — | ARGENTINE PESO | ||
US$ | — | UNITED STATES DOLLAR | ||
THUS$ | — | THOUSANDS OF UNITED STATES DOLLARS | ||
COP | — | COLOMBIAN PESO | ||
BRL/R$ | — | BRAZILIAN REAL | ||
THR$ | — | THOUSANDS OF BRAZILIAN REAL | ||
VEF | — | STRONG BOLIVAR |
F-1-A
PricewaterhouseCoopers
RUT: 81.513.400-1
Santiago – Chile
AV. Andres Bello 2711 - Pisos 2,3, 4Y 5
LasCondes
Teléfono: (56) (2) 940 0000
www.pwc.cl
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Lan Airlines S.A.
In our opinion, the accompanying balance sheets and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Lan Airlines S.A. and its subsidiaries at December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established inInternal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
F-1-B-1
Lan Airlines S.A.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
Santiago, Chile
February 14, 2012
F-1-B-2
Contents of the notes to the consolidated financial statements of LanLATAM Airlines Group S.A. and Subsidiaries.
Notes
Notes | Page | ||||||||
Non-current assets (or disposal groups) classified as held for sale | |||||||||
- Trade, other accounts receivable and non-current accounts receivable | |||||||||
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Notes
F-75 | |||||||||
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LANLATAM AIRLINES S.A.GROUP S.A AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
ASSETS | ||||||||||||||||||||
Note | As of December 31, 2014 | As of December 31, 2013 | ||||||||||||||||||
Note | As of December 31, 2011 | As of December 31, 2010 | ThUS$ | ThUS$ | ||||||||||||||||
ThUS$ | ThUS$ | |||||||||||||||||||
ASSETS | ||||||||||||||||||||
Current Assets | ||||||||||||||||||||
Current assets | ||||||||||||||||||||
Cash and cash equivalents | 6 - 7 | 374,407 | 631,052 | 6 - 7 | 989,396 | 1,984,903 | ||||||||||||||
Other financial assets | 7 - 11 | 227,803 | 245,451 | 7 - 11 | 650,401 | 709,944 | ||||||||||||||
Other non-financial assets | 12 | 26,660 | 18,820 | 12 | 247,871 | 335,617 | ||||||||||||||
Trade and other accounts receivable | 7 - 8 | 537,406 | 481,350 | 7 - 8 | 1,378,837 | 1,633,094 | ||||||||||||||
Accounts receivable from related entities | 7 - 9 | 838 | 50 | 7 - 9 | 308 | 628 | ||||||||||||||
Inventories | 10 | 72,787 | 53,193 | 10 | 266,039 | 231,028 | ||||||||||||||
Tax assets | 98,789 | 97,656 | 17 | 100,708 | 81,890 | |||||||||||||||
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Total current assets other than non-current assets (or disposal groups) classified as held for sale | 1,338,690 | 1,527,572 | ||||||||||||||||||
Total current assets other than non-current assets (or disposal groups) classified as held for sale or as held for distribution to owners | 3,633,560 | 4,977,104 | ||||||||||||||||||
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Non-current assets (or disposal groups) classified as held for sale | 13 | 4,661 | 5,497 | |||||||||||||||||
Non-current assets (or disposal groups) classified as held for sale or as held for distribution to owners | 1,064 | 2,445 | ||||||||||||||||||
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Total current assets | 1,343,351 | 1,533,069 | 3,634,624 | 4,979,549 | ||||||||||||||||
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Non-current Assets | ||||||||||||||||||||
Non-current assets | ||||||||||||||||||||
Other financial assets | 7 - 11 | 21,833 | 21,587 | 7 - 11 | 84,986 | 65,289 | ||||||||||||||
Other non-financial assets | 12 | 58,163 | 32,508 | 12 | 342,813 | 272,276 | ||||||||||||||
Accounts receivable | 7 - 8 | 7,491 | 7,883 | 7 - 8 | 30,465 | 100,775 | ||||||||||||||
Equity accounted investments | 15 | 991 | 593 | — | 6,596 | |||||||||||||||
Intangible assets other than goodwill | 16 | 64,923 | 45,749 | 14 | 1,880,079 | 2,093,308 | ||||||||||||||
Goodwill | 17 | 163,777 | 157,994 | 15 | 3,313,401 | 3,727,605 | ||||||||||||||
Property, plant and equipment | 18 | 5,927,982 | 4,948,430 | 16 | 10,773,076 | 10,982,786 | ||||||||||||||
Tax assets | 17 | 17,663 | — | |||||||||||||||||
Deferred tax assets | 19 | 60,148 | 38,084 | 17 | 407,323 | 402,962 | ||||||||||||||
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Total non-current assets | 6,305,308 | 5,252,828 | 16,849,806 | 17,651,597 | ||||||||||||||||
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Total assets | 7,648,659 | 6,785,897 | 20,484,430 | 22,631,146 | ||||||||||||||||
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The accompanying Notes 1 to 3936 form an integral part of these consolidated financial statements.
F-1-1
LANLATAM AIRLINES S.A.GROUP S.A AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
LIABILITIES AND EQUITY | ||||||||||||||||||||
As of | As of | |||||||||||||||||||
Note | As of December 31, 2011 | As of December 31, 2010 | December 31, | December 31, | ||||||||||||||||
LIABILITIES | Note | 2014 | 2013 | |||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||
LIABILITIES | ||||||||||||||||||||
Current liabilities | ||||||||||||||||||||
Other financial liabilities | 7 - 20 | 582,257 | 542,624 | 7 - 18 | 1,624,615 | 2,039,787 | ||||||||||||||
Trade and other accounts payables | 7 - 21 | 645,086 | 645,571 | 7 - 19 | 1,489,396 | 1,557,736 | ||||||||||||||
Accounts payable to related entities | 7 - 9 | 367 | 184 | 7 - 9 | 35 | 505 | ||||||||||||||
Other provisions | 22 | 7,363 | 753 | 20 | 12,411 | 27,856 | ||||||||||||||
Tax liabilities | 29,369 | 15,736 | 17 | 17,889 | 11,583 | |||||||||||||||
Other non-financial liabilities | 23 | 1,057,637 | 939,151 | 21 | 2,685,386 | 2,871,640 | ||||||||||||||
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Total current liabilities | 2,322,079 | 2,144,019 | 5,829,732 | 6,509,107 | ||||||||||||||||
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Non-current liabilities | ||||||||||||||||||||
Other financial liabilities | 7 - 20 | 3,109,136 | 2,562,348 | 7 - 18 | 7,389,012 | 7,859,985 | ||||||||||||||
Accounts payable | 7 - 25 | 354,930 | 425,681 | 7 - 23 | 577,454 | 922,887 | ||||||||||||||
Other provisions | 22 | 22,385 | 32,120 | 20 | 703,140 | 1,122,247 | ||||||||||||||
Deferred tax liabilities | 19 | 369,625 | 312,012 | 17 | 1,051,894 | 767,228 | ||||||||||||||
Employee benefits | 24 | 13,132 | 9,657 | 22 | 74,102 | 45,666 | ||||||||||||||
Other non-financial liabilities | 21 | 355,401 | 77,567 | |||||||||||||||||
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Total non-current liabilities | 3,869,208 | 3,341,818 | 10,151,003 | 10,795,580 | ||||||||||||||||
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Total liabilities | 6,191,287 | 5,485,837 | 15,980,735 | 17,304,687 | ||||||||||||||||
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EQUITY | ||||||||||||||||||||
Share capital | 26 | 473,907 | 453,444 | 24 | 2,545,705 | 2,389,384 | ||||||||||||||
Retained earnings | 26 | 1,116,798 | 949,214 | 24 | 536,190 | 795,303 | ||||||||||||||
Other equity interests | 26 | 8,492 | 5,463 | |||||||||||||||||
Treasury Shares | 24 | (178 | ) | (178 | ) | |||||||||||||||
Other reserves | 26 | (153,873 | ) | (111,307 | ) | 24 | 1,320,179 | 2,054,312 | ||||||||||||
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Equity attributable to owners of the parent | 1,445,324 | 1,296,814 | ||||||||||||||||||
Non-controlling interests | 12,048 | 3,246 | ||||||||||||||||||
Parent’s ownership interest | 4,401,896 | 5,238,821 | ||||||||||||||||||
Non-controlling interest | 13 | 101,799 | 87,638 | |||||||||||||||||
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Total equity | 1,457,372 | 1,300,060 | 4,503,695 | 5,326,459 | ||||||||||||||||
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Total liabilities and equity | 7,648,659 | 6,785,897 | 20,484,430 | 22,631,146 | ||||||||||||||||
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The accompanying Notes 1 to 3936 form an integral part of these consolidated financial statements.
F-1-2
LANLATAM AIRLINES S.A.GROUP S.A AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME BY FUNCTION
For the period ended | ||||||||||||||||||||||||||||
For the year ended December 31, | December 31, | |||||||||||||||||||||||||||
Note | 2011 | 2010 | 2009 | Note | 2014 | 2013 | 2012 (*) | |||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||||||
Revenue | 27 | 5,585,440 | 4,390,502 | 3,519,162 | 25 | 12,093,501 | 12,924,537 | 9,710,372 | ||||||||||||||||||||
Cost of sales | (4,078,598 | ) | (3,012,698 | ) | (2,522,778 | ) | (9,624,501 | ) | (10,054,164 | ) | (7,634,453 | ) | ||||||||||||||||
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Gross margin | 1,506,842 | 1,377,804 | 996,384 | 2,469,000 | 2,870,373 | 2,075,919 | ||||||||||||||||||||||
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Other income | 30 | 132,804 | 132,826 | 136,351 | 27 | 377,645 | 341,565 | 220,156 | ||||||||||||||||||||
Distribution costs | (479,829 | ) | (383,517 | ) | (326,964 | ) | (957,072 | ) | (1,025,896 | ) | (803,619 | ) | ||||||||||||||||
Administrative expenses | (405,716 | ) | (331,831 | ) | (269,588 | ) | (980,660 | ) | (1,136,115 | ) | (888,654 | ) | ||||||||||||||||
Other expenses | (214,411 | ) | (172,428 | ) | (100,483 | ) | (401,021 | ) | (408,703 | ) | (311,753 | ) | ||||||||||||||||
Other gains/(losses) | (33,039 | ) | 5,438 | (11,728 | ) | 33,524 | (55,410 | ) | (45,831 | ) | ||||||||||||||||||
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Gains (losses) from operating activities | 541,416 | 585,814 | 246,218 | |||||||||||||||||||||||||
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Financial income | 14,453 | 14,946 | 18,183 | 90,500 | 72,828 | 77,489 | ||||||||||||||||||||||
Financial costs | 28 | (139,077 | ) | (155,279 | ) | (153,109 | ) | 26 | (430,034 | ) | (462,524 | ) | (294,598 | ) | ||||||||||||||
Equity accounted earnings | 15 | 458 | 132 | 315 | ||||||||||||||||||||||||
Share of profit of investments accounted for using the equity method | (6,455 | ) | 1,954 | 972 | ||||||||||||||||||||||||
Foreign exchange gains/(losses) | 31 | (256 | ) | 13,792 | (11,237 | ) | 28 | (130,201 | ) | (482,174 | ) | 66,685 | ||||||||||||||||
Result of indexation units | 131 | 149 | (605 | ) | 7 | 214 | (22 | ) | ||||||||||||||||||||
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Income before taxes | 382,360 | 502,032 | 277,519 | |||||||||||||||||||||||||
Income tax expense | 19 | (61,789 | ) | (81,107 | ) | (44,487 | ) | |||||||||||||||||||||
Income (loss) before taxes | 65,233 | (283,888 | ) | 96,744 | ||||||||||||||||||||||||
Income (loss) tax expense / benefit | 17 | (292,404 | ) | 20,069 | (102,386 | ) | ||||||||||||||||||||||
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NET INCOME FOR THE YEAR | 320,571 | 420,925 | 233,032 | |||||||||||||||||||||||||
NET INCOME (LOSS) FOR THE PERIOD | (227,171 | ) | (263,819 | ) | (5,642 | ) | ||||||||||||||||||||||
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Income attributable to owners of the parent | 320,197 | 419,702 | 231,126 | |||||||||||||||||||||||||
Income attributable to non-controlling interests | 374 | 1,223 | 1,906 | |||||||||||||||||||||||||
Income (loss) attributable to owners of the parent | (259,985 | ) | (281,114 | ) | (19,076 | ) | ||||||||||||||||||||||
Income (loss) attributable to non-controlling interest | 13 | 32,814 | 17,295 | 13,434 | ||||||||||||||||||||||||
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Net income for the year | 320,571 | 420,925 | 233,032 | |||||||||||||||||||||||||
Net income (loss) for the year | (227,171 | ) | (263,819 | ) | (5,642 | ) | ||||||||||||||||||||||
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EARNINGS PER SHARE | ||||||||||||||||||||||||||||
Basic earnings per share (US$) | 32 | 0.94335 | 1.23882 | 0.68221 | ||||||||||||||||||||||||
Diluted earnings per share (US$) | 32 | 0.94260 | 1.23534 | 0.68221 | ||||||||||||||||||||||||
Basic earnings (losses) per share (US$) | 29 | (0.47656 | ) | (0.57613 | ) | (0.04627 | ) | |||||||||||||||||||||
Diluted earnings (losses) per share (US$) | 29 | (0.47656 | ) | (0.57613 | ) | (0.04627 | ) |
(*) The balances at December 31, 2012, include TAM S.A. and Subsidiaries from June 22, 2012, date of the business combination materialized. See Note 15.2
The accompanying Notes 1 to 3936 form an integral part of these consolidated financial statements.
F-1-3
LANLATAM AIRLINES S.A.GROUP S.A AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended December 31, | ||||||||||||||||
Note | 2011 | 2010 | 2009 | |||||||||||||
ThUS$ | ThUS$ | ThUS$ | ||||||||||||||
NET INCOME | 320,571 | 420,925 | 233,032 | |||||||||||||
Components of other comprehensive income, before taxes | ||||||||||||||||
Currency translation differences | ||||||||||||||||
Gains (losses) on currency translation, before tax | 31 | (10,864 | ) | 708 | 1,442 | |||||||||||
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Other comprehensive income, before taxes, currency translation differences | (10,864 | ) | 708 | 1,442 | ||||||||||||
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Cash flow hedges | ||||||||||||||||
Gains (losses) on cash flow hedges before tax | 20 | (40,368 | ) | (17,855 | ) | 252,508 | ||||||||||
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Other comprehensive income, before taxes, cash flow hedges | (40,368 | ) | (17,855 | ) | 252,508 | |||||||||||
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Other components of other comprehensive income, before taxes | (51,232 | ) | (17,147 | ) | 253,950 | |||||||||||
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Income tax relating to other comprehensive income [abstract] | ||||||||||||||||
Income tax related to currency translation differences in other comprehensive income | 19 | 1,846 | (120 | ) | 1,008 | |||||||||||
Income tax related to cash flow hedges in other comprehensive income | 19 | 6,862 | 3,035 | (42,925 | ) | |||||||||||
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Amount of income taxes related to components of other comprehensive income | 8,708 | 2,915 | (41,917 | ) | ||||||||||||
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Other comprehensive income | (42,524 | ) | (14,232 | ) | 212,033 | |||||||||||
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Total comprehensive income | 278,047 | 406,693 | 445,065 | |||||||||||||
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Comprehensive income attributable to owners of the parent | 277,631 | 405,549 | 441,977 | |||||||||||||
Comprehensive income attributable to non-controlling interests | 416 | 1,144 | 3,088 | |||||||||||||
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TOTAL COMPREHENSIVE INCOME | 278,047 | 406,693 | 445,065 | |||||||||||||
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For the periods ended | ||||||||||||||
December 31, | ||||||||||||||
Note | 2014 | 2013 | 2012 (*) | |||||||||||
ThUS$ | ThUS$ | ThUS$ | ||||||||||||
NET INCOME (LOSS) | (227,171 | ) | (263,819 | ) | (5,642 | ) | ||||||||
Components of other comprehensive income that will be reclassified to income before taxes | ||||||||||||||
Currency translation differences | ||||||||||||||
Gains (losses) on currency translation, before tax | 28 | (650,439 | ) | (629,858 | ) | 19,170 | ||||||||
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Other comprehensive income, before taxes, currency translation differences | (650,439 | ) | (629,858 | ) | 19,170 | |||||||||
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Cash flow hedges | ||||||||||||||
Gains (losses) on cash flow hedges before taxes | 18 | (163,993 | ) | 128,166 | (2,510 | ) | ||||||||
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Other comprehensive income (losses), before taxes, cash flow hedges | (163,993 | ) | 128,166 | (2,510 | ) | |||||||||
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Other components of other comprehensive income (loss), before taxes | (814,432 | ) | (501,692 | ) | 16,660 | |||||||||
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Income tax relating to other comprehensive income that will be reclassified to income | — | — | (2,734 | ) | ||||||||||
Income tax related to cash flow hedges in other comprehensive income | 47,979 | (19,345 | ) | (2,623 | ) | |||||||||
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Income taxes related to components of other comprehensive income that will be reclassified to income | 47,979 | (19,345 | ) | (5,357 | ) | |||||||||
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Other comprehensive income (loss) | (766,453 | ) | (521,037 | ) | 11,303 | |||||||||
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Total comprehensive income (loss) | (993,624 | ) | (784,856 | ) | 5,661 | |||||||||
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Comprehensive income (loss) attributable to owners of the parent | (980,697 | ) | (768,457 | ) | (2,359 | ) | ||||||||
Comprehensive income (loss) attributable to non-controlling interests | (12,927 | ) | (16,399 | ) | 8,020 | |||||||||
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TOTAL COMPREHENSIVE INCOME (LOSS) | (993,624 | ) | (784,856 | ) | 5,661 | |||||||||
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(*) | The balances at December 31, 2012, include TAM S.A. and Subsidiaries from June 22, 2012, date of the business combination materialized. See Note 15.2 |
The accompanying Notes 1 to 3936 form an integral part of these consolidated financial statements.
F-1-4
LANLATAM AIRLINES S.A.GROUP S.A AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Attributable to owners of the parent | Attributable to owners of the parent | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other reserves | Change in other reserves | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note | Share capital | Other equity interests | Reserve for exchange on translation differences | Cash flow hedging reserve | Retained earnings | Equity attributable to owners of the parent | Non- controlling interests | Total equity | Currency | Cash flow | Shares based | Other | Total | Parent’s | Non- | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | Share | Treasury | translation | hedging | payments | sundry | other | Retained | ownership | controlling | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity previously reported January 1, 2011 | 453,444 | 5,463 | (4,257 | ) | (107,050 | ) | 949,214 | 1,296,814 | 3,246 | 1,300,060 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note | capital | shares | reserve | reserve | reserve | reserve | reserve | earnings | interest | interest | equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity as of January 1, 2014 | 2,389,384 | (178 | ) | (589,991 | ) | (34,508 | ) | 21,011 | 2,657,800 | 2,054,312 | 795,303 | 5,238,821 | 87,638 | 5,326,459 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total increase (decrease) in equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gain (losses) | 26 | — | — | — | — | 320,197 | 320,197 | 374 | 320,571 | 24 | — | — | — | — | — | — | — | (259,985 | ) | (259,985 | ) | 32,814 | (227,171 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | (9,060 | ) | (33,506 | ) | — | (42,566 | ) | 42 | (42,524 | ) | — | — | (603,880 | ) | (116,832 | ) | — | — | (720,712 | ) | — | (720,712 | ) | (45,741 | ) | (766,453 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
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Total comprehensive income | — | — | (9,060 | ) | (33,506 | ) | 320,197 | 277,631 | 416 | 278,047 | — | — | (603,880 | ) | (116,832 | ) | — | — | (720,712 | ) | (259,985 | ) | (980,697 | ) | (12,927 | ) | (993,624 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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Transactions with shareholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity issuance | 26-36 | 23,135 | — | — | — | — | 23,135 | — | 23,135 | 24-33 | 156,321 | — | — | — | — | — | — | — | 156,321 | — | 156,321 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends | 26 | — | — | — | — | (151,981 | ) | (151,981 | ) | — | (151,981 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Increase (decrease) through transfers and other changes, equity | 26-36 | (2,672 | ) | 3,029 | — | — | (632 | ) | (275 | ) | 8,386 | 8,111 | 24-33 | — | — | — | — | 8,631 | (22,052 | ) | (13,421 | ) | 872 | (12,549 | ) | 27,088 | 14,539 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total transactions with shareholders | 20,463 | 3,029 | — | — | (152,613 | ) | (129,121 | ) | 8,386 | (120,735 | ) | 156,321 | — | — | — | 8,631 | (22,052 | ) | (13,421 | ) | 872 | 143,772 | 27,088 | 170,860 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Closing balance as of December 31, 2010 | 473,907 | 8,492 | (13,317 | ) | (140,556 | ) | 1,116,798 | 1,445,324 | 12,048 | 1,457,372 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Closing balance as of December 31, 2014 | 2,545,705 | (178 | ) | (1,193,871 | ) | (151,340 | ) | 29,642 | 2,635,748 | 1,320,179 | 536,190 | 4,401,896 | 101,799 | 4,503,695 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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The accompanying Notes 1 to 3936 form an integral part of these consolidated financial statements.
F-1-5
LANLATAM AIRLINES S.A.GROUP S.A AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Attributable to owners of the parent | Attributable to owners of the parent | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other reserves | Change in other reserves | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note | Share capital | Other equity interests | Currency translation reserve | Cash flow hedging reserve | Retained earnings | Equity attributable to owners of the parent | Non- controlling interests | Total equity | Currency | Cash flow | Shares based | Other | Total | Parent’s | Non- | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | Share | Treasury | translation | hedging | payments | sundry | other | Retained | ownership | controlling | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity previously reported January 1, 2010 | 453,444 | 2,490 | (4,924 | ) | (92,230 | ) | 740,047 | 1,098,827 | 7,099 | 1,105,926 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note | capital | shares | reserve | reserve | reserve | reserve | reserve | earnings | interest | interest | equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity as of January 1, 2013 | 1,501,018 | (203 | ) | 3,574 | (140,730 | ) | 5,574 | 2,666,682 | 2,535,100 | 1,076,136 | 5,112,051 | 108,634 | 5,220,685 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total increase (decrease) in equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gain (losses) | 26 | — | — | — | — | 419,702 | 419,702 | 1,223 | 420,925 | 24 | — | — | — | — | — | — | — | (281,114 | ) | (281,114 | ) | 17,295 | (263,819 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | 667 | (14,820 | ) | — | (14,153 | ) | (79 | ) | (14,232 | ) | — | — | (593,565 | ) | 106,222 | — | — | (487,343 | ) | — | (487,343 | ) | (33,694 | ) | (521,037 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total comprehensive income | — | — | 667 | (14,820 | ) | 419,702 | 405,549 | 1,144 | 406,693 | — | — | (593,565 | ) | 106,222 | — | — | (487,343 | ) | (281,114 | ) | (768,457 | ) | (16,399 | ) | (784,856 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Transactions with shareholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity issuance | 24-33 | 888,570 | — | — | — | — | — | — | — | 888,570 | — | 888,570 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends | 26 | — | — | — | — | (210,406 | ) | (210,406 | ) | — | (210,406 | ) | 24 | (25 | ) | 25 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Increase (decrease) through transfers and other changes, equity | 26-36 | — | 2,973 | — | — | (129 | ) | 2,844 | (4,997 | ) | (2,153 | ) | 24-33 | (179 | ) | — | — | — | 15,437 | (8,882 | ) | 6,555 | 281 | 6,657 | (4,597 | ) | 2,060 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total transactions with shareholders | — | 2,973 | — | — | (210,535 | ) | (207,562 | ) | (4,997 | ) | (212,559 | ) | 888,366 | 25 | — | — | 15,437 | (8,882 | ) | 6,555 | 281 | 895,227 | (4,597 | ) | 890,630 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Closing balance as of December 31, 2010 | 453,444 | 5,463 | (4,257 | ) | (107,050 | ) | 949,214 | 1,296,814 | 3,246 | 1,300,060 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Closing balance as of December 31, 2013 | 2,389,384 | (178 | ) | (589,991 | ) | (34,508 | ) | 21,011 | 2,657,800 | 2,054,312 | 795,303 | 5,238,821 | 87,638 | 5,326,459 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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The accompanying Notes 1 to 3936 form an integral part of these consolidated financial statements.
F-1-6
Attributable to owners of the parent | ||||||||||||||||||||||||||||||||||||||||||||||
Change in other reserves | ||||||||||||||||||||||||||||||||||||||||||||||
Currency | Cash flow | Shares based | Other | Total | Parent’s | Non- | ||||||||||||||||||||||||||||||||||||||||
Share | Treasury | translation | hedging | payments | sundry | other | Retained | ownership | controlling | Total | ||||||||||||||||||||||||||||||||||||
Note | capital | shares | reserve | reserve | reserve | reserve | reserve | earnings | interest | interest | equity | |||||||||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ||||||||||||||||||||||||||||||||||||
Equity as of January 1, 2012 | 473,907 | — | (13,317 | ) | (140,556 | ) | 7,130 | 1,362 | (145,381 | ) | 1,116,798 | 1,445,324 | 12,048 | 1,457,372 | ||||||||||||||||||||||||||||||||
Total increase (decrease) in equity | ||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||||||||||||||||
Gain (losses) | 24 | — | — | — | — | — | — | — | (19,076 | ) | (19,076 | ) | 13,434 | (5,642 | ) | |||||||||||||||||||||||||||||||
Other comprehensive income | — | — | 16,891 | (174 | ) | — | — | 16,717 | — | 16,717 | (5,414 | ) | 11,303 | |||||||||||||||||||||||||||||||||
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Total comprehensive income | — | — | 16,891 | (174 | ) | — | — | 16,717 | (19,076 | ) | (2,359 | ) | 8,020 | 5,661 | ||||||||||||||||||||||||||||||||
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Transactions with shareholders | ||||||||||||||||||||||||||||||||||||||||||||||
Equity issuance | 24-33 | 1,030,621 | — | — | — | — | 2,665,692 | 2,665,692 | — | 3,696,313 | — | 3,696,313 | ||||||||||||||||||||||||||||||||||
Dividends | 24 | — | — | — | — | — | — | — | (21,749 | ) | (21,749 | ) | — | (21,749 | ) | |||||||||||||||||||||||||||||||
Increase (decrease) through transactions with treasury shares | 24 | — | (203 | ) | — | — | — | — | — | — | (203 | ) | — | (203 | ) | |||||||||||||||||||||||||||||||
Increase (decrease) through transfers and other changes, equity | 24-33 | (3,510 | ) | — | — | — | (1,556 | ) | (372 | ) | (1,928 | ) | 163 | (5,275 | ) | 88,566 | 83,291 | |||||||||||||||||||||||||||||
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Total transactions with shareholders | 1,027,111 | (203 | ) | — | — | (1,556 | ) | 2,665,320 | 2,663,764 | (21,586 | ) | 3,669,086 | 88,566 | 3,757,652 | ||||||||||||||||||||||||||||||||
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Closing balance as of December 31, 2012 | 1,501,018 | (203 | ) | 3,574 | (140,730 | ) | 5,574 | 2,666,682 | 2,535,100 | 1,076,136 | 5,112,051 | 108,634 | 5,220,685 | |||||||||||||||||||||||||||||||||
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The accompanying Notes 1 to 36 form an integral part of these consolidated financial statements.
LANLATAM AIRLINES S.A.GROUP S.A AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS DIRECT – METHOD
For the year ended December 31, | For the periods ended December 31, | |||||||||||||||||||||||||||||
Note | 2011 | 2010 | 2009 | Note | 2014 | 2013 | 2012 | |||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||||||||
Cash flows from operating activities | ||||||||||||||||||||||||||||||
Cash collection from operating activities | ||||||||||||||||||||||||||||||
Proceeds from sales of goods and services | 5,966,464 | 4,831,963 | 3,871,189 | 13,367,838 | 13,406,275 | 10,258,473 | ||||||||||||||||||||||||
Other cash receipts from operating activities | 52,012 | 46,336 | 40,319 | 96,931 | 4,638 | 57,763 | ||||||||||||||||||||||||
Payments for operating activities | ||||||||||||||||||||||||||||||
Payments to suppliers for goods and services | (4,286,394 | ) | (3,058,168 | ) | (2,475,716 | ) | (8,823,007 | ) | (9,570,723 | ) | (7,153,865 | ) | ||||||||||||||||||
Payments to and on behalf of employees | (883,297 | ) | (633,686 | ) | (636,603 | ) | (2,433,652 | ) | (2,405,315 | ) | (1,938,769 | ) | ||||||||||||||||||
Other payments for operating activities | (84,000 | ) | (18,000 | ) | (19,000 | ) | (528,214 | ) | (31,215 | ) | (19,325 | ) | ||||||||||||||||||
Interest paid | (6,766 | ) | (387 | ) | — | |||||||||||||||||||||||||
Interest received | 11,428 | 11,438 | 13,542 | 11,589 | 11,310 | 52,986 | ||||||||||||||||||||||||
Income taxes refunded (paid) | 626 | (11,098 | ) | 10,304 | (108,389 | ) | (83,033 | ) | (3,018 | ) | ||||||||||||||||||||
Other cash inflows (outflows) | (7,499 | ) | (43,061 | ) | 41,792 | 6 | (251,657 | ) | 76,761 | (50,433 | ) | |||||||||||||||||||
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Net cash flows from operating activities | 762,574 | 1,125,337 | 845,827 | 1,331,439 | 1,408,698 | 1,203,812 | ||||||||||||||||||||||||
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Cash flows used in investing activities | ||||||||||||||||||||||||||||||
Cash flows from disposal of subsidiaries | 47,337 | 1,491 | 1,568 | |||||||||||||||||||||||||||
Cash flows used for acquisition of subsidiaries | (3,541 | ) | (12,000 | ) | (921 | ) | ||||||||||||||||||||||||
Cash flows used for in the purchase of non-controlling interests | — | — | (2,439 | ) | ||||||||||||||||||||||||||
Cash flows used to obtain control of subsidiaries or other businesses | 518 | (5,517 | ) | (3,223 | ) | |||||||||||||||||||||||||
Cash flows used in the purchase of non- controlling interest | — | (497 | ) | — | ||||||||||||||||||||||||||
Other cash receipts from sales of equity or debt instruments of other entities | 9,201 | 12,915 | 8,743 | 524,370 | 270,485 | 386,379 | ||||||||||||||||||||||||
Other payments to acquire equity or debt instruments of other entities | (72 | ) | (60,000 | ) | (58,983 | ) | (474,656 | ) | (440,801 | ) | — | |||||||||||||||||||
Amounts raised from sale of property, plant and equipment | 93,787 | 577 | 10,777 | 564,266 | 225,196 | 73,429 | ||||||||||||||||||||||||
Purchases of property, plant and equipment | (1,367,025 | ) | (1,029,158 | ) | (538,576 | ) | (1,440,445 | ) | (1,381,786 | ) | (2,389,364 | ) | ||||||||||||||||||
Amounts raised from sale of intangible assets | 6,189 | — | — | |||||||||||||||||||||||||||
Sales of intangible assets | — | — | — | |||||||||||||||||||||||||||
Purchases of intangible assets | (27,615 | ) | (19,236 | ) | (12,888 | ) | (55,759 | ) | (43,484 | ) | (59,166 | ) | ||||||||||||||||||
Payment from other long-term assets | — | 22,144 | 38,035 | |||||||||||||||||||||||||||
Dividends received | 89 | 111 | 414 | — | — | 351 | ||||||||||||||||||||||||
Interest received | 2,848 | 4,048 | 2,637 | |||||||||||||||||||||||||||
Other cash inflows (outflows) | 545 | 812 | — | 6 | (17,399 | ) | 75,448 | 27,143 | ||||||||||||||||||||||
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Net cash flow used in investing activities | (1,238,257 | ) | (1,100,440 | ) | (589,668 | ) | ||||||||||||||||||||||||
Net cash flow from (used in) investing activities | (899,105 | ) | (1,278,812 | ) | (1,926,416 | ) | ||||||||||||||||||||||||
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Cash flows from (used in) financing activities | ||||||||||||||||||||||||||||||
Amounts raised from issuance of shares | 23,153 | — | 156,321 | 888,949 | 83,512 | |||||||||||||||||||||||||
Payments to acquire or redeem the shares of the entity | 4,661 | — | (203 | ) | ||||||||||||||||||||||||||
Amounts raised from long-term loans | 969,252 | 687,792 | 671,425 | 1,042,820 | 2,043,518 | 2,185,663 | ||||||||||||||||||||||||
Amounts raised from short-term loans | 334,500 | — | — | 603,151 | 1,101,159 | 152,000 | ||||||||||||||||||||||||
Loans Repayments | (883,402 | ) | (554,539 | ) | (261,705 | ) | ||||||||||||||||||||||||
Loans repayments | (2,315,120 | ) | (1,952,013 | ) | (539,332 | ) | ||||||||||||||||||||||||
Payments of finance lease liabilities | (59,990 | ) | (54,034 | ) | (62,858 | ) | (394,131 | ) | (423,105 | ) | (292,931 | ) | ||||||||||||||||||
Dividends paid | (192,133 | ) | (155,407 | ) | (139,937 | ) | (35,362 | ) | (29,694 | ) | (124,827 | ) | ||||||||||||||||||
Interest paid | (119,086 | ) | (128,722 | ) | (129,323 | ) | (368,789 | ) | (361,006 | ) | (227,607 | ) | ||||||||||||||||||
Other cash inflows (outflows) | 146,849 | 80,181 | 21,588 | 6 | (13,777 | ) | (62,013 | ) | (231,079 | ) | ||||||||||||||||||||
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Net cash flows from (used in) financing activities | 219,143 | (124,729 | ) | 99,190 | (1,320,226 | ) | 1,205,795 | 1,005,196 | ||||||||||||||||||||||
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Net increase (decrease) in cash and cash equivalents before effect of exchanges rate change | (256,540 | ) | (99,832 | ) | 355,349 | (887,892 | ) | 1,335,681 | 282,592 | |||||||||||||||||||||
Effects of variation in the exchange rate on cash and cash equivalents | (105 | ) | (613 | ) | (24,824 | ) | (107,615 | ) | (1,041 | ) | (6,736 | ) | ||||||||||||||||||
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Net increase (decrease) in cash and cash equivalents | (256,645 | ) | (100,445 | ) | 330,525 | (995,507 | ) | 1,334,640 | 275,856 | |||||||||||||||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 6 | 631,052 | 731,497 | 400,972 | ||||||||||||||||||||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 6 | 1,984,903 | 650,263 | 374,407 | ||||||||||||||||||||||||||
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CASH AND CASH EQUIVALENTS AT END OF YEAR | 6 | 374,407 | 631,052 | 731,497 | ||||||||||||||||||||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | 6 | 989,396 | 1,984,903 | 650,263 | ||||||||||||||||||||||||||
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The accompanying Notes 1 to 3936 form an integral part of these consolidated financial statements.
F-1-7
LANLATAM AIRLINES S.A.GROUP S.A AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 20112014
LanLATAM Airlines Group S.A. (the “Company” or “LAN”) is a public company registered with the Chilean Superintendency of Securities and Insurance (SVS), under No.306, whose shares are quoted in Chile on the Valparaíso Stock Brokers—Stock Exchange (Valparaíso), the Chilean Electronic Stock Exchange and the Santiago Stock Exchange; it is also quoted in the United States of America on the New York Stock Exchange (NYSE)(“NYSE”) in New York in the form of American Depositary Receipts (ADRs)(“ADRs”) and in Brazil BM & FBOVESPA S.A. – Stock Exchange, Mercadorias e Futuros, in the form of Brazilian Depositary Receipts (“BDRs”).
Its principal business is passenger and cargo air transportation, both in the domestic markets of Chile, Peru, Argentina, Colombia, and Ecuador and Brazil and in a developed series of regional and international routes in America, Europe and Oceania. These businesses are performed directly or through its subsidiaries in different countries. In addition, the Company has subsidiaries operating in the freight business in Mexico, Brazil and Colombia.
On August 13, 2010, LAN Airlines S.A. and TAM S.A. (TAM) announced they have signed a non-binding Memorandum of Understanding (MOU) in which the companies agree to proceed with their intention of carrying out their operations jointly under one parent company, to be named LATAM Airlines Group. The proposed partnership of LAN with TAM would be within the world’s 10 largest airline groups. LATAM will provide transport services for passengers and cargo to more than 115 destinations in 23 countries, operating with a fleet of over 300 aircraft, with over 40,000 employees. Both airlines will continue operating independently with their current operating licenses and brands. Within the group, TAM will continue operating as a Brazilian company with its own structure. The current holding of LAN Airlines S.A. will operate as an independent business unit within the group. On October 20, 2010, LAN and TAM announced that the operating subsidiaries of TAM had presented the structure of the transaction to the Brazilian Civil Aviation Agency (ANAC), which was approved by this agency on March 1, 2011.
On January 18, 2011 the parties of the MOU (1) and Mrs. Maria Cláudia Oliveira Amaro, Maurício Rolim Amaro, Noemy Almeida Olivera Amaro and Joao Francisco Amaro (“Amaro Family”), as the only shareholders of TEP, signed (a) anImplementation Agreement and (b) a binding Exchange Offer Agreement (“Contracts Signed”) containing the final terms and conditions of the proposed partnership between LAN and TAM.
(1) On August 13, 2010 LAN reported as a significant matter to the Superintendency of Securities and Insurance that LAN, Costa Verde Aeronáutica S.A. and Inversiones Mineras del Cantábrico S.A. (the last two, “Cueto subsidiaries”), TAM S.A. (“TAM”) and TAM Empreendimentos e Participacoes S.A. (“TEP”) signed a non-binding Memorandum of Understanding (“MOU”) for which the primary terms were outlined.
On September 21, 2011, the Court of Defense of Free Competition (“TDLC”) approved the merger between LAN and TAM, establishing fourteen mitigation measures. On October 3, 2011, LAN and TAM filed an appeal to the Supreme Court objecting three of the mitigation measures.
On December 21, 2011, the Board of LAN cited a special meeting of shareholders, citation was performed November 11, 2011, in which LAN shareholders approved, among others, the following matters:
(a) The merger of LAN with Sister Holdco S.A. and Holdco II S.A. and companies (the “Absorbed Companies”), two companies specially constituted for the purpose of the association between LAN and TAM;
(b)The change of name and the other transactions contemplated in contracts.
F-1-8
(c) The increase in capital by US$ 1,465,372,970.09 by issuing 147,355,882 common shares without par value of which:
(i) US$ 1,417,639,617.60 through the issue of 142,555,882 shares, which are intended to be exchanged for shares of the Absorbed Companies as a result of the proposed Merger, at a rate of 0.9 new shares of LAN for each share that is fully subscribed and paid for each of the absorbed companies, and that belongs to shareholders other than LAN. LAN shares that holds in the acquired companies at the time to perfect the Merger, shall have no effect;
(ii) US$ 47,733,352.49 through the issuance of 4,800,000 shares, which will go towards compensation plans for employees of the Company and its subsidiaries, as provided in Article 24 of the Corporations Law.
The Company is located in Santiago, Chile, at Avenida Américo Vespucio Sur No. 901, commune of Renca.
Corporate Governance practices of the Company are set in accordance with Securities Market Law 18,045 the Corporations Law 18,046 and its regulations, and the regulations of the SVS and the laws and regulations of the United States of America and the U.S. Securities and Exchange Commission (SEC)(“SEC”) of that country, with respect to the issuance of ADRs, and the Federal Republic of Brazil and the Comissão de Valores MobiliáriosMobiliarios (“CVM”) of that country, as it pertains to the issuance of Brazilian Depositary Receipts (“BDRs”).BDRs.
The Board of the Company is composed of nine members who are elected every two years by the ordinary shareholdersshareholders’ meeting. The Board meets in regular monthly sessions and in extraordinary sessions as the corporate needs demand. Of the nine board members, three form part of its Directors’ Committee which fulfills both the role foreseen in the Corporations Law and the functions of the Audit Committee required by the Sarbanes Oxley ActLaw of the United States of America and the respective regulations of the SEC.
The majority shareholder of the Company is the Cueto Group, which through Costa Verde Aeronáutica S.A., Inversiones Mineras del Cantábrico S.A. andCosta Verde Aeronáutica SpA, Inversiones Nueva Costa Verde Aeronáutica Limitada, Inversiones Priesca Dos y Cía. Ltda., Inversiones Caravia Dos y Cía. Ltda., Inversiones El Fano Dos y Cía. Ltda., Inversiones La Espasa Dos S.A., Inversiones Puerto Claro Dos Limitada, Inversiones La Espasa Dos y Cía. Ltda., Inversiones Puerto Claro Dos y Cía. Limitada and Inversiones Mineras del Cantábrico S.A. owns 33.91%25.49% of the shares issued by the Company, and therefore is the controllercontrolling shareholder of the Company in accordance with the provisions of the letter b) of Article 97 and Article 99 of the Securities Market Law, given that despite not meeting the majority of votes at shareholders’ meeting or having the power to elect a majority of the directors of the Company, there is a decisive influence inon its administration.
As of December 31, 2011,2014, the Company had a total of 1,6821,622 registered shareholders, and 2.99%shareholders. At that date approximately 7.69 % of the Company’s share capital was in the form of ADRs.ADRs and approximately 0.53% in the form of BDRs.
For the yearperiod ended December 31, 20112014, the Company had an average of 20,87053,300 employees, ending the yearthis period with a total of 21,838 people, with 4,17053,072 employees, spread over 10,077 Administrative employees, 6,986 in administration, 2,918Maintenance, 17,517 in maintenance, 6,194Operations, 9,237 in operations, 3,837 cabin crew, 1,969 pilots,Cabin Crew, 4,009 in Controls Crew, and 2,7505,246 in sales.
F-1-9
Sales.
The significant operatingmain subsidiaries included in these consolidated financial statements are as follows:
As of December 31, 2011 | As of December 31, 2010 | |||||||||||||||||||||||||||||
Tax No. | Company | Country of origin | Functional Currency | Direct ownership interest | Indirect ownership interest | Total ownership interest | Direct ownership interest | Indirect ownership interest | Total ownership interest | |||||||||||||||||||||
% | % | % | % | % | % | |||||||||||||||||||||||||
96.518.860-6 | Lantours Division de Servicios Terrestres S.A. (*) | Chile | US$ | 99.9900 | 0.0100 | 100.0000 | 99.9900 | 0.0100 | 100.0000 | |||||||||||||||||||||
96.763.900-1 | Inmobiliaria Aeronáutica S.A. | Chile | US$ | 99.0100 | 0.9900 | 100.0000 | 99.0100 | 0.9900 | 100.0000 | |||||||||||||||||||||
96.969.680-0 | Lan Pax Group S.A. and Subsidiaries | Chile | US$ | 99.8361 | 0.1639 | 100.0000 | 99.8361 | 0.1639 | 100.0000 | |||||||||||||||||||||
Foreign | Lan Peru S.A. | Peru | US$ | 49.0000 | 21.0000 | 70.0000 | 49.0000 | 21.0000 | 70.0000 | |||||||||||||||||||||
Foreign | Lan Chile Investments Limited and Subsidiaries | Caymán Islands | US$ | 99.9900 | 0.0100 | 100.0000 | 99.9900 | 0.0100 | 100.0000 | |||||||||||||||||||||
93.383.000-4 | Lan Cargo S.A. | Chile | US$ | 99.8939 | 0.0041 | 99.8980 | 99.8939 | 0.0041 | 99.8980 | |||||||||||||||||||||
Foreign | Connecta Corporation | U.S.A | US$ | 0.0000 | 100.0000 | 100.0000 | 0.0000 | 100.0000 | 100.0000 | |||||||||||||||||||||
Foreign | Prime Airport Services Inc. and Subsidiary | U.S.A | US$ | 0.0000 | 100.0000 | 100.0000 | 0.0000 | 100.0000 | 100.0000 | |||||||||||||||||||||
96.951.280-7 | Transporte Aéreo S.A. | Chile | US$ | 0.0000 | 100.0000 | 100.0000 | 0.0000 | 100.0000 | 100.0000 | |||||||||||||||||||||
96.634.020-7 | Ediciones Ladeco América S.A. | Chile | CLP | 0.0000 | 100.0000 | 100.0000 | 0.0000 | 100.0000 | 100.0000 | |||||||||||||||||||||
Foreign | Aircraft International Leasing Limited | U.S.A | US$ | 0.0000 | 100.0000 | 100.0000 | 0.0000 | 100.0000 | 100.0000 | |||||||||||||||||||||
96.631.520-2 | Fast Air Almacenes de Carga S.A. | Chile | CLP | 0.0000 | 100.0000 | 100.0000 | 0.0000 | 100.0000 | 100.0000 | |||||||||||||||||||||
96.631.410-9 | Ladeco Cargo S.A. | Chile | CLP | 0.0000 | 100.0000 | 100.0000 | 0.0000 | 100.0000 | 100.0000 | |||||||||||||||||||||
Foreign | Laser Cargo S.R.L. | Argentina | ARS | 0.0000 | 100.0000 | 100.0000 | 0.0000 | 100.0000 | 100.0000 | |||||||||||||||||||||
Foreign | Lan Cargo Overseas Limited and Subsidiaries | Bahamas | US$ | 0.0000 | 100.0000 | 100.0000 | 0.0000 | 100.0000 | 100.0000 | |||||||||||||||||||||
96.969.690-8 | Lan Cargo Inversiones S.A. and Subsidiary | Chile | CLP | 0.0000 | 100.0000 | 100.0000 | 0.0000 | 100.0000 | 100.0000 | |||||||||||||||||||||
96.801.150-2 | Blue Express INTL S.A. and Subsidiary | Chile | CLP | 0.0000 | 0.0000 | 0.0000 | 0.0000 | 100.0000 | 100.0000 | |||||||||||||||||||||
96.575.810-0 | Inversiones Lan S.A. and Subsidiaries | Chile | CLP | 99.7100 | 0.0000 | 99.7100 | 99.7100 | 0.0000 | 99.7100 |
a) | As of December 31, 2014 |
Participation rate | Statement of financial position | Net Income | ||||||||||||||||||||||||||||||||
Tax No. | Company | Country of origin | Functional Currency | Direct ownership interest | Indirect ownership interest | Total ownership interest | Assets | Liabilities | Equity | Gain (loss) | ||||||||||||||||||||||||
% | % | % | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ||||||||||||||||||||||||||||
96.518.860-6 | Lantours Division Servicios Terrestres S.A. and Subsidiaries | Chile | US$ | 99.9900 | 0.0100 | 100.0000 | 3,229 | 2,289 | 940 | 2,078 | ||||||||||||||||||||||||
96.763.900-1 | Inmobiliaria Aeronáutica S.A. | Chile | US$ | 99.0100 | 0.9900 | 100.0000 | 39,920 | 16,854 | 23,066 | (717 | ) | |||||||||||||||||||||||
96.969.680-0 | Lan Pax Group S.A. and Subsidiaries (1) | Chile | US$ | 99.8361 | 0.1639 | 100.0000 | 640,020 | 1,065,157 | (426,016 | ) | (114,511 | ) | ||||||||||||||||||||||
Foreign | Lan Perú S.A. | Peru | US$ | 49.0000 | 21.0000 | 70.0000 | 239,470 | 228,395 | 11,075 | 1,058 | ||||||||||||||||||||||||
Foreign | Lan Chile Investments Limited and Subsidiaries (1) | Cayman Islands | US$ | 99.9900 | 0.0100 | 100.0000 | 2,015 | — | 2,015 | 2,844 | ||||||||||||||||||||||||
93.383.000-4 | Lan Cargo S.A. | Chile | US$ | 99.8939 | 0.0041 | 99.8980 | 575,979 | 234,772 | 341,207 | (17,905 | ) | |||||||||||||||||||||||
Foreign | Connecta Corporation | U.S.A. | US$ | 0.0000 | 100.0000 | 100.0000 | 27,431 | 28,853 | (1,422 | ) | 740 | |||||||||||||||||||||||
Foreign | Prime Airport Services Inc. and Subsidiary (1) | U.S.A. | US$ | 0.0000 | 100.0000 | 100.0000 | 18,120 | 22,897 | (4,777 | ) | 107 | |||||||||||||||||||||||
96.951.280-7 | Transporte Aéreo S.A. | Chile | US$ | 0.0000 | 100.0000 | 100.0000 | 367,570 | 147,278 | 220,292 | (19,001 | ) | |||||||||||||||||||||||
96.634.020-7 | Ediciones Ladeco América S.A. | Chile | CLP | 0.0000 | 100.0000 | 100.0000 | — | 484 | (484 | ) | — | |||||||||||||||||||||||
Foreign | Aircraft International Leasing Limited | U.S.A. | US$ | 0.0000 | 100.0000 | 100.0000 | — | — | — | 2,805 | ||||||||||||||||||||||||
96.631.520-2 | Fast Air Almacenes de Carga S.A. | Chile | CLP | 0.0000 | 100.0000 | 100.0000 | 9,601 | 3,912 | 5,689 | 893 | ||||||||||||||||||||||||
96.631.410-9 | Ladeco Cargo S.A. | Chile | CLP | 0.0000 | 100.0000 | 100.0000 | 346 | 13 | 333 | 16 | ||||||||||||||||||||||||
Foreign | Laser Cargo S.R.L. | Argentina | ARS | 0.0000 | 100.0000 | 100.0000 | 41 | 138 | (97 | ) | 12 | |||||||||||||||||||||||
Foreign | Lan Cargo Overseas Limited and Subsidiaries (1) | Bahamas | US$ | 0.0000 | 100.0000 | 100.0000 | 60,634 | 46,686 | 12,218 | (84,603 | ) | |||||||||||||||||||||||
96.969.690-8 | Lan Cargo Inversiones S.A. and Subsidiary (1) | Chile | CLP | 0.0000 | 100.0000 | 100.0000 | 45,589 | 59,768 | (12,711 | ) | (4,276 | ) | ||||||||||||||||||||||
96.575.810-0 | Inversiones Lan S.A. and Subsidiaries (1) | Chile | CLP | 99.7100 | 0.0000 | 99.7100 | 16,035 | 14,746 | 1,272 | (4,473 | ) | |||||||||||||||||||||||
Foreign | TAM S.A. and Subsidiaries (1) (2) | Brazil | BRL | 63.0901 | 36.9099 | 100.0000 | 6,817,698 | 5,809,529 | 912,634 | 171,655 |
(2) | The indirect participation percentage over TAM S.A. and Subsidiaries comes from Holdco I S.A., |
During 2014 LATAM Airlines Group S.A. made a capital increase in TAM S.A. for the total amount of ThUS$ 250,000.
b) | As of December 31, 2013 |
Participation rate | Statement of financial position | Net Income | ||||||||||||||||||||||||||||||||
Tax No. | Company | Country of origin | Functional Currency | Direct ownership interest | Indirect ownership interest | Total ownership interest | Assets | Liabilities | Equity | Gain (loss) | ||||||||||||||||||||||||
% | % | % | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ||||||||||||||||||||||||||||
96.518.860-6 | Lantours Division Servicios Terrestres S.A. and Subsidiaries | Chile | US$ | 99.9900 | 0.0100 | 100.0000 | 2,722 | 2,210 | 512 | 787 | ||||||||||||||||||||||||
96.763.900-1 | Inmobiliaria Aeronáutica S.A. | Chile | US$ | 99.0100 | 0.9900 | 100.0000 | 38,553 | 12,124 | 26,429 | 1,231 | ||||||||||||||||||||||||
96.969.680-0 | Lan Pax Group S.A. and Subsidiaries (1) | Chile | US$ | 99.8361 | 0.1639 | 100.0000 | 641,589 | 901,851 | (246,521 | ) | (104,966 | ) | ||||||||||||||||||||||
Foreign | Lan Perú S.A. | Peru | US$ | 49.0000 | 21.0000 | 70.0000 | 263,516 | 252,109 | 11,407 | 3,755 | ||||||||||||||||||||||||
Foreign | Lan Chile Investments Limited and Subsidiaries (1) | Cayman Islands | US$ | 99.9900 | 0.0100 | 100.0000 | 4,419 | 5,248 | (829 | ) | (1 | ) | ||||||||||||||||||||||
93.383.000-4 | Lan Cargo S.A. | Chile | US$ | 99.8939 | 0.0041 | 99.8980 | 772,640 | 413,527 | 359,113 | 3,685 | ||||||||||||||||||||||||
Foreign | Connecta Corporation | U.S.A. | US$ | 0.0000 | 100.0000 | 100.0000 | 9 | 2,171 | (2,162 | ) | (356 | ) | ||||||||||||||||||||||
Foreign | Prime Airport Services Inc. and Subsidiary (1) | U.S.A. | US$ | 0.0000 | 100.0000 | 100.0000 | 13,528 | 18,412 | (4,884 | ) | 78 | |||||||||||||||||||||||
96.951.280-7 | Transporte Aéreo S.A. | Chile | US$ | 0.0000 | 100.0000 | 100.0000 | 359,693 | 120,399 | 239,294 | (4,129 | ) | |||||||||||||||||||||||
96.634.020-7 | Ediciones Ladeco América S.A. | Chile | CLP | 0.0000 | 100.0000 | 100.0000 | — | 560 | (560 | ) | — | |||||||||||||||||||||||
Foreign | Aircraft International Leasing Limited | U.S.A. | US$ | 0.0000 | 100.0000 | 100.0000 | — | 2,805 | (2,805 | ) | (5 | ) | ||||||||||||||||||||||
96.631.520-2 | Fast Air Almacenes de Carga S.A. | Chile | CLP | 0.0000 | 100.0000 | 100.0000 | 10,675 | 3,684 | 6,991 | 1,802 | ||||||||||||||||||||||||
96.631.410-9 | Ladeco Cargo S.A. | Chile | CLP | 0.0000 | 100.0000 | 100.0000 | 381 | 13 | 368 | (2 | ) | |||||||||||||||||||||||
Foreign | Laser Cargo S.R.L. | Argentina | ARS | 0.0000 | 100.0000 | 100.0000 | 52 | 201 | (149 | ) | (34 | ) | ||||||||||||||||||||||
Foreign | Lan Cargo Overseas Limited and Subsidiaries (1) | Bahamas | US$ | 0.0000 | 100.0000 | 100.0000 | 354,250 | 256,109 | 96,817 | 111,043 | ||||||||||||||||||||||||
96.969.690-8 | Lan Cargo Inversiones S.A. and Subsidiary (1) | Chile | CLP | 0.0000 | 100.0000 | 100.0000 | 39,419 | 48,630 | (9,937 | ) | (1,246 | ) | ||||||||||||||||||||||
96.575.810-0 | Inversiones Lan S.A. and Subsidiaries (1) | Chile | CLP | 99.7100 | 0.0000 | 99.7100 | 15,362 | 8,933 | 6,421 | 517 | ||||||||||||||||||||||||
Foreign | TAM S.A. and Subsidiaries (1) (2) | Brazil | BRL | 63.0901 | 36.9099 | 100.0000 | 8,695,458 | 7,983,671 | 617,035 | (458,475 | ) |
F-1-10
(1) | The Equity reported corresponds to Equity attributable to owners of the parent, does not include Non-controlling interest. |
(2) | The indirect participation percentage over TAM S.A. and Subsidiaries comes from Holdco I S.A., entity for which LATAM Airlines Group S.A. holds a 99.9983% participation on the economic rights. Additionally LATAM Airlines Group S.A. owns 226 voting shares of Holdco I S.A., equivalent to 19.42% of total voting shares of that company. |
During 2013 LATAM Airlines Group S.A. made a capital increase in TAM S.A. for the total amount of ThUS$ 1,650,000.
Participation rate As of December 31, 2012 | Statement of financial position As of December 31, 2012 | Net Income As of December 31, 2012 | ||||||||||||||||||||||||||||||||
Tax No. | Company | Country of origin | Functional Currency | Direct ownership interest | Indirect ownership interest | Total ownership interest | Assets | Liabilities | Equity | Gain (loss) | ||||||||||||||||||||||||
% | % | % | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ||||||||||||||||||||||||||||
96.518.860-6 | Lantours Division Servicios Terrestres S.A. And Subsidiaries | Chile | US$ | 99.9900 | 0.0100 | 100.0000 | 2,678 | 2,153 | 525 | 1,300 | ||||||||||||||||||||||||
96.763.900-1 | Inmobiliaria Aeronáutica S.A. | Chile | US$ | 99.0100 | 0.9900 | 100.0000 | 57,227 | 23,029 | 34,198 | 17,719 | ||||||||||||||||||||||||
96.969.680-0 | Lan Pax Group S.A. and Subsidiaries (1) | Chile | US$ | 99.8361 | 0.1639 | 100.0000 | 522,408 | 637,851 | (112,395 | ) | (77,269 | ) | ||||||||||||||||||||||
Foreign | Lan Perú S.A. | Peru | US$ | 49.0000 | 21.0000 | 70.0000 | 159,361 | 150,319 | 9,042 | 2,513 | ||||||||||||||||||||||||
Foreign | Lan Chile Investments Limited and Subsidiaries (1) | Cayman Islands | US$ | 99.9900 | 0.0100 | 100.0000 | 4,419 | 5,247 | (828 | ) | (10 | ) | ||||||||||||||||||||||
93.383.000-4 | Lan Cargo S.A. | Chile | US$ | 99.8939 | 0.0041 | 99.8980 | 727,091 | 371,663 | 355,428 | (50,693 | ) | |||||||||||||||||||||||
Foreign | Connecta Corporation | U.S.A | US$ | 0.0000 | 100.0000 | 100.0000 | 234 | 2,041 | (1,807 | ) | 70 | |||||||||||||||||||||||
Foreign | Prime Airport Services Inc. and Subsidiary (1) | U.S.A | US$ | 0.0000 | 100.0000 | 100.0000 | 24,678 | 29,484 | (4,806 | ) | 1,174 | |||||||||||||||||||||||
96.951.280-7 | Transporte Aéreo S.A. | Chile | US$ | 0.0000 | 100.0000 | 100.0000 | 357,725 | 114,302 | 243,423 | 11,144 | ||||||||||||||||||||||||
96.634.020-7 | Ediciones Ladeco América S.A. | Chile | CLP | 0.0000 | 100.0000 | 100.0000 | — | 612 | (612 | ) | — | |||||||||||||||||||||||
Foreign | Aircraft International Leasing Limited | U.S.A | US$ | 0.0000 | 100.0000 | 100.0000 | — | 2,799 | (2,799 | ) | (5 | ) | ||||||||||||||||||||||
96.631.520-2 | Fast Air Almacenes de Carga S.A. | Chile | CLP | 0.0000 | 100.0000 | 100.0000 | 9,708 | 1,553 | 8,155 | 2,067 | ||||||||||||||||||||||||
96.631.410-9 | Ladeco Cargo S.A. | Chile | CLP | 0.0000 | 100.0000 | 100.0000 | 416 | 11 | 405 | 3 | ||||||||||||||||||||||||
Foreign | Laser Cargo S.R.L. | Argentina | ARS | 0.0000 | 100.0000 | 100.0000 | 70 | 228 | (158 | ) | (42 | ) | ||||||||||||||||||||||
Foreign | Lan Cargo Overseas Limited and Subsidiaries (1) | Bahamas | US$ | 0.0000 | 100.0000 | 100.0000 | 364,482 | 397,611 | (37,368 | ) | (6,375 | ) | ||||||||||||||||||||||
96.969.690-8 | Lan Cargo Inversiones S.A. and Subsidiary (1) | Chile | CLP | 0.0000 | 100.0000 | 100.0000 | 57,154 | 64,905 | (8,692 | ) | (4,458 | ) | ||||||||||||||||||||||
96.575.810-0 | Inversiones Lan S.A. and Subsidiaries (1) | Chile | CLP | 99.7100 | 0.0000 | 99.7100 | 16,181 | 9,714 | 6,466 | (112 | ) | |||||||||||||||||||||||
Foreign | TAM S.A. and Subsidiaries (1) (2) | Brazil | BRL | 63.0901 | 36.9099 | 100.0000 | 8,821,298 | 9,198,899 | (480,632 | ) | (75,195 | ) |
(1) | The Equity reported corresponds to Equity attributable to owners of the parent, does not include Non-controlling interest. |
(2) | The indirect participation percentage over TAM S.A. and Subsidiaries comes from Holdco I S.A., entity for which LATAM Airlines Group S.A. holds a 99.9983% participation. |
LATAM Airlines Group S.A. owns 226 voting shares of Holdco I S.A., equivalent to 19.42% of total voting shares of that company.
Additionally, the Company has proceeded to consolidate certain special purpose entities, denominated: JOL, destined to the aircraft financing and Chercán Leasing Limited, destined to the aircraft advance financing and Guanay Finance Limited, destined to the issuance of securitized bond, as the Company has major risks and benefits associated to them according to standards issued by the Standing Interpretations Committee of the International AccountingFinancial Reporting Standards: Consolidation – Special Purpose Entities (“SIC 12”)Consolidated Financial Statement (IFRS 10) and private investment funds in which the parent company and subsidiaries are contributors.
All the entities controlled have been included in the consolidation.
Changes in the scope of consolidation between January 1, 20102013 and December 31, 2011,2014, are detailed below:
(1) | Incorporation or acquisition of companies |
Florida West Technical Services LLC.On October 11, 2013, TAM S.A., directunder each contracts of sale of shares with Lan Cargo Overseas Limited (indirect subsidiary of Prime Airport ServicesLATAM Airlines Group S.A.) , in April 2010, changed its nameTADEF, Participação e Consultoria Empresarial Ltda. y Jochman Participações Ltda. acquired the 100% of the shares of Aerolinhas Brasileiras S.A. (ABSA). The effect of this transaction on LATAM Airlines Group S.A. corresponds to Lan Cargo Repair Station, LLC.
Aerovías de Integración Regional, AIRES S.A., indirect subsidiary of Lan Pax Group S.A., in November 2010, was acquired through is the purchasedirect owner of companies Akemi Holdings S.A. and Saipan Holdings S.A. (See Note 39)
AEROASIS55% of Aerolane Líneas Aéreas Nacionales del Ecuador S.A., direct subsidiaryduring 2014 obtains the 100% of the economic rights, through its participation in the company Holdco Ecuador S.A., who is owner of 45% remaining of Aerolane Líneas Aéreas Nacionales del Ecuador S.A. By this Lan Pax Group S.A, was acquired in February 2011. (See Note 39)
Blue Express INTL Ltda. and subsidiary, direct subsidiary of Lan Cargo S.A., were sold according to a purchase agreement signed on April 6, 2011.
NOTE 2 –- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following describes the principal accounting policies adopted in the preparation of these consolidated financial statements.
2.1. | Basis of Preparation |
The consolidated financial statements of LanLATAM Airlines Group S.A. are for the yearperiod ended December 31, 20112014, and have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) incorporated therein and IFRIC interpretations.with the interpretations issued by the International Financial Reporting Standards Interpretations Committee (IFRIC).
As explained in notes 2.17 and 17, on September 29, 2014 Law No. 20,780 was issued, which introduces modifications to the income tax system in Chile and other tax matters. On October 17, 2014 the Chilean Superintendence of Securities and Insurance (the “SVS”) issued Circular No. 856, which established that the effects of the change in the income tax rates on deferred tax assets and liabilities must be recognized directly within “Retained earnings” instead of the income statement as required by IAS 12.
In order to comply with IAS 12, these financial statements are different to those presented to the SVS as the aforementioned effect has been recognized within the income statement. A reconciliation of such differences in presented as follows:
As of December 31, 2014
Consolidated Financial Statements for SEC | Consolidated Financial Statements for SVS | Difference | ||||||||||
ThUS$ | ThUS$ | ThUS$ | ||||||||||
Total Equity | ||||||||||||
Parent’s ownership | ||||||||||||
Retained earnings | ||||||||||||
Net Income (Loss) for the period | (259,985 | ) | (109,790 | ) | (150,195 | ) | ||||||
Retained earnings for the last period | 796,175 | 645,980 | 150,195 | |||||||||
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Total Retained earnings | 536,190 | 536,190 | — | |||||||||
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Retained earnings | ||||||||||||
Net Income (Loss) for the period | 32,814 | 32,829 | (15 | ) | ||||||||
Retained earnings for the last period | 17,099 | 17,084 | 15 | |||||||||
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Total Retained earnings | 49,913 | 49,913 | — | |||||||||
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The consolidated financial statements have been prepared under the historic-cost criterion, although modified by the valuation at fair value of certain financial instruments.
The preparation of the consolidated financial statements in accordance with IFRSdescribed above requires the use of certain critical accounting estimates. It also requires management to use its judgment in applying the Company’s accounting policies. Note 4 shows the areas that imply a greater degree of judgment or complexity or the areas where the assumptions and estimates are significant to the consolidated financial statements.
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(a) AtIn order to facilitate comparison, there have been some minor reclassifications to the date of these consolidated financial statements corresponding to the following accounting pronouncements were adopted by the Company, with application effective as of January 1, 2011:previous year.
(a) | ||
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Date of issue | Application: | ||||
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Amendment to | December 2011 | 01/01/2014 |
Mandatory | ||||
Date of issue | Application: | |||
Annual periods beginning on or after | ||||
(i) Standards and amendments | ||||
Amendments to IFRS 10: Consolidated financial statements, IFRS 12: Disclosure of interests in other entities and IAS 27: Separate financial statements. | October 2012 | 01/01/2014 | ||
Amendment to IAS 36: Impairment of assets | May 2013 | 01/01/2014 The Company adopted in advance this amendment at December 31, 2013. | ||
Amendment to IAS 39: Financial instruments: Recognition and measurement | June 2013 | 01/01/2014 | ||
Amendment to IAS 19: Employee Benefits | November 2013 | 07/01/2014 | ||
(ii) Interpretations | ||||
IFRIC | May 2013 | 01/01/2014 | ||
(iii) Improvements | ||||
Improvements to the International Financial Reporting Standards (2012): IFRS 2: Share-based Payment; IFRS 3: Business Combinations Therefore, IFRS 9, IAS 37, and IAS 39 are also modified; IFRS 8: Operating Segments, IFRS 13: Fair Value Measurement, IFRS 9 and IAS 39 were consequently changed; IAS 16: Property, Plant and Equipment, and IAS 38: Intangible Assets; and IAS 24: Related Party Disclosures. | December 2013 | 07/01/2014 | ||
Improvements to the International Financial Reporting Standards (2013): IFRS 1: First-time Adoption of | December 2013 | 07/01/2014 | ||
The application of standards, amendments, interpretations and improvements had no material impact on the consolidated financial statements of the Company. |
(b) Accounting pronouncements effective implementation starting on January 1, 2015 and following: | ||||
Mandatory Application: | ||||
Annual periods beginning on or after | ||||
(i) Standards and amendments | ||||
IFRS 9: Financial instruments | December 2009 | 01/01/2018 | ||
IFRS 15: Revenue from contracts with customers | June 2014 | 01/01/2017 | ||
Amendment to IFRS 9: Financial instruments. | November 2013 | 01/01/2018 | ||
Amendment to IFRS 11: Joint arrangements. | May 2014 | 01/01/2016 | ||
Amendment to IAS 16: Property, plant and equipment, and IAS 38: Intangible assets. | May 2014 | 01/01/2016 | ||
Amendment to IAS 27: Separate financial statements. | August 2014 | 01/01/2016 | ||
Amendment to IFRS 10: Consolidated financial statements and IAS 28 Investments in associates and joint ventures. | September 2014 | 01/01/2016 | ||
Amendment IAS 1: Presentation of Financial Statements | December 2014 | 01/01/2016 | ||
Amendment to IFRS 10: Consolidated financial statements, IFRS 12: Disclosure of Interests in other entities and IAS 28: Investments in associates and joint ventures. | December 2014 | 01/01/2016 | ||
(ii) Improvements | ||||
Improvements to International Financial Reporting Standards (2012-2014 cycle): IFRS 5 Non-current assets held for sale and discontinued operations; IFRS 7 Financial instruments: Disclosures; IAS 19 Employee benefits and IAS 34 Interim financial reporting. | September 2014 | 01/01/2016 |
The Company’s management believes that the early adoption of the standards, amendments and interpretations described above havebut not had a significant impact on the Company’s consolidated financial statements.
(b) Accounting pronouncements with applicationsyet effective as of January 1, 2012 and following:
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The Company’s management believes that the adoption of the standards, amendments and interpretations described above would not have had a significant impact on the Company’s consolidated financial statements in the year of their first application. The Company only has not early adopted any of the above standards.amendment to IAS 36.
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2.2. | Basis of Consolidation |
(a) Subsidiaries
Subsidiaries are all the entities (including special-purpose entities) over which the Company has the power to control the financial and operating policies, which are generally accompanied by a holding of more than half of the voting rights. In evaluating whether the Company controls another entity, the existence and effect of potential voting rights that are currently exercisable or convertible at the date of the consolidated financial statements are considered. The subsidiaries are consolidated from the date on which control is passed to the Company and they are excluded from the consolidation on the date they cease to be so controlled. The results and flows are incorporated from the date of acquisition.
The Company usesapplies the acquisition-costacquisition method or purchase accountingto account for business combinations. The consideration transferred for the purchaseacquisition of subsidiaries.a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the group. The cost of acquisition isconsideration transferred includes the fair value of the assets delivered, the equity instruments issued and the liabilities incurredany asset or assumed on the exchange date. The identifiableliability resulting from a contingent consideration arrangement. Identifiable assets acquired and the liabilities and contingent liabilities assumed in a business combination are measured initially valued at their fair values at the acquisition date. The group recognizes any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value onor at the date of acquisition, regardlessnon-controlling interest’s proportionate share of the extentrecognized amounts of acquiree’s identifiable net assets.
Acquisition-related costs are expensed as incurred. If the non-controlling interests. The excess ofbusiness combination is achieved in stages, the acquisition cost over the fairdate carrying value of the Company’s holdingacquirer’s previously held equity interest in the net identifiable assets acquiredacquire is shown as goodwill. If the cost is less than there-measured to fair value ofat the net assets of the acquired subsidiary, the difference is recorded directlyacquisition date; any gains or losses arising from such remeasurement are recognized in the consolidated statement of income (Note 2.6).profit or loss.
Inter-company transactions, balances and unrealized gains on transactions between the Company’s entities are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment loss of the asset transferred. When necessary in order to ensure uniformity with the policies adopted by the Company, the accounting policies of the subsidiaries are modified.
(b) Transactions with non-controlling interestsTo account for and identify the financial information to be revealed when carrying out a business combination, such as the acquisition of an entity by the Company, shall apply the acquisition method provided for in IFRS 3: Business combination.
(b) | Transactions with non-controlling interests |
The Company applies the policy of considering transactions with non-controlling interests, when not related to loss of control, as equity transactions without an effect on income.
(c) Investees
(c) | Sales of subsidiaries |
When a subsidiary is sold and a percentage of participation is not retained, the Company derecognizes assets and liabilities of the subsidiary, the non-controlling and other components of equity related to the subsidiary. Any gain or associatesloss resulting from the loss of control is recognized in the consolidated income statement in Other gains (losses).
If LATAM Airlines Group S.A. and Subsidiaries retain an ownership of participation in the sold subsidiary, and does not represent control, this is recognized at fair value on the date that control is lost, the amounts previously recognized in Other comprehensive income are accounted as if the Company had disposed directly from the assets and related liabilities, which can cause these amounts are reclassified to profit or loss. The percentage retained valued at fair value are subsequently accounted using the equity method.
(d) | Investees or associates |
Investees or associates are all entities over which LanLATAM Airlines Group S.A. and Subsidiaries have a significant influence but hashave no control, thiscontrol. This usually arises from a holding of between 20% and 50% of the voting rights. Investments in associates are booked using the equity method and are initially recordedrecognized at their cost.
The participation of Lan Airlines S.A. and Subsidiaries in the losses or gains after the acquisition of its investees or associates is shown in results, and its participation in post acquisition movements in reserves of investees or associates are shown in reserves.
Post-acquisition movement is adjusted against the carrying amount of the investment. When the participation of Lan Airlines S.A. and Subsidiaries in the losses of an investee or associate is equal to or more than its holding in it, including any other non guaranteed account receivable, Lan Airlines S.A. and Subsidiaries will not show the additional losses unless it has incurred obligations or made payments on behalf of the investee or associate.
Gains or losses for dilution in investees or associates are shown in the consolidated statement of income.
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(a) Presentation and functional currencies
The items included in the financial statements of each of the entities of LanLATAM Airlines Group S.A. and Subsidiaries are valued using the currency of the main economic environment in which the entity operates (the functional currency). The functional currency of LanLATAM Airlines Group S.A. is the United States dollar which is also the presentation currency of the consolidated financial statements of LanLATAM Airlines Group S.A. and Subsidiaries.
(b) Transactions and balances
(b) | Transactions and balances |
Foreign currency transactions are translated to the functional currency using the exchange rates on the transaction dates. Foreign currency gains and losses resulting from the liquidation of these transactions and from the translation at the closing exchange rates of the monetary assets and liabilities denominated in foreign currency are shown in the consolidated statement of income.income by function except when deferred in Other comprehensive income as qualifying cash flow hedges.
(c) Group entities
(c) | Group entities |
The results and financial position of all the Group entities (none of which has the currency of a hyper- inflationaryhyper-inflationary economy) that have a functional currency other than the presentation currency are translated to the presentation currency as follows:
(i) Assets and liabilities of each consolidated statement of financial position presented are translated at the closing exchange rate on the consolidated statement of financial position date;
(ii) The revenues and expenses of each income statement account are translated at the exchange rates prevailing on the transaction dates, and
(iii) All the resultant exchange differences by conversion are shown as a separate component in Other comprehensive income.
The exchange rates used correspond to those fixed in the country where the subsidiary is located, whose functional currency is different to the U.S. dollar.
In the consolidation, exchange differences arising from the translation of a net investment in foreign entities (or local with a functional currency different to that of the parent), and of loans and other foreign currency instruments designated as hedges for these investments, are recorded within net equity. When the investment is sold, these exchange differences are shown in the consolidated statement of income as part of the loss or gain on the sale.
Adjustments to the goodwillGoodwill and fair value arising from the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated at the closing exchange rate.rate or period informed.
2.4. Property, plant and equipment
The land of LanLATAM Airlines Group S.A. and Subsidiaries is recognized at cost less any accumulated impairment loss. The rest of the property,Property, plant and equipment is shown,are registered, initially and subsequently, at historic cost less the corresponding depreciation and any impairment loss, except for certain land and minor equipment that are reassessed at first adoption, according to IFRS.loss.
The amounts of advance payments to aircraft manufacturers are capitalized by the Company under Construction in progress until receipt of the aircraft.
Subsequent costs (replacement of components, improvements, extensions, etc.) are included in the value of the initial asset or shown as a separate asset only when it is probable that the future economic benefits associated
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with the elements of property,Property, plant and equipment are going to flow to the Company and the cost of the element can be determined reliably. The value of the component replaced is written off in the books at the time of replacement. The rest of the repairs and maintenance are charged to the results of the year in which they are incurred.
Depreciation of property,Property, plant and equipment is calculated using the straight-line method over their estimated technical useful lives; except in the case of certain technical components which are depreciated on the basis of cycles and hours flown.
The residual value and useful life of assets are reviewed, and adjusted if necessary, once per year.
When the carrying amount of an asset is higher than its estimated recoverable amount, its value is reduced immediately to its recoverable amount (Note 2.8).
Losses and gains on the sale of property,Property, plant and equipment are calculated by comparing the proceeds obtainedcompensation with the book value and are included in the consolidated statement of income.
2.5. Intangible assets other than goodwill
(a) Brands, Airport slots and Loyalty program
Brands, Airport slots and Coalition and loyalty program are intangible assets of indefinite useful life and are subject to impairment tests annually as an integral part of each CGU, in accordance with the premises that are applicable, included as follows:
Airport slots – Air transport CGU
Loyalty program – Coalition and loyalty program Multiplus CGU
Brand – Air transport CGU
(See Note 15)
The airport slots correspond to an administrative authorization to carry out operations of arrival and departure of aircraft at a specific airport, within a specified period.
The Loyalty program corresponds to the system of accumulation and redemption of points that has developed Multiplus S.A., subsidiary of TAM S.A.
The Brands, airport Slots and Loyalty program were recognized in fair values determined in accordance with IFRS 3, as a consequence of the business combination with TAM and Subsidiaries.
(b) Computer software
Licenses for computer software acquired are capitalized on the basis of the costs incurred in acquiring them and preparing them for using the specific software. These costs are amortized over their estimated useful lives.lives, for which the Company has been defined useful lives between 3 and 7 years.
Expenses related to the development or maintenance of computer software which do not qualify for capitalization, are shown as an expense when incurred. CertainThe personnel costs and others costs directly related to the production of unique and identifiable computer software controlled by the Company, are shown as intangible assetsAssets others than Goodwill when they have met all the criteria for capitalization. The direct costs include the expenses of the personnel who develop the computer software and other costs directly associated.
Development costs of computer software shown as assets are amortized over their estimated useful lives.2.6. Goodwill
Goodwill represents the excess of acquisition cost over the fair value of the Company’s participation in the net identifiable assets of the subsidiary or associate on the acquisition date. Goodwill related to acquisition of subsidiaries is not amortized but tested for impairment annually and when there are indications that the carrying value may not be recoverable.annually. Gains and losses on the sale of an entity include the book amount of the goodwill related to the entity sold.
Interest costs incurred for the construction of any qualified asset are capitalized over the time necessary for completing and preparing the asset for its intended use. Other interest costs are charged torecognized in the consolidated income and expenses.statement when they are accrued.
2.8. Losses for impairment of non-financial assets
Intangible assets that have an indefinite useful life, and developing IT projects, are not subject to amortization and are subject to annual testing for impairment losses.impairment. Assets subject to amortization are subjected to
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impairment tests whenever any event or change in circumstances indicates that the book value of the assets may not be recoverable. An impairment loss is recorded when the book value is greater than the recoverable amount. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. In evaluating the impairment, the assets are grouped at the lowest level for which cash flows are separately identifiable (CGUs). Non-financial assets other than goodwill that have suffered an impairment loss are subjected to a test once per year to check thatreviewed if there has been no reversalare indicators of the loss.reverse losses at each reporting date.
The Company classifies its financial instruments in the following categories: financial assets at fair value through profit and loss and loans and accounts receivable and financial assets held to maturity.receivables. The classification depends on the purpose for which the financial instruments were acquired. Management determines the classification of its financial instruments at the time of initial recognition, which occurs on the date of transaction.
(a) Financial assets at fair value through profit and loss
Financial assets at fair value through profit and loss are financial instruments held for trading and those which have been designated as at fair value through profit or loss in their initial classification. A financial asset is classified in this category if acquired mainly for the purpose of being sold in the near future or when these assets are managed and measured using fair value. Derivatives are also classified as acquiredheld for trading unless they are designated as hedges. AssetsThe financial assets in this category and have been designated initial recognition through profit or loss, are classified as cashCash and cash equivalents and Other current financial assets and those designated as instruments held for trading are classified as Other current and othernon-current financial assets, designated on initial recognition.assets.
(b) Loans and accounts receivablereceivables
Loans and accounts receivablereceivables are non-derivative financial instruments with fixed or determinable payments not traded on an active market. These items are classified in current assets except for those with maturity over 12 months from the date of the consolidated statement of financial position, which are classified as non-current assets. Loans and accounts receivablereceivables are included in trade and other accounts receivable in the consolidated statement of financial position (Note 2.12).
(c) Financial assets held to maturity
Financial assets held to maturity are non-derivative financial instruments with fixed or determinable payments and fixed maturities that the Company’s management has the positive intention and capacity to hold until their maturity. Should the Company sell a not-insignificant amount of the financial assets held to their maturity, the whole category is reclassified as available for sale. These financial instruments held to maturity are included in non-current assets, except for those maturity equal to or less than 12 months from the consolidated statement of financial position, which are classified as other current financial assets.
RegularThe regular purchases and sales of financial assets are recognized on the trade date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or losslosses are initially recognized at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership.
Financial assets andThe financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are subsequently carried at amortized cost using the effective interest rate method. Held to maturity investments are carried at amortized cost using the effective interest rate.
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At the date of each consolidated statement of financial position, the Company assesses if there is objective evidence that a financial asset or group of financial assets may have suffered an impairment loss. For the case of
2.10. Derivative financial assets held to maturity, if there is any evidence of impairment, the amount of the provision is the difference between the book value of the assetsinstruments and the present value of the estimated future cash flows, discounted at the original effective interest rate.hedging activities
Derivatives are booked initially at fair value on the date the derivative contracts are signed and later they continue to be valued at their fair value. The method for booking the resultant loss or gain depends on whether the derivative has been designated as a hedging instrument and if so, the nature of the item hedged. The Company designates certain derivatives as:
(a) Hedge of the fair value of recognized assets (fair value hedge);
(b) Hedge of an identified risk associated with a recognized liability or an expected highly-probablehighly-Probable transaction (cash-flow hedge), or
(c) Derivatives that do not qualify for hedge accounting.
The Company documents, at the inception of each transaction, the relationship between the hedging instrument and the hedged item, as well as its objectives for managing risk and the strategy for carrying out various hedging transactions. The Company also documents its assessment, both at the beginning and on an ongoing basis, as to whether the derivatives used in the hedging transactions are highly effective in offsetting the changes in the fair value or cash flows of the items being hedged.
The total fair value of the hedging derivatives is booked as an otherOther non-current financial asset or liability if the remaining maturity of the item hedged is over 12 months, and as an other current financial asset or liability if the remaining term of the item hedged is less than 12 months. Derivatives not booked as hedges are classified as otherOther financial assets or liabilities, current in the case that their remaining maturity is less than 12 months and non-current in the case that it is more than 12 months.liabilities.
(a) Fair value hedges
Changes in the fair value of designated derivatives that qualify as fair value hedges are shown in the consolidated statement of income, together with any change in the fair value of the asset or liability hedged that is attributable to the risk being hedged.
(b) Cash flow hedges
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is shown in the statement of other comprehensive income. The loss or gain relating to the ineffective portion is recognized immediately in the consolidated statement of income under Other gains (losses). Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss.
In the case of variable interest-rate hedges, the amounts recognized in the statement of otherOther comprehensive income are reclassified to results within financial costs at the same time the associated debts accrue interest.
For fuel price hedges, the amounts shown in the statement of otherOther comprehensive income are reclassified to results under the line item Cost of sales to the extent that the fuel subject to the hedge is used.
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For foreign currency hedges, the amounts recognized in the statement of Other comprehensive income are reclassified to income as deferred revenue resulting from the use of points, are recognized as Income.
When hedging instruments mature or are sold or when they do not meet the requirements to be accounted for as hedges, any gain or loss accumulated in the statement of otherOther comprehensive income until that moment remains in the statement of other comprehensive income and is reclassified to the consolidated statement of income when the hedged transaction is finally recognized. When it is expected that the hedged transaction is no longer going to occur, the gain or loss accumulated in the statement of other comprehensive income is taken immediately to the consolidated statement of income as Other“Other gains (losses)”.
(c) Derivatives not booked as a hedge
Certain derivatives are not booked as a hedge. The changes in fair value of any derivative instrument that is not booked as a hedge are shown immediately in the consolidated statement of income in Other“Other gains (losses)”.
Inventories, detailed in Note 10, are shown at the lower of cost and their net realizable value. The cost is determined on the basis of the weighted average cost method.method (WAC). The net realizable value is the estimated selling price in the normal course of business, less estimated costs necessary to make the sale.
2.12. Trade and other accounts receivable
Trade accounts receivable are shown initially at their fair value and later at their amortized cost in accordance with the effective interest rate method, less the allowance for impairment losses. An allowance for impairment loss of trade accounts receivable is made when there is objective evidence that the Company will not be able to recover all the amounts due according to the original terms of the accounts receivable.
The existence of significant financial difficulties on the part of the debtor, the probability that the debtor is entering bankruptcy or financial reorganization and the default or delay in making payments are considered indicators that the receivable has been impaired. The amount of the provision is the difference between the book value of the assets and the present value of the estimated future cash flows, discounted at the original effective interest rate. The book value of the asset is reduced by the amount of the allowance and the loss is shown in the consolidated statement of income in Cost of sales. When an account receivable is written off, it is charged to the allowance account for accounts receivable.
2.13. Cash and cash equivalents
Cash and cash equivalents include cash and bank balances, time deposits in financial institutions, and other short-term and easily liquidatedhighly liquid investments.
The common shares are classified as net equity.
Incremental costs directly attributable to the issuance of new shares or options are shown in net equity as a deduction from the proceeds obtained.received from the placement of shares.
2.15. Trade and other accounts payables
Trade payables and other accounts payable are initially recognized at fair value and subsequently at amortized cost and are valued according to the method of the effective interest rate.
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Financial liabilities are shown initially at their fair value, net of the costs incurred in the transaction. Later, these financial liabilities are valued at their amortized cost; any difference between the proceeds obtained (net of the necessary arrangement costs) and the repayment value, is shown in the consolidated statement of income during the term of the debt, according to the effective interest rate method.
Financial liabilities are classified in current and non-current liabilities according to the contractual payment dates of the nominal principal.
2.17. Current and deferred taxes
The expense by current tax is comprised of income and deferred taxes.
The charge for current tax is calculated based on tax laws in force on the date of statement of financial position, in the countries in which the subsidiaries and associates operate and generate taxable income.
Deferred taxes are calculated using the liability method, on the temporary differences arising between the tax bases of assets and liabilities and their book values. However, if the temporary differences arise from the initial recognition of a liability or an asset in a transaction different from a business combination that at the time of the transaction does not affect the accounting result or the tax gain or loss, they are not booked. The deferred tax is determined using the tax rates (and laws) that have been enacted or substantially enacted at the end of the reporting period,consolidated financial statements close, and are expected to apply when the related deferred tax asset is realized or the deferred tax liability discharged.
Deferred tax assets are recognisedrecognized when it is probable that there will be sufficient future tax earnings with which to compensate the temporary differences.
The Company does not record deferred tax on temporary differences arising on investments(current and deferred) is recognized in subsidiaries and associates, providedincome by function, unless it relates to an item recognized in Other comprehensive income, directly in equity or from business combination. In that case the opportunity to reverse the temporary differencestax is controlledalso recognized in Other comprehensive income, directly in income by the Group and it is probable that the temporary differences will not reverse in the foreseeable future.function or goodwill, respectively.
(a) Personnel vacations
The Company recognizes the expense for personnel vacations on an accrual basis.
(b) Share-based compensation
The compensation plans implemented by the granting of options for the subscription and payment of shares are shown in the consolidated financial statements in accordance with IFRS 2: Share based payments, showing the effect of the fair value of the options granted as a charge to remuneration on a straight-line basis between the date of granting such options and the date on which these become vested.
(c) Post-employment and other long-term benefits
Provisions are made for these obligations by applying the method of the actuarial value of the accrued cost, and taking into account estimates of future permanence, mortality rates and future wage increases determined on the basis of actuarial calculations. The discount rates are determined by reference to market interest-rate curves. Actuarial gains or losses are shown in results for the year when they occur.other comprehensive income.
(d) Incentives
The Company has an annual incentives plan for its personnel for compliance with objectives and individual contribution to the results. The incentives eventually granted consist of a given number or portion of monthly remuneration and the provision is made on the basis of the amount estimated for distribution.
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Provisions are recognisedrecognized when:
(i) The Company has a present legal or implicit obligation as a result of past events;
(ii) It is probable that |
Provisions are shown at the present value of the disbursements expected to be necessary for settling the obligation using the Company’s best estimates.to settle an obligation; and
(iii) The pre-tax discount rate used for determining the present value reflects current market evaluations on the date of the consolidated financial statements, time value of money, as well as the specific risks related to the liability in question.amount has been reliably estimated.
Revenues include the fair value of the proceeds received or to be received on sales of goods and rendering services in the ordinary course of the Company’s business. Revenues are shown net of refunds, rebates and discounts.
(a) Rendering of services
(i) Passenger and cargo transport
The Company shows revenue from the transportation of passengers and cargo once the service has been provided.
Consistent with the foregoing, the Company presents the deferred revenues, generated by anticipated sale of flight tickets and freight services, in heading Other financial liabilities in the Statement of Financial Position.
(ii) Frequent flyer program
The Company currently has a frequent flyer program called Lan Pass,programs, whose objective is customer loyalty through the delivery of kilometers or points fly withwhenever the Company or its alliance partners inprograms holders make certain flights, use the services of entities registered with the program or make purchases with an associated credit card. The kilometers or points earned can be exchanged for flight tickets or other services of associated entities.
The consolidated financial statements include liabilities for this concept (deferred income), according to the estimate of the valuation established for the kilometers or points accumulated pending use at that date, in accordance with IFRIC 13: Customer loyalty programs.
(iii) Other revenues
The Company records revenues for other services when these have been provided.
(b) Interest income
Interest income is booked using the effective interest rate method.
(c) Dividend income
Dividend income is booked when the right to receive the payment is established.
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(a) When the Company is the lessee – financial lease
The Company leases certain property,Property, plant and equipment in which it has substantially all the risk and benefits deriving from the ownership; they are therefore classified as financial leases. Financial leases are capitalized at the start of the leaseinitially recorded at the lower of the fair value of the asset leased and the present value of the minimum lease payments.
Every lease payment is separated between the liability component and the financial expenses so as to obtain a constant interest rate over the outstanding amount of the debt. The corresponding leasing obligations, net of financial charges, are included in Other financial liabilities. The element of interest in the financial cost is charged to the consolidated statement of income over the lease period so that it produces a constant periodic rate of interest on the remaining balance of the liability for each year. The asset acquired under a financial lease is depreciated over its useful life and is included in Property, plant and equipment.
(b) When the Company is the lessee – operating lease
Leases, in which the lessor retains an important part of the risks and benefits deriving from ownership, are classified as operating leases. Payments with respect to operating leases (net of any incentive received from the lessor) are charged in the consolidated statement of income on a straight-line basis over the term of the lease.
2.22. Non-current assets or disposal groups classified as held for sale
Non-current assets (or disposal groups) classified as assets held for sale are shown at the lesser of their book value and the fair value less costs to sell.
The costs incurred for scheduled majorheavy maintenance of the aircraft’s fuselage and engines are capitalized and depreciated until the next maintenance. The depreciation rate is determined on technical grounds, according to itsthe use of the aircraft expressed in terms of cycles and flight hours.
In case of own aircraft or under financial leases, these maintenance cost are capitalized as Property, plant and equipment, while in the case of aircraft under operating leases, a liability is accrued based on the use of the main components is recognized, since exists a contractual obligation with the lessor to return the aircraft on agreed terms of maintenance levels. These are recognized as Cost of sales.
Additionally, some leases establish the obligation of the lessee to make deposits to the lessor as a guarantee of compliance with the maintenance and return conditions. These deposits, often called maintenance reserves, accumulate until a major maintenance is performed, once made, is request the recovery to the lessor. At the end of the contract period, the balance between paid reservations and conditions agreed with levels of maintain in delivering, be offset the parties if applicable.
The unscheduled maintenance of aircraft and engines, as well as minor maintenance, are charged to results as incurred.
Disbursements related to environmental protection are charged to results when incurred.
The Company’s activities are exposed to different financial risks: (a) market risk, (b) credit risk, and (c) liquidity risk. The Company’s global risk management program is focused on uncertainty in the financial markets and tries to minimize the potential adverse effects on the net margin. The Company uses derivativesderivative instruments to hedge part of these risks.
F-1-21
(a) Market risk
Due to the nature of its operations, the Company is exposed to market risks such as:
(i) fuel-price risk, (ii) interest-rate risk, and (iii) local exchange-rate risk. In order to fully or partially hedge all of these risks, the Company operates with derivative instruments to fix or limit rises in the underlying assets.possible impact that could generate the above mentioned risks.
(i) Fuel-price risk:
Fluctuations in fuel prices largely depend on the global supply and demand for oil, decisions taken by Organization of Petroleum Exporting Countries (“OPEC”), global refining capacity, stock levels maintained, and weather and geopolitical factors.
The Company purchases an aircraft fuel called Jet Fuel grade 54. There is a benchmark price in the international market for this underlying asset, which is US Gulf Coast Jet 54. However, the futures market for this asset has a low liquidity index and as a result the Company hedges its exposure using West Texas Intermediate (“WTI”) crude, Brent (“BRENT”) crude and distillate Heating Oil (“HO”), which have a high correlation with Jet Fuel and are highly liquid assets and therefore have advantages in comparison to the use of the U.S. Gulf Coast Jet 54 index.
During 2011,the period ended December 31, 2014, the Company booked gainsrecognized losses of US$ 39.9108.7 million on fuel hedging.derivative. During 2010,the period 2013, the Company recognized gains of US$ 1.019.0 million and during the same period 2012 the Company recognized losses of US$ 1.80 million for the same reason.
At December 31, 2011,2014, the market value of its fuel positions amounted to US$ 30.6157.2 million (positive)(negative). At December 31, 2010,2013, this market value was US$ 45.815.9 million (positive).
The following tables show the notional valuelevel of the purchase positions together with the derivatives contractedhedge for the different years:periods:
Positions as of December 31, 2011 (*) | Maturities | |||||||||||||||
Q112 | Q212 | Q312 | Total | |||||||||||||
Volume (thousands of barrels WTI) | 1,800 | 1,134 | 693 | 3,627 | ||||||||||||
Contracted future price (US$ per barril)(**) | 95 | 92 | 89 | 93 | ||||||||||||
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|
|
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|
|
| |||||||||
Total (ThUS$) | 171,000 | 104,328 | 61,677 | 337,311 | ||||||||||||
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|
|
|
|
|
| |||||||||
Approximate percentage of hedge (of expected consumption value) | 50 | % | 33 | % | 19 | % | 34 | % |
Maturities | ||||||||||||||||||||
Positions as of December 31, 2014 (*) | Q115 | Q215 | Q315 | Q415 | Total | |||||||||||||||
Percentage of the hedge of expected consumption value | 30 | % | 15 | % | 30 | % | 20 | % | 24 | % |
(*) | The volume shown in the table considers all the hedging instruments (swaps and options). |
Positions as of December 31, 2010 | Maturities | |||||||||||||||||||
Q111 | Q211 | Q311 | Q411 | Total | ||||||||||||||||
Volume (thousands of barrels WTI) | 1,848 | 918 | 687 | 324 | 3,777 | |||||||||||||||
Contracted future price (US$ per barril)(*) | 82 | 81 | 84 | 90 | 83 | |||||||||||||||
|
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|
|
|
|
|
| |||||||||||
Total (ThUS$) | 151,536 | 74,358 | 57,708 | 29,160 | 313,491 | |||||||||||||||
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|
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|
|
|
| |||||||||||
Approximate percentage of hedge (of expected consumption value) | 54 | % | 27 | % | 19 | % | 8 | % | 26 | % |
Positions as of December 31, 2013 (*) | Maturities | |||||||||||
Q114 | Q214 | Total | ||||||||||
Percentage of the hedge of expected consumption value | 56 | % | 26 | % | 41 | % |
(*) |
F-1-22
Sensitivity analysis
A drop in fuel price positively affects the Company through a reduction in costs. However, this drop also negatively affects contracted positions as these are acquired to protect the Company against the risk of a rise in price. The policy therefore is to maintain a hedge-free percentage in order to be competitive in the event of a drop in price.
AsDue to the fact that current positions do not represent changes in cash flows, but a variation in the exposure to the market value, the current hedge positions have no impact on income (they are booked as cash flow hedge contracts, so a variation in the fuel price has an impact on the Company’s net equity)equity through the consolidated statement of comprehensive income).
The following table shows the sensitivity analysis of the financial instruments according to reasonable changes in the fuel price and their effect on equity. The term of the projection was defined until the end of the last current fuel hedge contract, being the last business day of the third quarter of 2012. 2015.
The calculations were made considering a parallel movement of US$ 5 per barrel in the curve of the WTIBRENT and JET crude futures benchmark price at the end of December, 31, 20112014 and the end of December, 31, 2010.2013.
Bench marck price | Positions as of December 31, 2011 effect on equity (millions of US$) | Positions as of December 31, 2010 effect on equity (millions of US$) | ||||||||||||||
Benchmark price (US$ per barrel) | Positions as of December 31, 2014 effect on equity (millions of US$) | Positions as of December 31, 2013 effect on equity (millions of US$) | ||||||||||||||
+5 | +16.5 | +16.7 | +24.90 | +24.57 | ||||||||||||
-5 | -13.8 | -15.7 | -25.06 | -19.13 |
The Company seeks to reduce the risk of fuel price rises to ensure it is not left at a disadvantage compared to its competitors in the event of a sharp price fall. The Company therefore uses hedge instruments like swaps, call options and collars to partially hedge the fuel volumes consumed.
According to the requirements of IAS 39, during the presented years, the Company has not recorded amounts for ineffectiveness in the consolidated income statement.by consume.
Given the fuel hedge structure during 2011,the year of 2014, which considers a hedge-free portion, a vertical fall by US$ 5 dollars in the WTIBRENT and JET benchmark price (the monthly daily average), would have meant a decreasean impact of approximately US$ 42.590.2 million in the cost of total fuel consumption for the same period. For the same year,period of 2014, a vertical rise by US$ 5 dollars in the WTIBRENT and JET benchmark price (the monthly daily average) would have meant an impact of approximately US$ 39.588.07 million of increased fuel costs for the same period.costs.
(ii) Cash flow interest-rate risk:
The fluctuation in interest rates depends heavily on the state of the global economy. An improvement in long-term economic prospects moves long-term rates upward while a drop causes a decline through market effects. However, if we consider government intervention in periods of economic recession, it is usual to reduce interest rates to stimulate aggregate demand by making credit more accessible and increasing production (in the same way interest rates are raised in periods of economic expansion).
The present uncertainty about how the market and governments will react, and thus how interest rates will change, creates a risk related to the Company’s debt at floating interest rates and its investments.
Cash flow interest rate risk equates to the risk of future cash flows of the financial instruments due to the fluctuation in interest rates on the market. The Company’s exposure to risks of changes in market interest rates is mainly related to long-term obligations with variable interest rates.
F-1-23
In order to reduce the risk of an eventual rise in interest rates, the Company has signed interest-rate swap and call option contractscontracts. Currently a 69% (70% at December 31, 2013) of the debt is fixed to fluctuations in order to eliminate more than 82% of its exposure to interest-rate fluctuations. Theinterest rate. Therefore the Company is therefore exposed in one portion to a small portionthe variations of the fluctuations in theLondon Inter-Bank Offer Rate (“LIBOR”) of 30 days, 90 days, 180 days and 360 days London Inter Bank Offerdays. Other interest rates of less relevance are Brazilian Interbank Deposit Certificate (“ILC”), and the Interest Rate (LIBOR)Term of Brazil (“TJLP”).
The following table shows the sensitivity of changes in financial obligations that are not hedged against interest-rate variations. These changes are considered reasonably possible based on current market conditions.
Increase (decrease) in | Positions as of December 31, 2011 effect on pre-tax earnings (millions of US$) | Positions as of December 31, 2010 effect on pre-tax earnings (millions of US$) | ||||||||||||||
Increase (decrease) futures curve in libor 3 months | Positions as of December 31, 2014 effect on profit or loss before tax (millions of US$) | Positions as of December 31, 2013 effect on profit or loss before tax (millions of US$) | ||||||||||||||
+100 basis points | -3.06 | -1.18 | -27.53 | -29.70 | ||||||||||||
-100 basis points | +3.06 | +1.18 | +27.53 | +29.70 |
Changes in market conditions produce a change in the valuation of current financial instruments hedging interest rates, causing an effect on the Company’s equity (because they are booked as cash-flow hedges). These changes are considered reasonably possible based on current market conditions. The calculations were made increasing (decreasing) vertically 100 basis points of the three-month Libor futures curve.
Increase (decrease) futures | Positions as of December 31, 2011 effect on equity (millions of US$) | Positions as of December 31, 2010 effect on equity (millions of US$) | Positions as of December 31, 2014 effect on equity (millions of US$) | Positions as of December 31, 2013 effect on equity (millions of US$) | ||||||||||||
+100 basis points | 40.70 | 42.39 | +15.33 | +23.35 | ||||||||||||
-100 basis points | (43.20 | ) | (45.35 | ) | -15.95 | -24.46 |
There are limitations in the method used for the sensitivity analysis and relate to those provided by the market because the levels indicated by the futures curves are not necessarily met and will change in each year.period.
In accordance with the requirements of IAS 39, during the yearperiods presented, the Company has not recorded amounts for ineffectiveness in the consolidated income statement.
(iii) Local exchange-rateForeign exchange rate risk:
The functional currency used by the parent Company is the US dollar in terms of setting prices for its services, the composition of its statement of financial position and effects on its operating income.
The main risk arises when items listed on the balance sheet are exposed to exchange rate variations, due to their being listed in a currency other than the functional currency.
In the case of the subsidiary TAM S.A, which operates with the Brazilian Real as its functional currency, a large proportion of the company’s liabilities are expressed in United States Dollars. Therefore, this subsidiary’s profit and loss varies when its financial assets and liabilities, and its accounts receivable listed in dollars are converted to Brazilian Reals. This impact on profit and loss is consolidated in the Company.
In order to reduce the volatility on the financial statements of the Company caused by rises and falls in the R$/US$ exchange rate, the Company has conducted transactions for to reduce the net US$ liabilities held by TAM S.A.
The following table shows the variation of financial performance to appreciate or depreciate 10% exchange rate R$/US$:
Appreciation (depreciation) of R$/US$ | Effect at December 31, 2014 Millons of US$ | |||
-10% | +69.8 | |||
+10% | -69.8 |
The Company sells most of its services in US dollars, or prices equivalent to the US dollar and aBrazilian real. A large part of its expenses are denominated in US dollars or equivalents to the US dollar, particularly fuel costs, aeronautic charges, aircraft leases, insurance and aircraft components and accessories. Remuneration expenses are denominated in local currencies.
The Company maintains its cargo and passenger international business tariffs in US dollars. There is a mix in the domestic markets as sales in Peru are in local currency but the prices are indexed to the US dollar. In domestic markets of Brazil, Chile, Argentina and Argentina,Colombia the tariffs are in local currency without any kind of indexation. In the case of the domestic business in Ecuador, both tariffs and sales are in US dollar. The Company is therefore exposed to fluctuations in the different currencies, mainly:among which are: Brazilian real, Chilean peso, Argentine peso, UruguayanParaguayan guaraní, Mexican peso, Euro, Pound sterling, Peruvian sol, Brazilian real, Colombian peso, Australian dollar and New Zealand dollar; ofdollar. Of these currencies, the largest exposure is presented by Brazilian real and Chilean peso.
On the other hand, one of the sources of financing of the Company is the receipt of future flows relating to dividends and distributions of capital that the subsidiaries project distribute. These futures flows vary depending on the evolution of currency in Chilean pesos.compared to the US$. Most exposure to future flows is presented in subsidiary TAM S.A. and the volatility in the exchange rate R$/US$. In the case of the subsidiary TAM S.A. the incomes are expressed a large proportion in R$ and a large proportion of their costs are expressed in US$.
For cover the inversion in the subsidiaries and reduce the volatility in the cash flow , the Company may acquire derivatives contracts to hedge variations in other currencies against the Company’s functional currency, hedging exchange rate risk through currency forward.
With the object of reduce the exposition to the futures monthly operating flows of all 2014, caused by eventual depreciation of the BRL and assure an economic margins, LATAM done the hedge by derivatives FX Forward.
During the year ended at December 31, 2014 the Company recognized losses of US$ 3.8 million on hedging FX. During the period of 2013 and 2012 the Company had no current positions for this item, so no compensation is recognized.
At December 31, 2014, the market value of its FX positions amounted to US$0.1 million (negative). At end of December 2013 the market value was of US$ 32.1 million (positive).
At end of December 2014, the Company has contracted derivatives of FX for US$ 100 million (US$ 500 million at December 31, 2013)
Sensitivity exchange rate LATAM
A depreciation of exchange rate R$/ US$ affects negatively the Company for a rise of its costs in US$, however, it also affects positively the value of contracted derivate positions.
Because the changes in the value of current positions not represented changes in cash flows, but a variation in the exposure of market value, the current hedge positions have not impact on result (are registered as cash flow hedges according to IAS 39, therefore, a variation in the exposure has an impact on the Company’s net equity).
The Company managesfollowing table presents the sensitivity of derivative FX Forward instruments agrees with reasonable changes to exchange rate and its exposure to foreign currency risk through hedging selected balances using forward exchange contracts and cross currency swaps.effect on equity. The projection term was defined until the end of the last current contract hedge, being the last business day of the first month of 2015:
Appreciation (depreciation) of R$/US$ -10% +10%F-1-24 Effect at December 31, 2014
Millions of US$ -9.98 +9.98
Effects of exchange rate derivatives in the Financial Statements
The profit or losses caused by changes in the fair value of hedging instruments are segregated between intrinsic value and temporary value. The intrinsic value is the actual percentage of cash flow covered, initially shown in equity and later transferred to income, while the hedge transaction is recorded in income. The temporary value corresponds to the ineffective portion of cash flow hedge which is recognized in the financial results of the Company (Note 18).
Due to the functional currency of TAM S.A. and Subsidiaries is the Brazilian real, the Company presents the effects of the exchange rate fluctuations in Other comprehensive income by converting the Statement of financial position and Income statement of TAM S.A. and Subsidiaries from their functional currency to the U.S. dollar, which is the presentation currency of the consolidated financial statement of LATAM Airlines Group S.A. and Subsidiaries. The Goodwill generated in the Business combination is recognized as an asset of TAM S.A. and Subsidiaries in Brazilian real whose conversion to U.S. dollar also produces effects in Other comprehensive income.
The following table shows the change in Other comprehensive income recognized in Total equity in the case of appreciate or depreciate 10% the exchange rate R$/US$:
Appreciation (depreciation) of R$/US$ | Effect at December 31, 2014 Millions of US$ | Effect at December 31, 2013 Millions of US$ | ||||||
-10% | +461.15 | +466.45 | ||||||
+10% | -377.31 | -381.63 |
(b) Credit risk
Credit risk occurs when the counterparty to a financial agreement or instrument fails to discharge an obligation due or financial instrument, leading to a loss in market value of a financial instrument (only financial assets, not liabilities).
The Company is exposed to credit risk due to its operative and financial activities, including deposits with banks and financial institutions, investments in other kinds of instruments, exchange-rate transactions and the contracting of derivative instruments or options.
To reduce the credit risk associated with operational activities, the Company has established credit limits to abridge the exposure of their debtors which are monitored permanently (mainly in case of operational activities in Brazil with travel agents).
As a way to mitigate credit risk related to financial activities, the Company requires that the counterparty to the financial activities remain at least investment grade by major Risk Assessment Agencies. Additionally the company has established maximum limits for investments which are monitored regularly.
(i) Financial activities
Cash surpluses that remain after the financing of assets necessary for the operation are invested according to credit limits approved by the Company’s Board, mainly in time deposits with different financial institutions, private investment funds, short-term mutual funds, and easily-liquidated corporate and sovereign bonds with short remaining maturities. These investments are booked as cashCash and cash equivalents and as investments held to maturity.Other current financial assets.
In order to reduce counterparty risk and to ensure that the risk assumed is known and managed by the Company, investments are diversified among different banking institutions (both local and international). The Company evaluates the credit standing of each counterparty and the levels of investment, based on (i) their credit rating, (ii) the equity size of the counterparty, and (iii) investment limits according to the Company’s level of liquidity. According to these three parameters, the Company chooses the most restrictive parameter of the previous three and based on this, establishes limits for operations with each counterparty.
The Company has no guarantees to mitigate this exposure.
(ii) Operational activities
The Company has four large sales “clusters”: travel agencies, cargo agents, airlines and credit-card administrators. The first three are governed by IATA (InternationalInternational Air Transport Association),Association, international (“IATA”) organization comprising most of the airlines that represent over 90% of scheduled commercial traffic and one of its main objectives is to regulate the financial transactions between airlines and travel agents and cargo. When an agency or airline does not pay their debt, they are excluded from operating with IATA’s member airlines. In the case of credit-card administrators, they are fully guaranteed by 100% by the issuing institutions.
The exposure consists of the term granted, which fluctuates between 1 and 45 days.
One of the tools the Company uses for reducing credit risk is to participate in global entities related to the industry, such as IATA, Business Sales Processing (BSP)(“BSP”), Cargo Account Settlement Systems (“CASS”), IATA Clearing House (“ICH”) and banks (credit cards). These institutions fulfill the role of collectors and distributors between airlines and travel and cargo agencies. In the case of the Clearing House, it acts as an offsetting entity between airlines for the services provided between them. A reduction in term and implementation of guarantees has been achieved through these entities. Currently the sales invoicing of TAM Linhas Aéreas S.A. related with travel agents and cargo agents for domestic transportation in Brazil is done directly by TAM Linhas Aéreas S.A.
Credit quality of financial assets
The external credit evaluation system used by the Company is provided by IATA. Internal systems are also used for particular evaluations or specific markets based on trade reports available on the local market. The internal
F-1-25
classification system is complementary to the external one, i.e. for agencies or airlines not members of IATA, the internal demands are greater.
To reduce the credit risk associated with operational activities, the Company has established credit limits to abridge the exposure of their debtors which are monitored permanently (mainly in case of operational activities of TAM Linhas Aéreas S.A. with travel agents). The bad-debt rate in the principal countries where the Company has a presence is insignificant.
(c) Liquidity risk
Liquidity risk represents the risk that the Company has no funds to meet its obligations.
Because of the cyclical nature of the business, the operation, and its investment and financing needs related to the acquisition of new aircraft and renewal of its fleet, plus the financing needs related to market-risk hedges, the Company requires liquid funds to meet its payment obligations.
The Company therefore manages its cash and cash equivalents and its financial assets, matching the term of investments with those of its obligations. The Company’s policy is that the average term of its investments may not exceed the average term of its obligations. This cash and cash equivalents position is invested in highly-liquid short-term instruments through first-class financial entities.
The Company has future obligations related to financial leases, operating leases, maturities of other bank borrowings, derivative contracts and aircraft purchase contracts.
F-1-26
Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, 20112014
Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2 Chile.
Tax No. | Creditor | Creditor country | Currency | Up to 90 days | More than 90 days to one year | More than one to three years | More than three to five years | More than five years | Total | Nominal value | Amortization | Effective rate | Nominal rate | |||||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | % | % | ||||||||||||||||||||||||||||||||||||
Loans to exporters |
| |||||||||||||||||||||||||||||||||||||||||||
97.032.000-8 | BBVA | Chile | US$ | 100,102 | — | — | — | — | 100,102 | 100,000 | At expiration | 0.40 | 0.40 | |||||||||||||||||||||||||||||||
97.036.000-K | SANTANDER | Chile | US$ | 45,044 | — | — | — | — | 45,044 | 45,000 | At expiration | 0.34 | 0.34 | |||||||||||||||||||||||||||||||
97.006.000-6 | ESTADO | Chile | US$ | 55,076 | — | — | — | — | 55,076 | 55,000 | At expiration | 0.52 | 0.52 | |||||||||||||||||||||||||||||||
97.030.000-7 | BCI | Chile | US$ | 100,157 | — | — | — | — | 100,157 | 100,000 | At expiration | 0.47 | 0.47 | |||||||||||||||||||||||||||||||
76.645.030-K | ITAU | Chile | US$ | 15,025 | — | — | — | — | 15,025 | 15,000 | At expiration | 0.65 | 0.65 | |||||||||||||||||||||||||||||||
97.951.000-4 | HSBC | Chile | US$ | 12,010 | — | — | — | — | 12,010 | 12,000 | At expiration | 0.50 | 0.50 | |||||||||||||||||||||||||||||||
Bank loans |
| |||||||||||||||||||||||||||||||||||||||||||
97.023.000-9 | CORPBANCA | Chile | UF | 16,575 | 48,581 | 121,945 | 17,621 | — | 204,722 | 188,268 | Quarterly | 4.85 | 4.85 | |||||||||||||||||||||||||||||||
0-E | CITIBANK | Argentina | ARS | 1,298 | 18,700 | — | — | — | 19,998 | 17,542 | Monthly | 31.00 | 31.00 | |||||||||||||||||||||||||||||||
0-E | BBVA | Argentina | ARS | 1,713 | 23,403 | — | — | — | 25,116 | 21,050 | Monthly | 33.00 | 33.00 | |||||||||||||||||||||||||||||||
97.036.000-K | SANTANDER | U.S.A. | US$ | 1,610 | 3,476 | 283,438 | — | — | 288,524 | 282,967 | Quarterly | 2.33 | 2.33 | |||||||||||||||||||||||||||||||
Guaranteed obligations |
| |||||||||||||||||||||||||||||||||||||||||||
0-E | CREDIT AGRICOLE | France | US$ | 18,670 | 55,089 | 109,536 | 64,101 | 36,625 | 284,021 | 273,599 | Quarterly | 1.68 | 1.43 | |||||||||||||||||||||||||||||||
0-E | BNP PARIBAS | U.S.A. | US$ | 9,634 | 29,259 | 80,097 | 83,020 | 190,070 | 392,080 | 351,217 | Quarterly | 2.13 | 2.04 | |||||||||||||||||||||||||||||||
0-E | WELLS FARGO | U.S.A. | US$ | 35,533 | 106,692 | 285,218 | 286,264 | 698,052 | 1,411,759 | 1,302,968 | Quarterly | 2.26 | 1.57 | |||||||||||||||||||||||||||||||
0-E | CITIBANK | U.S.A. | US$ | 19,149 | 57,915 | 156,757 | 160,323 | 347,710 | 741,854 | 684,114 | Quarterly | 2.24 | 1.49 | |||||||||||||||||||||||||||||||
97.036.000-K | SANTANDER | Chile | US$ | 5,482 | 16,572 | 44,925 | 46,047 | 73,544 | 186,570 | 180,341 | Quarterly | 1.32 | 0.78 | |||||||||||||||||||||||||||||||
0-E | BTMU | U.S.A. | US$ | 2,931 | 8,863 | 24,091 | 24,778 | 52,541 | 113,204 | 107,645 | Quarterly | 1.64 | 1.04 | |||||||||||||||||||||||||||||||
0-E | APPLE BANK | U.S.A. | US$ | 1,437 | 4,358 | 11,849 | 12,206 | 26,318 | 56,168 | 53,390 | Quarterly | 1.63 | 1.03 | |||||||||||||||||||||||||||||||
0-E | US BANK | U.S.A. | US$ | 18,713 | 56,052 | 148,622 | 147,357 | 376,792 | 747,536 | 648,158 | Quarterly | 3.99 | 2.81 | |||||||||||||||||||||||||||||||
0-E | DEUTSCHE BANK | U.S.A. | US$ | 5,834 | 17,621 | 47,600 | 30,300 | 78,509 | 179,864 | 155,279 | Quarterly | 3.25 | 3.25 | |||||||||||||||||||||||||||||||
0-E | NATIXIS | France | US$ | 11,783 | 35,803 | 99,012 | 98,632 | 259,912 | 505,142 | 454,230 | Quarterly | 1.86 | 1.81 | |||||||||||||||||||||||||||||||
0-E | HSBC | U.S.A. | US$ | 1,564 | 4,725 | 12,738 | 12,956 | 31,701 | 63,684 | 59,005 | Quarterly | 2.29 | 1.48 | |||||||||||||||||||||||||||||||
0-E | PK AirFinance US, Inc. | U.S.A. | US$ | 2,074 | 6,378 | 18,091 | 19,836 | 28,763 | 75,142 | 69,721 | Monthly | 1.86 | 1.86 | |||||||||||||||||||||||||||||||
0-E | KFW IPEX-BANK | Germany | US$ | 696 | 2,124 | 6,048 | 4,587 | 3,771 | 17,226 | 16,088 | Quarterly | 2.10 | 2.10 | |||||||||||||||||||||||||||||||
Other guaranteed obligations |
| |||||||||||||||||||||||||||||||||||||||||||
0-E | DVB BANK SE | U.S.A. | US$ | 8,199 | 24,623 | 32,904 | — | — | 65,726 | 64,246 | Quarterly | 2.00 | 2.00 | |||||||||||||||||||||||||||||||
0-E | CREDIT AGRICOLE | U.S.A. | US$ | 7,864 | 23,394 | 62,540 | — | — | 93,798 | 91,337 | Quarterly | 1.73 | 1.73 | |||||||||||||||||||||||||||||||
Financial leases |
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0-E | ING | U.S.A. | US$ | 9,137 | 27,520 | 58,821 | 34,067 | 12,134 | 141,679 | 126,528 | Quarterly | 4.84 | 4.33 | |||||||||||||||||||||||||||||||
0-E | CREDIT AGRICOLE | France | US$ | 1,643 | 5,036 | 14,152 | — | — | 20,831 | 20,413 | Quarterly | 1.20 | 1.20 | |||||||||||||||||||||||||||||||
0-E | CITIBANK | U.S.A. | US$ | 6,083 | 18,250 | 48,667 | 48,667 | 14,262 | 135,929 | 115,449 | Quarterly | 6.40 | 5.67 | |||||||||||||||||||||||||||||||
0-E | PEFCO | U.S.A. | US$ | 17,555 | 52,678 | 138,380 | 67,095 | 3,899 | 279,607 | 252,205 | Quarterly | 5.35 | 4.76 | |||||||||||||||||||||||||||||||
0-E | BNP PARIBAS | U.S.A. | US$ | 11,240 | 33,917 | 91,743 | 60,834 | 10,974 | 208,708 | 191,672 | Quarterly | 4.14 | 3.68 | |||||||||||||||||||||||||||||||
0-E | WELLS FARGO | U.S.A. | US$ | 5,604 | 16,784 | 44,705 | 44,615 | 46,394 | 158,102 | 139,325 | Quarterly | 3.98 | 3.53 | |||||||||||||||||||||||||||||||
0-E | DVB BANK S E | U.S.A. | US$ | 4,701 | 14,145 | 33,201 | — | — | 52,047 | 50,569 | Quarterly | 1.89 | 1.89 | |||||||||||||||||||||||||||||||
0-E | US BANK | U.S.A. | US$ | 326 | 6,247 | 5,455 | — | — | 12,028 | 11,981 | Monthly | — | — | |||||||||||||||||||||||||||||||
0-E | BANC OF AMERICA | U.S.A. | US$ | 720 | 2,118 | 2,912 | — | — | 5,750 | 5,462 | Monthly | 1.41 | 1.41 | |||||||||||||||||||||||||||||||
Other loans |
| |||||||||||||||||||||||||||||||||||||||||||
0-E | BOEING | U.S.A. | US$ | — | 4,994 | 180,583 | — | — | 185,577 | 179,507 | At expiration | 1.74 | 1.74 | |||||||||||||||||||||||||||||||
0-E | CITIBANK (*) | U.S.A. | US$ | 6,825 | 20,175 | 209,730 | 209,778 | 104,852 | 551,360 | 450,000 | Quarterly | 6.00 | 6.00 | |||||||||||||||||||||||||||||||
Hedging derivatives |
| |||||||||||||||||||||||||||||||||||||||||||
— | OTHERS | — | US$ | 11,702 | 30,761 | 48,667 | 7,311 | 245 | 98,686 | 93,513 | — | — | — | |||||||||||||||||||||||||||||||
Non—hedging derivatives |
| |||||||||||||||||||||||||||||||||||||||||||
— | OTHERS | — | US$ | 1,002 | 628 | — | — | — | 1,630 | 730 | — | — | — | |||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||
Total | 574,711 | 776,881 | 2,422,427 | 1,480,395 | 2,397,068 | 7,651,482 | 6,985,519 | |||||||||||||||||||||||||||||||||||||
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(*) | ||||||||||||||||||||
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Canada. |
Class of Liability | More than 90 days to one year | More than one to three years | More than three to five years | More than five years | Total | Amortization | Effective rate | Nominal value | Nominal rate | |||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | % | ThUS$ | % | |||||||||||||||||||||||||||||
Guaranteed obligations | 12,076 | 32,192 | 32,213 | 60,438 | 140,944 | Quarterly | 5.69 | % | 113,193 | 5.01 | % | |||||||||||||||||||||||||
61,560 | 67,744 | 33,826 | 7,228 | 191,607 | Quarterly | 4.05 | % | 182,041 | 4.05 | % | ||||||||||||||||||||||||||
46,900 | 125,060 | 106,833 | 124,408 | 418,834 | Quarterly | 5.18 | % | 354,360 | 4.61 | % | ||||||||||||||||||||||||||
59,263 | 15 9,420 | 161,548 | 252,865 | 652,712 | Quarterly | 4.27 | % | 557,517 | 3.81 | % | ||||||||||||||||||||||||||
16,828 | 44,837 | 44,7 49 | 113,352 | 225,381 | Quarterly | 3.64 | % | 188,942 | 3.53 | % | ||||||||||||||||||||||||||
41,065 | 110,232 | 111,306 | 290,463 | 566,651 | Quarterly | 2.94 | % | 497,707 | 2.61 | % | ||||||||||||||||||||||||||
16,577 | 44,721 | 45,461 | 143,675 | 255,870 | Quarterly | 1.14 | % | 239,882 | 1.01 | % | ||||||||||||||||||||||||||
14,32 9 | 38,755 | 39,580 | 143,763 | 241,119 | Quarterly | 1.09 | % | 226,295 | 0.94 | % | ||||||||||||||||||||||||||
6,817 | 18,434 | 18,807 | 69,085 | 115,370 | Quarterly | 1.41 | % | 105,863 | 1.26 | % | ||||||||||||||||||||||||||
2,330 | 6,322 | 6,469 | 23,952 | 39,830 | Quarterly | 1.37 | % | 36,541 | 1.22 | % | ||||||||||||||||||||||||||
Financial leases | 21,559 | 43,281 | 39,703 | 9,324 | 121,199 | Quarterly | 3.94 | % | 110,576 | 3.73 | % | |||||||||||||||||||||||||
7,020 | 20,099 | 20,901 | 35,093 | 85,424 | Quarterly | 1.46 | % | 79,428 | 1.46 | % | ||||||||||||||||||||||||||
6,140 | 19,663 | — | — | 27,612 | Quarterly | 1.85 | % | 26,426 | 1.82 | % | ||||||||||||||||||||||||||
5,435 | 7,538 | — | — | 14,746 | Quarterly | 1.56 | % | 14,481 | 1.56 | % | ||||||||||||||||||||||||||
12,617 | 33,636 | 33,629 | 14,736 | 98,822 | Quarterly | 5.22 | % | 85,948 | 4.68 | % | ||||||||||||||||||||||||||
Bank loans | 12,704 | — | — | — | 12,704 | Semiannual | 2.35 | % | 12,500 | 2.35 | % | |||||||||||||||||||||||||
30,291 | — | — | — | 30,583 | Semiannual | 1.91 | % | 30,000 | 1.91 | % | ||||||||||||||||||||||||||
— | — | — | — | 50,187 | Quarterly | 1.51 | % | 50,000 | 1.51 | % | ||||||||||||||||||||||||||
876 | 45,532 | — | — | 46,408 | Semiannual | 1.82 | % | 44,848 | 1.81 | % | ||||||||||||||||||||||||||
61,297 | — | — | — | 61,297 | Anual | 2.21 | % | 60,000 | 2.13 | % | ||||||||||||||||||||||||||
Other loans | 2,314 | 203,779 | — | — | 207,238 | — | 2.55 | % | 202,899 | 2.55 | % | |||||||||||||||||||||||||
5,884 | 271,307 | — | — | 277,191 | — | 1.87 | % | 269,965 | 1.87 | % | ||||||||||||||||||||||||||
— | 31,081 | 31,006 | — | 62,087 | Quarterly | 2.43 | % | 58,960 | 2.43 | % | ||||||||||||||||||||||||||
Derivatives | 28,940 | 70,303 | 41,382 | 8,62 0 | 159,436 | — | — | 154,410 | — | |||||||||||||||||||||||||||
Non-hedging derivatives | 3,896 | 8,998 | 1,586 | — | 15,837 | — | — | 15,380 | — | |||||||||||||||||||||||||||
Accounts payable and | ||||||||||||||||||||||||||||||||||||
Other accounts payables | 25,920 | — | — | — | 437,828 | — | — | 437,828 | — | |||||||||||||||||||||||||||
— | — | — | — | 15,408 | — | — | 15,408 | — | ||||||||||||||||||||||||||||
— | — | — | — | 78,245 | — | — | 78,245 | — | ||||||||||||||||||||||||||||
Accounts payable, non-current | — | 36,000 | — | — | 36,000 | — | — | 36,000 | — | |||||||||||||||||||||||||||
Accounts payable Related parties | — | — | — | — | 147 | — | — | 147 | — | |||||||||||||||||||||||||||
— | — | — | — | 2 | — | — | 2 | — | ||||||||||||||||||||||||||||
— | — | — | — | 116 | — | — | 116 | — | ||||||||||||||||||||||||||||
— | — | — | — | 102 | — | — | 102 | — | ||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||
Total | 502,638 | 1,438,934 | 768,999 | 1,297,002 | 4,686,937 | 4,286,010 | ||||||||||||||||||||||||||||||
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F-1-27
Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, 20102014
Debtor: TAM S.A. and Subsidiaries, Tax No. 02.012.862/0001-60, Brazil.
Tax No. | Creditor | Creditor country | Currency | Up to 90 days | More than 90 days to one year | More than one to three years | More than three to five years | More than five years | Total | Nominal value | Amortization | Effective rate | Nominal rate | |||||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | % | % | ||||||||||||||||||||||||||||||||||||
Bank loans |
| |||||||||||||||||||||||||||||||||||||||||||
0-E | NEDERLANDSCHE CREDIETVERZEKERING MAATSCHAPPIJ | Holland | US$ |
| 184 |
|
| 493 |
|
| 1,315 |
|
| 1,315 |
|
| 1,369 |
|
| 4,676 |
|
| 3,796 |
| Monthly |
| 6.01 |
|
| 6.01 |
| |||||||||||||
Obligation with the public |
| |||||||||||||||||||||||||||||||||||||||||||
0-E | THE BANK OF NEW YORK | U.S.A. | US$ | 14,639 | 82,006 | 481,920 | 148,037 | 880,604 | 1,607,206 | 1,100,000 | At Expiration | 7.99 | 7.19 | |||||||||||||||||||||||||||||||
Financial leases |
| |||||||||||||||||||||||||||||||||||||||||||
0-E | AFS INVESTMENT IX LLC | U.S.A. | US$ | 2,808 | 7,701 | 20,531 | 20,522 | 8,548 | 60,110 | 51,120 | Monthly | 1.25 | 1.25 | |||||||||||||||||||||||||||||||
0-E | AIRBUS FINANCIAL | U.S.A. | US$ | 3,623 | 10,709 | 28,593 | 15,908 | 7,736 | 66,569 | 63,021 | Monthly | 1.42 | 1.42 | |||||||||||||||||||||||||||||||
0-E | CREDIT AGRICOLE-CIB | U.S.A. | US$ | 2,897 | 32,805 | — | — | — | 35,702 | 35,170 | Quarterly | 1.10 | 1.10 | |||||||||||||||||||||||||||||||
0-E | CREDIT AGRICOLE -CIB | France | US$ | 1,653 | 4,683 | 4,514 | — | — | 10,850 | 10,500 | Quarterly/Semiannual | 3.25 | 3.25 | |||||||||||||||||||||||||||||||
0-E | DVB BANK SE | Germany | US$ | 3,247 | 9,470 | — | — | — | 12,717 | 12,500 | Quarterly | 2.50 | 2.50 | |||||||||||||||||||||||||||||||
0-E | DVB BANK SE | U.S.A. | US$ | 206 | 554 | 767 | — | — | 1,527 | 1,492 | Monthly | 1.68 | 1.68 | |||||||||||||||||||||||||||||||
0-E | GENERAL ELECTRIC CAPITAL CORPORATION | U.S.A. | US$ | 2,512 | 11,229 | 24,278 | — | — | 38,019 | 36,848 | Monthly | 1.25 | 1.25 | |||||||||||||||||||||||||||||||
0-E | KFW IPEX-BANK | Germany | US$ | 3,596 | 11,209 | 19,167 | 14,028 | 5,365 | 53,365 | 50,687 | Monthly/Quarterly | 1.72 | 1.72 | |||||||||||||||||||||||||||||||
0-E | NATIXIS | France | US$ | 5,121 | 9,778 | 27,874 | 28,520 | 87,769 | 159,062 | 139,693 | Quarterly/Semiannual | 3.87 | 3.87 | |||||||||||||||||||||||||||||||
0-E | PK AIRFINANCE US, INC. | U.S.A. | US$ | 1,392 | 4,103 | 20,694 | — | — | 26,189 | 25,293 | Monthly | 1.75 | 1.75 | |||||||||||||||||||||||||||||||
0-E | WACAPOU LEASING S.A. | Luxemburg | US$ | 573 | 1,528 | 3,559 | 2,852 | 13,226 | 21,738 | 19,982 | Quarterly | 2.00 | 2.00 | |||||||||||||||||||||||||||||||
0-E | SOCIÉTÉ GÉNÉRALE MILAN BRANCH | Italy | US$ | 9,777 | 27,207 | 75,066 | 78,964 | 170,509 | 361,523 | 344,106 | Quarterly | 3.06 | 3.58 | |||||||||||||||||||||||||||||||
0-E | BANCO DE LAGE LANDEN BRASIL S.A | Brazil | BRL | 8 | — | — | — | — | 8 | — | Monthly | 11.70 | 11.70 | |||||||||||||||||||||||||||||||
0-E | BANCO IBM S.A | Brazil | BRL | 356 | 1,118 | 3,405 | 40 | — | 4,919 | 3,817 | Monthly | 10.58 | 10.58 | |||||||||||||||||||||||||||||||
0-E | HP FINANCIAL SERVICE | Brazil | BRL | 276 | 829 | 1,381 | — | — | 2,486 | 2,229 | Monthly | 9.90 | 9.90 | |||||||||||||||||||||||||||||||
0-E | SOCIETE AIR FRANCE | France | EUR | 547 | — | — | — | — | 547 | 114 | Monthly | 6.82 | 6.82 | |||||||||||||||||||||||||||||||
0-E | SOCIÉTÉ GÉNÉRALE | France | BRL | 155 | 446 | 1,351 | 206 | — | 2,158 | 1,643 | Monthly | 11.60 | 11.60 | |||||||||||||||||||||||||||||||
Other loans |
| |||||||||||||||||||||||||||||||||||||||||||
0-E | COMPANHIA BRASILEIRA DE MEIOS DE PAGAMENTO | Brazil | BRL | 30,281 | 15,576 | — | — | — | 45,857 | 45,857 | Monthly | 4.23 | 4.23 | |||||||||||||||||||||||||||||||
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|
|
|
|
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|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total | 83,851 | 231,444 | 714,415 | 310,392 | 1,175,126 | 2,515,228 | 1,947,868 | |||||||||||||||||||||||||||||||||||||
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|
Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, 2014
Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2, Chile.
Tax No. | Creditor | Creditor country | Currency | Up to 90 days | More than 90 days to one year | More than one to three years | More than three to five years | More than five years | Total | Nominal value | Amortization | Effective rate | Nominal rate | |||||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | % | % | ||||||||||||||||||||||||||||||||||||
Trade and other accounts payables |
| |||||||||||||||||||||||||||||||||||||||||||
— | OTHERS | OTHERS | US$ | 529,043 | 26,483 | — | — | — | 555,526 | 555,526 | — | — | — | |||||||||||||||||||||||||||||||
USD | 1,107 | 10,449 | — | — | — | 11,556 | 11,431 | Quarterly | 2.11 | 2.11 | ||||||||||||||||||||||||||||||||||
CLP | 23,878 | 241 | — | — | — | 24,119 | 24,119 | — | — | — | ||||||||||||||||||||||||||||||||||
BRL | 380,766 | 13 | — | — | — | 380,779 | 380,779 | — | — | — | ||||||||||||||||||||||||||||||||||
Others currencies | 224,040 | 228 | — | — | — | 224,268 | 224,268 | — | — | — | ||||||||||||||||||||||||||||||||||
Accounts payable to related parties currents |
| |||||||||||||||||||||||||||||||||||||||||||
65.216.000-1 | COMUNIDAD MUJER | Chile | CLP | 2 | — | — | — | — | 2 | 2 | — | — | — | |||||||||||||||||||||||||||||||
78.591.370-1 | BETHIA S.A. AND SUBSIDIARIES | Chile | CLP | 6 | — | — | — | — | 6 | 6 | — | — | — | |||||||||||||||||||||||||||||||
0-E | INVERSORA AERONÁUTICA ARGENTINA | Argentina | US$ | 27 | — | — | — | — | 27 | 27 | — | — | — | |||||||||||||||||||||||||||||||
|
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| |||||||||||||||||||||||||||||||
Total | 1,158,869 | 37,414 | — | — | — | 1,196,283 | 1,196,158 | |||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||
Total consolidated | 1,817,431 | 1,045,739 | 3,136,842 | 1,790,787 | 3,572,194 | 11,362,993 | 10,129,545 | |||||||||||||||||||||||||||||||||||||
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|
Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, 2013
Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2 Chile.
Tax No. | Creditor | Creditor country | Currency | Up to 90 days | More than 90 days to one year | More than one to three years | More than three to five years | More than five years | Total | Nominal value | Amortization | Effective rate | Nominal rate | |||||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | % | % | ||||||||||||||||||||||||||||||||||||
Loans to exporters |
| |||||||||||||||||||||||||||||||||||||||||||
97.032.000-8 | BBVA | Chile | US$ | — | 30,100 | — | — | — | 30,100 | 30,000 | At expiration | 1.00 | 1.00 | |||||||||||||||||||||||||||||||
97.036.000-K | SANTANDER | Chile | US$ | 231,533 | — | — | — | — | 231,533 | 230,000 | At expiration | 1.63 | 1.63 | |||||||||||||||||||||||||||||||
97.030.000-7 | ESTADO | Chile | US$ | — | 40,188 | — | — | — | 40,188 | 40,000 | At expiration | 1.06 | 1.06 | |||||||||||||||||||||||||||||||
76.100.458-1 | BLADEX | Chile | US$ | 100,934 | — | — | — | — | 100,934 | 100,000 | At expiration | 1.87 | 1.87 | |||||||||||||||||||||||||||||||
Bank loans |
| |||||||||||||||||||||||||||||||||||||||||||
97.036.000-K | SANTANDER | Chile | US$ | 877 | 789 | 115,051 | — | — | 116,717 | 115,051 | At expiration | 3.19 | 3.19 | |||||||||||||||||||||||||||||||
97.023.000-9 | CORPBANCA | Chile | UF | 19,001 | 55,465 | 139,603 | 84,505 | — | 298,574 | 268,460 | Quarterly | 4.85 | 4.85 | |||||||||||||||||||||||||||||||
0-E | CITIBANK | Argentina | ARS | 785 | 15,861 | — | — | — | 16,646 | 15,335 | Monthly | 20.75 | 20.75 | |||||||||||||||||||||||||||||||
0-E | BBVA | Argentina | ARS | 1,668 | 30,029 | — | — | — | 31,697 | 27,603 | Monthly | 23.78 | 23.78 | |||||||||||||||||||||||||||||||
Guaranteed obligations |
| |||||||||||||||||||||||||||||||||||||||||||
0-E | ING | U.S.A. | US$ | 4,031 | 12,065 | 32,213 | 32,203 | 28,234 | 108,746 | 91,543 | Quarterly | 5.69 | 5.01 | |||||||||||||||||||||||||||||||
0-E | CREDIT AGRICOLE | France | US$ | 11,862 | 35,886 | 83,920 | 10,139 | — | 141,807 | 140,312 | Quarterly | 1.99 | 1.99 | |||||||||||||||||||||||||||||||
0-E | PEFCO | U.S.A. | US$ | 2,280 | 6,839 | — | — | — | 9,119 | 8,964 | Quarterly | 3.06 | 2.73 | |||||||||||||||||||||||||||||||
0-E | BNP PARIBAS | U.S.A. | US$ | 11,325 | 34,296 | 93,368 | 96,444 | 237,865 | 473,298 | 418,254 | Quarterly | 2.45 | 2.31 | |||||||||||||||||||||||||||||||
0-E | WELLS FARGO | U.S.A. | US$ | 55,235 | 165,469 | 439,680 | 437,387 | 1,205,577 | 2,303,348 | 2,099,776 | Quarterly | 2.47 | 1.76 | |||||||||||||||||||||||||||||||
0-E | CITIBANK | U.S.A. | US$ | 11,540 | 34,748 | 93,687 | 95,226 | 168,917 | 404,118 | 372,191 | Quarterly | 2.64 | 2.04 | |||||||||||||||||||||||||||||||
97.036.000-K | SANTANDER | Chile | US$ | 5,420 | 16,374 | 44,359 | 45,459 | 96,694 | 208,306 | 200,599 | Quarterly | 1.32 | 0.78 | |||||||||||||||||||||||||||||||
0-E | BTMU | U.S.A. | US$ | 2,891 | 8,741 | 23,742 | 24,417 | 65,005 | 124,796 | 118,070 | Quarterly | 1.64 | 1.04 | |||||||||||||||||||||||||||||||
0-E | APPLE BANK | U.S.A. | US$ | 1,418 | 4,292 | 11,671 | 12,017 | 32,461 | 61,859 | 58,502 | Quarterly | 1.63 | 1.04 | |||||||||||||||||||||||||||||||
0-E | US BANK | U.S.A. | US$ | 18,699 | 56,022 | 148,643 | 147,528 | 449,705 | 820,597 | 703,992 | Quarterly | 2.81 | 2.81 | |||||||||||||||||||||||||||||||
0-E | DEUTSCHE BANK | U.S.A. | US$ | 5,760 | 17,500 | 47,175 | 39,021 | 93,773 | 203,229 | 173,036 | Quarterly | 3.27 | 3.27 | |||||||||||||||||||||||||||||||
Other guaranteed obligations |
| |||||||||||||||||||||||||||||||||||||||||||
0-E | DVB BANK SE | U.S.A. | US$ | 8,178 | 24,564 | 65,726 | — | — | 98,468 | 95,292 | Quarterly | 1.99 | 1.99 | |||||||||||||||||||||||||||||||
Financial leases |
| |||||||||||||||||||||||||||||||||||||||||||
0-E | ING | U.S.A. | US$ | 5,028 | 15,205 | 39,703 | 9,324 | — | 69,260 | 65,076 | Quarterly | 3.23 | 3.03 | |||||||||||||||||||||||||||||||
0-E | CREDIT AGRICOLE | France | US$ | 5,086 | 14,599 | 31,434 | 24,647 | 17,415 | 93,181 | 89,514 | Quarterly | 1.21 | 1.21 | |||||||||||||||||||||||||||||||
0-E | CITIBANK | U.S.A. | US$ | 2,009 | 6,028 | 16,075 | 16,075 | 8,038 | 48,225 | 40,564 | Quarterly | 6.38 | 5.65 | |||||||||||||||||||||||||||||||
0-E | PEFCO | U.S.A. | US$ | 17,566 | 52,678 | 140,462 | 115,934 | 23,211 | 349,851 | 308,774 | Quarterly | 5.35 | 4.23 | |||||||||||||||||||||||||||||||
0-E | BNP PARIBAS | U.S.A. | US$ | 7,984 | 24,056 | 64,890 | 59,475 | 7,139 | 163,544 | 147,334 | Quarterly | 4.65 | 4.15 | |||||||||||||||||||||||||||||||
0-E | BANC OF AMERICA | U.S.A. | US$ | 703 | 2,099 | 5,628 | — | — | 8,430 | 7,899 | Monthly | 1.43 | 1.43 | |||||||||||||||||||||||||||||||
Other loans |
| |||||||||||||||||||||||||||||||||||||||||||
0-E | BOEING | U.S.A. | US$ | — | 2,804 | 172,128 | — | — | 174,932 | 170,838 | At expiration | 1.75 | 1.75 | |||||||||||||||||||||||||||||||
0-E | CITIBANK (*) | U.S.A. | US$ | 9,750 | 20,100 | 131,865 | 209,810 | 209,684 | 581,209 | 450,000 | Quarterly | 6.00 | 6.00 | |||||||||||||||||||||||||||||||
Hedging derivatives |
| |||||||||||||||||||||||||||||||||||||||||||
— | OTHERS | — | US$ | 11,005 | 30,495 | 59,829 | 16,561 | 614 | 118,504 | 112,819 | — | — | — | |||||||||||||||||||||||||||||||
Non—hedging derivatives |
| |||||||||||||||||||||||||||||||||||||||||||
— | OTHERS | — | US$ | 1,120 | 3,203 | 1,618 | — | — | 5,941 | 5,562 | — | — | — | |||||||||||||||||||||||||||||||
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Total | 553,688 | 760,495 | 2,002,470 | 1,476,172 | 2,644,332 | 7,437,157 | 6,705,360 | |||||||||||||||||||||||||||||||||||||
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(*) | ||||||||||||||||||||
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Canada. |
Class of Liability | More than 90 days to one year | More than one to three years | More than three to five years | More than five years | Total | Amortization | Effective rate | Nominal value | Nominal rate | |||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | % | ThUS$ | % | |||||||||||||||||||||||||||||
Guaranteed obligations | 22,305 | 53,471 | 47,128 | 93,325 | 223,654 | Quarterly | 5.19 | % | 181,029 | 4.69 | % | |||||||||||||||||||||||||
63,352 | 130,785 | 39,186 | 20,916 | 275,284 | Quarterly | 4.47 | % | 256,417 | 4.47 | % | ||||||||||||||||||||||||||
59,513 | 158,688 | 149,595 | 209,374 | 597,008 | Quarterly | 5.16 | % | 497,692 | 4.60 | % | ||||||||||||||||||||||||||
68,726 | 184,673 | 186,931 | 385,438 | 848,599 | Quarterly | 4.49 | % | 707,306 | 4.00 | % | ||||||||||||||||||||||||||
16,842 | 44,872 | 44,796 | 135,714 | 247,850 | Quarterly | 3.64 | % | 204,392 | 3.53 | % | ||||||||||||||||||||||||||
27,039 | 72,767 | 73,806 | 206,771 | 389,367 | Quarterly | 3.93 | % | 326,235 | 3.48 | % | ||||||||||||||||||||||||||
8,859 | 24,242 | 25,206 | 95,708 | 15 6,934 | Quarterly | 0.95 | % | 14 8,741 | 0.83 | % | ||||||||||||||||||||||||||
Financial leases | 11,685 | 30,440 | 25,695 | 11,675 | 83,394 | Quarterly | 4.08 | % | 77,096 | 3.71 | % | |||||||||||||||||||||||||
6,786 | 18,376 | 22,613 | 43,431 | 93,455 | Quarterly | 1.27 | % | 87,337 | 1.27 | % | ||||||||||||||||||||||||||
5,24 9 | 26,758 | — | — | 33,699 | Quarterly | 1.32 | % | 32,921 | 1.27 | % | ||||||||||||||||||||||||||
11,87 3 | 14,628 | — | — | 30,359 | Quarterly | 1.28 | % | 29,864 | 1.25 | % | ||||||||||||||||||||||||||
Bank loans | 26,125 | 12,726 | — | — | 38,851 | Quarterly | 3.64 | % | 37,500 | 3.55 | % | |||||||||||||||||||||||||
Bank loans | 13,158 | 12,713 | — | — | 39,350 | Semiannual | 6.53 | % | 36,858 | 6.44 | % | |||||||||||||||||||||||||
21,653 | 10,332 | — | — | 31,985 | Semiannual | 6.67 | % | 29,967 | 6.60 | % | ||||||||||||||||||||||||||
38,14 4 | 18,188 | — | — | 56,332 | Semiannual | 6.71 | % | 52,723 | 6.63 | % | ||||||||||||||||||||||||||
47,521 | 22,666 | — | — | 70,187 | Semiannual | 6.65 | % | 65,704 | 6.59 | % | ||||||||||||||||||||||||||
— | — | — | — | 3,944 | 30 days | 3.37 | % | 3,936 | 3.37 | % | ||||||||||||||||||||||||||
Other loans | 1,587 | 72,962 | — | — | 75,135 | — | 3.29 | % | 72,962 | 3.29 | % | |||||||||||||||||||||||||
1,207 | 106,665 | — | — | 109,734 | — | 2.04 | % | 106,209 | 2.04 | % | ||||||||||||||||||||||||||
Derivatives | 22,331 | 61,273 | 24,643 | 4,751 | 119,016 | — | — | 115,189 | — | |||||||||||||||||||||||||||
Non-hedging derivatives | 4,239 | 9,891 | 5,608 | — | 21,199 | — | — | 20,703 | — | |||||||||||||||||||||||||||
Accounts payable and other accounts payables | 26,002 | — | — | — | 303,329 | — | — | 303,329 | — | |||||||||||||||||||||||||||
— | — | — | — | 28,058 | — | — | 28,058 | — | ||||||||||||||||||||||||||||
— | — | — | — | 169,307 | — | — | 169,307 | — | ||||||||||||||||||||||||||||
Accounts payable, non-current | — | 54,000 | — | — | 54,000 | — | — | 54,000 | — | |||||||||||||||||||||||||||
Accounts payable related parties | — | — | — | — | 110 | — | — | 110 | — | |||||||||||||||||||||||||||
— | — | — | — | 74 | �� | — | — | 74 | — | |||||||||||||||||||||||||||
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| |||||||||||||||||||||||||
Total | 504,196 | 1,141,116 | 645,207 | 1,207,103 | 4,100,214 | 3,645,659 | ||||||||||||||||||||||||||||||
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F-1-28
Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, 2013
Tax No. | Creditor | Creditor country | Currency | Up to 90 days | More than 90 days to one year | More than one to three years | More than three to five years | More than five years | Total | Nominal value | Amortization | Effective rate | Nominal rate | |||||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | % | % | ||||||||||||||||||||||||||||||||||||
Bank loans |
| |||||||||||||||||||||||||||||||||||||||||||
0-E | CITIBANK | Brazil | US$ | 2,410 | 44,071 | — | — | — | 46,481 | 43,885 | At Expiration | 3.76 | 3.20 | |||||||||||||||||||||||||||||||
0-E | BANCO DO BRASIL S.A. | Brazil | US$ | 9,803 | 135,450 | — | — | — | 145,253 | 137,849 | At Expiration | 5.20 | 4.66 | |||||||||||||||||||||||||||||||
0-E | BANCO ITAU BBA | Brazil | US$ | 29,142 | 50,737 | — | — | — | 79,879 | 73,830 | At Expiration | 6.31 | 4.73 | |||||||||||||||||||||||||||||||
0-E | BANCO SAFRA | Brazil | US$ | 43,211 | 22,986 | — | — | — | 66,197 | 62,357 | At Expiration | 3.73 | 2.94 | |||||||||||||||||||||||||||||||
0-E | BANCO SAFRA | Brazil | BRL | 200 | 447 | 52 | — | — | 699 | 684 | Monthly | 7.42 | 7.42 | |||||||||||||||||||||||||||||||
0-E | BANCO BRADESCO | Brazil | US$ | 79,995 | 50,686 | — | — | — | 130,681 | 122,341 | At Expiration | 3.87 | 3.29 | |||||||||||||||||||||||||||||||
0-E | BANCO BRADESCO | Brazil | BRL | — | 44,986 | — | — | — | 44,986 | 42,688 | At Expiration | 10.63 | 10.15 | |||||||||||||||||||||||||||||||
0-E | NEDERLANDSCHE CREDIETVERZEKERING MAATSCHAPPIJ | Holland | US$ | 186 | 495 | 1,320 | 1,320 | 2,035 | 5,356 | 4,215 | Monthly | 6.01 | 6.01 | |||||||||||||||||||||||||||||||
Obligation with the public |
| |||||||||||||||||||||||||||||||||||||||||||
0-E | THE BANK OF NEW YORK | U.S.A. | US$ | 34,010 | 80,251 | 190,343 | 457,367 | 953,212 | 1,715,183 | 1,100,000 | At Expiration | 8.60 | 8.41 | |||||||||||||||||||||||||||||||
Financial leases |
| |||||||||||||||||||||||||||||||||||||||||||
0-E | AFS INVESTMENT IX LLC | U.S.A. | US$ | 2,850 | 7,728 | 20,609 | 20,609 | 18,892 | 70,688 | 58,321 | Monthly | 1.25 | 1.25 | |||||||||||||||||||||||||||||||
0-E | AIR CANADA | U.S.A. | US$ | 1,325 | 1,645 | — | — | — | 2,970 | 2,970 | Monthly | — | — | |||||||||||||||||||||||||||||||
0-E | AIRBUS FINANCIAL | U.S.A. | US$ | 3,546 | 10,405 | 28,944 | 21,867 | 15,758 | 80,520 | 75,352 | Monthly | 1.42 | 1.42 | |||||||||||||||||||||||||||||||
0-E | AWAS | U.S.A. | US$ | 5,651 | 4,432 | — | — | — | 10,083 | 5,651 | Monthly | — | — | |||||||||||||||||||||||||||||||
0-E | BNP PARIBAS | U.S.A. | US$ | 722 | 2,008 | 5,705 | 6,283 | 8,648 | 23,366 | 22,082 | Quarterly | 1.00 | 1.00 | |||||||||||||||||||||||||||||||
0-E | BNP PARIBAS | France | US$ | 872 | 2,397 | 6,387 | 6,394 | 10,385 | 26,435 | 22,359 | Quarterly | 0.86 | 0.75 | |||||||||||||||||||||||||||||||
0-E | CITIBANK | England | US$ | 7,059 | 20,021 | 48,442 | 50,209 | 109,870 | 235,601 | 222,590 | Quarterly | 1.03 | 0.90 | |||||||||||||||||||||||||||||||
0-E | CREDIT AGRICOLE-CIB | U.S.A. | US$ | 4,971 | 14,177 | 57,595 | 12,297 | 14,308 | 103,348 | 97,945 | Quarterly | 1.40 | 1.40 | |||||||||||||||||||||||||||||||
0-E | CREDIT AGRICOLE -CIB | France | US$ | 8,834 | 26,771 | 61,037 | 51,629 | 53,270 | 201,541 | 195,396 | Semiannual/ Quarterly | 0.75 | 0.65 | |||||||||||||||||||||||||||||||
0-E | DVB BANK SE | Germany | US$ | 3,386 | 9,812 | 12,717 | — | — | 25,915 | 25,000 | Quarterly | 2.50 | 2.50 | |||||||||||||||||||||||||||||||
0-E | DVB BANK SE | U.S.A. | US$ | 214 | 621 | 1,243 | 284 | — | 2,362 | 2,279 | Monthly | 1.75 | 1.75 | |||||||||||||||||||||||||||||||
0-E | GENERAL ELECTRIC CAPITAL CORPORATION | U.S.A. | US$ | 3,709 | 48,803 | — | — | — | 52,512 | 51,978 | Monthly | 1.25 | 1.25 | |||||||||||||||||||||||||||||||
0-E | HSBC | France | US$ | 1,611 | 4,480 | 12,148 | 12,461 | 37,705 | 68,405 | 64,296 | Quarterly | 1.45 | 1.25 | |||||||||||||||||||||||||||||||
0-E | KFW IPEX-BANK | Germany | US$ | 4,463 | 13,067 | 30,880 | 21,672 | 18,232 | 88,314 | 82,718 | Monthly/ Quarterly | 1.74 | 1.74 | |||||||||||||||||||||||||||||||
0-E | NATIXIS | France | US$ | 9,619 | 20,117 | 58,917 | 62,444 | 124,621 | 275,718 | 246,128 | Semiannual/ Quarterly | 2.81 | 2.78 | |||||||||||||||||||||||||||||||
0-E | PK AIRFINANCE US, INC. | U.S.A. | US$ | 3,491 | 10,137 | 43,583 | 19,001 | 38,965 | 115,177 | 106,403 | Monthly | 1.71 | 1.71 | |||||||||||||||||||||||||||||||
0-E | WACAPOU LEASING S.A. | Luxemburg | US$ | 632 | 1,679 | 3,943 | 3,209 | 14,585 | 24,048 | 21,737 | Quarterly | 2.00 | 2.00 | |||||||||||||||||||||||||||||||
0-E | WELLS FARGO BANK NORTHWEST N.A. | U.S.A. | US$ | 1,781 | 1,427 | — | — | — | 3,208 | 3,194 | Monthly | 1.25 | 1.25 | |||||||||||||||||||||||||||||||
0-E | SOCIÉTÉ GÉNÉRALE MILAN BRANCH | Italy | US$ | 14,113 | 39,557 | 96,309 | 102,366 | 105,460 | 357,805 | 334,095 | Quarterly | 3.86 | 3.78 | |||||||||||||||||||||||||||||||
0-E | THE TORONTO-DOMINION BANK | U.S.A. | US$ | 580 | 1,673 | 4,534 | 4,645 | 6,619 | 18,051 | 17,394 | Quarterly | 0.57 | 0.57 | |||||||||||||||||||||||||||||||
0-E | BANCO DE LAGE LANDEN BRASIL S.A | Brazil | BRL | 224 | 676 | — | — | — | 900 | 963 | Monthly | 10.38 | 10.38 | |||||||||||||||||||||||||||||||
0-E | BANCO IBM S.A | Brazil | BRL | 184 | 205 | 630 | 306 | — | 1,325 | 1,050 | Monthly | 10.58 | 10.58 | |||||||||||||||||||||||||||||||
0-E | HP FINANCIAL SERVICE | Brazil | BRL | 376 | 960 | 2,507 | 313 | — | 4,156 | 3,559 | Monthly | 9.90 | 9.90 | |||||||||||||||||||||||||||||||
0-E | SOCIETE AIR FRANCE | France | EUR | 847 | 1,258 | — | — | — | 2,105 | 1,379 | Monthly | 6.82 | 6.82 | |||||||||||||||||||||||||||||||
Other loans |
| |||||||||||||||||||||||||||||||||||||||||||
0-E | COMPANHIA BRASILEIRA DE MEIOS DE PAGAMENTO | Brazil | BRL | 27,244 | 537 | — | — | — | 27,781 | 27,781 | Monthly | 2.38 | 2.38 | |||||||||||||||||||||||||||||||
— | OTHERS | Brazil | US$ | 496 | 1,156 | — | — | — | 1,652 | 1,652 | — | — | — | |||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||
Total | 307,757 | 675,858 | 687,845 | 854,676 | 1,532,565 | 4,058,701 | 3,282,121 | |||||||||||||||||||||||||||||||||||||
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Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, 2013
Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2 Chile.
Tax No. | Creditor | Creditor country | Currency | Up to 90 days | More than 90 days to one year | More than one to three years | More than three to five years | More than five years | Total | Nominal value | Amortization | Effective rate | Nominal rate | |||||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | % | % | ||||||||||||||||||||||||||||||||||||
Trade and other accounts payables |
| |||||||||||||||||||||||||||||||||||||||||||
— | OTHERS | OTHERS | US$ | 814,354 | 7,245 | — | — | — | 821,599 | 821,599 | — | — | — | |||||||||||||||||||||||||||||||
US$ | 1,104 | 3,318 | — | — | — | 4,422 | 4,141 | Quarterly | 2.01 | 2.01 | ||||||||||||||||||||||||||||||||||
CLP | 16,364 | 6 | — | — | — | 16,370 | 16,370 | — | — | — | ||||||||||||||||||||||||||||||||||
BRL | 193,189 | 8 | — | — | — | 193,197 | 193,197 | — | — | — | ||||||||||||||||||||||||||||||||||
BRL | 5,220 | 14,878 | — | — | — | 20,098 | 14,569 | Monthly | 8.99 | 8.99 | ||||||||||||||||||||||||||||||||||
Others currencies | 213,904 | 615 | — | — | — | 214,519 | 214,519 | — | — | — | ||||||||||||||||||||||||||||||||||
Accounts payable, non-current |
| |||||||||||||||||||||||||||||||||||||||||||
— | OTHERS | OTHERS | US$ | — | — | 11,557 | — | — | 11,557 | 11,400 | Quarterly | 2.01 | 2.01 | |||||||||||||||||||||||||||||||
BRL | — | — | 42,743 | 54,907 | 199,200 | 296,850 | 124,481 | Monthly | 8.99 | 8.99 | ||||||||||||||||||||||||||||||||||
Accounts payable to related parties currents |
| |||||||||||||||||||||||||||||||||||||||||||
96.847.880-K | LUFTHANSA LAN TECHNICAL TRAINING S.A. | Chile | US$ | 187 | — | — | — | — | 187 | 187 | — | — | — | |||||||||||||||||||||||||||||||
78.591.370-1 | BETHIA S.A. AND SUBSIDIARIES | Chile | CLP | 14 | — | — | — | 14 | 14 | — | — | — | ||||||||||||||||||||||||||||||||
0-E | INVERSORA AERONÁUTICA ARGENTINA | Argentina | US$ | 304 | — | — | — | 304 | 304 | — | — | — | ||||||||||||||||||||||||||||||||
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Total | 1,244,640 | 26,070 | 54,300 | 54,907 | 199,200 | 1,579,117 | 1,400,781 | |||||||||||||||||||||||||||||||||||||
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Total consolidated | 2,106,085 | 1,462,423 | 2,744,615 | 2,385,755 | 4,376,097 | 13,074,975 | 11,388,262 | |||||||||||||||||||||||||||||||||||||
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The Company has fuel, interest rate and interestexchange rate hedging strategies involving derivatives contracts with different financial institutions. The Company has margin facilities with each financial institution in order to regulate the mutual exposure produced by changes in the market valuation of the derivatives.
At the end of 2010,2013, the Company had provided US$ 78.594.3 million in derivative margin guarantees, for cash and stand-by letters of credit. At the end of December 31, 2011,2014, the Company had provided US$ 117.291.8 million in guarantees for Cash and cash equivalent and stand-by letters of credit. The increasefall was due to theat i) maturity of hedge contracts, ii) acquire of new fuel purchase contracts, and acquisition ofiii) changes in fuel prices, exchange rate R$/US$ and interest rate contracts, rising fuel prices and falling interest rates.
The Company’s objectives, with respect to the management of capital, are (i) to safeguard it in order to continue as an on-going business, (ii) to seek a return for its shareholders, and (iii) to maintain an optimum capital structure and reduce its costs.
In order to maintain or adjust the capital structure, the Company may adjust the amount of the dividends payable to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.
The Company monitors the adjusted leverage ratio, in line with industry practice. This indexratio is calculated as net adjusted debt divided by the sum of adjusted equity and net adjusted debt. Net adjusted debt is total financial debt plus 8 times the operating lease payments of the last 12 months, less total cash (measured as the sum of cash and cash equivalents plus marketable securities). CapitalAdjusted capital is the amount of net equity without the impact of the market value of derivatives, plus net adjusted debt.derivatives.
Currently theThe Company’s strategy, which has not changed since 2007, has consisted of maintaining aan adjusted leverage ratio of between 70% and 80% and an international credit rating of higher than BBB- (the minimum required for being considered investment grade). TheAs a result of consolidation with TAM S.A. and Subsidiaries, the rating agency Fitch has issued on May 2, 2014 a new long-term rating for the Company of BB with negative perspective (which is not an investment grade rating). Additionally, on June 10, 2013, S&P issued a long term rating of BB, with a positive outlook.
Adjusted leverage ratios as of December 31, 2011, and December 31, 2010, were as follows:ratios:
As of | As of | |||||||||||||||
December 31, | December 31, | |||||||||||||||
As of December 31, 2011 | As of December 31, 2010 | 2014 | 2013 | |||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||
Total financial loans | 3,788,272 | 3,259,666 | 8,817,215 | 9,830,866 | ||||||||||||
Last twelve months Operating lease payment x8 | 1,393,576 | 788,704 | ||||||||||||||
Last twelve months Operating lease payment x 8 | 4,171,072 | 3,528,616 | ||||||||||||||
Less: | ||||||||||||||||
Cash and marketable securities | (472,499 | ) | (737,093 | ) | (1,533,770 | ) | (2,561,574 | ) | ||||||||
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Total net adjusted debt | 4,709,349 | 3,311,277 | 11,454,517 | 10,797,908 | ||||||||||||
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Net Equity | 1,445,324 | 1,296,814 | 4,401,896 | 5,238,821 | ||||||||||||
Cash flow hedging reserve | 140,556 | 107,050 | 151,340 | 34,508 | ||||||||||||
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Adjusted equity | 1,585,880 | 1,403,864 | 4,553,236 | 5,273,329 | ||||||||||||
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Total adjusted debt and equity | 6,295,229 | 4,715,141 | 16,007,753 | 16,071,237 | ||||||||||||
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Adjusted leverage | 74.8 | % | 70.2 | % | 71.6 | % | 67.2 | % |
See information related to financial covenants in Note 31 (a).
F-1-293.3. Estimates of fair value.
At December 31, 2011,2014, the Company maintained financial instruments that should be recorded at fair value. These include:are grouped into two categories:
1. Hedge Instruments:
This category includes the following instruments:
2. Financial Investments:
This category includes the following instruments:
Interest rate derivative contracts,
Fuel derivative contracts,
Currency derivative contracts, and
The Company has classified the fair value measurement using a hierarchy that reflects the level of information used in the assessment. This hierarchy consists of 3 levels (I) fair value based on quoted prices in active markets for identical assets or liabilities, (II) fair value calculated through valuation methods based on inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) and (III) fair value based on inputs for the asset or liability that are not based on observable market data.
The fair value of financial instruments traded in active markets, such as investments acquired for trading, is based on quoted market prices at the close of the yearperiod using the current price of the buyer. The fair value of financial assets not traded in active markets (derivative contracts) is determined using valuation techniques that maximize use of available market information. Valuation techniques generally used by the Company are quoted market prices of similar instruments and / or estimating the present value of future cash flows using forward price curves of the market at yearperiod end.
The following table shows the classification of financial instruments at fair value, at December 31, 2011 depending on the level of information used in the assessment:
As of December 31, 2014 | As of December 31, 2013 | |||||||||||||||||||||||||||||||||||||||||||||||
Fair value At December 31, 2011 | Fair value measurements using values considered as | Fair value measurements using values considered as | Fair value measurements using values considered as | |||||||||||||||||||||||||||||||||||||||||||||
Level I | Level II | Level III | Fair value | Level I | Level II | Level III | Fair value | Level I | Level II | Level III | ||||||||||||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | 200,753 | 200,753 | — | — | 579,349 | 579,349 | — | — | ||||||||||||||||||||||||||||||||||||||||
Short-term mutual funds | 156,334 | 156,334 | — | — | 200,753 | 200,753 | — | — | 579,349 | 579,349 | — | — | ||||||||||||||||||||||||||||||||||||
Other financial assets, current | 546,535 | 526,081 | 20,454 | — | 625,086 | 546,116 | 78,970 | — | ||||||||||||||||||||||||||||||||||||||||
Fair value of interest rate derivatives | 73 | — | 73 | — | 1 | — | 1 | — | 6 | — | 6 | — | ||||||||||||||||||||||||||||||||||||
Fair value of fuel derivatives | 30,615 | — | 30,615 | — | 1,783 | — | 1,783 | — | 15,868 | — | 15,868 | — | ||||||||||||||||||||||||||||||||||||
Fair value of foreign currency derivatives | 631 | — | 631 | — | — | — | — | 32,058 | — | 32,058 | — | |||||||||||||||||||||||||||||||||||||
Interest accrued since the last payment date of Cross Currency Swap | 377 | — | 377 | — | 483 | — | 483 | — | ||||||||||||||||||||||||||||||||||||||||
Private investment funds | 60,733 | 60,733 | — | — | 480,777 | 480,777 | — | — | 544,182 | 544,182 | — | — | ||||||||||||||||||||||||||||||||||||
Certificate of deposit CDB | 18,293 | — | 18,293 | — | 2,374 | — | 2,374 | — | ||||||||||||||||||||||||||||||||||||||||
Domestic and foreign bonds | 41,111 | 41,111 | — | — | 351 | 351 | — | — | ||||||||||||||||||||||||||||||||||||||||
Time deposit | — | — | — | — | 28,181 | — | 28,181 | — | ||||||||||||||||||||||||||||||||||||||||
Other investments | 4,193 | 4,193 | — | — | 1,583 | 1,583 | — | — | ||||||||||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
Other financial liabilities, current | 227,233 | — | 227,233 | — | 70,506 | — | 70,506 | — | ||||||||||||||||||||||||||||||||||||||||
Fair value of interest rate derivatives | 159,436 | — | 159,436 | — | 26,395 | — | 26,395 | — | 32,070 | — | 32,070 | — | ||||||||||||||||||||||||||||||||||||
Fair value of fuel derivatives | 157,233 | — | 157,233 | — | ||||||||||||||||||||||||||||||||||||||||||||
Fair value of foreign currency derivatives | 884 | — | 884 | — | 37,242 | — | 37,242 | — | 28,621 | — | 28,621 | — | ||||||||||||||||||||||||||||||||||||
Interest rate derivatives not accounted for as hedging instruments | 14,766 | — | 14,766 | — | ||||||||||||||||||||||||||||||||||||||||||||
Interest accrued since the last payment date of Currency Swap | 5,173 | — | 5,173 | — | 5,775 | — | 5,775 | — | ||||||||||||||||||||||||||||||||||||||||
Interest rate derivatives not recognized as a hedge | 1,190 | — | 1,190 | 4,040 | 4,040 | |||||||||||||||||||||||||||||||||||||||||||
Other financial liabilities, non current | 28,327 | — | 28,327 | — | 56,397 | — | 56,397 | — | ||||||||||||||||||||||||||||||||||||||||
Fair value of interest rate derivatives | 28,327 | — | 28,327 | — | 54,906 | — | 54,906 | — | ||||||||||||||||||||||||||||||||||||||||
Interest rate derivatives not recognized as a hedge | — | — | — | — | 1,491 | — | 1,491 | — |
F-1-30
Additionally, at December 31, 2011,2014, the Company has financial instruments which are not recorded at fair value. In order to meet the disclosure requirements of fair values, the Company has valued these instruments as shown in the table below:
As of December 31, 2014 | As of December 31, 2013 | |||||||||||||||||||||||||||||||
As of December 31, 2011 | As of December 31, 2010 | Book | Fair | Book | Fair | |||||||||||||||||||||||||||
Book value | Fair value | Book value | Fair value | value | value | value | value | |||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||||||||
Cash and cash equivalents | 788,643 | 788,643 | 1,405,554 | 1,405,554 | ||||||||||||||||||||||||||||
Cash on hand | 4,605 | 4,605 | 3,857 | 3,857 | 11,568 | 11,568 | 6,017 | 6,017 | ||||||||||||||||||||||||
Bank balance | 17,013 | 17,013 | 24,432 | 24,432 | 239,514 | 239,514 | 229,935 | 229,935 | ||||||||||||||||||||||||
Time Deposits | 196,455 | 196,455 | 406,143 | 406,143 | ||||||||||||||||||||||||||||
Overnight | 154,666 | 154,666 | 508,781 | 508,781 | ||||||||||||||||||||||||||||
Time deposits | 382,895 | 382,895 | 660,821 | 660,821 | ||||||||||||||||||||||||||||
Other financial assets, current | 103,866 | 103,866 | 84,858 | 84,858 | ||||||||||||||||||||||||||||
Other financial assets | 103,866 | 103,866 | 84,858 | 84,858 | ||||||||||||||||||||||||||||
Domestic and foreign bonds | 37,359 | 40,250 | 47,184 | 50,294 | ||||||||||||||||||||||||||||
Other financial assets | 120,225 | 120,225 | 80,836 | 80,836 | ||||||||||||||||||||||||||||
Trade and other accounts receivable non-current | 544,897 | 544,897 | 489,233 | 489,233 | ||||||||||||||||||||||||||||
Trade and other accounts receivable current | 1,378,837 | 1,378,837 | 1,633,094 | 1,633,094 | ||||||||||||||||||||||||||||
Accounts receivable from related entities | 838 | 838 | 50 | 50 | 308 | 308 | 628 | 628 | ||||||||||||||||||||||||
Other financial liabilities | 3,516,307 | 3,665,661 | 2,945,294 | 2,969,939 | ||||||||||||||||||||||||||||
Trade and other accounts payables, | 531,481 | 531,481 | 500,694 | 500,694 | ||||||||||||||||||||||||||||
Other financial assets, non current | 84,986 | 84,986 | 65,289 | 65,289 | ||||||||||||||||||||||||||||
Accounts receivable | 30,465 | 30,465 | 100,775 | 100,775 | ||||||||||||||||||||||||||||
Other financial liabilities, current | 1,397,382 | 1,446,100 | 1,969,281 | 2,128,096 | ||||||||||||||||||||||||||||
Trade and other accounts payables | 1,489,396 | 1,489,396 | 1,557,736 | 1,557,736 | ||||||||||||||||||||||||||||
Accounts payable to related entities | 367 | 367 | 184 | 184 | 35 | 35 | 505 | 505 | ||||||||||||||||||||||||
Other financial liabilities, non current | 7,360,685 | 8,319,022 | 7,803,588 | 7,910,446 | ||||||||||||||||||||||||||||
Accounts payable, non-current | 307,965 | 307,965 | 368,372 | 368,372 | 577,454 | 577,454 | 922,887 | 922,887 |
The book values of accounts receivable and payable are assumed to approximate their fair values, due to their short-term nature. In the case of cash on hand, bank balances, overnight, time deposits and accounts payable, non-current, fair value approximates their carrying values.
The fair value of otherOther financial liabilities is estimated by discounting the future contractual cash flows at the current market interest rate for similar financial instruments. In the case of otherOther financial assets, the valuation was performed according to market prices at yearperiod end.
NOTE 4 –- ACCOUNTING ESTIMATES AND JUDGMENTS
The Company has used estimates to value and book some of the assets, liabilities, revenues, expenses and commitments; these relate principally to:
(a) | The evaluation of possible impairment losses for certain assets. |
(b) | The useful lives and residual values of fixed and intangible assets. |
(c) | The criteria employed in the valuation of certain assets. |
(d) | Air tickets sold that are not actually used. |
(e) | The calculation of deferred income at the |
(f) | The need for provisions and where required, the determination of their values. |
(g) | The recoverability of deferred tax assets. |
These estimates are made on the basis of the best information available on the matters analyzed.
In any case, it is possible that events will require modification of the estimates in the future, in which case the effects would be accounted for prospectively.
The management has applied judgment in determining that LATAM Airlines Group S.A. has control over TAM S.A. and Subsidiaries for accounting purposes and therefore has consolidated their financial statements. This judgment is made on the basis that LATAM issued their ordinary shares in exchange for all of the outstanding common and preferred shares of TAM, except those shareholders of TAM who did not accept exchange and which were subject of the squeeze-out entitling LATAM to substantially all of the economic benefits that will be generated by the LATAM Group and also, consequently, exposing it to substantially all the risks incidental to the operations of TAM. This exchange aligns the economic interests of LATAM and all of its shareholders, including the TAM controlling shareholders, ensuring that the shareholders and directors of TAM will have no incentive to exercise their rights in a manner that is beneficial to TAM but detrimental to LATAM. Further, all significant actions required for the operation of the airlines require the affirmative vote of both LATAM and the TAM controlling shareholders.
F-1-31
Since the integration of LAN and TAM operations, most critical airline activities in Brazil have been managed under the TAM CEO and global activities have been managed by the LATAM CEO, who is in charge of the overall operation of the LATAM Group and who reports to the LATAM board. Further, the LATAM CEO evaluates performance of the LATAM Group executives and, together with the LATAM board, determines compensation. Although there are restrictions on voting interests that currently may be held by foreign investors under Brazilian law, LATAM believes that the economic substance of these arrangements satisfies the requirements established by the applicable accounting standards and that consolidation by LATAM of TAM’s operations is appropriate.
NOTE 5 –- SEGMENTAL INFORMATION
The Company reports information by segments as established in IFRS 8 “Operating segments”. This standard sets rules for the reporting of information by segments in the financial statements, plus reporting about products and services, geographical areas and principal customers.
An operating segment is defined as a component of an entity on which financial information is held separately and which is evaluated regularly by the senior management in making decisions with respect to the assignment of resources and evaluation of results.
The Company has determined that it has only onetwo operating segment:segments: the air transportation.transportation business and the coalition and loyalty program Multiplus.
The Air transport segment corresponds to the route network for air transport and it is based on the way that the business is run and managed, according to the centralized nature of its operations, the ability to open and close routes and reallocate resources (aircraft, crew, staff, etc.) within the network, which is a functional relationship between all of them, making them inseparable. This segment definition is the most common level used by the global airline industry.
The segment of loyalty coalition called Multiplus, unlike LanPass and TAM Fidelidade, is a frequent flyer programs which operate as a unilateral system of loyalty that offers a flexible coalition system, interrelated among its members, with 13.8 million of members, along with being a government entity with a separately business and not directly related to air transport.
(a) For the periods ended
Air transport segment | ||||||||||||
For the year ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
ThUS$ | ThUS$ | ThUS$ | ||||||||||
Income from ordinary activities and other operating income | 5,718,244 | 4,523,328 | 3,655,513 | |||||||||
Interest income | 14,453 | 14,946 | 18,183 | |||||||||
Interest expense | (139,077 | ) | (155,279 | ) | (153,109 | ) | ||||||
|
|
|
|
|
| |||||||
Total net interest expense | (124,624 | ) | (140,333 | ) | (134,926 | ) | ||||||
|
|
|
|
|
| |||||||
Depreciation and amortization | (396,475 | ) | (336,491 | ) | (304,062 | ) | ||||||
Segment profit | 320,197 | 419,702 | 231,126 | |||||||||
Earnings on investments | 458 | 132 | 315 | |||||||||
Expenses for income tax | (61,789 | ) | (81,107 | ) | (44,487 | ) | ||||||
Assets of segment | 7,648,659 | 6,785,897 | 5,771,972 | |||||||||
Investments in associates | 991 | 593 | 1,236 | |||||||||
Purchase of non-monetary assets | 1,394,640 | 1,048,394 | 555,279 |
Air transportation At December 31, | Coalition and loyalty program Multiplus At December 31, | Eliminations At December 31, | Consolidated At December 31, | |||||||||||||||||||||||||||||||||||||||||||||
2014 | 2013 | 2012 | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | |||||||||||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||||||||||||||||||||
Income from ordinary activities from external customers (*) | 11,587,224 | 12,328,634 | 9,380,181 | 506,277 | 595,903 | 330,191 | — | — | — | 12,093,501 | 12,924,537 | 9,710,372 | ||||||||||||||||||||||||||||||||||||
LAN passenger | 4,464,761 | 4,731,296 | 4,529,099 | — | — | — | — | — | — | 4,464,761 | 4,731,296 | 4,529,099 | ||||||||||||||||||||||||||||||||||||
TAM passenger | 5,409,084 | 5,734,359 | 3,107,555 | 506,277 | 595,903 | 330,191 | — | — | — | 5,915,361 | 6,330,262 | 3,437,746 | ||||||||||||||||||||||||||||||||||||
Freight | 1,713,379 | 1,862,979 | 1,743,527 | — | — | — | — | — | — | 1,713,379 | 1,862,979 | 1,743,527 | ||||||||||||||||||||||||||||||||||||
Income from ordinary activities from transactions with other operating segments | 506,277 | 595,903 | 330,191 | 106,030 | 94,457 | 52,175 | (612,307 | ) | (690,360 | ) | (382,366 | ) | — | — | — | |||||||||||||||||||||||||||||||||
Other operating income | 217,390 | 272,640 | 207,273 | 160,255 | 68,925 | 26,696 | — | — | (13,813 | ) | 377,645 | 341,565 | 220,156 | |||||||||||||||||||||||||||||||||||
Interest income | 32,390 | 49,737 | 51,004 | 58,110 | 34,280 | 26,485 | — | (11,189 | ) | — | 90,500 | 72,828 | 77,489 | |||||||||||||||||||||||||||||||||||
Interest expense | (430,030 | ) | (472,171 | ) | (294,448 | ) | (4 | ) | (1,542 | ) | (150 | ) | — | 11,189 | — | (430,034 | ) | (462,524 | ) | (294,598 | ) | |||||||||||||||||||||||||||
Total net interest expense | (397,640 | ) | (422,434 | ) | (243,444 | ) | 58,106 | 32,738 | 26,335 | — | — | — | (339,534 | ) | (389,696 | ) | (217,109 | ) |
(*) | The Company does not have any interest revenue that should be recognized as income from ordinary activities by interest. |
For the periods ended
Air transportation At December 31, | Coalition and loyalty program Multiplus At December 31, | Eliminations At December 31, | Consolidated At December 31, | |||||||||||||||||||||||||||||||||||||||||||||
2014 | 2013 | 2012 | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | |||||||||||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||||||||||||||||||||
Depreciation and amortization | (983,847 | ) | (1,037,734 | ) | (770,264 | ) | (7,417 | ) | (3,999 | ) | (849 | ) | — | — | — | (991,264 | ) | (1,041,733 | ) | (771,113 | ) | |||||||||||||||||||||||||||
Material non-cash items other than depreciation and amortization | (168,573 | ) | (523,666 | ) | 33,497 | (2,350 | ) | 59 | (1,559 | ) | — | — | — | (170,923 | ) | (523,607 | ) | 31,938 | ||||||||||||||||||||||||||||||
Disposal of fixed assets and inventory losses | (28,756 | ) | (33,987 | ) | (21,990 | ) | (814 | ) | (123 | ) | (1,597 | ) | — | — | — | (29,570 | ) | (34,110 | ) | (23,587 | ) | |||||||||||||||||||||||||||
Doubtful accounts | (9,637 | ) | (7,754 | ) | (11,233 | ) | (1,522 | ) | 217 | 95 | — | — | — | (11,159 | ) | (7,537 | ) | (11,138 | ) | |||||||||||||||||||||||||||||
Exchange differences | (130,187 | ) | (482,139 | ) | 66,742 | (14 | ) | (35 | ) | (57 | ) | — | — | — | (130,201 | ) | (482,174 | ) | 66,685 | |||||||||||||||||||||||||||||
Result of indexation units | 7 | 214 | (22 | ) | — | — | — | — | — | — | 7 | 214 | (22 | ) | ||||||||||||||||||||||||||||||||||
Income (loss) atributable to owners of the parents | (404,346 | ) | (389,040 | ) | (81,222 | ) | 144,361 | 107,926 | 62,146 | — | — | — | (259,985 | ) | (281,114 | ) | (19,076 | ) | ||||||||||||||||||||||||||||||
Participation of the entity in the income of associates | (2,175 | ) | 1,954 | 972 | (4,280 | ) | — | — | — | — | — | (6,455 | ) | 1,954 | 972 | |||||||||||||||||||||||||||||||||
Expenses for income tax | (218,503 | ) | 72,155 | (72,324 | ) | (73,901 | ) | (52,086 | ) | (30,062 | ) | — | — | — | (292,404 | ) | 20,069 | (102,386 | ) | |||||||||||||||||||||||||||||
Segment profit / (loss) | (332,287 | ) | (344,337 | ) | (49,383 | ) | 105,116 | 80,518 | 43,741 | — | — | — | (227,171 | ) | (263,819 | ) | (5,642 | ) | ||||||||||||||||||||||||||||||
Assets of segment | 18,759,848 | 21,520,500 | 21,170,727 | 1,773,584 | 1,118,686 | 1,163,316 | (49,002 | ) | (8,040 | ) | (7,704 | ) | 20,484,430 | 22,631,146 | 22,326,339 | |||||||||||||||||||||||||||||||||
Investments in associates | — | 3,572 | 1,619 | — | 3,024 | 2,138 | — | — | — | — | 6,596 | 3,757 | ||||||||||||||||||||||||||||||||||||
Amount of non-current asset additions | 1,522,298 | 1,746,913 | 12,778,773 | — | — | 846,285 | — | — | — | 1,522,298 | 1,746,913 | 13,625,058 | ||||||||||||||||||||||||||||||||||||
Property, plant and equipment | 1,444,402 | 1,685,011 | 7,275,165 | — | — | — | — | — | — | 1,444,402 | 1,685,011 | 7,275,165 | ||||||||||||||||||||||||||||||||||||
Intangibles other than goodwill | 77,896 | 61,902 | 2,333,906 | — | — | — | — | — | — | 77,896 | 61,902 | 2,333,906 | ||||||||||||||||||||||||||||||||||||
Goodwill | — | — | 3,169,702 | — | — | 846,285 | — | — | — | — | — | 4,015,987 | ||||||||||||||||||||||||||||||||||||
Segment liabilities | 15,293,668 | 16,604,451 | 16,477,979 | 723,438 | 775,975 | 746,854 | (36,371 | ) | (75,739 | ) | (119,179 | ) | 15,980,735 | 17,304,687 | 17,105,654 | |||||||||||||||||||||||||||||||||
Purchase of non-monetary assets of segment | 1,496,204 | 1,425,270 | 2,448,530 | — | — | — | — | — | — | 1,496,204 | 1,425,270 | 2,448,530 |
The Company’s revenues by geographic area are as follows:
For the year ended December 31, | For the periods ended At December 31, | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||
Peru | 558,227 | 554,072 | 458,384 | 660,057 | 646,217 | 620,263 | ||||||||||||||||||
Argentina | 616,270 | 496,546 | 404,795 | 813,472 | 950,595 | 890,167 | ||||||||||||||||||
USA | 1,140,006 | 858,630 | 680,179 | |||||||||||||||||||||
U.S.A. | 1,224,264 | 1,290,493 | 1,268,573 | |||||||||||||||||||||
Europe | 523,749 | 447,702 | 343,819 | 935,893 | 937,539 | 738,803 | ||||||||||||||||||
Colombia | 369,102 | 85,309 | 76,574 | 391,678 | 387,999 | 366,664 | ||||||||||||||||||
Brazil | 5,361,594 | 5,572,884 | 3,322,431 | |||||||||||||||||||||
Ecuador | 248,585 | 273,712 | 266,271 | |||||||||||||||||||||
Chile | 1,423,956 | 1,239,350 | 1,004,291 | 1,589,202 | 1,698,476 | 1,525,009 | ||||||||||||||||||
Others (*) | 1,086,934 | 841,719 | 687,471 | |||||||||||||||||||||
Asia Pacific and rest of Latin America | 868,756 | 1,166,622 | 712,191 | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total (**) | 5,718,244 | 4,523,328 | 3,655,513 | |||||||||||||||||||||
Income from ordinary activities | 12,093,501 | 12,924,537 | 9,710,372 | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Other operating income | 377,645 | 341,565 | 220,156 | |||||||||||||||||||||
|
|
|
The Company allocates revenues by geographic area based on the point of sale of the passenger ticket or cargo. Assets are composed primarily of aircraft and aeronautical equipment, which are used throughout the different countries, so it is not possible to assign a geographic area.
The Company has no customers that individually represent more than 10% of sales.
F-1-32
NOTE 6 –- CASH AND CASH EQUIVALENTS
As of December 31, 2011 | As of December 31, 2010 | As of December 31, 2014 | As of December 31, 2013 | |||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||
Cash on hand | 4,605 | 3,857 | 11,568 | 6,017 | ||||||||||||
Bank balances | 17,013 | 24,432 | 239,514 | 229,935 | ||||||||||||
Overnight | 154,666 | 508,781 | ||||||||||||||
|
| |||||||||||||||
Total Cash | 405,748 | 744,733 | ||||||||||||||
|
| |||||||||||||||
Cash equivalents | ||||||||||||||||
Time deposits | 196,455 | 406,143 | 382,895 | 660,821 | ||||||||||||
Mutual funds | 156,334 | 196,620 | 200,753 | 579,349 | ||||||||||||
|
|
|
| |||||||||||||
Total | 374,407 | 631,052 | ||||||||||||||
Total cash equivalents | 583,648 | 1,240,170 | ||||||||||||||
|
|
|
| |||||||||||||
Total cash and cash equivalents | 989,396 | 1,984,903 | ||||||||||||||
|
|
Cash and cash equivalents are denominated in the following currencies at December 31, 2011, and December 31, 2010:currencies:
Currency | As of December 31, 2011 | As of December 31, 2010 | As of December 31, 2014 | As of December 31, 2013 | ||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||
US Dollar | 158,313 | 194,212 | ||||||||||||||
Chilean peso (*) | 148,274 | 368,360 | ||||||||||||||
Euro | 5,688 | 7,844 | ||||||||||||||
Argentine peso | 20,020 | 11,230 | 44,697 | 59,018 | ||||||||||||
Brazilian real | 6,616 | 4,759 | 45,591 | 253,392 | ||||||||||||
Chilean peso (*) | 30,758 | 229,918 | ||||||||||||||
Colombian peso | 7,668 | 10,231 | 17,188 | 28,132 | ||||||||||||
Euro | 9,639 | 16,571 | ||||||||||||||
US Dollar | 745,214 | 1,200,828 | ||||||||||||||
Strong bolivar (**) | 63,236 | 162,809 | ||||||||||||||
Other currencies | 27,828 | 34,416 | 33,073 | 34,235 | ||||||||||||
|
|
|
| |||||||||||||
Total | 374,407 | 631,052 | 989,396 | 1,984,903 | ||||||||||||
|
|
|
|
(*) | The Company |
(**) | In Venezuela, effective 2003, the authorities decreed that all remittances abroad should be approved by the Currency Management Commission (CADIVI). Despite having free availability of bolivars in Venezuela, the Company has certain restrictions for freely remitting these funds outside Venezuela. |
During 2014, in accordance with the acceptance of the Company about the proposal Bolivarian Republic of Venezuela regarding the repatriation of foreign exchange through the so-called “request of acquisition of foreign exchange”, the Company has certain restrictions for freely remitting these funds outside Venezuela. At December 31, 2011modified the amount subjectexchange rate used in determining equivalence of United States Dollar in cash and cash equivalents held in Strong Bolivar, from 6.3 VEF/US$ to such restrictions in dollar terms is12.0 VEF/US$, which represented a loss by foreign exchange, amounting to the sum of ThUS$ 23,914 (ThUS$ 26,738 at December 31, 2010).61,021.
The Company has nodone significant non-monetarynon-cash transactions that should be reported.mainly with financial leases, which are detailed in Note 16 letter (d), additional information in numeral (iv) Financial leases.
Other inflows (outflows) of cash:
F-1-33
For the periods ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
ThUS$ | ThUS$ | ThUS$ | ||||||||||
Currency hedge | (1,153 | ) | — | — | ||||||||
Fuel hedge | (45,365 | ) | 11,413 | 14,237 | ||||||||
Hedging margin guarantees | (64,334 | ) | 88,925 | 12,057 | ||||||||
Guarantees | (86,006 | ) | (5,001 | ) | (13,974 | ) | ||||||
Fuel derivatives premiums | (7,075 | ) | (4,041 | ) | (20,479 | ) | ||||||
Bank commissions, taxes paid and other | (47,724 | ) | (14,535 | ) | (42,274 | ) | ||||||
|
|
|
|
|
| |||||||
Total Other inflows (outflows) Operation flow | (251,657 | ) | 76,761 | (50,433 | ) | |||||||
|
|
|
|
|
| |||||||
opening balance Cash and cash equivalents acquired companies | — | — | 263,986 | |||||||||
Amount paid by Squeeze Out TAM S.A. (*) | — | — | (167,589 | ) | ||||||||
Certificate of bank deposits | (17,399 | ) | 75,448 | (69,254 | ) | |||||||
|
|
|
|
|
| |||||||
Total Other inflows (outflows) Investment flow | (17,399 | ) | 75,448 | 27,143 | ||||||||
|
|
|
|
|
| |||||||
Aircraft Financing advances | 8,669 | 24,650 | (242,804 | ) | ||||||||
Credit card loan manager | 23,864 | (8,965 | ) | 76,280 | ||||||||
Settlement of derivative contracts | (42,962 | ) | (61,897 | ) | (50,827 | ) | ||||||
Breakage | — | (16,280 | ) | (7,405 | ) | |||||||
Other | (3,348 | ) | 479 | (6,323 | ) | |||||||
|
|
|
|
|
| |||||||
Total Other inflows (outflows) Financing flow | (13,777 | ) | (62,013 | ) | (231,079 | ) | ||||||
|
|
|
|
|
|
(*) | See Note 15.2 Business combination |
7.1. Financial instruments by category
As of December 31, 20112014
Assets | Held to maturity | Loans and accounts receivable | Hedging derivatives | Held to trading | Designated as at fair value through profit and loss on initial recognition | Total | ||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||
Cash and cash equivalents | — | 218,073 | — | 156,334 | — | 374,407 | ||||||||||||||||||
Other financial assets (*) | 37,867 | 119,717 | 31,319 | — | 60,733 | 249,636 | ||||||||||||||||||
Trade and other current accounts receivable | — | 537,406 | — | — | — | 537,406 | ||||||||||||||||||
Current accounts receivable from related parties | — | 838 | — | — | — | 838 | ||||||||||||||||||
Non-current accounts receivable | — | 7,491 | — | — | — | 7,491 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | 37,867 | 883,525 | 31,319 | 156,334 | 60,733 | 1,169,778 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Assets | Loans and receivables | Hedge derivatives | Held for trading | Initial designation as fair value through profit and loss | Total | |||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ||||||||||||||||
Cash and cash equivalents | 788,643 | — | — | 200,753 | 989,396 | |||||||||||||||
Other financial assets, current (*) | 103,866 | 2,161 | 41,111 | 503,263 | 650,401 | |||||||||||||||
Trade and others accounts receivable, current | 1,378,837 | — | — | — | 1,378,837 | |||||||||||||||
Accounts receivable from related entities, current | 308 | — | — | — | 308 | |||||||||||||||
Other financial assets, non current (*) | 84,495 | — | 491 | — | 84,986 | |||||||||||||||
Accounts receivable, non current | 30,465 | — | — | — | 30,465 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 2,386,614 | 2,161 | 41,602 | 704,016 | 3,134,393 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
Liabilities | Other Financial liabilities | Hedging derivatives | Held to trading | Total | ||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||
Other financial liabilities | 3,516,307 | 160,320 | 14,766 | 3,691,393 | ||||||||||||
Trade and other accounts payables | 531,481 | — | — | 531,481 | ||||||||||||
Current accounts payable to related parties | 367 | — | — | 367 | ||||||||||||
Non-current accounts payable | 307,965 | — | — | 307,965 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | 4,356,120 | 160,320 | 14,766 | 4,531,206 | ||||||||||||
|
|
|
|
|
|
|
|
Other | Held | |||||||||||||||
financial | Hedge | for | ||||||||||||||
Liabilities | liabilities | derivatives | trading | Total | ||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||
Other liabilities, current | 1,397,382 | 226,043 | 1,190 | 1,624,615 | ||||||||||||
Trade and others accounts payable, current | 1,489,396 | — | — | 1,489,396 | ||||||||||||
Accounts payable to related entities, current | 35 | — | — | 35 | ||||||||||||
Other financial liabilities, non-current | 7,360,685 | 28,327 | — | 7,389,012 | ||||||||||||
Accounts payable, non-current | 577,454 | — | — | 577,454 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | 10,824,952 | 254,370 | 1,190 | 11,080,512 | ||||||||||||
|
|
|
|
|
|
|
|
(*) | The value presented |
As of
At December 31, 20102013
Assets | Held to maturity | Loans and accounts receivable | Hedging derivatives | Held to trading | Designated as at fair value through profit and loss on initial recognition | Total | ||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||
Cash and cash equivalents | — | 434,432 | — | 196,620 | — | 631,052 | ||||||||||||||||||
Other financial assets (*) | 47,691 | 80,329 | 80,161 | — | 58,857 | 267,038 | ||||||||||||||||||
Trade and other current accounts receivable | — | 481,350 | — | — | — | 481,350 | ||||||||||||||||||
Current accounts receivable from related parties | — | 50 | — | — | — | 50 | ||||||||||||||||||
Non-current accounts receivable | — | 7,883 | — | — | — | 7,883 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | 47,691 | 1,004,044 | 80,161 | 196,620 | 58,857 | 1,387,373 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Initial designation | ||||||||||||||||||||
Loans | Held | as fair value | ||||||||||||||||||
and | Hedge | for | through | |||||||||||||||||
Assets | receivables | derivatives | trading | profit and loss | Total | |||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ||||||||||||||||
Cash and cash equivalents | 1,405,554 | — | — | 579,349 | 1,984,903 | |||||||||||||||
Other financial assets, current (*) | 83,136 | 48,415 | 2,073 | 576,320 | 709,944 | |||||||||||||||
Trade and others accounts receivable, current | 1,633,094 | — | — | — | 1,633,094 | |||||||||||||||
Accounts receivable from related entities, current | 628 | — | — | — | 628 | |||||||||||||||
Other financial assets, non current (*) | 64,783 | — | 506 | — | 65,289 | |||||||||||||||
Accounts receivable, non current | 100,775 | — | — | — | 100,775 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 3,287,970 | 48,415 | 2,579 | 1,155,669 | 4,494,633 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
F-1-34
Liabilities | Other Financial liabilities | Hedging derivatives | Held to trading | Total | ||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||
Other financial liabilities | 2,945,294 | 139,930 | 19,748 | 3,104,972 | ||||||||||||
Trade and other accounts payables | 500,694 | — | — | 500,694 | ||||||||||||
Current accounts payable to related parties | 184 | — | — | 184 | ||||||||||||
Non-current accounts payable | 368,372 | — | — | 368,372 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | 3,814,544 | 139,930 | 19,748 | 3,974,222 | ||||||||||||
|
|
|
|
|
|
|
|
Other | Held | |||||||||||||||
financial | Hedge | for | ||||||||||||||
Liabilities | liabilities | derivatives | trading | Total | ||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||
Other liabilities, current | 1,969,281 | 66,466 | 4,040 | 2,039,787 | ||||||||||||
Trade and others accounts payable, current | 1,557,736 | — | — | 1,557,736 | ||||||||||||
Accounts payable to related entities, current | 505 | — | — | 505 | ||||||||||||
Other financial liabilities, non-current | 7,803,588 | 54,906 | 1,491 | 7,859,985 | ||||||||||||
Accounts payable, non-current | 922,887 | — | — | 922,887 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | 12,253,997 | 121,372 | 5,531 | 12,380,900 | ||||||||||||
|
|
|
|
|
|
|
|
(*) | The value presented |
7.2. Financial instruments by currency
a) Assets
F-1-35
As of | As of | |||||||
December 31, | December 31, | |||||||
2014 | 2013 | |||||||
ThUS$ | ThUS$ | |||||||
Cash and cash equivalents | 989,396 | 1,984,903 | ||||||
Argentine peso | 44,697 | 59,018 | ||||||
Brazilian real | 45,591 | 253,392 | ||||||
Chilean peso | 30,758 | 229,918 | ||||||
Colombian peso | 17,188 | 28,132 | ||||||
Euro | 9,639 | 16,571 | ||||||
US Dollar | 745,214 | 1,200,828 | ||||||
Strong bolivar | 63,236 | 162,809 | ||||||
Other currencies | 33,073 | 34,235 | ||||||
Other financial as sets (current and non-current) | 735,387 | 775,233 | ||||||
Argentine peso | 45,169 | 1,007 | ||||||
Brazilian real | 500,875 | 577,973 | ||||||
Chilean peso | 26,881 | 27,555 | ||||||
Colombian peso | 406 | 2,550 | ||||||
Euro | 4,244 | 5,494 | ||||||
US Dollar | 156,687 | 159,563 | ||||||
Strong bolivar | 43 | 14 | ||||||
Other currencies | 1,082 | 1,077 | ||||||
Trade and other accounts receivable, current | 1,378,837 | 1,633,094 | ||||||
Argentine peso | 100,798 | 27,343 | ||||||
Brazilian real | 528,404 | 802,789 | ||||||
Chilean peso | 131,191 | 82,880 | ||||||
Colombian peso | 9,021 | 9,762 | ||||||
Euro | 38,764 | 21,479 | ||||||
US Dollar | 369,774 | 520,991 | ||||||
Strong bolivar | 4,895 | 2,353 | ||||||
Other currencies (*) | 195,990 | 165,497 | ||||||
Accounts receivable, non-current | 30,465 | 100,775 | ||||||
Brazilian real | 761 | 1,194 | ||||||
Chilean peso | 5,814 | 8,624 | ||||||
US Dollar | 23,734 | 90,755 | ||||||
Other currencies (*) | 156 | 202 | ||||||
Accounts receivable from related entities, current | 308 | 628 | ||||||
Brazilian real | 9 | 162 | ||||||
Chilean peso | 299 | 466 | ||||||
Total assets | 3,134,393 | 4,494,633 | ||||||
Argentine peso | 190,664 | 87,368 | ||||||
Brazilian real | 1,075,640 | 1,635,510 | ||||||
Chilean peso | 194,943 | 349,443 | ||||||
Colombian peso | 26,615 | 40,444 | ||||||
Euro | 52,647 | 43,544 | ||||||
US Dollar | 1,295,409 | 1,972,137 | ||||||
Strong bolivar | 68,174 | 165,176 | ||||||
Other currencies | 230,301 | 201,011 |
b) Liabilities
a) Assets | As of December 31, 2011 | As of December 31, 2010 | ||||||
ThUS$ | ThUS$ | |||||||
Cash and cash equivalents | 374,407 | 631,052 | ||||||
US Dollar | 158,313 | 194,212 | ||||||
Chilean Peso | 148,274 | 368,360 | ||||||
Euro | 5,688 | 7,844 | ||||||
Argentine Peso | 20,020 | 11,230 | ||||||
Brazilian Real | 6,616 | 4,759 | ||||||
Colombian Peso | 7,668 | 10,231 | ||||||
Others | 27,828 | 34,416 | ||||||
Other financial Assets | 249,636 | 267,038 | ||||||
US Dollar | 241,008 | 255,808 | ||||||
Brazilian Real | 3,066 | 6,731 | ||||||
Colombian Peso | 4,175 | 2,917 | ||||||
Others | 1,387 | 1,582 | ||||||
Trade and other current accounts receivable | 537,406 | 481,350 | ||||||
US Dollar | 354,972 | 361,570 | ||||||
Chilean Peso | 63,818 | 28,606 | ||||||
Euro | 8,266 | 8,429 | ||||||
Argentine Peso | 24,879 | 6,702 | ||||||
Brazilian Real | 35,467 | 31,329 | ||||||
Australian Dollar | 5,567 | 5,588 | ||||||
Colombian Peso | 34,583 | 27,156 | ||||||
Others | 9,854 | 11,970 | ||||||
Non-current accounts receivable | 7,491 | 7,883 | ||||||
US Dollar | 9 | 9 | ||||||
Chilean Peso | 7,422 | 7,864 | ||||||
Others | 60 | 10 | ||||||
Current accounts receivable from related parties | 838 | 50 | ||||||
US Dollar | 29 | 29 | ||||||
Chilean Peso | 809 | 21 | ||||||
Total financial assets | 1,169,778 | 1,387,373 | ||||||
US Dollar | 754,331 | 811,628 | ||||||
Chilean Peso | 220,323 | 404,851 | ||||||
Euro | 13,954 | 16,273 | ||||||
Argentine Peso | 44,899 | 17,932 | ||||||
Brazilian Real | 45,149 | 42,819 | ||||||
Australian Dollar | 5,567 | 5,588 | ||||||
Colombian Peso | 46,426 | 40,304 | ||||||
Others | 39,129 | 47,978 |
Liabilities information is detailed in the table within Note 3 section (c) Liquidity risk.
F-1-36
Financial risk management.
NOTE 8 –- TRADE AND OTHER ACCOUNTS RECEIVABLE CURRENT, AND NON-CURRENT ACCOUNTS RECEIVABLE
As of | As of | |||||||||||||||
December 31, | December 31, | |||||||||||||||
As of December 31, 2011 | As of December 31, 2010 | 2014 | 2013 | |||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||
Trade accounts receivable | 474,852 | 435,576 | 1,269,435 | 1,552,489 | ||||||||||||
Other accounts receivable | 90,570 | 75,734 | 210,909 | 251,982 | ||||||||||||
|
|
|
| |||||||||||||
Total trade and other accounts receivable | 565,422 | 511,310 | 1,480,344 | 1,804,471 | ||||||||||||
Less: Allowance for impairment loss | (20,525 | ) | (22,077 | ) | (71,042 | ) | (70,602 | ) | ||||||||
|
|
|
| |||||||||||||
Total net trade and accounts receivable | 544,897 | 489,233 | 1,409,302 | 1,733,869 | ||||||||||||
Less: non-current portion – accounts receivable | (7,491 | ) | (7,883 | ) | (30,465 | ) | (100,775 | ) | ||||||||
|
|
|
| |||||||||||||
Trade and other accounts receivable, current | 537,406 | 481,350 | 1,378,837 | 1,633,094 | ||||||||||||
|
|
|
|
The fair value of trade and other accounts receivable does not differ significantly from the book value.
There are overdue accounts receivable which are not impaired. MaturityThe maturity of these accounts at the end of each period is as follows:
As of December 31, 2011 | As of December 31, 2010 | |||||||
ThUS$ | ThUS$ | |||||||
Up to 3 months | 17,138 | 12,506 | ||||||
Between 3 and 6 months | 6,256 | 11,114 | ||||||
|
|
|
| |||||
Total | 23,394 | 23,620 | ||||||
|
|
|
|
The amounts of individually impaired trade and other accounts receivable are as follows:
As of | As of | |||||||
December 31, | December 31, | |||||||
2014 | 2013 | |||||||
ThUS$ | ThUS$ | |||||||
Day | 1,088,364 | 1,378,226 | ||||||
Matured accounts receivable, but not impaired | ||||||||
Expired from 1 to 90 days | 83,599 | 72,417 | ||||||
Expired from 91 to 180 days | 11,521 | 11,547 | ||||||
More than 180 days overdue (*) | 14,909 | 19,697 | ||||||
|
|
|
| |||||
Total matured accounts receivable, but not impaired | 110,029 | 103,661 | ||||||
|
|
|
| |||||
Matured accounts receivable and impaired Judicial, pre-judicial collection and protested documents | 53,956 | 19,630 | ||||||
Debtor under pre-judicial collection process and portfolio sensitization | 17,086 | 50,972 | ||||||
|
|
|
| |||||
Total matured accounts receivable and impaired | 71,042 | 70,602 | ||||||
|
|
|
| |||||
Total | 1,269,435 | 1,552,489 | ||||||
|
|
|
|
As of December 31, 2011 | As of December 31, 2010 | |||||||
ThUS$ | ThUS$ | |||||||
Judicial and pre-judicial collection | 9,626 | 10,586 | ||||||
Debtors under pre-judicial collection process | 4,306 | 5,259 | ||||||
|
|
|
| |||||
Total | 13,932 | 15,845 | ||||||
|
|
|
|
(*) | Value of this segment corresponds primarily to accounts receivable that were evaluated in their ability to recover, therefore not requiring a provision. |
Currency balances that make up the trade receivables, non-currentTrade and other accounts receivable and non-current accounts receivables at December 31, 2011 and December 31, 2010, are as follows:receivable:
As of December 31, 2011 | As of December 31, 2010 | |||||||
Currency | ThUS$ | ThUS$ | ||||||
US Dollar | 354,981 | 361,579 | ||||||
Chilean Peso | 71,240 | 36,470 | ||||||
Euro | 8,266 | 8,429 | ||||||
Argentine Peso | 24,879 | 6,702 | ||||||
Brazilian Real | 35,467 | 31,329 | ||||||
Australian Dollar | 5,567 | 5,588 | ||||||
Colombian peso | 34,583 | 27,156 | ||||||
Other | 9,914 | 11,980 | ||||||
|
|
|
| |||||
Total | 544,897 | 489,233 | ||||||
|
|
|
|
F-1-37
As of | As of | |||||||
December 31, | December 31, | |||||||
Currency | 2014 | 2013 | ||||||
ThUS$ | ThUS$ | |||||||
Argentine Peso | 100,798 | 27,343 | ||||||
Brazilian Real | 529,165 | 803,983 | ||||||
Chilean Peso | 137,005 | 91,504 | ||||||
Colombian peso | 9,021 | 9,762 | ||||||
Euro | 38,764 | 21,479 | ||||||
US Dollar | 393,508 | 611,746 | ||||||
Strong bolivar | 4,895 | 2,353 | ||||||
Other currency (*) | 196,146 | 165,699 | ||||||
|
|
|
| |||||
Total | 1,409,302 | 1,733,869 | ||||||
|
|
|
| |||||
(*) Other currencies | ||||||||
Australian Dollar | 15,243 | 26,198 | ||||||
Chinese Yuan | 35,626 | 22,887 | ||||||
Danish Krone | 8,814 | 6,899 | ||||||
Pound Sterling | 33,624 | 15,256 | ||||||
Indian Rupee | 1,887 | 5,343 | ||||||
Japanese Yen | 4,635 | 10,332 | ||||||
Norwegian Kroner | 16,516 | 14,970 | ||||||
Swiss Franc | 5,701 | 6,645 | ||||||
Korean Won | 25,203 | 16,929 | ||||||
New Taiwanese Dollar | 10,323 | 9,670 | ||||||
Other currencies | 38,574 | 30,570 | ||||||
|
|
|
| |||||
Total | 196,146 | 165,699 | ||||||
|
|
|
|
The Company records allowances when there is evidence of impairment of trade receivables. The criteria used to determine that there is objective evidence of impairment losses are the maturity of the portfolio, specific acts of damage (default) and specific market signals.
Maturity | Impairment | |||
Judicial and pre-judicial collection | 100 | % | ||
Over 1 year | 100 | % | ||
Between 6 and 12 months | 50 | % |
The movement
Movement in the allowance for impairment loss of trade accountsTrade and other accounts receivables between January 01, 2010 and December 31, 2011 is as follows:receivables:
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
Addition for | Differences | |||||||||||||||||||||||
Opening | (Increase) | business | by | Closing | ||||||||||||||||||||
balance | Write-offs | Decrease | combination | subsidiaries | balance | |||||||||||||||||||
Periods | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ||||||||||||||||||
From January 1 to December 31, 2012 | (20,525 | ) | 3,312 | (2,857 | ) | (54,511 | ) | (922 | ) | (75,503 | ) | |||||||||||||
From January 1 to December 31, 2013 | (75,503 | ) | 9,928 | (5,027 | ) | — | — | (70,602 | ) | |||||||||||||||
From January 1 to December 31, 2014 | (70,602 | ) | 6,864 | (7,304 | ) | — | — | (71,042 | ) |
Once pre-judicial and judicial collection efforts are exhausted, the assets are written off against the allowance. The Company only uses the allowance method rather than direct write-off, to ensure control.
Historic and current re-negotiations are not relevant and the policy is to analyze case by case in order to classify them according to the existence of risk, determining whether it is appropriate to re-classifyreclassify accounts to pre-judicial recovery. If such re-classification is justified, an allowance is made for the account, whether overdue or falling due.
The maximum credit-risk exposure at the date of presentation of the information is the fair value of each one of the categories of accounts receivable indicated above.
As of December 31, 2014 | As of December 31, 2013 | |||||||||||||||||||||||||||||||||||||||||||||||
Gross exposure | Gross | Exposure net | Gross exposure | Gross | Exposure net | |||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2011 | As of December 31, 2010 | according to | impaired | of risk | according to | Impaired | of risk | |||||||||||||||||||||||||||||||||||||||||
Gross exposure | Gross Impaired exposure | Exposure net of risk concentrations | Gross exposure | Gross Impaired exposure | Exposure net of risk concentrations | balance | exposure | concentrations | balance | exposure | concentrations | |||||||||||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||||||||||||||||||||
Trade accounts receivable | 474,852 | (20,525 | ) | 454,327 | 435,576 | (22,077 | ) | 413,499 | 1,269,435 | (71,042 | ) | 1,198,393 | 1,552,489 | (70,602 | ) | 1,481,887 | ||||||||||||||||||||||||||||||||
Other accounts receivable | 90,570 | — | 90,570 | 75,734 | — | 75,734 | 210,909 | — | 210,909 | 251,982 | — | 251,982 |
There are no relevant guarantees covering credit risk and these are valued when they are settled; no materially significant direct guarantees exist. Existing guarantees, if appropriate, are made through IATA.
F-1-38
NOTE 9 –- ACCOUNTS RECEIVABLE FROM/PAYABLE TO RELATED ENTITIES
The accounts receivable from and payable to related entities as of December 31, 2011 and December 31, 2010, respectively, are as follows:(a) Accounts Receivable
Tax No. | Related party | Relationship | Country of origin | Currency | As of December 31, 2014 | As of December 31, 2013 | ||||||||||||||
ThUS$ | ThUS$ | |||||||||||||||||||
78.591.370-1 | Bethia S.A. and Subsidiaries | Others related parties | Chile | CLP | 284 | 441 | ||||||||||||||
79.773.440-1 | Transportes San Felipe S.A. | Others related parties | Chile | CLP | — | 1 | ||||||||||||||
87.752.000-5 | Granja Marina Tornagaleones S.A. | Others related parties | Chile | CLP | 15 | 24 | ||||||||||||||
Foreign | Made In Everywhere Repr. Com. Distr. Ltda. | Others related parties | Brazil | BRL | — | 2 | ||||||||||||||
Foreign | TAM Aviação Executiva e Taxi Aéreo S.A. | Others related parties | Brazil | BRL | — | 14 | ||||||||||||||
Foreign | Prisma Fidelidade S.A. | Joint Venture | Brazil | BRL | 9 | 146 | ||||||||||||||
|
|
|
| |||||||||||||||||
Total current assets | 308 | 628 | ||||||||||||||||||
|
|
|
|
(b) Accounts payable
Tax No. | Related party | Relationship | Country of origin | As of December 31, 2011 | As of December 31, 2010 | Currency | Transaction | Nature of transaction | ||||||||||||||||
ThUS$ | ThUS$ | |||||||||||||||||||||||
96.810.370-9 | Inversiones Costa Verde Ltda y CPA | Controlling shareholder | Chile | 19 | — | CLP | 30 to 45 Days | Monetary | ||||||||||||||||
96.778.310-2 | Concesionaria Chucumata S.A. | Associate | Chile | — | 4 | CLP | 30 to 45 Days | Monetary | ||||||||||||||||
96.921.070-3 | Austral Sociedad Concesionaria S.A. | Associate | Chile | — | 2 | CLP | 30 to 45 Days | Monetary | ||||||||||||||||
78.591.370-1 | Bethia S.A. y Filiales | Others related parties | Chile | 758 | — | CLP | 30 to 45 Days | Monetary | ||||||||||||||||
87.752.000-5 | Granja Marina Tornagaleones S.A. | Others related parties | Chile | 32 | 15 | CLP | 30 to 45 Days | Monetary | ||||||||||||||||
96.812.280-0 | San Alberto S.A. y Filiales | Others related parties | Chile | 29 | 29 | US$ | 30 to 45 Days | Monetary | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total current assets | 838 | 50 | ||||||||||||||||||||||
|
|
|
|
Tax No. | Related party | Relationship | Country of origin | As of December 31, 2011 | As of December 31, 2010 | Currency | Transaction | Nature of transaction | Related party | Relationship | Country of origin | Currency | As of December 31, 2014 | As of December 31, 2013 | ||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||||||||||||||||||
96.847.880-K | Lufthansa Lan Technical Training S.A. | Associate | Chile | — | 74 | CLP | 30 to 45 Days | Monetary | Lufthansa Lan Technical Training S.A. | Associate | Chile | US$ | — | 187 | ||||||||||||||||||||||||
96.847.880-K | Lufthansa Lan Technical Training S.A. | Associate | Chile | 147 | 110 | US$ | 30 to 45 Days | Monetary | ||||||||||||||||||||||||||||||
96.921.070-3 | Austral Sociedad Concesionaria S.A. | Associate | Chile | 2 | — | CLP | 30 to 45 Days | Monetary | ||||||||||||||||||||||||||||||
65.216.000-K | Comunidad Mujer | Other related parties | Chile | CLP | 2 | — | ||||||||||||||||||||||||||||||||
78.591.370-1 | Bethia S.A. y Filiales | Other related parties | Chile | 116 | — | CLP | 30 to 45 Days | Monetary | Bethia S.A. and Subsidiaries | Other related parties | Chile | CLP | 6 | 14 | ||||||||||||||||||||||||
Foreign | Inversora Aeronaútica Argentina | Other related parties | Argentina | 102 | — | US$ | 30 to 45 Days | Monetary | Inversora Aeronaútica Argentina | Other related parties | Argentina | US$ | 27 | 304 | ||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||
Total current liabilities | 367 | 184 | Total current liabilities | 35 | 505 | |||||||||||||||||||||||||||||||||
|
|
|
|
Transactions between related parties have been carried out on free-trade conditions between interested and duly-informed parties.
F-1-39
The transaction times are between 30 and 45 days, and the nature of settlement of the transactions is monetary.
The inventories at December 31, 2011 and December 31, 2010 respectively, are detailed below:
As of December 31, 2011 | As of December 31, 2010 | As of December 31, 2014 | As of December 31, 2013 | |||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||
Technical stock | 57,836 | 40,625 | 229,313 | 190,202 | ||||||||||||
Non-technical stock | 14,951 | 12,568 | 36,726 | 40,826 | ||||||||||||
|
|
|
| |||||||||||||
Total production suppliers | 266,039 | 231,028 | ||||||||||||||
72,787 | 53,193 |
|
| |||||||||||||
|
|
The items included in this heading are spare parts and materials that will be used mainly in consumption in in-flight and maintenance services (providedprovided to the Company and third parties),parties, which are valued at average cost, net of provision for obsolescence that as of December 31, 20112014 amounts to ThUS$ 1,6852,982 (ThUS$ 3,0751,757 as of December 31, 2010)2013). The resulting amounts do not exceed the respective net realizable values.
As of December 31, 2011,2014, the Company recorded ThUS$ 41,213189,864 (ThUS$ 32,915160,068 as of December 31, 2010)2013 and ThUS$ 127,989 as of December 31, 2012) within the income statement, mainly due to in-flight consumption and maintenance, which forms part of costCost of sales.
During 2014 no reversals of write-downs resulting from an increase in net realizable value.
NOTE 11 –- OTHER FINANCIAL ASSETS
The composition of otherOther financial assets is as follows:
As of December 31, 2011 | As of December 31, 2010 | |||||||
ThUS$ | ThUS$ | |||||||
Current | ||||||||
(a) Other financial assets | 196,484 | 165,712 | ||||||
(b) Hedging asset | 31,319 | 79,739 | ||||||
|
|
|
| |||||
Total Current | 227,803 | 245,451 | ||||||
|
|
|
| |||||
Non-current | ||||||||
(a) Other financial assets | 21,833 | 21,165 | ||||||
(b) Hedging assets | — | 422 | ||||||
|
|
|
| |||||
Total non-current | 21,833 | 21,587 | ||||||
|
|
|
|
F-1-40
Current Assets | Non-current assets | Total Assets | ||||||||||||||||||||||
As of December 31, 2014 | As of December 31, 2013 | As of December 31, 2014 | As of December 31, 2013 | As of December 31, 2014 | As of December 31, 2013 | |||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||
(a) Other financial assets | ||||||||||||||||||||||||
Private investment funds | 480,777 | 544,182 | — | — | 480,777 | 544,182 | ||||||||||||||||||
Deposits in guarantee (aircraft) | 8,458 | 51,879 | 70,155 | 49,893 | 78,613 | 101,772 | ||||||||||||||||||
Certificate of deposit (CBD) | 18,293 | 2,374 | — | — | 18,293 | 2,374 | ||||||||||||||||||
Time deposits | — | 28,181 | — | — | — | 28,181 | ||||||||||||||||||
Guarantees for margins of derivatives | 92,556 | 28,157 | — | — | 92,556 | 28,157 | ||||||||||||||||||
Deposits in guarantee (loan) | — | — | 11,116 | 11,753 | 11,116 | 11,753 | ||||||||||||||||||
Other investments | 4,193 | 1,583 | 491 | 506 | 4,684 | 2,089 | ||||||||||||||||||
Domestic and foreign bonds | 41,111 | 351 | — | — | 41,111 | 351 | ||||||||||||||||||
Other guarantees given | 2,852 | 4,822 | 3,224 | 3,137 | 6,076 | 7,959 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Subtotal of other financial assets | 648,240 | 661,529 | 84,986 | 65,289 | 733,226 | 726,818 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
(b) Hedging assets | ||||||||||||||||||||||||
Interest accrued since the last payment date of Cross currency swap | 377 | 483 | — | — | 377 | 483 | ||||||||||||||||||
Fair value of interest rate derivatives | 1 | 6 | — | — | 1 | 6 | ||||||||||||||||||
Fair value of foreign currency derivatives (1) | — | 32,058 | — | — | — | 32,058 | ||||||||||||||||||
Fair value of fuel price derivatives | 1,783 | 15,868 | — | — | 1,783 | 15,868 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Subtotal of hedging assets | 2,161 | 48,415 | — | — | 2,161 | 48,415 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Other Financial Assets | 650,401 | 709,944 | 84,986 | 65,289 | 735,387 | 775,233 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Other financial assets as of December 31, 2011 and December 31, 2010, respectively, are as follows:
As of December 31, 2011 | As of December 31, 2010 | |||||||
ThUS$ | ThUS$ | |||||||
Current | ||||||||
Private investment Funds | 60,733 | 58,857 | ||||||
Domestic and Foreign bonds | 37,359 | 47,184 | ||||||
Guarantees for margins of derivatives | 79,171 | 39,868 | ||||||
Deposits in guarantee (aircraft) | 11,657 | 12,030 | ||||||
Other guarantees given | 7,564 | 7,773 | ||||||
|
|
|
| |||||
Total current | 196,484 | 165,712 | ||||||
|
|
|
| |||||
Non-current | ||||||||
Deposits in guarantee (aircraft) | 15,498 | 15,000 | ||||||
Other guarantees given | 5,827 | 5,658 | ||||||
Other investments | 508 | 507 | ||||||
|
|
|
| |||||
Total non-current | 21,833 | 21,165 | ||||||
|
|
|
| |||||
Total other financial assets | 218,317 | 186,877 | ||||||
|
|
|
|
Hedging assets as of December 31, 2011 and December 31, 2010, are as follows:
As of December 31, 2011 | As of December 31, 2010 | |||||||
ThUS$ | ThUS$ | |||||||
Current | ||||||||
Interest accrued since last payment date of currency Swap | — | 3,691 | ||||||
Cash-flow hedge of interest-rate risk | 73 | — | ||||||
Cash-flow hedge of currency risk | 631 | 30,234 | ||||||
Cash-flow hedge of fuel-price risk | 30,615 | 45,814 | ||||||
|
|
|
| |||||
Total current | 31,319 | 79,739 | ||||||
|
|
|
| |||||
Non-current | ||||||||
Cash-flow hedge of interest-rate risk | — | 422 | ||||||
|
|
|
| |||||
Total non-current | — | 422 | ||||||
|
|
|
| |||||
Total hedging assets | 31,319 | 80,161 | ||||||
|
|
|
|
Foreign currency derivatives include the fair value of Forward and Cross Currency Swaps and forward exchange contracts.
The types of derivative hedging contracts maintained by the Company at the end of each yearperiod are presented in Note 20.
F-1-41
18.
NOTE 12 –- OTHER NON-FINANCIAL ASSETS
The composition of otherOther non-financial assets is as follows:
As of December 31, 2011 | As of December 31, 2010 | |||||||
ThUS$ | ThUS$ | |||||||
Current | ||||||||
a) Advance Payments | 25,501 | 17,648 | ||||||
b) Other assets | 1,159 | 1,172 | ||||||
|
|
|
| |||||
Total current | 26,660 | 18,820 | ||||||
|
|
|
| |||||
Non-Current | ||||||||
a) Advance Payments | 11,189 | 8,752 | ||||||
b) Other assets | 46,974 | 23,756 | ||||||
|
|
|
| |||||
Total non-current | 58,163 | 32,508 | ||||||
|
|
|
|
Current assets | Non-current assets | Total Assets | ||||||||||||||||||||||
As of December 31, 2014 | As of December 31, 2013 | As of December 31, 2014 | As of December 31, 2013 | As of December 31, 2014 | As of December 31, 2013 | |||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||
(a) Advance payments | ||||||||||||||||||||||||
Aircraft leases | 26,039 | 28,555 | 26,201 | 17,332 | 52,240 | 45,887 | ||||||||||||||||||
Aircraft insurance and other | 12,160 | 13,180 | — | — | 12,160 | 13,180 | ||||||||||||||||||
Others | 17,970 | 14,657 | 36,450 | 38,557 | 54,420 | 53,214 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Subtotal advance payments | 56,169 | 56,392 | 62,651 | 55,889 | 118,820 | 112,281 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
(b) Other assets | ||||||||||||||||||||||||
Aircraft maintenance reserve (*) | 31,108 | 152,797 | 123,588 | 79,012 | 154,696 | 231,809 | ||||||||||||||||||
Sales tax | 155,795 | 120,215 | 64,652 | 65,936 | 220,447 | 186,151 | ||||||||||||||||||
Other taxes | 3,513 | 5,556 | — | — | 3,513 | 5,556 | ||||||||||||||||||
Contributions to Société Internationale de Télécommunications Aéronautiques (“SITA”) | 599 | 657 | 453 | 515 | 1,052 | 1,172 | ||||||||||||||||||
Judicial deposits | — | — | 90,450 | 70,380 | 90,450 | 70,380 | ||||||||||||||||||
Others | 687 | — | 1,019 | 544 | 1,706 | 544 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Subtotal other assets | 191,702 | 279,225 | 280,162 | 216,387 | 471,864 | 495,612 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Other Non - Financial Assets | 247,871 | 335,617 | 342,813 | 272,276 | 590,684 | 607,893 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Advance paymentsThese amounts are calculated based on performance measures, such as flight hours or cycles, are payable periodically (usually monthly) and are contractually required to be repaid to the lessee upon the completion of the required maintenance of the leased aircraft. At the end of the lease term, any unused maintenance reserves are either returned to the Company in cash or used to offset amounts that we may owe the lessor as a maintenance adjustment.
In some cases (5 lease agreements), if the maintenance cost incurred by LATAM is less than the corresponding maintenance reserves, the lessor is entitled to retain those excess amounts at the time the heavy maintenance is performed. The Company periodically reviews its maintenance reserves for each of its leased aircraft to ensure that they will be recovered, and recognizes an expense if any such amounts are less than probable of being returned. Since the acquisition of TAM in June 2012, the cost of aircraft maintenance has been higher than the related maintenance reserves for all aircraft.
As of December 31, 2011 as of2014, LATAM had ThUS$ 154,696 in maintenance reserves (ThUS$ 231,809 at December 31, 2010 are as follows:
As of December 31, 2011 | As of December 31, 2010 | |||||||
ThUS$ | ThUS$ | |||||||
Current | ||||||||
Aircraft insurance and other | 7,954 | 6,459 | ||||||
Aircraft leases | 13,196 | 7,343 | ||||||
Handling and ground handling services | 2,941 | — | ||||||
Others | 1,410 | 3,846 | ||||||
|
|
|
| |||||
Total current | 25,501 | 17,648 | ||||||
|
|
|
| |||||
Non-Current | ||||||||
Aircraft leases | 11,189 | 4,984 | ||||||
Handling and ground handling services | — | 2,971 | ||||||
Others | — | 797 | ||||||
|
|
|
| |||||
Total non-current | 11,189 | 8,752 | ||||||
|
|
|
| |||||
Total advance payments | 36,690 | 26,400 | ||||||
|
|
|
|
F-1-42
Other assets as2013), corresponding to 12 aircraft out of a total fleet of 327 (21 aircraft out of a total fleet of 339 at December 31, 2011, and December 31, 20102013). All of the Company’s aircraft leases containing provisions for maintenance reserves will expire fully by 2017.
Aircraft maintenance reserves are classified as follows:current or non-current depending on the dates when the related maintenance is expected to be performed (Note 2.23).
As of December 31, 2011 | As of December 31, 2010 | |||||||
ThUS$ | ThUS$ | |||||||
Current | ||||||||
Others | 1,159 | 1,172 | ||||||
|
|
|
| |||||
Total current | 1,159 | 1,172 | ||||||
|
|
|
| |||||
Non-current | ||||||||
Recoverable taxes | 42,958 | 23,343 | ||||||
Others | 4,016 | 413 | ||||||
|
|
|
| |||||
Total non-current | 46,974 | 23,756 | ||||||
|
|
|
| |||||
Total other assets | 48,133 | 24,928 | ||||||
|
|
|
|
NOTE 13 – NON-CURRENT ASSETS (OR DISPOSAL GROUPS) CLASSIFIED AS HELD FOR SALE
Non-current assets and disposal groups held for sale as of December 31, 2011, and December 31, 2010 are as follows:
As of December 31, 2011 | As of December 31, 2010 | |||||||
ThUS$ | ThUS$ | |||||||
Engines | 2,204 | 2,204 | ||||||
Inventories on consignment | 527 | 748 | ||||||
Aircraft | 1,537 | 1,537 | ||||||
Scrapped aircraft | 365 | 970 | ||||||
Rotables | 28 | 38 | ||||||
|
|
|
| |||||
Total | 4,661 | 5,497 | ||||||
|
|
|
|
During 2011, sales were made of inventories held on consignment of the Boeing 737-200 fleet.
During the financial year 2010, sales were made of rotables, inventories held on consignment and three engines, all from the Boeing 737-200 fleet.
Item balances are shown net of provision, which as of December 31, 2011 amounted to ThUS$ 5,386 (ThUS$ 5,212 at December 31, 2010).
The Company has no discontinued operations as of December 31, 2011.
F-1-43
NOTE 14 –- INVESTMENTS IN SUBSIDIARIES
(a) Investments in subsidiaries
The Company has investments in companies recognized as investments in subsidiaries. All the companies defined as subsidiaries have been consolidated within the financial statements of LanLATAM Airlines Group S.A. and Subsidiaries. The consolidation also includes special-purpose entities and private investment funds.
The following is a summaryDetail of significant subsidiaries and summarized financial information with respect to the sum of the financial statements of subsidiary companies, special-purpose entities and private investment funds that have been consolidated:
As of December 31, 2011information:
Assets | Liabilities | |||||||
ThUS$ | ThUS$ | |||||||
Current | 493,662 | 618,360 | ||||||
Non-current | 1,498,840 | 917,171 | ||||||
|
|
|
| |||||
Total | 1,992,502 | 1,535,531 | ||||||
|
|
|
|
Name of significant subsidiary | Country of incorporation | Functional currency | As of December 31, 2014 % | Ownership As of December 31, 2013 % | As of December 31, 2012 % | |||||||||||
Lan Perú S.A. | Peru | US$ | 69.97858 | 69.97858 | 69.97858 | |||||||||||
Lan Cargo S.A. | Chile | US$ | 99.89803 | 99.89803 | 99.89803 | |||||||||||
Lan Argentina S.A. | Argentina | ARS | 94.99055 | 94.99055 | 94.99055 | |||||||||||
Transporte Aéreo S.A. | Chile | US$ | 99.89804 | 99.89804 | 99.89804 | |||||||||||
Aerolane Líneas Aéreas Nacionales del Ecuador S.A. | Ecuador | US$ | 100.00000 | 71.94990 | 71.94990 | |||||||||||
Aerovías de Integración Regional, AIRES S.A. | Colombia | COP | 99.01646 | 99.01646 | 98.21089 | |||||||||||
TAM S.A. | Brazil | BRL | 99.99938 | 99.99938 | 99.99938 |
As of December 31, 2010
Assets | Liabilities | |||||||
ThUS$ | ThUS$ | |||||||
Current | 442,743 | 565,606 | ||||||
Non-current | 1,388,194 | 773,927 | ||||||
|
|
|
| |||||
Total | 1,830,937 | 1,339,533 | ||||||
|
|
|
| |||||
For the year ended December 31, | ||||||||
2011 | 2010 | |||||||
ThUS$ | ThUS$ | |||||||
Total operating revenues | 2,619,157 | 1,931,998 | ||||||
Total expenses | (2,577,685 | ) | (1,849,438 | ) | ||||
|
|
|
| |||||
Total net income | 41,472 | 82,560 | ||||||
|
|
|
|
SignificantThe consolidated subsidiaries detailed as of December 31, 2011
| ||||||||||||
| ||||||||||||
| ||||||||||||
| ||||||||||||
| ||||||||||||
| ||||||||||||
|
F-1-44
do not have significant restrictions for transferring funds to controller.
Summary financial information of significant subsidiaries
Statement of financial position as of December 31, 2011 | Results for the year ended December 31, 2011 | |||||||||||||||||||||||||||||||
Name of significant subsidiary | Total Assets | Current Assets | Non-current Assets | Total Liabilities | Current Liabilities | Non-current Liabilities | Revenue | Net Income | ||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||||||||
Lan Perú S.A. | 139,888 | 124,485 | 15,403 | 128,979 | 128,025 | 954 | 916,861 | 920 | ||||||||||||||||||||||||
Lan Cargo S.A. | 765,829 | 188,937 | 576,892 | 343,799 | 122,450 | 221,349 | 258,298 | 57,140 | ||||||||||||||||||||||||
Lan Argentina S.A. | 136,579 | 108,561 | 28,018 | 114,037 | 112,555 | 1,482 | 438,137 | (1,972 | ) | |||||||||||||||||||||||
Transporte Aéreo S.A. | 348,943 | 237,627 | 111,316 | 116,663 | 26,332 | 90,331 | 370,697 | 26,146 | ||||||||||||||||||||||||
Aerolane Líneas Aéreas Nacionalesdel Ecuador S.A. | 71,598 | 42,369 | 29,229 | 61,102 | 58,726 | 2,376 | 278,039 | 2,303 | ||||||||||||||||||||||||
Aerovías de Integración Regional, AIRES S.A. | 134,983 | 76,936 | 58,047 | 80,271 | 70,112 | 10,159 | 282,493 | (25,860 | ) |
Significant subsidiaries detailed as of December 31, 2010
Statement of financial position as of December 31, 2014 | Results for the period ended December 31, 2014 | |||||||||||||||||||||||||||||||
Name of significant subsidiary | Total Assets | Current Assets | Non-current Assets | Total Liabilities | Current Liabilities | Non-current Liabilities | Revenue | Net Income | ||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||||||||
Lan Perú S.A. | 239,470 | 214,245 | 25,225 | 228,395 | 226,784 | 1,611 | 1,134,289 | 1,058 | ||||||||||||||||||||||||
Lan Cargo S.A. | 575,979 | 250,174 | 325,805 | 234,772 | 119,111 | 115,661 | 267,578 | (17,905 | ) | |||||||||||||||||||||||
Lan Argentina S.A. | 233,142 | 206,503 | 26,639 | 201,168 | 198,593 | 2,575 | 439,929 | (17,864 | ) | |||||||||||||||||||||||
Transporte Aéreo S.A. | 367,570 | 80,090 | 287,480 | 147,278 | 59,805 | 87,473 | 364,580 | (19,001 | ) | |||||||||||||||||||||||
Aerolane Líneas Aéreas Nacionales del Ecuador S.A. | 126,472 | 78,306 | 48,166 | 116,040 | 111,718 | 4,322 | 256,925 | (20,193 | ) | |||||||||||||||||||||||
Aerovías de Integración Regional, AIRES S.A. | 131,324 | 38,751 | 92,573 | 61,736 | 49,577 | 12,159 | 392,433 | (81,033 | ) | |||||||||||||||||||||||
TAM S.A. (*) | 6,817,698 | 1,921,316 | 4,896,382 | 5,809,529 | 2,279,110 | 3,530,419 | 6,628,432 | 171,655 | ||||||||||||||||||||||||
Statement of financial position as of December 31, 2013 | Results for the period ended December 31, 2013 | |||||||||||||||||||||||||||||||
Name of significant subsidiary | Total Assets | Current Assets | Non-current Assets | Total Liabilities | Current Liabilities | Non-current Liabilities | Revenue | Net Income | ||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||||||||
Lan Perú S.A. | 263,516 | 237,577 | 25,939 | 252,109 | 250,699 | 1,410 | 1,173,391 | 3,755 | ||||||||||||||||||||||||
Lan Cargo S.A. | 772,640 | 360,733 | 411,907 | 413,527 | 233,363 | 180,164 | 304,060 | 3,685 | ||||||||||||||||||||||||
Lan Argentina S.A. | 214,426 | 192,590 | 21,836 | 205,672 | 203,567 | 2,105 | 500,128 | (13,311 | ) | |||||||||||||||||||||||
Transporte Aéreo S.A. | 359,693 | 69,459 | 290,234 | 120,399 | 37,049 | 83,350 | 400,518 | (4,129 | ) | |||||||||||||||||||||||
Aerolane Líneas Aéreas Nacionales del Ecuador S.A. | 94,160 | 58,867 | 35,293 | 93,535 | 89,802 | 3,733 | 299,138 | (40,295 | ) | |||||||||||||||||||||||
Aerovías de Integración Regional, AIRES S.A. | 188,518 | 69,591 | 118,927 | 36,009 | 24,936 | 11,073 | 335,854 | (63,359 | ) | |||||||||||||||||||||||
TAM S.A. (*) | 8,695,458 | 2,372,047 | 6,323,411 | 7,983,671 | 3,249,581 | 4,734,090 | 6,791,104 | (458,475 | ) |
(*) | ||||||||||||||
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| Subsidiaries. |
Summary financial information of significant subsidiaries
Statement of financial position as of December 31, 2010 | Results for the year ended December 31, 2010 | |||||||||||||||||||||||||||||||
Name of significant subsidiary | Total Assets | Current Assets | Non-current Assets | Total Liabilities | Current Liabilities | Non-current Liabilities | Revenue | Net Income | ||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||||||||
Lan Perú S.A. | 124,761 | 113,579 | 11,182 | 114,771 | 113,750 | 1,021 | 759,704 | 1,524 | ||||||||||||||||||||||||
Lan Cargo S.A. | 737,550 | 183,877 | 553,673 | 340,082 | 103,018 | 237,064 | 209,512 | 59,285 | ||||||||||||||||||||||||
Lan Argentina S.A. | 113,168 | 84,751 | 28,417 | 88,286 | 87,420 | 866 | 381,168 | 2,984 | ||||||||||||||||||||||||
Transporte Aéreo S.A. | 329,190 | 215,575 | 113,615 | 123,056 | 28,777 | 94,279 | 296,543 | 31,227 | ||||||||||||||||||||||||
Aerolane Líneas Aéreas Nacionales del Ecuador S.A. | 48,416 | 24,561 | 23,855 | 51,723 | 38,299 | 13,424 | 235,877 | 1,011 |
F-1-45
NOTE 15 – EQUITY ACCOUNTED INVESTMENTS
The following summarized financial information is the sum of the financial statements of the investees, corresponding to the statements of financial position as of December 31, 2011 and December 31, 2010, and the statements of income for the year ended December 31, 2011, and December 31, 2010:
As of December 31, 2011
Assets | Liabilities | |||||||
ThUS$ | ThUS$ | |||||||
Current | 2,649 | 721 | ||||||
Non-current | 269 | 115 | ||||||
|
|
|
| |||||
Total | 2,918 | 836 | ||||||
|
|
|
|
As of December 31, 2010
Assets | Liabilities | |||||||
ThUS$ | ThUS$ | |||||||
Current | 1,865 | 301 | ||||||
Non-current | 382 | 562 | ||||||
|
|
|
| |||||
Total | 2,247 | 863 | ||||||
|
|
|
|
For the year ended December 31, | ||||||||
2011 | 2010 | |||||||
ThUS$ | ThUS$ | |||||||
Total operating revenues | 2,896 | 2,408 | ||||||
Total expenses | (1,902 | ) | (2,162 | ) | ||||
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|
|
| |||||
Sum of net income | 994 | 246 | ||||||
|
|
|
|
As an investment in associates, the Company has shown its holdings in the following companies: Austral Sociedad Concesionaria S.A., Lufthansa Lan Technical Training S.A. and Concesionaria Chucumata S.A. The Company made no investments in associates during the year ended December 31, 2011.
Percentage of ownership | Cost of investment | |||||||||||||||||||||||
Company | Country of incorporation | Functional currency | As of December 31, 2011 | As of December 31, 2010 | As of December 31, 2011 | As of December 31, 2010 | ||||||||||||||||||
% | % | ThUS$ | ThUS$ | |||||||||||||||||||||
Austral Sociedad Concesionaria S.A. | Chile | CLP | 20.00 | 20.00 | 661 | 661 | ||||||||||||||||||
Lufthansa Lan Technical Training S.A. | Chile | CLP | 50.00 | 50.00 | 702 | 702 | ||||||||||||||||||
Concesionaria Chucumata S.A. (*) | Chile | CLP | — | 16.70 | — | 119 |
Statement of financial position as of December 31, 2012 | Results for the period ended December 31, 2012 | |||||||||||||||||||||||||||||||
Name of significant subsidiary | Total Assets | Current Assets | Non-current Assets | Total Liabilities | Current Liabilities | Non-current Liabilities | Revenue | Net Income | ||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||||||||
Lan Perú S.A. | 159,361 | 133,448 | 25,913 | 150,319 | 149,263 | 1,056 | 1,047,106 | 2,513 | ||||||||||||||||||||||||
Lan Cargo S.A. | 727,091 | 172,856 | 554,235 | 371,663 | 169,501 | 202,162 | 292,066 | (50,693 | ) | |||||||||||||||||||||||
Lan Argentina S.A. | 165,961 | 144,463 | 21,498 | 141,454 | 139,653 | 1,801 | 538,328 | 9,152 | ||||||||||||||||||||||||
Transporte Aéreo S.A. | 357,725 | 249,174 | 108,551 | 114,302 | 26,731 | 87,571 | 373,157 | 11,144 | ||||||||||||||||||||||||
Aerolane Líneas Aéreas Nacionales del Ecuador S.A. | 74,204 | 40,531 | 33,673 | 71,284 | 68,068 | 3,216 | 305,177 | (14,077 | ) | |||||||||||||||||||||||
Aerovías de Integración Regional, AIRES S.A. | 165,032 | 58,457 | 106,575 | 58,398 | 46,434 | 11,964 | 283,870 | (75,522 | ) | |||||||||||||||||||||||
TAM S.A. (*) | 8,821,298 | 2,003,122 | 6,818,176 | 9,198,899 | 3,556,778 | 5,642,121 | 3,633,592 | (75,195 | ) |
(*) |
These companies do not have significant restrictions on the ability to transfer funds.
(b) Non-controlling interest
F-1-46
Equity | Tax No. | Country of origin | As of December 31, 2014 | As of December 31, 2013 | As of December 31, 2014 | As of December 31, 2013 | ||||||||||||||
% | % | ThUS$ | ThUS$ | |||||||||||||||||
Lan Perú S.A | 0-E | Peru | 30.00000 | 30.00000 | 3,323 | 3,423 | ||||||||||||||
Lan Cargo S.A. and Subsidiaries | 93.383.000-4 | Chile | 0.10605 | 0.10605 | 925 | 591 | ||||||||||||||
Inversiones Lan S.A. and Subsidiaries | 96.575.810-0 | Chile | 0.29000 | 0.29000 | 5 | 19 | ||||||||||||||
Promotora Aérea Latinoamericana S.A. and Subsidiaries | 0-E | Mexico | 51.00000 | 51.00000 | 1,730 | 1,315 | ||||||||||||||
Aerolane, Lineas Aéreas Nacionales del Ecuador S.A. | 0-E | Ecuador | 0.00000 | 28.05000 | — | (14,688 | ) | |||||||||||||
Inversora Cordillera S.A. and Subsidiaries | 0-E | Argentina | 4.22000 | 4.22000 | 195 | 966 | ||||||||||||||
Lan Argentina S.A. | 0-E | Argentina | 1.00000 | 1.00000 | 217 | 221 | ||||||||||||||
Americonsult de Guatemala S.A. | 0-E | Guatemala | 1.00000 | 1.00000 | 5 | 1 | ||||||||||||||
Americonsult Costa Rica S.A. | 0-E | Costa Rica | 1.00000 | 1.00000 | 6 | 8 | ||||||||||||||
Linea Aérea Carguera de Colombiana S.A. | 0-E | Colombia | 10.00000 | 10.00000 | (826 | ) | 660 | |||||||||||||
Aerolíneas Regionales de Integración Aires S.A. | 0-E | Colombia | 0.98307 | 0.98307 | 684 | 370 | ||||||||||||||
Transportes Aereos del Mercosur S.A. | 0-E | Paraguay | 5.02000 | 5.02000 | 825 | 1,695 | ||||||||||||||
Multiplus S.A. | 0-E | Brazil | 27.26000 | 27.15000 | 94,710 | 93,057 | ||||||||||||||
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|
|
| |||||||||||||||||
Total | 101,799 | 87,638 | ||||||||||||||||||
|
|
|
|
Lan Perú S.A Lan Cargo S.A. and Subsidiaries Inversiones Lan S.A. and Subsidiaries Promotora Aerea Latinoamericana S.A. and Subsidiaries Aerolinheas Brasileiras S.A. and Subsidiaries Aerolane, Lineas Aéreas Nacionales del Ecuador S.A. Inversora Cordillera S.A. and Subsidiaries Lan Argentina S.A. Americonsult de Guatemala S.A. Americonsult Costa Rica S.A. Linea Aérea Carguera de Colombiana S.A. Aerolíneas Regionales de Integración Aires S.A. Transportes Aereos del Mercosur S.A. Multiplus S.A. Total The movement of investments in associates between January 1, 2010 and December 31, 2011 is as follows:Incomes Tax No. Country
of origin As of
December 31,
2014 As of
December 31,
2013 As of
December 31,
2012 2014 For the period ended
December 31,
2013 2012 % % % ThUS$ ThUS$ ThUS$ 0-E Peru 30.00000 30.00000 30.00000 317 1,127 753 93.383.000-4 Chile 0.10605 0.10605 0.10200 (125 ) 111 (58 ) 96.575.810-0 Chile 0.29000 0.29000 0.29000 (14 ) 1 1 0-E Mexico 51.00000 51.00000 51.00000 396 (511 ) 226 0-E Brasil 0.00000 26.70000 26.70000 — (1,520 ) 631 0-E Ecuador 0.00000 28.05000 28.05000 (5,671 ) (11,303 ) (3,938 ) 0-E Argentina 4.22000 4.22000 4.22000 270 188 222 0-E Argentina 1.00000 1.00000 1.00000 58 47 48 0-E Guatemala 1.00000 1.00000 1.00000 4 1 (1 ) 0-E Costa
Rica 1.00000 1.00000 10.00000 6 — 2 0-E Colombia 10.00000 10.00000 10.00000 (495 ) (145 ) (528 ) 0-E Colombia 0.98307 1.02665 1.21900 (797 ) (645 ) (921 ) 0-E Paraguay 5.02000 5.02000 5.02000 (389 ) 671 321 0-E Brazil 27.26000 27.13000 27.08000 39,254 29,273 16,676 32,814 17,295 13,434
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The Company records the gain or loss on its investments in associates on a monthly basis in the consolidated statement of income, using the equity method. The Company has no investments in associates which are not accounted for using the equity method.
NOTE 16 –14 - INTANGIBLE ASSETS OTHER THAN GOODWILL
The details of intangible assets are as follows:
Classes of intangible assets (net) | As of December 31, 2011 | As of December 31, 2010 | ||||||||||||||||||||||
Classes of intangible assets | Classes of intangible assets | |||||||||||||||||||||||
(net) | (gross) | |||||||||||||||||||||||
As of December 31, 2014 | As of December 31, 2013 | As of December 31, 2014 | As of December 31, 2013 | |||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||
Computer software | 64,519 | 45,183 | 126,797 | 143,124 | 309,846 | 278,721 | ||||||||||||||||||
Developing software | 74,050 | 46,075 | 74,050 | 46,075 | ||||||||||||||||||||
Airport slots | 1,201,028 | 1,361,807 | 1,201,028 | 1,361,807 | ||||||||||||||||||||
Loyalty program | 400,317 | 453,907 | 400,317 | 453,907 | ||||||||||||||||||||
Trademarks | 77,887 | 88,314 | 77,887 | 88,314 | ||||||||||||||||||||
Other assets | 404 | 566 | — | 81 | 808 | 808 | ||||||||||||||||||
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|
|
|
|
| |||||||||||||||||||
Total | 64,923 | 45,749 | 1,880,079 | 2,093,308 | 2,063,936 | 2,229,632 | ||||||||||||||||||
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|
|
|
|
Classes of intangible assets (gross) | As of December 31, 2011 | As of December 31, 2010 | ||||||
ThUS$ | ThUS$ | |||||||
Computer software | 112,881 | 83,875 | ||||||
Other assets | 808 | 808 | ||||||
|
|
|
| |||||
Total | 113,689 | 84,683 | ||||||
|
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|
|
F-1-47
Opening balance as of January 1, 2012 Additions Withdrawals Transfer software Acquisitions through business combination Foreing exchange Amortization Closing balance as of December 31, 2012 Opening balance as of January 1, 2013 Additions Withdrawals Transfer software Foreing exchange Amortization Closing balance as of December 31, 2013 Opening balance as of January 1, 2014 Additions Withdrawals Transfer software Foreing exchange Amortization Closing balance as of December 31, 2014 The movement in software and other assets between January 1, 2010 and December 31, 2011 is as follows: Computer
software
Net Developing
software Airport
slots (*) Trademarks
and loyalty
program (*) Other
assets
Net Total ThUS$ ThUS$ ThUS$ ThUS$ ThUS$ ThUS$ 25,124 39,395 — — 404 64,923 18,769 43,632 — 24 — 62,425 (1,636 ) — — (2 ) — (1,638 ) 55,618 (51,391 ) — — — 4,227 78,106 22,864 1,552,016 617,934 561 2,271,481 (757 ) 135 9,114 3,628 3 12,123 (30,980 ) — — — (162 ) (31,142 ) 144,244 54,635 1,561,130 621,584 806 2,382,399 144,244 54,635 1,561,130 621,584 806 2,382,399 14,703 47,199 — — — 61,902 (467 ) (1,975 ) — — — (2,442 ) 46,444 (48,890 ) — — (492 ) (2,938 ) (5,542 ) (4,894 ) (199,323 ) (79,363 ) (72 ) (289,194 ) (56,258 ) — — — (161 ) (56,419 ) 143,124 46,075 1,361,807 542,221 81 2,093,308 143,124 46,075 1,361,807 542,221 81 2,093,308 16,902 60,994 — — — 77,896 (1,365 ) (3,576 ) — — — (4,941 ) 22,351 (24,539 ) — — — (2,188 ) (6,763 ) (4,904 ) (160,779 ) (64,017 ) — (236,463 ) (47,452 ) — — — (81 ) (47,533 ) 126,797 74,050 1,201,028 478,204 — 1,880,079
Computer software Net | Other assets Net | Total | ||||||||||
ThUS$ | ThUS$ | ThUS$ | ||||||||||
Opening balance as of January 1, 2010 | 34,087 | 727 | 34,814 | |||||||||
Additions | 20,915 | — | 20,915 | |||||||||
Acquisitions by business combination | 154 | — | 154 | |||||||||
Withdrawals | (779 | ) | — | (779 | ) | |||||||
Amortization | (9,194 | ) | (161 | ) | (9,355 | ) | ||||||
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|
|
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Balance as of December 31, 2010 | 45,183 | 566 | 45,749 | |||||||||
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Opening balance as of January 1, 2011 | 45,183 | 566 | 45,749 | |||||||||
Additions | 29,190 | — | 29,190 | |||||||||
Withdrawals | (184 | ) | — | (184 | ) | |||||||
Amortization | (9,670 | ) | (162 | ) | (9,832 | ) | ||||||
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Balance as of December 31, 2011 | 64,519 | 404 | 64,923 | |||||||||
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Intangible assets with defined useful lives consist primarily of licensing and computer software, for which the Company has established useful lives of between 4 and 7 years.
The Company shows its intangible assets at cost, except for acquisitions by business combination, which are at fair value; and amortization is made on a straight-line basis over their estimated useful lives.
The amortization of each yearthe period is shown in the consolidated statement of income in administrative expenses. The accumulated amortization of computer programs as of December 31, 20112014 amounts to ThUS$ 48,362183,049 (ThUS$ 38,692135,597 as of December 31, 2010)2013, ThUS$ 79,342 as of December 31, 2012). The accumulated amortization of other identifiable intangible assets as of December 31, 20112014 amounts to ThUS$ 404808 (ThUS$ 242727 as of December 31, 2010)2013, ThUS$ 566 as of December 31, 2012).
(*) See Note 2.5
NOTE 17 –15 - GOODWILL AND BUSINESS COMBINATION
The goodwill represents the excess of cost of acquisition over the fair value of the participation of the Company in the identifiable net assets of the subsidiary at the acquisition date. Goodwill amount at December 31, 2011 amounted to2014 is ThUS$ 163,7773,313,401 (ThUS$ 157,9943,727,605 at December 31, 2010)2013 and ThUS$ 4,213,160 as revised at December 2012).
AtThe Company has two cash- generating units (CGUs), confirming the existence of two cash- generating units: “Air transportation” and, “Coalition and loyalty program Multiplus”; consistent with this, at December 31, 2011, the Company2014 was performed an impairment testtests based on the value in use and no impairment was identified. The testing isThese tests are done at least once per year.
The value in useAt December 31, 2014, the recoverable amounts of those cash generating units have been determined from estimated cash flows by the Administration. The main assumptions used are disclosed as follows:
Air transportation | Coalition and loyalty | |||||
Annual growth rate (Terminal) | % | 1.5 and 2.5 | 4.7 and 5.7 | |||
Exchange rate (1) | R$/US$ | 2.7 and 3.62 | 2.7 and 3.62 | |||
Discount rate based on the weighted average cost of capital (WACC) | % | 9.8 and 10.8 | — | |||
Discount rate based on cost of equity (CoE) | % | — | 18.0 and 24.0 | |||
Fuel Price from futures price curves commodities markets | US$/barril | 90 | — |
(1) | In line with the expectations of the Central Bank of Brazil |
(2) | The flows, as in the growth rate and discount, are denominated in real. |
Given the expectation of growth and the long investment cycles characteristic of the industry, are used projections of ten years.
The result of the impairment test, which includes a sensitivity analysis of the main variables, showed that the estimated recoverable amount is higher than carrying value of the book value of net assets allocated to the cash generating unit, and therefore impairment was not detected.
The sensitivity analysis included individual impact of variations in the key assumptions with impact on the determination of the recoverable amounts, namely:
Increase Maximum WACC | Increase Maximum CoE | Decrease Minimum terminal growth rate | ||||
% | % | % | ||||
Air transportation CGU | 10.8 | — | 1.5 | |||
Coalition and loyalty program Multiplus CGU | — | 24.0 | 4.7 |
In none of the previous cases was presented impairment in the cash- generating unit.
Movement of Goodwill, separated by CGU:
Air Transport | Coalition and loyalty program Multiplus | Total | ||||||||||
ThUS$ | ThUS$ | ThUS$ | ||||||||||
Opening balance as of January 1, 2012 | 163,777 | — | 163,777 | |||||||||
Additions by business combination | 2,118,057 | — | 2,118,057 | |||||||||
Amendment initial recongnition | 1,051,645 | 846,285 | 1,897,930 | |||||||||
Increase (decrease) due to exchange rate differences | 28,427 | 4,969 | 33,396 | |||||||||
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|
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|
|
| |||||||
Closing balance as of December 31, 2012 | 3,361,906 | 851,254 | 4,213,160 | |||||||||
|
|
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|
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| |||||||
Opening balance as of January 1, 2013 | 3,361,906 | 851,254 | 4,213,160 | |||||||||
Increase (decrease) due to exchange rate differences | (421,729 | ) | (108,686 | ) | (530,415 | ) | ||||||
Others | 44,860 | — | 44,860 | |||||||||
|
|
|
|
|
| |||||||
Closing balance as of December 31, 2013 | 2,985,037 | 742,568 | 3,727,605 | |||||||||
|
|
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| |||||||
Opening balance as of January 1, 2014 | 2,985,037 | 742,568 | 3,727,605 | |||||||||
Increase (decrease) due to exchange rate differences | (360,371 | ) | (87,670 | ) | (448,041 | ) | ||||||
Others | 33,837 | — | 33,837 | |||||||||
|
|
|
|
|
| |||||||
Closing balance as of December 31, 2014 | 2,658,503 | 654,898 | 3,313,401 | |||||||||
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|
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|
|
The following information summarizes the business combination process with TAM S.A. and subsidiaries:
(a) Description of the business combination process with TAM S.A. and Subsidiaries
(b) Business combination in accordance with IFRS 3
(c) Other information
(a) Description of the Business Combination process with TAM S.A and Subsidiaries
Dated June 22, 2012 the merger was successfully completed between LAN Airlines S.A. (today LATAM Airlines Group S.A.), with Sister Holdco S.A. and Holdco II S.A., two companies specially constituted for the purpose of the association between the Company and TAM S.A. which goodwillwas reflected in the deed of execution of merger issued by such companies at the same time, and it was rectified by deed dated July 10, 2012. These scriptures recorded the share exchange of Sister Holdco S.A. and Holdco II S.A. for LAN’s shares in one related of 0.9 of LAN’s shares for each Sister Holdco S.A. and Holdco II S.A.. That exchange occurred with the delivery of the respective LAN shares to shareholders of Sister Holdco S.A. and the respective BDRs (“Brazilian Depositary Receipts”) and ADRs (“American Depositary Receipts”) from LAN to the shareholders of Holdco II S.A. abroad on June 27, 2012, that is, TAM shareholders who accepted the exchange offer.
The share exchange offer materialized with the exchange previously referenced was 99.9% of the TAM shares that accepted that TAM would stop being a public company in Brazil, which fulfilled the condition for the cancellation of registration, requirement for the success of the exchange offer.
The capital increase in LATAM Airline S.A originated in the merger is determined by the social capital amount of Sister Holdco S.A. and Holdco II S.A., equivalent to ThUS$ 951,409. The difference between this value and the purchase price (Note 15.2.b), amounting to ThUS$ 2,665,692 was included in “Other reserves” during 2012.
On July 27, 2012, TAM made use of the Squeeze-Out granted by the Brazilian legislation, under which a compulsory could rescue all TAM shares that were not exchanged in the exchange offer or contributed by controlling shareholders of TAM. Since TAM shares received in the exchange offer, plus the shares committed by the controlling shareholders of TAM, represented 95.9% of the total outstanding shares of TAM, the aforementioned condition was met on the remaining 4.1% through the disbursement by TAM of ThUS$ 165,143.
As a consequence of the end of that process: (i) concluded the process of Business Combination of LAN and TAM, and (ii) the renaming of LAN Airlines S.A. to LATAM Airlines Group S.A. became effective.
The costs incurred by LATAM Airline Group S.A. to make the Business Combination amounts to ThUS$ 50,647 for the year ended December 31, 2012, and were recorded in the Income statement when they were incurred.
The ownership structure of TAM, after the business combination, is as follows:
TAM S.A. | ||||||||||||||||||||
Holdco I S.A. | LATAM Airlines Group S.A. | Total | ||||||||||||||||||
Class of shares | Shares | % | Shares | % | Shares | |||||||||||||||
ON (voting rights) | 55,413,784 | 100.00 | — | 55,413,784 | ||||||||||||||||
PN (non-votings rights) | — | 94,718,931 | 100.00 | 94,718,931 | ||||||||||||||||
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| |||||||||||||||
Total | 55,413,784 | 94,718,931 | 150,132,715 | |||||||||||||||||
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| |||||||||||||||
Holdco I S.A. | ||||||||||||||||||||
TEP Chile S.A. (owned by the controlling shareholders of TAM) | LATAM Airlines Group S.A. | Total | ||||||||||||||||||
Class of shares | Shares | % | Shares | % | shares | |||||||||||||||
Serie A (voting rights) | 938 | 80.58 | 226 | 19.42 | 1,164 | |||||||||||||||
Serie B (economic right) | — | 55,413,621 | 100.00 | 55,413,621 | ||||||||||||||||
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| |||||||||||||||
Total | 938 | 55,413,847 | 55,414,785 | |||||||||||||||||
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|
TAM is a leading airline in Brazil, with more than 35 years in operation, and as of the date of the business combination it boasted: over 30,000 employees, a fleet of more than 160 aircraft, annual sales surpassing US$7.3 billion, and a 2011 Brazilian market share of 41.2% domestically, and 88.1% of international flights operated by Brazilian-flagged airlines. It is appropriate to point out that Multiplus S.A., a company controlled by TAM S.A., is engaged in the development and administration of client loyalty programs. Multiplus S.A. has been assignedregistered in the “Novo Mercado” section on the BMF&Bovespa exchange since February 3, 2010.
Under IFRS 3 this operation has been determined assumingregistered as a business combination consigning to the Company as purchaser of TAM. Besides the fact that yields, occupation factors and fleet capacity are maintained at current obtainable levels. The Company projects cash flows forLATAM is the initial periodsone who issuing the shares in the combination, this is based on internal budgetsthe economic rights and extrapolatesrelative vote relating of the finalformer shareholders of LAN and TAM over the combined entity.
(b) Business combination in accordance with IFRS 3 (*)
IFRS 3 establishes principles and requirements for how the acquirer:
i. | Recognizes and measure the consideration paid; |
ii. | Recognizes and measure fair value of identifiable net assets acquired; and |
iii. | Recognizes and measure the goodwill acquired. |
IFRS 3 provides the acquirer with a reasonable time (measurement period) to obtain the information necessary to identify and measure the three points mentioned above as of the acquisition date. During the measurement period, the acquirer shall retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and, if known, would have affected the measurement of the amounts recognized as of that date. The measurement period shall not exceed one year from the acquisition date (June 22, 2012). Therefore, some amounts reported in previous financial statements as provisional amounts because the accounting was incomplete have been retrospectively adjusted.
(i) Consideration paid
The following summarizes the consideration paid for TAM S.A. and subsidiaries:
Number of shares LAN (a) | Share price at fair value at June 22 exchange rate at June 22 US$ (b) | Total exchange of shares ThUS$ (a) times (b) | Squeeze Out At July 27 at t/c June 22 ThUS$ | Total purchase price ThUS$ | ||||||||||||||
135,119,066 | 26.76973 | 3,617,101 | 165,143 | 3,782,244 | ||||||||||||||
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Value of the share at June 22, 2012 CLP$ 13,489
Exchange rate as of June 22, 2012 503.89 CLP$/US$
Consideration paid was calculated, in accordance with IFRS 3, as the sum of the fair value of these periods based on a growth factor consistent with the long-term economic projectionsLAN shares provided and the Squeeze-Out cash payment explained in the markets in which the units operate. The determined cash flows are discounted at a rate which takes into account the timeNote 15.2.(a).
(*) See note 2.2
(ii) Fair value of moneyidentifiable assets acquired and risks related to those cash generating units which have not been taken into account in estimation of the units’ future cash flows.
F-1-48
liabilities assumed.
The movementfollowing table summarizes the fair value of goodwill from January 1, 2010 to December 31, 2011, is as follows:recognized amounts of identifiable assets acquired and liabilities assumed at the acquisition date.
Fair value | ||||
ThUS$ | ||||
| ||||
| ||||
| 324,170 | |||
Trade and other accounts receivable | 1,004,331 | |||
Inventories | 66,287 | |||
Tax assets | 145,626 | |||
Assets held for sale | 8,865 | |||
Airport Slots | 1,472,625 | |||
Loyalty program | 517,304 | |||
Other intangible assets | 281,552 | |||
Fleet | 3,178,065 | |||
Other property, plant and equipment | 1,063,036 | |||
Other financial liabilities | ( | ) | ||
Other non-financial liabilities | (1,445,463 | ) | ||
Trade and other accounts payables | (1,473,579 | ) | ||
Other provisions | (1,429,012 | ) | ||
Employee benefits | (18,580 | ) | ||
Tax liabilities | (65,185 | ) | ||
Deferred tax | (31,940 | ) | ||
Accounts payable to related entities | (82 | ) | ||
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| |||
| (130,817 | ) | ||
The airport slots (landing and take-offs) have been measured at fair value at the date of the combination, using the net present value of projected Earing Before Interest and Taxes
(EBIT) of those routes going through those airports where slots were acquired as part of |
(iii) Goodwill acquired
The financial statements of LATAM Airlines Group S.A. include goodwill recorded to the value of ThUS$ 4,015,987 calculated and assigned to corresponding segments. The following table summarizes the consideration paid, the fair value of assets acquired, liabilities assumed, non-controlling interest and goodwill acquired at the acquisition date.
ThUS$ | ThUS$ | |||||||
Purchase price | 3,782,244 | |||||||
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| |||||||
Less: | ||||||||
Historic net assets | 578,559 | |||||||
Fair value adjustment: | ||||||||
Airport Slots | (1,472,625 | ) | ||||||
Loyalty program | (517,304 | ) | ||||||
Fleet (included maintenance) | 723,364 | |||||||
Other provisions | 1,157,419 | |||||||
Error correction | 584,126 | |||||||
Deferred tax | 104,342 | |||||||
Other | 130,054 | |||||||
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| |||||||
Total adjustment | 709,376 | |||||||
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| |||||||
Total net assets at fair value | (130,817 | ) | (130,817 | ) | ||||
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Non-controlling interest | 102,926 | |||||||
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| |||||||
Goodwill restated at June 22, 2012 | 4,015,987 | |||||||
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|
The following table summarizes Goodwill acquired by segments.
Goodwill restated at June 22, 2012 | ||||
ThUS$ | ||||
Goodwill asignned Air transportation CGU | ||||
Goodwill asignned Coalition and loyalty program Multiplus CGU | 846,285 | |||
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Non-controlling interest have been measured and recognized at fair value.
(c) Other information
The income contribution of TAM S.A. and Subsidiaries during the period of 2012 was ThUS$ 3,633,592, the net result considered in the consolidated financial statements of the group at December 31, 2012, was a loss of ThUS$ 75,195.
NOTE 18 –16 - PROPERTY, PLANT AND EQUIPMENT
The composition by category of property,Property, plant and equipment is as follows:
Gross Book Value | Acumulated depreciation | Net Book Value | Gross Book Value | Acumulated depreciation | Net Book Value | |||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2011 | As of December 31, 2010 | As of December 31, 2011 | As of December 31, 2010 | As of December 31, 2011 | As of December 31, 2010 | As of December 31, 2014 | As of December 31, 2013 | As of December 31, 2014 | As of December 31, 2013 | As of December 31, 2014 | As of December 31, 2013 | |||||||||||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||||||||||||||||||||
Construction in progress | 1,087,563 | 715,603 | — | — | 1,087,563 | 715,603 | 937,279 | 858,650 | — | — | 937,279 | 858,650 | ||||||||||||||||||||||||||||||||||||
Land | 35,673 | 35,538 | — | — | 35,673 | 35,538 | 57,988 | 59,352 | — | — | 57,988 | 59,352 | ||||||||||||||||||||||||||||||||||||
Buildings | 101,123 | 101,181 | (23,185 | ) | (21,060 | ) | 77,938 | 80,121 | 249,361 | 247,263 | (82,355 | ) | (75,478 | ) | 167,006 | 171,785 | ||||||||||||||||||||||||||||||||
Plant and equipment | 5,380,663 | 4,816,723 | (1,238,678 | ) | (1,153,587 | ) | 4,141,985 | 3,663,136 | 8,660,352 | 8,461,456 | (1,770,560 | ) | (1,708,668 | ) | 6,889,792 | 6,752,788 | ||||||||||||||||||||||||||||||||
Own aircraft | 7,531,526 | 7,409,394 | (1,407,704 | ) | (1,347,671 | ) | 6,123,822 | 6,061,723 | ||||||||||||||||||||||||||||||||||||||||
Other | 1,128,826 | 1,052,062 | (362,856 | ) | (360,997 | ) | 765,970 | 691,065 | ||||||||||||||||||||||||||||||||||||||||
Machinery | 65,832 | 73,561 | (42,099 | ) | (41,509 | ) | 23,733 | 32,052 | ||||||||||||||||||||||||||||||||||||||||
Information technology equipment | 89,678 | 83,711 | (67,087 | ) | (65,112 | ) | 22,591 | 18,599 | 188,208 | 182,108 | (137,199 | ) | (135,889 | ) | 51,009 | 46,219 | ||||||||||||||||||||||||||||||||
Fixed installations and accessories | 64,936 | 52,954 | (29,838 | ) | (25,951 | ) | 35,098 | 27,003 | 97,090 | 97,212 | (53,307 | ) | (46,620 | ) | 43,783 | 50,592 | ||||||||||||||||||||||||||||||||
Motor vehicles | 3,714 | 3,269 | (2,077 | ) | (1,979 | ) | 1,637 | 1,290 | 95,981 | 75,150 | (53,452 | ) | (51,128 | ) | 42,529 | 24,022 | ||||||||||||||||||||||||||||||||
Leasehold improvements | 94,485 | 87,168 | (62,986 | ) | (43,048 | ) | 31,499 | 44,120 | 144,230 | 88,641 | (87,707 | ) | (71,872 | ) | 56,523 | 16,769 | ||||||||||||||||||||||||||||||||
Other property, plants and equip ment | 832,772 | 646,236 | (338,774 | ) | (283,216 | ) | 493,998 | 363,020 | ||||||||||||||||||||||||||||||||||||||||
Other property, plants and equipment | 4,522,589 | 4,791,236 | (2,019,155 | ) | (1,820,679 | ) | 2,503,434 | 2,970,557 | ||||||||||||||||||||||||||||||||||||||||
Financial leasing aircraft | 4,365,247 | 4,618,127 | (1,985,458 | ) | (1,777,980 | ) | 2,379,789 | 2,840,147 | ||||||||||||||||||||||||||||||||||||||||
Other | 157,342 | 173,109 | (33,697 | ) | (42,699 | ) | 123,645 | 130,410 | ||||||||||||||||||||||||||||||||||||||||
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Total | 7,690,607 | 6,542,383 | (1,762,625 | ) | (1,593,953 | ) | 5,927,982 | 4,948,430 | 15,018,910 | 14,934,629 | (4,245,834 | ) | (3,951,843 | ) | 10,773,076 | 10,982,786 | ||||||||||||||||||||||||||||||||
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F-1-49
(a) The movement in the different categories of property,Property, plant and equipment from January 1, 20102013 to December 31, 20112014 is shown below:
Construction in progress | Land | Buildings Net | Plant and equipment Net | Information technology equipment Net | Fixed installations & accessories Net | Motor vehicles Net | Leasehold improvements Net | Other property, plant and equipment Net | Property, Plant and equipment Net | |||||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||||||||||||||
Opening balance as of January 1, 2010 | 264,259 | 35,538 | 81,966 | 3,231,682 | 15,043 | 23,659 | 951 | 50,286 | 493,172 | 4,196,556 | ||||||||||||||||||||||||||||||
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Additions | 10,229 | — | 115 | 571,422 | 9,516 | 2,341 | 420 | 2,410 | 6,673 | 603,126 | ||||||||||||||||||||||||||||||
Acquisitions through business combination | — | — | 1,006 | 490 | 137 | 335 | 107 | — | 480 | 2,555 | ||||||||||||||||||||||||||||||
Disposals | — | — | — | (190 | ) | — | — | (7 | ) | — | (2 | ) | (199 | ) | ||||||||||||||||||||||||||
Transfers (to) from non-current assets (or disposal groups) classified as Held for Sale | — | — | — | 2,552 | — | — | — | — | — | 2,552 | ||||||||||||||||||||||||||||||
Retirements | — | — | — | (6,633 | ) | (536 | ) | (2 | ) | (12 | ) | — | (2,550 | ) | (9,733 | ) | ||||||||||||||||||||||||
Depreciation | — | — | (2,315 | ) | (235,800 | ) | (5,217 | ) | (3,997 | ) | (172 | ) | (16,797 | ) | (32,315 | ) | (296,613 | ) | ||||||||||||||||||||||
Increases (decreases) due to exchanges differences | (62 | ) | — | — | (857 | ) | 16 | (13 | ) | (3 | ) | — | (27 | ) | (946 | ) | ||||||||||||||||||||||||
Other increases (decreases) | 441,177 | — | (651 | ) | 100,470 | (360 | ) | 4,680 | 6 | 8,221 | (102,411 | ) | 451,132 | |||||||||||||||||||||||||||
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Changes, total | 451,344 | — | (1,845 | ) | 431,454 | 3,556 | 3,344 | 339 | (6,166 | ) | (130,152 | ) | 751,874 | |||||||||||||||||||||||||||
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Closing balance as of December 31, 2010 | 715,603 | 35,538 | 80,121 | 3,663,136 | 18,599 | 27,003 | 1,290 | 44,120 | 363,020 | 4,948,430 | ||||||||||||||||||||||||||||||
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F-1-50
Construction in progress | Land | Buildings Net | Plant and equipment Net | Information technology equipment Net | Fixed installations & accessories Net | Motor vehicles Net | Leasehold improvements Net | Other property, plant and equipment Net | Property, Plant and equipment Net | |||||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||||||||||||||
Opening balance as of January 1, 2011 | 715,603 | 35,538 | 80,121 | 3,663,136 | 18,599 | 27,003 | 1,290 | 44,120 | 363,020 | 4,948,430 | ||||||||||||||||||||||||||||||
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Additions | 29,898 | — | 1,111 | 1,028,568 | 11,885 | 6,663 | 543 | 6,555 | 19,072 | 1,104,295 | ||||||||||||||||||||||||||||||
Acquisitions through business combination | — | — | — | — | — | — | — | — | 16 | 16 | ||||||||||||||||||||||||||||||
Disposals | — | — | (2,681 | ) | (109,936 | ) | (8 | ) | — | (6 | ) | — | (537 | ) | (113,168 | ) | ||||||||||||||||||||||||
Transfers (to) from non-current assets (or disposal groups) classified as Held for Sale | (127 | ) | — | — | (112 | ) | (1,195 | ) | (588 | ) | (1 | ) | — | (115 | ) | (2,138 | ) | |||||||||||||||||||||||
Retirements | (150 | ) | — | (4 | ) | (4,817 | ) | (85 | ) | (23 | ) | (17 | ) | — | (332 | ) | (5,428 | ) | ||||||||||||||||||||||
Depreciation | — | — | (3,302 | ) | (265,062 | ) | (6,354 | ) | (3,602 | ) | (215 | ) | (19,938 | ) | (30,608 | ) | (329,081 | ) | ||||||||||||||||||||||
Increases (decreases) due to exchanges differences | (852 | ) | — | (95 | ) | (771 | ) | (63 | ) | (54 | ) | 18 | — | (95 | ) | (1,912 | ) | |||||||||||||||||||||||
Other increases (decreases) | 343,191 | 135 | 2,788 | (169,021 | ) | (188 | ) | 5,699 | 25 | 762 | 143,577 | 326,968 | ||||||||||||||||||||||||||||
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Changes, total | 371,960 | 135 | (2,183 | ) | 478,849 | 3,992 | 8,095 | 347 | (12,621 | ) | 130,978 | 979,552 | ||||||||||||||||||||||||||||
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Closing balance as of December 31, 2011 | 1,087,563 | 35,673 | 77,938 | 4,141,985 | 22,591 | 35,098 | 1,637 | 31,499 | 493,998 | 5,927,982 | ||||||||||||||||||||||||||||||
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F-1-51
Aircraft included in the Company’s property, plant and equipment:
Aircraft | Model | As of December 31, 2011 | As of December 31, 2010 | |||||||
Boeing 767 | 300ER | 21 | 18 | |||||||
Boeing 767 | 300F | 8 | 8 | |||||||
Boeing 767 | 200ER (*) | 1 | 1 | |||||||
Airbus A318 | 100 | 10 | 15 | |||||||
Airbus A319 | 100 | 24 | 20 | |||||||
Airbus A320 | 200 | 33 | 24 | |||||||
Airbus A340 | 300 | 4 | 4 | |||||||
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Total | 101 | 90 | ||||||||
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Construction in progress | Land | Buildings net | Plant and equipment net | Information technology equipment net | Fixed installations & accessories net | Motor vehicles net | Leasehold improvements net | Other property, plant and equipment net | Property, Plant and equipment net | |||||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||||||||||||||
Opening balance as of January 1, 2012 | 1,087,563 | 35,673 | 77,938 | 4,141,985 | 22,591 | 35,098 | 1,637 | 31,499 | 493,998 | 5,927,982 | ||||||||||||||||||||||||||||||
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Additions | 34,885 | — | 17,349 | 2,803,242 | 11,626 | 7,836 | 458 | 4,668 | 154,000 | 3,034,064 | ||||||||||||||||||||||||||||||
Acquisitions througth Bussines Combination | 553,781 | 46,373 | 87,338 | 469,650 | 16,990 | 1,696 | 4,099 | — | 3,061,174 | 4,241,101 | ||||||||||||||||||||||||||||||
Disposals | (27 | ) | (5,116 | ) | (4,821 | ) | (73,654 | ) | (15 | ) | — | (28 | ) | — | (5 | ) | (83,666 | ) | ||||||||||||||||||||||
Transfer (to) from non-current assets (or disposal groups) | (2,256 | ) | (11,895 | ) | — | (49,910 | ) | — | — | — | — | — | (64,061 | ) | ||||||||||||||||||||||||||
Retirements | (281 | ) | — | (1,100 | ) | (136,879 | ) | (951 | ) | (261 | ) | (62 | ) | (82 | ) | (18,799 | ) | (158,415 | ) | |||||||||||||||||||||
Depreciation expenses | — | — | (3,311 | ) | (319,578 | ) | (14,982 | ) | (6,526 | ) | (1,316 | ) | (16,432 | ) | (250,329 | ) | (612,474 | ) | ||||||||||||||||||||||
Foreing exchange | 1,844 | 272 | (2,370 | ) | 2,625 | 3,968 | 530 | (101 | ) | — | 16,725 | 23,493 | ||||||||||||||||||||||||||||
Other increases (decreases) | (522,506 | ) | — | 4,047 | (477,366 | ) | 1,236 | 3,970 | 35 | 2,075 | 487,561 | (500,948 | ) | |||||||||||||||||||||||||||
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Changes, total | 65,440 | 29,634 | 97,132 | 2,218,130 | 17,872 | 7,245 | 3,085 | (9,771 | ) | 3,450,327 | 5,879,094 | |||||||||||||||||||||||||||||
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Closing balance as of December 31, 2012 | 1,153,003 | 65,307 | 175,070 | 6,360,115 | 40,463 | 42,343 | 4,722 | 21,728 | 3,944,325 | 11,807,076 | ||||||||||||||||||||||||||||||
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Opening balance as of January 1, 2013 | 1,153,003 | 65,307 | 175,070 | 6,360,115 | 40,463 | 42,343 | 4,722 | 21,728 | 3,944,325 | 11,807,076 | ||||||||||||||||||||||||||||||
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Additions | 17,731 | — | 11,798 | 1,555,667 | 22,146 | 7,663 | 303 | — | 69,703 | 1,685,011 | ||||||||||||||||||||||||||||||
Disposals | — | — | — | (141,328 | ) | (31 | ) | — | (161 | ) | — | (644,637 | ) | (786,157 | ) | |||||||||||||||||||||||||
Retirements | (615 | ) | — | (430 | ) | (65,151 | ) | (270 | ) | (15 | ) | (10 | ) | (219 | ) | (19,716 | ) | (86,426 | ) | |||||||||||||||||||||
Depreciation expenses | — | — | (11,768 | ) | (446,503 | ) | (14,131 | ) | (8,893 | ) | (312 | ) | (12,281 | ) | (336,586 | ) | (830,474 | ) | ||||||||||||||||||||||
Foreing exchange | (53,452 | ) | (5,955 | ) | (12,414 | ) | (71,013 | ) | (3,375 | ) | (1,527 | ) | (286 | ) | (1 | ) | (320,738 | ) | (468,761 | ) | ||||||||||||||||||||
Other increases (decreases) | (258,017 | ) | — | 9,529 | (384,669 | ) | 1,417 | 11,021 | (2,512 | ) | 7,542 | 278,206 | (337,483 | ) | ||||||||||||||||||||||||||
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Changes, total | (294,353 | ) | (5,955 | ) | (3,285 | ) | 447,003 | 5,756 | 8,249 | (2,978 | ) | (4,959 | ) | (973,768 | ) | (824,290 | ) | |||||||||||||||||||||||
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Closing balance as of December 31, 2013 | 858,650 | 59,352 | 171,785 | 6,807,118 | 46,219 | 50,592 | 1,744 | 16,769 | 2,970,557 | 10,982,786 | ||||||||||||||||||||||||||||||
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Opening balance as of January 1, 2014 | 858,650 | 59,352 | 171,785 | 6,807,118 | 46,219 | 50,592 | 1,744 | 16,769 | 2,970,557 | 10,982,786 | ||||||||||||||||||||||||||||||
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Additions | 29,980 | 3,440 | 16,636 | 1,214,282 | 22,239 | 2,190 | 1,586 | — | 154,049 | 1,444,402 | ||||||||||||||||||||||||||||||
Disposals | — | — | — | (660,129 | )(*) | (57 | ) | — | (4 | ) | — | (328 | ) | (660,518 | ) | |||||||||||||||||||||||||
Retirements | (705 | ) | — | (403 | ) | (39,463 | ) | (205 | ) | (230 | ) | (53 | ) | (50 | ) | (34,282 | ) | (75,391 | ) | |||||||||||||||||||||
Depreciation expenses | — | — | (13,980 | ) | (431,967 | ) | (16,889 | ) | (8,899 | ) | (1,041 | ) | (19,127 | ) | (286,033 | ) | (777,936 | ) | ||||||||||||||||||||||
Foreing exchange | 733 | (4,804 | ) | (12,341 | ) | (59,957 | ) | (3,595 | ) | (1,509 | ) | 330 | — | (110,727 | ) | (191,870 | ) | |||||||||||||||||||||||
Other increases (decreases) | 48,621 | — | 5,309 | 124,205 | 3,297 | 1,639 | (597 | ) | 58,931 | (189,802 | ) | 51,603 | ||||||||||||||||||||||||||||
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Changes, total | 78,629 | (1,364 | ) | (4,779 | ) | 146,971 | 4,790 | (6,809 | ) | 221 | 39,754 | (467,123 | ) | (209,710 | ) | |||||||||||||||||||||||||
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Closing balance as of December 31, 2014 | 937,279 | 57,988 | 167,006 | 6,954,089 | 51,009 | 43,783 | 1,965 | 56,523 | 2,503,434 | 10,773,076 | ||||||||||||||||||||||||||||||
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(*) |
(b) | Composition of the fleet: |
Operating leases:
Aircraft included in the Company’s Property, plant and equipment | Operating leases | Total fleet | ||||||||||||||||||||||||||||||||||
Aircraft | Model | As of December 31, 2011 | As of December 31, 2010 | Model | As of December 31, 2014 | As of December 31, 2013 | As of December 31, 2014 | As of December 31, 2013 | As of December 31, 2014 | As of December 31, 2013 | ||||||||||||||||||||||||||
Boeing 767 | 300ER | 10 | 10 | 300 | — | 3 | — | — | — | 3 | ||||||||||||||||||||||||||
Boeing 767 | 300F | 4 | 3 | 300ER | 34 | 34 | 4 | 6 | 38 | 40 | ||||||||||||||||||||||||||
Boeing 767 | 300F | 8 | (1) | 8 | 3 | 4 | 11 | (1) | 12 | |||||||||||||||||||||||||||
Boeing 777 | Freighter | 2 | 2 | 300ER | 4 | 8 | 6 | 2 | 10 | 10 | ||||||||||||||||||||||||||
Boeing 777 | Freighter | 2 | 2 | 2 | 2 | 4 | 4 | |||||||||||||||||||||||||||||
Boeing 787 | 800 | 6 | 3 | 4 | 2 | 10 | 5 | |||||||||||||||||||||||||||||
Airbus A319 | 100 | 40 | 39 | 12 | 15 | 52 | 54 | |||||||||||||||||||||||||||||
Airbus A320 | 200 | 9 | 5 | 200 | 95 | 95 | 63 | 65 | 158 | 160 | ||||||||||||||||||||||||||
Airbus A321 | 200 | 18 | 9 | 3 | 1 | 21 | 10 | |||||||||||||||||||||||||||||
Airbus A330 | 200 | 8 | 8 | 5 | 12 | 13 | 20 | |||||||||||||||||||||||||||||
Airbus A340 | 300 | 3 | — | — | 4 | 3 | 4 | |||||||||||||||||||||||||||||
Airbus A340 | 300 | 1 | 1 | 500 | — | 2 | — | — | — | 2 | ||||||||||||||||||||||||||
Boeing 737 | 700 | 9 | 9 | 700 | — | — | — | 5 | — | 5 | ||||||||||||||||||||||||||
Bombardier | Dhc8-200 | 10 | 11 | Dhc8-200 | 2 | — | 5 | 7 | 7 | 7 | ||||||||||||||||||||||||||
Bombardier | Dhc8-400 | 4 | 4 | Dhc8-400 | — | — | — | 3 | — | 3 | ||||||||||||||||||||||||||
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Total | 49 | 45 | 220 | 211 | 107 | 128 | 327 | 339 | ||||||||||||||||||||||||||||
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Total fleet | 150 | 135 | ||||||||||||||||||||||||||||||||||
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Two aircraft leased to FEDEX |
(c) | Method used for the depreciation of |
Method | Useful life | Method | Useful life | |||||||||||||
minimum | maximum | minimum | maximum | |||||||||||||
Buildings | Straight line without residual value | 20 | 50 | Straight line without residual value | 20 | 50 | ||||||||||
Plant and equipment | Straight line with residual value of 20% in the short-haul fleet and 36% in the long-haul fleet (*) | 5 | 20 | Straight line with residual value of 20% in the short-haul fleet and 36% in the long-haul fleet. (*) | 5 | 20 | ||||||||||
Information technology equipment | Straight line without residual value | 5 | 10 | Straight line without residual value | 5 | 10 | ||||||||||
Fixed installations and accessories | Straight line without residual value | 10 | 10 | Straight line without residual value | 10 | 10 | ||||||||||
Motor vehicle | Straight line without residual value | 10 | 10 | Straight line without residual value | 10 | 10 | ||||||||||
Leasehold improvements | Straight line without residual value | 5 | 5 | Straight line without residual value | 5 | 5 | ||||||||||
Other property, plant and equipment | Straight line with residual value of 20% in the short-haul fleet and 36% in the long-haul fleet (*) | 3 | 20 | Straight line with residual value of 20% in the short-haul fleet and 36% in the long-haul fleet. (*) | 3 | 20 |
(*) | Except for certain technical components, which are depreciated on the basis of cycles and flight hours. |
F-1-52
The depreciation chargedaircraft with remarketing clause (**) under modality of financial leasing, which are depreciated according to income in the period ended December 31, 2011, which is included induration of their contracts, between 12 and 18 years. Its residual values are estimated according to market value at the consolidated statementend of income, amounts to ThUS$ 329,081 (ThUS$ 296,613 for the period ended December 31, 2010). Depreciation charges for the year are recognized in Cost of Sales and Administrative Expenses in the consolidated statement of income.such contracts.
Aircraft with remarketing clause are those that are required to sell at the end of the contract. The depreciation charged to income in the period, which is included in the consolidated statement of income, amounts to ThUS$ 777,936 (ThUS$ 830,474 at December 31, 2013 and ThUS$ 612,474 at December 31, 2012). Depreciation charges for the year are recognized in Cost of sales and administrative expenses in the consolidated statement of income. |
(d) | Additional information regarding |
Property, plant and equipment pledged as guarantee: |
In the yearperiod ended December 31, 20112014, were added direct guarantees wereby nine Airbus A321-200 aircraft and three Boeing 787-800 aircraft. Additionally, as a result of fleet transfer plan from TAM Linhas Aéreas S.A. to LATAM Airlines Group S.A., the Company added for sixteendirect guarantees associated with three Airbus A319-100 aircraft, nine of them corresponding to thetwenty one Airbus A320-200 fleet, four to theaircraft and seven Airbus A319-100 fleet and three to Boeing B767-300 fleet. A321-200 aircraft.
Moreover, in the second quarter of 2011 the Company sold three aircraft Airbus A318-100 fleet and in the third quarter two more of the same aircraft A318-100 fleet. Additionally, during the first quarter 2011, the Company sold its participationinterest in the permanent establishments CernicaloFlamenco Leasing LLC, Cisne Leasing LLC, Becacina Leasing LLC, Tricahue Leasing LLC and PetrelLoica Leasing LLC. ThereforeLimited. Products of the Company eliminatedabove direct guarantees associated with five aircraft Airbus A318-100 and three aircraftseven Boeing 767-300, (two freightertwo Airbus A319-100 and one passenger aircrafts).two Airbus A320-200 aircraft were removed.
Additionally, as a result of sale, direct guarantees associated with four Boeing 777-300 aircraft were removed.
Description of property,Property, plant and equipment pledged as guarantee:
As of December 31, 2011 | As of December 31, 2010 | |||||||||||||||||||
Creditor of guarantee | Assets committed | Fleet | Existing Debt | Book Value | Existing Debt | Book Value | ||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||
Wilmington | Aircraft and | Boeing 767 | 1,032,921 | 1,305,915 | 1,043,290 | 1,304,699 | ||||||||||||||
Trust Company | engines | Boeing 777 | 13,750 | 24,664 | 18,088 | 25,915 | ||||||||||||||
BNP Paribas | Aircraft and | Airbus A318 | 187,705 | 239,530 | 299,422 | 359,944 | ||||||||||||||
engines | Airbus A319 | 390,614 | 521,829 | 297,320 | 370,476 | |||||||||||||||
Airbus A320 | 695,308 | 855,214 | 407,275 | 478,082 | ||||||||||||||||
Credite Agricole (*) | Aircraft and | Airbus A319 | 93,019 | 158,355 | 108,803 | 178,342 | ||||||||||||||
engines | Airbus A320 | 34,530 | 149,486 | 58,236 | 172,426 | |||||||||||||||
Airbus A340 | 54,491 | 215,978 | 89,378 | 234,892 | ||||||||||||||||
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Total direct guarantee | 2,502,338 | 3,470,971 | 2,321,812 | 3,124,776 | ||||||||||||||||
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As of December 31, 2014 | As of December 31, 2013 | |||||||||||||||||||
Creditor of guarantee | Assets committed | Fleet | Existing Debt | Book Value | Existing Debt | Book Value | ||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||
Wilmington | Aircraft and engines | Boeing 767 | 1,001,311 | 1,277,357 | 1,437,810 | 1,827,349 | ||||||||||||||
Trust Company | Boeing 777 / 787 | 452,622 | 518,788 | 777,796 | 880,470 | |||||||||||||||
Banco Santander S.A. | Aircraft and engines | Airbus A319 | 66,318 | 100,485 | 74,042 | 105,353 | ||||||||||||||
Airbus A320 | 585,008 | 788,706 | 643,945 | 829,185 | ||||||||||||||||
Airbus A321 | 39,739 | 45,161 | 43,071 | 49,208 | ||||||||||||||||
BNP Paribas | Aircraft and engines | Airbus A319 | 174,714 | 238,103 | 209,993 | 281,846 | ||||||||||||||
Airbus A320 | 162,304 | 207,881 | 199,114 | 257,857 | ||||||||||||||||
Credit Agricole | Aircraft and engines | Airbus A319 | 55,797 | 121,038 | 32,251 | 99,241 | ||||||||||||||
Airbus A320 | 157,514 | 219,460 | 96,774 | 153,531 | ||||||||||||||||
Airbus A321 | 60,288 | 63,939 | — | — | ||||||||||||||||
JP Morgan | Aircraft and engines | Boeing 777 | 237,463 | 278,169 | 259,272 | 292,486 | ||||||||||||||
Wells Fargo | Aircraft and engines | Airbus A320 | 305,949 | 360,064 | 331,854 | 384,273 | ||||||||||||||
Bank of Utah | Aircraft and engines | Airbus A320 | 259,260 | 327,094 | 277,622 | 347,765 | ||||||||||||||
DVB Bank SE | Aircraft and engines | Boeing 767 | — | — | 95,292 | 151,824 | ||||||||||||||
Natixis | Aircraft and engines | Airbus A320 | 48,814 | 55,946 | — | — | ||||||||||||||
Airbus A321 | 405,416 | 488,198 | — | — | ||||||||||||||||
Citibank N. A. | Aircraft and engines | Airbus A320 | 142,591 | 146,535 | — | — | ||||||||||||||
Airbus A321 | 55,836 | 59,452 | — | — | ||||||||||||||||
HSBC | Aircraft and engines | Airbus A320 | 59,005 | 59,342 | — | — | ||||||||||||||
KfW IPEX-Bank | Aircraft and engines | Airbus A320 | 16,088 | 17,516 | — | — | ||||||||||||||
PK AirFinance US, Inc. | Aircraft and engines | Airbus A320 | 69,721 | 70,102 | — | — | ||||||||||||||
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Total direct guarantee | 4,355,758 | 5,443,336 | 4,478,836 | 5,660,388 | ||||||||||||||||
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The amounts of existing debt are presented at nominal value. Book value corresponds to the carrying value of the goods provided as guarantees.
Additionally, there are indirect guarantees related to assets recorded in property,Property, plant and equipment whose total debt at December 31, 20112014 amounted to ThUS $ 316,859 (ThUS $ 227,218ThUS$ 1,626,257 (ThUS$ 2,167,470 at December 31, 2010)2013). The book value of assets with indirect guarantees as of December 31, 20112014 amounts to ThUS$ 504,3552,335,135 (ThUS$ 328,8382,767,593 as of December 31, 2010)2013).
F-1-53
Commitments and others |
Fully depreciated assets and commitments for future purchases are as follows:
As of December 31, 2011 | As of December 31, 2010 | As of December 31, 2014 | As of December 31, 2013 | |||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||
Gross book value of fully depreciated property, plant and equipment still in use | 43,626 | 57,612 | 138,960 | 160,116 | ||||||||||||
Commitments for the acquisition of aircraft | 14,500,000 | 12,350,000 | ||||||||||||||
Commitments for the acquisition of aircraft (*) | 21,500,000 | 23,900,000 |
(*) | Acording to the manufacturer’s price list. |
Purchase commitment of aircraft
Year of delivery | ||||||||||||||||||||||||||||||||
Manufacturer | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | Total | ||||||||||||||||||||||||
Airbus S.A.S. | 16 | 23 | 26 | 31 | 11 | 12 | 5 | 124 | ||||||||||||||||||||||||
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A320-NEO | — | 2 | 18 | 16 | 8 | 8 | — | 52 | ||||||||||||||||||||||||
A321 | 15 | 15 | — | — | — | — | — | 30 | ||||||||||||||||||||||||
A321-NEO | — | — | — | 6 | — | 4 | 5 | 15 | ||||||||||||||||||||||||
A350 | 1 | 6 | 8 | 9 | 3 | — | — | 27 | ||||||||||||||||||||||||
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The Boeing Company | 3 | 5 | 6 | 4 | — | — | — | 18 | ||||||||||||||||||||||||
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B777 | — | — | 2 | — | — | — | — | 2 | ||||||||||||||||||||||||
B787-8 | 4 | 4 | 8 | |||||||||||||||||||||||||||||
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B787-9 | 3 | 5 | — | — | — | — | — | 8 | ||||||||||||||||||||||||
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Total | 19 | 28 | 32 | 35 | 11 | 12 | 5 | 142 | ||||||||||||||||||||||||
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In July 2014 the cancellation of 4 Airbus A320 was signed and changing 12 Airbus A320 aircraft for 12 Airbus A320 NEO aircraft. In December 2009,2014 a contract was signed changing 4 Airbus A320 aircraft for 4 Airbus A320 NEO aircraft and changing 4 Airbus A321 aircraft for 4 Airbus A321 NEO aircraft.
At December 31, 2014, as a result of the Companydifferent aircraft purchase agreements signed a purchase commitment with Airbus for the purchase of 30S.A.S., remain to receive 97 aircraft of theAirbus A320 family, with deliveries between 20112015 and 2016. Later, in December 20102021, and 27 Airbus aircraft A350 family with delivery dates starting from 2015.
The approximate amount is ThUS$ 17,600,000, according to the manufacturer’s price list. Additionally, the Company made another commitment to the manufacturerhas valid purchase options for the purchase of 50 A320 family aircraft with deliveries between 2012 and 2016. Additionally, in June 2011, the Company signed a contract for 20 additional aircraft of the A320 NEO family with deliveries between 2017 and 2018.5 Airbus A350 aircraft.
With regards to the above, as
As of December 31, 2011,2014, and as a result of different aircraft purchase contracts signed with Airbus S.A.S., there remain 90 Airbus aircraft of the A320 family to be delivered between 2012 and 2018. The approximate amount is ThUS$ 7,000,000, according to the manufacturer’s price list. Additionally, the Company has active purchase options for 4 A320 NEO aircraft.
In addition, purchase contracts were signed with The Boeing Company, in February, May and December 2011 for 3, 5 and 2 B767-300 aircraft, respectively.
As of December 31, 2011 and a as result of different aircraft contracts signed with The Boeing Company, 13 B767-300 aircraft remain to be delivered between 2012 and 2013, 2 B77-Freighter aircraft for delivery in 2012 and 26 B787receive a total of sixteen 787 Dreamliner aircraft, with delivery dates from 2012. between 2015 and 2018, and two 777 with delivery expected for 2017.
The approximate amount, is ThUS$ 7,500,000, according to the manufacturer’smanufacturer's price list. In addition,list, is ThUS$ 3,900,000. Additionally, the Company has valid purchase options over 1 B777- Freighter aircraft and 15 B787 Dreamlinerfor 2 Boeing 777 aircraft.
The acquisition of the aircraft is part of the strategic plan for long haul fleet. This plan also means the sale of 15 aircraft model Airbus A318 between 2011 and 2013. It is estimated that this sale will have no significant impact on results. During the third quarter of 2011 the Company sold the last 2 aircraft planned to be sold during 2011, thus completing the planned sale of 5 aircraft this year.
Capitalized interest costs with respect to |
For the year ended December 31, | ||||||||||
2011 | 2010 | |||||||||
Average rate of capitalization of capitalized interest costs | % | 3.51 | 4.31 | |||||||
Costs of capitalized interest | ThUS$ | 33,342 | 18,400 |
F-1-54
For the periods ended December 31, | ||||||||||||||
2014 | 2013 | 2012 | ||||||||||||
Average rate of capitalization of capitalized interest costs | % | 2.84 | 3.63 | 2.60 | ||||||||||
Costs of capitalized interest | ThUS$ | 18,426 | 25,625 | 45,069 |
Financial leases |
The detail of the main financial leases is as follows:
Lessor | Aircraft | Model | As of December 31, 2011 | As of December 31, 2010 | ||||||||
Bluebird Leasing LLC | Boeing 767 | 300F | 2 | 2 | ||||||||
Eagle Leasing LLC | Boeing 767 | 300ER | 1 | 2 | ||||||||
Seagull Leasing LLC | Boeing 767 | 300F | 1 | 1 | ||||||||
Cernicalo Leasing LLC | Boeing 767 | 300F | 2 | — | ||||||||
Petrel Leasing LLC | Boeing 767 | 300ER | 1 | — | ||||||||
Linnet Leasing Limited | Airbus A320 | 200 | 4 | 4 | ||||||||
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Total | 11 | 9 | ||||||||||
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Lessor | Aircraft | Model | As of December 31, 2014 | As of December 31, 2013 | ||||||||
Agonandra Statutory Trust | Airbus A319 | 100 | 4 | 4 | ||||||||
Agonandra Statutory Trust | Airbus A320 | 200 | 2 | 2 | ||||||||
Air Canada | Airbus A340 | 500 | — | 2 | ||||||||
AWMS I (AWAS) | Boeing 767 | 300 | — | 3 | ||||||||
Becacina Leasing LLC | Boeing 767 | 300ER | 1 | — | ||||||||
Caiquen Leasing LLC | Boeing 767 | 300F | 1 | 1 | ||||||||
Cernicalo Leasing LLC | Boeing 767 | 300F | 2 | 2 | ||||||||
Chirihue Leasing Trust | Boeing 767 | 300F | 2 | 2 | ||||||||
Cisne Leasing LLC | Boeing 767 | 300ER | 2 | — | ||||||||
Codorniz Leasing Limited | Airbus A319 | 100 | 2 | 2 | ||||||||
Conure Leasing Limited | Airbus A320 | 200 | 2 | 2 | ||||||||
Flamenco Leasing LLC | Boeing 767 | 300ER | 1 | — | ||||||||
FLYAFI 1 S.R.L. | Boeing 777 | 300ER | 1 | 1 | ||||||||
FLYAFI 2 S.R.L. | Boeing 777 | 300ER | 1 | 1 | ||||||||
FLYAFI 3 S.R.L. | Boeing 777 | 300ER | 1 | 1 | ||||||||
Forderum Holding B.V. (GECAS) | Airbus A320 | 200 | 2 | 2 | ||||||||
Garza Leasing LLC | Boeing 767 | 300ER | 1 | 1 | ||||||||
General Electric Capital Corporation | Airbus A330 | 200 | 3 | 3 | ||||||||
Intraelo BETA Corpotation (KFW) | Airbus A320 | 200 | 1 | 1 | ||||||||
Juliana Leasing Limited | Airbus A320 | 200 | 2 | 2 | ||||||||
Linnet Leasing Limited | Airbus A320 | 200 | 4 | 4 | ||||||||
Loica Leasing Limited | Airbus A319 | 100 | 2 | — | ||||||||
Loica Leasing Limited | Airbus A320 | 200 | 2 | — | ||||||||
Mirlo Leasing LLC | Boeing 767 | 300ER | 1 | 1 |
Lessor NBB Rio de Janeiro Lease CO and Brasilia Lease LLC (BBAM) NBB São Paulo Lease CO. Limited (BBAM) Osprey Leasing Limited Petrel Leasing LLC Pochard Leasing LLC Quetro Leasing LLC SG Infraestructure Italia S.R.L. SL Alcyone LTD (Showa) TMF Interlease Aviation B.V. TMF Interlease Aviation B.V. TMF Interlease Aviation II B.V. TMF Interlease Aviation II B.V. TMF Interlease Aviation III B.V. TMF Interlease Aviation III B.V. TMF Interlease Aviation III B.V. Tricahue Leasing LLC Wacapou Leasing S.A Wells Fargo Bank North National Association (ILFC) Total Leasing Aircraft Model As of
December 31,
2014 As of
December 31,
2013 Airbus A320 200 1 1 Airbus A321 200 1 1 Airbus A319 100 8 8 Boeing 767 300ER 1 1 Boeing 767 300ER 2 2 Boeing 767 300ER 3 3 Boeing 777 300ER 1 1 Airbus A320 200 1 1 Airbus A320 200 1 12 Airbus A330 200 1 1 Airbus A319 100 5 5 Airbus A320 200 2 2 Airbus A319 100 — 3 Airbus A320 200 — 12 Airbus A321 200 — 7 Boeing 767 300ER 3 — Airbus A320 200 1 1 Airbus A330 200 — 1 71 99
Financial leasing contracts where the Company acts as the lessee of aircrafts establish aduration between 12 and 18 year termterms and semi-annual, quarterly and monthly payments of obligations.
Additionally, the lessee will have the obligationsobligation to contract and maintain active the insurance coverage for the aircraft, perform maintenance on the aircraft and update the airworthiness certificates at their own cost.
Fixed assets acquired under financial leases are classified as Other property, plant and equipment. As of December 31, 2011,2014 the Company had elevenseventy one aircraft as financial leases (nine(ninety nine aircraft as of December 31, 2010)2013).
InDuring the yearperiod ended December 31, 2011,2014, due to the sale of its participation in the permanent establishments CernicaloFlamenco Leasing LLC, Cisne Leasing LLC, Becacina Leasing LLC, Tricahue Leasing LLC and PetrelLoica Leasing LLC,Limited, the Company increased its number of aircraft on lease by threeseven Boeing 767-300, (two freightertwo Airbus A319-100 and one passenger aircrafts).two Airbus A320-200 aircraft. Therefore, these aircraft were reclassified from the Plant and equipment category to the category otherOther property plant and equipment. Additionally, in November 2011
During the Company excercised athird quarter of 2014 the option was exercised to purchase one A330-200 and during the fourth quarter of 2014 the option for a B767-300 freighter belongswere exercised to the Eagle Leasing LLC, whichpurchase two A320-200 aircraft. Therefore, this aircraft was reclassified from the Other property plant and equipment category to the category Plant and equipment.
For other hand, as a result of fleet transfer plan from TAM Linhas Aéreas S.A. to LATAM Airlines Group S.A., the Company decreases its number of aircraft on lease by three Airbus A319-100 aircraft, twenty one Airbus A320-200 and seven Airbus A321-200 aircraft as a result of modifications in its financial contracts. Therefore, these aircraft were reclassified from the Other property plant and equipment category to the category Plant and equipment.
Additionally, as a result of the leasing contracts had ended; the Company decreases its number of aircraft on lease by three Boeing 767-300 aircraft and two Airbus A340-500 aircraft. These aircraft were on operative leasing agreement, but according to the stated policy were classified as financial leasing.
The book value of assets under financial leases as of December 31, 20112014 amounts to ThUS$ 464,0822,379,789 (ThUS$ 328,8382,840,147 as of December 31, 2010)2013).
The minimum payments under financial leases are as follows:
As of
As of December 31, 2014 | As of December 31, 2013 | As of December 31, 2012 | ||||||||||||||||||||||||||||||||||
Gross Value | Interest | Present Value | Gross Value | Interest | Present Value | Gross Value | Interest | Present Value | ||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ||||||||||||||||||||||||||||
No later than one year | 403,840 | (48,197 | ) | 355,643 | 462,157 | (53,925 | ) | 408,232 | 523,033 | (66,090 | ) | 456,943 | ||||||||||||||||||||||||
Between one and five years | 1,121,190 | (97,909 | ) | 1,023,281 | 1,406,384 | (118,702 | ) | 1,287,682 | 1,687,596 | (186,145 | ) | 1,501,451 | ||||||||||||||||||||||||
Over five years | 261,877 | (6,409 | ) | 255,468 | 633,120 | (19,562 | ) | 613,558 | 1,135,262 | (57,455 | ) | 1,077,807 | ||||||||||||||||||||||||
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| |||||||||||||||||||
Total | 1,786,907 | (152,515 | ) | 1,634,392 | 2,501,661 | (192,189 | ) | 2,309,472 | 3,345,891 | (309,690 | ) | 3,036,201 | ||||||||||||||||||||||||
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NOTE 17 - CURRENT AND DEFERRED TAXES
In the period ended December 31, 20112014, the income tax provision was calculated at the rate of 21% for the business year 2014, in accordance with the recently enacted Law No. 20,780 published in the Official Journal of the Republic of Chile on September 29, 2014.
Gross Value | Interest | Present Value | ||||||||||
ThUS$ | ThUS$ | ThUS$ | ||||||||||
No later than one year | 78,369 | (7,622 | ) | 70,747 | ||||||||
Between one and five years | 207,365 | (18,657 | ) | 188,708 | ||||||||
Over five years | 59,152 | (2,078 | ) | 57,074 | ||||||||
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| |||||||
Total | 344,886 | (28,357 | ) | 316,529 | ||||||||
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F-1-55
Among the main changes is the progressive increase of the First Category Tax which will reach 27% in 2018 if the “Partially Integrated Taxation System”(*) is chosen. Alternatively, if the Company chooses the “Attributed Income Taxation System”(*) the top rate would reach 25% in 2017.
As LATAM Airlines Group S.A. is a public company, by default it must choose the “Partially Integrated Taxation System”, unless a future Extraordinary Meeting of December 31, 2010Shareholders of the Company agrees, by a minimum of 2/3 of the votes, to choose the “Attributed Income Taxation System”. This decision must be taken at the latest in the last quarter of 2016.
Gross Value | Interest | Present Value | ||||||||||
ThUS$ | ThUS$ | ThUS$ | ||||||||||
No later than one year | 57,976 | (3,679 | ) | 54,297 | ||||||||
Between one and five years | 127,370 | (7,421 | ) | 119,949 | ||||||||
Over five years | 55,106 | (1,781 | ) | 53,325 | ||||||||
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| |||||||
Total | 240,452 | (12,881 | ) | 227,571 | ||||||||
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NOTE 19 – INCOME TAXESThe effects of the updating of deferred tax assets and liabilities according to rates changes introduced by Law No. 20,780 depending on their period back have been recorded on income for the period. The total effect on income was ThUS $ 150,210, which is explained by an increase in deferred tax assets of ThUS$ 87 and an increase in deferred tax liabilities of ThUS$ 145,253 and an increase in equity by deferred tax of ThUS$ 5,044. The net effect on the assets and liabilities by deferred tax is an increase on liabilities for ThUS$ 145,166.
Deferred tax assets and liabilities are offset if there is a legal right to offset assets and liabilities for income taxes relating to the same entity and tax authority.
(*) | The Partially Integrated Taxation System is one of the tax regimes approved through the Tax Reform previously mentioned, which is based on the taxation by the perception of profits and the Attributed Income Taxation System is based on the taxation by the accrual of profits. |
(a) | Current taxes |
(a.1) | The composition of the current tax assets is the following: |
Current assets | Non-current assets | Total assets | ||||||||||||||||||||||
As of December 31, 2014 | As of December 31, 2013 | As of December 31, 2014 | As of December 31, 2013 | As of December 31, 2014 | As of December 31, 2013 | |||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||
Provisional monthly payments (advances) | 68,752 | 61,570 | — | — | 68,752 | 61,570 | ||||||||||||||||||
Other recoverable credits | 31,956 | 20,320 | 17,663 | — | 49,619 | 20,320 | ||||||||||||||||||
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| |||||||||||||
Total current tax assets | 100,708 | 81,890 | 17,663 | — | 118,371 | 81,890 | ||||||||||||||||||
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(a.2) | The composition of the current tax liabilities are as follows: |
Current liabilities | Non-current liabilities | Total liabilities | ||||||||||||||||||||||
As of December 31, 2014 | As of December 31, 2013 | As of December 31, 2014 | As of December 31, 2013 | As of December 31, 2014 | As of December 31, 2013 | |||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||
Income tax provision | 16,712 | 9,919 | — | — | 16,712 | 9,919 | ||||||||||||||||||
Additional tax provision | 1,177 | 1,664 | — | — | 1,177 | 1,664 | ||||||||||||||||||
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| |||||||||||||
Total current tax liabilities | 17,889 | 11,583 | — | — | 17,889 | 11,583 | ||||||||||||||||||
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(b) | Deferred taxes |
The balances of deferred taxestax are as follows:the following:
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||
Concept | As of December 31, 2011 | As of December 31, 2010 | As of December 31, 2011 | As of December 31, 2010 | As of December 31, 2014 | As of December 31, 2013 | As of December 31, 2014 | As of December 31, 2013 | ||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||||||||
Depreciation | (547 | ) | (415 | ) | 338,741 | 290,254 | (23,675 | ) | (17,152 | ) | 847,965 | 557,845 | ||||||||||||||||||||
Leased assets | (102,457 | ) | (147,074 | ) | 83,318 | 46,688 | ||||||||||||||||||||||||||
Amortization | 14,255 | 12,286 | 36,667 | 29,606 | (31,750 | ) | (10,778 | ) | 128,350 | 113,579 | ||||||||||||||||||||||
Provisions | 7,036 | 8,128 | 48,681 | 23,017 | 416,153 | 317,883 | 65,076 | (207,358 | ) | |||||||||||||||||||||||
Post-employment benefit obligations | 865 | 622 | (924 | ) | (982 | ) | ||||||||||||||||||||||||||
Revaluation of financial instruments | — | — | (28,788 | ) | (21,926 | ) | 270 | 562 | (12,536 | ) | (15,508 | ) | ||||||||||||||||||||
Tax losses | 35,300 | 13,229 | — | — | 151,569 | 267,189 | (571,180 | ) | (284,339 | ) | ||||||||||||||||||||||
Revaluation property, plant and equipment | — | — | (5,999 | ) | (18,544 | ) | ||||||||||||||||||||||||||
Intangibles | — | — | 523,275 | 593,325 | ||||||||||||||||||||||||||||
Others | 3,239 | 4,234 | (24,752 | ) | (7,957 | ) | (2,787 | ) | (7,668 | ) | (6,375 | ) | (18,460 | ) | ||||||||||||||||||
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| |||||||||||||||||||||||||
Total | 60,148 | 38,084 | 369,625 | 312,012 | 407,323 | 402,962 | 1,051,894 | 767,228 | ||||||||||||||||||||||||
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MovementsThe balance of deferred tax assets and liabilities fromare composed principally of temporary differences to reverse in the long term.
Movements of Deferred tax assets and liabilities:
(a) From January 1 2010 to December 31, 2011 are as follows:2012
Opening balance Assets/(liabilities) | Recognized in consolidated income | Recognized in comprehensive income | Incoporation by business combination | Exchange rate variation | Efect from change in tax rate | Others | Ending balance Asset (liability) | |||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||||||||
Depreciation | (339,288 | ) | (21,066 | ) | — | (34,512 | ) | (203 | ) | (59,776 | ) | — | (454,845 | ) | ||||||||||||||||||
Leased assets | (65,240 | ) | (160,147 | ) | — | (31,533 | ) | (186 | ) | (11,513 | ) | — | (268,619 | ) | ||||||||||||||||||
Amortization | (22,412 | ) | (29,157 | ) | — | (18,614 | ) | (109 | ) | (6,471 | ) | — | (76,763 | ) | ||||||||||||||||||
Provisions | (37,759 | ) | 86,040 | — | 512,487 | 3,008 | (8,353 | ) | — | 555,423 | ||||||||||||||||||||||
Revaluation of financial instruments | 28,788 | (7,249 | ) | (2,623 | ) | 12,785 | 138 | 5,080 | — | 36,919 | ||||||||||||||||||||||
Tax losses | 118,597 | 152,022 | — | 134,833 | 792 | 14,334 | — | 420,578 | ||||||||||||||||||||||||
Revaluation propety, plant and equipment | — | (36,931 | ) | — | 59,474 | 349 | — | — | 22,892 | |||||||||||||||||||||||
Intangibles | — | — | — | (676,197 | ) | (3,970 | ) | — | — | (680,167 | ) | |||||||||||||||||||||
Others | 7,837 | 410 | (2,734 | ) | 34,577 | (165 | ) | 1,080 | (12,695 | ) | 28,310 | |||||||||||||||||||||
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| |||||||||||||||||
Total | (309,477 | ) | (16,078 | ) | (5,357 | ) | (6,700 | ) | (346 | ) | (65,619 | ) | (12,695 | ) | (416,272 | ) | ||||||||||||||||
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(b) From January 1 to December 31, 2013
Opening balance Assets/(liabilities) | Recognized in consolidated income | Recognized in comprehensive income | Exchange rate variation | Others | Ending balance Asset (liability) | |||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||
Depreciation | (454,845 | ) | (124,584 | ) | — | 4,432 | — | (574,997 | ) | |||||||||||||||
Leased assets | (268,619 | ) | 70,807 | — | 4,050 | — | (193,762 | ) | ||||||||||||||||
Amortization | (76,763 | ) | (49,985 | ) | — | 2,391 | — | (124,357 | ) | |||||||||||||||
Provisions | 555,423 | 35,636 | — | (65,818 | ) | — | 525,241 | |||||||||||||||||
Revaluation of financial instruments | 36,919 | 146 | (19,345 | ) | (1,650 | ) | — | 16,070 | ||||||||||||||||
Tax losses | 420,578 | 148,266 | — | (17,316 | ) | — | 551,528 | |||||||||||||||||
Revaluation propety, plant and equipment | 22,892 | 3,290 | — | (7,638 | ) | — | 18,544 | |||||||||||||||||
Intangibles | (680,167 | ) | — | — | 86,842 | — | (593,325 | ) | ||||||||||||||||
Others | 28,310 | 9,543 | — | (28,070 | ) | 1,009 | 10,792 | |||||||||||||||||
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| |||||||||||||
Total | (416,272 | ) | 93,119 | (19,345 | ) | (22,777 | ) | 1,009 | (364,266 | ) | ||||||||||||||
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(c) From January 1 to December 31, 2014
Opening balance Assets/(liabilities) | Recognized in consolidated income | Recognized in comprehensive income | Exchange rate variation | Efect from change in tax rate | Others | Ending balance Asset (liability) | ||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ||||||||||||||||||||||
Depreciation | (574,997 | ) | (74,623 | ) | — | 3,575 | (225,595 | ) | — | (871,640 | ) | |||||||||||||||||
Leased assets | (193,762 | ) | 47,749 | — | 3,267 | (43,029 | ) | — | (185,775 | ) | ||||||||||||||||||
Amortization | (124,357 | ) | (21,621 | ) | — | 1,928 | (16,050 | ) | — | (160,100 | ) | |||||||||||||||||
Provisions | 525,241 | (99,262 | ) | — | (53,090 | ) | (21,812 | ) | — | 351,077 | ||||||||||||||||||
Revaluation of financial instruments | 16,070 | (53,675 | ) | 47,979 | (1,331 | ) | 3,763 | — | 12,806 | |||||||||||||||||||
Tax losses (*) | 551,528 | 147,798 | — | (13,968 | ) | 163,596 | (126,205 | ) | 722,749 | |||||||||||||||||||
Revaluation propety, plant and equipment | 18,544 | (6,384 | ) | — | (6,161 | ) | — | — | 5,999 | |||||||||||||||||||
Intangibles | (593,325 | ) | — | — | 70,050 | — | — | (523,275 | ) | |||||||||||||||||||
Others | 10,792 | 13,455 | — | (26,200 | ) | (6,039 | ) | 11,580 | 3,588 | |||||||||||||||||||
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| |||||||||||||||
Total | (364,266 | ) | (46,563 | ) | 47,979 | (21,930 | ) | (145,166 | ) | (114,625 | ) | (644,571 | ) | |||||||||||||||
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|
Beginning balance asset (liability) | Recognized in consolidated income | Recognized in comprehensive income | Incorporation by business combinations | Others | Ending balance asset (liability) | |||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||
Depreciation | (222,188 | ) | (68,481 | ) | — | — | — | (290,669 | ) | |||||||||||||||
Amortization | (22,453 | ) | (5,948 | ) | — | 11,081 | — | (17,320 | ) | |||||||||||||||
Provisions | (2,102 | ) | (17,968 | ) | — | 5,181 | — | (14,889 | ) | |||||||||||||||
Post-employment benefit obligations | 1,183 | (196 | ) | — | 617 | — | 1,604 | |||||||||||||||||
Revaluation of financial instruments | 18,891 | — | 3,035 | — | — | 21,926 | ||||||||||||||||||
Tax losses | 5,013 | (1,303 | ) | — | 9,519 | — | 13,229 | |||||||||||||||||
Others | (8,311 | ) | 16,645 | (120 | ) | 2,545 | 1,432 | 12,191 | ||||||||||||||||
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|
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|
| |||||||||||||
Total | (229,967 | ) | (77,251 | ) | 2,915 | 28,943 | 1,432 | (273,928 | ) | |||||||||||||||
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F-1-56
Therefore, the company TAM Linhas Aéreas S.A. decreased its liability associated with the REFIS program using its deferred tax assets related to its tax loss of ThUS $ 126,205 at December 31, 2014, generating no effect on the outcome of tax.
Beginning balance asset (liability) | Recognized in consolidated income | Recognized in comprehensive income | Incorporation by business combinations | Reclassification | Others | Sale of investment | Ending balance asset (liability) | |||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||||||||
Depreciation | (290,669 | ) | (48,614 | ) | — | — | — | — | (5 | ) | (339,288 | ) | ||||||||||||||||||||
Amortization | (17,320 | ) | (8,903 | ) | — | 3,811 | — | — | — | (22,412 | ) | |||||||||||||||||||||
Provisions | (14,889 | ) | (26,368 | ) | — | — | — | — | (388 | ) | (41,645 | ) | ||||||||||||||||||||
Post-employment benefit obligations | 1,604 | 185 | — | — | — | — | — | 1,789 | ||||||||||||||||||||||||
Revaluation of financial instruments | 21,926 | — | 6,862 | — | — | — | — | 28,788 | ||||||||||||||||||||||||
Tax losses | 13,229 | 28,716 | — | — | (6,645 | ) | — | — | 35,300 | |||||||||||||||||||||||
Others | 12,191 | 16,542 | 1,846 | — | — | (2,521 | ) | (67 | ) | 27,991 | ||||||||||||||||||||||
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| |||||||||||||||||
Total | (273,928 | ) | (38,442 | ) | 8,708 | 3,811 | (6,645 | ) | (2,521 | ) | (460 | ) | (309,477 | ) | ||||||||||||||||||
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Deferred tax assets not recognized:
As of December 31, 2011 | As of December 31, 2010 | As of December 31, 2014 | As of December 31, 2013 | |||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||
Temporary differences | 2,152 | 2,152 | ||||||||||||||
Tax losses | 35 | 1,662 | 2,781 | 6,538 | ||||||||||||
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|
| |||||||||||||
Total Deferred tax assets not recognized | 2,187 | 3,814 | 2,781 | 6,538 | ||||||||||||
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|
Deferred income tax assets are recognized foron tax loss carry-forwards, are recognized to the extent that the realization of the relatedit is likely to provide relevant tax benefit through future taxable profits is probable.profits. The Company didhas not recognizerecognized deferred income tax assets of ThUS$ 352,781 (ThUS$ 1,6626,538 at December 31, 2010) in respect2013) compared to losses amounting toa loss of ThUS$ 10311,620 (ThUS$ 5,99228,855 at December 31, 2010) that can be carried2013) to offset against future taxable income.years tax benefits.
Expense (income) for deferredDeferred tax expense and current income taxes for the years ended at December 31, 2011 and December 31, 2010, respectively, are as follows:taxes:
For the year ended December 31, | ||||||||
2011 | 2010 | |||||||
ThUS$ | ThUS$ | |||||||
Expense for current income tax | ||||||||
Current tax expense | 19,470 | 8,890 | ||||||
Adjustment to previous year’s current tax | 3,877 | (3,153 | ) | |||||
Other current tax expense (income) | — | (1,881 | ) | |||||
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|
| |||||
Total current tax expense, net | 23,347 | 3,856 | ||||||
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|
| |||||
Expense for deferred income taxes | ||||||||
Deferred expense (income) for taxes related to the creation and reversal of temporary differences | 40,051 | 75,284 | ||||||
Reduction (increase) in value of deferred tax assets | (1,609 | ) | 1,967 | |||||
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|
|
| |||||
Total deferred tax expense, net | 38,442 | 77,251 | ||||||
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| |||||
Income tax expense | 61,789 | 81,107 | ||||||
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|
Current tax expense Current tax expense Adjustment to previous period’s current tax Other current tax expense Total current tax expense, net Deferred tax expense Deferred expense for taxes related to the creation and reversal of temporary differences Reduction (increase) in value of deferred tax assets during the evaluation of its usefulness Total deferred tax expense, net Income tax expense 2014 For the periods ended
December 31,
2013 2012 ThUS$ ThUS$ ThUS$ 97,782 73,611 34,563 (2,151 ) (561 ) (13,886 ) — — 12 95,631 73,050 20,689 196,676 (92,863 ) 80,293 97 (256 ) 1,404 196,773 (93,119 ) 81,697 292,404 (20,069 ) 102,386
F-1-57
Composition of income tax expense (income):
For the year ended December 31, | For the periods ended December 31, | |||||||||||||||||||
2011 | 2010 | 2014 | 2013 | 2012 | ||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ||||||||||||||||
Current tax expense, net, foreign | 4,486 | 1,121 | 92,272 | 61,118 | 30,827 | |||||||||||||||
Current tax expense, net, Chile | 18,861 | 2,735 | 3,359 | 11,932 | (10,138 | ) | ||||||||||||||
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|
|
| ||||||||||||||||
Total current tax expense, net | 23,347 | 3,856 | 95,631 | 73,050 | 20,689 | |||||||||||||||
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|
|
| ||||||||||||||||
Deferred tax expense, net, foreign | (20,876 | ) | 3,724 | 168,049 | (112,047 | ) | (53,842 | ) | ||||||||||||
Deferred tax expense, net, Chile | 59,318 | 73,527 | 28,724 | 18,928 | 135,539 | |||||||||||||||
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|
|
| ||||||||||||||||
Deferred tax expense, net, total | 38,442 | 77,251 | 196,773 | (93,119 | ) | 81,697 | ||||||||||||||
|
|
|
|
| ||||||||||||||||
Income tax expense | 61,789 | 81,107 | 292,404 | (20,069 | ) | 102,386 | ||||||||||||||
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|
Reconciliation ofProfit before tax expense usingby the legal rate to the tax expense using the effective rate:
For the year ended December 31, | ||||||||
2011 | 2010 | |||||||
ThUS$ | ThUS$ | |||||||
Tax expense using the legal rate | 76,410 | 85,138 | ||||||
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|
| |||||
Tax effect of legal rate change | (10,571 | ) | — | |||||
Tax effect of rates in other jurisdictions | 1,916 | 1,491 | ||||||
Tax effect of non-taxable operating revenues | (11,094 | ) | (4,089 | ) | ||||
Tax effect of disallowable expenses | 5,087 | 849 | ||||||
Tax effect of current period tax losses not recognized | — | 1,967 | ||||||
Other increases (decreases) | 41 | (4,249 | ) | |||||
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|
| |||||
Total adjustments to tax expense using the legal rate | (14,621 | ) | (4,031 | ) | ||||
|
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|
| |||||
Tax expense using the effective rate | 61,789 | 81,107 | ||||||
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|
|
Reconciliation of legal tax rate to effective tax rate:in Chile (21%)
For the year ended December 31, | ||||||||
2011 | 2010 | |||||||
% | % | |||||||
Legal tax rate | 20.00 | 17.00 | ||||||
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|
|
| |||||
Effect of tax rates for legal rate change | (2.77 | ) | — | |||||
Effect of tax rates in other jurisdictions | 0.50 | 0.30 | ||||||
Effect of tax rate on non-taxable operating revenues | (2.89 | ) | (0.82 | ) | ||||
Effect of tax rate on disallowable expenses | 1.33 | 0.17 | ||||||
Effect of tax rate on use of not-previously recognized tax losses | — | 0.39 | ||||||
Other increase (decrease) | 0.01 | (0.84 | ) | |||||
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|
|
| |||||
Total adjustment to the legal tax rate | (3.82 | ) | (0.80 | ) | ||||
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|
| |||||
Total effective tax rate | 16.18 | 16.20 | ||||||
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|
|
For the periods ended | ||||||||||||||||||||||||
December 31, | December 31, | |||||||||||||||||||||||
2014 | 2013 | 2012 | 2014 | 2013 | 2012 | |||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | % | % | % | |||||||||||||||||||
Tax expense using the legal rate | 6,805 | (2) | (61,035 | ) | 22,633 | (1) | 21.00 | (2) | 20.00 | 20.00 | (1) | |||||||||||||
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|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Tax effect by change in tax rate | 150,210 | — | 70,441 | 463.55 | — | 62.24 | ||||||||||||||||||
Tax effect of rates in other jurisdictions | 112,563 | (34,287 | ) | (10,512 | ) | 347.37 | 11.24 | (9.28 | ) | |||||||||||||||
Tax effect of non-taxable operating revenues | (60,960 | ) | (24,004 | ) | (7,029 | ) | (188.12 | ) | 7.87 | (6.21 | ) | |||||||||||||
Tax effect of disallowable expenses | 88,643 | 98,211 | 27,437 | 273.55 | (32.18 | ) | 24.24 | |||||||||||||||||
Other increases (decreases) in legal tax charge | (4,857 | ) | 1,046 | (584 | ) | (14.99 | ) | (0.34 | ) | (0.52 | ) | |||||||||||||
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| |||||||||||||
Total adjustments to tax expense using the legal rate | 285,599 | 40,966 | 79,753 | 881.36 | (13.41 | ) | 70.47 | |||||||||||||||||
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|
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|
| |||||||||||||
Tax expense using the effective rate | 292,404 | (20,069 | ) | 102,386 | 902.36 | 6.59 | 90.47 | |||||||||||||||||
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(1) | On September 27, 2012, the Law N° 20,630 was published in the Official Journal that “Improves Tax Legislation and Finance Education Reform”. Among the major tax reforms that the amending Law contains, the First Category Tax Rate was modified which must be declared and paid beginning in the 2013 tax year. |
F-1-58
(2) | On September 29, 2014, Law No. 20,780 “Amendment to the system of income taxation and introduces various adjustments in the tax system.” was published in the Official Journal of the Republic of Chile. Within major tax reforms that law contains is modified gradually from 2014 to 2018 the First- Category Tax rate to be declared and paid starting in tax year 2015. Thus, at December 31, 2014, the Company recognized a loss ThUS$ 150,210 as a result of the rate increase. |
Deferred taxes related to items charged to net equity:
For the year ended December 31, | ||||||||
2011 | 2010 | |||||||
ThUS$ | ThUS$ | |||||||
Aggregate deferred taxation of components of other comprehensive income | 8,708 | 2,915 | ||||||
Aggregate deferred taxation related to items charged to net equity | (355 | ) | (599 | ) | ||||
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|
|
| |||||
Total deferred taxes related to items charged to net equity | 8,353 | 2,316 | ||||||
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|
|
Deferred tax effects of the components of other comprehensive income:
For the period ended December 31, | ||||||||
2014 | 2013 | |||||||
ThUS$ | ThUS$ | |||||||
Aggregate deferred taxation of components of other comprehensive income | 40,227 | (19,345 | ) | |||||
Tax effect by change legal tax rate in other comprehensive income (*) | 7,752 | — | ||||||
Aggregate deferred taxation related to items charged to net equity | (3,389 | ) | (3,440 | ) | ||||
Tax effect by change legal tax rate in net equity (*) | (2,708 | ) | — | |||||
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|
|
| |||||
Total deferred taxes related to items charged to net equity | 41,882 | (22,785 | ) | |||||
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|
As of December 31, 2011 | ||||||||||||
Amount before Taxes | Income tax expense (income) | Amount after Taxes | ||||||||||
ThUS$ | ThUS$ | ThUS$ | ||||||||||
Cash-flow hedges | 40,368 | (6,862 | ) | 33,506 | ||||||||
Translation adjustment | 10,864 | (1,846 | ) | 9,018 | ||||||||
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| |||||||||||
(8,708 | ) | |||||||||||
|
|
(*) | Correspond to the tax by tax rate increases Law No. 20,780, tax reform, published in the Official Journal of the Republic of Chile on September 29, 2014. |
As of December 31, 2010 | ||||||||||||
Amount before Taxes | Income tax expense (income) | Amount after Taxes | ||||||||||
ThUS$ | ThUS$ | ThUS$ | ||||||||||
Cash-flow hedges | 17,855 | (3,035 | ) | 14,820 | ||||||||
Translation adjustment | (708 | ) | 120 | (588 | ) | |||||||
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| |||||||||||
(2,915 | ) | |||||||||||
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NOTE 20 –18 - OTHER FINANCIAL LIABILITIES
The composition of otherOther financial liabilities is as follows:
As of December 31, 2011 | As of December 31, 2010 | |||||||
ThUS$ | ThUS$ | |||||||
Current | ||||||||
(a) Bank loans | 537,334 | 495,261 | ||||||
(b) Other financial liabilities | 4,907 | 5,321 | ||||||
(c) Hedge liabilities | 40,016 | 42,042 | ||||||
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|
|
| |||||
Total Current | 582,257 | 542,624 | ||||||
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|
|
| |||||
Non-current | ||||||||
(a) Bank loans | 2,978,973 | 2,450,033 | ||||||
(b) Other financial liabilities | 9,859 | 14,427 | ||||||
(c) Hedge liabilities | 120,304 | 97,888 | ||||||
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|
|
| |||||
Total Non-current | 3,109,136 | 2,562,348 | ||||||
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|
|
Current (a) Interest bearing loans (b) Derivatives not recognized as a hedge (c) Hedge derivatives Total current Non-current (a) Interest bearing loans (b) Derivatives not recognized as a hedge (c) Hedge derivatives Total non-current As of
December 31,
2014 As of
December 31,
2013 ThUS$ ThUS$ 1,397,382 1,969,281 1,190 4,040 226,043 66,466 1,624,615 2,039,787 7,360,685 7,803,588 — 1,491 28,327 54,906 7,389,012 7,859,985
F-1-59
(a) Interest bearing loans
Obligations with credit institutions and debt instruments:
As of December 31, 2011 | As of December 31, 2010 | As of December 31, 2014 | As of December 31, 2013 | |||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||
Current | ||||||||||||||||
Loans to exporters | 327,278 | 401,263 | ||||||||||||||
Bank loans | 153,765 | 151,417 | 98,711 | 602,618 | ||||||||||||
Guaranteed obligations | 310,217 | 283,637 | 472,864 | 455,512 | ||||||||||||
Other guaranteed obligations | 61,872 | 31,109 | ||||||||||||||
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| |||||||||||||||
Subtotal bank loans | 960,725 | 1,490,502 | ||||||||||||||
Obligation with the public | 21,206 | 21,761 | ||||||||||||||
Financial leases | 70,747 | 54,297 | 364,514 | 423,537 | ||||||||||||
Other loans | 2,605 | 5,910 | 50,937 | 33,481 | ||||||||||||
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|
|
| |||||||||||||
Total current | 537,334 | 495,261 | 1,397,382 | 1,969,281 | ||||||||||||
|
|
|
| |||||||||||||
Non-current | ||||||||||||||||
Bank loans | 247,725 | 146,884 | 415,667 | 322,207 | ||||||||||||
Guaranteed obligations | 2,159,055 | 2,023,666 | 3,765,518 | 3,776,910 | ||||||||||||
Other guaranteed obligations | 93,992 | 64,247 | ||||||||||||||
|
| |||||||||||||||
Subtotal bank loans | 4,275,177 | 4,163,364 | ||||||||||||||
Obligation with the public | 1,111,481 | 1,116,671 | ||||||||||||||
Financial leases | 245,782 | 173,274 | 1,344,520 | 1,902,715 | ||||||||||||
Other loans | 326,411 | 106,209 | 629,507 | 620,838 | ||||||||||||
|
|
|
| |||||||||||||
Total non-current | 2,978,973 | 2,450,033 | 7,360,685 | 7,803,588 | ||||||||||||
|
|
|
| |||||||||||||
Total obligations with financial institutions | 3,516,307 | 2,945,294 | 8,758,067 | 9,772,869 | ||||||||||||
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|
|
|
All interest-bearing liabilities are recorded using the effective interest rate method. Under IFRS, the effective interest rate for loans with a fixed interest rate does not vary throughout the loan, while in the case of loans with variable interest rates, the effective rate changes on each date of repricingreprising of the loan.
Currency balances that make the interest bearing loans:
As of December 31, 2014 | As of December 31, 2013 | |||||||
Currency | ThUS$ | ThUS$ | ||||||
Argentine peso | 39,053 | 43,335 | ||||||
Brazilian real | 53,410 | 76,674 | ||||||
Chilean peso (U.F.) | 187,614 | 267,554 | ||||||
Euro | 547 | 2,029 | ||||||
US Dollar | 8,477,443 | 9,383,277 | ||||||
|
|
|
| |||||
Total | 8,758,067 | 9,772,869 | ||||||
|
|
|
|
Interest-bearing loans atdue in installments to December 31, 20112014
Debtor: LATAM Airlines Group S.A. and December 31, 2010, are as follows:Subsidiaries, Tax No. 89.862.200-2, Chile.
As of December 31, 2011 | As of December 31, 2010 | |||||||
ThUS$ | ThUS$ | |||||||
US Dollar | 3,516,307 | 2,753,788 | ||||||
Chilean Peso (*) | — | 187,101 | ||||||
Colombian Peso | — | 4,405 | ||||||
|
|
|
| |||||
Total | 3,516,307 | 2,945,294 | ||||||
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|
|
|
Nominal values | Accounting values | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax No. | Creditor | Creditor country | Currency | Up to 90 days | More than 90 days to one year | More than one to three years | More than three to five years | More than five years | Total nominal value | Up to 90 days | More than 90 days to one year | More than one to three years | More than three to five years | More than five years | Total accounting value | Amortization | Effective rate | Nominal rate | ||||||||||||||||||||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | % | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
Loans to exporters | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
97.032.000-8 | BBVA | Chile | US$ | 100,000 | — | — | — | — | 100,000 | 100,058 | — | — | — | — | 100,058 | At expiration | 0.40 | 0.40 | ||||||||||||||||||||||||||||||||||||||||||||||
97.036.000-K | SANTANDER | Chile | US$ | 45,000 | — | — | — | — | 45,000 | 45,040 | — | — | — | — | 45,040 | At expiration | 0.34 | 0.34 | ||||||||||||||||||||||||||||||||||||||||||||||
97.030.000-7 | ESTADO | Chile | US$ | 55,000 | — | — | — | — | 55,000 | 55,022 | — | — | — | — | 55,022 | At expiration | 0.52 | 0.52 | ||||||||||||||||||||||||||||||||||||||||||||||
97.006.000-6 | BCI | Chile | US$ | 100,000 | — | — | — | — | 100,000 | 100,140 | — | — | — | — | 100,140 | At expiration | 0.47 | 0.47 | ||||||||||||||||||||||||||||||||||||||||||||||
76.645.030-K | ITAU | Chile | US$ | 15,000 | — | — | — | — | 15,000 | 15,018 | — | — | — | — | 15,018 | At expiration | 0.65 | 0.65 | ||||||||||||||||||||||||||||||||||||||||||||||
97.951.000-4 | HSBC | Chile | US$ | 12,000 | — | — | — | — | 12,000 | 12,000 | — | — | — | — | 12,000 | At expiration | 0.50 | 0.50 | ||||||||||||||||||||||||||||||||||||||||||||||
Bank loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
97.023.000-9 | CORPBANCA | Chile | UF | 14,242 | 42,725 | 113,934 | 17,367 | — | 188,268 | 15,542 | 42,725 | 112,160 | 17,187 | — | 187,614 | Quarterly | 4.85 | 4.85 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | CITIBANK | Argentina | ARS | — | 17,542 | — | — | — | 17,542 | 122 | 17,542 | — | — | — | 17,664 | Monthly | 31.00 | 31.00 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | BBVA | Argentina | ARS | — | 21,050 | — | — | — | 21,050 | 339 | 21,050 | — | — | — | 21,389 | Monthly | 33.00 | 33.00 | ||||||||||||||||||||||||||||||||||||||||||||||
97.036.000-K | BBVA | Chile | US$ | — | — | 282,967 | — | — | 282,967 | 928 | — | 282,967 | — | — | 283,895 | Quarterly | 2.33 | 2.33 | ||||||||||||||||||||||||||||||||||||||||||||||
Guaranteed obligations | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
0-E | CREDIT AGRICOLE | France | US$ | 17,225 | 52,658 | 105,594 | 62,209 | 35,883 | 273,569 | 17,745 | 52,658 | 105,594 | 62,209 | 35,883 | 274,089 | Quarterly | 1.68 | 1.43 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | BNP PARIBAS | U.S.A. | US$ | 7,815 | 24,005 | 67,806 | 73,475 | 178,116 | 351,217 | 8,940 | 24,005 | 67,248 | 73,287 | 178,078 | 351,558 | Quarterly | 2.13 | 2.04 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | WELLS FARGO | U.S.A. | US$ | 30,351 | 91,866 | 251,040 | 260,112 | 669,599 | 1,302,968 | 34,771 | 91,866 | 219,808 | 245,026 | 653,056 | 1,244,527 | Quarterly | 2.26 | 1.57 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | CITIBANK | U.S.A. | US$ | 16,624 | 50,489 | 139,491 | 146,931 | 330,579 | 684,114 | 18,154 | 50,489 | 128,993 | 141,745 | 323,754 | 663,135 | Quarterly | 2.24 | 1.49 | ||||||||||||||||||||||||||||||||||||||||||||||
97.036.000-K | SANTANDER | Chile | US$ | 5,127 | 15,545 | 42,646 | 44,472 | 72,551 | 180,341 | 5,418 | 15,545 | 40,183 | 43,413 | 71,879 | 176,438 | Quarterly | 1.32 | 0.78 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | BTMU | U.S.A. | US$ | 2,649 | 8,042 | 22,221 | 23,393 | 51,340 | 107,645 | 2,838 | 8,042 | 20,557 | 22,621 | 50,668 | 104,726 | Quarterly | 1.64 | 1.04 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | APPLE BANK | U.S.A. | US$ | 1,296 | 3,952 | 10,919 | 11,516 | 25,707 | 53,390 | 1,448 | 3,952 | 10,094 | 11,131 | 25,366 | 51,991 | Quarterly | 1.63 | 1.03 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | US BANK | U.S.A. | US$ | 14,158 | 42,960 | 118,206 | 123,705 | 349,129 | 648,158 | 17,169 | 42,960 | 97,791 | 113,644 | 337,272 | 608,836 | Quarterly | 3.99 | 2.81 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | DEUTSCHE BANK | U.S.A. | US$ | 4,552 | 14,031 | 39,791 | 24,725 | 72,180 | 155,279 | 5,190 | 14,031 | 39,791 | 24,726 | 72,180 | 155,918 | Quarterly | 3.25 | 3.25 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | NATIXIS | France | US$ | 9,739 | 29,807 | 84,884 | 87,304 | 242,496 | 454,230 | 10,278 | 29,807 | 84,884 | 87,304 | 242,496 | 454,769 | Quarterly | 1.86 | 1.81 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | HSBC | U.S.A. | US$ | 1,340 | 4,082 | 11,249 | 11,820 | 30,514 | 59,005 | 1,474 | 4,082 | 11,249 | 11,820 | 30,514 | 59,139 | Quarterly | 2.29 | 1.48 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | PK AirFinance | U.S.A. | US$ | 1,755 | 5,452 | 16,014 | 18,412 | 28,088 | 69,721 | 1,810 | 5,452 | 16,014 | 18,412 | 28,088 | 69,776 | Quarterly | 1.86 | 1.86 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | KFW IPEX-BANK | U.S.A. | US$ | 611 | 1,885 | 5,568 | 4,334 | 3,690 | 16,088 | 613 | 1,885 | 5,568 | 4,334 | 3,690 | 16,090 | Quarterly | 2.10 | 2.10 | ||||||||||||||||||||||||||||||||||||||||||||||
— | SWAP Aircraft arrivals | — | US$ | 595 | 1,647 | 3,333 | 1,658 | 157 | 7,390 | 595 | 1,647 | 3,333 | 1,658 | 157 | 7,390 | Quarterly | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
Other guaranteed obligations | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
0-E | DVB BANK SE | U.S.A. | US$ | 7,877 | 23,877 | 32,492 | — | — | 64,246 | 7,920 | 23,878 | 32,492 | — | — | 64,290 | Quarterly | 2.00 | 2.00 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | CREDIT AGRICOLE | U.S.A. | US$ | 7,459 | 22,378 | 61,500 | — | — | 91,337 | 7,696 | 22,378 | 61,500 | — | — | 91,574 | Quarterly | 1.73 | 1.73 | ||||||||||||||||||||||||||||||||||||||||||||||
Financial leases | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
0-E | ING | U.S.A. | US$ | 7,744 | 23,786 | 52,041 | 31,151 | 11,806 | 126,528 | 8,754 | 23,786 | 50,985 | 30,853 | 11,771 | 126,149 | Quarterly | 4.84 | 4.33 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | CREDIT AGRICOLE | France | US$ | 1,581 | 4,877 | 13,955 | — | — | 20,413 | 1,628 | 4,877 | 13,955 | — | — | 20,460 | Quarterly | 1.20 | 1.20 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | CITIBANK | U.S.A. | US$ | 4,409 | 13,657 | 39,402 | 44,177 | 13,804 | 115,449 | 5,384 | 13,657 | 38,125 | 43,767 | 13,762 | 114,695 | Quarterly | 6.40 | 5.67 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | PEFCO | U.S.A. | US$ | 14,549 | 44,742 | 125,130 | 63,957 | 3,827 | 252,205 | 16,216 | 44,742 | 122,596 | 63,620 | 3,819 | 250,993 | Quarterly | 5.35 | 4.76 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | BNP PARIBAS | U.S.A. | US$ | 9,457 | 29,109 | 83,466 | 58,792 | 10,848 | 191,672 | 10,125 | 29,109 | 81,505 | 58,421 | 10,820 | 189,980 | Quarterly | 4.14 | 3.68 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | WELLS FARGO | U.S.A. | US$ | 4,373 | 13,323 | 37,242 | 39,862 | 44,525 | 139,325 | 4,830 | 13,323 | 357,710 | 39,264 | 44,290 | 459,417 | Quarterly | 3.98 | 3.53 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | DVB BANK SE | U.S.A. | US$ | 4,457 | 13,545 | 32,567 | — | — | 50,569 | 4,545 | 13,545 | 32,567 | — | — | 50,657 | Quarterly | 1.89 | 1.89 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | US BANK | U.S.A. | US$ | 280 | 11,701 | — | — | — | 11,981 | 280 | 11,701 | — | — | — | 11,981 | Monthly | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | BANC OF AMERICA | U.S.A. | US$ | 643 | 2,049 | 2,770 | — | — | 5,462 | 664 | 2,049 | 2,770 | — | — | 5,483 | Monthly | 1.41 | 1.41 | ||||||||||||||||||||||||||||||||||||||||||||||
Other loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
0-E | BOEING | U.S.A. | US$ | — | — | 179,507 | — | — | 179,507 | 3,580 | — | 179,507 | — | — | 183,087 | At expiration | 1.74 | 1.74 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | CITIBANK (*) | U.S.A. | US$ | — | — | 164,108 | 184,866 | 101,026 | 450,000 | 1,500 | — | 164,108 | 184,866 | 101,026 | 451,500 | Quarterly | 6.00 | 6.00 | ||||||||||||||||||||||||||||||||||||||||||||||
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Total | 517,908 | 630,782 | 2,139,843 | 1,334,238 | 2,275,865 | 6,898,636 | 543,774 | 630,783 | 2,384,054 | 1,299,308 | 2,238,569 | 7,096,488 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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(*) |
Interest-bearing loans due in installments to December 31, 2014
Debtor: TAM S.A. and Subsidiaries, Tax No. 02.012.862/0001-60, Brazil.
Amortization Bank loans 0-E Obligation with the public 0-E Financial leases 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E Other loans 0-E F-1-60 Nominal values Accounting values Tax No. Creditor Creditor
countryCurrency Up to
90 days More
than
90 days
to one
year More
than
one to
three
years More
than
three
to five
years More
than
five
years Total
nominal
value Up to
90 days More
than
90 days
to one
year More
than
one to
three
years More
than
three
to five
years More
than
five
years Total
accounting
value Effective
rate Nominal
rate ThUS$ ThUS$ ThUS$ ThUS$ ThUS$ ThUS$ �� ThUS$ ThUS$ ThUS$ ThUS$ ThUS$ ThUS$ % % NEDERLANDSCHE CREDIETVERZEKERING MAATSCHAPPIJ Holland US$ 108 335 971 1,094 1,288 3,796 127 336 971 1,094 1,288 3,816 Monthly 6.01 6.01 THE BANK OF NEW YORK U.S.A. US$ — — 300,000 — 800,000 1,100,000 12,178 9,028 304,377 4,583 802,521 1,132,687 At Expiration 7.99 7.19 AFS INVESTMENT IX LLC U.S.A. US$ 1,864 5,752 16,580 18,555 8,369 51,120 2,104 5,752 16,580 18,555 8,369 51,360 Monthly 1.25 1.25 AIRBUS FINANCIAL U.S.A. US$ 3,189 9,836 27,070 15,262 7,664 63,021 3,303 9,836 27,070 15,262 7,664 63,135 Monthly 1.42 1.42 CREDIT AGRICOLE-CIB U.S.A. US$ 2,704 32,466 — — — 35,170 2,752 32,466 — — — 35,218 Quarterly 1.10 1.10 CREDIT AGRICOLE-CIB France US$ 1,500 4,500 4,500 — — 10,500 1,566 4,500 4,500 — — 10,566 Quarterly/Semiannual 3.25 3.25 DVB BANK SE Germany US$ 3,125 9,375 — — — 12,500 3,160 9,375 — — — 12,535 Quarterly 2.50 2.50 DVB BANK SE U.S.A. US$ 197 540 755 — — 1,492 199 540 755 — — 1,494 Monthly 1.68 1.68 GENERAL ELECTRIC CAPITAL CORPORATION U.S.A. US$ 2,296 10,791 23,761 — — 36,848 2,346 10,791 23,761 — — 36,898 Monthly 1.25 1.25 KFW IPEX-BANK Germany US$ 3,246 10,541 18,037 13,535 5,328 50,687 3,339 10,541 18,037 13,535 5,328 50,780 Monthly/Quarterly 1.72 1.72 NATIXIS France US$ 2,887 6,705 20,987 23,723 85,391 139,693 4,044 6,705 20,987 23,723 85,391 140,850 Quarterly/Semiannual 3.87 3.87 PK AIRFINANCE US, INC. U.S.A. US$ 1,208 3,725 20,360 — — 25,293 1,256 3,725 20,360 — — 25,341 Monthly 1.75 1.75 WACAPOU LEASING S.A. Luxemburg US$ 416 1,198 2,847 2,406 13,115 19,982 456 1,198 2,847 2,406 13,115 20,022 Quarterly 2.00 2.00 SOCIÉTÉ GÉNÉRALE MILAN BRANCH Italy US$ 7,761 23,859 67,973 74,783 169,730 344,106 8,574 23,859 67,973 74,783 169,730 344,919 Quarterly 3.06 3.58 BANCO DE LAGE LANDEN BRASIL S.A Brazil BRL — — — — — — 8 — — — — 8 Monthly 11.70 11.70 BANCO IBM S.A Brazil BRL 319 957 2,514 27 — 3,817 91 957 2,604 27 — 3,679 Monthly 10.58 10.58 HP FINANCIAL SERVICE Brazil BRL 225 707 1,297 — — 2,229 143 707 1,379 — — 2,229 Monthly 9.90 9.90 SOCIETE AIR FRANCE France EUR 114 — — — — 114 547 — — — — 547 Monthly 6.82 6.82 SOCIETE GENERALE France BRL 126 377 1,005 135 — 1,643 82 377 1,044 135 — 1,638 Monthly 11.60 11.60 COMPANHIA BRASILEIRA DE MEIOS DE PAGAMENTO Brazil BRL 30,281 15,576 — — — 45,857 30,281 15,576 — — — 45,857 Monthly 4.23 4.23 Total 61,566 137,240 508,657 149,520 1,090,885 1,947,868 76,556 146,269 513,245 154,103 1,093,406 1,983,579 Total consolidated 579,474 768,022 2,648,500 1,483,758 3,366,750 8,846,504 620,330 777,052 2,575,299 1,453,411 3,331,975 8,758,067
Interest-bearing loans due in installments to December 31, 2013
Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2, Chile.
Nominal values | Accounting values | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
More 90 days | More one to | More three | More than | Total | More than 90 days | More than one to | More than three | More than | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Creditor | Up to | to one | three | to five | five | nominal | Up to | to one | three | to five | five | accounting | Effective | Nominal | ||||||||||||||||||||||||||||||||||||||||||||||||||
Tax No. | Creditor | country | Currency | 90 days | year | years | years | years | value | 90 days | year | years | years | years | value | Amortization | rate | rate | ||||||||||||||||||||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | % | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
Loans to exporters | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
97.032.000-8 | BBVA | Chile | US$ | — | 30,000 | — | — | — | 30,000 | — | 30,022 | — | — | — | 30,022 | At expiration | 1.00 | 1.00 | ||||||||||||||||||||||||||||||||||||||||||||||
97.036.000-K | SANTANDER | Chile | US$ | 230,000 | — | — | — | — | 230,000 | 230,819 | — | — | — | — | 230,819 | At expiration | 1.63 | 1.63 | ||||||||||||||||||||||||||||||||||||||||||||||
97.030.000-7 | ESTADO | Chile | US$ | — | 40,000 | — | — | — | 40,000 | — | 40,023 | — | — | — | 40,023 | At expiration | 1.06 | 1.06 | ||||||||||||||||||||||||||||||||||||||||||||||
76.100.458-1 | BLADEX | Chile | US$ | 100,000 | — | — | — | — | 100,000 | 100,399 | — | — | — | — | 100,399 | At expiration | 1.87 | 1.87 | ||||||||||||||||||||||||||||||||||||||||||||||
Bank loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
97.036.000-K | SANTANDER | Chile | US$ | — | — | 115,051 | — | — | 115,051 | 153 | — | 115,051 | — | — | 115,204 | At expiration | 3.19 | 3.19 | ||||||||||||||||||||||||||||||||||||||||||||||
97.023.000-9 | CORPBANCA | Chile | UF | 15,590 | 46,772 | 124,724 | 81,374 | — | 268,460 | 17,475 | 46,771 | 122,780 | 80,528 | — | 267,554 | Quarterly | 4.85 | 4.85 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | CITIBANK | Argentina | ARS | — | 15,335 | — | — | — | 15,335 | 35 | 15,335 | — | — | — | 15,370 | Monthly | 20.75 | 20.75 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | BBVA | Argentina | ARS | — | 27,603 | — | — | — | 27,603 | 362 | 27,603 | — | — | — | 27,965 | Monthly | 23.78 | 23.78 | ||||||||||||||||||||||||||||||||||||||||||||||
Guaranteed obligations | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
0-E | ING | U.S.A. | US$ | 2,865 | 8,808 | 25,172 | 27,867 | 26,831 | 91,543 | 3,635 | 8,807 | 24,144 | 27,437 | 26,682 | 90,705 | Quarterly | 5.69 | 5.01 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | CREDIT AGRICOLE | France | US$ | 12,920 | 34,713 | 82,646 | 10,033 | — | 140,312 | 13,209 | 34,713 | 82,646 | 10,033 | — | 140,601 | Quarterly | 1.99 | 1.99 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | PEFCO | U.S.A. | US$ | 2,219 | 6,745 | — | — | — | 8,964 | 2,239 | 6,746 | (19 | ) | — | — | 8,966 | Quarterly | 3.06 | 2.73 | |||||||||||||||||||||||||||||||||||||||||||||
0-E | BNP PARIBAS | U.S.A. | US$ | 8,875 | 27,256 | 76,985 | 83,871 | 221,267 | 418,254 | 10,356 | 27,256 | 75,420 | 83,243 | 221,031 | 417,306 | Quarterly | 2.45 | 2.31 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | WELLS FARGO | U.S.A. | US$ | 46,007 | 139,012 | 378,314 | 389,759 | 1,146,684 | 2,099,776 | 52,722 | 139,012 | 330,363 | 365,871 | 1,115,366 | 2,003,334 | Quarterly | 2.47 | 1.76 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | CITIBANK | U.S.A. | US$ | 9,607 | 29,315 | 81,681 | 87,189 | 164,399 | 372,191 | 10,850 | 29,315 | 76,583 | 84,847 | 162,473 | 364,068 | Quarterly | 2.64 | 2.04 | ||||||||||||||||||||||||||||||||||||||||||||||
97.036.000-K | SANTANDER | Chile | US$ | 5,021 | 15,237 | 41,767 | 43,552 | 95,022 | 200,599 | 5,347 | 15,238 | 38,966 | 42,256 | 93,880 | 195,687 | Quarterly | 1.32 | 0.78 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | BTMU | U.S.A. | US$ | 2,579 | 7,846 | 21,655 | 22,801 | 63,189 | 118,070 | 2,784 | 7,846 | 19,797 | 21,891 | 62,166 | 114,484 | Quarterly | 1.64 | 1.04 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | APPLE BANK | U.S.A. | US$ | 1,264 | 3,848 | 10,636 | 11,210 | 31,544 | 58,502 | 1,431 | 3,848 | 9,716 | 10,758 | 31,027 | 56,780 | Quarterly | 1.63 | 1.04 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | US BANK | U.S.A. | US$ | 13,840 | 41,995 | 115,549 | 120,924 | 411,684 | 703,992 | 17,106 | 41,995 | 93,083 | 109,417 | 395,163 | 656,764 | Quarterly | 2.81 | 2.81 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | DEUTSCHE BANK | U.S.A. | US$ | 4,348 | 13,408 | 38,018 | 32,448 | 84,814 | 173,036 | 5,053 | 13,408 | 38,017 | 32,449 | 84,814 | 173,741 | Quarterly | 3.27 | 3.27 | ||||||||||||||||||||||||||||||||||||||||||||||
— | SWAP Aircraft arrivals | — | US$ | 681 | 1,915 | 4,104 | 2,521 | 765 | 9,986 | 681 | 1,915 | 4,104 | 2,521 | 765 | 9,986 | Quarterly | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
Other guaranteed obligations | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
0-E | DVB BANK SE | U.S.A. | US$ | 7,703 | 23,342 | 64,247 | — | — | 95,292 | 7,766 | 23,343 | 64,247 | — | — | 95,356 | Quarterly | 1.99 | 1.99 | ||||||||||||||||||||||||||||||||||||||||||||||
Financial leases | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
0-E | ING | U.S.A. | US$ | 4,523 | 13,896 | 37,656 | 9,001 | — | 65,076 | 4,964 | 13,896 | 37,395 | 8,971 | — | 65,226 | Quarterly | 3.23 | 3.03 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | CREDIT AGRICOLE | France | US$ | 4,808 | 13,833 | 63,715 | 7,158 | — | 89,514 | 4,952 | 13,834 | 63,715 | 7,157 | — | 89,658 | Quarterly | 1.21 | 1.21 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | CITIBANK | U.S.A. | US$ | 1,430 | 4,414 | 12,707 | 14,254 | 7,759 | 40,564 | 1,651 | 4,413 | 12,254 | 14,089 | 7,731 | 40,138 | Quarterly | 6.38 | 5.65 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | PEFCO | U.S.A. | US$ | 13,867 | 42,702 | 121,395 | 108,403 | 22,407 | 308,774 | 15,884 | 42,702 | 118,027 | 107,595 | 22,324 | 306,532 | Quarterly | 5.35 | 4.23 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | BNP PARIBAS | U.S.A. | US$ | 6,443 | 19,839 | 56,989 | 56,934 | 7,129 | 147,334 | 6,908 | 19,839 | 55,403 | 56,567 | 7,109 | 145,826 | Quarterly | 4.65 | 4.15 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | BANC OF AMERICA | U.S.A. | US$ | 616 | 1,891 | 5,392 | — | — | 7,899 | 647 | 1,891 | 5,392 | — | — | 7,930 | Monthly | 1.43 | 1.43 | ||||||||||||||||||||||||||||||||||||||||||||||
Other loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
0-E | BOEING | U.S.A. | US$ | — | — | 170,838 | — | — | 170,838 | — | 1,650 | 170,838 | — | — | 172,488 | At expiration | 1.75 | 1.75 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | CITIBANK (*) | U.S.A. | US$ | — | — | 79,611 | 174,178 | 196,211 | 450,000 | 4,050 | — | 79,611 | 174,178 | 196,211 | 454,050 | Quarterly | 6.00 | 6.00 | ||||||||||||||||||||||||||||||||||||||||||||||
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Total | 495,206 | 609,725 | 1,728,852 | 1,283,477 | 2,479,705 | 6,596,965 | 521,478 | 611,421 | 1,637,533 | 1,239,808 | 2,426,742 | 6,436,982 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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(*) |
The detail of other financial liabilities as of
Interest-bearing loans due in installments to December 31, 20112013
Debtor: TAM S.A. and December 31, 2010, respectively, is as follows:Subsidiaries, Tax No. 02.012.862/0001-60, Brazil.
As of December 31, 2011 | As of December 31, 2010 | |||||||
ThUS$ | ThUS$ | |||||||
Current | ||||||||
Interest rate derivative not recognized as a hedge | 4,907 | 5,321 | ||||||
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Total current | 4,907 | 5,321 | ||||||
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Non-current | ||||||||
Interest rate derivative not recognized as a hedge | 9,859 | 14,427 | ||||||
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Total non-current | 9,859 | 14,427 | ||||||
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Total other financial liabilities | 14,766 | 19,748 | ||||||
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Nominal values | Accounting values | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
More than 90 days | More than one to | More than three | More than | Total | More than 90 days | More than one to | More than three to | More than | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Creditor | Up to | to one | three | to five | five | nominal | Up to | to one | three | five | five | accounting | Effective | Nominal | ||||||||||||||||||||||||||||||||||||||||||||||||||
Tax No. | Creditor | country | Currency | 90 days | year | years | years | years | value | 90 days | year | years | years | years | value | Amortization | rate | rate | ||||||||||||||||||||||||||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | % | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
Bank loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
0-E | CITIBANK | Brazil | US$ | 2,207 | 41,678 | — | — | — | 43,885 | 2,306 | 42,413 | — | — | — | 44,719 | At Expiration | 3.76 | 3.20 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | BANCO DO Brazil S.A. | Brazil | US$ | 9,050 | 128,799 | — | — | — | 137,849 | 9,410 | 130,742 | — | — | — | 140,152 | At Expiration | 5.20 | 4.66 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | BANCO ITAU BBA | Brazil | US$ | 26,611 | 47,219 | — | — | — | 73,830 | 27,804 | 48,424 | — | — | — | 76,228 | At Expiration | 6.31 | 4.73 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | BANCO SAFRA | Brazil | US$ | 40,626 | 21,731 | — | — | — | 62,357 | 41,768 | 22,213 | — | — | — | 63,981 | At Expiration | 3.73 | 2.94 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | BANCO SAFRA | Brazil | BRL | 193 | 443 | 48 | — | — | 684 | 187 | 431 | 51 | — | — | 669 | Monthly | 7.42 | 7.42 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | BANCO BRADESCO | Brazil | US$ | 74,700 | 47,641 | — | — | — | 122,341 | 77,218 | 48,828 | — | — | — | 126,046 | At Expiration | 3.87 | 3.29 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | BANCO BRADESCO | Brazil | BRL | — | 42,688 | — | — | — | 42,688 | — | 42,701 | — | — | — | 42,701 | At Expiration | 10.63 | 10.15 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | NEDERLANDSCHE CREDIETVERZEKERING MAATSCHAPPIJ | Holland | US$ | 102 | 316 | 915 | 1,031 | 1,851 | 4,215 | 123 | 316 | 915 | 1,031 | 1,851 | 4,236 | Monthly | 6.01 | 6.01 | ||||||||||||||||||||||||||||||||||||||||||||||
Obligation with the public | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
0-E | THE BANK OF NEW YORK | U.S.A. | US$ | — | — | — | 300,000 | 800,000 | 1,100,000 | 19,760 | 2,001 | 5,343 | 305,554 | 805,774 | 1,138,432 | At Expiration | 8.60 | 8.41 | ||||||||||||||||||||||||||||||||||||||||||||||
Financial leases | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
0-E | AFS INVESTMENT IX LLC | U.S.A. | US$ | 1,762 | 5,438 | 15,673 | 17,540 | 17,908 | 58,321 | 2,036 | 5,437 | 15,673 | 17,541 | 17,908 | 58,595 | Monthly | 1.25 | 1.25 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | AIR CANADA | U.S.A. | US$ | 1,325 | 1,645 | — | — | — | 2,970 | 1,325 | 1,645 | — | — | — | 2,970 | Monthly | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | AIRBUS FINANCIAL | U.S.A. | US$ | 3,020 | 9,311 | 26,792 | 20,813 | 15,416 | 75,352 | 3,156 | 9,311 | 26,792 | 20,812 | 15,417 | 75,488 | Monthly | 1.42 | 1.42 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | AWAS | U.S.A. | US$ | 2,992 | 2,659 | — | — | — | 5,651 | 3,656 | 2,659 | — | — | — | 6,315 | Monthly | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | BNP PARIBAS | U.S.A. | US$ | 580 | 1,810 | 5,262 | 5,982 | 8,448 | 22,082 | 651 | 1,810 | 5,262 | 5,982 | 8,448 | 22,153 | Quarterly | 1.00 | 1.00 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | BNP PARIBAS | France | US$ | 578 | 1,758 | 4,959 | 5,371 | 9,693 | 22,359 | 652 | 1,758 | 4,959 | 5,371 | 9,693 | 22,433 | Quarterly | 0.86 | 0.75 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | CITIBANK | England | US$ | 5,983 | 18,179 | 44,318 | 47,123 | 106,987 | 222,590 | 6,401 | 18,179 | 44,318 | 47,123 | 106,987 | 223,008 | Quarterly | 1.03 | 0.90 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | CREDIT AGRICOLE-CIB | U.S.A. | US$ | 4,258 | 12,917 | 55,573 | 11,431 | 13,766 | 97,945 | 4,516 | 12,917 | 55,573 | 11,431 | 13,766 | 98,203 | Quarterly | 1.40 | 1.40 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | CREDIT AGRICOLE -CIB | France | US$ | 7,911 | 25,433 | 58,866 | 50,469 | 52,717 | 195,396 | 8,334 | 25,433 | 58,866 | 50,469 | 52,717 | 195,819 | Quarterly/ Semiannual | 0.75 | 0.65 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | DVB BANK SE | Germany | US$ | 3,125 | 9,375 | 12,500 | — | — | 25,000 | 3,195 | 9,375 | 12,500 | — | — | 25,070 | Quarterly | 2.50 | 2.50 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | DVB BANK SE | U.S.A. | US$ | 197 | 590 | 1,210 | 282 | — | 2,279 | 201 | 590 | 1,210 | 282 | — | 2,283 | Monthly | 1.75 | 1.75 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | GENERAL ELECTRIC CAPITAL CORPORATION | U.S.A. | US$ | 3,430 | 48,548 | — | — | — | 51,978 | 3,501 | 48,548 | — | — | — | 52,049 | Monthly | 1.25 | 1.25 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | HSBC | France | US$ | 1,307 | 3,983 | 10,976 | 11,533 | 36,497 | 64,296 | 1,436 | 3,983 | 10,976 | 11,533 | 36,497 | 64,425 | Quarterly | 1.45 | 1.25 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | KFW IPEX-BANK | Germany | US$ | 3,877 | 11,869 | 28,660 | 20,499 | 17,813 | 82,718 | 4,027 | 11,869 | 28,660 | 20,500 | 17,813 | 82,869 | Monthly/ Quarterly | 1.74 | 1.74 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | NATIXIS | France | US$ | 6,009 | 16,490 | 49,293 | 55,352 | 118,984 | 246,128 | 7,586 | 16,490 | 49,293 | 55,352 | 118,984 | 247,705 | Quarterly/ Semiannual | 2.81 | 2.78 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | PK AIRFINANCE US, INC. | U.S.A. | US$ | 2,780 | 8,610 | 40,227 | 17,171 | 37,615 | 106,403 | 2,964 | 8,611 | 40,227 | 17,171 | 37,615 | 106,588 | Monthly | 1.71 | 1.71 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | WACAPOU LEASING S.A. | Luxemburg | US$ | 453 | 1,303 | 3,097 | 2,617 | 14,267 | 21,737 | 498 | 1,303 | 3,097 | 2,617 | 14,267 | 21,782 | Quarterly | 2.00 | 2.00 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | WELLS FARGO BANK NORTHWEST N.A. | U.S.A. | US$ | 1,769 | 1,425 | — | — | — | 3,194 | 1,773 | 1,425 | — | — | — | 3,198 | Monthly | 1.25 | 1.25 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | SOCIÉTÉ GÉNÉRALE MILAN BRANCH | Italy | US$ | 11,772 | 35,604 | 87,655 | 96,473 | 102,591 | 334,095 | 12,694 | 35,604 | 87,655 | 96,473 | 102,591 | 335,017 | Quarterly | 3.86 | 3.78 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | THE TORONTO-DOMINION BANK | U.S.A. | US$ | 515 | 1,566 | 4,297 | 4,485 | 6,531 | 17,394 | 541 | 1,566 | 4,297 | 4,485 | 6,531 | 17,420 | Quarterly | 0.57 | 0.57 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | BANCO DE LAGE LANDEN BRASIL S.A | Brazil | BRL | 239 | 724 | — | — | — | 963 | 222 | 674 | — | — | — | 896 | Monthly | 10.38 | 10.38 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | BANCO IBM S.A | Brazil | BRL | 134 | 192 | 511 | 213 | — | 1,050 | 153 | 192 | 511 | 213 | — | 1,069 | Monthly | 10.58 | 10.58 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | HP FINANCIAL SERVICE | Brazil | BRL | 287 | 746 | 2,218 | 308 | — | 3,559 | 285 | 745 | 2,220 | 308 | — | 3,558 | Monthly | 9.90 | 9.90 | ||||||||||||||||||||||||||||||||||||||||||||||
0-E | SOCIETE AIR FRANCE | France | EUR | 69 | 1,310 | — | — | — | 1,379 | 824 | 1,205 | — | — | — | 2,029 | Monthly | 6.82 | 6.82 | ||||||||||||||||||||||||||||||||||||||||||||||
Other loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
0-E | COMPANHIA BRASILEIRA DE MEIOS DE PAGAMENTO | Brazil | BRL | 27,244 | 537 | — | — | — | 27,781 | 27,244 | 537 | — | — | — | 27,781 | Monthly | 2.38 | 2.38 | ||||||||||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||
Total | 245,105 | 552,537 | 453,050 | 668,693 | 1,361,084 | 3,280,469 | 276,447 | 559,935 | 458,398 | 674,248 | 1,366,859 | 3,335,887 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||
Total consolidated | 740,311 | 1,162,262 | 2,181,902 | 1,952,170 | 3,840,789 | 9,877,434 | 797,925 | 1,171,356 | 2,095,931 | 1,914,056 | 3,793,601 | 9,772,869 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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Hedging liabilities(b) Derivatives not recognized as of December 31, 2011 and December 31, 2010 are as follows:a hedge
As of December 31, 2011 | As of December 31, 2010 | |||||||
ThUS$ | ThUS$ | |||||||
Current | ||||||||
Interest from the last date of interest rate swap | 5,027 | 3,826 | ||||||
Fair value interest rate derivatives | 34,105 | 24,522 | ||||||
Fair value of foreign currency derivatives | 884 | 13,694 | ||||||
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| |||||
Total current | 40,016 | 42,042 | ||||||
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| |||||
Non-current | ||||||||
Fair value interest rate derivatives | 120,304 | 90,666 | ||||||
Fair value of foreign currency derivatives | — | 7,222 | ||||||
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| |||||
Total non-current | 120,304 | 97,888 | ||||||
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| |||||
Total hedging liabilities | 160,320 | 139,930 | ||||||
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|
|
Total derivative | ||||||||||||||||||||||||
Current liabilities | Non-current liabilities | not recognized as a hedge | ||||||||||||||||||||||
As of | As of | As of | As of | As of | As of | |||||||||||||||||||
December 31, | December 31, | December 31, | December 31, | December 31, | December 31, | |||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||
Interest rate derivative not recognized as a hedge | 1,190 | 4,040 | — | 1,491 | 1,190 | 5,531 | ||||||||||||||||||
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Total derivatives not recognized as a hedge | 1,190 | 4,040 | — | 1,491 | 1,190 | 5,531 | ||||||||||||||||||
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(c) Hedge derivatives
Total hedge | ||||||||||||||||||||||||
Current liabilities | Non-current liabilities | derivatives | ||||||||||||||||||||||
As of | As of | As of | As of | As of | As of | |||||||||||||||||||
December 31, | December 31, | December 31, | December 31, | December 31, | December 31, | |||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||
Accrued interest from the last date of interest rate swap | 5,173 | 5,775 | — | — | 5,173 | 5,775 | ||||||||||||||||||
Fair value of interest rate derivatives | 26,395 | 32,070 | 28,327 | 54,906 | 54,722 | 86,976 | ||||||||||||||||||
Fair value of fuel derivatives | 157,233 | — | — | — | 157,233 | — | ||||||||||||||||||
Fair value of foreign currency derivatives | 37,242 | 28,621 | — | — | 37,242 | 28,621 | ||||||||||||||||||
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| |||||||||||||
Total hedge derivatives | 226,043 | 66,466 | 28,327 | 54,906 | 254,370 | 121,372 | ||||||||||||||||||
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The foreign currency derivatives correspond to Cross Currency Swapsexchanges are FX forward and forward exchange contracts.cross currency swap.
F-1-61
Hedging operation
The fair values of assets/ (liabilities), by type of derivative, of the contracts held as hedging instruments are presented below:
As of December 31, 2011 | As of December 31, 2010 | |||||||
ThUS$ | ThUS$ | |||||||
Forward starting swaps (FSS) (1) | (19,703 | ) | (54,670 | ) | ||||
Interest rate options (2) | 73 | 422 | ||||||
Interest rate swaps (3) | (139,733 | ) | (64,344 | ) | ||||
Cross currency swaps (CCIRS) (4) | — | 26,703 | ||||||
Fuel collars (5) | 19,016 | 17,782 | ||||||
Fuel swap (6) | 11,599 | 28,032 | ||||||
Currency forward (7) | (253 | ) | (13,694 | ) |
As of | As of | |||||||
December 31, | December 31, | |||||||
2014 | 2013 | |||||||
ThUS$ | ThUS$ | |||||||
Cross currency swaps (CCS) (1) | (38,802 | ) | (26,028 | ) | ||||
Interest rate options (2) | 1 | 6 | ||||||
Interest rate swaps (3) | (58,758 | ) | (92,088 | ) | ||||
Fuel collars (4) | (32,772 | ) | 1,878 | |||||
Fuel swap (5) | (122,678 | ) | 13,990 | |||||
Currency forward R$/US$ (6) | — | 32,058 | ||||||
Currency forward CLP/US$ (7) | — | (1,121 | ) | |||||
Currency collars (8) | — | (1,652 | ) |
(1) | Covers the significant variations in cash flows associated with market risk implicit in the changes in the 3-month LIBOR interest rate |
(2) | Covers the significant variations in cash flows associated with market risk implicit in the changes in the 3-month LIBOR interest rate for long-term loans incurred in the acquisition of aircraft. These contracts are recorded as cash flow hedges. |
(3) | Covers the significant variations in cash flows associated with market risk implicit in the increases in the 3 |
(4) | Covers |
Covers the significant variations in cash flows associated with market risk implicit in the changes in the price of future fuel purchases. These contracts are recorded as cash flow hedges. |
(6) | Covers the foreign exchange risk exposure of operating cash flows caused mainly by fluctuations in the exchange rate R$/US$. These contracts are recorded as cash flow hedges. |
(7) | Covers the investments denominated in Chilean pesos to |
(8) | Covers the foreign exchange risk exposure of Multiplus income caused by fluctuations in the |
During the yearsperiods presented, the Company only maintains cash flow hedges.hedges and fair value (in the case of CCS). In the case of fuel hedges, the cash flows subject to saidsuch hedges will impact results between 1 to 9in the next 12 months from the consolidated statement of financial position date, whereasmeanwhile in the case of interest rate hedging, the hedges will impact results over the life of the related loans, which are valid for 12 years. With respect to interest and currency hedges, the impact on results will occur continuously throughout the life of the contract (3 years), while cash flows will occur quarterly. Finally, theThe hedges on investments will impact results continuously throughout the life of the investment, (up to 3 months), while the cash flows occur at the maturity of the investment. In the case of currency hedges through a CCS, are generated two types of hedge accounting, a cash flow component by UF, and other fair value by US$ floating rate component.
During the yearsperiods presented, all hedgedthere have not occurred hedging operations of future highly probable forecast transactionstransaction that have occurred.
During the years presented, there hasnot been no hedge ineffectiveness recognized in the consolidated statement of income.realized.
Since none of the coverage resulted in the recognition of a non-financial asset, no portion of the result of the derivatives recognized in equity was transferred to the initial value of such assets.
F-1-62
The amounts recognized in comprehensive income during the yearperiod and transferred from net equity to income are as follows:
For the year ended December 31, | ||||||||
2011 | 2010 | |||||||
ThUS$ | ThUS$ | |||||||
Debit (credit) recognized in comprehensive income during the year | (40,368 | ) | (17,855 | ) | ||||
Debit (credit) transferred from net equity to income during the year | 62 | (35,010 | ) |
For the periods ended | ||||||||||||
December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
ThUS$ | ThUS$ | ThUS$ | ||||||||||
Debit (credit) recognized in comprehensive income during the period | (163,993 | ) | 128,166 | (2,510 | ) | |||||||
Debit (credit) transferred from net equity to income during the period | (151,520 | ) | (18,688 | ) | (26,470 | ) |
The composition of tradeTrade and other accounts payables is as follows:
As of | As of | |||||||||||||||
December 31, | December 31, | |||||||||||||||
As of December 31, 2011 | As of December 31, 2010 | 2014 | 2013 | |||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||
Current | ||||||||||||||||
(a) Trade and other accounts payable | 531,481 | 500,694 | ||||||||||||||
(a) Trade and other accounts payables | 1,196,123 | 1,264,395 | ||||||||||||||
(b) Accrued liabilities at the reporting date | 113,605 | 144,877 | 293,273 | 293,341 | ||||||||||||
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|
|
| |||||||||||||
Total trade and other accounts payables | 645,086 | 645,571 | 1,489,396 | 1,557,736 | ||||||||||||
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|
|
Trade and other accounts |
As of | As of | |||||||||||||||
December 31, | December 31, | |||||||||||||||
As of December 31, 2011 | As of December 31, 2010 | 2014 | 2013 | |||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||
Trade creditors | 410,533 | 389,568 | 924,105 | 969,260 | ||||||||||||
Leasing obligations | 18,849 | 26,474 | ||||||||||||||
Leasing obligation | 37,322 | 44,756 | ||||||||||||||
Other accounts payable (*) | 102,099 | 84,652 | 234,696 | 250,379 | ||||||||||||
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|
|
| |||||||||||||
Total | 531,481 | 500,694 | 1,196,123 | 1,264,395 | ||||||||||||
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|
|
(*) |
F-1-63
The details of Trade and other accounts payables by concept:are as follows:
As of December 31, 2011 | As of December 31, 2010 | As of | As of | |||||||||||||
ThUS$ | ThUS$ | December 31, | December 31, | |||||||||||||
Aircraft fuel | 134,088 | 104,404 | ||||||||||||||
2014 | 2013 | |||||||||||||||
ThUS$ | ThUS$ | |||||||||||||||
Aircraft Fuel | 290,109 | 302,419 | ||||||||||||||
Boarding Fee | 80,253 | 72,864 | 193,263 | 217,389 | ||||||||||||
Landing and other aviation fees | 41,900 | 43,941 | ||||||||||||||
Other personnel expenses | 114,245 | 117,418 | ||||||||||||||
Airport charges and overflight | 102,111 | 98,560 | ||||||||||||||
Professional services and advisory | 65,445 | 63,082 | ||||||||||||||
Suppliers’ technical purchases | 36,387 | 29,594 | 64,799 | 67,995 | ||||||||||||
Handling and ground handling | 34,743 | 39,915 | 55,503 | 48,797 | ||||||||||||
Other personnel expenses | 32,833 | 22,445 | ||||||||||||||
Professional services and advisory | 29,870 | 21,275 | ||||||||||||||
Marketing | 22,183 | 21,041 | 54,885 | 50,009 | ||||||||||||
Land services | 47,103 | 47,046 | ||||||||||||||
Aircraft and engines leasing | 18,849 | 26,474 | 37,322 | 44,756 | ||||||||||||
U.S.A Department of Justice (*) | 18,387 | 18,387 | ||||||||||||||
In-flight services | 12,929 | 11,761 | ||||||||||||||
Leases, maintenance and IT services | 34,029 | 46,163 | ||||||||||||||
Services on board | 24,642 | 29,940 | ||||||||||||||
Maintenance | 11,252 | 8,188 | 14,757 | 15,793 | ||||||||||||
Crew | 9,780 | 28,658 | 12,403 | 14,040 | ||||||||||||
Achievement of goals | 12,197 | 9,806 | ||||||||||||||
Communications | 6,447 | 4,578 | ||||||||||||||
Aviation insurance | 6,274 | 5,931 | 4,749 | 10,665 | ||||||||||||
Communication | 5,881 | 3,146 | ||||||||||||||
Distribution sistem | 3,293 | 3,103 | ||||||||||||||
Airlines | 908 | 5,054 | ||||||||||||||
Tax recovery program (*) | — | 14,569 | ||||||||||||||
U.S.A. Department of Justice (**) | — | 18,290 | ||||||||||||||
Others | 35,872 | 42,670 | 57,913 | 34,923 | ||||||||||||
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|
|
| |||||||||||||
Total trade and other accounts payables | 531,481 | 500,694 | 1,196,123 | 1,264,395 | ||||||||||||
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|
|
|
(*) |
(**) | Include agreement entitled “Plea Agreement” with the Department of Justice of the United States of America. See detail in Note |
As of December 31, 2011 | As of December 31, 2010 | As of | As of | |||||||||||||
ThUS$ | ThUS$ | December 31, | December 31, | |||||||||||||
2014 | 2013 | |||||||||||||||
ThUS$ | ThUS$ | |||||||||||||||
Accrued personnel expenses | 130,382 | 151,586 | ||||||||||||||
Aircraft and engine maintenance | 11,178 | 26,133 | 121,946 | 3,741 | ||||||||||||
Accounts payable to personnel | 38,391 | 52,441 | ||||||||||||||
Accrued personnel expenses | 46,034 | 40,974 | ||||||||||||||
Accounts payable to personnel (*) | 16,407 | 110,147 | ||||||||||||||
Others accrued liabilities | 18,002 | 25,329 | 24,538 | 27,867 | ||||||||||||
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|
|
| |||||||||||||
Total accrued liabilities | 113,605 | 144,877 | 293,273 | 293,341 | ||||||||||||
|
|
|
|
F-1-64
(*) | Profits and bonds participation (Note 22 letter b) |
NOTE 22 –20 - OTHER PROVISIONS
The detail of otherOther provisions as of December 31, 20112014 and December 31, 20102013 is as follows:
As of December 31, 2011 | As of December 31, 2010 | |||||||
ThUS$ | ThUS$ | |||||||
Current | ||||||||
Provision legal claims (1) | 7,363 | 753 | ||||||
|
|
|
| |||||
Total other provisions, current | 7,363 | 753 | ||||||
|
|
|
| |||||
Non-current | ||||||||
Provision legal claims (1) | 11,710 | 21,204 | ||||||
Provision for European Commission investigation (2) | 10,675 | 10,916 | ||||||
|
|
|
| |||||
Total other provisions, non-current | 22,385 | 32,120 | ||||||
|
|
|
| |||||
Total other provisions | 29,748 | 32,873 | ||||||
|
|
|
|
Current liabilities | Non-current liabilities | Total Liabilities | ||||||||||||||||||||||
As of | As of | As of | As of | As of | As of | |||||||||||||||||||
December 31, | December 31, | December 31, | December 31, | December 31, | December 31, | |||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||
Provision for contingencies (1) | ||||||||||||||||||||||||
Tax contingencies | 320 | 7,092 | 607,371 | 968,211 | 607,691 | 975,303 | ||||||||||||||||||
Civil contingencies | 11,870 | 13,430 | 47,355 | 50,022 | 59,225 | 63,452 | ||||||||||||||||||
Labor contingencies | 221 | 7,334 | 23,064 | 64,895 | 23,285 | 72,229 | ||||||||||||||||||
Other | — | — | 15,351 | 27,770 | 15,351 | 27,770 | ||||||||||||||||||
Provision for European | ||||||||||||||||||||||||
Commision investigation (2) | — | — | 9,999 | 11,349 | 9,999 | 11,349 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total other provisions (3) | 12,411 | 27,856 | 703,140 | 1,122,247 | 715,551 | 1,150,103 | ||||||||||||||||||
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(1) |
The tax contingencies correspond to litigation and tax criteria related to the tax treatment applicable to direct and indirect taxes, which are found in both administrative and judicial stage.
The civil contingencies correspond to different demands of civil order filed against the company.
The labor contingencies correspond to different demands of labor order filed against the company.
The Provisions are recognized in the consolidated income statement in administrative expenses or tax expenses, as appropriate.
(2) | Provision made for proceedings brought by the European Commission for possible breaches of free competition in the freight market. |
(3) | Total other provision at December 31, 2014, and at December 31, 2013, include the fair value correspond to those contingencies from the business combination with TAM S.A and subsidiaries, with a probability of loss under 50%, which are not provided for the normal application of IFRS enforcement and that only must be recognized in the context of a business combination in accordance with IFRS 3. |
Movement of provisions:
European | ||||||||||||
Legal | Commission | |||||||||||
claims | Investigation(*) | Total | ||||||||||
ThUS$ | ThUS$ | ThUS$ | ||||||||||
Opening balance as of January 1, 2012 | 19,073 | 10,675 | 29,748 | |||||||||
Increase in provisions | 30,399 | — | 30,399 | |||||||||
Provision used | (131,136 | ) | — | (131,136 | ) | |||||||
Additions deu to business combination | 1,429,012 | — | 1,429,012 | |||||||||
Difference by subsidiaries conversion | 8,391 | — | 8,391 | |||||||||
Reversal of provision | (449 | ) | — | (449 | ) | |||||||
Exchange difference | 291 | 190 | 481 | |||||||||
|
|
|
|
|
| |||||||
Closing balance as of December 31, 2012 | 1,355,581 | 10,865 | 1,366,446 | |||||||||
|
|
|
|
|
| |||||||
Opening balance as of January 1, 2013 | 1,355,581 | 10,865 | 1,366,446 | |||||||||
Increase in provisions | 65,107 | — | 65,107 | |||||||||
Provision used | (57,192 | ) | — | (57,192 | ) | |||||||
Difference by subsidiaries conversion | (170,452 | ) | — | (170,452 | ) | |||||||
Reversal of provision | (53,459 | ) | — | (53,459 | ) | |||||||
Exchange difference | (831 | ) | 484 | (347 | ) | |||||||
|
|
|
|
|
| |||||||
Closing balance as of December 31, 2013 | 1,138,754 | 11,349 | 1,150,103 | |||||||||
|
|
|
|
|
| |||||||
Opening balance as of January 1, 2014 | 1,138,754 | 11,349 | 1,150,103 | |||||||||
Increase in provisions | 42,792 | — | 42,792 | |||||||||
Provision used | (27,597 | ) | — | (27,597 | ) | |||||||
Difference by subsidiaries conversion | (132,092 | ) | — | (132,092 | ) | |||||||
Reversal of provision | (315,288 | ) | — | (315,288 | ) | |||||||
Exchange difference | (1,017 | ) | (1,350 | ) | (2,367 | ) | ||||||
|
|
|
|
|
| |||||||
Closing balance as of December 31, 2014 | 705,552 | 9,999 | 715,551 | |||||||||
|
|
|
|
|
|
Accumulated balance includes the judicial deposit in guarantee, related to the “Fundo Aeroviário” (FA), in the amount of US$ 90 million, was done in order to suspend the enforceability of the tax credit. The movementcompany is discussing over the Tribunal the constitutionality of provisions between January 1, 2010 andthe requirement made by FA in a legal suit. Initially it was covered by the effects of a provisional remedy, meaning that, the company was not obligated to collect the tax while there was not a judicial decision in this regard. However, the decision taken by a judge in the first instance was publicized in an unfavorable way, revoking the provisional remedy relief. As the legal suit is still in progress (TAM appealed from this first decision), the company needed to do the deposit judicial in guarantee to suspend the enforceability of such tax credit; deposit classified in this category deducting the existing provision. Finally, if the final decision is favorable to the company, the deposit already made is going to come back to TAM. On the other hand, if the tribunal confirms the first decision, such deposit will be converted in a definitive payment in favor of the Brazilian Government. The procedural stage at December 31, 20112014 is as follows:
Legal claims | European Commission Investigation | Total | ||||||||||
ThUS$ | ThUS$ | ThUS$ | ||||||||||
Opening balance as of January 1, 2010 | 2,804 | 25,000 | 27,804 | |||||||||
Increase in provisions | 2,872 | — | 2,872 | |||||||||
Acquisition through business combination | 17,174 | — | 17,174 | |||||||||
Provision used | (681 | ) | — | (681 | ) | |||||||
Reversal of unused provision | — | (14,084 | ) | (14,084 | ) | |||||||
Exchange difference | (212 | ) | — | (212 | ) | |||||||
|
|
|
|
|
| |||||||
Balance as of December 31, 2010 | 21,957 | 10,916 | 32,873 | |||||||||
|
|
|
|
|
|
Legal claims | European Commission Investigation | Total | ||||||||||
ThUS$ | ThUS$ | ThUS$ | ||||||||||
Opening balance as of January 1, 2011 | 21,957 | 10,916 | 32,873 | |||||||||
Increase in provisions | 12,085 | — | 12,085 | |||||||||
Provision used | (3,592 | ) | — | (3,592 | ) | |||||||
Reversal of unused provision | (11,518 | ) | — | (11,518 | ) | |||||||
Exchange difference | 141 | (241 | ) | (100 | ) | |||||||
|
|
|
|
|
| |||||||
Balance as of December 31, 2011 | 19,073 | 10,675 | 29,748 | |||||||||
|
|
|
|
|
|
F-1-65
disclosed in Note 30, at case No. 2001.51.01.012530-3.
European Commission Provision:
(a) This provision was established because of the investigation brought by the Directorate General for Competition of the European Commission against more than 25 cargo airlines, including Lan Cargo S.A., as part of a global investigation begun in 2006 regarding possible unfair competition on the air cargo market. This was a joint investigation by the European and U.S.A. authorities. The start of the investigation was disclosed through a significant matter(*) European Commission Provision: (a) This provision was established because of the investigation brought by the Directorate General for Competition of the European Commission against more than 25 cargo airlines, including Lan Cargo S.A., as part of a global investigation begun in 2006 regarding possible unfair competition on the air cargo market. This was a joint investigation by the European and U.S.A. authorities. The start of the investigation was disclosed through an Essential Matter report dated December 27, 2007. The U.S.A. portion of the global investigation concluded when Lan Cargo S.A. and its subsidiary, Aerolíneas Brasileiras S.A. (“ABSA”) signed aPlea Agreement with the U.S.A. Department of Justice, as disclosed in a significant matteran Essential Matter report notice on January 21, 2009.(b) A significant matterEssential Matter report dated November 9, 2010, reported that the General Direction of Competition had issued its decision on this case (the “decision”), under which it imposed fines totaling € 799,445,000 (seven hundred and ninety nine million four hundred and forty-five thousand Euros) for infringement of European Union regulations on free competition against eleven (11) airlines, among which are LanLATAM Airlines Group S.A. and Lan Cargo S.A., Air Canada, Air France, KLM, British Airways, Cargolux, Cathay Pacific, Japan Airlines, Qantas Airways, SASS.A.S. and Singapore Airlines.(c) Jointly, LanLATAM Airlines Group S.A. and Lan Cargo S.A., have been fined in the amount of € 8,220,000 (eight million two hundred twenty thousand Euros) for said infractions, which was provisioned in the financial statements of LAN.LATAM Airlines Group S.A. This is a minor fine in comparison to the original decision, as there was a significant reduction in fine because LANLATAM Airlines Group S.A. cooperated during the investigation.(d) On January 24, 2011, LanLATAM Airlines Group S.A. and Lan Cargo S.A. appealed the decision before the Court of Justice of the European Union. AtThe procedural stage at December 31, 2011,2014 is disclosed in Note 30, in (ii) lawsuits received by LATAM Airlines Group S.A. and Subsidiaries in European Commission Court.
NOTE 21 - OTHER NON-FINANCIAL LIABILITIES
Current liabilities | Non-current liabilities | Total Liabilities | ||||||||||||||||||||||
As of | As of | As of | As of | As of | As of | |||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||
Deferred revenues (*) | 2,565,391 | 2,739,125 | 355,353 | 77,513 | 2,920,744 | 2,816,638 | ||||||||||||||||||
Sales tax | 38,160 | 52,576 | — | — | 38,160 | 52,576 | ||||||||||||||||||
Retentions | 52,567 | 49,355 | — | — | 52,567 | 49,355 | ||||||||||||||||||
Others taxes | 18,880 | 12,294 | — | — | 18,880 | 12,294 | ||||||||||||||||||
Other sundry liabilities | 10,388 | 18,290 | 48 | 54 | 10,436 | 18,344 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
| |||||||||||||
Total other non-financial liabilities | 2,685,386 | 2,871,640 | 355,401 | 77,567 | 3,040,787 | 2,949,207 | ||||||||||||||||||
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|
|
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(*) | Note 2.20. |
The balance comprises, mainly, deferred income by services not yet rendered and programs such as: LANPASS, TAM Fidelidade y Multiplus:
LANPASS is the frequent flyer program created by LAN to reward the preference and loyalty its customers with many benefits and privileges, by the accumulation of kilometers that can be exchanged for free flying tickets or a wide range of products and services. Customers accumulate LANPASS kilometers every time they fly with LAN, TAM, in companiesoneworld® members and other airlines associated with the program, as well as buy on the stores or use the services of a vast network of companies that have an agreement with the program around the world.
For its part, TAM, thinking on frequent flyer who travel constantly, created the program TAM Fidelidade, in order to improve the passenger attention and give recognition to those who choose the company. By using this program, customers accumulate points in a variety of programs loyalty in a single account and can redeem them at all TAM destinations and related airline companies, and even more, participate in the Red Multiplus Fidelidade.
Multiplus is a coalition of loyalty program, with the aim of operate accumulation activities and redemption of points. This program has an integrated network by associates including hotels, financial institutions, retail companies, supermarkets, vehicle rentals and magazines, among many other partners from different segments.
As of | As of | |||||||
December 31, | December 31, | |||||||
2014 | 2013 | |||||||
ThUS$ | ThUS$ | |||||||
Retirements payments | 36,523 | 9,639 | ||||||
Resignation payments | 5,556 | 493 | ||||||
Other obligations | 32,023 | 35,534 | ||||||
|
|
|
| |||||
Total liability for employee benefits | 74,102 | 45,666 | ||||||
|
|
|
|
(a) The movement in retirements and resignation payments and other obligations:
Opening balance | Increase (decrease) current service provision | Benefits paid | Change of model | Closing balance | ||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ||||||||||||||||
From January 1 to December 31, 2012 | 13,132 | 25,003 | (40 | ) | — | 38,095 | ||||||||||||||
From January 1 to December 31, 2013 | 38,095 | 9,866 | (2,295 | ) | — | 45,666 | ||||||||||||||
From January 1 to December 31, 2014 | 45,666 | 1,507 | (2,466 | ) | 29,395 | 74,102 |
(b) The liability for short-term:
As of | As of | |||||||
December 31, | December 31, | |||||||
2014 | 2013 | |||||||
ThUS$ | ThUS$ | |||||||
Profit-sharing and bonuses (*) | 16,407 | 110,147 |
(*) | Accounts payables to employees (Note 19 letter b) |
The participation in profits and bonuses correspond to an annual incentives plan for achievement of objectives.
(c) Employment expenses are detailed below:
For the periods ended | ||||||||||||
December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
ThUS$ | ThUS$ | ThUS$ | ||||||||||
Salaries and wages | 1,656,565 | 1,720,513 | 1,296,101 | |||||||||
Short-term employee benefits | 361,328 | 452,158 | 397,824 | |||||||||
Termination benefits | 84,179 | 67,508 | 32,864 | |||||||||
Other personnel expenses | 248,030 | 252,590 | 182,126 | |||||||||
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|
|
|
|
| |||||||
Total | 2,350,102 | 2,492,769 | 1,908,915 | |||||||||
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|
|
|
|
|
NOTE 23 - ACCOUNTS PAYABLE, NON-CURRENT
As of December 31, 2014 | As of December 31, 2013 | |||||||
ThUS$ | ThUS$ | |||||||
Aircraft and engine maintenance | 506,312 | 663,837 | ||||||
Tax recovery program (*) | — | 176,666 | ||||||
Fleet financing (JOL) | 59,148 | 57,997 | ||||||
Provision for vacations and bonuses | 9,595 | 9,879 | ||||||
Other accounts payable | 1,945 | 2,654 | ||||||
Other sundry liabilities | 454 | 11,854 | ||||||
|
|
|
| |||||
Total accounts payable, non-current | 577,454 | 922,887 | ||||||
|
|
|
|
(*) | Fiscal Recovery Program in Brazil (REFIS), established in Law No. 11.941/09 and Provisional Measure No. 449/2009. REFIS is intended to allow the |
(a) Capital
The Company’s objective is to maintain an appropriate level of capitalization that enables it to ensure access to the financial markets for carrying out its medium and long-term objectives, optimizing the return for its shareholders and maintaining a solid financial position.
The Capital of the Company is managed and composed in the following form:
The capital of the Company at December 31, 2014 amounts to ThUS$ 2,545,705 divided into 545,547,819 common stock of a same series (ThUS$ 2,389,384, divided into 535,243,229 shares as of December 31, 2013), no par value. There are no special series of shares and no privileges. The form of its stock certificates and their issuance, exchange, disablement, loss, replacement and other similar circumstances, as well as the transfer of the shares, is governed by the provisions of Corporations Law and its regulations.
(b) Subscribed and paid shares
The following table shows the movement of the authorized and fully paid shares described above between January 1, 2013 and December 31, 2014.
Movement fully paid shares
Paid shares as of January 1, 2013 Placement of the remaining preferential shares issued for merger Companies Sister Holdco S.A. y Holdco II S.A. Preferential placement capital increase approved at Extraordinary Shareholders meeting dated June 11, 2013 Full right decrease of treasury stock Capitalization of reserves Paid shares as of December 31, 2013 Paid shares as of January 1, 2014 Preferential placement capital increase approved at Extraordinary Shareholders meeting dated June 11, 2013 Paid shares as of December 31, 2014 The capital of N° of
shares Movement
value of
shares (1)
ThUS$ Cost of issuance
and placement
of shares (2)
ThUS$ Paid- in
Capital
ThUS$ 479,098,052 1,507,200 (6,182 ) 1,501,018 4,457,739 104,351 — 104,351 51,695,410 784,219 — 784,219 (7,972 ) (25 ) — (25 ) — — (179 ) (179 ) 535,243,229 2,395,745 (6,361 ) 2,389,384 535,243,229 2,395,745 (6,361 ) 2,389,384 10,304,590 156,321 — 156,321 545,547,819 (3) 2,552,066 (6,361 ) 2,545,705
(1) | Amounts reported represent only those arising from the
|
(2) | Decrease of capital by
(c) Treasury stock At December 31, 2014, the Company held no treasury stock, the remaining of ThUS$ (178) corresponds to the difference between the amount paid for the shares and their book value, at the time of the full right decrease of the shares. At December 31, 2013, as per minutes of the Extraordinary Shareholder’s Meeting held on June 11, 2013, the company relinquished all right to 7,972 stocks of its portfolio, this date the Company does not maintain treasury stock. (d) Reserve of share-based payments Movement of Reserves of share-based payments:
The effect on deferred tax calculated on the reserves of share- based payments by modifying the tax rate mentioned above, was a charge to equity of ThUS$ 2,708. These reserves are related to the “Share-based payments” explained in Note 33. (e) Other sundry reserves Movement of Other sundry reserves:
Balance of Other sundry reserves comprises the following:
(f) Reserves with effect in other comprehensive income. Movement of Reserves with effect in other comprehensive income:
As of December 31, 2012
The Company’s dividend policy is that dividends distributed will be equal to the minimum required by law, i.e. 30% of the net income according to current regulations. This policy does not preclude the Company from distributing dividends in excess of this obligatory minimum, based on the events and circumstances that may occur during the course of the year. At December 31, 2014, have not been provisioned minimum mandatory dividends. The detail of revenues is as follows:
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Company | Court | Case Number | Origin | Stage of trial | Amounts Committed ThUS$ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Aerolinhas Brasileiras S.A. | Labor Court of Manaus. | 0002037- 67.2013.5.11.0016 | Lawsuit filed by | Process in the initial phase. The value is in the calculation stage by the external auditor. | Undetermined | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Aerolinhas Brasileiras S.A. | Labor Court of Campinas | 0011014-52.2014.5.15.0129 | Lawsuit filed by the Union of Air Service Workers of Campinas requiring assignment of hazard for ABSA workers. | Process in the initial phase. The amounts committed are being calculated by external auditor. | Undetermined | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
LATAM Airlines Group S.A.
In order to deal with any financial obligations arising from legal proceedings in effect at December 31, 2014, whether civil, tax, or labor, LATAM Airlines Group S.A. and Subsidiaries, has made provisions, which are included in Other non-current provisions that are disclosed in Note 20. The Company has not disclosed the individual probability of success for each contingency in order to not negatively affect its outcome. (a) Loan covenants With respect to various loans signed by the Company for the financing of Boeing 767, 777 and 787 aircraft, which carry the guarantee of the United States Export–Import Bank, limits have been set on some of the Company’s financial indicators on a consolidated basis. Moreover, and related to these same contracts, restrictions are also in place on the Company’s management in terms of its ownership and disposal of assets. Additionally, with respect to various loans signed by its subsidiary Lan Cargo S.A. for the financing of Boeing 767F and 777F aircraft, which carry the guarantee of the United States Export–Import Bank, restrictions have been established to the Company’s management and its subsidiary Lan Cargo S.A. in terms of shareholder composition and disposal of assets. In connection with the financing of spare engines for its Boeing 767, 767F, 777, 777F, which are guaranteed by the Export—Import Bank of the United States, restrictions have been placed on the ownership structure of their guarantors and their legal successor in case of merger. The Company and its subsidiaries do not maintain financial credit contracts with banks in Chile that indicate some limits on financial indicators of the Company or its subsidiaries. At December 31, 2014, the Company is in compliance with all indicators detailed above. (b) Commitments under operating leases as lessee Details of the main operating leases are as follows:
Lessor AWAS 4839 Trust AWAS 5125 Trust AWAS 5178 Limited AWAS 5234 Trust Baker & Spice Aviation Limited BOC Aviation Pte. Ltd. CIT Aerospace International CIT Aerospace International CIT Aerospace International Continuity Air Finance IV B.V Delaware Trust Company, National Association Eden Irish Aircr Leasing MSN 1459 GECAS Sverige Aircraft Leasing Worldwide AB GECAS Sverige Aircraft Leasing Worldwide AB GFL Aircraft Leasing Netherlands B.V. International Lease Finance Corporation International Lease Finance Corporation International Lease Finance Corporation KN Operating Limited (NAC) Magix Airlease limited MASL Sweden (1) AB MASL Sweden (2) AB MASL Sweden (7) AB MASL Sweden (8) AB MCAP Europe Limited - Mitsubishi Orix Aviation Systems Limited Pembroke B737-7006 Leasing Limited RBS Aerospace Limited SASOF II (J) Aviation Ireland Limited SKY HIGH V LEASING COMPANY LIMITED Sky High XXIV Leasing Company Limited Sky High XXV Leasing Company Limited SMBC Aviation Capital Limited SMBC Aviation Capital Limited Sunflower Aircraft Leasing Limited TC-CIT Aviation Ireland Limited Volito Aviation August 2007 AB Volito Aviation November 2006 AB Volito Brasilien AB Volito November 2006 AB Wells Fargo Bank North National Association Wells Fargo Bank North National Association Wells Fargo Bank Northwest National Association Wells Fargo Bank Northwest National Association Wells Fargo Bank Northwest National Association Wells Fargo Bank Northwest National Association Wells Fargo Bank Northwest National Association Wilmington Trust Company Yamasa Singapore Pte. Ltd. Zipdell Limited Total The rentals are shown in results for the period for which they are incurred. The minimum future lease payments not yet payable are the following:
The minimum lease payments charged to income are the following:
In the first quarter of 2013, returned an Airbus A320-200, while during the second quarter of 2013 two Airbus A319-100, one Airbus A320-200 and one Bombardier Dhc8-200 were returned as their leasing contracts had ended. During June 2013 the contracts system applied to ten Airbus A330-200 aircraft were changed from financial leasing to operative leasing, with each aircraft being leased for a period of forty months. During the third quarter of 2013, two Airbus A320-200 aircraft were leased for a period of 8 years each, one Boeing 787-800 aircraft was leased for a period of 12 years and two Boeing 777-300ER aircraft were leased for a period of 5 years each. Moreover, one Airbus A320-200, two Boeing 767-300ER aircraft and one Bombardier Dhc8-400 aircraft were returned. Additionally, during July of 2013 two Bombardier Dhc8-200 aircraft were acquired on leasing. In the fourth quarter of 2013, three Airbus A320-200 aircraft were leased for a period of eight years each, one Boeing 787-800 aircraft was leased for a period of twelve years. Moreover, two Airbus A320-200, one Airbus A319-100, one Airbus A340-300 and one Boeing 737-700 aircraft were returned. During the first quarter of 2014, two Airbus A320-200 aircraft were acquired and two Airbus A321-200 aircraft were leased for a period of 8 years each. Moreover, two Boeing 737-700 aircraft, one Boeing B767-300F aircraft, one Boeing 767-300F aircraft, one Airbus A340-300 aircraft and one Bombardier Dhc8-400 aircraft were returned. Additionally, as a result of its sale and subsequent lease, during March 2014 four Boeing 777-300ER aircraft were added as operative leasing, with each aircraft being leased for periods between four and six years each. During the second quarter of 2014, were added one Airbus A320-200 aircraft and one Boeing 787-800 aircraft by leasing them for a period of 8 and 12 years, respectively. For other hand, one Bombardier Dhc8-400 aircraft, four Airbus A320-200 aircraft, seven Airbus A330-200 aircraft and three Boeing 737-700 aircraft were returned. In the third quarter of 2014, were added one Airbus A320-200 aircraft and one Boeing 787-800 aircraft by leasing them for a period of 8 and 12 years, respectively. For other hand, one Bombardier Dhc8-400 aircraft, two Airbus A319-100 aircraft and one Boeing 767-300ER aircraft were returned. In the fourth quarter of 2014, two Airbus A320-200 aircraft and one Boeing 767-300ER aircraft were returned. For other hand, three A340-300 aircraft and one A319-100 aircraft were bought. Additionally it was reported that the purchase option will be exercised by 2 Bombardier Dhc8-200 aircraft. Therefore, these aircraft were reclassified to the category Property, plant and equipment. The operating lease agreements signed by the Company and its subsidiaries state that maintenance of the aircraft should be done according to the manufacturer’s technical instructions and within the margins agreed in the leasing agreements, a cost that must be assumed by the lessee. The lessee should also contract insurance for each aircraft to cover associated risks and the amounts of these assets. Regarding rental payments, these are unrestricted and may not be netted against other accounts receivable or payable between the lessor and lessee. At December 31, 2014 the Company has existing letters of credit related to operating leasing as follows:
(c) Other commitments At December 31, 2014 the Company has existing letters of credit, certificates of deposits and warranty insurance policies as follows:
NOTE 32 - TRANSACTIONS WITH RELATED PARTIES (a) Details of transactions with related parties as follows:
On December 28, 2012, Inmobiliaria Aeronáutica S.A. as seller and Sotraser S.A. (Subsidiary of Bethia S.A.) as purchaser, entered into an agreement to purchase the land called “Lot No. 12 of parcellation project Lo Echevers”. The value of the sale amounts to ThUS$ 14,217. On December 31, 2013, this balance is paid. The balances of Accounts receivable and accounts payable to related parties are disclosed in Note 9. Transactions between related parties have been carried out on free-trade conditions between interested and duly-informed parties. (b) Compensation of key management The Company has defined for these purposes that key management personnel are the executives who define the Company’s policies and major guidelines and who directly affect the results of the business, considering the levels of Vice-Presidents, Chief Executives and Directors.
NOTE 33 - SHARE-BASED PAYMENTS (a) Compensation plan for increase of capital in LATAM Airlines Group S.A. Compensation plans implemented by providing options for the subscription and payment of shares that have been granted by LATAM Airlines Group S.A. to employees of the Company and its subsidiaries, are recognized in the financial statements in accordance with the provisions of IFRS 2 “Share-based Payment”, showing the effect of the fair value of the options granted under compensation in linear between the date of grant of such options and the date on which these irrevocable. (a.1) Compensation plan 2011 At a Special Shareholders Meeting held on December 21, 2011, the Company’s shareholders approved, among other matters, an increase of capital of which 4,800,000 shares were allocated to compensation plans for employees of the Company and its subsidiaries, pursuant to Article 24 of the Companies Law. In this compensation plan no member of the controlling group would be benefited. The granting of options for the subscription and payment of shares has been formalized through conclusion of contracts of options to subscribe for shares, according to the proportions shown in the following schedule of accrual and is related to the permanence condition of the executive as employee of the Company at these dates for the exercise of the options: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Percentage |
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30%
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| 4,497,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share options in | 4,497,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share options granted | 160,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share options cancelled | (455,000 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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These options have been valued and recorded at fair value at the grant date, determined by the “Black-Scholes-Merton”. The effect on income to September 2014 corresponds to ThUS$ 15,895 (ThUS$ 17,200 at December 31, 2013). The input data of option pricing model used for share options granted are as follows:
(a.2) Compensation plan 2013 At the Extraordinary Shareholders’ Meeting held on June 11, 2013, the Company’s shareholders approved motions including increasing corporate equity, of which 1,500,000 shares were allocated to compensation plans for employees of the Company and its subsidiaries, in conformity with the stipulations established in Article 24 of the Corporations Law. Regard to this compensation plan, not exist yet a defined date for implementation. The granting of options for the subscription and payment of shares has been formalized through conclusion of contracts of options to subscribe for shares, according to the proportions shown in the following schedule of accrual and is related to the permanence condition of the executive at these dates for the exercise of the options: |
(b) Subsidiaries compensation plans TAM Linhas Aereas S.A. and Multiplus S.A., both subsidiaries of TAM S.A., have outstanding stock options at December 31, 2014, which amounted to 96,675 shares and 637,400 shares, respectively. TAM Linhas Aéreas S.A.
Multiplus S.A.
The Options of TAM Linhas Aéreas S.A., under the plan's terms, are divided into three equal parts and employees can run a third of its options after three, four and five years respectively, as long as they remain employees of the company. The agreed term of the options is seven years. For Multiplus S.A., the plan’s terms provide that the options granted to the usual prizes are divided into three equal parts and employees may exercise one-third of their two, three and four, options respectively, as long as they keep being employees of the company. The agreed term of the options is seven years after the grant of the option. The first extraordinary granting was divided into two equal parts, and only half of the options may be exercised after three years and half after four years. The second extraordinary granting was also divided into two equal parts, which may be exercised after one and two years respectively. Both companies have an option that contains a “service condition” in which the exercise of options depends exclusively on the delivery services by employees during a predetermined period. Terminated employees will be required to meet certain preconditions in order to maintain their right to the options. The acquisition of the share’s rights, in both companies is as follows:
In accordance with IFRS 2—Share-based payments, the fair value of the option must be recalculated and recorded as a liability of the Company once payment is made in cash (cash-settled). The fair value of these options was calculated using the Black-Scholes method, where the cases were updated with information LATAM Airlines Group S.A. Not exist value recorded in liabilities at December 31, 2014 and in income ThUS$ 191 (at December 31, 2013 the amount recognized in liabilities was ThUS$ 1,493 and ThUS$ 509 in incomes). LATAM Airlines Group S.A. manages environmental issues at the corporate, centralized in Environmental Management. To monitor the company and minimize their impact on the environment is a commitment to the highest level, where continuous improvement and contribute to the solution of the problem of global climate change, generating added value to the company and the region, are the pillars of his administration. One function of Environmental Management, in conjunction with the various areas of the Company, is to ensure environmental compliance, implementing a management system and environmental programs that meet the increasingly demanding requirements globally; well as continuous improvement programs in their internal processes that generate environmental and economic benefits and to join the currently completed. The Environment Strategy LATAM Airlines Group S.A. is based on the following objectives: Minimize the impact of its operations by using a modern fleet, efficient operational management and continuous incorporation of new technologies. Promote the efficient use of resources and minimization of waste in all processes. Manage responsibly our carbon footprint by measuring, monitoring and reducing emissions. Promote the development and use of alternative energy more efficient and less environmental impact. For 2014, we have established four priority areas of work to develop:
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Thus, during the first half of the year, we have worked in the following initiatives:
Documents filed as exhibits to this annual report: EXHIBIT INDEX
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